RH Reports Record Third Quarter Fiscal 2018 Results
Company Raises Q4 and FY18 Guidance and Long-Term Targets
RH Leadership will host a Q&A conference call at
THIRD QUARTER HIGHLIGHTS
Q3 GAAP DILUTED EPS
Q3 ADJUSTED
DILUTED EPS
Q3 GAAP NET INCOME
Q3 ADJUSTED
NET INCOME
Q3 GAAP OPERATING MARGIN 7.4% vs. 7.3% LY
Q3 ADJUSTED
OPERATING MARGIN 10.3% vs. 8.1% LY
Q3 GAAP NET REVENUES +7% vs. +8% LY
Q3 ADJUSTED NET
REVENUES +8% vs. +8% LY
Q3 COMPARABLE BRAND REVENUE +4% ON TOP OF +6% LY
COMPANY RAISES Q4 and FY18 GUIDANCE AND LONG-TERM TARGETS
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 third quarter results demonstrate the strength of the RH brand, our commitment to earnings growth, the power of our new business model, and our continued success revolutionizing physical retailing.
Adjusted net income for the quarter increased 92% to
GAAP net revenue growth accelerated from Q2 to Q3 and increased 7%
versus Q3 2017 on top of an 8% increase last year. Adjusted net revenues
for the quarter increased 8% to
Comparable brand revenues increased 4% in the third quarter on top of a 6% increase last year. Adjusted for last year’s inventory reduction efforts, comparable brand revenues increased 6.5%.
Both our comparable brand and net revenues were negatively impacted by
approximately 1 point due to slower special order receipts from
Our results reflect strong full price selling, higher outlet margins, and continued cost benefits from our new operating platform.
We generated
As articulated since the beginning of the year, we are managing the business with a bias for earnings versus revenue growth in fiscal 2018. We continue to restrain ourselves from chasing low quality sales at the expense of profitability, and remain focused on optimizing our new business model and building a platform that will enable us to disrupt and redefine the luxury lifestyle market for years to come.
Raising Fourth Quarter and Fiscal 2018 Guidance
As a result of our exceptional third quarter results and the continued evolution of our new business model, we are raising fourth quarter and fiscal 2018 revenue, adjusted operating income, adjusted net income, and adjusted diluted earnings per share guidance for a fourth time.
We are increasing fourth quarter revenue guidance to a range of
We are also increasing fiscal 2018 revenue guidance to a range of
As a reminder, our new fiscal 2018 adjusted net income guidance of
I would also point out that our return on invested capital is now expected to reach approximately 29% in fiscal 2018.
Our detailed updated guidance for the fourth quarter and fiscal 2018 are provided in a table with our financial results attached to this letter.
Once Again Increasing Long-Term Targets and Providing Preliminary Fiscal 2019 Guidance
We are once again raising our long-term targets as the earnings power and capital efficiency of our new operating model continues to evolve.
As mentioned last quarter, we believed that our target of achieving low to mid-teens adjusted operating margins and return on invested capital (ROIC)1 in excess of 30% by fiscal 2021 would happen sooner rather than later as the earnings power of our new model has proven to be greater than previously anticipated. As a result, last quarter we moved those targets forward by a full year, from fiscal 2021 to fiscal 2020.
Since last quarter we have completed a revolutionary redesign of our organization, closed an additional 500,000 square foot distribution center facility, and continued to reduce capital requirements for current and future new Galleries by improving deal economics and lowering construction costs.
As it relates to the redesign of the organization, the leadership team
spent the past nine months conceptualizing a new more streamlined and
collaborative structure designed to break down the silos and bureaucracy
that build up and slow down most companies as they grow. While we expect
cost savings of approximately
Our continued efforts to reduce inventories and redesign our
distribution center and reverse logistics network enabled us to close a
500,000 square foot distribution facility in
The combined
We’ve also made further improvements to our real estate development model, and continue to reduce capital requirements for future Galleries by improving deal economics and lowering construction costs. While all of our new Galleries scheduled to open in fiscal 2019 are under construction, we were able to lower capital requirements for three of the five new Galleries planned for next year, and the vast majority of future projects.
As a result of the above, we are once again moving our long-term targets forward another full year, and now expect to reach low-to-mid teens operating margins and return on invested capital of approximately 35% by fiscal 2019.
Correspondingly, we are providing preliminary guidance for fiscal 2019 and new long-term targets as follows:
Preliminary guidance for fiscal 2019
-
Net revenues in the range of
$2.72 to $2.82 billion , an increase of 8% to 12% - Adjusted operating margins in the range of 13.0% to 14.0%
-
Adjusted net income in the range of
$250 to $290 million -
Adjusted earnings per share in the range of
$9.30 to $10.70 - Return on invested capital (ROIC) of approximately 35%
- Adjusted diluted shares outstanding of approximately 27 million and an effective tax rate of 20%
New long-term targets
- Net revenue growth of 8% to 12% annually
- Adjusted operating margins in the mid-to-high teens
- Adjusted earnings growth of 15% to 20% annually
- Return on invested capital (ROIC) in excess of 50%
We continue to see a clear path to
Despite RH’s industry-leading performance, it is clear that prioritizing earnings over revenue growth this past year has compressed our earnings multiple and weighed on our stock price. While the market has rewarded top line growth at the expense of earnings, we believe many have overlooked what our team has accomplished in a very short period of time.
