RH Reports Third Quarter Fiscal 2017 Financial Results
Company Confirms Preliminary Results Announced on
Third Quarter Highlights
- Net revenues increased 8% on top of a 3% increase last year despite an approximate 1% negative impact from Hurricanes Harvey and Irma.
- Comparable brand revenues increased 6% compared to a 6% decrease last year.
-
GAAP net income increased to
$13.2 million despite a negative impact of approximately$1.3 million from Hurricanes Harvey and Irma and includes a positive impact of approximately$2.5 million related to a lower effective tax rate. This compares to GAAP net income of$2.5 million last year. -
Adjusted net income increased to
$24.4 million despite a negative impact of approximately$1.3 million from Hurricanes Harvey and Irma and includes a positive impact of approximately$2.5 million related to a lower effective tax rate. This compares to adjusted net income of$8.0 million last year. -
GAAP diluted earnings per share increased to
$0.56 despite a negative impact of approximately$0.05 from Hurricanes Harvey and Irma and includes a positive impact of approximately$0.11 related to a lower effective tax rate. This compares to GAAP diluted earnings per share of$0.06 last year. -
Adjusted diluted earnings per share increased to
$1.04 despite a negative impact of approximately$0.05 from Hurricanes Harvey and Irma and includes a positive impact of approximately$0.11 related to a lower effective tax rate. This compares to adjusted diluted earnings per share of$0.20 last year.
To Our People, Partners, and Shareholders,
Our third quarter results are beginning to demonstrate the earnings
power of our new membership model, and a dramatically more efficient
operating platform. Adjusted net revenues for the quarter increased 8%,
despite a 1% negative impact from Hurricanes Harvey and Irma. Adjusted
diluted earnings per share increased 420%, and reached
Our core
Regarding our balance sheet, in the second quarter we completed our
share buyback program resulting in 20.2 million shares of
A Simplified and More Efficient Business Model and Operating Platform
Over the past 18 months, we transformed our business from a promotional to a membership model that is enhancing our brand, streamlining our operations, and improving the customer experience. Simultaneously we began the redesign of our supply chain network, rationalizing our product offer, and transitioning inventory into fewer facilities, creating a more capital efficient model.
With 95% of our core
We have previously announced the closure of our distribution facilities
in
Our New Design Galleries Have the Potential to Double our Retail Sales in Every Market
Our quest to revolutionize physical retailing by building inspiring
spaces that blur the lines between residential and retail, indoors and
outdoors, home and hospitality has the potential to double our retail
sales in every market. Our recent openings of RH Toronto, The Gallery in
Yorkdale, and RH West Palm,
As previously communicated, due to the disruption caused by the ongoing
street construction in the
Looking Forward, Driving High Quality, Sustainable Growth
Looking forward, we are forecasting margins to rise and costs to fall as we cycle our efforts to reduce inventory, and benefit from the efficiencies of our new operating model. As discussed at our Investor Day, we will remain focused on optimizing the profitability of our new platform, and will be managing the business with a bias for earnings versus revenue growth. We plan to restrain ourselves from chasing low quality revenues, and instead focus on building a superior operating model that will enable us to compete and win over the long-term. It is becoming clear to us, as we witness the continued failures of high growth - no profit, online pure plays, that the complexities and costs of scaling a furniture business will favor those who have control of their brand from concept to customer, build an integrated multi-channel platform with a superior logistics network, and offer the customer a compelling physical and digital experience.
To that point, in fiscal 2018, we believe we have a clear line of sight
toward achieving net revenue growth in the range of 8% to 9% on a
comparable 52-week basis and adjusted operating margins in the range of
9% to 10%, while generating free cash flow in excess of
We remain confident in reaching our long term goal of
Building a Brand with No Peer, and a Customer Experience That Cannot be Replicated Online
We do understand that many of the strategies we are pursuing - opening the largest specialty retail experiences in our industry while most are shrinking the size of their retail footprint and 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 platforms, instead allowing our brand to be defined by the taste, style, 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.
