RH Reports First Quarter Fiscal 2016 Financial Results

CORTE MADERA, Calif.--(BUSINESS WIRE)-- RH (Restoration Hardware Holdings, Inc. - NYSE:RH) today announced financial results for the first quarter ended April 30, 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.

First Quarter Highlights

• Net revenues increased 8% on top of a 15% increase last year
• Comparable brand revenues increased 4% on top of a 15% increase last year
• GAAP net loss of $13.5 million compared to net income of $7.2 million for the same period last year
• Adjusted net loss of $2.1 million compared to adjusted net income of $9.8 million last year
• GAAP diluted loss per share of $0.33 compared to diluted earnings per share of $0.17 for the same period last year
• Adjusted diluted loss per share of $0.05 compared to adjusted diluted earnings per share of $0.23 last year

Gary Friedman, Chairman and Chief Executive Officer, commented, “Our near term business performance is being pressured by the continued headwinds in the markets impacted by energy and currency, as well as a general slowdown in the luxury consumer market. In addition, the costs associated with RH Modern production delays and investments to elevate the customer experience, the timing of recognizing membership revenues related to the transition from a promotional to a membership model, and a more aggressive approach to rationalizing our SKU count to optimize inventory, are expected to negatively impact our fiscal 2016 adjusted diluted EPS outlook by approximately $0.90 to $1.00. While there is uncertainty regarding the headwinds impacting revenues, we expect many of the cost and margin related issues to be short term in nature. This Fall, we plan to expand the mailing of our Source Books, introduce new collections across RH Interiors and RH Modern, launch RH Modern across our entire retail fleet, and remodel our existing legacy Galleries – including the installation of Design Ateliers, and the most significant product refresh in the Company’s history. Accordingly, we expect our performance to improve in the fourth quarter and accelerate as we enter fiscal 2017. Additionally, we have taken steps to streamline our organization resulting in expected cost savings of approximately $20 million on an annual basis.”

Mr. Friedman continued, “Our recent move from a promotional to a membership model, with the introduction of the RH Grey Card, further supports the evolution of our business from selling products to facilitating projects. While we are learning that the selling cycle with members is longer, as transactions are not closed with the urgency of artificially imposed sale deadlines, and the timing of recognizing membership revenues will put pressure on margins in the short term, we are pleased with the early adoption rate and growth in average order size. At this point we have every reason to believe membership will prove to be a success, elevating our brand, improving the customer experience, and streamlining our business.”

Mr. Friedman added, “In May, Waterworks officially became part of the RH family. Waterworks has long been the definition of the well-appointed bath, and is the only complete bath and kitchen business offering fittings, fixtures, furniture, accessories, lighting and surfaces under one brand in the market. We are thrilled to add this prestigious brand to our product platform, as it not only positions RH as an authority in two of the most important rooms of the home – the bath and kitchen – but also creates the first fully integrated luxury home platform in the world.”

Mr. Friedman concluded, “Despite our recent difficulties, we remain the leading luxury home brand in the world, with a clear path to $4 billion to $5 billion in North American revenues with mid-teens operating margins. The two fundamental strategies that get us there - the expansion of our product offer and the transformation of our real estate - remain well on track. The strong response to RH Modern, both in retail and direct, indicates this can quickly become a billion dollar plus brand. All of our new next generation Design Galleries are exceeding expectations and we continue to demonstrate that our strategy to transform our 7,500 square foot legacy stores into 45,000 to 60,000 square foot next generation Design Galleries will drive meaningful growth over time.”

First Quarter Fiscal 2016 Results

Revenue - Net revenues for the first quarter of fiscal 2016 increased 8% to $455.5 million from $422.4 million in the first quarter of fiscal 2015.

• Comparable brand revenue growth, which includes direct, was 4% in the first quarter of fiscal 2016 on top of 15% for the same period last year.
• Stores revenues increased 19% to $256.1 million in the first quarter of fiscal 2016. This growth is on top of a 13% increase in stores revenues in the first quarter of fiscal 2015.
• Direct revenues decreased 4% to $199.4 million in the first quarter of fiscal 2016. Direct revenues during the first quarter of fiscal 2016 represented 44% of total net revenues.

Retail Galleries - As of April 30, 2016, the Company operated a total of 69 retail galleries, consisting of 53 legacy Galleries, 6 larger format Design Galleries, 4 next generation Design Galleries, 1 RH Modern Gallery, and 5 RH Baby & Child Galleries, as well as 19 outlet stores, throughout the United States and Canada. This compares to a total of 67 retail galleries, consisting of 57 legacy Galleries, 6 larger format Galleries, 1 next generation Design Gallery, and 3 RH Baby & Child Galleries, as well as 17 outlet stores, as of May 2, 2015.

