Company Confirms Preliminary Results Announced on November 15,
2017
RH (NYSE: RH) today announced third quarter fiscal 2017 results
and Chairman and Chief Executive Officer, Gary Friedman, provided
an update on the Company’s continued evolution and outlook.
RH leadership will host a Q&A conference call at 2:00 p.m.
PT (5:00 p.m. ET) today.
Third Quarter Highlights
- Net revenues increased 8% on top of a
3% increase last year despite an approximate 1% negative impact
from Hurricanes Harvey and Irma.
- Comparable brand revenues increased 6%
compared to a 6% decrease last year.
- GAAP net income increased to $13.2
million despite a negative impact of approximately $1.3 million
from Hurricanes Harvey and Irma and includes a positive impact of
approximately $2.5 million related to a lower effective tax rate.
This compares to GAAP net income of $2.5 million last year.
- Adjusted net income increased to $24.4
million despite a negative impact of approximately $1.3 million
from Hurricanes Harvey and Irma and includes a positive impact of
approximately $2.5 million related to a lower effective tax rate.
This compares to adjusted net income of $8.0 million last
year.
- GAAP diluted earnings per share
increased to $0.56 despite a negative impact of approximately $0.05
from Hurricanes Harvey and Irma and includes a positive impact of
approximately $0.11 related to a lower effective tax rate. This
compares to GAAP diluted earnings per share of $0.06 last
year.
- Adjusted diluted earnings per share
increased to $1.04 despite a negative impact of approximately $0.05
from Hurricanes Harvey and Irma and includes a positive impact of
approximately $0.11 related to a lower effective tax rate. This
compares to adjusted diluted earnings per share of $0.20 last
year.
To Our People, Partners, and Shareholders,
Our third quarter results are beginning to demonstrate the
earnings power of our new membership model, and a dramatically more
efficient operating platform. Adjusted net revenues for the quarter
increased 8%, despite a 1% negative impact from Hurricanes Harvey
and Irma. Adjusted diluted earnings per share increased 420%, and
reached $1.04 for the quarter, despite a $0.05 per share negative
impact from the hurricanes and including a $0.11 per share positive
impact due to a lower effective tax rate, versus adjusted diluted
earnings per share of $0.20 a year ago.
Our core RH business continued to build momentum as comparable
brand revenues increased 6% in the quarter, on top of a 6% decrease
a year ago, with merchandise margins up sharply versus last year.
Investments in our RH Interior Design business, a key benefit of
membership, continues to evolve the brand from creating and selling
products to conceptualizing and selling spaces, deepening our
relationship with customers, and positioning RH as the leading
luxury interior design platform in the country.
Regarding our balance sheet, in the second quarter we completed
our share buyback program resulting in 20.2 million shares of RH
stock repurchased in the first half of fiscal 2017, or 49.5% of the
shares outstanding at the beginning of the year. We believe that
our aggregate $1 billion of share repurchases will continue to be
an excellent allocation of capital for the long term benefit of our
shareholders. We retired the $100 million second lien term loan in
the third quarter, and have approximately $480 million of aggregate
debt, outside of our convertible notes that are due June 2019 and
June 2020. Based on our forecasted cash flow of $420 million to
$440 million for fiscal 2017, we expect our leverage ratio to be
approximately 4 times trailing 12 month adjusted EBITDA by year
end. Based on continued strong cash flow generation in 2018 and
beyond, our current plan is to repay the convertible notes in cash
to minimize dilution. Based on the rapid improvement in our balance
sheet over the last six months and the continuing strong
performance of our business under the membership model, we
currently have multiple low-interest financing options available to
us and expect further improvement in our balance sheet and capital
mix in the year ahead.
A Simplified and More Efficient Business Model and Operating
Platform
Over the past 18 months, we transformed our business from a
promotional to a membership model that is enhancing our brand,
streamlining our operations, and improving the customer experience.
Simultaneously we began the redesign of our supply chain network,
rationalizing our product offer, and transitioning inventory into
fewer facilities, creating a more capital efficient model.
With 95% of our core RH business now generated from members, we
can confidently declare our move from a promotional to a membership
model a success. We currently have approximately 380,000 active RH
members, with membership fee income up 37% year-to-date. Other
positive trends we are experiencing include reductions in return,
exchange, and cancel rates. We believe that membership has
eliminated the frantic buying patterns and associated returns,
exchanges, and canceled orders that are the result of a chaotic
promotional model. We expect these factors to contribute to
improved financial performance through higher conversion of demand
into revenue, improved margins and lower costs across our operating
platform. We also believe that these changes will result in an
overall improvement in our customer experience which should yield
additional longer term benefits for our brand. Most importantly,
the simplification of our business model is enabling our leaders
and team members to identify and act on opportunities that would
have otherwise gone unnoticed in the chaos that prevails at many
other retailers.
We have previously announced the closure of our distribution
facilities in Los Angeles and Dallas. We completed the closure of
the Los Angeles facility in November and expect to close our
distribution center in Dallas by fiscal year end. In total, we will
eliminate 1.75 million square feet of distribution space, resulting
in savings of approximately $15 million annually. Moving forward,
servicing our business from two coastal distribution centers will
result in improved in-stocks, and significantly faster inventory
turns. The redesign of our reverse logistics and Outlet business is
now 90% complete, enabling us to liquidate customer returns in
market, while driving cost savings and margin enhancement of $15
million to $20 million annually.
