RH Form 10-Q Summary
Filing period: Quarterly period ended October 29, 2022, filed December 8, 2022. The request metadata identifies “2021 Q3,” but the filing is RH’s fiscal 2022 third-quarter Form 10-Q. Comparative periods ended October 30, 2021.
Business Context
RH is a luxury home furnishings retailer and lifestyle brand operating RH Galleries, Outlets, Waterworks Showrooms, hospitality venues and digital channels. As of October 29, 2022, RH operated 67 Galleries, 39 Outlets, 14 Waterworks Showrooms and one RH Guesthouse. The company opened its first RH Guesthouse in New York in September 2022.
Key Financial Metrics
| Metric | Three months ended October 29, 2022 | Three months ended October 30, 2021 | Nine months ended October 29, 2022 | Nine months ended October 30, 2021 |
|---|---|---|---|---|
| Net revenues | $869.1 million | $1,006.4 million | $2,818.0 million | $2,856.1 million |
| Gross profit | $420.8 million | $505.3 million | $1,442.6 million | $1,399.9 million |
| Gross margin | 48.4% | 50.2% | 51.2% | 49.0% |
| Income from operations | $170.3 million | $272.5 million | $610.0 million | $709.4 million |
| Operating margin | 19.6% | 27.1% | 21.6% | 24.8% |
| Net income | $98.8 million | $184.1 million | $421.7 million | $541.5 million |
| Net margin | 11.4% | 18.3% | 15.0% | 19.0% |
| Diluted EPS | $3.78 | $5.88 | $21.70 | $17.19 |
| Adjusted EBITDA | $216.2 million | $310.7 million | $765.6 million | $829.3 million |
Cash Flow and Balance Sheet
- Nine-month operating cash flow was $336.0 million, down from $533.7 million.
- Capital expenditures were $109.7 million; adjusted capital expenditures were $153.1 million, including landlord assets under construction net of tenant allowances.
- Cash and cash equivalents were $2.150 billion at October 29, 2022, compared with $2.178 billion at January 29, 2022. Including restricted cash, liquidity was $2.154 billion.
- Total debt was approximately $2.526 billion, compared with $2.269 billion at January 29, 2022. Net debt was $376 million, excluding restricted cash and non-recourse real estate loans.
- Term Loan B principal was $1.980 billion and Term Loan B-2 principal was $500 million, both maturing in 2028. The ABL facility had no borrowings and $578 million of availability net of letters of credit.
- Remaining convertible notes totaled approximately $44 million: $1.7 million due in 2023 and $41.9 million due in 2024.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 13.6%, primarily due to softening demand, partly offset by backlog relief and higher hospitality revenue. RH Segment revenue fell 14.9%, while Waterworks revenue increased 15.0%.
- Nine-month revenue declined 1.3%; RH Segment revenue decreased 2.3%, while Waterworks revenue increased 19.2%.
- Third-quarter gross margin declined 180 basis points to 48.4%. An $11 million inventory impairment reduced gross profit; excluding that item, gross margin declined approximately 50 basis points.
- Nine-month gross margin increased 220 basis points to 51.2%, or approximately 260 basis points excluding the $11 million inventory impairment.
- Third-quarter operating income declined 37.5%, and operating margin fell to 19.6%, as lower revenue and higher SG&A caused operating deleverage.
- SG&A increased 7.7% in the third quarter and 20.6% for the nine months, reflecting higher employment costs, advertising, professional fees, pre-opening expenses and corporate costs related to RH Guesthouse New York and new Galleries.
- Interest expense increased to $31.4 million from $13.2 million in the third quarter and to $78.5 million from $40.1 million for the nine months, primarily due to higher term-loan borrowings and interest rates.
- Nine-month results included a $169.6 million loss on extinguishment of debt related to repurchases of $237 million principal amount of convertible notes. RH also paid approximately $391 million to terminate related warrants and received approximately $232 million from terminating convertible note hedges.
- RH repurchased 1.13 million shares for approximately $286 million during the nine months and had $2.164 billion remaining under its repurchase authorization.
Outlook, Commentary and Risks
- Management expects fiscal 2022 adjusted capital expenditures of approximately $200 million to $225 million, primarily for new Design Galleries, expansion and infrastructure.
- Management stated that cash, operating cash flow and available financing are expected to cover debt obligations, working capital and other capital needs for more than the next 12 months.
- Long-term initiatives include Gallery transformation, product and brand elevation, hospitality, digital reimagination and global expansion. RH expects to launch RH England at Historic Aynho Park in spring 2023 and is pursuing additional European locations.
- Management identified inflation, rising interest rates, potential recession, a sustained housing-market downturn, weaker consumer demand and shifts in spending toward travel and leisure as significant risks.
- Supply-chain disruptions and vendor delays continued to affect product availability and the company’s ability to convert demand into revenue.
- RH has significant floating-rate debt and does not currently hedge interest-rate exposure. The company anticipated amending certain LIBOR-based facilities to reference SOFR.
- Legal proceedings include employment-related class actions, wage-and-hour claims, intellectual-property matters, consumer claims, product liability and regulatory matters. The filing states that potential losses from certain matters cannot currently be estimated.
- In December 2022, RH entered additional real-estate joint ventures and contributed properties and $27 million of promissory notes receivable. Accounting for these transactions was incomplete as of the filing date.
Investor Verification Checklist
- Reconcile the metadata’s “2021 Q3” designation against the filing’s actual October 29, 2022 reporting period.
- Assess whether demand weakness, housing-market exposure and consumer spending shifts persist beyond the reported quarter.
- Monitor gross-margin performance excluding the $11 million inventory impairment and determine whether occupancy deleverage continues.
- Evaluate floating-rate exposure, SOFR transition terms and the effect of higher interest rates on the $2.48 billion of term loans.
- Verify the timing and cash funding sources for the remaining 2023 and 2024 convertible notes.
- Compare actual fiscal 2022 adjusted capital expenditures with the $200 million to $225 million expectation and assess the return profile of new Galleries, hospitality and international expansion.
- Review inventory growth, working-capital usage and the significant increase in prepaid assets and tax receivables.
- Review subsequent-event disclosures and the eventual accounting for the December 2022 real-estate joint ventures.