RH: Climbing the elusive luxury mountain

“History has proven that men and women work for a dollar but die for what they believe in. We say inside our organization that this is not our company; it’s our cause. Some people say don’t take it personal. Those people are not our people. This is very personal for us.”- Gary Friedman, CEO of RH

After reading that quote, you could be forgiven if you thought RH’s “cause” is solving climate crisis or world hunger; in reality, all it is trying to sell is luxury furniture. At first glance, that may seem too trivial a “cause”, but anyone who knows the challenge of transforming a bland brand such as “Restoration Hardware” to climb through the luxury mountain will perhaps admit it is indeed a very challenging cause. This very unlikely and still somewhat emerging ascent to luxury is the central theme that encapsulates the story of RH.

As part of this deep dive, I have spoken with two shareholders of RH, both of whom would like to remain anonymous. As always, my engagement, discussion, and debates with analysts/investors who have been following the company for a while makes this deep dive more enriching than it would otherwise be, so I thank them for their time. Here’s the outline for this month’s deep dive:

Section 1 Understanding the elusive world of luxury: This deep dive started with some basics on the luxury brands, how it differs from premium brands, and why luxury status is hard to attain.

Section 2 Furniture industry dynamics: Following the basics of luxury, I discussed furniture industry dynamics, profitability, and whether RH is truly “peerless”.

Section 3 RH Business Model: This section outlines the business model, how it was transformed over the last decade, the shift in RH’s real estate strategy, and the RH membership program.

Section 4 The ambition of a global luxury platform: RH’s ambition to go beyond North America, as well as luxury furniture was highlighted in this section.

Section 5 Valuation and model assumptions: Implied expectations in the current stock price was discussed.

Section 6 Management and incentives: RH used to be battleground stock back in 2017. Gary Friedman inflicted maximum pain on the short sellers through excellent execution on the business as well as his bag of capital allocation tricks and thanks to his stock incentive plan, he currently owns ~28% of outstanding shares of RH. Current incentive plan for Friedman was also mentioned in this section.

Section 7 Final words: Concluding remarks on RH, and a very brief discussion on my overall portfolio.

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