Restoration Hardware (NYSE:RH) - Consumer Retail Group Analysts: Caitlyn Liu, Harrison Thomas, Allen Cheng, Pete Matthews, Aidan Sommer, Megan ...
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Restoration Hardware (NYSE:RH) Consumer Retail Group Analysts: Caitlyn Liu, Harrison Thomas, Allen Cheng, Pete Matthews, Aidan Sommer, Megan Syho Researchers: Andrew Cronin, Annie Lai, Benjamin Lee, Jimmy Ma, Sarah Johnston, Timothy Ma January 27th, 2021
Disclaimer The analyses and conclusions of the Western Investment Club (“WIC") contained in this presentation are based on publicly available information. WIC recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with WIC’s conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by WIC concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. The sole responsibility for the content of this publication lies with the authors. Its contents do not reflect the opinion of the University Students’ Council of the University of Western Ontario (“USC”). The USC assumes no responsibility or liability for any error, inaccuracy, omission or comment contained in this publication or for any use that may be made of such information by the reader.
Table of Contents I. Business Overview II. Internal Analysis III. External Analysis IV. Investment Thesis V. Valuation VI. Risks and Mitigations VII. Catalysts VIII. Investment Summary IX. Appendix
Company Overview RH is a leading luxury retailer in the home furnishings marketplace Business Overview Financial Information ▪ RH (Restoration Hardware) is a luxury home retailer Ticker NYSE:RH operating 68 galleries, 38 outlet stores, and 14 Waterworks Share Price $454.52 showrooms in the U.S. and U.K for a total of 120 stores 52 Week Low-High $73.14 - $524.02 ▪ Assortment includes furniture, lighting, textiles, bath ware, décor, outdoor and garden, and child and teen furnishings Enterprise Value $11,906.7M ▪ The company is growing the presence of its hospitality Market Capitalization $10,350.9M business with 10 restaurants alongside its galleries in a NTM EV / EBIT (1) 15.5x unique approach to maximize the consumer experience NTM Price / Earnings (2) 24.2x 52 Week Stock Chart Revenue $600 6M 4,000M 30.0% 24.5% 3,500M 20.4% 20.0% 14.3% $500 5M 12.9% 5.7% 3,000M 1.2% 2.7% 0.0% $400 4M 2,500M (20.0%) $300 3M 2,000M (40.0%) $200 2M 1,500M (60.0%) 1,000M $100 1M 500M (80.0%) $0 0M 0M (100.0%) 2013 2014 2015 2016 2017 2018 2019 2020 Revenue YoY Growth % (1) LTM EV/ EBIT 22.0x (2) LTM Price / Earnings 62.6x
Business Overview: RH Galleries Within the stores sales channel, RH operates a total of 82 RH Galleries and Waterworks Showrooms Legacy Galleries vs. Design Galleries RH Hospitality & Products Legacy Format Design Gallery ▪ With 10 new Design Gallery locations, RH offers the Number 38 24 hospitality experience featuring beautiful architecture, Square Footage 8K Sq. Ft. 33K Sq. Ft. cafes, wine vaults, barista bars, and restaurants Real Estate Shopping Malls Street Locations ▪ RH Cafes track on average $5-6M sales annually % Assortment
Business Overview: RH Design Galleries RH’s new Design Galleries are more efficient than the prior format, driving higher average unit volumes RH Design Gallery Strategy Design Gallery Larger Bespoke Indigenous Bespoke Secondary Market Prototype Design Galleries Design Galleries Design Galleries Size 33K sq. ft. 90K sq. ft. 80K sq. ft. 10-18K sq. ft. To be implemented within Located in top Best second home markets Smaller expressions of the Opportunity 2/3 of RH’s target markets, metropolitan markets & are where the wealthy and RH brand in markets more capital efficient highly profitable affluent visit and vacation served by smaller players Examples RH Nashville RH New York RH Palm Beach RH Milwaukee Source: Company Filings, Jefferies
Business Overview: Sales Channels RH has a fully integrated multi-channel business model, allowing for continued expansion & diversification Revenue Contribution by Channel (1) Revenue Contribution by Product Category (2) Direct 44% Furniture Non- 68% Furniture Store 56% 32% Sales Channels Galleries Outlet E-Commerce Source Books Trade & Contract RH operates 82 38 Outlets located in Ability to purchase Series of ~10 Represents sales from galleries, either as outlet malls, key to merchandise online, on catalogs published interior designers and design, legacy, selling returned or 5 multiple RH and mailed, created customers that modern, or baby & discontinued websites, websites in-house, primary purchase with child and teen merchandise offer room-based brand & advertising assistance of navigation vehicle designers RH will continue to strengthen its brand through its multi-channel business model (1) 2018 Annual Report, Store revenue represents retail stores, including Waterworks Showrooms, plus Outlet are Store, Direct revenues include sales through Source Books, websites, phone orders, including the contract business and a portion of the trade business. 2019 data not available as no longer reported (2) 2019 Annual Report
Business Overview: RH Business Model Luxury furniture experience has historically been characterized by product inaccessibility, pricing transparency, and underwhelming assortment breadth Luxury Furniture Retail Industry vs. RH Business Model Designers Suppliers Customer Retailer 1 French Heritage Furniture Retailer 2 Luxury Retail h Dealer 1 Fendi Casa Dealer 2 Interior Designer 1 Boca do Lobo Interior Designer 2 RH Design Partner Suppliers Customer Business Model RH Partner Designer 1 RH Partner Designer 2 RH Interior Designer Luxury Furniture Retail Industry RH Business Model ▪ Lack of or minimal pricing transparency for consumers ▪ RH’s differentiated business model cuts the time, transacting in multiple single-channels complexity and expense associated with furnishing a home ▪ Underwhelming assortment breadth that does not span entire room sets, as displayed within RH galleries ▪ Removes the barrier between consumers and designers ▪ Designer products or full lines are often inaccessible ▪ Well-known, high-end artisans are in one single platform RH cuts the time, complexity, and expense associated with furnishing a home Source: Company Filings, Jefferies
Business Overview: Supply Chain Continued improvements to supply chain and fulfillment capabilities allow RH to manage customer orders and distribution merchandise in an efficient and cost-effective manner Value Chain Sourcing Retailer Distribution & Delivery End Consumer Distribution network RH contracts with includes 2 furniture third-party vendors to fulfilment centers and 1 Households in-excess manufacture smaller fulfillment of $175K likely to merchandise. RH center. Home delivery furnish entire rooms, Approximately 70% of services is in 13 key upper-middle tiered products are sourced markets with a white households will buy from Asia and 16% glove home delivery pieces as well. from the US. service for larger furniture. RH’s luxury brand continues to target top income households earning more than $175K annually Source: Company Filings
