Chit Chat Stocks - RH (Formerly Restoration Hardware, Ticker: RH) with Paul Cerro

Episode Date: December 14, 2023

RH (formerly Restoration Hardware) is a luxury home furnishings retailer known for its high-end products and innovative design, but it contends with challenges in the retail sector and the impact of economic fluctuations on consumer spending in the home decor market. Listen as Brett and Ryan ask questions about the company, its business model, and its valuation. Enjoy the show! ***************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠ ****************************** 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 for our Tuesday episodes: ⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠ Interested in more from Paul Cerro? ⁠⁠⁠⁠https://x.com/paulcerro?s=20⁠ Contact us: [e-mail] Timestamps RH | (5:46) Where's the Growth | (20:40) Scale | (38:29) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Okay. Welcome to Chitchat Money. My name is Brett Schaefer, and today we have another quality interview for the listeners. We are talking RH as we continue in our December luxury theme with Paul Cerro, founder of Cedar Grove Capital Management. We'll have the link to Paul's sub stack in the show notes. We can read more about RH and all the stuff he is following, including in the small and medium-sized business investing world we've had them on the show before so if you like this one go search your podcast player for other interviews uh from paul on chit chat money we talk rh's business model it's how it shifted its international expansion we talk all the stuff that they're trying to get into with restaurants residential stuff the rh private jets

and the yachts, as well as how they are trying to climb the luxury mountain within home good furnishing. So let's not ramble on too much and spoil the whole thing. Here is our interview with Paul Cerro on RH. 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. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. Today, we are kicking off, or actually, this will be the second interview.

So we're chugging along in our luxury theme month, and we're talking RH, which for anyone that's followed them, is trying to make the transition to luxury. And we have a recurring guest, Paul Saro on the show, founder of Cedar Grove Capital Management. And if you don't know, someone who has been writing and exploring and has bought one so far, if I'm correct, a small business in, I don't know the exact details of the structure, but maybe you could talk about it more. But yeah, how have things been? And how is it in small business land trying to look for things to buy? Yeah, no, I think 2023 has been a very...

Also, thanks for having me. But 2023 has been a very interesting year for a lot of reasons, both on the public side and private side. Public side, I can imagine everybody's going on quite a roller coaster this year as we did last year. And even on the small business side,

I mean, it's, it's, um, it's noisy. Um, there's, there's a lot of people who say things are fine. Like you would say things are not fine. You know, you keep hearing about bankruptcies. You keep hearing about all these people having difficulties. So I think, um, I think when the small businesses start becoming a little bit more pronounced in their opinions and their thoughts, uh, that's when you should really start paying attention.

Um, I think it's, I think it's kind of happening now. okay and how long have you owned this small business i believe it's the pet one we've talked about it before and i guess how has it been i'm very curious like how is it running a small business yeah it's a little over a year um and there's it's a it is a learning curve especially when you go from never owning one to owning once you learn a lot about like the accounting side legal side payroll managing employees um customer you like you're like you're in it right like you're you're the guy um so it's been very knowledgeable um but i'm not gonna say it's without its uh ups and downs um but at the end of the day hopefully that if you did

your homework right um you are able to at least uh continue to have like have it grow have it continue to thrive etc on if you find out that it's not for you um hopefully there's a way that you can pass it on to the next person or something, you know, like there's at least in small business world, there's just a lot that can go on. It's almost kind of like Murphy's law, but, um, uh, I've learned a lot in the last year. That's for sure. Yeah. It seemed like you decided to on purpose jump right into the deep end of the pool. And what's interesting with the small businesses and we'll get to our rich in a second is that I think it was you that brought up the data point of how there may be over a million or

just a large amount of small businesses that are owned by people that are likely boomers or older Generation X that are going to have to either sell or pass it on eventually. And there's just going to be so much liquidity of just so much supply trying to come into the market. So it seems like a very interesting thing to be in and trying to go out for the next five to 10 years. But we're talking RH, you still are in the public markets as well. You followed RH for a long time. how were you introduced to them and you know what's been your journey following the company yeah i mean i've actually followed rh since i was in banking um rh was a client um and actually i think the last thing i worked one of the last things i worked on prior to leaving was uh i

think they were doing a convertible debt raise um and i think this was was this in 2019 2018 can't remember um and that's when their stock i think was trading at like uh actually with this stuff actually i think it was like 80 share back then um let's see yeah it's about like yeah it's about like oh yeah 80 80 90 bucks a share um so if you've been following it along since then i mean it uh more than quintupled at the top and then um you know just like a lot of consumer sucks came back to reality but uh no i've been very familiar with it um over the last you know five six years i've also seen the transition of you know it's galleries etc and also the very outspoken opinions of gary and that's the the for listeners that is the ceo uh who will

talk about a lot he is a 99 of investing conference calls are extremely boring but if you follow rh luckily they are the one percent that is not boring he is not afraid to speak his mind yeah he rambles a lot but he's also very real um but no so i've been playing it for a very long time so it's uh it's been close to me um for a while now all right and we'll talk about at the end what either attracts you or doesn't attract you to this business and the stock but for people that don't know and i guess they did change their name from restoration hardware to rh so for anyone this is the same company restoration hardware is rh what is rh's business model and this is one we could probably talk on for a half hour with all the different strategy shifts that they're going

