RH Reports Record First Quarter Fiscal 2018 Results
RH Leadership will host a Q&A conference call at
FIRST QUARTER HIGHLIGHTS
Q1 GAAP DILUTED EPS
Q1 ADJUSTED DILUTED EPS
Q1 GAAP NET INCOME
Q1 ADJUSTED NET INCOME
Q1 GAAP OPERATING MARGIN 9.6% vs. 1.2% LY
Q1 ADJUSTED OPERATING
MARGIN 9.6% vs. 1.5% LY
Q1 COMPARABLE BRAND REVENUE +1% vs. +9% LY
Q1 NET REVENUES -1% vs.
+23% LY
ON
To Our People, Partners and Shareholders,
We articulated at the beginning of the year that we will be managing the business with a bias for earnings versus revenue growth in fiscal 2018. We will restrain ourselves from chasing low quality sales at the expense of profitability like many in our industry, and instead focus on building an operating platform that will enable us to compete and win over the long-term.
Our first quarter adjusted diluted earnings per share of
We achieved record adjusted operating margins of 9.6% in the first quarter versus 1.5% last year, more than double our previous Q1 record of 4.4% in the first quarter of fiscal 2015 when adjusted operating margins reached an all-time high of 9.7% for the full year.
Adjusted gross margins increased 750 basis points to a first quarter record of 38.0%, compared to 30.5% last year reflecting strong full price selling, lower outlet revenues, and a more streamlined distribution and reverse logistics network.
First quarter adjusted net income reached
Comparable brand revenues grew 1% in the quarter, despite a 4 point drag from cycling last year’s inventory reduction efforts. Adjusted for last year’s inventory reduction efforts, comparable brand revenues increased 5% versus a 9% increase last year.
While first quarter net revenues of
Our work this past year to consolidate our distribution center network from four facilities to two while streamlining operations throughout our supply chain, has resulted in a significantly more efficient cost and working capital model. We believe this new model will prove to be a long-term competitive advantage that will separate and distinguish RH’s operating results for years to come.
Raising Fiscal 2018 Guidance, Providing Second Quarter Guidance and Updating Long-Term Financial Targets
As a result of our strong first quarter performance and accelerating revenue trends in the second quarter, we are raising our fiscal 2018 guidance for a second time this year.We are providing the following updated guidance for fiscal 2018:
-
Adjusted net revenues in the range of
$2.53 - $2.57 billion , an increase of 5% - 7% on a comparable 52-week vs. 52-week basis. - Adjusted gross margin in the range of 39.3% to 39.6% and adjusted SG&A as a percentage of revenue in the range of 28.6% to 28.9%.
- Adjusted operating margin in the range of 10.4% - 11.0%.
-
Adjusted net income in the range of
$168 - $181 million versus our previous range of$145 - $165 million . -
Adjusted diluted earnings per share in the range of
$6.34 - $6.83 based on a fully diluted share count of 26.5 million shares. -
Net capital expenditures in the range of
$75 million to $85 million . -
Merchandise inventories in the range of
$450 to $475 million , down 10% to 15% versus last year. -
Free cash flow in excess of
$260 million versus previous guidance for free cash flow in excess of$250 million .
We are providing the following guidance for the second quarter:
-
Adjusted net revenues in the range of
$655 - $662 million , an increase of 6% - 7% versus last year. - Adjusted gross margin in the range of 40.5% to 40.7% and adjusted SG&A as a percentage of revenue in the range of 29.6% to 29.8%.
- Adjusted operating margin in the range of 10.8% - 11.1%.
-
Adjusted net income in the range of
$45 - $47 million . -
Adjusted diluted earnings per share in the range of
$1.70 - $1.77 based on a fully diluted share count of 26.5 million shares.
Last quarter, we introduced an Intermediate and Long-Term Outlook with expectations for accelerated revenue growth and continued margin expansion with line of sight to adjusted operating margins in the low-to-mid teens by 2021.
Based on investor feedback we are providing the following margin and leverage opportunities that would bridge to low-to-mid teens adjusted operating margins by Fiscal 2021:
- 150 - 200 basis points of expense savings and margin enhancement from our new operating platform.
- 150 - 200 basis points of margin expansion and SG&A leverage from our real estate transformation.
- 50 basis points from cycling the start-up costs from RH Hospitality.
- 50 basis points from neutralizing the earnings drag from Waterworks.
