Retail Callouts (6/1): RL- New Idea Vetting Book, RH

Takeaway: RL - New Vetting Book. Call to be held Monday June 8th, 1:00 pm. RH - Management Incentivized to Deliver


Retail Callouts (6/1): RL- New Idea Vetting Book, RH - 6 1 chart1





Why We’re Doing This Now

Our next Idea Vetting Book will be on Monday, June 8th, and the topic will be Ralph Lauren. This is hardly a new name for us -- having covered it for the better part of two decades.  But we can't remember a time when there was more opacity in the model, less investor confidence in the Brand, or in management’s ability to execute on this story.   Ultimately we think there are critical questions to answer over both short-term and long-term durations, and we think we have the tools, insight, and historical perspective to more fully flesh out the debate.


Remember that Mr. Lauren in 75 years old, and is the sixth oldest CEO in the S&P. But his next layer of executives have only been at the company for an average of 3-5 years, which is very young for a company like this. It's no surprise then that the company just finished 'an investing year' and then promptly started another one.


Importantly, Mr. Lauren has 81.5% of the voting power at RL. He owns the Board outright, and details around its long-term strategic plan (presuming there is one) are extremely scant.  In addition to reviewing some of the near-term puts and takes for Ralph, we're also going to review some of the bigger strategic options facing the company (whether RL knows it or not).


More details to come.



RH - Management Incentivized to Deliver


We received some questions about RH's proxy statement (filed last Thurs) -- which is no surprise as people seem to be obsessed with everything and anything related to Gary Friedman, and his compensation is no exception.  According to this years proxy statement the RH CEO didn't take a pay bump for the 2nd straight year, but the top end of his achievable bonus scale climbed by 25%.


The way his bonus payout is structured, Freidman would take home a fixed percentage of his base pay dependent on the RH's performance. 'On plan' equates to a bonus equal to 100% of his annual salary. At 2x the current internal plan the payout climbs to 250% of the annual salary. Meaning if the company beats its internal pre-tax EBIT plans (around $200mm) by a factor of 2, Friedman could take home a total of $4.375mm this year ($1.25mm base + $3.125mm in incentives). At face value, that seems like a pretty cheap deal for shareholders, and it is. 


But it also outlines what happens when a CEO is compensated in stock in the early years. Freidman owns a 6% stake in RH, currently worth $212mm. At 2x the top of end of RH's current guidance, that would equate to $6.00 in earnings power. Apply a 30x multiple and we are talking an additional $200mm added to Friedman's net worth in 2015. $6.00 is more than a little bit ambitious for this year, but we like that the incentive is there.


If RH wins, then Friedman wins, and shareholders win.


Still our top name in all of Retail.



Retail Callouts (6/1): RL- New Idea Vetting Book, RH - 6 1 chart2





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