ARHS Big Comp Guide Down. Best Idea Short ARHS with a solid 4Q, but it was aided by the pull forward of revenue from accelerated satisfaction of its backlog. The company had already given a prelim update on 4Q, so revenue strength was known. But now the company is guiding to negative comps with the street expecting +9%, and coming off of 47% comps in the quarter just reported. QTD demand comps running up HSD, with the company implying comps are likely to converge with demand comps given satisfaction/pull forward of backlog in 2022. Now inventory is outgrowing the sales trend, as well. We think ARHS is overearning, with abnormal demand and margin trends from satisfying the backlog of pandemic demand. Now revenue should come under pressure and margins should revert rapidly. The street has EPS marching up to $1.00 per share over a TAIL duration, but we think that we are already at peak. This company went public when it did for a reason. We think that while sales might have a shot at coming in-line with the guide, its margins that will be at risk given that ARHS (unlike RH) runs a promotional model, and is likely to step-up discounting to drive its business. The company noted on its call that it’s testing smaller format design studios, which we think is a mistake. This is a space where you have to go big, like RH is doing opening up 75,000 foot galleries. To be clear, if there was a dramatic strategy change and ARHS adopted an RH Design Gallery model, we MIGHT get more constructive on the name. But for now, that simply isn’t the case, and we don’t think that ARHS management is in the same league as RH in being able to pull off an aspirational large-scale luxury concept. We think TAIL earnings settle out in the $0.40-$0.60 per share range, which is good for a mid-single digit stock. We’ll take the win today, but still think this name is headed lower in 2023 – even after today’s shellacking.
Takeaway: ARHS putting up perhaps the biggest demand deceleration guide in all of retail. Numbers still likely to come down.
