RH (NYSE: RH) today announced second quarter fiscal 2018 results
and Chairman & 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.
SECOND QUARTER HIGHLIGHTS
Q2 GAAP DILUTED EPS $2.33 vs. ($0.28) LYQ2 ADJUSTED DILUTED EPS
$2.49 vs. $0.65 LY
Q2 GAAP NET INCOME $64.0M vs. ($7.9M) LYQ2 ADJUSTED NET INCOME
$67.4M vs. $19.7M LY
Q2 GAAP OPERATING MARGIN 13.3% vs. 2.0% LYQ2 ADJUSTED OPERATING
MARGIN 12.3% vs. 6.4% LY
Q2 COMPARABLE BRAND REVENUE +5% vs. +7% LY
Q2 GAAP NET REVENUES +4% vs. +13% LYQ2 ADJUSTED NET REVENUES +4%
vs. +14% LY
COMPANY RAISES Q3, Q4 and FY18 EARNINGS GUIDANCE
Note: Please see the tables below for a reconciliation of all
GAAP to non-GAAP measures referenced in this press release.
To Our People, Partners, and Shareholders,
Our record second quarter results demonstrate our commitment to
earnings growth, the emerging power of our new business model, and
our continued success revolutionizing physical retailing. Based on
our strong second quarter performance and current trends, we are
raising our fiscal 2018 earnings guidance for a third time.
As articulated since the beginning of the year, we continue to
manage the business with a bias for earnings versus revenue growth.
We will restrain ourselves from chasing low quality sales at the
expense of profitability, and instead focus on optimizing our new
business model while building an operating platform that will
enable us to compete and win over the long-term.
It is clear that prioritizing earnings versus revenues this past
year made it possible for us to see opportunities throughout our
business that would have otherwise gone unnoticed. We now believe
that our target of achieving low to mid-teens adjusted operating
margins, and return on invested capital (ROIC) in excess of 30% by
2021 will happen sooner rather than later, as the earnings power of
our new model is proving to be greater than previously anticipated
and will be further amplified when we pivot back to growth in
fiscal 2019.
In my 40 plus years in the retail industry spanning three
leading platforms, I can honestly say I’ve never seen an
organization as clear and focused on optimizing a business as RH is
today. I could not be more proud of our team for driving these
industry leading results, and remain confident that our path
towards building the most profitable and capital efficient model in
our industry will prove to be the right one for our people,
partners, and shareholders.
Turning to our second quarter results, we achieved record GAAP
gross margins of 42.4% in the second quarter, increasing 900 basis
points versus a year ago, while adjusted gross margins increased
800 basis points to 42.1% compared to 34.1% last year. Our results
reflect strong full price selling, lower outlet revenues, and a
more streamlined distribution and reverse logistics network.
Second quarter GAAP operating margins reached a record 13.3%,
and adjusted operating margins reached a record 12.3% versus 6.4% a
year ago despite approximately 150 basis points of higher
advertising costs due to the new accounting rule that requires
catalog costs to be expensed in the quarter the books are
distributed, versus the previous standard of amortizing the costs
over the life of the book. As a reminder, this accounting change
will also negatively impact the third quarter adjusted operating
margins by approximately 200 basis points, while benefiting the
fourth quarter by approximately 300 basis points. For the year, we
expect advertising expense to be slightly down as a percentage of
revenues compared to fiscal 2017.
GAAP diluted earnings per share reached a record $2.33 in the
second quarter compared to a loss of $0.28 per share last year, and
adjusted diluted earnings per share also reached a record $2.49 in
the second quarter versus $0.65 per share a year ago.
GAAP and adjusted diluted earnings per share includes a $0.44
per share net benefit comprised of a $0.51 tax benefit from
associate option exercises following the sharp increase in our
share price, offset by $0.02 per share of payroll taxes on the
option exercises, and $0.05 per share from a higher diluted share
count due to the higher average share price in the quarter. There
was also a positive balance sheet cash benefit from the option
exercises of $18 million in the quarter.
Excluding the $0.44 per share net benefit, adjusted diluted
earnings per share reached $2.05 in the second quarter, widely
exceeding our guidance of $1.70 to $1.77, and more than three times
last year despite lower than expected revenues, highlighting the
earnings power of our new operating platform.
We generated over $25 million of free cash flow in the quarter,
and reduced our ratio of net debt to trailing twelve months
adjusted EBITDA from over 5 times at the end the second quarter of
fiscal 2017 to 2.4 times at the end of the second quarter of fiscal
2018. We expect to generate free cash flow in excess of $260
million for the year, further reducing our ratio of net debt to
trailing twelve months adjusted EBITDA to approximately 1.5 times
by year end.
Comparable brand revenues increased 5% in the second quarter,
despite a 3 point drag from last year’s inventory reduction efforts
and on top of a 7% increase last year. Adjusted for last year’s
inventory reduction efforts, comparable brand revenues increased 8%
in the second quarter of fiscal 2018.
GAAP and adjusted net revenues increased 4% in the second
quarter, accelerating nearly 5 points from the first quarter,
reaching $643 million versus $619 million last year. Net of the 3
point negative drag from higher outlet sales and 3 point drag from
SKU rationalization last year, adjusted net revenues increased 10%
in the second quarter fiscal 2018.
Looking forward, we expect the revenue drag from SKU
rationalization to be 2.5% in the third quarter and 1.5% in the
fourth quarter.
While I would like to see our revenue forecasting accuracy
improve, and believe it will in the second half of the year, it’s
hard to be precise given the inventory optimization efforts last
year, and even harder to be disappointed when the organization has
been focused on operational redesign and earnings growth resulting
in adjusted gross margins up 800 basis points, adjusted operating
margins up almost 600 basis points, inventories down 9%, and
adjusted diluted earnings per share up more than 3 times versus a
year ago.
Raising Fiscal 2018 Earnings Guidance and Increasing
Long-Term Targets
As a result of our strong second quarter earnings, we are
raising our fiscal 2018 adjusted diluted earnings per share
guidance for a third time. We are now expecting adjusted diluted
earnings per share for the year to be in the range of $7.35 to
$7.75 up 15% from our previous guidance of $6.34 to $6.83, while
slightly lowering revenue guidance by approximately 2% as we
continue to prioritize earnings over revenue growth and focus on
optimizing the profitability of our new operating model.
As part of raising our full year guidance, we are also raising
our third and fourth quarter adjusted diluted earnings per share
guidance. We are now expecting adjusted diluted earnings per share
for the third quarter to be in the range of $1.15 to $1.33, up from
$1.04 to $1.23, and adjusted diluted earnings per share for the
fourth quarter to be in the range of $2.33 to $2.54, up from $2.16
to $2.39.
Due to the earnings power of our new operating model, we are
also updating our previous long-term targets. We are moving forward
our expectations for adjusted operating margins in the low-to-mid
teens, and ROIC in excess of 30% by 2021, a full year to 2020.
We continue to see a clear path to $4 to $5 billion in North
American revenues, as well as a significant international
opportunity that could lead to RH becoming a $7 to $10 billion
dollar global brand.
Our long-term targets remain revenue growth of 8% to 12% and
earnings growth of 15% to 20% annually.
Our detailed updated guidance for fiscal 2018 and the third and
fourth quarters are provided in a table with our financial results
attached to this letter.