Our New Design Galleries Have the Potential to Double our
Retail Sales in Every Market
Our quest to revolutionize physical retailing by building
inspiring spaces that blur the lines between residential and
retail, indoors and outdoors, home and hospitality has the
potential to double our retail sales in every market. Our recent
openings of RH Toronto, The Gallery in Yorkdale, and RH West Palm,
The Gallery at City Center, are the second and third locations to
include an integrated Cafe, Wine Vault, and Barista Bar. There has
been an enthusiastic response to our integrated hospitality
offering in Toronto and West Palm, with both locations performing
similar to the opening weeks and months in Chicago, demonstrating
our ability to duplicate our success at the historic 3Arts Club
Cafe. In fact, last week Instagram published its most posted cafes
and bakeries for 2017, and our 3Arts Club Cafe ranked 7th in the
entire country. Our ability to seamlessly integrate food, wine, art
and design, activates all of the senses, drives significant traffic
into our galleries, and creates a customer experience that cannot
be replicated online.
As previously communicated, due to the disruption caused by the
ongoing street construction in the Meatpacking District, we have
decided to delay the opening of the New York Design Gallery until
the Spring-Summer of 2018. We expect an approximate $9 million
negative revenue impact from the delay, and a corresponding $1.5
million reduction to adjusted net income in the fourth quarter,
both of which are included in our fourth quarter guidance. We will
continue operating our Flatiron Gallery until the new Meatpacking
Gallery opens.
Looking Forward, Driving High Quality, Sustainable
Growth
Looking forward, we are forecasting margins to rise and costs to
fall as we cycle our efforts to reduce inventory, and benefit from
the efficiencies of our new operating model. As discussed at our
Investor Day, we will remain focused on optimizing the
profitability of our new platform, and will be managing the
business with a bias for earnings versus revenue growth. We plan to
restrain ourselves from chasing low quality revenues, and instead
focus on building a superior operating model that will enable us to
compete and win over the long-term. It is becoming clear to us, as
we witness the continued failures of high growth - no profit,
online pure plays, that the complexities and costs of scaling a
furniture business will favor those who have control of their brand
from concept to customer, build an integrated multi-channel
platform with a superior logistics network, and offer the customer
a compelling physical and digital experience.
To that point, in fiscal 2018, we believe we have a clear line
of sight toward achieving net revenue growth in the range of 8% to
9% on a comparable 52-week basis and adjusted operating margins in
the range of 9% to 10%, while generating free cash flow in excess
of $240 million. Inventory will again be a source of cash in fiscal
2018, and we anticipate lower real estate capital expenditures, as
we move from a leasing to a development model, where we recoup our
investments through a sale-leaseback arrangement. In total, we are
forecasting fiscal 2018 net capital expenditures to be in the range
of $65 million to $75 million.
We remain confident in reaching our long term goal of $4 billion
to $5 billion in North American revenues with industry leading
operating margins and returns on invested capital. We also believe
there is tremendous potential for the RH brand internationally, and
we are currently exploring opportunities to open our first Gallery
in London.
Building a Brand with No Peer, and a Customer Experience That
Cannot be Replicated Online
We do understand that many of the strategies we are pursuing -
opening the largest specialty retail experiences in our industry
while most are shrinking the size of their retail footprint and
closing stores; moving from a promotional to a membership model,
while others are increasing promotions, positioning their brands
around price versus product; continuing to mail inspiring Source
Books, while many are eliminating catalogs; and refusing to follow
the herd in self-promotion on social media platforms, instead
allowing our brand to be defined by the taste, style, design and
quality of the products and experiences we are creating - are all
in direct conflict with conventional wisdom and the plans being
pursued by many in our industry.
We believe when you step back and consider; one, we are building
a brand with no peer; two, we are creating a customer experience
that cannot be replicated online; and three, we have total control
of our brand from concept to customer, you realize what we are
building is extremely rare in today’s retail landscape, and we
would argue, will also prove to be equally valuable.
Lastly, we are deeply grateful for our people and partners whose
passion and persistence bring our vision and values to life each
day, as we pursue our quest to become one of the most admired
brands in the world.
Carpe Diem,
Gary
Gary FriedmanChairman and Chief Executive Officer
Fourth Quarter and Fiscal 2017
Outlook
- Fourth quarter adjusted net income in
the range of $37 million to $41 million despite an approximate $1.5
million negative impact as a result of the Company’s decision to
delay the opening of its New York Design Gallery to Spring-Summer
2018. This outlook assumes an approximate $2 million tax benefit
which corresponds to an expected 35% tax rate. Due to the recent
increases in the Company’s stock price and its impact on the fully
diluted share count, the Company is providing a table to assist in
estimating diluted shares outstanding and adjusted diluted earnings
per share.
- Fourth quarter net revenues in the
range of $655 million to $680 million despite a $9 million negative
impact due to the Company’s decision to delay the opening of its
New York Design Gallery.
- Fiscal 2017 adjusted net income in the
range of $83 million to $87 million despite the Company’s decision
to delay the opening of its New York Design Gallery.
- Fiscal 2017 net capital expenditures in
the range of $120 million to $130 million.
- Fiscal 2017 free cash flow in the range
of $420 million to $440 million.
Preliminary 2018 Outlook
- Net revenues in the range of $2.58
billion to $2.62 billion, representing growth of 6% to 7% on a
52-week vs 53-week basis. On a comparable 52-week vs 52-week basis,
net revenue growth is expected to be in the range of 8% to 9%.
- Adjusted operating margin in the range
of 9% to 10%.
- Adjusted net income in the range of
$125 million to $145 million.
- Net capital expenditures in the range
of $65 million to $75 million.
- Free cash flow in excess of $240
million.
Q&A Conference Call
Information
Accompanying this release, RH leadership will host a live
question and answer conference call at 2:00 p.m. PT (5:00 p.m. ET).
