RSTO Restoration Hardware (MM)

CORTE MADERA, Calif., Dec. 10 /PRNewswire-FirstCall/ -- Restoration Hardware, Inc. (NASDAQ:RSTO) today announced financial results for the third quarter ended November 3, 2007. Net revenue increased 10.6 percent to $173.7 million compared to $157.1 million in the third quarter of 2006. Loss from operations for the third quarter of 2007 was $12.9 million, inclusive of $1.4 million related to costs associated with the Merger Agreement between the Company and certain affiliates of Catterton Partners that was announced on November 8, 2007 and $0.4 million related to headcount reductions at the Company's headquarters. Loss from operations in the third quarter of 2006 was $3.7 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) were -$7.0 million versus $1.8 million in the third quarter of 2006. Net loss per fully diluted share was $0.39, including $0.04 per share related to costs associated with the Merger Agreement and $0.01 per share related to headcount reductions. Net loss per fully diluted share was $0.15 in the third quarter of 2006. Gary Friedman, President and Chief Executive Officer, stated, "Weakening consumer spending and traffic levels continued to affect our business in the third quarter, particularly higher ticket durable categories. Revenue did not achieve our expectations, driving substantially all of our larger than anticipated operating loss in the quarter. While we are encouraged by some of the early holiday trends in our business, we remain cautious due to the macro economic environment, which has proven highly challenging for the home furnishings sector this year." As previously announced in connection with the signing of the Merger Agreement with an affiliate of Catterton Partners, an independent committee of the Board of Directors engaged in a "go shop" process of soliciting proposals from third parties for a period of 35 days through December 13th, 2007 (negotiations with "excluded parties" under the Merger Agreement may continue beyond December 13). The Company will not hold a quarterly conference call to discuss third quarter financial results due to the pending Merger Agreement and activities related to the go shop process. As developments warrant, the Company will provide updates relating to the Merger Agreement and the go shop process through press releases and SEC filings. Revenues Third quarter net revenues increased $16.6 million compared to the year ago period, primarily driven by growth in the Company's Direct-to-Customer segment. Direct-to-Customer revenues were $97.2 million and accounted for 56% of total revenues, up from 36% of total revenues in the third quarter of last year. The increase reflects growth in catalog and page circulation, and a continuing shift in revenues from the Stores segment to the Direct-to-Customer segment resulting from management's multi-channel merchandising and marketing strategies and operational changes implemented in the second quarter of 2007. Revenues in the Stores segment were $76.5 million in the third quarter of 2007. Operating Income Third quarter loss from operations increased $9.2 million versus the year ago period, reflecting lower than anticipated revenues and $1.8 million in costs associated with the merger process and costs associated with headcount reductions announced at the beginning of the quarter. Gross margin declined 0.9% to 33.4%, reflecting lower product margins due to a higher mix of promotional selling, as well as higher supply chain costs compared to the third quarter of last year. Selling, general and administrative expenses (SG&A) as a percentage of sales rose 4.1% to 40.8%. The increase reflects higher volume in the Direct-to-Customer segment, which carries a higher rate of SG&A than the Stores segment, as well as the impact of planned growth and infrastructure investments and the $1.8 million of costs described earlier. Financial Position As of November 3, 2007, merchandise inventories were $231 million, which represents an increase of 6% versus a year ago and is in line with expectations. The outstanding balance in the Company's line of credit was $131 million compared to $111 million at the same time last year with the increase in borrowings driven by higher levels of inventory and capital spending. Availability under the Company's line of credit at the close of the quarter was $49 million. The Company believes it has sufficient liquidity to fund its operations through fiscal 2008. Business Outlook Due to uncertainty regarding the Company's holiday outlook as well as the pending Merger Agreement and go shop process, prior guidance is withdrawn and the Company will not be providing guidance regarding fourth quarter and full year 2007 financial results. About Restoration Hardware 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 http://www.restorationhardware.com/. As of December 10, 2007, the Company operated 102 retail stores and nine outlet stores in 30 states, the District of Columbia and Canada. Non-GAAP Financial Measures This press release references the following financial measures that are non-GAAP: (i) EBITDA of -$7.0 million for the third quarter of fiscal 2007, (ii) EBITDA of $1.8 million for the third quarter of fiscal 2006, (iii) the charge of $0.01 per share related to headcount reductions in the third quarter of fiscal year 2007, and (iv) the charge of $0.04 per share related to costs associated with the Company's Merger Agreement. The Company believes that the use of these non-GAAP financial measures 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. With respect to the charges in the third quarter of fiscal year 2007 of $0.01 per share related to headcount reductions and $0.04 per share related to costs associated with the Company's Merger Agreement, the most closely analogous GAAP financial measure is the Company's net loss per share for the third quarter of fiscal year 2007 of $0.39 per share. A table setting forth a reconciliation of EBITDA to net (loss) income is set forth below (in millions). 