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RH Raises Third Quarter and Fiscal 2017 Adjusted Net Income Guidance

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Company Provides Preliminary Fiscal 2018 Outlook

RH (NYSE:RH) today announced updated guidance for the third quarter
fiscal 2017 and a preliminary fiscal 2018 outlook ahead of the Company's
Investor Day being held in West Palm Beach, Florida on Thursday,
November 16, beginning at 2:00 pm EST. The Investor Day will be webcast
at the Company's Investor Relations website, ir.rh.com.

Third Quarter, Fourth Quarter and Fiscal 2017 Updated Guidance

  • Adjusted net revenues for the third quarter fiscal 2017 are now
    expected to be approximately $592.5 million, an increase of 8% versus
    $549.3 million last year, despite an approximate 1% negative impact
    from Hurricanes Harvey and Irma. This compares to the Company's prior
    guidance of adjusted net revenues in the range of $575 million to $590
    million, or an increase of 5% to 7% compared to last year. On a GAAP
    basis, net revenues are expected to be approximately $592.5 million
    for the third quarter.
  • Adjusted net income for the third quarter is now expected to be in the
    range of $24.0 million to $24.5 million, compared to $8.0 million last
    year, despite a negative impact of approximately $1.3 million from
    Hurricanes Harvey and Irma. The outlook also includes a positive
    impact of approximately $2.5 million related to a lower effective tax
    rate. This compares to the Company's prior guidance of adjusted net
    income in the range of $16 million to $19 million. On a GAAP basis,
    net income for the third quarter is expected to be in the range of
    $12.5 million to $13 million.
  • Adjusted diluted earnings per share for the third quarter is now
    expected to be in the range of $1.02 to $1.04, compared to $0.20 last
    year, despite a negative impact of approximately $0.05 per share from
    Hurricanes Harvey and Irma. The outlook also includes a positive
    impact of approximately $0.11 per share related to a lower effective
    tax rate. This compares to the Company's prior guidance of adjusted
    diluted earnings per share in the range of $0.68 to $0.80. On a GAAP
    basis, diluted earnings per share for the third quarter is expected to
    be in the range of $0.54 to $0.56.
  • The Company is increasing its fourth quarter adjusted net income
    guidance to a range of $37 million to $41 million, from a range of $33
    million to $37 million, despite an approximate $1.5 million negative
    impact as a result of the Company's decision to delay the opening of
    its New York Design Gallery to Spring-Summer 2018. This outlook
    reflects the benefits of improved business performance and assumes an
    approximate $2 million tax benefit which corresponds to an expected
    35% tax rate. Due to the recent increases in the Company's stock price
    and its impact on the fully diluted share count, the Company is
    providing a table below to assist in estimating diluted shares
    outstanding and adjusted diluted earnings per share.
  • Adjusted net revenues for the fourth quarter are now expected to be in
    the range of $655 million to $680 million due to a $9 million negative
    impact due to the Company's decision to delay the opening of its New
    York Design Gallery. This compares to the Company's prior adjusted net
    revenue guidance range of $664 million to $689 million.
  • The Company is increasing its fiscal 2017 adjusted net income guidance
    to a range of $82 million to $87 million, from a range of $70 million
    to $77 million, despite the Company's decision to delay the opening of
    its New York Design Gallery
  • The Company now expects fiscal 2017 capital expenditures in the range
    of $120 million to $130 million compared to its prior guidance range
    of $120 million to $140 million.
  • The Company now expects to generate free cash flow in the range of
    $420 million to $440 million in fiscal 2017.

Preliminary Fiscal 2018 Outlook

  • Net revenue in the range of $2.58 billion to $2.62 billion,
    representing growth of 6% to 7% on a 52-week vs 53-week basis. On a
    comparable 52-week vs 52-week basis, net revenue growth is expected to
    be in the range of 8% to 9%.
  • Adjusted operating margin in the range of 9% to 10%.
  • Adjusted net income in the range of $125 million to $145 million.
  • Net capital expenditures in the range of $65 million to $75 million.
  • Free cash flow in excess of $240 million.

To Our People, Partners, and Shareholders,

Our updated third quarter guidance demonstrates the earnings power of
our new membership model, and a dramatically more efficient operating
platform. Adjusted net revenues for the quarter are expected to be up
8%, despite a 1% negative impact from Hurricanes Harvey and Irma.
Adjusted diluted earnings per share is expected to be in the range of
$1.02 to $1.04, despite a $0.05 per share negative impact from the
Hurricanes and including a $0.11 per share positive impact due to a
lower effective tax rate, versus $0.20 a year ago.

