RH Reports Record First Quarter Fiscal 2019 Results

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

Company Raises Fiscal 2019 Guidance

CORTE MADERA, Calif.–(BUSINESS WIRE)–RH (NYSE: RH) today announced first quarter fiscal 2019 results.
Chairman & Chief Executive Officer Gary Friedman provided an update on
the Company’s continued evolution and outlook. RH Leadership will host a
Q&A conference call at 2:00 p.m. PT (5:00 p.m. ET) today.

FIRST QUARTER 2019 HIGHLIGHTS

Q1 GAAP NET REVENUES INCREASED +7.4% TO $598M
Q1 ADJUSTED NET
REVENUES INCREASED +7.4% TO $599M

Q1 GAAP OPERATING INCOME INCREASED +43% TO $68.6M VS. $48.1M LY
Q1
ADJUSTED OPERATING INCOME INCREASED +43% TO $70.5M VS. $49.2M LY

Q1 GAAP OPERATING MARGIN INCREASED 290 BASIS POINTS TO 11.5% VS. 8.6% LY
Q1
ADJUSTED OPERATING MARGIN INCREASED 300 BASIS POINTS TO 11.8% VS. 8.8% LY

Q1 GAAP NET INCOME INCREASED +40% TO $35.7M VS. $25.5M LY
Q1
ADJUSTED NET INCOME INCREASED +48% TO $45.2M VS. $30.6M LY

Q1 GAAP EPS INCREASED +42% TO $1.43 VS. $1.01 LY
Q1 ADJUSTED
DILUTED EPS INCREASED +53% TO $1.85 VS. $1.21 LY

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

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

To Our People, Partners, and Shareholders,

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

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

      Prior Guidance       Updated Guidance
Adjusted net revenue $ 2,585.0       $ 2,635.0 $ 2,642.8       $ 2,662.8
Adjusted operating income $ 309.4 $ 331.6 $ 332.5 $ 350.5
Adjusted operating margin 12.0% 12.6% 12.6% 13.2%
Adjusted net income $ 204.0 $ 220.0 $ 206.2 $ 218.2
Adjusted diluted EPS $ 8.05 $ 8.69 $ 8.76 $ 9.27

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

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

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

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

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

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

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

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

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

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

Our long term targets remain:

Net revenue growth of 8% to 12%
Adjusted operating margins in the
mid to high teens
Adjusted net income growth of 15% to 20% annually
Return
on invested capital (ROIC) in excess of 50%

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

  1. Revenue growth driven by our real estate transformation, the elevation
    and expansion of our product offering, and investments in RH Interior
    Design will continue to leverage SG&A and Occupancy costs;
  2. The cycling of several capital intensive real estate projects and the
    shift to predominantly capital light projects, will decrease occupancy
    costs and increase operating earnings and ROIC;
  3. Increased inventory turns and decreased working capital requirements
    as a result of our new supply chain strategy will continue to drive
    lower costs and higher returns on invested capital. To put this point
    into perspective, if our inventory had grown at the same rate of
    revenues since Q1 2016, we would have approximately $470 million of
    additional inventory than we do today and significantly higher
    operating costs; and
  4. Higher revenues, lower returns and reduced operating costs as a result
    of our new Home Delivery strategy. We have already identified cost
    savings of $15 to $20 million that will be captured over fiscal 2019
    and 2020.

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

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

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

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

Carpe Diem,

Gary

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

Q&A CONFERENCE CALL INFORMATION

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United States/
Canada) or (706) 679-9188 (International). A live broadcast of the
question and answer session conference call will also be available
online at the Company’s investor relations website, ir.rh.com. A replay
of the question and answer session conference call will be available
through June 26, 2019 by dialing (855) 859-2056 or (404) 537-3406 and
entering passcode 6032768, as well as on the Company’s investor
relations website.

