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Restoration Hardware, Inc. Reports Third Quarter 2006 Results

CORTE MADERA, Calif., Nov. 28 /PRNewswire-FirstCall/ -- Restoration Hardware, Inc. (Nasdaq: RSTO) today announced record financial results for the third quarter ended October 28, 2006. Results include the following:

    Third Quarter ended October 28, 2006

    -- Net revenue for the third quarter increased 22 percent to $157.1
       million.
    -- Comparable store sales for the third quarter increased 3.9 percent.
    -- Direct-to-customer revenue for the third quarter increased 58 percent.
    -- Loss from operations improved to $3.7 million for the third quarter.
       The loss from operations includes a non-cash charge of $0.9 million
       associated with the expensing of stock options from the adoption of
       SFAS 123R.  This compares to a loss from operations of $5.9 million for
       the same period last year.
    -- Net loss per share in the period was $0.15.  The net loss includes a
       non-cash charge of $0.02 per share associated with the expensing of
       stock options required under SFAS 123R.  In the same period last year,
       there was a net loss of $0.11 per share, inclusive of recording a tax
       benefit of $0.08 per share.
    -- Inventory was $217.7 million at the end of the third quarter compared
       to $164.1 million in the same period last year due to planned growth
       and acceleration of inventory receipts for the fourth quarter as part
       of our efforts to improve in-stock positions for the holiday period.
       We expect to end the fourth quarter with inventories up 15 to 20
       percent above last year, in line with our sales growth.

Gary Friedman, the Company's President, Chief Executive Officer and Chairman stated, "We are pleased to report another quarter of solid progress. Total revenues increased 22 percent, reflecting our ability to gain market share and improve profitability, despite a difficult home furnishings environment."

Mr. Friedman continued, "During the quarter, comparable store sales increased 3.9%, and Direct-to Customer revenues increased a better than expected 58%, as we continue to execute our Direct-Centric Growth Strategy."

"We launched two important growth initiatives during the quarter: First, we continued to extend our brand by introducing our second category extension, The Restoration Hardware Gift Catalog. In addition, we launched our new fashion home brand, Brocade Home. While still early, we are pleased with the response to both catalogs."

Mr. Friedman concluded, "Looking forward, we are encouraged by the early Holiday trends in our business, and are guiding comparable store sales to be up in the high single digits, with direct-to-customer revenues increasing 50 to 60 percent in the fourth quarter. We expect operating earnings to increase significantly over the fourth quarter of last year."

    Third Quarter Year-to-date ended October 28, 2006

    -- Net revenue for the third quarter year-to-date increased 20 percent to
       $469.8 million.
    -- Comparable store sales for the third quarter year-to-date increased 4.1
       percent.
    -- Direct-to-customer revenue for the third quarter year-to-date increased
       50 percent.
    -- Loss from operations improved to $5.1 million for the third quarter
       year-to-date.  The current year loss from operations included non-cash
       charges of $2.4 million associated with the expensing of stock options
       resulting from the adoption of SFAS 123R and $0.6 million related to a
       stock-based compensation charge recorded in the second quarter.  This
       compares to a loss from operations of $13.4 million for the same period
       last year.
    -- The year-to-date net loss per share was $0.27.  The net loss includes a
       non-cash charge of $0.06 per share associated with the expensing of
       stock options required under SFAS 123R and a non-cash charge of $0.02
       per share associated with the stock-based compensation charge recorded
       in the second quarter.  In the same period last year, there was a net
       loss of $0.28 per share, inclusive of recording a tax benefit of $0.19
       per share.

    Guidance

The Company provides the following guidance for the fourth quarter 2006 (14 weeks against last year's 13 week quarter):

    -- Total revenue growth of 24 to 28 percent over the fourth quarter last
       year (the extra week adds approximately 6 percentage points to the
       quarter's growth rate).
    -- Increase in comparable store sales of high single digits from the
       fourth quarter last year.
    -- Direct to customer revenue increase of approximately 50 to 60 percent
       over the fourth quarter last year.
    -- Income from operations between $16.5 and $20.5 million, which includes
       a charge of approximately $0.9 million attributable to the adoption of
       SFAS 123R and up to $2.5 million for costs associated with the
       Company's bonus program.  Income from operations in the fourth quarter
       of fiscal 2005 was $14.4 million and did not include any bonus expense.
    -- The weighted average diluted share count is estimated at approximately
       41 million shares.
    -- Quarter-end inventory increase of approximately 15 to 20 percent from
       the fourth quarter last year.
    -- Income tax expense will be between $0.4 and $0.6 million in the fourth
       quarter.
    -- Income per diluted share will be in the range of $0.34 to $0.44 per
       share, which includes a charge of approximately $0.02 per share
       attributable to the adoption of SFAS 123R and up to $0.06 per share for
       costs associated with the Company's bonus program. Fiscal 2005 fourth
       quarter loss per share was a loss of $0.52 per share and included a
       charge related to the valuation reserve against the company's net
       deferred tax assets of $0.74 per share.

