RH - Restoration Hardware

[Gregmal]

Sometimes a trade is just a trade. This basically played out as perfectly as one could have drawn it up. Of course we can backfill some genius investment thesis into the reasoning of "why", but sensibly, the play was an obvious low hanging fruit for someone positioned to make it happen. Einhorn has done it with DDS a few times.

[Jurgis]

Basically a more of the same quarter.

Revenues up, inventories down, profitability up and leverage measures down. What's not to like?

Conceptually, they are planning to continue on climbing the luxury mountain. Next step: Paris, London and the "adjoining" countries.

I think they should try Milan.

On the call, they referred to the correlation between their concept stores (they don't really call them stores, the sites are showrooms) and the Apple platform concept. Their moat is still based on the definition of their brand as an intermediate with taste and style.

Opinion unchanged.

 

Mr. Big should have apprenticed to these guys.

[Jurgis]

that's ambitious they think they can become a $20B company selling furniture.

Gary

 

W or RH - place your bets!  8)

[Cigarbutt]

As the opening poster, i feel obliged to update with the just released Q4 numbers (end Feb 1st).

In the footnote, they report that they were doing great until they met a market dislocation in March (sales down 40 to 43%, depending if you include the espresso sales or not).

So, in Q4, sales were down 6% (from the guidance revealed in December) but management says this was a strategic move and profitability held up and inventories increased a bit. They have a convertible issue (300M) in mid-July when the weather will, hopefully, have taken care of the heat-sensitive crowned bug. And they're looking for financing in order to take advantage of opportunities..I sent an e-mail to investor relations explaining that they may also qualify for a bail-out 'cause people are suffering.

So, along most adjusted Graham metrics, this is now a 'value' stock and, if you 'believe' in the following assumptions, tomorrow may offer a stock on sale:

Assumptions (you believe in):

-the jockey

-the V recovery

-the foreseeable future of luxury furniture in continental USA first (international ventures have been put on hold)

-Fed-induced wealth effect

 

From the release: 

"At RH, we live by Albert Einstein’s three rules of work. “Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity.” It was during the depths of the Great Recession, when the word “value” drove an entire industry to lower quality and reduce prices, that we chose to move in the opposite direction, raising the quality of our offering, and positioned RH as a disruptive force in the lucrative luxury home furnishings market. Out of the clutter of the current crisis, from the discord and related drama, and in the middle of what seems like the most difficult of times, we are once again destroying our current reality to reimagine RH in a manner that will, in the words of Steve Jobs, “Change everything, again.”"

Maybe it's just me but there are too many words that rhyme with bankruptcy in the Einstein quote.

For this post, I reviewed the thread and Gregmal's classic assessment of momentum perhaps caught the spirit of the whole thing: these guys sell Gatsby merchandise.

Last sentence of The Great Gatsby: "So we beat on, boats against the current, borne back ceaselessly into the past."

There has been a lot of ink trying to explain the meaning of this sentence. For some, it's the possibility and ability to start anew, the dream. Sadly, it also means that people keep repeating the same mistakes.

[Broeb22]

As someone who lives in the heart of the American furniture industry, I can tell you that RH and every other furniture manufacturer/retailer is in a world of hurt.

 

This could be the moment when RH’s insane leases and leverage mix a toxic cocktail that ends in bankruptcy.

 

Furniture companies are furloughing their entire staffs where I live, from the warehouse workers up to senior executives. I would hate to have the amount of debt RH has going into a recession.

[jschembs]

As someone who lives in the heart of the American furniture industry, I can tell you that RH and every other furniture manufacturer/retailer is in a world of hurt.

 

This could be the moment when RH’s insane leases and leverage mix a toxic cocktail that ends in bankruptcy.

 

Furniture companies are furloughing their entire staffs where I live, from the warehouse workers up to senior executives. I would hate to have the amount of debt RH has going into a recession.

 

Apparently Gary Friedman has discovered a way to navigate a brick & mortar furniture retailer, located in some of the most expensive property in the country, not only through all of this relatively unscathed, but doubling down to now try and sell luxury houses:

 

Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences.

 

His latest letter also quoted Einstein, so he's thinking big.

 

Sarcasm aside, is the rally in this name back to nearly ATHs due to a bet on income inequality that means RH's business should hold up relatively well through Depression levels of unemployment?

 

I also wonder how many WeWorks and other flashy corporate real estate buildouts were outfitted with trendy and expensive furniture. Not only will that type of spend likely dry up, but you'll have lots of used furniture on the secondary markets.

[Broeb22]

As someone who lives in the heart of the American furniture industry, I can tell you that RH and every other furniture manufacturer/retailer is in a world of hurt.

 

This could be the moment when RH’s insane leases and leverage mix a toxic cocktail that ends in bankruptcy.

 

Furniture companies are furloughing their entire staffs where I live, from the warehouse workers up to senior executives. I would hate to have the amount of debt RH has going into a recession.

 

Apparently Gary Friedman has discovered a way to navigate a brick & mortar furniture retailer, located in some of the most expensive property in the country, not only through all of this relatively unscathed, but doubling down to now try and sell luxury houses:

 

Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences.

 

His latest letter also quoted Einstein, so he's thinking big.

