RH | Dominant, With No Peers

As has become a regular occurrence for RH these past few quarters, the numbers speak for themselves – and what the numbers didn’t say, the 2-hour conference call certainly did. Simply put, if you fail to acknowledge that this company is legitimately evolving into a global home furnishings luxury brand (in effect, creating a classification that did not previously exist), then you're either living under a rock, or you don’t respect math. Total core demand was 36% for the quarter, Gross Margin was up a staggering 480bps vs last year to 47.4% (similar increase to WSM – though WSM benefitted from ~200bp in lower rent expense), and most importantly, operating margin clocked in at 23.7%. Furniture companies simply don’t put up these kind of margin levels. RH is sitting in a group with no peers in this business. The bar was exceptionally high this quarter for RH with no room for error, as every other company that’s tied to the Home absolutely crushed it. Fortunately, I can’t poke a single hole in what the company put up, guided to, or said in the Q&A call. The company guided to 15-20% revenue growth for the upcoming year, with the first quarter up over 50%. It’s worth noting that demand accelerated to +73% in February, and +96% over first two weeks of March. RH also put up guidance for 100-200bp margin expansion for the year. The margin expansion is just flat out too low – as is the top line guidance. In years past this company wasn’t afraid to miss a quarter at the expense of making the right moves to fuel long term growth. I still think that’s the case right now.  But the way they set-up expectations for FY21, we think they will beat EPS by 10-15% and come in at ~$21-$22 per share. For a company with no peers, a global growth runway and a path to 25% margins that’s achieving close to 60% ROIC – its current 23x multiple hardly seems like a stretch from where we sit. But still, it's not on FY21 numbers that get you paid here. You’ve got to think bigger – you also need more than a 2-year model. Looking out to FY25, we’ve got RH clocking it at $37 in earnings, which compares to the Street at $27. At that point about 25% of the company’s revenue will be outside of the US (predominantly Europe), with added runway to open up Asia. For a company with such category dominance, lack of any real competitor with scale, superior margins, returns, and growth runway, we think it’s easily fair to pay a 30x multiple for such an outsized earnings number. There’s your $1,100+ stock. Discount that back to today’s dollars by 10% annually and you get to a stock of about $750 in a year, or 40% upside from here. RH remains our favorite long-term story in retail. We’re due for a deep dive Black Book on this one…stay tuned.