The retailer — which overhauled its membership model after its shares tumbled 61 per cent and 17 per cent respectively in 2016 and 2016 — has made a comeback and its chief executive Gary Friedman said RH spent years imagining a business model that reflected characteristics of the luxury retailer, iPhone maker and Warren Buffett’s investment vehicle, which RH studies and admires.
Like LVMH, the luxury group behind Louis Vuitton and Moet & Chandon, he said RH is building a luxury platform in similar fashion and that he believes will “continue to benefit from a growing market as a result of the compounding wealth effect”. Mr Friedman added that RH could learn from LVMH’s success as a global brand, since it derives more than 75 of its sales from outside the US.
He added: “We also believe that building a luxury brand is extremely difficult, requiring decades of effort and a discerning level of taste which is generally absent in businesses of scale. As we have articulated in our investor presentations, there are those with taste and no scale, and those with scale and no taste, and we believe the idea of scaling taste is large and far reaching.”
Like Apple, RH is “designing a seamlessly integrated ecosystem of businesses that all amplify and render our brand”, Mr Friedman said. He pointed out the company’s retail business is made more valuable because of its interior design business and that both of those business are “rendered more valuable by our physical galleries and real estate development business” all of which are amplified by its hospitality business.
Finally, Mr Friedman said, like Berkshire, RH is investing with a long-term view and is “building a business that is capital efficient, generates significant free cash flow, enjoys a low cost of capital, and is developing a culture relentlessly focused on ROIC and capital allocation”. RH turned to capital markets in 2014 and 2015, issuing notes and raising $650m that it said helped it snap up nearly half its outstanding shares in 2017 when the stock was undervalued.
Berkshire does not hold a position in RH, according to its latest 13F filing.
Mr Friedman said the model RH is building will result in the company “leapfrogging far past comparable companies, and create the kind of separation in our industry that only brands like Apple, Nike, LVMH, Berkshire, and a few others have enjoyed in theirs”.
Time will tell.