We spent years imagining a model that reflects the qualities and
characteristics of three businesses we study and greatly admire: LVMH,
Like LVMH, we are building a luxury platform, and in a similar fashion,
we are beginning to demonstrate that we too can be rewarded with luxury
brand margins that are double those of competitors targeting broader
markets. Also, like LVMH, we believe that we will continue to benefit
from a growing market as a result of the compounding wealth effect. In
the past twelve years alone the stock market is up in excess of 80% from
its previous 2007 high prior to the great recession, and similarly
households with incomes in excess of
Similar to
Akin to
We believe the model we are building will result in
As I mentioned last quarter, never in my 40 plus years in the retail
industry have I seen an organization as clear and focused on optimizing
a business as
Our View of the Housing Market
While the luxury housing market has sequentially slowed throughout 2018, our revenues have sequentially accelerated, despite cycling inventory reduction efforts and managing the business with a bias for earnings versus revenue growth, clearly demonstrating our ability to gain market share. We believe we can continue to gain share even if market conditions remain soft in higher end housing.
There is also concern of an abundance of new luxury housing inventory
scheduled to come on the market in 2019 primarily in
Despite the data pointing to a slowing housing market, we continue to be confident in our plans to pivot back to growth in 2019, as we return to our product and brand expansion strategy, and accelerate our real estate transformation. We are also encouraged by a range of other positive macro economic factors including low unemployment, strong GDP growth, near record stock market levels and interest rates that are still low by historical standards.
Update on China Tariffs
As it relates to
The combination of being the only luxury furniture brand with scale, and having control of our product from concept to customer creates multiple competitive advantages as it relates to purchasing and pricing power versus the highly fragmented market we are disrupting.
2018 - A Continued Focus on Execution, Architecture and Cash
As we near the completion of our second year focused on executing a new business model, architecting a new operating platform and maximizing cash flow by increasing revenues and earnings while decreasing inventory and capital spending, our results are demonstrating that we are building a disruptive brand and business that will continue to gain profitable market share for years to come.
While most in our industry are closing or downsizing stores, we remain committed to our quest of revolutionizing physical retailing. We have proven our ability to double the retail sales in our markets with legacy stores while more than doubling our profitability. Our progress in fiscal 2018 includes the opening RH Portland and RH Nashville in the first half of the year, and the opening of two very unique and diverse retail experiences, RH New York and RH Yountville, in September. We continue to be pleased with the performance of our new Galleries and now have six Galleries with our integrated hospitality experience.
RH
The work being led by
As we did in fiscal 2017, we continued to 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.
Regarding our balance sheet, we expect future cash flows will be
adequate to repay the outstanding principal of our
To ensure financial flexibility and optionality, we completed a zero
coupon
During the third quarter, our Board of Directors approved a
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, and accelerate our retail estate transformation.
President, Chief Creative & Merchandising Officer
We also plan to increase our investment in RH Interior Design with a
goal of building the leading interior design firm in
As previously mentioned, our plan is to accelerate our real estate
transformation, opening 5 to 7 new Galleries per year, up from 3 to 5
per year. In fiscal 2019, we are planning to open 5 new Galleries,
including
Regarding our ongoing quest to revolutionize physical retailing and the
evolving nature of our real estate transformation,
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. Examples of target
secondary markets include
Third, we will continue to develop and open larger Bespoke Design
Galleries in the top metropolitan markets, similar to those we have
opened 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 indigenous
Bespoke Galleries include the Hamptons,
Like our evolving multi-tier Gallery strategy, Dave and his team 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 14 potential 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 Bespoke Design
Galleries in
As a result of the above, we feel confident that we can return to our long-term revenue growth targets of 8% to 12% annually, and possibly grow at a faster rate when we begin our international expansion.
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 expectations regarding free cash flow including the
amounts of free cash flow that we expect to generate in future time
periods; our adjustment of our year end net debt to adjusted twelve
months EBITDA forecast; our expectations regarding returns on invested
capital (ROIC) in future time periods; our plans regarding managing the
