prev

The Macro Show Replay | June 12, 2015

 

 

Watch the replay with guest analysis from Internet and Media Sector Head Hesham Shaaban. Hesham gave his updated thoughts on Twitter (TWTR) and CEO Dick Costolo stepping down.

 


RH - The Story Never Looked Better

Takeaway: We have never felt better about this story, and about management’s ability to profitably create growth that skeptics think does not exist.

Conclusion: We have never felt better about this story, and about management’s ability to profitably create growth that skeptics think does not exist.

 

DETAILS

This quarter is exactly what we were looking for from RH. The company put up a 15% comp – right in line with our model – and well above the 11% consensus. That flowed through to the bottom line with $0.23 in EPS, in line with our estimate, and 15% better than the Street.

 

In addition to the beat, we saw new store productivity get better on the margin, and management noted that Atlanta (about 6% of total square footage) is running ahead of expectations. Note that this had been a point of concern over the past quarter for many on the Street, as it is the first of the mega-galleries RH will be rolling out over the next few months. If Atlanta’s productivity was not cutting it, then we could see the reason for broader concern about the future. That issue is officially put to bed.

 

We like what the company did with guidance. It beat by $0.03, but took up the lower end of full year guidance by $0.07, and the top end by $0.05. At the same time, the company noted that there would be a meaningful ramp in 2H, and as such took down 2Q. Naturally, almost all of the questions we’ve gotten since the print revolve around 2Q guidance.

 

Let’s be clear about something…companies up and down the S&P and Russell are ‘conservatively’ guiding to down revenue, down margins and down earnings. With RH, not only did it take up guidance for the year – when it otherwise did not need to – but the mid-point of guidance for its worst quarter of the year calls for 15% revenue growth, improving new store productivity, and 23% earnings growth. That’s a pretty impressive algorithm in itself, especially given the fact that we start to see the benefit of new square footage growth in 2H15 as well as the impact of its new RH Modern concept.

 

The point here is that if the biggest thing people are worrying about is 2Q guidance, then we’ll take that any day given the fundamental setup that will likely allow RH to best its guidance while simultaneously staring at a meaningful 2H acceleration square in the face.

 

RH Modern: We think that most reports out this morning are likely to miss the mark on Modern. This is a lot more than a new category or concept for RH. We think it’s more like a classification. Think about it…everything that RH currently sells – whether it be Sofas, Chairs, Tables, Lighting, Flooring, Kitchen – that all falls under the traditional RH aesthetic. RH Modern, however, allows the company the opportunity to take every single category it sells, layer them over a new classification, and sell to a completely different customer.

 

If we have any concerns about this it will be the availability of retail space to sell the product – and the potential that RH takes space away from existing items to make room for RH Modern while it ramps up (which will take some time). Our sense, however, is that the stores will be getting bigger because the company will have the need for even more space. We’re going to follow up with another RH Black Book where we dive into the company’s real estate strategy in great detail. Expect that in the coming weeks.    

 

 

Here Are Some Of Our More Detailed Thoughts From Earlier this Week

 

06/09/15 05:16 PM EDT

RH – ROADMAP INTO THE PRINT

  

Takeaway: When a Consumer story is this explosive and disruptive, every quarter is an event. Fortunately, this story is very much on track.

 

Our team remains convinced that RH is one of the unique TAIL opportunities in Consumer/Retail as the company disrupts a large fragmented space of localized high-cost competitors, and changes the paradigm for how people shop for Home Furnishings. This is, at most, in the second inning and the types of changes we’ll see to product classification, consumer type, purchasing experience and ensuing financial characteristics are neither in Consumers’ sights, or Wall Street’s models.

 

When all is said and done, we still think that this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115 (22% upside -- the highest sell-side price target out there), but rather when we all have to adjust estimates for last year’s convert, which becomes mildly dilutive at $172 (83% upside).  At that point, we’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end, but regardless, we’re talking a stock between $225 and $325. We won’t bicker which one it is with the stock at $94 today.

 

So there’s our TAIL call. And despite our confidence in where it’s headed long-term, we have to respect the near-term volatility in the market, and in particular, such dynamic transformational stories like RH. With all of that said, here’s a look at our key modeling assumptions for the quarter and the year, and more importantly, what can go wrong on Thursday after the close that might be a negative surprise to the market (i.e. let’s flesh it out now).

 

RH - The Story Never Looked Better - rh financials

 

What Could Go Wrong

 

1. Revenue Weakness. This is the obvious item for a high multiple controversial growth stock.  RH guided to revenue growth of 13-15% for the quarter. We’re at 16%. Considerations…

    • Furniture sales ticked down materially industry-wide in April, though actually accelerated to the upside on a 2-year basis throughout the quarter. WSM noted this as well – but its sales accelerated on a 2yr basis by 300bps in 1Q even with the slowdown. Adding back the $30mm from the port strike sales accelerated 560bps

RH - The Story Never Looked Better - retail furniture

 

2.  Management reset the topline bar when it issued guidance in March for FY15, and expectations look very conservative for both 1Q15 and the full year. 20% DTC growth (an almost 10 percentage point deceleration on the 2yr trend line sequentially) alone would support an 11% brand comp in the quarter, just a couple basis points shy of the current consensus numbers. The revenue backlog looked extremely positive headed out of 4Q14 with deferred revenue up 37% YY. In prior quarters deferred revenue has been a tightly correlated indicator of future growth.

