From our experience analyzing companies and observing management teams, we find that the combination of boldness and discipline is rare. RH and CEO Gary Friedman remind us how exciting it is to invest in the small and mid-cap space. We also believe they demonstrate how effective management, a primary factor of our Polen Small Company Growth Investment Flywheel, helps to create long-term value.
One might be skeptical about the prospects for a luxury home furnishings retailer expanding into restaurants, hotels, corporate jets, and yachts. But digging deeper into the business and its management team reveals, to us, a compelling, long-term opportunity that is much more than a play on home furnishings.
Friedman has what we think is a unique style of leadership. Guided by authentic originality, we believe this style leads the company to engage in practices that may seem unorthodox to some but, to us, are more aptly described as highly innovative. Friedman orchestrated one of the most improbable turnarounds in corporate history. He transformed RH from a little-known company with a $20 million market cap at the edge of bankruptcy to a leading luxury home brand with a $10 billion market cap.1 As we see it, Friedman understands luxury on a deep level.
In our view, luxury is not just about creating products—it is also about creating experiences. When visiting an RH gallery, we think this focus on experiences is apparent. We believe RH ‘s core value proposition and competitive advantage is not only creating furniture but also aspirational spaces with the highest quality materials that harness premier aesthetics. These spaces aim to deliver emotional value to a customer and elicit feelings of awe. From this perspective, we think RH is well-positioned to expand into adjacent categories of restaurants, hotels, corporate jets, and yachts, which are simply different configurations of spaces that people occupy.
Friedman seems to operate with an underdog mentality and a bold vision to become a top brand in luxury.
RH’s value-creating reinvestment, a key driver of our investment flywheel, is made possible by another key driver of our flywheel, effective management. We have seen countless examples of how optionality can go awry for companies when management teams are bold without exercising discipline. However, as someone who has a robust strategic vision and credible track record, we believe Friedman has earned the license to dream. Friedman, in our opinion, has led the company with a notable display of long-term behavior, and his unique leadership catalyzes many who contribute to his vision. Despite RH’s market-leading position, Friedman seems to operate with an underdog mentality and a bold vision to become a top brand in luxury. This mentality and vision set the tone for the entire organization and appears to drive a relentless innovation and iteration process.
On the RH’s Q4 2020 earnings call, Friedman shared the quote, “History has proven that men will work for a dollar, but die for what they believe in.” As an astute student of brands, Friedman believes that passion for the product is the key to building a sustainable brand. The company prioritizes projects based first on the emotional value, then the strategic value, and, finally, the financial value of an idea. In our view, he understands that ideas with high emotional value can inspire employees, which, in turn, has the potential to deliver effective outcomes. This emphasis on emotional value fosters a culture that empowers employees to deliver results aligned with RH’s goal of designing and creating beautiful spaces. Despite a lean marketing strategy without a social media presence, RH is the most pinned, tweeted, and Instagrammed brand of its kind in the world, according to Friedman.2
Ultimately, to us, Friedman embodies the qualities that we seek in management, and his leadership is a prime illustration of how effective management can drive the flywheel and the potential to unlock long-term value creation for RH.
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of June 2021 may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.
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