through but how has the strategy shifted for them in recent years yeah so um rh uh they basically sell it's home goods and furnishings right and furniture so i know there's a lot of people who who are uh have have been in that market or currently in that market um it's it's like it's premium stuff right they have like very high quality um like bathroom towels which you know like i have and i like sell a very high-end furniture um and home furnishings um if you want to kind of put them in a in a bracket it's kind of like you have at the at the bottom of it as far as like kind of you know nice premium is like your crate and barrels your west elms your your william sonoma you know it's kind of more like kitcheny um uh herman miller i guess um

but then you know you keep kind of go up and going up and you got like you know ethan allen and rh is up there because everyone kept like commenting on their who's gonna buy a fifteen thousand dollar couch you know like that's that's kind of what rh is that's kind of what they sell and they sell them in these galleries um and these galleries are basically what you would go it's like it's almost like a showroom right you go in there kind of see the layouts of like what your living room could look like what your bathroom could look like you know what's your dining room uh bedroom uh etc right and before these these showrooms were very much like they're like kind of like on um the smaller end they weren't really that that well thought out etc

um and you know gary kind of transitioned these these um showrooms into these like these galleries which were like very like you walk in there you're just like this is a store right you actually think you're walking into like a legitimate like rich person's place right and they also incorporated it because they wanted to be more experiential so it's not just you just going in and saying hey i'm looking for a dresser and like that you know you go to a wafer you go outside our wafer you go go to ikea and you look at the dressers um this is like you go in there you go shop and then you can also go eat right so they have like restaurants and you know it's a whole ordeal right because because it wants to sell people on an experience of what you're basically paying a high price for

right um and getting it done that way and they also have like their own little catalog which If anyone has ever received an RH catalog, it is a very thick book of everything that's going to be coming out that season. So you can order, et cetera. They're also online. But their bread and butter are really these galleries. And they lure people in from just the experience of going there and trying things out. But then also showing to them like, hey, there's a reason why you're paying $15,000 for this couch. and that's kind of like what their simplistic business model is now do you think the change from basically back in the day they did less of this catering stuff do you think the change to say catering to the one percent you might call them and having this stuff where they want people

spending multiple hours in the gallery do you think they're trying to take that as a lesson from the luxury companies like an hermes or something like that and trying to apply that to attract the same sort of customer base? Is that where they're coming from here or is it from maybe a different lens? So here's the thing, and this is very subjective. There are a lot of people

who come from different income brackets, right? And historically, right? And this is no offense to them. There are people of the lower to middle income brackets that that do enjoy quality goods because they know that if they pay for a quality piece of work whether it be a handbag whether it be a couch whether it be a kitchen tape like you know whatever you want to call it um that they're going to be getting their money's worth right

this is exactly why people will buy a chanel bag or a lvmh bag um they'll go they'll go to the west elms and pay you know three four thousand dollars for a couch because they know it's it's of high quality. It's going to last a while. And then they also have the people who are of those income brackets that want to look as if they are rich because they have said thing. This is also why they spend money at Chanel, at LVMH, at Gucci, West Elm, whatever, right? Because they have that one piece that they can talk about, like the I own it. RH is, and again, this is very subjective they have home furnishings for a lot of people who make different kinds of amounts of money right so you can like you can still get a towel set for like when i say towel sets like a

towel and like a washcloth like a hundred bucks right it's it's definitely not cheap but you know if you can if you can't afford it um and then they also have like the top of the top of the spectrum too which is like who has money to spend fifteen thousand dollars on the couch not that many people. So I think it's them being able to showcase that RH offers a lot of different products at a lot of different price points. They're by no means cheap. I don't want to downplay that at all. They're by no means cheap. But the products that they offer and they sell are of very high quality. They can also be custom as well, made to order. But you're going to need a chunk of change to buy them. And that's kind of why whenever you spoke about RH, not you,

but people who spoke about rh they would always kind of relate it to like the um high net worth individuals we're talking about like 1 million plus because you know they would be the ones to buy the bigger nicer homes that would want to then fill it with bigger and nicer quality furnishings right um so there's kind of always like a comparison to those two um and then you have other people too who would again just want like that one piece from them or the or the the the bathroom sets or you know like the kitchen where there's a lot of different things um so it's not that they're trying to attract other people but they're trying to share they're trying to like again with other luxury brands prove that hey we are a top quality um we're

a top quality company selling top quality goods and yeah while it skews traditionally more towards a higher income person there are some things that people will still want to shell out money for because RH is, it's a valuable thing to talk about. So that's kind of like where I believe things are, but it's not necessarily like they're trying to move like uptrend or downtrend. It's just like, we make good stuff. Whoever can afford it is going to buy it.

