• Clint Engel

RH shares soar on 2Q earnings beat, upped guidance

The retailer used its first-half free cash flow in repurchase of nearly half its outstanding stock

CORTE MADERA, Calif. — Shares of luxury home furnishings retailer RH were up more than 46% in early trading Thursday after the company beat guidance for adjusted earnings and boosted its guidance for the full year.

Net revenues increased 13% to $615.3 million for the period ended July 29, up from $543.4 million for the same period a year ago. Comparable brand revenues increased 7%.

The company’s net loss for the period widened to $7.9 million, or 28 cents per share, compared to a gain of $6.9 million, or 17 cents-per-share a year ago.

Adjusted net income came in at $19.7 million, or 65 cents per share, up from $17.9 million, or 44 cents per share in the second quarter last year. The most adjusted recent gain comes after backing out items such as costs associated with a product recall, non-cash compensation charges related to vested options grants, tax implications and other items.

Rh increased its adjusted net earnings guidance for the full year to a range of $70 million to $77 million from the previous guidance of $60 million to $70 million. Revenues guidance also edged up to a range of $2.42 billion to $2.46 billion. Shares were trading early Thursday for about $72.60, up more than than $23.

In a release, Chairman and CEO Gary Friedman said, “2017 will be a year of execution, architecture and cash,” following a year of transition during which RH moved away from a promotional strategy to a membership model more fitting for its luxury brand. It also began the process of redesigning its supply chain network and introduced new businesses such as RH Modern, RH Teen and RH Hospitality.

Merchandise margins for the company’s core RH business increased two percentage points “reflecting the strength of our new model and strong growth in membership revenues,” he said.

But profit margins were affected by the company’s continued efforts to “rationalize our product offer and reduce inventories,” leading to a 46% increase in outlet revenues. RH estimated that incremental business pulled down overall gross margins by 2.1 percentage points in the quarter.

Moves to optimize inventory and reduce spending generated $282 million of free cash flow in the first six months, Friedman said — all of which went into a massive stock repurchase of 20.2 million shares, to date, or nearly half of all shares outstanding at the beginning of the year.

“We believe that our shares remain undervalued, and we will continue to evaluate further share repurchases based upon market conditions and our capital allocation priorities,” Friedman said.

Friedman also discussed the retailer’s plans to “architect a new operating platform,” this year, further optimizing inventories and taking greater control over final-mile deliveries, among other things. RH already redesigned its distribution network in a way that enabled it to cancel plans for a fifth distribution center that was to open this year.

It now believes it can get the job done with still fewer facilities and plans to consolidate down three distribution centers by the fourth quarter.

RHs also is reworking the path of product returns, which previously went from the customer’s home to the distribution center but now will be rerouted to “in-market alternatives,” Friedman said, which is expected to reduce transportation and handing costs while improving margins at its outlets.

“Our early tests indicate that this initiative could yield substantial savings and margin enhancement opportunity in the range of $15 million to $20 million annually,” he said.

But RH’s transformation of its real estate — away from small legacy stores that display less than 10% of its assortment and towards the much large Design Galleries, featuring RH Modern, RH Hospitality restaurants and wine vaults and more — “continues to be our largest value driving strategy,” Friedman said.

Today, only 14 of the retailer’s 85 galleries are Design Galleries. Friedman said there’s room for 60 to 70 in the United States and Canada.

The next ones are slated to open this year in Toronto; Palm Beach, Fla.; and New York, though the New York location may be pushed back to spring of 2018.

Clint EngelClint Engel | Senior Retail Editor, Furniture Today

Please feel free to email or call me with all of your retail news and tips, including expansion news, successful merchandising and marketing strategies and anything else you would like to see covered by Furniture/Today.  Contact me directly at cengel@furnituretoday.com or 336-605-1129.

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