A surprising lack of fireworks out of this RH print. There were puts and takes – as there always are. But the strategy overall is intact, and there are no changes to our call that this stock will be well over $1,000 over a TAIL duration. Over the near term, things are still weak due to the Quad 4 Recession. But just to put it into context, the fact that this company can still put up a 15% operating margin in the worst luxury housing environment in decades is extremely impressive. Recall that before RH embarked on its Design Gallery concept and reverse engineered a better logistics network – which were both game changers – margins were in the low single digits during the last housing market collapse. Europe is on track, with RH England opening next week, and Brussels, Dusseldorf, Munich and Madrid and an interior design studio in London over 18 months. Then there’s Paris, London Gallery, Milan and Sydney by FY25. Along the way there are more galleries opening in the US, not the least of which is the Aspen ecosystem, which we think will finally be opened in time for Winter 23/24. The plus on the print is that the company beat the quarter, putting up $2.21 vs $2.12 – not huge, but it’s better than a miss. RH took up sales guidance for the year – but that’s entirely to clear inventory from its old collections (much of which will take place in outlets) as it makes room for its biggest product refresh in 8-years. The biggest minus is that the company took down its midpoint of margin guidance by a point to 15% for the year to account for the clearance. We gotta acknowledge that it’s a bad look for a company that ‘never discounts product’ to be clearing inventory at a discount. But it’s cleaning up the balance sheet, and making room for its new product assortment to drive top line. The other negative is that the company didn’t repo any stock during the quarter. It had a particularly narrow window this quarter, and the business trends likely didn’t look good enough to step in the market. Impressive that the stock was so resilient in the quarter in the $250 range without an RH bid (and with Berkshire selling a 10% stake). We’re making minimal changes to our model for this year, and are still modeling a BIG earnings recovery year in 2024 – with EPS of $23.50 vs the Street at $15.50. Over a TAIL duration, we’re assuming that RH succeeds in Europe, and that margins revert back to the low to mid-20s. On top of an extra $1.5bn revenue build in the US, that gets us to ~$60 per share over 4-years. Yes, you have to be patient on this one, as Macro is not your friend right now. But the recovery here should be nothing short of explosive. See our store growth/revenue build below. Best long term holding in retail.
For our latest Black Book outlining our long term thesis, Replay Video Link CLICK HERE
