prev

RH | Our Thoughts on Price Action

Takeaway: We think risk is isolated to the multiple, not earnings, and that’s what matters most at a trough 16x p/e and 33% short interest.

We’ve been flooded with calls today on the RH price move – and we should be. We’re the big Bulls on the name, and lately it wants to do nothing but go down.

 

The stock is moving on no news, no sell-side calls, no conference presentations, etc… We don’t think that the 1010 Data Read-Thru is relevant in this instance.

 

We’re as confident as ever that NEAR-TERM earnings expectations are completely in check, and that long-term earnings are too low. And we’re as sure as we can be that we’re not about to be blindsided by any kind of press release from the company about management, business trends, or promotions.

 

We’re now looking at short interest at historical PEAK (33% of float), and the multiple setting a new historical trough (16x).  Put another way, we’re talking a 16x multiple for a 40% EPS grower.

 

Obviously, the market thinks we’re wrong in our earnings math.  We’re absolutely not ignoring a material slowdown in the economy or Hedgeye’s bearish Macro view. We simply think that RH should still do better than the consensus in that environment, and that’s what we’re focused on given the massive 40% correction since November, and 20% month-to-date in Jan. 

 

In the end, we think the risk is isolated to the multiple, not the consensus earnings, and that’s what matters most at a 16x p/e and 33% short interest

 

The key concerns we hear when talking to investors is centered on the 4Q print which won’t be out until late March, and what guidance for 2016 will look like. That’s centered on a few key issues that the CEO brought to the table on the last earnings call; notably Macro headwinds (particularly in oil affected markets like Houston) and Promotional pressure in the home furnishings space.   The ‘wall of silence’ is definitely a concern, as eight-weeks of no info won’t help anyone except the shorts. But our sense is that the company will make some kind of statement about business trends, growth plans, or earnings near quarter-end.

 

Numbers for the upcoming quarter look to be in check. Due to the following…

1) RH issued guidance on 12/10 with only 6 weeks left in the quarter and most purchase orders in the company’s hands given that the delivery window is 8-12 weeks and RH doesn’t recognize revenue until an order has been delivered.

2) As of 12/10, RH was tracking ahead of its guidance on the top-line which calls for revenue growth of 21-23%. Other than the verbiage, RH hasn’t changed up its promotional posture materially since the added event in mid-December. If, RH needed to make up ground on the top line in a quarter where it absolutely can’t miss we think the company would have pulled another promotional lever.

3) Gross margin guidance calls for 100bps of deleverage, giving the company plenty of room to promote if needed to drive the top line and market share. Coupled with meaningful SG&A leverage we still get to 150bps of EBIT margin expansion in the quarter.

 

Full thoughts on our outlook over a Trend duration see note below.

 

1/06/16

RH | It’s Us vs Them

 

Takeaway: Here’s a detailed overview of where we’re different from the Street, by line item, in each quarter in 2016. RH needs to deliver. It will.

 

More than any other company/issue we've had questions on since 2016 kicked into high gear,  RH takes the cake – and more specifically, its near-term earnings trajectory. We’d peg it at roughly a dozen queries in just two days, which is very big for us. We’re not surprised, and we agree 100% with the impetus for the concern. We believe fully in the long-term call, and believe now as much as ever that there’s $11 in earnings power, and that people will actually start to believe it within a year.  But the cold hard fact remains that the tactical game changed in December due to promotional activity, perceived economic sensitivity, and timing issues around concept and new store launches.

 

We can talk all day about the 2-3 year economics of new categories ramping up sales into bigger stores at lower rents. But the fact is that if RH misses revenue and/or earnings in either of the upcoming two quarters, $11/ps in future earnings won’t mean squat, and this multiple will deflate faster than a game ball in Foxboro (sorry Patriots fans).

 

As such, in the tables and charts below, we compare where we shake out in each of the next four quarters versus consensus, with particular focus on Sales, Gross Margins, SG&A, and EPS in 1H16.  The punchline is that we’re ahead of the Street every quarter on EPS, and are coming in at $4.48 for the year vs the Street at $3.94. The good news is that this is almost entirely top line driven throughout the year, with SG&A leverage to go with it. The downside is that we’re more conservative in both 1Q and 2Q than the Street on Gross Margin.  When all is said and done, however, we think that a better comp and higher EPS will trump lower GM, given that weakness in the latter is so well telegraphed.

 

[As a point of reference, we’re going to vet every single part of the RH Bear Case across durations in a Black Book to be released on January 25th (1pm EST presentation). We won’t necessarily disprove all of it, but we will fully analyze it. Stay tuned for details.]

