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RH: Nice Q Out of the Gate

Takeaway: Good debut for $RH. The growth/margin improvement story is very much intact, and in fact, is slightly ahead of our aggressive expectations.

This story is still full steam ahead, which is notable given that investor interest around the name has been paltry at best since the day after IPO. Comps are crushing it at +29%, the new Design Gallery in Scottsdale opened at or ahead of plan, and the company announced two new catalog businesses to launch this Spring – RH Tableware and RH Objects of Curiosity. It also announced RH Fine Art, which is likely an ASP-lifter. There’s usually not this much new info out of a recent IPO, but we definitely liked what we heard. There's noise around 4Q-to-date trends given the port stroke and lingering impact of Sandy, but that's hardly a sign of real underlying trends.

 

We’re taking up our Direct Numbers my next year about 4k catalogs without any degradation in revenue per page. This takes up our total Direct revs by about 800-900bp, and total RH sales by about 400bp.

 

There seemed to be some concern on the call about the Gross Margin. That shouldn’t be the case. The company went up against up a +450bp gross margin in this quarter last year. On a 2-year run rate, the gross margin was up 200bp despite an incremental shift to furniture which is lower GM (COGS includes shipping costs). This not a Gross Margin story on a longer term basis. It is about sheer top-line growth leveraging SG&A (which only  grew 12.9% vs 22% sales growth).

 

We still like this one a lot. The key rationale is that…

1)      We think that the company can leverage mid single digit square footage growth into double digit growth, and 20% top line. The company can then leverage fixed costs and grow EBIT by 30%, and EPS approaching 40% while it pays down debt. It is not without its volatility – especially on a quarter to quarter basis, but the growth algorithm works.

 

2)      Scale is critical in this business. That’s not a problem for RH if you measure by number of stores given that it has 73 locations as it can leverage a national distribution platform. Unfortunately, store count is a pretty useless metric when your average store is so small that it can only show 25% of the assortment. Categories like apparel might be ok in showing a prospective customer an item in an iPad 'lookbook' in hopes of placing an order. But when buying a sofa, desk, or bunk beds, people need to touch and feel. The shift to the company’s Design Galleries allow the ENTIRE assortment to be visible in the appropriate places.

 

3)      With the larger (25,000 square foot) Galleries, the company can also get into new categories like we’re seeing it do in the Spring of 2013. These will allow the company to cherry pick the best and most appropriate mix of product in each region and for each store to maximize sales productivity.

 

4)      While it opens Design Galleries, the existing base of stores allows the company to backfill existing markets with the new categories that are being tested in its new concepts.

 

5) It has only scratched the surface with its design services offering. Ever try to furnish a home with the help of a designer? Plan on spending 2x your budget.

 

6)      In the end, the Home category is one of the most fragmented in retail. Though people are quick to complain that prices are too high, we'd be quick to answer that there's a difference between high price and expensive. RH’s existing prices on like-for-like items are very competitive, and there are no other retailers that are doing what RH is trying to do with the same scale. It has had ‘defacto SKU proliferation’ in the past that held back profitability – which was only the case because it did not have the real estate to show 75% of its product in the way it needs to be presented to consumers. 

 

RH remains one of our top picks for those with a higher risk tolerance.


Trade Of The Day: WMT

Today we bought Walmart at $69.03 a share at 3:44 PM EDT in our Real-Time Alerts. The stock is oversold on our immediate-term TRADE durations but continues to hold our long-term TAIL support as oil makes another lower Bernanke high.

 

Trade Of The Day: WMT - image001

 


WMT: Idea Alert. Buying.

Takeaway: We think the downside here is minimal and there’s a big call option on WMT to the extent oil continues to make lower highs.

We added WMT to the long-side of our Real-Time Positions yet again. The stock signaled that it was immediate-term TRADE oversold according to Keith’s quantitative model today while holding its long-term TAIL support. We think the downside here is minimal and there’s a big call option on WMT to the extent oil continues to make lower highs.

 

 

WMT: Idea Alert. Buying. - WMT TTT

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Catching Up To Commodities

Should the US dollar continue to strengthen over the next quarter, commodities will continue to come down in price as they deflate after a miraculous pump up courtesy of the Federal Reserve. Oil has been one of the biggest losers over the past few months and we think there's room for further downside. Get the dollar right, you'll get commodities right.

 

Catching Up To Commodities - image001


Housing: The Recovery Continues

The MBA Mortgage Purchase Applications Index rose 1% last week, the fifth consecutive week of gains for the index; purchase applications are now 12.8% higher than they were a year ago. Refinance applications rose 8% last week as rates fell to 3.39%. Demand to buy homes continues to rise rapidly on a week-over-week basis as recovery in housing strengthens.

 

Housing: The Recovery Continues - MBA apps2

 

Housing: The Recovery Continues - refi

 

Housing: The Recovery Continues - YoY


U.S. Monetary Policy & Fiscal Cliff; Expert Call with John Taylor

U.S. Monetary Policy & Fiscal Cliff; Expert Call with John Taylor - taylorcall2

We will be hosting an expert conference call Tuesday, December 18th, at 1:00pm EST featuring Professor John B. Taylor of Stanford University. Professor Taylor is a highly regarded scholar known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. In the call entitled, Will Monetary Policy Take Us Over the Fiscal Cliff?, Professor Taylor will discuss our nation's current fiscal situation and the policy actions that are essential to augment our economy.


Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 485213#


KEY TOPICS WILL INCLUDE:

  • Economic problems still remain detrimental to the nation's economic stability following the Presidential Election    
  • Continued policy to not deleverage has hindered economic growth
    • Fiscal, regulatory, and monetary
    • A drag will continue even if fiscal cliff is avoided
  • Risks are two sided
  • A change in policy will bring back strong growth and stability

  

ABOUT JOHN TAYLOR:

  • Currently a Professor of Economics at Stanford University and a Senior Fellow in Economics at the Hoover Institution
  • Formerly served on the President's Council of Economic Advisers and as a member of the Congressional Budget Office's Panel of Economic Advisers
  • Served as Under Secretary of Treasury for International Affairs from 2001- 2005
  • Oversight of the International Monetary Fund and the World Bank
  • Responsible for coordinating financial policy with the G-7 countries
  • Accredited author, his latest the winner of the 2012 Hayek Prize, entitled: "First Principles: Five Keys to Restoring Americas' Prosperity"
  • Received numerous awards for his work as a researcher, public servant, and teacher
    • Awarded the Alexander Hamilton Award for his overall leadership at the U.S. Treasury, the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis 

 


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