RH
$100.72
Restoration Hardware
($2.39)
(2.32%)
Earnings Details
3rd Quarter October 2017
Tuesday, December 05, 2017 4:05:01 PM
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Summary

Restoration Hardware Reports In-line

Restoration Hardware (RH) reported 3rd Quarter October 2017 earnings of $1.04 per share on revenue of $592.5 million. The consensus earnings estimate was $1.04 per share on revenue of $599.2 million. The Earnings Whisper number was $1.04 per share. Revenue grew 7.9% on a year-over-year basis.

The company said it expects fourth quarter revenue of $655.0 million to $680.0 million. The current consensus revenue estimate is $676.6 million for the quarter ending January 31, 2018. The company also said it expects fiscal 2018 revenue of $2.58 billion to $2.62 billion. The current consensus estimate is revenue of $2.60 billion for the year ending January 31, 2019.

Restoration Hardware Holdings Inc, together with its subsidiaries, is a luxury home furnishings retailer that provides number of categories including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware & children’s furnishings.

Results
Reported Earnings
$1.04
Earnings Whisper
$1.04
Consensus Estimate
$1.04
Reported Revenue
$592.5 Mil
Revenue Estimate
$599.2 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

RH Reports Third Quarter Fiscal 2017 Financial Results

RH (RH) today announced third quarter fiscal 2017 results and Chairman and Chief Executive Officer, Gary Friedman, provided an update on the Company’s continued evolution and outlook.

RH leadership will host a Q&A conference call at 2:00 p.m. PT (5:00 p.m. ET) today.

Third Quarter Highlights

Net revenues increased 8% on top of a 3% increase last year despite an approximate 1% negative impact from Hurricanes Harvey and Irma.

Comparable brand revenues increased 6% compared to a 6% decrease last year.

GAAP net income increased to $13.2 million despite a negative impact of approximately $1.3 million from Hurricanes Harvey and Irma and includes a positive impact of approximately $2.5 million related to a lower effective tax rate. This compares to GAAP net income of $2.5 million last year.

Adjusted net income increased to $24.4 million despite a negative impact of approximately $1.3 million from Hurricanes Harvey and Irma and includes a positive impact of approximately $2.5 million related to a lower effective tax rate. This compares to adjusted net income of $8.0 million last year.

GAAP diluted earnings per share increased to $0.56 despite a negative impact of approximately $0.05 from Hurricanes Harvey and Irma and includes a positive impact of approximately $0.11 related to a lower effective tax rate. This compares to GAAP diluted earnings per share of $0.06 last year.

Adjusted diluted earnings per share increased to $1.04 despite a negative impact of approximately $0.05 from Hurricanes Harvey and Irma and includes a positive impact of approximately $0.11 related to a lower effective tax rate. This compares to adjusted diluted earnings per share of $0.20 last year.

To Our People, Partners, and Shareholders,

Our third quarter results are beginning to demonstrate the earnings power of our new membership model, and a dramatically more efficient operating platform. Adjusted net revenues for the quarter increased 8%, despite a 1% negative impact from Hurricanes Harvey and Irma. Adjusted diluted earnings per share increased 420%, and reached $1.04 for the quarter, despite a $0.05 per share negative impact from the hurricanes and including a $0.11 per share positive impact due to a lower effective tax rate, versus adjusted diluted earnings per share of $0.20 a year ago.

Our core RH business continued to build momentum as comparable brand revenues increased 6% in the quarter, on top of a 6% decrease a year ago, with merchandise margins up sharply versus last year. Investments in our RH Interior Design business, a key benefit of membership, continues to evolve the brand from creating and selling products to conceptualizing and selling spaces, deepening our relationship with customers, and positioning RH as the leading luxury interior design platform in the country.

Regarding our balance sheet, in the second quarter we completed our share buyback program resulting in 20.2 million shares of RH stock repurchased in the first half of fiscal 2017, or 49.5% of the shares outstanding at the beginning of the year. We believe that our aggregate $1 billion of share repurchases will continue to be an excellent allocation of capital for the long term benefit of our shareholders. We retired the $100 million second lien term loan in the third quarter, and have approximately $480 million of aggregate debt, outside of our convertible notes that are due June 2019 and June 2020. Based on our forecasted cash flow of $420 million to $440 million for fiscal 2017, we expect our leverage ratio to be approximately 4 times trailing 12 month adjusted EBITDA by year end. Based on continued strong cash flow generation in 2018 and beyond, our current plan is to repay the convertible notes in cash to minimize dilution. Based on the rapid improvement in our balance sheet over the last six months and the continuing strong performance of our business under the membership model, we currently have multiple low-interest financing options available to us and expect further improvement in our balance sheet and capital mix in the year ahead.

A Simplified and More Efficient Business Model and Operating Platform

Over the past 18 months, we transformed our business from a promotional to a membership model that is enhancing our brand, streamlining our operations, and improving the customer experience. Simultaneously we began the redesign of our supply chain network, rationalizing our product offer, and transitioning inventory into fewer facilities, creating a more capital efficient model.