Additionally, we are updating our long-term targets to include a return on invested capital1 (ROIC) goal. As a result of our rapidly improving profitability and capital efficient operating and real estate strategies, we are now forecasting ROIC in excess of 30% by fiscal 2021, an increase from 22% expected in fiscal 2018 and 10% in fiscal 2017
We see a clear path to
Our long-term targets remain revenue growth of 8% - 12% and earnings growth of 15% - 20% annually
2018 - A Continued Focus on Execution, Architecture and Cash
As communicated, we will continue to focus on executing 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.
We expect revenues to accelerate into the second quarter and through the
second half of 2018 as we cycle last year’s inventory optimization
efforts. Additionally, the new RH Interiors and RH Modern Source Books
have been arriving in customer’s homes over the past several weeks. We
expect to benefit from the introduction of several innovative new
collections, and the incremental customer contact this year of
DeMonty has infused the Supply Chain and Call Center organizations with
dynamic new leadership from our Gallery teams. New Senior Vice President
of Customer Delight Centers,
The 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 in the majority of
our markets, doubling the productivity of our delivery teams. We are
also redesigning our call center network, closing a call center in
We expect our work to architect 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 our ongoing efforts 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 fully expect future
cash flow will be adequate to repay the outstanding principal of our
Over the last three quarters, we have substantially reduced our net debt to trailing twelve months Adjusted EBITDA from 5x at the end the second quarter fiscal 2017 to 3x at the end of the first quarter fiscal 2018. Based on the continued strong financial performance of our business driving higher Adjusted EBITDA, we are in a position to reduce this ratio to less than 2x at the end of fiscal 2018.
The strength of our business and the reduction in leverage we have achieved during the past three quarters puts us in a strong position to take advantage of the positive conditions in the capital markets. We currently have multiple financing alternatives available to us on favorable terms that could provide us with additional financial flexibility with respect to capital allocation.
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. We will continue to manage the business with a bias for earnings versus revenue growth, and will restrain ourselves from chasing low quality sales at the expense of profitability like many in our industry.
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
We plan to continue our quest to revolutionize physical retailing in
fiscal 2018 and will open four new Galleries this year in
With a modern steel and glass industrial structure rising up five floors
through the original historic brick facade, RH New York, the Gallery in
the Historic Meatpacking district, is an architectural masterpiece
located on what is becoming one of the most iconic corners of the city.
The 90,000 gross square feet of indoor and outdoor space is connected by
a soaring central atrium with stacked cast iron columns, a grand
staircase that features the art installation “Rain” by the renowned
RH
RH
2019 - A Pivot to High Quality, Sustainable Growth
We plan a return to our product and brand expansion strategy in 2019, 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, and look forward to unveiling them 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
We have developed a new prototype
We will continue to develop and open larger Bespoke Design Galleries in
the top metropolitan markets, and indigenous Bespoke Galleries in the
best second home markets where the wealthy and affluent visit and
vacation. Examples include the Hamptons,
We continue to evolve from a leasing to a development model that will
reduce occupancy costs and increase our return on capital. We currently
have two projects,
Additionally, due to the productivity and proof of concept of our recent new Galleries, we are able to negotiate capital light traditional leasing deals, where 65% to 100% of the capital requirement will be funded by the landlord, versus 50% previously. All of the above mentioned deal structures lead to lower capital requirements, and significantly higher returns on invested capital.
