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Taking a splash in Luxurious Furniture

April 17, 2024
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Wiko Steyn
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Wiko Steyn

Unicorn Portfolio Update 9: #13 of 20 stocks added.

 

Restoration Hardware

Here we have another rather unusual pick, a high-end furniture brand which is not expected to grow much for the next three years. It also does not score great on our Unicorn Scorecard, so why does it deserve a spot in our portfolio?

RH share price shot up during the pandemic to a dizzying $744 from $250 before the pandemic. Now, thanks to quantitive tightening and recession fears we are all the way back to $250. Was the stock getting ahead of itself at $744? Yes, absolutely. Is it undervalued today? No, it is probably fairly valued due to the significant macro headwinds.

For South Africans, our closest reference to RH might be something like Weylandts but remember they are American so imagine a much larger scale, more expensive and luxury beyond belief. Feel free to visit their impressive website to get an idea.  If you're a rich person in America looking to upgrade your home, this is probably one of the first places that you'll go to.

 

Our conviction is based on four pillars:

  • Free Cash Flow machine

Due to the high-end nature of their products, they are able to operate on a highly profitable base. Although inflation and supply constraints might hurt their margins, they clearly cater for a wealthier type of clientele who should feel the pressures of a recession a bit less. 

 

  • Brutally transparent CEO

After the recent quarterly earnings, Friedman openly talked about the significant deceleration in demand from customers since the invasion of Ukraine. He does not downplay the impact that the current economy has on the market and acknowledges that the geopolitical tensions, rising inflation, and interest rates have made investors fearful. Although it significantly impacted the share price, we like this honesty. It gives you comfort because there is a higher probability that the stock is fairly valued. There are a lot of companies trying to deceive shareholders and they are always trying to maximise quarterly results. We love Gary Friedman's response in their earnings call shown below. 

 

  • Long term vision

The worst thing that could happen with this company today is if we start playing a quarterly game. Like someone said to me at the end of the day in a meeting, you have to protect the brand. Every company I have worked in, every time I've been around people that say you have to protect the brand is when brands start to erode because they stop playing offence, they stop investing with the same courage and passion and they stop having the same drive and energy to make things better and greater. So we're allergic to the status quo. We are passionate about finding big ideas. We don't care where they are. We are so excited about RH In-Your-Home

RH's core value proposition is not only creating beautiful luxurious furniture but also aspirational spaces with the highest quality materials that harness premier aesthetics. They are aspiring to build an ecosystem of products, places, services and spaces that establish the RH brand as a global leader. 

 

  • Taking advantage of the extreme pessimism in the retail sector

Retail is facing the perfect storm, first they lost market share to e-commerce during Covid and now the whole sector is riddled with the fear of a recession. But Restoration Hardware has an ace up their sleeves: superior in-store experience. And this is not like anything you have witnessed before, just have a look at the picture of their gallery in New York. If RH can survive this treacherous period, they should come out even stronger.

 

Our scorecards are only used as a guideline, the Core Fund Scorecard ensures we are only buying quality growth companies and the Unicorn Scorecard identifies asymmetrical risk/reward opportunities. This company might just not be well suited to these scorecards. At this point, you should realise that scorecards should not have the final say, sometimes you need to use your intuition and get a holistic view of a company.

 

Conclusion

When you combine a company with great margins and an excellent CEO executing a long-term vision you get a SWAN (Sleep Well At Night) stock with high potential to be a long-term winner. Buying quality at a fair value seems like a good deal to us.

 

Portfolio Updates Summary

  • Buy $250 RH at $243.10


 

Disclosure

This is not financial advice and is only based on the author's opinion. This is not buy or sell recommendations of any stock.  The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investors personal responsibility to always remain tax compliant.


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