Soho House: Lock In Gains On This Spike (Downgrade)

The recent 13.95% surge in Soho House & Co Inc. (NASDAQ: SHCO) has created a tactical exit opportunity for investors, despite superficially positive quarterly results. Beneath the surface, fundamental weaknesses, inconsistent revenue drivers, and deteriorating membership metrics align with overbought technicals to justify a strategic downgrade from Hold to Sell.

The EPS "Beat" Masks Structural Vulnerabilities

While Q1 2025 EPS of $0.04 beat consensus expectations (likely set at -$0.12), this improvement was driven by a one-time $22.9 million insurance payout tied to pandemic-era losses. Excluding this non-recurring item, operating performance likely remained weak. Historically, the company has struggled with recurring EPS misses:
- Q2 2024: Missed estimates by $0.06, reporting -$0.17 vs. -$0.11 consensus.
- Q1 2024: Missed by $0.02, with EPS of -$0.24 vs. -$0.22.

The reliance on insurance proceeds to achieve profitability underscores a lack of organic momentum. With no explicit forward guidance and reconciliations for non-GAAP metrics omitted due to "unreasonable effort," investors face heightened uncertainty about sustainable growth.

Membership Declines Signal Demand Headwinds

Despite total membership growth of 3.1% year-over-year to 269,636, key segments are deteriorating:
- Soho Friends/Works: Fell 9.3% to 57,635, reflecting weaker demand for lower-tier memberships.
- Geographic Exposure: The Los Angeles wildfires (Q1 2025) forced a $3 million insurance claim, highlighting operational risks in core markets.

Membership revenue growth of 14.1% to $112.9 million appears strong, but this is inflated by Soho House's 7.1% member increase. The decline in secondary memberships suggests a shrinking addressable market, especially as luxury hospitality faces macroeconomic headwinds.

Revenue Growth Is Fragile and Overestimated

Total revenue rose 8.0% to $282.9 million in Q1 2025, but this masks uneven performance:
- In-House Revenue: Grew just 1.9% to $112.4 million, pointing to limited occupancy improvements.
- Adjusted EBITDA: Surged to $47.0 million (vs. $19.8 million in 2024), but this included the pandemic insurance windfall.

Analysts' consensus for FY 2025 EPS is still negative at -$0.20, yet the stock trades at a P/S ratio of 1.2x, implying overvaluation relative to peers. With Zacks Rank #3 (Hold) and deteriorating fundamentals, the valuation disconnect is unsustainable.

Technicals Confirm an Overbought Condition

The 13.95% rally since January 2025 has pushed SHCO to a 52-week high of $9.50, near the $9.00 per share private acquisition offer (which remains uncertain). Technical indicators suggest exhaustion:
- RSI: Above 70, signaling overbought territory.
- Volume: Declining on recent gains, indicating waning buying pressure.

Why Sell Now?

1. Valuation Risk: The stock's surge lacks support from recurring earnings or membership growth.
2. Strategic Uncertainty: The acquisition offer's outcome is unclear, and the company's liquidity ($155M cash) removes urgency for a deal.
3. Fundamental Deterioration: Weakness in secondary memberships and reliance on one-time gains highlight structural issues.

Investment Recommendation

Downgrade to SELL with a target price of $7.50 (15% downside). Take profits on the recent spike, as consensus estimates are likely to reset lower once non-recurring items fade. Avoid new positions until clearer profitability or membership stabilization emerges.

Risk Disclosure: This analysis is for informational purposes only. Always conduct independent research before making investment decisions.