What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-30 compared with 2021-03-30 · 349 added, 502 removed, 248 unchanged (77% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a leading luxury retailer in the home furnishings market.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that are subject to risks and uncertainties.

Refer to “Special Note Regarding Forward-Looking Statements and Market Data” and Item 1A — Risk Factors in this Annual Report on Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements.

MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in Item 1A — Risk Factors and included elsewhere in this Annual Report on Form 10-K.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for fiscal 2021 and a comparison to fiscal 2020.

The discussion for fiscal 2020 and fiscal 2019 has been omitted from this Annual Report on Form 10-K, but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 30, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021.

MD&A is a supplement to our consolidated financial statements within Part II of this Annual Report on Form 10-K and is provided to enhance an understanding of our results of operations and financial condition.

Our MD&A is organized as follows:

This section provides a general description of our business, including the impacts of the COVID-19 pandemic, and describes our key value-driving strategies.

Factors Affecting Our Results of Operations .

This section discusses certain factors that affect our results of operations, including our strategic initiatives, our ability to source and distribute products effectively, consumer preferences and demand, overall economic trends and fluctuations in quarterly results.

How We Assess the Performance of Our Business.

This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income and adjusted capital expenditures.

Basis of Presentation and Results of Operations .

These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in fiscal 2021 compared to fiscal 2020, as well as non-GAAP measures we use for financial and operational decision making and as a means to evaluate period-to-period comparisons.

Liquidity and Capital Resources .

This section provides an overview of our sources and uses of cash and our financing arrangements, including our credit facilities and debt arrangements, in addition to the cash requirements for our business, such as our capital expenditures.

Critical Accounting Policies and Estimates .

This section discusses the accounting policies and estimates that involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, including the significant estimates and judgments used in the preparation of our consolidated financial statements.

Recently Issued Accounting Pronouncements .

This section provides a summary of recent authoritative accounting pronouncements that were adopted during fiscal 2021 and that will be adopted in future periods.

FORM 10-K | 41

We are a curator of design, taste and style in the luxury lifestyle market.

Our curated and fully integrated assortments are presented consistently across our sales channels in sophisticated and unique lifestyle settings.

We offer dominant merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings.

We position our Galleries as showrooms for our brand, while our websites, other digital initiatives and Source Books act as virtual extensions of our physical spaces.

Our retail business is fully integrated across our multiple channels consisting of our retail locations, Source Books and websites.

We have an integrated RH Hospitality experience in ten of our Design Gallery locations, which includes Restaurants and wine bars.

Our retail business is fully integrated across our multiple channels of distribution, consisting of our retail locations, websites and Source Books.

We position our Galleries as showrooms for our brand, while our websites and Source Books act as virtual and print extensions of our physical spaces.

We operate our retail locations throughout the United States, Canada, and the U.K., and have an integrated RH Hospitality experience in 13 of our Design Gallery locations, which includes Restaurants and Wine Bars.

As of January 29, 2022, we operated the following number of Galleries, outlets and Showrooms:

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Waterworks Showrooms

The COVID-19 outbreak in the first quarter of fiscal 2020 caused disruption to our business operations.

In our initial response to the COVID-19 health crisis we undertook immediate adjustments to our business operations including temporarily closing all of our retail locations and Restaurants, curtailing expenses and delaying investments including scaling back some inventory orders while we assessed the status of our business.

Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth fiscal quarters of fiscal 2020 as a result of both the reopening of most of our retail locations and also strong consumer demand for our products.

Local regulatory changes related to COVID-19 have continued to place operational restrictions on our Galleries and hospitality locations during the fourth quarter of fiscal 2020 and into the first quarter of 2021.

While we have continued to serve our customers and operate our business through the ongoing COVID-19 health crisis, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains uncertain.

Future adverse developments in connection with the COVID-19 crisis, including additional waves or resurgences of COVID-19 outbreaks, including with regard to new strains or variants of the virus, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance in future periods.

As of March 24, 2021 we had reopened all of our Galleries and Outlets, and nine out of ten of our Restaurants although many of our Restaurants were continuing to conduct business under occupancy limitations and other operational restrictions.

