Market Overview

RH Reports Record Second Quarter Fiscal 2018 Results

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RH (NYSE:RH) today announced second 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.

SECOND QUARTER HIGHLIGHTS

Q2 GAAP DILUTED EPS $2.33 vs. ($0.28) LY
Q2 ADJUSTED DILUTED EPS
$2.49 vs. $0.65 LY

Q2 GAAP NET INCOME $64.0M vs. ($7.9M) LY
Q2 ADJUSTED NET INCOME
$67.4M vs. $19.7M LY

Q2 GAAP OPERATING MARGIN 13.3% vs. 2.0% LY
Q2 ADJUSTED OPERATING
MARGIN 12.3% vs. 6.4% LY

Q2 COMPARABLE BRAND REVENUE +5% vs. +7% LY

Q2 GAAP NET REVENUES +4% vs. +13% LY
Q2 ADJUSTED NET REVENUES +4%
vs. +14% LY

COMPANY RAISES Q3, Q4 and FY18 EARNINGS GUIDANCE

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 second quarter results demonstrate our commitment to earnings
growth, the emerging power of our new business model, and our continued
success revolutionizing physical retailing. Based on our strong second
quarter performance and current trends, we are raising our fiscal 2018
earnings guidance for a third time.

As articulated since the beginning of the year, we continue to manage
the business with a bias for earnings versus revenue growth. We will
restrain ourselves from chasing low quality sales at the expense of
profitability, and instead focus on optimizing our new business model
while building an operating platform that will enable us to compete and
win over the long-term.

It is clear that prioritizing earnings versus revenues this past year
made it possible for us to see opportunities throughout our business
that would have otherwise gone unnoticed. We now believe that our target
of achieving low to mid-teens adjusted operating margins, and return on
invested capital (ROIC) in excess of 30% by 2021 will happen sooner
rather than later, as the earnings power of our new model is proving to
be greater than previously anticipated and will be further amplified
when we pivot back to growth in fiscal 2019.

In my 40 plus years in the retail industry spanning three leading
platforms, I can honestly say I've never 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 model in our industry will prove to be the right one for our
people, partners, and shareholders.

Turning to our second quarter results, we achieved record GAAP gross
margins of 42.4% in the second quarter, increasing 900 basis points
versus a year ago, while adjusted gross margins increased 800 basis
points to 42.1% compared to 34.1% last year. Our results reflect strong
full price selling, lower outlet revenues, and a more streamlined
distribution and reverse logistics network.

Second quarter GAAP operating margins reached a record 13.3%, and
adjusted operating margins reached a record 12.3% versus 6.4% a year ago
despite approximately 150 basis points of higher advertising costs due
to the new accounting rule that requires catalog costs to be expensed in
the quarter the books are distributed, versus the previous standard of
amortizing the costs over the life of the book. As a reminder, this
accounting change will also negatively impact the third quarter adjusted
operating margins by approximately 200 basis points, while benefiting
the fourth quarter by approximately 300 basis points. For the year, we
expect advertising expense to be slightly down as a percentage of
revenues compared to fiscal 2017.

GAAP diluted earnings per share reached a record $2.33 in the second
quarter compared to a loss of $0.28 per share last year, and adjusted
diluted earnings per share also reached a record $2.49 in the second
quarter versus $0.65 per share a year ago.

GAAP and adjusted diluted earnings per share includes a $0.44 per share
net benefit comprised of a $0.51 tax benefit from associate option
exercises following the sharp increase in our share price, offset by
$0.02 per share of payroll taxes on the option exercises, and $0.05 per
share from a higher diluted share count due to the higher average share
price in the quarter. There was also a positive balance sheet cash
benefit from the option exercises of $18 million in the quarter.

Excluding the $0.44 per share net benefit, adjusted diluted earnings per
share reached $2.05 in the second quarter, widely exceeding our guidance
of $1.70 to $1.77, and more than three times last year despite lower
than expected revenues, highlighting the earnings power of our new
operating platform.

We generated over $25 million of free cash flow in the quarter, and
reduced our ratio of net debt to trailing twelve months adjusted EBITDA
from over 5 times at the end the second quarter of fiscal 2017 to 2.4
times at the end of the second quarter of fiscal 2018. We expect to
generate free cash flow in excess of $260 million for the year, further
reducing our ratio of net debt to trailing twelve months adjusted EBITDA
to approximately 1.5 times by year end.

Comparable brand revenues increased 5% in the second quarter, despite a
3 point drag from last year's inventory reduction efforts and on top of
a 7% increase last year. Adjusted for last year's inventory reduction
efforts, comparable brand revenues increased 8% in the second quarter of
fiscal 2018.

GAAP and adjusted net revenues increased 4% in the second quarter,
accelerating nearly 5 points from the first quarter, reaching $643
million versus $619 million last year. Net of the 3 point negative drag
from higher outlet sales and 3 point drag from SKU rationalization last
year, adjusted net revenues increased 10% in the second quarter fiscal
2018.

Looking forward, we expect the revenue drag from SKU rationalization to
be 2.5% in the third quarter and 1.5% in the fourth quarter.

While I would like to see our revenue forecasting accuracy improve, and
believe it will in the second half of the year, it's hard to be precise
given the inventory optimization efforts last year, and even harder to
be disappointed when the organization has been focused on operational
redesign and earnings growth resulting in adjusted gross margins up 800
basis points, adjusted operating margins up almost 600 basis points,
inventories down 9%, and adjusted diluted earnings per share up more
than 3 times versus a year ago.

