GAAP EPS of $1.43, Adjusted Diluted EPS of $1.85 Increased 53%
Versus $1.21 Last Year
Company Raises Fiscal 2019 Guidance
RH (NYSE: RH) today announced first quarter fiscal 2019 results.
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.
FIRST QUARTER 2019 HIGHLIGHTS
Q1 GAAP NET REVENUES INCREASED +7.4% TO $598MQ1 ADJUSTED NET
REVENUES INCREASED +7.4% TO $599M
Q1 GAAP OPERATING INCOME INCREASED +43% TO $68.6M VS. $48.1M
LYQ1 ADJUSTED OPERATING INCOME INCREASED +43% TO $70.5M VS. $49.2M
LY
Q1 GAAP OPERATING MARGIN INCREASED 290 BASIS POINTS TO 11.5% VS.
8.6% LYQ1 ADJUSTED OPERATING MARGIN INCREASED 300 BASIS POINTS TO
11.8% VS. 8.8% LY
Q1 GAAP NET INCOME INCREASED +40% TO $35.7M VS. $25.5M LYQ1
ADJUSTED NET INCOME INCREASED +48% TO $45.2M VS. $30.6M LY
Q1 GAAP EPS INCREASED +42% TO $1.43 VS. $1.01 LYQ1 ADJUSTED
DILUTED EPS INCREASED +53% TO $1.85 VS. $1.21 LY
As of February 3, 2019, the Company adopted Accounting Standards
Update 2016-02, Accounting Standards Update 2018-10 and Accounting
Standards Update 2018-11 (together, “ASC 842”), which pertain to
accounting for leases. The Company’s previous and current guidance
conforms to the new policy. Under the Company’s adoption method,
the Company’s financial results for prior comparative periods are
presented with adjustments to reflect the impact of ASC 842. We
have provided reconciliation tables that update historical results
to reflect these changes in lease accounting standards.
Please see the tables below for a reconciliation of all GAAP to
non-GAAP measures referenced in this press release.
To Our People, Partners, and Shareholders,
First quarter fiscal 2019 was an exceptional start to the year
for Team RH. We generated record GAAP revenues of $598 million, an
increase of 7.4%, record GAAP operating margin of 11.5%, record
adjusted operating margin of 11.8%, record GAAP earnings per share
of $1.43, and record adjusted diluted earnings per share of $1.85,
a 53% increase versus $1.21 a year ago.
As a result of our strong first quarter results, we are raising
our fiscal 2019 adjusted net revenue, adjusted operating income,
adjusted operating margin and adjusted earnings guidance for the
year as follows:
Prior Guidance Updated
Guidance Adjusted net revenue $ 2,585.0 - $
2,635.0 $ 2,642.8 - $ 2,662.8 Adjusted
operating income $ 309.4 - $ 331.6 $ 332.5 - $ 350.5 Adjusted
operating margin 12.0% - 12.6% 12.6% - 13.2% Adjusted net income $
204.0 - $ 220.0 $ 206.2 - $ 218.2 Adjusted diluted EPS $ 8.05 - $
8.69 $ 8.76 - $ 9.27
The above guidance reflects approximately $20 million of
incremental interest expense due to the Company’s first quarter
debt financings representing a $0.58 reduction to our fiscal 2019
adjusted diluted EPS guidance. This is offset by our repurchase of
2.17 million shares in the first quarter, which has a weighted
average reduction of 1.79 million to our full year diluted share
count and a $0.59 benefit to our fiscal 2019 adjusted diluted EPS
guidance. As a reminder, the guidance reflects a normalized 26.0%
tax rate.
Our focus on elevating the brand and architecting an integrated
operating platform continues to result in our profit model
leapfrogging past the home furnishings industry and RH becoming one
of the few retailers that is growing revenues, expanding margins,
increasing operating earnings, and driving significantly higher
returns on invested capital.
First quarter revenues accelerated in late March, increasing
7.4% for the quarter compared to the prior year quarter. Net of the
approximately 2 point negative drag from eliminating fringe
promotions, adjusted net revenues increased 9.4% in the first
quarter fiscal 2019. We remain cautiously optimistic that business
momentum will continue despite negative macro trends and increased
tariffs, supported by the recent introduction of RH Beach House,
the continued elevation and expansion of our product offering,
investments in RH Interior Design, plus the launch of RH Ski House
and new galleries opening this fall.
Our largest and most important new Gallery, RH New York,
continues to build momentum and is trending comfortably in excess
of $100 million in annualized revenue. Two of our projects
scheduled to open late in the fourth quarter, RH San Francisco, The
Gallery at The Historic Bethlehem Steel Building, and RH Charlotte,
The Gallery at Phillips Place, are experiencing slight delays and
will now open in the first quarter of fiscal 2020. We have
productive legacy galleries in each of those markets, and due to
the late planned openings, we don’t anticipate a material impact to
this year’s revenues. We continue to be on track to achieve planned
asset sales of $50 - $60 million in Fiscal 2019. We are negotiating
a letter of intent for the sale of RH Yountville and expect to
begin receiving offers for RH Edina in the fall when the Gallery
opens.
Looking forward, we expect to accelerate our real estate
transformation to a rate of 5 to 7 new galleries in Fiscal 2020 and
a minimum of 7 new galleries in Fiscal 2021.
As a reminder, embedded in our 2019 guidance is approximately 3
point revenue 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). As planned, the drag
was approximately 2 points in the first quarter and we expect the
negative impact to be about 4 points in the second quarter, 2
points in the third quarter and 4 points in the fourth quarter.
Regarding China tariffs, we have renegotiated product costs and
selectively raised prices to mitigate the impact of the increase
from 10 to 25 percent. We are also moving certain production and
new product development out of China, plus exploring new
partnerships and expanding our own manufacturing facilities in the
United States. Long term, we do not believe the current trade
climate will impair our ability to achieve our stated financial
goals and the expected impact from the increased tariffs is
embedded in our guidance for the year.
