Company Raises Fiscal 2019 Guidance for the Fourth Time this
Year
RH (NYSE: RH) today announced third 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.
THIRD QUARTER 2019 HIGHLIGHTS
Q3 GAAP NET REVENUES INCREASED +6.4% to $677.5M Q3 ADJUSTED NET
REVENUES INCREASED +6.0% TO $676.7M
Q3 GAAP OPERATING INCOME INCREASED +111% TO $89.2M VS. $42.2M LY
Q3 ADJUSTED OPERATING INCOME INCREASED +44% TO $87.8M VS. $61.1M
LY
Q3 GAAP OPERATING MARGIN INCREASED 660 BASIS POINTS TO 13.2% VS.
6.6% LY Q3 ADJUSTED OPERATING MARGIN INCREASED 340 BASIS POINTS TO
13.0% VS. 9.6% LY
Q3 GAAP NET INCOME INCREASED +161% TO $52.5M VS. $20.1M LY Q3
ADJUSTED NET INCOME INCREASED +52% TO $65.4M* VS. $43.2M* LY
Q3 GAAP EPS INCREASED +197% TO $2.17 VS. $0.73 LY Q3 ADJUSTED
DILUTED EPS INCREASED +74% TO $2.79* VS. $1.60* LY
Q3 FREE CASH FLOW INCREASED TO $96M VS. $16M LY YTD FREE CASH
FLOW INCREASED TO $234M VS. $19M LY
*The Company’s adjusted net income and adjusted diluted EPS
benefited by $5.5M and $0.24, respectively, in the third quarter
due to a lower tax rate of 13.7% versus the previous estimate based
on a normalized tax rate of 21%.
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 record third quarter results and are
raising our fiscal 2019 guidance for the fourth time this year.
We generated record GAAP revenues of $678 million in the
quarter, an increase of 6.4%, inclusive of a two point drag from
eliminating unproductive product categories and fringe promotions.
Taking into account the two point drag, revenues for the quarter
would have increased 8.4%. We also generated record adjusted
operating earnings of $88 million, up 44% versus last year; record
adjusted operating margin of 13.0%, a 340 basis points increase
versus 9.6% a year ago; record adjusted diluted earnings per share
of $2.79, up 74% versus $1.60 last year; and $96 million of free
cash flow in the quarter versus $16 million a year ago.
We believe real models will become wildly popular in the post
WeWork era
We have spent decades building a business model that generates
industry leading profitability and return on invested capital, and
believe real models will become wildly popular in the post WeWork
era.
We also believe this recent period has been reminiscent of
previous times when growth without profitability has been unjustly
rewarded, and valuations were based on the misplaced belief that an
online retail business is more profitable than a physical store.
This view has driven new concepts to launch as “digitally native
brands” chasing internet valuations and cheap capital from private
and public markets who have somehow confused an online retail
startup, or in the case of WeWork, an office subleasing business,
with a technology company. It’s becoming clear that retail brands
birthed online desperately need a store lifeline to survive, as
many are finding the variable cost of marketing an invisible store
an unprofitable path to the future.
Traditional retailers hoping for the same favorable valuations,
and in some cases driven by the fear of not being viewed as
fashionable by millennials, have allocated the vast majority of
their capital to unnaturally grow their digital business. This has
resulted in shifting, not lifting, sales online at greater costs,
driving down margins while physical stores have been left to
rot.
We on the other hand have chosen to take the road less traveled,
and believe, like Robert Frost, that it will make all the
difference. Our focus on elevating the RH brand by building
architecturally inspiring spaces that blur the lines between
residential and retail, indoors and outdoors, home and hospitality
with seamlessly integrated restaurants and services, have rendered
our brand more valuable while creating a customer experience that
cannot be replicated online.
Our dominant physical presence combined with our integrated
multi-channel platform that generates over a billion dollars online
will continue to enable the RH brand to disrupt the highly
fragmented luxury home furnishings market and take share for years
to come.
Add to the above the most efficient operating platform in our
industry, a vertically integrated real estate development model
that is dramatically lowering capital requirements and occupancy
costs, and our discipline of driving high quality profitable growth
and you begin to understand why RH is one of the only brands that
is expanding operating margins while generating industry leading
returns on invested capital and significant free cash flow.
The emergence of RH as a luxury brand generating luxury
margins
We expect our operating margin to expand at least 200 basis
points in fiscal 2020 and now see a clear path to a 20% operating
margin over the next several years.
Factors contributing to 200 additional basis points in 2020
include:
- Cycling 1,000 basis points of margin erosion in 2019 in our
Outlet business due to liquidating excess inventory from the
closure of a distribution center in the fourth quarter of
2018.
- Cycling the margin drag from transitioning our rug business in
2019 from a single source importer to a direct sourcing model. We
expect rug margins to increase approximately 2,000 basis points
year over year as we cycle markdowns to clear old inventory and
realize significantly higher margins by eliminating the additional
markup from our previous single source importer.
- Cycling the margin drag from the investments to launch RH Beach
House and RH Ski House in mid to late 2019 and the requirement to
expense 100% of the advertising costs when the books were mailed
while only realizing a fraction of the annual revenues. We expect
to leverage that initial investment next year, while also expanding
and optimizing the assortments and mailing strategy.
- As previously communicated, we also expect margin contribution
from the redesign of our operating platform and home delivery
network in 2020 as our teams continue to use first principles
thinking to reconceptualize industry methodologies that have been
widely duplicated but rarely innovated.
Our planned margin improvement next year takes into account
negative impacts on margin from:
- The continued 50 basis point operating margin drag from our
investments to build a hospitality platform and the associated
pre-opening costs of bringing six restaurants and our first RH
Guesthouse to life in 2020. We expect this margin drag to subside
over the next few years as we begin to gain scale in hospitality
and leverage our infrastructure.