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 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, free cash flow, adjusted operating margin 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 second, third and fourth quarters of fiscal 2018 and for the fiscal
year 2018 as well as for intermediate and long term timeframes,
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, ration 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 a
massively more efficient operating platform that will enable us to
compete and win over the long-term; our belief that our work this past
year to consolidate our distribution center network from four facilities
to two, while streamlining operations throughout our supply chain, has
resulted in a significantly more efficient cost and working capital
model and that this new model will prove to be a long-term competitive
advantage that will separate and distinguish RH’s operating results for
years to come; our expectations for accelerated revenue growth and
continued margin expansion with line of sight to adjusted operating
margins in the low-to-mid teens by 2021, including by cycling the
start-up costs from RH Hospitality of approximately 50 - 70 basis,
neutralizing the earnings drag from Waterworks of approximately 40 - 60
basis points, cost savings and margin enhancement from our new operating
platform of approximately 150 - 200 basis points and gross margin
expansion and selling, general and administrative expense leverage from
our real estate transformation of approximately 150 - 200 basis points;
our forecast of ROIC in excess of 30% by fiscal 2021, an increase from
22% expected in fiscal 2018, as a result of our rapidly improving
profitability, and capital efficient operating and real estate
strategies; our focus on executing 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;
our expectation that revenues will accelerate into the second quarter
and through the second half of 2018 as we cycle last year’s inventory
optimization efforts; our expectation that we will benefit from the
introduction of several innovative new collections and the incremental
customer contact this year of RH Interiors in the Spring and RH Modern
in the Fall; our belief that we are building an operating platform and
customer culture that will leapfrog us far beyond the customer
experience and operating results that currently define our industry; our
expectation that our complete redesign of our home delivery network will
significantly increase the time product remains in its original
packaging, reduce returns and damages, and in the majority of our
markets, double the productivity of our delivery teams; our plan to
redesign our customer care center network, including closing a care
center in
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REVENUE METRICS |
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(Unaudited) |
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Three Months Ended |
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May 5, |
April 29, |
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| Stores as a percentage of net revenues [a] | 56 | % | 56 | % | |||
| Direct as a percentage of net revenues | 44 | % | 44 | % | |||
| Growth in net revenues: | |||||||
| Stores [a] | (1 | )% | 24 | % | |||
| Direct | (1 | )% | 23 | % | |||
| Total | (1 | )% | 23 | % | |||
| Comparable brand revenue growth | 1 | % | 9 | % | |||
| 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 $43.2 million and $56.1 million for the three months ended May 5, 2018 and April 29, 2017, respectively. | |
RETAIL GALLERY METRICS
(Unaudited)
As of
In addition, as of
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Three Months Ended |
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May 5, |
April 29, |
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Store Count |
Total Leased Selling |
Store Count |
Total Leased Selling |
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| (in thousands) | (in thousands) | ||||||||||||||
| Beginning of period | 83 | 981 | 85 | 912 | |||||||||||
| Retail Galleries opened: | |||||||||||||||
| Portland Design Gallery | 1 | 26.0 | — | — | |||||||||||
| RH Modern Dallas | 1 | 8.2 | — | — | |||||||||||
| Waterworks Scottsdale Showroom | 1 | 2.2 | — | — | |||||||||||
| Retail Galleries closed: | |||||||||||||||
| Portland legacy Gallery | (1 | ) | (4.7 | ) | — | — | |||||||||
| Waterworks Scottsdale Showroom | (1 | ) | (1.1 | ) | — | — | |||||||||
| End of period | 84 | 1,012 | 85 | 912 | |||||||||||
| Weighted-average leased selling square footage | 984 | 912 | |||||||||||||
| % Growth year over year | 8 | % | 26 | % | |||||||||||
