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RH details expansion strategy, other developments for 2019

BY CSA STAFF

RH upped its expansion strategy and raised its guidance for the year amid third-quarter earnings that beat Street expectations.

The luxury home retailer is accelerating its expansion starting in 2019, with plans to open five to seven new “Gallery” locations per year, up from three to three to five. It also is exploring opportunities to expand in London, Paris, and other parts of Europe.

The locations scheduled to open in 2019 will include Edina, Minn.;  Charlotte, N.C.;Corte Madera, Calif.; San Francisco; and Columbus, Ohio. In addition, RH will open its first boutique hotel, RH Guesthouse, this fall, in Manhattan’s Meatpacking District, across from its new store.

RH’s expansion includes several different models, including a new, smaller prototype that will range in size from 33,000 sq. ft. with a restaurant experience to 29,000 sq. ft. without one. The locations will feature assortments from RH’s various lines, ranging from interiors and modern to baby & child and outdoor, and contain interior design offices and presentation rooms where design professionals can work with customers on projects.

“Due to the reduced square footage and efficient design, this new model will be more capital efficient with less time and cost risk, but yield similar productivity,” stated Gary Friedman chairman and CEO, RH.

In addition, RH is developing a prototype tailored to secondary markets. Targeted at 10,000 to 18,000 sq. feet, the model is designed to allow RH to gain share in markets currently only served by smaller competitors, such as Jacksonville, Fla.; Fort Worth, Texas; and Hartford, Conn. The company plans to test a few of these stores during the next several years, and if proven successful, the format could lead RH to increase its long-term Gallery targets.

RH is not abandoning it larger showcase format, which it will continue to open in the top metropolitan markets, similar to its recently opened location in Manhattan’s Meakpacking District, which is on track to be the brand’s first $100 million Gallery in its second full year of operation, generating approximately $25 million per year of store level cash contribution.

“These iconic locations are highly profitable statements for our brand, and we believe create a long-term competitive advantage that will be difficult to duplicate,” stated Friedman.

The company also continue to open locations in the best second home markets where the wealthy and affluent visit and vacation, such as Palm Beach, Fla., and Aspen, Col.. These outposts are tailored to reflect the local culture, and sized to the potential of each market. Examples of indigenous Bespoke Galleries include the Hamptons, Palm Beach, Yountville, and Aspen.

Dining is most definitely in RH’s playbook going forward.

“We believe RH Hospitality is now a proven scalable business, and our plan is to increase the number of new Galleries with integrated restaurants, wine vaults, and barista bars going forward,” Friedman said.

Other developments planned for 2019 include several new brand extensions, with RH Beach House and RH Color launching in the spring and fall. Assortments in key categories will also be expanded.

The company also plans to increase investment in RH Interior Design, with a goal of building the leading interior design firm in North America.

“We believe there is a significant revenue opportunity by offering world class design and installation services as we move the brand beyond creating and selling products to conceptualizing and selling spaces,” Friedman said.

RH detailed its real estate strategy in a statement released with its third-quarter earnings. The retailer earned $22.4 million, or 81 cents a share, in the period ended Nov.3, compared with $13.2 million, or 56 cents a share, in the year-ago period. Adjusted for one-time items, the retailer earned $46.8 million, or $1.73 a share, in the quarter, compared with $1.04 a share a year ago. Analysts had expected adjusted earnings of $1.27 a share.

Net revenue rose to $636.6 million, compared with $592.5 million a year ago. Analysts had estimated sales of $632 million.  RH said its revenues were negatively impacted by approximately 1 point due to slower special order receipts from China due to tariff related shipping congestion.

“We expect the delayed receipts to have a positive impact on our fourth quarter revenues and have adjusted our guidance accordingly,” Friedman stated.

The company raised its fourth-quarter revenue guidance to a range between $680 million and $690 million, compared with a previous guidance of $665 million and $685 million. It raised its adjusted EPS forecasts to a range between $2.75 a share and $2.90 a share, versus a previous guidance of $2.33 a share to $2.54 a share.

For fiscal 2018, RH said it expects revenue between $2.519 billion and $2.529 billion, compared with a former guidance of between $2.489 billion and $2.521 billion. It raised EPS expectations to between $8.33 and $8.47, versus previous guidance of between $7.35 and $7.75.

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