RH Emphasis On Earnings Pays Off In Q1

Restoration Hardware (RH) significantly surpassed earnings expectations in the first quarter.

For the first quarter ended May 5, RH posted net income of $28.1 million, or $1.11 per diluted share, versus a net loss of $3.4 million, or nine cents per diluted share, in the year-prior quarter.

Adjusted net income, excluding one-time charges, was $33.5 million, or $1.33 per diluted share, versus $1.8 million, or five cents per diluted share, in the quarter a year earlier. Restoration Hardware topped a $1.01 adjusted diluted earnings per share consensus analyst estimate published by MarketBeat.

Comparable revenue increased 1% in the quarter year over year. Net revenues in the quarter were $557.4 million versus $562.1 million in the period a year previous. Income from operations was $53.6 million as compared to $6.9 million in the quarter the year before.

In a note to shareholders, employees and suppliers, RH reiterated that, at the beginning of the year, it had explained the company’s intention to manage “the business with a bias for earnings versus revenue growth in fiscal 2018.”

The note further stated, “We will restrain ourselves from chasing low quality sales at the expense of profitability like many in our industry, and instead focus on building an operating platform that will enable us to compete and win over the long-term.”

“Our first quarter adjusted diluted earnings per share of $1.33 versus five cents last year reflects that focus and demonstrates the power of our new membership model, our unique and proprietary product offering, our efforts to revolutionize physical retailing, and our work designing a more efficient operating platform. We achieved record adjusted operating margins of 9.6% in the first quarter versus 1.5% last year. Adjusted gross margins increased 750 basis points to a first quarter record of 38%, compared to 30.5% last year reflecting strong full price selling, lower outlet revenues, and a more streamlined distribution and reverse logistics network. Comparable brand revenues grew 1% in the quarter, despite a four-point drag from cycling last year’s inventory reduction efforts. Adjusted for last year’s inventory reduction efforts, comparable brand revenues increased 5% versus a 9% increase last year.”

The note went on to say, “While first quarter net revenues of $557 million decreased 0.8% as a result of cycling the approximate four points of revenue drag from SKU rationalization, and a two-point drag from incremental outlet sales last year, adjusted gross margin dollars increased 23.5% versus a year ago, demonstrating the true underlying strength of our business.”

Restoration Hardware added one net store in the first quarter, finishing with 84.  Stores generated 56% of revenues in the first quarter, RH pointed out, flat with the quarter a year prior.