Interested parties may access the call by dialing (866) 394-6658
(United States/Canada) or (706) 679-9188 (International). A live
broadcast of the question and answer session conference call will
also be available online at the Company’s investor relations
website, ir.rh.com. A replay of the question and answer session
conference call will be available through December 18, 2017 by
dialing (855) 859-2056 or (404) 537-3406 and entering passcode
6199665, as well as on the Company’s investor relations
website.
About RH
RH (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.
Non-GAAP Financial
Measures
To supplement its condensed consolidated financial statements,
which are prepared and presented in accordance with Generally
Accepted Accounting Principles (“GAAP”), the Company uses the
following non-GAAP financial measures: adjusted net revenue,
adjusted net income, adjusted diluted earnings per share, free cash
flow and adjusted operating margin (collectively, “non-GAAP
financial measures”). We compute these measures by adjusting the
applicable GAAP measures to remove the impact of certain recurring
and non-recurring charges and gains and the tax effect of these
adjustments. The presentation of this financial information is not
intended to be considered in isolation or as a substitute for, or
superior to, the financial information prepared and presented in
accordance with GAAP. The Company uses these non-GAAP financial
measures for financial and operational decision making and as a
means to evaluate period-to-period comparisons. The Company
believes that they provide useful information about operating
results, enhance the overall understanding of past financial
performance and future prospects, and allow for greater
transparency with respect to key metrics used by management in its
financial and operational decision making. The non-GAAP financial
measures used by the Company in this press release may be different
from the non-GAAP financial measures, including similarly titled
measures, used by other companies.
For more information on the non-GAAP financial measures, please
see the Reconciliation of GAAP to non-GAAP Financial Measures
tables in this press release. These accompanying tables include
details on the GAAP financial measures that are most directly
comparable to non-GAAP financial measures and the related
reconciliations between these financial measures.
Forward-Looking
Statements
This release contains forward-looking statements within the
meaning of the federal securities laws, including statements
related to: our future financial outlook and guidance for the
fourth quarter of fiscal 2017, for fiscal 2017 and for fiscal 2018,
including net revenues, adjusted net revenues, adjusted net income,
adjusted diluted earnings per share, adjusted operating margins,
free cash flow, leverage ratio, net revenue growth and net capital
expenditures; various estimates of diluted shares outstanding and
adjusted diluted earnings per share based on assumptions about
average stock prices; assumptions regarding the potential future
stock price of our common stock and expectations concerning stock
price appreciation; the impact of stock price and other factors
like option exercise levels on estimated diluted shares outstanding
and on our effective tax rate; the estimated reduction in adjusted
net revenues and adjusted net income as a result of the delayed
opening of the New York Design Gallery; our future tax rate; our
planned closing of our Dallas distribution center and related
estimated cost savings; our ability to improve in-stocks and
inventory turns by servicing our business from two coastal
distribution centers; estimated cost savings and margin enhancement
associated with the pending completion of our redesign of reverse
logistics and Outlet business; our ability to drive growth and
position ourselves as the leading luxury interior design platform
in the country; the anticipated timing of the opening our New York
Design Gallery in Spring-Summer of 2018; our continued operation of
our Flatiron Gallery; our belief that our stock repurchases in the
first and second quarters of 2017 will continue to be an excellent
allocation of capital for the long-term benefit for our
shareholders; our plan to pay down our convertible notes from cash
to minimize dilution; our belief that, based on the rapid
improvement in our balance sheet over the last six months and the
continuing strong performance of our business under the membership
model, we currently have multiple low-interest financing options
available to us; our expectation of further improvement in our
balance sheet and capital mix in the year ahead; our belief that
our new Design Galleries have the potential to double our retail
sales in every market; our focus on optimizing the profitability of
our new platform and our managing the business with a bias for
earnings versus revenue growth; the benefits of building a
multi-channel platform with a compelling physical experience and a
superior logistics network; our expectation that margins will rise
and costs will fall as we cycle our efforts to reduce inventory and
benefit from our new operating model; our expectation that
inventory will again be a source of cash in fiscal 2018;
anticipated lower real estate capital expenditures as we move from
a leasing to a development model, where we recoup our investments
through a sale-leaseback arrangement; the benefits of moving from a
promotional to a membership model; trends we are experiencing
including reductions in returns and exchange and cancel rates; our
expectation that factors relating to our membership model will
contribute to improved financial performance through higher
conversion of demand into revenue, improved margins and lower costs
across our operating platform, as well as an overall improvement in
our customer experience; the benefits of the simplification of our
business model; our potential for the RH brand internationally and
our opportunities to open a Gallery in London; our building of a
rare and valuable company and a brand with no peer and a customer
experience that cannot be replicated online; our expectation of
reaching our long term goal of $4 billion to $5 billion in North
American revenues with industry leading operating margins, and
returns on invested capital; any financial or operational factors
or results that are described as short term, one-time,
non-recurring or unusual (as similar operational or financial
factors may adversely affect the Company’s future results including
as a result of charges, costs and other items that may occur in one
or more subsequent financial reporting periods), and any statements
or assumptions underlying any of the foregoing. You can identify
forward-looking statements by the fact that they do not relate
strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,”
“project,” “plan,” “intend,” “believe,” “may,” “will,” “should,”
“likely” and other words and terms of similar meaning in connection
with any discussion of the timing or nature of future events. We
cannot assure you that future developments affecting us will be
those that we have anticipated. Important risks and uncertainties
that could cause actual results to differ materially from our
expectations or the assumptions set forth in this release include,
among others, our ability to retain key personnel; successful
implementation of our growth strategy; our ability to leverage
Waterworks; uncertainties in the current performance of our
business including a range of risks related to our operations as
well as external economic factors; general economic conditions and
the impact on consumer confidence and spending; changes in customer
demand for our products; our decisions concerning the allocation of
capital; decisions concerning the allocation of capital including
the extent to which we repurchase additional shares of our common
stock which will affect shares outstanding and EPS; factors
affecting our outstanding convertible senior notes or other forms
of our indebtedness; our ability to anticipate consumer preferences
and buying trends, and maintaining our brand promise to customers;
changes in consumer spending based on weather and other conditions
beyond our control; risks related to the number of new business
initiatives we are undertaking; strikes and work stoppages
affecting port workers and other industries involved in the
transportation of our products; our ability to obtain our products
in a timely fashion or in the quantities required; our ability to
employ reasonable and appropriate security measures to protect
personal information that we collect; our ability to support our
growth with appropriate information technology systems; risks
related to “conflict minerals” compliance and its impact on
sourcing, if any, as well as those risks and uncertainties
disclosed under the sections entitled “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in RH’s most recent Form 10-K and Form 10-Q
filed with the Securities and Exchange Commission, and similar
disclosures in subsequent reports filed with the SEC, which are
available on our investor relations website at ir.rh.com and on the
SEC website at www.sec.gov. Any forward-looking statement made by
us in this press release speaks only as of the date on which we
make it. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new information,
future developments or otherwise, except as may be required by any
applicable securities laws.
