Company Raises Q4 and FY18 Guidance and Long-Term
Targets
RH (NYSE: RH) today announced third quarter fiscal 2018 results
and Chairman & Chief Executive Officer, Gary Friedman, provided
an update on the Company’s continued evolution and outlook.
RH Leadership will host a Q&A conference call at 2:00 p.m.
PT (5:00 p.m. ET) today.
THIRD QUARTER HIGHLIGHTS
Q3 GAAP DILUTED EPS $0.81 vs. $0.56 LY +45%Q3 ADJUSTED
DILUTED EPS $1.73 vs. $1.04 LY +66%
Q3 GAAP NET INCOME $22.4M vs. $13.2M LY +70%Q3
ADJUSTED NET INCOME $46.8M vs. $24.4M LY +92%
Q3 GAAP OPERATING MARGIN 7.4% vs. 7.3% LYQ3 ADJUSTED
OPERATING MARGIN 10.3% vs. 8.1% LY
Q3 GAAP NET REVENUES +7% vs. +8% LYQ3 ADJUSTED NET
REVENUES +8% vs. +8% LY
Q3 COMPARABLE BRAND REVENUE +4% ON TOP OF +6% LY
COMPANY RAISES Q4 and FY18 GUIDANCE AND LONG-TERM
TARGETS
Note: Please see the tables below for a reconciliation of all
GAAP to non-GAAP measures referenced in this press release.
To Our People, Partners, and Shareholders,
Our record third quarter results demonstrate the strength of the
RH brand, our commitment to earnings growth, the power of our new
business model, and our continued success revolutionizing physical
retailing.
Adjusted net income for the quarter increased 92% to $46.8
million and adjusted diluted earnings per share increased 66% to
$1.73, significantly exceeding our recently raised guidance of
$1.15 to $1.33. GAAP net income increased 70% to $22.4 million and
GAAP diluted earnings per share increased 45% to $0.81 during the
third quarter.
GAAP net revenue growth accelerated from Q2 to Q3 and increased
7% versus Q3 2017 on top of an 8% increase last year. Adjusted net
revenues for the quarter increased 8% to $638.5 million on top of
an 8% increase last year. Adjusted for last year’s Q3 inventory
reduction efforts, adjusted net revenues increased 10%.
Comparable brand revenues increased 4% in the third quarter on
top of a 6% increase last year. Adjusted for last year’s inventory
reduction efforts, comparable brand revenues increased 6.5%.
Both our comparable brand and net revenues were negatively
impacted by approximately 1 point due to slower special order
receipts from China due to tariff related shipping congestion. We
expect the delayed receipts to have a positive impact on our fourth
quarter revenues and have adjusted our guidance accordingly.
Our results reflect strong full price selling, higher outlet
margins, and continued cost benefits from our new operating
platform.
We generated $16 million of free cash flow in the quarter, and
expect free cash flow in excess of $260 million for the year. We
have also adjusted our year end net debt to trailing twelve month
adjusted EBITDA forecast to approximately 1.8x reflecting the
repurchase of approximately 1.2 million shares during the third
quarter.
As articulated since the beginning of the year, we are managing
the business with a bias for earnings versus revenue growth in
fiscal 2018. We continue to restrain ourselves from chasing low
quality sales at the expense of profitability, and remain focused
on optimizing our new business model and building a platform that
will enable us to disrupt and redefine the luxury lifestyle market
for years to come.
Raising Fourth Quarter and Fiscal 2018 Guidance
As a result of our exceptional third quarter results and the
continued evolution of our new business model, we are raising
fourth quarter and fiscal 2018 revenue, adjusted operating income,
adjusted net income, and adjusted diluted earnings per share
guidance for a fourth time.
We are increasing fourth quarter revenue guidance to a range of
$680 to $690 million, versus previous guidance of $665 to $685
million, and raising adjusted diluted earnings per share guidance
to a range of $2.75 to $2.90 versus previous guidance of $2.33 to
$2.54.
We are also increasing fiscal 2018 revenue guidance to a range
of $2.519 to $2.529 billion, versus previous guidance of $2.489 to
$2.521 billion, and raising adjusted diluted earnings per share
guidance to a range of $8.33 to $8.47 versus previous guidance of
$7.35 to $7.75.
As a reminder, our new fiscal 2018 adjusted net income guidance
of $219 - $223 million represents a 64% increase at the midpoint
versus our original adjusted net income guidance of $125 - $145
million provided on November 15, 2017 during our investor day at
the opening of RH West Palm just one year ago.
I would also point out that our return on invested capital is
now expected to reach approximately 29% in fiscal 2018.
Our detailed updated guidance for the fourth quarter and fiscal
2018 are provided in a table with our financial results attached to
this letter.
Once Again Increasing Long-Term Targets and Providing
Preliminary Fiscal 2019 Guidance
We are once again raising our long-term targets as the earnings
power and capital efficiency of our new operating model continues
to evolve.
As mentioned last quarter, we believed that our target of
achieving low to mid-teens adjusted operating margins and return on
invested capital (ROIC)1 in excess of 30% by fiscal 2021 would
happen sooner rather than later as the earnings power of our new
model has proven to be greater than previously anticipated. As a
result, last quarter we moved those targets forward by a full year,
from fiscal 2021 to fiscal 2020.
Since last quarter we have completed a revolutionary redesign of
our organization, closed an additional 500,000 square foot
distribution center facility, and continued to reduce capital
requirements for current and future new Galleries by improving deal
economics and lowering construction costs.
As it relates to the redesign of the organization, the
leadership team spent the past nine months conceptualizing a new
more streamlined and collaborative structure designed to break down
the silos and bureaucracy that build up and slow down most
companies as they grow. While we expect cost savings of
approximately $24 million annually net of reinvestments, the
greatest benefit will be increased decision speed, accountability,
and focus.
Our continued efforts to reduce inventories and redesign our
distribution center and reverse logistics network enabled us to
close a 500,000 square foot distribution facility in Baltimore
during the third quarter which will result in approximately $4
million of net savings annually.
The combined $28 million of annualized net savings from the
redesign of our organization and closing of the distribution
facility will begin to be realized starting in the fourth quarter
of 2018.
We’ve also made further 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 result of the above, we are once again moving our long-term
targets forward another full year, and now expect to reach
low-to-mid teens operating margins and return on invested capital
of approximately 35% by fiscal 2019.
Correspondingly, we are providing preliminary guidance for
fiscal 2019 and new long-term targets as follows:
Preliminary guidance for fiscal 2019
- Net revenues in the range of $2.72 to
$2.82 billion, an increase of 8% to 12%
- Adjusted operating margins in the range
of 13.0% to 14.0%
- Adjusted net income in the range of
$250 to $290 million
- Adjusted earnings per share in the
range of $9.30 to $10.70
- Return on invested capital (ROIC) of
approximately 35%
- Adjusted diluted shares outstanding of
approximately 27 million and an effective tax rate of 20%
New long-term targets
- 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.
Despite RH’s industry-leading performance, it is clear that
prioritizing earnings over revenue growth this past year has
compressed our earnings multiple and weighed on our stock price.
While the market has rewarded top line growth at the expense of
earnings, we believe many have overlooked what our team has
accomplished in a very short period of time.
We spent years imagining a model that reflects the qualities and
characteristics of three businesses we study and greatly admire:
LVMH, Apple, and Berkshire Hathaway. I thought it would be helpful
to describe how we have integrated relevant aspects of each with
our own unique vision for RH to create a model that we believe will
redefine what was previously thought possible in our industry.
