EX-99.1 2 rh-20190612ex991b44915.htm rh_Ex99_1

Exhibit 99.1

Picture 1

 

RH REPORTS RECORD FIRST QUARTER FISCAL 2019 RESULTS

GAAP EPS of $1.43, Adjusted Diluted EPS of $1.85 Increased 53% Versus $1.21 Last Year

Company Raises Fiscal 2019 Guidance

 

 

Corte Madera, CA - June 12th, 2019 - RH (NYSE: RH) today announced first quarter fiscal 2019 results. Chairman & Chief Executive Officer Gary Friedman provided an update on the Company’s continued evolution and outlook. RH Leadership will host a Q&A conference call at 2:00 p.m. PT (5:00 p.m. ET) today.

 

 

FIRST QUARTER 2019 HIGHLIGHTS

 

Q1 GAAP NET REVENUES INCREASED +7.4% TO $598M

Q1 ADJUSTED NET REVENUES INCREASED +7.4% TO $599M

 

Q1 GAAP OPERATING INCOME INCREASED +43% TO $68.6M VS. $48.1M LY

Q1 ADJUSTED OPERATING INCOME INCREASED +43% TO $70.5M VS. $49.2M LY

 

Q1 GAAP OPERATING MARGIN INCREASED 290 BASIS POINTS TO 11.5% VS. 8.6% LY

Q1 ADJUSTED OPERATING MARGIN INCREASED 300 BASIS POINTS TO 11.8% VS. 8.8% LY

 

Q1 GAAP NET INCOME INCREASED +40% TO $35.7M VS. $25.5M LY

Q1 ADJUSTED NET INCOME INCREASED +48% TO $45.2M VS. $30.6M LY

 

Q1 GAAP EPS INCREASED +42% TO $1.43 VS. $1.01 LY

Q1 ADJUSTED DILUTED EPS INCREASED +53% TO $1.85 VS. $1.21 LY

 

As of February 3, 2019, the Company adopted Accounting Standards Update 2016-02, Accounting Standards Update 2018-10 and Accounting Standards Update 2018-11 (together, “ASC 842”), which pertain to accounting for leases. The Company’s previous and current guidance conforms to the new policy. Under the Company’s adoption method, the Company’s financial results for prior comparative periods are presented with adjustments to reflect the impact of ASC 842.  We have provided reconciliation tables that update historical results to reflect these changes in lease accounting standards.

 

Please see the tables below for a reconciliation of all GAAP to non-GAAP measures referenced in this press release.

 

 

To Our People, Partners, and Shareholders,

 

First quarter fiscal 2019 was an exceptional start to the year for Team RH. We generated record GAAP revenues of $598 million, an increase of 7.4%, record GAAP operating margin of 11.5%, record adjusted operating margin of 11.8%, record GAAP earnings per share of $1.43, and record adjusted diluted earnings per share of $1.85, a 53% increase versus $1.21 a year ago.

 

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As a result of our strong first quarter results, we are raising our fiscal 2019 adjusted net revenue, adjusted operating income, adjusted operating margin and adjusted earnings guidance for the year as follows:

 

 

 

 

 

 

 

    

Prior Guidance

    

Updated Guidance

Adjusted net revenues

 

$2,585.0 - $2,635.0

 

$2,642.8 - $2,662.8

Adjusted operating income

 

$309.4 - $331.6

 

$332.5 - $350.5

Adjusted operating margin

 

12.0% - 12.6%

 

12.6% - 13.2%

Adjusted net income

 

$204.0 - $220.0

 

$206.2 - $218.2

Adjusted diluted EPS

 

$8.05 - $8.69

 

$8.76 - $9.27

 

The above guidance reflects approximately $20 million of incremental interest expense due to the Company’s first quarter debt financings representing a $0.58 reduction to our fiscal 2019 adjusted diluted EPS guidance. This is offset by our repurchase of 2.17 million shares in the first quarter, which has a weighted average reduction of 1.79 million to our full year diluted share count and a $0.59 benefit to our fiscal 2019 adjusted diluted EPS guidance. As a reminder, the guidance reflects a normalized 26.0% tax rate.

 

Our focus on elevating the brand and architecting an integrated operating platform continues to result in our profit model leapfrogging past the home furnishings industry and RH becoming one of the few retailers that is growing revenues, expanding margins, increasing operating earnings, and driving significantly higher returns on invested capital.

 

First quarter revenues accelerated in late March, increasing 7.4% for the quarter compared to the prior year quarter. Net of the approximately 2 point negative drag from eliminating fringe promotions, adjusted net revenues increased 9.4% in the first quarter fiscal 2019. We remain cautiously optimistic that business momentum will continue despite negative macro trends and increased tariffs, supported by the recent introduction of RH Beach House, the continued elevation and expansion of our product offering, investments in RH Interior Design, plus the launch of RH Ski House and new galleries opening this fall.