 

RH - The Story Never Looked Better - rh def rev

 

3. Atlanta Opening. There has been so much negative noise around the new Atlanta Design Gallery, which opened in November. The source? None other than negative YELP reviews – all 8 of them. We actually couldn’t believe how many times we were asked about this. Maybe YELP is reliable to find a good cheeseburger for $12, but not for a $20,000 bedroom set at RH. Yes, it would be extremely negative if the company came out and said that Atlanta is a bust. But that is so highly unlikely. Think of the timing. It opened in November, then built local awareness for a few months, and did not really book any material revenue until 8-10 weeks later (i.e. March). As of 3-months ago, it had the second best opening of any store in the fleet. Things are highly unlikely to have turned so fast.  So…we flag this as a risk, but it’s not a big one.

 

4. Backlog. The West coast port slowdown and lower inventory position (sales growth was in excess of inventory growth in 4Q14) will mitigate the flow of the product back log in 1Q, but that’s already in consensus numbers. The $10mm - $12mm revenue push from 1Q15 to 2Q15 management guided to shaves 250-300bps off the top line in the quarter the company will report of Thursday. But, that is far less exaggerated than the 500-600bps revenue hit WSM experienced. That’s because a) 95% of RH’s business is cash and carry compared to WSM at less than ~50% and b) WSM relies much more on seasonal product which is much more dependent on inventory in-stock positions.

 

5. New Concepts – On the call, RH should give detail on the two new concepts that it has had in the hopper for the past year (two of many, we should add). If it does NOT, however, then the Street will be left wanting. It might also cost the company revenue in 2H, as these concepts have probably started to fuel expectations.  While the company didn’t officially say that it would unveil its two new lines on the 1Q call, the timing of the 2Q15 print (the company’s next officially scheduled opportunity to communicate with the street) doesn’t fall until early September. By that point it’s possible that the two source books scheduled for a Fall release will already be in homes. Thursday seems like the most logical time for the company to announce the new product coming down the pike.

 

6. The Biggest Loser. The Sourcebook that was just delivered weighed in at 6.5lbs, compared to 17lbs last year. That’s a huge improvement, particularly given that the Sourcebook was somewhat of a bust in 2Q14. That said, it also had twice the amount of product that we see in this year’s book. Is this the right formula? The company thinks so otherwise it would not have made the change. But the fact of the matter is that the Sourcebook remains a crutch for the company until its’ real estate profile is rightsized. Eventually, it won’t need it anymore. Until then, there will be hits and misses. Fortunately, this year we’re comping against a miss.

 

The Set-Up on the Top Line Improves as RH Exits 1Q.

  • 2Q15 – Benefit of at least $10 - $12mm (2.5 to 3 percentage points of growth) of demand push from 1Q to 2Q due to the West Coast port delays at the same time the company laps the change up in Source Book strategy which cost the company by our math $12mm - $18mm in sales last year. RH decoupled its Outdoor Source Book (the most seasonally important book from a timing perspective) from the big Source Book mailer (which arrived in our offices yesterday) to get the category refresh in front of the consumer a month earlier than last year.
  • 3Q15 – We’re modeling 3 new store openings in the quarter, 2 Full Line Design Galleries in Chicago and Denver and the re-opening of the Beverly Boulevard store in a new category/Baby & Child format after going dark when the Melrose Ave Design Gallery opened in 3Q14. That’s paired with the launch of 2 new categories. Expectations for the new lines are low as the company gains mind share, but any outperformance with the product launch could provide meaningful upside.
  • 4Q15 – 2 additional Full Line Design Gallery openings in Austin and Tampa with the benefit of the new square footage added in 3Q starting to be recognized on the P&L. The 8-12 week delivery window for new product means we will begin to see the real benefit of the square footage additions in 4Q. With additional upside opportunity from the 2 new category launches.

Margins – The company guided to 100-130bps of Operating Margin expansion for the year on 14-16% revenue growth mostly attributable to ad spend leverage with ‘modest’ Gross margin expansion. There are puts and takes on both line items by quarter, but the fact that the company feels so confident in its operating margin expansion for the year, the company actually walked consensus EBIT margin expectations by 40bps on 14-16% top line growth for the year when it released guidance in February, is a bullish set-up for the year assuming the company can deliver on the top line.

 

Additional details on 1Q15…

  • Gross Margin – We’re modeling 40bps of expansion driven by the price increases the company introduced when it released its Source Book in 2Q14. With DC occupancy pressure from the new West Coast distribution center and dead-rent for new stores opening in 2H partially offsetting the benefit. The West Coast port delays could drive additional shipping expense if product flow issues cause the company to make multiple in-home deliveries for multi-item orders.
  • SG&A – The ad savings benefit will not be realized until we get into 2Q15. Because catalog costs are capitalized and then amortized over a 12 month window, the commensurate costs associated with the 2Q14 Source book will land in 1Q15. Which means marketing spend will be elevated on a YY basis. We’re modeling SG&A growth slightly below sales growth after two quarters of deleverage in part because of the absence of pre-opening related marketing expenses for new Design Galleries.