Like LVMH, we are building a luxury platform, and in a similar
fashion, we are beginning to demonstrate that we too can be
rewarded with luxury brand margins that are double those of
competitors targeting broader markets. Also, like LVMH, we believe
that we will continue to benefit from a growing market as a result
of the compounding wealth effect. In the past twelve years alone
the stock market is up in excess of 80% from its previous 2007 high
prior to the great recession, and similarly households with incomes
in excess of $200,000 are also up approximately 80%. Additionally
we can learn from LVMH’s success building iconic global brands, as
75% of their revenues is outside of the United States. We also
believe that building a luxury brand is extremely difficult,
requiring decades of effort and a discerning level of taste which
is generally absent in businesses of scale. As we have articulated
in our investor presentations, there are those with taste and no
scale, and those with scale and no taste, and we believe the idea
of scaling taste is large and far reaching.
Similar to Apple, we are designing a seamlessly integrated
ecosystem of businesses that all amplify and render our brand, and
each other more valuable - where the whole becomes more valuable
than the parts. As an example, our retail business is amplified and
rendered more valuable by our interior design business - both are
amplified and rendered more valuable by our physical galleries and
real estate development business - and all are amplified and
rendered more valuable by our hospitality business. While each of
the above businesses are relevant in isolation, as an integrated
ecosystem they create a powerful customer proposition and a brand
that is difficult to replicate.
Akin to Berkshire Hathaway, we are building a business that is
capital efficient, generates significant free cash flow, enjoys a
low cost of capital, and is developing a culture relentlessly
focused on ROIC and capital allocation. Also like Berkshire, we
invest with a long-term view, indifferent to short term market
swings or recessions, and believe every market presents
opportunities. As Warren Buffet said, “Charlie and I have no magic
plan to add earnings except to dream big and be prepared mentally
and financially to act fast when opportunities present themselves.”
He added, “Every decade or so dark clouds will fill the economic
skies and they will briefly rain gold. When downpours of that sort
occur it’s imperative that we rush outside with washtubs and not
teaspoons.” We all witnessed how Berkshire took advantage of the
past recession, and demonstrated that those with capital in
difficult markets are the ones who capitalize. That is precisely
why we took advantage of the favorable capital markets in 2014 and
2015, executing two zero coupon convertible note transactions
raising $650 million for one of those rainy days. That low cost
capital enabled us to repurchase roughly half of the Company’s
outstanding shares when they were undervalued in 2017, which has
proven to be a very good allocation of capital for the benefit of
our shareholders. Unlike Berkshire Hathaway, I don’t see us
acquiring a large portfolio of businesses, but rather staying
focused on the growth opportunities in our current ecosystem. I do
expect us to continue accessing the capital markets when favorable
and to be disciplined in the allocation of our capital. We will use
our excess free cash flow to take advantage of real estate and
other investment opportunities, including repurchasing RH shares
when value presents itself.
We believe the model we are building will result in RH
leapfrogging far past comparable companies, and create the kind of
separation in our industry that only brands like Apple, Nike, LVMH,
Berkshire, and a few others have enjoyed in theirs.
As I mentioned last quarter, never in my 40 plus years in the
retail industry have I seen an organization as clear and focused on
optimizing a business as RH is today. I could not be more proud of
our team for driving these industry leading results, and remain
confident that our path towards building the most profitable and
capital efficient brand in our industry will prove to be the right
one for our people, partners, and shareholders.
Our View of the Housing Market
While the luxury housing market has sequentially slowed
throughout 2018, our revenues have sequentially accelerated,
despite cycling inventory reduction efforts and managing the
business with a bias for earnings versus revenue growth, clearly
demonstrating our ability to gain market share. We believe we can
continue to gain share even if market conditions remain soft in
higher end housing.
There is also concern of an abundance of new luxury housing
inventory scheduled to come on the market in 2019 primarily in New
York, Miami, and Los Angeles. On this specific issue, our view is
that an oversupply of high-end housing will most likely lead to
lower home prices in markets with excess inventory which is surely
not good for home builders or developers, but not necessarily bad
for RH, as unit sales at lower price points may reaccelerate
driving incremental demand for furniture and home furnishings.
Despite the data pointing to a slowing housing market, we
continue to be confident in our plans to pivot back to growth in
2019, as we return to our product and brand expansion strategy, and
accelerate our real estate transformation. We are also encouraged
by a range of other positive macro economic factors including low
unemployment, strong GDP growth, near record stock market levels
and interest rates that are still low by historical standards.
Update on China Tariffs
As it relates to China tariffs, we have been working with our
vendor partners on mitigation strategies and do not expect a
material impact on our business outside of a modest increase to
inventory levels due to the higher landed cost of the product.
The combination of being the only luxury furniture brand with
scale, and having control of our product from concept to customer
creates multiple competitive advantages as it relates to purchasing
and pricing power versus the highly fragmented market we are
disrupting.
2018 - A Continued Focus on Execution, Architecture and
Cash
As we near the completion of 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 that will continue to gain profitable market share for
years to come.
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 includes the opening 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 is off to a strong start despite the ongoing street
construction in the Meatpacking District. Our rooftop restaurant
has already ramped to a $10 million annual run rate, and we now
expect it to exceed $15 million per year once we expand seating
outdoors next spring. We also expect Gallery sales to further
accelerate next year as street construction is completed and new
luxury tenants begin to fill in the empty storefronts. We are
especially excited about the planned 2019 openings of Hermès and
Loro Piana on the two adjacent corners, the recent opening of Louis
Vuitton, and the announcement that Pastis, the iconic New York
restaurant will reopen directly across the street from our first RH
Guesthouse, also scheduled to open in the fall of 2019. We remain
confident that RH New York will be the brand's first $100 million
Gallery in its second full year of operation, generating
approximately $25 million per year of store level cash
contribution.
RH President of Hospitality Brendan Sodikoff and his team are
demonstrating we can execute a profitable, high quality food and
beverage experience across multiple markets while driving traffic
into our Galleries that result in incremental revenues in our core
business. 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. Additionally, we continue to believe strongly in the
prospects for our first RH Guesthouse, opening in the fall of 2019,
just steps from our new Gallery.
The work being led by RH President, Chief Operating, Service,
& Values Officer DeMonty Price and his team 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.
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 remain focused on optimizing
the profitability of our new operating platform.
Regarding our balance sheet, we expect future cash flows will be
adequate to repay the outstanding principal of our $350 million
June 2019 and $300 million June 2020 zero coupon convertible notes
at maturity. As a reminder, we purchased a bond hedge that is
designed to protect us against dilution on the 2019 notes up to
$171.98 per share, and up to $189.00 per share for the 2020
notes.
To ensure financial flexibility and optionality, we completed a
zero coupon $335 million convertible notes offering earlier this
year that matures in June 2023, and also purchased a corresponding
bond hedge designed to protect against dilution up to $309.84 per
share.
During the third quarter, our Board of Directors approved a $700
million common share repurchase program. We continue to believe our
shares are undervalued and this new repurchase program reflects our
confidence in the outlook for our business and continued
improvements in our operating model. In addition, we believe that
this capital allocation strategy represents an opportunity to
create value for our long-term shareholders. During the third
quarter, the Company repurchased nearly 1.2 million shares at an
average price per share of $125.06.
2019 - A Pivot to High Quality, Sustainable Growth
Our plan is to pivot back to high quality, sustainable growth in
fiscal 2019 as we return to our product and brand expansion
strategy, which has been on hold as we focused on our move to
membership and the architecture of our new operating platform, and
accelerate our retail estate transformation.
