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Restoration Hardware, Inc. Reports Fourth Quarter and Full Year Results

CORTE MADERA, Calif., March 30, 2006 /PRNewswire-FirstCall via COMTEX News Network/ -- Restoration Hardware, Inc. (Nasdaq: RSTO) today announced its financial results for the fourth quarter and fiscal year ended January 28, 2006. Results from operations were consistent with the Company's guidance issued on January 17, 2006. Results include the following:

Fourth Quarter ending January 28, 2006

     *    Net revenue for the fourth quarter increased 2 percent to $191.0
          million compared to net revenue of $187.9 million last year.
     *    Comparable store sales declined 5.5 percent for the fourth quarter
          against a 5.7 percent increase last year.
     *    Direct-to-customer revenue increased 20 percent to $48.2 million in
          the fourth quarter compared to a 51 percent increase last year.
     *    Income from operations was $14.4 million for the fourth quarter
          compared to $17.2 million for the same period last year.
     *    For the fourth quarter, the Company reported a net loss of $19.5
          million or $0.52 per share, inclusive of a non-cash charge of $27.9
          million or $0.74 per share, for a valuation allowance established
          against the Company's net deferred tax assets, as described below.
          Last year in the fourth quarter, the Company reported net income of
          $10.6 million or $0.28 per fully-diluted share.
     *    Excluding the establishment of the valuation allowance, earnings per
          share for the fourth quarter were consistent with the Company's
          guidance issued on January 17, 2006.

    Full year ending January 28, 2006

     *    Net revenue for the fiscal year increased 11 percent to $581.7
          million compared to net revenue of $525.8 million last year.
     *    Comparable store sales declined 0.3 percent for the full year
          against a 7.8 percent increase last year.
     *    Direct-to-customer revenue increased 34 percent to $160.0 million
          compared to a 75 percent increase last year.
     *    Income from operations was $0.9 million for the fiscal year compared
          to $4.1 million in fiscal 2004.
     *    For the full year, the Company reported a net loss of $29.3 million
          or $0.83 per share, inclusive of the non-cash charge of $27.9
          million for the valuation allowance established in the fourth
          quarter, as described below.  Last year for the full year, the
          Company reported net income of $1.7 million, $0.04 per fully-diluted
          share.

Gary Friedman, the Company's President, Chief Executive Officer and Chairman stated, "Our results of operations for the fourth quarter were in- line with our January 17, 2006 press release. The demand for our core businesses remains strong, and we expect that the reduction in our total order and revenue deferral balance as detailed in our January 17, 2006 press release, will provide a positive benefit to our results in future periods. For the first quarter of fiscal 2006, we expect comparable store sales to increase 6 percent to 8 percent, including two to three points of impact from the carry-over of fourth quarter order and revenue deferral, compared to a 5.0 percent increase last year. We also expect our direct-to-customer revenue to increase 20 percent to 25 percent on top of a 50 percent increase last year. Additionally, product margins will continue to be up several hundred basis points over a year ago."

Mr. Friedman continued, "Looking forward, we are excited about the many growth opportunities that lie ahead. This month, we launched our first category extension, the Restoration Hardware outdoor catalog. We believe it offers the most comprehensive and well-designed collection of outdoor furniture in the marketplace. In addition, as previously discussed, we will test a new concept targeting a broader-value market with a catalog mailing in September. We believe these initiatives will position the Company for sustained long-term growth."

Reported results for the fourth quarter include a non-cash charge of $27.9 million or $0.74 per share in connection with providing a full valuation allowance against the Company's net deferred tax asset. Based on the guidance provided in Statement of Financial Accounting Standard ("SFAS") No.109, and considering the cumulative U.S. losses of the company, we provided a valuation allowance against net deferred income tax assets. The charge will have no impact on cash flow or future prospects, nor does it alter our ability to utilize the underlying tax net operating loss and carry forwards in the future.

Adoption of SFAS No. 123(R), "Share-Based Payment"

The Company will adopt SFAS No. 123(R), "Share-Based Payment" in the first quarter of fiscal 2006. This accounting standard requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value over the requisite service period. Accordingly, the Company's guidance for the first quarter and the full year includes the estimated impact of SFAS No. 123(R).