Watch The Macro Show, Unlocked for Real-Time Alerts Subscribers

Watch the replay of The Macro Show from June 12, 2015.

 

See guest analysis from Internet and Media Sector Head Hesham Shaaban. Hesham gave his updated thoughts on Twitter (TWTR) and the urgency for the Company to find a better way to monetize its business model. 

 

To learn more about The Macro Show and to become a subscriber click here.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Call Invite | Long WhiteWave Foods

Please join us live for our Black Book presentation on The WhiteWave Foods Company (WWAV) on Thursday, June 18th at 1:00 pm ET (Please note the time change versus our previous WWAV note). We have had WWAV on our Best Idea List since 4/11/14, and will provide a detailed updated presentation. 

 

Yes valuation is rich, but rightfully so, WWAV has been lapping its competitors in the marketplace. We strongly believe that this name still has more room to run. WWAV operates in many segments that are nowhere near their full potential, and are still gaining popularity among mainstream consumers.

 

Their brands are all number one or two in their respective categories, with the ability to transcend across categories. We have seen it with Horizon, entering the center-of-store with Mac & Cheese and other snacks and Earthbound into frozen, So Delicious into creamers, the list goes on and will continue to get longer.

 

Bottom line this growth story is not over, and we are very excited to tell you more about our thought process during our live presentation.

 

Longer term there are many way you can win with WWAV:

  1. Growth of the base business ― distribution growth & category expansions
  2. Growth through acquisitions ― string of pearls approach
  3. Sell the company ― many large CPG companies are looking for growth

 

Call details and materials to be provided next week.

 

If you have any questions heading into the call please let us know.

 

Howard Penney

(O)

(E)

 


Cartoon of the Day: Cuckoo Fed?

Cartoon of the Day: Cuckoo Fed? - Fed cartoon 06.11.2015

 

Below is an excerpt from today's Morning Newsletter by CEO Keith McCullough:

 

...While Yellen isn’t married to Bernanke, she is wed to the policy expectations framework he created. While anything is possible when it comes to un-elected decision making on interest rates, I highly doubt she raises rates for the sake of the apologists.

 

Apologists? Yes. As in the every-other-meeting I’ve been in this week where a sophisticated Institutional Investor asks me “isn’t it just time she raises rates?” I promptly say no. Raising rates into a slowdown could easily perpetuate the next US recession.

 


Is Under Armour The Real Winner In Nike's Billion Dollar NBA Deal?

In case you missed it, Nike just inked a deal with the NBA taking over the rights to outfit its players beginning in 2017.

 

(Spoiler-Alert … we don’t consider this deal a “win” for Nike.)

 

Consider this: Just a week ago (before the 'official' announcement) if you approached ten people in your office, gym, neighborhood (whatever) and asked them who endorsed the NBA, I would bet $100 that no fewer than seven would have said Nike. And yet…  it was Adidas.

 

Four key issues to consider:

 

1. League endorsements largely do not work. Consumers really don't care about the logo players are required to put on their jerseys. What they care about is the logo players proudly choose to wear on their feet. That's why Nike walked away from these league deals over a decade ago.

Is Under Armour The Real Winner In Nike's Billion Dollar NBA Deal? - z cy

 

2. Adidas paid $400mm over 11 years. Nike is paying $1bn over 8-years. While this is still less than the $1.1bn/5-yrs that Nike is paying for the NFL, it is still a lot of coin to pay for the 5th most watched sport in the United States (NFL, MLB, CFB, NASCAR, NBA, NHL) -- yes, NBA is just one notch above hockey.

Is Under Armour The Real Winner In Nike's Billion Dollar NBA Deal? - z billion

 

3. Here's where Nike can earn its keep. If Nike can somehow figure out how to innovate the uniforms so that players notice a dramatic improvement in their ability to put points on the board and play over an extended period of time, then there's a commercial apparel opportunity for Nike. That's what Nike did with the NFL. But a football player's uniform weighs about 30lbs, and had not been innovated or streamlined in 30 years. That was a ripe opportunity for Nike.  Basketball? It’s a far different story -- shorts, tank top, shoes (maybe a headband)… that's it.

Is Under Armour The Real Winner In Nike's Billion Dollar NBA Deal? - z lf

 

4. We're reading a lot this morning about how this is bad for Under Armour.  Let's be clear about something...this helps UA. The fact that Under Armour is being boxed out of major endorsement deals by the 900lb gorilla in the space gives it all the ammo it needs to continue its reign as the anti-establishment brand for younger athletes.  We think Nike just gave UA a gift with this deal. And let's face it, UA has been crushing it lately with success in its own endorsement deals. Look no further than like Misty Copeland (a big miss by Nike), Jordan Spieth, Tom Brady, Andy Murray, and Stephen Curry.

Is Under Armour The Real Winner In Nike's Billion Dollar NBA Deal? - z jsp

 

Bottom line: Nike dropped the ball with this deal.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
next