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Restoration Hardware, Inc. Reports First Quarter Results

CORTE MADERA, Calif., May 25 /PRNewswire-FirstCall/ -- Restoration Hardware, Inc. (Nasdaq: RSTO) today announced its financial results for the first quarter ended April 29, 2006. Earnings were consistent with the Company's guidance issued on March 30, 2006. Results include the following:

First Quarter ended April 29, 2006

-- Net revenue for the first quarter increased 14 percent to $133.4 million compared to net revenue of $117.5 million for the same period last year.

-- Comparable store sales increased 4.0 percent for the first quarter against a 5.0 percent increase for the same period last year.

-- Direct-to-customer revenue increased 29 percent to $42.3 million in the first quarter compared to a 50 percent increase in the same period last year.

-- Loss from operations improved to $3.5 million for the first quarter compared to a loss from operations of $4.3 million for the same period last year. The loss from operations for the first quarter of fiscal 2006 included a $0.9 million non-cash charge associated with the expensing of stock options as required by SFAS 123R during the quarter.

-- The net loss for the first quarter was $4.9 million, inclusive of the $0.9 million non-cash charge associated with the expensing of stock options required under SFAS 123R. The fiscal 2006 first quarter results did not include any income tax benefit as a result of the Company's establishment of a valuation allowance against the Company's net deferred tax asset. In the same period last year, the net loss was $3.1 million inclusive of a net $2.1 million tax benefit.

-- Net loss per share in the first quarter was $0.13. The net loss includes a non-cash charge of approximately $0.02 per share associated with the expensing of stock options required under SFAS 123R. In the same period last year, the loss was $0.09 per share, inclusive of recording a tax benefit of $0.06 per share.

-- Inventory was $194.6 million at the end of the first quarter compared to $144.2 million in the same period last year due to planned growth and the acceleration of in-transit orders for the second quarter as part of our efforts to improve in-stock positions for seasonal transitions. This has created a variance in the timing comparison of year over year inventory levels at the end of each quarter, but does not effect overall inventory investments for the year. The Company expects to end the year with inventories up 5 to 10 percent year over year versus a sales increase of 18 to 22 percent.

Gary Friedman, the Company's President, Chief Executive Officer and Chairman, stated, "We are pleased with our results for the quarter as we significantly improved our operating results year over year. Our direct revenues grew 29 percent in the quarter on top of a 50 percent increase in the same period last year due in part to customer response to our first category extension, the Restoration Hardware outdoor catalog introduced in March. Our retail business delivered a solid 4.0 percent comparable store increase on top of a 5.0 percent increase in the first quarter last year. The 4.0 percent comparable store sales increase was 'revenue deferral neutral' as the expected pick up in comparable store sales of 2 to 3 percent from a reduction in revenue and order deferral was not realized due to a greater than anticipated revenue deferral at the end of the first quarter due to the strength of our furniture business."

Mr. Friedman continued, "Our business continues to be healthy as sales trends accelerate in the second quarter. We expect retail comparable store sales to increase in the mid single-digits versus a 5.6 percent increase last year and direct to customer sales to increase 35-40 percent against a 50 percent increase last year. We remain on-track against our objective of full- year revenue growth of 18 to 22 percent and operating margins of 1.5 percent to 2.0 percent, inclusive of the estimated impact of adopting SFAS 123R."

Guidance

The Company provides the following guidance for the second quarter 2006:

-- Total revenue growth of 17 to 20 percent over the second quarter last year.

-- Increase in comparable store sales of mid single digits versus a 5.6 percent increase in the second quarter of last year.

-- Direct to customer revenue increase of approximately 35 to 40 percent versus a 50 percent increase in the second quarter of last year.

-- Profit from operations of between a loss of $1.0 million and earnings of $1.0 million, which includes a charge of approximately $0.6 million attributable to the adoption of SFAS 123R. Loss from operations in the second quarter of fiscal 2005 was $3.2 million.

-- The weighted average share count is estimated at approximately 39 million shares compared to 33 million shares in the prior year, due to the conversion of our preferred stock in July 2005.

-- Quarter-end inventory increase of approximately 25 to 35 percent from the second quarter last year due to the planned acceleration of receipts for the third quarter seasonal transition.

-- Due to the valuation allowance provided against the Company's net deferred tax assets, income tax benefits or expense will be negligible in the second quarter.

-- Loss per share will be in the range of ($0.07) to ($0.02) per share, which includes a charge of approximately $0.02 per share attributable to the adoption of SFAS 123R. Fiscal 2005 second quarter loss per share was ($0.07) per share and included a tax benefit of $0.05 per share.

The Company provides the following guidance for the full-year 2006:

-- Total revenue growth of 18 to 22 percent over the fiscal year 2005.

-- Increase in comparable store sales of low to mid single digits over the same period last year.

-- Direct to customer revenue increase of 35 to 40 percent from fiscal year 2005.

