<PAGE> 1
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 APRIL 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 April 29, 2000, 17,005,019 shares of the Registrant's Common Stock
were outstanding.
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FORM 10-Q
FOR THE QUARTER ENDED APRIL 29, 2000
INDEX
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<S> <C> <C>
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of April 29, 2000,
January 29, 2000 and May 1, 1999 3
Statements of Operations for the three months ended
April 29, 2000 and May 1, 1999 4
Statements of Cash Flows for the three months ended
April 29, 2000 and May 1, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 29, January 29, May 1,
2000 2000 1999
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................. $ 2,282 $ 4,627 $ 131
Accounts receivable ....................................... 4,823 6,551 5,361
Merchandise inventories ................................... 91,187 85,902 65,773
Prepaid expense ........................................... 12,199 7,608 8,594
-----------------------------------
Total current assets ................................. 110,491 104,688 79,859
Property and equipment, net ............................... 110,407 108,706 77,240
Goodwill .................................................. 4,930 4,910 4,551
Other long term assets .................................... 4,065 4,057 2,765
-----------------------------------
Total assets ......................................... $229,893 $222,361 $164,415
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................... $ 45,131 $ 45,375 $ 30,448
Current portion of deferred lease incentives .............. 3,932 3,777 2,538
Revolving line of credit and short term debt .............. 1 2 10,301
Other current liabilities ................................. 5,192 6,515 6,836
-----------------------------------
Total current liabilities ............................ 54,256 55,669 50,123
Long-term debt ............................................ 316 344 452
Long-term line of credit .................................. 49,225 37,447 --
Long-term portion of deferred lease incentives ............ 38,447 37,950 26,417
Deferred rent ............................................. 8,772 8,069 5,234
-----------------------------------
Total liabilities .................................... 151,016 139,479 82,226
Stockholders' equity:
Common stock, $.0001 par value; 40,000,000, 40,000,000 and
40,000,000 shares authorized, respectively; 17,005,019
16,901,338 and 16,408,546 issued and outstanding,
respectively ......................................... 94,638 94,318 93,249
Accumulated other comprehensive income .................... (6) 26 11
Accumulated deficit ....................................... (15,755) (11,462) (11,071)
-----------------------------------
Total stockholders' equity ........................... 78,877 82,882 82,189
Total liabilities and stockholders' equity ........... $229,893 $222,361 $164,415
-----------------------------------
</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)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
April 29, 2000 May 1, 1999
----------------------------
<S> <C> <C>
Net Sales .................................. $68,573 $60,049
Cost of sales and occupancy ................ 51,101 46,000
----------------------------
Gross profit ........................ 17,472 14,049
Selling, general and administrative expenses 23,539 18,275
Pre-opening store expenses ................. 316 222
----------------------------
Loss from operations ....................... (6,383) (4,448)
Interest expense, net ...................... (895) (55)
----------------------------
Loss before income taxes ............ (7,278) (4,503)
Income tax benefit ......................... 2,982 1,846
----------------------------
Loss available to common stockholders ...... $(4,296) $(2,657)
----------------------------
Loss per share:
Basic ............................... ($0.25) ($0.16)
Diluted ............................. ($0.25) ($0.16)
Weighted average shares outstanding:
Basic ............................... 16,954 16,327
Diluted ............................. 16,954 16,327
</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)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
April 29, 2000 May 1, 1999
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................... $(4,296) $ (2,657)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................................... 3,377 2,208
Changes in assets and liabilities:
Accounts receivable ............................................. 1,729 (184)
Merchandise inventories ......................................... (5,285) (375)
Prepaid expenses and other assets ............................... (1,293) (3,081)
Accounts payable and accrued expenses ........................... (245) (9,250)
Taxes payable ................................................... (4,083) (3,326)
Other current liabilities ....................................... (548) 2,119
Deferred rent ................................................... 703 953
Deferred lease incentives and other
long-term liabilities ...................................... 652 1,030
----------------------------
Net cash used in operating activities ........................... (9,289) (12,563)
Cash flows from investing activities:
Capital expenditures ................................................... (5,026) (6,722)
Purchase of subsidiary ................................................. (74) (86)
----------------------------
Net cash used in investing activities ........................... (5,100) (6,808)
Cash flows from financing activities:
Borrowings under revolving line of
credit - net ....................................................... 11,778 10,297
Principal payments - capital lease obligations ......................... (25) (74)
Borrowings (repayments) on long term debt, net ......................... (1) (13)
Issuance of common stock ............................................... 320 1,080
----------------------------
Net cash provided by financing activities ....................... 12,072 11,290
Effect of foreign currency exchange rate changes on cash balances (28) 11
Net decrease in cash and cash equivalents .................................... (2,317) (8,081)
Cash and cash equivalents:
Beginning of period .................................................... 4,627 8,201
----------------------------
End of period .......................................................... $ 2,282 $ 131
----------------------------
Additional cash flow information:
Cash paid for interest (net of amount
capitalized) .................................................... $ 882 $ 71
----------------------------
Cash paid for taxes ................................................ $ 1,107 $ 3,825
----------------------------
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 29, 2000 AND MAY 1, 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 April 29, 2000 and May 1, 1999; results
of operations for the three months ended April 29, 2000 and May 1, 1999; and