ABOUT RH

RH (NYSE: RH) is a curator of design, taste and style in the luxury
lifestyle market. The Company offers its collections through its retail
galleries across North America, the Company’s multiple Source Books, and
online at RH.com, RHModern.com, RHBabyandChild.com, RHTeen.com and
Waterworks.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated financial statements, which are
prepared and presented in accordance with Generally Accepted Accounting
Principles (“GAAP”), the Company uses the following non-GAAP financial
measures: adjusted net revenue, adjusted operating income, adjusted net
income or adjusted net earnings, adjusted net income margin, adjusted
diluted earnings per share, normalized adjusted net income, normalized
adjusted diluted net income per share, ROIC or return on invested
capital, free cash flow, adjusted operating margin, adjusted gross
margin, adjusted SG&A, EBITDA and Adjusted EBITDA (collectively,
“non-GAAP financial measures”). We compute these measures by adjusting
the applicable GAAP measures to remove the impact of certain recurring
and non-recurring charges and gains and the tax effect of these
adjustments. The presentation of this financial information is not
intended to be considered in isolation or as a substitute for, or
superior to, the financial information prepared and presented in
accordance with GAAP. The Company uses these non-GAAP financial measures
for financial and operational decision making and as a means to evaluate
period-to-period comparisons. The Company believes that they provide
useful information about operating results, enhance the overall
understanding of past financial performance and future prospects, and
allow for greater transparency with respect to key metrics used by
management in its financial and operational decision making. The
non-GAAP financial measures used by the Company in this press release
may be different from the non-GAAP financial measures, including
similarly titled measures, used by other companies.

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

FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of
the federal securities laws, including without limitation, statements
regarding: Our fiscal 2019 guidance including our expectations for
adjusted net revenue, adjusted operating income, adjusted operating
income, adjusted net income, adjusted diluted EPS, the impact from the
increased tariffs, and a 3 point revenue reduction as a result of
editing unprofitable and non-strategic businesses, namely the
elimination of the remaining holiday business (1 point), the elimination
of fringe promotions (1 point), and the transition of our rug business
from a single source importer to a direct sourcing model (1 point); our
future opportunity, growth plans and strategies, including our focus on
elevating the brand and architecting an integrated operating platform,
our profit model leapfrogging past the home furnishings industry, and RH
becoming one of the few retailers that is growing revenues, expanding
margins, increasing operating earnings, and driving significantly higher
returns on invested capital; our expectation that our business momentum
will continue despite negative macro trends and increased tariffs,
supported by the recent introduction of RH Beach House, the continued
elevation and expansion of our product offering, investments in RH
Interior Design, plus the launch of RH Ski House and new galleries
opening this fall; our expectation that our RH New York gallery will
continue to build momentum and trend comfortably in excess of $100
million in revenue annually; our plan to open RH San Francisco, The
Gallery at The Historic Bethlehem Steel Building, and RH Charlotte, The
Gallery at Phillips Place, in the first quarter of fiscal 2020, and our
expectation that the slight delays in opening such galleries will not
have a material impact on this year’s revenues; our expectation of
receiving offers for RH Edina in the fall when the Gallery opens; our
plans to move certain production and new product development out of
China plus explore new partnerships and expand our own manufacturing
facilities in the United States; our belief that in the long term the
current trade climate will not impair our ability to achieve our stated
financial goals; the expected acceleration of our real estate
transformation including the opening of 5 to 7 new galleries in fiscal
2020 and a minimum of 7 new galleries in fiscal 2021, our belief that
our Company remains undervalued and that the repurchase of our shares
will prove to be an outstanding allocation of capital for the benefit of
our long term shareholders; our expectation that we will end the year
with net debt to TTM Adjusted EBITDA of approximately 2.0x; our path to
$4 to $5 billion in North America revenues; our expectations regarding
an International opportunity that could lead to RH becoming a $7 to $10
billion dollar global brand; our long term targets, including net
revenue growth of 8% to 12%, adjusted operating margins in the mid to
high teens, adjusted net income growth of 15% to 20% annually and ROIC
in excess of 50%; our belief that our initiatives, including (1) revenue
growth driven by our real estate transformation, the elevation and
expansion of our product offering, and investments in RH Interior Design
that will continue to leverage SG&A and Occupancy costs, (2) the cycling
of several capital intensive real estate projects and the shift to
predominantly capital light projects that will decrease occupancy costs
and increase operating earnings and ROIC, (3) increased inventory turns
and decreased working capital requirements as a result of our new supply
chain strategy that will continue to drive lower costs and higher
returns on invested capital, and (4) higher revenues, lower returns and
reduced operating costs as a result of our new Home Delivery strategy,
including cost savings of $15 to $20 million that will be captured over
fiscal 2019 and 2020, will lead to another step change in our financial
performance and return on invested capital over the next several years
and should translate into an additional 400 to 600 basis points of
operating margin and return on invested capital in excess of 50%; and
any statements or assumptions underlying any of the foregoing.

