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Restoration Hardware Holdings Inc (NYSE:RH) announced financial results for the second quarter ended July 30, 2016.

Second Quarter Highlights

  • Net revenues increased 7% on top of a 17% increase last year
  • Comparable brand revenues declined 3% compared to a 16% increase last year
  • GAAP net income of $6.9 million compared to $29.9 million last year
  • Adjusted net income of $17.9 million compared to $36.0 million last year
  • GAAP diluted earnings per share of $0.17 compared to $0.71 last year
  • Adjusted diluted earnings per share of $0.44 compared to $0.85 last year

Gary Friedman, Chairman and Chief Executive Officer, commented, “Net revenues of $543.4 million and adjusted diluted EPS of $0.44 were well ahead of our guidance for the quarter due to our ability to ship products earlier than anticipated, resulting in a pull forward of revenue and earnings into the second quarter from the third quarter. We remain confident in our outlook for the remainder of fiscal 2016 and are maintaining our net revenue and adjusted diluted EPS guidance for the year.”

Mr. Friedman added, “As previously communicated, we are making several strategic investments and changes to our business model in fiscal 2016 that are temporarily depressing financial results in the short term, which we believe will strengthen our brand and position the business for accelerated revenue and earnings growth in 2017 and beyond. These temporal issues include the costs related to the launch of RH Modern; the timing of recognizing membership revenues related to the transition from a promotional to a membership model; efforts to reduce inventories and rationalize our SKU count; and the decision to push our Source Book mailing from the Spring to the Fall.”

Mr. Friedman continued, “This Fall, we will begin to unveil some of the most significant initiatives in the history of our Company that we believe will create an inflection point in our business beginning in the fourth quarter of fiscal 2016, and build momentum throughout fiscal 2017. One, we have completely redesigned and rephotographed our entire collection of Source Books. The redesign, led by famed art director Fabien Baron, who designed the RH Modern book, presents the brand in a fresh and compelling new format. Two, based on our successful test of RH Modern in several of our Galleries, we will be introducing RH Modern across our entire retail fleet this Fall. Three, we are making a significant investment in our RH Interior Design business, including doubling the size of our design team versus a year ago, arming our designers with new tools and training, installing Design Ateliers – an interactive space where designers, architects and customers can work to imagine and execute their projects, and launching an innovative multi-channel advertising campaign that will communicate our unique and authentic design philosophy. Four, now armed with data after the inaugural mailing, we are optimizing the second edition of our RH Modern book, making significant changes to the merchandising and presentation, plus adding new collections that we believe will dramatically increase productivity. We plan to mail the second edition of RH Modern sometime in the early Spring of 2017. Furthermore, our real estate transformation will continue to generate incremental revenue as we complete the openings for fiscal 2016 in Kansas City, Austin, Las Vegas and Seattle and gain even further momentum in fiscal 2017 as many of our Galleries will have the added benefit of restaurants, wine vaults, and coffee bars, building on the success of our first hospitality venture at the Historic 3Arts Club in Chicago.”

Mr. Friedman concluded, “While the degree and pace of innovation at RH might seem ambitious comparatively, it is the result of years building a culture engineered to be, as Charles Darwin believed, the one most responsive to change. In a world moving exponentially faster, we are building one of the only true sustainable competitive advantages – a culture of imagination and innovation. A culture that is proving itself capable of imagining the future, and an organization that is demonstrating it can build it.”

Second Quarter Fiscal 2016 Results

Revenue – Net revenues for the second quarter of fiscal 2016 increased 7% to $543.4 million from $506.9 million in the second quarter of fiscal 2015.

  • Comparable brand revenue, which includes direct, declined 3% in the second quarter of fiscal 2016 compared to 16% growth for the same period last year.
  • Stores revenues increased 15% to $309.8 million in the second quarter of fiscal 2016. This growth is on top of a 21% increase in stores revenues in the second quarter of fiscal 2015.
  • Direct revenues decreased 2% to $233.6 million in the second quarter of fiscal 2016. Direct revenues during the second quarter of fiscal 2016 represented 43% of total net revenues.

Retail Galleries – As of July 30, 2016, the Company operated a total of 84 retail galleries, consisting of 53 legacy Galleries, 6 larger format Design Galleries, 4 next generation Design Galleries, 1 RH Modern Gallery, and 5 RH Baby & Child Galleries throughout the United States and Canada, as well as 15 Waterworks showrooms in the United States and UK. This compares to a total of 67 retail galleries, consisting of 57 legacy Galleries, 6 larger format Design Galleries, 1 next generation Design Gallery, and 3 RH Baby & Child Galleries throughout the United States and Canada, as ofAugust 1, 2015.

