RH | Duration Matters

It’s nearly impossible to poke holes in this RH quarter. Top line growth of 25%, gross profit up by 45%, and EBIT up 166%. Put up $6.20 in EPS vs the Street at $5.30. Still trying to keep up with demand with deferred revenue up 64%. Put up a 3Q operating margin of 26.7% -- which is a nearly unheard of number for a home furnishings retailer. Some luxury brands strive for that margin level. Guided to 20%+ top line in 4Q and double digit top line growth next year with expanding EBIT margins. Announced RH Contemporary and rollout of RH Color – more top line drivers. Gave clarity on European expansion with RH England in Spring ’22, RH Paris in the fall, followed by London, Munich, Dusseldorf, Brussels and Madrid – with would-be partners everywhere from China to Abu Dhabi knocking on RH’s door to launch the brand in their respective countries. In hindsight, people are going to look at this quarter and wonder if this was the peak. Peak demand, peak merch margin, peak EBIT margin, peak sentiment – peak everything. That’s why the stock is roughly flat on a killer print. Quite frankly, I’m not surprised one bit – not by the degree to which this company is executing, and not by the muted reaction in the market. I was asked before the print about if RH was a long into the print. My answer is that the fundamentals would blow away the Street, but that a $470 stock already knows it. Keep in mind that the stock is up 14% since WSM print and up 46% over the past three months. There’s a lot of good news in this name, and the company just earned it. We have this name at the top of our Long Bias list. To be clear, there is no other company that I’d rather own over a TAIL duration than RH. The question shouldn’t be whether this is a $500 stock by the end of this year – but rather when it breaks the $1,000 barrier and achieves $40 in TAIL EPS power. But I’m waiting to pound the table until there’s more controversy around this name, which will likely be driven by management inflicting short-term pain to the P&L in exchange for a triple-digit long-term return. Today, there is less controversy around RH than I can recall since the day it went public. Chances are, the controversy will come when the company rolls out its International store base and we see it build an operating asset base and logistics infrastructure on a Pan-European basis – which won’t come cheap. Likely an ROIC-eroding event, until it establishes dominance as the only global high-end home furnishing brand. The top line runway at this company is enormous, and people who say ‘it’s expensive for a furniture retailer’ are delusional. Buy on weakness…and if you can invest over a TAIL duration, buy today.