Gary Friedman, chairman and CEO, Restoration Hardware
CORTE MADERA, Calif. -- RH (NYSE: RH) has released its financial results for the fourth quarter and fiscal year 2020, and a shareholder letter from chairman and CEO, Gary Friedman, lays out the retailer's plans, including focusing on its RH brand and future developments.
"We are building the most comprehensive and compelling collection of luxury home furnishings in the world," Friedman stated. "The desirability and exclusivity of our product amplified in our inspiring spaces has enabled us to gain significant market share with RH Core demand up 36 percent in the fourth quarter. Our demand has accelerated sharply with February up 73 percent, and the first two weeks of March up 96 percent, prior to cycling the closing of our Galleries, Restaurants and Outlets a year ago."
The home furnishings retailer has spent the past several years transforming itself from a nearly bankrupt business selling nostalgic discovery items with a $20 million market cap into the leading luxury home brand in the world with a market value in excess of $10 billion, and its revised strategy seems to be paying off in spades.
RH, formerly known as Restoration Hardware, re-invented itself from a retailer of nostalgic discovery items to a luxury home furnishings destination.
In fact, Freidman pointed out that adjusted gross margin increased 480 basis points in the quarter, 540 basis points for the year, and 1,210 basis points on a three year basis versus fiscal 2017, "demonstrating the desirability of our exclusive offering, and the pricing power of our brand," he added.
"The strategic separation we’ve created will continue to grow as we further elevate and expand the RH Brand with the introductions of RH Contemporary in 2021, plus RH Color, RH Couture and RH Bespoke over the next several years.
"Additionally our plan is to unveil The World of RH, a digital portal presenting our products, places, services and spaces this fall. We will begin to bring the different parts of our integrated ecosystem to life with rich content that we believe will enhance our brand and connect with our clients on a much deeper level."
COMPANY PERFORMANCE
RH will continue to focus on its brands, such as RH Teen (launched in late 2015), introducing RH Contemporary in 2021.
"We continue to build the most productive operating platform and business model in our industry with adjusted operating margins increasing 750 basis points to 21.8 percent versus 14.3 percent last year on only 8 percent revenue growth," he stated. "Let me say that again, 750 basis points on only 8 percent revenue growth. It’s an operating margin never seen before in the furniture/home furnishings market, and more than 50 percent better than the closest competitor. Our ROIC of 53 percent in 2020 also puts us in a class of our own.
"Our results represent a systemic lift that is not merely a temporal pandemic shift due to an unsustainable revenue gain. Remember, virtually 100 percent of our core business is direct to customer, with less than one tenth of one percent being cash and carry from our stores, which is basically floor model sell off. That is why our demand to revenue lag is much greater than other home furnishings retailers who have seasonal assortments and large cash and carry businesses.
"It’s also important to note that due to the virus-induced supply chain disruptions, approximately $150 million of demand that was generated in 2020 will be recognized as revenue in 2021, while the majority of the selling costs to generate that demand was absorbed in 2020. If those revenues were recognized last year, our adjusted operating margin would have reached 23 percent.
"I often quote Bernard Arnault, the Chairman & CEO of LVMH as he says, 'Luxury goods are the only area in which it is possible to make luxury margins.' At 21.8 percent adjusted operating margin in 2020, RH has now eclipsed the operating margin of LVMH, and we have a clear line of sight to 25 percent-plus operating margin over the next several years. With less than $3 billion of net revenues, you can imagine the leverage we should experience as we scale."
100 percent of RH's core business is direct to customer, with less than one tenth of one percent being cash and carry from its stores. Above, a RH Design Atelier allow designers and clients a space to work together on projects.
COMPANY PROSPECTS
A sprawling 90,000 square foot luxe home furnishings destination in New York, RH's property also includes a restaurant and rooftop dining.
Freidman continued in his letter, "We ended 2020 with just less than $3 billion in net revenues and believe the data supports the RH brand reaching $5 to $6 billion in North America and $20 to $25 billion globally. We believe that number will continue to grow when you consider our opportunities in Hospitality and Homebuilding as we continue to expand the RH Ecosystem with the introduction of RH Guesthouses and RH Residences. We are tracking to begin our international expansion in Europe with the openings of RH England and RH Paris in 2022. We are planning to open our first Guesthouse in New York City this fall, followed by our second Guesthouse in Aspen, which will include our first RH Bath House & Spa, in the fall of 2022.