 

Our largest and most important new Gallery, RH New York, continues to build momentum and is trending comfortably in excess of $100 million in annualized revenue. Two of our projects scheduled to open late in the fourth quarter, RH San Francisco, The Gallery at The Historic Bethlehem Steel Building, and RH Charlotte, The Gallery at Phillips Place, are experiencing slight delays and will now open in the first quarter of fiscal 2020. We have productive legacy galleries in each of those markets, and due to the late planned openings, we don’t anticipate a material impact to this year’s revenues.  We continue to be on track to achieve planned asset sales of $50 - $60 million in Fiscal 2019.  We are negotiating a letter of intent for the sale of RH Yountville and expect to begin receiving offers for RH Edina in the fall when the Gallery opens.

 

Looking forward, we expect to accelerate our real estate transformation to a rate of 5 to 7 new galleries in Fiscal 2020 and a minimum of 7 new galleries in Fiscal 2021.

 

As a reminder, embedded in our 2019 guidance is approximately 3 point revenue reduction as a result of editing unprofitable and non-strategic businesses, namely the elimination of the remaining holiday business (1 point), the elimination of fringe promotions (1 point), and the transition of our rug business from a single source importer to a direct sourcing model (1 point).  As planned, the drag was approximately 2 points in the first quarter and we expect the negative impact to be about 4 points in the second quarter, 2 points in the third quarter and 4 points in the fourth quarter.

 

Regarding China tariffs, we have renegotiated product costs and selectively raised prices to mitigate the impact of the increase from 10 to 25 percent. We are also moving certain production and new product development out of China, plus exploring new partnerships and expanding our own manufacturing facilities in the United States. Long term, we do not believe the current trade climate will impair our ability to achieve our stated financial goals and the expected impact from the increased tariffs is embedded in our guidance for the year.

 

We believe our Company remains undervalued, and we continued to execute our share repurchase program in the first quarter, acquiring 2.2 million shares at an average price of $115.36. Inclusive of our share repurchases in 2017 and 2018, we have repurchased 24.4 million shares, or approximately 60% of the total shares outstanding at an average price of $61.40. We believe the repurchase of our shares will prove to be an outstanding allocation of capital for the benefit of our long term shareholders.

 

In the first quarter we completed multiple debt financings totaling $380 million and amended our credit facility, which in aggregate added $420 million of new liquidity, supporting both further purchases under our share repurchase and the planned repayment of $350 million of convertible notes due June 15, 2019 and $300 million of convertible notes due July 15, 2020. We will continue to be opportunistic as it relates to the capital markets and the repurchase of our shares. Our net debt is currently 2.8x TTM Adjusted EBITDA and we project that we will end the year with net debt to TTM Adjusted EBITDA of approximately 2.0x.

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Looking forward, we continue to see a clear path to $4 to $5 billion in North America revenues, and an international opportunity that could lead to RH becoming a $7 to $10 billion dollar global brand.

 

Our long term targets remain:

 

Net revenue growth of 8% to 12%

Adjusted operating margins in the mid to high teens

Adjusted net income growth of 15% to 20% annually

Return on invested capital (ROIC) in excess of 50%

 

We believe the following initiatives will lead to another step change in our financial performance and return on invested capital over the next several years.

 

1.Revenue growth driven by our real estate transformation, the elevation and expansion of our product offering, and investments in RH Interior Design will continue to leverage SG&A and Occupancy costs;

2.The cycling of several capital intensive real estate projects and the shift to predominantly capital light projects, will decrease occupancy costs and increase operating earnings and ROIC;

3.Increased inventory turns and decreased working capital requirements as a result of our new supply chain strategy will continue to drive lower costs and higher returns on invested capital. To put this point into perspective, if our inventory had grown at the same rate of revenues since Q1 2016, we would have approximately $470 million of additional inventory than we do today and significantly higher operating costs; and

4.Higher revenues, lower returns and reduced operating costs as a result of our new Home Delivery strategy. We have already identified cost savings of $15 to $20 million that will be captured over fiscal 2019 and 2020.

 

In total, the above initiatives should translate into an additional 400 to 600 basis points of operating margin and ROIC in excess of 50%.

 

We do understand that the strategies we are pursuing opening the largest specialty retail experiences in our industry while most are shrinking the size of the retail footprint or closing stores; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; continuing to mail inspiring Source Books, while many are eliminating catalogs; and refusing to follow the herd in self-promotion on social media, instead allowing our brand to be defined by the taste, design, and quality of the products and experiences we are creating  are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry.

 

We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape and, we would argue, will also prove to be equally valuable.

 

We would like to thank all of our people and partners whose passion and persistence bring our vision and values to life each and every day, as we pursue our quest to become one of the most admired brands in the world.

 

Carpe Diem,

 

Gary

 

Note: We define return on invested capital (ROIC) as adjusted operating income after-tax for the most recent twelve-month period, divided by the average of beginning and ending debt and equity less cash and equivalents as well as short and long-term investments for the most recent twelve- month period. ROIC is not a measure of financial performance under GAAP, and should be considered in addition to, and not as a substitute for other financial measures prepared in accordance with GAAP. Our method of determining ROIC may differ from other companies’ methods and therefore may not be comparable.

