We were initially caught off guard in seeing the announcement from RH hit the tape last night about its convertible offering. But after going through the numbers and the logic, we think it makes all the sense in the world. Here’s what we’re thinking…
- The company is, in effect, creating $350mm of low-cost liquidity through a convertible note offering. It currently has only $149mm outstanding on a $417.5mm credit facility. So why would it need to do this deal?
- First off, because it can. We’d like to see the company tap the capital markets for lower cost financing from a position of strength rather than from a defensive position if the long-term growth plan is thrown a curve ball.
- The cost of the debt is not the issue at hand. Yes, it’s nice that the structure of this deal suggests that there is no dilution until the stock is $170 – about 105% above current levels. And even then, we’re only talking about 3-4% dilution.
- No, the KEY ISSUE here is duration matching. The company just started what will be a 5+ year store growth plan where it will take square footage from 825k to about 2.3mm. It is signing leases today for 2H16. Its current credit facility expires in August 2016. One of the bear cases we hear is that the company would be locked into expensive leases in 2017/18 without having liquidity protection. Then we go into a recession, which would hurt cash flow and close the window for the company to find liquidity to finance its growth. That argument is officially shot in the foot.
The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock. If there’s any bad news, it’s that that there will be dilution at some point over the next few years – because we think that RH trades through $170.