RH (RH) 2003 Q1 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. At this time I'll turn your program over to the CFO of Restoration Hardware Kevin Shahan, please go ahead

Good afternoon everyone thank you for listening to our conference call for the first quarter of 2003. With me today on the call are Gary Friedman, our president and CEO. Steven Gordon, company's founder and chairman. Tom Bazzone, COO and Vivian McDonald, corporate controller.

This conference call will contain forward-looking statements that involve known and unknown risks. These forward-looking statements include, without limitation, financial guidance and statements concerning or relating to implications of the company's financial results for the first quarter of fiscal 2003 and the periods thereafter. Statements relating to the company's new strategy and other statements containing words such as believe, anticipates, estimates, plans, targets, expects, may, and words of similar import or statements of management's opinion. Point in time estimate made by management of the company. We caution you that such guidance and other forward-looking statements are just projections and actual results may differ materially from those in the guidance or other forward-looking statements.

Important factors that could cause such differences include, among others, those factors detailed in the company's filings for the Securities and Exchange Commission, including the recent filings on forms 10-K, 10-Q and 8-K, including but not limited to those described in the company's Form 10-K for fiscal 2002 and management's discussion on analysis of financial conditions and results of operations and business under the caption factors that may affect our future operating results and controls and procedures. With that safe harbor language completed I'll turn the call over to Gary

Good afternoon. I'll start by commenting on our results this past quarter then give you a sense for what we're working on and then by turning the call over to Kevin for more detailed financial review. We were quite pleased with our performance this past quarter. Comparable store sales increased 11.9% our direct business increased 72% despite a difficult economic environment. More importantly, our comparable store sales in April increased 17.6%, versus the double-digit increase in April of last year. This is significant, since April of last year was the launch of our merchandising and marketing strategy.

In addition to the 11.9% comp store sales increase in Q1, we were able to increase merchandise margins 380 basis points in the quarter. This was due to less promotional activity plus a shift in the merchandise mix to a higher percentage of text tiles and increase to direct floor [inaudible] A key success factor in the quarter an important part of our long-term strategy was the growth of our direct business. As we've discussed, our strategy is to move from a print to a direct advertising model using the catalog as our primary advertising vehicle. In order to do this, we needed to reposition the catalog and merchandise it to improve catalog response rates in our store areas, thus allowing us to increase circulation and drive store traffic. That strategy is working.

As we've dramatically improved response rates, driving improved performance in all three channels T these latest results give us the confidence we can continue to increase circulation over the next several quarters. These successes plus well-managed expenses enabled us to significantly reduce our losses versus a year ago and these are our previous earnings guidance and the consensus estimates for the quarter. As we look ahead, our focus continues to be refining our merchandise strategy and building our core businesses. Some of the important initiatives that will be launched this fall include the introduction of an exclusive line of bath faucets and fittings. We've designed fittings to match our eight existing hardware collections. All of the fittings are exclusive and made in the United States and carry a lifetime guarantee. They will be introduced in our storage catalogs and on line beginning in August and will be supported by a three-page [inaudible] introduction in our catalog and a national print advertising campaign in the major home magazines.

Second, we're launching a new upholstered furniture strategy this fall. We have new styles fabrics new entire marketing strategies for this category. This new strategy will be launched in stores catalogs and on line in August. Lastly as previously communicated we'll be opening three new restoration hardware prototype stores this fall. The new store is designed to show case our new merchandise strategy and clearly define Restoration Hardware's position in the marketplace. We've engaged well-known store designer Richard Altuna to help develop the concept. Richard had previously worked with me developing the [inaudible] as well as the pottery barn design studio and pottery barn kids format. The new stores will range in size from approximately 8,000 to 12,000 square feet. The 8,000 square foot format is being developed to allow us to expand Restoration Hardware into smaller markets so that would not warrant a 10 to 12,000 square foot store. With that let me turn the call over to Kevin.

