One of the joys of being a securities analyst is reading conference calls when a CEO goes AWOL and tells people what he or she is REALLY thinking. This week, on the Restoration Hardware (Ticker: RH) Q4 2021 conference call, Chairman and CEO Gary Friedman did not hold back at all on sharing his views on the looming pressures on U.S. companies and consumers. He even invoked a Global Financial Crisis era reference comparing the current moment to the time when bank stock CEOs were talking about buying back stock while their stocks were plummeting and their counterparties were getting worried about continuing to trade with them. The implication is that while oblivious investors appear to think all of the recent inflationary pressures and geopolitical issues are transient and\/or not material to companies\u2019 cash flows and growth, the reality on the ground is that things are quite ugly.<\/p>\n

By the way, the company also mentioned that growth has dropped by 10-12% since Russia invaded Ukraine. All this brings up a number of questions. Will U.S. consumers stop spending like they did back in 2008-09, the opposite of what happened during initial COVID outbreak? What will be the near-term impact of higher gas, food and rental prices on consumer sentiment and behavior? What will higher interest rates do to housing prices, demand for new homes and all of the economic activity that is intimately tied to housing? Our crystal ball is admittedly just as cloudy as is anyone else\u2019s. However, we have intentionally stayed away from \u201cCOVID winners\u201d in the consumer space; think companies that sell $4,000 mattresses, manufacture RVs and ones that benefit from everyone deciding to do home improvements projects all at once. We have viewed those companies as over-earning and have been very cautious about extrapolating recent trends and earnings power. In fact, the consumer discretionary exposure we have across our strategies includes companies that sell:<\/p>\n

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• Vitamins and supplements (NATR);<\/li>\n
• Low priced shoes and apparel (SKX);<\/li>\n
• Affordable luxury handbags and accessories (TPR);<\/li>\n
• Inexpensive home, gardening and pet-related products (SPB); and<\/li>\n
• Tickets to regional amusement parks (SIX)<\/li>\n<\/ul>\n

  If the RH CEO is correct (see the excerpt from the CapitalIQ transcript below) to be concerned about U.S. consumers\u2019 willingness to continue to spend on discretionary items, then for sure all of the above companies will be impacted to some degree. However, they all have the balance sheets to continue to operate and invest even during a period of consumer uneasiness. They also sell either inexpensive items or products and forms of entertainment that could benefit from a trade down. Have you looked at how expensive a day at Disneyland has become, what a pair of Nikes is going for or how much Louis Vuitton has raised prices on its bags? Instead, why not spend the day walking around a Six Flags park in a pair of Skechers Street shoes while carrying a very affordable Kate Spade purse?<\/p>\n

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  Steven Paul Forbes (Guggenheim Analyst)<\/strong><\/p>\n

  Gary, super helpful, right? Because I think as we try to contextualize the prudence of the guide, it almost appears like you\u2019re not incorporating a contribution from a lot of these year of the new factors, right? I mean, any comment on how you sort of built the guide from a bottom-up standpoint or how you would define the prudence behind it? And you have a great track record here. So any thoughts on just the guide in a holistic context on just the prudency behind it?<\/p>\n

  Gary G. Friedman (RH Chairman and CEO)<\/strong><\/p>\n

  Yes. Well, look, I mean, it\u2019s probably one of the most difficult guides since 2008 and \u201809 because we\u2019re right in the middle of this disruption from Ukraine and Russia, which I think — I don\u2019t think it\u2019s all Ukraine and Russia. I think it\u2019s triggered a greater awareness. Like it\u2019s like someone — I think this was ring the bell, everybody pay attention. And then all of a sudden, everybody started talking. Yes, all of a sudden, the Fed\u2019s off to the races, and that creates concern. You\u2019ve got housing prices at all-time highs. I mean, is it sustainable? I don\u2019t know for how long the math. Yes, doesn\u2019t make sense on kind of what\u2019s happening in the housing sector and other places that — you\u2019ve got inflation like I\u2019ve never seen.<\/p>\n

