RH (RH) 2003 Q2 法說會逐字稿

Good day. All sites are now on line I'd like to turn the conference over to Mr. Kevin Shahan, chief financial officer. Please go ahead.

Good afternoon thank you for listening to our earnings release conference call for the second quarter of 2003. With me on the call are Gary Friedman, our president and CEO. Stephen Gordon, company's founder and chairman. Tom Bazzone our chief operating officer and Vivian MacDonald, our corporate controller.

Before we proceed, please note that this conference call will contain forward-looking statements that involve known and unknown risks. These statements will include, without limitation, financial guidance and statements related to the implications of the company's second quarter 2003 results and periods thereafter, statements relating to the company's new strategy, and other statements reflecting management's opinion's and expectations regarding the business.

Guidance and other forward-looking statements offered or commented on by the company represent a point in time estimate made by management of the company and are subject to certain risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause such differences include, among others, those details in the company's recent filings with the Securities and Exchange Commission on forms 10-K, 10-Q and 8-K. The company undertakes no obligation to update any forward-looking statements or guidance on the basis of subsequent events or circumstances that may arise after this conference call.

Thanks and now I'll turn the call over to Gary.

Thank you for joining us. I'll start today's call on by commenting on our results this past quarter, give you an overview of the current initiatives and then give the call over to Kevin for more detailed review and Q&A.

We are pleases to report continued improved in both our top-line growth and bottom-line performance. Total sales for the company increased 13% and earnings per share performance improved 27% in the quarter. This was accomplished by 19.9% increase in comparable store sales on top of last year's 8.9% increase of 46% increase in our direct to customer channel on top of last year's 40% increase and continued focus on managing expenses and improving efficiencies throughout the organization.

We think it is important to note that our comparable stores sales performance translates to a 20% gain in store sales productivity over the two-year period. Clearly outpacing the two-year performance of home furnishings retailers in our peer group and demonstrating that customers are responding favorably to our new strategy.

As we enter the second phase of our repositioning, let me comment on some of our key initiatives for this year. Compare comparable stores sales performance remains the central focus of our strategy, as it is essential to leverage the fixed expense base of our retail stores to return the company to profitability and provide a platform for long-term growth.

Supporting the strategy are several initiatives. First, is our continued effort to build compelling core businesses to position Restoration Hardware as an authority and a destination for the categories we compete in. For example, this fall we have launched a proprietary line of bath faucets and fittings complimenting the exclusive bath hardware collections we introduced last year. We believe offering our customers the head to toe solution for the bathroom, whether it be updating remodeling or building a new home, serves to position Restoration Hardware as the authority in this category. From the business model perspective, Bath Hardware represents the company's highest margin category with zero fashion (ph) risk.

This fall we also launched our new upholstered furniture strategy entitled R Sofa Your Style, offering the customer an expanding selection of coordinated fabrics across multiple categories, including sofas and chairs, head boards and beds, dining chairs, benches and ottomans.

Now that we've got the proper balance of furniture in proportion to overall sales and margin mix, it is now appropriate to grow our furniture business in equal relationship to our total sales. As you will remember, when we began our efforts two years ago, furniture represented approximately 32% of our sales, while textiles represented only 4% of our business. Furniture now is approximately 25% of our sales, while textiles has grown from 4% to in excess of 20 % of our current revenues. In addition we've improved the overall furniture profitability model by including the delivery charges into the price of the product in our retail stores, improving our overall product margins in this category.

Next week we'll be holding our first annual autumn furniture sale. This effort will be modeled after our highly successful famous Fall lighting sale where we've not driven only driven incremental sales and margin, but have also created a top-of-mind (ph) awareness in the lighting category.

Over the past several years the company has held non-advertised furniture sale events driving incremental sales and margin. Our goal this year is to plan and advertise the event across all channels. Like our famous fall lighting sale we believe we can drive both incremental sales and margin plus position Restoration Hardware as a destination for high quality furniture. This should also drive-in incremental sales in other categories, a benefit from the increased traffic from the event.

We have also continued to expand and improve our assortments in window treatments, window hardware and lighting as we strive to have a more dominant position in the marketplace in these categories. All of our efforts in the areas mentioned are reflected in our stores catalog and on line, as our goal is to have a focus and powerful message across all channels.

Another important initiative we have talked about is using our catalog as our primary marketing vehicle. In order to do so, we needed to improve response rate in our store areas. So we could profitably increase circulation driving more sales in our stores, catalogs and on the web. Our initiative to improve response rates this spring included, one, expanding our offering by adding more pages and therefore increasing our sales to our best customers. Two, changing our product mix to a more catalog appropriate offering. And three, increasing our content of catalog only merchandise giving the customer greater reason to buy from the book in the store areas. Our results this spring exceed our plans since response rates in the store areas were up an impressive 44 % over last year. These results give us the confidence to continue our efforts to aggressively grow our direct business and have the added benefit of driving store traffic and building brand awareness across all channels.