Raising Fiscal 2018 Earnings Guidance and Increasing Long-Term Targets

As a result of our strong second quarter earnings, we are raising our
fiscal 2018 adjusted diluted earnings per share guidance for a third
time. We are now expecting adjusted diluted earnings per share for the
year to be in the range of $7.35 to $7.75 up 15% from our previous
guidance of $6.34 to $6.83, while slightly lowering revenue guidance by
approximately 2% as we continue to prioritize earnings over revenue
growth and focus on optimizing the profitability of our new operating
model.

As part of raising our full year guidance, we are also raising our third
and fourth quarter adjusted diluted earnings per share guidance. We are
now expecting adjusted diluted earnings per share for the third quarter
to be in the range of $1.15 to $1.33, up from $1.04 to $1.23, and
adjusted diluted earnings per share for the fourth quarter to be in the
range of $2.33 to $2.54, up from $2.16 to $2.39.

Due to the earnings power of our new operating model, we are also
updating our previous long-term targets. We are moving forward our
expectations for adjusted operating margins in the low-to-mid teens, and
ROIC in excess of 30% by 2021, a full year to 2020.

We continue to see a clear path to $4 to $5 billion in North American
revenues, as well as a significant international opportunity that could
lead to RH becoming a $7 to $10 billion dollar global brand.

Our long-term targets remain revenue growth of 8% to 12% and earnings
growth of 15% to 20% annually.

Our detailed updated guidance for fiscal 2018 and the third and fourth
quarters are provided in a table with our financial results attached to
this letter.

2018 - A Continued Focus on Execution, Architecture and Cash

As communicated, we will continue to focus on optimizing our new
business model, architecting a new operating platform and driving
significant cash flow by increasing revenues and earnings, while
decreasing inventory and capital spending in 2018.

We expect revenue growth to accelerate in the second half as the drag
from last year's inventory reduction efforts begins to lessen, and we
benefit from the second contact of the RH Interiors and RH Modern Source
Books that arrive in homes early September through early November.

While most in our industry are closing or downsizing stores, we remain
committed to our quest of revolutionizing physical retailing. Our
progress in fiscal 2018 includes opening RH Portland and RH Nashville in
the first half of the year, and the upcoming openings of two very unique
and diverse retail experiences, RH New York, opening on September 7th,
and RH Yountville, opening on September 23rd.

We continue to be pleased with the performance of our new Galleries, and
RH Portland and Nashville are no exception. RH Nashville is the fourth
new Gallery with our integrated hospitality experience and the early
hospitality results are exceeding the first year performance of RH
Chicago.

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. With
three of our four restaurants trending to generate $5 million to $6
million annually, and our fourth at approximately $4 million, we believe
RH Hospitality is now a proven scalable business, and we plan 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
summer of 2019 in New York, just steps from our new Gallery.

With a contemporary steel and glass structure rising up five floors
through the original historic brick facade, RH New York, the Gallery in
the Historic Meatpacking District is an architectural masterpiece
designed by Jim Gillam, of the award winning firm Backen, Gilliam, and
Kroger. Located on what is becoming one of the most iconic corners in
the city, the approximate 90,000 gross square feet of indoor and outdoor
space is connected by a soaring central atrium with stacked cast iron
columns, a grand staircase that features the art installation "New York
Night" by Los Angeles-based artist and designer Alison Berger, and a
glass elevator that transports customers up to a rooftop restaurant with
retractable doors opening onto a beautiful landscaped park with all-day
sunshine and incredible views of downtown and Freedom Tower. The Gallery
also features a Barista Bar & Outdoor Wine Terrace, full floors of RH
Interiors, Modern, Outdoor, Baby & Child and Teen, plus RH Interior
Design Offices supporting our onsite team, and an expansive Design
Atelier with private presentation rooms for our clients.

RH New York provides us the rare opportunity, to create what we believe
will be the most innovative new retail experience in the world, in
arguably the most important city in the world. I'm sure most of you
noticed our wrap of the Sunday New York Times this past weekend
announcing the public opening September 7th, and many of you received
invitations to our opening party September 5th, or to our Investor Event
and cocktail party September 6th post our 3:15 pm presentation at the
Goldman Sachs Global Retailing Conference. I would encourage you to join
us at one of the events or at our opening on Friday September 7th at
11am, to see why, as we articulated on the cover of the Sunday New York
Times that, "The Death of Retail. Is Overrated."

RH Yountville, opening September 23rd, will be an integrated compound of
food, wine, art and design. Reflective of the local culture, and
intended to engage the global luxury clientele who visit and vacation in
the Napa Valley, RH Yountville includes the Historic Ma(i)sonry
building, which has been transformed into a dramatic two story stone
wine vault with outdoor trellis covered living rooms that can be
reserved for wine tastings from some of the Valley's rare and hard to
acquire wines. We are finishing construction of three new pavilions on
the property, including an indoor - outdoor restaurant with a glass roof
and retractable steel and glass doors where you will dine under heritage
olive trees while listening to the sound of trickling water from
dramatic central fountains. The pavilions will be connected by lush
garden courtyards with outdoor fireplaces and walking paths of crushed
granite and bluestone pavers. RH Yountville will be a unique and
immersive experience, one that will serve to position RH as a taste and
style leader in our industry.

RH President, Chief Operating, Service and Values Officer DeMonty Price
and his team continue to lead a movement within the Company to build an
operating platform and customer culture that will leapfrog us far beyond
the customer experience and operating results that currently define our
industry. They are shifting the focus from orders to customers, and from
deliveries to delight, infusing their teams with an energy and passion
that is echoing throughout our Company and into the homes of our
customers.

Their work in home delivery includes a complete redesign of the network
which will significantly increase the time product remains in its
original packaging, reducing returns and damages, and doubling the
productivity of our delivery teams.

