Company Raises Fiscal 2019 Guidance for the Third Time this
Year
RH (NYSE: RH) today announced second 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.
SECOND QUARTER 2019 HIGHLIGHTS
Q2 GAAP NET REVENUES INCREASED +10.3% TO $706.5M Q2 ADJUSTED NET
REVENUES INCREASED +9.9% TO $706.5M
Q2 GAAP OPERATING INCOME INCREASED +27% TO $104.0M VS. $81.8M LY
Q2 ADJUSTED OPERATING INCOME INCREASED +39% TO $105.0M VS. $75.5M
LY
Q2 GAAP OPERATING MARGIN INCREASED 190 BASIS POINTS TO 14.7% VS.
12.8% LY Q2 ADJUSTED OPERATING MARGIN INCREASED 320 BASIS POINTS TO
14.9% VS. 11.7% LY
Q2 GAAP NET INCOME INCREASED +1% TO $63.8M VS. $62.9M LY Q2
ADJUSTED NET INCOME INCREASED +31% TO $71.4M* VS. $54.5M* LY
Q2 GAAP EPS INCREASED +25% TO $2.86 VS. $2.29 LY Q2 ADJUSTED
DILUTED EPS INCREASED +59% TO $3.20* VS. $2.01* LY
Q2 FREE CASH FLOW INCREASED TO $109.2M VS. $25.2M LY YTD Q2 FREE
CASH FLOW INCREASED TO $137.9M VS. $2.5M LY
*The Company’s adjusted net income and adjusted diluted EPS
benefited by $4.5M and $0.20, respectively, in the second quarter
due to a change of the normalized tax rate to 21% versus the
previous estimate of 26%, and the Company now expects the effective
tax rate for fiscal 2019 to be 21%. The Company has normalized all
periods presented using a tax rate of 21% to support comparability
of growth for purposes of presenting non-GAAP adjusted earnings in
order to facilitate year over year comparison of operating results
on a comparable basis with historical results at a consistent tax
rate across time periods. The Company has also provided
reconciliation tables that update historical results to reflect
these changes.
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. The
Company has provided reconciliation tables that update historical
results to reflect these changes in lease accounting standards.
Please see the tables below for reconciliations of all GAAP to
non-GAAP measures referenced in this press release.
To Our People, Partners, and Shareholders,
We are pleased to report another quarter of record results, and
are raising our fiscal 2019 guidance for the third time this year.
We generated record GAAP revenues of $706.5 million, an increase of
10.3%, record GAAP operating margin of 14.7%, record adjusted
operating margin of 14.9%, record GAAP earnings per share of $2.86,
and record adjusted diluted earnings per share of $3.20, a 59%
increase versus $2.01 a year ago applying a 21% normalized tax rate
in both years.
We are raising our fiscal 2019 guidance for the year as
follows:
Prior Guidance
Updated Guidance
Adjusted net revenues
$2,658.0 - $2,674.0
$2,680.3 - $2,694.3 Adjusted operating income*
$342.0 - $358.0
$365.5 - $372.3 Adjusted operating margin*
12.9% - 13.4%
13.6% - 13.8% Adjusted net income*
$213.3 - $223.8
$246.9 - $252.3 Adjusted diluted EPS
$9.08 - $9.52
$10.53 - $10.76
* The prior guidance for this financial measure is implied by
the Company’s July 29, 2019 upward revision to adjusted earnings
guidance. The last actual guidance issued for this financial
measure was on June 12, 2019 in connection with the Company’s first
quarter earnings release, when the Company provided fiscal 2019
adjusted operating income guidance of $332.5 million to $350.5
million, adjusted operating margin guidance of 12.6% to 13.2%, and
adjusted net income guidance of $206.2 million to $218.2
million.
Our focus on elevating the brand, architecting an integrated
operating platform, and pivoting the Company back to growth has
resulted in RH standing out as one of the few brands that is
growing revenues, expanding operating margins, and driving
significantly higher returns on invested capital and free cash
flow. Despite achieving industry leading operating margins, we
continue to demonstrate our ability to grow earnings significantly
faster than revenues, illustrating the desirability of our
differentiated product offering, and the emergence of RH as a
luxury brand generating luxury margins.
Second quarter adjusted net revenues increased 9.9% over last
year reflecting the strength of our core RH business, the
performance of our new galleries, particularly RH New York, the
continued expansion of RH Hospitality and planned accelerated
outlet sales due to the previously mentioned closure of a 500,000
square foot distribution facility in the fourth quarter of fiscal
2018. Additionally, we experienced better than expected delivered
sales in the last few weeks of the quarter as a result of shipping
efficiencies and lower returns due to the recent redesign of our
home delivery network.
As a reminder, embedded in our 2019 guidance there is an
approximate 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, 4 points in the second quarter and we expect approximately
2 points in the third quarter and 4 points in the fourth quarter.
Taking into account the approximate 4 point negative drag, adjusted
net revenues would have increased 13.9% in the second quarter. We
expect our new rug collection to contribute to both revenue and
earnings growth in fiscal 2020.
Despite the increase in tariffs and some negative macro trends,
we remain optimistic that our business momentum will continue,
supported by a number of positive factors including by the recent
mailing of the Fall Interiors and soon to be in-home Modern Source
Books, the increasing contribution from RH Beach House, the launch
of RH Ski House and new Galleries opening this fall.
Our largest and most important new Gallery, RH New York,
continues to trend comfortably in excess of $100 million in
annualized revenue for fiscal 2019 and will generate more than $30
million of cash contribution in its first full fiscal year. We are
on track to open RH Minneapolis, the Gallery in Edina, RH Columbus,
the Gallery at Easton Town Center, and RH Marin, the Gallery at the
Village of Corte Madera, in the second half. These new prototype
Galleries average 45,000 square feet of indoor and outdoor selling
space spanning three levels with rooftop parks, restaurants,
barista bars and consumer facing RH Interior Design offices, and
will enable us to place our disruptive product assortment and
immersive retail experience into the market at a fraction of our
former investment. Looking forward, we expect to accelerate our
real estate transformation to a rate of 5 to 7 new Galleries in
Fiscal 2020 and 7 or more new Galleries in Fiscal 2021.
Regarding trade with China, we do not expect the current tariffs
to impair our ability to achieve stated financial goals and the
impact from the increased tariffs is embedded in our guidance for
the year. We continue to receive pricing accommodations from
vendors and have implemented price increases where necessary with
little to no impact to our business.
As it relates to our balance sheet, we ended the second quarter
with inventory of $481 million versus $551 million last year, down
$70 million, or 13% versus a 10% revenue increase. Due to the
efficiency of our supply chain network redesign and the
simplification of our reverse logistics and outlet model we expect
to end the year with inventories down $80 to $90 million versus
2018. We are now projecting to generate free cash flow in the range
of $325 to $350 million and expect total net debt to trailing
twelve month adjusted EBITDA of approximately 1.8x to 1.9x at year
end.
While we remain comfortable with our balance sheet, the current
market conditions for convertible debt are attractive. As
previously communicated, we will continue to be opportunistic as it
relates to the capital markets. If there is an opportunity to issue
convertible debt at acceptable terms, it could enable us to lower
interest expense and increase adjusted diluted EPS by as much as
$0.20 to $0.25 this year, and $0.65 to $0.70 next year, creating
shareholder value and providing increased optionality for RH.
