By Sam Boughedda
With RH (NYSE:RH) set to launch in Europe, starting in England, a Cowen analyst said in a note to investors on Tuesday that they estimate the European luxury furniture TAM is greater than $50 billion, and between one and three new openings per year could contribute $90 million to $450 million to the company’s annual revenues.
“Successful expansion should re-rate valuation higher, but will require sharp execution, acceptance of Contemporary & buy-in from luxury designers. Our proprietary designer survey is encouraging, but risks exist,” said the analyst.
The analyst, who has an Outperform rating and $300 per share price target on RH stock, said the company is well positioned, as the luxury market is very fragmented, and the retailer's unique approach to physical retailing featuring restaurants and other culinary experiences will differentiate the brand and drive traffic to galleries.
“Initial focus will be on customer acceptance and demand ramp, along with sharp operational execution, especially around its supply chain and logistics network. In our view, successfully opening the first several galleries should help re-rate valuation closer to European luxury peers, as RH has historically traded at a 12x turn discount,” added the analyst.
However, he cautioned that while their proprietary U.K. luxury designer study Is encouraging, risks remain with RH’s brand awareness in the high-end designer community elevated but tied to the American market.
The analyst stated the “majority of participants think RH can have success in the U.K. However, some view the brand as below the super-premium clients that the company is attempting to acquire.” At the same time, designers were also “generally unaware of the upcoming opening of RH England.”
“Our analysis suggests RH England could contribute year-one total market revenues of $90mm to $110mm, EBIT margin in the 20% to 30% range, and +1% to +3% to EPS, while the RH London opening (likely next year) should provide a more meaningful contribution. We estimate RH could open 1-3 galleries per year in Europe starting in 2023, contributing $90mm to $450mm in annual sales. We maintain our estimates given unknowns around timing and market acceptance, but our European estimates suggest potentially meaningful upside to long-term revenue and EPS estimates."
RH's share price rose over 3% Tuesday.