TIP828: Restoration Hardware (RH): Building a Luxury Empire From Scratch w/ Shawn O'Malley and Daniel Mahncke

**SPEAKER_1** (0:00)
You're listening to TIP.

**Daniel Mahncke** (0:03)
I just, I don't know. I think I get it.

**Shawn O'Malley** (0:07)
It's a lot to process for us as value investors, to be fair.

**Daniel Mahncke** (0:11)
I mean, you're really just going to have to sell me on this whole yard thing. I mean, not being able to fully wrap our heads around the luxury industry is kind of why we didn't invest in the bluest of the blue bloods in LVMH. But now you've got me Googling pictures of yards that we can charter for 130k a week.

**Shawn O'Malley** (0:30)
Look, a good deal is a good deal.

**Daniel Mahncke** (0:32)
What do you write about that? So what do you say? Should we start?

**Shawn O'Malley** (0:35)
I'm ready. Let's do it.

**SPEAKER_1** (0:40)
Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you.
This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Shawn O'Malley and Daniel Mahncke.

**Daniel Mahncke** (1:26)
Today, we are covering a company a lot of folks in the US might know quite well, and while I, as a German, have honestly only encountered through their gorgeous galleries in Europe, we're talking about RH, the company formerly known as Restoration Hardware. Ticker is also RH. And the reason I think this episode is going to be so much fun is that we get to revisit a theme that we've already spent quite a lot of time on this year, which is true luxury. I mean, we covered LVMH a couple of months back with the whole Arnold Empire of timeless brands. And we also did Ferrari a bit before that, where Shawn, you made the case for Howar's Scarcity and Brand Authority and also pretty good engineering, compounded earnings at nearly 20% a year for a decade. And I personally covered MS, arguably the most prestigious clothing brand in the world. And RH is the American attempt to play that same game. But instead of starting with Louis Vuitton or Christian Dior, the company's CEO, Gary Friedman, is starting with couches, dining tables, and trying to scale all the way up to private jets, luxury hotels and fully furnished homes.
So I would say there's a lot to unpack. But before we get into it, quick plug here, we will be hosting our second Intrinsic Value Conference event in Midtown Manhattan this September. And if you're interested in joining us and networking with other investors as well as meeting us, you should check out the intrinsicvalueconference.com to learn more. And I can already tell you, it will be an even bigger conference than the one we had at OMAR just in May of this year. All right, Shawn. So you've been digging into RH for the last couple of weeks. So where do you want to start?

**Shawn O'Malley** (3:04)
I think I want to start with pointing out to the audience how painful it was for Daniel to recognize pretty good engineering over at Ferrari, right? There's a subtle thing, but you can pick up on that German-Italian engineering rivalry for automobiles.
Anyways, though, after you've studied so many businesses, you start to feel like you've seen it all, and then it comes along a company that still manages to flip the world upside down for you. That's how I felt with RH. I think it will come as a surprise to no one that I've never shopped at an RH store because I'm a stingy value investor. If I spent 10 grand on a couch, I would just be kicking myself for not putting that money into stocks instead. So I thought because I've been furnishing my house for the last few months, why not invest in the company behind my dream living room? If I do fabulously well in an RH investment, well then maybe that will help me rationalize splurging on the furniture. So obviously, I'm kidding a bit. The setup is really interesting and for starters, most investors will immediately screen out the company because it has a ton of debt, twice the market cap of the company's equity and debt.
So management has supposedly a pretty credible plan to become debt-free by 2029 So that's important to know for starters and we'll get more into that. But I think that all makes the stock interesting because there is a good reason for it to be overlooked with the debt and therefore potentially misvalued by the market. And then I'd argue rather than competing in a more commoditized industry like just simply selling furniture, RH sells a lifestyle vision and I know that sounds like consultant word salad, but really their business is more about selling design inspiration for luxury spaces to high net worth families and their designers. So you come to an RH store or scroll through their brochures or source books, as they call them, to see what your outdoor patio could look like, where you can buy an entire set that's tastefully curated in one fell swoop, rather than mixing and matching products across brands. And so this is a company whose median customer almost certainly has a multimillion dollar net worth and where the average order value is likely more than a thousand dollars, but can easily scale to $50,000 or more if you're purchasing multi-room installations. The thing is, with their target demo of high net worth and ultra high net worth families worth more than $20 million, this is a group that owns nearly four homes on average and spends six and a half times more on furnishings than the average owner of one single family home.