CORTE MADERA, Calif. -- RH (NYSE: RH) reports record fourth quarter and fiscal year 2021 results, and company Chairman & CEO Gary Friedman outlines the historic results in a letter to shareholders.
Below is Friedman's letter to shareholders, followed by Q4 and FY 2021 highlights.
We are pleased to report another year of record results with net revenues increasing 32% to $3.759 billion versus $2.849 billion a year ago, and up 42% versus 2019. If you exclude money-losing online businesses, it represents one of the highest two-year growth rates in our industry.
Demand versus 2019 grew 49%, which resulted in an incremental backlog at the end of the year of approximately $200 million of net revenues that we expect to fulfill over the course of 2022
RH continues to set a new standard for financial performance in the home furnishings industry and our results now reflect those of the luxury sector as adjusted operating margin reached 25.6% in 2021, up 1,130 basis points versus 2019, reflecting the strongest two-year growth in our sector.
Our performance demonstrates the desirability of our elevated and exclusive product range, the connective power of our evolving ecosystem, the profitability of our fully integrated business model and the significant strategic separation created by our inspiring physical spaces.
For the quarter, net revenues increased 11%, within our guidance range despite the virus variant that magnified supply chain issues in the second half of Q4.
We once again exceeded our adjusted operating margin outlook in the fourth quarter reaching 25.2% versus 23.7% last year, and up 780 basis points on a two-year basis.
FOURTH QUARTER 2021 FINANCIAL RESULTS AND SHAREHOLDER LETTER
We generated $97 million of free cash flow in the quarter and $477 million for the year, inclusive of a $191 million increase in inventory of which approximately $60 million is due to increased transit times and the balance targeted to alleviate our unshipped demand backlog.
We ended the year with $90 million of net debt and nearly $2.2 billion of cash on our balance sheet, while generating ROIC of 73% in 2021.
2022: THE YEAR OF THE NEW
As we’ve mentioned, while many of our plans were delayed by the virus, they were not disrupted by it. We used these past two years to reimagine and reinvent ourselves once again, and believe 2022 will mark the beginning of the next chapter of growth and innovation for the RH brand. 2022, The Year of The New, will include:
The opening of RH San Francisco at the Historic Bethlehem Steel Building, our most extraordinary new Bespoke Gallery to date.
The launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history.
The elevation and expansion of RH Interiors and RH Modern, inclusive of new collections and enhanced quality.
The unveiling of our first RH Guesthouse in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market.
The introduction of two new culinary concepts, an elevated live-fire restaurant opening in San Francisco, England and the New York Guesthouse, plus a Champagne and Caviar Bar also opening in the New York Guesthouse this year, with plans to expand both concepts to our future Galleries in Paris, London, Milan and Aspen. With average restaurant volumes approaching $10 million annually, and a very profitable four-wall model, we are making significant investments to build a world-class hospitality organization and see endless opportunities to elevate and activate our places and spaces, creating integrated and inspiring experiences for our members and customers that cannot be replicated online.
The debut of The World of RH, the first phase of our new digital portal highlighting the connective power of our evolving ecosystem of Products, Places, Services and Spaces all designed to inspire customers to dream, dine, travel and live in a world thoughtfully curated by RH, will create an emotional connection with our customers unlike any other brand in the world.
The liftoff of RH1 & RH2, our customized Gulfstream G650 and G550 that will be available for charter later this year.
The christening of RH3, our luxury yacht that will be available for charter in the Mediterranean and Caribbean. RH3 will be featured in the Robb Report, C Magazine and Boat International over the coming months.
The continued rollout of RH In-Your-Home, a unique and memorable delivery experience with Brand Ambassadors guiding every detail of the delivery and extending the selling experience into the home.
The expansion of the RH brand globally, beginning with the opening of RH England, The Gallery at the Historic Aynhoe Park, a magical 17th-century, 73-acre estate in the English countryside that will introduce RH to the UK in a dramatic and unforgettable fashion. Additionally, we have secured locations for Galleries in London, Paris, Munich and Dusseldorf, and are in lease or purchase negotiations for Galleries in Milan, Madrid, Brussels and France.
