Chit Chat Stocks - Arhaus (Ticker: ARHS) with Stranger Capital

Episode Date: March 23, 2023

Arhaus is a private home furnishings retailer that offers a range of high-quality and sustainably sourced furniture, decor, and accessories for homes and offices, and is known for its commitment to craftsmanship, design, and ethical sourcing in the competitive furniture market. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Stanger Capital's work? Check out their Twitter here: https://twitter.com/StrangerCapital?s=20 Contact us: [e-mail] Timestamps Arhaus | (2:53) Growth | (15:59) Consumer Spending | (21:43) Private Equity Ownership | (31:40) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer, as always. Today, we've got our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on the show Stranger Capital, and we're talking about Our House. That's A-R-H-A-U-S. It's sort of a luxury furniture type retailer, and I'll let Stranger Capital kind of explain more of it throughout the interview. But before we get to that, we want to talk about our sponsor. If you listen to the show on a regular basis, you already know them. It's Stratosphere. They are our investing home screen for fundamental research. We use it on a daily basis. They have tons of cool data visualization tools. They have SEC file aggregation all in one place for any companies you might want to follow. And then they have the custom-built KPI tools, which I think is probably the most unique part of the platform, where they've got company-specific metrics that date back a long way. So it's really the place to be, and you can do it for free or you can upgrade to a paid plan.

We really, really recommend it. But it's stratosphere.io. Check it out. And then if you are thinking about doing any of the paid plans, because they do have certainly some extra benefits, if you upgrade, use code CCM, you'll get 15% off and they have a number of different pricing tiers. So even if you're an individual investor, I recommend checking it out as well. If you're more interested in the platform, we've got a little three minute interview with Braden Dennis after the episode. So stick around for that. But without further ado,

here's our interview with Stranger Capital. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right. Welcome in. Today, we are joined by Stranger Capital is his pseudonym on Twitter.

Came across him through Twitter. I think we had some portfolio overlap. I thought you had an interesting portfolio. And so I reached out and we decided we're going to do a show on our house, which is not like we don't share a house. It's A-R-H-A-U-S. And I'll let Stranger talk about what the business does. But maybe could you give us some background on how you got interested in our house and maybe what the position is for you today? Sure. So, hi, everyone. I'm Stranger Capital. That's what I go by on Twitter. I am anonymous. So I found our house about nine months ago. So it was over the summer. I was simply screening for value stocks, looking for things that were trading below, I mean, like serious value. So like below 12 times forward earnings,

looking at single digit EBITDA multiples. And I remember glancing at our house and thinking, man, this thing is priced so low, but it's just kind of just fallen since its IPO. So I didn't really bother looking into it very much. Soon after that, maybe like, I don't know, a week, two weeks, I'm having a conversation with a friend of mine in our group chat who works out of D.C., lives in D.C., and he buys a lot of RH furniture. And I asked him, like, RH, this looks a lot like this store that I've come across called Our House.

Have you looked into Our House at all? And he's like, no. The only thing that I've heard is that their recliners are maybe nicer or something like that. He really had not heard much about Our House. So I'm like, OK, that's interesting. Again, another month or so goes by. I'm in Birmingham with my family and we're at something called the Summit. It's a very nice shopping area. And I see in our house and I'm like, well, that's kind of crazy. So I kind of look it up. Apparently this is the only our house in Alabama.

I go inside the store and I'm genuinely blown away. So before I kind of explain the store, let me give you a little bit of background about myself. I studied contemporary music for a long time. I actually took a college class on the Second Viennese School of Composers when I was in ninth grade. If you're not familiar with them, Second Viennese School of Composers refers to Arnold Schoenberg, who's the father of the 12 tone series. So we're talking about music that you cannot tap your foot to. This is music that's very mathematical, very experimental, very contemporary. So going into this store, like it really spoke to that artistic side of me it was it was like i was looking at multiple stages like theatrical stages in a way i mean the the furniture was intricate it it was a lot of it

