RH | Expect Another 8k

Takeaway: If the company was going to miss, it’d have announced it along with this 8k around management changes.

The announcement that COO Ken Dunaj is leaving RH bugs us, but only because of the ammo it gives the Street around the ‘Don’t Like Management’ argument against the stock. It’s not that Ken is/was on his own a major force behind driving growth and profitability. But this release tells the investment community several things – even if we don’t believe most of them.

  1. First off, this ‘resignation’ actually happened on Tuesday. If you were wondering what took the stock from $52 to $47, now you know. Someone got the memo early.
  2. This will probably introduce a ‘revolving door’ component to investor’s concerns about management. As for the issues around Gary being eccentric – those we can handle, and can easily refute. But the facts are stacking up about management leaving in a way that people will universally question RH’s ability to retain talent. They’ll look at the following…
    • Carlos Alberini, Co-CEO who left to become CEO of Lucky in Dec 2013 (yes, people will revive ‘the Carlos argument’)
    • Doug Diemoz, Chief Development Officer, left RH last summer after 15 months in order to be CEO of Crate & Barrel (not a big deal, RH has not missed a beat).
    • Richard Harvey, head of Kitchens & Tablewear, who quietly left late 2015 after being hired to meaningfully grow the Kitchens business. (RH shifted gears and saw several opportunities to pursue ahead of kitchens. He left on his own accord).
    • Dunaj, COO (leads the organization that moves product – not store openings, to be clear)
  3. In every instance, there was a change in strategy or direction that makes sense out of the headcount changes, which makes sense to us. When a story is as transformational as this, nobody’s job is status quo indefinitely.  But still, people who want stability in management on top of a dynamic growth story won’t like this.
  4. Ironically, this is not the 8K we were expecting to see. We were looking to see a Business Update press release, and the market was too. An interesting thought is that if business was in trouble, it would likely have had to have been disclosed along with this management change. In that regard, relative to expectations, the fact that we got the singular release about Dunaj is probably more bullish than anything else – again, relative to the stock’s performance over the past three days.
  5. Top management has been in planning meetings for much of the past two weeks. In that regard, the timing of a change like this makes sense. It also makes sense to us that we’ll see an update by the end of Feb, which will bless the quarter, and include a business outlook that is far better than a $47 stock suggests.

In the meantime, RH is trading at 12x current year numbers and a long term earnings growth rate of 40% (both of which no one believes). In other words, it’s trading in-line with KSS, and 25% BELOW zero square footage growth retailers with peak margins (like FL, GPS).

 

Here is a link to our latest RH Black Book:  RH In A Recession Black Book Click Here


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