President, Chief Creative & Merchandising Officer Eri Chaya
and her team have several new brand extension plans in our
development pipeline, such as RH Beach House and RH Color,
launching in the spring and fall of fiscal 2019. Additionally, they
have plans to expand our assortments in key categories, and
accelerate the introduction of new collections as we pivot back to
growth over the next several years.
We also plan to increase our investment in RH Interior Design
with a goal of building the leading interior design firm in North
America. We believe there is a significant revenue opportunity by
offering world class design and installation services as we move
the brand beyond creating and selling products to conceptualizing
and selling spaces.
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 fiscal 2019, we are planning to open 5 new
Galleries, including Edina, MN, Charlotte, NC, Corte Madera, CA,
San Francisco, CA, and Columbus, OH, as well as our first
Guesthouse in New York City. Growth in 2019 will also benefit from
the acceleration of RH New York once the city completes street work
and we add outdoor seating to our rooftop restaurant in the spring
of 2019.
Regarding our ongoing quest to revolutionize physical retailing
and the evolving nature of our real estate transformation, RH
President, Chief Real Estate & Development Officer Dave
Stanchak and his team have designed a new multi-tier market
strategy that we believe will optimize both market share and return
on invested capital.
First, we have developed a new RH prototype Design Gallery that
is an innovative and flexible blueprint to enable us to more
quickly place our disruptive product assortment and immersive
retail experience into the market. The new model is a standard we
will utilize that is based on key learnings from our recent Gallery
openings and will range in size from 33,000 square feet inclusive
of our integrated hospitality experience to 29,000 square feet
without. These new Galleries will represent our assortments from RH
Interiors, Modern, Baby & Child, Teen and Outdoor and contain
interior design offices and presentation rooms where design
professionals can work with clients on projects. Due to the reduced
square footage and efficient design, this new model will be more
capital efficient with less time and cost risk, but yield similar
productivity. We anticipate these new Galleries will represent
approximately two thirds of our target markets and enable us to
ramp our opening cadence from 3 to 5 new Galleries per year, to a
pace of 5 to 7 new Galleries per year. Future prototype examples
include Edina, MN, Corte Madera, CA, Columbus, OH, and Charlotte,
NC.
Second, we are developing a Gallery tailored to secondary
markets. Targeted to be 10,000 to 18,000 square feet, we believe
these smaller expressions of our brand will enable us to gain share
in markets currently only served by smaller competitors. Examples
of target secondary markets include Jacksonville, FL, Fort Worth,
TX, Hartford, CT, among others. We expect these Galleries to drive
$10 to $15 million of revenues at a net investment of $0 to $5
million, with a payback on our invested capital of 0 to 2 years.
Our plan is to test a few of these Galleries over the next several
years, and if proven successful, this format could lead to an
increase in our long-term Gallery targets.
Third, we will continue to develop and open larger Bespoke
Design Galleries in the top metropolitan markets, similar to those
we have opened in New York and Chicago. These iconic locations are
highly profitable statements for our brand, and we believe create a
long-term competitive advantage that will be difficult to
duplicate.
Fourth, we will continue to open indigenous Bespoke Galleries in
the best second home markets where the wealthy and affluent visit
and vacation. These Galleries will be tailored to reflect the local
culture, and be sized to the potential of each market. Examples of
indigenous Bespoke Galleries include the Hamptons, Palm Beach,
Yountville, and Aspen.
Like our evolving multi-tier Gallery strategy, Dave and his team
have developed a multi-tier real estate strategy that is designed
to significantly increase our unit level profitability and return
on invested capital. Our three primary deal constructs are outlined
below.
First, in many of our current projects, we are migrating from a
leasing to a development model. We currently have two Galleries,
Yountville and Edina, using this new model, and have an additional
five potential development projects in the pipeline. In the case of
Yountville and Edina, we expect to do a sale-leaseback that should
allow us to recoup all of our capital. In some cases we may be able
to pre-sell the property and structure the transaction where the
capital to build the project is advanced by the buyer during
construction, which could require zero upfront capital from RH.
Second, we are working on joint venture projects, where we share
the upside of a development with the developer/ landlord. An
example of this new model, would be our future Gallery and
Guesthouse in Aspen, where we are contributing the value of our
lease to the development in exchange for a profits interest in the
project. The developer will deliver to RH a substantially turnkey
Gallery and Guesthouse, while we continue to retain a 20% and 25%
profits interest in the properties. We would expect to monetize the
profits interest at the time of sale of the properties during the
first five years. The net result should be a minimal capital
investment to operationalize the business, with the expectation for
a net positive capital benefit at time of monetization of the
profits interest.
Third, due to the productivity and proof of concept of our
recent new Galleries, and the addition of a powerful, traffic
generating hospitality experience, we are able to negotiate
“capital light” leasing deals, where as much as 65% to 100% of the
capital requirement would be funded by the landlord, versus 35% to
50% previously. We currently have 14 potential capital light deals
in the development pipeline that would be scheduled to open in
fiscal 2019 and beyond.
All of the above mentioned deal structures should lead to lower
capital requirements, higher unit profitability, and significantly
higher returns on invested capital.
Lastly, we are currently exploring opportunities for Bespoke
Design Galleries in London, Paris, and other parts of Europe, and
believe there is tremendous opportunity for the RH brand to expand
globally.
As a result of the above, we feel confident that we can return
to our long-term revenue growth targets of 8% to 12% annually, and
possibly grow at a faster rate when we begin our international
expansion.
Building a Brand with No Peer and a Customer Experience That
Cannot Be Replicated Online
We do understand that the strategies we are pursuing - opening
the largest specialty retail experiences in our industry while most
are shrinking the size of their retail footprint or closing stores;
moving from a promotional to a membership model, while others are
increasing promotions, positioning their brands around price versus
product; continuing to mail inspiring Source Books, while many are
eliminating catalogs; and refusing to follow the herd in
self-promotion on social media, instead allowing our brand to be
defined by the taste, design, and quality of the products and
experiences we are creating - are all in direct conflict with
conventional wisdom and the plans being pursued by many in our
industry.
We believe when you step back and consider: one, we are building
a brand with no peer; two, we are creating a customer experience
that cannot be replicated online; and three, we have total control
of our brand from concept to customer, you realize what we are
building is extremely rare in today’s retail landscape, and we
would argue, will also prove to be equally valuable.
In closing, we are deeply grateful for all of our people and
partners whose passion and persistence bring our vision and values
to life each day, as we pursue our quest to become one of the most
admired brands in the world.
Carpe Diem,
Gary
Gary FriedmanChairman & Chief Executive Officer
1 Return on invested capital (ROIC): We define ROIC as adjusted
operating income after-tax for the most recent twelve-month period,
divided by the average of beginning and ending debt and equity less
cash and equivalents as well as short and long-term investments for
the most recent twelve- month period. ROIC is not a measure of
financial performance under GAAP, and should be considered in
addition to, and not as a substitute for other financial measures
prepared in accordance with GAAP. Our method of determining ROIC
may differ from other companies’ methods and therefore may not be
comparable.
Q&A CONFERENCE CALL INFORMATION
Accompanying this release, RH leadership will host a live
question and answer conference call at 2:00 p.m. PT (5:00 p.m. ET).
Interested parties may access the call by dialing (866) 394-6658
(United States/ Canada) or (706) 679-9188 (International). A live
broadcast of the question and answer session conference call will
also be available online at the Company’s investor relations
website, ir.rh.com. A replay of the question and answer session
conference call will be available through December 17, 2018 by
dialing (855) 859-2056 or (404) 537-3406 and entering passcode
5572267, as well as on the Company’s investor relations
website.
