It's Happening

Should get to that target in the Year of the Rabbit.

Restoration Hardware CEO is Back With Another Warning

Back in early April, I posted Wall Street Ignores Margin Collapse Warning. The CEO of RH talked about how dealing with inflation involved a number of bad choices, that collapsing margins were coming and that it reminded him of the scene in The Big Short, when people are listening toa speaker say the company is fine while the stock price is imploding. Now he's back...

ZH: US Consumer Implodes As RH Cuts Guidance For 2nd Time This Month, Warns Of Cratering Demand

Well, fast forward to today when moments ago RH - aka Restoration Hardward - just pulled a Snapchat and just three weeks after the company with the outspoken CEO saw its shares tumble after it guided lower for Q2 and the full year despite sold Q1 results, RH just cut guidance again with CEO Gary Friedman saying that “the deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year.”

Taking into account the macro-economic conditions and our current business trends, RH provided the following outlook for the second quarter and full year, which assumes demand will continue to soften during the remainder of fiscal 2022:

Fiscal 2022 net revenue growth in the range of (2%) to (5%), with adjusted operating margin in the range of 21.0% to 22.0%.

Previously the company had seen revenue growth of 5% to 7% and operating margin of 23.0% to 23.5%, so a huge hit to both the top-line and profit margins.

For Q2, RH sees net revenue growth in the range of (1%) to (3%), with adjusted operating margin in the range of 23.0% to 23.5%. The second quarter outlook remains unchanged versus our prior forecast due to faster backlog relief offsetting lower than expected demand.

Friedman's catastrophic forecast continued, “With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year.”

The economy is imploding and RH is first in line because they report weeks before the rest of the market, plus have high exposure in the housing market.

While the past week or so have been focused on technical warfare between bulls and bears, the macroeconomic picture is rapidly deteriorating. It's a matter of if, not when, the Fed pivots now, and from what level of SPX. After the pivot, then we'll get confirmation on whether a cyclical turn to inflation is underway or not.

Wall Street Ignores Margin Collapse Warning

Value investors, those concerned about inflation, and bears passed around the Restoration Hardware (RH) conference call, but even among those groups, I don't think it received nearly as much coverage as it deserved. Long story short: inflation kills stock valuations in many ways. Margin compression is one. As discussed by the RH CEO, companies have three main choices when dealing with inflation: cut quality to hold the line on price, raise prices and accept risk of lower sales, eat the costs via shrinking margins. All of these choices have negative impact either immediately (weaker sales or falling profitability) or later (brand destruction via lower quality).

RH fell nearly 20 percent last week as a result of its earnings and conference call warning of the struggle ahead:

He made an important point in the call, one that I think you could try beating into the heads of bulls with a 2x4, but would only end up with a pile of mush. He said he's very excited about the future, maybe the most excited he has been. There are many opportunities for the business. And yet, he also thinks this economic situation is similar to the scene in The Big Short when Bear Stearns stock suddenly implodes: This makes perfect sense to a bear such as myself. RH could have a great business and a great future, and it can also be the case that the market is valuing RH 50 percent higher than it should. The example I always go back to, because it so perfectly encapsulates the situation, is Amazon. The stock fell more than 90 percent during the dotcom bust. The economy and corporate success do not matter when valuations and sentiment change.

Here are profit margins with a regression line. Notice the surge following the pandemic. Inflation always looks like a boom at first. Corporations appear more profitable because inflation hits them first, in a good way. The first impact is rising demand. Every producer benefits because supply is constrained in the short-term.

Here is profit margin versus the S&P 500 Index:

The RH CEO tells us the benefit for the end stages of production is gone. Inflation is turning into a destroyer of value:

There's already evidence the recession may already be underway in the distribution stage.

ZH: Looming Freight Recession Sparks Plunge In Trucker Stocks, First Post-COVID Job-Losses

Here is a link to the Q4 2021 RH conference call. I do not know if that link will remain viable in the future. Below is the account that brought it to my attention. There are time stamped points worth giving a listen.

Retail is doomed if the RH CEO is alerting us to a sector trend. Investors seem to understand the risk for retail. XRT looks ready to plunge and IBUY, the online retail ETF, has already erased all of its gains since 2020.

The rest of the stock market is still oblivious. Also, consider the big Apple news last week in context of the RH CEO's comments: Apple Pay push is scarier for fintechs than banks

Apple (AAPL.O) is taking a bite out of the financial-technology sector. Digital upstarts like Affirm (AFRM.O) and Jack Dorsey’s Block (SQ.N) should be on high alert. Lenders like Goldman Sachs (GS.N), however, have less to fear.