The Company provides the following guidance for the full year 2006 (53 weeks against last year's 52 week year):

    -- Total revenue growth of 22 to 23 percent over fiscal year 2005 (the
       extra week adds approximately 2 percentage points to the full-year's
       growth rate).
    -- Increase in comparable store sales of mid single digits over the same
       period last year.
    -- Direct to customer revenue increase of 50 to 53 percent from fiscal
       year 2005.
    -- Operating margins of 1.6 to 2.2 percent, which includes a charge of
       approximately $3.3 million, or 0.5 percent of net revenue, attributable
       to the adoption of SFAS 123R, and $0.6 million, or 0.1 percent of net
       revenue, attributable to the stock-based compensation charge taken in
       the second quarter
    -- The weighted average diluted share count estimated at approximately
       39.5 million.
    -- Year-end inventory increase of 15 percent to 20 percent over 2005.
    -- Income tax expense for the year will be approximately $0.6 million.

    Non-GAAP Financial Measures

This release makes reference to certain financial measures that are non- GAAP, including (i) the income tax benefit of $0.08 per share recorded for the third quarter of fiscal 2005, (ii) the non-cash charge of $0.02 per share associated with the stock-based compensation expense recorded in the second quarter of fiscal 2006, (iii) the non-cash charge of $0.02 per share for the third quarter of fiscal 2006 for stock based compensation expense associated with adopting SFAS 123R, (iv) the non-cash charge of $0.06 per share associated with the adoption of SFAS 123R for the three fiscal quarters ended October 28, 2006, (v) the income tax benefit of $0.19 per share recorded for the three fiscal quarters ended October 29, 2005 and (vi) the guidance of a non-cash charge of $0.02 per share for the fourth quarter of fiscal 2006 for stock based compensation expense associated with adopting SFAS 123R. 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. These non-GAAP measures should be considered as a supplement to, and not as a substitute for or superior to, GAAP. The most-closely analogous GAAP financial measure to these amounts are the Company's net loss per share for each such period.

With respect to the guidance of a non-cash charge of approximately $0.02 per share for the fourth quarter of fiscal 2006 for stock based compensation expense associated with adopting SFAS 123R, the most-closely analogous GAAP financial measures is the Company's guidance of net income per diluted share in the range of approximately $0.34 to $0.44 per share for the fourth quarter.

Conference Call:

The Company's third quarter conference call is scheduled for today, Tuesday, November 28, 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=34125

If you are unable to participate during the live web cast, a playback of the conference call will be available beginning at 7:00 PM Eastern Time on Tuesday, November 28, 2006. The playback will be available via the internet at www.restorationhardware.com under "Investor Relations" or by Dial-in Number: 800.283.4595 until December 8, 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 November 28, 2006, the Company operated 103 retail stores and eight 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 the Company's anticipated full year revenue growth and operating margins, statements concerning guidance for the fourth quarter and full fiscal year of fiscal 2006, statements relating to revenue growth, comparable store sales, earnings, weighted average share count and inventory for the fourth quarter of fiscal 2006, statements concerning the anticipated impact of SFAS 123R on the Company's results for the fourth quarter of fiscal 2006, statements relating to the implications of the Company's revenues, sales and financial results for the third quarter of fiscal 2006, statements concerning the Company's opportunities in the fourth quarter of the year, statements relating to the launch and expected growth and importance to the Company of Brocade Home and the Gift Book, 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 July 29, 2006, in Part I, Item 2 thereof ("Management's Discussion and Analysis of Financial Condition and Results of Operations"), in Part I, Item 4 thereof ("Controls and Procedures"), and in Part II, Item 1A thereof ("Risk Factors"). 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.


