RH (NYSE: RH) today announced fourth quarter and fiscal year
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.
FOURTH QUARTER 2018 HIGHLIGHTS
Q4 GAAP DILUTED EPS $1.41 vs. $0.01 LYQ4 ADJUSTED
DILUTED EPS $3.00 vs. $1.69 LY +78%
Q4 GAAP NET INCOME $36.1M vs. $0.3M LYQ4 ADJUSTED NET
INCOME $76.0M vs. $43.3M LY +76%
Q4 GAAP OPERATING MARGIN 15.4% vs. 10.3% LYQ4 ADJUSTED
OPERATING MARGIN 15.9% vs. 11.2% LY
Q4 GAAP NET REVENUES FLAT vs. +14% LYQ4 ADJUSTED NET
REVENUES +7% vs. +6% LY ON COMPARABLE 13-WEEK BASIS
FISCAL YEAR 2018 HIGHLIGHTS
FY GAAP DILUTED EPS $5.68 vs. $0.07 LYFY ADJUSTED
DILUTED EPS $8.54 vs. $3.05 LY +180%
FY GAAP NET INCOME $150.6M vs. $2.2M LYFY ADJUSTED NET
INCOME $223.7M vs. $89.2M LY +151%
FY GAAP OPERATING MARGIN 11.5% vs. 5.4% LYFY ADJUSTED
OPERATING MARGIN 12.1% vs. 7.0% LY
FY GAAP NET REVENUES +3% vs. +14% LYFY ADJUSTED NET
REVENUES +5% vs. +12% LY ON COMPARABLE 52-WEEK BASIS
Note: Please see the tables below for a reconciliation of GAAP
to non-GAAP measures referenced in this press release.
To Our People, Partners, and Shareholders,
Fiscal 2018 was an extraordinary year for Team RH. We generated
record revenues in excess of $2.5 billion, record GAAP operating
margin of 11.5%, record adjusted operating margins of 12.1%, and
industry leading ROIC of 27.8%.
Our focus on elevating the brand and architecting an integrated
operating platform has resulted in our profit model leapfrogging
past the home furnishings industry, and RH becoming one of the few
retailers that is expanding margins, increasing operating earnings,
and driving significantly higher returns on invested capital.
We’ve created separation by bringing truly innovative and
disruptive strategies to life, many of which are counter to those
being pursued in the broader retail industry, including:
Designing an integrated ecosystem of products, businesses and
services that collectively amplify and render each other more
valuable, creating a truly unique customer experience that will be
difficult, if not impossible to replicate.
Creating a global product development platform that attracts and
amplifies the best designers, artisans, and manufacturers in the
world.
Controlling our collections from concept to customer, rendering
our products and brand more unique and valuable, while affording us
long term pricing power.
Operating a highly efficient multi-channel platform that enables
customers to access our brand where and when they want with a
single inventory and seamless experience.
Moving from a promotional to a membership model, elevating our
brand and streamlining our business while developing a more
intimate relationship with our customers.
Pivoting the brand from creating and selling products to
conceptualizing and selling spaces by building the largest
residential interior design firm in North America.
Opening architecturally inspiring and immersive physical
experiences that render our products and services more unique and
valuable, while doubling our retail revenues and earnings in every
market.
Developing a dynamic and seamlessly integrated hospitality
business that activates all of the senses, drives tremendous
traffic into our galleries and generates incremental revenues and
earnings for our brand.
Architecting a real estate development model that decreases
occupancy costs and capital requirements while increasing earnings
and returns on invested capital.
Building an integrated operating platform that is enhancing the
customer experience, while reducing costs and increasing returns on
invested inventory.
Redesigning our organization to break down the silos and
bureaucracy that build up as businesses grow, resulting in improved
focus and collaboration, and increased accountability and decision
speed.
While proud of what we’ve accomplished, and how we’ve redefined
our business and brand, it’s the potential to redefine our industry
and create new markets that continues to drive us.
Our future opportunity is based on our belief that, “There are
those with taste and no scale, and those with scale and no taste,
and the belief that the idea of scaling taste is large and far
reaching.”
We see an unlimited opportunity to create value by leveraging
our unique taste and scale to create large and lucrative global
markets across retail, interior design, hospitality, residential,
and commercial development.
We also believe, “We have to think until it hurts, until we can
see what others can’t see, so we can do what others can’t do.”
The separation we’ve created in our market reflects the efforts
of a team of people who have thought deeply for decades about the
brand we are building and the opportunities we carefully choose to
pursue. A team that understands that great brands are built based
on a long term view and willingness to make the investments that
lead to innovation and value creation.
The path we’ve chosen, while at times in conflict with current
thinking and conventional wisdom, has proven to be significantly
more right than wrong, and oftentimes shapes new paradigms. As an
example, the simplifying assumption that digital was more
profitable than physical, and online furniture businesses should
somehow be confused with technology companies may prove to be
misplaced as digital brands rush to build physical stores in search
of growth and profitability.
Speaking of profitability, which is surprisingly absent in the
narrative of most retail businesses that are birthed online, we
believe what many have overlooked is that the cost of marketing an
invisible store is proving to be more expensive than physical
experiences. While it’s certainly in vogue to launch a retail
business online, the numbers do not reflect that it is more capital
efficient and surely not more profitable.
We believe the past ten years will be looked back upon as the
lost decade of retail. A period where many brands have proclaimed a
consultant coined “Digital first strategy” allocating the vast
majority of their capital towards building unnecessary and complex
“Omni-channel capabilities”, while leaving their retail stores to
rot. It should not be a surprise that the vast majority have simply
shifted business from offline to online, with increased costs and
free shipping, destroying their operating margins.
We will instead follow our own unique path, one led by our
vision and values, and an obsession for building a brand with no
peer. We will sharpen our focus on elevating versus expanding,
pursue quality over quantity, and prioritize innovation over
duplication. We will continue, as we recently did in New York,
bringing architecturally inspiring, immersive, and profit
generating brand experiences to life that create emotional physical
connections in a world moving toward social digital connections.
(BTW, RH New York is already trending in excess of $100 million in
annualized revenue)
On Team RH we say, “Leaders have to be comfortable, making
others uncomfortable.”
We believe leadership is about pursuing a vision, something
you’ve never seen, that’s somewhere you’ve never been. As creatures
of habit, change is uncomfortable for humans, but for the people of
Team RH, a culture of leadership and innovation is at the core of
who we are, and reflected in everything we do.
We’ve grown comfortable making ourselves and others
uncomfortable for nearly two decades, and hope to continue for the
foreseeable future. It’s what leaders do, and how we know we’re on
the right path. It’s why you should count on us to take the road
less traveled, and make the long term decisions that we believe
will continue to inspire our customers and generate the highest
returns in our industry for years to come.