RH
REVENUE METRICS
(Unaudited)
Three Months Ended October 28, October
29, 2017 2016 Stores as a percentage of net
revenues 58 % 56 % Direct as a percentage of net
revenues 42 % 44 % Growth in net revenues: Stores 12 % 9 % Direct 3
% -3 % Total 8 % 3 % Comparable brand revenue growth 6 % -6 %
See the Company’s most recent Form 10-K and Form 10-Q
filings for the definitions of stores, direct, and comparable brand
revenue.
RHRETAIL GALLERY
METRICS(Unaudited)
As of October 28, 2017, the Company operated a total of 84
retail Galleries, consisting of 48 legacy Galleries, 6 larger
format Design Galleries, 9 next generation Design Galleries, 1 RH
Modern Gallery and 5 RH Baby & Child Galleries throughout the
United States and Canada, and 15 Waterworks showrooms throughout
the United States and in the U.K. This compares to a total of 85
retail Galleries, consisting of 51 legacy Galleries, 6 larger
format Design Galleries, 7 next generation Design Galleries, 1 RH
Modern Gallery and 5 RH Baby & Child Galleries throughout the
United States and Canada, and 15 Waterworks showrooms throughout
the United States and in the U.K., as of October 29, 2016.
In addition, as of October 28, 2017, the Company operated 31
outlet stores compared to 28 as of October 29, 2016.
Three Months Ended October 28,
October 29, 2017 2016 Total Leased
Selling Total Leased Selling Store Count
Square Footage Store Count Square Footage
(in thousands) (in thousands)
Beginning of
period 85 915 84 776 Retail Galleries opened:
Yorkdale next generation Design Gallery 1 43.3 — — Leawood next
generation Design Gallery — — 1 33.5 Waterworks San Francisco
Showroom — — 1 5.8 Austin next generation Design Gallery — — 1 39.6
Las Vegas next generation Design Gallery — — 1 47.6 Retail
Galleries closed: Toronto (Bay View) Legacy Gallery (1 )
(6.0 ) — — Toronto (Yonge Street) Legacy Gallery (1 ) (8.6 ) — —
Kansas City Legacy Gallery — — (1 ) (9.9 ) Waterworks - Kansas
Street, SF — — (1 ) (2.0 ) Austin Legacy Gallery — —
(1 ) (6.2 )
End of period 84 944
85 884 % Growth 7 % 30 %
Weighted-average leased selling square
footage
918 816 % Growth 12 % 31 % See the Company’s
most recent Form 10-K and Form 10-Q filings for square footage
definitions. Total leased square footage as of October 28, 2017 and
October 29, 2016 was 1,276,000 and 1,208,000, respectively.
Weighted-average leased square footage for the three months ended
October 28, 2017 and October 29, 2016 was 1,250,000 and 1,146,000,
respectively. Retail sales per leased selling square foot for the
three months ended October 28, 2017 and October 29, 2016 was $329
and $330, respectively.