Lastly, 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 and Chief Executive Officer
Fourth Quarter and Fiscal 2017 Outlook
-
Fourth quarter adjusted net income in the range of
$37 million to $41 million despite an approximate$1.5 million negative impact as a result of the Company’s decision to delay the opening of itsNew York Design Gallery to Spring-Summer 2018. This outlook assumes an approximate$2 million tax benefit which corresponds to an expected 35% tax rate. Due to the recent increases in the Company’s stock price and its impact on the fully diluted share count, the Company is providing a table to assist in estimating diluted shares outstanding and adjusted diluted earnings per share. -
Fourth quarter net revenues in the range of
$655 million to $680 million despite a$9 million negative impact due to the Company’s decision to delay the opening of itsNew York Design Gallery . -
Fiscal 2017 adjusted net income in the range of
$83 million to $87 million despite the Company’s decision to delay the opening of itsNew York Design Gallery . -
Fiscal 2017 net capital expenditures in the range of
$120 million to$130 million . -
Fiscal 2017 free cash flow in the range of
$420 million to $440 million .
Preliminary 2018 Outlook
-
Net revenues in the range of
$2.58 billion to $2.62 billion , representing growth of 6% to 7% on a 52-week vs 53-week basis. On a comparable 52-week vs 52-week basis, net revenue growth is expected to be in the range of 8% to 9%. - Adjusted operating margin in the range of 9% to 10%.
-
Adjusted net income in the range of
$125 million to $145 million . -
Net capital expenditures in the range of
$65 million to $75 million . -
Free cash flow in excess of
$240 million .
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 and adjusted operating margin (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 statements related to: our future
financial outlook and guidance for the fourth quarter of fiscal 2017,
for fiscal 2017 and for fiscal 2018, including net revenues, adjusted
net revenues, adjusted net income, adjusted diluted earnings per share,
adjusted operating margins, free cash flow, leverage ratio, net revenue
growth and net capital expenditures; various estimates of diluted shares
outstanding and adjusted diluted earnings per share based on assumptions
about average stock prices; assumptions regarding the potential future
stock price of our common stock and expectations concerning stock price
appreciation; the impact of stock price and other factors like option
exercise levels on estimated diluted shares outstanding and on our
effective tax rate; the estimated reduction in adjusted net revenues and
adjusted net income as a result of the delayed opening of the
RH |
|||||||
REVENUE METRICS |
|||||||
(Unaudited) |
|||||||
Three Months Ended | |||||||
October 28, | October 29, | ||||||
2017 | 2016 | ||||||
Stores as a percentage of net revenues | 58 | % | 56 | % | |||
Direct as a percentage of net revenues | 42 | % | 44 | % | |||
Growth in net revenues: | |||||||
Stores | 12 | % | 9 | % | |||
Direct | 3 | % | -3 | % | |||
Total | 8 | % | 3 | % | |||
Comparable brand revenue growth | 6 | % | -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. | |||||||
RETAIL GALLERY METRICS
(Unaudited)
As of
In addition, as of
Three Months Ended | ||||||||||||||||
October 28, | October 29, | |||||||||||||||
2017 | 2016 | |||||||||||||||
Total Leased Selling | Total Leased Selling | |||||||||||||||
Store Count | Square Footage | Store Count | Square Footage | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Beginning of period | 85 | 915 | 84 | 776 | ||||||||||||
Retail Galleries opened: | ||||||||||||||||
Yorkdale next generation Design Gallery | 1 | 43.3 | — | — | ||||||||||||
Leawood next generation Design Gallery | — | — | 1 | 33.5 | ||||||||||||
