RH just showed the market why it’s RH – the best in the business. It completely annihilated the quarter putting up $1.85 vs the Street at $1.53 with accelerating sales, outsized margins, bought $254mm more in stock, and took up guidance for the year by 10% at the midpoint at a time when more companies that compete in the Home category are blowing up left and right than I can recall at almost any point in my career. WSM beat the quarter due to SG&A cuts. Who cares… RH beat on revenue. Pure offense. No blaming tariffs, weather, a weak consumer…none of that. Just pure unadulterated exceptional results. I took RH off my Best Ideas Long list on May 23rd and put it at the top of my Long Bench in conjunction with our Macro team’s call that we’re reverting into Macro Quad 4 (growth slowing, inflation slowing, dovish monetary policy) in Q3 – see note below. That’s bearish for a high-end consumer as well as for small cap, highly levered, high beta names like RH. That’s a black eye for me today given the 20% after market move. Though putting on my risk management hat, these stellar results came before the macro environment unfolds as Hedgeye is forecasting (with weakness at the high end consumer) – so I’m still on the sidelines here until we de-risk Quad 4 post-summer. I’m on record (numerous times) in saying that this is ultimately a $300 stock. I said it when the stock was at $27 and I’ll say it again today. That said, I’m not gonna chase it on this squeeze, and I have absolutely no problem buying it back higher once the Macro risks pass – as those risks in the back half are very real. But for now, RH is showing that when it is focused on executing on its plan, Macro factors matter far less than with so called retail competitors (and I use the term ‘competitors’ very loosely -- as the competitive gap is blowing out). RH is the top name on on our Long Bench.
My note from May 23rd.
RH | Removing from Best Idea Long List
Takeaway: Me – the RH ultra-bull -- taking RH off my Best Ideas list might be a sign of the apocalypse. But it’s not. It’s a sign of Macro Quad 4.
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.