Okay. And we're going to come back to, because the company has talked about a lot and a lot of investors talk about them with their famous quote of climbing the luxury mountain. We'll get back to that later, but I want to talk about the core business probably, I don't want to call it the legacy business, but it's the one that they've been

operating for many years and it's home goods. So it can get impacted by the housing cycle. And as we've known for the last few years, it has been probably the wildest housing cycle. We've had people freezing in these 3% to 4% mortgages. And I know you had a quote here, I think it was your most recent update on RH where you said, Gary, the CEO has been calling for this, storm of the year to take place in 2022 for housing, and he hasn't downplayed any of it. So that's just some context for how have they been impacted by the housing cycle? Or maybe how do you think they've been impacted by the housing cycle? Is it depressing their financials, say, over the last few quarters?

Yeah, I think it's a very hot topic because in March of 2022, I remember this because uh when gary was on his earnings call every everybody was listening because he went off on that call and basically said like hey if you don't think we're in a recession you know you're out of your mind like things are going down the tubes like brace yourself because it's going to be a wild ride everyone's like yeah yeah half of the people saying like well he must know what he's talking about because he's the ceo the other half saying he's just blowing smoke there's no way it's going to happen um but it was it was interesting because he doesn't hold anything back he kind of calls it as he sees it however fast forward to now right we've almost had almost two years since

that call um he has basically said like hey housing's slowing down things are getting more expensive um you know our our once dominant position uh in the space is kind of like not deteriorating but it is it is seeing impact um and it is it's not an easy one because when you think about the consumer it's not it's not black and white unfortunately you everybody thinks it is but it's really not and for him to say like housing is going to be a big role in the impact to this business it's a very fair assumption right because you can be in the camp of if housing's taking a hit rh is taking it because rh is the one who is supplying those people with the goods to put in their house um and it's tough because with housing housing kept going up and up and up

and then rates kept going up and up that service kept the mortgages kept going up the uh the the dollars to buy the house like kept going up so when you think about what cash you have left to do anything with it's becoming less and less for all the discretionary things that you might spend on it historically again being those high net worth individuals who are playing 1 million 1 million plus for a home and you know even if it's 50 000 more they're paying for it's like that's 50 000 less that they could be spending to furnish their home um or to replace the stuff that's already in there right um there's a there's a huge shift so you have one camp which what i was a part of or am a part of was, hey, there's less share of a wallet to go around because the

housing people who would then be spending on this can't really spend as much as they can. But then you have another team on the other side, which is a fair assumption. Again, it's very subjective, at least as of now, I believe, that their buyers aren't picking the right products to sell. Because if you look at the Williams-Sonomas of the world and you look at other furniture companies um it's um like they're doing they're doing fine or they're doing okay like they're weathering the storm so you can so it really depends on what kind of maybe it's a mix of both

you know right um but when you think about historically how well rh has executed even before covid it's it's tough to say like they don't know what they're doing in the core business um but i would be amiss to say that consumers aren't feeling um a pinch when it comes to what they sell um especially if they're high net worth individuals you're always like oh well if the rich aren't spending you know things must be bad well it's like again like if you think about what happened in kobe kobe threw everything off like take the whole playbook throw it out because if you already bought all your furnishings in 2020 2021 what's the replacement cycle man that years, you're not going to keep buying it, right? You need new flow. And that new flow is

being hindered by everything that's happened with inflation, home prices, mortgages, yields, rates. So it's a lot of things. And I think it's just not the best to kind of like put it on one thing. But that's what Gary's been saying. It's like, hey, it's tough out there. And I think we're going to feel it, but we'll get through it. assets in 150 markets with 27 different currencies. Interactive Brokers also charges USD margin loan rates from 5.83% to 6.83%. They've also got the ability to trade stocks, bonds, futures, options, commodities, and more, all from a single unified platform. Brett and I use Interactive Brokers ourselves. And I honestly have to say that if you spend a

considerable amount of time managing your investments, if you're spanning the globe looking for new stocks i highly recommend using interactive brokers as your platform of choice restrictions apply but for more information visit ibkr.com member sipc open an account with ibkr today the royal canadian legion is celebrating its 100th anniversary and now our change has a two dollar coin to mark this milestone honor the legion's mission to carry forward stories of service and sacrifice to new generations and their dedication to supporting veterans and their families from coast to coast to coast celebrate this enduring legacy find the 100th anniversary of the royal canadian legion two dollar coin today yeah it seems like there's been a well

there has been a giant slowdown in spending for physical consumer discretionary items but a lot of it did shift uh to you know entertainment and experiences for the time being which makes sense uh because of like you said the pandemic the bullet effect from that it seems like they're getting affected uh one follow-up i have for this one maybe this is more of a general one before we move on to kind of their big ambitious things does the core business still have room to grow in the united states because they reference and i should have had this number exact number you might know it i think they say something about five to six billion dollars in north america when that's definitely smaller than or a bit larger than where they are today yeah no no you're right

um because their gallery the new galleries right the new showrooms that they have right i keep using showrooms and everybody understands when i say galleries but that's what they call our galleries they're just so massive in scale it's not like you're trying to pop up a mcdonald's every couple of miles off the highway because you're trying to you're trying to grow the scale right these are you go to an rh destination rh gallery because that is the only place where you can get it and you want to see it right um and um if you think about like urban cities like i live in new york city right and there is a very very nice rh gallery in the meatpacking district in chelsea um it's massive multiple floors has a restaurant etc um and you're not