 

EXHIBIT 1: Hedgeye P&L Variance vs Consensus

RH | Our Thoughts on Price Action - RH Trend 1   Summary Table 

 

 

EXHIBIT 2: RH Revenue, Hedgeye vs Consensus

4Q15: To get to the streets #’s for 4Q (mid-point of guidance) need to assume a big ramp in the 2yr trend from 16% to 23%. That reacceleration = $79mm in sales. If we attribute all of that to Modern/Teen we have to make modest assumption that M/Teen books run a productivity rate of just 45% of Spring mailings. That would be what we’d consider an obscenely low performance. Plus RH guided down margins appropriately to win market share. It appears to be working. Top line should not be an issue.

1Q16: Modern/Teen not a 1-quarter event – this builds sequentially. Look at big Source Book revamp in 2Q/3Q14 for proof. Plus, vendor network is the M/T revenue bottleneck, not consumer demand. That’s not a bad position to be in.

2Q16: Continued benefit from Modern & Teen, plus newest design galleries (Chicago, Denver, Tampa, Austin + LA Modern) will have more material impact to topline. Increased marketing spend in the form of source book pages.

RH | Our Thoughts on Price Action - RH Trend 2   Rev Chart 

 

 

EXHIBIT 3: RH EBIT Margins, Hedgeye vs Consensus

4Q15: Promotional environment pressure takes margins down in 4Q. Guide for -100bps on GM likely overshot to the downside. SG&A leverage from Source Book savings and scale in the model.

1Q16: Assume that promotional pressure persists, coupled with DC occupancy deleverage, and higher shipping cost – offset by one more quarter of SG&A leverage as Source Books savings amortized over 12 month window. Strong top line flows through.

2Q16: Promotional pressure eases, product flow normalizes and retail occupancy starts to kick in. Take spending up on marketing to drive top line.

RH | Our Thoughts on Price Action - RH Trend 3   GM Chart

 

 

EXHIBIT 4: RH EPS, Hedgeye vs Consensus

4Q15: Expectations in check for 4th quarter, and RH has to deliver. Sales expectations assume a big acceleration, but product pipe, new galleries, and market share efforts will drive 35% earnings growth even with GM pressure.

1Q16: Street underestimating how long tail is on Modern/Teen product. RH will push envelope to take market share. Enough SG&A levers left to offset any GM pressure.

2Q16: New galleries + Modern/Teen + increased marketing dollars = strong top line. Modest EBIT margin leverage. Street too low by $0.10.

RH | Our Thoughts on Price Action - RH Trend 4   EPS Chart

 

 

EXHIBIT 5: RH Peak, Mid, Trough Valuation and Sentiment Summary

Any way you cut it, RH is sitting near a trough valuation on all metrics, and within 200bps of peak short interest (currently 29%). In fairness, RH has trading history for only half of the current economic cycle – but for the stock to be anything other than egregiously cheap at $78, we need to be more wrong on the fundamentals than we’ve been on any name in a very long time.

RH | Our Thoughts on Price Action - RH Trend 5   Valuation 2


REPLAY of The Macro Show: Why Markets Are Crashing

IN CASE YOU MISSED IT: CHECK OUT THIS MUST-SEE MARKET EVENT.

 

CLICK HERE to watch the replay.

REPLAY of The Macro Show: Why Markets Are Crashing  - TMS replay final


The Macro Show Replay | January 15, 2016

 


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.

Fact Or Fiction? Stocks Headed For A Crash

Takeaway: If you're into Old Wall fiction close this post right now.

Fact Or Fiction? Stocks Headed For A Crash - Bubble bear cartoon 09.26.2014  1

 

Still with us? Okay. Here's the (unfortunate) painful reality for investors who were long U.S. equities heading into 2016. (Note: We've been avoiding equities, net short, since last July.) 

 

It's a sea of red. 

 

 

Despite today's bounce, remember that market conviction and bearish sentiment continues to grow...

 

 

Where do U.S. equities go from here?

 

Down.

 

Click the Image below to enlarge and Understand why...

Fact Or Fiction? Stocks Headed For A Crash - EL profits

 

 

That's all from us.



HedgeyeRetail (1/14) | NKE App Exclusives, Holiday Comps

Takeaway: Nike using SNKRS app for exclusive shoe offerings. Holiday comps slow 250bps from 2014.

