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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO_____________.
COMMISSION FILE NUMBER 333-51027
RESTORATION HARDWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0140361
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER ID NO.)
OF INCORPORATION OR ORGANIZATION)
15 KOCH ROAD, SUITE J, CORTE MADERA, CA 94925
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 924-1005
Indicate by check [x] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days [X] Yes [ ] No
As of August 26, 2000, 17,047,944 shares of the Registrant's Common
Stock were outstanding.
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FORM 10-Q
FOR THE QUARTER ENDED JULY 29, 2000
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of July 29, 2000,
January 29, 2000 and July 31, 1999 3
Statements of Operations for the three months ended
July 29, 2000 and July 31, 1999 4
Statements of Cash Flows for the three months ended
July 29, 2000 and July 31, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 29, January 29, July 31,
2000 2000 1999
--------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................. $ 2,408 $ 4,627 $ 1,839
Accounts receivable ....................................... 5,300 6,551 7,184
Merchandise inventories 88,102 85,902 64,793
Prepaid expense ........................................... 14,310 7,608 10,947
-----------------------------------
Total current assets ................................. 110,120 104,688 84,763
Property and equipment, net ............................... 114,216 108,706 86,150
Goodwill .................................................. 4,894 4,910 4,636
Other long term assets .................................... 4,022 4,057 3,003
-----------------------------------
Total assets ......................................... $233,252 $222,361 $178,552
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................... $ 51,063 $ 45,375 $ 37,611
Current portion of deferred lease incentives .............. 4,030 3,777 2,782
Revolving line of credit and short term debt .............. 3 2 16,729
Other current liabilities ................................. 5,371 6,515 6,179
-----------------------------------
Total current liabilities ............................ 60,467 55,669 63,301
Long-term debt ............................................ 300 344 400
Long-term line of credit .................................. 49,062 37,447 --
Long-term portion of deferred lease incentives ............ 38,418 37,950 28,920
Deferred rent ............................................. 9,485 8,069 6,067
-----------------------------------
Total liabilities .................................... 157,732 139,479 98,688
Stockholders' equity:
Common stock, $.0001 par value; 40,000,000 shares
authorized; 17,027,332 16,901,338 and 16,794,050
issued and outstanding, respectively ................. 94,697 94,318 93,516
Accumulated other comprehensive income .................... (3) 26 5
Accumulated deficit ....................................... (19,174) (11,462) (13,657)
-----------------------------------
Total stockholders' equity ........................... 75,520 82,882 79,864
Total liabilities and stockholders' equity ........... $233,252 $222,361 $178,552
-----------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
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<CAPTION>
Three Months Ended Six Months Ended
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July 29, July 31, July 29, July 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net Sales .................................. $71,185 $53,926 $139,758 $113,975
Cost of sales and occupancy ................ 52,180 39,717 103,281 85,717
---------------------------- ----------------------------
Gross profit ........................ 19,005 14,209 36,477 28,258
Selling, general and administrative expenses 23,447 17,783 46,986 36,058
Pre-opening store expenses ................. 216 582 532 804
---------------------------- ----------------------------
Loss from operations ....................... (4,658) (4,156) (11,041) (8,604)
Interest expense, net ...................... (1,135) (219) (2,030) (274)
---------------------------- ----------------------------
Loss before income taxes ............ (5,793) (4,375) (13,071) (8,878)
Income tax benefit ......................... 2,376 1,794 5,358 3,640
---------------------------- ----------------------------
Loss available to common stockholders ...... $(3,417) (2,581) (7,713) (5,238)
---------------------------- ----------------------------
Loss per share:
Basic ............................... ($0.20) ($0.15) ($0.45) ($0.32)
Diluted ............................. ($0.20) ($0.15) ($0.45) ($0.32)
Weighted average shares outstanding:
Basic ............................... 17,027 16,737 16,991 16,532
Diluted ............................. 17,027 16,737 16,991 16,532
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
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<CAPTION>
Six Months Ended
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July 29, July 31,
2000 1999
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Cash flows from operating activities:
Net loss ............................................................... $(7,713) $ (5,238)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................................... 7,179 4,591
Changes in assets and liabilities:
Accounts receivable ............................................. 1,252 (2,008)