18 years ago we began this journey with a vision of transforming
a nearly bankrupt business that had a $20 million market cap and a
box of Oxydol laundry detergent on the cover of its catalog, into
the leading luxury home brand in the world. The lessons and
learnings, the insights and the intricacies, the sacrifices you
make and scar tissue that you develop by getting knocked down 10
times and getting up 11, leads to the development of the mental and
moral qualities that build character in individuals and form
cultures in organizations. Lessons that can’t be learned in a
classroom, or by managing a business, but must be earned by
building a brand. If you’re inspired by what we’ve achieved over
the past 18 years, just imagine what we will accomplish in the next
18.
We like to say, “We’re looking for a few good people who don’t
know what can’t be done.”
If you’re one of those people, we invite you to continue
reading, or better yet, come join our cause.
Fiscal 2018 Highlights - Continued Focus on Execution,
Architecture and Cash
As we completed our second year focused on executing a new
business model, architecting a new operating platform and
maximizing cash flow by increasing revenues and earnings while
decreasing inventory and capital spending, our results are
demonstrating that we are building a disruptive brand and business
to gain profitable market share for years to come.
Our record fourth quarter and fiscal 2018 results demonstrate
the strength of the RH brand, the power of our new business model,
our focus on managing the business with a bias for earnings versus
revenue growth, and our continued success revolutionizing physical
retailing.
We raised our guidance for the fourth quarter after the close of
market on December 3rd. Despite the severe stock market volatility
that occurred through the rest of the month, with the Dow dropping
799 points on December 4th on its way to losing over 4,000 points
-- making it the worst December for stocks since the Great
Depression – we exceeded our guidance for adjusted operating
margins, adjusted operating income and adjusted net income.
Our core RH business, which has historically tracked to stock
market fluctuations, experienced a sales decline of approximately
10 points beginning the third week of December which persisted
through the remainder of the fourth quarter leading to a $13
million shortfall to the mid-point of our revised revenue guidance
in December.
On a comparable 52-week basis, adjusted net revenues increased
5% to $2.51 billion. Adjusted gross margins expanded 500 basis
points to 40.1% and adjusted operating margins increased 510 basis
points to 12.1%.
We generated adjusted diluted earnings per share of $8.54 in
fiscal 2018, driven by the significant growth in operating earnings
coupled with a lower adjusted effective tax rate of 16.9%,
primarily as a result of tax benefits associated with the exercise
of associate stock options and vesting of associate restricted
stock units, as well as a lower share count resulting from share
repurchases.
Fiscal 2018 free cash flow of $163 million fell short of our
expectations largely as a result of the lower revenues and higher
inventories due to softer sales and receipt timing, plus the
$50-$60 million in assets sales we anticipated closing during the
quarter the timing of which were also impacted by the market
volatility. We are currently reviewing multiple offers for our
Yountville property at attractive cap rates, and expect to finalize
the sale in the first half of this year. In addition, we are now
being advised to maximize the sale price of our Edina Gallery by
holding off on accepting offers for the property until the Gallery
opens this fall, which means the transaction would close in the
second half of 2019.
Merchandise inventories increased slightly to $532 million as a
result of lower sales during the quarter and an acceleration of
receipts from the first quarter to the fourth quarter as vendors
accelerated shipments ahead of Chinese New Year and potential
increase in tariffs.
As we did in fiscal 2017, we continued to hold ourselves back
from adding new businesses in fiscal 2018 outside of ongoing
investments in RH Hospitality as we remained focused on optimizing
the profitability of our new operating platform.
While most in our industry are closing or downsizing stores, we
remain committed to our quest of revolutionizing physical
retailing. We have proven our ability to double the retail sales in
our markets with legacy stores while more than doubling our
profitability. Our progress in fiscal 2018 included the opening of
RH Portland and RH Nashville in the first half of the year, and the
opening of two very unique and diverse retail experiences, RH New
York and RH Yountville, in September. We continue to be pleased
with the performance of our new Galleries and now have six
Galleries with our integrated hospitality experience.
RH New York continues to outperform despite the ongoing street
construction in the Meatpacking District, and is now trending at an
annualized revenue run rate in excess of $100 million. We expect
Gallery sales to further accelerate throughout the year as street
construction is completed and new luxury tenants begin to fill in
the empty storefronts.
Our efforts 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, is driving lower
costs and inventory levels, and higher earnings and inventory
turns. 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.
Moderating Preliminary Fiscal 2019 Outlook
Due to the continued weakness in our core business post the
fourth quarter market volatility, the negative trends in the high
end housing market, and our continued efforts to edit unprofitable
and non-strategic businesses, we are moderating our fiscal 2019 net
revenue outlook to $2.585 billion to $2.635 billion, representing
growth of 3% to 5%. The 6 point reduction at the midpoint from our
prior preliminary guidance is the result of a 3 point reduction due
to the market volatility and negative trends in high end housing,
plus a 3 point reduction as a result of editing unprofitable and
non-strategic businesses, namely the elimination of the remaining
holiday business (1 point), the elimination of fringe promotions (1
point), and the transition of our rug business from a single source
importer to a direct sourcing model (1 point).
Despite the lower sales outlook for fiscal 2019, our adjusted
operating margin outlook is only moderating slightly given the
power of our operating model and the editing of the unprofitable
and non-strategic businesses. Excluding adjustments for the new ASC
842 lease accounting adopted at the beginning of fiscal 2019, we
are expecting adjusted operating margins in the range of 12.7% to
13.3% up 90 basis points at the midpoint versus 12.1% in 2018, and
slightly lower than our prior guidance of 13.0% to 14.0%. The new
lease accounting is expected to have approximately an 70 basis
point impact on our adjusted operating margins, and 40 basis point
impact on our adjusted net income margin.
Our updated fiscal 2019 outlook excluding adjustments for the
new ASC 842 lease accounting is as follows:
- Adjusted net revenues in the range of
$2.585 to $2.635 billion, an increase of 3% to 5%
- Adjusted operating margins in the range
of 12.7% to 13.3%
- Adjusted net income in the range of
$213 to $230 million, representing a 7% to 16% increase on a
normalized 26% income tax rate in fiscal 2018 and 2019
- Adjusted diluted earnings per share in
the range of $8.41 to $9.08, representing an 11% to 19% increase on
a normalized 26% income tax rate in fiscal 2018 and 2019
We have several new brand extension plans in our development
pipeline. We are launching RH Beach House with a dedicated Source
Book this spring, and now plan to launch RH Ski House with a
dedicated Source Book this fall. We are electing to swap the
introduction of RH Ski House with RH Color which we are moving to
next year in order to present the two second home concepts in a
more logical progression. Additionally, we have plans to elevate
and expand our assortments in key categories with the introduction
of new bespoke collections as we pivot back to growth over the next
several years.
