This announcement about the launch of RH Teen is not groundbreaking by any means, but it is a positive one nonetheless, and is absolutely consistent with the path that RH needs to take in order to double its revenue by 2018 and reach $11 in earnings – a number that is $5, or ~80% above the consensus. If we’re right on our numbers – which we think we are – then that suggests a long-term CAGR in earnings and cash flow better than 40%. If that’s the case, then the current 28x forward multiple looks flat-out cheap given the growth profile. Higher multiple on higher earnings = $140 in six months, $200 by the end of next year, and then $300 in 2017. We detailed our math recently in our latest RH Black Book “RH | Road To $300” which outlines the longer-term, but what we think is interesting is how RH’s catalyst calendar is shaping up.
RH | Road to $300 Black Book
Video Link: CLICK HERE
Materials: CLICK HERE
Importantly, we think that the catalyst calendar is just starting to pick up, and should be the best that RH has seen – perhaps ever. Here’s the roadmap…
1) Earnings on September 10. We’re looking for a strong, consistent quarter out of RH, with 18% revenue leveraging to 25% EPS growth. Our number is only a penny ahead of consensus, keeping in mind that management was on its convert roadshow in the final month of the quarter. It already disclosed and telegraphed everything about this quarter that we need. If there’s any surprise, it should be on the plus side. But all-in, this quarter should have the lowest volatility out of any we’ve seen in a while.
2) RH Teen -- launch on September 18, with subsequent mailing of 200-page sourcebook and dedicated space inside future design galleries.
3) RH Modern – launches within a week of RH Teen. This will have a 370-page sourcebook with a simultaneous opening of a stand-alone store on Beverly Blvd.
4) Starting Late Sept/Early Oct, Successive Design Gallery Openings In…
- Chicago (62,000 feet in the most elite part of Chicago’s Gold Coast -- but at a non-elite cost).
- Denver (another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek).
- Tampa (47,000 feet, which is spot on with what our real estate analysis suggests is appropriate for 10% market share and $1,200/ft).
- Austin (47,000 feet at The Domain – likely to replace one of the two small-format stores in the area, one is just 4-miles away. That makes sense given that our math suggests that Austin could support 50-60k feet for RH).
5) Square Footage Growth Returns. Add up the four stores in the point above and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage (and that’s not counting Atlanta). Keep in mind that this company went from over 100 stores pre-recession (and before having a defendable merchandise, real estate strategy, and actual management team) to 67 in the latest quarter as it culled bad locations. Square footage grew on occasion over that period in a given quarter, but has settled in around 850k. Starting in 3Q, we should see square footage growth ramp from a mid-single digit rate in 2Q to a number ~20%, then steadily march towards 35%+ in FY16. Then we’ve got 20%+ square footage growth every year thereafter for at least five years based on our real estate analysis.
So all in, there’s two new and significant merchandising initiatives, which are solid on their own. But to pair them with the square footage growth acceleration seems almost like a fantastic coincidence. But it’s not. This has been in the plan all along. There’ll be many more new concepts and classifications – though we’d argue that the company can go deep and add $2bn in revenue with what it has.
To be clear, there’s much more to this story than just square footage growth – like the ability to consistently merchandise product people want in quantities they need. Without the ability to deliver on that requirement, a retailer could have the greatest store in the hottest location with the best demographics, and it will still be nothing but a liability (regardless of how low the rent might be). That’s why square footage growth is grinding to a halt for other US retailers. That’s also why the growth profile at RH is so powerful, and unmatchable by anyone we see in Retail today.