2018 - A Continued Focus on Execution, Architecture and
Cash
As communicated, we will continue to focus on optimizing our new
business model, architecting a new operating platform and driving
significant cash flow by increasing revenues and earnings, while
decreasing inventory and capital spending in 2018.
We expect revenue growth to accelerate in the second half as the
drag from last year’s inventory reduction efforts begins to lessen,
and we benefit from the second contact of the RH Interiors and RH
Modern Source Books that arrive in homes early September through
early November.
While most in our industry are closing or downsizing stores, we
remain committed to our quest of revolutionizing physical
retailing. Our progress in fiscal 2018 includes opening RH Portland
and RH Nashville in the first half of the year, and the upcoming
openings of two very unique and diverse retail experiences, RH New
York, opening on September 7th, and RH Yountville, opening on
September 23rd.
We continue to be pleased with the performance of our new
Galleries, and RH Portland and Nashville are no exception. RH
Nashville is the fourth new Gallery with our integrated hospitality
experience and the early hospitality results are exceeding the
first year performance of RH Chicago.
RH President of Hospitality Brendan Sodikoff and his team are
demonstrating we can execute a profitable high quality food and
beverage experience across multiple markets while driving traffic
into our Galleries that result in incremental revenues in our core
business. With three of our four restaurants trending to generate
$5 million to $6 million annually, and our fourth at approximately
$4 million, we believe RH Hospitality is now a proven scalable
business, and we plan to increase the number of new Galleries with
integrated restaurants, wine vaults, and barista bars going
forward. Additionally, we continue to believe strongly in the
prospects for our first RH Guesthouse, opening summer of 2019 in
New York, just steps from our new Gallery.
With a contemporary steel and glass structure rising up five
floors through the original historic brick facade, RH New York, the
Gallery in the Historic Meatpacking District is an architectural
masterpiece designed by Jim Gillam, of the award winning firm
Backen, Gilliam, and Kroger. Located on what is becoming one of the
most iconic corners in the city, the approximate 90,000 gross
square feet of indoor and outdoor space is connected by a soaring
central atrium with stacked cast iron columns, a grand staircase
that features the art installation “New York Night” by Los
Angeles-based artist and designer Alison Berger, and a glass
elevator that transports customers up to a rooftop restaurant with
retractable doors opening onto a beautiful landscaped park with
all-day sunshine and incredible views of downtown and Freedom
Tower. The Gallery also features a Barista Bar & Outdoor Wine
Terrace, full floors of RH Interiors, Modern, Outdoor, Baby &
Child and Teen, plus RH Interior Design Offices supporting our
onsite team, and an expansive Design Atelier with private
presentation rooms for our clients.
RH New York provides us the rare opportunity, to create what we
believe will be the most innovative new retail experience in the
world, in arguably the most important city in the world. I’m sure
most of you noticed our wrap of the Sunday New York Times this past
weekend announcing the public opening September 7th, and many of
you received invitations to our opening party September 5th, or to
our Investor Event and cocktail party September 6th post our 3:15
pm presentation at the Goldman Sachs Global Retailing Conference. I
would encourage you to join us at one of the events or at our
opening on Friday September 7th at 11am, to see why, as we
articulated on the cover of the Sunday New York Times that, “The
Death of Retail. Is Overrated.”
RH Yountville, opening September 23rd, will be an integrated
compound of food, wine, art and design. Reflective of the local
culture, and intended to engage the global luxury clientele who
visit and vacation in the Napa Valley, RH Yountville includes the
Historic Ma(i)sonry building, which has been transformed into a
dramatic two story stone wine vault with outdoor trellis covered
living rooms that can be reserved for wine tastings from some of
the Valley’s rare and hard to acquire wines. We are finishing
construction of three new pavilions on the property, including an
indoor - outdoor restaurant with a glass roof and retractable steel
and glass doors where you will dine under heritage olive trees
while listening to the sound of trickling water from dramatic
central fountains. The pavilions will be connected by lush garden
courtyards with outdoor fireplaces and walking paths of crushed
granite and bluestone pavers. RH Yountville will be a unique and
immersive experience, one that will serve to position RH as a taste
and style leader in our industry.
RH President, Chief Operating, Service and Values Officer
DeMonty Price and his team continue to lead a movement within the
Company to build an operating platform and customer culture that
will leapfrog us far beyond the customer experience and operating
results that currently define our industry. They are shifting the
focus from orders to customers, and from deliveries to delight,
infusing their teams with an energy and passion that is echoing
throughout our Company and into the homes of our customers.
Their work in home delivery includes a complete redesign of the
network which will significantly increase the time product remains
in its original packaging, reducing returns and damages, and
doubling the productivity of our delivery teams.
We have also redesigned our call center network, closing a call
center in Dallas, and opening a new Customer Delight Center at our
headquarters in Corte Madera, CA ensuring the voice of the customer
rings through the corridors of our corporate campus daily.
We expect our work architecting a new operating platform,
inclusive of our distribution center network redesign, the redesign
of our reverse logistics and outlet business, and the
reconceptualization of our home delivery and customer experience,
will drive lower costs and inventory levels, and higher earnings
and inventory turns throughout the balance of fiscal 2018. Looking
forward, we expect this multi-year effort to result in a
dramatically improved customer experience, continued margin
enhancement and significant cost savings over the next several
years.
Regarding our balance sheet and leverage ratios, we continue to
expect future cash flows will be adequate to repay the outstanding
principal of our $350 million June 2019 and $300 million June 2020
zero coupon convertible notes at maturity. As a reminder, we
purchased a bond hedge that is designed to protect us against
dilution on the 2019 notes up to $171.98 per share, and up to
$189.00 per share for the 2020 notes.
The strength of our business and the reduction in leverage we
have achieved during the past four quarters has put us in a strong
position to take advantage of the positive conditions in the
capital markets.
As such, we executed our third zero coupon convertible notes
offering in the second quarter of this year, raising $335 million
in notes convertible at $193.65 per share, a 25% premium to our
stock price of $154.92, the stock price at the time of the pricing
of the financing. We also purchased a corresponding bond hedge to
protect against dilution up to $309.84 per share. We used the
recent notes offering proceeds net of the bond hedge to pay down
interest bearing debt on our balance sheet, reducing interest
expense for the year.
We continue to have multiple financing alternatives available to
us on favorable terms that could further fortify our balance sheet
providing us with additional financial flexibility at a very low
cost of capital.
Looking back, had we not been opportunistic in responding to the
favorable market conditions through our convertible notes
financings in 2014 and 2015, we would not have been in a position
to repurchase $1 billion of our stock when it was undervalued last
year, which has proven to be an excellent allocation of capital for
the benefit of our shareholders. We are regularly evaluating
various low interest rate financing alternatives and expect to
follow the same opportunistic capital allocation approach in the
future regarding both sources and uses of capital.
As we did in fiscal 2017, we will once again hold ourselves back
from adding new businesses in fiscal 2018 outside of ongoing
investments in RH Hospitality as we remain focused on optimizing
the profitability of our new operating platform.
It remains clear to us as we witness the failures of high growth
- no profit, online pure plays and the declining operating margins
of traditional retailers who are driving an unnatural shift online,
that the complexities and costs of scaling a furniture business
will favor those who control their brand from concept to customer,
offer an immersive and inspiring physical and digital experience,
and have a superior logistics network that extends the brand into
the customer’s home. The road of endless promotions, free shipping,
and a shrinking store base is resulting in broken and unsustainable
retail models. We prefer the road less traveled by, and like Robert
Frost, believe it will make all the difference.
