Conclusion: Deferred revenue at RH accelerated to +37% in the quarter. That makes sense to us given the port issues and lower inventory numbers (Inventory growth was below sales growth for the quarter, which for RH at this stage in its growth plan is a problem). But, it gives us a lot of confidence in the company's ability to deliver on the top line.
Since 2Q13, this line item has been an exceptional indicator of growth in the upcoming quarter -- over the past 7 quarters, R2 = .923. Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter.
The point here is that deferred revenue is the highest we've seen in over 6 quarters. Port disruptions probably explain a part of the growth, but we'd also point out that due to the late Source Book release this year, orders were pushed later into 2H when compared to last year. The last time we saw the same level of deferred revenue growth (coming out of 1Q13), the company posted a 38% combined brand comp and 39% consolidate revenue growth. It's not likely that we'll see that type of sales growth in 1Q as the port bottlenecks will curtail the product and revenue flow in 1Q. But, the order and demand pipeline look very healthy headed into the new year.
Other 10k Callouts
Ad Spend - Marketing expense was up $32mm for the year (in-line with our Source Book cost math), and delevered by 80bps. That was driven almost 100% by the doubling of the Source Book page count. Those costs are amortized over a 12-month time period dependent on the sales curve. We should note that capitalized catalog costs were down 5% YY, compared to FY13 year end when capitalized catalog costs were +53%. Based on the commentary from the 4Q14 Q&A, RH will add additional mailers this year as it decouples the Baby&Child and Outdoor books from the 17lb source book and add two new concept mailers in the fall. But, the company will be more prudent this year on who and what it sends to its bulk mailing list in 2015. We're expecting significant ad leverage in 2015.