RH – Our Take on RH F&F
There has been a lot of buzz over the past 24hrs about the change up in RH's promotional posture with the addition of a 5-day Friends and Family event that ran from 12/4-12/8. While the company didn't run a Friends and Family event last year, our sense is that RH moved a January event earlier in the quarter. They have plenty of events to play with as most of the month of January in the 4th quarter of 2014 ran a 20% off deal. See table below.
RH's guidance for the balance of the year implies a meaningful acceleration in top line trends from 10% growth this quarter to 20% in 4Q15. That's driven in large part by the addition of 740 new pages of new product, 540 of which are RH modern. That's the main driver of the top line reacceleration and we don't think that a change up in the timing of one sale will move the needle dramatically. It's not as if RH has a bunch of seasonal merchandise to work through like many of the other retailers that could be considered comps. If anything, this helps RH pull sales into 4Q by incentivizing consumers to place orders earlier. Because of the shipping window and the fact that RH doesn't recognize sales until an order is delivered means that an order placed in January = a 1Q sale. But, we don't think that's at the expense of 1Q topline as the new product shift to 2H has shifted the demand curve this year. And, it doesn't have the GM impact that many would suspect especially if the company pulls a January sale.
Here’s our conclusions from our call on Tuesday:
1) The story is absolutely on track. We’re as close as we can get to being 100% confident that nothing will come from this print that will rattle our long-term call. Rather, we think that the commentary around value drivers like large format Design Gallery performance, and initial orders of Modern and Teen will be upbeat.
2) RH hasn’t missed yet, and shouldn’t start now. That said, this will be the most uninspiring quarter of the year due to the timing of store openings and new business launches. But let’s clarify ‘uninspiring’. RH is likely to grow EPS 30-35%, which compares to US Retail combined EPS growth of…4%.
3) We really like the stock here. Despite the business outperforming everything in Retail, the stock has underperformed virtually every Consumer stock index, including high-beta stocks in other Sectors. We think that the worst case here is that the comp is mid/high-single digits (we’re at 11% -- Street at 10%). But even then, after a few ugly days we think that the stock would get a temporary reprieve given that the company has so vocally telegraphed that 3Q would be soft. But would put extra focus to deliver in 4Q.
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