Operating Income and Margin** - On an unadjusted basis, GAAP operating loss was $11.5 million in the first quarter of fiscal 2016 compared to GAAP operating income of $17.0 million for the same period last year and GAAP operating margin was -2.5% compared to 4.0% for the same period last year.

Adjusted operating income in the first quarter of fiscal 2016 was $0.7 million compared to $18.6 million in the first quarter of fiscal 2015. Adjusted operating margin in the first quarter of fiscal 2016 was 0.2% compared to 4.4% for the same period last year.

Net Income (Loss) ** - On an unadjusted basis, GAAP net loss for the first quarter of fiscal 2016 was $13.5 million compared to GAAP net income of $7.2 million for the same period last year.

Adjusted net loss in the first quarter of fiscal 2016 was $2.1 million compared to adjusted net income of $9.8 million in the first quarter of fiscal 2015.

Earnings (Loss) Per Share** - On an unadjusted basis, GAAP diluted loss per share for the first quarter of fiscal 2016 was $0.33 compared to GAAP diluted earnings per share of $0.17 for the same period last year.

Adjusted diluted loss per share for the first quarter of fiscal 2016 was $0.05 compared to adjusted diluted earnings per share of $0.23 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’s results for fiscal 2016 will be impacted by certain short term operational items including costs associated with RH Modern production delays and investments to elevate the customer experience, timing issues related to the transition from a promotional to a membership model, and a more aggressive approach to rationalizing its SKU count and optimizing inventory. These factors are negatively impacting the Company’s fiscal 2016 adjusted diluted EPS outlook by approximately $0.90 to $1.00.

The Company is providing the following outlook for the second quarter of fiscal 2016 (including an approximate $2 million to $3 million net revenue and approximately $0.30 adjusted diluted EPS reduction per the short term operational items described above; these negative factors are partially offset by the addition of Waterworks during the second quarter of fiscal 2016):

• Net revenues in the range of $505 million to $520 million
• Adjusted net income in the range of $11.5 million to $13.5 million
• Adjusted diluted EPS in the range of $0.28 to $0.33
• Income tax rate of approximately 39%
• Diluted shares outstanding of approximately 41 million

The Company is lowering its outlook for fiscal year 2016 (including an approximate $16 million to $17 million net revenue and $0.90 to $1.00 adjusted diluted EPS reduction per the short term operational items described above; these negative factors are partially offset by the addition of Waterworks during the second quarter of fiscal 2016):

• Net revenues growth in the range of 1% to 3%
• Adjusted diluted EPS in the range of $1.60 to $1.80
• Capital expenditures in the range of $180 million to $210 million

Note: The Company’s adjusted net income (loss) and adjusted diluted earnings (loss) per share guidance does not include certain charges and costs. The adjustments to net income (loss) and diluted earnings (loss) per share in future periods are generally expected to be similar to the kinds of charges and costs excluded from adjusted net income (loss) and adjusted diluted earnings (loss) 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; 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 (loss) and adjusted diluted earnings (loss). 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.

Video Presentation and Q&A Conference Call Information

Accompanying this release, RH will today post a video presentation highlighting the Company’s first 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 June 21, 2016 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 24729843, 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.

**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 (loss), and adjusted diluted earnings (loss) 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 second and subsequent quarters of fiscal 2016 and the fiscal year ended January 28, 2017 and fiscal 2017, including net revenues, adjusted net income (loss), adjusted EPS and capital expenditures; the results of the Company’s efforts to improve and simplify numerous aspects of its supply chain and inventory management; continued investment in improvements to the customer experience; uncertainty regarding continued factors negatively impacting revenues, margins and earnings; the anticipated impact of the introduction of new collections across RH Modern and RH Interiors; the anticipated results of our next generation Galleries; the anticipated refresh of the RH Interiors Collection and expansion of RH Modern; the expected benefits of our Fall mailing of Source Books; the impact of various other business and operational factors on our financial results and operations, including our efforts to optimize inventory, rationalize SKUs and improve our supply chain; the anticipated benefits of the Waterworks acquisition; the Company’s ability to achieve $4-5 billion in revenues and a mid-teens operating margin and strategies for accomplishing such revenues and margin; the anticipated continued success of RH Modern as well as the Company’s core strategies to expand its products and transform its real estate; the anticipated benefits and other effects of the Company’s move to a membership model as well as the changes in its historical sales and promotional practices; anticipated costs savings from current operational initiatives including efforts to reorganize or streamline our business; any financial or operational factors or results that are described as short term, one-time, non-recurring or unusual (as similar operational or financial factors may adversely affect the Company’s future results including as a result of charges, costs and other items that may occur in one or more subsequent financial reporting periods), and any statements or assumptions underlying any of the foregoing. 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 take advantage of the transaction with 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 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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160608006426/en/

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

Source: Restoration Hardware Holdings, Inc.

Released June 8, 2016