We believe our Company remains undervalued, and we continued to
execute our share repurchase program in the first quarter,
acquiring 2.2 million shares at an average price of $115.36.
Inclusive of our share repurchases in 2017 and 2018, we have
repurchased 24.4 million shares, or approximately 60% of the total
shares outstanding at an average price of $61.40. We believe the
repurchase of our shares will prove to be an outstanding allocation
of capital for the benefit of our long term shareholders.
In the first quarter we completed multiple debt financings
totaling $380 million and amended our credit facility, which in
aggregate added $420 million of new liquidity, supporting both
further purchases under our share repurchase and the planned
repayment of $350 million of convertible notes due June 15, 2019
and $300 million of convertible notes due July 15, 2020. We will
continue to be opportunistic as it relates to the capital markets
and the repurchase of our shares. Our net debt is currently 2.8x
TTM Adjusted EBITDA and we project that we will end the year with
net debt to TTM Adjusted EBITDA of approximately 2.0x.
Looking forward, we continue to see a clear path to $4 to $5
billion in North America revenues, and an international opportunity
that could lead to RH becoming a $7 to $10 billion dollar global
brand.
Our long term targets remain:
Net revenue growth of 8% to 12%Adjusted operating margins in the
mid to high teensAdjusted net income growth of 15% to 20%
annuallyReturn on invested capital (ROIC) in excess of 50%
We believe the following initiatives will lead to another step
change in our financial performance and return on invested capital
over the next several years.
- Revenue growth driven by our real
estate transformation, the elevation and expansion of our product
offering, and investments in RH Interior Design will continue to
leverage SG&A and Occupancy costs;
- The cycling of several capital
intensive real estate projects and the shift to predominantly
capital light projects, will decrease occupancy costs and increase
operating earnings and ROIC;
- Increased inventory turns and decreased
working capital requirements as a result of our new supply chain
strategy will continue to drive lower costs and higher returns on
invested capital. To put this point into perspective, if our
inventory had grown at the same rate of revenues since Q1 2016, we
would have approximately $470 million of additional inventory than
we do today and significantly higher operating costs; and
- Higher revenues, lower returns and
reduced operating costs as a result of our new Home Delivery
strategy. We have already identified cost savings of $15 to $20
million that will be captured over fiscal 2019 and 2020.
In total, the above initiatives should translate into an
additional 400 to 600 basis points of operating margin and ROIC in
excess of 50%.
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 the 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 would like 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
Note: We define return on invested capital (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 June 26, 2019 by dialing
(855) 859-2056 or (404) 537-3406 and entering passcode 6032768, 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 operating income, 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, ROIC or 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 fiscal 2019 guidance
including our expectations for adjusted net revenue, adjusted
operating income, adjusted operating income, adjusted net income,
adjusted diluted EPS, the impact from the increased tariffs, and a
3 point revenue 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); our future
opportunity, growth plans and strategies, including our focus on
elevating the brand and architecting an integrated operating
platform, our profit model leapfrogging past the home furnishings
industry, and RH becoming one of the few retailers that is growing
revenues, expanding margins, increasing operating earnings, and
driving significantly higher returns on invested capital; our
expectation that our business momentum will continue despite
negative macro trends and increased tariffs, supported by the
recent introduction of RH Beach House, the continued elevation and
expansion of our product offering, investments in RH Interior
Design, plus the launch of RH Ski House and new galleries opening
this fall; our expectation that our RH New York gallery will
continue to build momentum and trend comfortably in excess of $100
million in revenue annually; our plan to open RH San Francisco, The
Gallery at The Historic Bethlehem Steel Building, and RH Charlotte,
The Gallery at Phillips Place, in the first quarter of fiscal 2020,
and our expectation that the slight delays in opening such
galleries will not have a material impact on this year’s revenues;
our expectation of receiving offers for RH Edina in the fall when
the Gallery opens; our plans to move certain production and new
product development out of China plus explore new partnerships and
expand our own manufacturing facilities in the United States; our
belief that in the long term the current trade climate will not
impair our ability to achieve our stated financial goals; the
expected acceleration of our real estate transformation including
the opening of 5 to 7 new galleries in fiscal 2020 and a minimum of
7 new galleries in fiscal 2021, our belief that our Company remains
undervalued and that the repurchase of our shares will prove to be
an outstanding allocation of capital for the benefit of our long
term shareholders; our expectation that we will end the year with
net debt to TTM Adjusted EBITDA of approximately 2.0x; our path to
$4 to $5 billion in North America revenues; our expectations
regarding an International opportunity that could lead to RH
becoming a $7 to $10 billion dollar global brand; our long term
targets, including net revenue growth of 8% to 12%, adjusted
operating margins in the mid to high teens, adjusted net income
growth of 15% to 20% annually and ROIC in excess of 50%; our belief
that our initiatives, including (1) revenue growth driven by our
real estate transformation, the elevation and expansion of our
product offering, and investments in RH Interior Design that will
continue to leverage SG&A and Occupancy costs, (2) the cycling
of several capital intensive real estate projects and the shift to
predominantly capital light projects that will decrease occupancy
costs and increase operating earnings and ROIC, (3) increased
inventory turns and decreased working capital requirements as a
result of our new supply chain strategy that will continue to drive
lower costs and higher returns on invested capital, and (4) higher
revenues, lower returns and reduced operating costs as a result of
our new Home Delivery strategy, including cost savings of $15 to
$20 million that will be captured over fiscal 2019 and 2020, will
lead to another step change in our financial performance and return
on invested capital over the next several years and should
translate into an additional 400 to 600 basis points of operating
margin and return on invested capital in excess of 50%; 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 including our real estate transformation and the number of
new gallery locations that we seek to open and the timing of
openings; 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
housing market as well as the impact of economic conditions 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, the countermeasures and mitigation steps that we adopt in
response 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.
