CONCLUSION: I love that opening quote “it only hurts (like its hurting 98% of retail) when you’re not prepared.” If you want to align yourself with a company that is strategically and financially prepared, look no further. With the exception of RH, I have yet to find a retailer that is proactively preparing for an outright recession and multiple Quad4s. This was a remarkably balanced quarter for a name like RH – a name that usually is fueled with spectacular stock action the day following a print. But in going through the print and listening to the call, there’s no way in hell Bulls will sell, but also not much ammo for the bears to cover. All in, the results were remarkably consistent with what we outlined in our preview – see note below. The company beat the quarter handily, slight top line beat (though could have smoked top line if it promoted – which RH, and other luxury brands DO NOT DO). But more specifically margins – with an impressive 350bp boost in GM yy. EBIT Margins for the quarter were 24.7%, which is an exceptional, and dare I say ‘luxury’ margin result in this economic Quad4/recessionary environment. EPS clocked in at $8.08 vs our $8.00 and the Street at $6.71. Again, the earnings power here is more than the company is guiding and the consensus is underwriting. The biggest ‘surprise’ is that the opening of RH England was pushed to Spring 2023. That’s a six month revenue push. Am I pleased about that? No. But in the grand scheme of the top line growth ahead of this company and accelerated store expansion, over a TAIL duration, it’s a non-event. Not expecting any delay for Paris opening later in the year. Friedman retains his title as the most visionary and ‘Macro Aware’ CEO in retail. Period. I’ve never seen anyone better in my career. He looks forward, not backwards – like most retailers (and ‘competing’ [I use that word loosely] home furnishings brands do). The second best quote from the call (after the one I used in the title) is “If you don’t think we’re in a recession, you’re downright crazy.” The company’s guidance reflects that. Like the title says, “it only hurts if you’re not prepared.” Part of the preparation is reflected in the balance sheet. The company got rid of more than half of its convertible debt this quarter, and bought back 1mm shares at $255. In the depths of Quad4 could this stock see $200. Absolutely. But RH has the warchest to buy back 60% of the float. So if you’re a short term investor, be my guest. Short it. You might be right as holiday approaches and a stretched consumer levers up and takes the personal savings rate to cycle lows. ALL of retail will trade down – including RH. But a) keep that short on a VERY tight leash – and be prepared for the company to buying more than ‘you’ can collectively short. If you’re playing the long game, as I am, you’ve got the consumer inflecting and multiples/earnings troughing in 1Q23, which is one quarter away from the last Quad4, the acceleration of Contemporary, Guest House, and the opening of Europe. If you want to be short that acceleration (ie POD and Quad inflection) with RH at 10x earnings 6-9 months down the road, I think you’re gonna get hurt – like badly. Like I say in the note below, I think this stock doubles in a year, and has a 3-5 year path to $2,000. It’s a complete anomaly to find a risk/reward like that. Goes without saying, but this is THE core name to own in retail, and is a high-profile, high-conviction Best Idea Long @Hedgeye.
OUR NOTE HEADING INTO THIS PRINT
RH | Respecting Quad 4
Takeaway: RH has ZERO incentive to do anything but take down 2H. Then set up for significant acceleration in 2023. 10-baggers are rocky and take time.
Conclusion: RH has one of the most ‘Macro Aware’ management teams in retail. It guides to what business will be like in 3-6 months, not how it’s trending today. The latter is how you get in trouble (and is how 95% of retail management’s roll). RH will do it right. Quad 4, which Friedman respects, says that’s a lower guide for 2-3 quarters. From a product and branding perspective, it is going on full offense at the exact time the consumer is retrenching – that’s what great brands like Amazon and Nike do. They invest to grow (and RH is doing it in a capital light way) while competitors cut costs and close stores. RH is one of the few brands with asymmetric drivers to the business over a TAIL duration. This was a 10-bagger at $30 – we made that call. And by the time we have ‘proof of concept’ Internationally and its global footprint grows aggressively, I think this is a $2,000 stock. Doubt/chirp/hate all you want. I’m a big boy. I can take it. But I like being right on the BIG calls. And this is one of them. Until then RH will be happy to buy 60% of the float with its war chest during Macro Quad 4. Best Idea Long – and one of the few core long-term holdings in retail.