Waterworks San Francisco Showroom | — | — | 1 | 5.8 | ||||||||||||
Austin next generation Design Gallery | — | — | 1 | 39.6 | ||||||||||||
Las Vegas next generation Design Gallery | — | — | 1 | 47.6 | ||||||||||||
Retail Galleries closed: | ||||||||||||||||
Toronto (Bay View) Legacy Gallery | (1 | ) |
|
(6.0 | ) | — | — | |||||||||
Toronto (Yonge Street) Legacy Gallery | (1 | ) | (8.6 | ) | — | — | ||||||||||
Kansas City Legacy Gallery | — | — | (1 | ) | (9.9 | ) | ||||||||||
Waterworks - Kansas Street, SF | — | — | (1 | ) | (2.0 | ) | ||||||||||
Austin Legacy Gallery | — | — | (1 | ) | (6.2 | ) | ||||||||||
End of period | 84 | 944 | 85 | 884 | ||||||||||||
% Growth | 7 | % | 30 | % | ||||||||||||
Weighted-average leased selling square footage |
918 | 816 | ||||||||||||||
% Growth | 12 | % | 31 | % | ||||||||||||
See the Company’s most recent Form 10-K and Form 10-Q filings for square footage definitions. | ||||||||||||||||
Total leased square footage as of October 28, 2017 and October 29, 2016 was 1,276,000 and 1,208,000, respectively. | ||||||||||||||||
Weighted-average leased square footage for the three months ended October 28, 2017 and October 29, 2016 was 1,250,000 and 1,146,000, respectively. | ||||||||||||||||
Retail sales per leased selling square foot for the three months ended October 28, 2017 and October 29, 2016 was $329 and $330, respectively. | ||||||||||||||||
RH | |||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||||||||||||||
(In thousands, except share and per share amounts) | |||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
October 28, | % of Net | October 29, | % of Net | October 28, | % of Net | October 29, | % of Net | ||||||||||||||||||||||
2017 | Revenues | 2016 | Revenues | 2017 | Revenues | 2016 | Revenues | ||||||||||||||||||||||
Net revenues | $ | 592,473 | 100.0 | % | $ | 549,328 | 100.0 | % | $ | 1,769,879 | 100.0 | % | $ | 1,548,165 | 100.0 | % | |||||||||||||
Cost of goods sold | 378,148 | 63.8 | % | 373,509 | 68.0 | % | 1,179,485 | 66.6 | % | 1,065,032 | 68.8 | % | |||||||||||||||||
Gross profit | 214,325 | 36.2 | % | 175,819 | 32.0 | % | 590,394 | 33.4 | % | 483,133 | 31.2 | % | |||||||||||||||||
Selling, general and administrative expenses |
171,163 | 28.9 | % | 160,433 | 29.2 | % | 528,213 | 29.9 | % |
457,207 |
29.5 | % | |||||||||||||||||
Income from operations | 43,162 | 7.3 | % | 15,386 | 2.8 | % | 62,181 | 3.5 | % | 25,926 | 1.7 | % | |||||||||||||||||
Other expenses | |||||||||||||||||||||||||||||
Interest expense—net | 18,915 | 3.2 | % | 11,091 | 2.0 | % | 45,496 | 2.5 | % | 32,528 | 2.1 | % | |||||||||||||||||
Loss on extinguishment of debt |
4,880 | 0.8 | % | — | — |
% |
4,880 | 0.3 | % | — | — |
% |
|||||||||||||||||
Total other expenses | 23,795 | 4.0 | % | 11,091 | 2.0 | % | 50,376 | 2.8 | % | 32,528 | 2.1 | % | |||||||||||||||||
Income (loss) before income taxes |
19,367 | 3.3 | % | 4,295 | 0.8 | % | 11,805 | 0.7 | % | (6,602 | ) | -0.4 | % | ||||||||||||||||
Income tax expense (benefit) | 6,216 | 1.1 | % | 1,778 | 0.3 | % | 9,886 | 0.6 | % | (2,567 | ) | -0.1 | % | ||||||||||||||||
Net income (loss) | $ | 13,151 | 2.2 | % | $ | 2,517 | 0.5 | % | $ | 1,919 | 0.1 | % | $ | (4,035 | ) | -0.3 | % | ||||||||||||
Weighted-average shares used in computing basic net income (loss) per share
|
21,221,848 | 40,730,059 | 29,076,556 | 40,653,091 | |||||||||||||||||||||||||
Basic net income (loss) per share |
$ | 0.62 | $ | 0.06 | $ | 0.07 | $ | (0.10 | ) | ||||||||||||||||||||
Weighted-average shares used in computing diluted net income (loss) per share
|
23,535,617 | 40,926,450 | 30,593,382 | 40,653,091 | |||||||||||||||||||||||||
Diluted net income (loss) per share
|
$ | 0.56 | $ | 0.06 | $ | 0.06 | $ | (0.10 | ) | ||||||||||||||||||||
RH | ||||||||||||||||
