Design Within Reach, Inc. Reports Fourth Quarter and Full Year Fiscal

Design Within Reach, Inc. Reports Fourth Quarter and Full Year Fiscal 2004 Results; Fourth Quarter Net Sales Increase 59% to $39.7M and Earnings from Operations Grows to $2.3M

    Business Editors

    SAN FRANCISCO--(BUSINESS WIRE)--Feb. 17, 2005--Design Within Reach, Inc. (NASDAQ:DWRI) today reported financial results for the 2004 fourth quarter (a fourteen week quarter) and year ended January 1, 2005. The Company's fiscal 2004, ended January 1, 2005, included 53 weeks and fiscal 2003, ended December 27, 2003, included 52 weeks.
    In addition, Design Within Reach announced that it has restated its balance sheets for the year ended December 27, 2003 and the first three quarters of 2004 to reflect inventory-in-transit from certain of the Company's vendors. The impact of the restatement is a $1.7 million increase in 2003 inventory, recorded as inventory in-transit, and the related payables. These non-cash adjustments do not have any effect on previously reported net sales, earnings or cash flow from operating activities. As of December 27, 2003 and January 1, 2005, the Company had inventory-in-transit of $2.1 million and $7.0 million, respectively.
    Net sales for the fourth quarter of 2004 were $39.7 million, an increase of 59% over the $25.0 million recorded in the quarter ended December 27, 2003. Net earnings for the fourth quarter of 2004 were $1.5 million, or $0.10 per diluted share on approximately 14.7 million shares outstanding, compared to $1.4 million, or $0.12 per diluted share on approximately 11.1 million shares outstanding, in the fourth quarter of 2003. Included in the results was a non-cash, stock based compensation charge of $177,000 in the fourth quarter of 2004 and a tax benefit of $852,000 in the fourth quarter of 2003. Earnings from operations, which excludes interest and taxes, was $2.3 million in the fourth quarter of 2004, compared to $519,000 in the prior year.
    For the year ended January 1, 2005, net sales increased 49% to $120.6 million, from $81.1 million in the year ended December 27, 2003. Net earnings available to common stockholders for fiscal year 2004 were $3.7 million, or $0.29 per diluted share on approximately 13.1 million shares outstanding, compared to $1.2 million, or $0.11 per diluted share on approximately 11.3 million shares outstanding, in the prior year. Results reflect non-cash, stock based compensation charges of $551,000 in 2004, the tax benefit of $852,000 in 2003 and the deemed preferred stock dividend payment of $1.8 million recorded in the second quarter of 2003. Excluding the non-recurring, deemed preferred stock dividend payment, Design Within Reach would have generated net earnings of $3.0 million, or $0.26 per diluted share, in fiscal 2003. For fiscal 2004, earnings from operations, which excludes interest, taxes and the deemed preferred stock dividend, was $6.1 million, compared to $2.1 million in fiscal 2003.
    "We are pleased with our performance for the fourth quarter and fiscal 2004," said Wayne Badovinus, President and Chief Executive Officer. "Our success is largely attributable to our unique, yet simple, business model and the increasing acceptance and market awareness of modern design. Having an integrated multi-channel operating platform and common inventory allows us to quickly respond to the market trends and strategic opportunities that we identify through our catalog, website, and studio locations. In fiscal year 2004, we increased our overall catalog circulation by approximately 17%, hosted over 30% more online sessions, and ended the year with 33 studio locations, up from 16 studios at the end of 2003. By successfully executing the strategy articulated when the company went public in June 2004, to increase our penetration of the modern design marketplace, we continue to improve revenue and profitability and create shareholder value."
    Net sales by distribution channel were as follows:

--	In-person sales (including sales in studios and by Design Within Reach's direct sales force) were $20.6 million in the fourth quarter of 2004, more than double the $9.8 million reported for the same period last year. For the year, in-person sales increased 98% to $57.8 million from $29.2 million. The increase was largely due to studio sales as the Company ended fiscal 2004 with 33 studios open versus 16 studios at the end of fiscal 2003. During the quarter, Design Within Reach opened four studios San Diego, California; Minneapolis, Minnesota; New York City; and in Atlanta, Georgia.
--	Direct sales (including sales through the phone and the Design Within Reach website) increased 20% to $15.2 million in the fourth quarter of 2004 from the same period last year. For the year, direct sales rose 15% to $50.6 million from $44.1 million in fiscal 2003 due primarily to the increase in catalog circulation and additional online marketing initiatives.

    Gross profit margin was 45.2% in the fourth quarter of 2004, compared to 46.5% in the same period last year. The gross margin decline was primarily due to the continued strength of the Euro versus the U.S. dollar, although this was partially offset by lower product costs associated with volume purchasing and increased sales of higher margin products. For the year, gross profit margin decreased to 46.0% from 46.6% in fiscal 2003 due primarily to the cost of merchandise sourced from Europe. Approximately 50% of Design Within Reach's merchandise is purchased from manufacturers in Europe and substantially all of these products in Euros.
    Selling, general and administrative expenses increased to $14.1 million in the fourth quarter of 2004 and to $45.5 million in fiscal 2004, from $9.7 million and $33.0 million, respectively, in the comparable periods last year. The higher expenditures were due to costs associated with the opening and operating of new studios and mailing additional catalogs. However, selling, general and administrative expenses as a percentage of sales decreased for the fourth quarter and fiscal 2004 as the company continues to realize operating leverage from its fully integrated sales channels and common inventory.
    Mr. Badovinus concluded, "We are in the early stages of what we believe is a long-term and exciting growth opportunity for Design Within Reach. In 2005, we look forward to building on our success by opening additional studios, expanding and refining our product offerings and increasing market awareness and appreciation for design products. We plan to open approximately 18-20 studios in fiscal 2005, up from previous plans of 16-18 studios, and eight of these are scheduled to open in the first quarter. In addition, we plan to increase catalog circulation by approximately 5% and introduce new online initiatives with the intent of driving additional customers to our studios, website and phone sales channels."
    Design Within Reach is raising its previously issued fiscal year 2005 revenue guidance of $155 million to a range of $160 to $165 million to reflect the additional studios planned to open in 2005. The Company remains comfortable with full year First Call consensus EPS estimates, reflecting increased operating expenses and continued margin pressure from the Euro. As the Company continues to open new studios and benefit from those that were opened in 2004 and the first part of 2005, revenue and net income are expected to steadily rise over the course of the year, with approximately 45% of net income for the year posted in the fourth quarter of fiscal 2005.