- A 70 basis point operating margin drag from Waterworks which we
expect to reduce over the next several years as we gain
efficiencies by greater integration of the business on the RH
platform.
We also continue to see long term margin opportunities as a
result of our new vertically integrated real estate, design and
development organization. We have in-sourced the majority of the
real estate functions, developed the RH Architecture and
Engineering group, and have formed RH Build, our own internal
construction company, driving dramatically lower costs to source
and build our new Galleries. This development model combined with
the high productivity of our new Galleries and one of the most
attractive hospitality concepts available to developers, continues
to enhance our deal economics, resulting in lower capital
requirements and higher returns on invested capital.
Additionally, we have begun to prove our capability as a
property developer with our first two development projects in
Yountville, California, and Edina, Minnesota. In Yountville we were
able to acquire, develop, and execute a sale leaseback of the
project at a cap rate of 4.26%, recouping the vast majority of our
capital, and we expect to complete a sale leaseback of our Edina
Gallery by the first half of next year at a cap rate in the range
of 5.0% to 5.25%, again recouping most of our investment. We are
also developing our Aspen Gallery and Guesthouse in a joint venture
that requires no upfront capital, and where RH has a profit
interest upon completion and sale of the properties. We expect to
recoup 90% to 100% of the minimal finish and fixture capital
investment in both projects.
We believe the combination of our new capital-light lease
developments, joint venture developments, and RH developments will
result in lower occupancy costs, lower capital requirements, higher
cash flow, and significantly higher returns on invested
capital.
Lastly, as we continue to transform our real estate in North
America from legacy to new design Galleries, we expect our revenues
to increase substantially, leveraging occupancy, advertising, and
other SG&A costs across the platform.
Product elevation + Gallery transformation + Global expansion
= $20 billion opportunity
In 2019 we began to elevate our product offer with the
introduction of RH Beach House and RH Ski House, plus the test of
Bespoke Collections in our RH Interiors Source Book. The revenue
growth from those investments will begin to bear fruit in fiscal
2020 as we gain a full year of sales and continue to expand the
assortments, optimize the Source Books, and present collections in
our Galleries. We will also gain a partial year of revenues from
the launch of RH Color next fall.
We plan to increase our Gallery openings to 5 to 7 per year
despite unexpected delays in development timelines we’ve
experienced in our recent projects. As an example, the mall
construction related to the development of RH Marin, The Gallery at
the Village of Corte Madera is not complete and we have decided to
delay the opening until the first quarter of next year. We do not
get a second chance to make a first impression, and opening our new
Gallery facing unsightly construction is not an option. Our other
new development, RH Columbus, The Gallery at Easton Town Center is
opening next week, and we hope to see some of you at the party on
Wednesday night. We are having success filling the development
pipeline with more than enough projects to reach our goal of 5 to 7
new Galleries per year going forward, and have increased confidence
in the predictability of openings as the majority are prototype
Galleries, and we take greater control of the development
process.
We expect to open five new Galleries and one Guesthouse in
fiscal 2020 with RH Marin, RH Charlotte, and RH San Francisco
opening in the first half, and RH Dallas, RH Jacksonville, and our
first RH Guesthouse in New York opening in the second half of next
year. Additionally, we will benefit in 2020 from the late 2019
openings of RH Minneapolis and RH Columbus. We also plan to open a
minimum of 7 new Galleries in fiscal 2021.
RH New York, our largest and most important new Gallery,
continues to trend comfortably in excess of $100 million in revenue
for fiscal 2019 and will generate more than $30 million of cash
contribution in its first full fiscal year.
We are building towards the launch of RH International in 2021
or 2022 and are close to completing real estate transactions for 5
to 7 initial locations across Europe. As discussed, we now believe
RH International represents our largest growth opportunity, and
based on the penetration of other luxury businesses, we believe it
will position RH to become a $20 billion global brand.
A capital structure that creates flexibility and
optionality
Focusing on our balance sheet, we ended the third quarter with
inventory of $429 million versus $566 million last year, down $137
million or 24% versus a 6% revenue increase. Due to the efficiency
of our supply chain network redesign and the simplification of our
reverse logistics and outlet business we expect to end the year
with inventories down $90 to $100 million versus 2018.
We are projecting to generate free cash flow in the range of
$350 to $360 million for 2019 and expect a ratio of net debt to
trailing twelve month adjusted EBITDA of approximately 1.7 times at
year end.
While we remain comfortable with our balance sheet, the current
market conditions for convertible debt remain attractive. As
previously communicated, we will continue to be opportunistic as it
relates to the capital markets and may issue additional convertible
notes if the terms are favorable. Looking back, had we not been
opportunistic in responding to market conditions through our prior
convertible notes financings we would not have been in a position
to repurchase 24.4 million shares, or approximately 60% of the
total shares outstanding at an average price of $61.40, which has
proven to be an excellent allocation of capital for the benefit of
our shareholders. We believe our Company remains undervalued and we
will continue to evaluate share repurchases.
China tariffs – the long and winding road
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.
Increasing our long-term outlook
Looking forward, we see a clear path to over $5 billion in North
America revenues, with high teens to low twenties operating margins
and ROIC in excess of 50%. Additionally, we now believe there is an
opportunity to build a $20 billion global brand as we expand
internationally and further develop the RH ecosystem that will move
the brand beyond creating and selling products to conceptualizing
and selling spaces.
We are increasing our long-term targets to:
Net revenue growth of 8% to 12%
Adjusted operating margins in the high teens to low twenties
Adjusted net income growth of 15% to 20%
Return on invested capital (ROIC) in excess of 50%
Building a brand with no peer
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.