RETAIL GALLERY METRICS(Unaudited)
We operated the following number of retail Galleries, outlets
and showrooms:
May 4, May
5, 2019 2018 RH Design Galleries 20 17 Legacy
Galleries 43 46 Modern Galleries 2 2 Baby & Child Galleries 5 4
Total RH Galleries 70 69 Outlets 40 32 Waterworks Showrooms
15 15
As of May 4, 2019, six of our RH Design Galleries include an
integrated RH Hospitality experience.
The following table presents RH Gallery and Waterworks showroom
metrics and excludes outlets:
Three
Months Ended May 4, May 5, 2019
2018 Total Leased Selling
Total Leased Selling
Store Count Square Footage Store Count
Square Footage (in thousands) (in thousands)
Beginning of
period 86 1,089 83 981 RH Galleries: Dallas RH Modern Gallery
(relocation) — (4.5) — — Dallas RH Baby & Child Gallery
(1)
(3.7) — — Dallas legacy Gallery (relocation) — (2.6) — — Portland
Design Gallery — — 1 26.0 Dallas RH Modern Gallery — — 1 8.2
Portland legacy Gallery — — (1) (4.7) Waterworks Showrooms:
Waterworks Scottsdale Showroom — — 1 2.2 Waterworks Scottsdale
Showroom — — (1) (1.1)
End of period 85 1,078 84 1,012
Weighted-average leased selling square footage
1,084
984
% Growth year over year
10%
8%
See the Company’s most recent Form 10-K and Form 10-Q
filings for square footage definitions.
Total leased square footage as of May 4, 2019 and May 5, 2018
was 1,454,000 and 1,358,000, respectively.
Weighted-average leased square footage for the three months
ended May 4, 2019 and May 5, 2018 was 1,461,000 and 1,323,000,
respectively.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In
thousands, except share and per share
amounts)(Unaudited)
Three Months
Ended May 4, % of Net May 5, % of
Net 2019 Revenues 2018 Revenues Net
revenues $ 598,421 100.0 % $ 557,406 100.0 % Cost of goods sold
365,607 61.1 % 348,073 62.4 % Gross profit 232,814
38.9 % 209,333 37.6 % Selling, general and administrative expenses
164,181 27.4 % 161,186 29.0 % Income from operations
68,633 11.5 % 48,147 8.6 % Interest expense—net 21,118 3.6 %
15,098 2.7 % Income before income taxes 47,515 7.9 % 33,049
5.9 % Income tax expense 11,793 1.9 % 7,588 1.3 % Net
income $ 35,722 6.0 % $ 25,461 4.6 % Weighted-average shares
used in computing basic net income per share 19,976,858 21,545,025
Basic net income per share $ 1.79 $ 1.18 Weighted-average
shares used in computing diluted net income per share 24,933,987
25,230,228 Diluted net income per share $ 1.43 $ 1.01
CONDENSED CONSOLIDATED BALANCE SHEETS(In
thousands)(Unaudited)
May 4, February
2, May 5, 2019 2019
2018 ASSETS Cash, cash equivalents and restricted
cash $ 102,550 $ 5,803 $ 20,796 Merchandise inventories 530,190
531,947 530,657 Other current assets 189,325
166,217 97,917 Total current assets 822,065 703,967
649,370 Property and equipment—net 954,142 952,957 750,532
Operating lease right-of-use assets 432,212 440,504 496,412
Goodwill and intangible assets 210,371 210,401 242,512 Other
non-current assets 127,042 115,189
130,647 Total assets $ 2,545,832 $ 2,423,018 $
2,269,473
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT) Liabilities Accounts payable and accrued expenses $
289,146 $ 320,497 $ 264,628 Convertible senior notes due 2019—net
347,918 343,789 — Operating lease liabilities 56,601 66,249 69,580
Deferred revenue, customer deposits and other current liabilities
317,945 262,051 239,524 Total
current liabilities 1,011,610 992,586 573,732 Asset based credit
facility — 57,500 219,000 Term loans—net 316,205 — 79,528
Promissory notes—net 40,208 — 11,285 Convertible senior notes due
2019—net — — 331,678 Convertible senior notes due 2020—net 275,884
271,157 257,425 Convertible senior notes due 2023—net 253,424
249,151 — Non-current operating lease liabilities 427,961 437,557
487,603 Non-current finance lease liabilities 436,228 421,245
257,811 Other non-current obligations 31,685
32,512 46,185 Total liabilities 2,793,205
2,461,708 2,264,247
Stockholders’ equity (deficit) (247,373 ) (38,690 )
5,226 Total liabilities and stockholders’ equity (deficit) $
2,545,832 $ 2,423,018 $ 2,269,473
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In
thousands)(Unaudited)
Three Months Ended May 4,
May 5, 2019 2018 CASH FLOWS FROM OPERATING
ACTIVITIES Net income $ 35,722 $ 25,461 Adjustments to
reconcile net income to net cash provided by (used in) operating
activities: Depreciation and amortization 27,189 22,745 Other
non-cash items 39,168 36,986 Change in assets and liabilities:
Prepaid expense and other assets (17,846 )
(31,486
) Accounts payable and accrued expenses (38,595 ) (46,674 ) Current
and non-current operating lease liability (27,131 ) (16,589 ) Other
changes in assets and liabilities 20,317
6,328
Net cash provided by (used in) operating activities
38,824 (3,229 )
CASH FLOWS FROM INVESTING
ACTIVITIES Capital expenditures (7,916 ) (17,679
) Net cash used in investing activities (7,916 )
(17,679 )
CASH FLOWS FROM FINANCING ACTIVITIES Net
borrowings (repayments) under asset based credit facility (57,500 )
19,030 Net borrowings under term loans 320,000 — Net borrowings
(repayments) under promissory and equipment security notes 59,017
(1,491 ) Debt issuance costs (4,499 ) — Repurchases of common
stock—including commissions (250,032 ) — Other financing activities
(1,153 ) 796 Net cash provided by financing
activities 65,833 18,335 Effects of
foreign currency exchange rate translation 6
