Market Overview

RH Reports Fourth Quarter and Fiscal 2017 Financial Results

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RH (NYSE:RH) today announced fourth quarter and fiscal 2017 results and
RH Chairman & Chief Executive Officer, Gary Friedman, provided an update
on the Company's continued evolution and outlook.

RH leadership will host a Q&A conference call at 2:00 p.m. PT (5:00 p.m.
ET) today.

Fourth Quarter Highlights

  • GAAP net revenues of $670.3 million, an increase of 14% versus last
    year.
  • Adjusted net revenues of $669.7 million, an increase of 13% versus
    last year.
  • GAAP net income of $0.3 million, inclusive of a $33.7 million goodwill
    impairment related to Waterworks.
  • Adjusted net income of $43.3 million, an increase of 55% versus last
    year.
  • GAAP diluted earnings per share of $0.01 compared to $0.23 last year.
  • Adjusted diluted earnings per share of $1.69, an increase of 149%
    versus last year.
  • Free cash flow of $129.5 million versus $24.4 million last year.

Fiscal Year Highlights

  • GAAP and adjusted net revenues of $2.44 billion, an increase of 14%
    versus last year.
  • GAAP net income of $2.2 million compared to $5.4 million last year.
  • Adjusted net income of $89.2 million, an increase of 72% versus last
    year.
  • GAAP diluted earnings per share of $0.07 compared to $0.13 last year.
  • Adjusted diluted earnings per share of $3.05, an increase of 140%
    versus last year.
  • Merchandise inventories of $527.0 million, a decrease of 30%, versus
    $752.3 million last year.
  • Free cash flow of $432.8 million.
  • The Company repurchased 20.2 million shares of common stock in fiscal
    2017 at an average price of $49.46.



To Our People, Partners, and Shareholders,

Our fourth quarter results continue to demonstrate the earnings power of
our new membership model and a dramatically more efficient operating
platform. Adjusted net revenues increased 13% to $670 million, with
adjusted net income reaching a record $43 million, up 55% versus a year
ago. Adjusted diluted earnings per share were $1.69, a 149% increase
versus last year, and the Company generated nearly $130 million of free
cash flow in the quarter.

2017 - The Year of Execution, Architecture and Cash

2017 was the year of execution, architecture and cash at RH. Our efforts
were focused on executing our new membership model, architecting a new
operating platform and maximizing cash flow by increasing revenues and
earnings, and decreasing inventory and capital spending.

With 95% of our core RH business driven by members, we can confidently
declare our move from a promotional to membership model a success.
Membership has enhanced our brand, streamlined our operations and vastly
improved the customer experience. We've made significant progress
redesigning our operating platform, inclusive of closing two
distribution centers, simplifying our reverse logistics and outlet
model, and reducing inventory by $225 million, or 30% versus a year ago.
Our focus on cash resulted in the Company generating $433 million in
free cash flow in 2017, enabling the repurchase of 20.2 million shares
of RH stock, which we believe will continue to be an excellent
allocation of capital for the long term benefit of our shareholders.

We ended the year with $339 million of aggregate debt, outside of the
convertible notes that are due June 2019 and June 2020. Based on
forecasted free cash flow in excess of $250 million in 2018, and our
outlook for 2019 and beyond, our current plan is to repay the
convertible notes in cash to minimize dilution. As a result of our
rapidly improving balance sheet and the continued strong performance of
our business, we find ourselves with multiple attractive financing
options available to us, and expect further improvement to our balance
sheet and capital structure in the year ahead.

We continued our quest to revolutionize physical retailing in 2017 as we
opened RH Toronto and RH West Palm, our second and third locations with
integrated cafés, wine vaults and barista bars. We have demonstrated our
ability to replicate the success of our first integrated hospitality
experience at RH Chicago, The Gallery at the Historic 3 Arts Club, which
Instagram reported as the 7th most Instagrammed café in the country last
year. Wedding proposals in the 3 Arts Café have now exceeded 50 since we
opened our doors in October of 2015 and we continue to have a line that
forms around the block on weekends before opening. We previously
announced that the 3 Arts Café exceeded $5 million in revenues in 2016,
its first full year of operation, and we are delighted to report that it
has comped positive since, as we refine our menus and improve execution.
These numbers would be impressive for any restaurant, but are especially
so for a café in the middle of a furniture store, with no exterior
signage, a limited all day menu, no bar, and last seating at 8pm.

We could not be more pleased with the early results being generated in
both Toronto and West Palm, neither of which was initially designed with
hospitality. In both cases, due to the success of Chicago, we delayed
construction and creatively found a way to integrate our hospitality
offering into the Galleries. Nonetheless, RH Toronto's hospitality
offering, with limited seating, and no wine vault, is tracking slightly
below Chicago's first year numbers adjusting for the exchange rate. RH
West Palm, where we were able to test our first rooftop restaurant, is
turning out to be our most successful. Our West Palm hospitality
offering is trending 35% ahead of Chicago's year one numbers, and is on
track to exceed $7 million in 2018.

We never had a goal of opening high volume restaurants but rather
provide an amenity for our clients who spend hours in our showrooms
designing their homes. Our secondary goal was to drive incremental
traffic into our Galleries, with the hope that some of the visitors who
might have never entered a furniture store would be moved by the
environment and inspired to reimagine their life at home. I'm pleased to
report that our initial foray into food and beverage with RH President
of Hospitality Brendan Sodikoff, and his team, has far exceeded our
expectations on every level, generating publicity, traffic, and an
incremental sales lift in our Galleries. We will continue to
aggressively invest in building a world class hospitality platform that
we believe will render the RH brand more unique and valuable.