We believe our Company remains undervalued and will continue to
evaluate share repurchases. Thus far in 2019, we have acquired 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 at an average price of $61.40 per share, or
approximately 60% of the total shares previously outstanding. We
believe the repurchase of our shares will prove to be an
outstanding allocation of capital for the benefit of our long term
shareholders.
Looking forward, we continue to see a clear path to $4 to $5
billion in North America revenues, with mid-to-high teens operating
margins and ROIC in excess of 50%. Additionally, we now believe
there is an opportunity to more than double those revenues as we
begin to expand globally, and move the brand beyond creating and
selling products to conceptualizing and selling spaces.
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 do understand the strategies we are pursuing – opening the
largest specialty retail experiences in our industry while most are
shrinking the size of their 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.
Ironically, I was reading an article in Forbes this morning with
the headline “RH, (A.K.A. Restoration Hardware) Fails When It Comes
To Digital.” The writer, Pamela Danziger, points to the Digital IQ
Index published by Gartner L2, a consulting group who ranks the
digital IQ of 103 specialty retailers with only Charlotte Russe
keeping RH off the bottom of the ranking. She pointed out that
Gartner L2’s principal specialty retail research analyst Supriya
Jain mentioned, “For at least the last three years, RH has ranked
in our (feeble) class in specialty retail”, and goes on to point
out that every other directly competitive brand ranks higher, with
Pier 1 ranking in the highest (gifted) class. I like to advise our
team that it is dangerous to run your business or live your life
based on other people’s thinking, especially ones who tend to be
sideline critics and have no experience building a business like
ours. I’m sure if Pamela, Supriya, and Gartner L2 did a Retail IQ
Index that looked at earnings growth and shareholder value creation
over the past three years across all channels, they would find RH’s
placement in the hierarchy quite different. Or better yet, since
85% of retail sales are still done in stores, maybe a Retail Store
IQ Index, ranking retailers on store performance or the metrics
important to customers would be interesting, and most likely find
us somewhere near the very top. Nonetheless, somehow “feebly” we
generate over a billion dollars in our digital channel, which also
ranks above all the competitive brands mentioned in the article. We
like to say on Team RH that “Leaders have to be comfortable making
others uncomfortable.” It’s what leaders do, and when you know
you’re on the right path, even when it makes others uncomfortable,
or when they call you feeble.
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.
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 September 24, 2019 by
dialing (855) 859-2056 or (404) 537-3406 and entering passcode
6784388, 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 margin, adjusted net income,
adjusted diluted EPS, the impact from the increased tariffs, the
impact of revenue reduction as a result of editing unprofitable and
non-strategic businesses; our future opportunity, growth plans and
strategies, including our focus on elevating the brand and
architecting an integrated operating platform, and RH becoming one
of the few retailers that is growing revenues, expanding margins,
and driving significantly higher returns on invested capital; our
optimism that our business momentum will continue despite negative
macro trends and increased tariffs; our expectations regarding our
tax rate for fiscal 2019 including assumptions regarding our
applicable tax rate and factors that would affect our tax rate; our
expectation that our RH New York gallery will continue to trend
comfortably in excess of $100 million in annualized revenue for
fiscal 2019 and will generate more than $30 million of cash
contribution in its first full fiscal year; our plan to open new
stores in the remainder of 2019; our belief that the current
tariffs will not impair our ability to achieve our stated financial
goals and that our response to tariffs will not have an adverse
impact on our business; the impact on our business trends from
macro factors; 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 expectations
regarding the convertible notes market and our ability to complete
a convertible notes financing on favorable terms; our expectations
regarding sources and uses of capital; our expectations with
respect to year-end inventory levels; planned accelerated outlet
sales; our projections regarding free cash flow and net debt to
trailing twelve month adjusted EBITDA at year end; our path to $4
to $5 billion in North America revenues, with mid-to-high teens
operating margins and ROIC in excess of 50%; our belief that there
is an opportunity to more than double revenues as we begin to
expand globally; 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 intention to be opportunistic as it relates
to the capital markets and the potential benefits to our Company of
completing a notes offering on acceptable terms; our positioning on
store performance and metrics important to customers relative to
other retailers; 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.
RETAIL GALLERY METRICS
(Unaudited)
We operated the following number of retail
Galleries, outlets and showrooms:
August 3,
August 4,
2019
2018
RH Design Galleries [a]
20
18
Legacy Galleries
43
44
Modern Galleries
2
2
Baby & Child Galleries
5
6
Total RH Galleries
70
70
Outlets [b]
40
36
Waterworks Showrooms
15
15
[a]
As of August 3, 2019 and August 4, 2018,
six and four of our RH Design Galleries include an integrated RH
Hospitality experience, respectively.
[b]
Net revenues for outlet stores, which
include warehouse sales, were $53.9 million and $37.9 million for
the three months ended August 3, 2019 and August 4, 2018,
respectively. Net revenues for outlet stores, which include
warehouse sales, were $109.5 million and $81.1 million for the six
months ended August 3, 2019 and August 4, 2018, respectively.
The following table presents RH Gallery and Waterworks showroom
metrics and excludes outlets:
Three Months Ended
August 3,
August 4,
2019
2018
Total Leased Selling
Total Leased Selling
Store Count
Square Footage
Store Count
Square Footage
(in thousands) (in thousands)
Beginning of period
85
1,078
84
1,012
Design Galleries: Nashville Design Gallery
—
—
1
45.6
Baby & Child Galleries: Portland RH Baby & Child Gallery
—
—
1
4.7
Dallas RH Baby & Child Gallery
—
—
1
3.7
Legacy Galleries: San Antonio legacy Gallery (relocation)
—
(3.8)
—
—
Nashville legacy Gallery
—
—
(1)
(7.1)
Washington DC legacy Gallery
—
—
(1)
(5.6)
End of period
85
1,074
85
1,053
Weighted-average leased selling square footage
1,075
1,035
% Growth year over year
4
%
13
%
See the Company’s most recent Form 10‑K and Form 10‑Q filings
for square footage definitions.
Total leased square footage as of August 3, 2019 and August 4,
2018 was 1,451,000 and 1,414,000, respectively.