business; our plan to pivot back to high quality, sustainable growth in
fiscal 2019; our goal of optimizing our new business model and building
a platform that will enable us to disrupt and redefine the luxury
lifestyle market for years to come; all statements regarding future
financial or operating performance including our financial outlook and
guidance including our fourth quarter and fiscal 2018 guidance; our
expectation regarding the benefits of the revolutionary redesign of our
organization; our expectation that the closure of our distribution
facility in
RH |
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REVENUE METRICS |
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(Unaudited) |
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Three Months Ended | ||||||||
November 3, |
October 28, |
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Stores as a percentage of net revenues [a] | 58 | % | 58 | % | ||||
Direct as a percentage of net revenues | 42 | % | 42 | % | ||||
Growth in net revenues: | ||||||||
Stores [a] | 8 | % | 12 | % | ||||
Direct | 7 | % | 3 | % | ||||
Total | 7 | % | 8 | % | ||||
Comparable brand revenue growth | 4 | % | 6 | % | ||||
See the Company’s most recent Form 10-K and Form 10-Q filings for the definitions of stores, direct, and comparable brand revenue. |
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[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 $47.2 million and $41.2 million for the three months ended November 3, 2018 and October 28, 2017, respectively. |
RH |
RETAIL GALLERY METRICS |
(Unaudited) |
As of November 3, 2018, the Company operated a total of 86 retail Galleries consisting of 20 Design Galleries, 43 legacy Galleries, 2 RH Modern Galleries and 6 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms throughout the United States and in the U.K. This compares to a total of 84 retail Galleries consisting of 15 Design Galleries, 48 legacy Galleries, 1 RH Modern Gallery and 5 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms throughout the United States and in the U.K., as of October 28, 2017. |
In addition, as of November 3, 2018, the Company operated 37 outlet stores compared to 31 as of October 28, 2017. |
Three Months Ended | ||||||||||||||
November 3, |
October 28, |
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Store Count |
Total Leased Selling |
Store Count |
Total Leased Selling |
|||||||||||
(in thousands) | (in thousands) | |||||||||||||
Beginning of period | 85 | 1,053 | 85 | 915 | ||||||||||
Retail Galleries opened: | ||||||||||||||
NY Meatpacking Design Gallery | 1 | 50.5 | — | — | ||||||||||
Yountville Design Gallery | 1 | 6.7 | — | — | ||||||||||
Toronto (Yorkdale) Design Gallery | — | — | 1 | 43.3 | ||||||||||
Retail Galleries closed: | ||||||||||||||
NY Flatiron legacy Gallery | (1 | ) | (21.4 | ) | — | — | ||||||||
Toronto (Bay View) legacy Gallery | — | — | (1 | ) | (6.0 | ) | ||||||||
Toronto (Yonge Street) legacy Gallery | — | — | (1 | ) | (8.6 | ) | ||||||||
End of period | 86 | 1,089 | 84 | 944 | ||||||||||
Weighted-average leased selling square footage | 1,069 | 918 | ||||||||||||
% Growth year over year | 16 | % | 12 | % |
See the Company’s most recent Form 10-K and Form 10-Q filings for square footage definitions. |
Total leased square footage as of November 3, 2018 and October 28, 2017 was 1,467,000 and 1,276,000, respectively. |
Weighted-average leased square footage for the three months ended November 3, 2018 and October 28, 2017 was 1,439,000 and 1,250,000, respectively. |
Retail sales per leased selling square foot for the three months ended November 3, 2018 and October 28, 2017 was $302 and $329, respectively. |
RH |
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
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(In thousands, except share and per share amounts) |
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(Unaudited) |
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
November 3, |
% of Net |
October 28, |
% of Net |
November 3, |
% of Net |
October 28, |
% of Net |
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Net revenues | $ | 636,558 | 100.0 | % | $ | 592,473 | 100.0 | % | $ | 1,834,762 | 100.0 | % | $ | 1,769,879 | 100.0 | % | ||||||||||
Cost of goods sold | 382,047 | 60.0 | % | 378,148 | 63.8 | % | 1,096,616 | 59.8 | % | 1,179,485 | 66.6 | % | ||||||||||||||
Gross profit | 254,511 | 40.0 | % | 214,325 | 36.2 | % | 738,146 | 40.2 | % | 590,394 | 33.4 | % | ||||||||||||||
Selling, general and administrative expenses |
207,495 | 32.6 | % | 171,163 | 28.9 | % | 552,154 | 30.1 | % | 528,213 | 29.9 | % | ||||||||||||||
Income from operations | 47,016 | 7.4 | % | 43,162 | 7.3 | % | 185,992 | 10.1 | % | 62,181 | 3.5 | % | ||||||||||||||
Other expenses | ||||||||||||||||||||||||||
Interest expense—net | 19,371 | 3.1 | % | 18,915 | 3.2 | % | 53,886 | 2.9 | % | 45,496 | 2.5 | % | ||||||||||||||
Loss on extinguishment of debt | — | 0.0 | % | 4,880 | 0.8 | % | 917 | 0.0 | % | 4,880 | 0.3 | % | ||||||||||||||
Total other expenses | 19,371 | 3.1 | % | 23,795 | 4.0 | % | 54,803 | 2.9 | % | 50,376 | 2.8 | % | ||||||||||||||
Income before income taxes | 27,645 | 4.3 | % | 19,367 | 3.3 | % | 131,189 | 7.2 | % | 11,805 | 0.7 | % | ||||||||||||||
Income tax expense | 5,234 | 0.8 | % | 6,216 | 1.1 | % | 16,677 | 0.9 | % | 9,886 | 0.6 | % | ||||||||||||||
