In weathering the COVID-19 roiled market, Restoration Hardware easily beat a Wall Street earnings estimate for the second quarter as the company continues on its way to significant margin gains, according to chairman and CEO Gary Friedman.
Net income for the quarter was $98.4 million, or $3.71 per diluted share, versus $63.8 million, or $2.86 per diluted share, in the period a year prior. As adjusted for one-time events, net income was $123 million, or $4.90 per diluted share, versus $71.4 million, or $3.20 per diluted share, in the year-earlier quarter.
RH topped a MarketBeat analyst consensus estimate of $3.36 per adjusted diluted share for the period.
Net revenues were $709.3 million versus $706.5 million in the quarter a year before. Income from operations was $136.6 million compared to $104 million, in the year-previous period.
In a note to shareholders, Friedman maintained, “The emergence of RH as a luxury brand generating luxury margins has arrived years sooner than expected, and we now believe we will reach 20% adjusted operating margin in fiscal 2020 with mid single digit revenue growth. If revenues grow at a higher rate in the second half, we would expect adjusted operating margins to expand beyond 20%, and now see a long term path to 25% adjusted operating margins.
“Our investments to elevate the RH brand led to product margins increasing 490 basis points in the second quarter, driving adjusted gross margin expansion of 550 basis points to 47.5% versus 42% last year. Adjusted SG&A decreased 140 basis points as a result of lower advertising and compensation costs, partially offset by an approximate 40 basis point drag from incremental COVID-related expenses. We achieved record adjusted operating margin of 21.8% in the second quarter, 690 basis points higher than last year’s previous record of 14.9% despite essentially flat revenues.”
As he looked ahead to the rest of the fiscal year, Friedman stated, “while we are not providing detailed financial guidance given the uncertainties in the overall market, our business trends have continued to build month over month with RH core demand +7% in May, +32% in June, +34% in July, and +47% in August versus the same months a year ago. Our September to date numbers are showing continued strength, +44% in the first 10 days of the fiscal month. Total company demand, which increased 16% in the second quarter, was negatively impacted by a 23% reduction in open store days for galleries due to the pandemic, restrictions limiting capacity in our restaurants, lower demand in our contract division due to a pullback in capital spending in the hospitality industry, and our previously discussed four-point drag to company revenues from lower sales in our outlet division. Inclusive of the above negative impacts year over year, total company demand accelerated from -1% in May, to +23% in June, +26% in July, and +38% in August. Our September to date trend is +37%.
“Due to disruptions across our global supply chain as a result of the virus, total company revenue growth lagged demand by approximately 16 points in the second quarter with the gap between the two widening as demand accelerated beyond our expectations. We expect revenues to lag demand by five to 10 points in the third quarter and begin to normalize in the fourth quarter as manufacturing and inventory receipts catch up to demand. Notably, we have not seen an increase in our cancel rate as a percentage of sales, signaling that we should convert a very high percentage of the demand to revenues over the next three quarters.
“While others have reported operating results driven by the temporal effects of COVID, our record margins and profitability are systemic. We are benefiting from the COVID-driven shift of spending in favor of the home, but this has coincided with a systemic shift and leapfrog of our operating model to a level unseen before in our industry.”