 

Sarcasm aside, is the rally in this name back to nearly ATHs due to a bet on income inequality that means RH's business should hold up relatively well through Depression levels of unemployment?

 

I also wonder how many WeWorks and other flashy corporate real estate buildouts were outfitted with trendy and expensive furniture. Not only will that type of spend likely dry up, but you'll have lots of used furniture on the secondary markets.

 

My significant other is in the industry and her company considers RH merchandise cheap, poorly constructed knockoffs. Her company is hurting badly right now and they don't have the retail space RH does, not to mention the restaurants and other "experiences" that RH thinks help it sell furniture. If her company's $10,000 sofas aren't selling, then I'm pretty confident that RH's current leases are acting like nooses around its neck, in addition to the leverage they took on for buybacks some years ago.

[jschembs]

As someone who lives in the heart of the American furniture industry, I can tell you that RH and every other furniture manufacturer/retailer is in a world of hurt.

 

This could be the moment when RH’s insane leases and leverage mix a toxic cocktail that ends in bankruptcy.

 

Furniture companies are furloughing their entire staffs where I live, from the warehouse workers up to senior executives. I would hate to have the amount of debt RH has going into a recession.

 

Apparently Gary Friedman has discovered a way to navigate a brick & mortar furniture retailer, located in some of the most expensive property in the country, not only through all of this relatively unscathed, but doubling down to now try and sell luxury houses:

 

Our ecosystem will come full circle as we begin to conceptualize and sell spaces, moving the brand beyond the $200 billion home furnishings market into the $1.7 trillion North American housing market by offering beautifully designed and furnished turnkey homes and condominiums with the introduction of RH Residences.

 

His latest letter also quoted Einstein, so he's thinking big.

 

Sarcasm aside, is the rally in this name back to nearly ATHs due to a bet on income inequality that means RH's business should hold up relatively well through Depression levels of unemployment?

 

I also wonder how many WeWorks and other flashy corporate real estate buildouts were outfitted with trendy and expensive furniture. Not only will that type of spend likely dry up, but you'll have lots of used furniture on the secondary markets.

 

My significant other is in the industry and her company considers RH merchandise cheap, poorly constructed knockoffs. Her company is hurting badly right now and they don't have the retail space RH does, not to mention the restaurants and other "experiences" that RH thinks help it sell furniture. If her company's $10,000 sofas aren't selling, then I'm pretty confident that RH's current leases are acting like nooses around its neck, in addition to the leverage they took on for buybacks some years ago.

 

That's one thing I've struggled with as far as the narrative Gary is trying to spin. I don't think imported furniture from Southeast Asia conveys luxury. And certainly neither do 30-40% gross margins. Contrast that with his aspirations (and gross margins of 70% at Hermes):

 

We have spent decades building a business model that generates industry leading profitability and return on invested capital, and believe, like Bernard Arnault, “Luxury goods are the only area it is possible to make luxury margins.”

 

The emergence of RH as a luxury brand generating luxury margins is becoming evident as our adjusted operating margin has expanded over 700 basis points in the past two years from 7.0% in 2017 to 14.3% in 2019. We continue to expect operating margins to expand in 2020 despite the current setbacks from COVID-19, and now see a clear path to 20% operating margin over the next few years.

[Broeb22]

Additionally, Gary's stated ambitions to be a $20 billion global brand is the antithesis of luxury. I don't have very good market research, but estimates of the global luxury furniture market are $27-28 billion. The total US furniture market is estimated at $480 billion. So RH is almost by necessity already playing in the upper-middle pools of the furniture market, and while going higher-margin is possible, he's not going to get to $20 billion long-term by going up-market, which is where the higher margins are.

 

I find it surprising that people don't see how obviously delusional Friedman is. The guy has delusions of grandeur in spades, and I wouldn't trust him with my money.

 

[gary17]

nice quarter.  seems like good sales during pandemic.  rich people don’t know how else to spend money being in lock down ...

 

stock up 20%

[Broeb22]

I like the RH3 luxury yacht they purchased/leased.

 

For as good a position as they seem to be in according to some, they have $17 million in cash on hand And generate $200M in FCF on a $7.5B mkt cap for a juicy 2.6% FCF yield on a retailer/manufacturer in a deeply cyclical industry.

 

Does RH not pay cash interest on their convertible debt?

 

How would you adjust their cash flows to account for them paying the debt in cash? Increase their cash balance accounting for a likely discount to par at issuance, and increase cash outflows?

[Xerxes]

Went from $80 per share during "OMG we are going into a depression", to $300 per share during "this is just speculation and will roll over" and now at $653 per share "we must own it"

[Spekulatius]

3 hours ago, Xerxes said:

Went from $80 per share during "OMG we are going into a depression", to $300 per share during "this is just speculation and will roll over" and now at $653 per share "we must own it"

Nobody knows nothing, least do those working in the industry. Must be frustrating to compete against a fellow like Gary who rips up the playbook and plays his own tune and it works.

 

Not that I have seen this coming.

[Jurgis]

I must admit that I did not get it then and I do not get it now. I get Wayfair and own it, but RH not really. Maybe RH is the Peloton of furniture shopping or something like that.

 

It would be very interesting to get honest opinion from Warren about RH. He should have insights from his furniture businesses. (Not gonna happen. Even if you buy the multiM lunch.)