$6.00
$60.00
bear $6.00
base $20.00
bull $60.00
margin of safety $9.00
market price* $112.99
RH is a luxury home-furnishings retailer (RH, RH Modern, RH Outdoor, Waterworks and hospitality) selling through large Design Galleries, catalogs (Source Books) and the web. Owner earnings are cash from operations after cash interest, less the swing in working capital (inventory, receivables, payables, customer deposits), less stock compensation, less the capital spending needed to keep the business at its current size. On that basis owner earnings per share were roughly $6-8 in fiscal 2018-2020, about $18-20 in the pandemic boom years of fiscal 2021-2022, and only about minus $0.13, minus $0.39 and $1.97 in fiscal 2023, 2024 and 2025. Two things changed the business: a debt-funded push into new Design Galleries (capital spending of $231-269 million a year in fiscal 2023-2024, versus $68-111 million in fiscal 2017-2020) and a very large buyback funded with borrowed money (about $1.25 billion in fiscal 2023, shrinking the share count from about 41 million in fiscal 2016 to about 19.8 million). Total debt is $2.42 billion, almost all term loans that mature in 2028 (the smaller Term Loan B-2 on October 20, 2028), and cash interest paid was $217 million in fiscal 2025. We did not credit the boom years as normal, and we did not use the earlier low-capital, low-debt years as normal either. Accounting judgements: working-capital swings are stripped out (fiscal 2025 cash flow was flattered by a $214 million inventory reduction, after a $269 million build in fiscal 2024). Lease payments, landlord-funded construction and other non-current items stay in the figures because they are real recurring cash costs. Stock compensation is deducted; fiscal 2020 included an unusually large one-time award. Only a small slice of capital spending is treated as growth spending (based on capital spending relative to sales growth); most of the gallery build-out is therefore charged against owner earnings, and no value is credited for the galleries it produces beyond what has already shown up in results. Growth check: fiscal 2025 owner earnings rose from about minus $0.39 to $1.97 per share, and revenue grew 8.1% ($3.18 billion to $3.44 billion). For the first half of fiscal 2026, revenue was $1.72 billion versus $1.71 billion a year earlier (about +0.5%), net income $46 million versus $60 million, operating cash flow $198 million versus $224 million, and capital spending $85 million versus $110 million. Growth has therefore slowed sharply, and the base case assumes none. Management's stated target of $5-6 billion in annual revenue from Galleries across the United States and Canada, and its plans for more European galleries, are ambitions rather than contracted or long-proven results, so they are left out of every case. Management also expects fiscal 2026 capital spending of $240-260 million, above fiscal 2025's $200 million, which is the main reason the base case sits below fiscal 2025's $1.97. Base case, about $20 per share: owner earnings of about $1.50 per share, flat, for 30 years and then nothing. This is below fiscal 2025 because of the higher capital spending plan and softer first-half profit. It assumes the brand, roughly 40 years old, and the gallery network keep earning at about this level with no growth.
Bear case, about $6 per share: the fiscal 2023-2024 experience repeats for three years (owner earnings around minus $0.25 per share, funded by more borrowing), then only about $1.00 per share for seven years as the 2028 term loans are refinanced at higher cost, then a ten-year fade to zero. Each 2 percentage points of extra interest on $2.4 billion is about $48 million a year, roughly $2.40 per share. Tariffs, including the 2025 Section 232 duties on wood furniture, on a largely imported product line add to that pressure. This case does not show the shares as worthless, but the equity is thin relative to the debt, and a weaker outcome cannot be ruled out.
Bull case, about $60 per share: capital spending is pulled back toward the 3-4% of sales it ran at in fiscal 2018-2020, when owner earnings were $6-8 per share, and owner earnings rise from about $2 to about $5 per share over five years, holding for 30 years in total. That level is below what the business earned in fiscal 2018-2020. What would make this wrong: a refinancing of the 2028 term loans on much worse terms (bear), or a sustained slowdown in furniture demand of the kind seen in fiscal 2022-2023, when revenue fell 4.6% and then 15.6%. On the upside, a faster pullback in gallery spending would lift owner earnings quickly, since each $50 million less capital spending is about $2.50 per share. Per-share values do not add or subtract debt separately because interest is already deducted from operating cash flow.