To The Moon

In today's edition, we will track the fundamental readings of long-term bullish companies in strong (TigerTrade Top 1 Gainer) concepts each week and look forward to your attention and discussion.

Disclaimer: Capital at risk. This is not direct financial advice or a recommendation to acquire or dispose of any investment, but for communication only.

Stocks logged one of their best first halves ever, with the $NASDAQ(.IXIC)$ rising a record 39%. Helping push the indexes up was strength in mega-cap technology stocks, including Apple, which hit the $3 trillion market cap milestone on the last day of trading.

The best-performing concepts are security & alarm services, home furnishing retail and industrial REITs.

Considering the different perceptions of the stock, this time TigerPicks choose $Restoration Hardware(RH)$ to have a fundamental highlight to help users understand it better.

$Restoration Hardware(RH)$

RH, formerly Restoration Hardware, is transforming from a luxury home furnishings company to a comprehensive luxury lifestyle brand. It collaboratively creates and curates high-end home furnishings displayed in expansive design galleries located in prime markets where the wealthy visit and vacation. The company also offers comprehensive design services and incorporates restaurants within its galleries to elevate the brand and attract more customers.

Currently valued at $8.3 billion enterprise value and a market cap of $6.3 billion, RH is poised for significant growth.

Carving a Niche in the Furnishings Industry

Furniture Industry Operating Metrics Comparison

Furniture Industry Operating Metrics Comparison (Author/tikr.com)

The $252 billion US furniture market is fragmented, with no entity securing more than a 10% share. Prominent mass-market retailers, including Ashley, $Ethan Allen Interiors(ETD)$, $La-Z-Boy(LZB)$ and IKEA, comprise a significant portion of the market. Within the crowded premium furniture sector, firms like $Arhaus, Inc.(ARHS)$, Herman Miller, West Elm, the Citizenry, and CB2 operate as ‘in-betweeners’, offering premium furnishings but failing to carve a unique niche to differentiate further.

While at the same time, these brands lack size, falling short of achieving significant economies of scale. CEO Gary Friedman often alludes to this gap in the marketplace, affirming, “There are those with taste and no scale, and those with scale and no taste.”

While the $516 billion global furniture market alone has substantial untapped potential, RH’s leadership sees an opportunity to carve out its own path on a worldwide scale. The strategy isn’t to sell commoditized furniture but to construct an ecosystem brimming with sought-after products, services, and experiences – an arena where no competitor currently operates.

This advantage is confirmed by a market-leading ~50% gross margins and 20%+ operating margins. Friedman is shaping a lifestyle brand infused with luxury and exclusivity, providing a private haven for those seeking respite from the pervasive exposure of personal lives in today’s social media era. This approach deviates from the undifferentiated premium furnishings competitors who cater to a relatively lower-end market segment, engaging in competition on the basis of cost or better product quality.

Brand

RH Dallas

Under the leadership of Gary Friedman, RH is carving a unique niche in the luxury market, transcending the traditional boundaries of the furnishings industry. Inspired by business giants like $LVMH-Moet Hennessy Louis Vuitton(LVMHF)$, Friedman is transforming RH into an exclusive lifestyle brand that offers more than just furniture. The company is evolving into a curator of lifestyles, blending products with immersive experiences, and selling an elevated lifestyle to high-net-worth individuals.

Unlike other retailers who have minimized their physical presence to focus on e-commerce, RH has increased its footprint with grand design galleries that serve as architectural masterpieces and a form of marketing.

Competitors downsizing to streamline costs must compensate through traditional forms of digital and media advertising—a trap that RH has managed to sidestep, showcasing a sales & marketing expense of just 2% of sales for fiscal 2022, in sharp contrast to 12.7%, 6.7%, and 3% for Ethan Allen, Williams-Sonoma, and Arhaus, respectively.

RH Source Books

RH Source Books (Author)

RH's innovative strategies include the production of Source Books, which serve as physical extensions of the brand, and a membership model that offers discounts and complimentary interior design services for a small annual fee of $175. This model enhances customer experience and product value perception, fostering brand loyalty and disrupting traditional buying patterns.

Echoing Apple's ethos, RH aims to create an integrated ecosystem of products, locations, and services. The company is extending its reach beyond furniture with the RH Guesthouse, the forthcoming RH Bath House & Spa, and RH Residences, offering a holistic hospitality experience for luxury-seeking travelers. RH is also venturing into the chartering business with its custom-designed Gulfstream jets and super yacht.

As RH continues to expand its offerings, it is solidifying its position as a leader in design and architecture and exploring new markets that increase its potential for future earnings. The company's innovative strategies have shown promising results, with average restaurant volumes nearing $10 million and significant business boosts when legacy galleries are revamped into new design galleries with integrated dining.