02 Internal Analysis
Internal Analysis RH has successfully expanded its margins and recently focused on transitioning their real estate strategy from a leasing model to a development model, resulting in lower capital investment and lower rent Number of Stores Free Cash Flow Margin 100 700 M FCF FCF Margin Projection Period 30% 85 83 86 83 80 69 20% 500 M 60 39 38 10% 40 28 32 300 M 17 0% 20 100 M -10% 0 2016 2017 2018 2019 Q3 2020 -100 M -20% Full Price Stores Outlet Stores Net Debt-to-EBITDA Geographic Exposure 6.0x Capital-light real estate strategy 1 5.2x 5 2 5.0x has lowered debt obligations 1 1 3.9x 1 4 4.0x 3.5x 2 3.2x 1 3 2 1 1 3 3.0x 1 3 2 1 1 2.0x 2.1x 20 1 2 2.0x 1 2 1 0.9x 1.1x 0.9x 1.0x 0.7x 1 2 8 1 5 0.0x 2012 2013 2014 2015 2016 2017 2018 2019 2020 LTM
Internal Analysis Management has greatly improved margins in the past four years with the introduction of Design Galleries and membership platform, with a long-term outlook of 25% EBIT margin in the next five years Historical GMROI/OMROI Analysis 3.50x 3.00x Management has improved inventory productivity by ~3x compared to 2016 2.50x 2.00x 1.50x 1.00x 0.50x – 1Q17A 1Q13A 2Q13A 3Q13A 4Q13A 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A 2Q17A 3Q17A 4Q17A 1Q18A 2Q18A 3Q18A 4Q18A 1Q19A 2Q19A 3Q19A 4Q19A 1Q20A 2Q20A 3Q20A Trailing 4Q OMROI Trailing 4Q GMROI Operating Efficiency Strong Industry-Relative Operating Margin LTM Margin from optimized operations, reopenings, real estate transformation 19.8% RH 19.8% The Home Depot 15.5% 14.4% 11.3% Williams-Sonoma 11.8% 9.7% At Home Group 11.7% 4.7% 5.4% Lowe's Companies 10.9% Ethan Allen 3.1% 2016 2017 2018 2019 2020 LTM 2.0% 7.0% 12.0% 17.0% 22.0%
Annotated Stock Chart RH stock rises with higher margins and elevated home spending from COVID-19 shutdowns 52-Week Annotated Stock Chart $600 6M 5 $500 5M 3 4 $400 4M $300 2 3M $200 2M 1 $100 1M $0 0M Jan/20 Feb/20 Mar/20 Apr/20 May/20 Jun/20 Jul/20 Aug/20 Sep/20 Oct/20 Nov/20 Dec/20 Jan/21 ▪1 March: COVID-19 related sell off, all RH retail locations are temporarily closed as cases reach thousands in the U.S ▪2 June 5: Q1 results are reported, most RH locations reopen, leading to a recovery and surge of sales in the upcoming quarter ▪3 September 10: Q2 results beat estimates with adjusted operating margin rising to 21.8%. RH Core demand is +7% in May, +32% in June, +34% in July, and +47% in August YoY driven by a more favorable product mix, operational improvements and increased demand ▪4 October: All RH Galleries and Outlets including 8 of the 10 restaurants reopen ▪5 December 10: Q3 results indicate strong demand trends despite the climate; operating income is up by 25% YoY from $89.2M to $111.2M, stemming from increases in product prices as well as decreased SG&A and compensation costs Source: Company Filings
03 External Analysis
Luxury Market and Furniture Retail Positioning US Luxury Consumer Goods, Furniture & Home Furnishings Landscape Denotes inclusion in comps High/Luxury Product Quality/Brand Positioning Low/Value Scale (US Revenues) Low High Source: Jefferies
Positioning RH as a Luxury Brand The emergence of RH as a luxury brand has allowed it to more closely generate luxury margins Price Points Per Couch Restoration Hardware Williams Sonoma Wayfair $13,595.00 $3,295.00 $769.99 Comparable Operating Margin to Luxury Brands 30% 28.5% 25.5% 25% 21.0% 19.8% 20% 16.8% 16.8% 16.7% 15% 10% 5% 0% Hermes Kering Ferrari RH LVMH Tiffany Burberry
External Analysis RH’s focus on the high-end, $200K+ segment allows it to differentiate itself from popular eCommerce players which focuses more on the downstream market Product Resilience to eCommerce High End Resilience to eCommerce Software 88.0% High End Music 82.0% Video/DVD 79.0% ($175K+) PCs 78.0% Books 66.0% Videogames 62.0% Mass Market PC Accessories 62.0% Homogeneous ($60K - $175K) Small Appliances 49.0% Event Tickets 57.0% Digitization Consumer Electronics 38.0% Low End Housewares 38.0% Homogeneous Flowers 37.0% ($60K) Easy to Handle Office 35.0% Toys 31.0% Luxury Furniture Market is Highly Fragmented Auto Parts 26.0% Sportings Goods 24.0% Apparel 22.0% ▪ RH is the second largest player among the high-end/luxury Large Appliances 21.0% Non-homogeneous Pets 16.0% Specialized Delivery home furnishing retailers (“HF”), only trailing WSM Footwear 15.0% Jewelry/Watches 15.0% ▪ Comparable Pottery Barn brands accounted for ~$3B in Beauty/Cosmetics 9.0% sales in 2017 vs RH’s total sales of $2.4B in the same year Medical Supplies 8.0% ▪ Within the bespoke segment, products are highly Furniture 8.0% Non-homogeneous OTC Drugs 6.0% Greater Service individualized with clients working with interior designers Home Improvement 3.0% Groceries 3.0% ▪ HF market is more resilient to eCommerce trends as the 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% product moves upstream Sources: Morgan Stanley ER, JPMorgan Initiating Coverage, Wayfair Investor Presentation
Furniture Market Growth within both the global furniture market and US furniture store sales are steady Global Furniture Market (US$B) US Furniture Store Sales (US$B) $68 3.7% CAGR $1,473 3.2% CAGR $66 $1,417 $1,384 $64 $64 $1,364 $1,309 $59 $60 $1,250 $57 $1,188 $1,128 $53 $1,072 $50 $51 $1,023 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Global Market for Luxury Furniture (US$B) RH Global Luxury Market Share 4.0% CAGR $30 $29 $28 10.1% $26 9.9% 10.0% $25 $24 $23 9.3% 2017 2018 2019 2020 2021 2022 2023 2017 2018 2019 2020 Source: Jefferies
External Analysis Positive demographics in $200K household and high proportion of furniture expenditure provides strong runway for domestic growth Commentary Average US Furniture Expenditures Over Time $500 30% ▪ Households >$200K are more likely to furnish entire rooms with RH, while those below that threshold typically $400 20% buy individual pieces $300 10% ▪ RH has historically described its customer base as $200 0% households earning >$200k in income, which represents $100 -10% ~8.5% of households $0 -20% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Annual Spend Y/Y% Growth Number of $200K Households in the US Household Furniture Expenditure By Income 12 9.0% >200K Households (millions) 10 8.0% 8.9% CAGR 7.0% 8 6.0% 6 5.0% 4.0% 4 3.0% 2.0% 2 1.0% 0 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Source: US Census, Jefferies, Company Filing