We also plan to increase our investment in RH Interior Design as
we continue 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.
As previously mentioned, our plan is to accelerate our real
estate transformation, opening 5 to 7 new Galleries per year, up
from 3 to 5 per year. In the second half of fiscal 2019, we are
planning to open 5 new Galleries, including Edina, MN, Charlotte,
NC, Corte Madera, CA, San Francisco, CA, and Columbus, OH, all with
our integrated hospitality offering. Due to the continued
construction on Gansevoort Street, we have chosen to delay the
opening of the The New York Guesthouse until spring of 2020.
With the ongoing development of RH Hospitality, we are
demonstrating that 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. While we still expect an approximate 50 basis
point drag on our operating margins due to the initial start-up
costs in fiscal 2019, we believe RH Hospitality is now a proven
scalable business, and our plan is to increase the number of new
Galleries with integrated restaurants, wine vaults, and barista
bars going forward.
In regards to Waterworks, you’ll notice in our financial tables
we took a further impairment on the business in the fourth quarter.
While the acquisition has been financially disappointing, causing a
70 basis point drag to our operating margins, we plan to take
aggressive steps to refocus and return the business to double digit
adjusted EBITDA margins, and still believe in the potential long
term synergies and value creation.
Turning to our balance sheet, our capital structure and
internally-generated cash flow provides us with the flexibility to
repay the outstanding principal of our $350 million June
2019 zero coupon convertible notes at maturity in cash. 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.
To ensure financial flexibility and optionality, we completed a
zero coupon $335 million convertible notes offering in June 2018
with a conversion price of $193.65 that matures in June 2023, with
a corresponding bond hedge designed to protect against dilution up
to $309.84 per share.
We also repurchased 886,700 shares in the quarter at an average
price of $118.20, for a total of 2.05 million shares at an average
price of $122.08 under our 2018 $700 million share repurchased
authorization. Including our $1 billion 2017 repurchase of 20.2
million shares at an average price of $49.46, we have repurchased a
total of 22.27 million shares at an average price of $56.13 for a
total of $1.25 billion.
Reiterating Long-Term Targets
We remain confident in our long-term targets as the earnings
power and capital efficiency of our new model continues to evolve
and we return to our product and brand expansion strategy. In
addition, we have made improvements to our real estate development
model, and continue to reduce capital requirements for future
Galleries by improving deal economics and lowering construction
costs. While all of our new Galleries scheduled to open in fiscal
2019 are under construction, we were able to lower capital
requirements for three of the five new Galleries planned for next
year, and the vast majority of future projects.
As a reminder, our long-term targets are as follows:
- Net revenue growth of 8% to 12%
annually
- Adjusted operating margins in the
mid-to-high teens
- Adjusted earnings growth of 15% to 20%
annually
- Return on invested capital (ROIC) in
excess of 50%
We continue to see a clear path to $4 to $5 billion in North
American revenues, and an international opportunity that could lead
to RH becoming a $7 to $10 billion dollar global brand. We are
currently exploring opportunities for Bespoke Design Galleries
in London, Paris, and other parts of 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.
We want to thank all of our people and partners whose passion
and persistence bring our vision and values to life each and every
day, as we pursue our quest to become one of the most admired
brands in the world.
Carpe Diem,
Gary
Gary Friedman
Chairman & 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 April 11, 2019 by dialing
(855) 859-2056 or (404) 537-3406 and entering passcode 1793353, 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 its collections through
its retail galleries across North America, the Company’s multiple
Source Books, and online at RH.com, RHModern.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 or adjusted net earnings, adjusted net income
margin, adjusted diluted earnings per share, normalized adjusted
net income, normalized adjusted diluted net income 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 regarding: our expectations regarding our
potential to define our industry and create new markets that drives
our business; our future opportunity; our future growth plans and
strategies, including our plan to sharpen our focus on elevating
versus expanding, pursue quality over quantity, and prioritize
innovation over duplication and our plan to create brand
experiences that have physical connections and our ability to
generate profits from such plan; our plans regarding managing the
business; our leadership and innovation strategies; our plans for
any future property sales, including the terms thereof and the
timing and our ability to finalize such sales; our plans for any
future strategic acquisitions or business expansions; our
expectations about increases or other changes in Gallery sales; our
expectations about the timing of the completion of street
construction and that the empty storefronts will be filled with new
luxury tenants; our expectations regarding the results of our
efforts to architect a new operating platform and about our
financial performance and results of operation, including any
expectations about margin enhancement and cost savings; our
expectations regarding net revenues, adjusted operating margins,
adjusted net income, and adjusted earnings per share, and our
expectations about any future changes to each of the foregoing; our
expectations regarding the impact of the new lease accounting on
our historical financial results as well as our future financial
results including our GAAP and non-GAAP results such as adjusted
operating margins and adjusted net income margin; our brand
extension plans and other development pipelines, including our
expectations about any launch timing, any future strategic
decisions and our plans to change or expand any product
assortments; our plans to increase our investment in RH Interior
Design, including any revenue opportunity that may result from such
increase in investment; our plans to accelerate our real estate
transformation, including the anticipated timing of any openings
and constructions; our expectation regarding the benefits of our
business strategy; 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, risks related to our
dependence on key personnel and any changes in our ability to
retain key personnel; successful implementation of our growth
strategy; risks related to the number of new business initiatives
we are undertaking; successful implementation of our growth
strategy; 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 ability to anticipate consumer
preferences and buying trends, and maintaining our brand promise to
customers; decisions concerning the allocation of capital; 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)
Beginning in fiscal 2019, RH will no longer be reporting the
Revenue Metrics table data below, including stores and direct
related metrics and comparable brand revenue growth, in order to
align external reporting with how the Company manages its business.
Three Months Ended Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
Stores as a percentage of net revenues [a] 55 % 54 % 56 %
56 % Direct as a percentage of net revenues 45 % 46 % 44 %
44 % Growth in net revenues: Stores [a] 3 % 18 % 3 % 16 % Direct (3
)% 10 % 2 % 12 % Total [b] — % 14 % 3 % 14 % Comparable brand
revenue growth 5 % 2 % 4 % 6 % Note: The fourth quarter of fiscal
2017 consisted of 14-weeks compared to 13-weeks for fiscal 2018.
The 14th week in fiscal 2017 added approximately $42.6 million in
net revenues to the quarter and the year. Because the fourth
quarter of fiscal 2017 was a 14-week quarter, comparable brand
revenue growth for the three months and year ended February 3, 2018
excludes the extra week of sales. 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 $50.7 million and $57.3 million for
the three months ended February 2, 2019 and February 3, 2018,
respectively. Net revenues for outlet stores, which include
warehouse sales, were $179.0 million and $205.7 million for the
year ended February 2, 2019 and February 3, 2018, respectively. [b]
Excluding the 14th week in the three months ended February 3, 2018,
net revenues would have increased 7% in the three months ended
February 2, 2019 and 7% in the three months ended February 3, 2018.