We have also redesigned our call center network, closing a call center
in Dallas, and opening a new Customer Delight Center at our headquarters
in Corte Madera, CA ensuring the voice of the customer rings through the
corridors of our corporate campus daily.

We expect our work 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, will drive lower costs and inventory
levels, and higher earnings and inventory turns throughout the balance
of fiscal 2018. 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.

Regarding our balance sheet and leverage ratios, we continue to 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.

The strength of our business and the reduction in leverage we have
achieved during the past four quarters has put us in a strong position
to take advantage of the positive conditions in the capital markets.

As such, we executed our third zero coupon convertible notes offering in
the second quarter of this year, raising $335 million in notes
convertible at $193.65 per share, a 25% premium to our stock price of
$154.92, the stock price at the time of the pricing of the financing. We
also purchased a corresponding bond hedge to protect against dilution up
to $309.84 per share. We used the recent notes offering proceeds net of
the bond hedge to pay down interest bearing debt on our balance sheet,
reducing interest expense for the year.

We continue to have multiple financing alternatives available to us on
favorable terms that could further fortify our balance sheet providing
us with additional financial flexibility at a very low cost of capital.

Looking back, had we not been opportunistic in responding to the
favorable market conditions through our convertible notes financings in
2014 and 2015, we would not have been in a position to repurchase $1
billion of our stock when it was undervalued last year, which has proven
to be an excellent allocation of capital for the benefit of our
shareholders. We are regularly evaluating various low interest rate
financing alternatives and expect to follow the same opportunistic
capital allocation approach in the future regarding both sources and
uses of capital.

As we did in fiscal 2017, we will once again 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.

It remains clear to us as we witness the failures of high growth - no
profit, online pure plays and the declining operating margins of
traditional retailers who are driving an unnatural shift online, that
the complexities and costs of scaling a furniture business will favor
those who control their brand from concept to customer, offer an
immersive and inspiring physical and digital experience, and have a
superior logistics network that extends the brand into the customer's
home. The road of endless promotions, free shipping, 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 in past economic cycles where growth without profitability has been
rewarded, when consumer markets tighten, so do capital markets,
resulting in a scramble to survive, and the corresponding opportunity
for those with strong brands and superior business models to thrive.
While none of us has an ability to predict exactly where we are in the
current economic cycle, we do have an ability to build a brand and
business that should enable us to disrupt and dominate regardless of
cycle time, consumer markets, capital markets, trade wars, or tweets.

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. We have several new brand
extension plans in our development pipeline, such as RH Beach House, and
RH Color, launching in 2019. Additionally, we plan to expand our
assortments in key categories, and accelerate the introduction of new
collections as we pivot back to growth next year.

We 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. You will
notice the expanded presence of RH Interior Design in our RH Interiors
and RH Modern Source Books, and our IMAGINE advertising campaign in many
of the leading shelter magazines.

Regarding our ongoing quest to revolutionize physical retailing and the
evolving nature of our real estate transformation, we have developed a
new multi-tier market approach that we believe will optimize both market
share and return on invested capital.

First, we have developed a new RH 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 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. Due to the reduced square footage and efficient design,
these new prototypes 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.

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. 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 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, as we are doing in New York
this year, and San Francisco in 2019. 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 current and
future Bespoke Galleries include the Hamptons and Palm Beach, and the
Bespoke Gallery opening this year in Yountville.

Like our evolving multi-tier Gallery strategy, we 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, under construction using this new model, and have an additional
three 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, and possibly more. In some cases we believe
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
12 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 Design Galleries in
the UK and Europe, and believe there is tremendous opportunity for the
RH brand to expand globally.

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

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

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

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 Friedman
Chairman & Chief Executive Officer

1 Return on invested capital (ROIC): We define ROIC as
adjusted operating income after-tax for the most recent twelve-month
period, divided by the average of beginning and ending debt and equity
less cash and equivalents as well as short and long-term investments for
the most recent twelve-month period. ROIC is not a measure of financial
performance under GAAP, and should be considered in addition to, and not
as a substitute for other financial measures prepared in accordance with
GAAP. Our method of determining ROIC may differ from other companies'
methods and therefore may not be comparable.

