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Restoration Hardware Issues $2B in New Debt

Restoration Hardware’s (RH) new debt financing gives the home furnishings retailer additional funding to expand its post-pandemic market share.

“This $2.0 billion debt financing creates substantial optionality as we continue to invest in positioning RH as a market defining, global luxury brand,” RH chairman and CEO Gary Friedman said. “The Term Loan represents an attractive cost of capital and enables RH to be opportunistic in creating long term value for our shareholders.”

The luxury home retailer last month reported reported at 30 percent jump in profits for the second quarter ended July 31 to $226.7 million, or $7.09 a diluted share, on a 39 percent gain in revenues to $988.9 million.

Cowen & Co. retail analyst Max Rakhlenko has an “outperform” rating on shares of RH, with a share price target of $850.00. Shares of RH have been trading in the $667-a-share range.

The analyst’s base case assumption presumes that supply gradually catches up to demand, along with EBIT (earnings before interest and taxes) margin expansion. RH can garner benefits in an upside scenario that includes new luxury home sales and suburban migration, along with the capture of operational efficiencies that drive greater than expected margins. Rakhlenko raised potential downside concerns included a slowdown in demand leading to lower sales and prolonged supply chain dislocation.

Restoration Hardware has extended delivery times due to supply chain disruptions.

“We are impressed with the top-and-bottom line beats given ongoing supply chain and logistics disruptions, as the business is overall operating at peak efficiency with exceptionally strong underlying momentum,” Rakhlenko said in a post-earnings research note last month.

RH has delayed the launch of RH Contemporary to Spring 2022 because of accelerating demand trends combined with ongoing supply chain headwinds. “Management’s commentary suggests the launch could be massive and will play a significant role in RH comping-the-comp next year,” Rakhlenko said.

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RH is in a dominant position coming out of the pandemic, which should give it “significantly greater market share over the longer-term,” he said.

RH is the luxury home goods leader with a 4.5 percent market share in an estimated $57 billion market, according to Rakhlenko, who sees “significant runway” for future gains. “RH remains in the earlier innings of a multi-year transformation journey with secular tailwinds and ongoing revenue and margin catalysts set to drive upside to management’s 15 percent to 20 percent annual net income growth target,” he said.

The company said term loan proceeds are expected to be used for general corporate purposes, and to pay the principal amount of its outstanding convertible notes due 2023 and 2024, with principals of $256 million and $124 million, respectively.

“We are pleased with the substantial level of support we received with our first issuance of rated debt. We anticipate that the additional interest expense as a result of the Term Loan will be approximately $11 million on an after-tax basis in the fiscal fourth quarter of 2021,” RH CFO Jack Preston said.

The $2 billion debt financing is a Term Loan from Bank of America, N.A.. It has a maturity date of Oct. 20, 2028 and a floating interest rate based on 2.5 percent over LIBOR, subject to a 0.50 percent LIBOR floor. The Term Loan was assigned a “Ba2” rating from Moody’s Investors Service and a “BB” rating from S&P Global.

RH competitors in the luxury home furnishings space include CB2 and Arhaus, which earlier this month filed to go public.

RH’s completion of of its debt financing comes at a challenging time for competitors such as ABC Carpet & Home, which filed for bankruptcy last month after the pandemic exacerbated turbulence at the already struggling company.

Court documents filed Friday show that stalking horse-bidder 888 Capital Partners, which the home retailer’s owner Paulette Cole partially controls, purchased ABC’s assets, with a sale hearing slated for Oct. 27 in a Manhattan bankruptcy court. 888 Capital is controlled by Regal Investments, giving Cole a minority stake in the business once the transaction closes, pending bankruptcy court approval. In addition, 888 Capital agreed to forgive $15 million of debt in exchange for its ownership stake.