I'll start off by reviewing the company's first quarter performance and then provide guidance for second quarter and fiscal 2003 numbers and then turn the call over for your questions. First quarter sales were up 18 percent to 81.8 million versus 69.4 million in the first quarter of last year. Comparable store sales were up 11.9 percent. And the direct channel which includes both our catalog and Internet divisions, first quarter sales increased 72 percent from last year's levels to 11.3 million. Our operating loss for the first quarter was 8.1 million, versus an operating loss of 16.6 million in the first quarter of last year. And improvement of 8.5 million.

Our net loss available to common stockholders for the quarter was 5.2 million, or 17 cents a share, versus a loss of 7.4 million, or 25 cents per share for the first quarter a year ago. Improvement of 2.1 million. And some additional indication of year-over-year earnings improvement, I believe that it is important to note that last year's first quarter earnings included and were improved by a one-time additional income tax benefit of four million as a consequence of the economic stimulus bill that was enacted in March of 2002. Gross profit as a percent of sales in the first quarter of 2003 was 24.4 percent, compared to 15.7 percent in the same period of last year.

The 870 basis point improvement and gross profit was due primarily to 380 basis point improvement in merchandise margins as well as the trend of the 30 basis point pick up to a leverage of fixed occupancy costs. Lower freight costs and leveraging of fixed buying and distribution costs contributed to the remainder of the improvement. The company's higher merchandise margins were the result of both reduced mark down activity and this year's first quarter versus last year. As well as our ongoing successful initiatives in raising margins through changes in the merchandise mix and direct sourcing. Selling general and administrative expense as a percent of sales were 34.3 percent for the first quarter of 2003, versus last year's 39.6 percent. The 530 basis point improvement was due primarily to the following factors: Store payroll as a percentage of sales improved by 200 basis points. Advertising was reduced by 90 basis points, and display and signage costs experienced a year-over-year reduction of 160 basis points. Total office expenses remained flat in dollar terms but with higher revenues leveraged by approximately 160 basis points. Finally, offsetting these improvements the company experienced a 100 basis point increase in direct channel expenses due to increased activity in that channel. Moving on to the balance sheet, the company's overall inventory balance at the end of the first quarter, 2003, was 100 million. Up 28 percent versus inventories of 78 million at the end of the first quarter a year ago.

Inventory at the end of first quarter a year ago was less than planned, as a result of late receipts of certain of the new merchandise categories. Since year-end we've cleaned out all excess seasonal inventories. The company still maintains approximately five million of excess inventory beyond our planned inventory level of 95 million. The majority of which is in core nonseasonal categories, which we expect to eliminate by the end of this years second quarter. Via planned moderate markdowns as well as slowing purchases. To give a historical perspective, at the end of first quarter of 2001 and first quarter of 2000 our inventories were at 91 million and 93 million respectively. In evaluating the productivity of our inventory, in the first quarter we experienced a 38 percent increase over last year, an inventory yield defined as gross profit defined by average for the period. We ended the first quarter with 27 million of bank debt versus eight million a year ago. Accounts payable and accrued expenses at the end of first quarter were 33 million versus 46 million last year.

The increased debt level was due to both an increase in our inventory levels as well as reductions in our accounts payable balance. Capital expenditures in the first quarter were [inaudible] totaling 0.4 million. To put balance sheet changes into perspective compared to the year-end 2002 balance sheet we've lowered debt and accounts payable by approximately 23 million, increased inventory by approximately 15 million, and accomplished about 20 million of capital expenditures. These investments in debt reductions total 58 million compared to net cash raised from equity offerings over the course of 2001 of about 55 million indicating that we've preserved a slightly added to the cash raised during our turnaround period. Turning now to guidance. We believe it's prudent within the current retail environment to provide only high level guidance as to the full year 2003 performance.

This is consistent with the guidance we provided during our year-end 2002 conference call while we provided general details on 2003 and more specific details on the upcoming quarter. So we'll be providing second quarter 2003 guidance with a little more specificity.

