Why Dan Loeb's Third Point Is Bullish On Restoration Hardware Stock

Daniel Loeb, the CEO and founder of New York-based hedge fund Third Point, on Friday revealed a new position in luxury furniture and home furnishings chain Restoration Hardware Holdings RH.

What Happened: In a letter to investors, Loeb revealed that the hedge fund started building a position in RH in the final quarter of last year as it believes the high-quality underlying business is at a fundamental “inflection point.”

Loeb said he believes the furniture company is “well-positioned” to yield benefits as it looks to implement its aggressive international expansion strategy and growth should happen “regardless of the political landscape or housing cycle.” 

As per Loeb, RH is not a traditional furniture company and any comparison with other furniture companies is not fair to the brand just like one cannot compare Ferrari with the rest of the automakers. 

See Also: Expert Ratings for RH

“Furniture companies are not known for their high returns on invested capital, and a common bear thesis on RH was that furniture companies had never sustainably earned >10% EBIT margins (which RH had recently exceeded),” Loeb said.

The hedge fund, which holds stake in SentinelOne Inc S, Intuit Inc INTU and Danaher Corp DHR among others, noted that RH CEO Gary Friedman is a once-in-a-generation leader who is both an innovator and effective capital allocator.

According to Loeb, RH commands higher product gross margins, better leverage on fixed costs, and a unique advantage in retail, where landlords basically pay RH to anchor retail properties, as RH’s stores draw high-income traffic and create a “halo effect.”

Price Action: RH shares closed 0.7% lower at $674.99 on Friday.

Photo: By Restoration Hardware on Wikimedia