Present Value of Free Cash Flow to the Firm (FCFF)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

Intrinsic Stock Value (Valuation Summary)

RH, free cash flow to the firm (FCFF) forecast

US$ in thousands, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 17.92%
0¹	FCFF₀	230,622
1	FCFF₁	268,324	= 230,622 × (1 + 16.35%)	227,547
2	FCFF₂	311,185	= 268,324 × (1 + 15.97%)	223,792
3	FCFF₃	359,729	= 311,185 × (1 + 15.60%)	219,389
4	FCFF₄	414,500	= 359,729 × (1 + 15.23%)	214,376
5	FCFF₅	476,060	= 414,500 × (1 + 14.85%)	208,798
5	Terminal value (TV₅)	17,819,157	= 476,060 × (1 + 14.85%) ÷ (17.92% – 14.85%)	7,815,406
Intrinsic value of RH capital				8,909,309
Less: Debt (fair value)				3,189,370
Intrinsic value of RH common stock				5,719,939

Intrinsic value of RH common stock (per share)				$259.38
Current share price				$246.82

Based on: 10-K (reporting date: 2023-01-28).

¹ See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

RH, cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	5,442,927	0.63	25.30%
Debt (fair value)	3,189,370	0.37	5.33%	= 6.66% × (1 – 19.98%)

Based on: 10-K (reporting date: 2023-01-28).

¹ US$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 22,052,211 × $246.82
= $5,442,926,719.02

Debt (fair value). See details »

² Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (21.00% + 16.20% + 27.80% + 18.10% + 16.80% + 92.80%) ÷ 6
= 19.98%

WACC = 17.92%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

RH, PRAT model

	Average	Jan 28, 2023	Jan 29, 2022	Jan 30, 2021	Feb 1, 2020	Feb 2, 2019	Feb 3, 2018
Selected Financial Data (US$ in thousands)
Interest expense		151,730)	66,883)	70,648)	88,509)	75,908)	63,084)
Net income		528,642)	688,546)	271,815)	220,375)	150,639)	2,180)

Effective income tax rate (EITR)¹		21.00%	16.20%	27.80%	18.10%	16.80%	92.80%

Interest expense, after tax²		119,867)	56,048)	51,008)	72,489)	63,155)	4,542)
Interest expense (after tax) and dividends		119,867)	56,048)	51,008)	72,489)	63,155)	4,542)

EBIT(1 – EITR)³		648,509)	744,594)	322,823)	292,864)	213,794)	6,722)

Convertible senior notes due 2024, net		—)	3,600)	—)	—)	—)	—)
Convertible senior notes due 2023, net		1,696)	9,389)	2,354)	—)	—)	—)
Convertible senior notes due 2020, net		—)	—)	—)	290,532)	—)	—)
Convertible senior notes due 2019, net		—)	—)	—)	—)	343,789)	—)
Current portion of term loans		25,000)	20,000)	—)	—)	—)	—)
Current finance lease liabilities		17,007)	15,511)	14,671)	9,188)	1,074)	471)
Current portion of equipment promissory notes		1,160)	13,625)	22,747)	22,009)	892)	6,033)
Asset based credit facility		—)	—)	—)	—)	57,500)	199,970)
Term loan B, net		1,936,529)	1,953,203)	—)	—)	—)	—)
Term loan B-2, net		469,245)	—)	—)	—)	—)	—)
Term loan, net		—)	—)	—)	—)	—)	79,499)
Real estate loans		17,909)	—)	—)	—)	—)	—)
Convertible senior notes due 2024, net		41,724)	184,461)	281,454)	264,982)	—)	—)
Convertible senior notes due 2023, net		—)	59,002)	282,956)	266,658)	249,151)	—)
Convertible senior notes due 2020, net		—)	—)	—)	—)	271,157)	252,994)
Convertible senior notes due 2019, net		—)	—)	—)	—)	—)	327,731)
Non-current finance lease liabilities		653,050)	560,550)	485,481)	442,988)	7,720)	7,509)
Non-current portion of equipment promissory notes, net		—)	1,129)	14,614)	31,053)	—)	—)
Stockholders’ equity (deficit)		784,661)	1,170,277)	447,026)	18,651)	(22,962)	(7,336)
Total capital		3,947,981)	3,990,747)	1,551,303)	1,346,061)	908,321)	866,871)
Financial Ratios
Retention rate (RR)⁴		0.82	0.92	0.84	0.75	0.70	0.32
Return on invested capital (ROIC)⁵		16.43%	18.66%	20.81%	21.76%	23.54%	0.78%
Averages
RR	0.81
ROIC	20.24%

FCFF growth rate (g)⁶	16.35%

Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).

¹ See details »

2023 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 151,730 × (1 – 21.00%)
= 119,867

³ EBIT(1 – EITR) = Net income + Interest expense, after tax
= 528,642 + 119,867
= 648,509

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [648,509 – 119,867] ÷ 648,509
= 0.82

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 648,509 ÷ 3,947,981
= 16.43%

⁶ g = RR × ROIC
= 0.81 × 20.24%
= 16.35%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (8,632,297 × 17.92% – 230,622) ÷ (8,632,297 + 230,622)
= 14.85%

where:

Total capital, fair value₀ = current fair value of RH debt and equity (US$ in thousands)
FCFF₀ = the last year RH free cash flow to the firm (US$ in thousands)
WACC = weighted average cost of RH capital

FCFF growth rate (g) forecast

RH, H-model

Year	Value	g_t
1	g₁	16.35%
2	g₂	15.97%
3	g₃	15.60%
4	g₄	15.23%
5 and thereafter	g₅	14.85%

where:
g₁ is implied by PRAT model
g₅ is implied by single-stage model
g₂, g₃ and g₄ are calculated using linear interpoltion between g₁ and g₅

Calculations

g₂ = g₁ + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 16.35% + (14.85% – 16.35%) × (2 – 1) ÷ (5 – 1)
= 15.97%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 16.35% + (14.85% – 16.35%) × (3 – 1) ÷ (5 – 1)
= 15.60%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 16.35% + (14.85% – 16.35%) × (4 – 1) ÷ (5 – 1)
= 15.23%

RH (NYSE:RH)