Weighted-average leased square footage for the three months
ended August 3, 2019 and August 4, 2018 was 1,451,000 and
1,392,000, respectively.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(In thousands, except share and
per share amounts)
(Unaudited) Three Months Ended Six
Months Ended
August 3,
% of Net
August 4,
% of Net
August 3,
% of Net
August 4,
% of Net
2019
Revenues
2018
Revenues
2019
Revenues
2018
Revenues
Net revenues
$
706,514
100.0
%
$
640,798
100.0
%
$
1,304,935
100.0
%
$
1,198,204
100.0
%
Cost of goods sold
411,556
58.3
%
372,454
58.1
%
777,163
59.6
%
720,527
60.1
%
Gross profit
294,958
41.7
%
268,344
41.9
%
527,772
40.4
%
477,677
39.9
%
Selling, general and administrative expenses
190,977
27.0
%
186,521
29.1
%
355,158
27.2
%
347,707
29.1
%
Income from operations
103,981
14.7
%
81,823
12.8
%
172,614
13.2
%
129,970
10.8
%
Other expenses
Interest expense—net
24,513
3.4
%
15,467
2.5
%
45,631
3.5
%
30,565
2.5
%
(Gain) loss on extinguishment of debt
(954
)
(0.1
)
%
917
0.1
%
(954
)
(0.1
)
%
917
0.1
%
Total other expenses
23,559
3.3
%
16,384
2.6
%
44,677
3.4
%
31,482
2.6
%
Income before income taxes
80,422
11.4
%
65,439
10.2
%
127,937
9.8
%
98,488
8.2
%
Income tax expense
16,665
2.4
%
2,533
0.4
%
28,458
2.2
%
10,121
0.8
%
Net income
$
63,757
9.0
%
$
62,906
9.8
%
$
99,479
7.6
%
$
88,367
7.4
%
Weighted-average shares used in computing basic net income
per share
18,465,876
21,925,702
19,221,367
21,735,364
Basic net income per share
$
3.45
$
2.87
$
5.18
$
4.07
Weighted-average shares used in computing diluted net income
per share
22,324,112
27,496,561
23,629,050
26,363,395
Diluted net income per share
$
2.86
$
2.29
$
4.21
$
3.35
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
(Unaudited)
August 3,
February 2,
August 4,
2019
2019
2018
ASSETS Cash and cash equivalents
$
11,555
$
5,803
$
22,199
Merchandise inventories
480,688
531,947
551,343
Other current assets
165,379
166,217
110,380
Total current assets
657,622
703,967
683,922
Property and equipment—net
950,594
952,957
798,212
Operating lease right-of-use assets
421,001
440,504
463,063
Goodwill and intangible assets
210,392
210,401
242,498
Other non-current assets
148,199
115,189
126,661
Total assets
$
2,387,808
$
2,423,018
$
2,314,356
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities Accounts payable and accrued expenses
$
289,713
$
320,497
$
284,942
Convertible senior notes due 2019—net
—
343,789
335,670
Convertible senior notes due 2020—net
280,688
—
—
Operating lease liabilities
57,162
66,249
59,664
Deferred revenue, customer deposits and other current liabilities
297,394
262,051
224,066
Total current liabilities
924,957
992,586
904,342
Asset based credit facility
145,000
57,500
—
Term loans—net
316,348
—
—
Equipment promissory notes—net
42,113
—
—
Convertible senior notes due 2020—net
—
271,157
261,929
Convertible senior notes due 2023—net
257,766
249,151
240,804
Non-current operating lease liabilities
415,803
437,557
454,812
Non-current finance lease liabilities
433,591
421,245
278,550
Other non-current obligations
30,148
32,512
32,410
Total liabilities
2,565,726
2,461,708
2,172,847
Stockholders’ equity (deficit)
(177,918
)
(38,690
)
141,509
Total liabilities and stockholders’ equity (deficit)
$
2,387,808
$
2,423,018
$
2,314,356
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
(Unaudited) Six Months Ended
August 3,
August 4,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES Net income
$
99,479
$
88,367
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization
52,510
41,939
Accretion of debt discount upon settlement of debt
(70,482
)
—
Other non-cash items
77,559
74,839
Change in assets and liabilities: Prepaid expense and other assets
(2,882
)
(40,646
)
Accounts payable and accrued expenses
(40,073
)
(31,707
)
Current and non-current operating lease liability
(44,513
)
(43,025
)
Other changes in assets and liabilities
25,535
(40,747
)
Net cash provided by operating activities
97,133
49,020
CASH FLOWS FROM INVESTING ACTIVITIES Capital
expenditures
(25,283
)
(42,916
)
Net cash used in investing activities
(25,283
)
(42,916
)
CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings
(repayments) under asset based credit facility
87,500
(199,970
)
Net borrowings (repayments) under term loans
320,000
(80,000
)
Net borrowings (repayments) under promissory and equipment security
notes
64,007
(31,974
)
Debt issuance costs
(4,636
)
—
Repayments of convertible senior notes
(278,560
)
—
Repurchases of common stock—including commissions
(250,032
)
—
Proceeds from issuance of convertible senior notes
—
335,000
Proceeds from issuance of warrants
—
51,021
Purchase of convertible notes hedges
—
(91,857
)
Debt issuance costs related to convertible senior notes
—
(6,349
)
Other financing activities
(4,302
)
17,779
Net cash used in financing activities
(66,023
)
(6,350
)
Effects of foreign currency exchange rate translation
(75
)
(124
)
Net increase (decrease) in cash and cash equivalents and restricted
cash equivalents
5,752
(370
)
Cash and cash equivalents and restricted 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
11,555
22,199
End of period—restricted cash equivalents (construction related
deposits)
—
2,745
End of period—cash and cash equivalents and restricted cash
equivalents
$
11,555
$
24,944
CALCULATION OF FREE CASH
FLOW
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
Net cash provided by operating activities
$
58,309
$
52,249
$
97,133
$
49,020
Accretion of debt discount upon settlement of debt
70,482
—
70,482
—
Capital expenditures
(17,367
)
(25,237
)
(25,283
)
(42,916
)
Principal payments under finance leases
(2,270
)
(1,791
)
(4,399
)
(3,567
)
Free cash flow [a]
$
109,154
$
25,221
$
137,933
$
2,537
[a]
Free cash flow is calculated as net cash
provided by operating activities and the non-cash accretion of debt
discount upon settlement of debt, 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.
RECONCILIATION OF GAAP NET INCOME
TO ADJUSTED NET INCOME
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
GAAP net income
$
63,757
$
62,906
$
99,479
$
88,367
Adjustments (pre-tax): Net revenues: Recall accrual [a]
—
1,853
413
1,853
Cost of goods sold: Asset impairments and change in useful lives
[b]
1,916
—
4,909
—
Recall accrual [a]
(320
)
(3,262
)
(2,381)
(3,516
)
Impact of inventory step-up [c]
—
190
—
380
Selling, general and administrative expenses: Legal settlements [d]
(1,193
)
(7,204
)
(1,193
)
(5,289)
Asset impairments and change in useful lives [b]
629
—
1,112
—
Recall accrual [a]
—
345
33
345
Reorganization related costs [e]
—
1,721
—
1,721
Reversal of loss on asset disposal [f]
—
—
—
(840
)
Interest expense—net: Amortization of debt discount [g]
9,918
9,000
21,607
16,272
(Gain) loss on extinguishment of debt [h]
(954
)
917
(954
)
917
Subtotal adjusted items
9,996
3,560
23,546
11,843
Impact of income tax items [i]
(2,323
)
(11,957
)
(3,354
)
(13,049
)
Adjusted net income [j]
$
71,430
$
54,509
$
119,671
$
87,161
[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]
The adjustment to cost of goods
sold represents the acceleration of depreciation expense due to a
change in the estimated useful lives of certain assets. The
adjustment to selling, general and administrative expenses for the
six months ended August 3, 2019 includes a $0.5 million charge
related to the termination of a service agreement associated with
such assets. The adjustment to selling, general and administrative
expenses for the three and six months ended August 3, 2019 also
includes asset impairment of $0.6 million.
[c]
Represents the non-cash amortization of
the inventory fair value adjustment recorded in connection with our
acquisition of Waterworks.
[d]
Represents legal settlements, net of
related legal expenses.
[e]
Represents costs associated with a supply
chain reorganization, including the closure of the Dallas customer
call center, which include severance costs and related taxes,
partially offset by a reversal of stock-based compensation expense
related to unvested equity awards.
[f]
Represents the reversal of an estimated
loss on disposal of asset due to negotiations of the sales price
being finalized.
[g]
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 $0.8 million during the three months ended August 3,
2019 and August 4, 2018, respectively. Amounts are presented net of
interest capitalized for capital projects of $1.4 million during
both the six months ended August 3, 2019 and August 4, 2018. The
2019 Notes matured on June 15, 2019 and did not impact amortization
of debt discount post-maturity.