Although our business has strengthened during the period from the second quarter of fiscal 2020 and continuing into the first quarter of fiscal 2021, various constraints in our merchandise supply chain have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the business conditions related to COVID-19 will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during fiscal 2021.

We expect that our supply chain may catch up to demand in the second half of fiscal 2021, but business circumstances and operational conditions in numerous international locations where our vendors operate cannot be predicted with certainty.

As an example, many other countries have not administered vaccines in response to COVID-19 with the same speed as the United States and a number of foreign countries have reestablished lockdowns and stay-at-home orders in response to increased COVID-19 cases during recent months.

As a result, the pandemic may continue to adversely affect business operations in these jurisdictions which could in turn have a negative impact on our business and our ability to source products through these locations.

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Our overall customer demand in specific markets during fiscal 2020 has generally correlated favorably with our customers’ ability to access our Galleries and Outlets.

Depending on the future course of the pandemic and further outbreaks, we may experience further restrictions on and closures of our physical operations with respect to Galleries, Outlets and Restaurants.

Although we have experienced strong demand for our products during fiscal 2020, some of the demand may have been driven by stay-at-home restrictions that have been in place throughout many parts of the United States and Canada.

The exact impact of changes to these stay-at-home restrictions cannot be predicted with certainty.

For example, consumer spending on the home including home furnishings has been strong during the period in which the stay-at-home orders have been in place.

The relaxation of the stay-at-home restrictions may trigger a shift in consumer spending patterns toward other categories such as travel and leisure activities and away from purchase of merchandise related to the home including home furnishings.

We are undertaking a large number of new business initiatives at the same time in order to support our future growth.

We have multiple growth initiatives and innovations in our development pipeline, including expanded merchandise assortments and new collections, additional galleries and guesthouses, new concepts and businesses including through investment in joint ventures and acquisitions.

The COVID-19 health crisis had a short-term impact on some of those efforts and initiatives such as the timing of some construction efforts with respect to opening new Gallery locations and optimizing our inventory.

From the second quarter of fiscal 2020, we have resumed many investments and previously deferred expenditures, but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further developments with respect to the pandemic.

For example, real estate development counterparties with respect to some of our Gallery development projects have withdrawn from these projects as a result of capital or liquidity constraints due to COVID-19 related difficulties, and these and other similar factors may impact the timing or scope of some of our new Galleries.

The ongoing global impact of COVID-19, including travel restrictions imposed by various countries, will continue to affect certain aspects of our planned international expansion and has been a major factor in our decision to delay the timing of our previous plans to open a number of our international locations.

Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, any negative developments could cause us to decide to curtail and/or further postpone business investments including those related to opening new Galleries in the U.S.

as well as other initiatives including our international expansion.

For more information on our company and operations, refer to Item 1—Business .

COVID-19 Pandemic

We have experienced a significant improvement in our business during fiscal 2021 despite the ongoing challenges presented by the COVID-19 pandemic and the disruption it has caused in our business operations beginning in the first quarter of fiscal 2020 and throughout fiscal 2021.

Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges, including port delays, which impacted our ability to convert business demand into revenues at normal historical rates.

We have continued to navigate changes in operational restrictions based upon changes in local conditions and regulations, and as pandemic-related restrictions continue to be lifted in fiscal 2022 we may see consumer spending patterns shift away from spending on the home and home-related categories, such as home furnishings, and consumers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

Key Value-Driving Strategies

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Product Elevation .

Our goal is to establish RH as the undisputed design and quality leader of the luxury home furnishings sector.

We have multiple growth initiatives and innovations that will further elevate the design and quality of every product category as we climb the luxury mountain and continue to differentiate our products in the market, including the introduction of RH Couture Upholstery and RH Bespoke, over the next several years .

Assortment Expansion.

We are expanding our assortment and introducing new concepts to increase market share and brand awareness.

This will include the launch of RH Contemporary in 2021, a new collection that bridges the gap between RH Interiors and RH Modern, while elevating our brand and expanding our market, and RH Color in the next several years.

We have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world.

Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve industry-leading revenues and margins.

Our customers know our brand concepts as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Baby & Child, RH TEEN and Waterworks.