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Q&A CONFERENCE CALL INFORMATION

 

Accompanying this release, RH leadership will host a live question and answer conference call at 2:00 p.m. PT (5:00 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.rh.com. A replay of the question and answer session conference call will be available through June 26, 2019 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 6032768, as well as on the Company’s investor relations website.

 

ABOUT RH

 

RH (NYSE: RH) is a curator of design, taste and style in the luxury lifestyle market. The Company offers its collections through its retail galleries across North America, the Company’s multiple Source Books, and online at RH.com, RHModern.com, RHBabyandChild.com, RHTeen.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 net revenue, adjusted operating income, adjusted net income or adjusted net earnings, adjusted net income margin, adjusted diluted earnings per share, normalized adjusted net income, normalized adjusted diluted net income per share, ROIC or return on invested capital, free cash flow, adjusted operating margin, adjusted gross margin, adjusted SG&A, EBITDA and Adjusted EBITDA (collectively, “non-GAAP financial measures”). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The Company uses these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. The non-GAAP financial measures used by the Company in this press release may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

 

For more information on the non-GAAP financial measures, please see the Reconciliation of GAAP to non-GAAP Financial Measures tables in this press release. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

 

FORWARD-LOOKING STATEMENTS

 

This release contains forward-looking statements within the meaning of the federal securities laws, including without limitation, statements regarding: Our fiscal 2019 guidance including our expectations for adjusted net revenue, adjusted operating income, adjusted operating income, adjusted net income, adjusted diluted EPS, the impact from the increased tariffs, and a 3 point revenue reduction as a result of editing unprofitable and non-strategic businesses, namely the elimination of the remaining holiday business (1 point), the elimination of fringe promotions (1 point), and the transition of our rug business from a single source importer to a direct sourcing model (1 point); our future opportunity, growth plans and strategies, including our focus on elevating the brand and architecting an integrated operating platform, our profit model leapfrogging past the home furnishings industry, and RH becoming one of the few retailers that is growing revenues, expanding margins, increasing operating earnings, and driving significantly higher returns on invested capital; our expectation that our business momentum will continue despite negative macro trends and increased tariffs, supported by the recent introduction of RH Beach House, the continued elevation and expansion of our product offering, investments in RH Interior Design, plus the launch of RH Ski House and new galleries opening this fall; our expectation that our RH New York gallery will continue to build momentum and trend comfortably in excess of $100 million in revenue annually; our plan to open RH San Francisco, The Gallery at The Historic Bethlehem Steel Building, and RH Charlotte, The Gallery at Phillips Place, in the first quarter of fiscal 2020, and our expectation that the slight delays in opening such galleries will not have a material impact on this year’s revenues; our expectation of receiving offers for RH Edina in the fall when the Gallery opens; our plans to move certain production and new product development out of China plus explore new partnerships and expand our own manufacturing facilities in the United States; our belief that in the long term the current trade climate will not impair our ability to achieve our stated financial goals; the expected  acceleration of our real estate transformation including the opening of 5 to 7 new galleries in fiscal 2020 and a minimum of 7 new galleries in fiscal 2021, our belief that our Company remains undervalued and that the repurchase of our shares will prove to be an outstanding allocation of capital for the benefit of our long term shareholders; our expectation that we will end the year with net debt to TTM Adjusted EBITDA of

4

approximately 2.0x; our path to $4 to $5 billion in North America revenues; our expectations regarding an International opportunity that could lead to RH becoming a $7 to $10 billion dollar global brand; our long term targets, including net revenue growth of 8% to 12%, adjusted operating margins in the mid to high teens, adjusted net income growth of 15% to 20% annually and ROIC in excess of 50%; our belief that our initiatives, including (1) revenue growth driven by our real estate transformation, the elevation and expansion of our product offering, and investments in RH Interior Design that will continue to leverage SG&A and Occupancy costs, (2) the cycling of several capital intensive real estate projects and the shift to predominantly capital light projects that will decrease occupancy costs and increase operating earnings and ROIC, (3) increased inventory turns and decreased working capital requirements as a result of our new supply chain strategy that will continue to drive lower costs and higher returns on invested capital, and (4) higher revenues, lower returns and reduced operating costs as a result of our new Home Delivery strategy, including cost savings of $15 to $20 million that will be captured over fiscal 2019 and 2020, will lead to another step change in our financial performance and return on invested capital over the next several years and should translate into an additional 400 to 600 basis points of operating margin and return on invested capital in excess of 50%; 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, risks related to our dependence on key personnel and any changes in our ability to retain key personnel; successful implementation of our growth strategy; risks related to the number of new business initiatives we are undertaking; successful implementation of our growth strategy including our real estate transformation and the number of new gallery locations that we seek to open and the timing of openings; 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 housing market as well as the impact of economic conditions on consumer confidence and spending; changes in customer demand for our products; our ability to anticipate consumer preferences and buying trends, and maintaining our brand promise to customers; decisions concerning the allocation of capital; factors affecting our outstanding convertible senior notes or other forms of our indebtedness; our ability to anticipate consumer preferences and buying trends, and maintain 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 our sourcing and supply chain including our dependence on imported products produced by foreign manufacturers and risks related to importation of such products including risks related to tariffs, the countermeasures and mitigation steps that we adopt in response to tariffs and other similar issues, 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 RH’s 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.rh.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.

