RH Reports Third Quarter Fiscal 2016 Financial Results

Q3 2016 Net Revenues and Adjusted Diluted EPS Ahead of Guidance

Lowering Q4 2016 Outlook Due to Slower Quarter-To-Date Holiday Sales and Later than Planned In Home of Fall 2016 Source Book

CORTE MADERA, Calif.--(BUSINESS WIRE)-- RH (Restoration Hardware Holdings, Inc. - NYSE:RH) today announced financial results for the third quarter ended October 29, 2016.

The Company will post a video presentation between approximately 1:15 p.m. – 1:30 p.m. PT (4:15 p.m. – 4:30 p.m. ET) today highlighting its continued evolution and recent performance on the RH Investor Relations website at ir.restorationhardware.com.

Third Quarter Highlights

• Net revenues increased 3% on top of a 10% increase last year
• Comparable brand revenues declined 6% compared to a 7% increase last year
• GAAP net income of $2.5 million compared to $20.7 million last year
• Adjusted net income of $8.0 million compared to $27.7 million last year
• GAAP diluted earnings per share of $0.06 compared to $0.49 last year
• Adjusted diluted earnings per share of $0.20 compared to $0.65 last year

Gary Friedman, Chairman and Chief Executive Officer, commented, “Third quarter fiscal 2016 net revenues of $549 million and adjusted EPS of $0.20 were ahead of our guidance for the quarter. Net revenues were driven by a higher conversion of orders into sales than expected given our strong in stock levels and supply chain improvements. In addition, our margins continued to be negatively impacted by many of the temporal factors impacting our fiscal 2016 earnings in addition to one-time costs associated with the remodel and refresh of our legacy Galleries during the quarter."

Mr. Friedman added, “As previously communicated, we are making several strategic investments and changes to our business model in fiscal 2016 that are temporarily depressing financial results in the short term, that we believe will strengthen our brand and position the business for accelerated growth in 2017 and beyond. These temporal issues include the costs related to the launch of RH Modern; the timing of recognizing membership revenues related to the transition from a promotional to a membership model; efforts to reduce inventories and rationalize our SKU count; and the decision to push our 2016 Source Book mailing from the Spring to the Fall.”

Mr. Friedman continued, “We are lowering our outlook for fiscal 2016 net revenues and adjusted EPS based on trends to-date during the fourth quarter. First, our business in November was below our expectations, which we largely attribute to consumer softness related to the US election and our Fall 2016 Source Books getting in homes later than planned. While our Fall 2016 Source Books began mailing in mid-September, the vast majority of the circulation is just getting in homes over the last few weeks versus our original expectations for the Books to be building earlier in the mailing cycle. This is resulting in a shift of sales that would have been booked in the fourth quarter into the first quarter of next year. In addition, sales of our Holiday Collection are trending lower than our expectations. We are taking a more aggressive approach to clear seasonal merchandise as well as taking deeper markdowns to accelerate our overall SKU rationalization efforts which are expected to result in lower product margins during the quarter. We are lowering our fiscal 2016 capital expenditures guidance to a range of $180 million to $190 million from our prior range of $180 to $210 million.”

Mr. Friedman concluded, “While we are clearly disappointed in our fourth quarter outlook, we believe we are making the necessary investments and changes to position our business for the long-term. As we look forward to fiscal 2017, we expect to anniversary the costs related to the launch of RH Modern; benefit from the deferral of membership revenue, plus capture additional revenue from new members and renewals; cycle our efforts to reduce inventories and rationalize our SKU count; and expect revenues to build from the mailing of our Fall 2016 Source Books and the second mailing of the RH Modern Source Book next Spring. We also expect incremental revenues from the 4 new Design Galleries opened in 2016, and the 6 new Design Galleries opening in 2017, 5 of which will have Cafes, Wine Vaults, and Coffee Bars similar to our successful hospitality experience at our Gallery at the 3Arts Club in Chicago. As we cycle these investments and changes, we expect sales to reaccelerate, operating margins to expand, and to generate free cash flow in 2017. At RH, we have demonstrated an ability to navigate through challenging periods before, and emerge an even stronger business and brand. We are confident that our choices will prove to be the right ones, driving long-term sustainable growth, improved returns on capital, and shareholder value.”