(62 ) Net increase (decrease) in cash and cash equivalents and
restricted cash equivalents 96,747 (2,635 ) Cash and cash
equivalents Beginning of period—cash and cash equivalents 5,803
17,907 Beginning of period—restricted cash equivalents
(construction related deposits) — 7,407
Beginning of period—cash and cash equivalents and restricted cash
equivalents $ 5,803 $ 25,314 End of
period—cash and cash equivalents 37,550 20,796 End of
period—restricted cash 65,000 — End of period—restricted cash
equivalents (construction related deposits) —
1,883 End of period—cash and cash equivalents, restricted
cash and restricted cash equivalents $ 102,550 $ 22,679
CALCULATION OF FREE CASH FLOW(In
thousands)(Unaudited)
Three Months Ended May 4,
May 5, 2019 2018 Net cash provided by (used
in) operating activities $ 38,824 $ (3,229 ) Capital expenditures
(7,916 ) (17,679 ) Principal payments under finance leases
(2,129 ) (1,776 ) Free cash flow [a] $ 28,779 $
(22,684 ) [a] Free cash flow is calculated as
net cash provided by (used in) operating activities, less capital
expenditures and principal payments under finance leases. Free cash
flow excludes all non-cash items. 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.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET
INCOME(In thousands)(Unaudited)
Three Months Ended May 4,
May 5, 2019 2018 GAAP net income
$ 35,722 $ 25,461
Adjustments (pre-tax): Net revenues:
Recall accrual [a] 413 — Cost of goods sold: Asset impairments and
change in useful lives [b] 2,993 — Recall accrual [a] (2,061 ) (254
) Impact of inventory step-up [c] — 190 Selling, general and
administrative expenses: Asset impairments and change in useful
lives [b] 483 — Recall accrual [a] 33 — Loss on asset disposal
reversal [d] — (840 ) Legal costs [e] — 1,915 Interest expense—net:
Amortization of debt discount [f] 11,689 7,272
Subtotal adjusted items 13,550 8,283 Impact of income tax
items [g] (4,084 ) (3,158 ) Adjusted net income [h] $
45,188 $ 30,586 [a] Represents
an adjustment to net revenues, increase in cost of goods sold and
inventory charges associated with product recalls, as well as
accrual adjustments and vendor claims. [b] Represents the
acceleration of depreciation expense of $3.0 million due to a
change in the estimated useful lives of certain assets, as well as
a $0.5 million charge related to the termination of a service
agreement associated with such assets. [c] Represents the non-cash
amortization of the inventory fair value adjustment recorded in
connection with our acquisition of Waterworks. [d] Represents the
reversal of an estimated loss on disposal of asset due to
negotiations of the sales price being finalized. [e] Represents
costs incurred in connection with a legal settlement. [f] 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 $0.7 million and $0.6 million during the three
months ended May 4, 2019 and May 5, 2018, respectively. [g] Assumes
a normalized tax rate of 26% for the three months ended May 4, 2019
and May 5, 2018. [h] 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 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.
RECONCILIATION OF DILUTED NET INCOME PER SHARE
TOADJUSTED DILUTED NET INCOME PER
SHARE(Unaudited)
Three Months Ended May 4,
May 5, 2019 2018 Diluted net
income per share $ 1.43 $ 1.01 Pro forma diluted net income
per share [a] $ 1.46 $ 1.01 Per share impact of adjustments
(pre-tax) [b]: Amortization of debt discount 0.48 0.29 Asset
impairments and change in useful lives 0.14 — Recall accrual (0.07
) (0.01 ) Loss on asset disposal reversal — (0.04 ) Impact of
inventory step-up — 0.01 Legal costs — 0.08
Subtotal adjusted items 0.55 0.33 Impact of income tax items
[b] (0.16 ) (0.13 ) Adjusted diluted net income per
share [c] $ 1.85 $ 1.21 [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 May 4, 2019 is calculated based on GAAP net income and pro
forma diluted weighted-average shares of 24,449,403, which excludes
dilution related to the 2019 Notes and 2020 Notes of 484,584
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.
RECONCILIATION OF NET REVENUES TO ADJUSTED NET
REVENUESAND GROSS PROFIT TO ADJUSTED GROSS PROFIT(In
thousands)(Unaudited)
Three Months Ended May 4, May
5, 2019 2018 Net revenues $ 598,421 $ 557,406
Recall accrual [a] 413 — Adjusted net
revenues [b] $ 598,834 $ 557,406 Gross profit
$ 232,814 $ 209,333 Asset impairments and change in useful lives
[a] 2,993 — Recall accrual [a] (1,648 ) (254 ) Impact of inventory
step-up [a] — 190 Adjusted gross profit
[b] $ 234,159 $ 209,269 Gross margin [c]
38.9 % 37.6 % Adjusted gross margin [c]
39.1 % 37.5 % [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.
RECONCILIATION OF NET INCOME TO OPERATING INCOMEAND
ADJUSTED OPERATING INCOME(In
thousands)(Unaudited)
Three Months Ended May 4, May
5, 2019 2018 Net income $ 35,722 $
25,461 Interest expense—net 21,118 15,098 Income tax expense
11,793 7,588 Operating income 68,633 48,147
Asset impairments and change in useful lives [a] 3,476 — Recall
accrual [a] (1,615 ) (254 ) Loss on asset disposal reversal [a] —
(840 ) Impact of inventory step-up [a] — 190 Legal costs [a]
— 1,915 Adjusted operating income [b] $ 70,494
$ 49,158 Net revenues $ 598,421 $
557,406 Adjusted net revenues [c] $ 598,834 $ 557,406
Operating margin [c] 11.5 % 8.6
% Adjusted operating margin [c] 11.8 %
8.8 % [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.
RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED
EBITDA(In thousands)(Unaudited)
Three Months Ended May 4,
May 5, 2019 2018 Net income $
35,722 $ 25,461 Depreciation and amortization 27,189 22,745
Interest expense—net 21,118 15,098 Income tax expense 11,793
7,588 EBITDA [a] 95,822 70,892 Stock-based
compensation [b] 5,695 7,997 Asset impairments and change in useful
lives [c] 483 — Recall accrual [c] (1,615 ) (254 ) Loss on asset
disposal reversal [c] — (840 ) Impact of inventory step-up [c] —
190 Legal costs [c] — 1,915 Adjusted
EBITDA [a] $ 100,385 $ 79,900
[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 and income
tax expense. Adjusted EBITDA reflects further adjustments to EBITDA
to eliminate the impact of stock-based 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 these non-GAAP financial measures 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. [c] Refer to table titled
“Reconciliation of GAAP Net Income to Adjusted Net Income” and the
related footnotes for additional information.
RECONCILIATION OF NET INCOME TO EBITDAAND ADJUSTED
EBITDA TRAILING TWELVE MONTHS(In
thousands)(Unaudited)
Trailing Twelve Months May 4,
2019 Net income $ 145,992 Depreciation and amortization
97,276 Interest expense—net 73,789 Goodwill and tradename
impairment [a] 32,086 Loss on extinguishment of debt [b] 917 Income
tax expense 29,438 EBITDA [c] 379,498 Stock-based
compensation [d] 21,820 Reorganization related costs [e] 9,977
Asset held for sale impairment [f] 8,497 Distribution center
closures [g] 3,886 Lease losses [h] 3,411 Asset impairments and
change in useful lives [i] 1,679 Recall accrual [j] 258 Impact of
inventory step-up [k] 190 Legal settlement [l] (7,204 )
Adjusted EBITDA [c] $ 422,012 [a]
Represents goodwill and tradename impairment related to the
Waterworks reporting unit. [b] 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. [c] Refer to
footnote [a] within table titled “Reconciliation of Net Income to
EBITDA and Adjusted EBITDA.” [d] Represents non-cash compensation
related to equity awards granted to employees. [e] 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. [f] Represents the impairment recorded upon
reclassification of an owned Design Gallery as held for sale. [g]
Represents disposals of inventory and property and equipment, lease
related charges, inventory transfer costs and other costs
associated with distribution center closures. [h] 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. [i] Represents a $1.2
million inventory impairment charge related to holiday merchandise
and a $0.5 million charge related to the termination of a service
agreement. [j] Represents adjustments to net revenues and cost of
goods sold, inventory charges associated with product recalls, as
well as accrual adjustments and vendor claims. [k] Represents the
non-cash amortization of the inventory fair value adjustment
recorded in connection with our acquisition of Waterworks. [l]
Represents a favorable legal settlement, net of related legal
expenses.
ASC 842 IMPACT OF ADOPTION(In
thousands)(Unaudited)
We adopted Accounting Standards Update (“ASU”) 2016-02, ASU
2018-10 and ASU 2018-11 (together, “ASC 842”), which pertain to
accounting for leases, on February 3, 2019, the first day of
our first fiscal quarter of 2019, using a modified retrospective
approach. Under this adoption method, the results of prior
comparative periods are revised with an adjustment to opening
retained earnings of fiscal 2017.
Condensed Consolidated Statements of Income
The following tables summarize the impact of adopting ASC 842 on
our fiscal 2018 annual and quarterly condensed consolidated
statements of income:
Year Ended February 2,
2019 As Reported Adjustment As Adjusted
Net revenues $ 2,505,653 $ — $ 2,505,653 Cost of goods sold
1,504,806 15,270 [a] 1,520,076 Gross profit
1,000,847 (15,270 ) 985,577 Selling, general and administrative
expenses 711,617 12,224 [b][c] 723,841
Income from operations 289,230 (27,494 ) 261,736 Other expenses
Interest expense—net 75,074 (7,305 ) [d] 67,769 Goodwill and
tradename impairment 32,086 — 32,086 Loss on extinguishment of debt
917 — 917 Total other expenses
108,077 (7,305 ) 100,772 Income before income taxes
181,153 (20,189 ) 160,964 Income tax expense 30,514
(5,281 ) [e] 25,233 Net income $ 150,639 $ (14,908 ) $
135,731 Weighted-average shares used in computing basic net income
per share 21,613,678 — 21,613,678 Basic net income per share $ 6.97
$ (0.69 ) $ 6.28 Weighted-average shares used in computing diluted
net income per share 26,533,225 — 26,533,225 Diluted net income per
share $ 5.68 $ (0.56 ) $ 5.12
Three Months Ended
May 5, 2018 As Reported Adjustment As
Adjusted Net revenues $ 557,406 $ — $ 557,406 Cost of goods
sold 345,371 2,702 [a] 348,073 Gross
profit 212,035 (2,702 ) 209,333 Selling, general and administrative
expenses 158,434 2,752 [b] 161,186
Income from operations 53,601 (5,454 ) 48,147 Interest expense—net
17,035 (1,937 ) [d] 15,098 Income before
income taxes 36,566 (3,517 ) 33,049 Income tax expense 8,507
(919 ) [e] 7,588 Net income $ 28,059 $ (2,598 ) $
25,461 Weighted-average shares used in computing basic net income
per share 21,545,025 — 21,545,025 Basic net income per share $ 1.30
$ (0.12 ) $ 1.18 Weighted-average shares used in computing diluted
net income per share 25,230,228 — 25,230,228 Diluted net income per
share $ 1.11 $ (0.10 ) $ 1.01
Three Months
Ended August 4, 2018 As Reported
Adjustment As Adjusted Net revenues $
640,798 $ — $ 640,798 Cost of goods sold 369,198
3,256 [a] 372,454 Gross profit 271,600 (3,256 )
268,344 Selling, general and administrative expenses 186,225
296 [b] 186,521 Income from operations 85,375
(3,552 ) 81,823 Other expenses Interest expense—net 17,480 (2,013 )
[d] 15,467 Loss on extinguishment of debt 917 —
917 Total other expenses 18,397 (2,013
) 16,384 Income before income taxes 66,978 (1,539 ) 65,439
Income tax expense 2,936 (403 ) [e] 2,533 Net
income $ 64,042 $ (1,136 ) $ 62,906 Weighted-average shares used in
computing basic net income per share 21,925,702 — 21,925,702 Basic
net income per share $ 2.92 $ (0.05 ) $ 2.87 Weighted-average
shares used in computing diluted net income per share 27,496,561 —