 

CONTACT

 

Allison Malkin

203-682-8225

allison.malkin@icrinc.com

 

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Picture 17

RETAIL GALLERY METRICS

(Unaudited)

We operated the following number of retail Galleries, outlets and showrooms:

 

 

 

 

 

 

 

May 4,

 

May 5,

 

 

2019

 

2018

RH

 

 

 

 

Design Galleries

    

20

 

17

Legacy Galleries

 

43

 

46

Modern Galleries

 

 2

 

 2

Baby & Child Galleries

 

 5

 

 4

Total RH Galleries

 

70

 

69

Outlets

 

40

 

32

 

 

 

 

 

Waterworks Showrooms

 

15

 

15

 

As of May 4, 2019, six of our RH Design Galleries include an integrated RH Hospitality experience.

The following table presents RH Gallery and Waterworks showroom metrics and excludes outlets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

May 4,

 

May 5,

 

 

 

2019

 

2018

 

 

    

 

    

Total Leased Selling

    

 

    

Total Leased Selling

 

 

 

Store Count

 

Square Footage

 

Store Count

 

Square Footage

 

 

 

 

 

(in thousands)

 

 

 

(in thousands)

 

Beginning of period

 

86

 

1,089

 

83

 

981

 

RH Galleries:

 

  

 

  

 

  

 

  

 

Dallas RH Modern Gallery (relocation)

 

 —

 

(4.5)

 

 —

 

 —

 

Dallas RH Baby & Child Gallery

 

(1)

 

(3.7)

 

 —

 

 —

 

Dallas legacy Gallery (relocation)

 

 —

 

(2.6)

 

 —

 

 —

 

Portland Design Gallery

 

 —

 

 —

 

 1

 

26.0

 

Dallas RH Modern Gallery

 

 —

 

 —

 

 1

 

8.2

 

Portland legacy Gallery

 

 —

 

 —

 

(1)

 

(4.7)

 

Waterworks Showrooms:

 

 

 

 

 

 

 

 

 

Waterworks Scottsdale Showroom

 

 —

 

 —

 

 1

 

2.2

 

Waterworks Scottsdale Showroom

 

 —

 

 —

 

(1)

 

(1.1)

 

End of period

 

85

 

1,078

 

84

 

1,012

 

 

 

  

 

  

 

  

 

  

 

Weighted-average leased selling square footage

 

  

 

1,084

 

  

 

984

 

% Growth year over year

 

  

 

10

%  

  

 

 8

%

 

See the Company’s most recent Form 10‑K and Form 10‑Q filings for square footage definitions.

Total leased square footage as of May 4, 2019 and May 5, 2018 was 1,454,000 and 1,358,000, respectively.

Weighted-average leased square footage for the three months ended May 4, 2019 and May 5, 2018 was 1,461,000 and 1,323,000, respectively.

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Picture 18

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

May 4,

 

% of Net

 

May 5,

 

% of Net

 

 

 

2019

 

Revenues

 

2018

 

Revenues

 

Net revenues

 

$

598,421

 

100.0

%  

$

557,406

 

100.0

%

Cost of goods sold

 

 

365,607

 

61.1

%  

 

348,073

 

62.4

%

Gross profit

 

 

232,814

 

38.9

%  

 

209,333

 

37.6

%

Selling, general and administrative expenses

 

 

164,181

 

27.4

%  

 

161,186

 

29.0

%

Income from operations

 

 

68,633

 

11.5

%  

 

48,147

 

8.6

%

Interest expense—net

 

 

21,118

 

3.6

%  

 

15,098

 

2.7

%

Income before income taxes

 

 

47,515

 

7.9

%  

 

33,049

 

5.9

%

Income tax expense

 

 

11,793

 

1.9

%  

 

7,588

 

1.3

%

Net income

 

$

35,722

 

6.0

%  

$

25,461

 

4.6

%

 

 

 

  

 

  

 

 

  

 

  

 

Weighted-average shares used in computing basic net income per share

 

 

19,976,858

 

  

 

 

21,545,025

 

  

 

Basic net income per share

 

$

1.79

 

  

 

$

1.18

 

  

 

 

 

 

  

 

  

 

 

  

 

  

 

Weighted-average shares used in computing diluted net income per share

 

 

24,933,987

 

  

 

 

25,230,228

 

  

 

Diluted net income per share

 

$

1.43

 

