Let’s face a few facts. Well, not facts. But they’re SMOs (Strong McGough Opinions).
- Gary does not like being public more than you hate owning his stock.
- If you care about a duration less than 5 years out, you’re probably dead to him.
- He’s one of the best strategic thinkers I’ve ever met. Eccentric. But passionate – and is right more often than not over a TAIL duration. The biggest consumer brands today were started by people that could be considered a little ‘off the grid’.
- Unfortunately, TREND reality comes before TAIL vision. That’s where I was wrong in round-tripping this name from $32 to $105 and back again. Gary has a team that cares about TREND – but he cares far less than the average CEO.
- He not care about tweaks to guidance – or even changing guidance as the underlying business changes -- frequently. Truth be told, he probably wants to avoid giving guidance altogether. Most CEOs hate guidance, but Gary is the one that is most likely to stop giving it – simply because it’s a distraction (which I agree with 100%). I would not be surprised if the company reverts to annual guidance only. Until there’s none at all.
Let’s not forget these little tid bits…
- He bought back 30% of the float in three weeks.
- Then got authorization for another 35%.
- Gary has the Board’s support in going as fast and as furious with the repo as he so desires.
- The company’s window for buying stock opens Monday.
- Do you REALLY think he won’t do it?
- Whether or not I consider it reckless to do so in light of the upcoming converts – that won’t stop him from doing so. Perhaps long term bearish if the economy ‘re-recesses' and the high-end tanks, but it’d be painful to be short the stock while he’s against you.
- Yes, 41% of the float is short. Painfully wrong for the year-to date. But definitely right after the close (stock still up 50%+ ytd after sell-off).
- If you’re short, he probably hates you, and wants nothing more than to prove you wrong. It’ll show in results – in a non-linear way – over the long term (TAIL duration).
- Until then he’ll reduce the float – a lot.
This company is no stranger to going private – and Friedman probably wants to be there again. There are enough people that believe in the long-term strategy – even if any of us/you do not.
In other words, finding a financial partner probably won’t be difficult. I can think of several.
To be clear, I would fall off my (non-RH) couch if he sold to any strategic buyer. Not WSM, not Amazon, not anyone. Nobody is going to be his boss. Not even a long-only PM who owns 15% of the company (sorry – but you know that already).
Some points on the quarter
1. Revenue accelerating
- Comps accelerating
- NSP improving
- Guided up 2Q and the full year revenue. Yes, there’s inventory to be cleared. No doubt. And that’s a problem. But it’s a temporary one, and the company finally has a distro pipe to clean it (back in the day it did not, and saw 500bp GM swings).
2. Margins pressured – sort of. Still positive – ie going up (not many retailers comping AND putting up + margins). Just not as much as expectations set just three weeks ago.
3. FCF looks stellar. Try to argue with the SIGMA. No one gives a hoot right now. But despite inventory issues, the cash cycle was down 48 days year on year, which is very bullish on a 1, 2 and 3-year run rate. Capex moderating as RH focuses on slower square footage growth (still high-teens) and better execution. RH on track to be FCF positive for the first in pretty much ever (or at least in this iteration of being public).
The Elephant in the Room (or the Bear in the China shop, or whatever).
This guidance cadence is perplexing. The growth algorithm is solid. But either 1) the rate of change or 2) the communication therein, leaves much to be desired.
- On Dec 8, RH Beat 3Q16 expectations then guided 4Q16 EPS 40% below the street and revenue 9% below the street.
- Feb 23, pre-announced 4Q EPS at the top end of its prior range ($0.68 vs $0.60-$0.70), revenue was also towards the high end of the range, $587mm vs $562M-592M. The company also announced a $300mm stock repo at this time.
- Mar 28, 4Q16 was reported in-line with the pre-announcement and 1Q16 EPS was guided in-line with the street with revenue guided 10% above expectation. Full year EPS was guided 20% below street (excluding buyback) and full year revenue was guided in-line at $2.3bn-$2.4bn.
- May 4, announced completion of $300mm share buyback and announces new $700mm share repo authorization.
- May 11, pre-announced 1Q EPS towards the center of prior range and 2 cents below the street, with revenue 4% above street expectation and the prior guided range. There was no update on full year outlook or guidance for 2Q on this release.
- June 1,
- 2Q rev guidance up 4% (who guides UP upcoming qtr revs?). Def not bearish.
- Guides down EPS from $0.65 (consensus – no prior guide) to $0.40 – vs $0.44 last year.
- FY rev guided up about $75mm, or 3.1%.
- But FY EPS by $0.20, or about 11%.
We can go back and forth on whether this is a 2Q/FY sandbag. It’s irrelevant in light of the ‘shock factor’ of a changing picture. But again, Gary does not care about hitting or beating a quarter – and he probably does not care that any of us care about hitting or beating a quarter. The answer there is vol – big time – on the downside AND upside. The market knows about the downside vol, and is not looking for the upside vol (which is inevitable).
If you can afford to look about mid-way between a HF duration and a GF duration, you’re looking at a 30%+ EPS grower in each of the next three years trading at sub-8x EBITDA – with a big call option on one of two things happening – going private or busting a covenant. But the coverts are not an issue until 2019/20 – a non-event if they convert. The repo is today. Well, Monday, actually. The repo will matter before the debt does – a lot (whether you think he should execute on it or not).