Our strategy to elevate the design and quality of our product will continue as we introduce RH Contemporary in 2022.

We also have plans to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color over the next several years.

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Gallery Transformation .

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We believe our strategy to open new Design Galleries in every major market will unlock the value of our vast assortment, generating a revenue opportunity for our business of $5 to $6 billion in North America.

We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries that is sized to the potential of each market and the size of our assortment.

We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries sized to the potential of each market and the size of our assortment.

In addition, we plan to incorporate hospitality into most of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable.

We believe Hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of Hospitality will help drive incremental sales of home furnishings in these Galleries.

Global Expansion.

We believe that our luxury brand positioning and unique aesthetic has strong international appeal, and that pursuit of global expansion will provide RH access to a substantial long-term market opportunity to build a $20 to $25 billion global brand over time.

As such, we are actively pursuing expanding the RH brand globally with the objective of launching international locations in Europe beginning in 2022.

We have secured a number of locations in various markets in the United Kingdom and continental Europe in which we expect to introduce our first Galleries outside of the U.S.

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We believe hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of hospitality drives incremental sales of home furnishings in these Galleries.

Brand Elevation .

Our vision is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that elevate and establish the RH brand as a global thought leader, taste and place maker.

Our ecosystem, with its immersive experiences, exposes existing and new customers to our evolving authority in design, architecture and hospitality while acting as a next-generation brand elevation and marketing strategy.

We are evolving the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker.

We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world.

Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 & RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation.

These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.

Digital Reimagination .

We are reimagining our website into the World of RH, a digital portal presenting our products, places, services and spaces.

This will enable existing and new customers to experience the immersive and multi-dimensional World of RH, inclusive of Our Products:

Interiors, Modern, Contemporary, Color, Beach House, Ski House, Baby & Child, TEEN and Waterworks;

Galleries, Guesthouses, Restaurants and Residences;

Our Services:

Interior Design, Architecture and Landscape Architecture;

and Our Spaces:

Plane and Yacht Design and Charter.

Business Optimization.

We continue to evolve our operating platform to elevate the customer experience and enhance decision-making.

These efforts include initiatives such as (i) RH In-Your-Home, a reimagined home delivery experience that sets a new standard for “white glove” delivery and extends the Gallery into the customer’s home, (ii) the opening of a new LA-based distribution center, which will allow us to reduce delivery times by seven to ten days for both outdoor furniture and special order upholstery in most major markets, and (iii) an internal digital transformation that will leapfrog the way we work and drive significant productivity in the product development process, which will begin with the reimagination of the Center of Innovation and Product Leadership .

Our strategy is to digitally reimagine the RH brand and business model both internally and externally.

Internally our multi-year effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation.

Externally our strategy is designed to come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

The World of RH will include rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable.

We believe an opportunity exists to create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a website can and should be.

Global Expansion.

We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that the pursuit of global expansion will provide RH a substantial long-term market opportunity to build a $20 to $25 billion global brand over time.

Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform and brand of RH.

As such, we are actively pursuing the expansion of the RH brand globally with the objective of launching international locations in Europe, beginning in 2022 with the opening of RH England, The Gallery at the Historic Aynhoe Park.

We have secured a number of locations in various markets in the United Kingdom and continental Europe for future Design Galleries and are in lease or purchase negotiations for additional locations .

Factors Affecting Our Results of Operations

The disruption to our business operations from the COVID-19 pandemic has had a significant impact on the comparability of certain ratios and year-over-year trends for our operating results for fiscal 2020 as compared to fiscal 2019.

The primary negative impact to our revenues from store closures occurred during the first half of fiscal 2020, but despite the reopening of most of our Galleries during the second and third fiscal quarters and a strong resurgence in customer demand for our products, we have continued to address a range of business circumstances related to COVID-19 including delays in inventory receipts and manufacturing as our supply chain recovers from the impact of the global health crisis.

We have also changed the cadence of our expenses and investments as we have sought to address the impact of the pandemic on the business and delayed the opening of certain new Gallery locations due to issues related to COVID-19 including the extensive travel restrictions that have been in place in Europe.

From the second quarter of fiscal 2020, we have resumed many investments and previously deferred expenditures but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further developments with respect to the pandemic.

