RH: $8.00 in 2018?

Takeaway: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.

Conclusion: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.

 

 

It was absolutely painful listening to analysts grilling management on the RH Q&A wanting to be spoonfed precise guidance in the coming quarters. We love math as much as anyone – probably more. But seriously…this is a company that should earn about $1.50 per share this year, and people are asking for guidance on items that account for maybe a nickel a share?  Here’s a better question… How long will it take for RH to earn $8.00?

 

Our current math suggests that we’ll see that number around 2018. That’s $6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’. If you want to use a simple PEG on today’s 12-month forward earnings, you’re looking at a $90 stock within 1-year based on our model. 2-years is $125, 3-years is $175. You get the idea… If you want to review the detailed modeling assumptions, join us for our Best Ideas call on RH in 2-weeks. (We did one at the IPO at $32, and while the stock has worked, we think that the thesis has evolved to an even greater unrealized degree.)

 

Now…here are a couple of puts and takes on the quarter.

1)      The print itself was solid. Right in line with our model with adjusted EPS coming in at $0.49 vs the Street at $0.42.

 

2)      Revenue was in-line with our above-consensus estimate, but the composition was off. RH comped 26%, which was well-below our expectation of near 40% and the consensus of 29%. But the RH Direct business (not in the comp) came in meaningfully higher, accounting for 47% of total sales. They washed each other out. But people will always want to see the comp higher. I guess it just sounds better. This ordinarily wouldn’t matter – but with a 9.4% run in the stock 10-days leading into the quarter – the company really needs perfection to keep the treadmill going. 26% is sub-perfect.

 

3)      On the flip side of that, RH guided up 3Q revenue by nearly 7% -- setting expectations for higher comps (high 30s). No one is upping revenue guidance in the consumer space these days. The confidence management has in its business is extreme.

 

4)      RH eliminated the Fall Source Book – the 8 pound catalogue package that your mailman hates delivering. We give the company all the credit in the world given the sheer costs associated with the mailers and limited economic benefit. The marketing dollars will be spent with more experiential forms of advertising.

 

5)      Combining the higher comp expectation for 3Q with the cost saves from the elimination of the mailer, RH raised EPS guidance to $0.27-$0.29 vs. the Street at $0.16. Again, a huge delta in guidance change.

 

6)      RH appears to be on a track of Gross Margin recovery. After weakness in 1H, 3Q GM should be closer to flat, with full recovery by 4Q.  

 

All in, the reported numbers were excellent. The cadence of strategic change to achieve the long-term earnings growth we’re looking for was there. The revenue composition combined with investors badgering management about guidance to a greater degree than usual is not going to help the stock. But we’re talking a very short window. 2H square footage is accelerating, comp is improving, and gross margins are on the rebound. And all of this is in the context of what we think is an extremely favorable 5-year growth trajectory. 

 

RH: $8.00 in 2018? - rhrhrhrhrhr


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more