These guidance numbers are as follows: Comparable store sales for the second quarter we expect to increase in the mid-single digits. We expect to achieve operating losses for the second quarter in the range of 3.5 to 4.5 million, versus a loss of 5.2 million in the second quarter of last year. This will result in a net loss of 9 to 11 cents per share on a basic share count of approximately 30 million, versus a 13-cent loss per share a year ago at basic share count of 29.2 million. For the whole of fiscal 2003, we are maintaining our previous guidance for operating margins in the range of one to two percent of sales. We continue to expect to be cash flow positive for fiscal 2003 and to end the fiscal year with no debt on the balance sheet. We project there will be adequate availability on our credit line throughout the year to fund both working capital and capital expenditures. Now I'll open the call up for questions.

If you have a question press the star and the pound key. If you have a question at this time press the star and the 1 on your touch tone phone. We'll pause a minute while we take our first question. First question come from Mike Napoletana from JP Morgan securities. Go ahead, please.

This is JP securities. Gary can you talk a little bit about the catalog productivity, specifically the number of catalogs you issued in the first quarter versus last year, and maybe talk about some of the productivities and I have a couple of follow-ups.

We'll have Kevin respond to the numbers.

The catalog circulation in the first quarter of 2003 was about 6.4 million versus 5.1 million. And first quarter of 2002, that's about 25 percent increase in circulation.

Then breakout between catalog and Internet sales?

Catalog sales and first quarter this year were 7.2 million and web sales were 4.1 million. So about 64 percent of the business was catalog and 36 percent web. Those percentages were roughly equal in last year's first quarter when catalog was 4.3 million, web was 2.3 million

Then looking forward to the second quarter, are there going to be any changes with respect to catalogs shipped year over year or quarter over quarter

We're actually not providing that type of guidance for the second quarter at this time

Okay. With respect to same store sales, looks like you think same store sales are going to be a little higher than you talked about earlier, but yet you're kind of being cautious on the earnings number. What do you think are the biggest challenges, Gary, in the second quarter for you guys?

Well, I think the challenges we face are probably the challenges that other retailers face. And that's more or less with the uncertainty of the current retail climate out there and the economic environment. While we over performed our expectations in Q1, we believe it's prudent to continue to be conservative. So more specific challenge might be on the merchandise margin side is we want to make sure we are really clean by the end of the second quarter and get inventories in line. And then on a comparative note to last year, since we launched our new merchandise strategy in April of last year, we really experienced no markdowns throughout the first several quarters. So merchandise margins versus a year ago will be somewhat lower, because of that.

So just to make sure I'm clear, Q2 merchandise margin this year will be lower than last year's?

Slightly lower, yes.

Okay. And I had another question, but I'll just -- what was depreciation expense for the first quarter?

Approximately four million, 4.5 million, in that range.

Great. Thanks.

Once again to register for a question please press the star and the 1 on your touch-tone telephone. To withdraw that question, press the pound key. We'll take our next question from Janet Klopinberg from JJK Research.

Hi Kevin, Steve. I wanted you to talk about the plan for the holiday some disappointment last year and maybe you could talk about what you're planning for that in terms of holiday assortment and SKUs in the gift giving area and maybe some strategy changes there.

Thank you, first let me talk a little bit about the disappointments from last year, to put it in perspective. Last year our biggest disappointment was in the holiday trim category. Really the trim and tree category, which includes ornaments and tree lights, etcetera. It's our belief, especially since we've kind of, kind of researched the rest of the industry and understand that everybody had a pretty difficult holiday in this area, that was due to the later Thanksgiving. People generally don't buy their ornaments or tree lights until they buy their tree. They don't generally buy their tree until after Thanksgiving. With Thanksgiving being a week later it compressed that business and caused an industry wide under performance in that category. This year we get an extra day, so you're not going to have the week compression and you'll get a plus day to it. So I think what drug us down last year as far as one of the big components is not going to be an issue this year.