Net income | $ | 22,411 | 3.5 | % | $ | 13,151 | 2.2 | % | $ | 114,512 | 6.2 | % | $ | 1,919 | 0.1 | % | ||||||||||
Weighted-average shares used in
computing basic net income per share |
22,082,141 | 21,221,848 | 21,850,955 | 29,076,556 | ||||||||||||||||||||||
Basic net income per share | $ | 1.01 | $ | 0.62 | $ | 5.24 | $ | 0.07 | ||||||||||||||||||
Weighted-average shares used in
computing diluted net income per share |
27,703,319 | 23,535,617 | 26,810,035 | 30,593,382 | ||||||||||||||||||||||
Diluted net income per share | $ | 0.81 | $ | 0.56 | $ | 4.27 | $ | 0.06 |
RH |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(In thousands) |
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(Unaudited) |
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November 3, |
February 3, |
October 28, |
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ASSETS | |||||||||||||
Cash and cash equivalents | $ | 7,755 | $ | 17,907 | $ | 22,162 | |||||||
Merchandise inventories | 566,117 | 527,026 | 557,345 | ||||||||||
Other current assets | 120,166 | 99,997 | 109,488 | ||||||||||
Total current assets | 694,038 | 644,930 | 688,995 | ||||||||||
Property and equipment—net | 856,230 | 800,698 | 778,320 | ||||||||||
Goodwill and intangible assets | 242,487 | 242,595 | 276,279 | ||||||||||
Other non-current assets | 50,570 | 44,643 | 57,972 | ||||||||||
Total assets | $ | 1,843,325 | $ | 1,732,866 | $ | 1,801,566 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||
Liabilities | |||||||||||||
Accounts payable and accrued expenses | $ | 306,860 | $ | 318,765 | $ | 252,569 | |||||||
Convertible senior notes due 2019—net | 339,707 | — | — | ||||||||||
Deferred revenue, customer deposits and other current liabilities | 218,506 | 200,570 | 217,188 | ||||||||||
Total current liabilities | 865,073 | 519,335 | 469,757 | ||||||||||
Asset based credit facility | 107,500 | 199,970 | 341,000 | ||||||||||
Term loans—net | — | 79,499 | 79,471 | ||||||||||
Convertible senior notes due 2019—net | — | 327,731 | 323,828 | ||||||||||
Convertible senior notes due 2020—net | 266,506 | 252,994 | 248,633 | ||||||||||
Convertible senior notes due 2023—net | 244,944 | — | — | ||||||||||
Financing obligations under build-to-suit lease transactions | 220,708 | 229,323 | 230,259 | ||||||||||
Other non-current obligations | 106,574 | 131,350 | 133,894 | ||||||||||
Total liabilities | 1,811,305 | 1,740,202 | 1,826,842 | ||||||||||
Stockholders’ equity (deficit) | 32,020 | (7,336 | ) | (25,276 | ) | ||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 1,843,325 | $ | 1,732,866 | $ | 1,801,566 |
RH |
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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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Nine Months Ended | ||||||||||
November 3, |
October 28, |
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CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
Net income | $ | 114,512 | $ | 1,919 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 53,180 | 51,092 | ||||||||
Other non-cash items | 57,426 | 77,516 | ||||||||
Change in assets and liabilities: | ||||||||||
Merchandise inventories | (39,815 | ) | 190,620 | |||||||
Accounts payable, accrued expenses and other | (57,711 | ) | 68,941 | |||||||
Net cash provided by operating activities | 127,592 | 390,088 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
Capital expenditures | (104,403 | ) | (104,233 | ) | ||||||
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 | (104,403 | ) | 86,691 | |||||||
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 | (92,470 | ) | 341,000 | |||||||
Net borrowings (repayments) under term loans | (80,000 | ) | 77,000 | |||||||
Net borrowings (repayments) under promissory and equipment security notes | (31,974 | ) | 33,159 | |||||||
Debt issuance costs | — | (8,298 | ) | |||||||
Repurchases of common stock—including commissions | (145,182 | ) | (1,000,326 | ) | ||||||
Net equity related transactions | 26,880 | 10,488 | ||||||||
Other financing activities | (4,688 | ) | (8,992 | ) | ||||||
Net cash used in financing activities | (39,619 | ) | (555,969 | ) | ||||||
Effects of foreign currency exchange rate translation | (136 | ) | 22 | |||||||
Net decrease in cash and cash equivalents and restricted cash equivalents | (16,566 | ) | (79,168 | ) | ||||||
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 | 7,755 | 22,162 | ||||||||
End of period—restricted cash equivalents (construction related deposits) | 993 | 13,737 | ||||||||
End of period—cash and cash equivalents and restricted cash equivalents | $ | 8,748 | $ | 35,899 |
RH |
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CALCULATION OF FREE CASH FLOW |
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(In thousands) |
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(Unaudited) |
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Nine Months Ended | ||||||||||
November 3, |
October 28, |
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Net cash provided by operating activities | $ | 127,592 | $ | 390,088 | ||||||
Capital expenditures | (104,403 | ) | (104,233 | ) | ||||||
Payments on build-to-suit lease transactions | (7,733 | ) | (8,734 | ) | ||||||
Borrowing on build-to-suit lease transactions | 3,539 | — | ||||||||
Payments on capital leases | (494 | ) | (258 | ) | ||||||