Excluding the 53rd week in the year ended February 3, 2018, net
revenues would have increased 5% in the year ended February 2, 2019
and 12% in the year ended February 3, 2018.
RH
RETAIL GALLERY METRICS
(Unaudited)
As of February 2, 2019, the Company operated a total of 86
retail Galleries consisting of 20 Design Galleries, 43 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.
As of February 2, 2019, 6 of our Design Galleries include an
integrated RH Hospitality experience. This compares to a total of
83 retail Galleries consisting of 16 Design Galleries, 47 legacy
Galleries, 1 RH Modern Gallery and 4 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
February 3, 2018. In addition, as of February 2, 2019, the
Company operated 39 outlet stores compared to 32 as of February 3,
2018.
Three Months Ended
February 2,2019
February 3,2018
Store Count
Total Leased SellingSquare
Footage
Store Count
Total Leased SellingSquare
Footage
(in thousands) (in thousands)
Beginning of period 86 1,089
84 944 Design Galleries opened: West Palm Design Gallery — — 1 46.5
Legacy Galleries closed: West Palm legacy Gallery — — (1 ) (7.1 )
Baby & Child Galleries closed: West Palm Baby & Child
Gallery — — (1 ) (2.5 )
End of period 86 1,089 83 981
Weighted-average leased selling square footage 1,089
973 % Growth year over year 12 % 7 %
Year Ended
February 2,2019
February 3,2018
Store Count
Total Leased SellingSquare
Footage
Store Count
Total Leased SellingSquare
Footage
(in thousands) (in thousands)
Beginning of period 83 981 85
912 Design Galleries opened: Portland Design Gallery 1 26.0 — —
Nashville Design Gallery 1 45.6 — — New York Design Gallery 1 50.5
— — Yountville Design Gallery 1 6.7 — — Toronto (Yorkdale) Design
Gallery — — 1 43.3 West Palm Design Gallery — — 1 46.5 Modern
Galleries opened: Dallas RH Modern Gallery 1 8.2 — — Baby &
Child Galleries opened: Portland RH Baby & Child Gallery 1 4.7
— — Dallas RH Baby & Child Gallery 1 3.7 — — Waterworks
Showrooms opened: Waterworks Scottsdale Showroom 1 2.2 — —
Waterworks Boston Showroom — — 1 5.0 Legacy Galleries closed:
Portland legacy Gallery (1 ) (4.7 ) — — Nashville legacy Gallery (1
) (7.1 ) — — Washington DC legacy Gallery (1 ) (5.6 ) — — NY
Flatiron legacy Gallery (1 ) (21.4 ) — — Toronto (Bay View) legacy
Gallery — — (1 ) (6.0 ) Toronto (Yonge Street) legacy Gallery — —
(1 ) (8.6 ) West Palm legacy Gallery — — (1 ) (7.1 ) Baby &
Child Galleries closed: West Palm Baby & Child Gallery — — (1 )
(2.5 ) Waterworks Showrooms closed: Waterworks Scottsdale Showroom
(1 ) (1.1 ) — — Waterworks Boston Showroom — — (1 ) (2.1 )
End of period 86 1,089 83 981 % Growth 11 % 8
%
Weighted-average leased selling square footage
1,047 930 % Growth 13 % 16 % See the Company’s
most recent Form 10-K and Form 10-Q filings for square footage
definitions. Total leased gross square footage as of February 2,
2019 and February 3, 2018 was 1,467,000 and 1,318,000,
respectively. Weighted-average leased square footage for the three
months ended February 2, 2019 and February 3, 2018 was 1,467,000
and 1,309,000, respectively. Weighted-average leased square footage
for the year ended February 2, 2019 and February 3, 2018 was
1,409,000 and 1,262,000, respectively. Retail sales per leased
selling square foot for the three months ended February 2, 2019 and
February 3, 2018 was $294 and $312, respectively. Retail sales per
leased selling square foot for the year ended February 2, 2019 and
February 3, 2018 was $1,177 and $1,252, respectively.
Beginning in fiscal 2019, RH will no longer report the retail
sales per selling square foot metrics noted above, however, RH will
continue to report total leased selling square footage.
RH CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited) Three Months Ended
Year Ended
February 2,2019
% of NetRevenues
February 3,2018
% of NetRevenues
February 2,2019
% of NetRevenues
February 3,2018
% of NetRevenues
Net revenues $ 670,891 100.0 % $ 670,295 100.0 % $
2,505,653 100.0 % $ 2,440,174 100.0 % Cost of goods
sold 408,190 60.8 % 411,622 61.4 %
1,504,806 60.1 % 1,591,107 65.2 % Gross
profit 262,701 39.2 % 258,673 38.6 % 1,000,847 39.9 % 849,067 34.8
% Selling, general and administrative
expenses
159,463 23.8 % 189,553 28.3 %
711,617 28.4 % 717,766 29.4 % Income from
operations 103,238 15.4 % 69,120 10.3 % 289,230 11.5 % 131,301 5.4
% Other expenses Interest expense—net 21,188 3.2 % 17,074 2.6 %
75,074 3.0 % 62,570 2.6 % Goodwill and tradename impairment 32,086
4.8 % 33,700 5.0 % 32,086 1.3 % 33,700 1.4 % Loss on extinguishment
of debt — — % — — % 917 —
% 4,880 0.2 % Total other expenses 53,274
8.0 % 50,774 7.6 % 108,077 4.3 %
101,150 4.2 % Income before income taxes 49,964 7.4 %
18,346 2.7 % 181,153 7.2 % 30,151 1.2 % Income tax expense
13,837 2.0 % 18,085 2.7 % 30,514
1.2 % 27,971 1.1 % Net income $ 36,127 5.4 % $
261 — % $ 150,639 6.0 % $ 2,180 0.1 %
Weighted-average shares used in
computing basic net income per share
20,901,841 21,418,283 21,613,678 27,053,616 Basic net income per
share $ 1.73 $ 0.01 $ 6.97 $ 0.08 Weighted-average shares
used in
computing diluted net income per share
25,702,791 25,666,174 26,533,225 29,253,208 Diluted net income per
share $ 1.41 $ 0.01 $ 5.68 $ 0.07
RH
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited)
February 2,2019
February 3,2018
ASSETS Cash and cash equivalents $ 5,803 $ 17,907
Merchandise inventories 531,947 527,026 Other current assets
144,943 99,997 Total current assets 682,693 644,930 Property
and equipment—net 863,562 800,698 Goodwill and intangible assets
210,401 242,595 Other non-current assets 49,378
44,643 Total assets $ 1,806,034 $ 1,732,866
LIABILITIES
AND STOCKHOLDERS’ DEFICIT Liabilities Accounts payable and
accrued expenses $ 320,441 $ 318,765 Convertible senior notes due
2019—net 343,789 — Deferred revenue, customer deposits and other
current liabilities 253,942 200,570 Total current
liabilities 918,172 519,335 Asset based credit facility 57,500
199,970 Term loans—net — 79,499 Convertible senior notes due
2019—net — 327,731 Convertible senior notes due 2020—net 271,157