looked and i found out of course that a lot of it is handmade um the furniture looked like works of art uh without being outrageously priced i mean it is premium you know our house does operate out a 400 billion dollar market and about 100 billion of that is premium furniture so at current sales they're only capturing like less than two percent of the premium market so there's a lot of a lot of room to grow obviously if they do things correctly but looking at all this furniture uh it really spoke to me because i looked at i've been to an rh before there's an rh that is there's a restoration hardware that is in birmingham and that furniture just does not really speak to me uh so that's kind of how i i found it um and then later on in the year i mean not later not much

later on i really started to develop an investment thesis around divesting from china so uh i can't remember exactly how it may have just been coincidental but i was looking at our house and i found oh my gosh their only bit of like touch with china is intellectual rights uh with in regards to their actual name, like the R House name. So if I believe it's with the CNIPA, the Chinese, the China National Intellectual Property Association, they don't do any manufacturing in China, but they do most of their manufacturing out of the U.S., which I really liked because the big concern was, you know, whenever you hear about something being made in China, you know, that a lot of the times, a lot of times, at least the first thing that I think of

is it speaks to a lower quality naturally because so many things are mass produced to meet global demand over in China because it's so cheap to produce over there. And then the other thing is, of course, we just went through a pandemic and supply chain issues are kind of still a lingering buzzword of multinational enterprises. So it's not that they don't have a foothold internationally. They do. They absolutely do. And I'll speak more to that later. But I was really pleasantly surprised to know that the majority of their products are actually manufactured in the US, with the exception of some products that are handmade by artisanal families and groups in places like Mexico, Italy, and Indonesia. So that alone really, I thought that was very

interesting compared to RH, which is a company whose the majority of their products, their final products are made in China and India. So that's kind of how I came across our house. Totally makes sense. Yeah, you teased it a little bit. But what does our house do? Can you explain the omni-channel model? And maybe just for any listener that is not within this industry or is a shopper within this industry, who are their target customers? Who are they trying to too convinced to go to their stores or on online or wherever. Right. So I would say at current salary levels or current income levels, excuse me, their primary target are going to be anybody who's interested in premium furniture. So we're

talking spending anywhere from $2,000 to $10,000 on a single piece of furniture, a $5,000 dining table, a $4,000 couch, very high quality stuff, very premium stuff. So their whole omni-channel breakdown. And it's funny because whenever I actually think of Omnichannel, I think of this meme that was like, it's the Winnie the Pooh meme where he's like sitting there all like sad, and then he looks all sophisticated. And it's funny because it's like Omnichannel is almost another way to say, yeah, we have a store and a website. So the thing about their Omnichannel approach is that they break it down into four different categories. So they've got their show rooms. They've got about 81 of those in the United States. Then e-commerce, which is of course

their online sales, then print and digital media, which is seasonal catalogs. And then they have an in-home designer services, which is a really cool service actually, which has grown in terms of hiring in-home designers for each of their showrooms. So their showrooms will have in-home designers who will meet with you and be like, Hey, I can actually come to your home, design a service for you. And it's actually been very successful. I think what they said is over the past five years, anybody who used the service, not past five years, just over their history, because they've been around for a couple of decades now, they just only recently gone public. Anybody who uses the in-home designer services, 40% of them go on to buy five or more pieces of furniture over their

lifetime. So the showrooms are what I was kind of explaining to you that I got to go to. very beautiful very intricate um each was set up like its own like it was like its own character uh with complementing furniture pieces to really speak to anybody who walks into the store um like i said they have 81 total in the united states they have a goal of expanding of of building five to seven more every year over the next 15 years with a long-term goal of having 150 showrooms. Okay. Now, e-commerce is, of course, their online sales. That accounts for about 17% of net revenues. And over the past four years, it's grown at a 30% compounded annual growth rate in terms of as a percentage of their, or not as a percentage, but the actual online

sales have grown at 32% annually. Whereas I believe in over the past four years, total revenue in general has grown at 26%. So print and digital media is the other one. This is a little bit more of a marketing segment for them. It includes seasonal catalogs, along with catalogs that they send out to subscribers of the catalogs and customers in September and January. And then they also use this segment, or I guess this omni-channel segment to throw in social media and social media influencers as well. And of course, like I said, the in-home design services. And they provide a more personalized client experience. And according to their 10K, I believe, since 2017, they have produced an average order value over three times out of a standard order.