Merchandise inventories ......................................... (2,201) 605
Prepaid expenses and other assets ............................... (889) (1,154)
Accounts payable and accrued expenses ........................... 5,678 (2,088)
Taxes payable ................................................... (6,556) (7,843)
Other current liabilities ....................................... (374) 1,505
Deferred rent ................................................... 1,416 1,786
Deferred lease incentives and other
long-term liabilities ...................................... 721 3,778
----------------------------
Net cash used in operating activities ........................... (1,487) (6,066)
Cash flows from investing activities:
Capital expenditures ................................................... (12,576) (17,967)
Purchase of subsidiary ................................................. (91) (218)
----------------------------
Net cash used in investing activities ........................... (12,667) (18,185)
Cash flows from financing activities:
Borrowings under revolving line of
credit - net ....................................................... 11,615 16,725
Principal payments - capital lease obligations ......................... (50) (169)
Borrowings (repayments) on long term debt, net ......................... 15 (14)
Issuance of common stock ............................................... 379 1,347
----------------------------
Net cash provided by financing activities ....................... 11,959 17,889
Effect of foreign currency exchange rate changes on cash balances (24) --
Net decrease in cash and cash equivalents .................................... (2,219) (6,362)
Cash and cash equivalents:
Beginning of period .................................................... 4,627 8,201
----------------------------
End of period .......................................................... $ 2,408 $ 1,839
----------------------------
Additional cash flow information:
Cash paid for interest (net of amount
capitalized) .................................................... $ 1,113 $ 335
----------------------------
Cash paid for taxes ................................................ $ 162 $ 3,985
----------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 29, 2000 AND JULY 31, 1999
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have been
prepared from our records without audit and, in management's opinion, include
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position at July 29, 2000 and July 31, 1999;
results of operations for the three and six months ended July 29, 2000 and July
31, 1999; and changes in cash flows for the six months then ended. The balance
sheet at January 29, 2000, as presented, has been derived from our audited
financial statements for the year then ended. Certain reclassifications have
been made to the 1999 presentation to conform to the 2000 presentation.
Our accounting policies are described in Note 1 to the audited consolidated
financial statements for the year ended January 29, 2000. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the interim condensed consolidated
financial statements. The interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including notes thereto, for the year ended January 29, 2000.
The results of operations for the three and six months presented herein are not
necessarily indicative of the results to be expected for the full year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as delayed by FAS No. 137, FAS
No. 133 will be effective for fiscal years beginning after June 15, 2000. FAS
No. 133 requires all derivatives to be recognized in the balance sheet as
either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be reassessed and documented pursuant to the
provisions of FAS No. 133. We will adopt FAS No. 133 for the 2001 fiscal year,
but do not expect such adoption to materially affect our financial statement
presentation as such activities are minimal.
2. REVOLVING LINE OF CREDIT
Pursuant to our senior secured credit facility, as amended and restated in
February 2000 and amended in March 2000, we have a line of credit of up to a
maximum of $100,000,000 with amounts available for letters of credit under the
line up to a maximum of $5,000,000 and an overall credit facility expiring in
June 2003. As of July 29, 2000, we were in compliance with the covenants under
the credit facility and we had outstanding $49.1 million in loans and $1.4
million in letters of credit under this facility. The availability under the
credit facility is limited by reference to a borrowing base formula calculated
based upon eligible inventory and eligible accounts receivable (subject to the
overall maximum cap on total borrowings). As a result, fluctuations in our
inventory and accounts receivable can affect our ability to make additional
borrowings under the credit facility. When the available borrowings fell below
$7,500,000, we became obligated by the agreed upon terms of the credit facility
to seek additional sources of credit or financing. In order to comply with this
obligation and to address our projected financing requirements to fund capital
expenditures related to opening new stores and inventory purchases over the
next twelve months, we are seeking additional sources of credit or financing.
Such additional sources of credit or financing may not be available or, if
available, may be on terms that are not as favorable as the current credit
facility.
