Restoration Hardware 1Q16 Earnings Call Notes

Restoration Hardware’s (RH) CEO Gary Friedman on Q1 2016 Results – Earnings Call Transcript

Consolidating distribution centers is better than managing several

think our bias today after a pretty fulsome review is to really simplify our distribution points and hold inventory in fewer distribution centers as opposed to spreading it out across multiple distribution centers. Our previous plans were to continue to open more distribution centers. Our analysis says that the inefficiencies and extra inventory you had to buy-and-hold to be in stock across multiple DCs was causing us inventory deleverage and bloating our balance sheet and also making it difficult to be in stock in the right DC, driving DC to DC transfers up, transportation costs up, etcetera, etcetera. So, our view is to hold inventory in fewer locations, in DCs, and that will improve our in stocks, reduce our working capital needs and inventory, improve our return on invested inventory and simplify things for both our internal teams, who are leading and managing inventory and our vendors.

macro headwinds are affecting the luxury market

I think we articulated that as one really being the macro factors that are affecting the luxury market that we believe is an accelerating headwind. And I think that’s seen pretty clearly across our industry and anybody who’s serving that luxury market today.

We are still performing

you step back here, we ,look look about retrenching or if you think about the action for taking, this is not a Company that all of a sudden its running negative 10 or 15 comp. We are still performing in the positive sales growth versus very aggressive numbers over the last several years. So we see these moves as short-term in nature.

We don’t have a broken top-line model, just difficulties in the short term

we expect the business to begin to accelerate in Q4 and are very optimistic about the content in the goods, and we’re going to have the most significant refresh of new product at retail in the history of our Company and we’re going to remodel the stores and install design ateliers, expand our design services. So I wouldn’t think about that the fact we got a broken top line model. We’ve have some difficulties in the short-term. We’re taking some actions to fix those.

We can always turn promotions back on

“We can always turn promotions back on. This is not like do or die. This is not like we made a change and if it doesn’t work we’re just going to kind of stay the course and drive the business down. That’s not our goal here. We think this is a right long-term move for the Company. We’re making long-term decisions and investments for the brand and business and we think they’re the right ones, but for some reason we’re wrong. I can tell you being I think I’m still the biggest shareholder in the Company, I’m going to change course and we will make decisions that are the right decision for the business, the brand and the shareholders”

There’s clearly a slowdown but we’re not anticipating another step down

“Sure, Oliver. Let’s try to start at the top of your questions. The demand environment, the evolution and we have — we believe we’re taking what — how we see the consumer responding today, which we think that there’s definitely a slowdown. We’ve incorporated those trends in our go forward guidance and we believe we’ve been appropriately conservative in how we guided. So that’s how we think about it. If there’s a another meaningful step down, we’re not anticipating that today.”

Everyone is becoming an Amazon customer

“almost every consumer is becoming an Amazon consumer, because of the breadth of their assortment and the simplicity that they bring to the consumer for many goods, and especially durable goods and that you need in and repeatable purchases. So, look I’m a big Amazon customer. It is Amazon serve the customer at every level in a way that is relevant, I’d say, no. I don’t think Amazon is going to be the only retailer left on the planet and I highly admire them”

Amazon is advantaged because they’re allowed to operate at 1-2% operating margins

“They’re, I’d say, short-term they’re advantaged, right, because they don’t have the same earnings hurdles that many traditional retailers have today. So you have retailers that are out there, they’ve been making 8% to 15% operating margins and all of a sudden Amazon is coming in with 1% or 2% operating margins and eating their lunch. I mean, it would be an interesting world to see if all the other retailers lower their operating margins to 1% to 2%, what would the fight look like. So it is a little bit of an unfair fight, right, because Amazon is not being held to the same standards from a profitability point of view. But today the market’s allowing that and actually rewarding that.”

We can all learn a lot from Amazon though

” Listen, I think Jeff’s is a very smart guy and he is using that advantage for all it’s worth. And he has been using it and he has been killing them. So god bless. I mean, it’s we can all learn from a lot of that — a lot of things that Amazon has done and what they continue to do. So we are big students of Amazon and big fans of what they do.”

We are reinventing physical retailing

“we’ve got advantages of our own and we like the advantages we have. We also think we’re — just like Amazon is reinventing online retailing and we are learning from them. We believe that we’re reinventing physical retailing and we’re building advantages that nobody else has on the physical side of the world. So, but look today — everything is changing in our industry and if you’re not a complete student of the entire retail business, no matter what channel, you’re going to get behind.”