Dive Brief:

• RH, formerly known as Restoration Hardware, on Tuesday reported first quarter net revenue fell 0.8% to $557.4 million from $562 million last year, the result of cycling the approximate 4 points of revenue drag from SKU rationalization, and a 2 point drag from incremental outlet sales last year. That missed analyst expectations cited by CNBC for $563.1 million.

• Adjusted net income rose to $33.5 million from $1.8 million in the year-ago period year, up more than three times its previous record of $9.8 million in the first quarter of fiscal 2015, according to a company press release. Comparable brand revenues in the quarter rose 1%, despite a 4 point decline due to inventory reduction efforts. Adjusted for that, comparable brand revenues rose 5% versus a 9% increase last year.

• Adjusted operating margins were 9.6% in the first quarter versus 1.5% last year, more than double the previous Q1 record of 4.4% in the fiscal 2015’s first quarter of fiscal 2015, and adjusted gross margins expanded by 750 basis points to a first quarter record of 38%, from 30.5% last year, reflecting full price selling, lower outlet revenues and a more streamlined distribution and reverse logistics network the company said. Looking forward, RH expects adjusted net revenues to range between $655 million and $662 million in the second quarter and between $2.53 billion and $2.57 billion for the year.

Dive Insight:

The revenue miss, while not exactly part of the plan, is the result of careful management, according to a letter to shareholders from CEO Gary Friedman. "We articulated at the beginning of the year that we will be managing the business with a bias for earnings versus revenue growth in fiscal 2018," he said. "We will restrain ourselves from chasing low quality sales at the expense of profitability like many in our industry, and instead focus on building an operating platform that will enable us to compete and win over the long-term."

The retailer is investing in its supply chain and staking its success on a sales approach that lures in luxury customers through a membership scheme and depends on brick-and-mortar stores, as well as its print catalog, for customer experience.

"We believe when you step back and consider: one, we are building a brand with no peer; two, we are creating a customer experience that cannot be replicated online; and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today’s retail landscape, and, we would argue, will also prove to be equally valuable," Friedman wrote. 

The company has developed a new prototype design gallery that Friedman said is based on key learnings from its recent gallery openings and will range in size from 29,000 square feet to 33,000 square feet (the latter including in-store restaurants). The company has hopes that the reduced square footage and efficient design will be more capital efficient while yielding similar productivity. The company plans to reach about two thirds of its target markets with those stores, adding three to five, and eventually five to seven, new locations each year, Friedman said.