RH - Restoration Hardware

[Cigarbutt]

A respected fellow member suggested to initiate a new thread on this one.

Recognizing that there is potentially a high public price to pay when suggesting that something coming out of Berkshire is wrong and in the spirit of being often wrong but never in doubt, here's the link to where the discussion started (with reply #1363):

https://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/buffett-news/1360/

Part of me would have preferred to leave the inputs buried in the generic Berkshire thread so that I could have eventually referred to them, in the unlikely event that some of it was right.

 

[LC]

I try and judge stock picks on two things:

-underlying business

-financial valuation

 

In terms of the underlying business here, it seems like they sell (cheap) Chinese furniture at insanely inflated prices:

https://laurelberninteriors.com/2016/08/10/shocking-truth-restoration-hardware/

 

An example there is a $79 lamp made in China goes for $1507 at RH.

 

Quality seems lacking. I'm guessing no hand cut dovetails  ;D Put it this way, I personally wouldn't buy a piece at RH. The price:value is totally out-of-whack.

 

Perhaps what attracted Buffett is the membership aspect a la Costco? Funny is that these days Costco isn't really the cheapest option, all the major retailers are pretty much in the same ballpark. But, Costco charges that membership fee which creates stickiness. I'm not sure where the great customer value is coming from, seems like a non-Buffett pick in that regards.

 

On the financial side, results have been nothing short of great. They bought 30% of their stock back in 1 year! Their gross margin improvement from 2018 to 2019 has also been impressive (guessing they squeezed China). And the valuation seems pretty decent: Call it 220MM in earnings, trading around 14x earnings. For growing revenues, what looks to be good margins, strong capital allocation (buying back shares pretty aggressively).

 

Those are my 2 cents. I try to avoid businesses where I don't find a value proposition in the product, but aside from that the financial side looks pretty good.

[petec]

Their gross margin improvement from 2018 to 2019 has also been impressive (guessing they squeezed China).

 

No, I think they changed to the membership model and stopped discounting to drive short term sales. This apparently increased margins and totally changed the amount of time the management had to spend on short term vs long term decisions. The CEO bangs on about this in his letters and calls, or did; it gets tediously repetitive but it's also quite impressive.

[LC]

That makes sense. Volume doesn't seem to have improved much so they wouldn't have gotten volume pricing discounts from China.

[Jurgis]

As long as they have ads with Sean Connery and Angelina Jolie lounging on their stools and couches, they gonna do well.

 

 

 

(Gratuitous reference to Louis Vutton)

[Cigarbutt]

^When dissecting the numbers, comparing to others and decomposing the net profit margin from the asset turnover, I came away with the impression that there were two main components to the 'improvement': 1-better merchandise sourcing choices and 2-a voluntary decision to avoid discounts and moving away from clearance sales that likely had a negative impact on the perception of the brand. This appears to be counter-intuitive but in his book Influence, Mr. Cialdini describes this phenomenon seen in certain segments. Here's a link summarizing this aspect:

https://www.productplan.com/product-pricing/

Customers can be irrational about prices the same way markets can remain irrational longer than expected.

 

@Jurgis

I recently saw Vutton (made in China) sunglasses that could be bought for 20$ (CDN) the same day I saw Vuitton (made in China) for 550$ (CDN) and they're not quite the same (the second store had nicer posters on the wall). 8)

[Jurgis]

@Jurgis

I recently saw Vutton (made in China) sunglasses that could be bought for 20$ (CDN) the same day I saw Vuitton (made in China) for 550$ (CDN) and they're not quite the same (the second store had nicer posters on the wall). 8)

 

8)

 

<---- (these are Vutton sunglasses on the smiley)

[mjs111]

I've never looked at RH until today, haven't bought any of its furniture, and am not a furniture aficionado, so I'm not the best judge here.  The knockoff stuff may be lower quality but I'd personally never be able to tell, especially if it's a chandelier hanging several feet above my head.  I'd be the type to buy the cheaper knockoff stuff.

 

If the blog post regarding RH selling Chinese-made stuff for 1000%+ markups were completely true then RH's margins and return on capital should be much higher than they are.  Gross margins are only in the high 30% range, operating margins in the high single/low double digits, and return on capital is in the low-mid single digits. 

 

data from Morningstar

2010        2011        2012        2013        2014        2015        2016        2017        2018        2019 Return on Assets %    -6.64      -1.73        3.78        -1.86        2.01        7.13        5.04        0.25          0.11        8.51 Return on Equity %  -12.96      -3.70        8.83        -3.64        3.65      14.58      11.47        0.60          0.48          — ROIC %                    -9.53      -1.72        6.83        -1.98        3.74      12.34        8.68        1.71          2.67          —

 

 

Mike

[Gregmal]

Furniture like this is really just for "me too" folks who need to flaunt their material things in order to feel important. Except, with furniture, once its out of the store and the tags are off, no one knows what brand it is, and no one, outside of the owner, cares either. Normal people dont spend $8k on a sofa when the same one give or take can be had at Ashley Furniture for $1500. Add in that a good chunk of their customers are the hand to mouth type living on the ledge of insolvency but making "tons of money" right now...