With 95% of our core RH business now generated from members, we can confidently declare our move from a promotional to a membership model a success. We currently have approximately 380,000 active RH members, with membership fee income up 37% year-to-date. Other positive trends we are experiencing include reductions in return, exchange, and cancel rates. We believe that membership has eliminated the frantic buying patterns and associated returns, exchanges, and canceled orders that are the result of a chaotic promotional model. We expect these factors to contribute to improved financial performance through higher conversion of demand into revenue, improved margins and lower costs across our operating platform. We also believe that these changes will result in an overall improvement in our customer experience which should yield additional longer term benefits for our brand. Most importantly, the simplification of our business model is enabling our leaders and team members to identify and act on opportunities that would have otherwise gone unnoticed in the chaos that prevails at many other retailers.

We have previously announced the closure of our distribution facilities in Los Angeles and Dallas. We completed the closure of the Los Angeles facility in November and expect to close our distribution center in Dallas by fiscal year end. In total, we will eliminate 1.75 million square feet of distribution space, resulting in savings of approximately $15 million annually. Moving forward, servicing our business from two coastal distribution centers will result in improved in-stocks, and significantly faster inventory turns. The redesign of our reverse logistics and Outlet business is now 90% complete, enabling us to liquidate customer returns in market, while driving cost savings and margin enhancement of $15 million to $20 million annually.

Our New Design Galleries Have the Potential to Double our Retail Sales in Every Market

Our quest to revolutionize physical retailing by building inspiring spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality has the potential to double our retail sales in every market. Our recent openings of RH Toronto, The Gallery in Yorkdale, and RH West Palm, The Gallery at City Center, are the second and third locations to include an integrated Cafe, Wine Vault, and Barista Bar. There has been an enthusiastic response to our integrated hospitality offering in Toronto and West Palm, with both locations performing similar to the opening weeks and months in Chicago, demonstrating our ability to duplicate our success at the historic 3Arts Club Cafe. In fact, last week Instagram published its most posted cafes and bakeries for 2017, and our 3Arts Club Cafe ranked 7th in the entire country. Our ability to seamlessly integrate food, wine, art and design, activates all of the senses, drives significant traffic into our galleries, and creates a customer experience that cannot be replicated online.

As previously communicated, due to the disruption caused by the ongoing street construction in the Meatpacking District, we have decided to delay the opening of the New York Design Gallery until the Spring-Summer of 2018. We expect an approximate $9 million negative revenue impact from the delay, and a corresponding $1.5 million reduction to adjusted net income in the fourth quarter, both of which are included in our fourth quarter guidance. We will continue operating our Flatiron Gallery until the new Meatpacking Gallery opens.

Looking Forward, Driving High Quality, Sustainable Growth

Looking forward, we are forecasting margins to rise and costs to fall as we cycle our efforts to reduce inventory, and benefit from the efficiencies of our new operating model. As discussed at our Investor Day, we will remain focused on optimizing the profitability of our new platform, and will be managing the business with a bias for earnings versus revenue growth. We plan to restrain ourselves from chasing low quality revenues, and instead focus on building a superior operating model that will enable us to compete and win over the long-term. It is becoming clear to us, as we witness the continued failures of high growth - no profit, online pure plays, that the complexities and costs of scaling a furniture business will favor those who have control of their brand from concept to customer, build an integrated multi-channel platform with a superior logistics network, and offer the customer a compelling physical and digital experience.

To that point, in fiscal 2018, we believe we have a clear line of sight toward achieving net revenue growth in the range of 8% to 9% on a comparable 52-week basis and adjusted operating margins in the range of 9% to 10%, while generating free cash flow in excess of $240 million. Inventory will again be a source of cash in fiscal 2018, and we anticipate lower real estate capital expenditures, as we move from a leasing to a development model, where we recoup our investments through a sale-leaseback arrangement. In total, we are forecasting fiscal 2018 net capital expenditures to be in the range of $65 million to $75 million.

We remain confident in reaching our long term goal of $4 billion to $5 billion in North American revenues with industry leading operating margins and returns on invested capital. We also believe there is tremendous potential for the RH brand internationally, and we are currently exploring opportunities to open our first Gallery in London.

Building a Brand with No Peer, and a Customer Experience That Cannot be Replicated Online

We do understand that many of the strategies we are pursuing - opening the largest specialty retail experiences in our industry while most are shrinking the size of their retail footprint and closing stores; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; continuing to mail inspiring Source Books, while many are eliminating catalogs; and refusing to follow the herd in self-promotion on social media platforms, instead allowing our brand to be defined by the taste, style, design and quality of the products and experiences we are creating - are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry.

We believe when you step back and consider; one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape, and we would argue, will also prove to be equally valuable.

Lastly, we are deeply grateful for our people and partners whose passion and persistence bring our vision and values to life each day, as we pursue our quest to become one of the most admired brands in the world.

Carpe Diem,

Gary

Gary Friedman Chairman and Chief Executive Officer

Fourth Quarter and Fiscal 2017 Outlook

Fourth quarter adjusted net income in the range of $37 million to $41 million despite an approximate $1.5 million negative impact as a result of the Company’s decision to delay the opening of its New York Design Gallery to Spring-Summer 2018. This outlook assumes an approximate $2 million tax benefit which corresponds to an expected 35% tax rate. Due to the recent increases in the Company’s stock price and its impact on the fully diluted share count, the Company is providing a table to assist in estimating diluted shares outstanding and adjusted diluted earnings per share.

Fourth quarter net revenues in the range of $655 million to $680 million despite a $9 million negative impact due to the Company’s decision to delay the opening of its New York Design Gallery.