[h]
The three and six months ended August 3,
2019 includes a gain on extinguishment of debt upon the maturity
and settlement of the 2019 Notes in June 2019. The three and six
months ended August 4, 2018 includes a 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 June 2018.
[i]
Assumes a normalized tax rate of 21% for the three and six months
ended August 3, 2019 and August 4, 2018 in order to facilitate year
over year comparison of operating results on a comparable basis
with historical results at a consistent tax rate across time
periods.
[j]
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.
RECONCILIATION OF DILUTED NET
INCOME PER SHARE TO
ADJUSTED DILUTED NET INCOME PER
SHARE
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
Diluted net income per share
$
2.86
$
2.29
$
4.21
$
3.35
Pro forma diluted net income per share [a]
$
2.86
$
2.32
$
4.25
$
3.38
Per share impact of adjustments (pre-tax) [b]: Amortization of debt
discount
0.44
0.34
0.92
0.62
Asset impairments and change in useful lives
0.11
—
0.26
—
Recall accrual
(0.01
)
(0.04
)
(0.08
)
(0.05
)
Legal settlements
(0.05
)
(0.27
)
(0.05
)
(0.20
)
(Gain) loss on extinguishment of debt
(0.04
)
0.03
(0.04
)
0.04
Reorganization related costs
—
0.06
—
0.06
Impact of inventory step-up
—
0.01
—
0.01
Reversal of loss on asset disposal
—
—
—
(0.03
)
Subtotal adjusted items
0.45
0.13
1.01
0.45
Impact of income tax items [b]
(0.11
)
(0.44
)
(0.14
)
(0.50
)
Adjusted diluted net income per share [c]
$
3.20
$
2.01
$
5.12
$
3.33
[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. The 2019 Notes,
2020 Notes and 2023 Notes did not have an impact on dilution during
the three months ended August 3, 2019. Pro forma diluted net income
per share for the three months ended August 4, 2018 is calculated
based on GAAP net income and pro forma diluted weighted-average
shares of 27,084,293, which excludes dilution related to the 2019
Notes and 2020 Notes of 412,268 shares. Pro forma diluted net
income per share for the six months ended August 3, 2019 is
calculated based on GAAP net income and pro forma diluted
weighted-average shares of 23,386,758, which excludes dilution
related to the 2019 Notes and 2020 Notes of 242,292 shares. Pro
forma diluted net income per share for the six months ended August
4, 2018 is calculated based on GAAP net income and pro forma
diluted weighted-average shares of 26,157,261, which excludes
dilution related to the 2019 Notes and 2020 Notes of 206,134
shares. The 2019 Notes matured on June 15, 2019 and did not have an
impact of the Company’s dilutive share count post-maturity.
[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.
RECONCILIATION OF NET REVENUES TO
ADJUSTED NET REVENUES
AND GROSS PROFIT TO ADJUSTED
GROSS PROFIT
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
Net revenues
$
706,514
$
640,798
$
1,304,935
$
1,198,204
Recall accrual [a]
—
1,853
413
1,853
Adjusted net revenues [b]
$
706,514
$
642,651
$
1,305,348
$
1,200,057
Gross profit
$
294,958
$
268,344
$
527,772
$
477,677
Asset impairments and change in useful lives [a]
1,916
—
4,909
—
Recall accrual [a]
(320
)
(1,409
)
(1,968
)
(1,663
)
Impact of inventory step-up [a]
—
190
—
380
Adjusted gross profit [b]
$
296,554
$
267,125
$
530,713
$
476,394
Gross margin [c]
41.7
%
41.9
%
40.4
%
39.9
%
Adjusted gross margin [c]
42.0
%
41.6
%
40.7
%
39.7
%
[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.
RECONCILIATION OF NET INCOME TO
OPERATING INCOME
AND ADJUSTED OPERATING
INCOME
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
Net income
$
63,757
$
62,906
$
99,479
$
88,367
Interest expense—net
24,513
15,467
45,631
30,565
(Gain) loss on extinguishment of debt
(954
)
917
(954
)
917
Income tax expense
16,665
2,533
28,458
10,121
Operating income
103,981
81,823
172,614
129,970
Asset impairments and change in useful lives [a]
2,545
—
6,021
—
Recall accrual [a]
(320
)
(1,064
)
(1,935
)
(1,318
)
Legal settlements [a]
(1,193
)
(7,204
)
(1,193
)
(5,289
)
Reorganization related costs [a]
—
1,721
—
1,721
Impact of inventory step-up [a]
—
190
—
380
Reversal of loss on asset disposal [a]
—
—
—
(840
)
Adjusted operating income [b]
$
105,013
$
75,466
$
175,507
$
124,624
Net revenues
$
706,514
$
640,798
$
1,304,935
$
1,198,204
Adjusted net revenues [c]
$
706,514
$
642,651
$
1,305,348
$
1,200,057
Operating margin [c]
14.7
%
12.8
%
13.2
%
10.8
%
Adjusted operating margin [c]
14.9
%
11.7
%
13.4
%
10.4
%
[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.
RECONCILIATION OF NET INCOME TO
EBITDA AND ADJUSTED EBITDA
(In thousands)
(Unaudited)
Three Months Ended
Six Months Ended
August 3,
August 4,
August 3,
August 4,
2019
2018
2019
2018
Net income
$
63,757
$
62,906
$
99,479
$
88,367
Depreciation and amortization
25,321
21,354
52,510
41,939
Interest expense—net
24,513
15,467
45,631
30,565
Income tax expense
16,665
2,533
28,458
10,121
EBITDA [a]
130,256
102,260
226,078
170,992
Stock-based compensation [b]
5,298
6,234
10,993
14,231
Asset impairments and change in useful lives [c]
629
—
1,112
—
Recall accrual [c]
(320
)
(1,064
)
(1,935
)
(1,318
)
Legal settlements [c]
(1,193
)
(7,204
)
(1,193
)
(5,289
)
(Gain) loss on extinguishment of debt [c]
(954
)
917
(954
)
917
Reorganization related costs [c]
—
1,721
—
1,721
Impact of inventory step-up [c]
—
190
—
380
Reversal of loss on asset disposal [c]
—
—
—
(840
)
Adjusted EBITDA [a]
$
133,716
$
103,054
$
234,101
$
180,794
[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.
RECONCILIATION OF NET INCOME TO
TRAILING TWELVE MONTHS EBITDA
AND TRAILING TWELVE MONTHS
ADJUSTED EBITDA
(In thousands)
(Unaudited)
Trailing Twelve Months
August 3,
2019
Net income
$
146,843
Depreciation and amortization
102,358
Interest expense—net
82,835
Income tax expense
43,570
EBITDA [a]
375,606
Goodwill and tradename impairment [b]
32,086
Stock-based compensation [c]
20,884
Asset held for sale impairment [d]
8,497
Reorganization related costs [e]
8,256
Distribution center closures [f]
3,886
Lease losses [g]
3,411
Asset impairments and change in useful lives [h]
2,308
Recall accrual [i]
1,002
Legal settlement [j]
(1,193
)
Gain on extinguishment of debt [k]
(954
)
Adjusted EBITDA [a]
$
453,789
[a]
Refer to footnote [a] within table titled
“Reconciliation of Net Income to EBITDA and Adjusted EBITDA.”
