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RH Reports Fourth Quarter and Fiscal 2016 Financial Results

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

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

Fiscal Year Highlights

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

Fourth Quarter Highlights

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

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

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

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

First Quarter and Fiscal 2017 Outlook

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

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

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

Outlook for First Quarter and Fiscal 2017

(In millions, except per share data)

First Quarter
2017

Fiscal Year
2017

Net revenues $530—$545 $2,300—$2,400
% growth vs. prior year 16%—20% 8%—12%
Adjusted net income $0.8—$2.4 $65—$80
% growth vs. prior year nm 26%—55%
Adjusted diluted EPS (based on diluted shares outstanding inclusive of share repurchases through March 24, 2017) $0.02—$0.06 $1.78—$2.19
Weighted-average diluted shares outstanding inclusive of share repurchases through March 24, 2017

38.1

36.6

For comparison purposes to current analyst first quarter and fiscal 2017 estimates:

Adjusted diluted EPS (based on estimated first quarter and fiscal 2017 weighted-average diluted shares outstanding prior to share repurchases) $0.02—$0.06 $1.58—$1.95
Estimated weighted-average diluted shares outstanding prior to share repurchases

40.8

41.1

Capital expenditures $140—$160
Planned asset sales

$15—$25

Note: The Company’s adjusted diluted earnings per share outlook excludes the potential benefit of any additional stock repurchases beyond those already completed through March 24, 2017. The Company’s adjusted net income and adjusted diluted earnings per share guidance does not include certain charges and costs. The adjustments to net income and diluted earnings per share in future periods are generally expected to be similar to the kinds of charges and costs excluded from adjusted net income and adjusted diluted earnings per share in prior periods, such as unusual non-cash and other compensation expense; one-time income tax expense or benefits; legal claim related expenses; reorganization costs including severance costs...


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