3. EARNINGS PER SHARE
Basic earnings per share is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur from common shares to be issued through stock options, warrants and
other convertible securities. The potential dilutive effects of 498,938 and
721,073 stock options are excluded from the diluted earnings per share for the
quarter to date periods ending July 29, 2000 and July 31, 1999, respectively,
because their inclusion in net loss periods would be anti-dilutive to earnings
per share.
4. SEGMENT REPORTING
We classify our business interests into three identifiable segments: retail,
furniture and RH Direct. The retail segment includes revenue and expense
associated with our retail locations (98 and 74 at July 29, 2000 and July 31,
1999, respectively). The furniture segment includes all revenue and expense
associated with The Michaels Furniture Company ("Michaels"). RH Direct includes
all revenue and expense associated with the catalog, e-commerce and other
operations.
We evaluate performance and allocate resources based on income from operations
which excludes unallocated corporate general and administrative costs. Certain
segment information, including segment assets, asset expenditures and related
depreciation expense, is not presented as all assets of the Company are
commingled and are not available by segment.
Financial information for our business segments is as follows:
<TABLE>
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Three Months Ended Six Months Ended
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July 29, July 31, July 31, July 29,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales
Retail ............................. $67,605 $ 50,132 $131,838 $106,198
Furniture .......................... 4,384 6,730 10,908 13,408
RH Direct .......................... 3,390 1,806 7,019 3,727
Intersegment sales ................. (4,194) (4,742) (10,007) (9,358)
---------------------------- ----------------------------
Consolidated net sales .................... 71,185 53,926 139,758 113,975
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
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Income/(Loss) from operations
Retail ............................. 6,601 3,137 10,363 4,533
Furniture .......................... 174 727 670 1,235
Unallocated ........................ (12,055) (7,301) (21,824) (12,968)
Intersegment income/(loss) from
operations...................... 622 (711) (250) (1,404)
---------------------------- ----------------------------
Consolidated loss from operations ......... $ (4,658) $ (4,148) $(11,041) ($8,604)
---------------------------- ----------------------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THE THREE MONTHS (SECOND QUARTER) AND SIX MONTHS (YEAR-TO-DATE) ENDED JULY 29,
2000 AS COMPARED TO THE THREE MONTHS (SECOND QUARTER) AND SIX MONTHS
(YEAR-TO-DATE) ENDED JULY 31, 1999
NET SALES. Net sales increased $17.3 million, or 32.1%, to $71.2 million in the
second quarter of 2000 from $53.9 million in the second quarter of the prior
year. At July 29, 2000, we operated 98 stores compared to 74 stores at July 31,
1999. The additional 24 stores opened in 2000 contributed an additional $19.3
million in sales. Comparable store sales were 0.8% in the second quarter of
2000. Year-to-date sales increased $25.8 million, or 22.6%, to $139.8 million
from $114.0 million in the prior year. Non-comparable stores contributed an
additional $33.1 million year-to-date to net sales, but was offset by the
comparable store sales decrease of 7.3% over the prior year.
GROSS PROFIT. Gross profit increased $4.8 million, or 33.8%, to $19.0 million in
the second quarter of 2000 from $14.2 million in the second quarter of the prior
year. As a percentage of net sales, second quarter gross profit was 26.7% in
2000 compared to 26.3% in the prior year. Year-to-date gross profit increased
$8.2 million, or 29.1%, to $36.4 million from $28.3 million in the prior year.
As a percentage of net sales, year-to-date gross profit was 26.1% compared to
24.7% in the prior year. Improvements in the merchandise margins at the retail
division combined with the decrease in merchandise markdowns over the prior year
contributed to the improvement, but was offset slightly by increased occupancy
costs.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
$5.7 million, or 31.8%, to $23.4 million in the second quarter of 2000 from
$17.8 million in the second quarter of the prior year. As a percentage of net
sales, SG&A expenses remained flat at 32.9% year over year. Year-to-date SG&A
expense increased $10.9 million, or 30.3%, from $36.1 million in the prior year.