So it seems that the in-home designer services is really where they build customer loyalty. And it's a really, really interesting segment. It honestly reminds me a little bit. I just looked through their investor deck when we were researching for questions for this podcast. And it reminded me a little bit of Ulta Beauty in that it's kind of that, I mean, it's different in markets, but it's kind of got that premium offering, has been resilient to online, any sort of online disruption. And there's like the services side, they have like beauty stylist kind of stuff in the store, which I think helps also sell items. I don't know, random tangent, but that's another operator who's done quite well, just like

our house. Ulta's very personal. My wife uses Ulta. I mean, my sister uses Ulta, my mother uses Ulta. I've been in the stores with them before, even I'm approached as a male, of course, like they'll come in there and say, you know, what can we help you with today? What kind of products are you looking for today? And I'm telling you, they really try to sell you on things big time.

And I think that store is a pretty good success. I've never really looked at the Ulta as a stock or as a company. And if I can be honest, I don't even know if they trade publicly. I assume they do. They do, yeah. They do. They have similar, like you said, omni-channel is kind of a lot of companies will just say it because they build a website and they're like, we're omni-channel. It's a fancy term for, hey, we have other channels to make sales.

But if you're not omnichannel today, then you're stuck 50, you know, 20, 30 years in the past. Right. All right. Let's kind of go through the, I guess, unit economics. What are our house's biggest costs? What are their margins? Could you give like some actual numbers just for context? And then have they, I mean, supply chain's been kind of a big buzzword, I think, over the last year or so. How have margins changed or fluctuated? Sure. So in terms of like unit sales and stuff like that, they don't actually produce those numbers. I wish they would. This was one of the first things that I was looking for through

earnings transcripts to the S1 through 10 Ks, 10 Qs. They don't report specific furniture, like what types of furniture sell the best or what their real unit economic numbers are. But they have spoken to the fact that unit economics have been stable across all United States regions. So other than that, it's really hard to speak to it because like I said, it's not reported in specific numbers. But like I said, it's been constant according to management. So in regards to their biggest costs, this is an interesting one. So if you go through their earnings transcript, one of the things that they point out multiple times is that materials have stabilized, lumber has stabilized, somewhat fallen, of course, and even manufacturing costs

have stabilized. So this got me thinking, okay, so they're not really speaking to what is actually changing in terms of their costs, what's really costing them the most. So if you take a look at their cost of goods sold versus their SG&A, their salary expense is growing at a faster rate. And that actually makes perfect sense to me because wage inflation is kind of the inflationary topic that a lot of macro theorists and macro economists are talking about. So I think that's going to be kind of the downfall in terms of compressing margins. Like right now, I think last year, they did 98 cents in EPS. I do not think it'll be that high. Personally, I have forecasted at about 84 cents, 83 to 84 cents per share. But their absolute, their biggest cost is going to

be what is wage inflation. I think it's interesting the way that they manage capital as well. It's a way that I don't really see a lot of companies do. I'm strictly using a cost of equity for the discounting this business because they rarely use debt. And when they do use debt, they use revolvers. And then when they do use revolvers, they often close them out for a very cheap price, albeit. So in terms of operating costs, SG&A is definitely their biggest cost. I definitely think it's going to become a bigger cost. Margins are pretty much identical with Restoration Hardware, except for gross profit. And that's something that I'm going to touch on a little bit later. But yeah, sorry. All right. It looks like one thing, I guess,

Ryan and I were glancing at the investor decks and stuff like that over the last year since they've really gone public and they saw some impressive growth in 2022. It was, I think the comp sales were over 40%. I think you're probably going to say that that's because of the return to because of COVID. How has that worked? What has management said about that stuff? And what are they looking for going forward of how comp sales and kind of just store traffic, how it's trending as we move to the normalized environment in 2023? Right. So the growth outlook from management is not stellar. They are expecting sales to pretty much grow at a much lower rate. So obviously, last year and the year before it was we're talking like 50 year-over-year uh growth uh in sales uh