Q&A CONFERENCE CALL INFORMATION

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United
States/Canada) or (706) 679-9188 (International). A live broadcast of
the question and answer session conference call will also be available
online at the Company's investor relations website, ir.rh.com. A replay
of the question and answer session conference call will be available
through September 18, 2018 by dialing (855) 859-2056 or (404) 537-3406
and entering passcode 2476376, 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 future financial and business outlook and guidance for
the third and fourth quarters of fiscal 2018 and for the fiscal year
2018 as well as our long-term targets, expectations and perceived
opportunities, including our guidance and outlook with respect to
revenues, adjusted net income, adjusted diluted earnings per share,
adjusted gross margin, capital expenditures, merchandise inventories,
free cash flow, adjusted operating margin, anticipated diluted shares
outstanding and net revenue growth, ratio of net total debt to trailing
twelve months adjusted EBITDA; our focus on managing the business with a
bias for earnings versus revenue growth in 2018; our belief that we are
building an operating platform that will enable us to compete and win
over the long-term; the impact of the new accounting rule that requires
catalog costs to be expensed in the quarter they are distributed,
including the expected impact on adjusted operating margins in the third
and fourth quarters; our belief that our target of achieving low to
mid-teens adjusted operating margins, and return on invested capital in
excess of 30% will happen by 2020, which is earlier than our previous
expectations; our long-term expectations of achieving $4 to $5 billion
in North American revenues as well as of RH becoming a $7 to $10 billion
dollar global brand; our expectations of disrupting physical retailing
and of being a disruptive force in the marketplace, gaining significant
market share and creating meaningful competitive barriers; expectations
related to our focus on optimizing our new business model, architecting
a new operating platform and driving significant cash flow in 2018
through increasing revenues and earnings, while decreasing inventory and
capital spending in 2018; our expectations concerning the continued
benefits of our membership model; our expectation that revenue growth
will accelerate in the second half of 2018 as we begin to cycle last
year's inventory reduction efforts and benefit from our second contact
of the RH Interiors and RH Modern Source Books that will be arriving in
homes early September through early November; our belief that we are
building an operating platform and customer culture that will leapfrog
us far beyond the customer experience and operating results that
currently define our industry; our expectation that our complete
redesign of our home delivery network will significantly increase the
time product remains in its original packaging, reduce returns and
damages, and double the productivity of our delivery teams; our
expectation that our work 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, will drive lower costs and
inventory levels, and higher earnings and inventory turns throughout the
balance of fiscal 2018 and result in a dramatically improved customer
experience, continued margin enhancement and significant cost savings
over the next several years; our expectation that future cash flow will
be adequate to repay the aggregate outstanding principal balance of our
aggregate of $650 million of zero coupon convertible notes due in June
2019 and June 2020; based on the continued strong financial performance
of our business, our expectation to reduce the ratio of net debt to
trailing twelve month adjusted EBITDA to 1.5 by the end of fiscal 2018;
our belief that the strength of our business and the reduction in
leverage we have achieved during the past four quarters puts us in a
strong position to take advantage of the positive conditions in the
capital markets and that we currently have multiple financing
alternatives available to us on favorable terms that could further
fortify our balance sheet and provide us with additional financial
flexibility at a very low cost of capital; our belief that our stock
repurchases in fiscal 2017 has proven to be an excellent allocation of
capital for the benefit of our shareholders and our expectation to
follow the same opportunistic capital allocation approach in the future
regarding both sources and uses of capital; our plan to hold ourselves
back from adding new businesses in fiscal 2018 outside of ongoing
investments in RH Hospitality; our plans to open new Galleries in New
York on September 7, 2018 and Yountville on September 23, 2018; the
product assortment and integrated hospitality experience to be presented
at such new Galleries and the anticipated customer experience at such
new Galleries; our expectations concerning product and brand expansion
beginning in 2019; our plans regarding our new prototype Design Gallery
with reduced square footage and efficient design, including our
expectations regarding (i) such new format Design Gallery representing
approximately two thirds of our target markets, and (ii) the financial
characteristics of such new format Design Galleries including with
respect to capital efficiency, timing, cost risk and productivity; our
expectations regarding the timing of, and benefits from, the opening of
any new Gallery or Guesthouse location; our objective and expectation to
increase the pace of new Gallery openings from 3 to 5 per year to 5 to 7
per year; our plans and expectations regarding developing and
introducing a new Gallery format that is tailored to secondary markets,
our expectations regarding gaining share in markets currently only
served by smaller competitors and our expectations concerning the
financial characteristics of such new Gallery formation including
driving $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
expectations regarding our larger Bespoke Design Galleries, including
the financial and operating characteristics of such Galleries and the
San Francisco Gallery expected to open in 2019; and our expectations
concerning indigenous 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 that this model will reduce occupancy costs and increase
our return on capital, (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, including that we expect that 65% to
100% of the capital requirement will be funded by the landlord, versus
35% to 50% previously and our expected pipeline of 12 of these capital
light deals; 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

August 4,

2018

    July 29,

2017

Stores as a percentage of net revenues [a] 56 % 57 %
Direct as a percentage of net revenues 44 % 43 %
Growth in net revenues:
Stores [a] 3 % 13 %
Direct 5 % 14 %
Total 4 % 13 %
Comparable brand revenue growth [b] [c] 5 % 7 %
 
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 $37.9 million and $51.1
million for the three months ended August 4, 2018 and July 29, 2017,
respectively.
[b] Waterworks revenue is included in comparable brand revenue growth
beginning June 2017, which is the first full month following the
one-year anniversary of the acquisition.
[c] Membership revenue is included in comparable brand revenue growth
beginning April 2017, which is the first full month following the
one-year anniversary of the program launch.
 

RH
RETAIL GALLERY METRICS
(Unaudited)

As of August 4, 2018, the Company operated a total of 85 retail
Galleries consisting of 18 Design Galleries, 44 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 85 retail Galleries
consisting of 14 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 July 29, 2017.

In addition, as of August 4, 2018, the Company operated 36 outlet stores
compared to 28 as of July 29, 2017.

    Three Months Ended
August 4,

2018

    July 29,

2017

Store Count    

Total Leased Selling
Square Footage

Store Count    

Total Leased Selling
Square Footage

  (in thousands)   (in thousands)
Beginning of period 84   1,012 85   912
Retail Galleries opened:
Nashville Design Gallery 1 45.6
Portland RH Baby&Child Gallery 1 4.7

 

Dallas RH Baby&Child Gallery 1 3.7
Waterworks Boston Showroom 1 5.0
Retail Galleries closed:
Nashville legacy Gallery (1 ) (7.1 )
Washington DC legacy Gallery (1 ) (5.6 )
Waterworks Boston Showroom       (1 )   (2.1 )
End of period   85   1,053   85   915
 
Weighted-average leased selling square footage 1,035 913
% Growth year over year 13 % 20 %
 

See the Company's most recent Form 10-K and Form 10-Q filings for square
footage definitions.
Total leased square footage as of August 4,
2018 and July 29, 2017 was 1,414,000 and 1,248,000, respectively.
Weighted-average
leased square footage for the three months ended August 4, 2018 and July
29, 2017 was 1,392,000 and 1,243,000, respectively.
Retail sales
per leased selling square foot for the three months ended August 4, 2018
and July 29, 2017 was $313 and $327, respectively.

