Uncertainty Remains High at Restoration Hardware

Despite nearly 30% average square footage growth over the last year, no-moat

Longer term, we believe RH can reignite sales growth and our model forecasts average top-line growth through the end of our forecast of 9% as square footage growth averages nearly 10% over the same time. Here, as higher sales stem from new galleries (to the tune of 2 times legacy stores or more, according to RH), expenses should leverage. Our forecast includes gross margins that bounce back starting in 2017, and expense leverage of only 70 basis points over the next decade, as some new endeavors, like wholly owning the delivery process, are likely to weigh on profit growth. This could lead earnings to remain below last year’s level ($2.72) until 2018. We also expect free cash flow to turn positive again in 2017, but could turn negative further out, as the build-out and spend cycle could prove lumpy.

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