RH sales returns

Restoration Hardware’s financial statements paint a picture of very high growth.  In the past, the financials were more or less internally consistent.  Numbers with a relationship to revenues (taxes paid, contingent rent, actual sales returns, employee count) largely tracked the growth in revenue growth.  What’s curious in the latest 10-K is that actual sales returns no longer track reported revenues due to an error identified for FY2013 and FY2012.

FY2014 = Year ended Jan 31, 2015.
FY2013 = Year ended Feb 1, 2014.
FY2012 = Year ended Feb 2, 2013.

Actual sales returns (before revision, in thousands):

FY2010 – $83,135
FY2011 – $103,097
FY2012 – $132,884
FY2013 – $158,534
FY2014 – not provided / not applicable

However, page 88 78 of the latest 10-K mentions that there was an error with the sales returns accounting:

During fiscal 2014, the Company identified an error related to its fiscal 2013 and fiscal 2012 allowance for sales returns footnote rollforward disclosure. The Company included merchandise exchanges within the provision for sales returns and actual returns activity in the footnote rollforward, however, merchandise exchanges are not considered returns and should have been excluded from the allowance for sales returns rollforward. This error did not impact the consolidated balance sheets, consolidated statements of operations or the consolidated statements of cash flows for any period.

Here are the new numbers for actual sales returns:

FY2012 – $89,124
FY2013 – $79,605
FY2014 – $82,758

Note that the new numbers are not consistent with RH’s revenue growth.  From FY2012 to FY2014:

  • Revenues grew from $1.193B to $1.867B (+56.5%).
  • (After revision) Actual sales returns fell 7.1%.

The new numbers make less sense than the old (erroneous) numbers.

*Disclosure:  Short RH via common shares and put options.  This is actually one of my weaker short ideas because this one might take a while even if my thesis is correct.

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3 thoughts on “RH sales returns

  1. I have been following RH as well, and really like it as a short.

    One interesting piece that falls out of the sales return error disclosure is that we can back into what actual exchanges were for FY 2012 and FY 2013 (which is just the difference between previous [error] disclosure and the current [corrected] disclosure).

    FY 2012 exchanges were $50.1M, or 4.2% of sales.
    FY 2013 exchanges were $78.9M, or 5.1% of sales.
    Exchanges increased 57%, while sales only increased by 30%.

    Also, the reserve balance of $10.2M has fallen to only 0.5% of FY 2014 sales. It did get as low as 0.4% at FY 2012, but one would imagine it can’t go much lower than this going forward.

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