Restoration Hardware’s Recent Earnings Call

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Restoration Hardware’s Recent Earnings Call. Here’s an excerpt from the episode:

Bill Brewster:
I’m fine to talk. I thought Restoration Hardware, I was just saying, I listened to a call yesterday, it was just a really interesting call of the way that they do it, it’s all Q&A, so you don’t have any other prepared remarks. And Gary Friedman the CEO is somebody that I’ve sort of gone back and forth on.

Bill Brewster:
I didn’t trust him at first and, I mean he has done everything that he said he would do, so at some point your execution matters. They’ve got themselves in a bit of a debt situation that I am confused on. Their 10-K today says that they have to settle in cash if their stock price is under 118. I was reading the actual indenture and never saw that provision, so if anybody listening can point exactly to where that language stems from, I’d be greatly appreciative.

Bill Brewster:
But anyway, it was an interesting call listening to a guy that’s in the retail business. He basically laid out the short thesis for all of the apparel retailers and whatnot. I mean he’s like, “Walk through any of these displays that have any Easter related anything or any spring color or anything like that, those companies are just screwed. You’re going to have to liquidate that inventory for almost nothing.”

Tobias Carlisle:
Who is hit by that stuff, the spring stuff?

Bill Brewster:
Dude, like Macy’s furloughed practically their entire-

Tobias Carlisle:
Nordstrom.

Bill Brewster:
Yeah, Nordstrom. I mean Nordstrom’s got a little bit better online presence, but I think they’re screwed too.

Tobias Carlisle:
So retailers are just hammered through this stuff of course, unless they’re Amazon of course.

Bill Brewster:
Yeah, that’s right, because all your seasonal traffic is basically gone.

Tobias Carlisle:
Got to give a shout out to Stryker677, “Wife is in labor.” Good luck brother.

Jake Taylor:
Wow, yeah.

Bill Brewster:
Thanks for tuning in, making room for the important stuff in life. I appreciate that.

Jake Taylor:
They might want to get out in front of this and roll out their all-black colors first for dark days ahead maybe.

Bill Brewster:
Maybe. You’re a little too pessimistic man.

Jake Taylor:
I’m a little pessimistic.

Bill Brewster:
We’re going to be out of this. But anyway, I thought it was an interesting call, and Gary talks a lot about or did talk a lot about not sacrificing the short term for the long term strategic vision and he talked about what Cheesecake Factory did by sending their landlords that letter.

Bill Brewster:
A lot of his riffing was about building partnerships for the long term and how would your landlord feel if you did that to them, and it was just sort of an interesting call. If they have to settle in cash, I mean I think they’re going to have to refi, and the debt markets aren’t exactly open. They could have to draw on the revolver. That’s not an ideal situation. Could be the Icarus trade coming home to roost.

Jake Taylor:
Is anyone buying furniture right now? Is that a thing? Like we’re stuck in our house or like, “I hate this ottoman?”

Bill Brewster:
Well, so here would be if I was going to do a bull pitch, this is exactly what I’d say. Their cohort is primed to work from home and all of the women in that cohort, and I mean I’m not trying to be sexist here it’s just women drive buying decisions at the house, I mean they’re looking around the house looking at things that they don’t like. We just spent a fair amount of money on sheets-

Tobias Carlisle:
What kind of threat count did you get Bill?

Bill Brewster:
I don’t know, but-

Jake Taylor:
Egyptian cotton.

Tobias Carlisle:
You got like that canvas sail.

Bill Brewster:
Dude, I spend where I sleep. That’s a lot of your time.

Tobias Carlisle:
You also got to get a second couch now, because you got the work couch and you’ve got your TV couch.

Bill Brewster:
Well, so honestly, your kids are beating the shit out of your house right now, because they’re not at school. So I actually don’t think it’s that crazy to think that some of people’s budget goes into the home. Now will it save a company? That’s a bit of a stretch, but I don’t think it’s crazy.

Jake Taylor:
Is anyone buying clothes right now too? Like I’m wearing the same sweatpants pretty much every day. If you’re not dressing up for other people now-

Tobias Carlisle:
Brent Beshore had a good comment to that effect, he was like, “Is it Zoom leisure or what do you call it?”

Jake Taylor:
Leisure for Americans.

Tobias Carlisle:
Leisure, apologies.

Bill Brewster:
No, it’s okay. Leisure sounds much better.

Tobias Carlisle:
You totally derailed me, but the point is you only need a shirt now with a tie. It’s pants optional.

Bill Brewster:
Yeah, I don’t wear underwear or pants. I’m not even wearing them right now, obviously. So I think spending has collapsed. I think it’s going to be interesting to see how debt and landlords and equity interact through this, because I mean you could say debt can foreclose on all these businesses.

Bill Brewster:
That’s, A, not really their business and, B, they would have a ton of businesses foreclosing at once. That’s not an easy thing to manage. So it seems to me like the incentives are for people to manage through. That said, when people get threatened with losing money, they do some crazy stuff.

Tobias Carlisle:
I got a good question for you here, it’s up on the screen. “Restoration Hardware call was interesting. Do you agree with his point that home goods and experiential retail might have some pent up demand after this?”

Bill Brewster:
Yeah, I do. Look, I think that guy understands. I mean I used to hate that idea. I think in November I went on this huge tirade on Twitter about it or whatever. I think he’s right on his strategy within that segment, I think he’s right that physical locations are more beneficial to the economics of that business than going fully online.

Bill Brewster:
If they have to settle these notes in cash, I don’t know how they don’t face a liquidity crunch unless they can refi, and their agents like US bank, that’s not a predatory bank. I think BMO was involved in the lending group. If those are bankers that work with you, if it’s credit hedge funds you got a problem potentially. I say that not knowing what I’m talking about, it’s just how I think about it.

Tobias Carlisle:
How hard line do you think everybody’s really going to be on the other side of this?

Bill Brewster:
That’s what I don’t know, but then the question is do you want to take that risk?

Tobias Carlisle:
You don’t want to take that risk, but a lot of folks have not got that choice at the moment. I mean a lot of businesses haven’t got that choice, I’m not even talking about individuals. You mean as an investor do you want to take that chance?

Bill Brewster:
Yeah, that’s right. I mean at RH, Gary’s got like four and a half million shares that are vested at a hundred bucks a share. I mean you sort of need him to execute this vision if you’re a creditor. You really don’t want to take over a furniture retailer and just kick it to some schmuck CEO, and he’s got 450 million reasons to bargain pretty hard. I do think you’ve got to weigh that stuff, but you’re making a bet. I mean it’s no slam dunk.

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