RH

RH the upscale furniture company has taken a pounding in the last 6 months, down 51%. It has fallen 15% since earnings release 2 days ago due to bearish comments by CEO.

Luxury home retailer RH says the company experienced “softening demand” during the first quarter that coincided with Russia’s attack on the Ukraine in late February.

“I think the invasion of Ukraine by Russia just became a kind of a reckoning point, if you will, where people had to stop and pay attention to everything,” said Chief Executive Gary Friedman during an earnings Q&A with analysts late Tuesday.

“And we saw our business slow about 10 to 12 points, and it’s been relatively consistent during that period.”

Friedman highlighted a wide range of disruptions including market volatility, housing prices and Fed movement on interest rates among the issues that are now preoccupying shoppers.

https://www.marketwatch.com/story/rh-says-softening-demand-i…

Berkshire Hathaway holds approx 8.5% of the company, which is currently worth $592 million. They have bought shares in the few quarters at prices of upto $680. Stock now trades at $326. The investment is probably Ted or Todd’s not Buffett’s himself.

https://www.dataroma.com/m/hist/hist.php?f=BRK&s=RH

At an earnings estimate of $25 for FY23 (Jan) and revenue growth in the 5-7% range, it is not hard to justify a price of $400 at a FWD PE of 16.

At a market cap of $7 billion, Buffett could easily buy the whole company, even with a decent premium.

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I gave you a prominent mention on my $RH twitter thread. I’ve had this on watchlist using T/A and still do.

Patiently watching and waiting, no need to nibble yet in my experience.

The people short this are some of the nastiest. They remind me of shorts in $PTON $AFRM $UPST etc. So, I take their comments with a grain of salt, but I am staying open-minded. I trade the charts, not F/A. But I like to know some of the background F/A in companies I trade.

I added some other notes which you did not mention:

https://twitter.com/peregreine/status/1509677686700089348

I don’t think it is through FALLING yet.

sunray
a man not interested

Yeah, there are plenty of naysayers for $RH on Twitter, for sure. Finviz is even worse I’ve noticed.

RH is often derided on the social media for its “overpriced” merchandise for the status seekers. They have done a great job so far promoting their brand and “lifestyle” it represents and charging a premium price for their products. They want to be compared to luxury retailers/status brands like LVMH and Hermes, and be accorded the same valuations.

One thing that concerns me is their expansion into restaurant, which is a notoriously tough business with high attrition and low margins.

Their business may slow for 2-3 quarters, as people postpone big discretionary purchases due to Ukraine/inflation/interest rate worries. But if we avoid a recession, they should be back to business as usual later in the year. Current share price will seem like a great bargain then.

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RH is often derided on the social media for its “overpriced” merchandise for the status seekers.

I don’t know the merch. But that word probably applied to the stock.
On the surface of things, even a big fall in the stock price doesn’t necessarily mean it’s cheap.
It depends how expensive it was when it started falling.

It’s in the “too hard” pile for me.
Almost all retailers of all kinds are losers if you hold longer than the exuberance does, and spotting the few excellent exceptions is a LOT of work and study.

Their earnings certainly soared in the last year. Good for them.
Will that extrapolate? Will it even stay that high? I have no idea. Analyst consensus is that earnings will fall a bit in real terms next year.
If the earnings do fade right back to trend, they still seem pretty overpriced on the surface of things, no?
The stock, not the goods : )

So I wouldn’t immediately be blaming the price fall on short sellers. I’d look first to the starting valuation level.
If the recent earnings spike was transient, 50-75 times cyclically high earnings was a wishful place to start.
Especially for what in many ways is a department store / furniture retailer.

The recent earnings and price charts rhyme with those of CROX.

Jim

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Hi Jim,

At first glance, I had the same impression as you. However, the current price does appear to meet your test of (10 to 12) x EPS in the next 5 to 10 years.

The expected EPS in 2026 (actually, between 2025 and 2027) is $29.00. The current price is $320.54. This means that a buyer now will pay 11.05 x expected earnings in the next 4 (not 5 to 10) years.

ROE in 2021 was 64.5% and is expected to be 39.0% in 2022, 29.0% in 2023, and 16.5% in 2026 (actually, between 2025 and 2027). These are very good numbers.

However, your point about retailing being a tough business is well taken.

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Note that several value investors bought higher than here, including Berkshire who has owned this since the middle of 2019. Berkshire added a very small amount recently too. https://www.dataroma.com/m/activity.php?sym=RH&typ=a

At first glance, I had the same impression as you. However, the current price does appear to meet your test of (10 to 12) x EPS in the next 5 to 10 years.

That does depend very strongly on whether you believe the consensus forecasts of what will happen 5-10 years hence.
I’m dubious about the sector in general and I have no personal insight that would let me believe these specific forecasts, so I’ll happily pass.
There are bigger fish in the barrel, easier to target.

My rule of thumb about the multiple of future earnings includes the phrase that the EPS number that matters is the “pretty darned sure” figure for average earnings 5-10 years out.
In this case I don’t have a “pretty darned sure” figure.
It takes years and years of study to achieve the level of ignorance I have.

In a general sense, as far as I know there are only two very sensible and profitable long run investment strategies for high returns:

  • Invest in things that are sufficiently predictable that you know it will work out well, and only at those times that they’re cheap and offer a margin of safety in case you’re wrong.
    e.g., Berkshire Hathaway stock at under 1.3 times book value per share.

  • Invest in those things that have unpredictable outcomes but strongly asymmetrical payoffs: heads I win big, tails I don’t lose much.
    e.g, fairly high strike call options on BABA.

Jim

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Note that several value investors bought higher than here, including Berkshire who has owned this since the middle of 2019. Berkshire added a very small amount recently too.

Past. Prices. Are. Completely. Irrelevant.

Berkshire can make a mistake too, and somewhat deliberately - remember them saying they will bet big if odds are 3:2. Nothing is guaranteed and they know it.