As in past economic cycles where growth without profitability
has been rewarded, when consumer markets tighten, so do capital
markets, resulting in a scramble to survive, and the corresponding
opportunity for those with strong brands and superior business
models to thrive. While none of us has an ability to predict
exactly where we are in the current economic cycle, we do have an
ability to build a brand and business that should enable us to
disrupt and dominate regardless of cycle time, consumer markets,
capital markets, trade wars, or tweets.
2019 - A Pivot to High Quality, Sustainable Growth
Our plan is to pivot back to high quality, sustainable growth in
fiscal 2019 as we return to our product and brand expansion
strategy, which has been on hold as we focused on our move to
membership and the architecture of our new operating platform. We
have several new brand extension plans in our development pipeline,
such as RH Beach House, and RH Color, launching in 2019.
Additionally, we plan to expand our assortments in key categories,
and accelerate the introduction of new collections as we pivot back
to growth next year.
We plan to increase our investment in RH Interior Design with a
goal of building the leading Interior Design Firm in North America.
We believe there is a significant revenue opportunity by offering
world class design and installation services as we move the brand
beyond creating and selling products to conceptualizing and selling
spaces. You will notice the expanded presence of RH Interior Design
in our RH Interiors and RH Modern Source Books, and our IMAGINE
advertising campaign in many of the leading shelter magazines.
Regarding our ongoing quest to revolutionize physical retailing
and the evolving nature of our real estate transformation, we have
developed a new multi-tier market approach that we believe will
optimize both market share and return on invested capital.
First, we have developed a new RH prototype Design Gallery that
will enable us to more quickly place our disruptive product
assortment and immersive retail experience into the market. The new
prototype is based on key learnings from our recent Gallery
openings and will range in size from 33,000 square feet inclusive
of our integrated hospitality experience to 29,000 square feet
without. These new Galleries will represent our assortments from RH
Interiors, Modern, Baby & Child, Teen and Outdoor. Due to the
reduced square footage and efficient design, these new prototypes
will be more capital efficient with less time and cost risk, but
yield similar productivity. We anticipate these new Galleries will
represent approximately two thirds of our target markets and enable
us to ramp our opening cadence from 3 to 5 new Galleries per year,
to a pace of 5 to 7 new Galleries per year.
Second, we are developing a Gallery tailored to secondary
markets. Targeted to be 10,000 to 18,000 square feet, we believe
these smaller expressions of our brand will enable us to gain share
in markets currently only served by smaller competitors. We expect
these Galleries to drive $10 to $15 million of revenues at a net
investment of $0 to $5 million, with a payback on our invested
capital of 0 to 2 years. Our plan is to test a few of these
Galleries over the next several years, and if proven successful,
this could lead to an increase in our long-term Gallery
targets.
Third, we will continue to develop and open larger Bespoke
Design Galleries in the top metropolitan markets, as we are doing
in New York this year, and San Francisco in 2019. These iconic
locations are highly profitable statements for our brand, and we
believe create a long-term competitive advantage that will be
difficult to duplicate.
Fourth, we will continue to open indigenous Bespoke Galleries in
the best second home markets where the wealthy and affluent visit
and vacation. These Galleries will be tailored to reflect the local
culture, and be sized to the potential of each market. Examples of
current and future Bespoke Galleries include the Hamptons and Palm
Beach, and the Bespoke Gallery opening this year in Yountville.
Like our evolving multi-tier Gallery strategy, we have developed
a multi-tier real estate strategy that is designed to significantly
increase our unit level profitability and return on invested
capital. Our three primary deal constructs are outlined below:
First, in many of our current projects, we are migrating from a
leasing to a development model. We currently have two Galleries,
Yountville and Edina, under construction using this new model, and
have an additional three development projects in the pipeline. In
the case of Yountville and Edina, we expect to do a sale-leaseback
that should allow us to recoup all of our capital, and possibly
more. In some cases we believe we may be able to pre-sell the
property and structure the transaction where the capital to build
the project is advanced by the buyer during construction, which
could require zero upfront capital from RH.
Second, we are working on joint venture projects, where we share
the upside of a development with the developer/landlord. An example
of this new model, would be our future Gallery and Guesthouse in
Aspen, where we are contributing the value of our lease to the
development in exchange for a profits interest in the project. The
developer will deliver to RH a substantially turnkey Gallery and
Guesthouse, while we continue to retain a 20% and 25% profits
interest in the properties. We would expect to monetize the profits
interest at the time of sale of the properties during the first
five years. The net result should be a minimal capital investment
to operationalize the business, with the expectation for a net
positive capital benefit at time of monetization of the profits
interest.
Third, due to the productivity and proof of concept of our
recent new Galleries, and the addition of a powerful, traffic
generating hospitality experience, we are able to negotiate
“capital light” leasing deals, where as much as 65% to 100% of the
capital requirement would be funded by the landlord, versus 35% to
50% previously. We currently have 12 capital light deals in the
development pipeline that would be scheduled to open in fiscal 2019
and beyond.
All of the above mentioned deal structures should lead to lower
capital requirements, higher unit profitability, and significantly
higher returns on invested capital.
Lastly, we are currently exploring opportunities for Design
Galleries in the UK and Europe, and believe there is tremendous
opportunity for the RH brand to expand globally.
Building a Brand with No Peer and a Customer Experience That
Cannot Be Replicated Online
We do understand that the strategies we are pursuing - opening
the largest specialty retail experiences in our industry while most
are shrinking the size of their retail footprint or 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, instead allowing our brand to be
defined by the taste, 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.
In closing, we are deeply grateful for all of 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 FriedmanChairman & Chief Executive Officer
1 Return on invested capital (ROIC): We define ROIC as adjusted
operating income after-tax for the most recent twelve-month period,
divided by the average of beginning and ending debt and equity less
cash and equivalents as well as short and long-term investments for
the most recent twelve-month period. ROIC is not a measure of
financial performance under GAAP, and should be considered in
addition to, and not as a substitute for other financial measures
prepared in accordance with GAAP. Our method of determining ROIC
may differ from other companies’ methods and therefore may not be
comparable.
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 September 18, 2018 by
dialing (855) 859-2056 or (404) 537-3406 and entering passcode
2476376, as well as on the Company’s investor relations
website.