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
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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(In thousands, except share and per share amounts) |
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(Unaudited) |
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| Three Months Ended | |||||||||||||
| May 5, 2018 |
% of Net Revenues |
April 29, 2017 |
% of Net Revenues |
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| Net revenues | $ | 557,406 | 100.0 | % | $ |
562,080 |
100.0 | % | |||||
| Cost of goods sold | 345,371 | 62.0 | % | 391,824 | 69.7 | % | |||||||
| Gross profit | 212,035 | 38.0 | % | 170,256 | 30.3 | % | |||||||
| Selling, general and administrative expenses | 158,434 | 28.4 | % | 163,360 | 29.1 | % | |||||||
| Income from operations | 53,601 | 9.6 | % | 6,896 | 1.2 | % | |||||||
| Interest expense—net | 17,035 | 3.1 | % | 12,179 | 2.1 | % | |||||||
| Income (loss) before income taxes | 36,566 | 6.5 | % | (5,283 | ) | (0.9 | )% | ||||||
| Income tax expense (benefit) | 8,507 | 1.5 | % | (1,913 | ) | (0.3 | )% | ||||||
| Net income (loss) | $ | 28,059 | 5.0 | % | $ | (3,370 | ) | (0.6 | )% | ||||
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Weighted-average shares used in computing basic
net income (loss) per share |
21,545,025 | 37,609,516 | |||||||||||
| Basic net income (loss) per share | $ | 1.30 | $ | (0.09 | ) | ||||||||
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Weighted-average shares used in computing diluted
net income (loss) per share |
25,230,228 | 37,609,516 | |||||||||||
| Diluted net income (loss) per share | $ | 1.11 | $ | (0.09 | ) | ||||||||
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(In thousands) |
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(Unaudited) |
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May 5, |
February 3, |
April 29, |
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| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 20,796 | $ | 17,907 | $ | 80,150 | |||||
| Merchandise inventories | 530,657 | 527,026 | 683,984 | ||||||||
| Asset held for sale | — | — | 8,179 | ||||||||
| Other current assets | 98,678 | 99,997 | 142,357 | ||||||||
| Total current assets | 650,131 | 644,930 | 914,670 | ||||||||
| Property and equipment—net | 811,369 |
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800,698 | 702,741 | |||||||
| Goodwill and intangible assets | 242,527 | 242,595 | 274,892 | ||||||||
| Other non-current assets | 44,934 | 44,643 | 56,083 | ||||||||
| Total assets | $ | 1,748,961 | $ | 1,732,866 | $ | 1,948,386 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
| Liabilities | |||||||||||
| Accounts payable and accrued expenses | $ | 264,173 | $ | 318,765 | $ | 233,395 | |||||
| Deferred revenue, customer deposits and other current liabilities | 232,323 | 200,570 | 210,526 | ||||||||
| Total current liabilities | 496,496 | 519,335 | 443,921 | ||||||||
| Asset based credit facility | 219,000 | 199,970 | — | ||||||||
| Term loan—net | 79,528 | 79,499 | — | ||||||||
| Convertible senior notes due 2019—net | 331,678 | 327,731 | 316,153 | ||||||||
| Convertible senior notes due 2020—net | 257,425 | 252,994 | 240,120 | ||||||||
| Financing obligations under build-to-suit lease transactions | 227,979 | 229,323 | 220,019 | ||||||||
| Other non-current obligations | 128,213 | 131,350 | 105,395 | ||||||||
| Total liabilities | 1,740,319 | 1,740,202 | 1,325,608 | ||||||||
| Stockholders’ equity (deficit) | 8,642 | (7,336 | ) | 622,778 | |||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 1,748,961 | $ | 1,732,866 | $ | 1,948,386 | |||||
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(In thousands) |
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(Unaudited) |
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| Three Months Ended | ||||||||
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May 5, |
April 29, |
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| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 28,059 | $ | (3,370 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 17,047 | 16,020 | ||||||
| Other non-cash items | 15,849 | 15,011 | ||||||
| Change in assets and liabilities—net of acquisition: | ||||||||
| Merchandise inventories | (4,032 | ) | 66,067 | |||||
| Accounts payable, accrued expenses and other | (51,608 | ) | 31,327 | |||||
| Net cash provided by operating activities | 5,315 | 125,055 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capital expenditures | (27,121 | ) | (21,173 | ) | ||||
| Proceeds from sale of assets held for sale—net | — | 4,900 | ||||||