Proceeds from sale of assets held for sale—net | — | 15,123 | ||||||||
Free cash flow [a] | $ | 18,501 | $ | 291,986 |
[a] | Free cash flow is calculated as net cash provided by operating activities, net proceeds from sale of assets held for sale, and borrowings under build-to-suit transactions, 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 |
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RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME |
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(In thousands) |
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(Unaudited) |
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Three Months Ended | Nine Months Ended | |||||||||||||||||
November 3, |
October 28, |
November 3, |
October 28, |
|||||||||||||||
GAAP net income | $ | 22,411 | $ | 13,151 | $ | 114,512 | $ | 1,919 | ||||||||||
Adjustments (pre-tax): | ||||||||||||||||||
Net revenues: | ||||||||||||||||||
Recall accrual [a] | 1,948 | — | 3,801 | 3,813 | ||||||||||||||
Cost of goods sold: | ||||||||||||||||||
Distribution center closures [b] | 1,478 | 497 | 1,478 | 497 | ||||||||||||||
Impact of inventory step-up [c] | — | 248 | 380 | 2,108 | ||||||||||||||
Recall accrual [a] | 1,738 | 3,552 | (1,778 | ) | 4,315 | |||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||||
Reorganization related costs [d] | 7,564 | 1,029 | 9,285 | 1,029 | ||||||||||||||
Lease losses [e] | 3,411 | — | 3,411 | — | ||||||||||||||
Recall accrual [a] | 300 | — | 645 | 157 | ||||||||||||||
Distribution center closures [b] | 2,372 | 336 | 300 | 336 | ||||||||||||||
Legal settlement [f] | — | — | (5,289 | ) | — | |||||||||||||
Executive non-cash compensation [g] | — | — | — | 23,872 | ||||||||||||||
Gain on sale of building and land [h] | — | (819 | ) | — | (2,119 | ) | ||||||||||||
Other expenses: | ||||||||||||||||||
Amortization of debt discount [i] | 11,283 | 6,879 | 27,555 | 20,384 | ||||||||||||||
Loss on extinguishment of debt [j] | — | 4,880 | 917 | 4,880 | ||||||||||||||
Subtotal adjusted items | 30,094 | 16,602 | 40,705 | 59,272 | ||||||||||||||
Impact of income tax items [k] | (5,679 | ) | (5,329 | ) | (7,503 | ) | (15,272 | ) | ||||||||||
Adjusted net income [l] | $ | 46,826 | $ | 24,424 | $ | 147,714 | $ | 45,919 |
[a] | Represents a reduction in net revenues, increase in cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments and insurance recoveries related to product recalls. | ||
[b] | Represents disposals of inventory and property and equipment, lease related charges, inventory transfer costs and other costs associated with distribution center closures. | ||
[c] | Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks. | ||
[d] | Represents severance costs and related taxes associated with reorganizations, including severance related to the closure of distribution centers and the Dallas customer call center as part of our supply chain reorganization. | ||
[e] | Represents an additional lease related charge due to the remeasurement of the lease loss liability for RH Contemporary Art resulting from an update to both the timing and the amount of future estimated lease related cash inflows. | ||
[f] | Represents a favorable legal settlement, net of related legal expenses. | ||
[g] | Represents non-cash compensation charges related to a fully vested option grant made to Mr. Friedman in May 2017. | ||
[h] | Represents the gain on the sale of building and land of one of our previously owned retail Galleries. | ||
[i] | 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”), for 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 expected lives. 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 $0.7 million and $0.8 million during the three months ended November 3, 2018 and October 28, 2017, respectively. Amounts are presented net of interest capitalized for capital projects of $2.1 million and $2.3 million during the nine months ended November 3, 2018 and October 28, 2017, respectively. | ||
[j] | 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, as well as the second lien term loan which was repaid in full in October 2017. | ||
[k] | The adjustments for the three months ended November 3, 2018 and October 28, 2017 represent the tax effect of the adjusted items based on our effective tax rates of 18.9% and 32.1%, respectively. The nine months ended November 3, 2018 and October 28, 2017 include an adjustment to calculate income tax expense at adjusted tax rates of 14.1% and 35.4%, respectively, which is calculated based on the weighted-average fiscal 2018 and fiscal 2017 quarterly effective tax rates. | ||
[l] | 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, 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 PER SHARE TO |
||||||||||||||||||
ADJUSTED DILUTED NET INCOME PER SHARE |
||||||||||||||||||
(Unaudited) |
||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
November 3, |
October 28, |
November 3, |
October 28, |
|||||||||||||||
Diluted net income per share | $ | 0.81 | $ | 0.56 | $ | 4.27 | $ | 0.06 | ||||||||||
Pro forma diluted net income per share [a] | $ | 0.83 | $ | 0.56 | $ | 4.33 | $ | 0.06 | ||||||||||
EPS impact of adjustments (pre-tax) [b]: | ||||||||||||||||||
Amortization of debt discount | 0.42 | 0.29 | 1.04 | 0.67 | ||||||||||||||
Reorganization related costs | 0.28 | 0.04 | 0.35 | 0.03 | ||||||||||||||
Lease losses | 0.12 | — | 0.14 | — | ||||||||||||||