Fiscal 2017 adjusted net income in the range of $83 million to $87 million despite the Company’s decision to delay the opening of its New York Design Gallery.

Fiscal 2017 net capital expenditures in the range of $120 million to $130 million.

Fiscal 2017 free cash flow in the range of $420 million to $440 million.

Preliminary 2018 Outlook

Net revenues in the range of $2.58 billion to $2.62 billion, representing growth of 6% to 7% on a 52-week vs 53-week basis. On a comparable 52-week vs 52-week basis, net revenue growth is expected to be in the range of 8% to 9%.

-- Adjusted operating margin in the range of 9% to 10%.

-- Adjusted net income in the range of $125 million to $145 million.

-- Net capital expenditures in the range of $65 million to $75 million.

-- Free cash flow in excess of $240 million.

Q&A Conference Call Information

Accompanying this release, RH leadership will host a live question and answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested parties may access the call by dialing (866) 394-6658 (United States/Canada) or (706) 679-9188 (International). A live broadcast of the question and answer session conference call will also be available online at the Company’s investor relations website, ir.rh.com. A replay of the question and answer session conference call will be available through December 18, 2017 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 6199665, as well as on the Company’s investor relations website.

About RH

RH (RH) is a curator of design, taste and style in the luxury lifestyle market. The Company offers collections through its retail galleries, Source Books, and online at RH.com, RHModern.com, and Waterworks.com.

Non-GAAP Financial Measures

To supplement its condensed consolidated financial statements, which are prepared and presented in accordance with Generally Accepted Accounting Principles ("GAAP"), the Company uses the following non-GAAP financial measures: adjusted net revenue, adjusted net income, adjusted diluted earnings per share, free cash flow and adjusted operating margin (collectively, "non-GAAP financial measures"). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The Company uses these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. The non-GAAP financial measures used by the Company in this press release may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the Reconciliation of GAAP to non-GAAP Financial Measures tables in this press release. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the federal securities laws, including statements related to: our future financial outlook and guidance for the fourth quarter of fiscal 2017, for fiscal 2017 and for fiscal 2018, including net revenues, adjusted net revenues, adjusted net income, adjusted diluted earnings per share, adjusted operating margins, free cash flow, leverage ratio, net revenue growth and net capital expenditures; various estimates of diluted shares outstanding and adjusted diluted earnings per share based on assumptions about average stock prices; assumptions regarding the potential future stock price of our common stock and expectations concerning stock price appreciation; the impact of stock price and other factors like option exercise levels on estimated diluted shares outstanding and on our effective tax rate; the estimated reduction in adjusted net revenues and adjusted net income as a result of the delayed opening of the New York Design Gallery; our future tax rate; our planned closing of our Dallas distribution center and related estimated cost savings; our ability to improve in-stocks and inventory turns by servicing our business from two coastal distribution centers; estimated cost savings and margin enhancement associated with the pending completion of our redesign of reverse logistics and Outlet business; our ability to drive growth and position ourselves as the leading luxury interior design platform in the country; the anticipated timing of the opening our New York Design Gallery in Spring-Summer of 2018; our continued operation of our Flatiron Gallery; our belief that our stock repurchases in the first and second quarters of 2017 will continue to be an excellent allocation of capital for the long-term benefit for our shareholders; our plan to pay down our convertible notes from cash to minimize dilution; our belief that, based on the rapid improvement in our balance sheet over the last six months and the continuing strong performance of our business under the membership model, we currently have multiple low-interest financing options available to us; our expectation of further improvement in our balance sheet and capital mix in the year ahead; our belief that our new Design Galleries have the potential to double our retail sales in every market; our focus on optimizing the profitability of our new platform and our managing the business with a bias for earnings versus revenue growth; the benefits of building a multi-channel platform with a compelling physical experience and a superior logistics network; our expectation that margins will rise and costs will fall as we cycle our efforts to reduce inventory and benefit from our new operating model; our expectation that inventory will again be a source of cash in fiscal 2018; anticipated lower real estate capital expenditures as we move from a leasing to a development model, where we recoup our investments through a sale-leaseback arrangement; the benefits of moving from a promotional to a membership model; trends we are experiencing including reductions in returns and exchange and cancel rates; our expectation that factors relating to our membership model will contribute to improved financial performance through higher conversion of demand into revenue, improved margins and lower costs across our operating platform, as well as an overall improvement in our customer experience; the benefits of the simplification of our business model; our potential for the RH brand internationally and our opportunities to open a Gallery in London; our building of a rare and valuable company and a brand with no peer and a customer experience that cannot be replicated online; our expectation of reaching our long term goal of $4 billion to $5 billion in North American revenues with industry leading operating margins, and returns on invested capital; any financial or operational factors or results that are described as short term, one-time, non-recurring or unusual (as similar operational or financial factors may adversely affect the Company’s future results including as a result of charges, costs and other items that may occur in one or more subsequent financial reporting periods), and any statements or assumptions underlying any of the foregoing. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future events. We cannot assure you that future developments affecting us will be those that we have anticipated. Important risks and uncertainties that could cause actual results to differ materially from our expectations or the assumptions set forth in this release include, among others, our ability to retain key personnel; successful implementation of our growth strategy; our ability to leverage Waterworks; uncertainties in the current performance of our business including a range of risks related to our operations as well as external economic factors; general economic conditions and the impact on consumer confidence and spending; changes in customer demand for our products; our decisions concerning the allocation of capital; decisions concerning the allocation of capital including the extent to which we repurchase additional shares of our common stock which will affect shares outstanding and EPS; factors affecting our outstanding convertible senior notes or other forms of our indebtedness; our ability to anticipate consumer preferences and buying trends, and maintaining our brand promise to customers; changes in consumer spending based on weather and other conditions beyond our control; risks related to the number of new business initiatives we are undertaking; strikes and work stoppages affecting port workers and other industries involved in the transportation of our products; our ability to obtain our products in a timely fashion or in the quantities required; our ability to employ reasonable and appropriate security measures to protect personal information that we collect; our ability to support our growth with appropriate information technology systems; risks related to "conflict minerals" compliance and its impact on sourcing, if any, as well as those risks and uncertainties disclosed under the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in RH’s most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, and similar disclosures in subsequent reports filed with the SEC, which are available on our investor relations website at ir.rh.com and on the SEC website at www.sec.gov. Any forward-looking statement made by us in this press release speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