"We are currently in design development for our first RH Residences as part of our larger Aspen ecosystem and have already received multiple unsolicited proposals to purchase the homes sight unseen, and to place deposits to reserve a home. We believe the revolutionary design of both the Guesthouses and Residences have the potential to create entirely new markets in their respective industries, while also positioning RH as a thought leader, taste, and place maker."
The company also announced plans to open four new Design Galleries in 2021, all with integrated restaurants and wine bars: RH San Francisco, The Gallery at the Historic Bethlehem Steel Building; RH Dallas, The Gallery on Knox; RH Oak Brook The Gallery at the Center; and RH Jacksonville, The Gallery at St. Johns Town Center.
A lavish atrium greets guests shopping, designing and eating at RH's Meatpacking District location.
BRANDS WITH MORE CONTROL WILL BECOME MORE VALUABLE
Restoration Hardware plans to add new brands to its portfolio --
RH Color, RH Couture, RH Bespoke -- over the next several years following the success of RH Modern, introduced in 2015,
"We have always invested in controlling our brand from concept to customer, avoiding intermediaries who will never care as much as we do. That’s why we’ve avoided partnerships, sponsorships, franchising or licensing and continue to believe brands with more control will become more valuable.
"The easy path of expanding a brand rarely pans out to be the best path. The road to global expansion is littered with brands that put their trust in others, only to spend years negotiating repurchase rights decades later after the damage is done. That’s not to say there won’t be exceptions where there’s an outstanding partner in a challenging country, but it will be a rare exception as we expand the RH brand around the world.
"We also continue to invest in taking more control of the customer experience and have been testing RH In-Your-Home in the Los Angeles and San Francisco markets and are extremely happy with the early results. As Fernando Garcia, our president of furniture operations and home delivery describes it, “RH In-Your-Home is not a different or better experience, it is a unique and memorable experience as we extend the Gallery into the customer’s home. With Furniture Ambassadors managing every detail, it creates an impression with our customers that can last a lifetime.”
"Additionally, we are opening a new one million square foot furniture distribution center in Southern California this spring. The new facility will allow us to reduce delivery times by seven to ten days for both outdoor furniture and special order upholstery in most major markets.
2021 HAS ALL THE SIGNS OF A VERY GOOD YEAR
Restoration Hardware's rug assortment includes a variety of hand-knot constructions featured in a 360-page-plus Rug Sourcebook.
"While 2021 will surely be a tale of two halves, the fact that we have a booming housing market, a record stock market, low interest rates, the expectation of a rebound in the economy and jobs market, combined with the recent further acceleration in our demand trends, has us feeling more rather than less optimistic that it might just turn out to be two very good halves.
"While we expect to face continued difficulties ramping vendor production to meet demand and don’t see the challenges with ocean freight or port congestion resolving themselves anytime soon, it’s hard not to forecast first quarter revenue growth of at least 50 percent, and adjusted operating margin in the 20 percent range. With the momentum in the business, we believe it’s safe to say 2021 should result in revenue growth in the range of 15 percent to 20 percent with adjusted operating margin expanding 100 to 200 basis points and ROIC in excess of 60 percent.
"We have made the decision once again to delay the mailing of our Source Books and the launch of RH Contemporary until the fall of 2021 to enable our manufacturing partners to catch up to the increasing demand trends. This decision should also support a strong second half as we have held back new collections for the past year, which will result in one of our largest new product launches in our history. Our RH Outdoor Source Book filled with 10 new collections is scheduled to be in home starting this week, with the digital Source Book and new outdoor collections live on our website today.
Restoration Hardware has transformed itself from a nearly bankrupt business selling nostalgic discovery items with a $20 million market cap into the leading luxury home brand in the world with a market value in excess of $10 billion. Today it operates 24 Design Galleries, 38 Legacy Galleries, two Modern Galleries, and four Baby & Child and Teen Galleries. It also operates 38 Outlet stores and 68 Waterworks showrooms.
Among the styles featured in Restoration Hardware's rug portfolio are abstract hand-knotted designs, such as Trouve.