Q1 2007 Restoration Hardware Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to today's teleconference. (OPERATOR INSTRUCTIONS) Please note this call may be recorded. I would now like to turn the program over to Chris Newman. Please go ahead.

CHRIS NEWMAN, SVP, CFO, RESTORATION HARDWARE: Thank you. Good afternoon, everyone, and thanks for joining us. Leading our call today is Gary Friedman, the Company's Chairman, President, and Chief Executive Officer. Ken Dunaj, our Chief Operating Officer is also with us today, and will be joining us for Q&A at the end of our formal remarks. But before we begin, I need to remind you that certain statements and information on this call will contain forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to certain assumptions, risks, uncertainties, and changes in circumstances.

Actual results or performance may vary materially from those expressed or implied in such statements. These statements will include, without limitation, statements concerning or relating to the Company's goals for sales growth and the expansion of operating margins in future periods. The Company's guidance for future periods, the Company's future initiatives and other statements containing words such such as expects, or words of similar import. Important factors that could cause differences are contained in the Company's filings with the SEC, including the MD&A section in our most recently filed Form 10-Q and Form 10-K and our release posted on the Company's website regarding our results to the first quarter fiscal 2007. Any guidance we offer represents a point in time estimate. We expressly disclaim any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. And now, I'd like to turn the call over to Gary.

GARY FRIEDMAN, CHAIRMAN, CEO, PRESIDENT, RESTORATION HARDWARE: Thank you, Chris. Good afternoon and thank you for joining us us today. As discussed on our last conditions call, we knew the first half of the year would be challenging based on the macroeconomic climate expecting furniture and home furnishings retailers and the timing of both the growth and infrastructure investments we are making. The first quarter was actually more difficult than expected, as you know, April turned out to be a soft month for retailers across the board. We were particularly hard hit because the second mailing of our outdoor catalog was in home on April 5, the day the major storm struck the East Coast. As a result, our sales volume in outdoor and other seasonal products was substantially below planned across all channels.

At the same time, we incurred excess costs to retrofit our furniture distribution centers which also negatively impacted our earnings for the quarter. While the timing of the April outdoor catalog drop was unfortunate, our early May outdoor catalog mailing has rebounded and is meeting plans. We have also taken action to mitigate the short fall to earnings for the year.

First, we revised our catalog circulation plan. We made changes where we saw the opportunity to streamline some lower performing mailings and reduce page count in order to increase overall productivity. Second, we renegotiated catalog production costs which are expected to generate significant savings in the second half of 2007 and into 2008. Chris will provide you with greater detail on both of these initiatives later in the call. We're confident these steps will allow us to recover a substantial part of the first quarter shortfall and still deliver improved operating earnings to the year.

While we're operating in a difficult macro environment our business is positioned for much stronger performance in the second half of fiscal 2007. The growth in infrastructure investments that are having a deleveraging effect in the first half will benefit us in the third and fourth quarters. The expenses we're incurring for our growth initiatives, specifically our third category extension, the restoration hardware Bed & Bath catalog, and our new division restoration hardware trade will translate into incremental growth and profitability in the back half of the year. We believe our new Bed & Bath catalog further strengthens our position as an authority and destination for these strategically important categories. There is really no one else in the marketplace offering this level of design and quality at our price points. Our first mailing was in home mid April and we are pleased with the early response.

We also see tremendous opportunity for a new trade division which targets interior designers, home builders and the hospitality market. This business leverages our core capabilities and product strengths, plus requires little capital investment. We officially kicked off our efforts last month at the hospitality show in Las Vegas where our brand met with enthusiastic response. Our newest brand, Brocade Home is in its second season and continues to gain momentum every quarter. While the business is still relatively small, we remain optimistic about the longer term growth potential of this distinctive new concept.

As mentioned, we are also developing Restoration Hardware baby and child, this new concept will debut as a catalog and website in 2008 with plans to test retail stores in 2009. We believe there's a void in the market for a more premium and sophisticated offering of home furnishings and furniture for newborns and toddlers. I recently reviewed the initial assortment and I can tell you as a father of twin four and a half-year-old girls I wish there was a concept like this today today. As discussed we believe the opportunity exists to significantly improve our operating margins over the next several years with the goal of reaching 4 to 5% in 2009. Our success will largely be driven by the transformation of our supply chain and systems infrastructure. We are in the beginning phases of implementing a three three-year strategy that will provided the foundation to support and leverage our growth. Let me give you an update on our progress and outline our plans for the balance of the year and into 2008.

First, we completed the retrofitting of our furniture distribution centers in the first quarter of this year. We installed new narrow-aisle racking which will greatly improve space utilization, product handling, and productivity. Second, we are consolidating our small package direct-to-customer operations from 3DC's into one centralized distribution center. This will improve our in-stocks, inventory turns, and reduced freight costs. The transition is underway and should be completed by the end of the second quarter. Third, we are installing a new warehouse management system in our furniture DC's to improve order integrity, tracking, and productivity. We expect to have this installed by the end of the third quarter.

Fourth, we are reengineering our home delivered furniture network with the goal of improving the service experience for our customers and reducing both returns and damages. This initiative will be rolled out in the second half of this year. …