  Now I was telling people when Yellen said, \u201cWe\u2019re going back to 2%,\u201d we were just signing our new freight contracts, ocean freight contracts. I just wonder if anybody — the Fed has picked up the phone and called a businessperson and said, \u201cHey, what do you think is happening with inflation? How\u2019s ocean rates? How is this? How is that?\u201d I mean, I think — I don\u2019t think anybody really understands what\u2019s coming from an inflation point of view because either businesses are going to make a lot less money or they\u2019re going to raise their prices. And I don\u2019t think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. It\u2019s — and I think it\u2019s going to outrun the consumer. And I think we\u2019re going to be in some tricky space.<\/p>\n

  So everything is kind of happening at once. And I think you got to prepare for war. I mean, if you\u2019re going into a very difficult, unpredictable time, you just got to be super flexible. You\u2019ve got to be able to improvise, adapt, overcome and kind of be ready for anything. And I don\u2019t mean that by playing defense. I mean it by playing offense, but it\u2019s — I wouldn\u2019t call it happy days right now. I\u2019d call it pensive days, be ready. And when we play like that, we usually have our best outcome. When we get overly optimistic, we have a higher likelihood to wind up in the ditch and get ahead of ourselves.<\/p>\n

  So — but if everything — if the war in Ukraine ends and inflation slows down in some miraculous way, I don\u2019t know, everybody can sign new freight contracts because, I mean, most of the world all signed new freight contracts. 2 years ago, price of a container for us went from $2,400 to $4,800?<\/p>\n

  Jack M. Preston (RH CFO)<\/strong><\/p>\n

  About that.<\/p>\n

  Gary G. Friedman (RH Chairman and CEO)<\/strong><\/p>\n

  Yes. Yes, it doubled. I\u2019m not going to tell you what it just went to. But just let\u2019s say, that looked like a nice increase. So — and it\u2019s not just us. It\u2019s everybody. So either people are going to do stupid things like take quality down to make their goods like — look like it\u2019s better value or they\u2019re going to not — they\u2019re going to have to take prices up. And — or they won\u2019t take prices up, and they\u2019ll hurt — their margin profile is going to change.<\/p>\n

  But it\u2019s not just us. It\u2019s everybody I know in every industry. And I just don\u2019t think it\u2019s like — again, I don\u2019t want to scare everybody. But I talked about the theme, like there\u2019s this scene in The Big Short where everybody is in that ballroom and the guy — I think it\u2019s the guy from Bear Stearns or someone is up there, one of those things, and he\u2019s saying how they\u2019re going to buy back $1 billion of their stock, this, this and that. And then one guy who\u2019s on his BlackBerry, he goes, \u201cCan I ask a question, sir? In the 20 minutes that you\u2019ve been talking, your stock is down like 55%.\u201d And everybody ran out of the room.<\/p>\n

  I just think we tend to just try to be transparent and honest. And look, maybe our stock is going to take a big hit because of this, and people are going to think Gary Friedman wasn\u2019t excited. I\u2019ve never — I told my team, I\u2019ve never been — in my 22 years here, I\u2019ve never been more excited. I\u2019ve also never been more uncertain, right? So — and I think you have to take a real balanced view right now.<\/p>\n","protected":false},"excerpt":{"rendered":"

  One of the joys of being a securities analyst is reading conference calls when a CEO goes AWOL and tells people what he or she is REALLY thinking. This week, on the Restoration Hardware (Ticker: RH) Q4 2021 conference call, Chairman and CEO Gary Friedman did not hold back at all on sharing his views […]<\/p>\n","protected":false},"author":3,"featured_media":9542,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_wp_rev_ctl_limit":""},"categories":[101,100,80,31],"tags":[],"class_list":["post-77650","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics-at-large","category-markets-rationality-decision-making","category-philosophical-musings","category-thoughts"],"yoast_head":"\n