[b]
Represents goodwill and tradename
impairment related to the Waterworks reporting unit.
[c]
Represents non-cash compensation related
to equity awards granted to employees.
[d]
Represents the impairment recorded upon
reclassification of an owned Design Gallery as held for sale.
[e]
Represents severance costs and related
taxes associated with reorganizations.
[f]
Represents disposals of inventory and
property and equipment, lease related charges, inventory transfer
costs and other costs associated with distribution center
closures.
[g]
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.
[h]
Represents a $1.2 million inventory
impairment charge related to holiday merchandise, an asset
impairment of $0.6 million and a $0.5 million charge related to the
termination of a service agreement.
[i]
Represents adjustments to net revenues and
cost of goods sold, inventory charges associated with product
recalls, as well as accrual adjustments and vendor claims.
[j]
Represents a legal settlement.
[k]
Represents a gain on extinguishment of
debt upon the maturity and settlement of the 2019 Notes in June
2019.
CALCULATION OF TOTAL DEBT, TOTAL
NET DEBT AND
RATIO OF TOTAL NET DEBT TO
TRAILING TWELVE MONTHS ADJUSTED EBITDA
(In thousands)
(Unaudited)
August 3,
Interest
2019
Rate [a]
Asset based credit facility
$
145,000
3.75
%
FILO term loan
120,000
5.13
%
Second lien term loan
200,000
8.94
%
Equipment promissory notes
64,007
4.56
%
Convertible senior notes due 2020 [b]
281,868
0.00
%
Convertible senior notes due 2023 [b]
261,848
0.00
%
Notes payable for share repurchases
18,741
4.97
%
Total debt
$
1,091,464
Cash and cash equivalents
(11,555
)
Total net debt
$
1,079,909
Trailing twelve months Adjusted EBITDA [c]
$
453,789
Ratio of total net debt to trailing twelve months Adjusted
EBITDA [c]
2.4
[a]
The interest rates for the
equipment promissory notes and notes payable for share repurchases
represent the weighted-average interest rates.
[b]
Amounts exclude discounts upon original
issuance and third party offering costs.
[c]
The ratio of total net debt to trailing
twelve months Adjusted EBITDA is calculated by dividing total net
debt by trailing twelve months Adjusted EBITDA. Refer to table
titled “Reconciliation of Net Income to Trailing Twelve Months
EBITDA and Trailing Twelve Months Adjusted EBITDA” and the related
footnotes for definitions of EBITDA and Adjusted EBITDA and a
reconciliation of trailing twelve months Adjusted EBITDA.
REVISED RECONCILIATION OF FIRST QUARTER FISCAL
2019
GAAP NET INCOME TO ADJUSTED NET INCOME
(In thousands)
(Unaudited)
As a result of the fluctuations in our quarterly income tax
rate, driven primarily by the variability of tax benefits
associated with equity awards including exercise of employee stock
options and vesting of employee restricted stock units, beginning
in the second quarter of fiscal 2019 RH will use a normalized tax
rate of 21% when reporting adjusted net income and adjusted diluted
net income per share in order to facilitate year over year
comparison of operating results on a comparable basis with
historical results at a consistent tax rate across time periods.
The normalized tax rate of 21% approximates our expected effective
tax rate for fiscal 2019. The table below presents the revised
adjusted net income and adjusted diluted net income per share for
the first quarter of fiscal 2019 to reflect the normalized 21% tax
rate.
Three Months Ended
May 4,
2019
Net income
$
35,722
Adjustments pre-tax [a]:
Net revenues:
Recall accrual
413
Cost of goods sold:
Asset impairments and change in useful lives
2,993
Recall accrual
(2,061
)
Selling, general and administrative expenses:
Asset impairments and change in useful lives
483
Recall accrual
33
Interest expense—net:
Amortization of debt discount
11,689
Subtotal adjusted items
13,550
Impact of income tax items [b]
(1,031
)
Adjusted net income [c]
$
48,241
Adjusted diluted net income per share [c]
$
1.97
[a]
Refer to above table titled
“Reconciliation of GAAP Net Income to Adjusted Net Income” and the
related footnotes for additional information.
[b]
Assumes a normalized tax rate of 21%.
[c]
Adjusted net income and adjusted diluted
net income per share are supplemental measures of financial
performance that are 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, as well as income tax expense utilizing a normalized
21% tax rate. We define adjusted diluted net income per share as
adjusted net income divided by the Company’s pro forma diluted
weighted-average shares. Pro forma diluted net income per share for
the first quarter of fiscal 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.
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
Year Ended February 3, 2018
As Reported
Adjustment
As Adjusted
Net revenues
$
2,440,174
$
—
$
2,440,174
Cost of goods sold
1,591,107
9,769
[a]
1,600,876
Gross profit
849,067
(9,769
)
839,298
Selling, general and administrative expenses
717,766
4,416
[b]
722,182
Income from operations
131,301
(14,185
)
117,116
Other expenses Interest expense—net
62,570
(6,567
)
[d]
56,003
Goodwill and tradename impairment
33,700
—
33,700
Loss on extinguishment of debt
4,880
—
4,880
Total other expenses
101,150
(6,567
)
94,583
Income before income taxes
30,151
(7,618
)
22,533
Income tax expense
27,971
(2,839
)
[e]
25,132
Net income (loss)
$
2,180
$
(4,779
)
$
(2,599
)
Weighted-average shares used in computing basic net income per
share
27,053,616
—
27,053,616
Basic net income (loss) per share
$
0.08
$
(0.18
)
$
(0.10
)
Weighted-average shares used in computing diluted net income per
share
29,253,208
(2,199,592
)
27,053,616
Diluted net income (loss) per share
$
0.07
$
(0.17
)
$
(0.10
)
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
[b]
161,186
Income from operations
53,601
(5,454
)
48,147
Interest expense—net
17,035
(1,937
)
[d]
15,098
Income before income taxes
36,566
(3,517
)
33,049
Income tax expense
8,507
(919
)
[e]
7,588
Net income
$
28,059
$
(2,598
)
$
25,461
Weighted-average shares used in computing basic net income per
share
21,545,025
—
21,545,025
Basic net income per share
$
1.30
$
(0.12
)
$
1.18
Weighted-average shares used in computing diluted net income per
share
25,230,228
—
25,230,228
Diluted net income per share
$
1.11
$
(0.10
)
$
1.01
Three Months Ended August 4, 2018
As Reported
Adjustment
As Adjusted
Net revenues
$
640,798
$
—
$
640,798
Cost of goods sold
369,198
3,256
[a]
372,454
Gross profit
271,600
(3,256
)
268,344
Selling, general and administrative expenses
186,225
296
[b]
186,521
Income from operations
85,375
(3,552
)
81,823
Other expenses Interest expense—net
17,480
(2,013
)
[d]
15,467
Loss on extinguishment of debt
917
—
917
Total other expenses
18,397
(2,013
)
16,384
Income before income taxes
66,978
(1,539
)
65,439
Income tax expense
2,936
(403
)
[e]
2,533
Net income
$
64,042
$
(1,136
)
$
62,906
Weighted-average shares used in computing basic net income per
share
21,925,702
—
21,925,702
Basic net income per share
$
2.92
$
(0.05
)
$
2.87
Weighted-average shares used in computing diluted net income per
share
27,496,561
—
27,496,561
Diluted net income per share
$
2.33
$
(0.04
)
$
2.29
Three Months Ended November 3, 2018
As Reported
Adjustment
As Adjusted
Net revenues
$
636,558
$
—
$
636,558
Cost of goods sold
382,047
4,490
[a]
386,537
Gross profit
254,511
(4,490
)
250,021
Selling, general and administrative expenses
207,495
298
[b]
207,793
Income from operations
47,016
(4,788
)
42,228
Interest expense—net
19,371
(1,676
)
[d]
17,695
Income before income taxes
27,645
(3,112
)
24,533
Income tax expense
5,234
(815
)
[e]
4,419
Net income
$
22,411
$
(2,297
)
$
20,114
Weighted-average shares used in computing basic net income per
share
22,082,141
—
22,082,141
Basic net income per share
$
1.01
$
(0.10
)
$
0.91
Weighted-average shares used in computing diluted net income per
share
27,703,319
—
27,703,319
Diluted net income per share
$
0.81
$
(0.08
)
$
0.73
Three Months Ended February 2,
2019
As Reported
Adjustment
As Adjusted
Net revenues
$
670,891
$
—
$
670,891
Cost of goods sold
408,190
4,822
[a]
413,012
Gross profit
262,701
(4,822
)
257,879
Selling, general and administrative expenses
159,463
8,878
[b][c]
168,341
Income from operations
103,238
(13,700
)
89,538
Other expenses Interest expense—net
21,188
(1,679
)
[d]
19,509
Goodwill and tradename impairment
32,086
—
32,086
Total other expenses
53,274
(1,679
)
51,595
Income before income taxes
49,964
(12,021
)
37,943
Income tax expense
13,837
(3,144
)
[e]
10,693
Net income
$
36,127
$
(8,877
)
$
27,250
Weighted-average shares used in computing basic net income per
share
20,901,841
—
20,901,841
Basic net income per share
$
1.73
$
(0.43
)
$
1.30
Weighted-average shares used in computing diluted net income per
share
25,702,791
—
25,702,791
Diluted net income per share
$
1.41
$
(0.35
)
$
1.06
[a]
Represents the acceleration of lease costs
primarily due to reclassification of certain leases from
build-to-suit arrangements to finance lease right-of-use assets
upon adoption of ASC 842.