The $2.9 trillion iPhone maker led by Tim Cook is beefing up its in-house financial-services infrastructure and expanding further in consumer credit, Bloomberg reported on Wednesday.

A move into consumer credit is the antithesis of growth and technology, but it does strike me as a-not-terrible decision in the face of collapsing margins.

$RH $Stonks @doombergt
Part 1.
I just listened to the earnings call. Quite entertaining...
Restoration Hardware CEO Gary Friedman said during Q&A:
- Inflation much higher than led to believe
- demand getting destroyed with rising prices
- costs going up everywhere

— nyugrad (@nyugrad1) March 30, 2022

Restoration Hardware earnings call CEO Gary Friedman said during Q&A:

- Inflation much higher than ppl think

- demand getting destroyed with rising prices

- costs going up everywhere

- consumer acting like they have no savings

- said it’s like the moment in the Big Short where ppl were in the room watching Bear Stearns fall

- believes consumers will get run over

- believes RH is a platform for curating wealthy tastes

Timestamps of note

17:20 inflation

34:00 supply chain

40:30 are record housing prices sustainable?

41:05 i dont think everyone understand how inflation will overrun the consumer. Has the fed called any businesses at all to ask them about inflation?

43:00 freight rates more than doubled

44:00 this is like the scene in the big short

Give it a listen.

P.S. NYU Grad has a Substack here.

Wayfair Again

Wayfair is ready to go into the abyss right now. Waiting on the broader market. Many retailers look terrible.

Screen Part Five

I expanded the screen conditions for only a 5 percent drop and found yet more familiar names...

Most Targets Broke Down

Still waiting on XLY, but ALGN, CTAS, MPWR, INTU, RH, MSCI, POOL, IDXX all broke down. Usually this is when the football gets pulled away. I added CMG and ISRG on possible breakdowns. NFLX also broke down. Aside from these, I see a lot of bearish setups. Mainly wading through them looking for the best setups. There are so many in the tech sector alone that no doubt many are out there.

The two next shoes might be SMH and BTC Bitcoin.

UUP tagged its 50-day MA today. I don't think the dollar matters much for the stock market right now, but down would be better for inflation trades and tech weakness, and up better for more general bearishness.

I'm going into Monday with guns blazing, but I'm here for the day the market doesn't bounce. There is growing bearish sentiment, but a lot of its is cautious from my reading. Looking for a 10 percent pullback tops. Fearful of the Federal Reserve, jawbone or policy shift. I don't sense much confidence or risk taking on the bearish side. History and support levels say maybe this dip was it. There's a case for a bounce and there have been face-ripper run ups from the support area the Nasdaq bulls defended today. But...if that support doesn't hold...there is nothing but air below. The risk-reward is heavily skewed in favor of bears thanks to VIX remaining suppressed. the 10-year yield held its breakout too. If the Fed opts for dovishness, they will probably ignite crude oil and the 10-year yields, and then the Nasdaq and all the ARKK trash will walk into an empty elevator shaft.

Bounce or Breakdown

A bunch of stocks I've covered before and have puts on many of them. I included a bunch of cloud stocks that I don't currently have puts on such as former targets HUBS and COUP, but I wanted to highlight their breakdowns. I have no idea which way the market will break. Previously the horizontals some of these are hitting offered support. HUBS and COUP are beaten down and could bounce. My only caveat is that when the market finally decides to have a sell-off it is going to join these bear leaders. The market is bouncing right now after hitting these support areas, I see a kind of unity, all-one-market across the charts. Even stuff going up like XLE is at resistance, and I've tossed that in here. Also a channel play on NWL. Long story short" every time we get to this point, dip buyers pour in and bears get hosed. Sometimes there are breaks like in late November, but even those are reversed. It only needs fail one time though, and that's the time the bears will feast, and the profits I will make on that break will dwarf whatever losses I take in the here and now.

Netflix also broke a long-term line.

Bear Trap or Next Leg Down Incoming?

Biotech was green earlier today and then reversed.

Biotech was a decent short at the horizontal yesterday, but who knows how it will finish the year. More interesting are some of ARK's holdings that haven't gotten off the mat. I already posted SQ earlier today, that is one. TWLO and SE are two more. roKU and U don't look particularly strong either. The question is bear trap or weakness? Given I think the rally will run out of steam, I lean bearish.

This one isn't in Cathy's portfolio, but looks ready to go.