ABOUT RH
RH (NYSE: 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, RH
Modern.com, RHBabyandChild.com, RHTeen.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, return on
invested capital, free cash flow, adjusted operating margin,
adjusted gross margin, adjusted SG&A, EBITDA and adjusted
EBITDA (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 without
limitation statements related to: our future financial and business
outlook and guidance for the third and fourth quarters of fiscal
2018 and for the fiscal year 2018 as well as our long-term targets,
expectations and perceived opportunities, including our guidance
and outlook with respect to revenues, adjusted net income, adjusted
diluted earnings per share, adjusted gross margin, capital
expenditures, merchandise inventories, free cash flow, adjusted
operating margin, anticipated diluted shares outstanding and net
revenue growth, ratio of net total debt to trailing twelve months
adjusted EBITDA; our focus on managing the business with a bias for
earnings versus revenue growth in 2018; our belief that we are
building an operating platform that will enable us to compete and
win over the long-term; the impact of the new accounting rule that
requires catalog costs to be expensed in the quarter they are
distributed, including the expected impact on adjusted operating
margins in the third and fourth quarters; our belief that our
target of achieving low to mid-teens adjusted operating margins,
and return on invested capital in excess of 30% will happen by
2020, which is earlier than our previous expectations; our
long-term expectations of achieving $4 to $5 billion in North
American revenues as well as of RH becoming a $7 to $10 billion
dollar global brand; our expectations of disrupting physical
retailing and of being a disruptive force in the marketplace,
gaining significant market share and creating meaningful
competitive barriers; expectations related to our focus on
optimizing our new business model, architecting a new operating
platform and driving significant cash flow in 2018 through
increasing revenues and earnings, while decreasing inventory and
capital spending in 2018; our expectations concerning the continued
benefits of our membership model; our expectation that revenue
growth will accelerate in the second half of 2018 as we begin to
cycle last year’s inventory reduction efforts and benefit from our
second contact of the RH Interiors and RH Modern Source Books that
will be arriving in homes early September through early November;
our belief that we are building an operating platform and customer
culture that will leapfrog us far beyond the customer experience
and operating results that currently define our industry; our
expectation that our complete redesign of our home delivery network
will significantly increase the time product remains in its
original packaging, reduce returns and damages, and double the
productivity of our delivery teams; our expectation that our work
architecting a new operating platform, inclusive of our
distribution center network redesign, the redesign of our reverse
logistics and outlet business, and the reconceptualization of our
home delivery and customer experience, will drive lower costs and
inventory levels, and higher earnings and inventory turns
throughout the balance of fiscal 2018 and result in a dramatically
improved customer experience, continued margin enhancement and
significant cost savings over the next several years; our
expectation that future cash flow will be adequate to repay the
aggregate outstanding principal balance of our aggregate of $650
million of zero coupon convertible notes due in June 2019 and June
2020; based on the continued strong financial performance of our
business, our expectation to reduce the ratio of net debt to
trailing twelve month adjusted EBITDA to 1.5 by the end of fiscal
2018; our belief that the strength of our business and the
reduction in leverage we have achieved during the past four
quarters puts us in a strong position to take advantage of the
positive conditions in the capital markets and that we currently
have multiple financing alternatives available to us on favorable
terms that could further fortify our balance sheet and provide us
with additional financial flexibility at a very low cost of
capital; our belief that our stock repurchases in fiscal 2017 has
proven to be an excellent allocation of capital for the benefit of
our shareholders and our expectation to follow the same
opportunistic capital allocation approach in the future regarding
both sources and uses of capital; our plan to hold ourselves back
from adding new businesses in fiscal 2018 outside of ongoing
investments in RH Hospitality; our plans to open new Galleries in
New York on September 7, 2018 and Yountville on September 23, 2018;
the product assortment and integrated hospitality experience to be
presented at such new Galleries and the anticipated customer
experience at such new Galleries; our expectations concerning
product and brand expansion beginning in 2019; our plans regarding
our new prototype Design Gallery with reduced square footage and
efficient design, including our expectations regarding (i) such new
format Design Gallery representing approximately two thirds of our
target markets, and (ii) the financial characteristics of such new
format Design Galleries including with respect to capital
efficiency, timing, cost risk and productivity; our expectations
regarding the timing of, and benefits from, the opening of any new
Gallery or Guesthouse location; our objective and expectation to
increase the pace of new Gallery openings from 3 to 5 per year to 5
to 7 per year; our plans and expectations regarding developing and
introducing a new Gallery format that is tailored to secondary
markets, our expectations regarding gaining share in markets
currently only served by smaller competitors and our expectations
concerning the financial characteristics of such new Gallery
formation including driving $10 to $15 million of revenues at a net
investment of $0 to $5 million, with a payback on our invested
capital of 0 to 2 years; our expectations regarding our larger
Bespoke Design Galleries, including the financial and operating
characteristics of such Galleries and the San Francisco Gallery
expected to open in 2019; and our expectations concerning
indigenous Bespoke Galleries; our expectations with respect to our
real estate development models that we will pursue and the benefits
of such different models including (i) the anticipated pipeline of
five additional projects that we would expect to pursue under a
development model as opposed to a traditional leasing model,
including our expectation that this model will reduce occupancy
costs and increase our return on capital, (ii) our expectation
regarding our future Gallery and Guesthouse in Aspen and other
similar real estate transactions, including monetizing the profits
interest at the time of sale of the property during the first five
years and (iii) our expectation that we will be able to negotiate
capital light leasing deals as well as the financial aspects of
such deals, including that we expect that 65% to 100% of the
capital requirement will be funded by the landlord, versus 35% to
50% previously and our expected pipeline of 12 of these capital
light deals; 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, risks related to our
dependence on key personnel and any changes in 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; 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 maintain 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 our sourcing and supply chain
including our dependence on imported products produced by foreign
manufacturers and risks related to importation of such products
including risks related to tariffs and other similar issues, 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
August 4,
2018
July 29,
2017
Stores as a percentage of net revenues [a] 56 % 57 % Direct as a
percentage of net revenues 44 % 43 % Growth in net revenues: Stores
[a] 3 % 13 % Direct 5 % 14 % Total 4 % 13 % Comparable brand
revenue growth [b] [c] 5 % 7 % See the Company’s most recent
Form 10-K and Form 10-Q filings for the definitions of stores,
direct, and comparable brand revenue. [a] Stores data
represents sales originating in retail stores, including Waterworks
showrooms, and outlet stores. Net revenues for outlet stores, which
include warehouse sales, were $37.9 million and $51.1 million for
the three months ended August 4, 2018 and July 29, 2017,
respectively. [b] Waterworks revenue is included in comparable
brand revenue growth beginning June 2017, which is the first full
month following the one-year anniversary of the acquisition. [c]
Membership revenue is included in comparable brand revenue growth
beginning April 2017, which is the first full month following the
one-year anniversary of the program launch.
RHRETAIL GALLERY
METRICS(Unaudited)
As of August 4, 2018, the Company operated a total of 85 retail
Galleries consisting of 18 Design Galleries, 44 legacy Galleries, 2
RH Modern Galleries and 6 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 14 Design Galleries, 50
legacy 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 July 29, 2017.
In addition, as of August 4, 2018, the Company operated 36
outlet stores compared to 28 as of July 29, 2017.
Three Months Ended August 4,
2018
July 29,
2017
Store Count
Total Leased Selling Square
Footage
Store Count
Total Leased SellingSquare
Footage
(in thousands) (in thousands)
Beginning of
period 84 1,012 85 912 Retail Galleries opened:
Nashville Design Gallery 1 45.6 — — Portland RH Baby&Child
Gallery 1 4.7
— — Dallas RH Baby&Child Gallery 1 3.7 — — Waterworks Boston
Showroom — — 1 5.0 Retail Galleries closed: Nashville legacy
Gallery (1 ) (7.1 ) — — Washington DC legacy Gallery (1 ) (5.6 ) —
— Waterworks Boston Showroom — — (1 )
(2.1 )
End of period 85 1,053 85
915
Weighted-average leased selling square footage
1,035 913 % Growth year over year 13 % 20 %
See the Company’s most recent Form 10-K and Form 10-Q filings
for square footage definitions.Total leased square footage as of
August 4, 2018 and July 29, 2017 was 1,414,000 and 1,248,000,
respectively.Weighted-average leased square footage for the three
months ended August 4, 2018 and July 29, 2017 was 1,392,000 and
1,243,000, respectively.Retail sales per leased selling square foot
for the three months ended August 4, 2018 and July 29, 2017 was
$313 and $327, respectively.
