Company Provides Preliminary Fiscal 2018 Outlook
RH (NYSE:RH) today announced updated guidance for the third
quarter fiscal 2017 and a preliminary fiscal 2018 outlook ahead of
the Company’s Investor Day being held in West Palm Beach, Florida
on Thursday, November 16, beginning at 2:00 pm EST. The Investor
Day will be webcast at the Company’s Investor Relations website,
ir.rh.com.
Third Quarter, Fourth Quarter and Fiscal 2017 Updated
Guidance
- Adjusted net revenues for the third
quarter fiscal 2017 are now expected to be approximately $592.5
million, an increase of 8% versus $549.3 million last year, despite
an approximate 1% negative impact from Hurricanes Harvey and Irma.
This compares to the Company’s prior guidance of adjusted net
revenues in the range of $575 million to $590 million, or an
increase of 5% to 7% compared to last year. On a GAAP basis, net
revenues are expected to be approximately $592.5 million for the
third quarter.
- Adjusted net income for the third
quarter is now expected to be in the range of $24.0 million to
$24.5 million, compared to $8.0 million last year, despite a
negative impact of approximately $1.3 million from Hurricanes
Harvey and Irma. The outlook also includes a positive impact of
approximately $2.5 million related to a lower effective tax rate.
This compares to the Company’s prior guidance of adjusted net
income in the range of $16 million to $19 million. On a GAAP basis,
net income for the third quarter is expected to be in the range of
$12.5 million to $13 million.
- Adjusted diluted earnings per share for
the third quarter is now expected to be in the range of $1.02 to
$1.04, compared to $0.20 last year, despite a negative impact of
approximately $0.05 per share from Hurricanes Harvey and Irma. The
outlook also includes a positive impact of approximately $0.11 per
share related to a lower effective tax rate. This compares to the
Company’s prior guidance of adjusted diluted earnings per share in
the range of $0.68 to $0.80. On a GAAP basis, diluted earnings per
share for the third quarter is expected to be in the range of $0.54
to $0.56.
- The Company is increasing its fourth
quarter adjusted net income guidance to a range of $37 million to
$41 million, from a range of $33 million to $37 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 reflects the benefits
of improved business performance and 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 below to assist in estimating diluted shares outstanding and
adjusted diluted earnings per share.
- Adjusted net revenues for the fourth
quarter are now expected to be in the range of $655 million to $680
million due to a $9 million negative impact due to the Company’s
decision to delay the opening of its New York Design Gallery. This
compares to the Company’s prior adjusted net revenue guidance range
of $664 million to $689 million.
- The Company is increasing its fiscal
2017 adjusted net income guidance to a range of $82 million to $87
million, from a range of $70 million to $77 million, despite the
Company’s decision to delay the opening of its New York Design
Gallery
- The Company now expects fiscal 2017
capital expenditures in the range of $120 million to $130 million
compared to its prior guidance range of $120 million to $140
million.
- The Company now expects to generate
free cash flow in the range of $420 million to $440 million in
fiscal 2017.
Preliminary Fiscal 2018 Outlook
- Net revenue 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.
To Our People, Partners, and Shareholders,
Our updated third quarter guidance demonstrates the earnings
power of our new membership model, and a dramatically more
efficient operating platform. Adjusted net revenues for the quarter
are expected to be up 8%, despite a 1% negative impact from
Hurricanes Harvey and Irma. Adjusted diluted earnings per share is
expected to be in the range of $1.02 to $1.04, 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
$0.20 a year ago.
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.
We have completed the planned closure of our distribution
facility in Los Angeles, and today we are announcing the closing of
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 DC’s will result
in improved in-stocks, and significantly faster inventory
turns.
The redesign of our reverse logistics and Outlet business is now
90% complete. Liquidating customer returns in market, and
eliminating the need to transport product back to our distribution
centers will drive cost savings and margin enhancement of $15
million to $20 million annually.
Our core RH business is building momentum behind the Fall
mailing of our RH Interiors Source Book, and the second edition of
our RH Modern Source Book mailed in the Spring. Our investments in
RH Interior Design Services are paying dividends as we continue to
drive growth and position the brand as the leading luxury design
platform in the country.
Our new Design Galleries continue to perform, creating a
customer experience that cannot be replicated online, and
distinguishing RH from other home businesses in the marketplace. RH
Toronto, The Gallery in Yorkdale, our second gallery with an
integrated food and beverage experience opened October 20th, and RH
West Palm, our third gallery with integrated hospitality, opens
this weekend on November 19th. We have decided, due to the
disruption caused by the ongoing street construction in the
Meatpacking District, to delay the opening of the New York Design
Gallery until the Spring-Summer of 2018. We expect an approximate
$9 million negative impact from the delay, and a corresponding $1.5
million reduction of adjusted net income in the fourth quarter,
which is included in our updated fourth quarter guidance. We will
continue operating our Flatiron Gallery until the new Meatpacking
Gallery opens.