Guidance

The Company provides the following guidance for the first quarter and full year fiscal 2006:

First Quarter fiscal 2006:

     *    Total revenue growth of 15 to 18 percent.
     *    Increase in comparable store sales of 6 to 8 percent.  The first
          quarter guidance includes the positive impact from fourth quarter
          order and revenue deferral of 2 to 3 percent.
     *    Direct to customer revenue increase of approximately 20 to 25
          percent.
     *    Operating loss of between $3.0 and $4.0 million, which includes the
          estimated impact of SFAS No. 123(R), stock option expensing, of
          approximately $1.3 million.  Loss from operations in the first
          quarter of fiscal 2005 was $4.3 million
     *    The weighted average share count is estimated at approximately 38.0
          million shares compared to 33.1 million shares in the prior year,
          due to the conversion of our preferred stock in July 2005.
     *    Quarter-end inventory increase of approximately 20 to 25 percent in
          support of accelerated revenue growth in the second quarter.
     *    Due to the valuation allowance provided against the Company's net
          deferred tax assets, income tax benefits or expense will be close to
          zero in 2006.
     *    Loss per share, inclusive of adopting SFAS No. 123(R) will be in the
          range of $0.12 to $0.15 per share.  The impact of adopting SFAS No.
          123(R) is estimated to be $0.03 per share.  The impact of no tax
          benefit being recorded in the first quarter is estimated to be $0.05
          to $0.06 per share.  Fiscal 2005 first quarter loss per share was
          $0.09 per share.

    Full Year fiscal 2006:

     *    Total revenue growth of approximately 18 to 22 percent.
     *    Increase in comparable store sales in the low to mid single digits.
     *    Direct to customer revenue increase of 35 to 40 percent.
     *    Operating margins of 1.5 to 2.0 percent, which includes the
          estimated impact of SFAS No. 123(R) stock option expensing of
          approximately $4.0 million, or 0.6 percent.
     *    Year-end inventory increase of approximately 5 percent as our outlet
          strategy helps moderate total inventory growth.
     *    Capital expenditures of no more than $15 million.  Investments are
          primarily focused against new order and warehouse management
          systems.
     *    The weighted average diluted share count estimated at approximately
          40 million.
     *    Due to the valuation allowance provided against the Company's net
          deferred tax assets, income tax benefits or expense will be close to
          zero in 2006.

    Non-GAAP Financial Measures

This release makes reference to certain financial measures that are non- GAAP, including (i) the fourth quarter non-cash charge of $0.74 per share for a valuation allowance established against the Company's net deferred tax asset, and (ii) revenue and order deferrals. The Company believes that the use of these non-GAAP financial measures allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. The most-closely analogous GAAP financial measure to the fourth quarter non-cash charge of $0.74 per share is the Company's net loss of $0.52 per share.

"Total revenue and order deferral" represents the combination of backorders, special orders and in-transit orders.

"Backorders" represent products that have been ordered by customers but are out of stock.

"Special orders" represent products that are made-to-order by customers and therefore are not in-stock at the time the order is taken.

"In-transit deferred revenue orders" represent items that have been billed and shipped to the customer but have not yet been delivered at the period end. These are included in the balance sheet under "deferred revenue and customer deposits."

Conference Call:

The Company's fourth quarter and fiscal year conference call is scheduled for today, Thursday, March 30, 2006. Following the release via the wire services, the Company will host a conference call beginning at 5:00 PM Eastern Time which can be accessed using the Dial-in Number: 800-362-0571 or via live web cast at: http://www.videonewswire.com/event.asp?id=32996

If you are unable to participate during the live web cast, a playback of the conference call will be available via the Internet at: http://www.videonewswire.com/event.asp?id=32996 beginning at 7:00 PM Eastern Time on Thursday, March 30, 2006. A web cast replay of the call will be available at www.restorationhardware.com under "Investor Relations -- Event Calendar" or by Dial-in Number: 888-562-0852 until April 6, 2006.