RH
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except share and per
share amounts)
(Unaudited)
Three Months Ended Six Months Ended August
4,
2018
% of Net
Revenues
July 29,
2017
% of Net
Revenues
August 4,
2018
% of Net
Revenues
July 29,
2017
% of Net
Revenues
Net revenues $ 640,798 100.0 % $ 615,326 100.0 % $
1,198,204 100.0 % $ 1,177,406 100.0 % Cost of goods
sold 369,198 57.6 % 409,513 66.6 %
714,569 59.6 % 801,337 68.1 % Gross
profit 271,600 42.4 % 205,813 33.4 % 483,635 40.4 % 376,069 31.9 %
Selling, general and administrative
expenses
186,225 29.1 % 193,690 31.4 %
344,659 28.8 % 357,050 30.3 % Income from
operations 85,375 13.3 % 12,123 2.0 % 138,976 11.6 % 19,019 1.6 %
Other expenses Interest expense—net 17,480 2.7 % 14,402 2.4 %
34,515 2.9 % 26,581 2.2 % Loss on extinguishment of debt 917
0.1 % — 0.0 % 917 0.1 % —
0.0 % Total other expenses 18,397 2.8 %
14,402 2.4 % 35,432 3.0 % 26,581
2.2 % Income (loss) before income taxes 66,978 10.5 % (2,279 ) (0.4
)% 103,544 8.6 % (7,562 ) (0.6 )% Income tax expense 2,936
0.5 % 5,583 0.9 % 11,443 0.9 %
3,670 0.4 % Net income (loss) $ 64,042 10.0 %
$ (7,862 ) (1.3 )% $ 92,101 7.7 % $ (11,232 )
(1.0 )% Weighted-average shares used in
computing basic net income (loss)
per share
21,925,702 28,398,307 21,735,364 35,667,217 Basic net income (loss)
per share $ 2.92 $ (0.28 ) $ 4.24 $ (0.31 ) Weighted-average
shares used in
computing diluted net income (loss)
per share
27,496,561 28,398,307 26,363,395 35,667,217 Diluted net income
(loss) per share $ 2.33 $ (0.28 ) $ 3.49 $ (0.31 )
RH
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
(Unaudited)
August 4,
2018
February 3,
2018
July 29,
2017
ASSETS Cash and cash equivalents $ 22,199 $ 17,907 $ 21,637
Merchandise inventories 551,343 527,026 608,048 Other current
assets 118,960 99,997 112,431 Total current
assets 692,502 644,930 742,116 Property and equipment—net 833,232
800,698 744,460 Goodwill and intangible assets 242,498 242,595
276,342 Other non-current assets 45,875 44,643
56,491 Total assets $ 1,814,107 $ 1,732,866 $ 1,819,409
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Liabilities
Accounts payable and accrued expenses $ 284,942 $ 318,765 $ 271,837
Convertible senior notes due 2019—net 335,670 — — Deferred revenue,
customer deposits and other current liabilities 216,333
200,570 223,912 Total current liabilities 836,945
519,335 495,749 Asset based credit facility — 199,970 283,000 Term
loans—net — 79,499 176,363 Convertible senior notes due 2019—net —
327,731 319,969 Convertible senior notes due 2020—net 261,929
252,994 244,342 Convertible senior notes due 2023—net 240,804 — —
Financing obligations under build-to-suit lease transactions
225,700 229,323 226,231 Other non-current obligations
102,668 131,350 120,539 Total liabilities
1,668,046 1,740,202 1,866,193 Stockholders’
equity (deficit) 146,061 (7,336 ) (46,784 )
Total liabilities and stockholders’ equity (deficit) $ 1,814,107 $
1,732,866 $ 1,819,409
RH
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended August 4,
2018
July 29,
2017
CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $
92,101 $ (11,232 ) Adjustments to reconcile net income (loss) to
net cash provided by operating activities: Depreciation and
amortization 34,803 32,546 Other non-cash items 34,779 55,358
Change in assets and liabilities: Merchandise inventories (24,995 )
140,331 Accounts payable, accrued expenses and other (66,459
) 97,353 Net cash provided by operating activities
70,229 314,356
CASH FLOWS FROM INVESTING
ACTIVITIES Capital expenditures (61,212 ) (56,697 ) Proceeds
from sale of assets held for sale—net — 15,123 Net proceeds from
investments — 175,801 Net cash provided by (used in)
investing activities (61,212 ) 134,227
CASH
FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of
convertible senior notes 335,000 — Proceeds from issuance of
warrants 51,021 — Purchase of convertible notes hedges (91,857 ) —
Debt issuance costs related to convertible senior notes (6,349 ) —
Net borrowings (repayments) under asset based credit facility
(199,970 ) 283,000 Net borrowings (repayments) under term loans
(80,000 ) 180,000 Net borrowings (repayments) under promissory and
equipment security notes (31,974 ) 13,883 Debt issuance costs —
(7,939 ) Repurchases of common stock—including commissions —
(1,000,326 ) Net equity related transactions 21,346 8,064 Other
financing activities (6,480 ) (4,759 ) Net cash used
in financing activities (9,263 ) (528,077 ) Effects
of foreign currency exchange rate translation (124 )
55 Net decrease in cash and cash equivalents and restricted cash
equivalents (370 ) (79,439 ) Cash and cash equivalents Beginning of
period—cash and cash equivalents 17,907 87,023 Beginning of
period—restricted cash equivalents (construction related deposits)
7,407 28,044 Beginning of period—cash and cash
equivalents and restricted cash equivalents 25,314
115,067 End of period—cash and cash equivalents 22,199
21,637 End of period—restricted cash equivalents (construction
related deposits) 2,745 13,991 End of period—cash and
cash equivalents and restricted cash equivalents $ 24,944 $ 35,628
RH
CALCULATION OF FREE CASH FLOW
(In thousands)
(Unaudited)
Six Months Ended August 4,
2018
July 29,
2017
Net cash provided by operating activities $ 70,229 $ 314,356
Capital expenditures (61,212 ) (56,697 ) Payments on build-to-suit
lease transactions (6,190 ) (4,601 ) Payments on capital leases
(290 ) (158 ) Proceeds from sale of assets held for sale—net —
15,123 Free cash flow [a] $ 2,537 $ 268,023 [a] Free
cash flow is calculated as net cash provided by operating
activities and net proceeds from sale of assets held for sale, less
capital expenditures, 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
RECONCILIATION OF GAAP NET INCOME
(LOSS) TO ADJUSTED NET INCOME
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 4,2018
July 29,2017
August 4,2018
July 29,2017
GAAP net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 )
Adjustments (pre-tax):
Net revenues: Recall accrual [a] 1,853 3,813 1,853 3,813 Cost of
goods sold: Recall accrual [a] (3,262 ) 763 (3,516 ) 763 Impact of
inventory step-up [b] 190 480 380 1,860 Selling, general and
administrative expenses: Legal settlement [c] (7,204 ) — (5,289 ) —
Distribution center closures [d] — — (2,072 ) — Reorganization
related costs [e] 1,721 — 1,721 — Recall accrual [a] 345 157 345
157 Executive non-cash compensation [f] — 23,872 — 23,872 Gain on
sale of building and land [g] — (1,300 ) — (1,300 ) Other expenses:
Amortization of debt discount [h] 9,000 6,790 16,272 13,505 Loss on
extinguishment of debt [i] 917 — 917 —
Subtotal adjusted items 3,560 34,575 10,611 42,670 Impact of income
tax items [j] (168 ) (7,012 ) (1,824 )
(9,943 ) Adjusted net income [k] $ 67,434 $ 19,701 $ 100,888 $
21,495 [a] Represents a reduction in net revenues, increase
in cost of goods sold and inventory charges associated with product
recalls initiated in the second quarter of fiscal 2018 and in the
second quarter of fiscal 2017, as well as accrual adjustments,
insurance recoveries and vendor claims related to previously
initiated recalls. [b] Represents the non-cash amortization of the
inventory fair value adjustment recorded in connection with our
acquisition of Waterworks. [c] Represents a legal settlement, net
of related legal expenses. [d] Represents an adjustment to the
lease related liability associated with the Dallas distribution
center closure in fiscal 2017 primarily due to the remeasurement of
the liability for lease losses resulting from a sublease agreement
we entered into in April 2018 that resulted in an update to both
the timing and the term of future lease-related cash inflows. [e]
Represents costs associated with a supply chain reorganization,
including the closure of the Dallas customer call center, which
include severance costs and related taxes, partially offset by a
reversal of stock-based compensation expense related to unvested
equity awards. [f] Represents non-cash compensation charges related
to a fully vested option grant made to Mr. Friedman in May 2017.