RECONCILIATION OF GAAP NET INCOME (LOSS) TO ADJUSTED NET INCOME | ||||||||||||||||
(In thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
GAAP net income (loss) | $ | 13,151 | $ | 2,517 | $ | 1,919 | $ | (4,035 | ) | |||||||
Adjustments (pre-tax): | ||||||||||||||||
Net revenues: | ||||||||||||||||
Recall accrual [a] | — | — | 3,813 | — | ||||||||||||
Cost of goods sold: | ||||||||||||||||
Recall accrual [a] | 3,552 | — | 4,315 | — | ||||||||||||
Impact of inventory step-up [b] | 248 | 1,786 | 2,108 | 5,187 | ||||||||||||
Distribution center closures [c] | 497 | — | 497 | — | ||||||||||||
Legal claim [d] | — | — | — | 7,729 | ||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Non-cash compensation [e] | — | — | 23,872 | 3,672 | ||||||||||||
Distribution center closures [c] | 1,365 | — | 1,365 | — | ||||||||||||
Recall accrual [a] | — | — | 157 | — | ||||||||||||
Gain on sale of building and land [f] | (819 | ) | — | (2,119 | ) | — | ||||||||||
Reorganization related costs [g] | — | 974 | — | 5,698 | ||||||||||||
Acquisition related costs [h] | — | — | — | 2,847 | ||||||||||||
Legal claim [d] | — | — | — | 972 | ||||||||||||
Other expenses: | ||||||||||||||||
Amortization of debt discount [i] | 6,879 | 6,629 | 20,384 | 19,550 | ||||||||||||
Loss on extinguishment of debt [j] | 4,880 | — | 4,880 | — | ||||||||||||
Subtotal adjusted items | 16,602 | 9,389 | 59,272 | 45,655 | ||||||||||||
Impact of income tax on adjusted items [k] | (5,329 | ) | (3,887 | ) | (15,272 | ) | (17,759 | ) | ||||||||
Adjusted net income [l] | $ | 24,424 | $ | 8,019 | $ | 45,919 | $ | 23,861 |
[a] | Represents costs and inventory charges associated with a product recall initiated in the second quarter of fiscal 2017, as well as an adjustment in the nine months ended October 28, 2017 of the recall accrual related to certain product recalls initiated in the fourth quarter of fiscal 2016. | |
[b] | Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks. | |
[c] | Represents severance expense and certain inventory transfer costs associated with two distribution center closures, one of which was completed in November 2017 and one which is expected to occur in January 2018. | |
[d] | Represents the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards. | |
[e] | Represents non-cash compensation charges related to a fully vested option grant made to Mr. Friedman in May 2017 and the fully vested option grants made in connection with our acquisition of Waterworks in May 2016. | |
[f] | Represents the gain on the sale of building and land. As we entered into a short-term lease agreement to lease the property subsequent to the sale, the total gain associated with the sale of this property was amortized over a five month period. | |
[g] | 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. | |
[h] | Represents costs incurred in connection with our acquisition of Waterworks including professional fees. | |
[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”) 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 expected lives. 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 $0.8 million and $0.6 million during the three months ended October 28, 2017 and October 29, 2016, respectively. Amounts are presented net of interest capitalized for capital projects of $2.3 million and $1.9 million during the nine months ended October 28, 2017 and October 29, 2016, respectively. | |
[j] | Represents the loss on extinguishment of debt related to the second lien term loan which was repaid in full in October 2017. | |
