I have covered this name and have known management (quite well) since pre-IPO. I can say…without hesitation…that this quarter is the best dose of confidence, focus and humility I have ever seen out of this team. Maybe it’s because there is now a half-dozen people in the office of the President (that’s only partially a joke)…or maybe it’s because there’s an exceptional operating plan in place, and management is willing to forego a few points in comp to meaningfully reduce inventory, accelerate merchandise margin, jack earnings quality, cash flow, returns and add an element of stability to a business that 42% of Wall Street is hoping will fail.
I never like hearing a CEO talk about short interest and gaming the bears. But Friedman has a long term plan that I believe will transform retail. I’m not echoing the guy – not by a long shot. I have no allegiance to any management team. Period. I usually like being diametrically opposed to management teams bc they so often deserve it often believing in a plan that is flawed. But the fact is that I think RH’s plan is 100% correct. GF’s organization believes it, and are rallying behind it after two years of operational and organizational pain. It still stuns and amazes me that over 40% of the float is short (still over 30% after adjusting for delta hedging against the convert).
I think where most people are so uncomfortable is that the plan with RH is that the plan will change. We say that at Hedgeye all the time. We operate in a dynamic environment, and part of a winning #process is to embrace change. That does not come without enough volatility to kill an elephant. But changing plans over the short and intermediate term, to win over the long term, while never losing sight of a vision is what winners do. The current plan at RH is perhaps the most appropriately risk-managed plan we have seen in 5-years.
Yes, it will look a little different next quarter, and the quarter after that. And yes, the company will be perceived to ‘be a major failure’ once again when it swings and misses. I’m 100% cool with that. This stock is not one to own for the quarter. If that’s what you’re playing for, you’re right today, and probably will be next quarter. But we’re talking what…10-20% return. Fine. The real value creation comes from driving one of the most impressive consumer-driven earnings and cash flow algorithms in retail and achieving $10 in earnings power over less than 4-years. It’s funny…people think the guy is a reckless, thoughtless cowboy when the stock is $27, but then a genius when it is at $105. What happens when it’s a $200 stock?
I’m not changing our ‘already above consensus’ numbers (we were already modeling a sizable beat). The gap will narrow between us and the Street on this event for this year, but after consensus numbers change, we’ll still be 20% ahead of the Street next year. Ironically, we need 40% less pre-tax income today to get to $10/share than we did 12 months ago. Not just a tax thing. It’s a CEO taking out 40% of the float thing. The way I see it, within 12 months the street will be eyeing $9-10 in EPS on a 20% growth rate.
Picking a magic multiple on a name like this is borderline ridiculous. And p/e multiples are punk with this one given the leverage here. Even if we just straight line today’s 9x EBITDA multiple to 2019, we get to a $120 stock. Roll that to 2020 numbers, and you’re at $150 – and that’s assuming it’s not revalued higher for more consistent growth in a less volatile model with leverage going from 5x to 1.5x. Every EBITDA turn above 9x is another $12 in the stock price. Have fun…
