Like Apple AAPL, -4.40% Friedman says RH is building an “ecosystem of businesses” that make the brand more valuable. In the case of RH, the hospitality business is an enhancement to the physical stores and interior design business. “While each of the ...and more »
Luxury home retailer RH says there are three companies that it “studies and admires”: luxury conglomerate LVMH Louis Vuitton Moet Hennessy, Apple Inc. and Berkshire Hathaway Inc.
In a lengthy message to its “people, partners and shareholders,” RH Chief Executive Gary Friedman outlined the ways in which RH RH, +10.90% takes its cues from these three companies.
“Like LVMH, we are building a luxury platform, and in a similar fashion, we are beginning to demonstrate that we too can be rewarded with luxury brand margins that are double those of competitors targeting broader markets,” he wrote.
In addition, he thinks RH will continue to benefit from the “compounding wealth effect,” like MC, -1.28%
“In the past 12 years alone the stock market is up in excess of 80% from its previous 2007 high prior to the great recession, and similarly households with incomes of excess of $200,000 are also up approximately 80%,” he said.
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Like Apple AAPL, -4.40% Friedman says RH is building an “ecosystem of businesses” that make the brand more valuable. In the case of RH, the hospitality business is an enhancement to the physical stores and interior design business.
“While each of the above businesses are relevant in isolation, as an integrated ecosystem they create a powerful customer proposition and a brand that is difficult to replicate,” Friedman said.
RH has focused its attention on stores that include cafés, wine vaults and tasting rooms, and espresso bars.
And Berkshire Hathaway provides a model for a business that is “capital efficient,” has significant free cash flow, has a “low cost of capital,” and “a culture relentlessly focused on ROIC [return on invested capital] and capital allocation.”
Friedman said RH is also thinking in the long term like Berkshire Hathaway BRK.A, -4.81% BRK.B, -4.84% .
“We all witnessed how Berkshire took advantage of the past recession, and demonstrated that those with capital in difficult markets are the ones who capitalize,” Friedman wrote. “That is precisely why we took advantage of the favorable capital markets in 2014 and 2015, executing two zero coupon convertible note transactions raising $650 million for one of those rainy days.”
RH reported third-quarter earnings that beat expectations and raised its guidance. Shares closed Tuesday up 10.8%.
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“RH’s focus on profitability over growth is clearly paying off as it transforms into a luxury brand with no peer, and market share growth drivers should accelerate in 2019,” wrote Wedbush analysts led by Seth Basham in a note.
“RH’s forecasts appear reasonable in a modest macro slowdown environment.”
Even a slumping housing market doesn’t frighten RH, with Friedman noting that RH’s revenue has accelerated.
“[O]ur view is that an oversupply of high-end housing will most likely lead to lower home prices in markets with excess inventory which is surely not good for home builders and developers, but not necessarily bad for RH, as unit sales at lower price points may reaccelerate driving incremental demand for furniture and home furnishings,” he said.
Wedbush thinks RH is differentiated and has created an aspirational environment in its stores, which will help it continue to thrive.
“The company’s impressive control of its brand shines through in strong pricing power, forming the base for top- and bottom-line growth,” Wedbush wrote.
It rates RH shares outperform with a $160 price target, up from $145.
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UBS analysts warn housing market problems and capital markets volatility could still have an impact.
“In order for the stock to work in a sustained way, we think the business has to consistently generate healthy same-store sales growth,” UBS wrote. “Otherwise its earnings algorithm will be in doubt.”
UBS rates RH shares neutral with a $150 price target.
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On the other hand, Wells Fargo is bullish about RH.
“We believe Q3 results (and a strong FY19 outlook) serve as evidence that the macro remains favorable, RH’s model is working, and the company is successfully transforming itself to a faster growing, more profitable business,” analysts led by Zachary Fadem wrote.
Wells Fargo rates RH shares outperform with a $175 price target, up from $145.
RH stock has advanced 59% for the year to date while the S&P 500 index SPX, -3.24% is up 1% for the period.
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