-- Operating margins of 1.5 to 2.0 percent, which includes a charge of approximately $3.0 million, or 0.4 percent, attributable to the adoption of SFAS 123R.

-- The weighted average diluted share count estimated at approximately 40 million.

    -- Year-end inventory increase of 5 to 10%.
    -- income tax expense for the year will be approximately $1 million.

    Non-GAAP Financial Measures

This release makes reference to certain financial measures that are non- GAAP, including (i) the non-cash charge of $0.02 per share for the first quarter of fiscal 2006 for stock based compensation expense associated with adopting SFAS 123R, (ii) the income tax benefit of $0.06 per share and $0.05 per share recorded for the first quarter of fiscal 2005 and the second quarter of fiscal 2005, respectively, and (iii) revenue and order deferrals. The Company believes that the use of these non-GAAP financial measures allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. The most-closely analogous GAAP financial measure to the first quarter of fiscal 2006 non-cash charge of $0.02 per share is the Company's net loss of $0.13 per share for the first quarter of fiscal 2006. The most-closely analogous GAAP financial measure to the income tax benefit of $0.06 per share for the first quarter of fiscal 2005 is the Company's net loss of $0.09 per share for such quarter, and the most- closely analogous GAAP financial measure to the income tax benefit of $0.05 per share for the second quarter of fiscal 2005 is the Company's net loss of $0.07 per share for such quarter.

"Total revenue and order deferral" represents the combination of backorders, special orders, and in-transit orders.

"Backorders" represent products that have been ordered by customers but are out of stock.

"Special orders" represent products that are made-to-order by customers and therefore are not in-stock at the time the order is taken.

"In-transit deferred revenue orders" represent items that have been billed and shipped to the customer but have not yet been delivered at the period end. These are included in the balance sheet under "deferred revenue and customer deposits."

Conference Call:

The Company's first quarter conference call is scheduled for today, Thursday, May 25, 2006. Following the release via the wire services, the Company will host a conference call beginning at 5:00 p.m. Eastern Time which can be accessed using the Dial-in Number: 800-362-0653 or via live web cast at: http://www.videonewswire.com/event.asp?id=34125 .

If you are unable to participate during the live web cast, a playback of the conference call will be available via the Internet at: http://reports.visualwebcaster.com/Report.aspx?eventID=34125&pwd=TTC26 beginning at 7:00 p.m. Eastern Time on Thursday, May 25, 2006. A web cast replay of the call will be available at www.restorationhardware.com under "Investor Relations" or by Dial-in Number: 800-839-5493 until June 2, 2006.

About Restoration Hardware, Inc.:

Restoration Hardware, Inc. is a specialty retailer of high quality home furnishings, bath fixtures and bathware, functional and decorative hardware and related merchandise that reflects the Company's classic and authentic American point of view. Restoration Hardware, Inc. sells its merchandise offering through its retail stores, catalog (800-762-1005) and on-line at www.restorationhardware.com. As of May 25, 2006, the Company operated 103 retail stores and seven outlet stores in 30 states, the District of Columbia and Canada.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

This release contains forward-looking statements that involve known and unknown risks. Such forward-looking statements include, without limitation, statements concerning or relating to the Company's anticipated full year revenue growth and operating margins, statements concerning guidance for the second quarter and full fiscal year of fiscal 2006, statements relating to revenue growth, comparable store sales, direct to customer sales, earnings, weighted average share count and inventory for the second quarter of fiscal 2006, statements concerning the anticipated impact of SFAS 123R on the Company's results for the second quarter of fiscal 2006, statements relating to the implications of the Company's revenues, sales and financial results for the first quarter of fiscal 2006, and other statements containing words such as "expects" and words of similar import or statements of management's opinion. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, including financial results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, customer reactions to the Company's current and anticipated merchandising and marketing programs and strategies, timely introduction and customer acceptance of the Company's merchandise, positive customer reaction to the Company's catalog and Internet offerings, revised product mix, prototype stores and core businesses, timely and effective sourcing of the Company's merchandise from its foreign and domestic vendors and delivery of merchandise through its supply chain to its stores and customers, effective inventory and catalog management, actual achievement of cost savings and improvements to operating efficiencies, effective sales performance, in particular during the holiday selling season, the actual impact of key personnel of the Company on the development and execution of the Company's strategies, changes in investor perceptions of the Company, fluctuations in comparable store sales, limitations resulting from restrictive covenants in the Company's credit facility, changes in economic or business conditions in general, changes in political conditions in the United States and abroad in general, changes in product supply, changes in the competitive environment in which the Company operates, changes in the Company's management information needs, changes in customer needs and expectations, governmental actions and other factors detailed in the Company's filings with the Securities and Exchange Commission, including its recent filings on Forms 10-K, 10-Q and 8-K, including, but not limited to, those described in the Company's Form 10-K for the fiscal year ended January 28, 2006 in Part I, Item 1 thereof ("Business") under the caption "Competition," in Part I, Item 1A thereof ("Risk Factors"), in Part II, Item 7 thereof ("Management's Discussion and Analysis of Financial Condition and Results of Operations") under the captions "Revenue and Segment Results," "Expenses," "Liquidity and Capital Resources," and "Critical Accounting Policies" and in Part II, Item 9A thereof ("Controls and Procedures"). Guidance offered by the Company represents a point-in-time estimate made by management of the Company. The Company undertakes no obligation to update any guidance or any other forward-looking statements in order to reflect events or circumstances that may arise after the date of this release. With respect to any statements concerning revenue deferrals, there is inherent risk to the realization of revenue deferrals and the amount of revenue deferrals can fluctuate from quarter to quarter based upon a variety of factors including our order mix, our in stock position, rates of order cancellation and our ability to ship goods to the customer. Revenue deferral represents the combination of backorders, special orders and in-transit orders.