External Analysis RH’s target customers are typically unaffected during an economic downturn Changes in Net Worth by Wealth Quantile between 2001:Q1 and 2005:Q1 Total Net Worth Held by the Top 1% (99th to 100th Wealth Percentiles), Q1 2001=100 Total Net Worth Held by the 90th to 99th Wealth Percentiles, Q1 2001=100 Total Net Worth Held by the 50th to 90th Wealth Percentiles, Q1 2001=100 Total Net Worth Held by the Bottom (1st to 50th Wealth Percentiles), Q1 2001=100 170 160 150 140 Index 130 120 110 100 90 80 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods from Value Scaled to 100 Changes in Net Worth by Wealth Quantile between 2007:Q3 and 2017:Q3 Total Net Worth Held by the Top 1% (99th to 100th Wealth Percentiles), Q4 2007=100 Total Net Worth Held by the 90th to 99th Wealth Percentiles, Q4 2007=100 Total Net Worth Held by the 50th to 90th Wealth Percentiles, Q4 2007=100 Total Net Worth Held by the Bottom (1st to 50th Wealth Percentiles), Q4 2007=100 160 140 120 100 Index 80 60 40 20 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Periods from Value Scaled to 100 Source: Board of Governors of the Federal Reserve System (US)
04 Investment Thesis
Investment Thesis Overview RH’s current business model and growth potential is underestimated by the market 1 ▪ RH is the only luxury retailer with scale due to its unique business model ▪ The company’s recent real estate strategy to pursue new larger design galleries show Unique Business Model superior unit economics that establish a robust competitive advantage for RH ▪ New design galleries help to enhance RH’s luxury customer experience along with complementary interior design services and the RH membership program 2 ▪ RH can continue to drive value creation by expanding their store count and increasing margins in existing retail stores Domestic Growth & Continued ▪ The company has an extensive runway for growth domestically and internationally Transformation ▪ Continued transformation of traditional legacy stores to more efficient design galleries is overlooked by the market 3 ▪ RH has significant potential to expand internationally ▪ The company recognizes that there is an immense opportunity to grow with no true International Expansion competitor in the international market ▪ Management forecasts a majority of revenue to eventually come from their international segment
Thesis I: Unique Business Model RH will continue to close stores operating as a Legacy Gallery, replacing them with new Design Galleries and an integrated hospitality experience Store Count Breakdown 1 2 85 83 86 83 74 71 70 70 67 69 73.9% 68.1% 62.3% 58.0% 79.7% 23.2% 29.0% 31.9% 11.6% 18.8% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Design Galleries Legacy Galleries Modern Baby & Child and Teen Waterworks Showrooms 2016 2017 2018 2019 2020 Design Galleries with Hospitality 1 1 4 8 10 Design Galleries Store Count 8 13 16 20 22 Legacy Galleries Store Count 55 51 47 43 40 ▪1 In 2015, RH launched two new product categories, RH Modern and RH Teen. In May 2016, RH acquires 15 stores of Waterworks, a luxury bath and kitchen brand for $119.9M. Focus has been more recently to elevate brand rather than increase product offerings ▪2 Since opening the first hospitality experience in 2015 with RH Chicago, RH has continued to prioritise the hospitality experience and management expects to operate a total of 60-70 design galleries in the US and Canada from 22 currently Source: Company Filings
Thesis I: Unique Business Model RH’s real estate transformation is unique to other retailers by showcasing products in an architecturally inspiring, upscale environment that ultimately drives sales and elevates the RH brand Legacy vs. Design Gallery Unit Economics Implications of New Design Galleries ▪ Sales, profits, and cash flows improve: higher average order values driven by purchases of multiple pieces, additional yield of 10-20% lift in DTC Revenue ▪ Low capital investment: RH is able to negotiate superior deals with landlords in high-end retail centers ▪ Luxury customer experience: hospitality from integrated restaurants and interior design services Store Economics Against Furniture Retailers Larger design galleries with superior unit economics show a robust competitive advantage Source: Company Filings, J.P. Morgan Initiating Coverage
Thesis I: Unique Business Model RH is moving beyond a traditional leasing approach with a multi-pronged strategy that seeks to lower capital requirements, improve unit economics, and drive significantly higher ROIC Real Estate Strategy Real Estate Development Model Joint Venture Model Capital Light Model Mechanics ▪ Sale-leaseback or pre-selling the ▪ Contribute value of lease to ▪ Covenants and restrictions property development in exchange limiting sale of properties for profit interest in project ▪ All of RH’s deals are capital light ▪ Leverage strength of RH balance sheet, operations, and strategic ability to sell ▪ Used when RH can’t outright as many landlords are offering to real estate buy property subsidize their buildout cost ▪ Recoup/achieve gains on substantial ▪ RH shares the upside of ▪ 65-100% of capital requirement Advantages amounts of capital development with landlord funded by landlord, versus ▪ Sale leaseback enables lower expenses 35% to 50% previously ▪ Minimal capital investment to ▪ As the main anchor tenant in operationalize the business ▪ Recoup most, if not all, of capital shopping districts, RH can secure investment galleries 50% lower than prior stores ▪ Yountville: Acquired, developed, and ▪ Gallery and Guesthouse in ▪ RH executes 40-year lease. Examples executed sale leaseback at 4.26% cap rate. Aspen: Developer will deliver to Landlord contributes $20M TA Recouped vast majority of capital RH a substantially turnkey Gallery toward $28M gallery for RH net and Guesthouse, while RH retains capital investment of $8M. ▪ Edina: Expect to complete sale leaseback a 20% and 25% profits interest in Development pro-forma in 1H20 at 5-5.25% cap. Expect to properties, respectively projects return of capital within recoup most of investment 8-10 months Pipeline ▪ Detroit, Morristown, Naples ▪ Not disclosed ▪ 15 potential deals in development pipeline Source: Company Filings, Jefferies