2018 - A Continued Focus on Execution, Architecture and Cash

In 2018, we will continue our focus on execution, architecture and cash.
We will once again hold ourselves back from adding new businesses
outside of our ongoing investments in RH Hospitality as we work to
design an operating platform that aligns with and amplifies our luxury
positioning, inclusive of continued work on our distribution center
network redesign, reverse logistics and outlet redesign, and the
reconceptualization of home delivery. As discussed at our Investor Day,
we will remain focused on optimizing the profitability of our new
platform, and will be managing the business in 2018 with a bias for
earnings versus revenue growth. We will restrain ourselves from chasing
low quality revenues as others are doing in our industry, and instead
focus on building a superior operating model that will enable us to
compete and win over the long term. It is clear to us, as we witness the
continued failures of high growth - no profit, online pure plays, and
the declining operating margins of traditional retailers, that the
complexities and costs of scaling a furniture business will favor those
who control their brand from concept to customer, have an integrated
platform with superior logistics, and offer the customer both a
compelling physical and digital experience. The road of endless
promotions, free shipping, an unnatural shift to online, and a shrinking
store base, is resulting in broken and unsustainable retail models. We
prefer the road less traveled by, and like Robert Frost, believe it will
make all the difference.

As you can see in our outlook, due to the above mentioned priorities, we
are forecasting a more conservative view of revenue growth, yet are
raising our expectations for strong earnings growth in 2018. Our
adjusted operating margins are now forecasted to be in an
industry-leading range of 9.2% to 10.2%, while generating free cash flow
in excess of $250 million. Adjusted gross margins are expected to
increase 260 to 340 basis points as we cycle our SKU rationalization and
inventory reduction efforts from last year. We've meaningfully raised
our adjusted net income outlook to a range of $145 to $165 million, an
increase of 63% to 85% over last year, and versus our prior guidance of
$125 to $145 million, reflecting the benefits of a more efficient
operating platform with an expected tax rate of 26%.

We plan to open four new Galleries in 2018, Portland, Nashville,
Yountville and New York, the latter three with integrated cafés, wine
vaults and barista bars. The Nashville Gallery is our first attempt to
replicate the architecture and layout of RH Chicago, with a central
courtyard café that features a soaring steel and glass atrium where you
will dine under heritage olive trees while listening to the sounds of
trickling fountains. RH New York is a six level shopping experience
connected by a grand staircase that features the art installation
"Rain", by the renowned Los Angeles artist, architect, and designer
Allison Berger, a dramatic central atrium with stacked cast iron
columns, and a glass elevator that lifts you up to a rooftop café
encased in a glass box, and surrounded by a beautiful landscaped park
with all day sunshine and incredible views of downtown. RH New York, The
Gallery in the Historic Meatpacking District, provides us the rare
opportunity, in arguably the most important city in the world, to
develop a ground up retail experience like no other, and will prove to
be worth the wait.

2019 - A Pivot to High Quality, Sustainable Growth

Our plan is to pivot the Company back to growth in 2019 by returning to
our product and business expansion strategy and reaccelerating our real
estate transformation.

We plan a return to our product and business expansion strategy in 2019,
which has been on hold as we focused on our move to membership and the
architecture of a new operating platform. We have several new business
and brand extension plans in our pipeline, and look forward to unveiling
them beginning next year.

We have also developed a new prototype Design Gallery that will enable
us to more quickly place our disruptive product assortment and immersive
retail experience into the market. The new prototype is based on key
learnings from a number of 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, and will represent our
assortments from RH Interiors, RH Modern, RH Baby&Child, RH Teen and RH
Outdoor. Due to the reduced square footage and efficient design, these
new Galleries will be significantly more capital efficient with less
time and cost risk. We anticipate these new Galleries will represent
approximately two thirds of our target markets and enable us to ramp
from 3 to 5 new Galleries per year to a pace of 5 to 7. We will continue
to develop and open larger Bespoke Design Galleries in the top
metropolitan markets, and indigenous Bespoke Galleries in the best
second home markets where the wealthy and affluent visit and vacation.
Examples include the Hamptons, Aspen, Palm Beach, and the Napa Valley,
among others. This summer we are opening RH Yountville, the Gallery in
the Napa Valley. We've developed an experience reflective of the local
culture, integrating food, wine, art, and design into an immersive
compound that will connect visitors and residents to our unique and
authentic point of view, while positioning RH as a taste and design
authority.

Additionally, we are continuing to evolve from a leasing to a
development model that will reduce our occupancy costs and increase our
return on capital. We currently have two projects, Yountville, CA, and
Edina, MN, under construction using this new model and have an
additional five projects in the development process.

We are introducing an Intermediate and Long Term Outlook with
expectations for accelerated revenue growth and continued margin
expansion. By cycling the significant start-up costs from RH
Hospitality, neutralizing the earnings drag from Waterworks, benefitting
from the continued cost savings of our new operating platform, and
leveraging the gain we expect from our real estate transformation, we
now have a clear path to operating margins in the low to mid-teens by
2021.

We remain confident in our long term goal of $4 to $5 billion in North
American revenues with industry leading operating margins and returns on
invested capital. We also believe there is tremendous potential for the
RH brand internationally, and we continue to explore opportunities to
open our first Gallery in London.

Building a Brand with No Peer and a Customer Experience That Cannot
Be Replicated Online

We do understand that many of the strategies we are pursuing — opening
the largest specialty retail experiences in our industry while most are
shrinking the size of the retail footprint or closing stores; moving
from a promotional to a membership model, while others are increasing
promotions, positioning their brands around price versus product;
continuing to mail inspiring Source Books, while many are eliminating
catalogs; and refusing to follow the herd in self-promotion on social
media, instead allowing our brand to be defined by the taste, style,
design and quality of the products and experiences we are creating — are
all in direct conflict with conventional wisdom and the plans being
pursued by many in our industry.