RH CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
share and per share amounts) (Unaudited)
Three Months Ended Nine Months Ended
October 28, % of Net October 29,
% of Net October 28, % of Net
October 29, % of Net 2017
Revenues 2016 Revenues 2017
Revenues 2016 Revenues Net revenues $ 592,473
100.0 % $ 549,328 100.0 % $ 1,769,879 100.0 %
$ 1,548,165 100.0 % Cost of goods sold 378,148
63.8 % 373,509 68.0 % 1,179,485 66.6 %
1,065,032 68.8 % Gross profit 214,325 36.2 % 175,819
32.0 % 590,394 33.4 % 483,133 31.2 %
Selling, general and administrative
expenses
171,163 28.9 % 160,433 29.2 %
528,213 29.9 %
457,207
29.5 % Income from operations 43,162 7.3 % 15,386 2.8 %
62,181 3.5 % 25,926 1.7 % Other expenses Interest expense—net
18,915 3.2 % 11,091 2.0 % 45,496 2.5 % 32,528 2.1 %
Loss on extinguishment of debt
4,880 0.8 % — —
%
4,880 0.3 % — —
%
Total other expenses 23,795 4.0 % 11,091 2.0 % 50,376 2.8 % 32,528
2.1 %
Income (loss) before income taxes
19,367 3.3 % 4,295 0.8 % 11,805 0.7 % (6,602 ) -0.4 % Income tax
expense (benefit) 6,216 1.1 % 1,778 0.3
% 9,886 0.6 % (2,567 ) -0.1 % Net
income (loss) $ 13,151 2.2 % $ 2,517 0.5 % $ 1,919
0.1 % $ (4,035 ) -0.3 %
Weighted-average shares used in computing
basic net income (loss) per share
21,221,848 40,730,059 29,076,556 40,653,091
Basic net income (loss) per share
$ 0.62 $ 0.06 $ 0.07 $ (0.10 )
Weighted-average shares used in computing
diluted net income (loss) per share
23,535,617 40,926,450 30,593,382 40,653,091
Diluted net income (loss) per share
$ 0.56 $ 0.06 $ 0.06 $ (0.10 )
RH
RECONCILIATION OF GAAP NET INCOME (LOSS) TO ADJUSTED NET
INCOME (In thousands) (Unaudited)
Three Months Ended Nine Months Ended
October 28, October 29, October 28,
October 29, 2017 2016 2017
2016 GAAP net income (loss) $ 13,151 $ 2,517 $ 1,919 $
(4,035 )
Adjustments (pre-tax): Net revenues: Recall accrual
[a] — — 3,813 — Cost of goods sold: Recall accrual [a] 3,552 —
4,315 — Impact of inventory step-up [b] 248 1,786 2,108 5,187
Distribution center closures [c] 497 — 497 — Legal claim [d] — — —
7,729 Selling, general and administrative expenses: Non-cash
compensation [e] — — 23,872 3,672 Distribution center closures [c]
1,365 — 1,365 — Recall accrual [a] — — 157 — Gain on sale of
building and land [f] (819 ) — (2,119 ) — Reorganization related
costs [g] — 974 — 5,698 Acquisition related costs [h] — — — 2,847
Legal claim [d] — — — 972 Other expenses: Amortization of debt
discount [i] 6,879 6,629 20,384 19,550 Loss on extinguishment of
debt [j] 4,880 — 4,880 — Subtotal
adjusted items 16,602 9,389 59,272 45,655 Impact of income tax on
adjusted items [k] (5,329 ) (3,887 ) (15,272 )
(17,759 ) Adjusted net income [l] $ 24,424 $ 8,019 $ 45,919
$ 23,861 [a] Represents costs and inventory charges
associated with a product recall initiated in the second quarter of
fiscal 2017, as well as an adjustment in the nine months ended
October 28, 2017 of the recall accrual related to certain product
recalls initiated in the fourth quarter of fiscal 2016. [b]
Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of
Waterworks. [c] Represents severance expense and certain inventory
transfer costs associated with two distribution center closures,
one of which was completed in November 2017 and one which is
expected to occur in January 2018. [d] Represents the estimated
cumulative impact of coupons redeemed in connection with a legal
claim alleging that the Company violated California’s Song-Beverly
Credit Card Act of 1971 by requesting and recording ZIP codes from
customers paying with credit cards. [e] Represents non-cash
compensation charges related to a fully vested option grant made to
Mr. Friedman in May 2017 and the fully vested option grants made in
connection with our acquisition of Waterworks in May 2016. [f]
Represents the gain on the sale of building and land. As we entered
into a short-term lease agreement to lease the property subsequent
to the sale, the total gain associated with the sale of this
property was amortized over a five month period. [g] Represents
costs associated with a reorganization, which include severance
costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.
[h] Represents costs incurred in connection with our acquisition of
Waterworks including professional fees. [i] Under GAAP, certain
convertible debt instruments that may be settled in cash on
conversion are required to be separately accounted for as liability
and equity components of the instrument in a manner that reflects
the issuer’s non-convertible debt borrowing rate. Accordingly, in
accounting for GAAP purposes for the $350 million aggregate
principal amount of convertible senior notes that were issued in
June 2014 (the “2019 Notes”) and for the $300 million aggregate
principal amount of convertible senior notes that were issued in
June and July 2015 (the “2020 Notes”), we separated the 2019 Notes
and 2020 Notes into liability (debt) and equity (conversion option)
components and we are amortizing as debt discount an amount equal
to the fair value of the equity components as interest expense on
the 2019 Notes and 2020 Notes over their expected lives. The equity
components represent the difference between the proceeds from the
issuance of the 2019 Notes and 2020 Notes and the fair value of the
liability components of the 2019 Notes and 2020 Notes,
respectively. Amounts are presented net of interest capitalized for
capital projects of $0.8 million and $0.6 million during the three
months ended October 28, 2017 and October 29, 2016, respectively.
Amounts are presented net of interest capitalized for capital
projects of $2.3 million and $1.9 million during the nine months
ended October 28, 2017 and October 29, 2016, respectively. [j]
Represents the loss on extinguishment of debt related to the second
lien term loan which was repaid in full in October 2017. [k] The
adjustment for the three months ended October 28, 2017 represents
the tax effect of the adjusted items based on our effective tax
rate of 32.1%. The nine months ended October 28, 2017 includes an
adjustment to calculate income tax expense at an adjusted tax rate
of 35.4%, which is calculated based on the weighted-average fiscal
2017 quarterly adjusted effective tax rates. The adjustments for
the three and nine months ended October 29, 2016 represent the tax
effect of the adjusted items based on our effective tax rates of
41.4% and 38.9%, respectively. [l] Adjusted net income is a
supplemental measure of financial performance that is not required
by, or presented in accordance with, GAAP. We define adjusted net
income as net income (loss), adjusted for the impact of certain
non-recurring and other items that we do not consider
representative of our underlying operating performance. Adjusted
net income is included in this press release because management
believes that adjusted net income provides meaningful supplemental
information for investors regarding the performance of our business
and facilitates a meaningful evaluation of actual results on a
comparable basis with historical results. Our management uses this
non-GAAP financial measure in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter.