252,994 Convertible senior notes due 2023—net 249,151 — Financing
obligations under build-to-suit lease transactions 228,928 229,323
Other non-current obligations 104,088 131,350 Total
liabilities 1,828,996 1,740,202 Stockholders’
deficit (22,962 ) (7,336 ) Total liabilities and
stockholders’ deficit $ 1,806,034 $ 1,732,866
RH CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited) Year
Ended
February 2,2019
February 3,2018
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 150,639 $
2,180 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization 74,346 70,135
Other non-cash items 116,415 148,457 Change in assets and
liabilities: Merchandise inventories (7,399 ) 220,767 Accounts
payable, accrued expenses and other (33,445 ) 115,278
Net cash provided by operating activities 300,556
556,817
CASH FLOWS FROM INVESTING ACTIVITIES Capital
expenditures (136,736 ) (146,233 ) Net proceeds from sale of assets
held for sale — 15,123 Net proceeds from investments —
175,801 Net cash provided by (used in) investing activities
(136,736 ) 44,691
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 (142,470 ) 199,970 Net borrowings
(repayments) under term loans (80,000 ) 77,000 Net borrowings
(repayments) under promissory and equipment security notes (31,974
) 31,681 Debt issuance costs — (8,298 ) Repurchases of common
stock—including commissions (250,000 ) (1,000,326 ) Net equity
related transactions 34,522 19,137 Other financing activities
(1,094 ) (10,577 ) Net cash used in financing
activities (183,201 ) (691,413 ) Effects of foreign
currency exchange rate translation (130 ) 152 Net
decrease in cash and cash equivalents and restricted cash
equivalents (19,511 ) (89,753 ) 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 5,803 17,907
End of period—restricted cash equivalents (construction related
deposits) — 7,407 End of period—cash and cash equivalents
and restricted cash equivalents $ 5,803 $ 25,314
RH CALCULATION OF FREE CASH FLOW (In
thousands) (Unaudited) Year Ended
February 2,2019
February 3,2018
Net cash provided by operating activities $ 300,556 $ 556,817
Capital expenditures (136,736 ) (146,233 ) Payments on
build-to-suit lease transactions (7,452 ) (10,200 ) Borrowing on
build-to-suit lease transactions 7,077 — Payments on capital leases
(719 ) (377 ) Proceeds from sale of assets held for sale—net —
15,123 Free cash flow [a] $ 162,726 $ 415,130 [a]
Free cash flow is calculated as net cash provided by
operating activities, net proceeds from sale of assets held for
sale, and borrowing on build-to-suit lease transactions, 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 TO
ADJUSTED NET INCOME (In thousands) (Unaudited)
Three Months Ended Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
GAAP net income $ 36,127 $ 261 $ 150,639 $ 2,180
Adjustments
(pre-tax): Net revenues: Recall accrual [a] 932 (606 ) 4,733
3,207 Cost of goods sold: Asset impairments [b] 3,807 — 3,807 —
Distribution center closures [c] — 1,240 1,478 1,737 Impact of
inventory step-up [d] — 419 380 2,527 Recall accrual [a] (2,361 ) —
(4,139 ) 4,315 Anti-dumping exposure [e] — (2,202 ) — (2,202 )
Selling, general and administrative expenses: Reorganization
related costs [f] 692 (80 ) 9,977 949 Lease losses [g] — 4,417
3,411 4,417 Recall accrual [a] 380 28 1,025 185 Distribution center
closures [c] — 2,773 300 3,109 Legal settlement [h] — — (5,289 ) —
Executive non-cash compensation [i] — — — 23,872 Gain on sale of
building and land [j] — — — (2,119 ) Other expenses: Goodwill and
tradename impairment [k] 32,086 33,700 32,086 33,700 Amortization
of debt discount [l] 11,661 7,542 39,216 27,926 Loss on
extinguishment of debt [m] — — 917
4,880 Subtotal adjusted items 47,197 47,231 87,902 106,503 Impact
of income tax items [n] (7,344 ) (4,211 )
(14,847 ) (19,483 ) Adjusted net income [o] $ 75,980 $
43,281 $ 223,694 $ 89,200 [a] Represents a reduction
in net revenues, impact on cost of goods sold, as well as accrual
adjustments and insurance recoveries related to certain product
recalls. [b] The adjustment includes accelerated depreciation
expense of $2.6 million due to a change in the estimated useful
life of certain assets and a $1.2 million inventory impairment
charge related to holiday merchandise. [c] Represents disposals of
inventory and property and equipment, lease related charges,
inventory transfer costs and other costs associated with
distribution center closures. [d] Represents the non-cash
amortization of the inventory fair value adjustment recorded in
connection with our acquisition of Waterworks. [e] 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. [f]
Represents severance costs and related taxes associated with
reorganizations, including severance related to the closure of
distribution centers and the Dallas customer call center as part of
our supply chain reorganization. [g] The adjustment represents
additional lease related charges due to the remeasurement of the
lease loss liability for RH Contemporary Art resulting from an
update to both the timing and the amount of future estimated lease
related cash inflows in fiscal 2017 and fiscal 2018. [h] Represents
a favorable legal settlement, net of related legal expenses. [i]
Represents non-cash compensation charges related to a fully vested
option grant made to Mr. Friedman in May 2017. [j] Represents the
gain on the sale of building and land of one of our previously
owned retail Galleries. [k] Represents goodwill and tradename
impairment related to the Waterworks reporting unit. [l] 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”), for 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 expected lives. 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 $0.6 million and $0.2 million during the three
months ended February 2, 2019 and February 3, 2018, respectively.
Amounts are presented net of interest capitalized for capital
projects of $2.7 million and $2.5 million during fiscal 2018 and
fiscal 2017, respectively. [m] 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, as well as
the second lien term loan which was repaid in full in October 2017.