         

 

RH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 
Three Months Ended Six Months Ended
August 4,

2018

      % of Net

Revenues

    July 29,

2017

    % of Net

Revenues

August 4,

2018

      % of Net

Revenues

    July 29,

2017

    % of Net

Revenues

Net revenues $ 640,798   100.0 % $ 615,326   100.0 % $ 1,198,204   100.0 % $ 1,177,406   100.0 %
Cost of goods sold   369,198   57.6 %   409,513   66.6 %   714,569   59.6 %   801,337   68.1 %
Gross profit 271,600 42.4 % 205,813 33.4 % 483,635 40.4 % 376,069 31.9 %
Selling, general and administrative

expenses

  186,225   29.1 %   193,690   31.4 %   344,659   28.8 %   357,050   30.3 %
Income from operations 85,375 13.3 % 12,123 2.0 % 138,976 11.6 % 19,019 1.6 %
Other expenses
Interest expense—net 17,480 2.7 % 14,402 2.4 % 34,515 2.9 % 26,581 2.2 %
Loss on extinguishment of debt   917   0.1 %     0.0 %   917   0.1 %     0.0 %
Total other expenses   18,397   2.8 %   14,402   2.4 %   35,432   3.0 %   26,581   2.2 %
Income (loss) before income taxes 66,978 10.5 % (2,279 ) (0.4 )% 103,544 8.6 % (7,562 ) (0.6 )%
Income tax expense   2,936   0.5 %   5,583   0.9 %   11,443   0.9 %   3,670   0.4 %
Net income (loss) $ 64,042   10.0 % $ (7,862 )   (1.3 )% $ 92,101   7.7 % $ (11,232 )   (1.0 )%
 
Weighted-average shares used in

computing basic net income (loss)

per share

21,925,702 28,398,307 21,735,364 35,667,217
Basic net income (loss) per share $ 2.92 $ (0.28 ) $ 4.24 $ (0.31 )
 
Weighted-average shares used in

computing diluted net income (loss)

per share

27,496,561 28,398,307 26,363,395 35,667,217
Diluted net income (loss) per share $ 2.33 $ (0.28 ) $ 3.49 $ (0.31 )
 
             

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 
August 4,

2018

February 3,

2018

July 29,

2017

ASSETS
Cash and cash equivalents $ 22,199 $ 17,907 $ 21,637
Merchandise inventories 551,343 527,026 608,048
Other current assets   118,960   99,997   112,431
Total current assets 692,502 644,930 742,116
Property and equipment—net 833,232 800,698 744,460
Goodwill and intangible assets 242,498 242,595 276,342
Other non-current assets   45,875   44,643   56,491
Total assets $ 1,814,107 $ 1,732,866 $ 1,819,409
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 284,942 $ 318,765 $ 271,837
Convertible senior notes due 2019—net 335,670
Deferred revenue, customer deposits and other current liabilities   216,333   200,570   223,912
Total current liabilities 836,945 519,335 495,749
Asset based credit facility 199,970 283,000
Term loans—net 79,499 176,363
Convertible senior notes due 2019—net 327,731 319,969
Convertible senior notes due 2020—net 261,929 252,994 244,342
Convertible senior notes due 2023—net 240,804
Financing obligations under build-to-suit lease transactions 225,700 229,323 226,231
Other non-current obligations   102,668   131,350   120,539
Total liabilities   1,668,046   1,740,202   1,866,193
 
Stockholders' equity (deficit)   146,061   (7,336 )   (46,784 )
Total liabilities and stockholders' equity (deficit) $ 1,814,107 $ 1,732,866 $ 1,819,409
 
   

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
Six Months Ended
August 4,

2018

    July 29,

2017

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 92,101 $ (11,232 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 34,803 32,546
Other non-cash items 34,779 55,358
Change in assets and liabilities:
Merchandise inventories (24,995 ) 140,331
Accounts payable, accrued expenses and other   (66,459 )   97,353
Net cash provided by operating activities   70,229   314,356
 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (61,212 ) (56,697 )
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   (61,212 )   134,227
 
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 (199,970 ) 283,000
Net borrowings (repayments) under term loans (80,000 ) 180,000
Net borrowings (repayments) under promissory and equipment security
notes
(31,974 ) 13,883
Debt issuance costs (7,939 )
Repurchases of common stock—including commissions (1,000,326 )
Net equity related transactions 21,346 8,064
Other financing activities   (6,480 )   (4,759 )
Net cash used in financing activities   (9,263 )   (528,077 )
Effects of foreign currency exchange rate translation   (124 )   55
Net decrease in cash and cash equivalents and restricted cash
equivalents
(370 ) (79,439 )
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 22,199 21,637
End of period—restricted cash equivalents (construction related
deposits)
  2,745   13,991
End of period—cash and cash equivalents and restricted cash
equivalents
$ 24,944 $ 35,628
   

RH

CALCULATION OF FREE CASH FLOW

(In thousands)

(Unaudited)

 
Six Months Ended
August 4,

2018

    July 29,

2017

Net cash provided by operating activities $ 70,229 $ 314,356
Capital expenditures (61,212 ) (56,697 )
Payments on build-to-suit lease transactions (6,190 ) (4,601 )
Payments on capital leases (290 ) (158 )
Proceeds from sale of assets held for sale—net   15,123
Free cash flow [a] $ 2,537 $ 268,023
[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, 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 (LOSS) TO ADJUSTED NET INCOME