changes in cash flows for the three 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 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, will be effective
for fiscal years beginning after June 15, 2000, which 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 2000 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. As of April 29, 2000, we were in compliance
with the covenants under the credit facility and we had outstanding $49.2
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 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
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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 448,410 and
1,337,173 stock options are excluded from the diluted earnings per share for the
quarter to date periods ending April 29, 2000 and May 1, 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 (96 and 67 at April 29, 2000 and May 1,
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>
<CAPTION>
Three Months Ended
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April 29, 2000 May 1, 1999
----------------------------
<S> <C> <C>
Net sales
Retail ................................................................ $64,233 $ 56,065
Furniture ............................................................. 6,524 6,677
RH Direct ............................................................. 3,629 1,922
Intersegment sales .................................................... (5,813) (4,615)
----------------------------
Consolidated net sales ....................................................... 68,573 60,049
----------------------------
Income/(Loss) from operations
Retail ................................................................ 3,762 1,396
Furniture ............................................................. 496 508
Unallocated ........................................................... (9,769) (5,660)
Intersegment loss from operations ..................................... (872) (692)
----------------------------
Consolidated loss from operations ............................................ $ (6,383) $ (4,448)
----------------------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THE THREE MONTHS (FIRST QUARTER) ENDED APRIL 29, 2000 AS COMPARED TO THE THREE
MONTHS (FIRST QUARTER) ENDED MAY 1, 1999
NET SALES. Net sales increased $8.6 million, or 14.3%, to $68.6 million in the
first quarter of 2000 from $60.0 million in the first quarter of the prior year.
At April 29, 2000, we operated 96 stores compared to 67 stores at May 1, 1999.
The additional 29 stores opened in 2000 contributed an additional $16.0 million
in sales, but was offset by the comparable store sales, which decreased 14.4% in
the first quarter of 2000 from the prior year. The decline in quarterly
comparable store sales resulted primarily from our decision to not anniversary
the "Turn Back the Century" sale in the first quarter of this year. During the
first quarter of the prior year the sale event contributed to the positive 18.4%
comparable store sales.
GROSS PROFIT. Gross profit increased $3.4 million, or 24.4%, to $17.4 million in
the first quarter of 2000 from $14.0 million in the first quarter of the prior
year. As a percentage of net sales, first quarter gross profit was 25.5% in 2000
compared to 23.4% 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 in both dollars and as a percentage of
sales.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
$5.3 million, or 28.8%, to $23.5 million in the first quarter of 2000 from $18.3
million in the first quarter of the prior year. As a percentage of net sales,
SG&A expenses increased to 34.3% in the first quarter of 2000 compared to 30.4%
in the first quarter of the prior year. The increase in SG&A expense for the
first quarter over the prior year is due to our continuing efforts to improve
<PAGE> 8
the home office and distribution center infrastructures, as well as the increase
in selling expense at the stores related to the 29 new stores opened.
PREOPENING STORE EXPENSE. Pre-opening store expense increased $94,000, or 42.3%,
to $316,000 in the first quarter of 2000 from $222,000 in the first quarter of
the prior year. As a percentage of net sales, pre-opening expense increased to
0.5% in the first quarter of 2000 compared to 0.4% in the first quarter of the
prior year. During the quarter we opened 3 stores compared to 2 stores in the
first quarter of 1999. 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 $840,000 in the first quarter of 2000 to $895,000
from $55,000 in the first quarter of the prior year. The increase over the prior
year was 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 $9.3 million, a
decrease of $3.3 million over net cash used of $12.6 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 $5.1 million, a
decrease of $1.7 million over net cash used in investing activities of $6.8
million in the prior year. Historically, cash used in investing activities has
been related to capital expenditures for new store expansion. Such expenditures
totaled $5.0 million year to date for 2000 compared to $6.7 million in the prior
year.
Net cash provided by financing activities year to date for 2000 was $12.1
million, an increase of $0.7 million over net cash provided by investing
activities of $11.3 million in the prior year. Net cash provided by borrowings
under our line of credit totaled $11.8 million year to date, compared to $10.3
million for the same period in the prior year.
<PAGE> 9
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. As of April 29, 2000, we were in compliance
with the covenants under the credit facility and we had outstanding $49.2
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 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 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
<PAGE> 10
Our net sales and net income have grown significantly during the past several
years, primarily as a result of the opening of new stores. We intend to continue
to pursue an aggressive growth strategy for the foreseeable future, and our
future operating results will depend largely upon our ability to open and
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 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
<PAGE> 11
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 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 96 stores at April 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
<PAGE> 12
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.
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.
<PAGE> 13
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
<PAGE> 14
- 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.
/s/ STEPHEN GORDON
Date: June 13, 2000 By:______________________
Stephen Gordon
Chief Executive Officer
/s/ WALTER PARKS
Date: June 13, 2000 By:______________________
Walter Parks
Chief Administrative Officer
(Principal Financial Officer)
<PAGE> 15
EXHIBIT INDEX
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27.1 Financial Data Schedule
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