RH Swings to Q2 Loss, but Sees Brighter Future

September 7, 2017  by Larry Thomas in Economic News, Industry   

Revenue for the quarter ended July 29 rose 13.2% to $615.3 million, and comparable brand revenues increased 7%.

About 57% of revenues came from its brick-and-mortar stores and 43% from e-commerce and catalog sales.

The retailer formerly known as Restoration Hardware said its transformation to a membership business model from a promotional model has been especially effective because it has allowed the company to streamline operations and provide a better customer experience.

Plus, the company said it is in the early stages of redesigning its supply chain, which should further improve the bottom line. Supply chain initiatives include closing one of its four furniture distribution centers and gradually phasing out the hiring of third-party delivery firms for last-mile deliveries.

"As we anniversary the launch of the RH Members Program, and the initial stage of the redesign of our supply chain network, we are beginning to experience the benefits of membership and a dramatically simplified operating model," chairman and CEO Gary Friedman said in a letter to shareholders that accompanied the financial results. "I am pleased to report strong second quarter results as we move past the most uncertain stages of our transformation."

As a result, RH boosted its revenue and earnings projections for the year.

The retailer is now expecting revenues of $2.42 billion to $2.46 billion, up from a June estimate of $2.4 billion to $2.45 billion. And its new forecast for adjusted earnings per share is $2.43 to $2.67, well above the June projection of $1.67 to $1.94.

He said profit margins were squeezed in the most recent quarter by inventory reduction efforts and the re-working of its product assortment. That pushed more sales through its low-margin outlet stores, he explained.

But he said the new membership program has significantly reduced the number of returns, exchanges and order cancellations.

"We believe that membership has eliminated the frantic buying patterns and associated returns, exchanges, and canceled orders that are the result of a chaotic promotional model. We expect these factors to contribute to improved financial performance through higher conversion of demand into revenue, improved margins and lower costs across our operating platform," Friedman told shareholders.

RH ended the quarter with 85 retail stores, but only 14 were in its larger Design Gallery format. Friedman said he believes the U.S. will support 60 to 70 of the larger-format stores.

For the six months ended July 29, revenues rose 17.9% to $1.18 billion. The first-half net loss totaled $11.2 million or 31 cents per share. That compares with a loss of $6.55 million or 16 cents per share in the first half of the previous fiscal year.