As a percentage of net sales, SG&A expenses increased to 33.6% compared to 31.6%
in the prior year. The increase in SG&A expense for the second quarter over the
prior year is due to our continuing efforts to improve the home office and
distribution center infrastructures, as well as the increase in selling expense
at the stores related to the 24 new stores opened.
PREOPENING STORE EXPENSE. Pre-opening store expense decreased $366,000, or
62.8%, to $216,000 in the second quarter of 2000 from $582,000 in the second
quarter of the prior year. As a percentage of net sales, pre-opening expense
decreased to 0.3% in the second quarter of 2000 compared to 1.1% in the second
quarter of the prior year. During the quarter we opened 2 stores compared to 7
stores in the second quarter of 1999. Year-to-date pre-opening expense decreased
$272,000, or 33.8%, to $532,000 from $804,000 in the prior year. Again, this
reduction in expense, both in dollars and as a percentage of net sales, is due
to our reduction in new store openings year over year. Pre-opening store
expenses include all costs associated with the start-up of the store prior to
opening including recruiting, payroll, travel, supplies, occupancy related and
advertising, and are expensed as incurred. As a percentage of sales, we
anticipate this expense to decrease over time.
NET INTEREST EXPENSE. Interest expense, net of interest income, which includes
capital lease interest and interest expense on borrowings under our line of
credit facility, increased $916,000 in the second quarter of 2000 to $1.1
million from $0.2 million in the second quarter of the prior year. Year-to-date
interest expense increased $1.7 million to $2.0 million from $0.3 million in the
prior year. These increases over the prior year are due to higher borrowings
under the line of credit in 2000 compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our main sources of liquidity and capital resources have been cash flows from
operations, borrowings under our credit facilities and proceeds from equity
financings. Our primary capital requirements have been for new store
development, working capital and general corporate needs.
Net cash used in operating activities year to date for 2000 was $1.5 million, a
decrease of $4.6 million over net cash used of $6.1 million in the prior year.
This improvement resulted primarily from the timing of trade and other payables,
offset by a higher net loss and increases in merchandise inventories.
Net cash used in investing activities year to date for 2000 was $12.7 million, a
decrease of $5.5 million over net cash used in investing activities of $18.2
million in the prior year. Historically, cash used in investing activities has
been related to capital expenditures for new store expansion. Such expenditures
totaled $12.6 million year to date for 2000 compared to $18.0 million in the
prior year.
Net cash provided by financing activities year to date for 2000 was $12.0
million, a decrease of $5.9 million over net cash provided by investing
activities of $17.9 million in the prior year. Net cash provided by borrowings
under our line of credit totaled $11.6 million year to date, compared to $16.7
million for the same period in the prior year.
Pursuant to our senior secured credit facility, as amended and restated in
February 2000 and amended in March 2000, we have a line of credit of up to a
maximum of $100,000,000 with amounts available for credit letters of credit
under the line up to a maximum of $5,000,000 and an overall credit facility
expiring in June 2003. As of July 29, 2000, we were in compliance with the
covenants under the credit facility and we had outstanding $49.1 million in
loans and $1.4 million in letters of credit under this facility. The
availability under the credit facility is limited by reference to a borrowing
base formula calculated based upon
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eligible inventory and eligible accounts receivable (subject to the overall
maximum cap on total borrowings). As a result, fluctuations in our inventory and
accounts receivable can affect our ability to make additional borrowings under
the credit facility. When the available borrowings fell below $7,500,000, we
became obligated by the terms of the credit facility to seek additional sources
of credit or financing. In order to comply with this obligation and to address
our projected financing requirements to fund capital expenditures related to
opening new stores and inventory purchases over the next twelve months, we are
seeking additional sources of credit or financing. Such additional sources of
credit or financing may not be available or, if available, may be on terms that
are not as favorable as the current credit facility.
In connection with the acquisition of our furniture subsidiary, we are required
to pay the former owner contingent cash consideration equal to 25% of Michaels'
EBITDA for fiscal year ending February 3, 2001. In addition, we are required to
transfer shares of Michaels to the former owner of Michaels equal to 3.4% of
such shares of Michaels if Michaels' EBITDA for the fiscal year ending 2001
equals or exceeds $4.0 million. An EBITDA based payment of $592,000 was paid in
March 2000 to the President of Michaels and no shares of Michaels were
transferred to the previous owner.