trying to flood the market but there's definitely white space in america to be able to um keep building out these galleries and in these in these cities that have been attracting you know especially when you talk about migration of tech bros and everybody else who has developed wealth over the last couple of years, you know, like it could be more in Florida with like Miami and everybody moving from New York to Miami, right. It should be more in like Austin or Houston, potentially in California or Seattle. I know we spoke about it before we started recording,

but there's definitely white space there. But I don't see why there couldn't be more design galleries. And when you also think about it too, while this while it will take capex to build out everything you know like that also kind of helps with like logistics as well because you got you could kind of like move pieces around a little bit easier if you have stores more in a network within uh around the country right um so yeah they did quote to five to six billion just in georgia north america um but i don't think it's not possible for that to happen i think it's it's very much possible but again there's execution

risk with that and also seeing how the economy plays out but that is what they quoted and i do think it's something that is not far-fetched so what are they what are they doing i guess this is part of the kind of ambitious growth strategy what are they doing to change like how are they what are they doing to get to that five to six billion dollars in revenue because from that i don't follow the company that closely like what's different between them now versus say 2018 that's That's going to get them to that $5, $6 billion range. Well, yes, historically, I mentioned it in the past. So the design galleries are much, much smaller.

I think they're like sub 10,000 square feet. If you think about it, 10,000 square feet is still pretty big, especially when the average home is, I think, like what, like 2,500 or 3,000 square feet. You basically have like three or four of those in their old design galleries. However, when the new updated refreshed ones, it's multiples of that, right? if you had a 10 000 square foot legacy gallery you're now dealing with 30 40 50 even sometimes 60 000 square feet i'm talking these things are massive um but it's not it's not like some type of warehouse bill i don't want because for people who aren't familiar i don't want them to think

it's like you walk into again an ikea and there's just built furniture everywhere and like hey take your pick and then get an employee to like help you put in your cart like it's not how it works um it's a very very experience driven service so when you think about how to help a consumer spend more money it's because you make them want to be able to spend that money you don't make it a hassle you make it very much like oh i want to own this so when you think about how they can get the incremental sales lift it's kind of already proven um bigger stores result in more sales again strategically located i'm not going to say it's a foolproof system but bigger stores can lead to bigger sales because you can fit more stuff in there you can

show off more product you can help um a customer go for a couch but then you know like why not just complete the couch with a coffee table when i complete the coffee table with end tables why not complete them with lamps when you know you just keep tacking on things because you have so much to offer them right um and i've and i've been to creighton barrels we got our couch creighton barrel and like while it's nice it is very limited it's like one floor it's like maybe a thousand square feet um so when you talk about a sales lift you have bigger galleries in general to be able to offer customers more for um their i guess new purchase but then you also have um again more unit growth so that's a physical galleries opening up and contributing more to the top line um and if

you're if you're able to sell more out of each store right then your your four wall epithel is to be going up right so then so your unit economics goes up um as long as people are spending right uh so you have you have a a really nice effect here between the unit growth and the ability to um upsell customers when you're there and i think that kind of plays hand in hand very nicely with growing top line and from there you know looking top down it's just a function of being able to execute well on the on the on the profits you know making sure like labor isn't too expensive you know etc um but that's kind of how that's a two-pronged approach right it's just being able to sell more per store and then being able to grow stores makes sense and another way

for them to expand which they have quoted some perhaps more ambitious numbers is international expansion now when i read some people that are a bit more maybe bearish on this part they say hey you know american brands have trouble going to europe which is kind of a big first target market here but when i read your update you said that quote international expansion is not where investors need to get wary um why do you believe that why they're sending these up in london i believe maybe it's not london uh paris madrid why do you think these can have success what's their strategy here so being in the consumer space i think it's i mean you're not wrong there's a lot lot of people who say like yeah when an american brand goes to overseas kind of like it's not

received as well because it's an it's an american brand right um usually american brands are very mass market they're very cheap they are not of high quality right it's like um it's like when h&m moved from from europe to america or great product market fit people want cheap clothes um you know you're talking about like uh then all birds moved to europe yeah it's very different because if you think about europe they have very high quality stuff for footwear all birds might be revolutionized the tech bro lounge footwear here but that does not necessarily mean it's going to fit in europe what's interesting though is why this is why i said you shouldn't you don't need to be as concerned about it is because it's furnishings right there's no label on the

furnishings that says this is rh right they're not like plastering everything that says rh it's it's just it's just home furnishings it is this quality stuff that if you like it you will buy it right um so when you think about the the market in general overseas internationally it's very fragmented right you have a lot of smaller uh companies mom and pops who are making the furniture and selling it and selling it so it's a it's a very highly fragmented place um so when you have rh coming in who's like hey you sell high quality stuff people who have money will still always flock to products that they can afford right if it's quality stuff you're going to go there so when they when you think about rh bringing in a new

