As the first half draws to a close I like to sit back and talk about who truly did have the best quarter versus expectations. I am not talking about the 10% to 15% better. I am talking about the companies that simply weren't in the ballpark of what was thought possible.
The winner? Pretty clear, actually: RH (RH) . The company reported 78% revenue growth when Wall Street was looking for 56%. RH core demand, what matters when you are doing apples to apples, increased 109%, "the strongest demand trends in our industry," as the shareholder letter pointed out. Gross margins expanded 550 basis points and adjusted operating margins increased 1,260 basis points, to 22.6% versus 10%.
There.
I just gave you all the gobbledygook, all the authentic Wall Street gibberish you need to be able to hang your hat on why would want to buy the highest end furnishings and food in gorgeous galleries all over the country and soon Europe.
I could make a gazillion projections about how this company, at $14 billion, is ridiculously small considering that I expect it to do $6 billion in sales in just a couple of years' time.
Or I can talk about how the company "did" the quarter, I mean, really did the quarter.
It accomplished these numbers because there is a merchant at the helm, Gary Friedman, I mean a real live merchant who bleeds RH and wants you to do, too. We do. We're one of the more than 400,000 members of the RH club.
Now before I tell you exactly how Gary created this greatness let me tell you why it may be one of the best second half stocks to buy. Oh, let me let him tell it: "the unmasking of the general public could lead to a Roaring Twenties type of consumer exuberance" and given the "strong housing and renovation market, both with pent up demand and a long tail, a record stock market, low interest rates and the reopening of large parts of the economy." Gary believes it could be like a Town & Country cover: "Remember Fun? Get Ready for the Comeback."
I struggle to say why Gary and RH are so special. In some ways it's best to say what it isn't: a company with seasonal inventory, a Valentine's Day, Easter, July 4th, a company with fashion risk, no more than classics can have that risk, and a clientele that's well, rich, which means they have staying power and like the membership model that Gary converted to in 2016.
Most of all RH is like no other retailer. Or as he puts it: "All you need to do is walk a mall to notice most retail stores are archaic windowless boxes that lack any sense of humanity. There's generally no fresh air or natural light, plants die in most retail stores and they can't be a good environment for humans either."
It's tough to pin down what to call RH's places. Stores seems too limiting. Gary calls them galleries but I think that implies too little given all the incredible spaces, and places to eat and furniture to gawk at. It's hard because, let's say, there were Michelin books for retailers. RH would get three stars and everyone else would get no stars. They are experiences. They are dreamy. They are the type of spaces that are like fabulous writing: you know it when you read it and the British manor and French Champs Elysees place will enhance the story-telling.
One thing is certain, it shouldn't be happening. There shouldn't be a place that offers amazing goods that could be priced like Lamborghinis or Brunello Cucinelli but are more likely priced the equivalent of BMW or Audi. I know, doesn't' seem like a bargain, but only to the uninitiated.
It's not easy getting to where RH is. Or as Gary puts it, "Hermes, Chanel Louis Vuitton, Gucci, Cartier, Tiffany and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain. Never has a brand started at the base as we have and made the climb to the peak."
You know what happens when you get there? You can charge a lot more and people are a lot more proud when they buy something. I could go on and on about how this was the best quarter of the first half but I leave you with this: when the stock was in the 100s he and the company bought back millions of dollars worth of stock and he told us so. His confidence was ridiculously high and it seemed foolhardy in the midst of the pandemic. Now, it's just brilliant. And I don't think it is by any means finished climbing as long as this man stays as hungry and as talented as he is.
