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As RH arrives in the Meatpacking District, Wall Street sends its shares packing
Sep 18, 2018
Dennis Scully

There’s an old adage on Wall Street: Buy the rumor, sell the news. Savvy traders love nothing more than bidding up the shares of a company that is rumored to be coming out with a strong earnings report and then selling their position for a fast profit once the news hits the wires—usually well before retail traders even know what happened.

Traders who had been keeping an eye on the shares of RH, the company formerly known as Restoration Hardware, returned from their Labor Day holidays to find the stock price near its all-time high of around $160 a share. Speculation had been growing that RH would report record earnings after the market closed that afternoon, and so some traders decided this was a good time to start selling shares and taking profits.

After the news hit that RH did indeed report record adjusted profits of $67 million in the second quarter, traders sold even more, likely deciding that the news was as good as it could get for a while. Shares of RH had, after all, rallied over 400 percent since the start of 2017, and some felt that the turnaround story might be getting a bit long in the tooth.

By the end of last week, shares had fallen over 20 percent, shaving more than $700 million off the company’s market capitalization.

Gary Friedman, the company’s chairman and CEO, is RH’s largest shareholder. He controls about 27 percent of the shares, and as a result of the selloff, his personal net worth decreased by more than $200 million. Friedman told Jim Cramer of CNBC during an interview that week that a member of his staff spotted the sharp selloff in the stock and asked Friedman if he was OK. Friedman said he was great, and that this week wasn’t about the stock price. And indeed, it wasn’t—it was about realizing a long-held dream.

This was the week that RH could finally take the tape off the windows and open its most ambitious storefront to date, a 90,000-square-foot gallery in the historic Meatpacking District. Friedman and his team had signed the lease on the space four years ago, but at the Goldman Sachs Investor Conference last week, Friedman shared that the inspiration for the grandeur and majesty of the gallery was something he had first envisioned back in 1986.

Friedman said of the new gallery: “We really do believe that this is the most innovative new retail experience in the world, in the most important city in the world.”

“If you think back to the last time this was done, maybe the only time this was done, it was 32 years ago when the Ralph Lauren company opened the Rhinelander mansion on Madison Avenue. … I was 29 years old and I had just started at Williams-Sonoma and I was at the Goldman [Sachs] conference with Howard Lester, the then-chairman. And I was in New York and I had to go see the Ralph Lauren store—because I always wanted to go work for Ralph Lauren. At one point, my whole closet was Polo when I was in my 20s and I was saving my money and I was going to come to New York and work for Ralph. I remember walking into the Rhinelander mansion and thinking, This is so incredible, no one has ever done this before—and I don’t think anyone will ever do this again. I think that we have created the same kind of experience.”

Friedman was quick to qualify that his newest gallery isn’t a flagship, but rather “a highly profitable iconic location that will serve as a global calling card and bridge to our European expansion.”

With his focus now clearly on building a global luxury brand along the lines of LVMH, Friedman continued, “The customers that come to New York especially from Europe and South America and really all over the world, when they see this and experience it, it’s going to echo around the world.”

Pointing out that only 25 percent of LVMH’s business comes from the United States, Friedman said that once RH has opened locations in major European cities, he believes that the company’s revenues could easily grow to over $10 billion annually. He then shared that at the end of the week, he and his chief real estate officer were headed to London, Paris and Madrid. Global expansion, here they come.

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