design gallery to the uk to france to um germany germany and there's a whole list there's a whole list of um countries where they they plan to open up stores it's not like they're trying to flood the market with like all right we got to get everybody in here it's like no it's like you got money we're going to build you the experience here and you you still have to come to us right and we're going to make sure you have a great experience we'll make sure you spend money here because you can afford it and you you appreciate high quality stuff um you don't have to go to like eight different people in order to get something to get furnishings for your home you can literally just come to rh and we'll take care of it um and that's why they're spending buku bucks building

this out because they're trying to penetrate that market um so that's why that's why i was saying like don't get too concerned because it's still very high quality stuff who's only going to be attracted by people who appreciate high quality goods um and um it's not like they're just trying to flood the market it's it's a it's going to be a slow burn internationally it will require capex just like every every other company in existence has ever expanded internationally i'm not downplaying that but um it's not one where i don't believe that they're not going people who are spending money yeah and there's quite a few wealthy people in europe as well now the one thing that yeah they're uh i guess the thing that maybe investors get the most

concerned about when i talk or at least read what they're saying is all these adjacent things like the international expansion it's pretty clear path but now they're doing they got the what do they call it the rh private jets the rh yacht they have this residential thing slash hotel thing i'm not exactly sure you can kind of explain people get very confused about this what's their strategy here and does it connect to kind of the new maybe not new but them trying to build themselves as the home goods luxury brand uh and having these galleries with the restaurants and the stuff like that i mean people get very nervous i mean didn't they just buy the the wine uh in california yeah exactly yeah so yeah winery restaurants you got the private jet you got the yacht you got these

uh residential slash travel things what is their strategy here do you think it's too ambitious because a lot of people kind of they get concerned when they're doing all these things at once yeah so i know i mentioned a few times the experience that they've been able to create within these galleries has proven very fruitful for their business like they understand that it works right so they're just trying to take it up one notch and again i'm not like i'm not as bullish on this part i label them as as controlled call options as long as they stay controlled right as long as gary doesn't start like doubling down tripling down quadrupling down on the cap on the growth capex here to build out these ideas the call option could could play

out um so what so what to recap people who are listening core business is experiential galleries um to help people buy goods and home furnishings the the call options that he's doing here is he's taking that experience up a notch um and with these experiences he has like he's talking about you know hosting luxury yachts and luxury hotels and luxury residences um the the so the um the estate i guess that they just opened up in england um i think it's like 50 acres 50 60 acres um maybe more than that i forget but it's like it's like massive right and you go there because you want to be able to like visit it stay there spend money you know pick up a few things you know have it shipped to your ship shipped back to wherever you are etc right so what i but i believe

he's doing and i know you guys have you guys have followed airbnb before i mean airbnb is just like you know capitalizing on the whole like trend of traveling and potentially experiences in different countries and you know whatever right beating out hotels there there's a very there's a subsect of individuals who have buku bucks that want to spend buku bucks on an experience um an experiential stay in multiple places around the world and i think in my in my notes i think i have it where there are there are people who pay upwards of thirteen thousand dollars a night at some of these crazy, crazy villas and stuff like that because they can. And if you think about Gary and his ambition of making RH bigger than just home furnishings and capturing more share of the

wallet of high net worth individuals, he wants to capture their ability to kind of, I don't want to say lure, but attract those individuals to be like, hey, even if you don't want home furnishings by us we can still get we can still deliver on a very well thought out high quality experience that you know you can pay for right um it's not like people who are contemplating staring staying at the marriott versus the holiday inn right these are people who like you know they roll up in the rolls royce that just got they just picked them up in the from from the airport and they drove them out to the countryside or something like you know like it's it's that type of service And he's trying to capitalize on that subsect of individuals who are willing to spend and who want to spend.

The big, big question mark here is if it will actually work out. Will those consumers actually perceive RH to be the one that can deliver on that? Is it a far-fetched idea? Will it pay off? It's very expensive because it's not like you're designing a new product and seeing if someone buys it. You have to buy an estate and you have to renovate it and hire people and train people and furnish it and go to all the... It's not cheap, right? That's kind of why I labeled it as a control call option because there is dollars going to it, but it's not like runaway growth here where people are just lighting cash on fire in the name of sparking something.

It's a tech. It's not really like that. um so that's kind of why um i labeled it as like an inflection point because rh is it's not necessarily pivoting its model right it's just bolting on a new part of it to its to its business um and that's kind of why you either have to decide all right if i if i loved the core business and only the core business do i want to stick around for the next iteration of rh under gary or you know what i've had a great ride i'm gonna i'm gonna call it out because i only i only want the core business you know um and that's kind of where things are but there there are lots of spend

going to building the next level of luxury experience under rh have have they given out any data uh about how successful these have been so far or are we still in the very early stages we won't know yet oh it's still very it's still very soon um and considering what you could be spending money on um like for instance if you have like chartered planes right like okay there's blade exists for a reason right there's people who use blade um if you want to talk about the yachts right there are i mean we don't know because i certainly can't afford it i don't know about you but there are plenty of people who who knows a guy who knows a guy or knows a company who charters private yachts right um so like why not be able to do that all under rh i'm not saying

