Restoration Hardware 2015 Annual Report Download - page 41

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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. 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. For example, some of our vendors experienced difficulty in producing goods in
sufficient quantity to meet initial customer demand in connection with the introduction of our RH Modern product assortment.
Fluctuation in Quarterly Results. Our quarterly results have historically varied depending upon a variety of factors, including
the timing and extent of product offerings, promotional events, store openings, shifts in the timing of holidays and the timing and
circulation of our Source Books, among other things. As a result of these factors, our working capital requirements and demands on
our product distribution and delivery network may fluctuate during the year. Unique factors in any given quarter may affect period-to-
period comparisons between the quarters being compared, and the results for any quarter are not necessarily indicative of the results
that we may achieve for a full fiscal year.
In 2015, more than half of our product newness, whether within existing product categories or through creation of new product
categories, was introduced in the fall of 2015, primarily with the launch of RH Modern and RH Teen, whereas in prior years the
majority of our new product introductions coincided with our Spring Source Book mailing. While our Spring 2015 Source Book was
mailed several weeks earlier than last year, the amount of new product introductions this Spring was lower than last year. In addition,
there was a significant reduction in the circulated pages in our Spring 2015 Source Book versus last year. The timing and cadence of
new product introductions is an important factor when comparing quarter and year over year results.
As a result of the number of current business initiatives we are pursuing, we have experienced in the past and may experience in
the future significant period-to-period variability in our financial performance and results of operations. In response to some of our
new business initiatives, we have recently experienced substantial increases in revenue and strong improvements in financial
performance on a quarter by quarter comparison basis. The rate of growth in our revenue and the extent of improvements in our
financial performance have changed from quarter to quarter based upon a range of business factors. We expect fluctuations in our rate
of revenue growth and in our financial performance will continue in future periods as we continue to pursue a large number of new
business initiatives. In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain
variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that affect our results of
operations, including:
Net Revenues. Net revenues reflect our sale of merchandise plus shipping and handling revenue collected from our customers,
less returns and discounts. Revenues are recognized upon receipt of product by our customers.
Gross Profit. Gross profit is equal to our net revenues less cost of goods sold. Gross profit as a percentage of our net revenues is
referred to as gross margin. Cost of goods sold include the direct cost of purchased merchandise; inventory shrinkage, inventory
adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or market reserves; inbound freight;
all freight costs to get merchandise to our stores; design, buying and allocation costs; occupancy costs related to store operations and
our supply chain, such as rent and common area maintenance for our leases; depreciation and amortization of leasehold improvements,
equipment and other assets in our stores and distribution centers. In addition, cost of goods sold include all logistics costs associated
with shipping product to our customers, which are partially offset by shipping income collected from customers (recorded in net
revenues). We expect gross profit to increase to the extent that we successfully grow our net revenues and leverage the fixed portion
of cost of goods sold.
Our gross profit can be favorably impacted by sales volume increases, as occupancy and certain other costs that are largely fixed
do not necessarily increase proportionally with volume increases. Changes in the mix of our products may also impact our gross profit.
We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and
our outlet stores to efficiently sell these products. The timing and level of markdowns are driven primarily by customer acceptance of
our merchandise. The primary drivers of the costs of individual goods are raw materials costs, which fluctuate based on a number of
factors beyond our control, including commodity prices, changes in supply and demand, general economic conditions, competition,
import duties, tariffs and government regulation, logistics costs (which may increase in the event of, for example, expansions of or
interruptions in the operation of our distribution centers, furniture home delivery hubs and customer service center or damage or
interruption to our information systems) and labor costs in the countries where we source our merchandise. We place orders with
merchandise vendors primarily in United States dollars and, as a result, are not exposed to significant foreign currency exchange risk.