Restoration Hardware (NYSE:RH) Needs To Get Real With Investors

- June 16, 2016

RH

With these things considered, I already explained why Friedman and Restoration Hardware‘s (RH) currency and energy excuse is completely insane. It does not make sense, and I urge you to go back and read this article to understand the reasons why.

In saying that, I find it dishonest at best that Friedman noted a decline in oil prices as a reason for weak store traffic last quarter, but after a 50% bounce off lows, and a stock market that is now very close to all-time highs, he is using the same “low oil prices, beaten down stock market” excuse as last quarter. Thus, it makes even less sense today than it did three months ago.

Granted, I am not the only person who realizes the dishonesty and utter disrespect that RH is showing to shareholders. The conference call had analysts really probing Friedman on these issues, and it was rather uncomfortable to hear him stumble and mumble answers. I kind of feel sorry for the guy, because he’s either in denial or he truly thinks he’s smarter than everyone else.

What Friedman should be telling investors

Dear investors, we fu#ked up. We have a high net worth clientele, had ridiculous growth for a four year span, and thought the glory days would never end. It’s hard to understand how comparable sales growth can go from 15% and 20% to 5% and 0% in just two years time, but it appears that our 69 stores have reached a peak, and are saturated.

In realizing this peak, it no longer makes sense to build dozens of mega stores, because our markets at most existing stores have become saturated. Instead, we will continue to operate at capacity in our busiest markets, we will be selective in entering new markets, and we will use data analytics to launch standalone stores that promote certain RH brands like RH Modern and Lawn & Garden where demand and customer orders are highest.

We will build out our e-commerce channels, and will quit trying to sell you all on the notion that market volatility, low oil prices, and production delays have taken us from a 20% growth company to a near breakeven company. In fact, we don’t even have major production delays. That was a lie.

We will maximize profitability by reducing these insane expansion costs, and will quit treating investors like they are stupid. We now realize that the bullshit we have served investors does not taste good, and has contributed to the deterioration of shareholder value. We believe that by reducing costs and being more selective in expanding our business, we can achieve a mid-single digit growth rate long-term and a mid teen operating margin. We are fully capable of creating $150 million in net income over the next 12-months with the ability to grow profits 10% each year thereafter.

Will Friedman ever say the above to shareholders? Not any time soon, but sooner or later he will be forced to face the reality of Restoration Hardware’s circumstances. When that day comes, investors will realize that this is a company that can still grow at a moderate rate, and a stock that trades at just 7.5 times the $150 million in net income that RH could easily achieve with existing operations.

The big takeaway here is that RH has got to embrace technology. Those who are RH customers are very loyal to the brand, myself included. But, brick-and-mortar stores and massive catalogs are not the answer long-term. It needs to build an e-commerce presence and embrace data analytics to maximize in-store inventory and launch standalone concepts in areas of the country where demand would be highest.

Since I am a consumer of RH products, and see the potential in these different approaches, I don’t plan to divest my small stake in the company right now. However, much like VRX and LC, owning RH requires patience, and a large position is risky due to the hole that management has dug. Therefore, if you are going to own RH, make sure it is a small stake, and don’t expect shares to appreciate any time soon.

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4 Trackbacks

  1. […] put, the company made some bad concept bets, but the good news is that RH seems to be moving in the right direction by launching […]

  2. […] all of its problems were the fault of management. To this day, RH management still has not said what it should to investors. Still, when Goldman Sachs (NYSE:GS) adds RH stock to its “Conviction Buy” list and […]

  3. […] is unchanged by this quarter. However, management still does not seem to have a good handle on the real problems, and has over promised and under delivered for nearly two years […]

  4. By Edequity Edwin Javius on December 18, 2016 at 11:14 pm

    Edequity Edwin Javius

    Restoration Hardware (NYSE:RH) Needs To Get Real With Investors

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