[k] | The adjustment for the three months ended October 28, 2017 represents the tax effect of the adjusted items based on our effective tax rate of 32.1%. The nine months ended October 28, 2017 includes an adjustment to calculate income tax expense at an adjusted tax rate of 35.4%, which is calculated based on the weighted-average fiscal 2017 quarterly adjusted effective tax rates. The adjustments for the three and nine months ended October 29, 2016 represent the tax effect of the adjusted items based on our effective tax rates of 41.4% and 38.9%, respectively. | |
[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 (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 | Nine Months Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Diluted net income (loss) per share | $ | 0.56 | $ | 0.06 | $ | 0.06 | $ | (0.10 | ) | |||||||
Pro forma diluted net income (loss) per share [a] | $ | 0.56 | $ | 0.06 | $ | 0.06 | $ | (0.10 | ) | |||||||
EPS impact of adjustments (pre-tax) [b]: | ||||||||||||||||
Non-cash compensation | $ | — | $ | — | $ | 0.78 | $ | 0.09 | ||||||||
Amortization of debt discount | 0.29 | 0.17 | 0.67 | 0.48 | ||||||||||||
Recall accrual | 0.15 | — | 0.27 | — | ||||||||||||
Loss on extinguishment of debt | 0.21 | — | 0.16 | — | ||||||||||||
Impact of inventory step-up | 0.01 | 0.04 | 0.07 | 0.13 | ||||||||||||
Distribution center closures | 0.08 | — | 0.06 | — | ||||||||||||
Gain on sale of building and land | (0.03 | ) | — | (0.07 | ) | — | ||||||||||
Legal claim | — | — | — | 0.21 | ||||||||||||
Reorganization related costs | — | 0.02 | — | 0.14 | ||||||||||||
Acquisition related costs | — | — | — | 0.07 | ||||||||||||
Subtotal adjusted items | 0.71 | 0.23 | 1.94 | 1.12 | ||||||||||||
Impact of income tax items [b] | (0.23 | ) | (0.09 | ) | (0.50 | ) | (0.44 | ) | ||||||||
Adjusted diluted net income per share [c] | $ | 1.04 | $ | 0.20 | $ | 1.50 | $ | 0.58 |
[a] | Pro forma diluted net loss per share for the nine months ended October 29, 2016 is calculated based on GAAP net loss and pro forma diluted weighted-average shares of 40,892,878. | |
[b] | Refer to table titled “Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income” and the related footnotes for additional information. | |
[c] | Adjusted diluted net income per share is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted diluted net income per share as net income (loss), adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance divided by the Company’s share count. Adjusted diluted net income per share is included in this press release because management believes that adjusted diluted net income per share provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. | |
RH | ||||||||||||||||
RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT | ||||||||||||||||
(In thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues | $ | 592,473 | $ | 549,328 | $ | 1,769,879 | $ | 1,548,165 | ||||||||
Recall accrual [a] | — | — | 3,813 | — | ||||||||||||
Adjusted net revenues [b] | $ | 592,473 | $ | 549,328 | $ | 1,773,692 | $ | 1,548,165 | ||||||||
Gross profit | $ | 214,325 | $ | 175,819 | $ | 590,394 | $ | 483,133 | ||||||||
Recall accrual [a] | 3,552 | — | 8,128 | — | ||||||||||||
Impact of inventory step-up [a] | 248 | 1,786 | 2,108 | 5,187 | ||||||||||||
Distribution center closures [a] | 497 | — | 497 | — | ||||||||||||
Legal claim [a] | — | — | — | 7,729 | ||||||||||||
Adjusted gross profit [b] | $ | 218,622 | $ | 177,605 | $ | 601,127 | $ | 496,049 | ||||||||
Gross margin [c] | 36.2 | % | 32.0 | % | 33.4 | % | 31.2 | % | ||||||||
Adjusted gross margin [c] | 36.9 | % | 32.3 | % | 33.9 | % | 32.0 | % |
[a] | Refer to table titled “Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income” and the related footnotes for additional information. | |