  

 

$

1.01

 

  

 

 

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Picture 19

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

May 4,

    

February 2,

    

May 5,

 

 

 

2019

 

2019

 

2018

 

ASSETS

 

 

  

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

102,550

 

$

5,803

 

$

20,796

 

Merchandise inventories

 

 

530,190

 

 

531,947

 

 

530,657

 

Other current assets

 

 

189,325

 

 

166,217

 

 

97,917

 

Total current assets

 

 

822,065

 

 

703,967

 

 

649,370

 

Property and equipment—net

 

 

954,142

 

 

952,957

 

 

750,532

 

Operating lease right-of-use assets

 

 

432,212

 

 

440,504

 

 

496,412

 

Goodwill and intangible assets

 

 

210,371

 

 

210,401

 

 

242,512

 

Other non-current assets

 

 

127,042

 

 

115,189

 

 

130,647

 

Total assets

 

$

2,545,832

 

$

2,423,018

 

$

2,269,473

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

  

 

 

  

 

 

  

 

Liabilities

 

 

  

 

 

  

 

 

  

 

Accounts payable and accrued expenses

 

$

289,146

 

$

320,497

 

$

264,628

 

Convertible senior notes due 2019—net

 

 

347,918

 

 

343,789

 

 

 —

 

Operating lease liabilities

 

 

56,601

 

 

66,249

 

 

69,580

 

Deferred revenue, customer deposits and other current liabilities

 

 

317,945

 

 

262,051

 

 

239,524

 

Total current liabilities

 

 

1,011,610

 

 

992,586

 

 

573,732

 

Asset based credit facility

 

 

 —

 

 

57,500

 

 

219,000

 

Term loans—net

 

 

316,205

 

 

 —

 

 

79,528

 

Promissory notes—net

 

 

40,208

 

 

 —

 

 

11,285

 

Convertible senior notes due 2019—net

 

 

 —

 

 

 —

 

 

331,678

 

Convertible senior notes due 2020—net

 

 

275,884

 

 

271,157

 

 

257,425

 

Convertible senior notes due 2023—net

 

 

253,424

 

 

249,151

 

 

 —

 

Non-current operating lease liabilities

 

 

427,961

 

 

437,557

 

 

487,603

 

Non-current finance lease liabilities

 

 

 436,228

 

 

421,245

 

 

257,811

 

Other non-current obligations

 

 

31,685

 

 

32,512

 

 

46,185

 

Total liabilities

 

 

2,793,205

 

 

2,461,708

 

 

2,264,247

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

(247,373)

 

 

(38,690)

 

 

5,226

 

Total liabilities and stockholders’ equity (deficit)

 

$

2,545,832

 

$

2,423,018

 

$

2,269,473

 

 

8

Picture 20

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

May 4,

    

May 5,

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

Net income

 

$

35,722

 

$

25,461

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

27,189

 

 

22,745

Other non-cash items

 

 

39,168

 

 

36,986

Change in assets and liabilities:

 

 

  

 

 

  

Prepaid expense and other assets

 

 

(17,846)

 

 

(31,486)

Accounts payable and accrued expenses

 

 

(38,595)

 

 

(46,674)

Current and non-current operating lease liability

 

 

(27,131)

 

 

(16,589)

Other changes in assets and liabilities

 

 

20,317

 

 

6,328

Net cash provided by (used in) operating activities

 

 

38,824

 

 

(3,229)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

Capital expenditures

 

 

(7,916)

 

 

(17,679)

Net cash used in investing activities

 

 

(7,916)

 

 

(17,679)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

Net borrowings (repayments) under asset based credit facility

 

 

(57,500)

 

 

19,030

Net borrowings under term loans

 

 

320,000

 

 

 —

Net borrowings (repayments) under promissory and equipment security notes

 

 

59,017

 

 

(1,491)

Debt issuance costs

 

 

(4,499)

 

 

 —

Repurchases of common stock—including commissions

 

 

(250,032)

 

 

 —

Other financing activities

 

 

(1,153)

 

 

796

Net cash provided by financing activities

 

 

65,833

 

 

18,335

Effects of foreign currency exchange rate translation

 

 

 6

 

 

(62)

Net increase (decrease) in cash and cash equivalents and restricted cash equivalents

 

 

96,747

 

 

(2,635)

Cash and cash equivalents

 

 

  

 

 

  

Beginning of period—cash and cash equivalents

 

 

5,803

 

 

17,907

Beginning of period—restricted cash equivalents (construction related deposits)

 

 

 —

 

 

7,407

Beginning of period—cash and cash equivalents and restricted cash equivalents

 

$

5,803

 

$

25,314

 

 

 

 

 

 

 

End of period—cash and cash equivalents

 

 

37,550

 

 

20,796

End of period—restricted cash

 

 

65,000

 

 

 —

End of period—restricted cash equivalents (construction related deposits)

 

 

 —

 

 

1,883

End of period—cash and cash equivalents, restricted cash and restricted cash equivalents

 

$

102,550

 

$

22,679

 

9

Picture 21

CALCULATION OF FREE CASH FLOW

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

May 4,

    

May 5,

 

 

2019

 

2018

Net cash provided by (used in) operating activities

 

$

38,824

 

$

(3,229)

Capital expenditures

 

 

(7,916)

 

 

(17,679)

Principal payments under finance leases

 

 

(2,129)

 

 

(1,776)

Free cash flow [a]

 

$

28,779

 

$

(22,684)


[a]

Free cash flow is calculated as net cash provided by (used in) operating activities, less capital expenditures and principal payments under finance leases. Free cash flow excludes all non-cash items. 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.

