There’s a lot of moving parts around RH right now, but none more important to the near-term story than the cadence of revenue growth – something that has accounted for 90% of our conversations with investors since the print. We don’t think that anyone thinks we’ll see a repeat of the 2Q sales hiccup, but there’s definite skepticism over company guidance for an uptick in 3Q sales growth. We’re extremely confident in a meaningful sequential step up in growth. Here’s why…
First off, let’s look at the company’s deferred revenue. This line item has been an exceptional indicator of growth in the upcoming quarter. Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter. Everyone knows this, it was an issue last year as sales shifted from one quarter to the next. We already went through the analysis of why the change in revenue happened in our note on Sept 10, but our point here is that we’re headed into 3Q with what we’ll call Accrued Revenue growth of 35%. There’s not a one-to-one relationship between deferred/accrued revenue and sales growth, but it’s pretty darn close – and it’s spot-on directionally (as outlined in the chart below).
There’s one time where deferred revenue was not a good indicator, and that was in 1Q13. That was when RH was experiencing delivery issues and did not have enough inventory to meet demand. But those constraints are no longer. Since 1Q13, the company has increased DC square footage by 40%. Importantly, inventory is up 35% (vs. accrued revenue of 35%) and company guidance of 20-23%. We’re slightly above that (24%) and are very confident in our model.