you know roughly 50 what is it 51 in comparable growth um and then they also have this interesting metric called demand comparable growth um i like this metric because it kind of gives me a little bit more insight into uh what i think performance is going to be is going to look like so comparable growth refers to sales growth from stores that have been, or sorry, showrooms that have been open for 15 consecutive months. Demand comparable growth is a little different. So comparable growth is actually talking about revenue. So the product has been delivered, right? Demand comparable growth is referring to growth in orders placed. So if you actually look at 2021 versus 22 comparable growth is pretty much the same it's stellar it's like 51 however demand comparable

growth has changed in 2021 uh orders placed or in terms of the value of the orders placed was at 45 and 45 and a half percent um in 2022 is up 13.8 so i think this is really the gauge that management is using um and uh towards uh estimating or forecasting what the future is going to look look like. But whenever it comes to why management is forecasting such low sales growth, I'm talking about like 3% to 5%, I believe, or 4% to 6%. It's because I found that this management team, I really found them to be very conservative. And I like that. I don't like management teams that are overly optimistic. And I like them to think realistically. But their growth expectations, I think are conservative. They leave room for improvement. You know, they don't want to make

any mistakes, I guess, with the analysts as well, because I know that some companies are swayed a little bit by analyst expectations. But overall, like I told you earlier, you know, they want to open five to seven stores a year on average for the next 15 years. And demand comparable growth really speaks to the fact that you're not going to see 50% year over year sales again. A lot of really was backlogged from coven because the way they you know the way revenue is tracked is have you received the order you know and if if if it's all backlogged and they're finally getting a lot of that supply a lot of people are receiving orders at one time that's going to show massive revenue growth so i think that's why i really respect the demand comparable growth metric

that they give because they're like hey look our sales are massive like right now like they're up 50%, but that's going to change and demand comparable growth speaks to that. It's not perfectly correlative, but it does speak to that. So I do think sales will slow down. Sorry, go ahead. Sorry. Yeah. Just a quick follow-up here. Thinking over the next five to seven years or kind of a longer term time horizon, has management indicated, or have you made any projections or analysis on what their comp sales could be over, say, an extended time period as we get out of these weird fluctuations? Are they guiding for 5%, 3%? Or is it more of just we want it to be positive? Sure. So two quick things. One,

management is refusing to make any comments about what 2024 and beyond look like. I think, again, that speaks to their conservative nature. They're like, we know the macro environment's odd. They've used the phrase prudently cautious multiple times in their earnings call from this last week. So they don't want to really speak to that. However, they do believe that the premium market of furniture will experience a 6% sales compounded

annual growth rate from 2023 to 2026. So that's where I'm kind of getting my estimate. Now, their estimate, their range is 3% to 6% growth. So I think it's like 12. They're expecting 2023 to be $1.24 billion to $1.3 billion. I've got my expectation at $1.3 billion. I genuinely think that they could do better than that. I really wouldn't be surprised if they did because, like I said, I think they're being

very conservative, but I like the higher number here in terms of growth. So they haven't spoken to further years, and they expect the general industry of premium home furnishings to grow at around 6% a year for the next few years. That's all they've said to it. I assume that guide that you mentioned, the guidance for next year, is probably why the stock has kind of sharply declined over the last couple of weeks. Absolutely. It's 100% the reason. Are you concerned? And I know this is kind of like tough because no one can really forecast and everyone keeps throwing like macro concerns out as kind of like a reason to conservative guide or maybe just like they bottle all their problems into that.

But like, are you concerned about like a tightening consumer spending or do you think it's premium enough that maybe that customer won't be as affected? It's a great question. um i don't think that i don't think they're going to be as affected uh in in terms of wealthier people spending however um and and if and if somebody can actually i don't have the data in front of me on this but this is something that i've heard more than once recently um the way a lot of luxury cyclical spending uh goes for for wealthier families and wealthier households and individuals is it oftentimes flows with the stock market so if the stock market is doing performing poorly, then luxury cyclicals will oftentimes perform poorly, which makes sense. It makes

sense. However, I don't think that this specific demographic of customers is going to be greatly affected by recession. But that's just, that's personally how I see it. They're less affected by recessions. They oftentimes have more money, have more capital. They're able to spend the way that they oftentimes want to. And if anybody feels like I'm wrong in that, please, please let me know. But that's kind of how I see the customer base. It is a wealthier customer base. Yeah. Thank you for that. And I think I agree. It's so hard to forecast. So maybe we just don't have to talk about that because it's almost like it'll figure itself out eventually. And you can also add in stuff like household formation and the tightening residential real estate market.