In addition, as of July 30, 2016, the Company operated 23 outlet stores compared to 15 as of August 1, 2015.

Operating Income and Margin** – On an unadjusted basis, GAAP operating income was $22.0 million in the second quarter of fiscal 2016 compared to $56.4 million for the same period last year and GAAP operating margin was 4.1% compared to 11.1% for the same period last year.

Adjusted operating income in the second quarter of fiscal 2016 was $33.2 million compared to $61.9 million in the second quarter of fiscal 2015. Adjusted operating margin in the second quarter of fiscal 2016 was 6.1% compared to 12.2% for the same period last year.

Net Income** – On an unadjusted basis, GAAP net income for the second quarter of fiscal 2016 was $6.9 million compared to $29.9 million for the same period last year.

Adjusted net income in the second quarter of fiscal 2016 was $17.9 million compared to $36.0 million in the second quarter of fiscal 2015.

Earnings Per Share** – On an unadjusted basis, GAAP diluted earnings per share for the second quarter of fiscal 2016 was $0.17 compared to $0.71for the same period last year.

Adjusted diluted earnings per share for the second quarter of fiscal 2016 was $0.44 compared to $0.85 for the same period last year.

A reconciliation of GAAP to non-GAAP financial measures is provided in the tables accompanying this release.

Outlook

The Company’s results for fiscal 2016 will be impacted by certain short term operational items including costs associated with RH Modern production delays and investments to elevate the customer experience, timing issues related to the transition from a promotional to a membership model, and a more aggressive approach to rationalizing its SKU count and optimizing inventory. These factors are negatively impacting the Company’s fiscal 2016 adjusted diluted EPS outlook by approximately $0.90 to $1.00.

The Company is providing the following outlook for the third quarter of fiscal 2016 (including an approximate $0.15 adjusted diluted EPS reduction per the short term operational items described above):

  • Net revenues in the range of $520 million to $530 million
  • Adjusted net income in the range of $5 million to $7 million
  • Adjusted diluted EPS in the range of $0.13 to $0.18
  • Income tax rate of approximately 39%
  • Diluted shares outstanding of approximately 40.9 million

The Company is maintaining its outlook for fiscal year 2016 (including an approximate $0.90 to $1.00 adjusted diluted EPS reduction per the short term operational items described above) as follows:

  • Net revenues growth in the range of 1% to 3%
  • Adjusted diluted EPS in the range of $1.60 to $1.80
  • Capital expenditures in the range of $180 million to $210 million

Note: The Company’s adjusted net income and adjusted diluted earnings per share guidance does not include certain charges and costs. The adjustments to net income and diluted earnings per share in future periods are generally expected to be similar to the kinds of charges and costs excluded from adjusted net income and adjusted diluted earnings per share in prior quarters, such as non-cash and other compensation expense; one-time income tax expense; legal claim related expenses; reorganization costs including severance costs and related taxes; and charges and costs in connection with the acquisition of Waterworks, among others. The exclusion of these charges and costs in future periods will have a significant impact on the Company’s adjusted net income and adjusted diluted earnings. The Company is not able to provide a reconciliation of the Company’s non-GAAP financial guidance to the corresponding GAAP measures without unreasonable effort because of the uncertainty and variability of the nature and amount of these future charges and costs.

Shares of Restoration Hardware are up nearly 14% in after-hours trading. RH has a 1-year high of $106.49 and a 1-year low of $24.75. The stock’s 50-day moving average is $31.55 and its 200-day moving average is $35.06.

On the ratings front, RH has been the subject of a number of recent research reports. In a report issued on August 18, Goldman Sachs analyst Matthew Fassler upgraded RH to Buy, with a price target of $40, which implies an upside of 13% from current levels. Separately, on the same day, Nomura’s Jessica Schoen reiterated a Buy rating on the stock and has a price target of $60.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Matthew Fassler and Jessica Schoen have a total average return of 3.8% and -3.5% respectively. Fassler has a success rate of 49% and is ranked #1098 out of 4147 analysts, while Schoen has a success rate of 40% and is ranked #3447.

The street is mostly Neutral on RH stock. Out of 10 analysts who cover the stock, 8 suggest a Hold rating and 2 recommend to Buy the stock. The 12-month average price target assigned to the stock is $40.67, which implies an upside of 15.2% from current levels.

Restoration Hardware Holdings, Inc. is a holding company which operates the business through its subsidiary Restoration Hardware, Inc. It offers furniture, lighting, textiles, bathware, decor, outdoor and garden, as well as baby and child products. The company operates an integrated business with multiple channels of distribution including galleries, source books and websites. Restoration Hardware Holdings was founded by Stephen J. Gordon in 1980 and is headquartered in Corte Madera, CA.