You can identify forward-looking statements by the fact that they do not
relate strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,”
“plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other
words and terms of similar meaning in connection with any discussion of
the timing or nature of future events. We cannot assure you that future
developments affecting us will be those that we have anticipated.
Important risks and uncertainties that could cause actual results to
differ materially from our expectations include, among others, risks
related to our dependence on key personnel and any changes in our
ability to retain key personnel; successful implementation of our growth
strategy; risks related to the number of new business initiatives we are
undertaking; successful implementation of our growth strategy including
our real estate transformation and the number of new gallery locations
that we seek to open and the timing of openings; uncertainties in the
current performance of our business including a range of risks related
to our operations as well as external economic factors; general economic
conditions and the housing market as well as the impact of economic
conditions on consumer confidence and spending; changes in customer
demand for our products; our ability to anticipate consumer preferences
and buying trends, and maintaining our brand promise to customers;
decisions concerning the allocation of capital; factors affecting our
outstanding convertible senior notes or other forms of our indebtedness;
our ability to anticipate consumer preferences and buying trends, and
maintain our brand promise to customers; changes in consumer spending
based on weather and other conditions beyond our control; risks related
to the number of new business initiatives we are undertaking; strikes
and work stoppages affecting port workers and other industries involved
in the transportation of our products; our ability to obtain our
products in a timely fashion or in the quantities required; our ability
to employ reasonable and appropriate security measures to protect
personal information that we collect; our ability to support our growth
with appropriate information technology systems; risks related to our
sourcing and supply chain including our dependence on imported products
produced by foreign manufacturers and risks related to importation of
such products including risks related to tariffs, the countermeasures
and mitigation steps that we adopt in response to tariffs and other
similar issues, as well as those risks and uncertainties disclosed under
the sections entitled “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in RH’s most
recent Form 10-K and Form 10-Q filed with the Securities and Exchange
Commission, and similar disclosures in subsequent reports filed with the
SEC, which are available on our investor relations website at ir.rh.com
and on the SEC website at www.sec.gov.
Any forward-looking statement made by us in this press release speaks
only as of the date on which we make it. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of
new information, future developments or otherwise, except as may be
required by any applicable securities laws.

RETAIL GALLERY METRICS
(Unaudited)

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

           
May 4, May 5,
2019 2018
RH
Design Galleries 20 17
Legacy Galleries 43 46
Modern Galleries 2 2
Baby & Child Galleries 5 4
Total RH Galleries 70 69
Outlets 40 32
 
Waterworks Showrooms 15 15
 

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

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

               
Three Months Ended
May 4, May 5,
2019 2018
Total Leased Selling

Total Leased Selling

Store Count Square Footage Store Count Square Footage
(in thousands) (in thousands)
Beginning of period 86 1,089 83 981
RH Galleries:
Dallas RH Modern Gallery (relocation) (4.5)
Dallas RH Baby & Child Gallery

(1)

 

(3.7)
Dallas legacy Gallery (relocation) (2.6)
Portland Design Gallery 1 26.0
Dallas RH Modern Gallery 1 8.2
Portland legacy Gallery (1) (4.7)
Waterworks Showrooms:
Waterworks Scottsdale Showroom 1 2.2
Waterworks Scottsdale Showroom (1) (1.1)
End of period 85 1,078 84 1,012
 
Weighted-average leased selling square footage 1,084

984

% Growth year over year

10%

8%

 

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except share and per share amounts)

(Unaudited)

             
Three Months Ended
May 4, % of Net May 5, % of Net
2019 Revenues 2018 Revenues
Net revenues $ 598,421 100.0 % $ 557,406 100.0 %
Cost of goods sold   365,607 61.1 %   348,073 62.4 %
Gross profit 232,814 38.9 % 209,333 37.6 %
Selling, general and administrative expenses   164,181 27.4 %   161,186 29.0 %
Income from operations 68,633 11.5 % 48,147 8.6 %
Interest expense—net   21,118 3.6 %   15,098 2.7 %
Income before income taxes 47,515 7.9 % 33,049 5.9 %
Income tax expense   11,793 1.9 %   7,588 1.3 %
Net income $ 35,722 6.0 % $ 25,461 4.6 %
 
Weighted-average shares used in computing basic net income per share 19,976,858 21,545,025
Basic net income per share $ 1.79 $ 1.18
 
Weighted-average shares used in computing diluted net income per
share
24,933,987 25,230,228
Diluted net income per share $ 1.43 $ 1.01
 

Contacts

Allison Malkin
203-682-8225
allison.malkin@icrinc.com

Read full story here

RH Reports Record First Quarter Fiscal 2019 Results

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

Company Raises Fiscal 2019 Guidance

CORTE MADERA, Calif.–(BUSINESS WIRE)–RH (NYSE: RH) today announced first quarter fiscal 2019 results.
Chairman & Chief Executive Officer Gary Friedman provided an update on
the Company’s continued evolution and outlook. RH Leadership will host a
Q&A conference call at 2:00 p.m. PT (5:00 p.m. ET) today.