Thesis I: Unique Business Model RH’s unique retail strategy strengthens the consumer experience and elevates the RH brand A Luxury Customer Experience RH Hospitality RH Interior Design RH Membership Unique Products Direct Increase to Sales Largest Interior Design 95% of Core Business Wide Assortment New galleries with RH Platform By 2017, the RH’s product offerings Hospitality drive 2x RH rolled out design membership program span a wide range more stores sales along ateliers in all RH stores in accounts for 95% of including even outdoor, with a 10-20% increase 2016, using this service as a the core business rug, beach house, and ski in the DTC Channel differentiator for the high- house categories. end consumer 415,000 Members 3-4x More Traffic RH currently has 415,000 New Releases The café inside the 65% members in 2020 Introducing new products Chicago 3 Arts Club tracks Currently 65% of the retail of RH Color and RH 5-6M annual sales and was business is coming from Benefits Contemporary in 2021 the 7th most Instagrammed members that use RH’s RH Members program restaurant in 2018 interior design services results in reduction in Design returns and sales volatility, RH works closely with a Unique Layout Low Capital Intensity improved inventory The inspiring architectural network of artisan partners This personalized service management and larger to develop products layout entices consumers helps sell more with little purchases to purchase the furniture capital requirements RH has curated a full-scale luxury lifestyle brand by continuing to strengthen its services and offerings Source: Company Filings
Thesis II: Domestic Growth and Continued Transformation What is the opportunity for domestic growth? Management Commentary RH Design Gallery Markets ▪ The CEO sees a “clear path to $4 billion to $5 billion in Addressable Market = Households with >$100K in North America revenues” Income ▪ Management foresees having 60 to 70 locations in the United States and Canada Average Population of 894,111 ▪ Introduce galleries at a pace of 5 to 7 per year from the current rate of 3 to 5 Average Addressable Market of 212,196 US Markets with Design Galleries (Excluding California and NYC) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Population Addressable Market
Thesis II: Domestic Growth and Continued Transformation There is still room for RH to expand their business domestically Significant Expansion Opportunity Potential Market Characteristics 100.0% Population Addressable Market Existing Design Galleries 894,111 212,196 80.0% Potential Design Galleries 1,189,936 264,489 60.0% ▪ The company has opportunities to expand to 11 new 40.0% markets with similar demographics to their current 20.0% domestic galleries 0.0% ▪ Management willingness to grow domestic revenue lends 1 confidence to these projections Design Galleries Modern Galleries Potential Design Galleries Potential Markets to Address 1,800,000 1,400,000 1,000,000 600,000 200,000 -200,000 Phoenix Philadelphia Washington Fort Worth Jacksonville Montreal Ottawa San Antonio Portland Calgary Edmonton Population Addressable Market
Thesis II: Domestic Growth and Continued Transformation Market for domestic growth is almost certain and is accretive to shareholders Domestic Revenue Growth Base Case Domestic Store Build New Design Galleries 11 5 Retired Legacy Galleries 4 4 Design Galleries Total Selling Square Feet 418,000 3 Sales per square foot $1,000 2 Discount for Gallery -30% Sales per square foot $700 1 Accretive Revenue $292,600,000 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Legacy Galleries Total Selling Square Feet -30,000 Design Galleries Secondary Galleries Sales per square foot $1,000 Premium for Legacy 10% Sales per square foot $1,100 Operating Margin Expansion Revenue Effect -$33,000,000 25.0% Net Revenue Impact $259,600,000 Operating Margin 20.0% 20.0% Implied EBIT $51,920,000 15.0% Assumed EV/EBIT 15.5X 10.0% Implied EV Addition $804,760,000 5.0% Current EV $11,654,800,000 Total EV $12,459,560,000 0.0% Percent of Enterprise Value 6.5% Base Case Operating Margins Street Operating Margins Upside through domestic markets is very likely
Thesis III: International Expansion Can RH expand successfully expand in international markets? Management Commentary Competitive Landscape in Europe High Quality ▪ Management believes that, in the long run, 75% of revenue will be generated from international markets ▪ The CEO remarked that “there is a complete void in the market for a concept like (RH’s)” Cheap Expensive ▪ CEO stated that RH has been offered retail partnerships from every continent excluding Antarctica Low Quality Portion of Revenue from North America 50.0% 43.5% 40.0% 30.0% 26.8% 23.5% 19.1% 18.7% 18.0% 20.0% 10.0% 0.0% Tiffany Ferrari LVMH Kering Burberry Hermes
Thesis III: International Expansion The addressable market for RH in Europe is significant International Expansion is a Free Option Limited Expansion Risk International Revenue $0 ▪ Supply chain is largely insulated from international Implied Domestic Revenue CAGR 3.1% expansion due to limited inventory held at stores New Galleries Opened 31 ▪ RH has successfully sourced locations in Europe that can Legacy Stores Closed 19 support their need for large square footage Implied Upside (base case) 55.8% Exit Multiple 22.0X ▪ Past initiatives to reduce SKUs and reduce underperforming inventory have streamlined RH’s supply Implied Upside (no int'l revenue) 0.0% chain Exit Multiple 14.0X Average Home Furnisher Multiple 15.5x Addressable Market Failed international expansion poses little risk 35 cities with 1mm+ pop. in Europe 20,000 6.0% 214 cities with 1mm+ pop. in Asia Thousands (000’s) 5.0% 15,000 4.0% 10,000 3.0% 5,000 2.0% 10 cities with 1mm+ pop. in USA 1.0% 0 0.0% Europe United States 3 cities with 1mm+ pop. in Canada Millionaires % of Population
Thesis III: International Expansion Short-term international expansion is transparent while growth is uncertain in the long term Current Expansion Initiatives Base Case International Revenue ▪ RH's is starting its expansion into Europe, with first gallery 100.0% in U.K. and Paris opening in early 2022 80.0% ▪ Lease deals for galleries are finalized in central London, 60.0% Munich and Dusseldorf and set to open by end of 2023 40.0% ▪ The UK is one of the biggest and most rapidly growing 20.0% segments in the luxury furniture market; success in this 0.0% country can bring up to $600M in revenue if RH is able to 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 capture 2.5%-3% of the market share International Revenue Domestic Revenue International Store Build 6 5 4 3 2 1 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Design Galleries Secondary Galleries
05 Valuation
Comparable Companies Analysis RH currently trades on a 20.2x EBIT multiple compared to peer mean of 20.9x despite a 19.8% margin On an EV/EBIT basis RH currently trades higher in comparison to home retailer peers. However, we believe this is fair given RH is a luxury retailer and thus warrants a higher premium. This is evident through RH’s higher EBIT margins. Share price appreciation will result from continued margin expansion, earnings growth, and international growth.
