Costs Kill Restoration Profits

Don Hogsett, November 29, 2004

Corte Madera, Calif. — Even though same-store sales jumped 8.7 percent, and overall sales climbed more than 23 percent at Restoration Hardware, rising costs and interest expense produced a nine month loss of $9.1 million, compared with a year-before deficit of $10.8 million.

Third quarter sales at the specialty retailer rose 23.3 percent, to $118.2 million, helped by soaring direct-to-consumer sales, which rocketed up 78.1 percent to $28.4 million. Sales in its retail stores climbed 12.4 percent, to $89.7 million.

In more good news, average gross margin climbed substantially, rising 32.1 percent from 30 percent a year ago.

But that's where the good news stopped, and rising costs and interest expense tipped the retailer into red ink. Costs jumped 28.7 percent, far exceeding the growth in sales, to $42.5 million from $33 million last year, pulling $9.5 million away from the bottom line. Taking a further bite out of the bottom line, interest expense increased 42 percent to $737,000.

Gary Friedman, president and CEO, said, “Although pleased with our sales performance and product margin expansion in the third quarter, we experienced higher than anticipated advertising and distribution costs.”

Federal regulation compliance costs pushed costs even higher. “While making progress in improving execution in our distribution centers, identifying optimum catalog circulation strategies and improving internal controls, these items negatively impacted earnings in the quarter by approximately 5 to 6 cents per share,” almost two-thirds of the quarter's loss.

Restoration Hardware Inc.

Qtr. 10/30 (x000) 2004 2003 % change
a-Third quarter results include an income-tax benefit of $2.2 million, compared with $1.9 million last year.
b-Nine-month results include an income-tax benefit of $6.1 million versus $10.8 million last year.
Sales $118,165 $95,914 23.3
Oper. Income (EBIT) (4,542) (4,244) --
Net income (3,118)a (2,858)a --
Per share (diluted) (0.09) (0.09) --
Average gross margin 32.1% 30.0% --
SG&A expenses 35.9% 34.5% --
Nine months
Sales 337,965 273,553 23.5
Oper. Income (EBIT) (13,503) (16,381) --
Net income (9,106)b (10,833)b --
Per share (diluted) (0.28) (0.36) --
Average gross margin 28.9% 26.9% --
SG&A expense 32.9% 32.9% --

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