27,496,561 Diluted net income per share $ 2.33 $ (0.04 ) $ 2.29
Three Months Ended November 3, 2018 As
Reported Adjustment As Adjusted Net revenues $
636,558 $ — $ 636,558 Cost of goods sold 382,047
4,490 [a] 386,537 Gross profit 254,511 (4,490 )
250,021 Selling, general and administrative expenses 207,495
298 [b] 207,793 Income from operations 47,016
(4,788 ) 42,228 Interest expense—net 19,371 (1,676 ) [d] 17,695
Income before income taxes 27,645 (3,112 ) 24,533 Income tax
expense 5,234 (815 ) [e] 4,419 Net income $
22,411 $ (2,297 ) $ 20,114 Weighted-average shares used in
computing basic net income per share 22,082,141 — 22,082,141 Basic
net income per share $ 1.01 $ (0.10 ) $ 0.91 Weighted-average
shares used in computing diluted net income per share 27,703,319 —
27,703,319 Diluted net income per share $ 0.81 $ (0.08 ) $ 0.73
Three Months Ended February 2, 2019 As
Reported Adjustment As Adjusted Net revenues $
670,891 $ — $ 670,891 Cost of goods sold 408,190
4,822 [a] 413,012 Gross profit 262,701 (4,822 )
257,879 Selling, general and administrative expenses 159,463
8,878 [b][c] 168,341 Income from operations
103,238 (13,700 ) 89,538 Other expenses Interest expense—net 21,188
(1,679 ) [d] 19,509 Goodwill and tradename impairment 32,086 —
32,086 Total other expenses 53,274 (1,679 )
51,595 Income before income taxes 49,964 (12,021 ) 37,943 Income
tax expense 13,837 (3,144 ) [e] 10,693 Net
income $ 36,127 $ (8,877 ) $ 27,250 Weighted-average shares used in
computing basic net income per share 20,901,841 — 20,901,841 Basic
net income per share $ 1.73 $ (0.43 ) $ 1.30 Weighted-average
shares used in computing diluted net income per share 25,702,791 —
25,702,791 Diluted net income per share $ 1.41 $ (0.35 ) $ 1.06
[a] Represents the acceleration of lease costs
primarily due to reclassification of certain leases from
build-to-suit arrangements to finance lease right-of-use assets
upon adoption of ASC 842. [b] The year ended February 2, 2019 and
three months ended May 5, 2018 include lease costs of $1.2 million
associated with a location that were previously accounted for under
ASC 420—Exit or Disposal Cost Obligations guidance. [c] The year
ended February 2, 2019 and three months ended February 2, 2019
include an impairment of approximately $8.5 million related to an
asset held for sale under a sale-leaseback transaction. [d]
Represents a decrease in build-to-suit interest expense due to
derecognition of build-to-suit arrangements upon adoption of ASC
842, partially offset by an increase in interest expense related to
finance lease right-of-use assets. [e] Represents the tax impact of
the income statement adjustments resulting from the adoption of ASC
842.
Condensed Consolidated Balance Sheet
The following table summarizes the impact of adopting ASC 842 on
certain line items of our fiscal 2018 condensed consolidated
balance sheet:
February 2,
2019 As Reported Adjustment As Adjusted
Other current assets $ 144,943 $ 21,274 [a] $ 166,217 Property and
equipment—net 863,562 89,395 [b] 952,957 Operating lease
right-of-use assets — 440,504 [c] 440,504 Other non-current assets
49,378 65,811 [d] 115,189 Accounts payable and accrued expenses
320,441 56 [e] 320,497 Operating lease liabilities — 66,249 [c]
66,249 Deferred revenue, customer deposits and other current
liabilities 253,942 8,109 [f] 262,051 Financing obligations under
built-to-suit lease transactions 228,928 (228,928 ) [g] —
Non-current operating lease liabilities — 437,557 [c] 437,557
Non-current finance lease liabilities — 421,245 [f] 421,245 Other
non-current obligations 104,088 (71,576 ) [h] 32,512 Total
stockholders’ deficit (22,962 ) (15,728 ) [i] (38,690 )
[a] Includes the recognition of asset held for sale
under a sale-leaseback transaction, partially offset by the
reclassification of prepaid rent to operating lease liabilities and
other current liabilities (for finance leases). [b] Represents (i)
recognition of finance lease right-of-use assets, partially offset
by (ii) derecognition of non-Company owned properties that were
capitalized under previously existing build-to-suit accounting
policies, (iii) reclassification of construction in progress assets
determined to be landlord assets to other non-current assets and
(iv) reclassification of initial direct costs related to operating
leases to operating lease right-of-use assets. [c] Represents
recognition of operating lease right-of-use assets and
corresponding current and non-current lease liabilities. The
operating lease right-of-use asset also includes the
reclassification of deferred rent and unamortized lease incentives
related to operating leases and the reclassification of initial
direct costs from property and equipment—net. [d] Primarily
represents reclassification from property and equipment—net of
construction in progress assets determined to be landlord assets
for which the lease has not yet commenced, as well as the
recognition of net deferred tax assets related to the adoption of
ASC 842. [e] Represents a reclassification of an accrual for real
estate taxes. [f] Primarily represents recognition of the current
and non-current finance lease liabilities. The other current
liabilities line item also includes the reclassification of current
obligations associated with leases previously reported as capital
leases to finance lease liabilities. [g] Represents derecognition
of liabilities related to non-Company owned properties that were
consolidated under previously existing build-to-suit accounting
policies. [h] Includes reclassification of deferred rent and
unamortized lease incentives to operating lease right-of-use assets
upon adoption of ASC 842, as well as derecognition of the net lease
loss liabilities as such balances were reclassified to operating
lease right-of-use assets and operating current and non-current
liabilities, and the reclassification of non-current obligations
associated with leases previously reported as capital leases to
finance lease liabilities. [i] Represents a decrease to the
consolidated net income for fiscal 2017 and fiscal 2018, as well as
an increase of $4.0 million to beginning fiscal 2017 retained
earnings related to the adoption of ASC 842.