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 December 18, 2019 by
dialing (855) 859-2056 or (404) 537-3406 and entering passcode
5322168, 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; our statements regarding RH being a real
model that generates industry leading profitability and return on
invested capital, and our belief that real models will become
wildly popular in the post WeWork era; our future opportunity,
growth plans and strategies, including our focus on elevating the
brand; 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 the RH brand
will continue to disrupt the highly fragmented luxury home
furnishings market and take share for years to come; our
expectation that operating margins will expand over the next
several years and the reasons therefor; our expectations concerning
our ability to increase our operating margins in future periods
such as the expectation that operating margins will expand by at
least 200 basis points in fiscal 2020 and our path to 20% operating
margin over the next several years including the basis for such
expectations, such as expectations concerning cycling previous
drags on margin and operating margin improvements from our current
and future business initiatives such as our rug strategy, the
introduction of RH Beach House, RH Ski House and other new product
categories and assortments, the redesign of our operating platform
and home delivery network in 2020 and other operational
improvements, the benefits of our real estate strategy including
capital efficiencies and lower capital requirements and higher ROIC
as well as our expectation to alleviate the current drag on
operating margins from various investments we are making such as
investments in RH Hospitality and RH Guesthouse as well as expected
benefits from greater integration of Waterworks on the RH platform;
statements regarding elevating the RH brand by building
architecturally inspiring spaces that blur the lines between
residential and retail, indoors and outdoors, home and hospitality
with seamlessly integrated restaurants and services which have
rendered our brand more valuable while creating a customer
experience that cannot be replicated online; our belief that RH is
one of the only brands that is expanding operating margins while
generating industry leading returns on invested capital and
significant free cash flow; our statement that RH Build is driving
dramatically lower costs to source and build our new Galleries; our
statement that our development model combined with the high
productivity of our new Galleries and one of the most attractive
hospitality concepts available to developers continues to enhance
our deal economics, resulting in lower capital requirements and
higher returns on invested capital; our statement that our product
elevation, Gallery transformation and global expansion presents a
$20 billion opportunity; our statement that our capital structure
creates flexibility and optionality; our statement that we are
building a brand with no peer; our expectation that revenues will
increase as we continue the transformation of our real estate in
North America from legacy to new design Galleries; our expectation
for revenue growth from RH Beach House, RH Ski House and Bespoke
Collections in our RH Interiors Source Book; our expectations
regarding year-end inventory levels; our expectation that we will
complete a sale leaseback of our Edina Gallery in the first half of
next year; our expectations regarding our investments in our Aspen
Gallery and Guesthouse projects; our belief that the combination of
our new capital light lease developments, joint venture
developments, and RH developments will result in lower occupancy
costs, lower capital requirements, higher cash flow, and
significantly higher returns on invested capital; our statement
that our RH New York Gallery continues to trend comfortably in
excess of $100 million in revenue for fiscal 2019 and will generate
more than $30 million of cash contribution in its first full fiscal
year; our belief that the current tariffs will not impair our
ability to achieve our stated financial goals; our expectation to
increase our Gallery openings to 5 to 7 per year; our plan to open
five new Galleries and one Guesthouse in fiscal 2020 with RH Marin,
RH Charlotte, and RH San Francisco opening in the first half, and
RH Dallas, RH Jacksonville, and our first RH Guesthouse in New York
opening by the second half of next year; our plan to open a minimum
of 7 new Galleries in fiscal 2021; our plan to launch RH Color next
Fall; our belief that RH International represents our largest
growth opportunity and our belief that it will position RH to
become a $20 billion global brand; our plan to launch RH
International in 2021 or 2022 and to complete real estate
transactions for 5 to 7 initial locations across Europe; our belief
that our Company remains undervalued and that the repurchase of our
shares will prove to be an excellent allocation of capital for the
benefit of our 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 projections regarding free cash
flow and net debt to trailing twelve month adjusted EBITDA at year
end; our path to over $5 billion in North America revenues, with
high teens to low twenties operating margins and ROIC in excess of
50%; our long term targets, including net revenue growth of 8% to
12%, adjusted operating margins in the high teens to low twenties,
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; and any statements
or assumptions underlying any of the foregoing.
You can identify forward-looking statements by the fact that
they do not relate strictly to historical or current facts. These
statements may include words such as “anticipate,” “estimate,”
“expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,”
“should,” “likely” and other words and terms of similar meaning in
connection with any discussion of the timing or nature of future
events. We cannot assure you that future developments affecting us
will be those that we have anticipated. Important risks and
uncertainties that could cause actual results to differ materially
from our expectations include, among others, risks related to our
dependence on key personnel and any changes in our ability to
retain key personnel; successful implementation of our growth
strategy; risks related to the number of new business initiatives
we are undertaking; successful implementation of our growth
strategy including our real estate transformation and the number of
new Gallery locations that we seek to open and the timing of
openings; uncertainties in the current performance of our business
including a range of risks related to our operations as well as
external economic factors; general economic conditions and the
housing market as well as the impact of economic conditions on
consumer confidence and spending; changes in customer demand for
our products; our ability to anticipate consumer preferences and
buying trends, and maintaining our brand promise to customers;
decisions concerning the allocation of capital; factors affecting
our outstanding convertible senior notes or other forms of our
indebtedness; our ability to anticipate consumer preferences and
buying trends, and maintain our brand promise to customers; changes
in consumer spending based on weather and other conditions beyond
our control; risks related to the number of new business
initiatives we are undertaking; strikes and work stoppages
affecting port workers and other industries involved in the
transportation of our products; our ability to obtain our products
in a timely fashion or in the quantities required; our ability to
employ reasonable and appropriate security measures to protect
personal information that we collect; our ability to support our
growth with appropriate information technology systems; risks
related to our sourcing and supply chain including our dependence
on imported products produced by foreign manufacturers and risks
related to importation of such products including risks related to
tariffs, the countermeasures and mitigation steps that we adopt in
response to tariffs and other similar issues, as well as those
risks and uncertainties disclosed under the sections entitled “Risk
Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in RH’s most recent Form 10-K
and Form 10-Q filed with the Securities and Exchange Commission,
and similar disclosures in subsequent reports filed with the SEC,
which are available on our investor relations website at ir.rh.com
and on the SEC website at www.sec.gov. Any forward-looking
statement made by us in this press release speaks only as of the
date on which we make it. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be
required by any applicable securities laws.