ABOUT RH
RH (NYSE: RH) is a curator of design, taste and style in the
luxury lifestyle market. The Company offers collections through its
retail galleries, Source Books, and online at RH.com, RH
Modern.com, RHBabyandChild.com, RHTeen.com, and Waterworks.com.
NON-GAAP FINANCIAL MEASURES
To supplement its condensed consolidated financial statements,
which are prepared and presented in accordance with Generally
Accepted Accounting Principles (“GAAP”), the Company uses the
following non-GAAP financial measures: adjusted net revenue,
adjusted net income, adjusted diluted earnings per share, return on
invested capital, free cash flow, adjusted operating margin,
adjusted gross margin, adjusted SG&A, EBITDA and adjusted
EBITDA (collectively, “non- GAAP financial measures”). We compute
these measures by adjusting the applicable GAAP measures to remove
the impact of certain recurring and non-recurring charges and gains
and the tax effect of these adjustments. The presentation of this
financial information is not intended to be considered in isolation
or as a substitute for, or superior to, the financial information
prepared and presented in accordance with GAAP. The Company uses
these non-GAAP financial measures for financial and operational
decision making and as a means to evaluate period-to-period
comparisons. The Company believes that they provide useful
information about operating results, enhance the overall
understanding of past financial performance and future prospects,
and allow for greater transparency with respect to key metrics used
by management in its financial and operational decision making. The
non-GAAP financial measures used by the Company in this press
release may be different from the non-GAAP financial measures,
including similarly titled measures, used by other companies.
For more information on the non-GAAP financial measures, please
see the Reconciliation of GAAP to non-GAAP Financial Measures
tables in this press release. These accompanying tables include
details on the GAAP financial measures that are most directly
comparable to non-GAAP financial measures and the related
reconciliations between these financial measures.
FORWARD-LOOKING STATEMENTS
This release contains forward-looking statements within the
meaning of the federal securities laws, including without
limitation statements related to: our expectations regarding free
cash flow including the amounts of free cash flow that we expect to
generate in future time periods; our adjustment of our year end net
debt to adjusted twelve months EBITDA forecast; our expectations
regarding returns on invested capital (ROIC) in future time
periods; our plans regarding managing the business; our plan to
pivot back to high quality, sustainable growth in fiscal 2019; our
goal of optimizing our new business model and building a platform
that will enable us to disrupt and redefine the luxury lifestyle
market for years to come; all statements regarding future financial
or operating performance including our financial outlook and
guidance including our fourth quarter and fiscal 2018 guidance; our
expectation regarding the benefits of the revolutionary redesign of
our organization; our expectation that the closure of our
distribution facility in Baltimore during the third quarter of
fiscal 2018 will result in annual net savings; our plans and
objectives with respect to changes in our real estate strategy
including the pursuit of new real estate models in lieu of a
traditional leasing model; our preliminary outlook for fiscal 2019;
our term financial and operating goals, targets and expectations;
our belief that annualized net savings from the redesign of our
organization and closing of the Baltimore distribution facility
will begin to be realized starting in the fourth quarter of 2018;
our belief that we could possibly grow at a faster rate when we
begin our international expansion; our belief that we see a clear
path to $4 to $5 billion in North American revenues, as well as an
international opportunity that could lead to RH becoming a $7 to
$10 billion dollar global brand; the effects of tariffs and other
trade related actions including the potential impact of China
tariff related mitigation strategies with our vendor partners and
our expectations that these tariffs will not have a material impact
on our business in Q4 2018 or in fiscal 2019 outside of the items
we have specifically noted; our belief that we are building a
disruptive brand and business that will continue to gain profitable
market share for years to come; our expectation 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; our plan to
increase the number of new Galleries with integrated restaurants,
wine vaults, and barista bars going forward; the prospects for our
first RH Guesthouse and the plan to open it in 2019 in New York
City; our expectation that our multi-year effort to architect a new
operating platform will result in a dramatically improved customer
experience, continued margin enhancement and significant cost
savings over the next several years; our expectation that future
cash flows will be adequate to repay the outstanding principal of
our $350 million June 2019 and $300 million June 2020 zero coupon
convertible notes at maturity; our belief that our shares are
undervalued, including due to our expectations about the outlook
for our business and continued improvements in our operating model,
and that our capital allocation strategy including our new
repurchase program represents an opportunity to create value for
our shareholders; our plan to launch several new brand extension
plans, such as RH Beach House and RH Color, in fiscal 2019; our
plan to increase our investment in RH Interior Design with a goal
of building the leading interior design firm in North America; our
expectation that there is a significant revenue opportunity by
offering world class design and installation services; our plan to
accelerate our real estate transformation, opening 5 to 7 new
Galleries per year, up from 3 to 5 per year, including through new
model Galleries that we anticipate will represent approximately two
thirds of our target markets; our plan to open 5 new Galleries,
including Edina, MN, Charlotte, NC, Corte Madera, CA, San
Francisco, California and Columbus, OH, as well as our first
Guesthouse in New York City, in fiscal 2019; our ability to drive
more than a doubling in revenues and profits as we transition
markets to our high performing Gallery formats; our expectation
that RH New York will exceed $15 million per year and that the NY
Gallery’s sales will further accelerate next year as construction
is completed and new luxury tenants begin to open in nearby
storefronts; our statement that we remain confident that RH New
York will be the brand’s first $100 million Gallery in its second
full year of operation, generating approximately $25 million per
year of store level cash contribution; our plan to expand seating
in our NY Gallery in 2019 to include outdoors; our expectations
regarding the amount of drag on our operating margins due to the
initial start-up costs in 2019 of RH Hospitality; our belief that
RH Hospitality is now a proven scalable business, and our plan to
increase the number of new Galleries with integrated restaurants,
wine vaults, and barista bars going forward; our strong belief in
the prospects of our first RH Guesthouse and its planned opening in
2019; the ongoing development of our new multi-tier market approach
and our belief that it will optimize both market share and return
on invested capital; statements regarding slower special order
receipts from China due to tariff related shipping congestion
having a positive impact on our fourth quarter revenues; statements
regarding the benefits to our brand and business our seamlessly
integrated ecosystem of products, businesses, services, and
experiences; statements regarding our demonstration that we can be
rewarded with luxury brand margins that are double those of
competitors targeting broader markets; statements that we will
continue to benefit from a growing market as a result of the
compounding wealth effect; statements regarding our ability to
scale taste and that the impact of such effort is large and far
reaching and expectations regarding the returns from such
initiative; statements regarding building a business that is
capital efficient, generates significant free cash flow, enjoys a
low cost of capital, and is developing a culture relentlessly
focused on ROIC; statements that we invest with a long term view,
