Why Soho House & Co's Stock Could Be in for a Rocky Ride Ahead

Soho House & Co (SHCO) has long been a darling of the luxury hospitality sector, but recent developments suggest investors should brace for turbulence. Despite modest revenue growth in 2024, the company’s financial fragility, strategic crossroads, and operational headwinds paint a worrying picture. Let’s dissect the risks.

Revenue Growth Masks Financial Strain

SHCO reported a 7% year-over-year revenue rise to $1.2 billion in fiscal 2024, driven by strong membership and retail segments. However, the company’s net loss widened to $163 million, or $0.84 per share, due to non-cash charges. A staggering $38.5 million was tied to impairments—primarily in its North American Soho Works properties and terminated hotel contracts—while $22.7 million stemmed from foreign exchange losses. Even the adjusted EBITDA gain of 14% to $131.9 million was clouded by out-of-period expenses, including inventory write-downs and tax adjustments.

The real red flag lies in operating margins, which have deteriorated sharply. House-Level Contribution Margin fell to 27% in 2024 from 30% in 2023, and Other Contribution Margin plunged to 13% from 18%, signaling rising costs and execution challenges.

Strategic Uncertainty: The $9 Buyout Offer

The company’s future hinges on a third-party $9-per-share buyout offer, which remains under review by a Special Committee. While this price represents a 40% premium to recent lows, the offer’s acceptance could force drastic strategic shifts—or, if rejected, prolong investor uncertainty.

Critically, the bid underscores that the market believes SHCO’s current valuation (around $6.50 per share as of early 2025) is too low to justify its risks. Investors should note that the company’s net debt has risen 5% year-over-year to $672.55 million, with cash reserves shrinking to $152.7 million. Without a buyout, SHCO’s reliance on external financing could grow more costly in a rising-rate environment.

Debt and Liquidity: A Tightrope Act

SHCO’s total debt now stands at $828.87 million, up 3% from 2023. The company’s restricted cash has surged 85% to $3.6 million, but this reflects liquidity constraints rather than growth. With USD-denominated debt, FX volatility remains a lurking threat, as seen in the $22.7 million non-cash loss last year.

The debt-to-EBITDA ratio is particularly alarming. Assuming $131.9 million in adjusted EBITDA, the ratio exceeds 6x—a level typically considered risky for non-financial firms. This debt burden leaves little room for error in a weakening economy.

Operational Weaknesses: In-House Revenue Stumbles

While membership growth (up 4.5% to 271,541) and app engagement (218,000 users) are positives, the core In-House segment—which accounts for 40% of revenue—has faltered. In Q4 2024, In-House revenues dropped 1.5% year-over-year, despite a 1% RevPAR gain. This suggests occupancy or demand issues, which could worsen if the economy slows.

The company’s decision to hire a Chief Transformation Officer and implement a new ERP system aims to boost efficiency, but such projects often face delays and cost overruns. Meanwhile, recurring impairments—$14 million in 2024 and $48 million in 2023—highlight misallocated capital in ventures like Soho Works.

Conclusion: Risks Outweigh Rewards

SHCO’s membership-driven model shows promise, but its financial health is precarious. With net debt exceeding $600 million, declining margins, and the specter of a buyout, investors must weigh the risks carefully. Key data points crystallize the dilemma:

• Net Debt/EBITDA: Over 6x, signaling limited financial flexibility.
• In-House Revenue Decline: A 1.5% drop in Q4 hints at weakening demand.
• Margin Erosion: House-Level margins down 3 percentage points since 2023.

Unless the buyout materializes or operational improvements materialize quickly, SHCO’s stock faces significant downside. For now, the warning signs are too loud to ignore.

Investors should proceed with caution—this isn’t just a stock to watch. It’s one to tread carefully around.