RH Reports Fourth Quarter and Fiscal 2016 Financial Results

RH Reports Fourth Quarter and Fiscal 2016 Financial Results

Company Expects Fiscal 2017 Net Revenue Growth in the Range of 8% to 12%;
Adjusted Net Income Growth in the Range of 26% to 55%

RH (NYSE:RH) today announced financial results for the fourth quarter and fiscal year ended January 28, 2017, and provided its outlook for the first quarter and the fiscal year ending February 3, 2018.

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

Fiscal Year Highlights

• GAAP and adjusted net revenues increased 1% on top of a 13% increase last year
• Comparable brand revenues declined 7% compared to an 11% increase last year
• GAAP net income of $5.4 million compared to $91.1 million last year
• Adjusted net income of $51.8 million compared to $114.8 million last year
• GAAP diluted earnings per share of $0.13 compared to $2.16 last year
• Adjusted diluted earnings per share of $1.27 compared to $2.72 last year

Fourth Quarter Highlights

• GAAP and adjusted net revenues declined 9% on top of an 11% increase last year
• Comparable brand revenues declined 18% compared to a 9% increase last year
• GAAP net income of $9.4 million compared to $33.3 million last year
• Adjusted net income of $27.9 million compared to $41.2 million last year
• GAAP diluted earnings per share of $0.23 compared to $0.79 last year
• Adjusted diluted earnings per share of $0.68 compared to $0.98 last year

Gary Friedman, Chairman and Chief Executive Officer, commented, “Exiting fiscal 2016, we are now through the most uncertain stages of our transformation. We made several strategic investments and changes to our business last year, which temporarily depressed financial results in the short term, that we believe will strengthen our brand and position the business for accelerated growth in fiscal 2017 and beyond. These temporal issues included 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 rationalize our SKU count, and the decision to push our 2016 RH Interiors Source Book mailing from spring to fall.”

“2016 was a year of transformation and transition at RH. We transformed our business from a promotional to a membership model that we believe will enhance our brand, streamline our operations, and vastly improve the customer experience. We also began the redesign of our supply chain network, transitioning inventory into fewer facilities, which enabled us to forgo building a planned distribution center scheduled to open in 2017. 2016 was also the first full year of many new business initiatives such as RH Modern, RH Teen, RH Hospitality, the redesign of our RH Interiors Source Book, the roll out of Design Ateliers in our retail Galleries, and the addition of Waterworks to our platform. All of these new initiatives are expected to contribute to growth in 2017 and beyond.”

“While 2016 was a year of transformation and transition, 2017 will be a year of execution, architecture, and cash flow at RH. Our focus will be on executing our new business model, architecting a new back-end operating platform, and maximizing cash flow. While our investment strategy will always maintain a long-term view, we believe we can improve working capital and returns by having a more disciplined approach to capital allocation. Accordingly, we plan to reduce our new Gallery opening cadence to a range of 3 to 5 per year, which is expected to drive high-quality sustainable growth, while lowering capital requirements and execution risk over the course of our real estate transformation. We remain confident in reaching our long term goal of $4 to $5 billion in North American revenues, mid-teens operating margins, significant free cash flow, and industry-leading returns on invested capital.”

First Quarter and Fiscal 2017 Outlook

Mr. Friedman continued, “We expect first quarter fiscal 2017 net revenues to increase 16% to 20%, of which approximately 5 points of growth is due to the acquisition of Waterworks and 5 points is related to higher outlet and warehouse sales stemming from accelerated inventory optimization efforts during the quarter. Excluding these factors, we are expecting growth in the range of 6% to 10%, as we anniversary the launch of the RH Members Program, and benefit from the mailing of our Fall 2016 RH Interiors Source Book and the recent mailing of RH Outdoor. While our higher outlet revenues and inventory optimization efforts are having a positive impact on revenues in the first quarter, they will have a negative impact on margins and earnings as we expect adjusted net income in the range of $0.8 to $2.4 million.”

“While we expect revenue growth to accelerate, operating margins to expand, and to generate significant free cash flow in fiscal 2017, we are taking a cautiously optimistic approach to our outlook given the uncertain macro environment in addition to the many initiatives and investments we are undertaking. As a result, we expect total net revenues to increase 8% to 12%, inclusive of 2-points of growth due to the 53rd week, and anticipate adjusted net income to increase 26% to 55% in fiscal 2017. We plan to generate meaningful free cash flow driven by increased earnings, reduced capital spending, and lower inventories,” concluded Mr. Friedman.

RH’s fiscal 2017 will include 53 weeks compared to the prior fiscal year which included 52 weeks. The Company is providing the following outlook for the first quarter and fiscal 2017:

Note: The Company’s adjusted diluted earnings per share outlook excludes the potential benefit of any additional stock repurchases beyond those already completed through March 24, 2017. 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 periods, such as unusual non-cash and other compensation expense; one-time income tax expense or benefits; legal claim related expenses; reorganization costs including severance costs and related taxes; non-cash amortization of debt discount; and charges and costs in connection with the acquisition of Waterworks, among others. The exclusion of these charges and costs in future periods will have a significant impact on the Company’s adjusted net 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.

Fiscal 2016 Results

Revenue – GAAP net revenues for fiscal 2016 increased 1% to $2.135 billion from $2.109 billion in fiscal 2015. Adjusted net revenues for fiscal 2016 increased 1% to $2.138 billion.