indifferent to short term market swings or recessions, and believe
every market presents opportunities; statements regarding future
intentions with respect to the allocation of capital including our
expectations regarding potential acquisitions; statements that we
plan to remain focused on the growth opportunities in our current
ecosystem; statements that we expect to continue accessing the
capital markets when favorable and use our excess free cash flow to
take advantage of real estate and other opportunities; expectations
and statements regarding the number of shares outstanding or when
and to what extent we might repurchase RH shares or the financial
returns we expect from such investments including statements
regarding whether repurchase of shares represents a good investment
or that our shares are undervalued; statements regarding the
similarity in our business to that of other companies or brands
including Apple, LVMH and Berkshire Hathaway; our belief that the
model we are building will result in RH leapfrogging far past
comparable companies; statements regarding the housing market and
other macroeconomic factors and their potential impact on our
business; our expectations regarding our real estate strategy
including the performance and benefits of different new Gallery
formats and various different real estate development models that
we are pursuing for new Galleries; our utilization of a new RH
prototype Design Gallery and our expectations regarding the
financial dynamics of this prototype model including that it will
open new markets including our anticipation that these new Design
Galleries will represent approximately two thirds of our target
markets and our expectations regarding gaining share in markets
currently only served by smaller competitors; our expectations
regarding larger Bespoke Design Galleries, including the financial
and operating characteristics of such Galleries; and our
expectations concerning indigenous Bespoke Galleries and the
benefits and financial characteristics of such smaller Bespoke
Galleries; our expectations with respect to our real estate
development models that we will pursue and the benefits of such
different models including (i) the anticipated pipeline of five
additional projects that we would expect to pursue under a
development model as opposed to a traditional leasing model,
including our expectation regarding the benefits of this model,
(ii) our expectation regarding our future Gallery and Guesthouse in
Aspen and other similar real estate transactions, including
monetizing the profits interest at the time of sale of the property
during the first five years and (iii) our expectation that we will
be able to negotiate capital light leasing deals as well as the
financial aspects of such deals, and our expected pipeline of these
capital light deals; statements regarding exploring opportunities
for Bespoke Design Galleries in Europe; any financial or
operational factors or results that are described as short term,
one-time, non-recurring or unusual (as similar operational or
financial factors may adversely affect the Company’s future results
including as a result of charges, costs and other items that may
occur in one or more subsequent financial reporting periods); and
any statements or assumptions underlying any of the foregoing. You
can identify forward-looking statements by the fact that they do
not relate strictly to historical or current facts. These
statements may include words such as “anticipate,” “estimate,”
“expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,”
“should,” “likely” and other words and terms of similar meaning in
connection with any discussion of the timing or nature of future
events. We cannot assure you that future developments affecting us
will be those that we have anticipated. Important risks and
uncertainties that could cause actual results to differ materially
from our expectations or the assumptions set forth in this release
include, among others, risks related to our dependence on key
personnel and any changes in key personnel; successful
implementation of our growth strategy; our ability to leverage
Waterworks; uncertainties in the current performance of our
business including a range of risks related to our operations as
well as external economic factors; general economic conditions and
the impact on consumer confidence and spending; changes in customer
demand for our products; decisions concerning the allocation of
capital including the extent to which we repurchase additional
shares of our common stock which will affect shares outstanding and
EPS; factors affecting our outstanding convertible senior notes or
other forms of our indebtedness; our ability to anticipate consumer
preferences and buying trends, and maintain our brand promise to
customers; changes in consumer spending based on weather and other
conditions beyond our control; risks related to the number of new
business initiatives we are undertaking; strikes and work stoppages
affecting port workers and other industries involved in the
transportation of our products; our ability to obtain our products
in a timely fashion or in the quantities required; our ability to
employ reasonable and appropriate security measures to protect
personal information that we collect; our ability to support our
growth with appropriate information technology systems; risks
related to our sourcing and supply chain including our dependence
on imported products produced by foreign manufacturers and risks
related to importation of such products including risks related to
tariffs and other similar issues, as well as those risks and
uncertainties disclosed under the sections entitled “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in RH’s most recent Form 10-K and Form
10-Q filed with the Securities and Exchange Commission, and similar
disclosures in subsequent reports filed with the SEC, which are
available on our investor relations website at ir.rh.com and on the
SEC website at www.sec.gov. Any forward-looking statement made by
us in this press release speaks only as of the date on which we
make it. We undertake no obligation to publicly update any forward-
looking statement, whether as a result of new information, future
developments or otherwise, except as may be required by any
applicable securities laws.
RH
REVENUE METRICS
(Unaudited)
Three Months Ended
November 3,2018
October 28,2017
Stores as a percentage of net revenues [a] 58 % 58 % Direct as a
percentage of net revenues 42 % 42 % Growth in net revenues: Stores
[a] 8 % 12 % Direct 7 % 3 % Total 7 % 8 % Comparable brand revenue
growth 4 % 6 %
See the Company’s most recent Form 10-K
and Form 10-Q filings for the definitions of stores, direct, and
comparable brand revenue.
[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 $47.2 million and $41.2 million for the three months
ended November 3, 2018 and October 28, 2017, respectively.
RH
RETAIL GALLERY METRICS
(Unaudited)
As of November 3, 2018, 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.
This compares to a total of 84 retail Galleries consisting of 15
Design Galleries, 48 legacy Galleries, 1 RH Modern Gallery and 5 RH
Baby & Child Galleries throughout the United States and Canada,
and 15 Waterworks showrooms throughout the United States and in the
U.K., as of October 28, 2017. In addition, as of November 3,
2018, the Company operated 37 outlet stores compared to 31 as of
October 28, 2017.
Three Months
Ended
November 3,2018
October 28,2017
Store Count
Total Leased SellingSquare
Footage
Store Count
Total Leased SellingSquare
Footage
(in thousands) (in thousands)
Beginning of period 85 1,053
85 915 Retail Galleries opened: NY Meatpacking Design Gallery 1
50.5 — — Yountville Design Gallery 1 6.7 — — Toronto (Yorkdale)
Design Gallery — — 1 43.3 Retail Galleries closed: NY Flatiron
legacy Gallery (1 ) (21.4 ) — — Toronto (Bay View) legacy Gallery —
— (1 ) (6.0 ) Toronto (Yonge Street) legacy Gallery — —
(1 ) (8.6 )
End of period 86 1,089 84
944
Weighted-average leased selling square
footage 1,069 918 % Growth year over year 16 % 12
% See the Company’s most recent Form 10-K and Form 10-Q filings for
square footage definitions. Total leased square footage as of
November 3, 2018 and October 28, 2017 was 1,467,000 and 1,276,000,
respectively. Weighted-average leased square footage for the three
months ended November 3, 2018 and October 28, 2017 was 1,439,000
and 1,250,000, respectively. Retail sales per leased selling square
foot for the three months ended November 3, 2018 and October 28,
2017 was $302 and $329, respectively.
