Restoration Hardware 2014 Annual Report Download - page 51

Factors Affecting Our Operating Results
Various factors affected our results for the periods presented in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” including the following:
Overall Economic Trends. The industry in which we operate is cyclical, and consequently our revenues are
affected by general economic conditions. For example, reduced consumer confidence and lower availability and
higher cost of consumer credit reduce demand for our products and limit our ability to increase prices or sustain
price increases. We expect that some of the economic factors that have been in place for the last several years,
including the continuing economic uncertainty (particularly in the housing market in the United States) may
continue in future periods. For more information, see “Risk Factors—Changes in consumer spending or the
housing market may significantly harm our revenue and results of operations.”
Our Strategic Initiatives. We are in the process of implementing a number of significant business initiatives
that have had and will continue to have an impact on our results of operations, including the development of new
larger format Galleries, which we refer to as next generation Galleries, in a number of new locations, the
optimization of our store sizes to better fit anticipated demand in a given market, the expansion of our product
categories and services and changes in the ways in which we market with our Source Books. Although these
initiatives are designed to create growth in our business and continuing improvement in our operating results, the
timing of expenditures related to these initiatives, as well as the achievement of returns on our investments, may
affect our results of operation in future periods, and we may not achieve the desired benefits. Opening next
generation Galleries will require significant capital expenditures, and retail store closures may lead to charges
including lease termination and other exit costs. These changes could affect our results of operation in future
periods. In addition, the investments required to continue our strategic initiatives may have a negative impact on
cash flows in future periods and could create pressure on our liquidity if we do not achieve the desired results
from these initiatives in a timely manner. We expect that we will continue to incur significant capital
expenditures as part of our initiative to open more next generation Galleries over the next several years, and that
these expenditures will have an impact on our cash flows during this time. For fiscal 2014, we incurred total
capital expenditures of $110.4 million. Additionally, we made payments of $9.3 million in fiscal 2014 to escrow
accounts for future construction of certain next generation Galleries. We anticipate our gross capital expenditures
to be approximately $140 million to $160 million for fiscal 2015, which we anticipate to be offset by
approximately $10 million to $20 million due to landlord contributions and other capital inflows related to our
real estate transformation and portfolio.
Consumer Preferences and Demand. Our ability to maintain our appeal to existing customers and attract
new customers depends on our ability to originate, develop and offer a compelling product assortment responsive
to customer preferences and design trends. We have successfully introduced a large number of new products
during recent periods, which we believe has been a contributing factor in our sales and operating results. Periods
in which our products have achieved strong customer acceptance generally have had more favorable results. If
we misjudge the market for our products, we may be faced with excess inventories for some products and may be
required to become more promotional in our selling activities, which would impact our net revenues and gross
profit.
Our Ability to Source and Distribute Products Effectively. Our net revenues and gross profit are affected by
our ability to purchase our merchandise in sufficient quantities at competitive prices. While we believe our
vendors have adequate capacity to meet our current and anticipated demand, our level of net revenues have been
adversely affected in prior periods by constraints in our supply chain, including the inability of our vendors to
produce sufficient quantities of some merchandise in a manner that was able to match market demand from our
customers, leading to higher levels of customer back orders and lost sales.
Fluctuation in Quarterly Results. Our quarterly results have historically varied depending upon a variety of
factors, including our product offerings, promotional events, store openings, shifts in the timing of holidays and
timing of Source Book releases, among other things. As a result of these factors, our working capital
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