Comparable Companies Analysis RH has similar margins compared to luxury peers but trades more in line with home furnishers 30.0% 28.5% 25.5% 21.0% 19.8% 20.0% 16.8% 15.5% 12.8% Margin 11.8% 11.7% EBIT 10.9% 10.0% 3.1% 0.0% RMS KER RACE RH MC HD BRBY WSM HOME LOW ETH 60.0x 50.1x 49.0x 50.0x 38.9x EV/EBIT 40.0x 33.0x 26.5x LTM 30.0x 21.7x 20.2x 17.9x 16.5x 16.1x 15.0x 20.0x 10.0x 0.0x RMS RACE ETH MC BRBY KER RH HOME HD WSM LOW 50.0x 39.1x 40.0x 34.1x EV/EBIT NTM 30.0x 22.8x 21.2x 19.2x 19.0x 17.3x 15.5x 20.0x 14.8x 14.7x 13.3x 10.0x 0.0x RMS RACE MC BRBY KER HOME HD RH LOW WSM ETH 15.0x Net Debt/EBIT 9.9x 10.0x 6.2x LTM 5.0x 3.4x 2.5x 2.4x 2.0x 1.9x 1.8x 1.7x 1.6x NM 0.0x HOME ETH RH LOW MC KER BRBY HD RACE WSM RMS
Valuation RH has historically traded around ~30x EBIT multiple in 2017, the company increased EBIT margins from 15% to 20% since then which has resulted in a lower multiple compared to historical average Multiple Expansion EBIT Margins Consistent with Luxury Peers 35.0x 25% ▪ RH could realize multiple expansion with increased int’l 21% presence, as shown in past retailers 30.0x 20% ▪ More lucrative customer base and higher average basket 25.0x NTM EV/EBIT EBIT Margin price compared to traditional home retailers 20.0x 20% 15% 11% ▪ Membership and hospitality segments command a 15.0x 28.6x 10% premium 10.0x 15.5x ▪ Successful expansion to European markets and margin 15.5x 5% 5.0x improvements can warrant higher multiple as the current discount is due to worries about execution risk – 0% RH Home Retailers Luxury Brands Under Armor: Multiple Expansion As Int’l Rises Ralph Lauren: Multiple Expansion As Int’l Rises Source: Jefferies
Discounted Cash Flow Analysis – Base Case The DCF shows that RH is trading at a discount to its intrinsic value Free Cash Flow Build 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Revenue 2,969 3,110 3,289 3,482 3,681 3,847 4,046 4,238 4,413 4,593 EBIT 629.5 665.6 710.4 759.1 809.9 854.1 906 957.7 1,006.3 1,056.5 NOPAT 497.3 525.9 561.2 599.7 639.8 674.8 716.0 756.6 795.0 834.6 (+) D&A 134.3 141.0 150.0 160.7 172.6 184.3 198.4 213.1 228.1 244.2 (-) Capital Expenditures (109.9) (115.1) (121.7) (128.8) (136.2) (142.4) (149.7) (156.8) (163.3) (170.0) (-) Changes in Net working capital (90.2) (0.6) (0.8) (0.9) (0.9) (0.7) (0.9) (0.9) (0.8) (0.8) Unlevered Free Cash Flow 431.5 551.2 588.7 630.6 675.4 716.0 763.8 812.1 859.0 908.1 PV Unlevered Discount Period Free Cash Flow 406.4 1 479.3 2 472.7 3 467.5 4 462.3 5 452.5 6 445.6 7 437.5 8 427.2 9 417.0 10 IMPLIED UPSIDE/(DOWNSIDE) Exit Multiple WACC Exit Multiple Method 70796.2% 20.0x 21.0x 22.0x 23.0x 24.0x % Debt 15.5% Terminal Year EBIT $1,057 6.3% $779.70 $809.47 $839.23 $869.00 $898.77 % Equity 84.5% Exit Multiple 22.0x 7.3% $715.55 $742.72 $769.89 $797.06 $824.23 Terminal Value $23,243 8.3% $657.20 $682.02 $706.84 $731.66 $756.48 WACC 8.3% 9.3% $604.07 $626.76 $649.46 $672.15 $694.84 PV Terminal Value $10,674 10.3% $555.64 $576.41 $597.18 $617.94 $638.71 Sum PV UFCF $4,566 Cost of Debt 8.9% Tax Rate 21.0% Enterprise Value $15,240 After-Tax Cost of Debt 7.1% % Enterprise Value 70.0% Less: Debt $1,572 IMPLIED UPSIDE/(DOWNSIDE) Risk Free Rate 2.5% Add: Cash $148 Exit Multiple Levered Beta 1.10 Equity Value $13,815 55.8% 20.0x 21.0x 22.0x 23.0x 24.0x Equity Risk Premium 5.5% 6.3% 71.5% 78.1% 84.6% 91.2% 97.7% Cost of Equity 8.5% Fully Diluted Shares Outstanding 19.514 7.3% 57.4% 63.4% 69.4% 75.4% 81.3% Implied Share Price $708.0 8.3% 44.6% 50.1% 55.5% 61.0% 66.4% Current Share Price $454.5 9.3% 32.9% 37.9% 42.9% 47.9% 52.9% WACC 8.3% Implied Upside/(Downside) 55.8% 10.3% 22.2% 26.8% 31.4% 36.0% 40.5%
06 Risks & Mitigations
Risks & Mitigations Several risks could have adverse implications on the value of RH Details Mitigation ▪ RH's new business model includes ▪ RH predicts unfulfilled orders will keeping light inventory, but sources add $80-100MM to revenue in 2021 70% of products from Asia ▪ RH is expanding U.S. manufacturing Supply Chain Bottlenecks ▪ Mismanagement of supply chains capabilities, potentially bolstering and pandemic-related disruptions to product delivery and quality world trade could result in lost sales and lagging revenue growth ▪ Transforming supply infrastructure with new distribution center Details Mitigation ▪ Incremental tariffs on Chinese ▪ “Being overly reactive and moving imports could be critical as 38% of sourcing around in product RH's total merchandise sales are categories like ours can present Trade Tension Between U.S. sourced from China massively more risk.” said CEO and China Gary Friedman ▪ In case of strong tensions between U.S. and China, relocating ▪ Management is mitigating the operations may need to be impacts through pricing and considered sourcing adjustments
Risks & Mitigations Several risks could have adverse implications on the value of RH CEO Gary Friedman is a Polarizing CEO Details ▪ Gary Friedman is an erratic CEO who promises lofty goals for the company ▪ From 1988 to 2001, Friedman worked for Williams-Sonoma until appointed as co-chief executive officer of RH in 2001 ▪ He has a mission to grow RH into a global luxury brand and has devoted his career to achieving this goal – he is almost inseparable from the RH brand ▪ Friedman led the failed launch of RH Modern, causing a 70% decline in the stock price ▪ Following, RH executed a partial LBO of itself, issuing ~$1B in debt for share buybacks, giving Friedman over ~50% ownership at the time Mitigation ▪ The CEO owns approximately 10% of the company and has a majority of his net worth in the shares ▪ Friedman’s compensation plan is heavily tied to the performance of RH’s shares, incentivizing him to increase the value of RH’s stock ▪ Upon first joining RH, Friedman spent his own money to keep the company from going bankrupt in 2001, reinventing the company to become RH today ▪ Rather than chasing short term growth, RH management stays true to the furniture business by rejecting the idea of a mass integration of restaurants into the business
07 Catalysts
Catalysts Successful execution of long-term strategy can appreciate market value by 6 – 8x in 2030 • Continued demand from COVID-19 related drivers could continue to increase sales and Short Term margins in Q4/Q1 2021 earnings Strong Q4/Q1 • Growth following COVID-19 normalization persists as the furniture purchase cycle is often Earnings elongated • Real estate transactions continue to grow, creating continued demand for luxury furniture • RH is expanding to Europe with the first two galleries opening in the UK in 2022 • Management has already signed or is finalizing lease agreements for 5 other locations in International Europe Expansion • Continued store expansion in Europe and strong unit economics will deliver value to RH’s Medium Term shareholders • Introduction of smaller RH galleries to secondary markets will generate greater margins and sales for RH Further Domestic • Expansion of large-scale galleries to underserved metropolitan markets will continue to drive Expansion growth • Introduction of new product lines will increase SSSG and drive growth • Management achieves 2030 targets for RH Long Term • RH is successfully transitioned into a global luxury brand and develops a luxury ecosystem of Success in 2030 products & services Target Goals • RH’s continued shift to luxury products further expands margins • Growth opportunities in international markets still prevail
