After 2-years of gloom and doom, Gary Friedman is calling for a dramatic positive turn in the business in '24. We think he's right. The company annihilated the quarter, though bears will point to a shift in ad spending from 2Q into 3Q, hence a lower 3Q guide. It's embarrassingly low, to be clear. The company put up $3.93 vs the Street at $2.65, with an impressive 20% EBIT margin. That said costs are going to step up in 3Q with a big marketing push -- particularly in Europe, where initial datapoints out of RH England are largely positive (in line with our research). We think the company's 3Q margin guidance of 8-10% is a joke. Even with elevated marketing spend, we think margins come in closer to 15%. This company just set itself up for a massive beat.
But the biggest change was in Friedman's characterization of 2024, where he called for a positive inflection in 1H, and then another in 2H -- regardless of Macro. He's referring to the impact of the first product refresh in 8-years, a broad-based rollout of Contemporary, a new Modern collection, and a full year of three European galleries (England, Munich and Dusseldorf) with another three to come throughout the year. That's on top of the US gallery expansion, which should all in lead to share gains in a category that will likely have proven to have bottomed from a rate of change perspective in 1H23.
We think that estimates here are way off. The consensus is likely to come in around $11 for this year, while we're sticking with our $14 estimate. The Street's $15 in 2024 is likely to be low by a good $7 per share. The stock is trading down on the guide, but we think that for people looking at 2024, there's no better place to look for massive torque in the top line and margin algorithm than with RH. We've said it before and will say it again, but we think that the Street will be upgrading this name at $500 or higher. Over a TAIL duration we get to $60 per share in earnings power vs the Street at $23, which we think is good for at least a $1,500 stock.
Click Here for our Elevator Pitch 1-pager on the name.