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


                                            13 weeks ended    13 weeks ended
                                                    % of Net          % of Net
                                           10/28/06 Revenue  10/29/05 Revenue


    Retail net revenue                     $100,059   63.7%  $92,256   71.8%
    Direct-to-customer net revenue           57,014   36.3%   36,146   28.2%
        Total net revenue                   157,073  100.0%  128,402  100.0%

    Cost of revenue and occupancy           103,232   65.7%   84,033   65.4%
        Gross profit                         53,841   34.3%   44,369   34.6%

    Selling, general and administrative
     expense                                 57,545   36.7%   50,302   39.2%
        Loss from operations                 (3,704)  (2.4%)  (5,933)  (4.6%)

    Interest expense, net                    (2,119)  (1.3%)  (1,164)  (0.9%)

        Loss before income taxes             (5,823)  (3.7%)  (7,097)  (5.5%)

    Income tax benefit                          115    0.1%    2,887    2.2%

    Net loss                                $(5,708)  (3.6%) $(4,210)  (3.3%)

    Loss per share, basic and diluted        $(0.15)          $(0.11)

    Weighted average shares outstanding,
        basic and diluted                    38,311           37,648

    Comparable store sales growth
     (decline)                                  3.9%            (2.1)%
    Stores open at end of period                103              102
    Store selling square footage at
     end of period                          687,625          676,520


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


                                            39 weeks ended    39 weeks ended
                                                    % of Net          % of Net
                                           10/28/06 Revenue  10/29/05 Revenue


    Retail net revenue                     $302,547   64.4%  $278,832   71.4%
    Direct-to-customer net revenue          167,249   35.6%   111,816   28.6%
       Total net revenue                    469,796  100.0%   390,648  100.0%

    Cost of revenue and occupancy           311,825   66.4%   267,363   68.4%
       Gross profit                         157,971   33.6%   123,285   31.6%

    Selling, general and administrative
     expense                                163,036   34.7%   136,725   35.0%
       Loss from operations                  (5,065)  (1.1%)  (13,440)  (3.4%)

    Interest expense, net                    (5,282)  (1.1%)   (2,823)  (0.8%)

       Loss before income taxes             (10,347)  (2.2%)  (16,263)  (4.2%)

    Income tax (expense) benefit                (38)   0.0%     6,478    1.7%

    Net loss                               $(10,385)  (2.2%)  $(9,785)  (2.5%)

    Loss per share of common stock, basic
     and diluted                             $(0.27)           $(0.28)

    Weighted average shares outstanding,
       basic and diluted                     37,989            34,673

    Comparable store sales growth              4.1%              2.7%
    Retail stores open at end of period         103               102
    Total selling square footage at end of
     period                                 687,625           676,520


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

                                            10/28/06     1/28/06    10/29/05

    ASSETS
    Current assets:
        Cash and cash equivalents             $1,639      $1,990      $3,635
        Accounts receivable                   12,068       5,884       9,415
        Merchandise inventories              217,668     158,647     164,138
        Prepaid expense and other current
         assets                               18,734       9,590      21,363
            Total current assets            $250,109    $176,111    $198,551

        Property and equipment, net           89,187      92,360      90,157
        Goodwill                               4,560       4,560       4,560
        Deferred tax assets, net                 376          --      18,582
        Other assets                           1,445       1,237       7,237
            Total assets                    $345,677    $274,268    $319,087

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
        Accounts payable and accrued
         expenses                            $80,342     $62,818     $66,126
        Deferred revenue and customer
         deposits                             12,910       8,304      11,778
        Other current liabilities             18,372      17,506      13,092
            Total current liabilities        111,624      88,628      90,996

        Long-term debt, net of issuance
         costs                               110,941      58,126      79,578
        Deferred lease incentives             24,717      27,465      28,445
        Deferred rent                         19,796      19,866      20,064
        Other long-term obligations            1,002          51          40
            Total liabilities                268,080     194,136     219,123

    Stockholders equity:
    Common stock                                   4           4           4
    Additional paid-in capital               176,897     169,187     169,492
    Accumulated other comprehensive
     income                                    1,150       1,010       1,015
    Accumulated deficit                     (100,454)    (90,069)    (70,547)
            Total stockholders' equity        77,597      80,132      99,964


            Total liabilities and
             stockholders' equity           $345,677    $274,268    $319,087

    Common stock issued and outstanding
     at end of period                         38,699      37,763      37,726

SOURCE  Restoration Hardware, Inc.
    -0-                             11/28/2006
    /CONTACT:  Chris Newman, Chief Financial Officer of Restoration Hardware,
Inc., +1-415-924-3578, or fax, +1-415-945-7264/
    /Web site:  http://www.restorationhardware.com/
    (RSTO)

CO:  Restoration Hardware, Inc.
ST:  California
IN:  REA HOU
SU:  ERN ERP CCA

SF-JL
-- SFTU127 --
7596 11/28/2006 16:00 EST http://www.prnewswire.com