10

Picture 22

RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

May 4,

    

May 5,

 

 

2019

 

2018

GAAP net income

 

$

35,722

 

$

25,461

Adjustments (pre-tax):

 

 

  

 

 

  

Net revenues:

 

 

  

 

 

  

Recall accrual [a]

 

 

413

 

 

 —

Cost of goods sold:

 

 

  

 

 

  

Asset impairments and change in useful lives [b]

 

 

2,993

 

 

 —

Recall accrual [a]

 

 

(2,061)

 

 

(254)

Impact of inventory step-up [c]

 

 

 —

 

 

190

Selling, general and administrative expenses:

 

 

  

 

 

  

Asset impairments and change in useful lives [b]

 

 

483

 

 

 —

Recall accrual [a]

 

 

33

 

 

 —

Loss on asset disposal reversal  [d]

 

 

 —

 

 

(840)

Legal costs [e]

 

 

 —

 

 

1,915

Interest expense—net:

 

 

  

 

 

  

Amortization of debt discount [f]

 

 

11,689

 

 

7,272

Subtotal adjusted items

 

 

13,550

 

 

8,283

Impact of income tax items [g]

 

 

(4,084)

 

 

(3,158)

Adjusted net income [h]

 

$

45,188

 

$

30,586


[a]

Represents an adjustment to net revenues, increase in cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments and vendor claims.

[b]

Represents the acceleration of depreciation expense of $3.0 million due to a change in the estimated useful lives of certain assets, as well as a $0.5 million charge related to the termination of a service agreement associated with such assets.

[c]

Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks.

[d]

Represents the reversal of an estimated loss on disposal of asset due to negotiations of the sales price being finalized.

[e]

Represents costs incurred in connection with a legal settlement.

[f]

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”), for the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”) and for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”), we separated the 2019 Notes, 2020 Notes and 2023 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes, 2020 Notes and 2023 Notes over their expected lives. The equity components represent the difference between the proceeds from the issuance of the 2019 Notes, 2020 Notes and 2023 Notes and the fair value of the liability components of the 2019 Notes, 2020 Notes and 2023 Notes, respectively. Amounts are presented net of interest capitalized for capital projects of $0.7 million and $0.6 million during the three months ended May 4, 2019 and May 5, 2018, respectively.

[g]

Assumes a normalized tax rate of 26% for the three months ended May 4, 2019 and May 5, 2018.

[h]

Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net income is included in this press release because management believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of 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.

11

Picture 23

RECONCILIATION OF DILUTED NET INCOME PER SHARE TO

ADJUSTED DILUTED NET INCOME PER SHARE

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

May 4,

    

May 5,

 

 

2019

 

2018

Diluted net income per share

 

$

1.43

 

$

1.01

 

 

 

 

 

 

 

Pro forma diluted net income per share [a]

 

$

1.46

 

$

1.01

Per share impact of adjustments (pre-tax) [b]:

 

 

  

 

 

  

Amortization of debt discount

 

 

0.48

 

 

0.29

Asset impairments and change in useful lives

 

 

0.14

 

 

 —

Recall accrual

 

 

(0.07)

 

 

(0.01)

Loss on asset disposal reversal

 

 

 —

 

 

(0.04)

Impact of inventory step-up

 

 

 —

 

 

0.01

Legal costs

 

 

 —

 

 

0.08

Subtotal adjusted items

 

 

0.55

 

 

0.33

Impact of income tax items [b]

 

 

(0.16)

 

 

(0.13)

Adjusted diluted net income per share [c]

 

$

1.85

 

$

1.21


[a]

For GAAP purposes, we incur dilution above the lower strike prices of our 2019 Notes, 2020 Notes and 2023 Notes of $116.09, $118.13 and $193.65, respectively. However, we exclude from our adjusted diluted shares outstanding calculation the dilutive impact of the convertible notes between $116.09 and $171.98 for our 2019 Notes, between $118.13 and $189.00 for our 2020 Notes, and between $193.65 and $309.84 for our 2023 Notes, based on the bond hedge contracts in place that will deliver shares to offset dilution in these ranges. At stock prices in excess of $171.98, $189.00 and $309.84, we will incur dilution related to the 2019 Notes, 2020 Notes and 2023 Notes, respectively, and our obligation to deliver additional shares in excess of the dilution protection provided by the bond hedges. Pro forma diluted net income per share for the three months ended May 4, 2019 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 24,449,403, which excludes dilution related to the 2019 Notes and 2020 Notes of 484,584 shares.