[g] Represents the gain on the sale of building and land of one of
our owned retail Galleries. [h] 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”), the $300 million aggregate principal amount of convertible
senior notes that were issued in June and July 2015 (the “2020
Notes”), and for the $335 million aggregate principal amount of
convertible senior notes that were issued in June 2018 (the “2023
Notes”), we separated the 2019 Notes, 2020 Notes and 2023 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, 2020 Notes and 2023 Notes over their respective terms. The
equity components represent the difference between the proceeds
from the issuance of the 2019 Notes, 2020 Notes and 2023 Notes and
the fair value of the liability components of the 2019 Notes, 2020
Notes and 2023 Notes, respectively. Amounts are presented net of
interest capitalized for capital projects of $0.8 million during
both the three months ended August 4, 2018 and July 29, 2017.
Amounts are presented net of interest capitalized for capital
projects of $1.4 million and $1.5 million during the six months
ended August 4, 2018 and July 29, 2017, respectively. [i]
Represents the loss on extinguishment of debt related to the LILO
term loan, the promissory note secured by our aircraft and the
equipment security notes, all of which were repaid in full in June
2018. [j] The adjustment for the three months ended August 4, 2018
represents the tax effect of the adjusted items based on our
effective tax rate of 4.4%. The six months ended August 4, 2018
includes an adjustment to calculate income tax expense at an
adjusted tax rate of 11.6%, which is calculated based on the
weighted-average fiscal 2018 quarterly effective tax rates. The
adjustments for the three and six months ended July 29, 2017 assume
a normalized tax rate of approximately 39%. [k] 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 Six Months
Ended
August 4,2018
July 29,2017
August 4,2018
July 29,2017
Diluted net income (loss) per share $ 2.33 $ (0.28 ) $ 3.49 $ (0.31
) Pro forma diluted net income (loss) per share [a] $ 2.36 $
(0.26 ) $ 3.52 $ (0.31 ) EPS impact of adjustments (pre-tax) [b]:
Amortization of debt discount 0.34 0.21 0.62 0.38 Reorganization
related costs 0.06 — 0.07 — Loss on extinguishment of debt 0.03 —
0.04 — Impact of inventory step-up 0.01 0.02 0.01 0.05 Legal
settlement (0.27 ) — (0.20 ) — Distribution center closures — —
(0.08 ) — Recall accrual (0.04 ) 0.16 (0.05 ) 0.13 Executive
non-cash compensation — 0.79 — 0.65 Gain on sale of building and
land — (0.04 ) — (0.04 ) Subtotal
adjusted items 0.13 1.14 0.41 1.17 Impact of income tax items [b]
— (0.23 ) (0.08 ) (0.27 ) Adjusted
diluted net income per share [c] $ 2.49 $ 0.65 $ 3.86 $ 0.59 [a]
For GAAP purposes, we incur dilution above
the lower strike prices of our 2019 Notes, 2020 Notes and 2023
Notes of $116.09, $118.13 and $193.65, respectively. However, we
exclude from our adjusted diluted shares outstanding calculation
the dilutive impact of the convertible notes between $116.09 and
$171.98 for our 2019 Notes, between $118.13 and $189.00 for our
2020 Notes, and between $193.65 and $309.84 for our 2023 Notes,
based on the bond hedge contracts in place that will deliver shares
to offset dilution in these ranges. At stock prices in excess of
$171.98, $189.00 and $309.84, we will incur dilution related to the
2019 Notes, 2020 Notes and 2023 Notes, respectively, and our
obligation to deliver additional shares in excess of the dilution
protection provided by the bond hedges. Pro forma diluted net
income per share for the three months ended August 4, 2018 is
calculated based on GAAP net income and pro forma diluted
weighted-average shares of 27,084,293, which excludes dilution
related to the 2019 Notes and 2020 Notes of 412,268 shares. Pro
forma diluted net income per share for the six months ended August
4, 2018 is calculated based on GAAP net income and pro forma
diluted weighted-average shares of 26,157,261, which excludes
dilution related to the 2019 Notes and 2020 Notes of 206,134
shares.Pro forma diluted net loss per share for the three and six
months ended July 29, 2017 is calculated based on GAAP net loss and
pro forma diluted weighted-average shares of 30,365,424 and
36,562,408, respectively.
[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 NET REVENUES TO
ADJUSTED NET REVENUES
AND GROSS PROFIT TO ADJUSTED GROSS
PROFIT
(In thousands)
(Unaudited)
Three Months Ended Six Months
Ended
August 4,2018
July 29,2017
August 4,2018
July 29,2017
Net revenues $ 640,798 $ 615,326 $ 1,198,204 $ 1,177,406 Recall
accrual [a] 1,853 3,813 1,853 3,813
Adjusted net revenues [b] $ 642,651 $ 619,139 $ 1,200,057 $
1,181,219 Gross profit $ 271,600 $ 205,813 $ 483,635 $
376,069 Recall accrual [a] (1,409 ) 4,576 (1,663 ) 4,576 Impact of
inventory step-up [a] 190 480 380 1,860
Adjusted gross profit [b] $ 270,381 $ 210,869 $ 482,352 $ 382,505
Gross margin [c] 42.4 % 33.4 % 40.4 %
31.9 % Adjusted gross margin [c] 42.1 % 34.1 %
40.2 % 32.4 % [a] Refer to table titled
“Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income”
and the related footnotes for additional information. [b] Adjusted
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 Six
Months Ended
August 4,2018
July 29,2017
August 4,2018
July 29,2017
Net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 ) Interest
expense—net 17,480 14,402 34,515 26,581 Loss on extinguishment of
debt 917 — 917 — Income tax expense 2,936 5,583
11,443 3,670 Operating income 85,375 12,123 138,976
19,019 Legal settlement [a] (7,204 ) — (5,289 ) — Distribution
center closures [a] — — (2,072 ) — Recall accrual [a] (1,064 )
4,733 (1,318 ) 4,733 Reorganization related costs [a] 1,721 — 1,721
— Impact of inventory step-up [a] 190 480 380 1,860 Executive
non-cash compensation [a] — 23,872 — 23,872 Gain on sale of
building and land [a] — (1,300 ) —
(1,300 ) Adjusted operating income [b] $ 79,018 $ 39,908 $ 132,398
$ 48,184 Net revenues $ 640,798 $ 615,326 $ 1,198,204 $
1,177,406 Adjusted net revenues [c] $ 642,651 $ 619,139 $ 1,200,057
$ 1,181,219 Operating margin [c] 13.3 % 2.0 %
11.6 % 1.6 % Adjusted operating margin [c]
12.3 % 6.4 % 11.0 % 4.1 % [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 Net Revenues to Adjusted Net
Revenues and Gross Profit to Adjusted Gross Profit” and the related
footnotes for a definition and reconciliation of adjusted net
revenues.
