Design Within Reach Inc declares Q2 preliminary results

August 06, 2005 - United States Of America

San Francisco based home accessories provider Design Within Reach reported preliminary financial results for the second quarter ended July 2, 2005. The results are preliminary due to a delay following the Company's May 2005 systems conversion and pending auditor review.

Net sales for the second quarter of 2005 were $41.9 million, an increase of 49 percent over the $28.2 million recorded in the same period last year. Net earnings for the second quarter of 2005 were $1.4 million, or $0.09 per diluted share on approximately 14.8 million shares outstanding, compared to $806,000, or $0.07 per diluted share on approximately 11.7 million shares outstanding, in the second quarter of 2004. Earnings from operations were $2.2 million compared to $1.4 million the prior year.

For the six months ended July 2, 2005, net sales increased 53 percent to $77.4 million from $50.7 million for the same period in 2004. Net earnings for the first six months of 2005 were $2.3 million, or $0.15 per diluted share, compared to $1.3 million, or $0.11 per diluted share, during the same period in 2004. For the six months ended July 2, 2005, earnings from operations was $3.4 million, compared to $2.2 million in the same six-month period in 2004.

"Company second quarter results continue to demonstrate our ability to expand into new markets and realize the operating leverage of their integrated sales platform and single common inventory," said Wayne Badovinus, President and Chief Executive Officer. "With a total of 51 Studios in operation, they are experiencing robust sales growth, but their strong top-line results continue to be impacted at the gross margin level, primarily due to the negative effect of the Euro exchange rate year-over-year and increased shipping costs."

Badovinus continued, "After much internal analysis and in-depth strategic discussions with their board, they have pre-emptively determined that it is their top priority, and in their long-term best interest, to focus on stabilizing and improving gross margins and protecting the valuable Design Within Reach brand.They have already implemented a number of margin initiatives, including reducing the number of promotional events, further developing alternative product sourcing, growing their proprietary product development effort, and employing additional shipping options. They are confident that this is the most prudent approach to maximizing profitability and effectively managing the business going forward."

Net sales by distribution channel were as follows:

In-person sales (including Studio sales, sales through the Company's direct sales force and sales from the Design Within Reach warehouse) were $23.9 million in the second quarter of 2005, a 91 percent increase from the same period last year. In attention, the Company opened 25 net new studios since the end of the same period last year.

During the quarter, Design Within Reach opened Studios in the following nine markets: Austin, Texas; Burlingame, California; Las Vegas, Nevada; Cleveland and Columbus, Ohio; Greenwich, Connecticut; Adams Morgan, D.C.; Roslyn, New York; and Tribeca in New York City and ended the second quarter of 2005 with 51 studios.

Direct sales (including phone sales and sales through the Design Within Reach website) were $13.5 million in the second quarter of 2005; a 6 percent increase over the same period last year. Gains in the direct sales channel have slowed as the Company continues to open Studios and enable customers to experience Design With Reach products in person.

Gross profit margin was 44.7 percent in the second quarter of 2005, compared to 46.5 percent in the same period last year. This decrease is due primarily to the strength of the Euro versus the U.S. dollar and the rising costs of shipping. Shipping and handling expenses have increased significantly as the new Studios influence the merchandise mix toward "white glove delivery" items, which require special assistance due to their weight or fragility.

For the second quarter of 2005, selling, general and administrative expenses increased to $15.2 million, from $10.9 million in the same period last year, primarily due to costs associated with the opening of new Studios, Sarbanes-Oxley compliance, and the Company's Employee Stock Purchase Plan.

Selling, general and administrative expenses as a percentage of sales decreased to 36.2 percent, from 38.6 percent in the same period last year, as the Company leveraged fixed fulfillment center costs and corporate overhead spread over increased sales.

Guidance

Design Within Reach remains comfortable with its previously issued revenue guidance of $160 to $165 million for 2005. The Company is, however, lowering diluted earnings per share to a range of $0.40-$0.42, which suggests an approximately 38 percent-45 percent EPS growth rate from 2004.

This reduction reflects the Company's decision to minimize the use of promotional activity to offset product and shipping margin pressures and additional Sarbanes-Oxley compliance expenses. Design Within Reach expects the vast majority of earnings for the second half of 2005 to come in the fourth quarter as the benefits from the product and shipping initiatives begin to take hold.

Conference Call

Design Within Reach Inc will host a conference call on, August 4, 2005 at 2:00 p.m. Pacific (5:00 p.m. Eastern). The call, which will be hosted by Wayne Badovinus, President and Chief Executive Officer, and Ken La Honta, Chief Financial Officer, will be broadcast live over the Internet and accessible through the Investor Relations section of the Company's website. The webcast will be archived online within one hour of the completion of the conference call and available at company website.

Design Within Reach Inc, founded in 1998, is an integrated, multi-channel provider of distinctive modern design furnishings and accessories. Using a single common "in stock and ready to ship" inventory, the company markets and sells its products to both residential and commercial customers nationwide.