    Conference Call

    Design Within Reach, Inc. will host a conference call today, February 17, 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 David Barnard, Chief Financial Officer, will be broadcast live over the Internet and accessible through the Investor Relations section of the Company's website at www.dwr.com. The webcast will be archived online within one hour of the completion of the conference call and available at www.dwr.com.

    About Design Within Reach, Inc.

    Design Within Reach, Inc., founded in 1998 and headquartered in San Francisco, is an integrated multi-channel provider of distinctive modern design furnishings and accessories. The Company markets and sells its products to both residential and commercial customers nationwide through the DWR catalog, studios, website and direct sales force, and a single common "in stock and ready to ship" inventory.

    This press release includes forward-looking statements, including statements related to anticipated revenues, expenses, earnings, operating cash flows, the outlook for Design With Reach's markets and the demand for its products. Factors that could cause Design With Reach's actual results to differ materially from these forward-looking statements include its ability to effectively market and sell products in diverse market segments, its reliance on a limited number of products and third-party vendors and distributors, its ability to expand studio operations, increases in fulfillment costs, disruptions to information technology systems, unpredictable events and circumstances relating to international suppliers, increased competition, government regulatory action and general economic conditions. Please refer to our reports and filings with the Securities and Exchange Commission, including our latest 10-K filing, for a further discussion of these risks and uncertainties. We also caution you not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events.

    "Design Within Reach" is a registered trademark of Design Within Reach, Inc.

Design Within Reach, Inc. Condensed Statements of Earnings (amounts in thousands, except per share data)

Fourteen Thirteen Weeks Weeks Ended Ended January December Fiscal Fiscal 1, 27, Year Year 2005 2003 2005 2004

Net sales $39,716 $24,992 $120,598 $81,138 Cost of sales 21,782 13,380 65,077 43,298 -------- --------- --------- -------- Gross margin 17,934 11,612 55,521 37,840 Selling, general and administrative expenses 14,135 9,698 45,455 33,046 Stock based compensation 177 - 551 - Depreciation and amortization 1,280 873 3,340 2,098 Facility relocation costs - 522 198 559 -------- --------- --------- -------- Earnings from operations 2,342 519 5,977 2,137 Net interest income (expense) 115 (38) 81 (29) -------- --------- --------- -------- Earnings before income taxes 2,457 499 6,058 2,108 Income tax expense 927 (852) 2,314 (852) -------- --------- --------- -------- Net earnings 1,530 1,351 3,744 2,960 Deemed preferred stock dividends - 0 - (1,765) -------- --------- --------- -------- Net earnings (loss) available to common stockholders $1,530 $1,039 $3,744 $1,195 ======== ========= ========= ======== Net earnings (loss) per share: Basic $0.12 $0.41 $0.46 $0.37 Diluted $0.10 $0.12 $0.29 $0.11

Weighted average shares used in calculation of net earnings (loss) per share: Basic 12,866 3,315 8,177 3,261 Diluted 14,661 11,107 13,128 11,294

Design Within Reach, Inc. Condensed Consolidated Balance Sheets (amounts in thousands)

January 1, 2005 Dec 27, (1) 2003 -------- --------

ASSETS Current assets Cash and cash equivalents $21,141 $44 Accounts receivable 1,344 620 Inventory, net 13,815 11,032 Inventory-in-transit 7,049 2,072 Other current assets 9,270 2,316 ----------------- Total current assets 52,619 16,084 ----------------- Property and equipment, net 18,572 9,018 Other non-current assets 3,429 420 ----------------- Total assets $74,620 $25,522 =================

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $14,317 $6,531 Accrued expenses 4,668 2,714 Bank credit facility 1,053 3,325 Other current liabilities 3,699 1,868 ----------------- Total current liabilities 23,737 14,438 ----------------- Other non-current liabilities 2,881 1,246 Total liabilities 26,618 15,684 ----------------- Total stockholders' equity 48,002 9,838 ----------------- Total liabilities and stockholders' equity $74,620 $25,522 =================

    (1) Initial public offering occurred on June 29, 2004 and closed July 6, 2004.

--30--RJ/la*

CONTACT: Design Within Reach, Inc. David Barnard, 415-676-6500 dbarnard@dwr.com or Integrated Corporate Relations, Inc. Andrew Greenebaum/Christine Lumpkins, 310-395-2215 agreenebaum@icr-online.com clumpkins@icr-online.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: MANUFACTURING CONSUMER/HOUSEHOLD APPAREL/TEXTILES EARNINGS CONFERENCE CALLS SOURCE: Design Within Reach, Inc.

Copyright Business Wire 2005