DETAILS
I think the RH quarter tomorrow will look fine on revenue and EPS. It’s the guidance that I worry about. Remember, Friedman was the CEO who I called ‘Macro Aware’ two quarters ago when he foretold that businesses would be guiding down/falling apart materially in 2H. He was spot on. In the 13 weeks since the company last reported, Macro has gotten worse, not better. Companies have blown up left and right. My money is on the company talking down numbers. People love to use WSM as a proxy (which is a mistake, it promotes to middle America while RH sells full price to the top 10% of the population), and that company put out a respectable/borderline impressive quarter, and gave an ‘extend the trend’ guide, which I absolutely do not think is believable. It’s a Best Idea Short.
RH, on the other hand, is in limbo. It just launched the RH Contemporary line, and is deploying capital to build a MASSIVE brand in Europe. But neither of those will manifest into meaningful revenue streams until mid 2023. Ironically, that’s when we near the end of Quad 4. I like when companies invest when the top line is tough. That’s how Nike and Amazon roll – and I put RH in the same class. That’s how I run my own business. It’s how you gain share, and ultimately come out in the end #winning.
My Retail playbook is that (as we already know) companies are guiding down 3Q left and right. But 4Q guidance isn’t low enough. The consumer will stretch around holiday, deplete their savings, lever up, and completely dry up in 1Q. All while the housing market is hitting a wall. Clearly, The Home is not a fun place to be in that environment. Then we get FY23 guidance by April/May and after retail getting its teeth kicked in, it will kitchen sink the year, which will FINALLY jibe with us being in Macro Quad 4 – 4 of them to be exact. That’s when we make the call to be long retail big time. I’m not talking 20-30% gains – but 100% on earnings and multiple expansion. Make no mistake, RH is one of the few companies that budgets its business based on demand that it will likely see in 3-6 months – not (like WSM) that guides based on what it’s seeing today.
Bottom line is that 2H numbers are likely to come down, and I think that sets up RH for a meaningful acceleration in earnings in 2023 – one of the very few retailers that should fit that bill. RH Contemporary will be in full swing, the build out of Europe will start to contribute to both revs and Gross Margins, and lets not forget that sometime before Quad 4 is over, the company is likely to deploy its $2.5billion in cash to repo up to 60% of the float. That gives this stock MASSIVE support on a selloff. Though he didn’t tell me this outright think Friedman’s ‘buy with impunity’ price is below $200 [Edit: though being in the market at $255 is a tell that perhaps his price is higher]. I don’t think we’ll see that $200 level soon.
Could Friday be an ugly stock day? Yep. But that doesn’t shake my confidence in the model that TAIL earnings power is understated by 100%. People chirp me on twitter all day that I’m wrong on this stock, that the brand is losing share, and that the company is foolish to open Europe when it’s facing an energy crisis and is likely in a recession. But I think that’s the EXACT time to open up Europe. When ‘competitors’ (mostly Mom and Pops) are pulling back, cutting costs from their business, just at the time RH goes on offense to gain share in the most affluent markets in Europe with what are likely to be the most impressive (and capital light) retail stores of any sort anywhere in the world.
Over a 3-5 year timeline, I think RH has $60 in EPS power. Yes, $60. That compares to the Street closer to $30. If I’m right on that model, and the large scale rollout throughout Europe, which I think I am (tho won’t be without its logistical speedbumps), this company will get at least a pseudo luxury multiple of 20x earnings – or a $1,200 stock. As it gets ‘proof of concept’ in Europe and then targets the Middle East and Asia, that’s when it gets a full-on Global luxury home furnishings multiple on a higher earnings stream, and sentiment completely turns on this name. I know it sounds like a ridiculous call at $250, but I think that this is ultimately a $2,000 stock. And barring a complete botch of execution Internationally (which most bears tell me will be a #fail – and I vehemently disagree with), I think this is a $2,000 stock over 3-5 years. People thought I was nuts when I called this a 10-bagger at $30. It was a rough road, and I was wrong for extended periods of time. That hurt, but in the end it paid off. It’s gonna pay off again.
One of my biggest concerns over the next 1-2 years from is that RH gets sold to the likes of Berkshire or LVMH. What’s that worth? $600? That’s highway robbery. Friedman’s price target is arguably higher than mine – and not by a little. I think it’s highly unlikely that this company gets sold, particularly with Friedman as a 21% shareholder. He has a hugely vested interest in letting this story evolve into what it was meant to be.