Over the past 18 months, we transformed our business from a promotional
to a membership model that is enhancing our brand, streamlining our
operations, and improving the customer experience. Simultaneously we
began the redesign of our supply chain network, rationalizing our
product offer, and transitioning inventory into fewer facilities,
creating a more capital efficient model.

We have completed the planned closure of our distribution facility in
Los Angeles, and today we are announcing the closing of our distribution
center in Dallas by fiscal year end. In total we will eliminate 1.75
million square feet of distribution space, resulting in savings of
approximately $15 million annually. Moving forward, servicing our
business from two coastal DC's will result in improved in-stocks, and
significantly faster inventory turns.

The redesign of our reverse logistics and Outlet business is now 90%
complete. Liquidating customer returns in market, and eliminating the
need to transport product back to our distribution centers will drive
cost savings and margin enhancement of $15 million to $20 million
annually.

Our core RH business is building momentum behind the Fall mailing of our
RH Interiors Source Book, and the second edition of our RH Modern Source
Book mailed in the Spring. Our investments in RH Interior Design
Services are paying dividends as we continue to drive growth and
position the brand as the leading luxury design platform in the country.

Our new Design Galleries continue to perform, creating a customer
experience that cannot be replicated online, and distinguishing RH from
other home businesses in the marketplace. RH Toronto, The Gallery in
Yorkdale, our second gallery with an integrated food and beverage
experience opened October 20th, and RH West Palm, our third gallery with
integrated hospitality, opens this weekend on November 19th. We have
decided, due to the disruption caused by the ongoing street construction
in the Meatpacking District, to delay the opening of the New York Design
Gallery until the Spring-Summer of 2018. We expect an approximate $9
million negative impact from the delay, and a corresponding $1.5 million
reduction of adjusted net income in the fourth quarter, which is
included in our updated fourth quarter guidance. We will continue
operating our Flatiron Gallery until the new Meatpacking Gallery opens.

In the second quarter, we completed the second tranche of our share
buyback program resulting in 20.2 million shares of RH stock repurchased
in the first half of fiscal 2017, or 49.5% of the shares outstanding at
the beginning of the year. We believe that our aggregate $1 billion of
share repurchases are, and will continue to be, an excellent allocation
of capital for the long term benefit of our shareholders. Regarding our
debt structure, we retired the $100 million second lien term loan
earlier than planned, and have approximately $480 million of aggregate
debt, outside of our convertible notes that are due June 2019 and June
2020. Our current plans are to repay the convertible notes in cash to
minimize dilution. Based on our forecasted business performance, and in
light of existing favorable market conditions, we currently have
multiple low-interest financing options available to us.

Looking forward, we are forecasting margins to rise and costs to fall as
we cycle our efforts to reduce inventory, and benefit from our new
operating model. In fiscal 2018, we believe we have a clear line of
sight toward achieving net revenue growth in the range of 8% to 9% on a
comparable 52-week basis and adjusted operating margins in the range of
9% to 10% while generating free cash flow in excess of $240 million.
Inventory will again be a source of cash in fiscal 2018, and we
anticipate lower real estate capital expenditures, as we move from a
leasing to a development model, where we recoup our investments through
a sale-leaseback arrangement. We will be providing more color regarding
our new real estate model during our Investor Day. In total, we are
forecasting fiscal 2018 net capital expenditures to be in the range of
$65 million to $75 million.

We remain confident in reaching our long term goal of $4 billion to $5
billion in North American revenues with industry leading operating
margins and returns on invested capital.

We plan to share more details of our strategy and outlook during our
Investor Day presentations on Thursday, November 16th at 2:00 pm EST,
where we will also be unveiling RH West Palm, our latest effort to
revolutionize physical retailing.

We hope you can join us in West Palm Beach, or listen to our webcast
live at ir.rh.com.

Carpe Diem,

Gary

Gary Friedman
Chairman and Chief Executive Officer

       
TABLE ILLUSTRATING THE ANTICIPATED IMPACT OF STOCK PRICE ON
DILUTED SHARES OUTSTANDING
                     
Average Q4 2017 Stock Price

Adjusted net income and diluted share counts in millions

$80.00     $100.00     $120.00     $140.00     $160.00     $180.00     $200.00
 
Midpoint of Q4 2017 Adjusted Net Income Guidance $39.0 $39.0 $39.0 $39.0 $39.0 $39.0 $39.0
 
Q4 2017 Diluted Shares Outstanding 24.6 25.7 26.6 27.2 27.7 30.2 31.3
 
Q4 2017 Adjusted Earnings Per Share $1.59 $1.52 $1.47 $1.43 $1.41 $1.29 $1.25
 
             
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