13 weeks ended 11/3/07 10/28/06 Net (loss) income: GAAP (15.2) (5.7) Add: Interest expense 2.4 2.1 Add: Income tax expense (benefit) (0.1) (0.1) Add: Depreciation and amortization expense 5.9 5.5 Earnings before interest, taxes, depreciation and amortization (EBITDA): Non-GAAP (7.0) 1.8 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 This release contains forward-looking statements that involve known and unknown risks. Such forward-looking statements include, without limitation, statements concerning or relating to the early holiday trends in the Company's gift business, statements relating to the Company's progress toward building a best-in-class supply chain and infrastructure and the benefits thereof, and other statements containing words such as "expects" and words of similar import or statements of management's opinion. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, including financial results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, customer reactions to the Company's current and anticipated merchandising and marketing programs and strategies, timely introduction and customer acceptance of the Company's merchandise, positive customer reaction to the Company's catalog and Internet offerings, revised product mix, prototype stores and core businesses, timely and effective sourcing of the Company's merchandise from its foreign and domestic vendors and delivery of merchandise through its supply chain to its stores and customers, effective inventory and catalog management, actual achievement of cost savings and improvements to operating efficiencies, effective sales performance, in particular during the holiday selling season, the actual impact of key personnel of the Company on the development and execution of the Company's strategies, changes in investor perceptions of the Company, limitations resulting from restrictive covenants in the Company's credit facility, changes in economic or business conditions in general, changes in political conditions in the United States and abroad in general, changes in product supply, changes in the competitive environment in which the Company operates, changes in the Company's management information needs, changes in customer needs and expectations, governmental actions and other factors detailed in the Company's filings with the Securities and Exchange Commission, including its recent filings on Forms 10-K, 10-Q and 8-K, including, but not limited to, those described in the Company's Form 10-Q for the quarter ended August 4, 2007, in Part I, Item 2 thereof ("Management's Discussion and Analysis of Financial Condition and Results of Operations"), in Part I, Item 4 thereof ("Controls and Procedures"), and in Part II, Item 1A thereof ("Risk Factors"). Unless required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RESTORATION HARDWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) 13 weeks ended 13 weeks ended % of % of 11/3/07 Net Revenue 10/28/06 Net Revenue Stores net revenue $76,465 44.0% $100,059 63.7% Direct-to-customer net revenue 97,216 56.0% 57,014 36.3% Net revenues $173,681 100.0% $157,073 100.0% Cost of revenue and occupancy 115,615 66.6% 103,232 65.7% Gross profit 58,066 33.4% 53,841 34.3% Selling, general and administrative expense 70,950 40.8% 57,545 36.7% Loss from operations (12,884) (7.4%) (3,704) (2.4%) Interest expense, net (2,409) (1.4%) (2,119) (1.3%) Loss before income taxes (15,293) (8.8%) (5,823) (3.7%) Income tax benefit 105 0.1% 115 0.1% Net loss $(15,188) (8.7%) $(5,708) (3.6%) Loss per share, basic and diluted $(0.39) $(0.15) Weighted average shares outstanding, basic and diluted 38,826 38,311 RESTORATION HARDWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) 39 weeks ended 39 weeks ended % of % of 11/3/07 Net Revenue 10/28/06 Net Revenue Stores net revenue $250,553 50.1% $302,547 64.4% Direct-to-customer net revenue 249,060 49.9% 167,249 35.6% Net revenues $499,613 100.0% $469,796 100.0% Cost of revenue and occupancy 336,055 67.3% 311,825 66.4% Gross profit 163,558 32.7% 157,971 33.6% Selling, general and administrative expense 193,856 38.8% 163,036 34.7% Loss from operations (30,298) (6.1%) (5,065) (1.1%) Interest expense, net (6,644) (1.3%) (5,282) (1.1%) Loss before income taxes (36,942) (7.4%) (10,347) (2.2%) Income tax benefit (expense) 73 0.0% (38) (0.0%) Net loss $(36,869) (7.4%) $(10,385) (2.2%) Loss per share, basic and diluted $(0.95) $(0.27) Weighted average shares outstanding, basic and diluted 38,794 37,989 RESTORATION HARDWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands) 11/3/07 2/3/07 10/28/06 ASSETS Current assets: Cash and cash equivalents $1,746 $1,461 $1,639 Accounts receivable 8,535 7,164 12,068 Merchandise inventories 230,913 192,805 217,668 Prepaid expense and other current assets 19,636 18,984 20,327 Total current assets 260,830 220,414 251,702 Property and equipment, net 89,283 87,961 89,187 Goodwill 4,560 4,560 4,560 Deferred tax assets, net 2,025 1,911 376 Other assets 1,541 1,521 1,445 Total assets $358,239 $316,367 $347,270 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $83,287 $79,340 $81,935 Deferred revenue and customer deposits 13,063 9,556 12,910 Deferred tax liabilities, net 1,452 1,357 - Other current liabilities 21,541 20,335 18,372 Total current liabilities 119,343 110,588 113,217 Long-term debt, net of debt issuance 131,317 68,384 110,941 Deferred lease incentives 20,007 23,515 24,717 Deferred rent 18,824 19,998 19,796 Other long-term obligations 10,460 1,774 1,002 Total liabilities 299,951 224,259 269,673 Stockholders equity: Common stock 4 4 4 Additional paid-in capital 180,717 178,176 176,897 Accumulated other comprehensive income 2,161 745 1,150 Accumulated deficit (124,594) (86,817) (100,454) Total stockholders' equity 58,288 92,108 77,597 Total liabilities and stockholders' equity $358,239 $316,367 $347,270 Contact: Chris Newman SVP CFO 415-945-4530 DATASOURCE: Restoration Hardware, Inc. CONTACT: Chris Newman, SVP CFO of Restoration Hardware, Inc., +1-415-945-4530 Web site: http://www.restorationhardware.com/

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