[b]

Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.

[c]

Adjusted diluted net income per share is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted diluted net income per share as net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance divided by the Company’s share count. Adjusted diluted net income per share is included in this press release because management believes that adjusted diluted net income per share provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

12

Picture 24

RECONCILIATION OF NET REVENUES TO ADJUSTED NET REVENUES

AND GROSS PROFIT TO ADJUSTED GROSS PROFIT

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

May 4,

    

May 5,

 

 

 

2019

 

2018

 

Net revenues

 

$

598,421

 

$

557,406

 

Recall accrual [a]

 

 

413

 

 

 —

 

Adjusted net revenues [b]

 

$

598,834

 

$

557,406

 

 

 

 

 

 

 

 

 

Gross profit

 

$

232,814

 

$

209,333

 

Asset impairments and change in useful lives [a]

 

 

2,993

 

 

 —

 

Recall accrual [a]

 

 

(1,648)

 

 

(254)

 

Impact of inventory step-up [a]

 

 

 —

 

 

190

 

Adjusted gross profit [b]

 

$

234,159

 

$

209,269

 

 

 

 

 

 

 

 

 

Gross margin [c]

 

 

38.9

%  

 

37.6

%

Adjusted gross margin [c]

 

 

39.1

%  

 

37.5

%


[a]

Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.

[b]

Adjusted net revenues and adjusted gross profit are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net revenues as net revenues, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define adjusted gross profit as gross profit, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net revenues and adjusted gross profit are included in this press release because management believes that adjusted net revenues and adjusted gross profit provide meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

[c]

Gross margin is defined as gross profit divided by net revenues. Adjusted gross margin is defined as adjusted gross profit divided by adjusted net revenues.

13

Picture 25

RECONCILIATION OF NET INCOME TO OPERATING INCOME

AND ADJUSTED OPERATING INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

May 4,

    

May 5,

 

 

 

2019

 

2018

 

Net income

 

$

35,722

 

$

25,461

 

Interest expense—net

 

 

21,118

 

 

15,098

 

Income tax expense

 

 

11,793

 

 

7,588

 

Operating income

 

 

68,633

 

 

48,147

 

Asset impairments and change in useful lives [a]

 

 

3,476

 

 

 —

 

Recall accrual [a]

 

 

(1,615)

 

 

(254)

 

Loss on asset disposal reversal [a]

 

 

 —

 

 

(840)

 

Impact of inventory step-up [a]

 

 

 —

 

 

190

 

Legal costs [a]

 

 

 —

 

 

1,915

 

Adjusted operating income [b]

 

$

70,494

 

$

49,158

 

 

 

 

  

 

 

  

 

Net revenues

 

$

598,421

 

$

557,406

 

Adjusted net revenues [c]

 

$

598,834

 

$

557,406

 

 

 

 

  

 

 

  

 

Operating margin [c]

 

 

11.5

%  

 

8.6

%

Adjusted operating margin [c]

 

 

11.8

%  

 

8.8

%


[a]

Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.

[b]

Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted operating income is included in this press release because management believes that adjusted operating income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

[c]

Operating margin is defined as operating income divided by net revenues. Adjusted operating margin is defined as adjusted operating income divided by adjusted net revenues. Refer to table titled “Reconciliation of Net Revenues to Adjusted Net Revenues and Gross Profit to Adjusted Gross Profit” and the related footnotes for a definition and reconciliation of adjusted net revenues.

14

Picture 26

RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED EBITDA

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

May 4,

 

May 5,

 

 

2019

 

2018

Net income

    

$

35,722

    

$

25,461

Depreciation and amortization

 

 

27,189

 

 

22,745

Interest expense—net

 

 

21,118

 

 

15,098

Income tax expense

 

 

11,793

 

 

7,588

EBITDA [a]

 

 

95,822

 

 

70,892

Stock-based compensation [b]

 

 

5,695

 

 

7,997

Asset impairments and change in useful lives [c]

 

 

483

 

 

 —

Recall accrual [c]

 

 

(1,615)

 

 

(254)

Loss on asset disposal reversal [c]

 

 

 —

 

 

(840)

Impact of inventory step-up [c]

 

 

 —

 

 

190

Legal costs [c]

 

 

 —

 

 

1,915

Adjusted EBITDA [a]

 

$

100,385

 

$

79,900


[a]

EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense and income tax expense. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of stock-based compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance. EBITDA and Adjusted EBITDA are included in this press release because management believes that these metrics provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions for other companies due to different methods of calculation.

[b]

Represents non-cash compensation related to equity awards granted to employees.

[c]

Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.