Recall accrual | 0.15 | 0.15 | 0.10 | 0.27 | ||||||||||||||
Distribution center closures | 0.14 | 0.04 | 0.07 | 0.03 | ||||||||||||||
Loss on extinguishment of debt | — | 0.21 | 0.03 | 0.16 | ||||||||||||||
Impact of inventory step-up | — | 0.01 | 0.01 | 0.07 | ||||||||||||||
Legal settlement | — | — | (0.20 | ) | — | |||||||||||||
Executive non-cash compensation | — | — | — | 0.78 | ||||||||||||||
Gain on sale of building and land | — | (0.03 | ) | — | (0.07 | ) | ||||||||||||
Subtotal adjusted items | 1.11 | 0.71 | 1.54 | 1.94 | ||||||||||||||
Impact of income tax items [b] | (0.21 | ) | (0.23 | ) | (0.29 | ) | (0.50 | ) | ||||||||||
Adjusted diluted net income per share [c] | $ | 1.73 | $ | 1.04 | $ | 5.58 | $ | 1.50 |
[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 November 3, 2018 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 27,048,517, which excludes dilution related to the 2019 Notes and 2020 Notes of 654,802 shares. Pro forma diluted net income per share for the nine months ended November 3, 2018 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 26,454,345, which excludes dilution related to the 2019 Notes and 2020 Notes of 355,690 shares. | ||
[b] | Refer to table titled “Reconciliation of GAAP Net Income 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, 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 | Nine Months Ended | |||||||||||||||||
November 3, |
October 28, |
November 3, |
October 28, |
|||||||||||||||
Net revenues | $ | 636,558 | $ | 592,473 | $ | 1,834,762 | $ | 1,769,879 | ||||||||||
Recall accrual [a] | 1,948 | — | 3,801 | 3,813 | ||||||||||||||
Adjusted net revenues [b] | $ | 638,506 | $ | 592,473 | $ | 1,838,563 | $ | 1,773,692 | ||||||||||
Gross profit | $ | 254,511 | $ | 214,325 | $ | 738,146 | $ | 590,394 | ||||||||||
Recall accrual [a] | 3,686 | 3,552 | 2,023 | 8,128 | ||||||||||||||
Distribution center closures [a] | 1,478 | 497 | 1,478 | 497 | ||||||||||||||
Impact of inventory step-up [a] | — | 248 | 380 | 2,108 | ||||||||||||||
Adjusted gross profit [b] | $ | 259,675 | $ | 218,622 | $ | 742,027 | $ | 601,127 | ||||||||||
Gross margin [c] | 40.0 | % | 36.2 | % | 40.2 | % | 33.4 | % | ||||||||||
Adjusted gross margin [c] | 40.7 | % | 36.9 | % | 40.4 | % | 33.9 | % |
[a] | Refer to table titled “Reconciliation of GAAP Net Income 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 TO OPERATING INCOME |
||||||||||||||||||
AND ADJUSTED OPERATING INCOME |
||||||||||||||||||
(In thousands) |
||||||||||||||||||
(Unaudited) |
||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
November 3, |
October 28, |
November 3, |
October 28, |
|||||||||||||||
Net income | $ | 22,411 | $ | 13,151 | $ | 114,512 | $ | 1,919 | ||||||||||
Interest expense—net | 19,371 | 18,915 | 53,886 | 45,496 | ||||||||||||||
Loss on extinguishment of debt | — | 4,880 | 917 | 4,880 | ||||||||||||||
Income tax expense | 5,234 | 6,216 | 16,677 | 9,886 | ||||||||||||||
Operating income | 47,016 | 43,162 | 185,992 | 62,181 | ||||||||||||||
Reorganization related costs [a] | 7,564 | 1,029 | 9,285 | 1,029 | ||||||||||||||
Lease losses [a] | 3,411 | — | 3,411 | — | ||||||||||||||
Recall accrual [a] | 3,986 | 3,552 | 2,668 | 8,285 | ||||||||||||||
Distribution center closures [a] | 3,850 | 833 | 1,778 | 833 | ||||||||||||||
Impact of inventory step-up [a] | — | 248 | 380 | 2,108 | ||||||||||||||
Legal settlement [a] | — | — | (5,289 | ) | — | |||||||||||||
Executive non-cash compensation [a] | — | — | — | 23,872 | ||||||||||||||
Gain on sale of building and land [a] | — | (819 | ) | — | (2,119 | ) | ||||||||||||
Adjusted operating income [b] | $ | 65,827 | $ | 48,005 | $ | 198,225 | $ | 96,189 | ||||||||||
Net revenues | $ | 636,558 | $ | 592,473 | $ | 1,834,762 | $ | 1,769,879 | ||||||||||
Adjusted net revenues [c] | $ | 638,506 | $ | 592,473 | $ | 1,838,563 | $ | 1,773,692 | ||||||||||
Operating margin [c] | 7.4 | % | 7.3 | % | 10.1 | % | 3.5 | % | ||||||||||
Adjusted operating margin [c] | 10.3 | % | 8.1 | % | 10.8 | % | 5.4 | % |
[a] | Refer to table titled “Reconciliation of GAAP Net Income 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 TO EBITDA AND ADJUSTED EBITDA |
|||||||||||||||||
(In thousands) |
|||||||||||||||||
(Unaudited) |
|||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
November 3, |
October 28, |
November 3, |
October 28, |
||||||||||||||
Net income | $ | 22,411 | $ | 13,151 | $ | 114,512 | $ | 1,919 | |||||||||
Depreciation and amortization | 18,377 | 18,546 | 53,180 | 51,092 | |||||||||||||
Interest expense—net | 19,371 | 18,915 | 53,886 | 45,496 | |||||||||||||
Loss on extinguishment of debt | — | 4,880 | 917 | 4,880 | |||||||||||||
Income tax expense | 5,234 | 6,216 | 16,677 | 9,886 | |||||||||||||
EBITDA [a] | 65,393 | 61,708 | 239,172 | 113,273 | |||||||||||||
Non-cash compensation [b] | 3,685 | 6,763 | 17,916 | 42,929 | |||||||||||||
Reorganization related costs [c] | 7,564 | 1,029 | 9,285 | 1,029 | |||||||||||||
Lease losses [c] | 3,411 | — | 3,411 | — | |||||||||||||
Recall accrual [c] | 3,986 | 3,552 | 2,668 | 8,285 | |||||||||||||
Distribution center closures [c] | 3,850 | 833 | 1,778 | 833 | |||||||||||||
Impact of inventory step-up [c] | — | 248 | 380 | 2,108 | |||||||||||||
Legal settlement [c] | — | — |
(5,289 |
) |
— | ||||||||||||
Gain on sale of building and land [c] | — | (819 | ) | — | (2,119 | ) | |||||||||||
Adjusted EBITDA [a] | $ | 87,889 | $ | 73,314 | $ |