How many people are going to be moving from apartments to these new homes? Is that going to change. And again, it'll all figure itself out eventually. And then they're all, they're always this short-term concerns, but when we look at their competition, it seems like the established competitor is RH. Are there any others, you know, are they're going after, like you said, a $100 billion market opportunity, who are they trying to steal share from? And do you think they have any sort of competitive advantages? So their RH is definitely their biggest competitor there are some others that you could throw in there that have been around a little bit longer um you know a couple that come to mind are gonna be like william sonoma

um i believe uh what's the name of the company it's now just fleeing my mind um i believe actually it's the it's the it's the company that owns pottery barn i cannot remember it might i don't think it's william sonoma but there's another one anyway uh ethan allen interiors is another one that hasn't been very successful um haverty is the same as well so really when i'm talking about competition i am nine times out of ten i'm talking about our uh restoration hardware um so this is this is the the you know the little the the nail-biting competition that i like to focus a lot on so a couple things that i want to talk about and this is probably the one that i'm going to spend the most time on so uh when you're comparing our house and restoration

hardware the first thing you're going to notice that is different in terms of like because i like to take a customer approach go to the actual places look at the products you know what do i like about them the first thing you're going to notice is the the style our house has a very modern and classical style whereas restoration hardware has a very contemporary style do you know what i mean by the difference between modern and contemporary not really not at all Well, I, I, my, yeah, my knowledge on, uh, I think I was speaking to Brian too, our knowledge on, uh, interior design is, is approximately zero. So this is a, this is, it's, it's, it's very periodical.

So contemporary literally means what is happening now. It is, it's the style that is now the style that is today. And the contemporary of today is furniture that has clean lines, soft edges. It's either square or it's round. Uh, it's solid cuddle color. It's, it's got a solid, subtle pattern. it's very simple design really simple design modern is a little bit of a different take so classical so modern and classical what I mean by that is modern is going to refer to a time period

specifically late 1800s to early 1920s or sorry yeah 19 early 1900s so when I think of modern and classical it's more intricate it is it has more character quite frankly the design is just more, it's more unique. It speaks, it speaks more of a character than, you know, something that is very, you know, straight line, soft edges, you know, and some people like that style and it's fine. And that's where my bias is going to kind of come into this conversation. I am biased towards modern looking furniture, much more than I am against contemporary, much, much more than I am in regards to contemporary furniture. So that's their, that's their big design, like difference, If that makes sense. And in terms of in terms of other other ways that I compare them, you know, with our age, you know, it's very it's vertically integrated.

And so is so is our house. But our house, I would say they implement different forms of actually getting their customers on board. So we're talking about the in-home design services, handmade furniture. I don't believe that's the same case with RH. Most of the furniture products that are sold by our house, like I said, are manufactured either in the U.S. at the North Carolina facility or other operating lease facilities that they have. And then, of course, they've got the handcrafted works that they get in from Mexico and Italy and Indonesia, and then also some that are handcrafted here in the U.S. So I think our house speaks to a more personalized customer. someone who isn't necessarily looking to go with the times, but go with a piece of furniture that's like a piece of art that really speaks to them. And like I said, this is my bias.