RH
RECONCILIATION OF NET INCOME (LOSS) TO
EBITDA AND ADJUSTED EBITDA
(In thousands)
(Unaudited)
Three Months Ended Six Months
Ended
August 4,2018
July 29,2017
August 4,2018
July 29,2017
Net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 )
Depreciation and amortization 17,756 16,526 34,803 32,546 Interest
expense—net 17,480 14,402 34,515 26,581 Loss on extinguishment of
debt 917 — 917 — Income tax expense 2,936 5,583
11,443 3,670 EBITDA [a] 103,131 28,649 173,779 51,565
Non-cash compensation [b] 6,234 30,877 14,231 36,166 Reorganization
related costs [c] 1,721 — 1,721 — Impact of inventory step-up [c]
190 480 380 1,860 Legal settlement [c] (7,204 ) — (5,289 ) —
Distribution center closures [c] — — (2,072 ) — Recall accrual [c]
(1,064 ) 4,733 (1,318 ) 4,733 Gain on sale of building and land [c]
— (1,300 ) — (1,300 ) Adjusted EBITDA
[a] $ 103,008 $ 63,439 $ 181,432 $ 93,024 [a] EBITDA and
Adjusted EBITDA are supplemental measures of financial performance
that are not required by, or presented in accordance with, GAAP. We
define EBITDA as consolidated net income (loss) before depreciation
and amortization, interest expense, loss on extinguishment of debt
and provision for income taxes. Adjusted EBITDA reflects further
adjustments to EBITDA to eliminate the impact of non- cash
compensation, as well as certain non-recurring and other items that
we do not consider representative of our underlying operating
performance. EBITDA and Adjusted EBITDA are included in this press
release because management believes that these metrics provide
meaningful supplemental information for investors regarding the
performance of our business and facilitate 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. Our measures of EBITDA
and Adjusted EBITDA are not necessarily comparable to other
similarly titled captions for other companies due to different
methods of calculation. [b] Represents non-cash compensation
charges related to equity awards granted to employees, including
the non-cash compensation charge related to a fully vested option
grant made to Mr. Friedman in May 2017. [c] Refer to table titled
“Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income”
and the related footnotes for additional information.
RH
RECONCILIATION OF NET INCOME TO
EBITDA
AND ADJUSTED EBITDA TRAILING TWELVE
MONTHS
(In thousands)
(Unaudited)
Trailing Twelve Months
August 4,2018
July 29,2017
Net income $ 105,513 $ 721 Depreciation and amortization 72,392
63,606 Interest expense—net 70,504 49,626 Goodwill impairment [a]
33,700 — Loss on extinguishment of debt [b] 5,797 — Income tax
expense 35,744 11,168 EBITDA [m] 323,650 125,121
Non-cash compensation [c] 28,774 51,296 Asset impairment and lease
losses [d] 4,417 12,743 Distribution center closures [e] 3,723 —
Reorganization related costs [f] 1,721 974 Recall accrual [g] 1,656
9,348 Impact of inventory step-up [h] 1,047 5,294 Legal settlement
[i] (5,289 ) — Anti-dumping exposure [j] (2,202 ) — Gain on sale of
building and land [k] (819 ) (1,300 ) Aircraft impairment [l]
— 4,767 Adjusted EBITDA [m] $ 356,678 $ 208,243 [a]
Represents goodwill impairment related to the Waterworks
reporting unit. [b] Represents the loss on extinguishment of debt
related to the second lien term loan which was repaid in full in
October 2017, as well as the LILO term loan, the promissory note
secured by our aircraft and the equipment security notes, all of
which were repaid in full in June 2018. [c] Represents non-cash
compensation related to equity awards granted to employees,
including the non-cash compensation charge related to a fully
vested option grant made to Mr. Friedman in May 2017. [d]
Represents the impairments associated with RH Contemporary Art and
RH Kitchen. [e] Represents property and equipment disposals, lease
related charges, inventory transfer costs, severance expense and
other costs associated with two distribution center closures, which
were completed in November 2017 and January 2018. [f] Represents
costs associated with reorganizations, which include severance
costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.
[g] Represents a reduction in net revenues, increase in cost of
goods sold and inventory charges associated with product recalls,
as well as accrual adjustments, insurance recoveries and vendor
claims related to product recalls. [h] Represents a legal
settlement, net of related legal expenses. [i] Represents the
non-cash amortization of the inventory fair value adjustment
recorded in connection with our acquisition of Waterworks. [j]
Represents the release of the remaining reserve for potential
claims regarding anti-dumping duties which we believe have lapsed.
The reserve related to potential tariff obligations of one of our
foreign suppliers following the U.S. Department of Commerce’s
review on the anti-dumping duty order on wooden bedroom furniture
from China for the period from January 1, 2011 through December 31,
2011. [k] Represents the gain on the sale of building and land of
one of our owned retail Galleries. [l] Represents the impairment
recorded upon reclassification of aircraft as asset held for sale.
[m] Refer to footnote [a] within table titled “Reconciliation of
Net Income (Loss) to EBITDA and Adjusted EBITDA.”
RHTOPIC 606 IMPACT OF
ADOPTION(In thousands)(Unaudited)
We adopted ASU 2014-09 (“Topic 606”), which pertains to revenue
recognition, on February 4, 2018.
The adoption of Topic 606 had the most material impact on the
timing of advertising expense recognition related to direct
response advertising, including costs associated with the Company’s
Source Books. Under Topic 606, the Company will recognize expense
associated with the Source Books upon the delivery of the Source
Books to the carrier. Prior to adoption of Topic 606, costs
associated with Source Books were capitalized and amortized over
their expected period of future benefit.