We believe when you step back and consider: one, we are building a brand
with no peer; two, we are creating a customer experience that cannot be
replicated online; and three, we have total control of our brand from
concept to customer, you realize what we are building is extremely rare
in today's retail landscape, and, we would argue, will also prove to be
very valuable.

In closing, we are deeply grateful for our people and partners whose
passion and persistence bring our vision and values to life each day, as
we pursue our quest to become one of the most admired brands in the
world.

Carpe Diem,

Gary

Gary Friedman
Chairman and Chief Executive Officer





Fiscal 2018 Outlook

  • Net revenues in the range of $2.53 to $2.57 billion, representing
    growth of 5% to 7% on a comparable 52-week vs. 52-week basis. The
    Company's net revenue outlook is approximately $50 million lower than
    its prior expectations due to its decision to delay the opening of its
    New York Design Gallery (now scheduled for Fall 2018) and the
    Company's first Guesthouse (now scheduled for Spring 2019) as a result
    of the ongoing disruption from the city's street and infrastructure
    construction in the Meatpacking District. Additionally, the Company
    does not plan to launch any new businesses in 2018 outside of RH
    Hospitality while it remains focused on designing an operating
    platform that aligns with and amplifies its luxury positioning.
  • Adjusted gross margin in the range of 37.7% to 38.5% and adjusted SG&A
    as a percentage of revenue in the range of 28.3% to 28.5%.
  • Adjusted operating margin in the range of 9.2% to 10.2%, an increase
    versus the Company's prior expectations for adjusted operating margin
    of 9.0% to 10.0%, due to continued benefits from efforts to architect
    a simplified and more efficient operating platform and despite the
    negative impact from the delay of the New York Gallery and Guesthouse.
  • Adjusted net income in the range of $145 to $165 million, up 63% to
    85% versus last year, and an increase compared to the Company's prior
    guidance range of $125 to $145 million, reflecting benefits from a
    more efficient operating platform, and a tax rate of approximately 26%.
  • Adjusted earnings per share in the range of $5.45 to $6.20 based on
    diluted shares outstanding of approximately 26.6 million.
  • Net capital expenditures in the range of $75 to $85 million versus
    $112 million in fiscal 2017.
  • Merchandise inventories in the range of $450 to $475 million, down 10%
    to 15% versus last year.
  • Free cash flow in excess of $250 million.

First Quarter Outlook

  • Net revenues in the range of $555 to $565 million, reflecting an
    approximate 5 point negative impact from cycling last year's inventory
    optimization efforts.
  • Adjusted gross margin in the range of 36.4% to 36.8% and adjusted SG&A
    as a percentage of revenue in the range of 28.7% to 28.8%.
  • Adjusted operating margin in the range of 7.6% to 8.1%.
  • Adjusted operating income in the range of $42 to $46 million.
  • Adjusted net income in the range of $24 to $27 million.
  • Adjusted earnings per share in the range of $0.95 to $1.05 based on
    diluted shares outstanding of approximately 25.5 million.

Intermediate and Long Term Targets

  • The Company plans to pivot towards revenue growth in fiscal 2019, by
    accelerating its disruptive real estate transformation and returning
    to its product and business expansion strategy, which has been on hold
    while architecting its new operating platform. Net revenue growth is
    expected to reaccelerate to a range of 8% to 12%.
  • As the Company continues to gain benefits from its move to membership,
    a simplified and more efficient operating platform and cycles the
    current investment drag from its hospitality initiatives, operating
    margins are now expected to reach the low to mid-teens by 2021.

Q&A Conference Call Information

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United
States/Canada) or (706) 679-9188 (International). A live broadcast of
the question and answer session conference call will also be available
online at the Company's investor relations website, ir.rh.com. A replay
of the question and answer session conference call will be available
through April 9, 2018 by dialing (855) 859-2056 or (404) 537-3406 and
entering passcode 6199665, as well as on the Company's investor
relations website.

Tax Reform

The United States enacted the Tax Cuts and Jobs Act (the "Tax Act") on
December 22, 2017. The new legislation contains several key tax
provisions that affect RH and, as required, we have included reasonable
estimates of the income tax effects of the changes in tax law and tax
rate in our fiscal 2017 financial results. Since the Tax Act was passed
in the fourth quarter of fiscal 2017, we consider the accounting for the
transition tax, deferred tax re-measurements, and other items to be
provisional as the charge may be adjusted due to changes in
interpretations and assumptions we have made, guidance that may be
issued, and actions we may take as a result of the tax legislation. We
expect to finalize our estimates within the one-year measurement period
allowed by the SEC. Our provision for income taxes in fiscal 2017
included $7.0 million of income tax expense as a result of the Tax Act,
including $6.0 million for the provisional re-measurement of our net
deferred tax assets for the reduction in the U.S. corporate income tax
rate from 35% to 21% and a $1.0 million charge for our provisional
estimate of the transition tax. The provisional tax related impact of
tax reform has been excluded from our adjusted tax rate for the fourth
quarter and fiscal 2017.

