RH Profit Dives in Q3

Expenses from RH Modern and membership model launches cut deeply into profit
December 9, 2016David Gill

RHlogo3x2CORTE MADERA, Calif.—Increased costs slashed third quarter net income for RH (Restoration Hardware) by 87.8 percent, to $2.5 million.

These added expenses resulted from the launch of the RH Modern brand, the company’s transition from a promotional to a membership model, efforts to reduce inventories and rationalize RH’s SKU count and the company’s decision to push the 2016 Source Book mailing from the spring to the fall, said Gary Friedman, chairman and CEO. These moves played a part in beefing up selling, general and administrative expenses by 10 percent in dollars and 180 basis points as a percentage of sales, to 29.2 percent. They also cut deeply into gross margin, which fell 482 basis points to 32 percent.

Net revenues increased 3.2 percent to $549.3 million in the quarter, which ended on Oct. 29. However, comparable-brand revenue (defined by RH as a combination of same-store sales and direct revenues minus noncomparable store sales, sales at closed stores and net revenues at outlet stores) fell 6 percent.

“We are clearly disappointed by our short-term results,” Friedman said in a video presentation about the third quarter. However, he added, RH will continue its efforts with its membership model and SKU rationalization. “Many retailers are in a race to the bottom regarding price. RH has chosen not to join that race,” he said.

Also on the video, Karen Boone, co-president and chief financial and administrative officer, said RH now expects the fourth quarter to produce net revenues ranging from $562 million to $592 million. For the fiscal year, revenues should total from $2.1 billion to $2.4 billion, Boone said.

The next fiscal year should bring an acceleration to RH’s revenues and improved results on the bottom line. “Our long-term growth strategies remain intact,” Boone said. “Our inventory optimization has allowed us to remove inefficient SKUs. We are on course to achieve $4 billion to $5 billion in {annual} revenues in North America.”

David GillDavid Gill | Senior Editor
dgill@hfnmag.com

David Gill covers home textiles, small electrics housewares, personal-care products, cleaning products, mattresses, consumer electronics and major appliances. He also reports on retailers and writes about the business and financial side of both vendors and retailers. He has more than 30 years of experience in business journalism, and has worked for other publications and websites that cover consumer products from both the manufacturer and retailer sides. His outside interests include sports (he is a big fan of the New York teams and of British soccer), cooking, movies and theater. He occasionally enjoys a good cigar as well.

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