08 Investment Summary
Investment Recommendation Recommendation Buy RH (NYSE: RH) at $454.52 Target Price: $708 Implied Upside: 55.8%
9 Appendix
COVID-19 Related Drivers Margin Expansion 30% 20% 10% COVID-19 Pandemic 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2016 2016 2016 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 EBIT Margin COVID-19 Margin Expansion Continued Demand Drivers ▪ Increases in wealth and home investment trends bolstered ▪ RH is looking to sustain recent success through larger demand throughout the pandemic stores and exploring “luxury demand’ vs. home furnishing – Core business demand was +33% YoY demand ▪ Sustained volume allowed for the spreading of fixed costs ▪ Efforts will include the reopening of restaurants, store capacity, and mailing source books ▪ Margins increased as a result of closing lower priced outlet stores and decreasing SG&A through not sending out ▪ ‘Brand elevation’ (higher prices and more volume from sourcebooks producers) will result in sustained future margin growth
Product Quality RH’s high prices are not just for the furniture Complimentary Interior Designers Product Reviews ▪ RH has fully integrated the design process with a full ▪ RH reviews on popular product review sites are not as design platform offered through their membership positive as expected given the high price points of the program product ▪ RH’s high prices reflect the inclusion of design services ▪ Reviews have become more positive following the transition to RH galleries from legacy stores and a superior retail experience ▪ RH has a 1.5 star rating on ConsumerAffairs.com ▪ Interior designers at RH are compelled to only purchase products from RH ▪ Many consumers do not believe RH furniture is worth the price Quality Relative to Peers Suppliers ▪ RH remains a premier furniture manufacturing company ▪ 70% of products were sourced from Asia, 16% from the ▪ The company shares third party vendors with other higher USA and the remainder from other countries end furniture manufacturers, including Williams Sonoma ▪ Approximately 38% of products are sourced from China ▪ RH differentiates their products through superior designs ▪ Identical RH products have been found on Alibaba that are with their design partners and strong marketing through being sold directly from the supplier at a fraction of the their catalogs cost
Customer Reviews and Segmentation Their gallery renovation has increased overall customer retail experience Overview Customer Segmentation ▪ Renovations from Restoration Hardware retail store to RH ▪ RH targets casual customers and interior designers Gallery increased the overall customer retail experience ▪ Customer profiles: 40+ y/o, annual income >$200K with increased walk-in buyers and sales figure ▪ Interior designers are not the main customer base ▪ Positive customer reviews from the store are usually – Immense investment in shopping/dining experience generated by their restaurants and interior design; New York Rooftop location has 4 stars ratings with 348 reviews – Designers source from more cost-effective vendors – RH’s design service rivals with 3rd-party designers ▪ Quality of RH's furniture is still being questioned, general consensus on quality not matching its price range – RH offers the “designer’s discount” to everyone Case Study: RH New York Gallery Yelp Reviews Number of Yelp Reviews Consensus 100 80 60 52 Before Gallery (Avg 1.5 stars) After Gallery (Avg 3.5 stars) 40 20 6 9 24 22 0 • Poor customer service • Great dining experience Before Gallery Opened After Gallery Opened • Lack of selection • Beautiful interior design • Low quality items • Overpriced items 1-2 Stars 2.5-3.5 Stars 4-5 Stars
2030 Management Objectives Objectives Gary Friedman Quote ▪ Management is working to establish a global luxury brand in 2030 by: – Expanding into Europe “If you were sitting with us in out leadership team conference room, – Achieving double digit revenue growth rates by you would see our view of what we believe the next decade could opening 5-7 new stores per year – Realizing a mid-twenty percent operating margin (by look like. At a compounded annual growth rate of 10% to 15% we closing down legacy and outlet stores) would generate annual revenue of $7.4 to $11.5 billion. If you assume an adjusted operating margin in the mid-twenties and a Bigger Picture continued expansion of our valuation multiples, our market value ▪ Gary Friedman sees RH as the premier luxury home brand could be $50 to $70 billion in 2030, our roughly 6 to 8 times our ▪ The brand will continue to develop ecosystems and ancillary offerings to furniture to advance this notion current value. If you’re looking for a comp, take a glance at Hermes, ▪ Friedman views the robust business model and provision exactly ten years ago today.” of not only luxury goods but luxury experience as deserving of a luxury retail multiple
Domestic Growth Opportunities – Case Studies How substantial is the opportunity to address domestic markets? New Markets to Enter Population Target City Description TAM 1,633,020 • Opportunity to enter this new market by converting an abandoned retail space to a high functioning design gallery Phoenix • An urban environment and concentration of wealth make this an 326,604 attractive opportunity 1,584,540 • Opportunity to enter this new market by converting an abandoned retail space to a high functioning design gallery Philadelphia • An urban environment and concentration of wealth make this an 253,526 attractive opportunity 1,564,490 • Opportunity to convert existing legacy store into a design gallery • RH would either find a new retail space and close an existing store, San Antonio or expand square footage to accommodate to fit gallery 281,608 specifications RH has the opportunity to enter 7 new markets with design galleries and convert 4 legacy stores
2021 Expansion Initiatives Upcoming pipeline Domestic RH San Francisco RH Dallas RH Oak Brook RH Jacksonville (Historic Bethlehem Steel Building) (Knox Street) (Oak Brook Center) (St. Johns Town Center) 60,000 sqft 96,000 sqft 41,500 sqft 48,500 sqft Expected 2021 Expected 2021 Expected 2021 Expected 2021 International RH England RH Paris RH London (Location TBA) (Location TBA) (Location TBA) Spring 2022 Fall 2022 Spring 2023