FACTORS THAT MAY AFFECT FUTURE RESULTS
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our business is highly seasonal, reflecting the general pattern associated with
the retail industry of peak sales and earnings during the holiday season. Due to
the importance of the holiday selling season, the fourth quarter of each year
has historically contributed, and we expect it will continue to contribute, a
disproportionate percentage of our net sales and most of our anticipated net
income for the entire year. In anticipation of increased sales activity during
the fourth quarter we incur significant additional expenses. If, for any reason,
our sales were to fall below our expectations in November and December, our
business, financial condition and annual operating results would be materially
adversely affected. In addition, we make decisions regarding merchandise well in
advance of the season in which it will be sold, particularly for the holiday
selling season. Significant deviations from projected demand for products could
have a material adverse effect on our financial condition and results of
operations.
Our quarterly results of operations may also fluctuate based upon a variety of
other factors, including, among other things, the number and timing of store
openings and related pre-opening store expenses, the amount of net sales
contributed by new and existing stores, the mix of products sold, the timing and
level of markdowns, promotional events, store closings, refurbishments or
relocations, adverse weather conditions, shifts in the timing of holidays,
timing of catalog releases or catalog sales, competitive factors and general
economic conditions. We have experienced, and expect to continue to experience,
substantial seasonal fluctuations in our sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of our retail
sales and nearly all of our profits have been realized during the fourth
quarter. We expect this pattern to continue during the current year and
anticipate that in subsequent years the fourth quarter will continue to
contribute disproportionately to our operating results, particularly during
November and December.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
Our net sales and net income have grown significantly during the past several
years, primarily as a result of the opening of new stores. Our future operating
results will depend largely on our ability to operate stores and manage a larger
business successfully. We opened 28 new stores in 1999 and we intend to open 13
new stores in 2000. Our ability to open stores on a timely basis and the
performance of such stores will depend upon many factors, including, among
others, our ability to identify and enter new markets, locate suitable store
sites, negotiate acceptable lease terms, acquire merchandise, hire and train
store managers and sales associates and obtain adequate capital resources on
acceptable terms. Any restrictions on our ability to expand would have a
material adverse effect on our business, results of operations and financial
condition. As a result, there can be no assurance that we will be able to
achieve our targets for opening new stores. Moreover, there can be no assurance
that our new stores will be successful or achieve operating results comparable
to our existing stores.
We plan to continue to enter new markets in various regions of the United States
in 2000. Operation of a greater number of new stores and expansion into new
markets may present competitive, distribution and merchandising challenges that
are different from those currently encountered by us in our existing stores and
markets. In addition, there can be no assurance that our expansion within our
existing markets will not adversely affect the individual financial performance
of our existing stores or our overall results of operations. Specifically, we
cannot determine the impact on current profitability as we expand our
distribution of catalogs and increase our mail order and e-commerce businesses.
We will need to continually evaluate the adequacy of our store management and
management information and distribution systems to manage our planned expansion.
There can be no assurance that we will anticipate all of the changing demands
that our expanding operations will impose on such systems, and the failure to
adapt our systems and procedures to such changing demands could have a material
adverse effect on our business, results of operations and financial condition.
There can be no assurance that we will successfully achieve our expansion
targets or, if achieved, that planned expansion will not have an adverse impact
on results of operations.
We anticipate that we will need to expand our current distribution network to
accommodate our planned expansion in the future. Currently we are implementing a
change in distribution strategy from maintaining furniture and lighting
inventories at third party warehouse locations near stores to more centralized
locations whereby furniture and lighting would be stored at Company operated
regional distribution centers. We are also transitioning our vendor direct
shipments to the regional distribution centers. We implemented a new Warehouse
Management System at our West coast facility last year and our East coast
facility during this spring to aid us in our distribution administration. There
can be no assurance that such changes will not cause disruptions that could
materially adversely affect our business, results of operations and financial
condition. We currently continue to rely on third party warehouses to handle our
products during this transition and the expense related to this fluctuates with
inventory levels and there can be no assurance that we can reduce this expense
as inventory levels increase. Further, we rely upon third party carriers and
warehouses for our product shipments, including shipments to and from all of our
stores, and accordingly are subject to the risks, including employee strikes and
inclement weather, associated with such carriers' ability to provide warehousing
and delivery services to meet our needs. In addition, distribution, warehousing
and freight costs also fluctuate as a result of sales activity and there is no
assurance that we can generate sufficient merchandise margins to offset these
additional costs. We are also dependent upon
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temporary employees to adequately staff our distribution facility, particularly
during busy periods such as the Christmas season and while stores are opening.
