RH Leadership will host a Q&A conference call at
SECOND QUARTER HIGHLIGHTS
Q2 GAAP DILUTED EPS
Q2 ADJUSTED DILUTED EPS
Q2 GAAP NET INCOME
Q2 ADJUSTED NET INCOME
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
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
GAAP and adjusted diluted earnings per share includes a
Excluding the
We generated over
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
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
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
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
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
We continue to be pleased with the performance of our new Galleries, and
RH Portland and
With a contemporary steel and glass structure rising up five floors
through the original historic brick facade, RH New York, the Gallery in
the
RH
RH
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
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
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
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
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
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
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
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
Third, we will continue to develop and open larger Bespoke Design
Galleries in the top metropolitan markets, as we are doing in
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
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,
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
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
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.
Gary
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,
ABOUT
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
|
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. | |
RETAIL GALLERY METRICS
(Unaudited)
As of
In addition, as of
| Three Months Ended | ||||||||||||||||||||
| August 4, 2018 |
July 29, 2017 |
|||||||||||||||||||
| Store Count |
Total Leased Selling |
Store Count |
Total Leased Selling |
|||||||||||||||||
| (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
Weighted-average
leased square footage for the three months ended
Retail sales
per leased selling square foot for the three months ended
|
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, |
July 29, |
August 4, |
July 29, |
|||||||||||||||||||
| 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, |
July 29, |
August 4, |
July 29, |
|||||||||||||||||
| 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. |
|
| [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, |
July 29, |
August 4, |
July 29, |
||||||||||||||
| 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, |
July 29, |
August 4, |
July 29, |
||||||||||||||||||
| 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, |
July 29, |
August 4, |
July 29, |
||||||||||||||
| 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, |
July 29, |
|||||||||||
| 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.” | |
TOPIC 606 IMPACT OF ADOPTION
(In thousands)
(Unaudited)
We adopted ASU 2014-09 (“Topic 606”), which pertains to revenue
recognition, on
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 |
Topic 606 |
Balances without |
% of Net |
|||||||||||||||||||||||
| 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 |
Balances without |
||||||||||||
| 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.
|
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| RH ESTIMATED TOPIC 606 IMPACT TO FISCAL 2018 GUIDANCE BY QUARTER |
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| First Quarter 2018 |
Second Quarter 2018 |
Third Quarter 2018 |
Fourth Quarter 2018 |
Fiscal Year 2018 |
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| 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) |
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| 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 |
View source version on businesswire.com: https://www.businesswire.com/news/home/20180904005850/en/
Source:
RH
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations
and Strategy
cmclaughlin@rh.com