(In thousands)

(Unaudited)

           
Three Months Ended Six Months Ended

August 4,
2018

   

July 29,
2017

August 4,
2018

   

July 29,
2017

GAAP net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 )

Adjustments (pre-tax):

Net revenues:
Recall accrual [a] 1,853 3,813 1,853 3,813
Cost of goods sold:
Recall accrual [a] (3,262 ) 763 (3,516 ) 763
Impact of inventory step-up [b] 190 480 380 1,860
Selling, general and administrative expenses:
Legal settlement [c] (7,204 ) (5,289 )
Distribution center closures [d] (2,072 )
Reorganization related costs [e] 1,721 1,721
Recall accrual [a] 345 157 345 157
Executive non-cash compensation [f] 23,872 23,872
Gain on sale of building and land [g] (1,300 ) (1,300 )
Other expenses:
Amortization of debt discount [h] 9,000 6,790 16,272 13,505
Loss on extinguishment of debt [i]   917     917  
Subtotal adjusted items 3,560 34,575 10,611 42,670
Impact of income tax items [j]   (168 )   (7,012 )   (1,824 )   (9,943 )
Adjusted net income [k] $ 67,434 $ 19,701 $ 100,888 $ 21,495
[a]   Represents a reduction in net revenues, increase in cost of goods
sold and inventory charges associated with product recalls initiated
in the second quarter of fiscal 2018 and in the second quarter of
fiscal 2017, as well as accrual adjustments, insurance recoveries
and vendor claims related to previously initiated recalls.
[b] Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.
[c] Represents a legal settlement, net of related legal expenses.
[d] Represents an adjustment to the lease related liability associated
with the Dallas distribution center closure in fiscal 2017 primarily
due to the remeasurement of the liability for lease losses resulting
from a sublease agreement we entered into in April 2018 that
resulted in an update to both the timing and the term of future
lease-related cash inflows.
[e] Represents costs associated with a supply chain reorganization,
including the closure of the Dallas customer call center, which
include severance costs and related taxes, partially offset by a
reversal of stock-based compensation expense related to unvested
equity awards.
[f] Represents non-cash compensation charges related to a fully vested
option grant made to Mr. Friedman in May 2017.
[g] Represents the gain on the sale of building and land of one of our
owned retail Galleries.
[h] 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"), 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 respective terms. 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 $0.8 million during both the three months ended
August 4, 2018 and July 29, 2017. Amounts are presented net of
interest capitalized for capital projects of $1.4 million and $1.5
million during the six months ended August 4, 2018 and July 29,
2017, respectively.
[i] 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.
[j] The adjustment for the three months ended August 4, 2018 represents
the tax effect of the adjusted items based on our effective tax rate
of 4.4%. The six months ended August 4, 2018 includes an adjustment
to calculate income tax expense at an adjusted tax rate of 11.6%,
which is calculated based on the weighted-average fiscal 2018
quarterly effective tax rates. The adjustments for the three and six
months ended July 29, 2017 assume a normalized tax rate of
approximately 39%.
[k] 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 (loss),
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 (LOSS) PER SHARE TO

ADJUSTED DILUTED NET INCOME PER SHARE

(Unaudited)

       
Three Months Ended Six Months Ended

August 4,
2018

   

July 29,
2017

August 4,
2018

   

July 29,
2017

Diluted net income (loss) per share $ 2.33 $ (0.28 ) $ 3.49 $ (0.31 )
 
Pro forma diluted net income (loss) per share [a] $ 2.36 $ (0.26 ) $ 3.52 $ (0.31 )
EPS impact of adjustments (pre-tax) [b]:
Amortization of debt discount 0.34 0.21 0.62 0.38
Reorganization related costs 0.06 0.07
Loss on extinguishment of debt 0.03 0.04
Impact of inventory step-up 0.01 0.02 0.01 0.05
Legal settlement (0.27 ) (0.20 )
Distribution center closures (0.08 )
Recall accrual (0.04 ) 0.16 (0.05 ) 0.13
Executive non-cash compensation 0.79 0.65
Gain on sale of building and land     (0.04 )     (0.04 )
Subtotal adjusted items 0.13 1.14 0.41 1.17
Impact of income tax items [b]     (0.23 )   (0.08 )   (0.27 )
Adjusted diluted net income per share [c] $ 2.49 $ 0.65 $ 3.86 $ 0.59
[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 August 4, 2018 is calculated based on GAAP net
income and pro forma diluted weighted-average shares of
27,084,293, which excludes dilution related to the 2019 Notes and
2020 Notes of 412,268 shares. Pro forma diluted net income per
share for the six months ended August 4, 2018 is calculated based
on GAAP net income and pro forma diluted weighted-average shares
of 26,157,261, which excludes dilution related to the 2019 Notes
and 2020 Notes of 206,134 shares.
Pro forma diluted net loss
per share for the three and six months ended July 29, 2017 is
calculated based on GAAP net loss and pro forma diluted
weighted-average shares of 30,365,424 and 36,562,408, respectively.

