Not many holes to poke in this RH quarter. I was floored to hear that the first question on the call was about 3Q revenue guidance being ‘light’ when the company took up the year by $1.35ps on top of a $0.51ps 2Q beat. So short-sighted. We’re in Macro Quad 4 (growth and inflation decelerating) – a period where RH should statistically underperform -- but nobody sent RH the memo. Some of the biggest and best companies in retail are dropping like flies, but RH’s growth and profit algorithm is accelerating. It smoked its recently upwardly revised guidance, and guided up for the year – again (for the third time). Clean EPS relative to expectations of $3.00 (it actually reported $3.20 but had a tax benefit) beat the consensus of $2.69, and it took up the year by $0.84 per share more than the 2Q beat (which was guided higher three weeks ago). It put up 10% sales growth and leveraged it to 33% EBIT growth. My math is that a clean top line growth is closer to 7% -- adjusting for inventory clearance and the benefit of the NY store last year. Gross margins were down 10bps – the only ding (if you want to call it that) – but it went up against an 800bp compare last year. Inventory clearance was a 200-300bp driver as it closed a DC this quarter (good strategic move), but anytime we see liquidation in this business it tends to crush gross margins. That simply did not happen. In 3Q we should see a slight step down in growth per guidance, but I think hindsight will show that the company is going to prove that it just guided conservatively. When looking at store openings the big revenue acceleration comes in 2020 due to the timing of store openings – several of which were pushed from 2019 – 7 on a weighted basis compared to just 2 in 2019. This is going to be a very tough stock not to own in 2020 (and dangerous short with 33% of the float short the name) – at which point we’ll have de-risked Macro Quad 4, will have a sharp revenue acceleration, and likely deleverage as it will presumably price another convert which will eliminate $0.70 per share in interest expense. Don’t think $175 or $200. This is ultimately over a $300 stock over 3-years (and GF will likely tell me that I’m too conservative). I’m stunned that this company has an EV of only $5bn when companies like Wayfair have 3x the market cap yet seemingly does not care about things that I think are pretty important, like generating (a lot of) earnings, cash flow and real return on capital. One of the few companies in retail (the other one that comes to mind is Nike – bad company to be alongside) that has the power to offset tariff pressure at the customer facing end with pricing and with price concessions at the supplier level, which it dominates. If I could own only one stock over a TAIL duration is retail, RH would be it by a country mile. Get ready for 2020…if you get a chance to buy as we see a store opening lull in 2H, do it.
