Takeaway: We have an upside bias to tonight’s print. But at this valuation, the market thinks RH is broken across any duration.

We’re roughly in-line on both comp (+5%) and EPS (+$0.06) for RH this quarter.  Our bias is to the upside on both metrics, but we think there are other things that matter a lot more. Let’s face it, this is a seasonally weak quarter for a company in the midst of a well-telegraphed yet painful transition period. The way the stock is trading, the market thinks that virtually no part of our long term bullish view is going to happen. On our numbers, RH is trading at less than 8.0x earnings, and at 4.0x EBITDA – and that’s on NEXT YEAR’s numbers – it’s not like we’re telling you to look out to 2018 or ’19.  So clearly, the market simply lost massive faith in this story and in the management team’s ability to deliver. We have not. Are we worried about the back half? Yes, particularly as the switch to the new promotional cadence (Grey Card ‘club’ as opposed to ‘in your face’ episodic promos) takes place.  Most people generally get the revenue volatility that’s likely coming down the pike. But very very few people we talk to actually want to take the plunge and own it through this year.  And there you have a 4.0x EBITDA multiple.

Also consider the following comparison of RH today to RH on its IPO. The table below tells it all, but here are some callouts. Enterprise Value is now a mere 14.5% higher, and yet…

1) Revenue has doubled to $2.1bn

2) Margins have more than doubled to 9.7%

3) Productivity went up by over $1,000 per foot, which is simply an astonishing statistic.

4) Net Debt/Total Cap went from 38% to 5%

5) P/E went from 30x to 13x

And keep in mind that at the time of the IPO, the ‘growth’ was in 20k foot Design Galleries, but we’ve since learned that landlords are giving RH preferential terms on 40k-60k sq ft properties, and they’re working as it relates to gaining outsized share of each of those markets.

Our point here is that the valuation has been decimated over this time period, and yet the growth story has expanded if anything, and been de-risked from a funding perspective. Is it in a pretty ugly pivot period right now? Yes. Might the company need to invest more capital to facilitate growth? Perhaps – worst case. But for a long term investor (ie you can look out 9 months or more), this name is as appealing as they come.

RH | Then and Now and Tonight - RH then now

RH | Then and Now and Tonight - 6 8 2016 chart2