it's the smartest idea i'm saying i i understand where he's coming from um but that's kind of where it's where he's trying to like strategically place money see how it rolls out and see how that experience because maybe the planes make sense maybe they don't make sense maybe that makes sense maybe it doesn't you know like maybe these residences where people will actually pay rh to build out these residences and like manage it etc will pay off like we don't know and that's why i think people are scared because it's something pretty new for the company and since we don't have a track record of it we can't really place a high confidence interval to it all we know is that historically rh has done very well with integrating experiences within

its design galleries and that's kind of what everybody's running off of okay and those historical ones can be like the restaurants and stuff like that that have done quite well yeah yeah i mean that's that's basically all you really have to go off of um so if you can kind of intertwine that into a villa or an estate or you know on a boat you know um it could pay off and that's why that's why i live with them as call options right okay and then back to the core business maybe some people disagree about this but there's a lot of people the consensus seems to be that there has never been a scaled luxury company for home goods and furniture why do you think that is because there isn't like the hermes or

the louis vuitton or the rolex for home goods what can rh be that can they climb into this luxury space as they call it uh the cliche the luxury mountain is that achievable and maybe like how long could it take how are they telling kind of this luxury store do you think it's six being successful uh with their target customers it's gonna be a slow burn if they can get to it i think it's gonna be a slow burn i'm not expecting it to happen anywhere in the short term i think it's i mean how old's your mess 200 years old a little over 200 years something like that um they got quite the story to tell yeah yeah i mean like you Hermes didn't become Hermes in 10 years, in 20 years, 30 years.

Hermes became Hermes because it's lasted a while. It's fitted royalty in Europe. You know, it's done a lot, right? And it's like fine wine, right? It gets more and more expensive and tastes better the longer it exists, right? And that's why Hermes can charge $50,000 plus for a single Birkin bag, right? And then it'll resale for like double that. When you look at, and I'm actually glad you asked this question

because i think it's i've heard of other people's comments about it um and i did you say you had sleep well on already or you were planning on talking to sleep well he will be on the week before and we didn't cover our age too much but yeah no but he covers luxury i know that um he's he's had a few thoughts on luxury yeah he'll his who are recording it different but his will be on uh it's already recorded for the listeners it'll be the one the week before this comes out so yeah okay it's this on it's on broad base luxury right or is that leandra uh that they were both on at the same time oh okay okay yeah so we both talked yeah yeah yeah i've chatted with leandra about it too so i like yeah luxury luxury goods well also it depends on what you define as luxury right like

historically luxury has been like very high quality exclusive stuff right like people want people who can get them and people could afford them right like we could afford them that bucket is very small um so when you talk about luxury up this luxury mountain it's in my opinion it's the still high quality goods and it's still attracting the people that you want to attract to buy it which is predominantly the rich people right rich individuals however when they make a comment about you know it's not quite luxury that i just have to disagree with that because people are just people are so fixated on your messes lvmh the gucci's the pradas of the world right which they are luxury they are luxury brands however when you talk about scale like

small leather goods is so much easier to scale than furnishings it just is right like you'll get me wrong you will still see pieces from lvmh like you'll see um i think it's they didn't come up with like a boxing bag that has lvmh stamped everywhere on the leather that's like four or five thousand dollars like you're not moving that in mass but there's gonna be some there's gonna be some egotistical guy who wants to have some boxing bag with lvmh hanging from the ceiling when you when you talk about the consumers paying for it like yeah more more consumers going to be paying uh for an eight thousand dollar satchel you know one two three four times throughout their their life because they want to have a different styles of bags for different

reasons for different purposes right same thing with wallets same things with um for men's briefcases same thing for um their um perfumes and like glassware plateware all that kind of stuff right that they all make right because it's all small stuff where two things the replacement cycle can be a lot shorter but then also you can kind of build out your own personal closet or or apartment or home or whatever more frequently with those smaller goods because you need to just get more of it uh have um optionality no one is going to be buying a fifteen thousand dollar i'm gonna stop saying fifteen thousand i don't people think i'm like skewing it five to ten thousand dollar couch as often because when you buy that one five thousand ten thousand dollar couch it's

gonna be there for years right you're not gonna keep switching it out like all right all right honey is it in the garage and like we'll get the the brown brown leather couch instead of the suede like nobody does that right i mean i'm sure there is somebody but in scale nobody does that so when you talk about like why hasn't a home goods company scaled as much it's because the ability for them to is not nearly as abundant as other luxury brands can and have done i'm not saying there's anything wrong with it um but it's just you're comparing apples to oranges right they're still a part of the same like category but what you're trying to sell are just two dramatically different things um so that's kind of why i believe that calling or trying to say

like they're they're not necessarily luxury i don't really know about that i mean i think it's also because like people don't associate luxury with an american brand um i think i think americans think of luxury as in you know the europeans when they're still kings and queens of the world and you know what they fought over you know religion and territory like that kind of thing right um versus an american brand that's like hey yeah we popped up like not that long ago um i think there's that level of aspect and misconception but um that's why i don't think it's been done before it doesn't never say never but that's why i also think it's gonna be a slow burn as long as they can execute well and so far if they've been if their track record is anything of it

when it comes to the redesigning of the galleries, I don't see why they couldn't be that company at scale. It was never made for mass market. It's never intended to be for mass market. Yeah, so what you're saying is if they technically aren't true luxury, it doesn't mean the business can't succeed. You know what I mean?