| Net proceeds from investments | — | 175,801 | ||||||
| Net cash provided by (used in) investing activities | (27,121 | ) | 159,528 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net borrowings under asset based credit facility | 19,030 | — | ||||||
| Repayments under promissory and equipment security notes | (1,491 | ) | — | |||||
| Repurchases of common stock—including commissions | — | (300,140 | ) | |||||
| Net equity related transactions | 2,572 | 2,418 | ||||||
| Other financing activities | (3,319 | ) | (1,365 | ) | ||||
| Net cash provided by (used in) financing activities | 16,792 | (299,087 | ) | |||||
| Effects of foreign currency exchange rate translation | (62 | ) | (86 | ) | ||||
| Net decrease in cash and cash equivalents and restricted cash equivalents | (5,076 | ) | (14,590 | ) | ||||
| Cash and cash equivalents | ||||||||
| Beginning of period—cash and cash equivalents | 17,907 | 87,023 | ||||||
| Beginning of period—restricted cash equivalents (construction related deposits) | 12,498 | 31,850 | ||||||
| Beginning of period—cash and cash equivalents and restricted cash equivalents | 30,405 | 118,873 | ||||||
| End of period—cash and cash equivalents | 20,796 | 80,150 | ||||||
| End of period—restricted cash equivalents (construction related deposits) | 4,533 | 24,133 | ||||||
| End of period—cash and cash equivalents and restricted cash equivalents | $ | 25,329 | $ | 104,283 | ||||
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CALCULATION OF FREE CASH FLOW |
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(In thousands) |
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(Unaudited) |
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| Three Months Ended | ||||||||
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May 5, |
April 29, |
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| Net cash provided by operating activities | $ | 5,315 | $ | 125,055 | ||||
| Capital expenditures | (27,121 | ) | (21,173 | ) | ||||
| Payments on build-to-suit lease transactions | (3,207 | ) | (1,289 | ) | ||||
| Payments on capital leases | (112 | ) | (76 | ) | ||||
| Proceeds from sale of assets held for sale—net | — | 4,900 | ||||||
| Free cash flow [a] | $ | (25,125 | ) | $ | 107,417 | |||
| [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. | |
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RECONCILIATION OF GAAP NET INCOME (LOSS) TO ADJUSTED NET INCOME |
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(In thousands) |
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(Unaudited) |
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| Three Months Ended | ||||||||
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May 5, |
April 29, |
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| GAAP net income (loss) | $ | 28,059 | $ | (3,370 | ) | |||
| Adjustments (pre-tax): | ||||||||
| Cost of goods sold: | ||||||||
| Impact of inventory step-up [a] | 190 | 1,380 | ||||||
| Recall accrual [b] | (254 | ) | — | |||||
| Selling, general and administrative expenses: | ||||||||
| Post-acquisition related legal costs [c] | 1,915 | — | ||||||
| Distribution center closures [d] | (2,072 | ) | — | |||||
| Interest expense—net: | ||||||||
| Amortization of debt discount [e] | 7,272 | 6,715 | ||||||
| Subtotal adjusted items | 7,051 | 8,095 | ||||||
| Impact of income tax on adjusted items [f] | (1,656 | ) | (2,931 | ) | ||||
| Adjusted net income [g] | $ | 33,454 | $ | 1,794 | ||||
| [a] | Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks. | |
| [b] | Represents an adjustment related to certain product recalls. | |
| [c] | Represents legal expenses incurred in connection with the final purchase price of Waterworks. | |
| [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] | Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”) and for the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), we separated the 2019 Notes and 2020 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes and 2020 Notes over their respective terms. The equity components represent the difference between the proceeds from the issuance of the 2019 Notes and 2020 Notes and the fair value of the liability components of the 2019 Notes and 2020 Notes, respectively. Amounts are presented net of interest capitalized for capital projects of $0.6 million and $0.7 million during the three months ended May 5, 2018 and April 29, 2017, respectively. | |
| [f] | The adjustments for the three months ended May 5, 2018 and April 29, 2017 represent the tax effect of the adjusted items based on our effective tax rates of 23.3% and 36.2%, respectively. | |
