Takeaway: RH Teen is a plus, but its importance will be dwarfed by how well RH is likely to execute this growth plan over the next four months.
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.
Excerpt from a recent Hedgeye Investing Ideas newsletter:
From the perspective of foreign exchange market participants, the U.S. remains the “best house in a bad neighborhood” and we remain bullish on the U.S. dollar (UUP) as a result.
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Takeaway: After rolling SA claims hit 266.3k in April 2000, it took exactly one year for the economy to enter recession. This week's reading: 266.3k.
With spot SA claims having hit a 42-year low four weeks ago, the rolling 4-week number has hit its own low of 266.3k this week. The last time rolling SA claims were at this level was the week ending April 15, 2000. Aside from that one week in 2000, this is the lowest level of rolling SA claims since December 1973.
For perspective, back in the late '90s, early '00s cycle, 266.3k was the lowest rolling SA claims would go. The following chart shows that from April 15, 2000 claims began to rise; the economy entered recession exactly one year later.
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Takeaway: Book Some Gains on RED Short-side and look for a re-entry point.
With WTI moving in on its oversold signal, we want to book some gains short-side and outline a few upcoming catalysts that could disrupt our view (which hasn’t changed) through the end of the year.
Our intermediate-term view of 1) more deflationary USD strength and 2) Confirming market signals (PRICE, VOLUME, VOLATILITY) drives our bearish view on commodities as an asset class. With that being said, many of the tickers on our screen look oversold (Crude oil included) on the FX catalyst this week and we want to point out a few snap back risks over the next month and a half (think of them as shorter-term risks within an intermediate-term TREND view on the asset class).
With WTI moving to the bottom end of our risk range we like the idea of booking some gains short-side with the intention of re-shorting at a better price. Since the reflation trade unwind (June 10th), the market signaling taking crude lower confirms our intermediate-term TREND bias but these signals haven’t been as strong over the last two weeks.
- Implied volatility (OVX Index) has moved higher with widening realized ranges. Higher volatility increases the range of probable outcomes near term
- The healthy volumes and greater price semi-deviation on the down days (Target threshold of “0%”) confirm the bearish momentum over the last month and a half but these signals too, aren’t as strong
- Consensus now expects more USD strength and pain in commodities as relative USD correlations have broken down over the last month
The table above shows that on days of negative returns since the June 10th highs (which double up down days), we’ve seen healthy volumes and more variance in price momentum (All BEARISH signals) meaning that the downside moves have been much more pronounced on average.
Most importantly, these price signals haven’t been as pronounced over the last two weeks, and currency correlations (both absolute and relative) are breaking down as expected volatility widens out: NON-LINEAR RISK.
WIDENING RANGES: Realized Ranges and expected volatility stretching out
We outlined both of the next two central planning catalysts in the Macro Show this morning:
“$USD: Investors pushed out the dots yesterday as global growth slowing and China’s quasi-acknowledgement of economic reality pushed bets on the probability of a September lift-off back below 50% and pushed the dollar -1.1% lower on the day. As a consequence XLE pop +1.86% to lead sector performance. Jackson Hole is the next currency catalyst, and we expect the event to be Euro bearish with Draghi’s presence. Jackson Hole = Aug 27-29th, September FOMC = Sept 17th.”
With the 2-step Chinese devaluation and likely Draghi jawboning in Jackson Hole perpetuating a de-facto tightening without a fed funds rate cut, any incrementally dovish move out of the Fed could unwind consensus positioning which is betting on more of the same:
The most differentiated part of our GIP model right now for the full year 2015 is our inflation estimates (See below). With the relative central policy measures globally perpetuating more USD strength, expect a pushing of the dots (or an expected pushing of the dots) if the Fed starts to sniff out CPI readings anywhere in our area code ahead of the September meeting. Even so, Draghi is the near-term catalyst (unless we get more from Beijing), but the market is sniffing him out.
In this excerpt from today's edition of The Macro Show, U.S. Macro Analyst Christian Drake explains the absurdly high NYS multi-family permits through June and how that will likely precipitate the first bad housing number in a long time.
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