RH Form 10-Q Summary
Business context and reporting period
This filing covers RH’s fiscal first quarter ended May 1, 2021, compared with the three months ended May 2, 2020. The request metadata identifies “2020 Q1,” but the filing is the 2021 first-quarter Form 10-Q. RH is a luxury home-furnishings retailer operating Galleries, outlets, websites, Source Books, Waterworks showrooms and hospitality locations. As of May 1, 2021, RH operated 68 Galleries, 38 outlets and 14 Waterworks showrooms.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $860.8 million | $482.9 million | Up 78.3% |
| Gross profit | $407.0 million | $199.7 million | Up 103.8% |
| Gross margin | 47.3% | 41.3% | Up 600 basis points |
| Income from operations | $187.9 million | $35.5 million | Up $152.4 million |
| Operating margin | 21.8% | 7.3% | Up 1,450 basis points |
| Net income (loss) | $130.7 million | $(3.2) million | Improved $133.9 million |
| Diluted EPS | $4.19 | $(0.17) | Improved $4.36 |
| Adjusted EBITDA | $228.3 million | $77.4 million | Up 194.8% |
| Adjusted net income | $142.3 million | $29.9 million | Up 375.0% |
Furniture revenue was $580.0 million, up from $312.5 million, while non-furniture revenue was $280.8 million, up from $170.4 million. RH Segment revenue increased 80.2% to $819.8 million, and Waterworks revenue increased 46.6% to $41.0 million.
Net cash provided by operating activities was $190.9 million, compared with cash used of $16.9 million in the prior-year quarter. Capital expenditures were $50.3 million, and adjusted capital expenditures were $63.8 million. Cash and cash equivalents were $229.5 million at May 1, 2021; including restricted cash, total cash and restricted cash was $235.5 million.
Total assets were $3.24 billion and total stockholders’ equity was $594.5 million. Merchandise inventories were $593.9 million, up from $544.2 million at January 30, 2021. Deferred revenue and customer deposits were $363.4 million, up from $280.6 million.
RH had no outstanding borrowings under its asset-based revolving credit facility. Borrowing-base availability was $285.6 million, net of $20.1 million in letters of credit. Equipment promissory notes had a net carrying amount of $31.8 million. Convertible senior notes had aggregate principal outstanding of approximately $683 million: approximately $333 million due in 2023 and $350 million due in 2024. Total lease liabilities were $1.12 billion, including $604.6 million of operating lease liabilities and $516.4 million of finance lease liabilities.
Material changes versus the prior comparable period
- Results benefited from strong demand for home furnishings and from the adverse comparison with Q1 2020, when COVID-19 caused widespread Gallery and showroom closures.
- Gross margin expanded primarily because of price increases, product mix, higher Outlet margins and occupancy-cost leverage.
- SG&A increased 33.4% in dollars but declined to 25.5% of revenue from 34.0%, reflecting operating leverage. Q1 2021 included $5.9 million of non-cash compensation related to an executive option grant; Q1 2020 included impairments and reorganization costs.
- Interest expense declined to $13.3 million from $19.6 million, primarily because of lower convertible-debt discount amortization and lower promissory-note interest.
- Q1 2020 included a $20.5 million Waterworks tradename impairment, $4.8 million of asset impairments and $4.1 million of reorganization costs. Q1 2021 included a $0.5 million product-recall accrual and a $0.1 million loss on debt extinguishment.
- Operating cash flow improved substantially, supported by net income and an $82.7 million increase in deferred revenue and customer deposits, partly offset by inventory investment of $49.5 million.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2021 adjusted capital expenditures of approximately $250 million to $300 million, primarily for new Design Galleries and infrastructure.
- Management described long-term initiatives including product elevation, Gallery transformation, brand elevation, digital reimagination and international expansion, with initial European Galleries targeted beginning in 2022.
- Management stated that supply-chain constraints, vendor backlogs, production disruptions and shipping delays could continue for several quarters and may prevent demand from converting to revenue at normal rates.
- Management warned that consumer spending could shift away from home furnishings toward travel, leisure and other activities as pandemic restrictions ease.
- Management believed operating cash flows and available financing would be sufficient for more than the next 12 months, but noted that additional liquidity may be needed to repay convertible notes in cash at maturity or upon early conversion.
- Approximately $30.8 million of 2023 Notes were elected for conversion in May 2021 and were expected to be settled in the second quarter. The company expected to repay remaining convertible-note principal in cash to minimize dilution, subject to available liquidity and financing conditions.
- Convertible-note warrants may dilute shareholders above strike prices of approximately $309.84 per share for the 2023 Notes and $338.24 per share for the 2024 Notes.
- The company reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors. Legal proceedings are ordinary-course matters, but outcomes remain inherently uncertain.
Most important facts for investors to verify
- Whether supply-chain delays and vendor capacity constraints persist and affect order backlogs, inventory availability and revenue conversion.
- Whether elevated home-furnishings demand persists after broader economic reopening and changes in consumer spending.
- The pace and funding requirements of the $250 million to $300 million fiscal 2021 capital-expenditure program and international Gallery expansion.
- Cash generation and liquidity available to fund the approximately $683 million of convertible-note principal due or subject to early conversion.
- Potential dilution from convertible notes, warrants, stock-based compensation and future equity-linked financing.
- The impact of approximately $1.12 billion of lease liabilities and $667.4 million of legally binding payments for leases signed but not yet commenced.
- Product-recall exposure, litigation developments, tax contingencies and the continued effects of COVID-19 on operations and global sourcing.