Third Quarter Fiscal 2016 Results

Revenue - Net revenues for the third quarter of fiscal 2016 increased 3% to $549.3 million from $532.4 million in the third quarter of fiscal 2015.

• Comparable brand revenue, which includes direct, declined 6% in the third quarter of fiscal 2016 compared to 7% growth for the same period last year.
• Stores revenues increased 9% to $306.8 million in the third quarter of fiscal 2016. This growth is on top of a 16% increase in stores revenues in the third quarter of fiscal 2015.
• Direct revenues decreased 3% to $242.5 million in the third quarter of fiscal 2016. Direct revenues during the third quarter of fiscal 2016 represented 44% of total net revenues.

Retail Galleries - As of October 29, 2016, the Company operated a total of 85 retail galleries, consisting of 51 legacy Galleries, 6 larger format Design Galleries, 7 next generation Design Galleries, 1 RH Modern Gallery, and 5 RH Baby & Child Galleries throughout the United States and Canada, as well as 15 Waterworks showrooms in the United States and UK. This compares to a total of 68 retail galleries, consisting of 54 legacy Galleries, 6 larger format Design Galleries, 3 next generation Design Galleries, and 5 RH Baby & Child Galleries throughout the United States and Canada, as of October 31, 2015.

In addition, as of October 29, 2016, the Company operated 28 outlet stores compared to 17 as of October 31, 2015.

Operating Income and Margin** - On an unadjusted basis, GAAP operating income was $15.4 million in the third quarter of fiscal 2016 compared to $44.9 million for the same period last year and GAAP operating margin was 2.8% compared to 8.4% for the same period last year.

Adjusted operating income in the third quarter of fiscal 2016 was $18.1 million compared to $50.0 million in the third quarter of fiscal 2015. Adjusted operating margin in the third quarter of fiscal 2016 was 3.3% compared to 9.4% for the same period last year.

Net Income** - On an unadjusted basis, GAAP net income for the third quarter of fiscal 2016 was $2.5 million compared to $20.7 million for the same period last year.

Adjusted net income in the third quarter of fiscal 2016 was $8.0 million compared to $27.7 million in the third quarter of fiscal 2015.

Earnings Per Share** - On an unadjusted basis, GAAP diluted earnings per share for the third quarter of fiscal 2016 was $0.06 compared to $0.49 for the same period last year.

Adjusted diluted earnings per share for the third quarter of fiscal 2016 was $0.20 compared to $0.65 for the same period last year.

A reconciliation of GAAP to non-GAAP financial measures is provided in the tables accompanying this release.

Outlook

The Company is providing the following outlook for the fourth quarter of fiscal 2016:

• Net revenues in the range of $562 million to $592 million
• Adjusted net income in the range of $24.5 million to $28.5 million
• Adjusted diluted EPS in the range of $0.60 to $0.70
• Income tax rate of approximately 39%
• Diluted shares outstanding of approximately 41 million

The Company is updating its outlook for fiscal year 2016 as follows:

• Net revenues in the range of $2.11 billion to $2.14 billion, representing flat to 1% growth from the prior year
• Adjusted diluted EPS in the range of $1.19 to $1.29
• Capital expenditures in the range of $180 million to $190 million

Note: The Company’s adjusted net income and adjusted diluted earnings per share guidance does not include certain charges and costs. The adjustments to net income and diluted earnings per share in future periods are generally expected to be similar to the kinds of charges and costs excluded from adjusted net income and adjusted diluted earnings per share in prior quarters, such as non-cash and other compensation expense; one-time income tax expense; legal claim related expenses; reorganization costs including severance costs and related taxes; 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 income and adjusted diluted earnings. 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.

Company Name Change

Effective January 1, 2017, the Company will change its corporate name from Restoration Hardware Holdings, Inc. to “RH”. The Company’s stock ticker symbol “RH” will remain the same.

