Restoration Hardware (RH) Q3 Guidance Tops Views

RH (NYSE: RH) today announced updated guidance for the third quarter fiscal 2017 and a preliminary fiscal 2018 outlook ahead of the Company’s Investor Day being held in West Palm Beach, Florida on Thursday, November 16, beginning at 2:00 pm EST. The Investor Day will be webcast at the Company’s Investor Relations website, ir.rh.com.

Third Quarter, Fourth Quarter and Fiscal 2017 Updated Guidance

• Adjusted net revenues for the third quarter fiscal 2017 are now expected to be approximately $592.5 million, an increase of 8% versus $549.3 million last year, despite an approximate 1% negative impact from Hurricanes Harvey and Irma. This compares to the Company’s prior guidance of adjusted net revenues in the range of $575 million to $590 million, or an increase of 5% to 7% compared to last year. On a GAAP basis, net revenues are expected to be approximately $592.5 million for the third quarter.
• Adjusted net income for the third quarter is now expected to be in the range of $24.0 million to $24.5 million, compared to $8.0 million last year, despite a negative impact of approximately $1.3 million from Hurricanes Harvey and Irma. The outlook also includes a positive impact of approximately $2.5 million related to a lower effective tax rate. This compares to the Company’s prior guidance of adjusted net income in the range of $16 million to $19 million. On a GAAP basis, net income for the third quarter is expected to be in the range of $12.5 million to $13 million.
• Adjusted diluted earnings per share for the third quarter is now expected to be in the range of $1.02 to $1.04, compared to $0.20 last year, despite a negative impact of approximately $0.05 per share from Hurricanes Harvey and Irma. The outlook also includes a positive impact of approximately $0.11 per share related to a lower effective tax rate. This compares to the Company’s prior guidance of adjusted diluted earnings per share in the range of $0.68 to $0.80. On a GAAP basis, diluted earnings per share for the third quarter is expected to be in the range of $0.54 to $0.56.
• The Company is increasing its fourth quarter adjusted net income guidance to a range of $37 million to $41 million, from a range of $33 million to $37 million, despite an approximate $1.5 million negative impact as a result of the Company’s decision to delay the opening of its New York Design Gallery to Spring-Summer 2018. This outlook reflects the benefits of improved business performance and assumes an approximate $2 million tax benefit which corresponds to an expected 35% tax rate. Due to the recent increases in the Company’s stock price and its impact on the fully diluted share count, the Company is providing a table below to assist in estimating diluted shares outstanding and adjusted diluted earnings per share.
• Adjusted net revenues for the fourth quarter are now expected to be in the range of $655 million to $680 million due to a $9 million negative impact due to the Company’s decision to delay the opening of its New York Design Gallery. This compares to the Company’s prior adjusted net revenue guidance range of $664 million to $689 million.
• The Company is increasing its fiscal 2017 adjusted net income guidance to a range of $82 million to $87 million, from a range of $70 million to $77 million, despite the Company’s decision to delay the opening of its New York Design Gallery
• The Company now expects fiscal 2017 capital expenditures in the range of $120 million to $130 million compared to its prior guidance range of $120 million to $140 million.
• The Company now expects to generate free cash flow in the range of $420 million to $440 million in fiscal 2017.

Preliminary Fiscal 2018 Outlook

• Net revenue in the range of $2.58 billion to $2.62 billion, representing growth of 6% to 7% on a 52-week vs 53-week basis. On a comparable 52-week vs 52-week basis, net revenue growth is expected to be in the range of 8% to 9%.
• Adjusted operating margin in the range of 9% to 10%.
• Adjusted net income in the range of $125 million to $145 million.
• Net capital expenditures in the range of $65 million to $75 million.
• Free cash flow in excess of $240 million.

(Street sees Q3 EPS of 79c on revenue of $587.6 million. FY17 EPS is seen at $2.61 on revenue of $2.45 billion and FY18 EPS is seen at $3.79 on revenue of $2.6 billion)

To Our People, Partners, and Shareholders,

Our updated third quarter guidance demonstrates the earnings power of our new membership model, and a dramatically more efficient operating platform. Adjusted net revenues for the quarter are expected to be up 8%, despite a 1% negative impact from Hurricanes Harvey and Irma. Adjusted diluted earnings per share is expected to be in the range of $1.02 to $1.04, despite a $0.05 per share negative impact from the Hurricanes and including a $0.11 per share positive impact due to a lower effective tax rate, versus $0.20 a year ago.

Over the past 18 months, we transformed our business from a promotional to a membership model that is enhancing our brand, streamlining our operations, and improving the customer experience. Simultaneously we began the redesign of our supply chain network, rationalizing our product offer, and transitioning inventory into fewer facilities, creating a more capital efficient model.