[b] Refer to table titled "Reconciliation of GAAP Net Income (Loss) 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 (loss), 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 Six Months Ended

August 4,
2018

 

July 29,
2017

August 4,
2018

 

July 29,
2017

Net revenues $ 640,798 $ 615,326 $ 1,198,204 $ 1,177,406
Recall accrual [a]   1,853   3,813   1,853   3,813
Adjusted net revenues [b] $ 642,651 $ 619,139 $ 1,200,057 $ 1,181,219
 
Gross profit $ 271,600 $ 205,813 $ 483,635 $ 376,069
Recall accrual [a] (1,409 ) 4,576 (1,663 ) 4,576
Impact of inventory step-up [a]   190   480   380   1,860
Adjusted gross profit [b] $ 270,381 $ 210,869 $ 482,352 $ 382,505
 
Gross margin [c]   42.4 %   33.4 %   40.4 %   31.9 %
Adjusted gross margin [c]   42.1 %   34.1 %   40.2 %   32.4 %
[a]   Refer to table titled "Reconciliation of GAAP Net Income (Loss) 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 (LOSS) TO OPERATING

INCOME AND ADJUSTED OPERATING INCOME

(In thousands)

(Unaudited)

         
Three Months Ended Six Months Ended

August 4,
2018

   

July 29,
2017

August 4,
2018

   

July 29,
2017

Net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 )
Interest expense—net 17,480 14,402 34,515 26,581
Loss on extinguishment of debt 917 917
Income tax expense   2,936   5,583   11,443   3,670
Operating income 85,375 12,123 138,976 19,019
Legal settlement [a] (7,204 ) (5,289 )
Distribution center closures [a] (2,072 )
Recall accrual [a] (1,064 ) 4,733 (1,318 ) 4,733
Reorganization related costs [a] 1,721 1,721
Impact of inventory step-up [a] 190 480 380 1,860
Executive non-cash compensation [a] 23,872 23,872
Gain on sale of building and land [a]     (1,300 )     (1,300 )
Adjusted operating income [b] $ 79,018 $ 39,908 $ 132,398 $ 48,184
 
Net revenues $ 640,798 $ 615,326 $ 1,198,204 $ 1,177,406
Adjusted net revenues [c] $ 642,651 $ 619,139 $ 1,200,057 $ 1,181,219
 
Operating margin [c]   13.3 %   2.0 %   11.6 %   1.6 %
Adjusted operating margin [c]   12.3 %   6.4 %   11.0 %   4.1 %
[a]   Refer to table titled "Reconciliation of GAAP Net Income (Loss) 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 (LOSS) TO EBITDA AND ADJUSTED
EBITDA

(In thousands)

(Unaudited)

     
Three Months Ended Six Months Ended

August 4,
2018

 

July 29,
2017

August 4,
2018

 

July 29,
2017

Net income (loss) $ 64,042 $ (7,862 ) $ 92,101 $ (11,232 )
Depreciation and amortization 17,756 16,526 34,803 32,546
Interest expense—net 17,480 14,402 34,515 26,581
Loss on extinguishment of debt 917 917
Income tax expense   2,936   5,583   11,443   3,670
EBITDA [a] 103,131 28,649 173,779 51,565
Non-cash compensation [b] 6,234 30,877 14,231 36,166
Reorganization related costs [c] 1,721 1,721
Impact of inventory step-up [c] 190 480 380 1,860
Legal settlement [c] (7,204 ) (5,289 )
Distribution center closures [c] (2,072 )
Recall accrual [c] (1,064 ) 4,733 (1,318 ) 4,733
Gain on sale of building and land [c]     (1,300 )     (1,300 )
Adjusted EBITDA [a] $ 103,008 $ 63,439 $ 181,432 $ 93,024
[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 (loss)
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 charges 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 (Loss) 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

August 4,
2018

   

July 29,
2017

Net income $ 105,513 $ 721
Depreciation and amortization 72,392 63,606
Interest expense—net 70,504 49,626
Goodwill impairment [a] 33,700
Loss on extinguishment of debt [b] 5,797
Income tax expense   35,744   11,168
EBITDA [m] 323,650 125,121
Non-cash compensation [c] 28,774 51,296
Asset impairment and lease losses [d] 4,417 12,743
Distribution center closures [e] 3,723
Reorganization related costs [f] 1,721 974
Recall accrual [g] 1,656 9,348
Impact of inventory step-up [h] 1,047 5,294
Legal settlement [i] (5,289 )
Anti-dumping exposure [j] (2,202 )
Gain on sale of building and land [k] (819 ) (1,300 )
Aircraft impairment [l]     4,767
Adjusted EBITDA [m] $ 356,678 $ 208,243
[a]   Represents goodwill impairment related to the Waterworks reporting
unit.
[b] Represents the loss on extinguishment of debt related to the second
lien term loan which was repaid in full in October 2017, as well as
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] 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.
[d] Represents the impairments associated with RH Contemporary Art and
RH Kitchen.
[e] Represents property and equipment disposals, lease related charges,
inventory transfer costs, severance expense and other costs
associated with two distribution center closures, which were
completed in November 2017 and January 2018.
[f] Represents costs associated with reorganizations, which include
severance costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.
[g] Represents a reduction in net revenues, increase in cost of goods
sold and inventory charges associated with product recalls, as well
as accrual adjustments, insurance recoveries and vendor claims
related to product recalls.
[h] Represents a legal settlement, net of related legal expenses.
[i] Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.
[j] 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.
[k] Represents the gain on the sale of building and land of one of our
owned retail Galleries.
[l] Represents the impairment recorded upon reclassification of aircraft
as asset held for sale.
[m] Refer to footnote [a] within table titled "Reconciliation of Net
Income (Loss) to EBITDA and Adjusted EBITDA."
 

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.