Non-GAAP Financial Measures

To supplement its condensed consolidated financial statements, which are
prepared and presented in accordance with Generally Accepted Accounting
Principles ("GAAP"), the Company uses the following non-GAAP financial
measures: adjusted net revenue, adjusted net income, adjusted diluted
earnings per share, free cash flow and adjusted operating margin
(collectively, "non-GAAP financial measures"). We compute these measures
by adjusting the applicable GAAP measures to remove the impact of
certain recurring and non-recurring charges and gains and the tax effect
of these adjustments. The presentation of this financial information is
not intended to be considered in isolation or as a substitute for, or
superior to, the financial information prepared and presented in
accordance with GAAP. The Company uses these non-GAAP financial measures
for financial and operational decision making and as a means to evaluate
period-to-period comparisons. The Company believes that they provide
useful information about operating results, enhance the overall
understanding of past financial performance and future prospects, and
allow for greater transparency with respect to key metrics used by
management in its financial and operational decision making. The
non-GAAP financial measures used by the Company in this press release
may be different from the non-GAAP financial measures, including
similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the
Reconciliation of GAAP to non-GAAP Financial Measures tables in this
press release. These accompanying tables include details on the GAAP
financial measures that are most directly comparable to non-GAAP
financial measures and the related reconciliations between these
financial measures.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of
the federal securities laws, including statements related to: our future
financial outlook and guidance for the first quarter of fiscal 2018, for
the fiscal year 2018 and for intermediate and long term timeframes,
including our guidance and outlook with respect to net revenues,
adjusted net revenues, adjusted net income, adjusted diluted earnings
per share, adjusted gross margin, operating margins, adjusted operating
margins, free cash flow, expected tax rate, anticipated diluted shares
outstanding, inventories, net capital expenditures and net revenue
growth; various estimates of diluted shares outstanding and adjusted
diluted earnings per share based on assumptions about average stock
prices; assumptions regarding the potential future stock price of our
common stock and expectations concerning stock price appreciation; the
impact of stock price and other factors like option exercise levels on
estimated diluted shares outstanding and on our effective tax rate; the
estimated reduction in adjusted net revenues as a result of the delayed
opening of the New York Design Gallery and the New York Guesthouse; the
anticipated benefits from the closing of two of our distribution centers
including our ability to improve our results by servicing our business
from two coastal distribution centers; estimated cost savings and margin
enhancement associated with the pending completion of our redesign of
reverse logistics and Outlet business; our ability to drive growth and
position ourselves as the leading luxury interior design platform in the
country; the anticipated timing of the opening our New York Design
Gallery and our New York Guesthouse; our continued operation of our
Flatiron Gallery; our belief that our stock repurchases in fiscal 2017
will continue to be an excellent allocation of capital for the long-term
benefit for our shareholders; our plan to pay down our convertible notes
from cash to minimize dilution; our belief that, based on the rapid
improvement in our balance sheet and the continuing strong performance
of our business under the membership model, we currently have multiple
attractive financing options available to us; our expectation of further
improvement in our balance sheet and capital mix in the year ahead; our
belief that our new prototype for Design Galleries for certain markets
can be completed in a faster timeframe and at lower development costs
than some of our other new Design Galleries that we have already
introduced; our focus on optimizing the profitability of our new
platform and managing the business with a bias for earnings versus
revenue growth in 2018; our expectations for a return to increased rates
of revenue growth in 2019; our expectations concerning product and
business expansion beginning in 2019; our objective to increase the pace
of new Gallery openings from 3 to 5 per year to 5 to 7 per year; the
benefits of building a multi-channel platform with a compelling physical
experience and a superior logistics network; our expectation that
margins will rise and costs will fall as we cycle our efforts to reduce
inventory and benefit from our new operating model; our expectations for
free cash flow in 2018 and that inventory will be a source of cash in
fiscal 2018; anticipated lower real estate capital expenditures as we
move from a leasing to a development model, where we recoup our
investments through a sale-leaseback arrangement; the range of benefits
to our operating model and margins from moving to a membership model
including our expectation that factors relating to our membership model
will contribute to improved financial performance through higher
conversion of demand into revenue, improved margins and lower costs
across our operating platform, as well as an overall improvement in our
customer experience; the benefits of the simplification of our business
model; our potential for the RH brand internationally and our
opportunities to open a Gallery in London; our building of a rare and
valuable company and a brand with no peer and a customer experience that
cannot be replicated online; our expectation of reaching our long term
goal of $4 billion to $5 billion in North American revenues with
industry leading operating margins, and returns on invested capital; any
financial or operational factors or results that are described as short
term, one-time, non-recurring or unusual including the delay in opening
of our Design Gallery in New York and the impairment of goodwill
associated with the acquisition of Waterworks (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); our financial
results for fiscal 2017 and the fourth quarter of fiscal 2017 are
preliminary unaudited results and are subject to adjustment based upon
completion of the audit of our financial statements for the fiscal year
ended February 3, 2108; anticipated impact of the Tax Act on our
business and tax rate, our ability to replicate the success of our
integrated hospitality experience in connection with the opening of new
Design Galleries, and any statements or assumptions underlying any of
the foregoing. You can identify forward-looking statements by the fact
that they do not relate strictly to historical or current facts. These
statements may include words such as "anticipate," "estimate," "expect,"
"project," "plan," "intend," "believe," "may," "will," "should,"
"likely" and other words and terms of similar meaning in connection with
any discussion of the timing or nature of future events. We cannot
assure you that future developments affecting us will be those that we
have anticipated. Important risks and uncertainties that could cause
actual results to differ materially from our expectations or the
assumptions set forth in this release include, among others, our ability
to retain key personnel; successful implementation of our growth
strategy; the ongoing operating challenges of our Waterworks business;
uncertainties in the current performance of our business including a
range of risks related to our operations as well as external economic
factors; general economic conditions and the impact on consumer
confidence and spending; changes in customer demand for our products;
our decisions concerning the allocation of capital; decisions concerning
the allocation of capital including the extent to which we repurchase
additional shares of our common stock which will affect shares
outstanding and EPS; factors affecting our outstanding convertible
senior notes or other forms of our indebtedness; our ability to
anticipate consumer preferences and buying trends, and maintaining our
brand promise to customers; changes in consumer spending based on
weather and other conditions beyond our control; risks related to the
number of new business initiatives we are undertaking; strikes and work
stoppages affecting port workers and other industries involved in the
transportation of our products; our ability to obtain our products in a
timely fashion or in the quantities required; our ability to employ
reasonable and appropriate security measures to protect personal
information that we collect; our ability to support our growth with
appropriate information technology systems; risks related to "conflict
minerals" compliance and its impact on sourcing, if any, as well as
those risks and uncertainties disclosed under the sections entitled
"Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in RH's most recent Form 10-K and
Form 10-Q filed with the Securities and Exchange Commission, and similar
disclosures in subsequent reports filed with the SEC, which are
available on our investor relations website at ir.rh.com and on the SEC
website at www.sec.gov.
Any forward-looking statement made by us in this press release speaks
only as of the date on which we make it. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of
new information, future developments or otherwise, except as may be
required by any applicable securities laws.

