Gary and the Board just authorized RH to go toe-to-toe, dollar for dollar, against the entire 33% of the float that’s actively short.
Doubt the strategy if you want…I wouldn’t advise you to, but you have every right. You’ve earned it if you’ve been short RH. But the fact is that this is probably not the management team you want to bet against when its completing a 16 month bottoming process, and is playing more offense on a growth plan than I have seen in many years (and I’ve been doing this since Analysts had to get approval from our DoRs as to what the business reason was for us wanting access to this thing called ‘the Internet’). RH was up to bat 5 times last year and went down on 15 pitches. But at least it got up to the plate – more than I can say about 90% of companies in the retail supply chain.
RH had the stones to quantify over $1.00 per share in investments that it made last year that are unlikely to recur. We all know that the ‘if this did not happen then earnings would have been $XX’ shtick never really works. But it does not work when investors make that call. Now the company is giving the ammo. The Street is only looking for $0.74 ps in incremental earnings – with $1.00 of non-recurring items. AND these are items that the company did not ‘HBI’ – meaning that it did not strip them out as non-recurring items to boost perceived profitability. It flowed them right through the P&L, which is the right way to do it.
My point is that to get to the consensus numbers for the current year, we need to assume that…
1) the base business is down AGAIN,
2) that square footage is NOT growing (it will be up 24%+ by year end),
3) that it is NOT getting astounding real estate deals (these deals were not apparent last year when other initiatives diluted returns),
4) that the company’s success in taking the brand upstream last year (see chart below) actually scared away customers (which it didn’t),
5) you need to bet against and upgraded management team and process,
6) you need to assume that the category decelerates by another 800bps like it did last year (even though it has turned positive),
7) you need to bet that Hedgeye’s Macro team is flat-out wrong in our #growthaccelerating call.
8) AND, you need to assume that the company has absolutely nothing up its sleeve (that nobody knows about) to actually grow the business and capitalize that it is the best and most aspirational brand in the home furnishings space.
Also, when the company puts out detailed results and hosts the call, my sense is that we’ll all see that the new stores are working better than people think – which will debunk part of the ‘this store growth story is punk’ call (and trust me, that call is pervasively consensus). That call was un-fightable (and unbelievable) when RH batted 0.000 last year. This year, it will matter again, and people might actually start to build/believe in a cogent bull case.
Here’s Some Important Color on the Repo
We all know that it’s one thing to announce a plan, and it’s another thing to exercise it. Does anyone reading this REALLY think that this management team WON’T do it? I dare you to ‘double dog dare’ them.
Here’s math. I like math.
- About $420mm is short, or 40.9% of the float.
- About 800bps of that is due to delta hedging around the convert.
- So we’re really talking an even third of the float is actively betting against this company (ie have been very right for the past year). That’s about $335mm.
- Friedman and the Board just authorized RH Treasury to repo nearly all of it.
- Aside from taking it outright private, which I would DEFINITELY not put past Friedman (bought stock at $35 and has been involved in two LBOs in the past), this is about as close as RH can get to sticking it in the face of people betting against the company’s strategy. #fact
To put this into perspective, a ‘mere $300mm buyback’ for RH, is like Nike announcing a $35bn repo. Nike is one of the most balanced and prudent buyers of its own stock – and $35bn is exactly TWICE as much as it has bought in the 45-year history of the company.
The Stock Call From Here
I’m definitely not going to get ahead of myself – again – on this call. The stock will have, what, a 15-20% day tomorrow? Yah “great McGough, the stock is off 75% in 15 months. Keep your 20% up day.” I am keenly aware that the stock will work MUCH more slowly now than it did in the hey-day of 2014. It’s at a different part of its maturation cycle, is a more complex company, and there is much credibility to be re-earned. That takes time.