 

Three Months Ended August 4, 2018

      As Reported      

% of Net
Revenues

   

Topic 606
Adjustments

   

Balances without
Adoption of Topic 606

     

% of Net
Revenues

Net revenues [a] $ 640,798   100.0 % $ (1,685 ) $ 639,113   100.0 %
Cost of goods sold [b]   369,198   57.6 %   (662 )   368,536   57.7 %
Gross profit 271,600 42.4 % (1,023 ) 270,577 42.3 %
Selling, general and administrative expenses [c]   186,225   29.1 %   (11,105 )   175,120   27.4 %
Income from operations 85,375 13.3 % 10,082 95,457 14.9 %
Other expenses
Interest expense—net 17,480 2.7 % 17,480 2.7 %
Loss on extinguishment of debt   917   0.1 %     917   0.1 %
Total other expenses   18,397   2.8 %     18,397   2.8 %
Income before income taxes 66,978 10.5 % 10,082 77,060 12.1 %
Income tax expense [d]   2,936   0.5 %   455   3,391   0.6 %
Net income $ 64,042   10.0 % $ 9,627 $ 73,669   11.5 %
[a]   Adjustment to net revenues includes (i) $1.2 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) $0.2 million increase associated
with membership revenue and (v) $0.2 million increase associated
with reversal of return reserve.
[b] Adjustment to costs of goods sold represents deferred cost of goods
sold of $0.6 million and the impact of related shipping expenses of
$0.1 million.
[c] Adjustment to selling, general and administrative expenses includes
a $10.0 million decrease in advertising expense, gift card breakage
of $0.6 million and incentive payment amortization of $0.5 million.
[d] Adjustment to income tax expense represents the tax effect of the
adjustments based on our effective tax rate of 4.4%.
 

The following table summarizes the impact of adopting Topic 606 on our
condensed consolidated balance sheet:

    As of August 4, 2018

As Reported

     

Topic 606
Adjustments

   

Balances without
Adoption of Topic
606

Other current assets $ 118,960 $ 36,012 $ 154,972
Other non-current assets 45,875 (6,561 ) 39,314
Accounts payable and accrued expenses 284,942 (732 ) 284,210
Deferred revenue, customer deposits and other current liabilities 216,333 5,995 222,328
Stockholders' equity 146,061 24,188 170,249
 
RH

FISCAL 2018 GUIDANCE BY QUARTER

(In millions, except per share data)

     
The Company is providing the following outlook for fiscal 2018:
                   
First Quarter
2018
Second Quarter
2018
Third Quarter
2018
Fourth Quarter
2018
Fiscal Year
2018
Adjusted net revenues $557.4 [a] $642.7 $624 - $636 $665 - $685 $2,489 - $2,521
% growth vs. prior year (1)% 4% 5% - 7% 6% - 9% [b] 4% - 5% [b]
 
Adjusted gross margin (% of net revenues) 38.0% 42.1% 40.0% - 40.5% 39.5% - 40.0% 40.0% - 40.2%
 
Adjusted SG&A (as % of net revenues) 28.5% [a] 29.8% 31.6% - 32.0% 24.7% - 25.0% 28.6% - 28.7%
 
Adjusted operating margin (% of net revenues) 9.6% 12.3% 8.0% - 8.9% 14.5% - 15.3% 11.2% - 11.7%
 
Adjusted net income $33.5 $67.4 $31.3 - $36.1 $65.6 - $71.6 $197.8 - $208.6
 
Adjusted diluted EPS $1.33 $2.49 $1.15 - $1.33 $2.33 - $2.54 $7.35 - $7.75
 
Merchandise inventories $450 - $475
 
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 Quarter

2018

Second Quarter

2018

Third Quarter

2018

Fourth Quarter

2018

Fiscal Year

2018

Net revenues 1.1% Increase 0.4% Decrease 0.1% Decrease 0.6% Increase 0.5% Increase
 
Adjusted gross margin (% of net revenues) 30 bps Increase 10 bps Increase No impact 10 bps Increase 10 bps Increase
 
Adjusted SG&A (as % of net revenues) 110 bps Decrease 170 bps Increase 220 bps Increase 300 bps Decrease 10 bps Decrease
 
Adjusted operating margin (% of net revenues) [a] 140 bps Increase 160 bps Decrease 220 bps Decrease 290 bps Increase 20 bps Increase
[a]  

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 210 basis points
decrease in the third quarter fiscal 2018, approximately 320 basis
points increase in the fourth quarter fiscal 2018 and
approximately 20 basis points increase in fiscal 2018.

 
RH

ANTICIPATED IMPACT OF STOCK PRICE ON ADJUSTED DILUTED SHARES
OUTSTANDING

(In millions, except stock price and per share data)

       
Average Third Quarter Fiscal 2018 Stock Price
$ 150.00       $ 170.00       $ 190.00       $ 210.00       $ 230.00       $ 250.00
Midpoint of Q3 2018 adjusted net income guidance $ 33.7 $ 33.7 $ 33.7 $ 33.7 $ 33.7 $ 33.7
 
Q3 2018 adjusted diluted shares outstanding [a] 27.63 27.98 28.58 29.32 29.93 30.45
 
Q3 2018 adjusted earnings per share $ 1.22 $ 1.20 $ 1.18 $ 1.15 $ 1.13 $ 1.11
 
 
Average Fiscal 2018 Stock Price
$ 150.00 $ 170.00 $ 190.00 $ 210.00 $ 230.00 $ 250.00
Midpoint of fiscal 2018 adjusted net income guidance $ 203.2 $ 203.2 $ 203.2 $ 203.2 $ 203.2 $ 203.2
 
Fiscal 2018 adjusted diluted shares outstanding [a] 27.26 27.60 28.19 28.93 29.53 30.05
 
Fiscal 2018 adjusted earnings per share $ 7.45 $ 7.36 $ 7.21 $ 7.02 $ 6.88 $ 6.76

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 0.299 million, 0.800 million, 1.213 million and 1.561
million incremental shares at $190.00, $210.00, $230.00 and $250.00
average share price, respectively, due to dilution from the
convertible not

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