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Restoration {Hardware} Holdings Inc (RH) Q1 2021 Earnings Name Transcript

Restoration Hardware Holdings Inc (RH) Q1 2021 Earnings Call Transcript

Restoration {Hardware} Holdings Inc (NYSE: RH) Q1 2021 earnings name dated Jun. 09, 2021

Company Contributors:

Allison Malkin — Investor Relations

Gary Friedman — Chairman and Chief Govt Officer

Jack Preston — Chief Monetary Officer

Presentation:

Operator

Women and gents, thanks for standing by, and welcome to the RH First Quarter Fiscal 2021 Earnings Name. [Operator Instructions]

I might now like at hand the convention over to your speaker at this time, Ms. Allison Malkin of ICR. Thanks. Please go forward, ma’am.

Allison Malkin — Investor Relations

Thanks. Good afternoon, everybody. Thanks for becoming a member of us for our first quarter fiscal 2021 convention name. Becoming a member of me at this time are Gary Friedman, Chairman and Chief Govt Officer; and Jack Preston, Chief Monetary Officer.

Earlier than we begin, I want to remind you of our authorized disclaimer that we are going to make sure statements at this time which can be ahead trying throughout the which means of the federal securities legal guidelines, together with statements concerning the outlook for our enterprise and different issues referenced in our press launch issued at this time. These forward-looking statements contain a variety of dangers and uncertainties that would trigger precise outcomes to vary materially. Please check with our SEC filings, in addition to our press launch issued at this time for a extra detailed description of the chance elements that will have an effect on our outcomes. Please additionally word that these forward-looking statements mirror our opinions solely as of the date of this name, and we undertake no obligation to revise or publicly launch the outcomes of any revision to those forward-looking statements in mild of recent data or future occasions.

Additionally, throughout this name, we could focus on non-GAAP monetary measures, which modify our GAAP outcomes to eradicate the impression of sure objects. You will discover extra data relating to these non-GAAP monetary measures and a reconciliation of those non-GAAP to GAAP measures in at this time’s monetary outcomes press launch. A stay broadcast of this name can be accessible on the Investor Relations part of our web site at ir.rh.com.

With that, I’ll flip the decision over to Gary.

Gary Friedman — Chairman and Chief Govt Officer

Nice. Thanks, everybody. We’re going to start out with an outline of our Shareholder Letter, which highlights our outcomes and outlook, after which we’ll open the decision to questions.

To our individuals, companions, and shareholders, fiscal 2021 is off to a powerful begin, with revenues up 78% within the first quarter versus down 19% a 12 months in the past. Complete Firm demand elevated 101% in Q1 and RH Core demand elevated 109%, the strongest demand tendencies in our business.

We proceed to set a brand new commonplace for monetary efficiency amongst residence furnishings retailers with adjusted working margin rising 1,260 foundation factors within the first quarter to 22.6% versus 10% a 12 months in the past.

Adjusted web revenue elevated 375%, and adjusted diluted EPS elevated 285% to $4.89 per share versus $1.27 final 12 months.

We generated $228 million of adjusted EBITDA within the quarter and $136 million of free money circulation. Q1 ended with complete web debt of $382 million and trailing twelve months adjusted EBITDA of $896 million. Our expectation is to be web debt free by the top of this fiscal 12 months.

Improve in fiscal 2021outlook: Based mostly on present enterprise tendencies, we’re elevating our outlook for income progress in fiscal 2021 to a spread of 25% to 30% versus our prior outlook of 15% to twenty%. We now anticipate adjusted working margin within the vary of 23.5% to 24.3%, a rise of 170 foundation factors to 250 foundation factors versus our prior outlook of 100 foundation factors to 200 foundation factors, with ROIC in extra of 60%.

Because it pertains to the second quarter, we anticipate income progress within the vary of 35% to 37%, and adjusted working margin within the vary of 25.9% to 26.1%.

Whereas fiscal 2021 will certainly be a story of two halves, there are various information factors that lead us to really feel optimistic that our robust efficiency will proceed by way of the second half of 2021 with progress reaccelerating in fiscal 2022 and past. These embody a powerful housing and renovation market, each with pent-up demand and an extended tail, a document inventory market, low rates of interest and the reopening of a number of giant components of our financial system. Moreover, the un-masking of most of the people might result in a Roaring Twenties kind of client exuberance. City & Nation captured that feeling completely on the latest cowl of their journal, titled, “Keep in mind Enjoyable? Get Prepared for the Comeback!”. Mix that with the most important new product introduction cycle in our historical past starting this fall, and the launch of RH Worldwide subsequent 12 months, and enjoyable it could possibly be.