Domestic Markets How substantial is the opportunity to address domestic markets? New Markets to Enter 2,000,000 1,500,000 1,000,000 500,000 0 Phoenix Philadelphia Washington Fort Worth Jacksonville Montreal Ottawa Population Addressable Market Opportunity to Convert to Design Gallery 2,000,000 1,500,000 1,000,000 500,000 0 San Antonio Portland Calgary Edmonton Population Addressable Market
International Expansion Initiatives When will international expansion occur? Commentary Execution Risk ▪ Expansion into Europe was delayed one year due to the ▪ RH’s individual store inventory policies mitigate the risk of impacts of COVID-19 on designing spaces any supply chain risks ▪ Management is close to finalizing deals for galleries in ▪ RH does not need to dramatically expand their supply Brussels and Madrid chain to meet international demand ▪ There are 98 cities in Europe with populations over half a ▪ Management successfully reinvented the business over the million people., compared to 46 in the United States and past decade while expanding margins, offering conviction Canada in the team’s ability to grow the business Current Expansion Initiatives RH England RH Paris RH London RH Munich RH Dusseldorf (Location TBA) (Location TBA) (Location TBA) (Location TBA) (Location TBA) Spring 2022 Fall 2022 Spring 2023 Lease Signed Lease Signed
International Operating Capabilities Can the company sustain industry leading operating margins in international markets? Operating Capabilities Hermes Operating Margin ▪ CEO recently remarked that the European market will 35.0% 34.5% have higher margins than the United States 34.0% 33.5% ▪ Limited need to organize inventory and deliver to the 33.0% markets, causing their cost structure to be relatively 32.5% insulated 32.0% 31.5% ▪ Limited number of stores will drive outsized leverage 31.0% 30.5% ▪ Minor expenses and capex will be the leading costs 30.0% Americas Rest of World Net Debt to EBITDA 6.0X 5.2X 5.0X 5.0X 3.8X 4.0X 3.0X 2.5X 2.0X 1.0X 0.0X 2018 2019 2020 LTM
Developing a Luxury Ecosystem RH is in the process of establishing a global luxury brand Establishing a Luxury Ecosystem RH Guesthouses RH Residences RH RH Yountville Luxury The World of RH Brand RH3 Yacht RH Color “Building an ecosystem of products, places, services and spaces that establish the RH brand as a global thought leader” Gary Friedman, Q3 Shareholder Letter
Case Study: LVMH RH is in the process of establishing a global luxury brand LVMH Luxury Ecosystem Fashion Wines & Spirits LVMH Watches & Hospitality Luxury Jewelry Brand Perfumes & Retail Cosmetics
Management Overview Gary Friedman is a polarizing, visionary CEO who has transformed RH into a luxury retailer Gary Friedman: Not Your Traditional CEO Key Events ▪ Community college dropout ▪ 2014: Friedman resumes his role at RH, launches the first RH gallery ▪ Began working part-time at the Gap in 1977, became President and COO of Williams Sonoma in 2000 ▪ 2017: Friedman buys back $1 billion in shares ▪ Friedman served as Chief Merchandising Officer for Williams Sonoma and Pottery Barn ▪ 2019: Friedman sells 500,000 shares to settle marital agreements and for personal liquidity needs ▪ After being passed up for CEO at Williams Sonoma, Friedman was appointed Co-CEO of RH in 2001 ▪ 2020: COVID-19 pandemic bolsters demand ; RH has a ~766% return since Friedman resumed as CEO Ownership Breakdown Top 5 Holders 5.0% 8.3% 14.4% 7.1% 9.0% 8.4% 78.9% 11.6% 9.1% % Total Shares Outstanding Fidelity T. Rowe Price Gary Friedman Berkshire Hathaway BlackRock Insitutions Individuals/Insiders Public Hedge Fund Managers
Quality Shareholder Base RH has a strong shareholder base that will hold management accountable RH Ownership Breakdown Strong Shareholder Interest 100% ▪ Pelham Capital has invested over 9% of their AUM into RH 90% ▪ Durable Capital Partners has invested 10% of their AUM 80% into RH 70% ▪ These active shareholders with significant stakes in the firm will hold management accountable for capital allocation 60% policies 50% 40% Institutional Ownership 30% 80% 75% 20% 70% 10% 65% 60% 0% 55% Pelham Capital Ltd Durable Capital Partners 50% Berkshire Hathaway Gary Friedman Others
Management Compensation Plan Key Management’s compensation is heavily tied to shareholder performance CEO Gary Friedman’s Compensation Plan Details ▪ Gary Friedman’s plan includes the ability to earn 700,000 new shares if all performance targets are met yearly 175,000 $800 Number of Shares Where Restrictions Lapse – If the twenty-day trading price of the stock reaches $650 in 2021 (Year 1) 58,333 new shares will be 20 Day Trading Price for RH Stock 58,334 58,333 58,333 58,333 issued ▪ Restrictions lapse up to one quarter 116,667 ▪ As a result of achieving the $358 price target set out in 2017, Friedman received a compensation package worth 58,334 58,333 58,333 58,333 $650 $171 - $176 million in Q3 2020 ▪ The additional price target of $500 was achieved in Q4 on 58,333 01/12/2021 58,334 58,333 58,333 58,333 $500
Market Views RH will continue to outperform analyst expectations Bear Bull WIC ▪ Bearish views persist from poor ▪ RH is a unique luxury retailer ▪ RH will continue to beat EPS financial performance from that will successfully grow predictions and outperform over 2015-2016, and risky buybacks volume and margins the long run, securing market occurring at the same time share and successfully capturing ▪ RH operates and is investing in a ▪ Investments in the RH demand faster than the market declining industry of in-person ecosystem and continued currently believes retail economic trends will drive price ▪ Competitive advantages are not appreciation ▪ Long term growth will be as robust as they appear achieved far after the pandemic ▪ Questions about membership ▪ CEO Gary Friedman will renewal rates, length of leases in successfully lead a revolution ▪ Market views this as a good an industry ripe for disruption from middling retailer to a company, we view the business ▪ Short interest is roughly 15% of leading luxury brand with a as great float strong business model
Return on Invested Capital ROIC has increased with RH’s Real Estate Transformation and New Real Estate Development Model ROIC Graph 20.0% 18.0% 17.16% 16.35% 16.0% 15.41% 15.08% 14.93% 14.80% 14.93% 14.51% 14.0% 13.04% 12.00% 12.13% 12.0% 10.0% 8.0% 6.65% 6.0% 3.82% 4.0% 3.11% 3.03% 2.00% 1.65% 2.0% 0.0%