If I were to look at my generation, I feel like our house is going to speak more to them than it is, than RH is going to. But like I said, that is a bias of mine. The competitive difference in terms of margins. So if you look at the margin difference between in our house and RH. They're the exact same. They've grown the exact same except for gross margins. The gross margins with our house are approximately 43% with restoration hardware, they're about 75%. So you're like, wow, that's a significant difference. That probably speaks to the competitive advantage. And it does for RH. It makes it sound like, okay, RH really has the competitive advantage here. But at the same time, you have to consider 70% of RH's products,

I believe that's the number, roughly 70% of their final products are manufactured in China, whereas our house, the majority of them are now manufactured in the U.S. So you're talking about a higher cost of goods sold when you're manufacturing from the U.S., but you're also talking about higher quality, more personalized furniture, more intricate furniture. Like I said, speaks to someone on an individual level. So those are the biggest differences between our house and RH. it's going to be the style it's going to be where they source a lot of their where they source a lot of their products um and uh yeah other than that they're they're very they are very comparable uh that our house does not use a lot of debt whereas uh rh does use debt um you know so those are the biggest differences what do you think of our house's management team i like them like i

said they are they're they're conservative i'm still studying them per se um you know they do have someone on their management team who's their chief merchandising officer who did work for RH between 2017 and 2020. And I like that because, you know, you've got somebody who's actually worked with a direct competitor, at least very recently, who's on your management team. And in earnings transcripts and in their filings, they've mentioned they are studying multiple times, they're studying their competitors. And, you know, that's a really important thing when once you're entering into a market, not entering into a market, but trying to expand your market share. Because if I can be honest, our house is not known by a lot of people.

I think they did a survey of about 900 individuals. I'm not sure how it was sampled, but they mentioned this in their investor deck. And they had five or four other comparable businesses. They didn't mention the names, but I know for a fact, one of them was RH. And I know RH is a really big name. So about 80% of the people surveyed had heard of RH, 70 to 80%. However, our house, it was only known by about 40% of the people that they surveyed. Like I said, I don't know how they sampled it, but I do know personally, I've asked other people, hey, do you like restoration hardware or do you like our house?

And just about every person that I've personally asked in person, they've said, I've never heard of our house, but I know about restoration hardware. So that's going to be- And you're in an area with an R House geographically close by, right? And an RH. They are literally like, I think they're actually in the same shopping center. So it's interesting because it's very different styles. R House is trying to expand into a market that RH and Williams-Sonoma have a lot of

control over, but not even that, they're competing against 21,000 different business units that are in this market. And notice how I only mentioned like three, because they're competing not necessarily just against these big guys. Between RH and our house, you're talking about 8% of the market share of a premium market. There are a lot of small businesses who are manufacturing, making homemade premium furniture themselves that aren't publicly traded, that aren't well-known, that maybe have a local customer base. So that's going to be a big challenge. That's a challenge for both of them, RH and our house, if that makes sense. Makes sense. And then on the stock more specifically, I believe you mentioned before

we hit record that they're one of the largest investors is a private equity fund or private equity institution. Are they kind of, what do you think about that? And then do you see that sort of a risk at all? So, yes, they were taken public in late 2021 by a private equity firm by the name of Freeman Spogli. Freeman Spogli owns, I believe at this point in time, approximately 23% of outstanding common stock. That's a lot. And it absolutely is a risk because when I think of a private equity firm, I think of making a quick gain within two to three years. Now, I am surprised that going through all their filings in the middle of February, while I was selling off the stock, that they had not made any changes to their position. They haven't taken any gains.

I know that they would be up at that point in time, maybe like 30% from their position. So I was surprised to see no change in position from them. And they still haven't changed position. And that is a risk for investing going forward. And it does affect what multiple I'd be willing to invest in the company at. But yeah, Freeman Spogli took them public. They still own 23% of the shares. And like I said, it is a risk. I guess that's maybe a vote of confidence in some ways too, that they are holding onto these shares and not just liquidating. It absolutely could be a vote of confidence. One thing I forgot to mention, and I feel so dumb for not doing this when you were asking about management, this is a founder-led company.

