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
01 Business Overview
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 Filings02 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 LTMInternal 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 Filings03 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: JefferiesPositioning 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 BurberryExternal 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 $2.4B in the same year
Medical Supplies 8.0% ▪ Within the bespoke segment, products are highly
Furniture 8.0%
Non-homogeneous
OTC Drugs 6.0% Greater Service individualized with clients working with interior designers
Home Improvement 3.0%
Groceries 3.0% ▪ HF market is more resilient to eCommerce trends as the
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% product moves upstream
Sources: Morgan Stanley ER, JPMorgan Initiating Coverage, Wayfair Investor PresentationFurniture Market
Growth within both the global furniture market and US furniture store sales are steady
Global Furniture Market (US$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: JefferiesExternal 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 FilingExternal 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 segmentThesis 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 FilingsThesis 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 CoverageThesis 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, JefferiesThesis 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 FilingsThesis 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 MarketThesis 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 MarketThesis 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 likelyThesis 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 HermesThesis 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 PopulationThesis 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 Galleries05 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 RMSValuation
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: JefferiesDiscounted 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 adjustmentsRisks & 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 business07 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 prevail08 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 growthProduct 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 costCustomer 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 Stars2030 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 multipleDomestic 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 stores2021 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 2023Domestic 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 MarketInternational 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 SignedInternational 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 LTMDeveloping 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 LetterCase 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
CosmeticsManagement 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 ManagersQuality 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
OthersManagement 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
$500Market 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 modelReturn 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 deliveryPast 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
AfterUnique 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 ResearchSignificant 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 ResearchMembership 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 BusinessStore 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 FeetGrowth 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-20Case 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 TribuneNebraska 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 entryYou can also read