We have completed the planned closure of our distribution facility in Los Angeles, and today we are announcing the closing of our distribution center in Dallas by fiscal year end. In total we will eliminate 1.75 million square feet of distribution space, resulting in savings of approximately $15 million annually. Moving forward, servicing our business from two coastal DC’s will result in improved in-stocks, and significantly faster inventory turns.

The redesign of our reverse logistics and Outlet business is now 90% complete. Liquidating customer returns in market, and eliminating the need to transport product back to our distribution centers will drive cost savings and margin enhancement of $15 million to $20 million annually.

Our core RH business is building momentum behind the Fall mailing of our RH Interiors Source Book, and the second edition of our RH Modern Source Book mailed in the Spring. Our investments in RH Interior Design Services are paying dividends as we continue to drive growth and position the brand as the leading luxury design platform in the country.

Our new Design Galleries continue to perform, creating a customer experience that cannot be replicated online, and distinguishing RH from other home businesses in the marketplace. RH Toronto, The Gallery in Yorkdale, our second gallery with an integrated food and beverage experience opened October 20th, and RH West Palm, our third gallery with integrated hospitality, opens this weekend on November 19th. We have decided, due to the disruption caused by the ongoing street construction in the Meatpacking District, to delay the opening of the New York Design Gallery until the Spring-Summer of 2018. We expect an approximate $9 million negative impact from the delay, and a corresponding $1.5 million reduction of adjusted net income in the fourth quarter, which is included in our updated fourth quarter guidance. We will continue operating our Flatiron Gallery until the new Meatpacking Gallery opens.

In the second quarter, we completed the second tranche of our share buyback program resulting in 20.2 million shares of RH stock repurchased in the first half of fiscal 2017, or 49.5% of the shares outstanding at the beginning of the year. We believe that our aggregate $1 billion of share repurchases are, and will continue to be, an excellent allocation of capital for the long term benefit of our shareholders. Regarding our debt structure, we retired the $100 million second lien term loan earlier than planned, and have approximately $480 million of aggregate debt, outside of our convertible notes that are due June 2019 and June 2020. Our current plans are to repay the convertible notes in cash to minimize dilution. Based on our forecasted business performance, and in light of existing favorable market conditions, we currently have multiple low-interest financing options available to us.

Looking forward, we are forecasting margins to rise and costs to fall as we cycle our efforts to reduce inventory, and benefit from our new operating model. In fiscal 2018, we believe we have a clear line of sight toward achieving net revenue growth in the range of 8% to 9% on a comparable 52-week basis and adjusted operating margins in the range of 9% to 10% while generating free cash flow in excess of $240 million. Inventory will again be a source of cash in fiscal 2018, and we anticipate lower real estate capital expenditures, as we move from a leasing to a development model, where we recoup our investments through a sale-leaseback arrangement. We will be providing more color regarding our new real estate model during our Investor Day. In total, we are forecasting fiscal 2018 net capital expenditures to be in the range of $65 million to $75 million.

We remain confident in reaching our long term goal of $4 billion to $5 billion in North American revenues with industry leading operating margins and returns on invested capital.

We plan to share more details of our strategy and outlook during our Investor Day presentations on Thursday, November 16th at 2:00 pm EST, where we will also be unveiling RH West Palm, our latest effort to revolutionize physical retailing.

We hope you can join us in West Palm Beach, or listen to our webcast live at ir.rh.com.

Carpe Diem,

Gary

Gary FriedmanChairman and Chief Executive Officer

The Company has not completed its quarter end closing and review process with respect to preparation of its third quarter fiscal 2017 financial results and the actual results may differ from the guidance provided in this press release. Further commentary on the Company’s third quarter financial results will be provided in connection with its third quarter earnings release.

Note: The Company’s adjusted net revenues, adjusted net income, adjusted diluted earnings per share, free cash flow and adjusted operating margins guidance does not include certain charges and costs. The adjustments to net revenues, net income, diluted earnings per share, net cash provided by (used in) operating activities and operating margins in future periods are generally expected to be similar to the kinds of charges and costs excluded from adjusted net revenues, adjusted net income, adjusted diluted earnings per share, free cash flow and adjusted operating margins in prior periods, such as unusual non-cash and other compensation expense; out of the ordinary income tax expense or benefits; expenses related to legal claims and contingencies; reorganization costs including severance costs and related taxes; non-cash amortization of debt discount; and charges and costs in connection with the acquisition of Waterworks, among others. The exclusion of these charges and costs in future periods will have a significant impact on the Company’s adjusted net revenues, adjusted net income, adjusted diluted earnings per share, free cash flow and adjusted operating margins. 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.

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