About RH

RH (NYSE:RH) is a curator of design, taste and style in the luxury
lifestyle market. The Company offers collections through its retail
galleries, Source Books, and online at RH.com, RHModern.com, and
Waterworks.com.

RH

REVENUE METRICS

(Unaudited)

 
  Three Months Ended

February 3,
2018

 

January 28,
2017

Stores as a percentage of net revenues 54% 52%
Direct as a percentage of net revenues 46% 48%
Growth in net revenues:
Stores 18% -4%
Direct 10% -15%
Total 14% -9%
Comparable brand revenue growth 2% -18%
 

Note: The fourth quarter of fiscal 2017 consisted of 14-weeks
compared to 13-weeks for the prior year. The 14th week added
approximately $36 million in net revenues to the quarter and the
year. Excluding the 14th week, net revenues increased 7% during
the fourth quarter of fiscal 2017. Because fiscal 2017 was a
53-week year, comparable brand revenue growth for fiscal 2017
excludes the extra week of sales. See the Company's most recent
Form 10-K and Form 10-Q filings for the definitions of stores,
direct, and comparable brand revenue.

 

RH
RETAIL GALLERY METRICS
(Unaudited)

As of February 3, 2018, the Company operated a total of 83 retail
Galleries consisting of 16 Design Galleries (10 next generation Design
Galleries and 6 larger format Design Galleries), 47 legacy Galleries, 1
RH Modern Gallery and 4 RH Baby & Child Galleries throughout the United
States and Canada, and 15 Waterworks showrooms throughout the United
States and in the U.K. This compares to a total of 85 retail Galleries
consisting of 14 Design Galleries (8 next generation Design Galleries
and 6 larger format Design Galleries), 50 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 January 28, 2017.

In addition, as of February 3, 2018, the Company operated 32 outlet
stores compared to 28 as of January 28, 2017.

  Three Months Ended

February 3,
2018

 

January 28,
2017

Store Count

 

Total Leased Selling
Square Footage

Store Count  

Total Leased Selling
Square Footage

(in thousands) (in thousands)
Beginning of period 84 944 85 884
Retail Galleries opened:
West Palm Design Gallery 1 46.5
Seattle Design Gallery 1 35.7
Pittsburgh Gallery 1 6.0
Retail Galleries closed:
West Palm legacy Gallery (1 ) (7.1 )
West Palm Baby & Child Gallery (1 ) (2.5 )
Seattle legacy Gallery (1 ) (8.1 )
Pittsburgh legacy Gallery     (1 ) (5.7 )
End of period 83   981   85   912  
 
Weighted-average leased selling square footage 943 906
% Growth year over year 4 % 26 %
 
       

Twelve Months Ended

February 3,
2018

January 28,
2017

Store Count

Total Leased Selling
Square Footage

  Store Count

Total Leased Selling
Square Footage

(in thousands) (in thousands)
Beginning of period 85 912 69 725
Waterworks Showrooms acquired 15 51.0
Retail Galleries opened:
Toronto (Yorkdale) Design Gallery 1 43.3
West Palm Design Gallery 1 46.5
Waterworks Boston Showroom 1 5.0
Leawood Design Gallery 1 33.5
Austin Design Gallery 1 39.6
Las Vegas Design Gallery 1 47.6
Seattle Design Gallery 1 35.7
Pittsburgh Gallery 1 6.0
Waterworks San Francisco Showroom 1 5.8
Retail Galleries closed:
Toronto (Bay View) legacy Gallery (1) (6.0)
Toronto (Yonge Street) legacy Gallery (1) (8.6)
West Palm legacy Gallery (1) (7.1)
West Palm Baby & Child Gallery (1) (2.5)
Waterworks Boston (1) (2.1)

Kansas City legacy Gallery

(1) (9.9)
Austin legacy Gallery (1) (6.2)
Seattle legacy Gallery (1) (8.1)
Pittsburgh legacy Gallery (1) (5.7)
Waterworks San Francisco (Kansas Street) Showroom (1) (2.0)
End of period 83 981 85 912
% Growth 8% 26%
 
Weighted-average leased selling square footage 916 802
% Growth 14% 25%
See the Company's most recent Form 10-K and Form 10-Q filings for
square footage definitions.
Total leased square footage as of February 3, 2018 and January 28,
2017 was 1,318,000 and 1,242,000, respectively.
Weighted-average leased square footage for the three months ended
February 3, 2018 and January 28, 2017 was 1,275,000 and 1,235,000,
respectively.
Weighted-average leased square footage for the year ended February
3, 2018 and January 28, 2017 was 1,248,000 and 1,108,000,
respectively.
Retail sales per leased selling square foot for the three months
ended February 3, 2018 and January 28, 2017 was $322 and $287,
respectively.
Retail sales per leased selling square foot for the year ended
February 3, 2018 and January 28, 2017 was $1,270 and $1,285,
respectively.
 