Is that kind of what you're summing up here? Like even if there's holes in their idea that this is like a luxury brand and whether it's a little different because it's home goods compared to the traditional ones yeah i think the stock's gonna not work yeah the track record the track record of luxury favors those that have been around for a while um which is again the small goods players um because it works it works very very well um and so when people start thinking like well they aren't really going into furnishings that

much so is that because they know something it's like no because they have a model that works and they also weren't founded on that um rh is founded on the furnishings in the furnishings model and they've had to iterate which has been successful um to an extent um so it's that's why i say like comparing apples and oranges because they're it's like same same but different you know um and again depending on who you ask and people are going to say that's not right you're going to say like oh yeah i can kind of see that so it's like i said it's a very subjective topic um that's kind of my thoughts are on it um but yeah all right let's move into the ceo mentioned before gary friedman he is a unique character i want to talk about you know his your thoughts on his the buyback

balance sheet and kind of his capital allocation principles in general yeah so um he's a it's a firecracker um he like i said before he rambles a lot on his calls like he man if you can cut down his calls by like 75 percent you'd still probably be there about for like an hour um because he just talks so much however he he is an ambitious guy the people historically speaking the people who have been able to deliver spectacular results in things in projects and companies and ideas or whatever usually come from people who have thought in a very crazy kind of way right he's one of them um he's very unorthodox he's very direct he's very loud he's very opinionated i mean when you're talking about like design

oriented goods you kind of have to be right um so that that's his personality and uh when i mentioned the beginning of this call when i first got introduced to rh it was because we were doing a convertible debt raise for them right they're paying they're going to be paying a zero percent coupon and the i believe the at the time the exercise price to convert was i think like 50 higher than where the stock was trading at and there were people were like i'll fund that Because they were like so optimistic about the execution of RH, which if you look at the chart, yeah, it really did happen. So when you think about its capital allocation strategy, if I'm talking pre-COVID, you had the smart strategy of doing convertible debt, you know, with high exercise prices that people were willing to pay for. And taking the share count down by half, or you might be getting to that.

Yeah, that was late. That's late. That's like, that's after COVID. let's say um and his strategy to spend money to build out these bigger galleries these new experiential stuff so that's that's pre-covid did well then we talk about covid granted it's it's it messed everything up because you had people stuck in their homes left with cash wanted to buy the nice things right the nice stuff of the world right they didn't want to go to wayfair they're going to go to rrh and they did however you know like um they had a buyback authorization of a few billion dollars, which at certain points was about half their market cap, depending on where you looked at it. And the most recent one is when they bought back,

I think they left, was it like $1.25 or $1.3 billion in cash in the remaining authorization to purchase stock. I think it was about, oh man, what was it? It was like over 25% like that. it was wild as big right and that kind of kept it from capitulating um a lot of people would argue that his most recent capital allocation strategy of his share buybacks was a little premature um especially if you don't think the economy's going to recover for his company just yet you know the stock could go down could go down further and he could have bought cheaper right it's always these could have and honestly i'm kind of in that camp he could have right um but with the recent buyback authorization i think he did what he thought was right

at the time it might have been perfect i'm not trying to say it was um and then you also have him saying that the company's gonna be spending you know a few hundred million dollars more to build out these wild dreams that you and i just talked about just in the hopes that it's gonna you know invigorate new type of growth within the company um so it's it's tough because i think there's a lot of uncharted waters here that need to be navigated um i i do think there probably might need to be some checks and balances put in place with him uh to make sure he doesn't go off the deep end and take everybody down with him but i'm not going to sit here and pretend that his crazy ideas didn't get rh to where it was you know before this whole inflation debacle like

he led he led that um that's kind of why i'm still backing it so what does their capital structure look like because i think some people worry about you know taking on a bunch of debt and then buying back stock right how is it turned out yeah so i mean he yeah there's a lot of debt um i think it's probably about like half uh market cap right now um something i haven't checked it recently i think it's about roughly give or take um and you have something that is it's floating um so it's expensive um what do you think about the rate of return here which is not like he didn't have to get sign off on he still needed to get signed off on it um buying back the shares at the prices that he bought them at which is kind of like around here

i think that around here and up i think the average is like 325 330 something like that um as of right now it looks like it was a bad idea you know as of as of now however he also owns a large he also owns a large stake of of shares in the company and one thing i definitely want to point out when people talk about insider ownership and the vision of the ceo and kind of like where they're going right you have you have a lot of a lot of ceos who have done very well with stock-based comp and you know they liquidate their positions not liquidate, but they draw down on their positions because, hey, I'm going to go ahead and take some chips off the table. When RH was selling at above $700 a share, he really didn't