There can be no assurance that we will continue to receive adequate assistance
from our temporary employees, or that there will continue to be sufficient
sources of temporary employees.
FINANCING GROWTH AND OPERATIONS
Historically, cash flow from operations has been insufficient to finance new
store openings and we have relied upon our line of credit and the proceeds from
our initial public offering in June 1998 to finance working capital
requirements. There can be no assurance that our operations will generate
sufficient cash flow or that adequate financing will be available to support our
continued expansion program.
Our credit facility includes a number of restrictive, affirmative and financial
covenants, including restrictions on annual capital expenditures, minimum
earnings before income tax, depreciation and amortization ratios. If we are not
successful in meeting our covenant obligations under the credit facility, it
could result in a default under our loan agreement and any such default, if not
resolved, could have a material adverse effect on our business, results of
operations and financial condition.
Our available borrowings under the line of credit facility are limited by
reference to a borrowing base formula calculated based upon eligible inventory
and eligible accounts receivable. As a result, fluctuations in monthly
performance can affect our ability to make additional borrowings under the
credit facility. When the available borrowings fell below $7,500,000 we became
obligated by the agreed upon terms of the credit facility to seek additional
sources of credit or financing. In order to comply with this obligation and to
address our capital expenditures related to opening new stores and inventory
purchases over the next twelve months, we are seeking additional sources of
credit or financing. Although we have received indications of interest, we have
no assurance that such additional sources of credit or financing will be
available, which could have a material adverse effect on our business, results
of operations and financial condition. If available, such additional sources of
credit or financing may be on terms that are not as favorable as the current
credit facility, which could have a material adverse effect on our business,
results of operations and financial condition.
SMALL STORE BASE
We operated 98 stores at July 29, 2000. The results achieved to date by our
relatively small store base may not be indicative of the results that may be
achieved from a larger number of stores. In addition, should any new store be
unprofitable or should any existing store experience a decline in profitability,
the effect on our results of operations could be more significant than would be
the case if we had a larger store base.
FLUCTUATIONS IN COMPARABLE STORE SALES
A variety of factors affect our comparable store sales including, among others,
the general retail sales environment, our ability to efficiently source and
distribute products, changes in our merchandise mix, promotional events, the
impact of competition and our ability to execute our business strategy
efficiently. Our comparable store sales results have fluctuated significantly in
the past and we believe that such fluctuations may continue. Past comparable
store sales results are no indication of future results.
DEPENDENCE ON KEY PERSONNEL
Our performance depends largely on the efforts and abilities of our executive
and senior management team, particularly Stephen Gordon, our Chief Executive
Officer and founder. The loss of Mr. Gordon's services or the services of other
members of the management team could have a material adverse effect on our
business, results of operations and financial condition. We do not have
employment agreements with any of the members of our executive management team.
In addition, our performance will depend upon our ability to attract and retain
qualified management, merchandising and sales personnel. There can be no
assurance that Mr. Gordon and the existing management team will be able to
manage the Company or our growth or that we will be able to attract and retain
additional qualified personnel as needed in the future.