 

RH

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

           
Three Months Ended Twelve Months Ended

February 3,
2018

 

% of Net
Revenues

January 28,
2017

% of Net
Revenues

February 3,
2018

 

% of Net
Revenues

January 28,
2017

% of Net
Revenues

Net revenues $ 670,295 100.0 % $ 586,706 100.0 % $ 2,440,174 100.0 % $ 2,134,871 100.0 %
Cost of goods sold   411,622 61.4 %   390,052 66.5 %   1,591,107 65.2 %   1,455,084 68.2 %
Gross profit 258,673 38.6 % 196,654 33.5 % 849,067 34.8 % 679,787 31.8 %

Selling, general and administrative expenses

  189,553 28.3 %   169,544 28.9 %   717,766 29.4 %   626,751 29.3 %
Income from operations 69,120 10.3 % 27,110 4.6 % 131,301 5.4 % 53,036 2.5 %
Other expenses
Interest expense—net 17,074 2.6 % 11,954 2.0 % 62,570 2.6 % 44,482

2.1

%

Goodwill impairment 33,700 5.0 %

%

 

33,700 1.4 %

%

Loss on extinguishment of debt

 

%

 

%

  4,880 0.2 %  

%

Total other expenses   50,774 7.6 %   11,954 2.0 %   101,150 4.2 %   44,482 2.1 %

Income before income taxes

18,346 2.7 % 15,156 2.6 % 30,151 1.2 % 8,554 0.4 %
Income tax expense   18,085 2.7 %   5,720 1.0 %   27,971 1.1 %   3,153 0.1 %
Net income $ 261

% $ 9,436 1.6 % $ 2,180 0.1 % $ 5,401 0.3 %
 

Weighted-average shares used in computing basic net income per
share

21,418,283 40,803,626 27,053,616 40,691,483
Basic net income per share $ 0.01 $ 0.23 $ 0.08 $ 0.13
 

Weighted-average shares used in computing diluted net income per
share

25,666,174 41,000,760 29,253,208 40,926,840
Diluted net income per share $ 0.01 $ 0.23 $ 0.07 $ 0.13
 

RH

RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME

(In thousands)

(Unaudited)

   
Three Months Ended Twelve Months Ended

February 3,
2018

 

January 28,
2017

February 3,
2018

 

January 28,
2017

GAAP net income $ 261   $ 9,436   $ 2,180   $ 5,401  
Adjustments (pre-tax):
Net revenues:
Recall accrual [a] (606 ) 3,441 3,207 3,441
Cost of goods sold:
Recall accrual [a] 535 4,315 535
Impact of inventory step-up [b] 419 1,648 2,527 6,835
Distribution center closures [c] 1,240 1,737
Anti-dumping exposure [d] (2,202 ) (2,202 )
Legal claim [e] 7,729
Asset impairments and lease losses [f] 2,185 2,185
Selling, general and administrative expenses:
Non-cash compensation [g] 23,872 3,672
Asset impairments and lease losses [f] 4,417 10,558 4,417 10,558
Distribution center closures [c] 2,693 4,058
Recall accrual [a] 28 639 185 639
Gain on sale of building and land [h] (2,119 )
Reorganization related costs [i] 5,698
Aircraft impairment [j] 4,767 4,767
Acquisition related costs [k] 2,847
Legal claim [e] 972
Other expenses:
Goodwill impairment [l] 33,700 33,700
Amortization of debt discount [m] 7,542 6,854 27,926 26,404
Loss on extinguishment of debt [n]           4,880      
Subtotal adjusted items 47,231 30,627 106,503 76,282
Impact of income tax on adjusted items [o]   (4,211 )   (12,135 )   (19,483 )   (29,894 )
Adjusted net income [p] $ 43,281   $ 27,928   $ 89,200   $ 51,789  
[a]   Represents costs and inventory charges associated with product
recalls initiated in the fourth quarter of fiscal 2016 and second
quarter of fiscal 2017, as well as adjustments in fiscal 2017 of the
accrual related to the recall initiated in fiscal 2016.
[b] Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.
[c] Represents severance expense, lease related charges, property and
equipment disposals and certain inventory transfer costs associated
with two distribution center closures, which were completed in
November 2017 and January 2018.
[d] 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.
[e] Represents charges incurred or the estimated cumulative impact of
coupons redeemed in connection with a legal claim alleging that the
Company violated California's Song-Beverly Credit Card Act of 1971
by requesting and recording ZIP codes from customers paying with
credit cards.
[f] Represents the impairments associated with RH Contemporary Art and
RH Kitchen. The impairment related to RH Kitchen is a result of the
alignment with the Waterworks Kitchen product line strategy. This
resulted in cost of goods sold of $1.0 million which represented
impairment of inventory in fiscal 2016. RH Contemporary Art was
integrated into the broader RH platform and no longer operates as a
separate division. In fiscal 2016, this resulted in cost of goods
sold of $1.1 million which represented impairment of inventory, and
selling, general and administrative expenses of $10.6 million which
represents lease related charges, property and equipment disposals,
and donations. In fiscal 2017, an additional lease related charge of
$4.4 million was recorded due to the remeasurement of the liability
for lease losses for RH Contemporary Art resulting from an update to
both the timing and the amount of future estimated lease related
cash inflows.
[g] Represents a non-cash compensation charges related to a fully vested
option grant made to Mr. Friedman in May 2017 and the fully vested
option grants made in connection with our acquisition of Waterworks
in May 2016.
[h] Represents the gain on the sale of building and land of one of our
owned retail Galleries.
[i] Represents costs associated with a reorganization, which include
severance costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.
[j] Represents the impairment recorded upon reclassification of aircraft
as asset held for sale.
[k] Represents costs incurred in connection with our acquisition of
Waterworks including professional fees.
[l]

Represents goodwill impairment related to the Waterworks reporting
unit.

