The automatic brain

Our brain will automatically leap into action when it senses danger.  If we are in physical danger, it will trigger our ‘flight or fight’ response.  If we are in social or emotional danger, it will message us through feelings such as anxiety so that we avoid that situation.  Unfortunately, this system doesn’t always act perfectly and can cause us to behave irrationally.  For example, we may feel a sense of dread when faced with an unpleasant task.  This leads to procrastination, an irrational behaviour that many of us wish we didn’t have.

This post will look at:

  • How our brains nudge us towards irrational behaviours.
  • How we can get rid of those irrational behaviours.
  • How we can use it to understand narcissists and how to deal with them.

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RH has some weird loans

The latest Restoration Hardware 10-Q discloses 2 unusual loans.  The first loan is a $14M promissory note “secured by the Company’s aircraft”.

  1. The collateralization of the loan is unusual.  I could not find FAA registration records that would suggest that there are any airplanes currently backing this loan.
  2. Secondly, it’s unclear if the interest rate is attractive for the lender.  The statement of cash flows and contractual obligations in the Q2 2017 10-Q imply that the lender will receive $14.0M back ($0.117M plus $13.883M) by 2022 or later.  On the face of it, it seems that this loan has a term of over 4 years and a cash interest rate of 0% (!!).  Now perhaps I am wrong about the terms of this loan as the 10-Q does not disclose many details on the note (e.g. effective interest rate, non-cash components, etc.).
  3. Similarly, there is a $20M “equipment security” note that also seems to have a cash interest rate of 0%.

It is a little weird that RH was able to find a party willing to lend money in such an unusual manner.

Unfortunately, I actually don’t know what’s going on… perhaps my readers can figure this one out.

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Google Trends

Google Trends may be an interesting tool for investors.

  1. It allows investors to gather data on a company that’s fresher than the last quarter’s earnings release.  This can be helpful in turnaround situations such as Aeropostale (ARO) and Cafepress (PRSS).
  2. Having leading earnings indicators can be helpful for manufacturing companies (e.g. RGR, SWHC) where there is not much data on consumer demand due to fluctuating inventory at the retail and distributor level.
  3. In rare cases where fraud is suspected, Google Trends may provide some indications about actual revenues.

Here is an example of Google Trends in action:

google-trends-ARO

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RH may be a bad short in the near term

My theory is that RH’s capex guidance telegraphs what future earnings will be.  The latest guidance is for 27-45% higher capex than last fiscal year ($140-160M versus $110M).

  1. If RH is the real deal, then the growth investments should generate high returns on invested capital.  If so, RH should rapidly grow earnings.  (Of course, anything can happen and RH may see poor or negative returns on its new investments.)
  2. Suppose you believe that RH has been aggressively capitalizing costs that should more appropriately be expensed.  Such accounting practices would inflate earnings.  The high capex guidance may telegraph high reported earnings.

In either scenario, earnings will increase in the short term.  My theory (and it’s just a theory) is that short sellers may wish to wait until the company guides capex lower.

*Disclosure:  Short RH via common shares and put options.

RH sales returns Part 2: Do they make sense?

I did a quick look at a few other retailers that post their actual sales returns in their SEC filings (WSM, AEO, and NILE).  The pattern among those three is that sales returns as a percentage of revenue fluctuates very little.  The rapidly-growing online retailer NILE shows the most variation of the three, ranging from 9.11% to 10.60%.  RH’s range is from 4.43% to 7.47%.  Without the error disclosed in RH’s latest 10-K, the range is from 10.22% to 11.14%.

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