[b] | Adjusted net revenues and adjusted gross profit are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net revenues as net revenues, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define adjusted gross profit as gross profit, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net revenues and adjusted gross profit are included in this press release because management believes that adjusted net revenues and adjusted gross profit provide meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. | |
[c] | Gross margin is defined as gross profit divided by net revenues. Adjusted gross margin is defined as adjusted gross profit divided by adjusted net revenues. | |
RH | ||||||||||||||||
RECONCILIATION OF NET INCOME (LOSS) TO OPERATING | ||||||||||||||||
INCOME AND ADJUSTED OPERATING INCOME | ||||||||||||||||
(In thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 13,151 | $ | 2,517 | $ | 1,919 | $ | (4,035 | ) | |||||||
Interest expense—net | 18,915 | 11,091 | 45,496 | 32,528 | ||||||||||||
Loss on extinguishment of debt | 4,880 | — | 4,880 | — | ||||||||||||
Income tax expense (benefit) | 6,216 | 1,778 | 9,886 | (2,567 | ) | |||||||||||
Operating income | 43,162 | 15,386 | 62,181 | 25,926 | ||||||||||||
Non-cash compensation [a] | — | — | 23,872 | 3,672 | ||||||||||||
Recall accrual [a] | 3,552 | — | 8,285 | — | ||||||||||||
Impact of inventory step-up [a] | 248 | 1,786 | 2,108 | 5,187 | ||||||||||||
Distribution center closures [a] | 1,862 | — | 1,862 | — | ||||||||||||
Gain on sale of building and land [a] | (819 | ) | — | (2,119 | ) | — | ||||||||||
Legal claim [a] | — | — | — | 8,701 | ||||||||||||
Reorganization related costs [a] | — | 974 | — | 5,698 | ||||||||||||
Acquisition related costs [a] | — | — | — | 2,847 | ||||||||||||
Adjusted operating income [b] | $ | 48,005 | $ | 18,146 | $ | 96,189 | $ | 52,031 | ||||||||
Net revenues | $ | 592,473 | $ | 549,328 | $ | 1,769,879 | $ | 1,548,165 | ||||||||
Adjusted net revenues [c] | $ | 592,473 | $ | 549,328 | $ | 1,773,692 | $ | 1,548,165 | ||||||||
Operating margin [c] | 7.3 | % | 2.8 | % | 3.5 | % | 1.7 | % | ||||||||
Adjusted operating margin [c] | 8.1 | % | 3.3 | % | 5.4 | % | 3.4 | % |
[a] | Refer to table titled “Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income” and the related footnotes for additional information. | |
[b] | Adjusted 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 Gross Profit to Adjusted Gross Profit” and the related footnotes for a definition and reconciliation of adjusted net revenues. | |
RH | ||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||
(In thousands) | ||||||||||
(Unaudited) | ||||||||||
October 28, | January 28, | October 29, | ||||||||
2017 | 2017 | 2016 | ||||||||
As Revised [a] | ||||||||||
ASSETS | ||||||||||
Cash and cash equivalents | $ | 22,162 | $ | 87,023 | $ | 47,135 | ||||
Short-term investments | — | 142,677 | 170,153 | |||||||
Merchandise inventories | 557,345 | 752,304 | 776,586 | |||||||
Asset held for sale | — | 4,900 | — | |||||||
Other current assets | 109,488 | 151,353 | 149,639 | |||||||
Total current assets | 688,995 | 1,138,257 | 1,143,513 | |||||||
Long-term investments | — | 33,212 | 21,056 | |||||||
Property and equipment—net | 778,320 | 682,056 | 656,569 | |||||||
Goodwill and intangible assets | 276,279 | 274,360 | 276,568 | |||||||
Other non-current assets | 57,972 | 64,635 | 50,304 | |||||||
Total assets | $ | 1,801,566 | $ | 2,192,520 | $ | 2,148,010 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||
Liabilities | ||||||||||
Accounts payable and accrued expenses | $ | 252,569 | $ | 226,980 | $ | 222,788 | ||||
Deferred revenue, customer deposits and other current liabilities | 217,188 | 189,189 | 188,342 | |||||||
Total current liabilities | 469,757 | 416,169 | 411,130 | |||||||
Asset based credit facility | 341,000 | — | — | |||||||
Term loan—net | 79,471 | — | — | |||||||
Convertible senior notes due 2019—net | 323,828 | 312,379 | 308,649 | |||||||
Convertible senior notes due 2020—net | 248,633 | 235,965 | 231,876 | |||||||
