Research

“We're Building A Restaurant Company” - 03/06/26

Gary Friedman (CEO RH) seems to have an ongoing fascination with Ralph Lauren, or more explicitly how he thinks it isn’t a luxury brand. Meanwhile the furniture of RH couldn’t sell at a 25% member’s discount, so he had to increase that to 30% last year (standard discount level of Gap where he started career). And since that didn’t work either he recently increased the “clearance” discount to 70% from the 60% level it has perpetually run at since September 2023. Now it seems RH is apparently a restaurant business instead, so we decided to compare their first location in Chicago to the Ralph Lauren restaurant in the same city. But we didn’t stop there and took a deeper look into the entire “chain” of restaurants from RH. The big question here isn’t what each restaurant does in revenue in the first year or two but rather what happens afterwards when fanfare and hype of the beautiful new store begins to fade.

If you don’t know if you are either a furniture or restaurant company, then we are not sure the natural thing to do is open an expensive store in Paris where the mix of space is almost 60/40 (traffic more like 10/90). We recently visited RH Paris and provide our independent thoughts as we are no longer tainted by accepting invitations to grand opening galas like many of our former sell-side brethren still do (not all). Stunningly beautiful store but like similar Gary Friedman vanity projects (RH England, RH Guesthouse, RH Aspen, etc), it almost seems like the furniture itself was an afterthought to having a restaurant with a view of the Eiffel Tower (even if its closed 1/3 the year). What stood out most is the lounge bar which we demonstrate is almost a caricature of the “World of RH” and coin the phrase “timeshare chic” to describe.

This is one of those cases where it’s hard not to find challenges with the company but most of that is likely already embedded in the current valuation. There is real value here and regardless of ample criticism you find in this note, it seems we found the natural bottom in the stock until new information is released. If it doesn’t want to go down much further than $150 on a week like this (US invasion of Iran) than we are more inclined to respect the overall market view. We certainly are not as positive about the recovery path as the Street, but it is difficult to not visualize some recovery at this point. As the heavily criticized RH England demonstrates, international sales productivity is likely to improve over time and bring with it less of a margin drag. While we have questions about the longer-term viability of the company’s restaurant strategy, the cash flow yield generation appears exceptional for now and we don’t see a reason for that to change in the near-term. All it would really take to get investors highly interested in the story again is for Gary to slow down his empire building just long enough to digest ample investments made over the past several years. While he gave no indication of that on the last call (quite the contrary) we note history is filled with sudden changes, reversals, and contradictions in his mindset.

We believe the reasonable range of EPS outcomes this year is now $6.75 to $8.00 (which compares to current consensus of ~$7.00).