• Comparable brand revenue, which includes direct, declined 7% in fiscal 2016 compared to 11% growth for the same period last year.
• Stores revenues increased 9% to $1.179 billion in fiscal 2016. Stores revenues during fiscal 2016 represented 55% of total net revenues. Outlet and warehouse sales, which are included in stores revenues, were $144.6 million in fiscal 2016 compared to $142.8 million for the same period last year.
• Direct revenues decreased 7% to $956.0 million in fiscal 2016. Direct revenues during fiscal 2016 represented 45% of total net revenues.

Retail Galleries - As of January 28, 2017, the Company operated a total of 85 retail Galleries, consisting of 50 legacy Galleries, 6 larger format Design Galleries, 8 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 throughout the United States and UK. This compares to 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 throughout the United States and Canada, as of January 30, 2016.

In addition, as of January 28, 2017, the Company operated 28 outlet stores compared to 17 as of January 30, 2016.

Operating Income and Margin** - On an unadjusted basis, GAAP operating income was $53.0 million in fiscal 2016 compared to $185.6 million for the same period last year and GAAP operating margin was 2.5% compared to 8.8% for the same period last year.

Adjusted operating income in fiscal 2016 was $102.9 million compared to $204.6 million in fiscal 2015. Adjusted operating margin in fiscal 2016 was 4.8% compared to 9.7% for the same period last year.

Net Income** - On an unadjusted basis, GAAP net income for fiscal 2016 was $5.4 million compared to $91.1 million for the same period last year.

Adjusted net income in fiscal 2016 was $51.8 million compared to $114.8 million in fiscal 2015.

Earnings Per Share** - On an unadjusted basis, GAAP diluted earnings per share for fiscal 2016 was $0.13 compared to $2.16 for the same period last year.

Adjusted diluted earnings per share for fiscal 2016 was $1.27 compared to $2.72 for the same period last year.

Fourth Quarter Fiscal 2016 Results

Revenue – GAAP net revenues for the fourth quarter of fiscal 2016 decreased 9% to $586.7 million from $647.2 million in the fourth quarter of fiscal 2015. Adjusted net revenues for the fourth quarter of fiscal 2016 decreased 9% to $590.1 million.

• Comparable brand revenue, which includes direct, declined 18% in the fourth quarter of fiscal 2016 compared to 9% growth for the same period last year.
• Stores revenues decreased 4% to $306.2 million in the fourth quarter of fiscal 2016. Stores revenues during the fourth quarter of fiscal 2016 represented 52% of total net revenues.
• Direct revenues decreased 15% to $280.5 million in the fourth quarter of fiscal 2016. Direct revenues during the fourth quarter of fiscal 2016 represented 48% of total net revenues.

Operating Income and Margin** - On an unadjusted basis, GAAP operating income was $27.1 million in the fourth quarter of fiscal 2016 compared to $67.2 million for the same period last year and GAAP operating margin was 4.6% compared to 10.4% for the same period last year.

Adjusted operating income in the fourth quarter of fiscal 2016 was $50.9 million compared to $74.2 million in the fourth quarter of fiscal 2015. Adjusted operating margin in the fourth quarter of fiscal 2016 was 8.6% compared to 11.5% for the same period last year.

Net Income** - On an unadjusted basis, GAAP net income for the fourth quarter of fiscal 2016 was $9.4 million compared to $33.3 million for the same period last year.

Adjusted net income in the fourth quarter of fiscal 2016 was $27.9 million compared to $41.2 million in the fourth quarter of fiscal 2015.

Earnings Per Share** - On an unadjusted basis, GAAP diluted earnings per share for the fourth quarter of fiscal 2016 was $0.23 compared to $0.79 for the same period last year.

Adjusted diluted earnings per share for the fourth quarter of fiscal 2016 was $0.68 compared to $0.98 for the same period last year.

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

Video Presentation and Q&A Conference Call Information

Accompanying this release, RH will today post a video presentation highlighting the Company’s fourth quarter fiscal 2016 performance and outlook on the Company’s Investor Relations website, ir.rh.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.rh.com. A replay of the question and answer session conference call will be available through April 10, 2017 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 93055728, 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 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 net revenues, 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 outlook and guidance, including for the first quarter of fiscal 2017, for fiscal year 2017 and over the longer term, including net revenues, net income, operating margins, cash flow, capital expenditures, costs and expenses and EPS as well as the our expectation that we will have growth in cash from operations in 2017; the anticipated benefits of our business investments and strategies including (i) efforts to optimize inventories and rationalize SKUs, (ii) efforts to implement a more disciplined approach to capital allocation, (iii) the mailing of Source Books, (iv) the opening of new Gallery locations, (v) the membership program and (vi) the redesign of our supply chain network; our plans regarding RH Modern and expectations concerning the potential of the RH Modern product offering; our share repurchase program or any expectations concerning any repurchases of our shares now or in the future; our expectations concerning the strength of the RH brand; our expectations concerning the Company’s confidence in the long-term opportunity to reach $4 to $5 billion in North American sales and mid-teens operating margins, significant free cash flow and industry-leading returns on invested capital. 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 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.

RH
Cammeron McLaughlin, 415-945-4998
SVP, Investor Relations and Strategy
cmclaughlin@rh.com

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