[m] Under GAAP, certain convertible debt instruments that may be settled
in cash on conversion are required to be separately accounted for as
liability and equity components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate.
Accordingly, in accounting for GAAP purposes for the $350 million
aggregate principal amount of convertible senior notes that were
issued in June 2014 (the "2019 Notes") and for the $300 million
aggregate principal amount of convertible senior notes that were
issued in June and July 2015 (the "2020 Notes"), we separated the
2019 Notes and 2020 Notes into liability (debt) and equity
(conversion option) components and we are amortizing as debt
discount an amount equal to the fair value of the equity components
as interest expense on the 2019 Notes and 2020 Notes over their
respective terms. The equity components represent the difference
between the proceeds from the issuance of the 2019 Notes and 2020
Notes and the fair value of the liability components of the 2019
Notes and 2020 Notes, respectively. Amounts are presented net of
interest capitalized for capital projects of $0.2 million and $0.5
million during the three months ended February 3, 2018 and January
27, 2017, respectively. Amounts are presented net of interest
capitalized for capital projects of $2.5 million and $2.4 million
during the twelve months ended February 3, 2018 and January 27,
2017, respectively.
[n] Represents the loss on extinguishment of debt related to the second
lien term loan which was repaid in full in October 2017.
[o] The adjustment for the three months ended February 3, 2018 is based
on an adjusted tax rate of 34.0%, which excludes the impact of tax
reform, including the $6.0 million revaluation of the net deferred
tax assets and $1.0 million transitional tax, as well as the $5.9
million tax impact associated with the Waterworks reporting unit
goodwill impairment. The adjustment for the twelve months ended
February 3, 2018 is based on an adjusted tax rate of 34.7%, which is
calculated based on the weighted-average fiscal 2017 quarterly
adjusted pro forma tax rates and excludes the tax related impact of
tax reform and the goodwill impairment, as discussed above. The
three and twelve months ended January 28, 2017 assume a normalized
tax rate of 39%.
[p] 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 Twelve Months Ended

February 3,
2018

 

January 28,
2017

February 3,
2018

 

January 28,
2017

Diluted net income per share $ 0.01 $ 0.23 $ 0.07 $ 0.13
EPS impact of adjustments (pre-tax) [a]:
Goodwill impairment $ 1.31 $ $ 1.15 $
Amortization of debt discount 0.29 0.17 0.95 0.65
Non-cash compensation 0.82 0.09
Recall accrual (0.02 ) 0.11 0.26 0.11
Distribution center closures 0.16 0.20
Loss on extinguishment of debt 0.17
Asset impairments and lease losses 0.17 0.31 0.15 0.31
Impact of inventory step-up 0.02 0.04 0.10 0.17
Anti-dumping exposure (0.09 ) (0.08 )
Gain on sale of building and land (0.07 )
Aircraft impairment 0.12 0.12
Legal claim 0.21
Reorganization related costs 0.14
Acquisition related costs         0.07
Subtotal adjusted items 1.84 0.75 3.65 1.87
Impact of income tax items [a]   (0.16 )   (0.30 )   (0.67 )   (0.73 )
Adjusted diluted net income per share [b] $ 1.69 $ 0.68 $ 3.05 $ 1.27
[a]   Refer to table titled "Reconciliation of GAAP Net Income to Adjusted
Net Income" and the related footnotes for additional information.
[b] 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 GROSS PROFIT TO ADJUSTED GROSS PROFIT

(In thousands)

(Unaudited)

   
Three Months Ended Twelve Months Ended

February 3,
2018

 

January 28,
2017

February 3,
2018

 

January 28,
2017

Net revenues $ 670,295 $ 586,706 $ 2,440,174 $ 2,134,871
Recall accrual [a]   (606 )   3,441   3,207   3,441
Adjusted net revenues [b] $ 669,689 $ 590,147 $ 2,443,381 $ 2,138,312
 
Gross profit $ 258,673 $ 196,654 $ 849,067 $ 679,787
Recall accrual [a] (606 ) 3,976 7,522 3,976
Impact of inventory step-up [a] 419 1,648 2,527 6,835
Distribution center closures [a] 1,240 1,737
Anti-dumping exposure [a] (2,202 ) (2,202 )
Asset impairments and lease losses [a] 2,185 2,185
Legal claim [a]         7,729
Adjusted gross profit [b] $ 257,524 $ 204,463 $ 858,651 $ 700,512
 
Gross margin [c]   38.6 %   33.5 %   34.8 %   31.8 %
Adjusted gross margin [c]   38.5 %   34.6 %   35.1 %   32.8 %
[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 Twelve Months Ended

February 3,
2018

 

January 28,
2017

February 3,
2018

 