 

This is ultimately an ultra consumer discretionary name, not the Apple of furniture or whatever. But I get that it is now and must own and must talk about stock because it showed up in the Berkshire portfolio.

 

Ive followed this thing for years, and the money is made(easily I might add) trading the momentum and short squeezes.

[Jurgis]

Long time ago I have invested in Natuzzi  ( https://www.marketwatch.com/investing/stock/ntz ) - Italian leather sofa brand. Did not go well. Chinese knockoffs kicked Sean Connery's butt.  :-\

[KJP]

Furniture like this is really just for "me too" folks who need to flaunt their material things in order to feel important. Except, with furniture, once its out of the store and the tags are off, no one knows what brand it is, and no one, outside of the owner, cares either. Normal people dont spend $8k on a sofa when the same one give or take can be had at Ashley Furniture for $1500. Add in that a good chunk of their customers are the hand to mouth type living on the ledge of insolvency but making "tons of money" right now...

 

This is ultimately an ultra consumer discretionary name, not the Apple of furniture or whatever. But I get that it is now and must own and must talk about stock because it showed up in the Berkshire portfolio.

 

Ive followed this thing for years, and the money is made(easily I might add) trading the momentum and short squeezes.

 

I agree.  I get RH's paper catalogs.  Every time I flip through it I ask myself:  "Who buys this stuff at these prices?" 

 

Also, you're exposed to the cyclicality of home sales, which drive furniture sales. 

[Broeb22]

I generally believe that marrying operating leverage with financial leverage = bankruptcy. You can do one or the other, but both will kill you almost every time. If this isn’t a business with significant operating leverage, then I don’t know what is.

 

With the size of the stores they operate and the type of customer they serve that Gregmal so eloquently described, their leases are only slightly less of a noose around their necks than WeWork’s.

 

Owning a business like this for the long term is insanity. Market share in the upscale furniture business shifts pretty quickly. There are basically zero barriers to anyone doing exactly what they do....Find some suppliers in Asia who will make nice-looking cheap stuff and then sign egregious leases for extremely large spaces all over the country.

[BG2008]

Furniture like this is really just for "me too" folks who need to flaunt their material things in order to feel important. Except, with furniture, once its out of the store and the tags are off, no one knows what brand it is, and no one, outside of the owner, cares either. Normal people dont spend $8k on a sofa when the same one give or take can be had at Ashley Furniture for $1500. Add in that a good chunk of their customers are the hand to mouth type living on the ledge of insolvency but making "tons of money" right now...

 

This is ultimately an ultra consumer discretionary name, not the Apple of furniture or whatever. But I get that it is now and must own and must talk about stock because it showed up in the Berkshire portfolio.

 

Ive followed this thing for years, and the money is made(easily I might add) trading the momentum and short squeezes.

 

Not Value Investors...I think value investors are particularly bad at figuring out what retail concepts resonate with people.  Just because you won't pay up for the chic looks and the story telling doesn't mean that lots of Americans won't.

 

I agree.  I get RH's paper catalogs.  Every time I flip through it I ask myself:  "Who buys this stuff at these prices?" 

 

Also, you're exposed to the cyclicality of home sales, which drive furniture sales.

[LC]

looking cheap stuff and then sign egregious leases for extremely large spaces all over the country.

 

Exactly

[Gregmal]

If I was really crazy about due diligence with this company I would probably do what I could to check out their credit customers. Industry wide practice, at least last time I looked was to utilize the easy money pitch, and basically convince people that if you gave them 5 years of no interest that this somehow makes it ok to buy something they cant afford. I dont think Ive ever heard anyone get turned down either.

 

Ill be the first to admit I am hardly a retail guru, but this type of stuff should be called Gatsby merchandise. I dont know enough for this to be anything more than anecdotal, but old money rich people from what Ive seen, kind of look at this stuff as tacky and a glaring designation of "new money". Those people shop at Roche Bobois and places like Greenbaum Interiors.

 

So if the demographic is not old money folks, and obviously not poor/middle class, that can possibly work just not on a large scale and not through the economic cycle. And when you juice that market, again, which is basically new money hipsters and hipster wannabes by introducing credit, you've got a bit of a Molotov cocktail.

 

That said, Ive only ever made money here on the long side. Gary Friedman is a genius and fucking up short sellers is probably higher up on his to do list than anything else. Dont mess with Gary. I wouldn't be shocked, although maybe Im overestimating Berkshire's savviness, but their play owning RH could be simple. Maybe they'd found info they felt showed positive trends into the years end, and realized RH+BRK exposure+massive short interest on low float = good trade setup for a ride to $250-$300.

 

 

[gary17]

Gary Friedman is a genius and fucking up short sellers is probably higher up on his to do list than anything else.

 

Lol. I laugh because I can’t agree more based on the conference calls I have heard this year. 