 

15

Picture 27

RECONCILIATION OF NET INCOME TO EBITDA

AND ADJUSTED EBITDA TRAILING TWELVE MONTHS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Trailing Twelve Months

 

 

May 4,

 

 

2019

Net income

    

$

145,992

Depreciation and amortization

 

 

97,276

Interest expense—net

 

 

73,789

Goodwill and tradename impairment [a]

 

 

32,086

Loss on extinguishment of debt [b]

 

 

917

Income tax expense

 

 

29,438

EBITDA [c]

 

 

379,498

Stock-based compensation [d]

 

 

21,820

Reorganization related costs [e]

 

 

9,977

Asset held for sale impairment [f]

 

 

8,497

Distribution center closures [g]

 

 

3,886

Lease losses [h]

 

 

3,411

Asset impairments and change in useful lives [i]

 

 

1,679

Recall accrual [j]

 

 

258

Impact of inventory step-up [k]

 

 

190

Legal settlement [l]

 

 

(7,204)

Adjusted EBITDA [c]

 

$

422,012


[a]

Represents goodwill and tradename impairment related to the Waterworks reporting unit.

[b]

Represents the loss on extinguishment of debt related to the LILO term loan, the promissory note secured by our aircraft and the equipment security notes, all of which were repaid in full in June 2018.

[c]

Refer to footnote [a] within table titled “Reconciliation of Net Income to EBITDA and Adjusted EBITDA.”

[d]

Represents non-cash compensation related to equity awards granted to employees.

[e]

Represents severance costs and related taxes associated with reorganizations, including severance related to the closure of distribution centers and the Dallas customer call center as part of our supply chain reorganization.

[f]

Represents the impairment recorded upon reclassification of an owned Design Gallery as held for sale.

[g]

Represents disposals of inventory and property and equipment, lease related charges, inventory transfer costs and other costs associated with distribution center closures.

[h]

The adjustment represents additional lease related charges due to the remeasurement of the lease loss liability for RH Contemporary Art resulting from an update to both the timing and the amount of future estimated lease related cash inflows.

[i]

Represents a $1.2 million inventory impairment charge related to holiday merchandise and a $0.5 million charge related to the termination of a service agreement.

[j]

Represents adjustments to net revenues and cost of goods sold, inventory charges associated with product recalls, as well as accrual adjustments and vendor claims.

[k]

Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks.

[l]

Represents a favorable legal settlement, net of related legal expenses.

16

Picture 28

ASC 842 IMPACT OF ADOPTION

(In thousands)

(Unaudited)

We adopted Accounting Standards Update (“ASU”) 2016‑02, ASU 2018-10 and ASU 2018-11 (together, “ASC 842”), which pertain to accounting for leases, on February 3, 2019, the first day of our first fiscal quarter of 2019, using a modified retrospective approach. Under this adoption method, the results of prior comparative periods are revised with an adjustment to opening retained earnings of fiscal 2017.

Condensed Consolidated Statements of Income

The following tables summarize the impact of adopting ASC 842 on our fiscal 2018 annual and quarterly condensed consolidated statements of income:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended February 2, 2019

 

    

As Reported

    

Adjustment

 

As Adjusted

Net revenues

 

$

2,505,653

 

$

 —

 

$

2,505,653

Cost of goods sold

 

 

1,504,806

 

 

15,270

[a]

 

1,520,076

Gross profit

 

 

1,000,847

 

 

(15,270)

 

 

985,577

Selling, general and administrative expenses

 

 

711,617

 

 

12,224

[b][c]

 

723,841

Income from operations

 

 

289,230

 

 

(27,494)

 

 

261,736

Other expenses

 

 

  

 

 

 

 

 

  

Interest expense—net

 

 

75,074

 

 

(7,305)

[d]

 

67,769

Goodwill and tradename impairment

 

 

32,086

 

 

 —

 

 

32,086

Loss on extinguishment of debt

 

 

917

 

 

 —

 

 

917

Total other expenses

 

 

108,077

 

 

(7,305)

 

 

100,772

Income before income taxes

 

 

181,153

 

 

(20,189)

 

 

160,964

Income tax expense

 

 

30,514

 

 

(5,281)

[e]

 

25,233

Net income

 

$

150,639

 

$

(14,908)

 

$

135,731

Weighted-average shares used in computing basic net income per share

 

 

21,613,678

 

 

 —

 

 

21,613,678

Basic net income per share

 

$

6.97

 

$

(0.69)

 

$

6.28

Weighted-average shares used in computing diluted net income per share

 

 

26,533,225

 

 

 —

 

 

26,533,225

Diluted net income per share

 

$

5.68

 

$

(0.56)

 

$

5.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 5, 2018

 

    

As Reported

    

Adjustment

 

As Adjusted

Net revenues

 

$

557,406

 

$

 —

 

$

557,406

Cost of goods sold

 

 

345,371

 

 

2,702

[a]

 

348,073

Gross profit

 

 

212,035

 

 

(2,702)

 

 

209,333

Selling, general and administrative expenses

 

 

158,434

 

 

2,752