269,321 |
$ | 166,338 |
[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 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 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 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 | ||||||||||
November 3, |
July 29, |
|||||||||
Net income | $ | 114,773 | $ | 721 | ||||||
Depreciation and amortization | 72,223 | 63,606 | ||||||||
Interest expense—net | 70,960 | 49,626 | ||||||||
Goodwill impairment [a] | 33,700 | — | ||||||||
Loss on extinguishment of debt [b] | 917 | — | ||||||||
Income tax expense | 34,762 | 11,168 | ||||||||
EBITDA [c] | 327,335 | 125,121 | ||||||||
Non-cash compensation [d] | 25,696 | 51,296 | ||||||||
Reorganization related costs [e] | 9,205 | 974 | ||||||||
Asset impairment and lease losses [f] | 7,828 | 12,743 | ||||||||
Distribution center closures [g] | 5,791 | — | ||||||||
Recall accrual [h] | 2,090 | 9,348 | ||||||||
Impact of inventory step-up [i] | 799 | 5,294 | ||||||||
Legal settlement [j] | (5,289 | ) | — | |||||||
Anti-dumping exposure [k] | (2,202 | ) | — | |||||||
Gain on sale of building and land [l] | — | (1,300 | ) | |||||||
Aircraft impairment [m] | — | 4,767 | ||||||||
Adjusted EBITDA [c] |
$ | 371,253 | $ | 208,243 |
[a] | Represents goodwill impairment related to the Waterworks reporting unit. | ||
[b] | 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. | ||
[c] | Refer to footnote [a] within table titled “Reconciliation of Net Income to EBITDA and Adjusted EBITDA.” | ||
[d] | 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. | ||
[e] | Represents severance costs and related taxes associated with reorganizations, including severance related to the closure of distribution centers and the Dallas customer call center as part of our supply chain reorganization. | ||
[f] | Represents the impairments associated with RH Contemporary Art and RH Kitchen. | ||
[g] | Represents disposals of inventory and property and equipment, lease related charges, inventory transfer costs, and other costs associated with distribution center closures. | ||
[h] | Represents a reduction in net revenues, increase in cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments and insurance recoveries related to product recalls. | ||
[i] | Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks. | ||
[j] | Represents a favorable legal settlement, net of related legal expenses. | ||
[k] | 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. | ||
[l] | Represents the gain on the sale of building and land of one of our previously owned retail Galleries. | ||
[m] | Represents the impairment recorded upon reclassification of aircraft as asset held for sale. |
RH |
TOPIC 606 IMPACT OF ADOPTION |
(In thousands) |
(Unaudited) |
We adopted ASU 2014-09 (“Topic 606”), which pertains to revenue recognition, on February 4, 2018. |
The adoption of Topic 606 had the most material impact on the timing of advertising expense recognition related to direct response advertising, including costs associated with the Company’s Source Books. Under Topic 606, the Company will recognize expense associated with the Source Books upon the delivery of the Source Books to the carrier. Prior to adoption of Topic 606, costs associated with Source Books were capitalized and amortized over their expected period of future benefit. |
The following table summarizes the impact of adopting Topic 606 on our condensed consolidated statement of income: |
Three Months Ended November 3, 2018 | ||||||||||||||||||
As Reported |
% of Net |
Topic 606 |
Balances without |
% of Net Revenues |
||||||||||||||
Net revenues [a] | $ | 636,558 | 100.0 | % | $ | (1,066 | ) | $ | 635,492 | 100.0 | % | |||||||
Cost of goods sold [b] | 382,047 | 60.0 | % | (80 | ) | 381,967 | 60.1 | % | ||||||||||
Gross profit | 254,511 | 40.0 | % | (986 | ) | 253,525 | 39.9 | % | ||||||||||
Selling, general and administrative expenses [c] | 207,495 | 32.6 | % | (11,693 | ) | 195,802 | 30.8 | % | ||||||||||
Income from operations | 47,016 | 7.4 | % | 10,707 | 57,723 | 9.1 | % | |||||||||||
Other expenses | ||||||||||||||||||
Interest expense—net | 19,371 | 3.1 | % | — | 19,371 | 3.0 | % | |||||||||||
Loss on extinguishment of debt | — | 0.0 | % | — | — | 0.0 | % | |||||||||||
Total other expenses | 19,371 | 3.1 | % | — | 19,371 | 3.0 | % | |||||||||||
Income before income taxes | 27,645 | 4.3 | % | 10,707 | 38,352 | 6.0 | % | |||||||||||
Income tax expense [d] | 5,234 | 0.8 | % | 2,015 | 7,249 | 1.2 | % | |||||||||||
Net income | $ | 22,411 | 3.5 | % | $ | 8,692 | $ | 31,103 | 4.9 | % |
[a] | Topic 606 adjustment to net revenues includes (i) $0.6 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) $0.4 million increase associated with membership revenue. | ||
[b] | Topic 606 adjustment to costs of goods sold represents deferred cost of goods sold and the impact of related shipping expenses of $0.1 million. | ||
[c] | Topic 606 adjustment to selling, general and administrative expenses includes a $10.5 million decrease in advertising expense, gift card breakage of $0.7 million and incentive payment amortization of $0.5 million. | ||
[d] | Topic 606 adjustment to income tax expense represents the tax effect of the adjustments based on our effective tax rate of 18.9%. | ||
The following table summarizes the impact of adopting Topic 606 on certain line items of our condensed consolidated balance sheet: |