RH RECONCILIATION OF DILUTED
NET INCOME (LOSS) PER SHARE TO ADJUSTED DILUTED NET INCOME
PER SHARE (Unaudited) Three Months
Ended Nine Months Ended October 28,
October 29, October 28, October 29,
2017 2016 2017 2016 Diluted net income
(loss) per share $ 0.56 $ 0.06 $ 0.06 $ (0.10 ) Pro forma
diluted net income (loss) per share [a] $ 0.56 $ 0.06 $ 0.06 $
(0.10 ) EPS impact of adjustments (pre-tax) [b]: Non-cash
compensation $ — $ — $ 0.78 $ 0.09 Amortization of debt discount
0.29 0.17 0.67 0.48 Recall accrual 0.15 — 0.27 — Loss on
extinguishment of debt 0.21 — 0.16 — Impact of inventory step-up
0.01 0.04 0.07 0.13 Distribution center closures 0.08 — 0.06 — Gain
on sale of building and land (0.03 ) — (0.07 ) — Legal claim — — —
0.21 Reorganization related costs — 0.02 — 0.14 Acquisition related
costs — — — 0.07 Subtotal adjusted
items 0.71 0.23 1.94 1.12 Impact of income tax items [b]
(0.23 ) (0.09 ) (0.50 ) (0.44 ) Adjusted
diluted net income per share [c] $ 1.04 $ 0.20 $ 1.50 $ 0.58 [a]
Pro forma diluted net loss per share for the nine months
ended October 29, 2016 is calculated based on GAAP net loss and pro
forma diluted weighted-average shares of 40,892,878. [b] Refer to
table titled “Reconciliation of GAAP Net Income (Loss) to Adjusted
Net Income” and the related footnotes for additional information.
[c] Adjusted diluted net income per share is a supplemental measure
of financial performance that is not required by, or presented in
accordance with, GAAP. We define adjusted diluted net income per
share as net income (loss), adjusted for the impact of certain
non-recurring and other items that we do not consider
representative of our underlying operating performance divided by
the Company’s share count. Adjusted diluted net income per share is
included in this press release because management believes that
adjusted diluted net income per share provides meaningful
supplemental information for investors regarding the performance of
our business and facilitates a meaningful evaluation of operating
results on a comparable basis with historical results. Our
management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter.
RH
RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT
(In thousands) (Unaudited) Three
Months Ended Nine Months Ended October 28,
October 29, October 28, October
29, 2017 2016 2017 2016 Net
revenues $ 592,473 $ 549,328 $ 1,769,879 $ 1,548,165 Recall accrual
[a] — — 3,813 — Adjusted net revenues
[b] $ 592,473 $ 549,328 $ 1,773,692 $ 1,548,165 Gross profit
$ 214,325 $ 175,819 $ 590,394 $ 483,133 Recall accrual [a] 3,552 —
8,128 — Impact of inventory step-up [a] 248 1,786 2,108 5,187
Distribution center closures [a] 497 — 497 — Legal claim [a]
— — — 7,729 Adjusted gross profit [b] $
218,622 $ 177,605 $ 601,127 $ 496,049 Gross margin [c]
36.2 % 32.0 % 33.4 % 31.2 % Adjusted
gross margin [c] 36.9 % 32.3 % 33.9 %
32.0 % [a] Refer to table titled “Reconciliation of GAAP Net
Income (Loss) to Adjusted Net Income” and the related footnotes for
additional information. [b] Adjusted net revenues and adjusted
gross profit are supplemental measures of financial performance
that are not required by, or presented in accordance with, GAAP. We
define adjusted net revenues as net revenues, adjusted for the
impact of certain non-recurring and other items that we do not
consider representative of our underlying operating performance. We
define adjusted gross profit as gross profit, adjusted for the
impact of certain non-recurring and other items that we do not
consider representative of our underlying operating performance.
Adjusted net revenues and adjusted gross profit are included in
this press release because management believes that adjusted net
revenues and adjusted gross profit provide meaningful supplemental
information for investors regarding the performance of our business
and facilitates a meaningful evaluation of operating results on a
comparable basis with historical results. Our management uses these
non-GAAP financial measures in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter. [c] Gross margin is defined as gross profit divided by
net revenues. Adjusted gross margin is defined as adjusted gross
profit divided by adjusted net revenues.
RH
RECONCILIATION OF NET INCOME (LOSS) TO OPERATING INCOME
AND ADJUSTED OPERATING INCOME (In thousands)
(Unaudited) Three Months Ended
Nine Months Ended October 28, October
29, October 28, October 29, 2017
2016 2017 2016 Net income (loss) $ 13,151 $
2,517 $ 1,919 $ (4,035 ) Interest expense—net 18,915 11,091 45,496
32,528 Loss on extinguishment of debt 4,880 — 4,880 — Income tax
expense (benefit) 6,216 1,778 9,886
(2,567 ) Operating income 43,162 15,386 62,181 25,926 Non-cash
compensation [a] — — 23,872 3,672 Recall accrual [a] 3,552 — 8,285
— Impact of inventory step-up [a] 248 1,786 2,108 5,187
Distribution center closures [a] 1,862 — 1,862 — Gain on sale of
building and land [a] (819 ) — (2,119 ) — Legal claim [a] — — —
8,701 Reorganization related costs [a] — 974 — 5,698 Acquisition
related costs [a] — — — 2,847 Adjusted
operating income [b] $ 48,005 $ 18,146 $ 96,189 $ 52,031 Net
revenues $ 592,473 $ 549,328 $ 1,769,879 $ 1,548,165 Adjusted net
revenues [c] $ 592,473 $ 549,328 $ 1,773,692 $ 1,548,165
Operating margin [c] 7.3 % 2.8 % 3.5 %
1.7 % Adjusted operating margin [c] 8.1 % 3.3 %
5.4 % 3.4 % [a] Refer to table titled
“Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income”
and the related footnotes for additional information. [b] Adjusted
operating income is a supplemental measure of financial performance
that is not required by, or presented in accordance with, GAAP. We
define adjusted operating income as operating income, adjusted for
the impact of certain non-recurring and other items that we do not
consider representative of our underlying operating performance.
