RH Form 10-Q Summary
Business Context and Reporting Period
Restoration Hardware Holdings, Inc. is a luxury home furnishings retailer selling through stores, catalogs and websites. As of May 3, 2014, it operated 69 retail stores and 17 outlet stores in the United States and Canada. The filing covers the three months ended May 3, 2014, compared with the three months ended May 4, 2013. The request metadata identifies “2013 Q1,” but the filing is for fiscal 2014 first quarter.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenues | $366.3 million | $301.3 million | Up 21.5% |
| Gross profit | $124.3 million | $101.9 million | Up 22.1% |
| Gross margin | 34.0% | 33.8% | Up 0.2 percentage points |
| Income from operations | $4.8 million | $0.5 million | Improved |
| Net income (loss) | $1.8 million | $(0.2) million | Improved |
| Diluted EPS | $0.04 | Not meaningful due to loss | Improved |
| Net cash used in operating activities | $(57.2) million | $(19.6) million | Greater use of cash |
| Capital expenditures | $16.5 million | $9.7 million | Up $6.8 million |
Revenue growth was driven by stores revenue of $189.8 million, up 19.2%, and direct revenue of $176.4 million, up 24.2%. Comparable brand revenue growth was 18%, compared with 39% in the prior-year quarter. Furniture revenue was $209.7 million and non-furniture revenue was $156.5 million.
SG&A increased 18.0% to $119.6 million. SG&A was 32.7% of revenue on a reported basis and 30.1% excluding the legal charge and specified prior-year one-time items. Adjusted net income, a non-GAAP measure, was $7.2 million versus $2.3 million in the prior-year period.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $10.9 million at May 3, 2014, versus $13.4 million at February 1, 2014.
- Merchandise inventories increased to $483.5 million from $453.8 million, primarily in preparation for the spring and outdoor selling season.
- Borrowings under the revolving credit facility were $149.1 million, with $229.4 million of undrawn availability and $18.5 million of outstanding letters of credit. The weighted-average interest rate was 2.32%.
- Total liabilities were $557.7 million, including $149.1 million of revolving debt, $45.8 million of build-to-suit financing obligations and $18.4 million of long-term notes related to share repurchases.
- Operating cash use increased primarily because of inventory purchases, higher catalog costs and tax payments. Financing activities provided $71.3 million, including $63.7 million of net revolving-credit borrowings.
- Management expected operating cash flow and available borrowing capacity to fund working capital, planned capital expenditures and debt payments for at least the next 12 to 24 months.
- Fiscal 2014 capital expenditures were planned at approximately $115 million to $125 million; $16.5 million had been spent through the quarter.
Material Changes, Outlook and Unusual Items
- The company recorded a $9.2 million charge related to a California class-action legal claim alleging improper collection of customer ZIP codes in credit-card transactions. The proposed claims process remained subject to court approval.
- The company’s adjusted net income excludes the legal charge and applies a normalized 40% tax rate; this measure is not calculated under GAAP.
- Interest expense increased to $2.1 million from $0.8 million, reflecting build-to-suit accounting and higher revolving-credit borrowings.
- The company completed a $2.5 million acquisition on February 3, 2014, from an entity owned by a company employee.
- The company repurchased 241,322 shares from former employees for approximately $15.7 million, settled through promissory notes bearing 5% interest and maturing in eight years. Additional shares were withheld for employee tax and exercise obligations.
- Management cited favorable customer response to expanded and new product categories as a primary revenue driver. No specific full-year revenue or earnings guidance was provided in the filing text.
- Management identified risks related to reliance on foreign vendors, including artisans and specialty suppliers, limited production capacity, supply disruptions, import issues, and the absence of long-term supply or pricing assurances. Approximately 74% of fiscal 2013 merchandise purchases were from vendors located abroad.
- The revolving credit agreement contains restrictive covenants; the company was in compliance as of May 3, 2014. The facility matures August 3, 2016 and is secured by substantially all of the operating company’s assets.
- Litigation outcomes remain inherently unpredictable, and the company stated that additional losses could exceed accrued amounts, although management did not expect current matters to have a material adverse effect on the financial statements.
Important Facts for Investors to Verify
- Verify the final court approval, claims participation and ultimate cash cost of the $9.2 million ZIP-code litigation charge.
- Monitor inventory growth, catalog spending and operating cash flow, which required substantially more credit financing than in the prior-year quarter.
- Reconcile reported net income with adjusted net income and assess whether excluded items are genuinely nonrecurring.
- Track utilization, availability, covenants and maturity of the revolving credit facility, particularly as planned capital expenditures rise.
- Assess whether the lower 18% comparable brand growth rate versus 39% in the prior-year quarter reflects normalization or weakening demand.
- Evaluate execution of the $115 million to $125 million fiscal 2014 capital expenditure plan and the resulting lease, build-to-suit and working-capital obligations.