As of November 3, 2018 | ||||||||||||
As Reported |
Topic 606 |
Balances without |
||||||||||
Other current assets | $ | 120,166 | $ | 46,972 | $ | 167,138 | ||||||
Other non-current assets | 50,570 | (6,561 | ) | 44,009 | ||||||||
Accounts payable and accrued expenses | 306,860 | (789 | ) | 306,071 | ||||||||
Deferred revenue, customer deposits and other current liabilities | 218,506 | 8,320 | 226,826 | |||||||||
Stockholders’ equity | 32,020 | 32,880 | 64,900 |
RH |
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] | $642.7 | $638.5 | $680 - $690 | $2,519 - $2,529 | |||||||
% growth vs. prior year | (1)% | 4% | 8% | 8% - 10% [b] | 5% [b] | |||||||
Adjusted gross margin (% of net revenues) | 38.0% | 42.1% | 40.7% | 39.5% - 40.0% | 40.1% - 40.3% | |||||||
Adjusted SG&A (as % of net revenues) | 28.5% [a] | 29.8% | 30.4% | 24.6% - 24.8% | 28.2% - 28.3% | |||||||
Adjusted operating margin (% of net revenues) | 9.6% | 12.3% | 10.3% | 14.8% - 15.3% | 11.9% - 12.0% | |||||||
Adjusted net income | $33.5 | $67.4 | $46.8 | $71.5 - $75.4 | $219.2 - $223.1 | |||||||
Adjusted diluted EPS | $1.33 | $2.49 | $1.73 | $2.75 - $2.90 | $8.33 - $8.47 | |||||||
Merchandise inventories | $475 - $495 | |||||||||||
Capital expenditures—net of asset sales | $75 - $85 | |||||||||||
Free cash flow | $260+ |
[a] | First quarter net revenues and SG&A as a percentage of net revenues are shown on a GAAP basis. | ||
[b] | On comparable 13-week to 13-week basis for fourth quarter 2018 and 52-week to 52-week basis for fiscal 2018. The extra week added approximately $42.6 million to fiscal 2017 net revenues. |
Note: The Company’s adjusted net income does not include certain charges and costs. The adjustments to net revenues, gross margin, selling, general and administrative expenses, operating income, operating margin and net income in future periods are generally expected to be similar to the kinds of charges and costs excluded from such non-GAAP financial measures in prior periods, such as unusual non-cash and other compensation expense; one-time income tax expense or benefits; legal claim related expenses; recall accruals; reorganization costs including severance costs and related taxes; non-cash amortization of debt discount; and charges and costs in connection with the acquisition of Waterworks, among others. The exclusion of these charges and costs in future periods will have a significant impact on the Company’s adjusted net revenues, adjusted gross margin, adjusted selling, general and administrative expenses, adjusted operating income, adjusted operating margin and adjusted net income. The Company is not able to provide a reconciliation of the Company’s non-GAAP financial guidance to the corresponding GAAP measures without unreasonable effort because of the uncertainty and variability of the nature and amount of these future charges and costs. |
RH |
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ESTIMATED TOPIC 606 IMPACT TO FISCAL 2018 GUIDANCE BY QUARTER |
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First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Fiscal Year |
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Topic 606 net revenues | 1.1% Increase | 0.4% Increase | 0.2% Decrease | 0.7% Increase | 0.5% Increase | |||||||
Topic 606 adjusted gross margin (% of net revenues) | 30 bps Increase | 10 bps Increase | 10 bps Increase | 10 bps Increase | 10 bps Increase | |||||||
Topic 606 adjusted SG&A (as % of net revenues) | 110 bps Decrease | 170 bps Increase | 180 bps Increase | 220 bps Decrease | 10 bps Increase | |||||||
Topic 606 adjusted operating margin (% of net revenues) [a] | 140 bps Increase | 160 bps Decrease | 170 bps Decrease | 230 bps Increase | No Impact |
[a] | Topic 606 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 160 basis points decrease in the third quarter fiscal 2018, approximately 240 basis points increase in the fourth quarter fiscal 2018 and no impact on fiscal 2018. |
RH |
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ANTICIPATED IMPACT OF STOCK PRICE ON ADJUSTED DILUTED SHARES OUTSTANDING |
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(In millions, except stock price and per share data) |
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Average Fourth Quarter Fiscal 2018 Stock Price | ||||||||||||||||||||
$ | 100.00 | $ | 120.00 | $ | 140.00 | $ | 160.00 | $ | 180.00 | $ | 200.00 | |||||||||
Midpoint of Q4 2018 adjusted net income guidance | $ | 73.5 | $ | 73.5 | $ | 73.5 | $ | 73.5 | $ | 73.5 | $ | 73.5 | ||||||||
Q4 2018 adjusted diluted shares outstanding [a] | 24.91 | 25.58 | 26.06 | 26.42 | 26.85 | 27.52 | ||||||||||||||
Q4 2018 adjusted earnings per share | $ | 2.95 | $ | 2.87 | $ | 2.82 | $ | 2.78 | $ | 2.74 | $ | 2.67 | ||||||||
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 | $ | 221.2 | $ | 221.2 | $ | 221.2 | $ | 221.2 | $ | 221.2 | $ | 221.2 | ||||||||
Fiscal 2018 adjusted diluted shares outstanding [a] | 26.43 | 26.59 | 26.71 | 26.80 | 27.01 | 27.50 | ||||||||||||||
Fiscal 2018 adjusted earnings per share | $ | 8.37 | $ | 8.32 | $ | 8.28 | $ | 8.25 | $ | 8.19 | $ | 8.04 |
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 0.134 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/20181203005949/en/
Source:
Cammeron McLaughlin
SVP, Investor Relations and Strategy
(415)
945-4998
cmclaughlin@rh.com