CONTACT
Allison Malkin
203-682-8225
allison.malkin@icrinc.com
FOURTH QUARTER AND FISCAL 2019 OUTLOOK
(In millions, except per share data)
The Company is providing the following outlook for the fourth
quarter and full year fiscal 2019:
Prior Guidance
Updated Guidance
Fourth Quarter
Fiscal Year
Fourth Quarter
Fiscal Year
2019
2019
2019
2019
Adjusted net revenues
$703.0 - $711.0
$2,680 - $2,694
$703.0 - $711.5
$2,685 - $2,694
% growth vs. prior year
5% - 6%
7%
5% - 6%
7%
Adjusted gross margin (% of net revenues)
40.9% - 41.2%
40.6% - 40.7%
40.9% - 41.2%
41.0% - 41.1%
Adjusted SG&A (as % of net revenues)
24.7% - 24.6%
26.9%
24.5%
26.9%
Adjusted operating income
$114.0 - $117.8
$365.5 - $372.3
$115.3 - $119.0
$378.6 - $382.3
% growth vs. prior year
12% - 16%
27% - 30%
14% - 17%
32% - 33%
Adjusted operating margin (% of net revenues)
16.2% - 16.6%
13.6% - 13.8%
16.4% - 16.7%
14.1% - 14.2%
Adjusted net income*
$83.0 - $86.0
$252.9 - $258.2
$83.8 - $86.7
$268.9 - $271.8
Adjusted diluted EPS*
$3.50 - $3.62
$10.78 - $11.01
$3.50 - $3.62
$11.58 - $11.70
% growth vs. prior year
20% - 24%
38% - 41%
20% - 24%
48% - 50%
Adjusted capital expenditures—net of landlord contributions
$160 - $170
$150 - $160
Asset sales
$50 - $60
$24
Free cash flow
$325 - $350
$350 - $360
* The prior guidance for these financial
measures is implied by the Company’s September 18, 2019 upward
revision to adjusted diluted EPS guidance. The last actual guidance
issued for fourth quarter 2019 and fiscal 2019 adjusted net income
and fourth quarter 2019 adjusted diluted EPS was on September 10,
2019 in connection with the Company’s second quarter earnings
release, when the Company provided adjusted net income guidance of
$246.9 million to $252.3 million and adjusted diluted EPS of $10.53
to $10.76 for fiscal 2019, adjusted net income guidance of $78.9
million to $81.9 million and adjusted diluted EPS of $3.33 to $3.45
for the fourth quarter 2019.
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.
RETAIL GALLERY METRICS
(Unaudited)
We operated the following number of retail Galleries, outlets
and showrooms:
November 2,
November 3,
2019
2018
RH
Design Galleries [a]
21
20
Legacy Galleries
42
43
Modern Galleries
2
2
Baby & Child Galleries
5
6
Total RH Galleries
70
71
Outlets [b]
39
37
Waterworks Showrooms
15
15
__________________
[a]
As of November 2, 2019 and November 3,
2018, seven and six of our RH Design Galleries include an
integrated RH Hospitality experience, respectively.
[b]
Net revenues for outlet stores, which
include warehouse sales, were $60.7 million and $47.2 million for
the three months ended November 2, 2019 and November 3, 2018,
respectively. Net revenues for outlet stores, which include
warehouse sales, were $170.2 million and $128.3 million for the
nine months ended November 2, 2019 and November 3, 2018,
respectively.
The following table presents RH Gallery and Waterworks showroom
metrics and excludes outlets:
Three Months Ended
November 2,
November 3,
2019
2018
Total Leased Selling
Total Leased Selling
Store Count
Square Footage
Store Count
Square Footage
(in thousands)
(in thousands)
Beginning of period
85
1,074
85
1,053
Design Galleries:
Minneapolis Design Gallery
1
32.9
—
—
New York Design Gallery
—
—
1
50.5
Yountville Design Gallery
—
—
1
6.7
Legacy Galleries:
Minneapolis legacy Gallery
(1)
(13.3)
—
—
New York legacy Gallery
—
—
(1)
(21.4)
End of period
85
1,094
86
1,089
Weighted-average leased selling square
footage
1,082
1,069
% Growth year over year
1
%
16
%
See the Company’s most recent Form 10‑K and Form 10‑Q filings
for square footage definitions.
Total leased square footage as of November 2, 2019 and November
3, 2018 was approximately 1,480,000 and 1,467,000,
respectively.