RH
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(In thousands, except share and per
share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
November 3,2018
% of NetRevenues
October 28,2017
% of NetRevenues
November 3,2018
% of NetRevenues
October 28,2017
% of NetRevenues
Net revenues $ 636,558 100.0 % $ 592,473 100.0 % $ 1,834,762 100.0
% $ 1,769,879 100.0 % Cost of goods sold 382,047 60.0 %
378,148 63.8 % 1,096,616 59.8 % 1,179,485 66.6
% Gross profit 254,511 40.0 % 214,325 36.2 % 738,146 40.2 % 590,394
33.4 %
Selling, general and administrative
expenses
207,495 32.6 % 171,163 28.9 % 552,154 30.1 %
528,213 29.9 % Income from operations 47,016 7.4 % 43,162
7.3 % 185,992 10.1 % 62,181 3.5 % Other expenses Interest
expense—net 19,371 3.1 % 18,915 3.2 % 53,886 2.9 % 45,496 2.5 %
Loss on extinguishment of debt — 0.0 % 4,880 0.8 %
917 0.0 % 4,880 0.3 % Total other expenses
19,371 3.1 % 23,795 4.0 % 54,803 2.9 % 50,376
2.8 % Income before income taxes 27,645 4.3 % 19,367 3.3 % 131,189
7.2 % 11,805 0.7 % Income tax expense 5,234 0.8 %
6,216 1.1 % 16,677 0.9 % 9,886 0.6 % Net income $
22,411 3.5 % $ 13,151 2.2 % $ 114,512 6.2 % $ 1,919 0.1 %
Weighted-average shares used in
computing basic net income per share
22,082,141 21,221,848 21,850,955 29,076,556 Basic net income per
share $ 1.01 $ 0.62 $ 5.24 $ 0.07 Weighted-average shares
used in
computing diluted net income per share
27,703,319 23,535,617 26,810,035 30,593,382 Diluted net income per
share $ 0.81 $ 0.56 $ 4.27 $ 0.06
RH
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
(Unaudited)
November 3,2018
February 3,2018
October 28,2017
ASSETS Cash and cash equivalents $ 7,755 $ 17,907 $ 22,162
Merchandise inventories 566,117 527,026 557,345 Other current
assets 120,166 99,997 109,488
Total current assets 694,038 644,930 688,995 Property and
equipment—net 856,230 800,698 778,320 Goodwill and intangible
assets 242,487 242,595 276,279 Other non-current assets
50,570 44,643 57,972 Total assets $
1,843,325 $ 1,732,866 $ 1,801,566
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Liabilities
Accounts payable and accrued expenses $ 306,860 $ 318,765 $ 252,569
Convertible senior notes due 2019—net 339,707 — — Deferred revenue,
customer deposits and other current liabilities 218,506
200,570 217,188 Total current
liabilities 865,073 519,335 469,757 Asset based credit facility
107,500 199,970 341,000 Term loans—net — 79,499 79,471 Convertible
senior notes due 2019—net — 327,731 323,828 Convertible senior
notes due 2020—net 266,506 252,994 248,633 Convertible senior notes
due 2023—net 244,944 — — Financing obligations under build-to-suit
lease transactions 220,708 229,323 230,259 Other non-current
obligations 106,574 131,350 133,894
Total liabilities 1,811,305 1,740,202
1,826,842 Stockholders’ equity (deficit)
32,020 (7,336 ) (25,276 ) Total liabilities
and stockholders’ equity (deficit) $ 1,843,325 $ 1,732,866 $
1,801,566
RH
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
November 3,2018
October 28,2017
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 114,512 $
1,919 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization 53,180 51,092
Other non-cash items 57,426 77,516 Change in assets and
liabilities: Merchandise inventories (39,815 ) 190,620 Accounts
payable, accrued expenses and other (57,711 ) 68,941
Net cash provided by operating activities 127,592
390,088
CASH FLOWS FROM INVESTING
ACTIVITIES Capital expenditures (104,403 ) (104,233 ) Proceeds
from sale of assets held for sale—net — 15,123 Net proceeds from
investments — 175,801 Net cash provided
by (used in) investing activities (104,403 ) 86,691
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 (92,470 ) 341,000 Net borrowings (repayments) under term
loans (80,000 ) 77,000 Net borrowings (repayments) under promissory
and equipment security notes (31,974 ) 33,159 Debt issuance costs —
(8,298 ) Repurchases of common stock—including commissions (145,182
) (1,000,326 ) Net equity related transactions 26,880 10,488 Other
financing activities (4,688 ) (8,992 ) Net cash used
in financing activities (39,619 ) (555,969 ) Effects
of foreign currency exchange rate translation (136 )
22 Net decrease in cash and cash equivalents and restricted
cash equivalents (16,566 ) (79,168 ) 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 7,755 22,162 End of
period—restricted cash equivalents (construction related deposits)
993 13,737 End of period—cash and cash
equivalents and restricted cash equivalents $ 8,748 $ 35,899
RH
CALCULATION OF FREE CASH FLOW
(In thousands)
(Unaudited)
Nine Months Ended
November 3,2018
October 28,2017
Net cash provided by operating activities $ 127,592 $ 390,088
Capital expenditures (104,403 ) (104,233 ) Payments on
build-to-suit lease transactions (7,733 ) (8,734 ) Borrowing on
build-to-suit lease transactions 3,539 — Payments on capital leases
(494 ) (258 ) Proceeds from sale of assets held for sale—net —
15,123 Free cash flow [a] $ 18,501 $ 291,986 [a]
Free cash flow is calculated as net cash provided by
operating activities, net proceeds from sale of assets held for
sale, and borrowings under build-to-suit 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
Nine Months Ended
November 3,2018
October 28,2017
November 3,2018
October 28,2017
GAAP net income $ 22,411 $ 13,151 $ 114,512 $
1,919
Adjustments (pre-tax): Net revenues: Recall
accrual [a] 1,948 — 3,801 3,813 Cost of goods sold: Distribution
center closures [b] 1,478 497 1,478 497 Impact of inventory step-up
[c] — 248 380 2,108 Recall accrual [a] 1,738 3,552 (1,778 ) 4,315
Selling, general and administrative expenses: Reorganization
related costs [d] 7,564 1,029 9,285 1,029 Lease losses [e] 3,411 —
3,411 — Recall accrual [a] 300 — 645 157 Distribution center
closures [b] 2,372 336 300 336 Legal settlement [f] — — (5,289 ) —
Executive non-cash compensation [g] — — — 23,872 Gain on sale of
building and land [h] — (819 ) — (2,119 ) Other expenses:
Amortization of debt discount [i] 11,283 6,879 27,555 20,384 Loss
on extinguishment of debt [j] — 4,880
917 4,880 Subtotal adjusted items
30,094 16,602 40,705 59,272 Impact of income tax items [k]
(5,679 ) (5,329 ) (7,503 ) (15,272 ) Adjusted
net income [l] $ 46,826 $ 24,424 $ 147,714 $
45,919 [a] Represents a reduction in net
revenues, increase in cost of goods sold and inventory charges
associated with product recalls, as well as accrual adjustments and
insurance recoveries related to product recalls. [b] Represents
disposals of inventory and property and equipment, lease related
charges, inventory transfer costs and other costs associated with
distribution center closures. [c] Represents the non-cash
amortization of the inventory fair value adjustment recorded in
connection with our acquisition of Waterworks. [d] 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. [e] Represents an additional lease related charge
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. [f]
Represents a favorable legal settlement, net of related legal
expenses. [g] Represents non-cash compensation charges related to a
fully vested option grant made to Mr. Friedman in May 2017. [h]
Represents the gain on the sale of building and land of one of our
previously owned retail Galleries. [i] Under GAAP, certain
convertible debt instruments that may be settled in cash on
conversion are required to be separately accounted for as liability
and equity components of the instrument in a manner that reflects
the issuer’s non-convertible debt borrowing rate. Accordingly, in
accounting for GAAP purposes for the $350 million aggregate
principal amount of convertible senior notes that were issued in
June 2014 (the “2019 Notes”), 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 $0.8 million during the three
months ended November 3, 2018 and October 28, 2017, respectively.