| [g] | 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 | ||||||||
|
May 5, 2018 |
April 29, 2017 |
|||||||
| Diluted net income (loss) per share | $ | 1.11 | $ | (0.09 | ) | |||
| Pro forma diluted net income (loss) per share [a] | $ | 1.11 | $ | (0.09 | ) | |||
| EPS impact of adjustments (pre-tax) [b]: | ||||||||
| Amortization of debt discount | 0.29 | 0.18 | ||||||
| Post-acquisition related legal costs | 0.08 | — | ||||||
| Impact of inventory step-up | 0.01 | 0.04 | ||||||
| Distribution center closures | (0.08 | ) | — | |||||
| Recall accrual | (0.01 | ) | — | |||||
| Subtotal adjusted items | 0.29 | 0.22 | ||||||
| Impact of income tax items [b] | (0.07 | ) | (0.08 | ) | ||||
| Adjusted diluted net income per share [c] | $ | 1.33 | $ | 0.05 | ||||
| [a] | Pro forma diluted net loss per share for the three months ended April 29, 2017 is calculated based on GAAP net loss and diluted weighted-average shares of 37,879,107. | |
| [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 |
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|
RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT |
||||||||
|
(In thousands) |
||||||||
|
(Unaudited) |
||||||||
| Three Months Ended | ||||||||
|
May 5, |
April 29, |
|||||||
| Gross profit | $ | 212,035 | $ | 170,256 | ||||
| Impact of inventory step-up [a] | 190 | 1,380 | ||||||
| Recall accrual [a] | (254 | ) | — | |||||
| Adjusted gross profit [b] | $ | 211,971 | $ | 171,636 | ||||
| Net revenues | $ | 557,406 | $ | 562,080 | ||||
| Gross margin [c] | 38.0 | % | 30.3 | % | ||||
| Adjusted gross margin [c] | 38.0 | % | 30.5 | % | ||||
| [a] | Refer to table titled “Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income” and the related footnotes for additional information. | |
| [b] | Adjusted gross profit is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. 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 gross profit is included in this press release because management believes that adjusted gross profit 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] | Gross margin is defined as gross profit divided by net revenues. Adjusted gross margin is defined as adjusted gross profit divided by net revenues. | |
|
RH |
||||||||
|
RECONCILIATION OF NET INCOME (LOSS) TO OPERATING |
||||||||
|
INCOME AND ADJUSTED OPERATING INCOME |
||||||||
|
(In thousands) |
||||||||
|
(Unaudited) |
||||||||
| Three Months Ended | ||||||||
|
May 5, |
April 29, |
|||||||
| Net income (loss) | $ | 28,059 | $ | (3,370 | ) | |||
| Interest expense—net | 17,035 | 12,179 | ||||||
| Income tax expense (benefit) | 8,507 | (1,913 | ) | |||||
| Operating income | 53,601 | 6,896 | ||||||
| Post-acquisition related legal costs [a] | 1,915 | — | ||||||
| Impact of inventory step-up [a] | 190 | 1,380 | ||||||
| Distribution center closures [a] | (2,072 | ) | — | |||||
| Recall accrual [a] | (254 | ) | — | |||||
| Adjusted operating income [b] | $ | 53,380 | $ | 8,276 | ||||
| Net revenues | $ | 557,406 | $ | 562,080 | ||||
| Operating margin [c] | 9.6 | % | 1.2 | % | ||||
| Adjusted operating margin [c] | 9.6 | % | 1.5 | % | ||||
| [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 net revenues. | |
|
RH |
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|
RECONCILIATION OF NET INCOME (LOSS) TO EBITDA AND ADJUSTED EBITDA |
||||||||
|
(In thousands) |
||||||||
|
(Unaudited) |
||||||||
| Three Months Ended | ||||||||
|
May 5, |
April 29, |
|||||||
| Net income (loss) | $ | 28,059 | $ | (3,370 | ) | |||
| Depreciation and amortization | 17,047 | 16,020 | ||||||
| Interest expense—net | 17,035 | 12,179 | ||||||
| Income tax expense (benefit) | 8,507 | (1,913 | ) | |||||
| EBITDA [a] | 70,648 | 22,916 | ||||||
| Non-cash compensation [b] | 7,997 | 5,289 | ||||||
| Post-acquisition related legal costs [c] | 1,915 | — | ||||||
| Impact of inventory step-up [c] | 190 | 1,380 | ||||||
| Distribution center closures [c] | (2,072 | ) | — | |||||
| Recall accrual [c] | (254 | ) | — | |||||
| Adjusted EBITDA [a] | $ | 78,424 | $ | 29,585 | ||||
| [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 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 related to equity awards granted to employees. | |
| [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 | ||||||||
| May 5, | July 29, | |||||||
| 2018 | 2017 | |||||||
| Net income | $ | 33,609 | $ | 721 | ||||
| Depreciation and amortization | 71,162 | 63,606 | ||||||
| Interest expense—net | 67,426 | 49,626 | ||||||
| Goodwill impairment [a] | 33,700 | — | ||||||
| Loss on extinguishment of debt [b] | 4,880 | — | ||||||
| Income tax expense | 38,391 | 11,168 | ||||||