NKE - Nike's newest release, the Nike Air Pressure 'OG', will be available exclusively via the Nike SNKRS app at $300

 

Between Brand Jordan and Nike, NKE Inc. has 10 releases on the radar for this weekend. But, the most exclusive and highest priced item can only be found on the Nike SNKR app. This is relatively new for Nike, which sold its first shoe exclusively on the Nike SNKR app on 10/31/15. This marks number 2. It makes sense that Nike would slowly test and build the exclusive sneaker release on its own platform. Which is why we see the majority of releases in conjunction with partners. But over time, as Nike builds its ecomm business from $1.2bn to $10bn by 2020, expect to see more exclusive Nike only releases. We have already seen this in the running category where Nike holds its best merch/colorways for its own stores and website. The kicker here over the near term is that everything a consumer could buy at FL, FINL, DKS, HIBB etc. is also featured prominently on nike.com.

HedgeyeRetail (1/14)  |  NKE App Exclusives, Holiday Comps - 1 14 2016 chart1

(http://solecollector.com/news/release-roundup-the-sneakers-you-need-to-check-out-this-weekend-1-14-2016/)

 

Holiday Sales Comps Down 250bps From 2014

 

Of the 27 retailers/concepts that have reported Holiday sales comps to date 15 have reported a sequential deceleration in the 1yr trend at an average of 7.3%, with 11 posting accelerations at an average rate of 3.3%. On a 2yr basis its more mixed with 1 being flat, 12 posting sequential improvement, and 13 posting a sequential deceleration. In total the average comp for the group is 0.3% down from 2.8% in 2014.

 

As we look forward to 2016, the Street’s numbers are banking on a recovery in growth and margin starting in 1Q. In other words, it’s chalking up this ‘thing’ retailers are feeling now as exactly what management teams want us all to believe – while they cross their fingers, hope and pray that the economy is not really slowing.  YTD, the XRT has marginally underperformed the broader market by 100bps. But, it’s trading at 16x earnings, and has short interest that is disproportionately low for an economy that is #LateCycle. We’re net sellers of Retail.

HedgeyeRetail (1/14)  |  NKE App Exclusives, Holiday Comps - 1 14 2016 chart2E

HedgeyeRetail (1/14)  |  NKE App Exclusives, Holiday Comps - 1 14 2016 chart3

 

ETSY, AMZN - Amazon and Etsy Gain in Search Exposure, eBay Tumbles

(http://www.ecommercebytes.com/cab/abn/y16/m01/i14/s01)

HedgeyeRetail (1/14)  |  NKE App Exclusives, Holiday Comps - 1 14 2016 chart5

 

NKE - Kevin Hart Reveals His Nike Signature Shoe on the Tonight Show, to be released in April

Note: Kevin Hart has 24.7mm twitter followers, Kanye West has 17.1mm

(http://footwearnews.com/2016/focus/athletic-outdoor/kevin-hart-nike-sneakers-jimmy-fallon-183853/)

 

W - Wayfair.com Launches One-Stop Flooring Shop

(http://investor.wayfair.com/investor-relations/press-releases/press-releases-details/2016/Wayfaircom-Launches-One-Stop-Flooring-Shop/default.aspx)

 

NKE - Group of Nike Factory Workers Caught Stealing Thousand of Shoes  in Vietnam

(http://solecollector.com/news/nike-factory-workers-steal-sneakers/)

 

DKS - Dick’s is partnering with predictive analytics solutions provider First Insight to get insight into merchandise

(http://www.retailingtoday.com/article/dicks-obtains-early-insight-merchandise)

 

GPRO - After a disappointing holiday season, GoPro announces that it will cut 7% of its workforce

(http://www.wsj.com/articles/gopro-plans-jobs-cuts-provides-weak-sales-outlook-1452720993)

 

AMZN - Amazon is opening an AWS region in Montreal, Québec, Canada in the coming year

(https://aws.amazon.com/blogs/aws/in-the-works-aws-region-in-canada/)

 

NKE, AdiBok - After turning down a pay increase and extension from Adidas, John Wall could be joining Nike and Team LeBron 

(http://solecollector.com/news/john-wall-wearing-nike-lebron-sneakers/)

 

Following Ed Crenshaw's retirement announcement on Wednesday, Publix announces that current company President will become president and CEO

(http://www.retailingtoday.com/article/publix-super-markets-ceo-stepping-down)

 

VSI - David Edwab, the Vitamin Shoppe's lead director since April 2011, has stepped down

(http://www.retailingtoday.com/article/vitamin-shoppe-overhauls-board-directors)

 

Sheetz investing more than $15mm to raise employee wages between 5-10% without cutting hours

(http://www.chainstoreage.com/article/chain-increase-employee-wages--without-cutting-hours)


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next