[n] The adjustment for the three months ended February 2, 2019 is
based on an adjusted tax rate of 21.8% which excludes a $3.6
million tax impact associated with the Waterworks reporting unit
goodwill impairment. The adjustment for the three months ended
February 3, 2018 is based on an adjusted tax rate of 34.0% which
excludes the impact of tax reform, including the $6.0 million
revaluation of the net deferred tax assets and $1.0 million
transitional tax, as well as the $5.9 million tax impact associated
with the Waterworks reporting unit goodwill impairment. The year
ended February 2, 2019 and February 3, 2018 include adjustments to
calculate income tax expense at adjusted tax rates of 16.9% and
34.7%, respectively, which are calculated based on the
weighted-average fiscal 2018 and fiscal 2017 quarterly effective
tax rates and exclude the impact of tax reform and the tax impact
associated with the Waterworks reporting unit goodwill impairment.
[o] 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, 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 PER SHARE TO
ADJUSTED DILUTED NET INCOME PER SHARE (Unaudited)
Three Months Ended Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
Diluted net income per share $ 1.41 $ 0.01 $ 5.68 $ 0.07 Pro
forma diluted net income per share [a] $ 1.42 $ 0.01 $ 5.75 $ 0.07
EPS impact of adjustments (pre-tax) [b]: Amortization of debt
discount 0.46 0.29 1.50 0.95 Goodwill and tradename impairment 1.26
1.31 1.23 1.15 Reorganization related costs 0.03 — 0.38 0.03 Asset
impairments 0.15 —
0.14
— Lease losses — 0.17 0.13 0.15 Distribution center closures — 0.16
0.07 0.17 Recall accrual (0.04 ) (0.02 ) 0.06 0.26 Loss on
extinguishment of debt — — 0.04 0.17 Impact of inventory step-up —
0.02
0.01
0.10 Legal settlement — — (0.20 ) — Executive non-cash compensation
— — — 0.82 Anti-dumping exposure — (0.09 ) — (0.08 ) Gain on sale
of building and land — — — (0.07 )
Subtotal adjusted items 1.86 1.84 3.36 3.65 Impact of income tax
items [b] (0.28 ) (0.16 ) (0.57 ) (0.67
) Adjusted diluted net income per share [c] $ 3.00 $ 1.69 $ 8.54 $
3.05 [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 February 2, 2019 is
calculated based on GAAP net income and pro forma diluted
weighted-average shares of 25,360,886, which excludes dilution
related to the 2019 Notes and 2020 Notes of 341,905 shares. Pro
forma diluted net income per share for the year ended February 2,
2019 is calculated based on GAAP net income and pro forma diluted
weighted-average shares of 26,180,981, which excludes dilution
related to the 2019 Notes and 2020 Notes of 352,244 shares. [b]
Refer to table titled “Reconciliation of GAAP Net Income 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, 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 Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
Net revenues $ 670,891 $ 670,295 $ 2,505,653 $ 2,440,174 Recall
accrual [a] 932 (606 ) 4,733 3,207
Adjusted net revenues [b] $ 671,823 $ 669,689 $ 2,510,386 $
2,443,381 Gross profit $ 262,701 $ 258,673 $ 1,000,847 $
849,067 Asset impairments [a] 3,807 — 3,807 — Distribution center
closures [a] — 1,240 1,478 1,737 Recall accrual [a] (1,429 ) (606 )
594 7,522 Impact of inventory step-up [a] — 419 380 2,527
Anti-dumping exposure [a] — (2,202 ) —
(2,202 ) Adjusted gross profit [b] $ 265,079 $ 257,524 $ 1,007,106
$ 858,651 Gross margin [c] 39.2 % 38.6 %
39.9 % 34.8 % Adjusted gross margin [c] 39.5 %
38.5 % 40.1 % 35.1 % [a] Refer
to table titled “Reconciliation of GAAP Net Income 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 TO OPERATING INCOME AND
ADJUSTED OPERATING INCOME (In thousands)
(Unaudited) Three Months Ended
Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
Net income $ 36,127 $ 261 $ 150,639 $ 2,180 Interest expense—net
21,188 17,074 75,074 62,570 Goodwill and tradename impairment
32,086 33,700 32,086 33,700 Loss on extinguishment of debt — — 917
4,880 Income tax expense 13,837 18,085 30,514
27,971 Operating income 103,238 69,120 289,230 131,301
Reorganization related costs [a] 692 (80 ) 9,977 949 Asset
impairments [a] 3,807 — 3,807 — Lease losses [a] — 4,417 3,411
4,417 Distribution center closures [a] — 4,013 1,778 4,846 Recall
accrual [a] (1,049 ) (578 ) 1,619 7,707 Impact of inventory step-up
[a] — 419 380 2,527 Legal settlement [a] — — (5,289 ) — Executive
non-cash compensation [a] — — — 23,872 Anti-dumping exposure [a] —
(2,202 ) — (2,202 ) Gain on sale of building and land [a] —
— — (2,119 ) Adjusted operating income [b] $
106,688 $ 75,109 $ 304,913 $ 171,298 Net revenues $ 670,891
$ 670,295 $ 2,505,653 $ 2,440,174 Adjusted net revenues [c] $
671,823 $ 669,689 $ 2,510,386 $ 2,443,381 Operating margin
[c] 15.4 % 10.3 % 11.5 % 5.4 % Adjusted
operating margin [c] 15.9 % 11.2 % 12.1 %
7.0 % [a] Refer to table titled
“Reconciliation of GAAP Net Income 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 TO EBITDA AND ADJUSTED EBITDA
(In thousands) (Unaudited) Three
Months Ended Year Ended
February 2,2019
February 3,2018
February 2,2019
February 3,2018
Net income $ 36,127 $ 261 $ 150,639 $ 2,180 Depreciation and
amortization 21,166 19,043 74,346 70,135 Interest expense—net
21,188 17,074 75,074 62,570 Goodwill and tradename impairment
32,086 33,700 32,086 33,700 Loss on extinguishment of debt — — 917
4,880 Income tax expense 13,837 18,085 30,514
27,971 EBITDA [a] 124,404 88,163 363,576 201,436 Non-cash
compensation [b] 6,206 7,780 24,122 50,709 Reorganization related
costs [c] 692 (80 ) 9,977 949 Lease losses [c] — 4,417 3,411 4,417
Distribution center closures [c] — 4,013 1,778 4,846 Recall accrual
[c] (1,049 ) (578 ) 1,619 7,707 Asset impairments [c] 1,196 — 1,196
— Impact of inventory step-up [c] — 419 380 2,527 Legal settlement
[c] — — (5,289 ) — Anti-dumping exposure [c] — (2,202 ) — (2,202 )
Gain on sale of building and land [c] — — —
(2,119 ) Adjusted EBITDA [a] $ 131,449 $ 101,932 $ 400,770 $
268,270 [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 before depreciation and
amortization, interest expense, goodwill and tradename impairment,
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 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 to Adjusted Net Income” and the related footnotes for
additional information.