| EBITDA [m] | 249,168 | 125,121 | ||||||
| Non-cash compensation [c] | 53,417 | 51,296 | ||||||
| Recall accrual [d] | 7,453 | 9,348 | ||||||
| Asset impairment and lease losses [e] | 4,417 | 12,743 | ||||||
| Distribution center closures [f] | 3,723 | — | ||||||
| Post-acquisition related legal costs [g] | 1,915 | — | ||||||
| Impact of inventory step-up [h] | 1,337 | 5,294 | ||||||
| Anti-dumping exposure [i] | (2,202 | ) | — | |||||
| Gain on sale of building and land [j] | (2,119 | ) | (1,300 | ) | ||||
| Aircraft impairment [k] | — | 4,767 | ||||||
| Reorganization related costs [l] | — | 974 | ||||||
| Adjusted EBITDA [m] | $ | 317,109 | $ | 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. | |
| [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 an adjustment related to certain product recalls. | |
| [e] | Represents the impairments associated with RH Contemporary Art and RH Kitchen. | |
| [f] | 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. | |
| [g] | Represents legal expenses incurred in connection with the final purchase price of Waterworks. | |
| [h] | Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks. | |
| [i] | 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. | |
| [j] | Represents the gain on the sale of building and land of one of our owned retail Galleries. | |
| [k] | Represents the impairment recorded upon reclassification of aircraft as asset held for sale. | |
| [l] | Represents costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards. | |
| [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 May 5, 2018 | ||||||||||||||||||||
| As Reported |
% of Net |
Topic 606 |
Balances without |
% of Net |
||||||||||||||||
| Net revenues [a] | $ | 557,406 | 100.0 | % | $ | (7,610 | ) | $ | 549,796 | 100.0 | % | |||||||||
| Cost of goods sold [b] | 345,371 | 62.0 | % | (2,988 | ) | 342,383 | 62.3 | % | ||||||||||||
| Gross profit | 212,035 | 38.0 | % | (4,622 | ) | 207,413 | 37.7 | % | ||||||||||||
| Selling, general and administrative expenses [c] | 158,434 | 28.4 | % | 3,803 | 162,237 | 29.5 | % | |||||||||||||
| Income from operations | 53,601 | 9.6 | % | (8,425 | ) | 45,176 | 8.2 | % | ||||||||||||
| Interest expense—net | 17,035 | 3.1 | % | — | 17,035 | 3.1 | % | |||||||||||||
| Income before income taxes | 36,566 | 6.5 | % | (8,425 | ) | 28,141 | 5.1 | % | ||||||||||||
| Income tax expense [d] | 8,507 | 1.5 | % | (1,950 | ) | 6,557 | 1.2 | % | ||||||||||||
| Net income | $ | 28,059 | 5.0 | % | $ | (6,475 | ) | $ | 21,584 | 3.9 | % | |||||||||
| [a] | Adjustment to net revenues includes (i) $6.7 million associated with deferred revenue, (ii) $0.5 million associated with incentive payment amortization and (iii) $0.4 million associated with gift card breakage. | |
| [b] | Adjustment to costs of goods sold represents deferred cost of goods sold of $2.5 million and the impact of related shipping expenses of $0.5 million. | |
| [c] | Adjustment to selling, general and administrative expenses include a $4.9 million increase in advertising expense, partially offset by 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 23.3%. | |
The following table summarizes the impact of adopting Topic 606 on our condensed consolidated balance sheet:
| As of May 5, 2018 | |||||||||||
| As Reported |
Topic 606 |
Balances without |
|||||||||
| Other current assets | $ | 98,678 | $ | 27,652 | $ | 126,330 | |||||
| Other non-current assets | 44,934 | (6,561 | ) | 38,373 | |||||||
| Accounts payable and accrued expenses | 264,173 | (638 | ) | 263,535 | |||||||
| Deferred revenue, customer deposits and other current liabilities | 232,323 | 7,168 | 239,491 | ||||||||
| Stockholders’ equity | 8,642 | 14,561 | 23,203 | ||||||||
|
RH |
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|
FISCAL 2018 GUIDANCE BY QUARTER |
||||||||||
|
(In millions, except per share data) |
||||||||||
|
The Company is providing the following outlook for fiscal 2018: |
||||||||||
|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Fiscal Year |
||||||
|
Adjusted net revenues |
$557.4 [a] |
$655 - $662 | $640 - $652 | $678 - $699 |
$2,530 - $2,570 |
|||||
| % growth vs. prior year | (1)% | 6% - 7% | 8% - 10% |
8% - 11% [b] |
5% - 7% [b] |
|||||
|
Adjusted gross margin (% of net revenues) |
38.0% | 40.5% - 40.7% | 39.5% - 40.0% | 39.0% - 39.5% | 39.3% - 39.6% | |||||
| Adjusted SG&A (as % of net revenues) |
28.5% [a] |
29.6% - 29.8% | 31.6% - 32.0% | 25.1% - 25.5% | 28.6% - 28.9% | |||||
| Adjusted operating margin (% of net revenues) | 9.6% | 10.8% - 11.1% | 7.5% - 8.4% | 13.5% - 14.4% | 10.4% - 11.0% | |||||
| Adjusted net income | $33.5 | $45 - $47 | $28 - $33 | $61 - $67 | $168 - $181 | |||||