RH
REVENUE METRICS
(Unaudited)
Three Months Ended
October 28,
October 29,
2017
2016
Stores as a percentage of net revenues
58 %
56 %
Direct as a percentage of net revenues
42 %
44 %
Growth in net revenues:
Stores
12 %
9 %
Direct
3 %
-3 %
Total
8 %
3 %
Comparable brand revenue growth
6 %
-6 %
See the Company’s most recent Form 10-K and Form 10-Q filings for
the definitions of stores, direct, and comparable brand revenue.

RH RETAIL GALLERY METRICS (Unaudited)

As of October 28, 2017, the Company operated a total of 84 retail Galleries, consisting of 48 legacy Galleries, 6 larger format Design Galleries, 9 next generation Design Galleries, 1 RH Modern Gallery and 5 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms throughout the United States and in the U.K. This compares to a total of 85 retail Galleries, consisting of 51 legacy Galleries, 6 larger format Design Galleries, 7 next generation Design Galleries, 1 RH Modern Gallery and 5 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms throughout the United States and in the U.K., as of October 29, 2016.

In addition, as of October 28, 2017, the Company operated 31 outlet stores compared to 28 as of October 29, 2016.

Three Months Ended
October 28,
October 29,
2017
2016
Total Leased Selling
Total Leased Selling
Store Count
Square Footage
Store Count
Square Footage
(in thousands)
(in thousands)
Beginning of period
85
915
84
776
Retail Galleries opened:
Yorkdale next generation Design Gallery
1
43.3
--
--
Leawood next generation Design Gallery
--
--
1
33.5
Waterworks San Francisco Showroom
--
--
1
5.8
Austin next generation Design Gallery
--
--
1
39.6
Las Vegas next generation Design Gallery
--
--
1
47.6
Retail Galleries closed:
Toronto (Bay View) Legacy Gallery
(1 )
(6.0 )
--
--
Toronto (Yonge Street) Legacy Gallery
(1 )
(8.6 )
--
--
Kansas City Legacy Gallery
--
--
(1 )
(9.9 )
Waterworks - Kansas Street, SF
--
--
(1 )
(2.0 )
Austin Legacy Gallery
--
--
(1 )
(6.2 )
End of period
84
944
85
884
% Growth
7 %
30 %
Weighted-average leased selling square footage
918
816
% Growth
12 %
31 %
See the Company’s most recent Form 10-K and Form 10-Q filings for
square footage definitions.
Total leased square footage as of October 28, 2017 and October 29,
2016 was 1,276,000 and 1,208,000, respectively.
Weighted-average leased square footage for the three months ended
October 28, 2017 and October 29, 2016 was 1,250,000 and 1,146,000,
respectively.
Retail sales per leased selling square foot for the three months
ended October 28, 2017 and October 29, 2016 was $329 and $330,
respectively.
RH
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
October 28,
% of Net
October 29,
% of Net
October 28,
% of Net
October 29,
% of Net
2017
Revenues
2016
Revenues
2017
Revenues
2016
Revenues
Net revenues
$
592,473
100.0 %
$
549,328
100.0 %
$
1,769,879
100.0 %
$
1,548,165
100.0 %
Cost of goods sold
378,148
63.8 %
373,509
68.0 %
1,179,485
66.6 %
1,065,032
68.8 %
Gross profit
214,325
36.2 %
175,819
32.0 %
590,394
33.4 %
483,133
31.2 %
Selling, general and administrative expenses
171,163
28.9 %
160,433
29.2 %
528,213
29.9 %
457,207
29.5 %
Income from operations
43,162
7.3 %
15,386
2.8 %
62,181
3.5 %
25,926
1.7 %
Other expenses
Interest expense--net
18,915
3.2 %
11,091
2.0 %
45,496
2.5 %
32,528
2.1 %
4,880
0.8 %
--
-- %
4,880
0.3 %
--
-- %
Loss on extinguishment of debt
Total other expenses
23,795
4.0 %
11,091
2.0 %
50,376
2.8 %
32,528
2.1 %
19,367
3.3 %
4,295
0.8 %
11,805
0.7 %
(6,602 )
-0.4 %
Income (loss) before income taxes
Income tax expense (benefit)
6,216
1.1 %
1,778
0.3 %
9,886
0.6 %
(2,567 )
-0.1 %
Net income (loss)
$
13,151
2.2 %
$
2,517
0.5 %
$
1,919
0.1 %
$
(4,035 )
-0.3 %
Weighted-average shares used in computing basic net income (loss)
21,221,848
40,730,059
29,076,556
40,653,091
per share
Basic net income (loss) per share
$
0.62
$
0.06
$
0.07
$
(0.10 )
Weighted-average shares used in computing diluted net income
23,535,617
40,926,450
30,593,382
40,653,091
(loss) per share
Diluted net income (loss) per share
$
0.56
$
0.06
$
0.06
$
(0.10 )
RH
RECONCILIATION OF GAAP NET INCOME (LOSS) TO ADJUSTED NET INCOME
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
October 28,
October 29,
October 28,
October 29,
2017
2016
2017
2016
GAAP net income (loss)
$
13,151
$
2,517
$
1,919
$
(4,035 )
Adjustments (pre-tax):
Net revenues:
Recall accrual [a]
--
--
3,813
--
Cost of goods sold:
Recall accrual [a]
3,552
--
4,315
--
Impact of inventory step-up [b]
248
1,786
2,108
5,187
Distribution center closures [c]
497
--
497
--
Legal claim [d]
--
--
--
7,729
Selling, general and administrative expenses:
Non-cash compensation [e]
--
--
23,872
3,672
Distribution center closures [c]
1,365
--
1,365
--
Recall accrual [a]
--
--
157
--
Gain on sale of building and land [f]
(819 )
--
(2,119 )
--
Reorganization related costs [g]
--
974
--
5,698
Acquisition related costs [h]
--
--
--
2,847
Legal claim [d]
--
--
--
972
Other expenses:
Amortization of debt discount [i]
6,879
6,629
20,384
19,550
Loss on extinguishment of debt [j]
4,880
--
4,880
--
Subtotal adjusted items
16,602
9,389
59,272
45,655
Impact of income tax on adjusted items [k]
(5,329 )