The CEO, John Reed, this company was started by John and his father, Jack, in 1986, I believe under the name HomeWorks. Correct me if I'm wrong. Yes, HomeWorks. They changed their name in 2013 to our house. So I just wanted to throw that tidbit out there. But John, along with two of the other board directors, have a significant stake in the company as well in terms of voting rights. I think they genuinely care about the company. And I know you could say that about any management. and that's a little bit of a cop-out to say, but I really mean that. John has been the founder of this company. He's been around with this company for decades. And like I said, I like the management team. I like their conservative style. So I'm not concerned about the direction that management wants to take it. I know they want to grow. And I think you're absolutely right that Freeman and

Spogli possibly could see a real growth opportunity here. I'm not sure. All I knew at the time was that this is the best of the best that I've gotten so far. I've got to cut my stake 22% at an all-time high with rates this high with- 22% of your portfolio. Yes. 22% of my portfolio. Yeah. Let me rephrase that. I started off with 14% of a position at the beginning of the year. I added to it and then the stock price also carried it up to a 22% position in the peak. So the beginning of February, I didn't actually start selling the stock until the middle of February. And then eventually got all the way down to a 6% position at the beginning of March. And the stock just plummeted on guidance and took it from a 6%

position to a 3% position in one day. All right. Yeah. And clearly you still like the business today, at least somewhat, or you still like the stock. Let's talk valuation. what does it look like currently? How do you kind of look at the... I know there is some uncertainty around what the earnings will be, but how do you look at that along with capital allocation, any sort of numbers around that would be helpful as well. Maybe also, I don't know if you have it, their return on invested capital for their store expansion, because that's probably very important or not probably, it is very important for their growth going forward. Yeah, I feel bad. I don't have return on invested capital. That's another. That is one. Thank you for mentioning that. I will get that number and I will share it with you guys when I actually calculate it. But I did not actually calculate it for this interview or for this podcast. They're currently trading at 15 times earnings. I believe they're currently also trading at an EB to EBITDA of around six times.

Um, so the current valuation, I believe at 84 cents per share is at 10 times. Now I think management is expecting about 73%, I'm sorry, 73 cents per share earnings per share for 2023. Um, I think that's low. Uh, I obviously, like I said, it's conservative, so it's got room to be beat. Um, but I do think it's low. So forecasting for next year, I came to the same conclusion at 84 cents per share. But personally, with the risk of private equity still owning, with the risk of interest rates still rising, you know, there's a very thin price that I'd be really willing to pay to get back into a position that I've already gotten 50% out of.

Um, uh, and, and it really is going to depend on how accurate management is on sales. They are, like I said, expecting 1.24 to 1.3 billion. I've got it at 1.3 billion. We'll see how that goes for the next, uh, for the next earnings report. But I personally at this time would be willing to buy in between eight to 10 times forward earnings. So we're kind of in that realm. I'll tell you this, if it gets down to seven to seven bucks a share, I'm going to get back in. I'm a hundred percent believer in the business. I think they've got a lot of room to grow, but you know, I have changed my mind on whether or not they deserve to trade at a growth valuation. I don't think they do yet. They are doing about 1.2 billion in sales annually right

now. And as they've stated the market, I guess that the, the TAM of, of premium furnishings is around a hundred billion. There's a lot of room to grow, but they have got to grow their brand awareness. That's going to be their biggest challenge. There's a lot of people who don't know about them. They've got to not just expand stores, but they've got to get people to actually know about their business and know about their products. Because like I said, I've talked to a lot of people personally, and I know that this is anecdotal alternative evidence, but there's a lot of people that I know who have heard of RH, but they've never heard of our house. However, I think our house has better quality products. I think they could be more successful at building customer

loyalty. And overall, I think they've got a lot more room to grow and a lot of market share to steal from not just RH, but also Williams-Sonoma and private smaller businesses. So if I were to say, am I going to buy in again right now? No, I'm not. I'm trying to de-risk a little bit. I wouldn't want to get back in right now after it just tanked, you know, after that earnings report. I want to see how management expectations are met. I want to see, do they really think that sales is going to significantly slow down or are they just being overly conservative? If the next earning report comes out and I think they're being overly conservative, you can bet your butt I'm going to get back in, especially if it's trading at eight times

forward earnings. Okay. Last question. And this is the question we always try to end with, which is the pre-mortem. How could an investment in our house go poorly from here? An exit from private equity in terms of the stock price. That's a big one. It's not a fundamental reason for an investment to fail, but that's a big one. The other one is failure to capture your market share. That's, like I said, their biggest challenge. They've got to get brand awareness. If they are not successful in that with social media and with even physical advertisements, then they're going to struggle. That's for sure. And you don't want to waste time, even if they're still doing sales and their sales aren't necessarily falling. If their sales aren't