Another initiative we've been focused on is the launch of a new store prototype this fall. While our re-fixturing efforts last year allowed us to better use the square footage in our existing stores to present our new strategy, our new store will be designed to reflect the new merchandising positioning with much greater clarity and authority. The new store is also being designed to be able to flex in size from 8,000 to 12,000 square feet so we can appropriately size stores to their market potential, versus building 10 to 12,000 square foot stores in all locations.

We'll be opening three new stores this fall in Richmond Virginia, Cleveland Ohio and Corte Madera, California. We believe they will provide the company with new platform for future growth.

Another important initiative has been to control expenses across the organization. To date we've made a substantial progress as it relates to financial planning and analysis, return on investment disciplines and have implemented a rigorous financial review meeting process monthly to drive accountability throughout the organization. We continue to believe there is substantial opportunity to leverage expense structure into the future.

Now let me turn the call over to Kevin Shahan our chief financial officer.

Thanks, Gary. First I'll review the company's second quarter performance. Then provide some guidance with respect to third quarter and fiscal 2003 numbers and then I'll turn the call over for questions.

Second quarter net sales were up 13% to $96 million, versus $85 million in the second quarter of last year. Comparable store sales for the quarter were up 9.9%, versus an 8.9% increase last year.

In the direct channel, which includes both our catalog and Internet divisions, second quarter sales increased 46% from last year's levels to $14.1 million. This compares to a 40% increase in the second quarter last year.

Total retail transactions in the second quarter increased 10% versus last year. While revenues per-transaction increased 3%. Teller-direct transaction in the second quarter increased 40% versus last year, with revenue per-transaction also increasing 3%.

Response rates improved in the summer catalog mailings, which drive second quarter results, due to the increased proportion of new and catalog-only content, as well as increased average page count. As a result we were able to realize a 46% increase in direct sales approximately flat circulation to last year.

While our operating loss for the second quarter was $4 million versus an operating loss of $5.2 million in the second quarter last year, our net loss for the quarter was $2.8 million, or 9 cents per share, versus the loss of $3.8 million, or 13 cents per share for the second quarter a year ago, representing a $1 million or 27% improvement.

Gross profit as a percent of net sales from the second quarter was 25.9%, compared to 26.2% in the same period last year. The 30 basis point reduction in gross profit was due primarily to increased mark-downs versus a year ago, mainly in outdoor furniture and textiles, partially offset by a (inaudible) basis point pickup through the leveraging of fixed occupancy, buying and distribution costs. Mark-downs were unusually low in the textile and other newly introduced product areas last year, as selling trends had not yet been established and our more normalize on the current year.

Mark-downs in outdoor furniture was lower last year as the assortment sold-out early in the season thereby missing potential gross margin dollar (ph) gains but turning out a higher margin rate performance.

Selling, general and administrate expenses as a percent of net sales were 30.1% in the second quarter of 2003, versus last year's 32.4%. The 230 basis point improvement was due primarily to leveraging store payroll, advertising and headquarter expenses.

We closed three under-performing stores during the quarter. Located in Tampa, Florida, Baton Rouge Louisiana and (inaudible) Pennsylvania. The PNL effect of these closures was negligible as closing costs and fixed assets write-offs were offset by the write-off of deferred construction allowance and deferred rent balances.

For the first six months of 2003 net sales were up 15% to $177.7 million, versus $154.4 million a year ago. Comparable store sales for the six-month period increased 10.8%, on top of a 4.8% increase last year. Direct to customer sales for the first six months increased 57% to $25.4 million, versus a 23% increase a year ago.

Our operating loss for the first six months was $12.1 million, and an improvement of $9.7 million or 44% versus an operating loss of $21.8 million in the first six months last year. Our net loss for the six-month period was $8 million, or 27 cents per share versus $11.3 million, or 38 cents per share a year ago, representing a $3.3 million or 29% improvement to the bottom line.

There's some additional indication of year-over-year earnings improvement for the first six months. I believe it's important to note that last year's first six months earnings included and were improved by, an additional income tax benefit of $4 million, as a consequence of the economic stimulus bill that was enacted in March of 2002.

Moving on to the balance sheet. The company's inventory balance at the end of the second quarter 2003 was $92 million, up 3% versus inventories of $89 million at the end of the second quarter a year ago, as compared to our 13 % sales increase over the same period. We are satisfied that we exited the first half as planned, with inventories that are clean and in line with our rate of sales growth.

We ended the second quarter with $26 million of bank debt, slightly down from $27 million at the end of our first quarter, and up versus $23 million at the end of the second quarter a year ago.