You must also relaxation assured that we have now strain examined our enterprise assumptions and dangers, and are assured in our skill to take care of an adjusted working margin in extra of 20% in nearly any financial draw back situation we will envision.

The emergence of RH as a luxurious model producing luxurious margins. We’ve spent a long time constructing a model and enterprise mannequin that generates business main profitability and return on invested capital, and consider, like Bernard Arnault, Luxurious items are the one space it’s attainable to make luxurious margins.

With 21.8% adjusted working margin in fiscal 2020, RH has eclipsed the working margin of LVMH, and we now have a transparent line of sight to 25%-plus adjusted working margin over the subsequent a number of years.

Because it pertains to our enterprise mannequin, what is commonly missed is the simplicity and low-risk nature of what we have now constructed. I believed it could be useful to focus on a number of the key attributes.

No Seasonal Stock: We don’t provide seasonal classes like Valentine’s Day, Easter, Halloween, Thanksgiving or Christmas. Nor do we supply collections or shade palettes tied to spring, summer time, fall or winter like many residence furnishings or residence enchancment retailers. We spent years eliminating these classes to keep away from seasonal markdowns, enabling us to have a considerably increased margin enterprise.

Restricted Vogue Danger: Our enterprise will not be pushed by the style cycles present in retail fashions that require frequent discounting. The foremost tendencies that drive our enterprise are tied to structure and the lifeless. Architectural tendencies have a tendency to alter over a long time, not years. For instance, many level to the 1997 opening of the Guggenheim Museum in Bilbao, Spain by the legendary architect Frank Gehry, as the start of the latest fashionable motion. We launched RH Fashionable nearly twenty years later within the fall of 2015, when a important mass of contemporary properties and condominiums was reached, establishing a large new market.

Because it pertains to the lifeless, generations go away and their belongings transfer by way of property gross sales, which feed the vintage markets, which drive the high-end inside design market, which influences the high-end replica market, and the tendencies proceed to circulation downstream. If you wish to know the place the mid-century fashionable development got here from, do the mathematics or go to a cemetery.

Membership: Transferring from a promotional to a membership mannequin, as we did in 2016, simplified and streamlined our enterprise, eliminating the chaos and prices related to a continually altering buyer proposition. Membership additionally deepened our relationship with our prospects as the bulk use our inside designers to furnish their properties. This developed our enterprise from promoting merchandise to promoting areas, driving increased common orders and decrease buyer acquisition prices as RH has turn into their prime of thoughts alternative for luxurious residence furnishings.

Luxurious Positioning: Luxurious manufacturers have confirmed to be much less inclined to financial downturns as their prospects could briefly pause their spending however don’t lose the flexibility to spend. Moreover, investing within the residence grows exponentially as prospects accumulate wealth, buying extra properties, which drives increased gross sales, leading to decrease promoting prices, and a extra worthwhile working mannequin.

A Compelling Imaginative and prescient For The Future: We enter this new decade with a compelling imaginative and prescient for the longer term, a group enthusiastic about bringing that imaginative and prescient to life, and the strongest model and enterprise mannequin in our business. We plan to launch an unimaginable quantity of modern new methods designed to additional elevate and increase the RH model. As I did in my latest annual shareholder letter, I’ll define the strategic separation we’ve created and the methods we’re pursuing as we proceed our quest to turn into one of the admired manufacturers on the earth.

Product Elevation: We’ve constructed essentially the most complete and compelling assortment of luxurious residence furnishings underneath one model on the earth. Our merchandise are introduced throughout a number of collections, classes, and channels that we management, and their desirability and exclusivity has enabled us to realize business main revenues and margins. Our prospects know them as RH Interiors, RH Fashionable, RH Seaside Home, RH Ski Home, RH Out of doors, RH Rugs, RH Lighting, RH Linens, RH Child & Youngster, RH Teen and Waterworks. Our technique to elevate the design and high quality of our product will proceed as we introduce RH Up to date in 2021 with a 400 web page supply e book, devoted web site, nationwide advert marketing campaign, and a freestanding RH Up to date Gallery within the San Francisco Design District. We even have plans to introduce RH Couture Upholstery, RH Bespoke Furnishings and RH Colour over the subsequent a number of years.

