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RH > SEC Filings for RH > Form 10-Q on 17-Dec-2013All Recent SEC Filings

Show all filings for RESTORATION HARDWARE HOLDINGS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RESTORATION HARDWARE HOLDINGS INC


17-Dec-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our most recent Form 10-K filed on April 29, 2013.

FORWARD-LOOKING STATEMENTS AND MARKET DATA

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled "Risk Factors" in Part II of this quarterly report and in our most recent Form 10-K filed on April 29, 2013 (the "2012 Form 10-K"), "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this quarterly report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Overview

We are a leading luxury retailer in the home furnishings marketplace. Our collections of timeless, updated classics and reproductions are presented consistently across our sales channels in sophisticated and unique lifestyle settings that we believe are on par with world-class interior designers. We offer dominant merchandise assortments across a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware and children's furnishings. Our business is fully integrated across our multiple channels of distribution, consisting of our stores, catalogs and websites. We position our stores as showrooms for our brand, while our catalogs and websites act as virtual extensions of our stores. As of November 2, 2013, we operated a total of 70 retail stores, consisting of 62 Galleries, 5 Full Line Design Galleries and 3 Baby & Child Galleries, as well as 17 outlet stores throughout the United States and Canada.


Table of Contents

Basis of Presentation and Results of Operations

The following table sets forth our statements of operations and other financial and operating data.

On November 7, 2012, Restoration Hardware Holdings, Inc. completed an initial public offering and acquired all of the outstanding shares of capital stock of Restoration Hardware, Inc. Outstanding units under the Team Resto Ownership Plan were exchanged for common stock of Restoration Hardware Holdings, Inc. at the time of its initial public offering. These transactions are referred to as the "Reorganization." Restoration Hardware Holdings, Inc. has not engaged in any business or other activities except in connection with its formation and the Reorganization. Accordingly, all financial and other information herein relating to periods prior to the completion of the Reorganization is that of Restoration Hardware, Inc.

                                               Three Months Ended                    Nine Months Ended
                                         November 2,        October 27,       November 2,        October 27,
                                            2013               2012               2013              2012
                                               (dollars in thousands, excluding per square foot store
                                                                        data)
Statement of Operations Data:
Net revenues                            $     395,832      $     284,171      $  1,079,267      $     794,991
Cost of goods sold                            255,032            182,291           697,364            503,716

Gross profit                                  140,800            101,880           381,903            291,275
Selling, general and administrative
expenses                                      116,940             99,886           385,312            271,716

Income (loss) from operations                  23,860              1,994            (3,409 )           19,559
Interest expense                               (2,165 )           (1,544 )          (4,196 )           (4,598 )

Income (loss) before income taxes              21,695                450            (7,605 )           14,961
Income tax expense (benefit)                   12,146             (1,235 )             842               (612 )

Net income (loss)                       $       9,549      $       1,685      $     (8,447 )    $      15,573

Other Financial and Operating Data:
Growth in net revenues:
Stores (1)                                         33 %               21 %              33 %               19 %
Direct                                             47 %               24 %              39 %               25 %
Total                                              39 %               22 %              36 %               22 %
Retail (2):
Comparable store sales change (3)                  29 %               29 %              31 %               29 %
Retail stores open at beginning of
period                                             70                 73                71                 74
Stores opened                                      -                  -                  2                  3
Stores closed                                      -                  -                  3                  4
Retail stores open at end of period                70                 73                70                 73
Total leased square footage at end of
period (in thousands)                             796                780               796                780
Total leased selling square footage
at end of period (in thousands) (4)               521                502               521                502
Retail sales per selling square foot
(5)                                     $         364      $         282      $      1,002      $         763
Direct:
Catalogs circulated (in thousands)
(6)                                             4,330             11,721            12,325             26,851
Catalog pages circulated (in
millions) (6)                                     892              7,944             6,583             15,360
Direct as a percentage of net
revenues (7)                                       46 %               44 %              47 %               46 %
Capital expenditures                    $      27,005      $      12,114      $     57,622      $      25,631
Adjusted net income (8)                 $      13,017      $       2,662      $     35,067      $      13,582


Table of Contents

(1) Store data represents retail stores plus outlet stores. Net revenues for outlet stores for the three months ended November 2, 2013 and October 27, 2012 were $22.4 million and $13.9 million, respectively. Net revenues for outlet stores for the nine months ended November 2, 2013 and October 27, 2012 were $57.5 million and $38.2 million, respectively.