FIRST QUARTER 2019 HIGHLIGHTS

Q1 GAAP NET REVENUES INCREASED +7.4% TO $598M
Q1 ADJUSTED NET
REVENUES INCREASED +7.4% TO $599M

Q1 GAAP OPERATING INCOME INCREASED +43% TO $68.6M VS. $48.1M LY
Q1
ADJUSTED OPERATING INCOME INCREASED +43% TO $70.5M VS. $49.2M LY

Q1 GAAP OPERATING MARGIN INCREASED 290 BASIS POINTS TO 11.5% VS. 8.6% LY
Q1
ADJUSTED OPERATING MARGIN INCREASED 300 BASIS POINTS TO 11.8% VS. 8.8% LY

Q1 GAAP NET INCOME INCREASED +40% TO $35.7M VS. $25.5M LY
Q1
ADJUSTED NET INCOME INCREASED +48% TO $45.2M VS. $30.6M LY

Q1 GAAP EPS INCREASED +42% TO $1.43 VS. $1.01 LY
Q1 ADJUSTED
DILUTED EPS INCREASED +53% TO $1.85 VS. $1.21 LY

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

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

To Our People, Partners, and Shareholders,

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

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

      Prior Guidance       Updated Guidance
Adjusted net revenue $ 2,585.0       $ 2,635.0 $ 2,642.8       $ 2,662.8
Adjusted operating income $ 309.4 $ 331.6 $ 332.5 $ 350.5
Adjusted operating margin 12.0% 12.6% 12.6% 13.2%
Adjusted net income $ 204.0 $ 220.0 $ 206.2 $ 218.2
Adjusted diluted EPS $ 8.05 $ 8.69 $ 8.76 $ 9.27

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

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

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

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

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

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

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

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

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

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

Our long term targets remain:

Net revenue growth of 8% to 12%
Adjusted operating margins in the
mid to high teens
Adjusted net income growth of 15% to 20% annually
Return
on invested capital (ROIC) in excess of 50%

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

  1. Revenue growth driven by our real estate transformation, the elevation
    and expansion of our product offering, and investments in RH Interior
    Design will continue to leverage SG&A and Occupancy costs;
  2. The cycling of several capital intensive real estate projects and the
    shift to predominantly capital light projects, will decrease occupancy
    costs and increase operating earnings and ROIC;
  3. Increased inventory turns and decreased working capital requirements
    as a result of our new supply chain strategy will continue to drive
    lower costs and higher returns on invested capital. To put this point
    into perspective, if our inventory had grown at the same rate of
    revenues since Q1 2016, we would have approximately $470 million of
    additional inventory than we do today and significantly higher
    operating costs; and
  4. Higher revenues, lower returns and reduced operating costs as a result
    of our new Home Delivery strategy. We have already identified cost
    savings of $15 to $20 million that will be captured over fiscal 2019
    and 2020.

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

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

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

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

Carpe Diem,

Gary

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

Q&A CONFERENCE CALL INFORMATION

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United States/
Canada) or (706) 679-9188 (International). A live broadcast of the
question and answer session conference call will also be available
online at the Company’s investor relations website, ir.rh.com. A replay
of the question and answer session conference call will be available
through June 26, 2019 by dialing (855) 859-2056 or (404) 537-3406 and
entering passcode 6032768, as well as on the Company’s investor
relations website.