Weighted-average leased square footage for the three months
ended November 2, 2019 and November 3, 2018 was approximately
1,462,000 and 1,439,000, respectively.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(In thousands, except share and per
share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
November 2,
% of Net
November 3,
% of Net
November 2,
% of Net
November 3,
% of Net
2019
Revenues
2018
Revenues
2019
Revenues
2018
Revenues
Net revenues
$
677,526
100.0
%
$
636,558
100.0
%
$
1,982,461
100.0
%
$
1,834,762
100.0
%
Cost of goods sold
393,360
58.1
%
386,537
60.7
%
1,170,523
59.0
%
1,107,064
60.3
%
Gross profit
284,166
41.9
%
250,021
39.3
%
811,938
41.0
%
727,698
39.7
%
Selling, general and administrative
expenses
194,929
28.7
%
207,793
32.7
%
550,087
27.8
%
555,500
30.3
%
Income from operations
89,237
13.2
%
42,228
6.6
%
261,851
13.2
%
172,198
9.4
%
Other expenses
Interest expense—net
21,564
3.2
%
17,695
2.7
%
67,195
3.4
%
48,260
2.7
%
Loss on extinguishment of debt—net
6,857
1.0
%
—
—
%
5,903
0.3
%
917
—
%
Total other expenses
28,421
4.2
%
17,695
2.7
%
73,098
3.7
%
49,177
2.7
%
Income before income taxes
60,816
9.0
%
24,533
3.9
%
188,753
9.5
%
123,021
6.7
%
Income tax expense
8,353
1.3
%
4,419
0.7
%
36,811
1.8
%
14,540
0.8
%
Net income
$
52,463
7.7
%
$
20,114
3.2
%
$
151,942
7.7
%
$
108,481
5.9
%
Weighted-average shares used in computing
basic net income per share
18,765,769
22,082,141
19,069,501
21,850,955
Basic net income per share
$
2.80
$
0.91
$
7.97
$
4.96
Weighted-average shares used in computing
diluted net income per share
24,170,172
27,703,319
23,809,425
26,810,035
Diluted net income per share
$
2.17
$
0.73
$
6.38
$
4.05
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands)
(Unaudited)
November 2,
February 2,
November 3,
2019
2019
2018
ASSETS
Cash and cash equivalents
$
38,253
$
5,803
$
7,755
Merchandise inventories
429,189
531,947
566,117
Other current assets
92,037
166,217
112,333
Total current assets
559,479
703,967
686,205
Property and equipment—net
969,090
952,957
1,000,861
Operating lease right-of-use assets
415,912
440,504
451,751
Goodwill and intangible assets
210,398
210,401
242,487
Other non-current assets
207,134
115,189
99,127
Total assets
$
2,362,013
$
2,423,018
$
2,480,431
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
Liabilities
Accounts payable and accrued expenses
$
288,937
$
320,497
$
306,860
Convertible senior notes due 2019—net
—
343,789
339,707
Convertible senior notes due 2020—net
285,570
—
—
Operating lease liabilities
55,753
66,249
61,525
Deferred revenue, customer deposits and
other current liabilities
273,446
262,051
223,948
Total current liabilities
903,706
992,586
932,040
Asset based credit facility
—
57,500
107,500
Term loan—net
89,408
—
—
Equipment promissory notes—net
36,613
—
—
Convertible senior notes due 2020—net
—
271,157
266,506
Convertible senior notes due 2023—net
262,177
249,151
244,944
Convertible senior notes due 2024—net
261,010
—
—
Non-current operating lease
liabilities
412,247
437,557
449,080
Non-current finance lease liabilities
431,379
421,245
423,566
Other non-current obligations
28,693
32,512
31,625
Total liabilities
2,425,233
2,461,708
2,455,261
Stockholders’ equity (deficit)
(63,220
)
(38,690
)
25,170
Total liabilities and stockholders’ equity
(deficit)
$
2,362,013
$
2,423,018
$
2,480,431
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
November 2,
November 3,
2019
2018
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income
$
151,942
$
108,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
75,945
64,934
Accretion of debt discount upon settlement
of debt
(70,482)
—
Other non-cash items
121,847
118,407
Change in assets and liabilities:
Prepaid expense and other assets
42,178
(51,614)
Accounts payable and accrued expenses
(41,474)
(11,529)
Current and non-current operating lease
liability
(61,887)
(57,806)
Other changes in assets and
liabilities
(7,072)
(74,157)
Net cash provided by operating
activities
210,997
96,716
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures
(64,614)
(73,278)
Deposit on asset under construction
(30,000)
—
Proceeds from sale of assets
24,078
—
Net cash used in investing activities
(70,536)
(73,278)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net repayments under asset based credit
facility
(57,500)
(92,470)
Net borrowings (repayments) under term
loans
86,000
(80,000)
Net borrowings (repayments) under
promissory and equipment security notes
88,720
(31,974)
Debt issuance costs
(4,636)
—
Repayments of convertible senior notes
(278,560)
—
Repurchases of common stock—including
commissions
(250,032)
(145,182)
Proceeds from issuance of convertible
senior notes
350,000
335,000
Proceeds from issuance of warrants
50,225
51,021
Purchase of convertible notes hedges
(91,350)
(91,857)
Debt issuance costs related to convertible
senior notes
(4,818)
(6,349)
Other financing activities
3,943
21,943
Net cash used in financing activities
(108,008)
(39,868)
Effects of foreign currency exchange rate
translation
(3)
(136)
Net increase (decrease) in cash and cash
equivalents and restricted cash equivalents
32,450
(16,566)
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
38,253
7,755
End of period—restricted cash equivalents
(construction related deposits)
—
993
End of period—cash and cash equivalents
and restricted cash equivalents
$
38,253
$
8,748
CALCULATION OF FREE CASH FLOW
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
Net cash provided by operating
activities
$
113,864
$
47,696
$
210,997
$
96,716
Accretion of debt discount upon settlement
of debt
—
—
70,482
—
Proceeds from sale of assets
24,078
—
24,078
—
Capital expenditures
(39,331
)
(30,362
)
(64,614
)
(73,278
)
Principal payments under finance
leases
(2,737
)
(1,370
)
(7,136
)
(4,937
)
Free cash flow [a]
$
95,874
$
15,964
$
233,807
$
18,501
__________________
[a]
Free cash flow is calculated as net cash
provided by operating activities, the non-cash accretion of debt
discount upon
settlement of debt and proceeds from sale
of assets, 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
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
GAAP net income
$
52,463
$
20,114
$
151,942
$
108,481
Adjustments (pre-tax):
Net revenues:
Recall accrual [a]
(804
)
1,948
(391
)
3,801
Cost of goods sold:
Asset impairments and change in useful
lives [b]
—
—
4,909
—
Recall accrual [a]
(991
)
1,738
(3,372
)
(1,778
)
Distribution center closures [c]
—
1,478
—
1,478
Impact of inventory step-up [d]
—
—
—
380
Selling, general and administrative
expenses:
Asset impairments and change in useful
lives [b]
1,031
—
2,143
—
Reorganization related costs [e]
1,075
7,564
1,075
9,285
Asset held for sale gain [f]
(1,529
)
—
(1,529
)
—
Legal settlements [g]
—
—
(1,193
)
(5,289
)
Recall accrual [a]
(258
)
300
(225
)
645
Lease losses [h]
—
3,411
—
3,411
Distribution center closures [c]
—
2,408
—
1,568
Interest expense—net:
Amortization of debt discount [i]
9,638
11,283
31,245
27,555
Loss on extinguishment of debt—net [j]
6,857
—
5,903
917
Subtotal adjusted items
15,019
30,130
38,565
41,973
Impact of income tax items [k]
(2,036
)
(7,060
)
(5,390
)
(20,109
)
Adjusted net income [l]
$
65,446
$
43,184
$
185,117
$
130,345
__________________
[a]
Represents adjustments to net revenues,
cost of goods sold and inventory charges associated with product
recalls, as well as accrual adjustments, and vendor and insurance
claims.