[b]
The year ended February 2, 2019 and three
months ended May 5, 2018 include lease costs of $1.2 million
associated with a location that were previously accounted for under
ASC 420—Exit or Disposal Cost Obligations
guidance.
[c]
The year ended February 2, 2019 and three
months ended February 2, 2019 include an impairment of
approximately $8.5 million related to an asset held for sale under
a sale-leaseback transaction.
[d]
Represents a decrease in build-to-suit
interest expense due to derecognition of build-to-suit arrangements
upon adoption of ASC 842, partially offset by an increase in
interest expense related to finance lease right-of-use assets.
[e]
Represents the tax impact of the income
statement adjustments resulting from the adoption of ASC 842.
Condensed Consolidated Balance Sheet
The following table summarizes the impact of adopting ASC 842 on
certain line items of our fiscal 2018 condensed consolidated
balance sheet:
February 2, 2019
As Reported
Adjustment
As Adjusted
Other current assets
$
144,943
$
21,274
[a]
$
166,217
Property and equipment—net
863,562
89,395
[b]
952,957
Operating lease right-of-use assets
—
440,504
[c]
440,504
Other non-current assets
49,378
65,811
[d]
115,189
Accounts payable and accrued expenses
320,441
56
[e]
320,497
Operating lease liabilities
—
66,249
[c]
66,249
Deferred revenue, customer deposits and other current liabilities
253,942
8,109
[f]
262,051
Financing obligations under built-to-suit lease transactions
228,928
(228,928
)
[g]
—
Non-current operating lease liabilities
—
437,557
[c]
437,557
Non-current finance lease liabilities
—
421,245
[f]
421,245
Other non-current obligations
104,088
(71,576
)
[h]
32,512
Total stockholders’ deficit
(22,962
)
(15,728
)
[i]
(38,690
)
[a]
Includes the recognition of asset held for
sale under a sale-leaseback transaction, partially offset by the
reclassification of prepaid rent to operating lease liabilities and
other current liabilities (for finance leases).
[b]
Represents (i) recognition of finance
lease right-of-use assets, partially offset by (ii) derecognition
of non-Company owned properties that were capitalized under
previously existing build-to-suit accounting policies, (iii)
reclassification of construction in progress assets determined to
be landlord assets to other non-current assets and (iv)
reclassification of initial direct costs related to operating
leases to operating lease right-of-use assets.
[c]
Represents recognition of
operating lease right-of-use assets and corresponding current and
non-current lease liabilities. The operating lease right-of-use
asset also includes the reclassification of deferred rent and
unamortized lease incentives related to operating leases and the
reclassification of initial direct costs from property and
equipment—net.
[d]
Primarily represents reclassification from
property and equipment—net of construction in progress assets
determined to be landlord assets for which the lease has not yet
commenced, as well as the recognition of net deferred tax assets
related to the adoption of ASC 842.
[e]
Represents a reclassification of an
accrual for real estate taxes.
[f]
Primarily represents recognition of the
current and non-current finance lease liabilities. The other
current liabilities line item also includes the reclassification of
current obligations associated with leases previously reported as
capital leases to finance lease liabilities.
[g]
Represents derecognition of liabilities
related to non-Company owned properties that were consolidated
under previously existing build-to-suit accounting policies.
[h]
Includes reclassification of deferred rent
and unamortized lease incentives to operating lease right-of-use
assets upon adoption of ASC 842, as well as derecognition of the
net lease loss liabilities as such balances were reclassified to
operating lease right-of-use assets and operating current and
non-current liabilities, and the reclassification of non-current
obligations associated with leases previously reported as capital
leases to finance lease liabilities.
[i]
Represents a decrease to the consolidated
net income for fiscal 2017 and fiscal 2018, as well as an increase
of $4.0 million to beginning fiscal 2017 retained earnings related
to the adoption of ASC 842.
ASC 842: Reconciliation of Net Income to Adjusted Net
Income
The following table presents our adjusted reconciliation of net
income to adjusted net income for the quarterly and annual fiscal
2018 periods:
Fiscal 2018
First
Second
Third
Fourth
Fiscal
Quarter
Quarter
Quarter
Quarter
Year
Net income
$
25,461
$
62,906
$
20,114
$
27,250
$
135,731
Adjustments pre-tax: Net revenues: Recall accrual [a]
—
1,853
1,948
932
4,733
Cost of goods sold:
Recall accrual [a]
(254
)
(3,262
)
1,738
(2,361
)
(4,139
)
Asset impairments and change in useful lives [b]
—
—
—
3,807
3,807
Distribution center closures [c]
—
—
1,478
—
1,478
Impact of inventory step-up [d]
190
190
—
—
380
Selling, general and administrative expenses:
Reorganization related costs [e]
—
1,721
7,564
692
9,977
Asset held for sale impairment [f]
—
—
—
8,497
8,497
Lease losses [g]
—
—
3,411
—
3,411
Distribution center closures [c]
(840
)
—
2,408
—
1,568
Recall accrual [a]
—
345
300
380
1,025
Legal settlement [h]
1,915
(7,204
)
—
—
(5,289
)
Other expenses:
Amortization of debt discount [i]
7,272
9,000
11,283
11,661
39,216
Goodwill and tradename impairment [j]
—
—
—
32,086
32,086
Loss on extinguishment of debt [k]
—
917
—
—
917
Subtotal adjusted items
8,283
3,560
30,130
55,694
97,667
Impact of income tax items [l]
(1,092
)
(11,957
)
(7,060
)
(8,971
)
(29,080
)
Adjusted net income [m]
$
32,652
$
54,509
$
43,184
$
73,973
$
204,318
[a]
Represents adjustments to net revenues and
cost of goods sold, inventory charges associated with product
recalls, as well as accrual adjustments and vendor claims.