So some definitely newness and excitement in that area of business side to be introduced. The other component was, if you really think about what we focused on in the first year of this repositioning, we were later focused on rebuilding the core categories for the company, and kind of putting a foundation in place that would kind of drive a top of line awareness for Restoration Hardware in core businesses. We made a lot of changes in our merchandising organization, and with that happening some of the businesses that were more holiday-specific, that peaked more greatly at holiday, we kind of didn't execute well, specifically some areas like candle light or frames or et cetera, where we just didn't have those categories, merchandised well. At best we didn't get the holiday peak. We kind of square rooted those. I think we have the right merchandise strategy in place to correct that.

And that was kind of principally where we were disappointed. We came in at three top in the quarter, which compared to the rest of retail wasn't a bad number compared to I think the expectation and where we performed in the third quarter was somewhat of a disappointment. So therefore we believe that the third quarter this year is an, or the fourth quarter this year is an opportunity quarter for us. We've got a lot of newness, a lot of exciting gift giving strategies in place. And believe that also the recent, I think, indicators on our catalog response rates area in store areas are going to give us more competence as we move into the second half as we continue to market more aggressively than a year ago.

Great. Thanks a lot.

Our next question comes from [Christine Corber]from WR Hambrecht.

Can you talk about the new store prototype how is the layout going to be different from your larger stores and clearly I'm assuming you're going to be editing down the SKU count for the 8,000 square foot store and how does that differ from the larger stores? Thanks.

Sure. The biggest difference in the stores that we have out there today and the new store prototype is really going to be kind of space allocation and presentation of core businesses. The typical RESTO store out there is a series of small rooms marching down the side with a big room in the center. When we went to reposition the merchandise strategy, the concept, we were able to kind of refixture the stores, but not really remodel the stores and move walls. And therefore proportion spaces to the core businesses that we believed were going to drive the most revenues.

So this store really allows us to proportion the space correctly, to design and develop fixturing and presentation methods that allows us to exploit those businesses in a very clear and dominant and unique way. And so that's the biggest change you'll see. I mean it is a completely different experience for the customer where I believe today you walk in and even though we've made a lot of progress in refining and focusing the businesses and becoming more clear to our consumers, the new store is going to hit you over the head with the businesses that Restoration Hardware is going to be famous for. You'll see a tremendously exciting hardware hall where between bath hardware and cabinet door and hardware where you're going to see kind of the 21st century modern hardware store experience, which will be tremendously exciting.

You'll see an exciting furniture gallery that will aggregate the furniture from, spread out between all the rooms of the store today to kind of a more central location where we'll display the furniture in more focused lifestyle vignettes with product knowledge and information engineered to the experience. We'll have a dramatic lighting gallery, that will focus on architectural lighting, ceiling and wall [inaudible] and kitchen and bath and living and dining lighting that will kind of position us as a authority in that category.

And then you'll see a major textiles hall that will bring the textiles together in one kind of powerful statement that will show case the goods in a way that allows the customer to really see how they go together and how they can mix and match them. You'll really get the idea that we're dominant in hardware, furniture, lighting and textiles and then the accessories businesses will be merchandised in a secondary way, in kind of a background way and will be sprinkled throughout the store.

But that really becomes a key component. When you think about smaller store, what's going to be different in that store is that it will have a slightly edited assortment, mostly on the furniture side of the business. And so we'll keep kind of the higher margin, highly productive categories, the smaller stores will not have as big a footprint and therefore will carry less furniture pads in them. But we've got kind of innovative ways to still show the broad assortment to the customer through some different marketing vehicles that's designed into the new store.

Great. Thank you.

Once again to ask a question please press the star and the 1 on your touch-tone telephone. We have no further questions at this time. I'll turn it back over to our management team for any closing comments you may have.

Well, thank you for joining our conference call everyone. We look forward to talking to you in the next quarter. Thanks so much.