RH: A Surprise $1 Billion In Cash To Accelerate Expansion

Summary

• RH Dec. 5 share volume was 4.7MM above the 90 day average. I expect holders of up to 6.0MM warrants expiring Dec. 6 are exercising at $171.98 and immediately selling.
• Exercise of 3.0MM warrants will bring in more than $500MM in cash. If the full 6.0MM warrants are exercised that will bring in more than $1 billion in cash for RH.
• Ignore the short-term dilutionary effect of the additional shares.
• The strength of RH balance sheet will no longer be in question, funds will be immediately available for planned expansion, and RH long-term target for return on invested capital is in excess of 50%.
• The warrants effectively put a floor price of $171.98 under RH shares, because CEO Gary Friedman will almost certainly use available cash to repurchase below that price.

Why Shares Of RH Surged Today

From the Motley Fool, Dec. 5, "Why Shares of RH Surged Today""

Shares of RH (NYSE: NYSE:RH) jumped on Thursday after the furniture retailer reported its third quarter results. Despite tariffs on Chinese goods, RH managed to beat expectations for both revenue and earnings. The stock was up 13.4% at market close.

The Q3 result certainly contributed. But I believe there was another reason. With Berkshire Hathaway recently taking a position in RH there would be institutional buyers wanting to also gain a stake in RH. But with less than 3 million shares not already held by institutions or insiders (see Table 2 below) it would be difficult to secure a sizable stake in RH in a short time period. The availability of an additional 3.0 to 6.0 million shares from conversion of warrants would have provided an ideal avenue for institutions to gain a sizable chunk of RH shares in one transaction. Ideal also for the warrant holders who could convert at $171.98 with an assured sale to meet the outlay for conversion, and with an assured profit. I believe this was the major reason for Dec. 5 share volume of 5.6MM shares, 4.7MM above the 90 day average daily volume. I expect holders of up to 6.0MM warrants expiring Dec. 6 are converting at $171.98 with immediate sale already locked in through placements to institutions. It could be a hectic day of trading for RH on Dec. 6, as any balance of warrants are converted and sold. This is particularly so as the share price of $233.65 at close on Dec. 5 was over 35% above the warrant conversion price of $171.98.

RH: Investment Thesis

First, the risks -

I will start with a cautionary note. RH's business is exposed to additional risk

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