In the second quarter, we completed the second tranche of 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 are, and will
continue to be, an excellent allocation of capital for the long
term benefit of our shareholders. Regarding our debt structure, we
retired the $100 million second lien term loan earlier than
planned, and have approximately $480 million of aggregate debt,
outside of our convertible notes that are due June 2019 and June
2020. Our current plans are to repay the convertible notes in cash
to minimize dilution. Based on our forecasted business performance,
and in light of existing favorable market conditions, we currently
have multiple low-interest financing options available to us.
Looking forward, we are forecasting margins to rise and costs to
fall as we cycle our efforts to reduce inventory, and benefit from
our new operating model. 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. We will be providing more color regarding our new real
estate model during our Investor Day. 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 plan to share more details of our strategy and outlook during
our Investor Day presentations on Thursday, November 16th at 2:00
pm EST, where we will also be unveiling RH West Palm, our latest
effort to revolutionize physical retailing.
We hope you can join us in West Palm Beach, or listen to our
webcast live at ir.rh.com.
Carpe Diem,
Gary
Gary FriedmanChairman and Chief Executive Officer
TABLE ILLUSTRATING THE ANTICIPATED
IMPACT OF STOCK PRICE ON DILUTED SHARES OUTSTANDING
Average Q4 2017 Stock Price
Adjusted net income and diluted share
counts in millions
$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 FY 2017 Stock Price $61.00 $66.00
$71.00 $76.00 $81.00
$86.00 $91.00 Midpoint of FY
2017 Adjusted Net Income Guidance $84.5 $84.5 $84.5 $84.5 $84.5
$84.5 $84.5 FY 2017 Diluted Shares Outstanding 29.1 29.5
29.9 30.2 30.6 30.9 31.2 FY 2017 Adjusted Earnings Per Share
$2.90 $2.86 $2.83 $2.80 $2.76 $2.73 $2.71
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 an
assumption around the timing and number of options exercises and
actual diluted shares outstanding may vary if actual exercises
differ from estimates.
The Company has not completed its quarter end closing and review
process with respect to preparation of its third quarter fiscal
2017 financial results and the actual results may differ from the
guidance provided in this press release. Further commentary on the
Company’s third quarter financial results will be provided in
connection with its third quarter earnings release.
Note: The Company’s adjusted net revenues, adjusted net income,
adjusted diluted earnings per share, free cash flow and adjusted
operating margins guidance does not include certain charges and
costs. The adjustments to net revenues, net income, diluted
earnings per share, net cash provided by (used in) operating
activities and operating margins in future periods are generally
expected to be similar to the kinds of charges and costs excluded
from adjusted net revenues, adjusted net income, adjusted diluted
earnings per share, free cash flow and adjusted operating margins
in prior periods, such as unusual non-cash and other compensation
expense; out of the ordinary income tax expense or benefits;
expenses related to legal claims and contingencies; 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 net income,
adjusted diluted earnings per share, free cash flow and adjusted
operating margins. 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.
*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.
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, RHModern.com,
and Waterworks.com.
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 third and
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, 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 impacts on adjusted net
revenues, adjusted net income and adjusted diluted earnings per
share from Hurricanes Harvey and Irma and from a lower 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 expectations regarding the availability of
low-interest rate financing options to us as well as our
assumptions about other sources of liquidity being available to
finance our capital expenditures and working capital requirements;
our future tax rate; our belief that our transformation to a
membership model will enhance our brand, streamline our operations
and improve the customer experience; our expectation that we will
create a more capital efficient model through the redesign of our
supply chain network, rationalizing our product offer, and
transitioning inventory into fewer facilities; 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; the anticipated benefit from mailings of our Source
Books; our ability to drive growth and position ourselves as the
leading luxury design platform in the country; our projected
opening of RH West Palm; 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, in light of
existing favorable market conditions, we currently have multiple
low-interest financing options available to us; 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; expectations
regarding our Investor Day presentation; 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 include, among others, that the financial outlook
provided for the third and fourth quarters of fiscal 2017, for
fiscal 2017 and for fiscal 2018 does not represent actual financial
results and is subject to change based upon the preparation of our
financial statements; our ability to open the New York Design
Gallery and RH West Palm Gallery when planned; our ability to close
our Dallas distribution center and adequately service our business
from two coastal distribution centers; our ability to retain key
personnel; successful implementation of our growth strategy; our
ability to take advantage of the transaction with 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; factors affecting our outstanding convertible senior
notes; 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 such as occurred with Hurricanes Harvey and Irma; 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 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.restorationhardware.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.
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version on businesswire.com: http://www.businesswire.com/news/home/20171115006430/en/
RHCammeron McLaughlin, 415-945-4998SVP, Investor Relations and
Strategycmclaughlin@rh.com
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