RH Form 10-K Summary
Business context and reporting period
Restoration Hardware Holdings, Inc. (RH) is a luxury home furnishings retailer selling through stores, catalogs and websites. This filing is a Form 10-K for the 52-week fiscal year ended February 1, 2014, referred to as fiscal 2013. The request metadata identifies “2012 Q4,” but the supplied filing is the fiscal 2013 annual report and includes quarterly data for the fourth quarter ended February 1, 2014.
- At year-end, RH operated 70 retail stores, 17 outlet stores, nine distribution or home-delivery facilities and websites that recorded approximately 22.2 million unique visits during fiscal 2013.
- Stores generated 53% of fiscal 2013 net revenue and direct channels generated 47%.
- RH’s strategy emphasized larger Full Line Design Galleries, expanded product categories and services, brand development, international expansion and operating-margin leverage.
Financial performance and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 | Change or comment |
|---|---|---|---|
| Net revenues | $1,551.0 million | $1,193.0 million | Increased 30.0% |
| Stores revenue | $818.4 million | $643.3 million | Increased 27.2% |
| Direct revenue | $732.6 million | $549.7 million | Increased 33.3% |
| Gross profit | $556.9 million | $436.4 million | Increased 27.6% |
| Gross margin | 35.9% | 36.6% | Decreased 0.7 percentage points |
| Operating income (loss) | $54.9 million | $(69.0) million | Turned profitable |
| Operating margin | 3.5% | (5.8)% | Improved materially |
| Net income (loss) | $18.2 million | $(12.8) million | Returned to GAAP profitability |
| Adjusted net income | $69.1 million | $37.7 million | Increased 83%; non-GAAP |
| Adjusted EBITDA | $148.6 million | $96.6 million | Increased approximately 54%; non-GAAP |
| Cash flow from operations | $87.5 million | $(3.9) million | Improved by $91.4 million |
| Capital expenditures | $93.9 million | $49.1 million | Nearly doubled |
| Cash and cash equivalents | $13.4 million | $8.4 million | Increased $5.0 million |
| Total debt, including current portion | $87.6 million | $87.0 million | Essentially unchanged |
Fiscal 2013 gross-margin pressure reflected strategic pricing on new products, product mix and higher freight costs associated with furniture sales. These pressures were partly offset by improved leverage of fixed occupancy costs. Excluding certain one-time and non-cash items, SG&A was 28.1% of revenue versus 31.4% in fiscal 2012.
Inventory increased $100.9 million during fiscal 2013 to support growth. The company reported $453.8 million of merchandise inventory at year-end, compared with $353.3 million a year earlier. Inventory reserves were $9.3 million, compared with $5.9 million.
At February 1, 2014, RH had $85.4 million outstanding under its revolving credit facility, $261.7 million of undrawn availability and $18.9 million of outstanding letters of credit. The facility matures August 3, 2016, is secured by substantially all of Restoration Hardware, Inc.’s assets and had a weighted-average interest rate of 2.80%. RH reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue growth accelerated to 30.0% from 24.5% in fiscal 2012, with comparable brand revenue growth of 31% and comparable store sales growth of 27%.
- GAAP operating results improved from a $69.0 million operating loss to $54.9 million of operating income.
- GAAP net income improved from a $12.8 million loss to $18.2 million of income. Fiscal 2012 included unusually large charges, including $115.1 million of non-cash compensation, $10.8 million of IPO costs and $4.8 million related to a special committee investigation.
- Fiscal 2013 included $63.2 million of non-cash and other one-time compensation, including a $33.7 million charge for a fully vested option granted to Gary Friedman and a $29.5 million charge for performance-based share vesting. It also included $2.9 million of follow-on offering fees.
- Gross margin declined from 36.6% to 35.9%, despite gross-profit growth.
- Operating cash flow recovered to $87.5 million from a $3.9 million use of cash, while capital expenditures increased to $93.9 million.
- Property and equipment increased to $214.9 million from $111.4 million, including approximately $33 million of build-to-suit assets and related financing obligations.
- Gary Friedman became Chairman and Chief Executive Officer after Carlos Alberini resigned as Co-Chief Executive Officer effective January 31, 2014. Alberini remained a director.
Guidance, outlook, commentary and risks
- Management expected fiscal 2014 capital expenditures of approximately $115 million to $125 million, primarily for Full Line Design Galleries, store development and infrastructure.
- Management stated that operating cash flow and available revolver capacity were expected to satisfy capital and operating requirements for at least the next 12 to 24 months.
- RH planned to continue replacing or consolidating older stores with larger Full Line Design Galleries, expand product categories and services, pursue selected international markets and improve margins through scale and occupancy leverage.
- The filing did not provide a specific fiscal 2014 revenue, earnings or comparable-sales forecast.
- Major risks include dependence on discretionary consumer spending and housing activity; execution risk from simultaneous store, category, supply-chain and technology initiatives; inventory excesses or shortages; reliance on foreign vendors and imports; freight, tariff and commodity-cost volatility; competition; lease and occupancy commitments; and dependence on key personnel.
- Approximately 74% of merchandise purchase volume was sourced from vendors outside the United States, including approximately 69% from Asia. One vendor represented approximately 12% of fiscal 2013 purchase dollar volume.
- RH disclosed that it was not fully compliant with Payment Card Industry data-security standards and expected to incur additional compliance costs. Data breaches could result in litigation, fines, operational disruption and reputational damage.
- Legal proceedings arise in the ordinary course of business. RH had recorded reserves for estimated losses but stated that additional losses could exceed accrued amounts, although management did not expect current matters to have a material adverse effect.
- The company recorded a $1.4 million impairment charge related to an underperforming Baby & Child Gallery and had approximately $612.7 million of future operating-lease payments, excluding certain contingent rent.
- No cash dividends were declared or paid, and RH did not expect to pay dividends in the foreseeable future.
Most important facts for an investor to verify
- Confirm that the applicable reporting period is fiscal 2013 ended February 1, 2014, rather than fiscal 2012 fourth quarter.
- Reconcile GAAP earnings with adjusted net income and adjusted EBITDA, particularly the substantial stock-based compensation adjustments.
- Assess whether revenue growth can continue without further gross-margin erosion and whether Full Line Design Galleries achieve targeted returns.
- Monitor inventory growth, markdowns, returns and working-capital requirements relative to sales growth.
- Evaluate liquidity after the planned $115 million to $125 million of fiscal 2014 capital expenditures and the company’s reliance on the borrowing-base revolver.
- Review executive-transition, governance and related-party disclosures involving Gary Friedman and Carlos Alberini.
- Assess exposure to foreign sourcing, China-related tariffs, vendor concentration, supply disruptions and product-quality or compliance issues.
- Consider the economic impact of long-term operating leases, build-to-suit obligations and other contractual commitments.