Bespoke Furniture Manufacturers RH has achieved luxury at scale and now offers a more desirable service than local, bespoke services Restoration Hardware Bespoke Services ▪ RH has cultivated a brand of exclusivity and quality, ▪ Customers of bespoke services primarily seek the allowing consumers to convey the same level of pride in following in furniture: their homes but with a better customer experience – Specific size requirements – RH may be considered a Veblen good – Adherence to certain style requirements ▪ The business offers superior customer service through – Incorporation of a customers’ preferred material providing: – A sense of extravagance/uniqueness – Designers and interior consultations – Close collaboration with producers gives a sense of – Customer support and return policies assurance with the product – Enjoyable shopping experience – The ability to test out products before buying ▪ The bespoke furniture industry has search costs attached ▪ Customers are aware of the RH brand and quality, lowering with finding a provider of both satisfactory service and the barrier of information required to make a purchase quality ▪ Same feeling as buying custom due to price point, ability to ▪ In many cases consumers loose the ability to tout the brand say this is RH name of their furnishings ▪ Significant time lags exist between order and delivery
Past Transformations of Storefronts RH’s ability to transform large storefronts into immersive retail experiences is unparalleled in retail RH Chicago RH Greenwich RH Chicago at the Historic Museum of at the Historic Post Office at the Historic 3 Arts Club Natural History Before After
Unique Retail Experience RH’s transformation from legacy stores to galleries has created a consumer experience that cannot be replicated Restoration Hardware Store RH Galleries 2013 1. Normal retail experience 1. No inventory on hand 2. Immense selection of inventory 2. Immersive shopping experience 3. Small store space 3. Over double the selling space 4. Undifferentiated mall tenant 4. Highly sought-after anchor tenant RH Galleries are proven to be a destination within the communities they reside Hobbs + Black Architects The most exciting concept in retail since the creation of the Apple store Citron Research
Significant Anchor Tenant With the decline of physical retail, RH has become the only significant anchor tenant for shopping districts Case Study: RH Denver, The Gallery at Cherry Creek Before After ▪ RH has been able to secure new galleries at a rent per square foot that is about 50% lower than their prior mall-based stores ▪ All of RH’s real estate deals will be capital light as many landlords are offering to subsidize their buildout cost ▪ 65% to 100% of the capital requirement is expected to be funded by the landlord in upcoming years, vs. 35% to 50% previously “We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape, and we would argue, will also prove to be equally valuable.” Source: Citron Research
Membership Model The RH experience is enhanced by the RH Membership Model implemented in 2016, as well as RH’s complementary interior design services Benefits RH Membership Count ▪ Improved customer experience 420,000 ▪ Lower cancellations and returns 415,000 ▪ Improved operational costs 410,000 ▪ Less variability in selling price 405,000 ▪ Fewer individual shipments 400,000 ▪ Simplified sales forecasting 395,000 ▪ Reduced downstream implications on supply chain 2018 2019 2020 RH Member Contribution RH Interior Design & Artisans ▪ The RH Interior Design services are more capital-light ▪ RH one of the largest interior design platforms ▪ Differentiated experience from RH members and interior designers % RH Member Contribution To Core Business % RH Non-Member Contribution To Core Business
Store Efficiency Management’s decision to increase store size and decrease sales per square foot is working Sales Per Selling Square Feet $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 2015 2016 2017 2018 2019 2020 Decreases in Sales Per Selling Square Feet are Expected 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 2015 2016 2017 2018 2019 Change in Selling Square Feet Change in Sales Per Selling Square Feet
Growth in Real Estate Transactions Low rates have been a significant catalyst for growth in the luxury furniture market Furniture Purchase Cycle Demand for Second Homes & Luxury Homes ▪ The design and furniture purchase cycle is typically ▪ Demand for second homes increased by 100% year over elongated and will drive demand for well past the year in October slowdown ▪ Low rates coupled with a desire to relocate have caused ▪ RH experienced product shortages in Q3 as demand significant increases in demand for vacation homes exceeded supply over the period ▪ Luxury homes sales surged 60.7% in Q4 2020, indicating ▪ Temporary shifts away from urban areas will generate the impact of rising asset prices on wealthy families significant revenue for RH Home Sales in the United States 7,500 6860 6690 7,000 6570 Thousands of Units 6,500 5980 5760 5860 6,000 5420 5270 5,500 5,000 4330 4700 4,500 3910 4,000 3,500 3,000 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Case Study on RH Modern Expansion initiatives have stumbled in the past RH Modern Debacle Aftermath ▪ Management announced they were launching RH Modern, a line ▪ Comparable sales fell from 15% to 4% YoY and of modern furniture with the potential to open standalone RH management revised their sales guidance Modern stores ▪ Vendors had difficulty ramping production, delaying sales and ▪ RH COO promptly resigned and was replaced by Gary deliveries Friedman ▪ Customers were forced to wait months for deliveries and many ▪ RH stock fell approximately 70% and took years to recover items were out of stock ▪ Critics believe RH rushed the opening and had incredibly strict deadlines for RH Stock Price $120 $100 $80 $60 $40 $20 $0 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 WSJ, Chicago Tribune
Nebraska Furniture Mart – Buffett Study RH bears a high resemblance to a longstanding Berkshire holding The Story Nebraska Furniture vs. Restoration Hardware ▪ Nebraska Furniture Mart (NFM) was founded in 1937 by Russian immigrant Rose Blumkin NFM RH ▪ From an initial $500 investment, Blumkin grew NFM into Largest store is the largest home retail store in the country Largest store is Large Store Fixtures 70,000 square 560,000 square feet ▪ In 1983 Warren Buffet purchased 80% of NFM at a $60 feet million valuation ▪ NFM has maintained high profitability (sales/square foot) Profitability ~$1,000/sq. ft ~$1,000/sq. ft while operating immense store fixtures The RH Progression Restaurants, Wide selection of Customer galleries and look items drives ▪ With a larger focus being placed on galleries, RH is moving Experience books drive volume towards larger store fixtures (100,000+ square feet) in volume select markets, increasing consumer touchpoints, available collections, and driving increased volume Price Point Discount Pricing Premium Pricing – Larger stores may decrease sales per square foot, but will offer faster payback ratios and drive ~4x more volume than current stores RH’s high profitability in operating large fixtures ▪ Such efforts will continue to separate RH from competitors acts as a barrier of entry
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