DEPENDENCE ON KEY VENDORS
Our performance depends on our ability to purchase our merchandise in sufficient
quantities at competitive prices. Although we have many sources of merchandise,
two of our vendors (Mitchell Gold, a manufacturer of upholstered furniture and
Robert Abbey Inc., a manufacturer of table and floor lamps) together accounted
for approximately 15% of our aggregate merchandise purchases in fiscal year
1999. In addition, our smaller vendors generally have limited resources,
production capacities and operating histories, and some of our vendors have
limited the distribution of their merchandise in the past. We have no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to new products and any vendor or distributor could discontinue
selling to us at any time. There can be no assurance that we will be able to
acquire desired merchandise in sufficient quantities on terms acceptable to us
in the future, or be able to develop relationships with new vendors or that any
inability to acquire suitable merchandise or the loss of one or more key vendors
will not have a material adverse effect on our business, results of operations
and financial condition. In addition, a single vendor supports our merchandise
management information systems and we have generally employed a single general
contractor to oversee the construction of our new stores. A failure by such
vendor to support these systems or by such contractor to continue such services
adequately could have a material adverse effect on the Company.
DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS
Historically we have purchased approximately 15% of our merchandise directly
from vendors located abroad, primarily in India, and expect that such purchases
will increase slightly as a percentage of total merchandise purchases in 2000.
These arrangements are subject to the risks of relying on products manufactured
abroad, including import duties and quotas, loss of "most favored nation"
trading status, currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign trade
practices. While we believe that we could find alternative sources of supply, an
interruption or delay in supply from India or our other foreign sources, or the
imposition of additional duties, taxes or other charges on these imports could
have a material adverse effect on our business, financial condition and results
of operations unless and until alternative supply arrangements are secured.
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Moreover, products from alternative sources may be of lesser quality or more
expensive than those we currently purchase.
CHANGES IN CONSUMER TRENDS
Our success depends on our ability to anticipate and respond to changing
merchandise trends and consumer demands in a timely manner. We believe we are
benefiting from a lifestyle trend toward increased interest in home renovation,
gardening and interior decorating. Any change in such trend could adversely
affect consumer interest in our major product lines. Moreover, our products must
appeal to a broad range of consumers whose preferences cannot always be
predicted with certainty and may change between sales seasons. If we misjudge
either the market for our merchandise or our customers' purchasing habits, we
may experience a material decline in sales or be required to sell inventory at
reduced margins. We could also suffer a loss of customer goodwill if our stores
or newly acquired furniture making operations do not adhere to our quality
control or service procedures or otherwise fail to ensure satisfactory quality
of our products. These outcomes may have a material adverse effect on our
business, operating results and financial condition.
GENERAL ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on merchandise
that we offer, including, among others, general business conditions, interest
rates, taxation and consumer confidence in future economic conditions. Adverse
economic conditions and any related decrease in consumer demand for
discretionary items such as those offered by us could have a material adverse
effect on our business, results of operations and financial condition.
GOVERNMENT REGULATION
Many of our imported products are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, we are
subject to currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign practices.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report on this quarterly Form 10-Q contains "forward looking statements,"
within the meaning of the Private Securities Litigation Reform Act of 1995, that
involve known and unknown risks. Such forward-looking statements include
statements as to our plans to open additional stores, the results of strategic
initiatives, the anticipated performance of new stores, the impact of
competition and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may," "intends," and words of similar
import or statements of management's opinion. These forward-looking statements
and assumptions involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or our 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, changes in economic or
business conditions in general, changes in product supply, changes in our
distribution strategy, changes in the competitive environment in which we
operate, competition for and the availability of sites for new stores, changes
in our management information needs, changes in customer needs and expectations
and governmental actions. We undertake no obligation to update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to our market risk as disclosed in our report on
Form 10-K filed for the fiscal year ended January 29, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings against us. We are, however,
involved in routine litigation arising in the ordinary course of our business,
and, while the results of the proceedings cannot be predicted with certainty, we
believe that the final outcome of such matters will not have a material adverse
effect on our consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
* 27.1 Financial Data Schedule
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- Filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 20, 2000 was filed on March 21, 2000
pursuant to Item 5 (Other Events).
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Restoration Hardware, INC.
Date: September 12, 2000 By: /s/ STEPHEN GORDON
-------------------------------------
Stephen Gordon
Chief Executive Officer
Date: September 12, 2000 By: /s/ WALTER PARKS
-------------------------------------
Walter Parks
Chief Administrative Officer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
27.1 Financial Data Schedule
12