ASC 842: Reconciliation of Net Income to Adjusted Net Income
The following table presents our adjusted reconciliation of net
income to adjusted net income for the quarterly and annual fiscal
2018 periods:
Fiscal 2018 First Second Third
Fourth Fiscal Quarter Quarter
Quarter Quarter Year Net income $ 25,461 $
62,906 $ 20,114 $ 27,250 $ 135,731 Adjustments pre-tax: Net
revenues: Recall accrual [a] — 1,853 1,948 932 4,733 Cost of goods
sold: Recall accrual [a] (254 ) (3,262 ) 1,738 (2,361 ) (4,139 )
Asset impairments and change in useful lives [b] — — — 3,807 3,807
Distribution center closures [c] — — 1,478 — 1,478 Impact of
inventory step-up [d] 190 190 — — 380 Selling, general and
administrative expenses: Reorganization related costs [e] — 1,721
7,564 692 9,977 Asset held for sale impairment [f] — — — 8,497
8,497 Lease losses [g] — — 3,411 — 3,411 Distribution center
closures [c] (840 ) — 2,408 — 1,568 Recall accrual [a] — 345 300
380 1,025 Legal settlement [h] 1,915 (7,204 ) — — (5,289 ) Other
expenses: Amortization of debt discount [i] 7,272 9,000 11,283
11,661 39,216 Goodwill and tradename impairment [j] — — — 32,086
32,086 Loss on extinguishment of debt [k] —
917 — — 917
Subtotal adjusted items 8,283 3,560 30,130 55,694 97,667 Impact of
income tax items [l] (3,158 ) (15,407 ) (9,793
) (13,653 ) (42,011 ) Adjusted net income [m] $
30,586 $ 51,059 $ 40,451 $ 69,291 $
191,387 [a] Represents adjustments to
net revenues and cost of goods sold, inventory charges associated
with product recalls, as well as accrual adjustments and vendor
claims. [b] The adjustment includes accelerated depreciation
expense of $2.6 million due to a change in the estimated useful
lives 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
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. [f] Represents the impairment recorded upon
reclassification of an owned Design Gallery as held for sale. [g]
Represents 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. [h]
Represents a favorable legal settlement and related legal expenses.
[i] Refer to footnote [f] within table titled “Reconciliation of
GAAP Net Income to Adjusted Net Income.” Amounts are presented net
of interest capitalized for capital projects of $0.6 million, $0.8
million, $0.7 million and $0.6 million during the first, second,
third and fourth quarters of fiscal 2018, respectively. Fiscal 2018
is presented net of interest capitalized for capital projects of
$2.7 million. [j] Represents goodwill and tradename impairment
related to the Waterworks reporting unit. [k] 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. [l] Assumes a
normalized tax rate of 26% for each period presented. [m] Refer to
footnote [h] within table titled “Reconciliation of GAAP Net Income
to Adjusted Net Income.”
ASC 842: Reconciliation of Diluted Net Income Per Share to
Adjusted Diluted Net Income Per Share
The following table presents our adjusted reconciliation of net
income to adjusted net income for the quarterly and annual fiscal
2018 periods:
Fiscal 2018 First Second Third
Fourth Fiscal Quarter Quarter
Quarter Quarter Year Diluted net income per
share $ 1.01 $ 2.29 $ 0.73 $ 1.06 $ 5.12 Pro forma diluted
net income per share [a] $ 1.01 $ 2.32 $ 0.74 $ 1.07 $ 5.18 Per
share impact of adjustments (pre-tax) [b]: Amortization of debt
discount 0.29 0.34 0.42 0.46 1.50 Goodwill and tradename impairment
— — — 1.27 1.23 Reorganization related costs — 0.06 0.28 0.03 0.38
Asset held for sale impairment — — — 0.34 0.32 Asset impairments
and change in useful lives — — — 0.14 0.14 Lease losses — — 0.12 —
0.13 Distribution center closures (0.04 ) — 0.14 — 0.12 Recall
accrual (0.01 ) (0.04 ) 0.15 (0.04 ) 0.06 Loss on extinguishment of
debt — 0.03 — — 0.04 Impact of inventory step-up 0.01 0.01 — — 0.01
Legal settlement 0.08 (0.27 ) —
— (0.20 ) Subtotal adjusted items 0.33 0.13
1.11 2.20 3.73 Impact of income tax items [b] (0.13 )
(0.56 ) (0.35 ) (0.54 ) (1.60 ) Adjusted
diluted net income per share [c] $ 1.21 $ 1.89 $ 1.50
$ 2.73 $ 7.31 [a] Refer
to footnote [a] within table titled “Reconciliation of Diluted Net
Income Per Share to Adjusted Diluted Net Income Per Share.” Pro
forma diluted net income per share for the second quarter of fiscal
2018 is calculated based on GAAP net income and pro forma diluted
weighted-average shares of 27,084,293, which excludes dilution
related to the 2019 Notes and 2020 Notes of 412,268 shares. Pro
forma diluted net income per share for the third quarter of fiscal
2018 is calculated based on GAAP net income and pro forma diluted
weighted-average shares of 27,048,517, which excludes dilution
related to the 2019 Notes and 2020 Notes of 654,802 shares. Pro
forma diluted net income per share for the fourth quarter of fiscal
2018 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 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. [b] Refer to above table
titled “ASC 842: Reconciliation of Net Income to Adjusted Net
Income” and the related footnotes for additional information. [c]
Refer to footnote [c] within table titled “Reconciliation of
Diluted Net Income Per Share to Adjusted Diluted Net Income Per
Share.”