RH
TOPIC 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. The following table summarizes the impact of
adopting Topic 606 on our condensed consolidated statement of
income:
Three Months Ended February 2, 2019 As
Reported
% of NetRevenues
Topic 606Adjustments
Amounts withoutAdoption of Topic
606
% of NetRevenues
Net revenues [a] $ 670,891 100.0 % $ 493 $ 671,384
100.0 % Cost of goods sold [b] 408,190 60.8 %
245 408,435 60.8 % Gross profit 262,701 39.2 % 248
262,949 39.2 % Selling, general and administrative expenses [c]
159,463 23.8 % 16,379 175,842
26.2 % Income from operations 103,238 15.4 % (16,131 ) 87,107 13.0
% Other expenses Interest expense—net 21,188 3.2 % — 21,188 3.2 %
Goodwill and tradename impairment 32,086 4.8 % — 32,086 4.8 % Loss
on extinguishment of debt — — % — —
— % Total other expenses 53,274 8.0 % —
53,274 8.0 % Income before income taxes 49,964 7.4 %
(16,131 ) 33,833 5.0 % Income tax expense [d] 13,837
2.0 % (4,465 ) 9,372 1.4 % Net income $ 36,127
5.4 % $ (11,666 ) $ 24,461 3.6 % [a]
Topic 606 adjustment to net revenues includes (i) $0.8 million
associated with deferred revenue, (ii) $0.4 million associated with
post-sale discounts, partially offset by (iii) $0.5 million
associated with incentive payment amortization and (iv) $0.3
million associated with gift card breakage. [b] Topic 606
adjustment to costs of goods sold represents deferred cost of goods
sold of $0.1 million and the impact of related shipping expenses of
$0.1 million. [c]
Topic 606 adjustment to selling, general
and administrative expenses includes an $18.0 million increase in
advertising expense, offset by gift card breakage of $1.1 million
and incentive payment amortization of $0.5 million.
[d] Topic 606 adjustment to income tax expense represents the tax
effect of the adjustments based on our effective tax rate of 27.7%
for the three months ended February 2, 2019.
The following table summarizes the impact
of adopting Topic 606 on certain line items of our condensed
consolidated balance sheet:
As of February 2, 2019 As Reported
Topic 606Adjustments
Balances withoutAdoption of
Topic 606
Other current assets $ 144,943 $ 33,587 $ 178,530 Other non-current
assets 49,378 (6,561 ) 42,817 Accounts payable and accrued expenses
320,441 (686 ) 319,755 Deferred revenue, customer deposits and
other current liabilities 253,942 6,498 260,440 Stockholders’
deficit (22,962 ) 21,214 (1,748 )
RH
ESTIMATED TOPIC 606 IMPACT TO FISCAL 2018 BY QUARTER
First Quarter
2018
Second Quarter
2018
Third Quarter
2018
Fourth Quarter
2018
Fiscal Year
2018
Topic 606 adjusted net revenues 1.1% Increase 0.4% Increase 0.2%
Decrease 0.6% Increase 0.5% Increase
Topic 606 adjusted gross margin (% of net
revenues)
30 bps Increase
10 bps Increase
10 bps Increase
No Impact
10 bps Increase
Topic 606 adjusted SG&A (as % of net
revenues)
100 bps Decrease
170 bps Increase
180 bps Increase
240 bps Decrease
No Impact
Topic 606 adjusted operating margin (% of
net revenues) [a]
140 bps Increase
160 bps Decrease
170 bps Decrease
240 bps Increase
10 bps Increase
[a] Topic 606 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
160 basis points decrease in the third quarter fiscal 2018,
approximately 270 basis points increase in the fourth quarter
fiscal 2018 and approximately 10 basis points increase on fiscal
2018.
RH
ESTIMATED TOPIC 842 IMPACT TO ADJUSTED
FISCAL 2018 BY QUARTER
(Unaudited)
We adopted ASU 2016-02—Leases (“Topic
842”), which pertains to accounting for leases, on February 3, 2019
our first fiscal quarter of 2019, using a retrospective approach we
will apply the new accounting standard to each prior reporting
period presented in future filings.
We anticipate the adoption will have a material impact on
our consolidated statements of income, specifically cost of goods
sold and interest expense—net, primarily due to the change from
build-to-suit lease transactions under the previous accounting
guidance to the new finance lease classification treatment. The
finance lease classification for these leases will generally result
in a higher expense than the corresponding cash payments at the
beginning of the lease term and will decline over the lease term as
the liability is reduced. The right of use asset amortization
portion of the expense will be recorded within cost of goods sold
and the debt service (interest portion) will be recorded within
interest expense—net. The following table summarizes the
preliminary impact of adopting Topic 842 on certain of our adjusted
operating metrics:
First Quarter
2018
Second Quarter
2018
Third Quarter
2018
Fourth Quarter
2018
Fiscal Year
2018
Topic 842 adjusted gross margin (% of net
revenues)
40 bps Decrease
50 bps Decrease
70 bps Decrease
80 bps Decrease
60 bps Decrease
Topic 842 adjusted SG&A (as % of net
revenues)
20 bps Increase No Impact No Impact No Impact 10 bps Increase
Topic 842 adjusted operating margin (% of
net revenues)
70 bps Decrease
60 bps Decrease
70 bps Decrease
80 bps Decrease 70 bps Decrease
Topic 842 adjusted net income margin (% of
net revenues)
30 bps Decrease
20 bps Decrease
40 bps Decrease
40 bps Decrease 30 bps Decrease The preliminary assessment
of the potential impact of ASC 842 on the Company’s future
financial results reflected in the above table is not finalized and
is subject to change based upon the Company’s further work with
respect to ASC 842 and the assessment of the impact of ASC 842.
RH
RECONCILIATION OF GAAP NET INCOME TO
NORMALIZED ADJUSTED NET INCOME
(Unaudited)
Due to the fluctuation in our quarterly
income tax rate in fiscal 2018, driven primarily by the variability
of tax benefits associated with the exercise of associate stock
options and vesting of associate restricted stock units, the table
below presents normalized adjusted net income and normalized
adjusted diluted net income per share to aid in the comparability
of these metrics to our fiscal 2019 outlook. The normalized
adjusted net income and normalized adjusted diluted net income per
share reflect a tax rate of 26.0% which compares to the effective
tax rate of 16.8% in fiscal 2018.
Beginning in fiscal 2019, RH will use a normalized 26.0% tax
rate when reporting adjusted net income and adjusted diluted net
income per share.