[b]
The adjustment for the nine months ended
November 2, 2019 includes $4.9 million of accelerated depreciation
expense due to a change in the estimated useful lives of certain
assets, as well as a $0.5 million charge related to the termination
of a service agreement associated with such assets, which are
included in cost of goods sold and selling, general and
administrative expenses, respectively. The adjustment to selling,
general and administrative expenses for the three and nine months
ended November 2, 2019 also includes asset impairment of $1.0
million and $1.6 million, respectively.
[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.
[f]
Represents the gain on real estate related
to asset held for sale and other land sales.
[g]
Represents legal settlements, net of
related legal expenses.
[h]
Represents an additional lease related
charge due to the remeasurement of the lease loss liability for RH
contemporary Art resulting from an update to both the timing and
the amount of future estimated lease related cash inflows.
[i]
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”), for the $335 million aggregate principal amount
of convertible senior notes that were issued in June 2018 (the
“2023 Notes”), and for the $350 million aggregate principal amount
of convertible senior notes that were issued in September 2019 (the
“2024 Notes”), we separated the 2019 Notes, 2020 Notes, 2023 Notes
and 2024 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, 2023 Notes and 2024 Notes over their
expected lives. The equity components represent the difference
between the proceeds from the issuance of the 2019 Notes, 2020
Notes, 2023 Notes and 2024 Notes and the fair value of the
liability components of the 2019 Notes, 2020 Notes, 2023 Notes and
2024 Notes, respectively. Amounts are presented net of interest
capitalized for capital projects of $0.9 million and $0.7 million
during the three months ended November 2, 2019 and November 3,
2018, respectively. Amounts are presented net of interest
capitalized for capital projects of $2.3 million and $2.1 million
during the nine months ended November 2, 2019 and November 3, 2018,
respectively. The 2019 Notes matured on June 15, 2019 and did not
impact amortization of debt discount post-maturity.
[j]
The three and nine months ended November
2, 2019 include a $6.7 million loss on extinguishment of debt
related to the second lien term loan which was repaid in full in
September 2019, as well as $0.2 million of accelerated debt
issuance costs related to early repayment of a portion of the FILO
term loan. The nine months ended November 2, 2019 also includes a
$1.0 million gain on extinguishment of debt upon the maturity and
settlement of the 2019 Notes in June 2019. The nine months ended
November 3, 2018 represents 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.
[k]
The adjustment for the three months ended
November 2, 2019 represents the tax effect of the adjusted items
based on our effective tax rate of 13.7%. The adjustment for the
nine months ended November 2, 2019 is based on an adjusted tax rate
of 18.6%, which is calculated using a 21% normalized tax rate for
the three months ended May 4, 2019 and the three months ended
August 3, 2019, and the effective tax rate of 13.7% for the three
months ended November 2, 2019. The three and nine months ended
November 3, 2018 assume a normalized tax rate of 21%.
[l]
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
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
Diluted net income per share
$
2.17
$
0.73
$
6.38
$
4.05
Pro forma diluted net income per share
[a]
$
2.23
$
0.74
$
6.49
$
4.10
Per share impact of adjustments (pre-tax)
[b]:
Amortization of debt discount
0.41
0.42
1.33
1.04
Asset impairments and change in useful
lives
0.04
—
0.30
—
Loss on extinguishment of debt—net
0.29
—
0.25
0.03
Reorganization related costs
0.05
0.28
0.05
0.35
Recall accrual
(0.09
)
0.15
(0.17
)
0.10
Asset held for sale gain
(0.06
)
—
(0.06
)
—
Legal settlements
—
—
(0.05
)
(0.20
)
Impact of inventory step-up
—
—
—
0.01
Lease losses
—
0.12
—
0.14
Distribution center closures
—
0.14
—
0.12
Subtotal adjusted items
0.64
1.11
1.65
1.59
Impact of income tax items [b]
(0.08
)
(0.25
)
(0.23
)
(0.76
)
Adjusted diluted net income per share
[c]
$
2.79
$
1.60
$
7.91
$
4.93
__________________
[a]
For GAAP purposes, we incur dilution above
the lower strike prices of our 2019 Notes, 2020 Notes, 2023 Notes
and 2024 Notes of $116.09, $118.13, $193.65 and $211.40,
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, between $193.65 and $309.84
for our 2023 Notes, and between $211.40 and $338.24 for our 2024
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, $309.84 and $338.24, we will incur dilution
related to the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes,
respectively, and our obligation to deliver additional shares in
excess of the dilution protection provided by the bond hedges. Pro
forma diluted net income per share for the three months ended
November 2, 2019 is calculated based on GAAP net income and pro
forma diluted weighted-average shares of 23,478,124, which excludes
dilution related to the 2020 Notes of 692,048 shares. Pro forma
diluted net income per share for the three months ended November 3,
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 nine months ended
November 2, 2019 is calculated based on GAAP net income and pro
forma diluted weighted-average shares of 23,417,214, which excludes
dilution related to the 2019 Notes and 2020 Notes of 392,211
shares. Pro forma diluted net income per share for the nine months
ended November 3, 2018 is calculated based on GAAP net income and
pro forma diluted weighted-average shares of 26,454,345, which
excludes dilution related to the 2019 Notes and 2020 Notes of
355,690 shares.
