RH tops Q2 estimates; to accelerate expansion

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RH tops Q2 estimates; to accelerate expansion

By Marianne Wilson - 09/11/2019
The retailer formerly known as Restoration Hardware beat expectations for its second quarter as its expressed confidence in a strategy that is focused largely on experiential brick-and-mortar.

RH raised its annual guidance for the third time this year amid strong sales and the launch of new lines. The company is also moving towards international expansion.

“We just actually just got back Sunday night from another trip overseas to look at opportunities and locations,” RH chairman and CEO Gary Friedman said on the company’s earnings call. And I think a couple of things becomes clear … there really is a complete void in the market for a concept like ours and for a higher-end kind of dominantly positioned assorted home business. I don't know if I've ever been more excited about anything, any idea or any opportunity.”

The luxe home furnishings retailer reported earnings of $64 million, or $2.86 a share, for the quarter ended Aug. 3, compared with $63 million, or $2.29 a share, in the year-ago period. Adjusted earnings a share were $3.20, easily topping analysts’ expectations of $2.69 a share.

Revenue rose 9.9% to $707 million, topping forecasts for $695 million. The company credited the increase partially to the strength of its core RH business and the performance of its new stores (“galleries” in RH speak), particularly its 90,000-sq.-ft. RH New York flagship, which it said continues to “trend comfortably in excess’ of $100 million in annualized revenue for fiscal 2019 and will generate more than $30 million of cash contribution in its first full fiscal year. The company also credited the ongoing expansion of its restaurant division, RH Hospitality, for the second-quarter sales increase.

RH is on track to open new several gallery locations, including at the Gallery at Easton Town Center, Columbus, Ohio, and the Village of Corte Madera; Corte Madera, Calif. Another is planned for Galleria Edina, Edina, Minn. The three locations will feature the company’s new prototype, which averages 45,000 sq. ft. of indoor and outdoor selling space spanning three levels with rooftop parks, restaurants, barista bars and RH Interior Design offices. The prototype “will enable us to place our disruptive product assortment and immersive retail experience into the market at a fraction of our former investment,” Friedman stated.

RH had 85 stores at the end of the quarter. It expects to accelerate its real estate transformation to a rate of five to seven new galleries in fiscal 2020 and seven or more in fiscal 2021.

Regarding trade with China, RH said it does not expect the current tariffs to impair its ability to achieve its stated financial goals.

“We continue to receive pricing accommodations from vendors and have implemented price increases where necessary with little to no impact to our business,” the company stated.

The company struck a familiar refrain in its earnings release, noting that its approaches are not in sync with the current retail mode.

“We do understand the strategies we are pursuing – opening the largest specialty retail experiences in our industry while most are shrinking the size of their retail footprint or closing stores; moving from a promotional to a membership model, while others are increasing promotions, positioning their brands around price versus product; continuing to mail inspiring Source Books, while many are eliminating catalogs; and refusing to follow the herd in self-promotion on social media, instead allowing our brand to be defined by the taste, design, and quality of the products and experiences we are creating – are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry,” stated Friedman.

The company has a stated goal of $4 to $5 billion in North America revenues, with mid-to-high teens operating margins and ROIC in excess of 50%.

“Additionally, we now believe there is an opportunity to more than double those revenues as we begin to expand globally, and move the brand beyond creating and selling products to conceptualizing and selling spaces,” Friedman said.

RH expects fiscal 2019 revenue between $2.680 billion and $2.694 billion, compared with a previous expectation of between $2.658 billion and $2.674 billion. It called for an adjusted EPS between $10.53 and $10.76 for the year, versus a previous guidance of between $9.08 and $9.52.