[b]
The adjustment includes accelerated
depreciation expense of $2.6 million due to a change in the
estimated useful lives of certain assets and a $1.2 million
inventory impairment charge related to holiday merchandise.
[c]
Represents disposals of inventory and
property and equipment, lease related charges, inventory transfer
costs and other costs associated with distribution center
closures.
[d]
Represents the non-cash amortization of
the inventory fair value adjustment recorded in connection with our
acquisition of Waterworks.
[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 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.
[h]
Represents a legal settlement, net of
related legal expenses.
[i]
Refer to footnote [g] within table titled
“Reconciliation of GAAP Net Income to Adjusted Net Income.” Amounts
are presented net of interest capitalized for capital projects of
$0.6 million, $0.8 million, $0.7 million and $0.6 million during
the first, second, third and fourth quarters of fiscal 2018,
respectively. Fiscal 2018 is presented net of interest capitalized
for capital projects of $2.7 million.
[j]
Represents goodwill and tradename
impairment related to the Waterworks reporting unit.
[k]
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.
[l]
Assumes a normalized tax rate of 21% for
each period presented. These amounts have been revised to reflect a
21% normalized tax rate in order to aid in the comparability of
these metrics to our fiscal 2019 results and outlook.
[m]
Refer to footnote [j] within table titled
“Reconciliation of GAAP Net Income to Adjusted Net Income.”
ASC 842: Reconciliation of Diluted Net Income Per Share to
Adjusted Diluted Net Income Per Share
The following table presents our adjusted reconciliation of
diluted net income per share to adjusted diluted net income per
share for the quarterly and annual fiscal 2018 periods:
Fiscal 2018 First Second Third
Fourth Fiscal Quarter Quarter
Quarter Quarter Year Diluted net income per
share
$
1.01
$
2.29
$
0.73
$
1.06
$
5.12
Pro forma diluted net income per share [a]
$
1.01
$
2.32
$
0.74
$
1.07
$
5.18
Per share impact of adjustments (pre-tax) [b]: Amortization of debt
discount
0.29
0.34
0.42
0.46
1.50
Goodwill and tradename impairment — — —
1.27
1.23
Reorganization related costs —
0.06
0.28
0.03
0.38
Asset held for sale impairment — — —
0.34
0.32
Asset impairments and change in useful lives — — —
0.14
0.14
Lease losses — —
0.12
—
0.13
Distribution center closures
(0.04
)
—
0.14
—
0.12
Recall accrual
(0.01
)
(0.04
)
0.15
(0.04
)
0.06
Loss on extinguishment of debt —
0.03
— —
0.04
Impact of inventory step-up
0.01
0.01
— —
0.01
Legal settlement
0.08
(0.27
)
— —
(0.20
)
Subtotal adjusted items
0.33
0.13
1.11
2.20
3.73
Impact of income tax items [b]
(0.05
)
(0.44
)
(0.25
)
(0.35
)
(1.11
)
Adjusted diluted net income per share [c]
$
1.29
$
2.01
$
1.60
$
2.92
$
7.80
[a]
Refer to footnote [a] within table titled
“Reconciliation of Diluted Net Income Per Share to Adjusted Diluted
Net Income Per Share.” Pro forma diluted net income per share for
the second quarter of fiscal 2018 is calculated based on GAAP net
income and pro forma diluted weighted-average shares of 27,084,293,
which excludes dilution related to the 2019 Notes and 2020 Notes of
412,268 shares. Pro forma diluted net income per share for the
third quarter of fiscal 2018 is calculated based on GAAP net income
and pro forma diluted weighted-average shares of 27,048,517, which
excludes dilution related to the 2019 Notes and 2020 Notes of
654,802 shares. Pro forma diluted net income per share for the
fourth quarter of fiscal 2018 is calculated based on GAAP net
income and pro forma diluted weighted-average shares of 25,360,886,
which excludes dilution related to the 2019 Notes and 2020 Notes of
341,905 shares. Pro forma diluted net income per share for fiscal
2018 is calculated based on GAAP net income and pro forma diluted
weighted-average shares of 26,180,981, which excludes dilution
related to the 2019 Notes and 2020 Notes of 352,244 shares.
[b]
Refer to above table titled “ASC 842:
Reconciliation of Net Income to Adjusted Net Income” and the
related footnotes for additional information.
[c]
Refer to footnote [c] within table titled
“Reconciliation of Diluted Net Income Per Share to Adjusted Diluted
Net Income Per Share.”
ASC 842: Reconciliation of Net Revenues to Adjusted Net
Revenues and Gross Profit to Adjusted Gross Profit
The following table presents our adjusted reconciliation of net
revenues to adjusted net revenues and gross profit to adjusted
gross profit for the quarterly and annual fiscal 2018 periods:
Fiscal 2018
First
Second
Third
Fourth
Fiscal
Quarter
Quarter
Quarter
Quarter
Year
Net revenues
$
557,406
$
640,798
$
636,558
$
670,891
$
2,505,653
Recall accrual [a]
—
1,853
1,948
932
4,733
Adjusted net revenues [b]
$
557,406
$
642,651
$
638,506
$
671,823
$
2,510,386
Gross profit
$
209,333
$
268,344
$
250,021
$
257,879
$
985,577
Recall accrual [a]
(254
)
(1,409
)
3,686
(1,429
)
594
Asset impairments and change in useful lives [a]
—
—
—
3,807
3,807
Distribution center closures [a]
—
—
1,478
—
1,478
Impact of inventory step-up [a]
190
190
—
—
380
Adjusted gross profit [b]
$
209,269
$
267,125
$
255,185
$
260,257
$
991,836
Gross margin [c]
37.6
%
41.9
%
39.3
%
38.4
%
39.3
%
Adjusted gross margin [c]
37.5
%
41.6
%
40.0
%
38.7
%
39.5
%
[a]
Refer to above table titled “ASC 842:
Reconciliation of Net Income to Adjusted Net Income” and the
related footnotes for additional information.
[b]
Refer to footnote [b] within table titled
“Reconciliation of Net Revenues to Adjusted Net Revenues and Gross
Profit to Adjusted Gross Profit.”
[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.