Gallery Transformation: Our skill to remodel our legacy shops into multi-dimensional Design Galleries that double our retail income and profitability in each market will allow the RH model to succeed in $5 billion to $6 billion of revenues with a mid-20percents adjusted working margin in North America. These inspiring and disruptive bodily experiences render our merchandise extra worthwhile whereas creating strategic separation and unmatched model consciousness, enabling us to realize important market share at decrease promoting prices. This presents a conundrum for our competitors who’re closing or downsizing their shops whereas we construct the most important specialty shops within the historical past of our business. We consider our Galleries are proving to be an enormous aggressive benefit, enabling RH to amass prospects at decrease fastened prices versus variable digital promoting prices that may change each day for store-less or store-closing manufacturers.

All you want to do is stroll a mall to note most retail shops are archaic windowless containers that lack any sense of humanity. There’s usually no contemporary air or pure mild, vegetation die in most retail shops and so they can’t be an excellent atmosphere for people both. That’s why we don’t construct retail shops, we create inspiring areas that blur the strains between residential and retail, indoors and outside, residence and hospitality. Areas which can be stuffed with contemporary air and pure mild, with backyard courtyards, roof-top parks, eating places and wine bars. Areas that activate the entire senses, and areas that can not be replicated on-line.

RH Dallas, which opened in Might of this 12 months is off to an incredible begin with our roof-top restaurant booked till August. Our plan is to open three extra Design Galleries in 2021, together with RH San Francisco, RH Oak Brook, RH Jacksonville, a freestanding RH Up to date Gallery opening in San Francisco, plus our first RH Guesthouse, opening in New York this Fall.

Model Elevation: We’re starting to evolve the model past curating and promoting product to conceptualizing and promoting areas, by constructing an ecosystem of merchandise, companies, locations and areas designed to raise and render our product extra worthwhile whereas establishing the RH model as a thought chief, style and place maker.

Our Merchandise are the core of our ecosystem and embody RH Interiors, RH Up to date, RH Fashionable, RH Seaside Home, RH Ski Home, RH Out of doors, RH Rugs, RH Lighting, RH Linens, RH Child & Youngster, RH Teen and Waterworks.

Our Companies, RH Inside Design, RH Contract, RH Commerce and RH In-Your-Dwelling render our product extra worthwhile whereas extending the model into adjoining companies that amplify the core. For instance, we consider that RH Inside Design has turn into the most important residential design agency in North America and has facilitated our transition from promoting merchandise to promoting areas. RH Commerce serves exterior inside designers and design companies, partnering on initiatives and appearing as a help group managing the logistics of enormous, advanced designs. RH Contract serves the Hospitality and Industrial markets with design and logistics help for big scale, quantity initiatives. RH In-Your-Dwelling, elevates the client expertise with Furnishings Ambassadors managing each element of your supply, extending the promoting expertise into the house whereas making a memorable and lasting impression. We’re additionally exploring the chance to increase our companies to incorporate RH Structure and RH Panorama Structure as we obtain fixed inquiries relating to the design of our Galleries, Backyard Courtyards and roof-top Parks.

Our Locations embody RH Galleries, designed to raise and render our product and model extra worthwhile, RH Eating places, which additional elevate the client expertise whereas driving top quality, incremental site visitors to our Galleries, RH Guesthouses, the place our aim is to create a brand new marketplace for vacationers looking for privateness and luxurious within the $200 billion lodge business, and RH Residences, absolutely furnished luxurious properties, condominiums and residences with built-in companies that may ship style and time worth to rich and prosperous, time-starved prospects.

Our Areas, conceptualized to encourage and elevate the model, will initially embody Aircraft & Yacht Design and Constitution, the place prospects can entry our design expertise, view our work on-line, and constitution RH1 and RH2, our non-public planes, and RH3, our luxurious yacht, which is out there within the Mediterranean and Caribbean the place the rich and prosperous go to and trip. We may even be unveiling our first RH Bathtub Home & Spa as a part of our Aspen Guesthouse, scheduled to open within the second half of 2022, in addition to different thrilling areas we will probably be revealing over the subsequent a number of years.

We consider our seamlessly built-in ecosystem of immersive experiences evokes prospects to dream, design, dine, journey and stay in a world thoughtfully curated by RH, creating an impression and connection not like every other model on the earth.

Digital Reimagination: Our technique is to digitally reimagine the RH model and enterprise mannequin each internally and externally. Internally relating to how we innovate, curate, and combine all of the dynamic facets of our model, and externally as we introduce our prospects to The World of RH, a brand new digital portal presenting our Merchandise, Companies, Locations and Areas. This multi-year effort started internally final 12 months with the reimagination of our Middle of Innovation & Product Management, which can incorporate digitally built-in visuals and determination information designed to amplify the inventive course of from product ideation to product presentation.