 

I feel they are pursuing a strategy that’s unique with the cafe and upcoming hotels.  And international expansion maybe next

 

I still have a hard time believing membership changes the business so dramatically

[TorontoRaptorsFan]

https://chicago.eater.com/2019/10/3/20895787/restoration-hardware-brendan-sodikoff-lawsuit-au-cheval-3-arts-club-backpay

 

[johnny]

If the blog post regarding RH selling Chinese-made stuff for 1000%+ markups were completely true then RH's margins and return on capital should be much higher than they are.  Gross margins are only in the high 30% range

 

If I had a 1000% markup business that depended entirely on a public perception that I wasn't marking things up 1,000%, I'd do everything I could to obscure that fact in my public financials, especially since there's not exactly going to be a ton of regulatory/legal scrutiny for those pushing numbers in that direction. I'm no accountant but I could come up with a few schemes that wouldn't make me feel like I was in legal peril.

[KCLarkin]

If the blog post regarding RH selling Chinese-made stuff for 1000%+ markups were completely true then RH's margins and return on capital should be much higher than they are.  Gross margins are only in the high 30% range

 

If I had a 1000% markup business that depended entirely on a public perception that I wasn't marking things up 1,000%, I'd do everything I could to obscure that fact in my public financials, especially since there's not exactly going to be a ton of regulatory/legal scrutiny for those pushing numbers in that direction. I'm no accountant but I could come up with a few schemes that wouldn't make me feel like I was in legal peril.

 

Or maybe some random blog that compares cheap Alibaba knockoffs to RH isn't a reliable source?

[johnny]

I think the truth is likely in the middle. It's actually hard for me to fathom the True Cost of those $6,000 bed frames is actually over $4k. We were just browsing RH yesterday so until further notice I'm the scuttlebutt champ of this thread.

[LC]

Restoration hardware: $3,950

https://www.restorationhardware.com/catalog/product/product.jsp?productId=prod13040104&categoryId=cat10160012

 

Alibaba: $326

https://www.alibaba.com/product-detail/Polished-Nickel-Round-Chandelier-Modern-8_62190141605.html?spm=a2700.galleryofferlist.0.0.73096050Te7UUS

 

Now I'll admit they are not exact matches. RH has 1 extra tier and different glass. But I only did about 4 minutes of searching.

 

I am now scuttlebutt champ!  ;D

 

Here's another one:

 

Alibata - $375

https://www.alibaba.com/product-detail/6-arms-Restoration-Hardware-wrought-iron_62185951999.html?spm=a2700.galleryofferlist.0.0.7f606ac47a6EHM

 

RH: $3,063

https://www.restorationhardware.com/catalog/product/product.jsp?productId=prod2700550&categoryId=cat10160012

 

But you see, the Alibaba version lacks the following:

 

Inspired by 19th-century physicist Léon Foucault's gyroscope, our collection from Timothy Oulton is a striking juxtaposition of the rustic and the refined. The fixture's iron, double-gimbal frame encircles a nucleus of upraised lights, its faceted teardrops illuminating from within.

 

It's all about that striking juxtaposition, the double-gimbal frame, the nucleus of upraised lights...so rustic, so refined!

That'll be $2700, please!

[Spekulatius]

Amazing - $6.5 shipping for that ugly chandelier from China. How do they do this?

[DTEJD1997]

Amazing - $6.5 shipping for that ugly chandelier from China. How do they do this?

 

Shipping from China to USA is VERY heavily subsidized.

 

A lot of USA retailers & businesses bitterly complain about this as it is cheaper to ship from China to USA than it is to ship from CA to NY.

 

USA postal system should phase this out quickly.

[Spekulatius]

Amazing - $6.5 shipping for that ugly chandelier from China. How do they do this?

 

Shipping from China to USA is VERY heavily subsidized.

 

A lot of USA retailers & businesses bitterly complain about this as it is cheaper to ship from China to USA than it is to ship from CA to NY.

 

USA postal system should phase this out quickly.

 

Yep. Seems like an easy thing to fix. With some much bravado about the trade war, changing this should be a no brainer. I do recall they my wife got a couple of small items shipped from a retailer from HK a couple of years ago for about 50c.

[DTEJD1997]

Amazing - $6.5 shipping for that ugly chandelier from China. How do they do this?

 

Shipping from China to USA is VERY heavily subsidized.

 

A lot of USA retailers & businesses bitterly complain about this as it is cheaper to ship from China to USA than it is to ship from CA to NY.

 

USA postal system should phase this out quickly.

 

Yep. Seems like an easy thing to fix. With some much bravado about the trade war, changing this should be a no brainer. I do recall they my wife got a couple of small items shipped from a retailer from HK a couple of years ago for about 50c.

 

yes, this should have been addressed YEARS ago.

 

Come to think of it....if the USA had politicians that weren't "developmentally disabled" and actually knew of, and came up in business, we would not be in this situation to begin with.

 

In the late 80's, when China is just getting going, FINE, have very cheap shipments.  Give China maybe 10 years or so to get up on their feet.  Then in year 11, shipment rates go up 10%.  Over the next 9 years or so, rates go up every year till they are equalized (or close to it) at the end of the 10 year period. 

 

20 years should have been long enough for China to get their industry up & going.

 

Instead, USA just gets taken advantage of in perpetuity.

 

I don't blame China, I blame USA politicians.