Financing obligations under build-to-suit lease transactions | 230,259 | 203,015 | 193,277 | |||||||
Other non-current obligations | 133,894 | 105,123 | 100,900 | |||||||
Total liabilities | 1,826,842 | 1,272,651 | 1,245,832 | |||||||
Stockholders’ equity (deficit) | (25,276 | ) | 919,869 | 902,178 | ||||||
Total liabilities and stockholders’ equity (deficit) | $ | 1,801,566 | $ | 2,192,520 | $ | 2,148,010 |
[a] | During the fourth quarter of fiscal 2016 management determined that we had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in our consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents. The revision decreased cash and cash equivalents and accounts payable and accrued expenses by $8.3 million as of October 29, 2016. | |
RH | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
Nine Months Ended | ||||||||
October 28, | October 29, | |||||||
2017 | 2016 | |||||||
As Revised [a] | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | 1,919 | $ | (4,035 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization | 51,092 | 41,248 | ||||||
Other non-cash items | 74,516 | 53,611 | ||||||
Change in assets and liabilities—net of acquisition: | ||||||||
Merchandise inventories | 190,620 | (23,261 | ) | |||||
Accounts payable, accrued expenses and other | 68,615 | (86,548 | ) | |||||
Net cash provided by (used in) operating activities | 386,762 | (18,985 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Capital expenditures—including construction related deposits and purchase of trademarks and domain names |
(89,600 | ) | (108,145 | ) | ||||
Proceeds from sale of assets held for sale—net | 15,123 | — | ||||||
Net proceeds from (purchases of) investments | 175,801 | (39,133 | ) | |||||
Acquisition of business—net of cash acquired | — | (116,100 | ) | |||||
Net cash provided by (used in) investing activities | 101,324 | (263,378 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net borrowings under asset based credit facility | 341,000 | — | ||||||
Net borrowings under term loans | 80,000 | — | ||||||
Net borrowings under promissory and equipment security notes | 33,159 | — | ||||||
Debt issuance costs | (8,298 | ) | — | |||||
Repurchases of common stock—including commissions | (1,000,326 | ) | — | |||||
Net equity related transactions | 10,488 | (2,049 | ) | |||||
Other financing activities | (8,992 | ) | (262 | ) | ||||
Net cash used in financing activities | (552,969 | ) | (2,311 | ) | ||||
Effects of foreign currency exchange rate translation | 22 | 342 | ||||||
Net decrease in cash and cash equivalents | (64,861 | ) | (284,332 | ) | ||||
Cash and cash equivalents | ||||||||
Beginning of period | 87,023 | 331,467 | ||||||
End of period | $ | 22,162 | $ | 47,135 |
[a] | During the fourth quarter of fiscal 2016 management determined that we had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in our consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents. The revision decreased net cash provided by operating activities by $10.1 million for the nine months ended October 29, 2016. | |
RH | ||||||||
CALCULATION OF FREE CASH FLOW | ||||||||
(In thousands) | ||||||||
(Unaudited) | ||||||||
Nine Months Ended | ||||||||
October 28, | October 29, | |||||||
2017 | 2016 | |||||||
As Revised [a] | ||||||||
Net cash provided by (used in) operating activities | $ | 386,762 | $ | (18,985 | ) | |||
Capital expenditures—including construction related deposits and purchase of trademarks and domain names |
(89,600 | ) | (108,145 | ) | ||||
Payments on build-to-suit lease transactions | (8,734 | ) | — | |||||
Payments on capital leases | (258 | ) | (262 | ) | ||||
Proceeds from sale of assets held for sale—net | 15,123 | — | ||||||
Free cash flow [b] | $ | 303,293 | $ | (127,392 | ) |