ASC 842: Reconciliation of Net Revenues to Adjusted Net Revenues
and Gross Profit to Adjusted Gross Profit
The following table presents our adjusted reconciliation of net
revenues to adjusted net revenues and gross profit to adjusted
gross profit for the quarterly and annual fiscal 2018 periods:
Fiscal 2018
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter
Year Net revenues $ 557,406 $ 640,798 $ 636,558 $ 670,891 $
2,505,653 Recall accrual [a] — 1,853
1,948 932 4,733 Adjusted net revenues
[b] $ 557,406 $ 642,651 $ 638,506 $ 671,823 $
2,510,386 Gross profit $ 209,333 $ 268,344 $ 250,021 $
257,879 $ 985,577 Recall accrual [a] (254 ) (1,409 ) 3,686 (1,429 )
594 Asset impairments and change in useful lives [a] — — — 3,807
3,807 Distribution center closures [a] — — 1,478 — Impact of
inventory step-up [a] 190 190 —
— 380 Adjusted gross profit [b] $ 209,269
$ 267,125 $ 255,185 $ 260,257 $ 991,836
Gross margin [c] 37.6 % 41.9 %
39.3 % 38.4 % 39.3 % Adjusted gross margin [c]
37.5 % 41.6 % 40.0 % 38.7
% 39.5 % [a] Refer to above
table titled “ASC 842: Reconciliation of Net Income to Adjusted Net
Income” and the related footnotes for additional information. [b]
Refer to footnote [b] within table titled “Reconciliation of Net
Revenues to Adjusted Net Revenues and Gross Profit to Adjusted
Gross Profit.” [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.
ASC 842: Reconciliation of Net Income to Operating Income and
Adjusted Operating Income
The following table presents our adjusted reconciliation of net
income to operating income and adjusted operating income for the
quarterly and annual fiscal 2018 periods:
Fiscal 2018
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter
Year Net income $ 25,461 $ 62,906 $ 20,114 $ 27,250 $
135,731 Interest expense—net 15,098 15,467 17,695 19,509 67,769
Goodwill and tradename impairment — — — 32,086 32,086 Loss on
extinguishment of debt — 917 — — 917 Income tax expense
7,588 2,533 4,419 10,693
25,233 Operating income 48,147 81,823 42,228 89,538
261,736 Reorganization related costs [a] — 1,721 7,564 692 9,977
Asset held for sale impairment [a] — — — 8,497 8,497 Asset
impairments and change in useful lives [a] — — — 3,807 3,807 Lease
losses [a] — — 3,411 — 3,411 Distribution center closures [a] (840
) — 3,886 — 3,046 Recall accrual [a] (254 ) (1,064 ) 3,986 (1,049 )
1,619 Impact of inventory step-up [a] 190 190 — — 380 Legal
settlement [a] 1,915 (7,204 ) —
— (5,289 ) Adjusted operating income [b] $ 49,158
$ 75,466 $ 61,075 $ 101,485 $ 287,184
Net revenues $ 557,406 $ 640,798 $ 636,558 $
670,891 $ 2,505,653 Adjusted net revenues [c] $
557,406 $ 642,651 $ 638,506 $ 671,823 $
2,510,386 Operating margin [c] 8.6 %
12.8 % 6.6 % 13.4 % 10.5
% Adjusted operating margin [c] 8.8 %
11.7 % 9.6 % 15.1 % 11.4
% [a] Refer to above table titled “ASC 842:
Reconciliation of Net Income to Adjusted Net Income” and the
related footnotes for additional information. [b] Refer to footnote
[b] within table titled “Reconciliation of Net Income to Operating
Income and Adjusted Operating Income.” [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 above table titled “ASC 842:
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.
SECOND QUARTER AND FISCAL 2019 OUTLOOK(In millions,
except per share data)
The Company is providing the following outlook for the second
quarter and full year fiscal 2019:
Second Quarter Fiscal
Year 2019 2019 Adjusted net revenues $681.0 -
$688.0 $2,642.8 - $2,662.8 % growth vs. prior year 6% - 7% 5% - 6%
Adjusted gross margin 41.1% - 41.4% 40.5% - 40.8% (% of net
revenues) Adjusted SG&A
28.6% - 28.5%
27.9% - 27.6% (as % of net revenues) Adjusted operating
income
$85.0 - $89.0
$332.5 - $350.5
% growth vs. prior year
13% - 18%
16% - 22% Adjusted operating margin
12.5% - 12.9%
12.6% - 13.2% (% of net revenues) Adjusted net income
$52.0 - $55.0
$206.2 - $218.2
Adjusted diluted EPS
$2.33 - $2.47
$8.76 - $9.27
% growth vs. prior year
24% - 31%
20% - 27%
Capital expenditures—net of landlord contributions –– $165 -
$185 Asset sales –– $50 - $60 Free cash flow –– $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; and non-cash amortization of
debt discount, 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.
ESTIMATED DILUTED SHARES OUTSTANDING(In
millions)
Average Stock Price $
100.00 $ 120.00 $ 140.00
$ 160.00 $ 180.00 $
200.00 Q2 2019 adjusted diluted shares outstanding [a] 21.96
22.60 23.04 23.39 23.85 24.54 Fiscal 2019 adjusted diluted shares
outstanding [a] 22.37 22.99 23.44 23.79 24.25 24.93
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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190612005896/en/
Allison Malkin203-682-8225allison.malkin@icrinc.com
RH (NYSE:RH)
Historical Stock Chart
From Jun 2024 to Jul 2024
RH (NYSE:RH)
Historical Stock Chart
From Jul 2023 to Jul 2024