First Quarter
2018
Second Quarter
2018
Third Quarter
2018
Fourth Quarter
2018
Fiscal Year
2018
GAAP net income $ 28,059 $ 64,042 $ 22,411 $ 36,127 $
150,639 GAAP income tax expense 8,507 2,936
5,234 13,837 30,514 GAAP income before income taxes
36,566 66,978 27,645 49,964
181,153 Adjustments (pre-tax) [a]: Net revenues: Recall
accrual — 1,853 1,948 932 4,733 Cost of goods sold: Asset
impairments — — — 3,807 3,807 Distribution center closures — —
1,478 — 1,478 Impact of inventory step-up 190 190 — — 380 Recall
accrual (254 ) (3,262 ) 1,738 (2,361 ) (4,139 ) Selling, general
and administrative expenses: Reorganization related costs — 1,721
7,564 692 9,977 Lease losses — — 3,411 — 3,411 Recall accrual — 345
300 380 1,025 Distribution center closures (2,072 ) — 2,372 — 300
Legal settlement 1,915 (7,204 ) — — (5,289 ) Other expenses:
Goodwill and tradename impairment — — — 32,086 32,086 Amortization
of debt discount 7,272 9,000 11,283 11,661 39,216 Loss on
extinguishment of debt — 917 — —
917 Subtotal adjusted items 7,051 3,560 30,094
47,197 87,902 Adjusted net income before tax
43,617 70,538 57,739 97,161 269,055
Adjusted income tax expense using
normalized 26% tax rate
11,340 18,340 15,012 25,262
69,954 Normalized adjusted net income [b] $ 32,277 $ 52,198 $
42,727 $ 71,899 $ 199,101
Normalized adjusted diluted net income
per share [b] $ 1.28 $ 1.93 $ 1.58 $ 2.84 $ 7.60 [a]
Refer to table titled “Reconciliation of GAAP Net Income to
Adjusted Net Income” and the related footnotes for additional
information. [b] Normalized adjusted net income and normalized
adjusted diluted net income per share are supplemental measures of
financial performance that are not required by, or presented in
accordance with, GAAP. We define normalized adjusted net income as
net income, adjusted for the impact of certain non-recurring and
other items that we do not consider representative of our
underlying operating performance, as well as income tax expense
utilizing a normalized 26% tax rate. We define normalized adjusted
diluted net income per share as normalized adjusted net income
divided by the Company’s pro forma diluted weighted-average shares
(refer to table titled “Reconciliation of Diluted Net Income Per
Share To Adjusted Diluted Net Income Per Share” and the related
footnotes, as well as below, for additional information).
Normalized adjusted net income and normalized adjusted diluted net
income per share 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 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. Pro forma diluted
weighted-average shares were 27,084,293, 27,048,517 and 25,360,886
for the second, third and fourth fiscal quarters of 2018,
respectively, which excludes dilution of 412,268, 654,802, and
341,905 shares, respectively, related to the 2019 Notes and 2020
Notes. There was no impact on diluted weighted-average shares
related to the 2019 Notes, 2020 Notes or 2023 Notes for the first
fiscal quarter of 2018. Pro forma diluted net income per share for
fiscal 2018 is calculated based on GAAP net income and pro forma
diluted weighted-average shares of 26,180,981, which excludes
dilution related to the 2019 Notes and 2020 Notes of 352,244
shares.
RH
FIRST QUARTER AND FISCAL 2019
OUTLOOK
(In millions, except per share
data)
The below tables include an overview of
our guidance for selected first quarter and fiscal 2019 operating
metrics. We adopted ASU 2016-02—Leases (“Topic 842”), which
pertains to accounting for leases, on February 3, 2019 our first
quarter of fiscal 2019. For illustrative purposes only, we have
provided the tables below based on preliminary and unaudited
estimates the adoption of Topic 842 is expected to have on our
outlook.
The Company is providing the following outlook for the first
quarter of fiscal 2019:
Outlook Under
ASC 840
Illustrative Impact
of ASC 842 Unaudited
Adjustments
Outlook Under
ASC 842
Adjusted net revenues $582 - $588 $ — $583 - $588 % growth
vs. prior year 4% - 5% 4% - 5% Adjusted gross margin
(% of net revenues)
39.4% - 39.7%
(80 bps)
38.6% - 38.9% Adjusted SG&A
(as % of net revenues)
28.6% - 28.3%
10 bps
28.5% - 28.2% Adjusted operating income
$62.9 - $67.0
($5)
$58.2 - $62.3
Adjusted operating margin
(% of net revenues)
10.8% - 11.4%
(80 bps)
10.0% - 10.6% Adjusted net income
$40 - $43
($3)
$37 - $40
Adjusted diluted EPS
$1.58 - $1.70
($0.12)
$1.47 - $1.58
The Company is providing the following
outlook for fiscal 2019:
Outlook Under
ASC 840
Illustrative Impact
of ASC 842 Unaudited
Adjustments
Outlook Under
ASC 842
Adjusted net revenues $2,585 - $2,635 $ — $2,585 - $2,635 %
growth vs. prior year 3% - 5% 3% - 5% Adjusted gross margin
(% of net revenues)
40.9% - 41.2%
(70 bps)
40.1% - 40.4% Adjusted SG&A
(as % of net revenues)
28.2% - 27.9% — bps 28.2% - 27.9% Adjusted operating income
$328.3 - $350.8 ($19)
$309.4 - $331.6
Adjusted operating margin
(% of net revenues)
12.7% - 13.3%
(70 bps)
12.0% - 12.6% Adjusted net income
$213 - $230
($10)
$204 - $220
Adjusted diluted EPS
$8.41 - $9.08
($0.36)
$8.05 - $8.69
Capital expenditures—net of landlord contributions $165 -
$185 $ — $165 - $185 Asset sales $50 - $60 $ — $50 - $60
Free cash flow $250 - $275 $ — $250 - $275 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; legal claim related
expenses; recall accruals; reorganization costs including severance
costs and related taxes; non-cash amortization of debt discount;
and one-time income tax expense or benefits, among others. The
exclusion of these charges and costs in future periods could 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
DILUTED SHARES OUTSTANDING (In millions)
Average Stock Price $ 100.00 $ 120.00
$ 140.00 $ 160.00 $ 180.00
$ 200.00 Q1 2019 adjusted diluted shares outstanding
[a] 24.12 24.74 25.22 25.56 25.98 26.64 Fiscal 2019 adjusted
diluted shares outstanding [a] 24.14 24.77 25.22 25.56 25.98 26.63
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 would have an 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 0.134 million and
0.562 million incremental shares at $180.00 and $200.00 average
share price, respectively, due to dilution from the convertible
notes.
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version on businesswire.com: https://www.businesswire.com/news/home/20190328005931/en/
Cammeron McLaughlincmclaughlin@rh.com415-945-4998
RH (NYSE:RH)
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