I’m removing RH from my Best Ideas long list. Putting it at the very top of the bench waiting for better timing and catalysts.
To be clear, I think RH is the most dynamic and innovative concept in retail. It has what I think is the biggest white space to capture out of any name in retail, and both the vision, plan and talent to execute on it. If I had to take my entire retirement nest egg and put it in one stock – RH would be the clear winner. Over a TAIL duration there is a clear path to this name being a 2-3 bagger from its current $88.
But our Macro team is making a call for reversion into Quad 4 in Q319 after a negative GDP surprise in 2Q. And while almost nothing in retail works long-side in Quad 4 (growth slowing, inflation slowing, dovish monetary policy) in particular you want to avoid organic growth, high beta, small cap, and leverage. In that Macro factor context, RH is especially poorly positioned. High-end spending takes a hit (ie short the rich) and the same negative capital market factors that halted RH’s business in its tracks in 4Q come back into the equation. Add on the certainty that 25% tariffs will have a particularly strong negative impact on the furniture business, and the timing just is not right to put fresh money to work in RH – even though it’s trading at just 10x earnings and 7x EBITDA. But Quad 4 is valuation agnostic.
I’ll be floored if I don’t have RH as a Best Idea again in six months’ time after either because of a better price, or because we will have simply de-risked Quad 4 – even if it’s at a higher price than what we see today.
Also important to note that I’m adding Willians-Sonoma as a Best Idea Short. Same macro factors – same tariff exposure, but zero vision, weak management, and no organic growth. Adding that alongside Wayfair, which remains on our Best Idea Short list with 40-50% downside.