Amounts are presented net of interest capitalized for capital
projects of $2.1 million and $2.3 million during the nine months
ended November 3, 2018 and October 28, 2017, respectively. [j]
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. [k] The adjustments for the three months ended
November 3, 2018 and October 28, 2017 represent the tax effect of
the adjusted items based on our effective tax rates of 18.9% and
32.1%, respectively. The nine months ended November 3, 2018 and
October 28, 2017 include an adjustment to calculate income tax
expense at adjusted tax rates of 14.1% and 35.4%, respectively,
which is calculated based on the weighted-average fiscal 2018 and
fiscal 2017 quarterly effective tax rates. [l] Adjusted net income
is a supplemental measure of financial performance that is not
required by, or presented in accordance with, GAAP. We define
adjusted net income as net income, 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
Nine Months Ended
November 3,2018
October 28,2017
November 3,2018
October 28,2017
Diluted net income per share $ 0.81 $ 0.56 $ 4.27 $ 0.06 Pro
forma diluted net income per share [a] $ 0.83 $ 0.56 $ 4.33 $ 0.06
EPS impact of adjustments (pre-tax) [b]: Amortization of debt
discount 0.42 0.29 1.04 0.67 Reorganization related costs 0.28 0.04
0.35 0.03 Lease losses 0.12 — 0.14 — Recall accrual 0.15 0.15 0.10
0.27 Distribution center closures 0.14 0.04 0.07 0.03 Loss on
extinguishment of debt — 0.21 0.03 0.16 Impact of inventory step-up
— 0.01 0.01 0.07 Legal settlement — — (0.20 ) — Executive non-cash
compensation — — — 0.78 Gain on sale of building and land —
(0.03 ) — (0.07 ) Subtotal
adjusted items 1.11 0.71 1.54 1.94 Impact of income tax items [b]
(0.21 ) (0.23 ) (0.29 ) (0.50 )
Adjusted diluted net income per share [c] $ 1.73 $ 1.04
$ 5.58 $ 1.50 [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 November 3, 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 nine
months ended November 3, 2018 is calculated based on GAAP net
income and pro forma diluted weighted-average shares of 26,454,345,
which excludes dilution related to the 2019 Notes and 2020 Notes of
355,690 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
Nine Months Ended
November 3,2018
October 28,2017
November 3,2018
October 28,2017
Net revenues $ 636,558 $ 592,473 $ 1,834,762 $ 1,769,879 Recall
accrual [a] 1,948 — 3,801
3,813 Adjusted net revenues [b] $ 638,506 $
592,473 $ 1,838,563 $ 1,773,692 Gross
profit $ 254,511 $ 214,325 $ 738,146 $ 590,394 Recall accrual [a]
3,686 3,552 2,023 8,128 Distribution center closures [a] 1,478 497
1,478 497 Impact of inventory step-up [a] —
248 380 2,108 Adjusted gross
profit [b] $ 259,675 $ 218,622 $ 742,027 $
601,127 Gross margin [c] 40.0 % 36.2 %
40.2 % 33.4 % Adjusted gross margin [c] 40.7 %
36.9 % 40.4 % 33.9 % [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
Nine Months Ended
November 3,2018
October 28,2017
November 3,2018
October 28,2017
Net income $ 22,411 $ 13,151 $ 114,512 $ 1,919 Interest expense—net
19,371 18,915 53,886 45,496 Loss on extinguishment of debt — 4,880
917 4,880 Income tax expense 5,234 6,216
16,677 9,886 Operating income
47,016 43,162 185,992 62,181 Reorganization related costs [a] 7,564
1,029 9,285 1,029 Lease losses [a] 3,411 — 3,411 — Recall accrual
[a] 3,986 3,552 2,668 8,285 Distribution center closures [a] 3,850
833 1,778 833 Impact of inventory step-up [a] — 248 380 2,108 Legal
settlement [a] — — (5,289 ) — Executive non-cash compensation [a] —
— — 23,872 Gain on sale of building and land [a] —
(819 ) — (2,119 ) Adjusted operating
income [b] $ 65,827 $ 48,005 $ 198,225 $
96,189 Net revenues $ 636,558 $ 592,473
$ 1,834,762 $ 1,769,879 Adjusted net revenues [c] $
638,506 $ 592,473 $ 1,838,563 $ 1,773,692
Operating margin [c] 7.4 % 7.3 %
10.1 % 3.5 % Adjusted operating margin [c] 10.3 %
8.1 % 10.8 % 5.4 % [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
Nine Months Ended
November 3,2018
October 28,2017
November 3,2018
October 28,2017
Net income $ 22,411 $ 13,151 $ 114,512 $ 1,919 Depreciation and
amortization 18,377 18,546 53,180 51,092 Interest expense—net
19,371 18,915 53,886 45,496 Loss on extinguishment of debt — 4,880
917 4,880 Income tax expense 5,234 6,216
16,677 9,886 EBITDA [a] 65,393 61,708
239,172 113,273 Non-cash compensation [b] 3,685 6,763 17,916 42,929
Reorganization related costs [c] 7,564 1,029 9,285 1,029 Lease
losses [c] 3,411 — 3,411 — Recall accrual [c] 3,986 3,552 2,668
8,285 Distribution center closures [c] 3,850 833 1,778 833 Impact
of inventory step-up [c] — 248 380 2,108 Legal settlement [c] — —
(5,289
)
— Gain on sale of building and land [c] — (819 )
— (2,119 ) Adjusted EBITDA [a] $ 87,889 $
73,314 $
269,321
$ 166,338 [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, 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
RECONCILIATION OF NET INCOME TO
EBITDA
AND ADJUSTED EBITDA TRAILING TWELVE
MONTHS
(In thousands)
(Unaudited)
Trailing Twelve Months
November 3,2018
July 29,2017
Net income $ 114,773 $ 721 Depreciation and amortization 72,223
63,606 Interest expense—net 70,960 49,626 Goodwill impairment [a]
33,700 — Loss on extinguishment of debt [b] 917 — Income tax
expense 34,762 11,168 EBITDA [c]
327,335 125,121 Non-cash compensation [d] 25,696 51,296
Reorganization related costs [e] 9,205 974 Asset impairment and
lease losses [f] 7,828 12,743 Distribution center closures [g]
5,791 — Recall accrual [h] 2,090 9,348 Impact of inventory step-up
[i] 799 5,294 Legal settlement [j] (5,289 ) — Anti-dumping exposure
[k] (2,202 ) — Gain on sale of building and land [l] — (1,300 )
Aircraft impairment [m] — 4,767
Adjusted EBITDA [c]
$ 371,253 $ 208,243 [a] Represents
goodwill 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, including the non-cash compensation charge related to a
fully vested option grant made to Mr. Friedman in May 2017. [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 impairments
associated with RH Contemporary Art and RH Kitchen. [g] Represents
disposals of inventory and property and equipment, lease related
charges, inventory transfer costs, and other costs associated with
distribution center closures. [h] Represents a reduction in net
revenues, increase in cost of goods sold and inventory charges
associated with product recalls, as well as accrual adjustments and
insurance recoveries related to product recalls. [i] Represents the
non-cash amortization of the inventory fair value adjustment
recorded in connection with our acquisition of Waterworks. [j]
Represents a favorable legal settlement, net of related legal
expenses. [k] 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. [l] Represents the gain on the sale of building
and land of one of our previously owned retail Galleries. [m]
Represents the impairment recorded upon reclassification of
aircraft as asset held for sale.
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 November 3,
2018 As Reported
% of NetRevenues
Topic 606Adjustments
Balances withoutAdoption of
Topic 606
% of Net
Revenues
Net revenues [a] $ 636,558 100.0 % $ (1,066 ) $ 635,492 100.0 %
Cost of goods sold [b] 382,047 60.0 % (80 )
381,967 60.1 % Gross profit 254,511 40.0 % (986 ) 253,525 39.9 %
Selling, general and administrative expenses [c] 207,495
32.6 % (11,693 ) 195,802 30.8 % Income from
operations 47,016 7.4 % 10,707 57,723 9.1 % Other expenses Interest
expense—net 19,371 3.1 % — 19,371 3.0 % Loss on extinguishment of
debt — 0.0 % — — 0.0 % Total other
expenses 19,371 3.1 % — 19,371 3.0 %
Income before income taxes 27,645 4.3 % 10,707 38,352 6.0 % Income
tax expense [d] 5,234 0.8 % 2,015 7,249
1.2 % Net income $ 22,411 3.5 % $ 8,692 $ 31,103 4.9 %
[a] Topic 606 adjustment to net revenues includes (i)
$0.6 million associated with deferred revenue, (ii) $0.5 million
associated with incentive payment amortization, (iii) $0.4 million
associated with gift card breakage, partially offset by (iv) $0.4
million increase associated with membership revenue. [b] Topic 606
adjustment to costs of goods sold represents deferred cost of goods
sold and the impact of related shipping expenses of $0.1 million.