[b]
Refer to table titled “Reconciliation of
GAAP Net Income to Adjusted Net Income” and the related footnotes
for additional information.
[c]
Adjusted diluted net income per share is a
supplemental measure of financial performance that is not required
by, or presented in accordance with, GAAP. We define adjusted
diluted net income per share as net income, adjusted for the impact
of certain non-recurring and other items that we do not consider
representative of our underlying operating performance divided by
the Company’s share count. Adjusted diluted net income per share is
included in this press release because management believes that
adjusted diluted net income per share provides meaningful
supplemental information for investors regarding the performance of
our business and facilitates a meaningful evaluation of operating
results on a comparable basis with historical results. Our
management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter.
RECONCILIATION OF NET REVENUES
TO ADJUSTED NET REVENUES
AND GROSS PROFIT TO ADJUSTED
GROSS PROFIT
(In thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
Net revenues
$
677,526
$
636,558
$
1,982,461
$
1,834,762
Recall accrual [a]
(804
)
1,948
(391
)
3,801
Adjusted net revenues [b]
$
676,722
$
638,506
$
1,982,070
$
1,838,563
Gross profit
$
284,166
$
250,021
$
811,938
$
727,698
Asset impairments and change in useful
lives [a]
—
—
4,909
—
Recall accrual [a]
(1,795
)
3,686
(3,763
)
2,023
Distribution center closures [a]
—
1,478
—
1,478
Impact of inventory step-up [a]
—
—
—
380
Adjusted gross profit [b]
$
282,371
$
255,185
$
813,084
$
731,579
Gross margin [c]
41.9
%
39.3
%
41.0
%
39.7
%
Adjusted gross margin [c]
41.7
%
40.0
%
41.0
%
39.8
%
__________________
[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
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
Net income
$
52,463
$
20,114
$
151,942
$
108,481
Interest expense—net
21,564
17,695
67,195
48,260
Loss on extinguishment of debt—net
6,857
—
5,903
917
Income tax expense
8,353
4,419
36,811
14,540
Operating income
89,237
42,228
261,851
172,198
Asset impairments and change in useful
lives [a]
1,031
—
7,052
—
Reorganization related costs [a]
1,075
7,564
1,075
9,285
Recall accrual [a]
(2,053
)
3,986
(3,988
)
2,668
Asset held for sale gain [a]
(1,529
)
—
(1,529
)
—
Legal settlements [a]
—
—
(1,193
)
(5,289
)
Lease losses [a]
—
3,411
—
3,411
Distribution center closures [a]
—
3,886
—
3,046
Impact of inventory step-up [a]
—
—
—
380
Adjusted operating income [b]
$
87,761
$
61,075
$
263,268
$
185,699
Net revenues
$
677,526
$
636,558
$
1,982,461
$
1,834,762
Adjusted net revenues [c]
$
676,722
$
638,506
$
1,982,070
$
1,838,563
Operating margin [c]
13.2
%
6.6
%
13.2
%
9.4
%
Adjusted operating margin [c]
13.0
%
9.6
%
13.3
%
10.1
%
__________________
[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
Nine Months Ended
November 2,
November 3,
November 2,
November 3,
2019
2018
2019
2018
Net income
$
52,463
$
20,114
$
151,942
$
108,481
Depreciation and amortization
23,435
22,995
75,945
64,934
Interest expense—net
21,564
17,695
67,195
48,260
Income tax expense
8,353
4,419
36,811
14,540
EBITDA [a]
105,815
65,223
331,893
236,215
Stock-based compensation [b]
5,116
3,685
16,109
17,916
Loss on extinguishment of debt—net [c]
6,857
—
5,903
917
Asset impairments and change in useful
lives [c]
1,031
—
2,143
—
Reorganization related costs [c]
1,075
7,564
1,075
9,285
Recall accrual [c]
(2,053
)
3,986
(3,988
)
2,668
Asset held for sale gain [c]
(1,529
)
—
(1,529
)
—
Legal settlements [c]
—
—
(1,193
)
(5,289
)
Lease losses [c]
—
3,411
—
3,411
Distribution center closures [c]
—
3,886
—
3,046
Impact of inventory step-up [c]
—
—
—
380
Adjusted EBITDA [a]
$
116,312
$
87,755
$
350,413
$
268,549
__________________
[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
November 2,
2019
Net income
$
179,192
Depreciation and amortization
102,568
Interest expense—net
86,704
Income tax expense
47,504
EBITDA [a]
415,968
Goodwill and tradename impairment [b]
32,086
Stock-based compensation [c]
22,315
Asset held for sale impairment—net [d]
6,968
Loss on extinguishment of debt—net [e]
5,903
Asset impairments and change in useful
lives [f]
3,339
Reorganization related costs [g]
1,767
Recall accrual [h]
(5,037
)
Legal settlement [i]
(1,193
)
Adjusted EBITDA [a]
$
482,116
__________________
[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 impairment due to the sale of
an owned Design Gallery and other land sales.