We also expect that direct and indirect effects of the COVID-19 pandemic may continue to affect the comparability of our results during fiscal 2021.

Although we have experienced strong demand for our products during the second half of fiscal 2020, for example, some of the demand may have been driven by stay-at-home restrictions that have been in place throughout many parts of the United States and Canada.

The relaxation of the stay-at-home restrictions may trigger a shift in consumer spending patterns toward other categories such as travel and leisure activities and away from the purchase of merchandise related to the home including home furnishings which could affect our results of operation in fiscal 2021.

Substantially all of our retail locations were open for most of fiscal 2021 and demand for our products has been strong, resulting in our record financial performance achieved in fiscal 2021.

The emergence of new variants such as the “Delta” and “Omicron” variants have continued to present new challenges, especially constraints in our supply chain, including port delays, which have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the evolving nature of the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels for at least the next several quarters.

Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges that we continue to experience.

For more information, refer to Item 1A—Risk Factors—The COVID-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.

Apart from the impact of the COVID-19 pandemic on our business operations and on macroeconomic conditions, below are certain factors that affect our results of operations.

FORM 10-K | 43

Our Strategic Initiatives.

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While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter.

Delays in the rate of opening new Galleries and in pursuit of our international expansion as a result of COVID-19 have results in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.

Delays in the rate of opening new Galleries and in pursuit of our international expansion as a result of COVID-19 have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.

In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives.

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Our current and anticipated demand and our level of net revenues have been adversely affected in prior periods by constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise to match market demand from our customers, leading to higher levels of customer back orders and lost sales.

For example, a number of our vendors are experiencing delays in

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production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.

For example, a number of our vendors have experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.

In addition, as we introduce new products and expand our merchandise assortments into new categories, we expect to experience delays in the production of some new offerings, as we have had similar experiences during prior periods when we adopted substantial newness in our business such as with the introduction of RH Modern in 2015.

During fiscal 2020, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues and our global supply chain has not fully recovered from the impact of this dislocation.

While we expect this dislocation to be resolved by the second half of fiscal 2021, there can be no assurance as to the exact course that the recovery in our supply chain will occur and a number of factors could contribute to further complications in our supply chain including COVID-19 developments in countries where our vendors produce and ship merchandise.

Based on total dollar volume of purchases for fiscal 2020, approximately 72% of our products were sourced from Asia, 15% from the United States and the remainder from other countries and regions.

For fiscal 2020, approximately 35% of our products were sourced from China.

During fiscal 2021 and 2020, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues, and our global supply chain has not fully recovered from the impact of this dislocation.

While we expect this dislocation to be resolved in the near term, there can be no assurance as to the exact course that the recovery in our supply chain will take and a number of factors could contribute to further complications in our supply chain, including COVID-19 developments in countries where our vendors produce merchandise.

Based on total dollar volume of purchases for fiscal 2021, 69% of our products were sourced from Asia, with 34% sourced from China, 15% from the U.S.

and the remainder from other countries and regions.

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If we misjudge the market for our products or the product lines that we acquire, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net revenues and gross profit.

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Overall Economic Trends .

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We have determined that our customer purchasing patterns are influenced by economic factors including the health and volatility of the stock market.

We have seen that previous declines in the stock market and periods of high volatility have been correlated with a reduction in consumer demands for our products and may continue in future periods.

We have seen that previous declines in the stock market and periods of high volatility have correlated with a reduction in consumer demand for our products and may continue in future periods.

We target consumers of high-end home furnishings.

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For more information, refer to Item 1A—Risk Factors — Changes in consumer spending and factors that influence spending of the specific categories of consumers that purchase from us, including the health of the high-end housing market, may significantly impact our revenue and results of operations and —The COVID-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate .

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Fluctuation in Quarterly Results .

Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, the opening of new retail locations, shifts in the timing of various events quarter over quarter including holidays and other events such as store closures, the timing of Source Book releases, promotional events and the timing and extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.

As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.

For example, we experienced significant fluctuations in our revenue growth over the last several years including within the quarters during fiscal 2020.

