Conclusion: It’s as if Gary Friedman listened to Hedgeye Macro’s Themes deck earlier today and Keith’s #MOAB (Mother of All Bubbles) call from last week, as his tone about the state of the consumer and economy was equally beared-up. The company guided down, as expected, though we think it will come in ahead of where the Street was coming into this print. Numbers are too low. And on the guide down to about $11.50-$12.50 per share (from the Street at $16.50) the stock is down only marginally after hours. People saw this coming, as did we. European and US expansion are both on track, as is the expanded rollout of Contemporary. The company is investing right through the biggest luxury housing decline of a generation, and a 70-80% decline in mortgage re-fi activity. This is as bad as it gets for a company like RH. Admittedly, a $230 stock couldn’t care less about a TAIL duration, but the business should inflect, at least marginally, when we get out of Quad4, and then materially rebound in 2024 at the same time we’re staring down the barrel of six new galleries coming online and the business beginning its growth burst in Europe. On the TAIL, we’re still coming out with earnings power between $50 and $60 per share (closer to $60), with the Street likely to be closer to $20 after this print. This is THE best TAIL story in retail – bar none, and we think it’s a multi-bagger from here. To be clear, as the data comes in throughout 2Q on the Macro front and (we think) retail trades down, there’s no reason why this stock can’t break $200 again vs $230 today. We think the company will be a big buyer – particularly in the wake of a kitchen sink guide with $1.5bn in cash to repo more stock. If our TAIL EPS number is right, which we think it is, we think we’re looking at a stock well over $1,000 over three years. That has not changed. The risk/reward (upside/downside) from current levels is simply incredible. Yes, you have to be patient, but when the business turns, it’s likely to take this stock higher – fast. If you don’t want to be there for another 10-15% draw down in a weak retail tape, we’re fine with avoiding the FOMO. We’d be just as comfortable buying this stock $100 higher in 6-9 months – the upside from there is still more attractive than you’ll find anywhere in global retail. Best Idea Long
-- McGough
Guidance And Cost Cuts
The company took a big cut to 2023 earnings as we expected, though revised more than we thought. The full year revenue and operating margin guide build to around $12.50. The buyback we expect would push that up to $14+ and we think the operations ultimately end up better than the company is guiding to, meaning we expect EPS in excess of where the street was into this event of $16.50. The company is preparing for and guiding to a dislocated consumer/home environment in 2023. The CEO on the call flagged an 8 point drop in business trend around the SIVB collapse, but business has since, for the most part, recovered to the prior trend, for now. 1Q is implied down mid-20s, driving a lot of fixed cost/occupancy deleverage. Business should improve into 2H both from an underlying US demand perspective and with the launch of international. The ramp of international is driving 150bps in op margin drag, while the company has also announced a round of job cuts impacting 440 employees. The run rate of cost savings to be in the area of $50mm. Some investments, like the return of sourcebooks, will offset that savings.
International Expansion & Strategy
The international growth story remains on track, starting with the planned opening of England in “summer”, which we take to mean the back half of 2Q. Then expansion into Brussels, Dusseldorf, Munich, Madrid and a London Interior Design Studio over the next 18 months. Looking into late 2024 and 2025 comes Paris, the London Design Gallery, Milan and Sydney. Sydney is a newly disclosed location (though an expected one), and is the first market outside of Western Europe or North America. It demonstrates the truly global aspirations of the company with the CEO noting the potential for $20bn to $25bn in global revenue over the long term. There are a lot of things to be cautious about over a TREND duration, but a lot things to be excited about over a TAIL duration. Inflation, fed policy, a massive correction in the luxury home market, and a global banking crisis are impacting near term demand trends, but given the company investments in this downturn the opportunity for highly profitable growth in 2024 and 2025 is immense, and the company remains focused on brand investment, growth, and value creation over a much longer duration than that with the CEO instilling a vision that he expects will extend beyond his lifetime (he’s only 65).
Balance Sheet and Buyback
The balance sheet and cash generation remains strong even after the company bought back $1bn in stock this year with another 2.6mm shares this Q around an average price of $275. The company has $1.5bn in cash on the balance sheet with net debt of ~$1bn and leverage of roughly 1.7x on the 2023 guide. With the product updates and contemporary launch, the company will likely ramp clearance of unessential inventory around discontinued lines freeing up some more cash over the next couple quarters. The company has another $1.45bn in share repurchase authorization, we expect it to be buying in the market after this print, though likely at more moderated volumes than we saw in 4Q, at least until demand trends and the macro environment again improve. That keeps some downside support on the price until the business and P&L inflects in 2H 2023 and beyond.
-- McLean