[e]
Includes a $6.7 million loss on
extinguishment of debt related to the second lien term loan which
was repaid in full in September 2019, as well as $0.2 million of
accelerated debt issuance costs related to early repayment of a
portion of the FILO term loan, which is partially offset by a $1.0
million gain on extinguishment of debt upon the maturity and
settlement of the 2019 Notes in June 2019.
[f]
Represents a $1.2 million inventory
impairment charge related to holiday merchandise, an asset
impairment of $1.6 million and a $0.5 million charge related to the
termination of a service agreement.
[g]
Represents severance costs and related
taxes associated with reorganizations.
[h]
Represents adjustments to net revenues,
cost of goods sold and inventory charges associated with product
recalls, as well as accrual adjustments, and vendor and insurance
claims.
[i]
Represents a legal settlement.
CALCULATION OF TOTAL DEBT,
TOTAL NET DEBT AND
RATIO OF TOTAL NET DEBT TO
TRAILING TWELVE MONTHS ADJUSTED EBITDA
(In thousands)
(Unaudited)
November 2,
Interest
2019
Rate [a]
Asset based credit facility
$
—
3.44
%
FILO term loan
90,000
4.69
%
Equipment promissory notes
58,720
4.56
%
Convertible senior notes due 2020 [b]
286,452
0.00
%
Convertible senior notes due 2023 [b]
266,026
0.00
%
Convertible senior notes due 2024 [b]
264,552
0.00
%
Notes payable for share repurchases
18,741
4.97
%
Total debt
$
984,491
Cash and cash equivalents
(38,253)
Total net debt
$
946,238
Trailing twelve months Adjusted EBITDA
[c]
$
482,116
Ratio of total net debt to trailing twelve
months Adjusted EBITDA [c]
2.0
__________________
[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.
ASC 842 IMPACT OF ADOPTION
(In thousands)
(Unaudited)
We adopted Accounting Standards Update (“ASU”) 2016‑02, ASU
2018-10 and ASU 2018-11 (together, “ASC 842”), which pertain to
accounting for leases, on February 3, 2019, the first day of our
first fiscal quarter of 2019, using a modified retrospective
approach. Under this adoption method, the results of prior
comparative periods are revised with an adjustment to opening
retained earnings of fiscal 2017.
Condensed Consolidated Statements of Income
The following tables summarize the impact of adopting ASC 842 on
our fiscal 2018 annual and quarterly condensed consolidated
statements of income:
Year Ended February 2,
2019
As Reported
Adjustment
As Adjusted
Net revenues
$
2,505,653
$
—
$
2,505,653
Cost of goods sold
1,504,806
15,270
[a]
1,520,076
Gross profit
1,000,847
(15,270)
985,577
Selling, general and administrative
expenses
711,617
12,224
[b][c]
723,841
Income from operations
289,230
(27,494)
261,736
Other expenses
Interest expense—net
75,074
(7,305)
[d]
67,769
Goodwill and tradename impairment
32,086
—
32,086
Loss on extinguishment of debt
917
—
917
Total other expenses
108,077
(7,305)
100,772
Income before income taxes
181,153
(20,189)
160,964
Income tax expense
30,514
(5,281)
[e]
25,233
Net income
$
150,639
$
(14,908)
$
135,731
Weighted-average shares used in computing
basic net income per share
21,613,678
—
21,613,678
Basic net income per share
$
6.97
$
(0.69)
$
6.28
Weighted-average shares used in computing
diluted net income per share
26,533,225
—
26,533,225
Diluted net income per share
$
5.68
$
(0.56)
$
5.12
Three Months Ended May 5,
2018
As Reported
Adjustment
As Adjusted
Net revenues
$
557,406
$
—
$
557,406
Cost of goods sold
345,371
2,702
[a]
348,073
Gross profit
212,035
(2,702)
209,333
Selling, general and administrative
expenses
158,434
2,752
[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
22,995
26,623
91,557
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
65,223
84,075
320,290
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
$
87,755
$
131,703
$
400,252
__________________
[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.
ESTIMATED DILUTED SHARES
OUTSTANDING
(In millions)
Q4 2019 Average Stock
Price
$
140
$
160
$
180
$
200
$
220
$
240
Q4 2019 adjusted diluted shares
outstanding [a]
23.23
23.57
23.88
24.27
24.79
25.15
Implied Fiscal 2019 Average
Stock Price
$
135
$
140
$
145
$
150
$
155
$
160
Fiscal 2019 adjusted diluted shares
outstanding [a]
23.38
23.47
23.55
23.64
23.78
23.87
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, 2023 Notes and 2024 Notes of $118.13,
$193.65 and $211.40, 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, between
$193.65 and $309.84 for our 2023 Notes, and between $211.40 and
$338.24 for our 2024 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, $309.84 and $338.24, we will
incur dilution related to the 2020 Notes, 2023 Notes and 2024
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 Q4 2019 adjusted diluted shares
outstanding include 0.140 million, 0.358 million and 0.540 million
incremental shares at $200, $220 and $240 average share prices,
respectively, due to dilution from the convertible notes. The
Fiscal 2019 adjusted diluted shares outstanding include 0.035
million, 0.089 million and 0.135 million incremental shares at
$150, $155 and $160 average share prices, respectively, due to
dilution from the convertible notes.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191204005918/en/
Allison Malkin 203-682-8225 allison.malkin@icrinc.com
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