ABOUT RH

RH (NYSE: RH) is a curator of design, taste and style in the luxury
lifestyle market. The Company offers its collections through its retail
galleries across North America, the Company’s multiple Source Books, and
online at RH.com, RHModern.com, RHBabyandChild.com, RHTeen.com and
Waterworks.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated financial statements, which are
prepared and presented in accordance with Generally Accepted Accounting
Principles (“GAAP”), the Company uses the following non-GAAP financial
measures: adjusted net revenue, adjusted operating income, adjusted net
income or adjusted net earnings, adjusted net income margin, adjusted
diluted earnings per share, normalized adjusted net income, normalized
adjusted diluted net income per share, ROIC or return on invested
capital, free cash flow, adjusted operating margin, adjusted gross
margin, adjusted SG&A, EBITDA and Adjusted EBITDA (collectively,
“non-GAAP financial measures”). We compute these measures by adjusting
the applicable GAAP measures to remove the impact of certain recurring
and non-recurring charges and gains and the tax effect of these
adjustments. The presentation of this financial information is not
intended to be considered in isolation or as a substitute for, or
superior to, the financial information prepared and presented in
accordance with GAAP. The Company uses these non-GAAP financial measures
for financial and operational decision making and as a means to evaluate
period-to-period comparisons. The Company believes that they provide
useful information about operating results, enhance the overall
understanding of past financial performance and future prospects, and
allow for greater transparency with respect to key metrics used by
management in its financial and operational decision making. The
non-GAAP financial measures used by the Company in this press release
may be different from the non-GAAP financial measures, including
similarly titled measures, used by other companies.

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

FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of
the federal securities laws, including without limitation, statements
regarding: Our fiscal 2019 guidance including our expectations for
adjusted net revenue, adjusted operating income, adjusted operating
income, adjusted net income, adjusted diluted EPS, the impact from the
increased tariffs, and a 3 point revenue reduction as a result of
editing unprofitable and non-strategic businesses, namely the
elimination of the remaining holiday business (1 point), the elimination
of fringe promotions (1 point), and the transition of our rug business
from a single source importer to a direct sourcing model (1 point); our
future opportunity, growth plans and strategies, including our focus on
elevating the brand and architecting an integrated operating platform,
our profit model leapfrogging past the home furnishings industry, and RH
becoming one of the few retailers that is growing revenues, expanding
margins, increasing operating earnings, and driving significantly higher
returns on invested capital; our expectation that our business momentum
will continue despite negative macro trends and increased tariffs,
supported by the recent introduction of RH Beach House, the continued
elevation and expansion of our product offering, investments in RH
Interior Design, plus the launch of RH Ski House and new galleries
opening this fall; our expectation that our RH New York gallery will
continue to build momentum and trend comfortably in excess of $100
million in revenue annually; our plan to open RH San Francisco, The
Gallery at The Historic Bethlehem Steel Building, and RH Charlotte, The
Gallery at Phillips Place, in the first quarter of fiscal 2020, and our
expectation that the slight delays in opening such galleries will not
have a material impact on this year’s revenues; our expectation of
receiving offers for RH Edina in the fall when the Gallery opens; our
plans to move certain production and new product development out of
China plus explore new partnerships and expand our own manufacturing
facilities in the United States; our belief that in the long term the
current trade climate will not impair our ability to achieve our stated
financial goals; the expected acceleration of our real estate
transformation including the opening of 5 to 7 new galleries in fiscal
2020 and a minimum of 7 new galleries in fiscal 2021, our belief that
our Company remains undervalued and that the repurchase of our shares
will prove to be an outstanding allocation of capital for the benefit of
our long term shareholders; our expectation that we will end the year
with net debt to TTM Adjusted EBITDA of approximately 2.0x; our path to
$4 to $5 billion in North America revenues; our expectations regarding
an International opportunity that could lead to RH becoming a $7 to $10
billion dollar global brand; our long term targets, including net
revenue growth of 8% to 12%, adjusted operating margins in the mid to
high teens, adjusted net income growth of 15% to 20% annually and ROIC
in excess of 50%; our belief that our initiatives, including (1) revenue
growth driven by our real estate transformation, the elevation and
expansion of our product offering, and investments in RH Interior Design
that will continue to leverage SG&A and Occupancy costs, (2) the cycling
of several capital intensive real estate projects and the shift to
predominantly capital light projects that will decrease occupancy costs
and increase operating earnings and ROIC, (3) increased inventory turns
and decreased working capital requirements as a result of our new supply
chain strategy that will continue to drive lower costs and higher
returns on invested capital, and (4) higher revenues, lower returns and
reduced operating costs as a result of our new Home Delivery strategy,
including cost savings of $15 to $20 million that will be captured over
fiscal 2019 and 2020, will lead to another step change in our financial
performance and return on invested capital over the next several years
and should translate into an additional 400 to 600 basis points of
operating margin and return on invested capital in excess of 50%; and
any statements or assumptions underlying any of the foregoing.