| Adjusted diluted EPS | $1.33 | $1.70 - $1.77 | $1.04 - $1.23 | $2.16 - $2.39 |
$6.34 - $6.83 |
|||||
|
[a] First quarter net revenues and SG&A as a percentage of net revenues are both shown on a GAAP basis. |
|
[b] On comparable 13-week to 13-week basis for fourth quarter 2018 and 52-week to 52-week basis for fiscal 2018. The extra week added approximately $42.6 million to fiscal 2017 net revenues. |
| Note: The Company’s adjusted net income does not include certain charges and costs. The adjustments to net revenues, gross margin, selling, general and administrative expenses, operating income, operating margin and net income in future periods are generally expected to be similar to the kinds of charges and costs excluded from such non-GAAP financial measures in prior periods, such as unusual non-cash and other compensation expense; one-time income tax expense or benefits; legal claim related expenses; recall accruals; reorganization costs including severance costs and related taxes; non-cash amortization of debt discount; and charges and costs in connection with the acquisition of Waterworks, among others. The exclusion of these charges and costs in future periods will have a significant impact on the Company’s adjusted net revenues, adjusted gross margin, adjusted selling, general and administrative expenses, adjusted operating income, adjusted operating margin and adjusted net income. The Company is not able to provide a reconciliation of the Company’s non-GAAP financial guidance to the corresponding GAAP measures without unreasonable effort because of the uncertainty and variability of the nature and amount of these future charges and costs. |
|
RH |
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|
ESTIMATED TOPIC 606 IMPACT TO FISCAL GUIDANCE 2018 BY QUARTER |
||||||||||
|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Fiscal Year |
||||||
|
Adjusted net revenues |
1.1% Increase | 0.1% Decrease | 0.1% Decrease | 0.7% Increase | 0.4% Increase | |||||
| Adjusted gross margin (% of net revenues) | 30 bps Increase | No impact | No impact | No impact | 10 bps Increase | |||||
| Adjusted SG&A (as % of net revenues) | 110 bps Decrease | 190 bps Increase | 220 bps Increase | 310 bps Decrease | 10 bps Increase | |||||
| Adjusted operating margin (% of net revenues) | 140 bps Increase | 190 bps Decrease | 220 bps Decrease | 310 bps Increase | No Impact | |||||
|
RH |
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|
ANTICIPATED IMPACT OF STOCK PRICE ON ADJUSTED DILUTED SHARES OUTSTANDING |
|||||||||||||||||||||||
|
(In millions, except stock price and per share data) |
|||||||||||||||||||||||
| Average Second Quarter Fiscal 2018 Stock Price | |||||||||||||||||||||||
| $ | 100.00 | $ | 120.00 | $ | 140.00 | $ | 160.00 | $ | 180.00 | $ | 200.00 | ||||||||||||
| Midpoint of Q2 2018 adjusted net income guidance | $ | 46.0 | $ | 46.0 | $ | 46.0 | $ | 46.0 | $ | 46.0 | $ | 46.0 | |||||||||||
| Q2 2018 adjusted diluted shares outstanding [a] | 26.01 | 26.80 | 27.38 | 27.83 | 28.31 | 29.01 | |||||||||||||||||
| Q2 2018 adjusted earnings per share | $ | 1.77 | $ | 1.72 | $ | 1.68 | $ | 1.65 | $ | 1.62 | $ | 1.59 | |||||||||||
|
|
|||||||||||||||||||||||
| Average Fiscal 2018 Stock Price | |||||||||||||||||||||||
| $ | 100.00 | $ | 120.00 | $ | 140.00 | $ | 160.00 | $ | 180.00 | $ | 200.00 | ||||||||||||
| Midpoint of fiscal 2018 adjusted net income guidance | $ | 174.5 | $ | 174.5 | $ | 174.5 | $ | 174.5 | $ | 174.5 | $ | 174.5 | |||||||||||
| Fiscal 2018 adjusted diluted shares outstanding [a] | 26.06 | 26.84 | 27.42 | 27.86 | 28.33 | 29.03 | |||||||||||||||||
| Fiscal 2018 adjusted earnings per share | $ | 6.70 | $ | 6.50 | $ | 6.36 | $ | 6.26 | $ | 6.16 | $ | 6.01 | |||||||||||
|
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 and 2020 convertible notes of $116.09 and $118.13, respectively. However, no additional shares will be included in our Adjusted Diluted Shares Outstanding calculation between $116.09 and $171.98 for our 2019 convertible notes, and between $118.13 and $189.00 for our 2020 convertible 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 and $189.00, we will incur dilution related to the 2019 convertible notes and 2020 convertible 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 0.134 million and 0.562 million incremental shares at $180.00 and $200.00 average share price, respectively, due to dilution from the convertible notes. | |
View source version on businesswire.com: https://www.businesswire.com/news/home/20180611006127/en/
Source:
RH
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations
and Strategy
cmclaughlin@rh.com