Our exterior efforts will start this fall with the launch of section one in every of our new digital portal, The World of RH, which can embody wealthy, immersive content material with simplified navigation and search performance, all designed to boost the procuring expertise and render our product and model extra worthwhile. We consider a chance exists to create comparable strategic separation on-line as we have now with our Galleries offline, re-conceptualizing what an internet site can and ought to be.

World Growth: We consider that RH has the potential to turn into a $20 billion to $25 billion international model in its present type, and presumably bigger if facets of our ecosystem turn into significant income streams. Our view is the aggressive atmosphere globally is extra fragmented and primed for disruption than the North American market, and there’s no direct competitor of scale that possesses the product, operational platform, and model of RH.

Our international growth begins within the spring of 2022 with the opening of RH England, The Gallery at Aynhoe Park, a 73 acre historic property designed in 1615 by Sir John Soane, arguably one of the revered and celebrated architects of his time. RH England will characteristic The Aynhoe Architectural Library, The Aynhoe Natural Gardens, The RH Restaurant & Orangery, and The RH Champagne & Caviar Cellar amongst different distinctive experiences.

Pending reopening plans for France, our aim is to open RH Paris, The Gallery on the Champs-Elysees within the fall of 2022. Clients will arrive by way of magnificent 18-foot gates and stroll down a decomposed granite path lined with majestic hedges that result in a backyard courtyard the place you encounter 18-foot brass doorways and open a — that open to a six-floor atrium linked by traversing brass staircases and a glass elevator. RH Paris will embody a restaurant overlooking the gardens impressed by the Grand Palais, a glowing Champagne and Caviar Bar on the highest flooring, and a romantic roof-top backyard the place you possibly can sip an RH Bellini whereas having fun with views of the Eiffel Tower.

In complete, we have now secured 5 areas in Europe together with London, Munich and Dusseldorf, and are in closing lease negotiations for an extra 5 areas which can open over the subsequent two to a few years.

Climbing the luxurious mountain whereas constructing a model with no peer. Hermes, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany and the remainder of the best luxurious manufacturers on the earth have been all born on the highest of the luxurious mountain. By no means has a model began on the base, as we have now, and made the climb to the height. We consider RH may be the primary to make the climb, figuring out very nicely these on the prime don’t essentially need us to. The reality is, we’re not from their neighborhood, nor invited to their events. To make the climb, we perceive that our work needs to be so extraordinary that it creates a compelled reconsideration of our model, requiring these on the prime of the mountain to tip their hat in respect.

It isn’t a climb for the faint of coronary heart, requiring creativeness, innovation, and an excessive amount of persistence and perspiration. We’ve to be keen to endure short-term ache to drive long-term acquire, as we did transferring from a promotional to a membership mannequin, elevating our product, remodeling our shops, redesigning our working platform, or managing the enterprise with a bias for earnings versus revenues as we constructed a monetary mannequin to help long-term high-quality progress.

We additionally perceive the methods we’re pursuing: opening the most important specialty retail experiences in our business, whereas most are shrinking the dimensions of their retail footprint or closing shops; transferring from a promotional to a membership mannequin, whereas others are positioning their manufacturers round value versus product; persevering with to mail inspiring Supply Books, whereas many are eliminating catalogs, and, refusing to comply with the herd in self-promotion on social media, as an alternative permitting our model to be outlined by the design and high quality of the merchandise and experiences we’re creating, are all in direct battle with typical knowledge and the plans being pursued by many in our business.

We consider whenever you step again and think about: one, we’re constructing a model with no peer; two, we’re making a buyer expertise that can not be replicated on-line; and three, we have now complete management of our model from idea to buyer, you understand what we’re constructing is extraordinarily uncommon in at this time’s retail panorama and we’d argue, may even show to be equally worthwhile.

I need to thank the individuals of Group RH who stay our values and combat for our trigger. A group that’s constructing a tradition of management versus followship, that strives to innovate versus duplicate. A group of individuals with the braveness to proceed the climb even because the air will get skinny and the percentages get slim. A group of individuals keen to get knocked down ten instances and get again up eleven as they attempt to plant the RH flag on the very peak of the luxurious mountain. Carpe Diem.

I’ll now open the decision for questions.

We’re nonetheless processing the Q&A portion of the convention name. We will probably be updating it as quickly as we analyze and course of the con name. Keep tuned right here for extra updates.

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