Our quarterly results during fiscal 2020 were affected by a variety of factors related to the overall operating environment including the impact of the pandemic on various parts of our operations and we expect this variability in quarterly results to continue in fiscal 2021.

In addition, we have historically experienced some seasonality in our business trends as our sales are typically higher in the second fiscal quarter, which correlates to a peak selling season for outdoor items including outdoor furniture.

Unique factors in any given quarter may affect period-to-period comparisons between the quarters being compared, and the results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year.

Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Source Book releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.

As a result of these factors, our working capital requirements and demands may fluctuate during the year.

Unique factors in any given quarter may affect period-to-period comparisons, and the results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year.

How We Assess the Performance of Our Business

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Gross profit as a percentage of our net revenues is referred to as gross margin.

Cost of goods sold include the direct cost of purchased merchandise;

Cost of goods sold includes the direct cost of purchased merchandise;

inventory shrinkage, inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves;

inbound freight;

all freight costs to get merchandise to our stores;

all freight costs to get merchandise to our Galleries;

design, buying and allocation costs;

occupancy costs related to store operations and our supply chain, such as rent and common area maintenance for our leases;

depreciation and amortization of leasehold improvements, equipment and other assets in our stores and distribution centers.

In addition, cost of goods sold include all logistics costs associated with shipping product to our customers, which are partially offset by shipping income collected from customers (recorded in net revenues on the consolidated statements of income).

Our gross profit and gross margin can be favorably impacted by sales volume increases, as occupancy and certain other costs that are largely fixed do not necessarily increase proportionally with volume increases.

occupancy costs related to Gallery operations and our supply chain, such as rent and common area maintenance for our leases;

depreciation and amortization of leasehold improvements, equipment and other assets in our Galleries and distribution centers.

In addition, cost of goods sold includes all logistics costs associated with shipping product to our customers, which are partially offset by shipping income collected from customers (recorded in net revenues on the consolidated statements of income).

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Changes in the mix of our products may also impact our gross profit and gross margin.

We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and our outlet stores to efficiently sell these products.

We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and our outlets to efficiently sell these products.

The timing and extent of markdowns are driven primarily by customer acceptance of our merchandise.

The primary drivers of the costs of individual goods are raw materials costs, which fluctuate based on a number of factors beyond our control, including commodity prices, changes in supply and demand, general economic conditions, competition, import duties, tariffs and government regulation, logistics costs (which may increase in the event of, for example, expansions of or interruptions in the operation of our distribution centers, furniture home delivery centers and customer service center or damage or interruption to our information systems) and labor costs in the countries where we source our merchandise.

We place orders with merchandise vendors primarily in United States dollars and, as a result, are not exposed to significant foreign currency exchange risk.

We place orders with merchandise vendors primarily in United States dollars and, as a result, are not currently exposed to significant foreign currency exchange risk.

Our gross profit and gross margin may not be comparable to other specialty retailers, as some companies may not include all or a portion of the costs related to their distribution network and store occupancy in calculating gross profit and gross margin as we and many other retailers do, but instead may include them in selling, general and administrative expenses.

In addition, certain of our store leases are accounted for as finance leases which result in our recording a portion of the expense related to these agreements in interest expense—net on the consolidated statements of income.

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In addition, certain of our retail leases are accounted for as finance leases, which result in our recording a portion of the expense related to these agreements in interest expense—net on the consolidated statements of income.

In recent periods we have experienced higher cost of goods sold primarily related to our increased costs of merchandise and inbound freight.

Our strategy is to offset these higher costs through price increases, as well as efficiencies in our operations.

These cost increases are reasonably likely to continue to affect our business in the future given the current macroeconomic conditions.

We plan to refine our strategies to continue to address these impacts as they occur.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses include all operating costs not included in cost of goods sold .

These expenses include payroll and payroll related expenses, store expenses other than occupancy and expenses related to many of our operations at our corporate headquarters, including utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.

All store pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred.

We expect certain of these expenses to continue to increase as we open new stores, develop new product categories and otherwise pursue our current business initiatives.

These expenses include payroll and payroll-related expenses, retail expenses other than occupancy and expenses related to many of our operations at our corporate headquarters, including utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.

All pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred.

We expect certain of these expenses to continue to increase as we open new retail locations and outlets, develop new product categories and otherwise pursue our current business initiatives.

Selling, general and administrative expenses as a percentage of net revenues are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed.

In addition, in recent periods we have experienced increased selling, general and administrative expenses, including certain non-cash compensation expenses and costs associated with asset impairments and leases losses, sale leaseback transactions, reorganizations and distribution center closures and product recalls, as discussed in “Basis of Presentation and Results of Operations” below.

Adjusted Operating Income, Adjusted EBITDA and Adjusted Net Income.

We believe that adjusted operating income, adjusted EBITDA and adjusted net income are useful measures of operating performance, as the adjustments eliminate non-recurring and other items that are not reflective of underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business.

We also use adjusted operating income, adjusted EBITDA and adjusted net income as methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations.

In addition, in recent periods we have experienced increased selling, general and administrative expenses, including certain non-cash compensation expenses and costs associated with asset impairments and lease losses, sale leaseback transactions, reorganizations and product recalls, as discussed in “Basis of Presentation and Results of Operations” below.

Adjusted Operating Income, Adjusted Net Income and Adjusted EBITDA.

We believe that adjusted operating income, adjusted net income and adjusted EBITDA are useful measures of operating performance, as the adjustments eliminate non-recurring and other items that are not reflective of underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business.

We also use adjusted operating income, adjusted net income and adjusted EBITDA as methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations.

We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.

We define EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense—net and income tax expense.

We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense.

Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance.

Because adjusted EBITDA omits non-cash items, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance.

We define adjusted net income as consolidated net income (loss), adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.

Refer to Item 6— Selected Consolidated Financial Data for further information.

Free Cash Flow.

Free cash flow excludes all non-cash items.

Free cash flow is net cash provided by operating activities adjusted by the non-cash accretion of debt discount upon settlement of debt, proceeds from sale of asset, capital expenditures, principal payments under finance leases and equity method investments.

Free cash flow is included in this filing because our senior leadership team believes that free cash flow provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results.

Our senior leadership team uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business.

We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.

Refer to “Non-GAAP Financial Measures” below for further information.

46 | FORM 10-K

Basis of Presentation and Results of Operations

The following table sets forth our consolidated statements of income and other financial and operating data.

Consolidated Statements of Income:

The following table sets forth our consolidated statements of income:

(dollars in thousands)

Cost of goods sold

3 unchanged sentences

Interest expense—net

Goodwill and tradename impairment

(Gain) loss on extinguishment of debt—net

Tradename impairment

(Gain) loss on extinguishment of debt

Other expense—net

Total other expenses

3 unchanged sentences

Share of equity method investments losses

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles (“GAAP”), we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures (collectively, our “non-GAAP financial measures”).

We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons.

We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision making.

The non-GAAP financial measures used by us in this Annual Report on Form 10-K may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below.

These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Adjusted Operating Income .

Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.

FORM 10-K | 47

The following table sets forth our consolidated statements of income as a percentage of total net revenues.

Consolidated Statements of Income:

Cost of goods sold

Selling, general and administrative expenses

Income from operations

Other expenses

Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income

(in thousands)

Income tax expense (1)

(Gain) loss on extinguishment of debt (1)

Interest expense—net (1)

Goodwill and tradename impairment

(Gain) loss on extinguishment of debt—net

Total other expenses

Income before income taxes

Share of equity method investments losses (1)

Other expense—net (1)

Tradename impairment (1)

Operating income

Non-cash compensation (2)

Asset impairments and change in useful lives (3)

Recall accrual (4)

Reorganization related costs (5)

(Gain) loss on sale leaseback transaction (6)

Legal settlements (7)

Gain on sale of building and land (8)

Adjusted operating income

(1) Refer to discussion “Fiscal 2021 Compared to Fiscal 2020” below for a discussion of our results of operations for the year ended January 29, 2022 and January 30, 2021.

Information on the year ended February 1, 2020 (fiscal 2019) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 30, 2021, filed with the SEC on March 30, 2021.