About Restoration Hardware, Inc.:

Restoration Hardware, Inc. is a specialty retailer of high quality home furnishings, bath fixtures and bathware, functional and decorative hardware and related merchandise that reflects the Company's classic and authentic American point of view. Restoration Hardware, Inc. sells its merchandise offering through its retail stores, catalog (800-762-1005) and on-line at www.restorationhardware.com. As of March 30, 2006, the Company operated 103 retail stores and six outlet stores in 30 states, the District of Columbia and Canada.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

This release contains forward-looking statements that involve known and unknown risks. Such forward-looking statements include, without limitation, statements concerning or relating to implications of the Company's revenues, sales and financial results for the fourth quarter and full fiscal year of fiscal 2005, statements concerning guidance for the first quarter and full fiscal year of fiscal 2006, statements relating to the Company's anticipated revenue, comparable store sales, direct-to-consumer sales and earnings per share for future periods, statements relating to the impact of total revenue and order deferral on the Company's results in future periods, statements concerning the anticipated benefits of certain growth opportunities for the Company, and other statements containing words such as "expects" and words of similar import or statements of management's opinion. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, including financial results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, customer reactions to the Company's current and anticipated merchandising and marketing programs and strategies, timely introduction and customer acceptance of the Company's merchandise, positive customer reaction to the Company's catalog and Internet offerings, revised product mix, prototype stores and core businesses, timely and effective sourcing of the Company's merchandise from its foreign and domestic vendors and delivery of merchandise through its supply chain to its stores and customers, effective inventory and catalog management, actual achievement of cost savings and improvements to operating efficiencies, effective sales performance, in particular during the holiday selling season, the actual impact of key personnel of the Company on the development and execution of the Company's strategies, changes in investor perceptions of the Company, fluctuations in comparable store sales, limitations resulting from restrictive covenants in the Company's credit facility, changes in economic or business conditions in general, changes in political conditions in the United States and abroad in general, changes in product supply, changes in the competitive environment in which the Company operates, changes in the Company's management information needs, changes in customer needs and expectations, governmental actions and other factors detailed in the Company's filings with the Securities and Exchange Commission, including its recent filings on Forms 10- K, 10-Q and 8-K, including, but not limited to, those described in the Company's Form 10-Q for the quarter ended October 29, 2005 in Part I, Item 2 thereof ("Management's Discussion and Analysis of Financial Condition and Results of Operations") under the captions "Revenue," "Expenses," "Liquidity and Capital Resources" and "Factors that May Affect Our Future Operating Results," and in Part I, Item 4 thereof ("Controls and Procedures"). Guidance offered by the Company represents a point-in-time estimate made by management of the Company. The Company undertakes no obligation to update any guidance or any other forward-looking statements in order to reflect events or circumstances that may arise after the date of this release. With respect to any statements concerning revenue and order deferrals or the possible benefits to be derived from revenue and order deferrals in future periods, there is inherent risk to the realization of revenue and order deferrals and the amount of revenue and order deferrals can fluctuate from quarter to quarter based upon a variety of factors including our order mix, our in stock position, rates of order cancellation and our ability to ship goods to the customer. Revenue and order deferral represents the combination of backorders, special orders and in-transit orders.

RESTORATION HARDWARE, INC.
              CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
               (in thousands, except per share and store data)

                                           13 weeks ended    13 weeks ended
                                                  % of Net          % of Net
                                          1/28/06  Revenue  1/29/05  Revenue


    Retail net revenue                    $142,834   74.8%  $147,739   78.6%
    Direct-to-customer net revenue          48,175   25.2%    40,119   21.4%
        Total net revenue                  191,009  100.0%   187,858  100.0%

    Cost of revenue and occupancy          116,881   61.2%   119,921   63.8%
        Gross profit                        74,128   38.8%    67,937   36.2%

    Selling, general and administrative
     expense                                59,744   31.3%    50,740   27.0%
        Income from operations              14,384    7.5%    17,197    9.2%

    Interest expense, net                   (1,227)  (0.6%)     (799)  (0.5%)

        Income before income taxes          13,157    6.9%    16,398    8.7%

    Income tax expense                     (32,679) (17.1%)   (5,817)  (3.1%)