[a] | During the fourth quarter of fiscal 2016 management determined that we had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in our consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents. The revision decreased net cash provided by operating activities by $10.1 million for the nine months ended October 29, 2016. | |
[b] | Free cash flow is calculated as net cash provided by (used in) operating activities and net proceeds from sale of assets held for sale, less capital expenditures, construction related deposits, purchase of trademarks and domain names, 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 | ||||
FOURTH QUARTER AND FISCAL 2017 OUTLOOK | ||||
(In millions, except per share data) | ||||
RH’s fiscal 2017 will include 53 weeks compared to the prior fiscal year which included 52 weeks. The Company is providing the following outlook for the fourth quarter and fiscal 2017: |
||||
Fourth Quarter | Fiscal Year | |||
2017 | 2017 | |||
Adjusted net revenues | $655 – $680 | $2,429 – $2,454 | ||
% growth vs. prior year | 11% – 15% | 14% – 15% | ||
Adjusted gross margin (% of net revenues) |
37.1% – 37.4% |
34.7% – 34.9% |
||
Adjusted selling, general, and administrative expenses (% of net revenues) |
26.8% – 27.0% |
28.0% – 28.1% |
||
Adjusted operating income |
$66 – $72 |
$162 – $169 |
||
% growth vs. prior year |
30% – 42% |
58% – 64% |
||
Adjusted operating margin (% of net revenues) |
10.1% – 10.6% |
6.7% – 6.9% |
||
Adjusted net income | $37 – $41 |
$83 – $87 |
||
% growth vs. prior year | 33% – 48% |
60% – 68% |
||
Capital expenditures | $120 – $130 | |||
Asset sales |
$15 | |||
Free cash flow | $420 – $440 |
Note: RH’s fiscal 2017 will include 53 weeks compared to the prior fiscal year which included 52 weeks. The extra week in fiscal 2017 is expected to add approximately $44 million to $46 million in net revenues for the fourth quarter and fiscal year. 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 | |||||||||||||||||||||||||||
ANTICIPATED IMPACT OF STOCK PRICE ON DILUTED SHARES OUTSTANDING | |||||||||||||||||||||||||||
(In millions, except per share data) | |||||||||||||||||||||||||||
Average Fourth Quarter 2017 Stock Price | |||||||||||||||||||||||||||
$ | 80.00 | $ | 100.00 | $ | 120.00 | $ | 140.00 | $ | 160.00 | $ | 180.00 | $ | 200.00 | ||||||||||||||
Midpoint of Q4 2017 adjusted net income guidance | $ | 39.0 | $ | 39.0 | $ | 39.0 | $ | 39.0 | $ | 39.0 | $ | 39.0 | $ | 39.0 | |||||||||||||
Q4 2017 Diluted shares outstanding | 24.6 | 25.7 | 26.6 | 27.2 | 27.7 | 30.2 | 31.3 | ||||||||||||||||||||
Q4 2017 Adjusted earnings per share | $ | 1.59 | $ | 1.52 | $ | 1.47 | $ | 1.43 | $ | 1.41 | $ | 1.29 | $ | 1.25 | |||||||||||||
Implied Average Fiscal 2017 Stock Price | |||||||||||||||||||||||||||
$ |
61.00 |
$ | 66.00 | $ | 71.00 | $ | 76.00 | $ | 81.00 | $ | 86.00 | $ | 91.00 | ||||||||||||||
Midpoint of Fiscal 2017 adjusted net income guidance | $ |
85.0 |
$ |
85.0 |
$ |
85.0 |
$ |
85.0 |
$ |
85.0 |
$ |
85.0 |
$ |
85.0 |
|||||||||||||
Fiscal 2017 Diluted shares outstanding | 29.1 | 29.5 | 29.9 | 30.2 | 30.6 | 30.9 | 31.2 | ||||||||||||||||||||
Fiscal 2017 Adjusted earnings per share | $ |
2.92 |
$ |
2.88 |
$ |
2.84 |
$ |
2.81 |
$ |
2.78 |
$ |
2.75 |
$ |
2.72 |
Note: The table above is intended to demonstrate the impact of increasing stock prices on our diluted shares outstanding due to 1) additional in-the-money options and 2) the higher cost of acquired shares under the treasury stock method. At stock prices in excess of $172, we will incur dilution related to the convertible notes 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. |
View source version on businesswire.com: http://www.businesswire.com/news/home/20171205006351/en/
Source:
RH
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations
and Strategy
cmclaughlin@rh.com