RH (RH – Best Idea Long) | Expect fireworks from RH's EPS report on Wed after market close. Up front, we still have high conviction that this name is headed over $1,000 over a TAIL duration. But looking over a TRADE and TREND duration, this is a much more difficult call with the stock re-approaching $300. Do we think RH will miss the quarter? No. We're modeling a beat, but that's likely to come from margins, not top line. In order for this stock to work, like REALLY work, we need an acceleration in the top line, and we're unlikely to get that this quarter. We're seeing store visits look less bad, which is a positive, and we're seeing an uptick in sales of homes over $1mm – also a big plus. But both those will likely show up in recognized revenue a quarter or two out. Two quarters ago, Friedman called for two business inflections in 2024 (just thinking out loud, isn't a double inflection a bad thing? – up and then back down again?). Nonetheless we get what he meant...that sales would turn up once the new assortment hits, and then turn up again when housing improves. So far, neither inflection is apparent in the data, nor will it be in this week's results. At this point, we'll take a single inflection – never mind a double.
That leads us to the biggest opportunity, and risk, for the P&L and the stock. We think that there's a 60-70% chance that Friedman cuts price by 10-20% across the board in one of the next two quarters. He's done it before, with Contemporary, so there's a precedent for such a move. When Contemporary units weren't moving at a price 25% above the core RH aesthetic, GF immediately lowered price, and the product started moving. Keep in mind that this company raised price 40% during the pandemic. Giving back half of that to get volume to start moving higher is absolutely not out of the question. What RH wants to avoid is both a) a stagnant top line, and b) risk of inventories rising and having to discount product – like it did late last year. Do yourself a favor and ask WSM and ARHS management what would happen to their respective businesses if RH made this move...any answer other than "we'd have to more aggressively promote" would be a flat-out lie.
The next key consideration this quarter is Europe. The company has stores opened in England, Munich, Dusseldorf, and now Brussels. The last three are too young to have any real store or market share metrics behind them. But England has been open for nine months. The company NEEDS to give some quantification as to how this market is trending. If not, then people will assume that it's going poorly. To be 100% clear, we think RH is going to crush it in Europe, and have been impressed with the cadence of store openings thus far. The risk in Europe isn't whether or not it works, it's how much capital it takes to MAKE it work. The company has gotta give some real numbers here.
Bottom line here is that we still think that this stock is going to be a MASSIVE winner over 3-years. We think the company earns 2x the consensus $22 estimate in FY27. Yes, even with a a price cut we can get to 20%+ margins (vs 13% today). $50 in EPS, which is what we're underwriting, should get a 20-30x multiple for a company with RH's growth, high-end brand, competitive moat, and unparalleled square footage and market share growth when compared to other retailers. That gets to a stock well over $1,000. But tactically, this name could be up or down $50 on the print. We don't like 1 to 1 odds. We'd rather be buyers on a sell-off, or better yet, buy it at $350-$400 once we get confirmation about Europe or a turn in the US. A ramp in volume and comp would lead to outsized cash flow, which would also make this one of the best de-levering stories in retail. Bottom line, if you own it, trim SOME, then be prepared to add back after the event.