(3,887 )
(15,272 )
(17,759 )
Adjusted net income [l]
$
24,424
$
8,019
$
45,919
$
23,861
[a]
Represents costs and inventory charges associated with a product
recall initiated in the second quarter of fiscal 2017, as well as an
adjustment in the nine months ended October 28, 2017 of the recall
accrual related to certain product recalls initiated in the fourth
quarter of fiscal 2016.
[b]
Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.
[c]
Represents severance expense and certain inventory transfer costs
associated with two distribution center closures, one of which was
completed in November 2017 and one which is expected to occur in
January 2018.
[d]
Represents the estimated cumulative impact of coupons redeemed in
connection with a legal claim alleging that the Company violated
California’s Song-Beverly Credit Card Act of 1971 by requesting and
recording ZIP codes from customers paying with credit cards.
[e]
Represents non-cash compensation charges related to a fully vested
option grant made to Mr. Friedman in May 2017 and the fully vested
option grants made in connection with our acquisition of Waterworks
in May 2016.
[f]
Represents the gain on the sale of building and land. As we entered
into a short-term lease agreement to lease the property subsequent
to the sale, the total gain associated with the sale of this
property was amortized over a five month period.
[g]
Represents costs associated with a reorganization, which include
severance costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.
[h]
Represents costs incurred in connection with our acquisition of
Waterworks including professional fees.
[i]
Under GAAP, certain convertible debt instruments that may be settled
in cash on conversion are required to be separately accounted for as
liability and equity components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate.
Accordingly, in accounting for GAAP purposes for the $350 million
aggregate principal amount of convertible senior notes that were
issued in June 2014 (the "2019 Notes") and for the $300 million
aggregate principal amount of convertible senior notes that were
issued in June and July 2015 (the "2020 Notes"), we separated the
2019 Notes and 2020 Notes into liability (debt) and equity
(conversion option) components and we are amortizing as debt
discount an amount equal to the fair value of the equity components
as interest expense on the 2019 Notes and 2020 Notes over their
expected lives. The equity components represent the difference
between the proceeds from the issuance of the 2019 Notes and 2020
Notes and the fair value of the liability components of the 2019
Notes and 2020 Notes, respectively. Amounts are presented net of
interest capitalized for capital projects of $0.8 million and $0.6
million during the three months ended October 28, 2017 and October
29, 2016, respectively. Amounts are presented net of interest
capitalized for capital projects of $2.3 million and $1.9 million
during the nine months ended October 28, 2017 and October 29, 2016,
respectively.
[j]
Represents the loss on extinguishment of debt related to the second
lien term loan which was repaid in full in October 2017.
[k]
The adjustment for the three months ended October 28, 2017
represents the tax effect of the adjusted items based on our
effective tax rate of 32.1%. The nine months ended October 28, 2017
includes an adjustment to calculate income tax expense at an
adjusted tax rate of 35.4%, which is calculated based on the
weighted-average fiscal 2017 quarterly adjusted effective tax rates.
The adjustments for the three and nine months ended October 29, 2016
represent the tax effect of the adjusted items based on our
effective tax rates of 41.4% and 38.9%, respectively.
[l]
Adjusted net income is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted net income as net income (loss),
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted net income is included in this press release
because management believes that adjusted net income provides
meaningful supplemental information for investors regarding the
performance of our business and facilitates a meaningful evaluation
of actual results on a comparable basis with historical results. Our
management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter.
RH
RECONCILIATION OF DILUTED NET INCOME (LOSS) PER SHARE TO
ADJUSTED DILUTED NET INCOME PER SHARE
(Unaudited)
Three Months Ended
Nine Months Ended
October 28,
October 29,
October 28,
October 29,
2017
2016
2017
2016
Diluted net income (loss) per share
$
0.56
$
0.06
$
0.06
$
(0.10 )
Pro forma diluted net income (loss) per share [a]
$
0.56
$
0.06
$
0.06
$
(0.10 )
EPS impact of adjustments (pre-tax) [b]:
Non-cash compensation
$ --
$ --
$
0.78
$
0.09
Amortization of debt discount
0.29
0.17
0.67
0.48
Recall accrual
0.15
--
0.27
--
Loss on extinguishment of debt
0.21
--
0.16
--
Impact of inventory step-up
0.01
0.04
0.07
0.13
Distribution center closures
0.08
--
0.06
--
Gain on sale of building and land
(0.03 )
--
(0.07 )
--
Legal claim
--
--
--
0.21
Reorganization related costs
--
0.02
--
0.14
Acquisition related costs
--
--
--
0.07