Accounts payable and accrued expenses at the end of the second quarter were $32 million, versus $42 million last year.

Capital expenditures from the second quarter totaled $1.9 million, primarily related to three stores currently in construction. These include two new stores in Richmond, Virginia and Cleveland, Ohio and the extensive remodel and expansion of our Corte Madera, California store.

Turning now to guidance. We expect comparable store sales for the third quarter to increase in the mid single digits. While we plan to be opening our two new stores and the remodeled Corte Madera store these openings will occur towards the latter part of the third quarter and aren't expected to add materially to the quarter's sales.

We're comfortable with the consensus estimate of a loss of 6 cents per share for the third quarter, versus an 8 cent loss per share in the quarter a year ago. The basic weighted average share count is expected to be approximately 30.1 million shares.

For the year 2003, we are maintaining our previous guidance for operating margins in the range of 1% to 2% of net sales. We expect inventory levels to end the third quarter flat to slightly lower than last year and to end the fourth quarter slightly higher than last year. You may remember that at the end of last year we felt our inventory at $95 million was about 10% too high, however, with the 15% increase in our first half revenue base this year, and our expectations for first and second quarters next year, we are comfortable with inventory levels at the $95 million level or slightly higher for the end of this year.

We continue to expect to be cash flow positive for 2003 and to end the fiscal year with no debt on the balance sheet. We project there will be adequate liability to fund the capital and capital expenditures.

Thanks and now I'll open the call up for questions.

First question will come from Christine Corber from WH Hambrecht.

Can you comment on the initial customer response to the new merchandise that you just rolled out to the stores?

So far so good, Christine. I was encouraged by the initial response to the bath faucets and fixtures in the first couple of weeks exceeded our initial plans. We do believe that's a business that will grow over time, it's not really an impulse business, but initial response has been favorable and above our plan.

The initial response to the upholstered furniture strategy has been in-line to slightly above our plan. Again we think that would be a building strategy. And the initial response to a lot of our other fall category initiatives, whether it be expanded window treatment assortment or window hardware assortment, and kind of the fashion layer across the business has been right on plan.

Okay. And then can you also talk about, you mentioned that you're going to advertise your autumn furniture sale across all channels, how are you going to do that? Are we going to see some print advertising? Just through the catalog?

We tentatively have, right now our plans are to advertise in all of our store windows and throughout our stores, in the front of our catalog and the opening fold of the catalog as well as on the web site and through e-mail contact with our customers. We do have a tentative plan to maybe have a print campaign, but because this is the first time we're doing this, we're going to look at that cautiously and if needed we will let it fly. If our business is above our expectations we may not run the ad.

Great. Thanks.

Our next question will come from Rusty Haas (ph) from Roth Capital Partners please go ahead.

Can you give us a sense which product categories kind of performed well and which under-performed?

For the second quarter?

Yeah.

Well, we had -- although the outdoor furniture business was below our expectations to start the year, we had planned a significant improvement in that category, and we saw significant improvement in that category. Yeah, slightly more promotional prices than we had originally planned, but it was a key driver to the quarter, to the quarter tea performance. Other key categories were the bath business, bath hardware and bath textiles continued to perform at a high level as we planned. The textiles category continued to deliver strong comp store contribution throughout the company.

And furniture and lighting?

The furniture business in the second quarter was somewhat softer than last year, as planned, except for the outdoor furniture component. Lighting business performed at about planned and we also at or performed in the garden and the accessory category as relates to garden.

Okay, thank you.

Our next question will come from Mike Napoletana from JPM securities.

Thanks. To get to your second half assumptions of operating margin of 1 to 2%, can you talk a little bit about the mix shift this year versus last year and the impact on gross margin? And do you see, the second part of that question, if it's not in gross margin then do you still see gaining these SG&A efficiencies in the second half of the year?

We don't expect to continue to gain SG&A efficiencies in the second half of the year. I would point out that that 1% to 2% guidance was for the whole year not just the second half.

Right. But I mean in total, one to two percent indicates that it's likely you'll see some gross margin improvement over a year ago. I'm wondering if that's true to the mix shift or not?

We're definitely expect to see it just on the basis of leveraging fixed expenses and to some extent will continue as we shift towards higher margin product categories in the mix to improve on that basis as well.

And then I just point of clarification -- did you say that all three of the stores are going to be opening up, they'll be at the end of the third quarter? Or two and one?

Two and one, Mike. The Cordemedera store will open in the beginning of the fourth (ph) quarter.

Analyst: Great. Thank you.

It appears we have no further questions at this time.

That's all the questions, operator?

Yes, it is.

Okay. Thank you very much everybody for joining our conference call. And we look forward to talking to you next quarter.