Thread by @MattJMcClintock

A lot of noise on #Fintwit regarding upcoming $RH earnings this week. I covered the company at a sell-side bulge bracket from 2016 to 2019, which included a dramatic investor sentiment change from Gary is terrible to he’s the next Steve Jobs. Here is my preview:

(1) $RH guided 1Q23 on March 29th. Since that time, US Census Retail Sales show April sales for Furniture industry down almost 9%, worst month since Mar-May 2020 and 2009 before that. March was down almost 3% so significant sequential industry deterioration.

(2) $RH 1Q22 sales were up 11.2% while 4Q21 sales were up 11.1%. So similarly difficult comparison as 4Q22 when sales came in at the low end of their guidance. Yet much worse industry performance.

(3) $TCS (high income demographic) reported on 5/16, saw a notable decline in March, and continued to see that in both April and May. $W saw 2QTD sales down HSD through 5/4, which appears sequentially worse than down 7.3% in 1Q23 and down 5% in 4Q22. Both not good for $RH

(4) Customer deposits down 16% 4Q22 y/y, by far worst result last ten years with 3Q22 at down only 6% tying for the second worst result. Significantly reduces any cushion the company can take from the downside we saw in April’s Census sales for the industry.

(5) $RH has history of trying to guide conservatively but monthly drop offs in industry sales of this magnitude are quite rare. It’s also hard to see what could make the world much better in May so whatever forward guidance they give in 1Q23 feels limited to the upside.

(6) $RH Memberships were 97% 2022 sales. Memberships ended 2022 at 351k, down 29% y/y and 50k lower than the 405k in 2017 which was first year they reported the number. For reference sales were $2.4 billion that year, or $500 mm lower than the low end of 23 guidance.

(7) To that last point, $RH membership income really doesn’t have a cost associated with it so that means almost 150k of lost members X $175 per member equals $26 mm in lost EBIT on an annual basis.

(8) But more importantly, kind of hard to sell the $RH vision of a “Lifestyle” brand when members cancel at such a significant rate. Its on auto-renew. That means almost 1/3 of RH’s customers spent active time to cancel their engagement with the brand in the last year alone.

(9) Also kind of hard to reconcile $RH as a “Luxury” brand when ~1/3 of its customers cancel their membership just to save $175 a year, in a single year that wasn’t even a recession. If anything, that likely just eliminated the possibility of LVMH ever buying them.

(10) This takes me to the last standing long-term bull thesis: expansion in Europe. First off, hard to believe Europeans will care more about the $RH brand than the ~1/3 of NA customers that just outright dropped it.

$RH London originally supposed to open mid/late summer 22, pushed to spring 23, pushed to spring/summer 23. Probably will be pumped this Q like its "AI". UK housing is variable rate so consumers likely have less budget for “Luxury” furniture than consumers in the fixed rate US.

Short history of US Retail: $COST is only current successful global retailer. Wholesale brands are different but that’s not $RH. People seem to forget the hype of $ANF going to London in 2007, which marked the absolute top in that stock.

$ANF has similarities to $RH's “Lifestyle” concept with expensive stores for hyped brands. Some say similar eccentric CEO’s. But can easily point out how best in breed today $WMT, $HD, $TGT also couldn’t do it. Even $VSCO couldn’t do it despite a globally watched fashion show.

(14) Funny side story, $ANF also surpassed 20%+ EBIT margins for a short time period like $RH just did. Retailer margins, unlike wholesaler, have high amounts of operational leverage so they do really well in good times but do much worse in bad times.

(15) Next up, Warren Buffet, #1 holder last quarter, blowing entirely out $RH stock is not to be ignored. Berkshire has had a massive Home Furnishing business for decades so he certainly is getting real time intel on the industry.

(16) T Rowe key shareholder of $RH during peak years (2014-2020). They provided cover to Gary to do what was necessary for the story despite intense hatred from investment community in earlier years. They started selling as revenue stalled in 2019 and got out with COVID.

(17) There is no longer anyone on the holder page that inspires confidence in anything long term at the company. Fidelity could be a PM holdout that I am unaware of but certainly feeling lonely these days. $RH now seems short term HF trading stock with no active LO support.

(18) To the point on Buffet, $RH bulls ignored C-suite insider sales (including CFO down to only 1 single share) last year heading into 4Q22 earnings and that didn’t work out too well for them. See this thread for more info:

https://twitter.com/MattJMcClintock/status/1622019098522566656?s=20

(19) Share Repurchases: $RH has $2.4 BN just in unhedged variable rate Term Loan debt vs. $1.5 BN cash. Also $1.15 BN leases, but at least relatively fixed. Never had more than $500 mm GAAP FCF. Now revenue guidance down 20%+ vs. peak. You think the banking crisis is bad?

(20) $RH Term Loan B ($1.94 BN) issued 10/21 with interest at LIBOR + 0.5% (floor 2.5%). Term Loan B-2 ($469 mm) issued 5/22 with interest at SOFR (floor 0.5%) + 3.25% interest rate margin and + 0.1% credit spread. Look are reference rates since:

(21) $RH TLDR: 1) historical industry decel in Apr, after issued guidance. 2) Bad Memberships and customer deposits remove any upside. 3) Europe won't help. 4) Buffet has real time intel on industry. 5) Unhedged variable rate debt likely prevents meaningful share repurchases.

Disclosure. I have a small short position on $RH via options. Don't feel comfortable with more because Gary has a strong history of working the markets.