Low-Cost Operating Advantage

RH is leveraging its scale to develop a capital-efficient operating advantage that outperforms its peers. The company has overhauled its operating platform, reimagining its value chain from SKU strategy to logistics and distribution. It has also formed strategic partnerships with landlords and real estate developers, reducing capital requirements and enhancing return on capital.

RH Operating Expenses as a % of Revenue

RH Operating Expenses as a % of Revenue (Author/SEC Filings)

RH has streamlined its operations over the past decade, simplifying its supply chain and reducing costs as the company grows. In 2016, RH launched initiatives to reorganize its operating platform and redesign its outlet and reverse logistics models. The company rationalized and reduced SKUs, eliminating lower-tier items that diluted its luxury positioning. This strategy improved inventory turnover rates and became a significant source of working capital.

RH Operating Efficiency

RH Operating Efficiency (Author/SEC Filings)

RH also simplified its supply chain network, closing three distribution centers amounting to 2.25 million in square footage reductions and eliminating duplicate SKUs. The company's membership model helped to eliminate sudden order spikes, relieving stress on the logistics network and reducing return rates, exchanges, and canceled orders.

Nearly 100% of RH's core business is a direct-to-consumer model, freeing up valuable floor space for product display and minimizing risks such as theft and shrinkage. The company also rearchitected its legacy outlet and reverse logistics model, rerouting customer returns directly to its outlet network and reducing annual costs.

RH has taken control of the last-mile home delivery, reducing return and exchange volumes and improving the overall customer experience. The company sources its inventory directly from third-party vendors. In fiscal 2022, for instance, 75% of RH’s purchase dollar volume came from just 25 vendors. This strategy has effectively allowed RH to exploit a fragmented supplier landscape. It leverages its considerable bargaining power to negotiate favorable prices while exerting significant control over the process. This unique approach enables RH to reap the benefits of not owning the manufacturing process while mitigating some associated downsides.

RH has strategically reduced its capital obligations for its galleries by capitalizing on its financial strength and prestige. The company utilizes sale-leasebacks, enters joint ventures, and negotiates capital-friendly leasing deals. These strategies have significantly reduced occupancy costs and capital requirements, increasing free cash flow generation and return on invested total capital.

Valuation

While we believe profitability to continue to improve and for sales to continue to grow, it is uncertain how well new product lines will perform and how many new galleries will be constructed. In the past, management has stated that it would build 5-7 galleries a year, but it is unclear how realistic this goal could be.

• Projecting Revenues (2022-2027): We project a modest gallery growth rate of 2 galleries per year beginning 2023 and a 7% revenue per gallery growth rate beginning 2024. In 2023 we account for the anticipated hit to discretionary spending and housing starts with a 7% decrease in sales per gallery for 2023, which is below general expectations and management guidance. In our revenue build, sales per gallery does not regain 2021 levels until 2025. Outlet stores add little to the bottom line and generally serve as a venue to test out new products, and so we just assume a moderate growth rate in that regard. Waterwork Showrooms could potentially see a major bump in growth in the coming years, but without clear guidance from management and only making up 4% of revenue, we apply a similarly conservative assumption to that segment. See our sensitivity analysis for how different gallery and revenue per gallery growth rate assumptions affect valuation.

• Projecting Expenses (2022-2027): RH's consolidated income statement is vague. We project gross profit and EBIT based on historic margins, management guidance, and a conservative expectation of future profitability, based on the assumption of operating leverage and reducing expenses. See our sensitivity analysis for how different margin assumptions affect valuation.

• Projecting Interest, Operating and Finance Leases, and Taxes (2022- 2026): RH's management is quite opportunistic in its approach to raising capital, and so without any end in sight to the current interest rate hikes, we assume that RH will not be taking on any additional debt. We project Operating and Finance Leases as a function of revenue and then calculate their expenses via their current discount rate. We assume a 21% tax rate, in line with management expectations.

• Terminal Value: RH is currently trading at a 7.59x EV/Adj. EBITDA multiple. We assume a 6.00x Adj. EBITDA exit multiple, which comes with a 2.8% implied perpetuity growth assumption. To be on the safe side, we use the perpetuity growth rate method, with a perpetuity growth rate of 2%, to calculate our terminal value. Our terminal discount rate and growth period discount rate are both 10%. See our sensitivity analysis to see how different discount rates and terminal assumptions affect valuation.

RH FCF Projections

FCF Projections (RH)

RH Valuation

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 16 analysts offering 12-month price forecasts for RH have a median target of 258.00, with a high estimate of 360.00 and a low estimate of 176.00. The median estimate represents a -21.72% decrease from the last price of 329.59.

Hope this analysis helps you get more understanding of the company's whole image, Tiger Picks will follow up the monthly performance as a longterm track.

Resource:

https://seekingalpha.com/article/4613032-rh-redefining-luxury-scaling-new-heights-global-furnishings-industry

https://seekingalpha.com/article/4610927-rh-stock-diamond-hidden-in-the-rough-attractive-long-term

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