(2) Retail data has been calculated based upon retail stores, which includes our Baby & Child stores and excludes outlet stores.

(3) Comparable store sales have been calculated based upon retail stores that were open at least fourteen full months as of the end of the reporting period and did not change square footage by more than 20% between periods. If a store is closed for seven days during a month, that month will be excluded from comparable store sales. Comparable store net revenues exclude revenues from outlet stores.

(4) Leased selling square footage is retail space at our stores used to sell our products. Leased selling square footage excludes backrooms at retail stores used for storage, office space or similar matters. Leased selling square footage excludes exterior sales space located outside a store, such as courtyards, gardens and rooftops. Leased selling square footage includes approximately 4,500 square feet related to one owned store location.

(5) Retail sales per leased selling square foot is calculated by dividing total net revenues for all retail stores, comparable and non-comparable, by the average leased selling square footage for the period.

(6) The catalogs and catalog pages circulated from period to period do not take into account different page sizes per catalog distributed. Page sizes and page counts vary for different catalog mailings and we sometimes mail different versions of a catalog at the same time. Accordingly, period to period comparisons of catalogs circulated and catalog pages circulated do not take these variations into account.

(7) Direct revenues include sales through our catalogs and websites.

(8) Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, generally accepted accounting principles ("GAAP"). We define adjusted net income as consolidated net income (loss), adjusted for the impact of certain non-recurring and other items that we do not consider representative of our ongoing operating performance. Adjusted net income is included in this filing because management believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of actual results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to adjusted net income for the periods indicated below (in thousands).

                                             Three Months Ended                        Nine Months Ended
                                      November 2,          October 27,          November 2,          October 27,
                                          2013                2012                 2013                 2012
Net income (loss)                    $        9,549       $       1,685        $      (8,447 )      $      15,573
Adjustments pre-tax:
Management and pre-IPO board
fees (a)                                         -                1,198                   -                 3,285
Non-cash compensation (b)                        -                   -                63,155                   -
Follow-on offering fees (c)                      -                   -                 2,895                   -
Lease termination costs (d)                      -                   -                    -                  (386 )
Special committee investigation
and remediation (e)                              -                2,789                   -                 4,778

Subtotal adjusted items                          -                3,987               66,050                7,677
Impact of income tax items (f)                3,468              (3,010 )            (22,536 )             (9,668 )

Adjusted net income                  $       13,017       $       2,662        $      35,067        $      13,582

(a) Represents fees paid in accordance with our management services agreement with Home Holdings, as well as fees and expense reimbursements paid to our Board of Directors prior to the initial public offering. All management fees were paid in full at the time of the initial public offering. Board fees and expenses subsequent to the initial public offering are not included in the above adjustments and are included in both the GAAP and adjusted net income
(loss) amounts.

(b) Includes non-cash compensation charges related to the performance-based vesting of certain shares granted to Mr. Friedman, as well as the one-time, fully vested option granted to Mr. Friedman upon his reappointment as Chairman and Co-Chief Executive Officer in July 2013. All other equity related awards granted to employees are not included in the above adjustments and are included in both the GAAP and adjusted net income (loss) amounts.

(c) Represents legal and other professional fees incurred in connection with our follow-on offerings in May 2013 and July 2013.

(d) Includes lease termination costs for retail stores that were closed prior to their respective lease termination dates. The amount in the nine months ended October 27, 2012 relates to changes in estimates regarding liabilities for future lease payments for closed stores.

(e) Represents legal and other professional fees, incurred in connection with the investigation conducted by the special committee of the Board of Directors relating to Mr. Friedman and our subsequent remedial actions.

(f) Assumes a normalized tax rate of 40% for all periods presented.


Table of Contents

The following table sets forth our consolidated statements of operations as a percentage of total net revenues.

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