Subtotal adjusted items
0.71
0.23
1.94
1.12
Impact of income tax items [b]
(0.23 )
(0.09 )
(0.50 )
(0.44 )
Adjusted diluted net income per share [c]
$
1.04
$
0.20
$
1.50
$
0.58
[a]
Pro forma diluted net loss per share for the nine months ended
October 29, 2016 is calculated based on GAAP net loss and pro forma
diluted weighted-average shares of 40,892,878.
[b]
Refer to table titled "Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income" and the related footnotes for additional
information.
[c]
Adjusted diluted net income per share is a supplemental measure of
financial performance that is not required by, or presented in
accordance with, GAAP. We define adjusted diluted net income per
share as net income (loss), adjusted for the impact of certain
non-recurring and other items that we do not consider representative
of our underlying operating performance divided by the Company’s
share count. Adjusted diluted net income per share is included in
this press release because management believes that adjusted diluted
net income per share provides meaningful supplemental information
for investors regarding the performance of our business and
facilitates a meaningful evaluation of operating results on a
comparable basis with historical results. Our management uses this
non-GAAP financial measure in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter.
RH
RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
October 28,
October 29,
October 28,
October 29,
2017
2016
2017
2016
Net revenues
$
592,473
$
549,328
$
1,769,879
$
1,548,165
Recall accrual [a]
--
--
3,813
--
Adjusted net revenues [b]
$
592,473
$
549,328
$
1,773,692
$
1,548,165
Gross profit
$
214,325
$
175,819
$
590,394
$
483,133
Recall accrual [a]
3,552
--
8,128
--
Impact of inventory step-up [a]
248
1,786
2,108
5,187
Distribution center closures [a]
497
--
497
--
Legal claim [a]
--
--
--
7,729
Adjusted gross profit [b]
$
218,622
$
177,605
$
601,127
$
496,049
Gross margin [c]
36.2 %
32.0 %
33.4 %
31.2 %
Adjusted gross margin [c]
36.9 %
32.3 %
33.9 %
32.0 %
[a]
Refer to table titled "Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income" and the related footnotes for additional
information.
[b]
Adjusted net revenues and adjusted gross profit are supplemental
measures of financial performance that are not required by, or
presented in accordance with, GAAP. We define adjusted net revenues
as net revenues, adjusted for the impact of certain non-recurring
and other items that we do not consider representative of our
underlying operating performance. We define adjusted gross profit as
gross profit, adjusted for the impact of certain non-recurring and
other items that we do not consider representative of our underlying
operating performance. Adjusted net revenues and adjusted gross
profit are included in this press release because management
believes that adjusted net revenues and adjusted gross profit
provide meaningful supplemental information for investors regarding
the performance of our business and facilitates a meaningful
evaluation of operating results on a comparable basis with
historical results. Our management uses these non-GAAP financial
measures in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.
[c]
Gross margin is defined as gross profit divided by net revenues.
Adjusted gross margin is defined as adjusted gross profit divided by
adjusted net revenues.
RH
RECONCILIATION OF NET INCOME (LOSS) TO OPERATING
INCOME AND ADJUSTED OPERATING INCOME
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
October 28,
October 29,
October 28,
October 29,
2017
2016
2017
2016
Net income (loss)
$
13,151
$
2,517
$
1,919
$
(4,035 )
Interest expense--net
18,915
11,091
45,496
32,528
Loss on extinguishment of debt
4,880
--
4,880
--
Income tax expense (benefit)
6,216
1,778
9,886
(2,567 )
Operating income
43,162
15,386
62,181
25,926
Non-cash compensation [a]
--
--
23,872
3,672
Recall accrual [a]
3,552
--
8,285
--
Impact of inventory step-up [a]
248
1,786
2,108
5,187
Distribution center closures [a]
1,862
--
1,862
--
Gain on sale of building and land [a]
(819 )
--
(2,119 )
--
Legal claim [a]
--
--
--
8,701
Reorganization related costs [a]
--
974
--
5,698
Acquisition related costs [a]
--
--
--
2,847
Adjusted operating income [b]
$
48,005
$
18,146
$
96,189
$
52,031
Net revenues
$
592,473
$
549,328
$
1,769,879
$
1,548,165
Adjusted net revenues [c]
$
592,473
$
549,328
$
1,773,692
$
1,548,165
Operating margin [c]
7.3 %
2.8 %
3.5 %
1.7 %
Adjusted operating margin [c]
8.1 %
3.3 %
5.4 %
3.4 %
[a]
Refer to table titled "Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income" and the related footnotes for additional
information.
[b]
Adjusted operating income is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted operating income as operating income,
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted operating income is included in this press
release because management believes that adjusted operating income
provides meaningful supplemental information for investors regarding
the performance of our business and facilitates a meaningful
evaluation of operating results on a comparable basis with