Adjusted operating income is included in this press release because
management believes that adjusted operating income provides
meaningful supplemental information for investors regarding the
performance of our business and facilitates a meaningful evaluation
of operating results on a comparable basis with historical results.
Our management uses this non-GAAP financial measure in order to
have comparable financial results to analyze changes in our
underlying business from quarter to quarter. [c] Operating margin
is defined as operating income divided by net revenues. Adjusted
operating margin is defined as adjusted operating income divided by
adjusted net revenues. Refer to table titled “Reconciliation of
Gross Profit to Adjusted Gross Profit” and the related footnotes
for a definition and reconciliation of adjusted net revenues.
RH CONDENSED CONSOLIDATED BALANCE
SHEETS (In thousands) (Unaudited)
October 28, January 28, October
29, 2017 2017 2016 As Revised
[a] ASSETS Cash and cash equivalents $ 22,162 $
87,023 $ 47,135 Short-term investments — 142,677 170,153
Merchandise inventories 557,345 752,304 776,586 Asset held for sale
— 4,900 — Other current assets 109,488 151,353
149,639 Total current assets 688,995 1,138,257 1,143,513 Long-term
investments — 33,212 21,056 Property and equipment—net 778,320
682,056 656,569 Goodwill and intangible assets 276,279 274,360
276,568 Other non-current assets 57,972 64,635
50,304 Total assets $ 1,801,566 $ 2,192,520 $ 2,148,010
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Liabilities
Accounts payable and accrued expenses $ 252,569 $ 226,980 $ 222,788
Deferred revenue, customer deposits and other current liabilities
217,188 189,189 188,342 Total current
liabilities 469,757 416,169 411,130 Asset based credit facility
341,000 — — Term loan—net 79,471 — — Convertible senior notes due
2019—net 323,828 312,379 308,649 Convertible senior notes due
2020—net 248,633 235,965 231,876 Financing obligations under
build-to-suit lease transactions 230,259 203,015 193,277 Other
non-current obligations 133,894 105,123
100,900 Total liabilities 1,826,842 1,272,651
1,245,832 Stockholders’ equity (deficit) (25,276 )
919,869 902,178 Total liabilities and stockholders’
equity (deficit) $ 1,801,566 $ 2,192,520 $ 2,148,010 [a]
During the fourth quarter of fiscal 2016 management determined that
we had incorrectly reported negative cash balances due to
outstanding checks in the accounts payable and accrued expenses
financial statement line item in our consolidated balance sheets
without properly applying the limited right of offset against cash
and cash equivalents. The revision decreased cash and cash
equivalents and accounts payable and accrued expenses by $8.3
million as of October 29, 2016.
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In
thousands) (Unaudited) Nine Months
Ended October 28, October 29, 2017
2016 As Revised [a] CASH FLOWS FROM
OPERATING ACTIVITIES Net income (loss) $ 1,919 $ (4,035 )
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 51,092 41,248 Other non-cash items
74,516 53,611 Change in assets and liabilities—net of acquisition:
Merchandise inventories 190,620 (23,261 ) Accounts payable, accrued
expenses and other 68,615 (86,548 ) Net cash provided
by (used in) operating activities 386,762 (18,985 )
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures—including
construction related deposits and purchase of trademarks and domain
names
(89,600 ) (108,145 ) Proceeds from sale of assets held for sale—net
15,123 — Net proceeds from (purchases of) investments 175,801
(39,133 ) Acquisition of business—net of cash acquired —
(116,100 ) Net cash provided by (used in) investing activities
101,324 (263,378 )
CASH FLOWS FROM
FINANCING ACTIVITIES Net borrowings under asset based credit
facility 341,000 — Net borrowings under term loans 80,000 — Net
borrowings under promissory and equipment security notes 33,159 —
Debt issuance costs (8,298 ) — Repurchases of common
stock—including commissions (1,000,326 ) — Net equity related
transactions 10,488 (2,049 ) Other financing activities
(8,992 ) (262 ) Net cash used in financing activities
(552,969 ) (2,311 ) Effects of foreign currency exchange
rate translation 22 342 Net decrease in cash and cash
equivalents (64,861 ) (284,332 ) Cash and cash equivalents
Beginning of period 87,023 331,467 End of period $
22,162 $ 47,135 [a] During the fourth quarter of fiscal 2016
management determined that we had incorrectly reported negative
cash balances due to outstanding checks in the accounts payable and
accrued expenses financial statement line item in our consolidated
balance sheets without properly applying the limited right of
offset against cash and cash equivalents. The revision decreased
net cash provided by operating activities by $10.1 million for the
nine months ended October 29, 2016.
