SRCL Matt McClintock Consensus Media Watch a quick video on the harrowing possibility raised by our findings: Jim Cramer could be wrong about a stock.

After a visionary turnaround, RH is running out of cash — and could be one prolonged housing downturn away from a cataclysmic collapse…… …according to a months-long investigation that included site visits across continents; satellite imagery, AIS data, flight records, and real estate deeds of trust; forensic accounting; and way too many overpriced (though admittedly delicious) showroom salads. Based on Hunterbrook Media’s reporting, Hunterbrook Capital is short RH (NYSE: $RH) at the time of publication. Positions may change at any time. See full disclosures on our website. Here’s what we found:

RH’s profligate leadership has drained RH of resources under the banner of brand-building — bringing the company to the brink of a liquidity crisis. The luxury brand has seen its cash position fall from $2.3 billion to just $42 million — after acquiring two private jets, a yacht, and what’s been called a “personal penthouse” for the CEO; borrowing $2.5 billion at variable rates just as they began rising in 2022, sending annual interest payments soaring from $81 million to $211 million; spending $2.3 billion on stock buybacks while RH’s CEO sold $740 million of his own shares; splurging on a European expansion that seems to be a complete flop; spending 9-figures on a perpetually delayed Aspen complex; and failing to move through meaningful inventory despite widespread discounts.

Bankruptcy Indicator Flashes Red Among the 85 major U.S. retailers valued over $5 billion, RH now has the second-lowest Altman z-score count of just 1.65. This bankruptcy risk indicator, which has predicted corporate failures since 1968, puts RH deep in what analysts call the “distress zone.”

Sky High Expectations Last month, RH reported earnings that might have sent another company’s stock plummeting — missing expectations on revenues, profit, margins, EBITDA, earnings per share, customer deposits, cash flow, and just about every other metric. Sales per square foot is also at its lowest level in a decade — raising the possibility that the company’s growth in revenue has just been a result of real estate expansion. But RH is nonetheless trading around its highest share price — and multiple — in years. Much of the recent momentum in the name comes from the CEO’s stated expectations of an imminent demand inflection for the fourth quarter — projecting 19% revenue growth as most of its competitors are predicting an industry wide slowdown amid a sluggish housing market. “The guy is spot on in his projections,” fawned Jim Cramer on CNBC. But an analysis of 15 misses in the last 20 quarters shows RH has consistently failed to meet expectations, with a cumulative $1.4 billion shortfall in free cash flow. In 2019, the company settled a lawsuit for $50 million over allegedly false claims hyping future growth. RH’s latest narrative of rapid, imminent growth appears to be unsubstantiated as well.

Inventory up, Margins Down In order to move product, RH has resorted to “clearance” sales at up to 60% — and a wave of promotional emails. Credit: @nyseSRCL for the discount analysis; and shout out @MattJMcClintock and @consensusgurus for tracking promotional emails In part as a result of this discounting, the company has missed consensus gross margin estimates in seven of the last eight quarters — with its most recent miss being its largest in a decade. But even with this “disruptive pricing,” as RH’s CEO calls it, RH has seen its inventory soar, according to the company’s SEC filings and Hunterbrook’s satellite analysis of five RH warehouses.

The Mysterious “Demand” Metric and Growth Story That Have Helped RH To Defy Gravity While RH has posted disappointing top-line and bottom-line earnings, its CEO has hyped the company’s growth in “demand,” a bespoke metric RH introduced in recent years that supposedly measures “the dollar value of orders placed.” But in recent years, the growth in “demand” has not tracked the company’s growth in deferred revenue, a standard metric, even though the two should, in theory, look similar. Experts who spoke to Hunterbrook have been unable to make sense of the discrepancy.

Failed international expansion: With a limited universe of cities to expand into within the United States, RH launched retail stores in England and Germany. RH projected England would earn $50 million to $250 million of revenue in year one, but it won’t hit the low end of its estimate in either of its first two years. A visit to the site found more deer than customers. The Germany stores, meanwhile, led to $18.6 million in impairments, with RH declining to renew their leases and shipping inventory back to the United States. One analyst chalked the difficult expansion up to “literal” poor product-market fit — arguing European homes are not large enough for RH’s furniture.

A looming impairment in Aspen? RH’s Aspen development, costing over $140 million to date, shows minimal progress, based on Hunterbrook’s review of local records and drone footage. Key properties face significant delays and maintenance issues. An analysis of nearby land values from Hunterbrook’s Real Estate Database shows Friedman’s claims about the growth in the value of these properties (which he says has doubled or tripled) does not align with the broader real estate environment.

Will RH Need to Raise? With cash dwindling, RH may soon need to raise dilutive capital, unless the company manages to turn cash flow positive in the fourth quarter. In the meantime, RH could always generate some cash by selling the planes, yacht, and penthouse, though it’s unclear exactly what they are worth. They are, after all, heavily used. (More on this in the full article!)

@MattJMcClintock @ConsensusGurus Read the full investigation at RH did not reply to repeated requests to respond to these findings.

@nyseSRCL @MattJMcClintock @ConsensusGurus I expect to see "disruptive pricing" in this house of cards very soon

@nyseSRCL @MattJMcClintock @ConsensusGurus Regardless of your views on the business quality - cyclical businesses always have “high multiples” on cyclical trough earnings numbers? So your valuation points are pretty weak.

@nyseSRCL @MattJMcClintock @ConsensusGurus RH in Europe is going to end as well as GM trying to sell Caddies in Europe. Europe has far superior product from Italy and Germany which better fits their style and house sizes

@nyseSRCL @MattJMcClintock @ConsensusGurus @HedgeyeRetail @Hedgeye