RH Form 10-Q Summary
Reporting period: Three months ended April 30, 2016, compared with three months ended May 2, 2015. The provided request metadata identifies “2015 Q1,” but the filing is for fiscal 2016 first quarter. RH is a luxury home furnishings retailer operating stores, outlets, catalogs and websites. As of April 30, 2016, it operated 69 retail stores and 19 outlet stores across the United States, Canada and the District of Columbia.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $455.5 million | $422.4 million | 7.8% increase |
| Gross profit | $127.5 million | $143.4 million | 11.1% decrease |
| Gross margin | 28.0% | 33.9% | Down 5.9 percentage points |
| SG&A expense | $139.0 million | $126.4 million | 10.0% increase |
| Operating income (loss) | $(11.5) million | $17.0 million | Turned to loss |
| Net income (loss) | $(13.5) million | $7.2 million | Turned to loss |
| Diluted EPS | $(0.33) | $0.17 | Declined |
| Net cash used in operating activities | $(106.3) million | $(14.4) million | Greater cash use |
| Capital expenditures | $45.3 million | $29.2 million | Increase |
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $237.2 million at April 30, 2016, compared with $349.9 million at January 30, 2016. Short- and long-term investments totaled $110.9 million.
- Merchandise inventories increased to $763.1 million from $725.4 million at fiscal year-end.
- Convertible senior notes had net carrying values of $304.1 million due 2019 and $228.5 million due 2020. Principal amounts were $350 million and $300 million, respectively; both instruments carry a 0.00% stated interest rate but generate non-cash debt-discount amortization.
- The revolving credit facility had no borrowings, $555.5 million of undrawn availability and $14.9 million of outstanding letters of credit. RH was in compliance with its covenants.
- Total liabilities were $1.17 billion and stockholders’ equity was $879.5 million at April 30, 2016.
Material Changes Versus the Prior Period
- Revenue growth was driven primarily by new products and categories, including RH Modern and RH TEEN, expanded assortments, and increased retail selling space. Store revenue rose 19.2%, while direct revenue declined 4.0%.
- Comparable brand revenue growth was 4%, down from the prior year’s reported 15%.
- Gross margin deterioration reflected lower product margins, higher shipping costs, customer accommodations related to RH Modern production delays, and approximately $7.7 million of estimated coupon redemptions related to a legal claim.
- Revenue was reduced by an estimated $14 million from customer accommodations and related expenses associated with production delays and efforts to improve the customer experience.
- SG&A increased due to employment, corporate occupancy, technology and professional costs. Q1 2016 also included $2.1 million of Waterworks acquisition-related costs and $1.4 million of reorganization-related costs.
- Net interest expense increased to $10.5 million from $5.6 million, primarily due to higher amortization of convertible debt discounts and build-to-suit lease interest.
- Operating cash flow declined materially because of the net loss and working-capital uses, including inventory growth, vendor deposits, tax-related balances and lower accounts payable and accrued liabilities.
Guidance, Outlook, Risks and Unusual Items
- Management stated that financial performance is subject to higher-than-normal uncertainty because of RH Grey Card implementation, product and customer-experience initiatives, organizational streamlining, inventory optimization and the decision not to circulate a spring Source Book. The filing does not provide a clear numerical revenue or earnings guidance range.
- RH expects fiscal 2016 gross capital expenditures of approximately $180 million to $210 million, primarily for new galleries, infrastructure and related growth investments.
- Management expects cash from operations, existing liquidity and available financing to support working-capital needs and planned capital expenditures for the next 12 to 24 months, although near-term cash requirements may fluctuate with product introductions.
- Macroeconomic risks include weakness in luxury consumer spending, underperformance in energy- and oil-related markets, and currency fluctuations. Management expects these headwinds may continue.
- On May 27, 2016, RH acquired more than 90% of Waterworks for approximately $118.4 million in cash, funded from existing cash. The transaction was subsequent to quarter-end and was not reflected in the April 30 balance sheet.
- On June 8, 2016, RH announced a workforce and expense-reduction reorganization expected to generate material charges. The filing does not provide a clear estimate of the total future costs.
- The Hernandez class action related to collection of customer ZIP codes remained pending final court action. RH had accrued related amounts, but additional losses beyond accrued amounts were possible.
- RH adopted several accounting updates with no material impact. It was evaluating the future effects of the new lease standard, which management expects could significantly affect the financial statements because of the company’s substantial lease portfolio.
Most Important Facts to Verify
- Whether gross-margin pressure from RH Modern production issues, customer accommodations, shipping costs and legal-claim coupons is temporary or persists.
- The cash-flow effect of the $118.4 million Waterworks acquisition and the company’s elevated fiscal 2016 capital-expenditure plan.
- The timing and amount of charges from the June 2016 workforce reduction and broader reorganization.
- Inventory levels, sell-through and working-capital needs following new product introductions.
- Future dilution or cash-settlement exposure from the 2019 and 2020 convertible notes and related warrants.
- Progress of the Hernandez litigation and the potential for additional coupon-related or other legal costs.
- Execution of the RH Grey Card program, including its effect on selling cycles, promotional cadence, revenue recognition and margins.