RH
CALCULATION OF FREE CASH FLOW (In thousands)
(Unaudited) Nine Months Ended
October 28, October 29, 2017
2016 As Revised [a] Net cash provided by (used
in) operating activities $ 386,762 $ (18,985 )
Capital expenditures—including
construction related deposits and purchase of trademarks and domain
names
(89,600 ) (108,145 ) Payments on build-to-suit lease transactions
(8,734 ) — Payments on capital leases (258 ) (262 ) Proceeds from
sale of assets held for sale—net 15,123 — Free cash flow [b]
$ 303,293 $ (127,392 ) [a] During the fourth quarter of
fiscal 2016 management determined that we had incorrectly reported
negative cash balances due to outstanding checks in the accounts
payable and accrued expenses financial statement line item in our
consolidated balance sheets without properly applying the limited
right of offset against cash and cash equivalents. The revision
decreased net cash provided by operating activities by $10.1
million for the nine months ended October 29, 2016. [b] Free cash
flow is calculated as net cash provided by (used in) operating
activities and net proceeds from sale of assets held for sale, less
capital expenditures, construction related deposits, purchase of
trademarks and domain names, payments on build-to-suit lease
transactions and payments on capital leases. Free cash flow
excludes all non-cash items, such as the non-cash additions of
property and equipment due to build-to-suit lease transactions.
Free cash flow is included in this press release because management
believes that free cash flow provides meaningful supplemental
information for investors regarding the performance of our business
and facilitates a meaningful evaluation of operating results on a
comparable basis with historical results. Our management uses this
non-GAAP financial measure in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter.
RH FOURTH QUARTER AND FISCAL
2017 OUTLOOK (In millions, except per share data)
RH’s fiscal 2017 will include 53 weeks
compared to the prior fiscal year which included 52 weeks. The
Company is providing the following outlook for the fourth quarter
and fiscal 2017:
Fourth Quarter Fiscal Year
2017 2017 Adjusted net revenues $655 – $680 $2,429 –
$2,454 % growth vs. prior year 11% – 15% 14% – 15% Adjusted
gross margin (% of net revenues)
37.1% – 37.4%
34.7% – 34.9%
Adjusted selling, general, and
administrative expenses (% of net revenues)
26.8% – 27.0%
28.0% – 28.1%
Adjusted operating income
$66 – $72
$162 – $169
% growth vs. prior year
30% – 42%
58% – 64%
Adjusted operating margin (% of net revenues)
10.1% – 10.6%
6.7% – 6.9%
Adjusted net income $37 – $41
$83 – $87
% growth vs. prior year 33% – 48%
60% – 68%
Capital expenditures $120 – $130
Asset sales
$15 Free cash flow $420 – $440
Note: RH’s fiscal 2017 will include 53
weeks compared to the prior fiscal year which included 52 weeks.
The extra week in fiscal 2017 is expected to add approximately $44
million to $46 million in net revenues for the fourth quarter and
fiscal year. The Company’s adjusted net income does not include
certain charges and costs. The adjustments to net revenues, gross
margin, selling, general and administrative expenses, operating
income, operating margin and net income in future periods are
generally expected to be similar to the kinds of charges and costs
excluded from such non-GAAP financial measures in prior periods,
such as unusual non-cash and other compensation expense; one-time
income tax expense or benefits; legal claim related expenses;
recall accruals; reorganization costs including severance costs and
related taxes; non-cash amortization of debt discount; and charges
and costs in connection with the acquisition of Waterworks, among
others. The exclusion of these charges and costs in future periods
will have a significant impact on the Company’s adjusted net
revenues, adjusted gross margin, adjusted selling, general and
administrative expenses, adjusted operating income, adjusted
operating margin and adjusted net income. The Company is not able
to provide a reconciliation of the Company’s non-GAAP financial
guidance to the corresponding GAAP measures without unreasonable
effort because of the uncertainty and variability of the nature and
amount of these future charges and costs.
RH ANTICIPATED IMPACT OF STOCK PRICE ON
DILUTED SHARES OUTSTANDING (In millions, except per share
data) Average Fourth Quarter 2017 Stock
Price $ 80.00 $ 100.00 $ 120.00
$ 140.00 $ 160.00 $
180.00 $ 200.00 Midpoint of Q4 2017 adjusted net
income guidance $ 39.0 $ 39.0 $ 39.0 $ 39.0
$ 39.0 $ 39.0 $ 39.0 Q4 2017 Diluted
shares outstanding 24.6 25.7 26.6 27.2 27.7 30.2 31.3 Q4
2017 Adjusted earnings per share $ 1.59 $ 1.52 $ 1.47 $ 1.43 $ 1.41
$ 1.29 $ 1.25
Implied Average Fiscal 2017 Stock
Price $
61.00
$ 66.00 $ 71.00 $ 76.00
$ 81.00 $ 86.00 $ 91.00
Midpoint of Fiscal 2017 adjusted net income guidance $
85.0
$
85.0
$
85.0
$
85.0
$
85.0
$
85.0
$
85.0
Fiscal 2017 Diluted shares outstanding 29.1 29.5 29.9 30.2
30.6 30.9 31.2 Fiscal 2017 Adjusted earnings per share $
2.92
$
2.88
$
2.84
$
2.81
$
2.78
$
2.75
$
2.72
Note: The table above is intended to demonstrate the impact of
increasing stock prices on our diluted shares outstanding due to 1)
additional in-the-money options and 2) the higher cost of acquired
shares under the treasury stock method. At stock prices in excess
of $172, we will incur dilution related to the convertible notes
and our obligation to deliver additional shares in excess of the
dilution protection provided by the bond hedges. The calculation
also includes assumptions around the timing and number of options
exercises. Actual diluted shares outstanding may differ if actual
exercises differ from estimates.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171205006351/en/
RHCammeron McLaughlin, 415-945-4998SVP, Investor Relations and
Strategycmclaughlin@rh.com
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