The opening of RH Palo Alto, The Gallery at Stanford Shopping Center, which will represent the next evolution of our highly productive prototype Galleries.
BUSINESS OUTLOOK
While we enter 2022 with confidence that our efforts will continue to elevate and expand the RH brand for years to come, we also recognize there are several external factors, such as record inflation, rising interest rates and global unrest, that create uncertainty.
Although we lack the ability to predict economic outcomes on a macro scale, we do have the business model, strategy and balance sheet to take advantage of opportunities that may present themselves whether it be during times of economic expansion, contraction or dislocation.
While first quarter sales and margin trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia’s invasion of Ukraine in late February and the market volatility that followed.
FOURTH QUARTER 2021 FINANCIAL RESULTS AND SHAREHOLDER LETTER
We believe it is prudent to remain conservative until demand trends return to normal and are providing the following outlook for the first quarter and fiscal 2022:
First quarter net revenue growth in the range of 7% to 8%, versus 78% last year, with adjusted operating margin in the range of 23.0% to 23.5%, versus 22.6% a year ago.
Fiscal 2022 net revenue growth in the range of 5% to 7%, versus 32% last year, with adjusted operating margin in the range of 25.0% to 26.0%, versus 25.6% in 2021.
Our outlook is inclusive of opening RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid-to- late summer and RH Palo Alto in the fourth quarter.
RH BUSINESS VISION & ECOSYSTEM − THE LONG VIEW
We believe, “There are those with taste and no scale, and those with scale and no taste,” and the idea of scaling taste is large and far reaching.
Our goal to position RH as the arbiter of taste for the home, has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world.
Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.
Our efforts to elevate and expand our collection will continue with the introductions of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade.
Our plan to open immersive Design Galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America, and $20 to $25 billion globally.
Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker.
Our products are elevated and rendered more valuable by our architecturally inspiring Galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.
Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.
Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 & RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.
This leads to our long-term strategy of building the world’s first consumer-facing architecture, interior design and landscape architecture services platform inside our Galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries.
Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences − fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers.
The entirety of our strategy will come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.
Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A one percent share of the global market represents a $70 to $100 billion opportunity.
Our ecosystem of Products, Places, Services and Spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.
Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable.
FOURTH QUARTER 2021 FINANCIAL RESULTS AND SHAREHOLDER LETTER
CLIMBING THE LUXURY MOUNTAIN AND BUILDING A BRAND WITH NO PEER
Every luxury brand, from Chanel to Cartier, Aston Martin to Aman, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We understand that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart, and as we continue our ascent the air gets thin and the odds become slim.
Twenty years ago we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required and the scar tissue developed by getting knocked down ten times and getting up eleven leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can’t be learned in a classroom, or by managing a business, they must be earned by building one. Or, by reaching the top of the mountain.
Fiscal 2021 Highlights
-- FY GAAP net revenues increased 32% to $3.759b vs. $2.849b ly
-- FY adjusted net revenues increased 32% to $3.758b vs. $2.850b ly
-- FY GAAP operating margin increased 830 basis points to 24.7% vs. 16.4% ly
-- FY adjusted operating margin increased 380 basis points to 25.6% vs. 21.8% ly
-- FY GAAP net income increased 153% to $689m vs. $272m ly
-- FY adjusted net income increased 66% to $767m vs. $463m ly
-- FY GAAP diluted eps increased 122% to $22.13 vs. $9.96 ly
-- FY adjusted diluted EPS increased 46% to $26.12 vs. $17.83 ly
Fourth Quarter 2021 Highlights
-- Q4 GAAP net revenues increased 11% to $903m vs. $812m ly
-- Q4 adjusted net revenues increased 11% to $902m vs. $813m ly
-- Q4 GAAP operating margin increased 150 basis points to 24.1% vs. 22.6% ly
-- Q4 adjusted operating margin increased 150 basis points to 25.2% vs. 23.7% ly
-- Q4 GAAP net income increased 13% to $147m vs. $130m ly
-- Q4 adjusted net income increased 14% to $164m vs. $143m ly
-- Q4 GAAP diluted eps increased 14% to $4.91 vs. $4.31 ly
-- Q4 adjusted diluted EPS increased 12% to $5.66 vs. $5.07 ly