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WSM/RH – The Only Chart That Matters

Takeaway: This is pretty much the only WSM chart we really care about.

WSM/RH – The Only Chart That Matters - WSM RH comp 2

The 4Q WSM comp was uninspiring at face value at 5.1%, though to be fair the 2-year trends held steady across every concept except for PB Teen (only 6% of rev). But the key for us is that comps trended down for WSM, and trended up for RH (which already preannounced the quarter it will report next week). These two names are often mentioned in the same sentence. But keep in mind that one of them (WSM) grows square footage at 2% on its best day and is comping mid-single digits. The other has square footage growth accelerating to 25% by the end of 2015, and just comped 24% (the second best comp in all of retail behind Kate Spade’s 28%).

WSM took down 1Q guidance, which was almost entirely due to the impact of the West Coast Port issues. The Street will probably look through this, and it should. We certainly will.  But the question about the impact on RH from labor issues has already come up in the hours since the WSM call.

Could RH see some impact? Yes. It definitely could, and we expect there to be mention of it on the call. The company is far less mature than WSM and therefore has less experience dealing with issues like this. But keep in mind one important factor…the business that is at risk of being lost forever is what we’d call ‘cash and carry’. That means that the consumer goes into the store, and walks out with the merchandise in their hands. If it’s stuck on a container ship, the consumer is likely walking away empty handed. Consider the following…

a)      An apparel company (which is near 100% ‘cash and carry’), that has delayed containers, gets the merchandise several weeks into the season – after the consumer has already made full price purchases. The goods ultimately get sold, but at a deep discount. That’s problematic.

b)      By our math, WSM is closer to 30-40% ‘C&C’. Far from optimal, but the nature of its category carries less risk than apparel, footwear, or some other non-durable category.

c)       RH, however, has an estimated 5% of its business that walks out of the store with the consumer on the day of purchase. Could some of that be lost? Yes, and some will. But the remainder of the impact should come down to an extension of the time it takes to deliver product. Maybe it takes 12-weeks on a custom order instead of 7-8 weeks, and yes, that could push revenue into 2Q. If anything, this will simply come down to when the revenue is recognized. When all is said and done, we’d argue that RH is structurally more insulated from lost revenue than any other type of retailer. It will probably come down to a matter of timing.