RH 2022 Second-Quarter Form 10-Q Summary
Business context and reporting period
RH is a luxury home-furnishings retailer and lifestyle brand operating RH Galleries, Outlets, Waterworks Showrooms, websites and Source Books. As of July 30, 2022, it operated 67 RH Galleries, 39 Outlets and 14 Waterworks Showrooms across the United States, Canada and the U.K. The filing covers the three and six months ended July 30, 2022, compared with July 31, 2021. The request metadata identifies “2021 Q2,” but the source filing is the 2022 second-quarter Form 10-Q, filed September 8, 2022.
Financial performance and position
| Metric | Three months ended July 30, 2022 | Three months ended July 31, 2021 | Six months ended July 30, 2022 | Six months ended July 31, 2021 |
|---|---|---|---|---|
| Net revenues | $991.6 million | $988.9 million | $1,948.9 million | $1,849.7 million |
| Gross profit | $523.2 million | $487.7 million | $1,021.8 million | $894.7 million |
| Gross margin | 52.8% | 49.3% | 52.4% | 48.4% |
| Income from operations | $234.4 million | $249.0 million | $439.7 million | $436.9 million |
| Operating margin | 23.6% | 25.2% | 22.6% | 23.6% |
| Net income | $122.3 million | $226.7 million | $323.0 million | $357.4 million |
| Diluted EPS | $5.37 | $7.09 | $17.70 | $11.31 |
| Adjusted EBITDA | $279.8 million | $290.4 million | $549.4 million | $518.6 million |
Six-month operating cash flow was $192.5 million, down from $316.7 million. Investing cash flow was negative $64.1 million, including $62.6 million of capital expenditures. Financing cash flow was negative $224.2 million. Cash and cash equivalents were $2.085 billion at July 30, 2022, compared with $2.178 billion at January 29, 2022.
Total debt was approximately $2.531 billion, producing reported net debt of approximately $446 million. Debt included $1.985 billion of Term Loan B, $500 million of Term Loan B-2 and approximately $44 million of remaining convertible senior notes. The ABL facility had no borrowings and $528 million of availability net of outstanding letters of credit.
Total assets were $5.831 billion and total stockholders’ equity was $1.220 billion at July 30, 2022. Merchandise inventories increased to $859.1 million from $734.3 million at January 29, 2022. Lease liabilities totaled approximately $1.280 billion, including $677.2 million of finance lease liabilities.
Material changes versus the prior comparable period
- Second-quarter revenue increased only 0.3%, as RH Segment revenue declined 0.8% amid softening demand, partly offset by backlog relief and higher hospitality revenue. Waterworks revenue increased 24.7%.
- Six-month revenue increased 5.4%, reflecting fulfillment of prior-period backlog, new restaurant openings and higher Waterworks and Outlet sales. Management stated that demand trends softened beginning in the first quarter of fiscal 2022.
- Gross margin expanded 350 basis points in the quarter and 400 basis points year to date, primarily from improved product margins and shipping-cost leverage.
- SG&A increased 21.0% in the quarter and 27.2% year to date, driven by advertising, the new RH Contemporary Source Book, the launch of The World of RH, employment costs, occupancy, professional fees and pre-opening expenses.
- Net income declined 46.1% in the quarter and 9.6% year to date. Results were affected by higher interest expense, debt-extinguishment losses and a substantially higher quarterly tax expense. Year-to-date results benefited from a $107.0 million income-tax benefit, primarily related to stock-based compensation tax benefits.
- RH adopted ASU 2020-06 in the first quarter of fiscal 2022, changing the accounting for convertible debt and affecting debt carrying values, retained earnings and diluted EPS.
- RH repurchased and retired 1.0 million shares in the second quarter for approximately $254.7 million at an average price of $254.72 per share. The repurchase authorization was increased to $2.450 billion, with approximately $2.195 billion remaining.
Guidance, outlook, commentary and risks
- Management expects fiscal 2022 adjusted capital expenditures of approximately $200 million to $225 million, primarily for new Design Galleries, growth initiatives and infrastructure.
- Management stated that cash balances, operating cash flow and available financing are expected to fund debt repayment, working capital and other capital needs for more than the next 12 months.
- RH expects to repay the remaining convertible notes in cash where possible to minimize dilution. Approximately $1.7 million of 2023 Notes remained, due June 2023, and approximately $42 million of 2024 Notes remained, due September 2024.
- Long-term initiatives include Gallery transformation, hospitality, international expansion, digital development and new product categories. Management targeted the opening of RH England in spring 2023 and described potential North American Gallery revenue of $5 billion to $6 billion.
- Key risks include inflation, rising interest rates, recession and housing-market weakness, changing consumer spending toward travel and leisure, supply-chain delays, inventory levels, floating-rate debt, the LIBOR-to-SOFR transition, foreign-currency exposure and execution risk from global expansion and real-estate investments.
- Legal proceedings include employment and wage-and-hour matters, intellectual-property and consumer claims, product-liability matters and regulatory proceedings. The company stated that it cannot estimate potential losses for certain class-action matters, although it does not currently expect existing proceedings to have a material adverse effect.
- The company reported no material off-balance-sheet commitments and stated that its disclosure controls were effective. Management reported no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the recent softening in RH Segment demand persists and affects revenue, backlog conversion and inventory levels.
- The sustainability of the significant gross-margin improvement as freight, labor, occupancy and product costs evolve.
- Interest-rate sensitivity and refinancing or repayment requirements for the approximately $2.5 billion of term debt and upcoming convertible-note maturities.
- Cash deployment decisions, including the substantial share-repurchase authorization relative to capital expenditures and leverage.
- Execution, timing and required capital for new Galleries, hospitality projects, RH England and broader international expansion.
- The tax impact of stock-option-related benefits and whether the unusually large year-to-date tax benefit recurs.
- Potential liabilities from employment litigation, product recalls, regulatory matters and other contingencies that the filing states cannot yet be reliably estimated.