Video Presentation and Q&A Conference Call Information

Accompanying this release, RH will today post a video presentation highlighting the Company’s third quarter fiscal 2016 performance and outlook on the Company’s Investor Relations website, ir.restorationhardware.com. Management will then host a live question and answer conference call at 2:30 p.m. PT (5:30 p.m. ET). Interested parties may access the call by dialing (866) 394-6658 (United States/Canada) or (706) 679-9188 (International). A live broadcast of the question and answer session conference call will also be available online at the Company’s investor relations website, ir.restorationhardware.com. A replay of the question and answer session conference call will be available through December 21, 2016 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 28847543, as well as on the Company’s investor relations website.

About RH

RH (Restoration Hardware Holdings, Inc. - NYSE:RH) is a curator of design, taste and style in the luxury lifestyle market. The Company offers collections through its retail galleries, Source Books, and online at RH.com, RHModern.com, and Waterworks.com.

**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 operating income, adjusted operating margin, adjusted net income, and adjusted diluted earnings per share (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 and the accompanying video presentation contain forward-looking statements within the meaning of the federal securities laws including statements related to our future financial guidance, including for the fourth quarter of fiscal 2016 and full year 2016, including net revenues, adjusted net income, adjusted EPS and capital expenditures; the impact of certain changes in the Company’s business model, including the launch of RH Modern, the Company’s new membership model, the Company’s efforts to reduce inventories and rationalize its SKU count, the timing of the distribution of the Company’s 2016 Source Book and RH Modern Source Book mailings, and the ability of those changes to accelerate growth in 2017 and later periods; the effect of macroeconomic factors, including the US election; plans regarding seasonal merchandise; the Company’s expectations with respect to fiscal 2017 that it will anniversary costs related to the launch of RH Modern, benefit from the deferral of membership revenue plus capture additional revenue from new members and renewals, cycle its efforts to reduce inventories and rationalize its SKU count, and will build revenues from the mailing of its Fall 2016 Source Books and the second mailing of the RH Modern Source Book next Spring; the Company’s expectations with respect to revenues associated with the four new Design Galleries opened in 2016 and the six new Design Galleries opening in 2017, including with respect to revenues associated with Cafes, Wine Vaults, and Coffee Bars at five such new Design Galleries; and, any statements or assumptions underlying any of the foregoing. These forward-looking statements include factors having a temporary, one-time or temporal impact on the Company’s business and results of operation, and there is inherent uncertainty and risks relating to the impact of such factors on the Company’s business and results of operation, whether such factors and impact will be recurring and the exact timing of any such impact on the Company’s business and results of operation. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future events. We cannot assure you that future developments affecting us will be those that we have anticipated. Important risks and uncertainties that could cause actual results to differ materially from our expectations include, among others, our ability to retain key personnel; successful implementation of our growth strategy; our ability to leverage Waterworks; uncertainties in the current performance of our business including a range of risks related to our operations as well as external economic factors; general economic conditions and the impact on consumer confidence and spending; changes in customer demand for our products; factors affecting our outstanding convertible senior notes; our ability to anticipate consumer preferences and buying trends, and maintaining our brand promise to customers; changes in consumer spending based on weather and other conditions beyond our control; risks related to the number of new business initiatives we are undertaking; strikes and work stoppages affecting port workers and other industries involved in the transportation of our products; our ability to obtain our products in a timely fashion or in the quantities required; our ability to employ reasonable and appropriate security measures to protect personal information that we collect; our ability to support our growth with appropriate information technology systems; risks related to “conflict minerals” compliance and its impact on sourcing, if any, as well as those risks and uncertainties disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Restoration Hardware Holdings’ most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, and similar disclosures in subsequent reports filed with the SEC, which are available on our investor relations website at ir.restorationhardware.com and on the SEC website at www.sec.gov. Any forward-looking statement made by us in this press release speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

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Restoration Hardware Holdings, Inc.
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations and Strategy
cmclaughlin@rh.com

Source: Restoration Hardware Holdings, Inc.

Released December 8, 2016