sell any. And that was an all-time high for RH. He's like, I didn't want to sell anything there because I knew it was going to be worth more than that. I still think it's going to be worth more than that. So you have a CEO who's like, my money's where my mouth is. Yeah, don't get me wrong. He sold shares to pay for the options and stuff like that. But he's still in it. He's got skin in the game and he's been on a wild roller coaster a bit like i said before before um it over quintupling and then also it getting cut by half and in some points i think it's like 60 60 no yeah something like that so you got a guy who's who's in it to win it and he puts his money where his mouth is and i gotta respect that because he could have easily taken a lot

off the table and he didn't um so that's why i think he truly believes that his new his new capital allocation strategy of putting into these new growth oriented uh projects will yield him higher than what he has already paid out or sorry already bought back in the shares and um what he quote unquote gave up you know two years ago in the sense of what he could have realized as far as gains okay as we close things out what are your thoughts on the valuation today for listeners just in case you're listening at a different time. We're at about $288 a share as of this recording. And are you buying?

I know what's nice about having you on is you can be open about what you're doing. So are you buying shares at these levels? Why or why not? Yeah, I mean, we still have the position at the end of our Q3 letter. Disclaimer, I still have it. Am I sizing up?

Like, no. Just because the strategy has changed a bit as far as how the fund goes. however the point still stands that i'm saying it's like the inflection is there and you just have to decide if you're going to be going for the ride um it's not going to be an easy one it's going to be very bumpy but if you either believe in the vision that can come to fruition it could be very rewarding or it could be very painful in the sense that it doesn't work out and the company has spent a lot of money to do so, I'm still optimistic because they

still generate plenty of sizable free cash flow, even after paying off all the debt, paying off the service coverage. And that's kind of where I see it, big picture. However, there are interesting takes that, which piggyback off of what you said, like There's been no home goods company at scale. There's been a lot of talks, and I've spoken to other managers about it as well, that why not RH just be the home furnishings arm of one of these luxury brands? And then you almost kind of speculate, maybe down the road, RH gets acquired, and they become the home furnishings arm of these small other goods brands. um and you know with the combined balance sheets and if you still believe if they still believe

that gary can get it done fly man you know get it done build build it build it under the house of lvmh build under the house of maybe not our best but most likely lvmh um and go from there so i think that's kind of where i see it that's a that's like that's a hail mary i'm not even that's like a one percent odds of that even happening but it's still it's still there um um so that's kind of where i where i kind of see it today uh and we'll see if anything changes okay and you've heard this one before we ask it for basically every individual stock that we talk about on chitchat money is the pre-mortem to wrap things up why would a investment in rh go poorly i know we talked a bit about some of this stuff already but just to wrap things up any anything

else that could concern you you're watching as risks for uh this business yeah i think there's actually three core risks that i'm saying one the economy does worsen it kind of takes everybody down with it um it's not like ours is going to be isolated from us like other people are going to be are going to be isolated from it as well it's going to it's going to hit the consumers hard that's one thing if that if that happens secondly um which i brought up briefly but when you're trying to sell goods you guys you gotta you gotta sell goods that people want and there's always the risk that these designers and these buyers don't necessarily buy the goods that people want to have in their home if people are looking at the video of this there's a lot of

stuff going on in my background right now from zoom that uh you know like maybe people like it maybe people don't like it if you're going to be stuck with that inventory then yeah you're going to take markdowns you need to take promotional uh promotional hits to margin etc so there is that risk as well and thirdly like i said the controlled call options right the new growth initiatives if those don't work out i would get concerned if gary doesn't recognize that those aren't working out in the sense it's like he kind of like i mentioned before like doubles down or triples down on it because we got to give it some more time if they don't work out no one holds options to expiration right you got you got to get get out you take the loss of this move um or

the flip side of that is too is like there might be hints that it could be working out and you got to put even more cash into it then i'd be like okay is is this uh the return really there we're just trying to like figure out could it be there you know i think those are probably like the three core ones. But the biggest one I have is just the overall economy. If this shift does not get right quickly, I think a lot of people are going to get hit with some collateral damage. All right. Well, thank you again for coming on. Before we sign off here, where can investors find you? We're going to link to the sub stack for anyone that... It'll be in the show notes, but for anyone that just wants to search it,

It is Cedar Grove Capital Management, but I'm giving the pitch for you. Where can the listeners find you? Yeah, no. So I'm active on Twitter. It's searched by my name. And then the bio has all the other places too. Yeah, so I share my thoughts on Substack. You can find a lot of information there as well.

And yeah, if you ever want to chat things, just shoot me a DM. They're open. Always happy to chat consumer and consumer tech. and you know i'm trying to get new ideas and help people out and see what i'm missing yeah paul is not wrong his dms are open and he is very open to having conversations uh on twitter so definitely hop on if you're if you're not uh if you're on twitter definitely give him a follow especially for these type of spaces but let's hit the disclosure we are not financial advisors anything that ryan and i say on this episode or by guests is not formal advice or recommendation

uh we or our guests may own securities discussed in this podcast thank you everyone for tuning in and we'll see you next time