historical results. Our management uses this non-GAAP financial
measure in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.
[c]
Operating margin is defined as operating income divided by net
revenues. Adjusted operating margin is defined as adjusted operating
income divided by adjusted net revenues. Refer to table titled
"Reconciliation of Gross Profit to Adjusted Gross Profit" and the
related footnotes for a definition and reconciliation of adjusted
net revenues.
RH
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
October 28,
January 28,
October 29,
2017
2017
2016
As Revised [a]
ASSETS
Cash and cash equivalents
$
22,162
$
87,023
$
47,135
Short-term investments
--
142,677
170,153
Merchandise inventories
557,345
752,304
776,586
Asset held for sale
--
4,900
--
Other current assets
109,488
151,353
149,639
Total current assets
688,995
1,138,257
1,143,513
Long-term investments
--
33,212
21,056
Property and equipment--net
778,320
682,056
656,569
Goodwill and intangible assets
276,279
274,360
276,568
Other non-current assets
57,972
64,635
50,304
Total assets
$ 1,801,566
$ 2,192,520
$
2,148,010
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses
$
252,569
$
226,980
$
222,788
Deferred revenue, customer deposits and other current liabilities
217,188
189,189
188,342
Total current liabilities
469,757
416,169
411,130
Asset based credit facility
341,000
--
--
Term loan--net
79,471
--
--
Convertible senior notes due 2019--net
323,828
312,379
308,649
Convertible senior notes due 2020--net
248,633
235,965
231,876
Financing obligations under build-to-suit lease transactions
230,259
203,015
193,277
Other non-current obligations
133,894
105,123
100,900
Total liabilities
1,826,842
1,272,651
1,245,832
Stockholders’ equity (deficit)
(25,276 )
919,869
902,178
Total liabilities and stockholders’ equity (deficit)
$ 1,801,566
$ 2,192,520
$
2,148,010
[a]
During the fourth quarter of fiscal 2016 management determined that
we had incorrectly reported negative cash balances due to
outstanding checks in the accounts payable and accrued expenses
financial statement line item in our consolidated balance sheets
without properly applying the limited right of offset against cash
and cash equivalents. The revision decreased cash and cash
equivalents and accounts payable and accrued expenses by $8.3
million as of October 29, 2016.
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
October 28,
October 29,
2017
2016
As Revised [a]
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
1,919
$
(4,035 )
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
51,092
41,248
Other non-cash items
74,516
53,611
Change in assets and liabilities--net of acquisition:
Merchandise inventories
190,620
(23,261 )
Accounts payable, accrued expenses and other
68,615
(86,548 )
Net cash provided by (used in) operating activities
386,762
(18,985 )
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures--including construction related deposits and
(89,600 )
(108,145 )
purchase of trademarks and domain names
Proceeds from sale of assets held for sale--net
15,123
--
Net proceeds from (purchases of) investments
175,801
(39,133 )
Acquisition of business--net of cash acquired
--
(116,100 )
Net cash provided by (used in) investing activities
101,324
(263,378 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under asset based credit facility
341,000
--
Net borrowings under term loans
80,000
--
Net borrowings under promissory and equipment security notes
33,159
--
Debt issuance costs
(8,298 )
--
Repurchases of common stock--including commissions
(1,000,326 )
--
Net equity related transactions
10,488
(2,049 )
Other financing activities
(8,992 )
(262 )
Net cash used in financing activities
(552,969 )
(2,311 )
Effects of foreign currency exchange rate translation
22
342
Net decrease in cash and cash equivalents
(64,861 )
(284,332 )
Cash and cash equivalents
Beginning of period
87,023
331,467
End of period
$
22,162
$
47,135
[a]
During the fourth quarter of fiscal 2016 management determined that
we had incorrectly reported negative cash balances due to
outstanding checks in the accounts payable and accrued expenses
financial statement line item in our consolidated balance sheets
without properly applying the limited right of offset against cash
and cash equivalents. The revision decreased net cash provided by
operating activities by $10.1 million for the nine months ended
October 29, 2016.
RH
CALCULATION OF FREE CASH FLOW
(In thousands)
(Unaudited)
Nine Months Ended
October 28,
October 29,
2017
2016
As Revised [a]
Net cash provided by (used in) operating activities
$ 386,762
$
(18,985 )
(89,600 )
(108,145 )
Capital expenditures--including construction related deposits and
purchase of trademarks and domain names
Payments on build-to-suit lease transactions
(8,734 )
--
Payments on capital leases
(258 )
(262 )
Proceeds from sale of assets held for sale--net
15,123
--
Free cash flow [b]
$ 303,293
$ (127,392 )
[a]
During the fourth quarter of fiscal 2016 management determined that
we had incorrectly reported negative cash balances due to
outstanding checks in the accounts payable and accrued expenses