You can identify forward-looking statements by the fact that they do not
relate strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,”
“plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other
words and terms of similar meaning in connection with any discussion of
the timing or nature of future events. We cannot assure you that future
developments affecting us will be those that we have anticipated.
Important risks and uncertainties that could cause actual results to
differ materially from our expectations include, among others, risks
related to our dependence on key personnel and any changes in our
ability to retain key personnel; successful implementation of our growth
strategy; risks related to the number of new business initiatives we are
undertaking; successful implementation of our growth strategy including
our real estate transformation and the number of new gallery locations
that we seek to open and the timing of openings; uncertainties in the
current performance of our business including a range of risks related
to our operations as well as external economic factors; general economic
conditions and the housing market as well as the impact of economic
conditions on consumer confidence and spending; changes in customer
demand for our products; our ability to anticipate consumer preferences
and buying trends, and maintaining our brand promise to customers;
decisions concerning the allocation of capital; factors affecting our
outstanding convertible senior notes or other forms of our indebtedness;
our ability to anticipate consumer preferences and buying trends, and
maintain our brand promise to customers; changes in consumer spending
based on weather and other conditions beyond our control; risks related
to the number of new business initiatives we are undertaking; strikes
and work stoppages affecting port workers and other industries involved
in the transportation of our products; our ability to obtain our
products in a timely fashion or in the quantities required; our ability
to employ reasonable and appropriate security measures to protect
personal information that we collect; our ability to support our growth
with appropriate information technology systems; risks related to our
sourcing and supply chain including our dependence on imported products
produced by foreign manufacturers and risks related to importation of
such products including risks related to tariffs, the countermeasures
and mitigation steps that we adopt in response to tariffs and other
similar issues, as well as those risks and uncertainties disclosed under
the sections entitled “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in RH’s most
recent Form 10-K and Form 10-Q filed with the Securities and Exchange
Commission, and similar disclosures in subsequent reports filed with the
SEC, which are available on our investor relations website at ir.rh.com
and on the SEC website at www.sec.gov.
Any forward-looking statement made by us in this press release speaks
only as of the date on which we make it. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of
new information, future developments or otherwise, except as may be
required by any applicable securities laws.

RETAIL GALLERY METRICS
(Unaudited)

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

           
May 4, May 5,
2019 2018
RH
Design Galleries 20 17
Legacy Galleries 43 46
Modern Galleries 2 2
Baby & Child Galleries 5 4
Total RH Galleries 70 69
Outlets 40 32
 
Waterworks Showrooms 15 15
 

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

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

               
Three Months Ended
May 4, May 5,
2019 2018
Total Leased Selling

Total Leased Selling

Store Count Square Footage Store Count Square Footage
(in thousands) (in thousands)
Beginning of period 86 1,089 83 981
RH Galleries:
Dallas RH Modern Gallery (relocation) (4.5)
Dallas RH Baby & Child Gallery

(1)

 

(3.7)
Dallas legacy Gallery (relocation) (2.6)
Portland Design Gallery 1 26.0
Dallas RH Modern Gallery 1 8.2
Portland legacy Gallery (1) (4.7)
Waterworks Showrooms:
Waterworks Scottsdale Showroom 1 2.2
Waterworks Scottsdale Showroom (1) (1.1)
End of period 85 1,078 84 1,012
 
Weighted-average leased selling square footage 1,084

984

% Growth year over year

10%

8%

 

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except share and per share amounts)

(Unaudited)

             
Three Months Ended
May 4, % of Net May 5, % of Net
2019 Revenues 2018 Revenues
Net revenues $ 598,421 100.0 % $ 557,406 100.0 %
Cost of goods sold   365,607 61.1 %   348,073 62.4 %
Gross profit 232,814 38.9 % 209,333 37.6 %
Selling, general and administrative expenses   164,181 27.4 %   161,186 29.0 %
Income from operations 68,633 11.5 % 48,147 8.6 %
Interest expense—net   21,118 3.6 %   15,098 2.7 %
Income before income taxes 47,515 7.9 % 33,049 5.9 %
Income tax expense   11,793 1.9 %   7,588 1.3 %
Net income $ 35,722 6.0 % $ 25,461 4.6 %
 
Weighted-average shares used in computing basic net income per share 19,976,858 21,545,025
Basic net income per share $ 1.79 $ 1.18
 
Weighted-average shares used in computing diluted net income per
share
24,933,987 25,230,228
Diluted net income per share $ 1.43 $ 1.01
 

Contacts

Allison Malkin
203-682-8225
allison.malkin@icrinc.com

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