ASC 842: Reconciliation of Net Income to Operating Income
and Adjusted Operating Income
The following table presents our adjusted reconciliation of net
income to operating income and adjusted operating income for the
quarterly and annual fiscal 2018 periods:
Fiscal 2018
First
Second
Third
Fourth
Fiscal
Quarter
Quarter
Quarter
Quarter
Year
Net income
$
25,461
$
62,906
$
20,114
$
27,250
$
135,731
Interest expense—net
15,098
15,467
17,695
19,509
67,769
Goodwill and tradename impairment
—
—
—
32,086
32,086
Loss on extinguishment of debt
—
917
—
—
917
Income tax expense
7,588
2,533
4,419
10,693
25,233
Operating income
48,147
81,823
42,228
89,538
261,736
Reorganization related costs [a]
—
1,721
7,564
692
9,977
Asset held for sale impairment [a]
—
—
—
8,497
8,497
Asset impairments and change in useful lives [a]
—
—
—
3,807
3,807
Lease losses [a]
—
—
3,411
—
3,411
Distribution center closures [a]
(840
)
—
3,886
—
3,046
Recall accrual [a]
(254
)
(1,064
)
3,986
(1,049
)
1,619
Impact of inventory step-up [a]
190
190
—
—
380
Legal settlement [a]
1,915
(7,204
)
—
—
(5,289
)
Adjusted operating income [b]
$
49,158
$
75,466
$
61,075
$
101,485
$
287,184
Net revenues
$
557,406
$
640,798
$
636,558
$
670,891
$
2,505,653
Adjusted net revenues [c]
$
557,406
$
642,651
$
638,506
$
671,823
$
2,510,386
Operating margin [c]
8.6
%
12.8
%
6.6
%
13.3
%
10.4
%
Adjusted operating margin [c]
8.8
%
11.7
%
9.6
%
15.1
%
11.4
%
[a]
Refer to above table titled “ASC 842:
Reconciliation of Net Income to Adjusted Net Income” and the
related footnotes for additional information.
[b]
Refer to footnote [b] within table titled
“Reconciliation of Net Income to Operating Income and Adjusted
Operating Income.”
[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 above table titled “ASC 842: 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.
ASC 842: Reconciliation of Net Income to EBITDA and
Adjusted EBITDA
Fiscal 2018
First
Second
Third
Fourth
Fiscal
Quarter
Quarter
Quarter
Quarter
Year
Net income
$
25,461
$
62,906
$
20,114
$
27,250
$
135,731
Depreciation and amortization
20,585
21,354
23,175
26,673
91,787
Interest expense—net
15,098
15,467
17,695
19,509
67,769
Income tax expense
7,588
2,533
4,419
10,693
25,233
EBITDA [a]
68,732
102,260
65,403
84,125
320,520
Goodwill and tradename impairment [b]
—
—
—
32,086
32,086
Stock-based compensation [c]
7,997
6,234
3,685
6,206
24,122
Reorganization related costs [b]
—
1,721
7,564
692
9,977
Asset held for sale impairment [b]
—
—
—
8,497
8,497
Lease losses [b]
—
—
3,411
—
3,411
Distribution center closures [b]
(840
)
—
3,886
—
3,046
Recall accrual [b]
(254
)
(1,064
)
3,986
(1,049
)
1,619
Asset impairments and change in useful lives [b]
—
—
—
1,196
1,196
Loss on extinguishment of debt [b]
—
917
—
—
917
Impact of inventory step-up [b]
190
190
—
—
380
Legal settlement [b]
1,915
(7,204
)
—
—
(5,289
)
Adjusted EBITDA [a]
$
77,740
$
103,054
$
87,935
$
131,753
$
400,482
[a]
Refer to footnote [a] within table titled
“Reconciliation of Net Income to EBITDA and Adjusted EBITDA.”
[b]
Refer to table titled “ASC 842:
Reconciliation of Net Income to Adjusted Net Income” and the
related footnotes for additional information.
[c]
Represents non-cash compensation related
to equity awards granted to employees.
THIRD QUARTER, FOURTH QUARTER AND
FISCAL 2019 OUTLOOK
(In millions, except per share
data)
The Company is providing the following
outlook for the third quarter, fourth quarter and full year fiscal
2019:
Third Quarter
Fourth Quarter
Fiscal Year
2019
2019
2019
Adjusted net revenues
$672.0 - $678.0
$703.0 - $711.0
$2,680.3 - $2,694.3
% growth vs. prior year
5% - 6%
5% - 6%
7%
Adjusted gross margin (% of net revenues)
40.1% - 40.4%
40.9% - 41.2%
40.6% - 40.7%
Adjusted SG&A (as % of net revenues)
28.7% - 28.8%
24.6% - 24.7%
26.9%
Adjusted operating income
$76.0 - $79.0
$114.0 - $117.8
$365.5 - $372.3
% growth vs. prior year
24% - 29%
12% - 16%
27% - 30%
Adjusted operating margin (% of net revenues)
11.3% - 11.7%
16.2% - 16.6%
13.6% - 13.8%
Adjusted net income
$48.3 - $50.7
$78.9 - $81.9
$246.9 - $252.3
Adjusted diluted EPS
$2.08 - $2.18
$3.33 - $3.45
$10.53 - $10.76
% growth vs. prior year
30% - 36%
14% - 18%
35% - 38%
Capital expenditures—net of landlord contributions
$160 - $170
Asset sales
$50 - $60
Free cash flow
$325 - $350
Note: The Company’s adjusted net income does not include certain
charges and costs. The adjustments to net revenues, gross margin,
selling, general and administrative expenses, operating income,
operating margin and net income in future periods are generally
expected to be similar to the kinds of charges and costs excluded
from such non-GAAP financial measures in prior periods, such as
unusual non-cash and other compensation expense; legal claim
related expenses; recall accruals; reorganization costs including
severance costs and related taxes; and non-cash amortization of
debt discount, among others. The exclusion of these charges and
costs in future periods could have a significant impact on the
Company’s adjusted net revenues, adjusted gross margin, adjusted
selling, general and administrative expenses, adjusted operating
income, adjusted operating margin and adjusted net income. 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.
ESTIMATED DILUTED SHARES
OUTSTANDING
(In millions) Average Stock Price
$
100.00
$
120.00
$
140.00
$
160.00
$
180.00
$
200.00
Q3 2019 adjusted diluted shares outstanding [a]
22.02
22.64
23.07
23.42
23.74
24.14
Q4 2019 adjusted diluted shares outstanding [a]
22.18
22.79
23.22
23.57
23.88
24.28
Fiscal 2019 adjusted diluted shares outstanding [a]
22.38
23.00
23.45
23.79
24.16
24.66
Note: The table above is intended to demonstrate the impact of
increasing stock prices on our adjusted diluted shares outstanding
due to 1) additional in-the-money options and 2) the higher cost of
acquired shares under the treasury stock method. The 2019 Notes
matured on June 15, 2019 and will not have an impact of the
Company’s dilutive share count post-maturity.
For GAAP purposes, we will incur dilution above the lower strike
prices of our 2020 Notes and 2023 Notes of $118.13 and $193.65,
respectively. However, no additional shares will be included in our
adjusted diluted shares outstanding calculation 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 $189.00 and $309.84, we will incur dilution related to
the 2020 Notes and 2023 Notes, respectively, and would have an
obligation to deliver additional shares in excess of the dilution
protection provided by the bond hedges.
The calculation also includes assumptions around the timing and
number of options exercises. Actual diluted shares outstanding may
differ if actual exercises differ from estimates. The stock option
awards outstanding for RH’s Chairman and CEO are included in all of
the adjusted diluted shares outstanding scenarios above based on
the exercise prices of $46.50, $75.43 and $50.00 for the November
2012, July 2013 and May 2017 grants, respectively.
[a]
The Q3 2019 and Q4 2019 adjusted diluted
shares outstanding includes 0.140 million incremental shares at
$200.00 average share price due to dilution from the convertible
notes. The Fiscal 2019 adjusted diluted shares outstanding includes
0.050 million and 0.298 million incremental shares at $180.00 and
$200.00 average share price, respectively, due to dilution from the
convertible notes
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190910006098/en/
Allison Malkin 203-682-8225 allison.malkin@icrinc.com
RH (NYSE:RH)
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