financial statement line item in our consolidated balance sheets
without properly applying the limited right of offset against cash
and cash equivalents. The revision decreased net cash provided by
operating activities by $10.1 million for the nine months ended
October 29, 2016.
[b]
Free cash flow is calculated as net cash provided by (used in)
operating activities and net proceeds from sale of assets held for
sale, less capital expenditures, construction related deposits,
purchase of trademarks and domain names, payments on build-to-suit
lease transactions and payments on capital leases. Free cash flow
excludes all non-cash items, such as the non-cash additions of
property and equipment due to build-to-suit lease transactions. Free
cash flow is included in this press release because management
believes that free cash flow provides meaningful supplemental
information for investors regarding the performance of our business
and facilitates a meaningful evaluation of operating results on a
comparable basis with historical results. Our management uses this
non-GAAP financial measure in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter.
RH
FOURTH QUARTER AND FISCAL 2017 OUTLOOK
(In millions, except per share data)
RH’s fiscal 2017 will include 53 weeks compared to the prior
fiscal year which included 52 weeks. The Company is providing the
following outlook for the fourth quarter and fiscal 2017:
Fourth Quarter
Fiscal Year
2017
2017
Adjusted net revenues
$655 - $680
$2,429 - $2,454
% growth vs. prior year
11% - 15%
14% - 15%
Adjusted gross margin (% of net revenues)
37.1% - 37.4%
34.7% - 34.9%
Adjusted selling, general, and administrative expenses (% of net
26.8% - 27.0%
28.0% - 28.1%
revenues)
Adjusted operating income
$66 - $72
$162 - $169
% growth vs. prior year
30% - 42%
58% - 64%
Adjusted operating margin (% of net revenues)
10.1% - 10.6%
6.7% - 6.9%
Adjusted net income
$37 - $41
$83 - $87
% growth vs. prior year
33% - 48%
60% - 68%
Capital expenditures
$120 - $130
Asset sales
$15
Free cash flow
$420 - $440
Note: RH’s fiscal 2017 will include 53 weeks compared to the prior
fiscal year which included 52 weeks. The extra week in fiscal 2017
is expected to add approximately $44 million to $46 million in net
revenues for the fourth quarter and fiscal year. The Company’s
adjusted net income does not include certain charges and costs.
The adjustments to net revenues, gross margin, selling, general
and administrative expenses, operating income, operating margin
and net income in future periods are generally expected to be
similar to the kinds of charges and costs excluded from such
non-GAAP financial measures in prior periods, such as unusual
non-cash and other compensation expense; one-time income tax
expense or benefits; legal claim related expenses; recall
accruals; reorganization costs including severance costs and
related taxes; non-cash amortization of debt discount; and charges
and costs in connection with the acquisition of Waterworks, among
others. The exclusion of these charges and costs in future periods
will have a significant impact on the Company’s adjusted net
revenues, adjusted gross margin, adjusted selling, general and
administrative expenses, adjusted operating income, adjusted
operating margin and adjusted net income. The Company is not able
to provide a reconciliation of the Company’s non-GAAP financial
guidance to the corresponding GAAP measures without unreasonable
effort because of the uncertainty and variability of the nature
and amount of these future charges and costs.
RH
ANTICIPATED IMPACT OF STOCK PRICE ON DILUTED SHARES OUTSTANDING
(In millions, except per share data)
Average Fourth Quarter 2017 Stock Price
$ 80.00
$ 100.00
$ 120.00
$ 140.00
$ 160.00
$ 180.00
$
200.00
Midpoint of Q4 2017 adjusted net income guidance
$
39.0
$
39.0
$
39.0
$
39.0
$
39.0
$
39.0
$
39.0
Q4 2017 Diluted shares outstanding
24.6
25.7
26.6
27.2
27.7
30.2
31.3
Q4 2017 Adjusted earnings per share
$
1.59
$
1.52
$
1.47
$
1.43
$
1.41
$
1.29
$
1.25
Implied Average Fiscal 2017 Stock Price
$ 61.00
$ 66.00
$ 71.00
$ 76.00
$ 81.00
$ 86.00
$
91.00
Midpoint of Fiscal 2017 adjusted net income guidance
$
85.0
$
85.0
$
85.0
$
85.0
$
85.0
$
85.0
$
85.0
Fiscal 2017 Diluted shares outstanding
29.1
29.5
29.9
30.2
30.6
30.9
31.2
Fiscal 2017 Adjusted earnings per share
$
2.92
$
2.88
$
2.84
$
2.81
$
2.78
$
2.75
$
2.72
Note: The table above is intended to demonstrate the impact of
increasing stock prices on our diluted shares outstanding due to 1)
additional in-the-money options and 2) the higher cost of acquired
shares under the treasury stock method. At stock prices in excess of
$172, we will incur dilution related to the convertible notes and
our obligation to deliver additional shares in excess of the
dilution protection provided by the bond hedges. The calculation
also includes assumptions around the timing and number of options
exercises. Actual diluted shares outstanding may differ if actual
exercises differ from estimates.

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SOURCE: RH

RH
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations and Strategy
cmclaughlin@rh.com