[c] Topic 606 adjustment to selling, general and administrative
expenses includes a $10.5 million decrease in advertising expense,
gift card breakage of $0.7 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 18.9%. The following table
summarizes the impact of adopting Topic 606 on certain line items
of our condensed consolidated balance sheet:
As of November 3, 2018 As Reported
Topic 606Adjustments
Balances withoutAdoption of
Topic 606
Other current assets $ 120,166 $ 46,972 $ 167,138 Other non-current
assets 50,570 (6,561 ) 44,009 Accounts payable and accrued expenses
306,860 (789 ) 306,071 Deferred revenue, customer deposits and
other current liabilities 218,506 8,320 226,826 Stockholders’
equity 32,020 32,880 64,900
RH
FISCAL 2018 GUIDANCE BY QUARTER
(In millions, except per share
data)
The Company is providing the following outlook for fiscal 2018:
First Quarter2018
Second Quarter2018
Third Quarter2018
Fourth Quarter2018
Fiscal Year2018
Adjusted net revenues $557.4 [a] $642.7 $638.5 $680 - $690 $2,519 -
$2,529 % growth vs. prior year (1)% 4% 8% 8% - 10% [b] 5% [b]
Adjusted gross margin (% of net revenues) 38.0% 42.1% 40.7%
39.5% - 40.0% 40.1% - 40.3% Adjusted SG&A (as % of net
revenues) 28.5% [a] 29.8% 30.4% 24.6% - 24.8% 28.2% - 28.3%
Adjusted operating margin (% of net revenues) 9.6% 12.3% 10.3%
14.8% - 15.3% 11.9% - 12.0% Adjusted net income $33.5 $67.4
$46.8 $71.5 - $75.4 $219.2 - $223.1 Adjusted diluted EPS
$1.33 $2.49 $1.73 $2.75 - $2.90 $8.33 - $8.47 Merchandise
inventories $475 - $495 Capital expenditures—net of asset
sales $75 - $85 Free cash flow $260+ [a] First
quarter net revenues and SG&A as a percentage of net revenues
are shown on a GAAP basis. [b] On comparable 13-week to 13-week
basis for fourth quarter 2018 and 52-week to 52-week basis for
fiscal 2018. The extra week added approximately $42.6 million to
fiscal 2017 net revenues. Note: The Company’s adjusted net income
does not include certain charges and costs. The adjustments to net
revenues, gross margin, selling, general and administrative
expenses, operating income, operating margin and net income in
future periods are generally expected to be similar to the kinds of
charges and costs excluded from such non-GAAP financial measures in
prior periods, such as unusual non-cash and other compensation
expense; one-time income tax expense or benefits; legal claim
related expenses; recall accruals; reorganization costs including
severance costs and related taxes; non-cash amortization of debt
discount; and charges and costs in connection with the acquisition
of Waterworks, among others. The exclusion of these charges and
costs in future periods will have a significant impact on the
Company’s adjusted net revenues, adjusted gross margin, adjusted
selling, general and administrative expenses, adjusted operating
income, adjusted operating margin and adjusted net income. The
Company is not able to provide a reconciliation of the Company’s
non-GAAP financial guidance to the corresponding GAAP measures
without unreasonable effort because of the uncertainty and
variability of the nature and amount of these future charges and
costs.
RH
ESTIMATED TOPIC 606 IMPACT TO FISCAL
2018 GUIDANCE BY QUARTER
First Quarter2018
Second Quarter2018
Third Quarter2018
Fourth Quarter2018
Fiscal Year2018
Topic 606 net revenues 1.1% Increase 0.4% Increase 0.2% Decrease
0.7% Increase 0.5% Increase Topic 606 adjusted gross margin
(% of net revenues) 30 bps Increase 10 bps Increase 10 bps Increase
10 bps Increase 10 bps Increase Topic 606 adjusted SG&A
(as % of net revenues) 110 bps Decrease 170 bps Increase 180 bps
Increase 220 bps Decrease 10 bps Increase Topic 606 adjusted
operating margin (% of net revenues) [a] 140 bps Increase 160 bps
Decrease 170 bps Decrease 230 bps Increase No Impact [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 240
basis points increase in the fourth quarter fiscal 2018 and no
impact on fiscal 2018.
RH
ANTICIPATED IMPACT OF STOCK PRICE ON
ADJUSTED DILUTED SHARES OUTSTANDING
(In millions, except stock price and
per share data)
Average Fourth Quarter Fiscal 2018
Stock Price $ 100.00 $ 120.00 $ 140.00 $
160.00 $ 180.00 $ 200.00 Midpoint of Q4 2018 adjusted
net income guidance $ 73.5 $ 73.5 $ 73.5 $ 73.5 $ 73.5 $ 73.5
Q4 2018 adjusted diluted shares outstanding [a] 24.91 25.58
26.06 26.42 26.85 27.52 Q4 2018 adjusted earnings per share
$ 2.95 $ 2.87 $ 2.82 $ 2.78 $ 2.74 $ 2.67
Average
Fiscal 2018 Stock Price $ 100.00 $ 120.00 $ 140.00 $ 160.00 $
180.00 $ 200.00 Midpoint of fiscal 2018 adjusted net income
guidance $ 221.2 $ 221.2 $ 221.2 $ 221.2 $ 221.2 $ 221.2
Fiscal 2018 adjusted diluted shares outstanding [a] 26.43 26.59
26.71 26.80 27.01 27.50 Fiscal 2018 adjusted earnings per
share $ 8.37 $ 8.32 $ 8.28 $ 8.25 $ 8.19 $ 8.04 Note: The
table above is intended to demonstrate the impact of increasing
stock prices on our adjusted diluted shares outstanding due to 1)
additional in-the-money options and 2) the higher cost of acquired
shares under the treasury stock method. For GAAP purposes,
we will incur dilution above the lower strike prices of our 2019
Notes, 2020 Notes and 2023 Notes of $116.09, $118.13 and $193.65,
respectively. However, no additional shares will be included in our
adjusted diluted shares outstanding calculation between $116.09 and
$171.98 for our 2019 Notes, between $118.13 and $189.00 for our
2020 Notes, and between $193.65 and $309.84 for our 2023 Notes,
based on the bond hedge contracts in place that will deliver shares
to offset dilution in these ranges. At stock prices in excess of
$171.98, $189.00 and $309.84, we will incur dilution related to the
2019 Notes, 2020 Notes and 2023 Notes, respectively, and our
obligation to deliver additional shares in excess of the dilution
protection provided by the bond hedges. The calculation also
includes assumptions around the timing and number of options
exercises. Actual diluted shares outstanding may differ if actual
exercises differ from estimates. The stock option awards
outstanding for RH’s Chairman and CEO are included in all of the
adjusted diluted shares outstanding scenarios above based on the
exercise prices of $46.50, $75.43 and $50.00 for the November 2012,
July 2013 and May 2017 grants, respectively. [a]
Includes 0.134 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/20181203005949/en/
Cammeron McLaughlinSVP, Investor Relations and Strategy(415)
945-4998cmclaughlin@rh.com
RH (NYSE:RH)
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