    Net (loss) income                     $(19,522) (10.2%)  $10,581    5.6%

    (Loss) income per common share, basic   $(0.52)            $0.32
    (Loss) income per common share,
     diluted                                $(0.52)            $0.28
    Weighted average shares outstanding,
        basic                               37,747            33,049
        diluted                             37,747            38,135

    Comparable store sales (decline)
     growth                                  (5.5)%             5.7%
    Retail stores open at end of period        103               102
    Total selling square footage at end
     of period                             685,672           676,520


                          RESTORATION HARDWARE, INC.
              CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
               (in thousands, except per share and store data)

                                          52 weeks ended    52 weeks ended
                                                 % of Net          % of Net
                                         1/28/06  Revenue  1/29/05  Revenue


    Retail net revenue                   $421,666   72.5%  $406,833   77.4%
    Direct-to-customer net revenue        159,991   27.5%   118,990   22.6%
        Total net revenue                 581,657  100.0%   525,823  100.0%

    Cost of revenue and occupancy         384,244   66.1%   359,808   68.4%
        Gross profit                      197,413   33.9%   166,015   31.6%

    Selling, general and administrative
     expense                              196,469   33.7%   161,939   30.8%
        Income from operations                944    0.2%     4,076    0.8%

    Interest expense, net                  (4,050)  (0.7%)   (2,472)  (0.5%)

        (Loss) income before income taxes  (3,106)  (0.5%)    1,604    0.3%

    Income tax (expense) benefit          (26,201)  (4.5%)      100    0.0%

    Net (loss) income                    $(29,307)  (5.0%)   $1,704    0.3%

    (Loss) income per common share,
     basic                                 $(0.83)            $0.05
    (Loss) income per common share,
     diluted                               $(0.83)            $0.04
    Weighted average shares outstanding,
        basic                              35,441            32,940
        diluted                            35,441            38,183

    Comparable store sales (decline)
     growth                                 (0.3)%             7.8%
    Retail stores open at end of period       103               102
    Total selling square footage at end
     of period                            685,672           676,520


                          RESTORATION HARDWARE, INC.
              CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                                (in thousands)

                                                    1/28/06           1/29/05

    ASSETS
    Current assets:
        Cash and cash equivalents                    $1,990            $1,904
        Accounts receivable                           5,884             6,945
        Merchandise inventories                     158,647           144,185
        Deferred tax assets, current portion, net        --             7,119
        Prepaid expense and other current assets      9,590            12,455
             Total current assets                  $176,111          $172,608

        Property and equipment, net                  92,360            81,886
        Goodwill                                      4,560             4,560
        Deferred tax assets, net                         --            18,745
        Other assets                                  1,237             1,464
             Total assets                          $274,268          $279,263

    LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
        STOCK AND STOCKHOLDERS' EQUITY
    Current liabilities:
        Accounts payable and accrued expenses       $62,818           $63,920
        Line of credit, net of debt issuance             --            33,819
        Deferred revenue and customer deposits        8,304             8,130
        Other current liabilities                    17,506            14,948
             Total current liabilities               88,628           120,817

        Long-term debt, net of debt issuance         58,126                --
        Deferred lease incentives                    27,465            30,365
        Deferred rent                                19,866            20,321
        Other long-term obligations                      51               143
             Total liabilities                      194,136           171,646
    Commitments and contingencies
    Series A redeemable convertible
     preferred stock                                     --             8,331

    Common stock                                          4                 3
    Additional paid-in capital                      169,187           159,233
    Unearned compensation                                --                --
    Accumulated other comprehensive income            1,010               812
    Accumulated deficit                             (90,069)          (60,762)
             Total stockholders' equity              80,132            99,286

             Total liabilities, redeemable
              convertible preferred stock and
              stockholders' equity                 $274,268          $279,263

    Common stock issued and outstanding at
     end of period                                   37,763            33,084

SOURCE Restoration Hardware, Inc.

Gary Friedman, President and Chief Executive Officer of Restoration Hardware, Inc.,
+1-415-924-1005, or fax, +1-415-945-7264
http://www.prnewswire.com