Restoration Hardware, Inc. Reports Slower Than Expected First Quarter Growth

Furniture World Magazine

Restoration Hardware, Inc. announced preliminary results for the first quarter ended May 5, 2007 and updated guidance for the second quarter and full year of fiscal 2007. The Company expects first quarter net revenues to be approximately $142 million, reflecting growth of 7% compared to net revenues of $133 million in the first quarter of fiscal 2006. In addition, the company expects operating margins in the range of -7.7 to -8.5 percent compared to operating margins of -2.6 percent in last year's first quarter. "Our preliminary results for the first quarter are lower than our expectations due to two primary factors," stated Gary Friedman, President and Chief Executive Officer. "First, April sales were below plan. The shortfall occurred primarily in our outdoor and seasonal businesses with the majority concentrated in the Eastern region of the country. We believe this is predominantly due to the fact that our second Outdoor catalog mailing dropped on April 5th during adverse weather conditions in the East. Additionally, we continue to see general softness across our business due to the challenging home furnishings environment. Second, we completed the planned retrofitting of our furniture Distribution Centers, which resulted in higher than anticipated costs during the quarter." Mr. Friedman continued, "We have implemented cost reduction strategies to lower expenses over the balance of the year, including the renegotiation of key components of our catalog production costs. Although our first half results will be below expectations, we believe our cost reduction efforts will enable us to recover a substantial part of the first half shortfall and still deliver improved operating earnings for the year. While we are encouraged that the initial response to the May 3rd drop of our Outdoor catalog is meeting expectations, our outlook for the second quarter remains cautious." The Company expects the following earnings results for the first quarter of fiscal 2007: - Operating margins in the range of -8.5 to -7.7 percent - Earnings before interest, taxes, depreciation & amortization (EBITDA) in the range of -$6.5 million to -$5.5 million - Earnings per diluted share in the range of -$0.36 to -$0.34 - Inventory increase in the range of 13 to 14 percent over fiscal 2006 first quarter The Company provides the following guidance for the second quarter of fiscal 2007: - Total revenues in the range of $195 million to $199 million, an increase of 9% to 11% over fiscal 2006. -Operating margins in the range of -1.0 to 0.0 percent - Earnings before interest, taxes, depreciation & amortization (EBITDA) in the range of $3.5 million to $5.5 million - Interest expense in the range of $2.3 million to $2.4 million - Effective tax rate of close to zero - The weighted average share count is estimated at approximately 39 million shares - Inventory increase in the range of 25 to 30 percent over fiscal 2006 second quarter - Earnings per diluted share in the range of -$0.12 to -$0.06 The Company provides the following guidance for full year fiscal 2007: - Total revenues in the range of $780 million to $793 million, an increase of 9% to 11% over fiscal 2006 - Operating margins in the range of 1.4 to 1.8 percent - Earnings before interest, taxes, depreciation & amortization (EBITDA) in the range of $34.1 million to $37.5 million - Interest expense in the range of $8.6 million to $8.9 million - Effective annual tax rate of 40 percent - The weighted average share count is estimated at approximately 40 million shares - Inventory increase in the range of 11 to 13 percent over fiscal 2006 - Capital expenditures in the range of $15 million to $18 million - Earnings per diluted share in the range of $0.03 to $0.09 Separately, the Company announced that it successfully closed a $265 million amended credit facility, consisting of a $175 million revolving credit facility, a $15 million fully funded term loan, and a $75 million accordion, which will provide greater financial flexibility to accommodate future growth. Chris Newman, Chief Financial Officer of Restoration Hardware, stated, "The renegotiation of our credit facility has reduced interest costs compared to the prior facility and will provide us with greater financial flexibility. This is particularly important as we execute our supply chain initiatives over the next 2-3 years and continue to pursue our growth plans." Non-GAAP Financial Measures: This release makes reference to certain financial measures that are non- GAAP, including (i) EBITDA guidance for the first quarter of fiscal 2007 of between -$6.5 million and -$5.5 million, (ii) EBITDA guidance for the second quarter of fiscal 2007 of between $3.5 million and $5.5 million and (iii) EBITDA guidance for the full year of fiscal 2007 of between $34.1 million and $37.5 million. The Company believes that the use of EBITDA allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. EBITDA is a widely used financial metric to assess cash flow. "EBITDA" consists of earnings before interest, taxes, depreciation and amortization. EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP. The most closely analogous GAAP financial measure to EBITDA is net (loss) income for the applicable period. A table setting forth a reconciliation of projected EBITDA to projected net (loss) income is set forth below (in millions). About Restoration Hardware, Inc.: Restoration Hardware, Inc. is a specialty retailer of high quality home furnishings, bath fixtures and bathware, functional and decorative hardware, gifts and related merchandise that reflects the Company's classic and authentic American point of view. Restoration Hardware, Inc. sells its merchandise offering through its retail stores, catalog (800-762-1005) and on- line at www.restorationhardware.com. As of May 9, 2007, the Company operated 103 retail stores and eight outlet stores in 30 states, the District of Columbia and Canada.