But the TAIL story did not change anywhere near as much as the TREND call did over the past year. Just as important, in a retail tape where maybe 3-5% of the 200 names I track have a truly defendable story, and are doing the right things for the right reasons, I think that the ‘playing offense’ story will have pretty sharp teeth in 2017. The company did a great job in giving us the data re investments and earnings puts/takes, while keeping expectations very grounded. I’ll fall out of my chair if the Boone/McLaughlin duo gets ahead of their skis on guidance.
The story is likely to change meaningfully to 'promising less, and delivering more'. That takes longer for a stock to work – and it will probably not get a 30 multiple again for a loooong time. But we don’t need that for it to be a killer stock (long!) in 2017. A 15x multiple (only 0.4x PEG) on visibility to a $3+ number 18-24 months out is a $45 stock. If the company earns back (and maintains) its cred – which I think it will, then higher multiple on a higher number thereafter. But let’s take one year at a time. I was wrong in not respecting that in 2015. A $45 stock is still half of where it was 18 months ago. But gotta (re)start somewhere.
This name is worthy of being on my Best Ideas List today than ever. It has less risk today than when it was at $50 -- and is downright cheap with significant growth in revs, margins, EPS and cash flow. I’m keeping my expectations in check, and will let the company deliver.
RH IS TAKING THIS BRAND UP BY BEING LESS PROMOTIONAL. WHO DOES THAT? COMPANIES THAT WANT TO GROW TOMORROW AT THE EXPENSE OF TODAY. COMPANIES THAT WIN.
HERE ARE MY HEDGEYE RETAILDIRECT COMMENTS FROM THIS MORNING
1) RH. Is tonight the night? I’m not holding my breath (but still can’t breathe).
o RH preannounced revs 2-years ago on Feb 5th. Last year it did so on the 24th. With how the calendar lines up, that suggests today after the close if RH follows the same cadence as last year.
o RH knows its sales number – and with the consensus comp -19% it’s safe to say that expectations are in the toilet.
o I have a very difficult time getting to a comp down something starting with a 2-handle. But what I think really matters here is the Outlook/tone towards ’17. The company has to convince the Street that it is near the end of the bottoming process.
o If RH guides down – basically does the opposite of when it had the forecasting/communication gaffe at this time last year – then this stock is a perma-teen – regardless of the fundamentals. I think there’s less than a 10% chance that happens.
o My gut says that RH waits another week this time around to have the best data to give confidence around it’s trajectory in ’17.
The reality is that – metaphorically – RH was at bat 5 times last year, and it went down on 15 pitches.
o Unlike HBI, KSS, TGT, TIF, etc…that pulled the goalie on branding, R&D, marketing, pension funding, etc…to hit numbers, RH did the EXACT opposite.
o It mis-executed ad nauseam – really almost laughable had it not destroyed so much shareholder value. But it did so while a) taking the brand UPSTREAM and b) launching new growth initiatives while c) transforming its real estate profile WHILE d) growth in the category went from high-single digits to near-flat.
o I get it that people doubt the long-term strategy. They have EVERY right and reason to. But the market’s confidence in what this company can and likely will deliver overshot meaningfully on the downside.
In the end, yes…I get it…there’s career risk associated with being long here (incl my own) – ESPECIALLY after round-tripping to/from $105 AND when the TRADE factors still look so bad. We definitely need a fundamental catalyst. I’m 80% confident we get it in 1H, and we’ll see revs, margins and working cap turn bullish. Yes, I lose sleep over it. But I’m pretty sure that when someone (or at least I) gets too comfortable with a call – it’s time to re-valuate the call. I’m comfortable being uncomfortable about this call.
The ‘fear’ call is consensus. When it’s trading at 5x EBITDA and 9x EPS – that’s gonna matter once the near-term is de-risked and there’s visibility to a 2,000bp+ revenue acceleration – and that’s only a quarter away. The earnings algorithm and ROIC profile should look SO much better in 2017 – at a time when the bucket of retailers that can actually be dubbed ‘investable’ falls faster than Squawk Box’s ratings.