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


                                 13 weeks ended           13 weeks ended
                              4/29/06    % of Net      4/30/05    % of Net
                                          Revenue                  Revenue

    Retail net revenue        $91,060       68.3%      $84,677       72.1%
    Direct-to-customer
     net revenue               42,320       31.7%       32,788       27.9%
      Total net revenue       133,380      100.0%      117,465      100.0%

    Cost of revenue and
     occupancy                 88,495       66.3%       81,823       69.7%
      Gross profit             44,885       33.7%       35,642       30.3%

    Selling, general and
     administrative expense    48,353       36.3%       39,986       34.0%

      Loss from operations     (3,468)      (2.6%)      (4,344)      (3.7%)

    Interest expense, net      (1,424)      (1.1%)        (825)      (0.7%)


      Loss before income
       taxes                   (4,892)      (3.7%)      (5,169)      (4.4%)

    Income tax (expense)
     benefit                      (21)      (0.0%)       2,056        1.7%

    Net loss                  $(4,913)      (3.7%)     $(3,113)      (2.7%)

    Loss per share of
     common stock, basic
     and diluted               $(0.13)                  $(0.09)

    Weighted average shares
     outstanding, basic
     and diluted               37,773                   33,110

    Comparable store
     sales growth                 4.0%                     5.0%
    Retail stores open
     at end of period             103                      102
    Total selling square
     footage at end
     of period                685,672                  676,520


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

                                           4/29/06      1/28/06    4/30/05
    ASSETS
    Current assets:
        Cash and cash equivalents           $2,260      $ 1,990    $ 1,879
        Accounts receivable                  9,175        5,884      6,800
        Merchandise inventories            194,628      158,647    144,152
        Prepaid expense and other
         current assets                     17,633        9,590     19,875

            Total current assets          $223,696     $176,111   $172,706

        Property and equipment, net         91,449       92,360     80,192
        Goodwill                             4,560        4,560      4,560
        Deferred tax assets, net                --           --     18,688
        Other assets                         1,343        1,237      2,766

            Total assets                  $321,048     $274,268   $278,912

    LIABILITIES, REDEEMABLE CONVERTIBLE
     PREFERRED STOCK AND STOCKHOLDERS'
     EQUITY
    Current liabilities:
        Accounts payable and accrued
         expenses                         $ 77,626      $62,818    $50,722
        Line of credit, net of debt
         issuance                               --           --     52,390
        Deferred revenue and customer
         deposits                           14,178        8,304      8,966
        Other current liabilities           17,197       17,506     12,412

            Total current liabilities      109,001       88,628    124,490

        Long-term debt, net of debt
         issuance                           88,065       58,126         --

        Deferred lease incentives           26,667       27,465     29,419
        Deferred rent                       20,160       19,866     20,218
        Other long-term obligations            660           51         92

            Total liabilities              244,553      194,136    174,219

    Commitments and contingencies
    Series A redeemable convertible
     preferred stock                            --           --      8,331

    Stockholders equity:
    Common stock                                 4            4          3
    Additional paid-in capital             170,290      169,187    159,532
    Accumulated other comprehensive
     income                                  1,183        1,010        702
    Accumulated deficit                   (94,982)     (90,069)   (63,875)
            Total stockholders' equity      76,495       80,132     96,362
            Total liabilities, redeemable
             convertible preferred
             stock and stockholders'
             equity                       $321,048     $274,268   $278,912

    Common stock issued and outstanding
     at end of period                       37,810       37,763     33,156
SOURCE  Restoration Hardware, Inc.
    -0-                             05/25/2006
    /CONTACT:  Gary Friedman, President and Chief Executive Officer of
Restoration Hardware, Inc., +1-415-924-1005, or fax, +1-415-945-7264/
    /Web site:  http://www.restorationhardware.com/
    (RSTO)

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

JP-CD
-- SFTH071 --
2734 05/25/2006 16:00 EDT http://www.prnewswire.com