January 28,
2017

Net income $ 261 $ 9,436 $ 2,180 $ 5,401
Interest expense—net 17,074 11,954 62,570 44,482
Goodwill impairment 33,700 33,700
Loss on extinguishment of debt 4,880
Income tax expense   18,085   5,720   27,971 3,153
Operating income 69,120 27,110 131,301 53,036
Non-cash compensation [a] 23,872 3,672
Recall accrual [a] (578 ) 4,615 7,707 4,615
Distribution center closures [a] 3,933 5,795
Asset impairments and lease losses [a] 4,417 12,743 4,417 12,743
Impact of inventory step-up [a] 419 1,648 2,527 6,835
Anti-dumping exposure [a] (2,202 ) (2,202 )
Gain on sale of building and land [a] (2,119 )
Legal claim [a] 8,701
Reorganization related costs [a] 5,698
Aircraft impairment [a] 4,767 4,767
Acquisition related costs [a]         2,847
Adjusted operating income [b] $ 75,109 $ 50,883 $ 171,298 $ 102,914
 
Net revenues $ 670,295 $ 586,706 $ 2,440,174 $ 2,134,871
Adjusted net revenues [c] $ 669,689 $ 590,147 $ 2,443,381 $ 2,138,312
 
Operating margin [c]   10.3 %   4.6 %   5.4 %   2.5 %
Adjusted operating margin [c]   11.2 %   8.6 %   7.0 %   4.8 %
 
[a]   Refer to table titled "Reconciliation of GAAP Net Income to Adjusted
Net Income" and the related footnotes for additional information.
[b] Adjusted operating income is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted operating income as operating income,
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted operating income is included in this press
release because management believes that adjusted operating income
provides meaningful supplemental information for investors regarding
the performance of our business and facilitates a meaningful
evaluation of operating results on a comparable basis with
historical results. Our management uses this non-GAAP financial
measure in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.
[c] Operating margin is defined as operating income divided by net
revenues. Adjusted operating margin is defined as adjusted operating
income divided by adjusted net revenues. Refer to table titled
"Reconciliation of Gross Profit to Adjusted Gross Profit" and the
related footnotes for a definition and reconciliation of adjusted
net revenues.
 

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

   

February 3,
2018

January 28,
2017

ASSETS
Cash and cash equivalents $ 17,907 $ 87,023
Short-term investments 142,677
Merchandise inventories 527,026 752,304
Asset held for sale 4,900
Other current assets   99,997   151,353
Total current assets 644,930 1,138,257
Long-term investments 33,212
Property and equipment—net 800,698 682,056
Goodwill and intangible assets 242,595 274,360
Other non-current assets   44,643   64,635
Total assets $ 1,732,866 $ 2,192,520
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 318,765 $ 226,980
Deferred revenue, customer deposits and other current liabilities   200,570   189,189
Total current liabilities 519,335 416,169
Asset based credit facility 199,970
Term loan—net 79,499
Convertible senior notes due 2019—net 327,731 312,379
Convertible senior notes due 2020—net 252,994 235,965
Financing obligations under build-to-suit lease transactions 229,323 203,015
Other non-current obligations   131,350   105,123
Total liabilities   1,740,202   1,272,651
 
Stockholders' equity (deficit)   (7,336 )   919,869
Total liabilities and stockholders' equity (deficit) $ 1,732,866 $ 2,192,520
 

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
Twelve Months Ended

February 3,
2018

 

January 28,
2017

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,180 $ 5,401
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 70,135 56,995
Other non-cash items 145,457 93,833
Change in assets and liabilities—net of acquisition:
Merchandise inventories 220,767 (4,304 )
Accounts payable, accrued expenses and other   116,563   (72,624 )
Net cash provided by operating activities   555,102   79,301
 
CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures—including construction related deposits and
purchase of trademarks and domain names

(126,881 ) (181,802 )
Proceeds from sale of assets held for sale—net 15,123
Net proceeds from (purchases of) investments 175,801 (24,051 )
Acquisition of business—net of cash acquired   (116,100 )
Net cash provided by (used in) investing activities   64,043   (321,953 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under asset based credit facility 199,970
Net borrowings under term loans 80,000
Net borrowings under promissory and equipment security notes 31,681
Debt issuance costs (8,298 )
Repurchases of common stock—including commissions (1,000,326 )
Net equity related transactions 19,137 (1,630 )
Other financing activities   (10,577 )   (611 )
Net cash used in financing activities   (688,413 )   (2,241 )
Effects of foreign currency exchange rate translation   152   449
Net decrease in cash and cash equivalents (69,116 ) (244,444 )
Cash and cash equivalents
Beginning of period   87,023   331,467
End of period $ 17,907 $ 87,023
 

RH

CALCULATION OF FREE CASH FLOW

(In thousands)

(Unaudited)

 
Twelve Months Ended

February 3,
2018

 

January 28,
2017

Net cash provided by operating activities $ 555,102 $ 79,301

Capital expenditures—including construction related deposits and
purchase of trademarks and domain names

(126,881 ) (181,802 )
Payments on build-to-suit lease transactions (10,200 ) (134 )
Payments on capital leases (377 ) (344 )
Proceeds from sale of assets held for sale—net   15,123  
Free cash flow [a] $ 432,767 $ (102,979 )
[a]   Free cash flow is calculated as net cash provided by operating
activities and net proceeds from sale of assets held for sale, less
capital expenditures, construction related deposits, purchase of
trademarks and domain names, payments on build-to-suit lease
transactions and payments on capital leases. Free cash flow excludes
all non-cash items, such as the non-cash additions of property and
equipment due to build-to-suit lease transactions. Free cash flow is
included in this press release because management believes that free
cash flow provides meaningful supplemental information for investors
regarding the performance of our business and facilitates a
meaningful evaluation of operating results on a comparable basis
with historical results. Our management uses this non-GAAP financial
measure in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.
 

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