Three Months Ended August 4,
2018
As Reported
% of NetRevenues
Topic 606Adjustments
Balances withoutAdoption of
Topic 606
% of NetRevenues
Net revenues [a] $ 640,798 100.0 % $ (1,685 ) $ 639,113
100.0 % Cost of goods sold [b] 369,198 57.6 %
(662 ) 368,536 57.7 % Gross profit 271,600
42.4 % (1,023 ) 270,577 42.3 % Selling, general and administrative
expenses [c] 186,225 29.1 % (11,105 )
175,120 27.4 % Income from operations 85,375 13.3 % 10,082
95,457 14.9 % Other expenses Interest expense—net 17,480 2.7 % —
17,480 2.7 % Loss on extinguishment of debt 917 0.1 %
— 917 0.1 % Total other expenses 18,397
2.8 % — 18,397 2.8 % Income before
income taxes 66,978 10.5 % 10,082 77,060 12.1 % Income tax expense
[d] 2,936 0.5 % 455 3,391 0.6 %
Net income $ 64,042 10.0 % $ 9,627 $ 73,669 11.5 %
[a] Adjustment to net revenues includes (i) $1.2 million
associated with deferred revenue, (ii) $0.5 million associated with
incentive payment amortization, (iii) $0.4 million associated with
gift card breakage, partially offset by (iv) $0.2 million increase
associated with membership revenue and (v) $0.2 million increase
associated with reversal of return reserve. [b] Adjustment to costs
of goods sold represents deferred cost of goods sold of $0.6
million and the impact of related shipping expenses of $0.1
million. [c] Adjustment to selling, general and administrative
expenses includes a $10.0 million decrease in advertising expense,
gift card breakage of $0.6 million and incentive payment
amortization of $0.5 million. [d] Adjustment to income tax expense
represents the tax effect of the adjustments based on our effective
tax rate of 4.4%.
The following table summarizes the impact of adopting Topic 606
on our condensed consolidated balance sheet:
As of August 4, 2018
As Reported
Topic 606Adjustments
Balances withoutAdoption of
Topic 606
Other current assets $ 118,960 $ 36,012 $ 154,972 Other non-current
assets 45,875 (6,561 ) 39,314 Accounts payable and accrued expenses
284,942 (732 ) 284,210 Deferred revenue, customer deposits and
other current liabilities 216,333 5,995 222,328 Stockholders’
equity 146,061 24,188 170,249
RH
FISCAL 2018 GUIDANCE BY QUARTER
(In millions, except per share
data)
The Company is providing the following outlook
for fiscal 2018:
First Quarter2018 Second
Quarter2018 Third Quarter2018 Fourth
Quarter2018 Fiscal Year2018 Adjusted net
revenues $557.4 [a] $642.7 $624 - $636 $665 - $685 $2,489 - $2,521
% growth vs. prior year (1)% 4% 5% - 7% 6% - 9% [b] 4% - 5% [b]
Adjusted gross margin (% of net revenues) 38.0% 42.1% 40.0%
- 40.5% 39.5% - 40.0% 40.0% - 40.2% Adjusted SG&A (as %
of net revenues) 28.5% [a] 29.8% 31.6% - 32.0% 24.7% - 25.0% 28.6%
- 28.7% Adjusted operating margin (% of net revenues) 9.6%
12.3% 8.0% - 8.9% 14.5% - 15.3% 11.2% - 11.7% Adjusted net
income $33.5 $67.4 $31.3 - $36.1 $65.6 - $71.6 $197.8 - $208.6
Adjusted diluted EPS $1.33 $2.49 $1.15 - $1.33 $2.33 - $2.54
$7.35 - $7.75 Merchandise inventories $450 - $475
Capital expenditures—net of asset sales $75 - $85 Free cash
flow $260+ [a] First quarter net revenues and SG&A as a
percentage of net revenues are shown on a GAAP basis. [b] On
comparable 13-week to 13-week basis for fourth quarter 2018 and
52-week to 52-week basis for fiscal 2018. The extra week added
approximately $42.6 million to fiscal 2017 net revenues.
Note: 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
ESTIMATED TOPIC 606 IMPACT TO FISCAL
2018 GUIDANCE BY QUARTER
First Quarter
2018
Second Quarter
2018
Third Quarter
2018
Fourth Quarter
2018
Fiscal Year
2018
Net revenues 1.1% Increase 0.4% Decrease 0.1% Decrease 0.6%
Increase 0.5% Increase Adjusted gross margin (% of net
revenues) 30 bps Increase 10 bps Increase No impact 10 bps Increase
10 bps Increase Adjusted SG&A (as % of net revenues) 110
bps Decrease 170 bps Increase 220 bps Increase 300 bps Decrease 10
bps Decrease Adjusted operating margin (% of net revenues)
[a] 140 bps Increase 160 bps Decrease 220 bps Decrease 290 bps
Increase 20 bps Increase [a]
Adjusted operating margin includes the
impact of advertising costs as follows: approximately 90 basis
points increase in the first quarter 2018, approximately 150 basis
points decrease in the second quarter fiscal 2018, approximately
210 basis points decrease in the third quarter fiscal 2018,
approximately 320 basis points increase in the fourth quarter
fiscal 2018 and approximately 20 basis points increase in fiscal
2018.
RH
ANTICIPATED IMPACT OF STOCK PRICE ON
ADJUSTED DILUTED SHARES OUTSTANDING
(In millions, except stock price and
per share data)
Average Third Quarter Fiscal 2018
Stock Price $ 150.00 $ 170.00
$ 190.00 $ 210.00
$ 230.00 $ 250.00 Midpoint of Q3 2018
adjusted net income guidance $ 33.7 $ 33.7 $ 33.7 $ 33.7 $ 33.7 $
33.7 Q3 2018 adjusted diluted shares outstanding [a] 27.63
27.98 28.58 29.32 29.93 30.45 Q3 2018 adjusted earnings per
share $ 1.22 $ 1.20 $ 1.18 $ 1.15 $ 1.13 $ 1.11
Average Fiscal 2018 Stock Price $ 150.00 $ 170.00 $ 190.00 $
210.00 $ 230.00 $ 250.00 Midpoint of fiscal 2018 adjusted net
income guidance $ 203.2 $ 203.2 $ 203.2 $ 203.2 $ 203.2 $ 203.2
Fiscal 2018 adjusted diluted shares outstanding [a] 27.26
27.60 28.19 28.93 29.53 30.05 Fiscal 2018 adjusted earnings
per share $ 7.45 $ 7.36 $ 7.21 $ 7.02 $ 6.88 $ 6.76
Note: The table above is intended to
demonstrate the impact of increasing stock prices on our adjusted
diluted shares outstanding due to 1) additional in-the-money
options and 2) the higher cost of acquired shares under the
treasury stock method.
For GAAP purposes, we will incur dilution above the lower
strike prices of our 2019 Notes, 2020 Notes and 2023 Notes of
$116.09, $118.13 and $193.65, respectively. However, no additional
shares will be included in our adjusted diluted shares outstanding
calculation between $116.09 and $171.98 for our 2019 Notes, between
$118.13 and $189.00 for our 2020 Notes, and between $193.65 and
$309.84 for our 2023 Notes, based on the bond hedge contracts in
place that will deliver shares to offset dilution in these ranges.
At stock prices in excess of $171.98, $189.00 and $309.84, we will
incur dilution related to the 2019 Notes, 2020 Notes and 2023
Notes, respectively, 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.
The stock option awards outstanding for RH’s Chairman and CEO are
included in all of the adjusted diluted shares outstanding
scenarios above based on the exercise prices of $46.50, $75.43 and
$50.00 for the November 2012, July 2013 and May 2017 grants,
respectively. [a] Includes 0.299 million, 0.800
million, 1.213 million and 1.561 million incremental shares at
$190.00, $210.00, $230.00 and $250.00 average share price,
respectively, due to dilution from the convertible not
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180904005850/en/
RHCammeron McLaughlin, 415-945-4998SVP, Investor Relations and
Strategycmclaughlin@rh.com
RH (NYSE:RH)
Historical Stock Chart
From Mar 2024 to Apr 2024
RH (NYSE:RH)
Historical Stock Chart
From Apr 2023 to Apr 2024