really rising at a good rate, if their earnings aren't rising at a good rate, if their free cash flow is not improving, then you're wasting time sitting in a stock that's not going to move. that's the bottom line. So do I think that they're going to go out of business or something? Absolutely not. I mean, they've been around since the eighties. They've got a great customer base. They've got great quality products, high quality products. But like I said, the way an investment would fail buying the stock, it's going to be if they fail to increase brand awareness and in the short term, an exit from private equity. Okay. I think that's all the questions we have. Brett is nodding his head, so that is going to do it. Where can people find more of

your work, follow more of your thoughts? Specifically Twitter. I'm only on Twitter right now. I haven't branched out into a sub stack or anything like that. I frankly just haven't had the time. I mean, for the past three years, I've been in school working full-time and part-time studying for the CFA. I'm a husband and a father. So I struggle to have free time to put out a lot of, you know, in-depth work on my investment ideas, but I'm working on improving that. And if you want to stay up to date with anything that I think, if you think my thoughts are interesting for some crazy reason, follow me on Twitter. It's at Stranger Capital. You'll know it's me because the icon is the album cover of The Stranger by Billy Joel. It's one of my

favorite albums of all time. So yeah, that's me on Twitter. Give me a follow. All right. Well, that's going to do it. We got to throw our disclosure on here before we go. So we want to remind all our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Stranger Capital, once again, for coming on the show, and we'll see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io,

Brayden Dennis. Brayden, welcome. I wanted to basically give listeners that are interested in Stratosphere more context around what the platform is. So let's start there. What is Stratosphere and then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a listener myself. I like the deep dives. I like the different guests, the different perspectives on some interesting companies. So I think it's a good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out like, how can I overlay 10 years of financial side-by-side up to 35 years we have now, and how can I actually build out a proper database of company KPIs that are not just revenue, but like if you're looking at like Costco, like how many warehouses do they have? How many paid

members are are in like our costco members or you know if i want to do a comp against like the streaming like how many netflix subs versus uh hbo plus discovery plus no disney plus like how do i build up proper comps of those because those are the metrics that actually move the business those are the ones that actually move the needle more than any like gap financial metric you'll find and so it started off as just purely a passion project and i figured let's just make the leap into entrepreneurship and uh see where it goes and you know it brought brought us here today yeah and like you mentioned it is the stuff that you can't find anywhere else at least not in a i mean you could find it page by page and on their front exactly you can go through 35 uh pdf filings

and find it be my guest and that and that's basically what we did for a long time so what do I guess, maybe describe the pricing model so people know, but you're going to say there's a free platform. What do free users get? Yeah. Good thing. Because our mission was to always build a free platform. And so we really kept true to our mission and give an amazing platform for free, which gives you 10 years of financial statements on 40,000 global security. So we don't list you just to US securities. It's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. You can look at the press releases right inside the app,

news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are all the features you'll get on the free tier. Now on the middle tier, the personal tier, you're going to unlock up to 35 years of financials and just kind of like nice to have, like quality of life, like notifications being built in, price targets for building models, like business owner mode where you can hide prices, like kind of like just that next level for individual investors who want to level up. And then the top tier is for like investment teams and professionals who want to unlock that KPI data and request KPI coverage as well. Like a firm will be like, here,

we want these 10 names in our coverage and in your coverage. And then you'll have basically our, our entire universe that we're looking at, which is great. Right. Because like earning season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, like it's right there in one place, especially easy to handle around the peak of earning season. And that matters a lot for these people.

And so we have a premium tier for that as well. That's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans. But I think that covers it pretty well. If you're interested, please go ahead and check out stratosphere.io. We'll have a link in the description as well. But thank you, Brayden, for joining us.

Ryan, keep it up. I really like what you and Brett are doing and I'll be listening along. This family is on the brink of civil war. On September 18th, Mobland, the hit original series is back on Paramount Plus. We are the Harlegans. Don't know them yet?

Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder? I want karma dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want to vote? I'll give you a vote! Mobland new season hits September 18th on Paramount Plus.