(2) The adjustment in fiscal 2021 represents the amortization of the non-cash compensation charge related to an option grant made to Mr.

Friedman in October 2020.

The adjustment in fiscal 2020 represents the non-cash compensation charge upon grant date related to an option grant made to Mr.

Friedman in October 2020 and amortization in the fourth quarter of fiscal 2020.

(3) The adjustment in fiscal 2021 represents asset impairments of $9.6 million.

The adjustments in fiscal 2020 include asset impairments of $6.6 million, acceleration of depreciation expense of $3.9 million due to a change in the estimated useful lives of certain assets and asset impairment of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

The adjustment in fiscal 2019 includes (i) asset impairments of $9.1 million, (ii) acceleration of depreciation expense of $6.2 million due to a change in the estimated useful lives of certain assets and a $0.5 million charge related to the termination of a service agreement associated with such assets, (iii) an RH Contemporary Art lease impairment of $4.6 million, resulting from an update to both the timing and the amount of future estimated lease related cash inflows, and (iv) other lease impairments of $1.5 million due to early exit of leased facilities.

(4) Represents adjustments to net revenues, cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments, and vendor and insurance claims.

In fiscal 2021, the recall adjustments increased net revenues by $1.2 million and increased selling, general and administrative expenses by $3.1 million.

In fiscal 2020, the recall adjustments decreased net revenues by $1.4 million, increased cost of goods sold by $4.6 million and increased selling, general and administrative expenses by $1.4 million.

In fiscal 2019, the recall adjustments increased net revenues by $0.4 million, decreased cost of goods sold by $3.4 million and decreased selling, general and administrative expenses by $0.2 million.

(5) Represents severance costs and related payroll taxes associated with reorganizations.

(6) The adjustment in fiscal 2020 represents the loss on a sale-leaseback transaction related to one of our previously owned Design Galleries.

The adjustment in fiscal 2019 represents the gain on a real estate sale related to an asset previously classified as held for sale.

(7) Represents legal settlements, net of related legal expenses.

(8) Represents the gain on the sale of building and land of one of our previously owned retail Galleries, and other land sales.

48 | FORM 10-K

Adjusted Net Income .

Adjusted net income is a supplemental measure of financial performance that are not required by, or presented in accordance with, GAAP.

Reconciliation of GAAP Net Income to Adjusted Net Income

(in thousands)

Adjustments pre-tax:

(Gain) loss on extinguishment of debt (1)

Non-cash compensation (1)

Amortization of debt discount (2)

Asset impairments and change in useful lives (1)

Recall accrual (1)

Reorganization related costs (1)

Tradename impairment (1)

(Gain) loss on sale leaseback transaction (1)

Legal settlements (1)

Gain on sale of building and land (1)

Subtotal adjusted items

Impact of income tax items (3)

Share of equity method investments losses (1)

Adjusted net income

(1) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.

(2) Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.

Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”), the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”) and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the “2024 Notes”), we separated the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes over their expected lives.

The equity components represent the difference between the proceeds from the issuance of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes and the fair value of the liability components of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes, respectively.

Amounts are presented net of interest capitalized for capital projects of $10 million, $5.3 million and $3.7 million during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

The 2019 Notes matured on June 15, 2019 and the 2020 Notes matured on July 15, 2020 and neither impacted amortization of debt discount post-maturity.

(3) The adjustment for fiscal 2021 is based on an adjusted tax rate of 16.1%, which excludes the tax impact associated with our share of equity method investments losses.

The adjustment in fiscal 2020 is based on an adjusted tax rate of 21.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.

Friedman in the third quarter of fiscal 2020, the Waterworks reporting unit tradename impairment recorded in the first quarter of fiscal 2020 and our share of equity method investments losses.

The adjustment in fiscal 2019 is based on an adjusted tax rate of 17.4%, which is calculated using a 21% normalized tax rate for the first and second quarters and the effective tax rates of 13.7% and 14.9% for the third and fourth quarters, respectively.

FORM 10-K | 49

EBITDA and Adjusted EBITDA .

EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP.

We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense.

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

(in thousands)

Depreciation and amortization

Interest expense—net

Income tax expense

Income before equity method investments

Non-cash compensation (1)

(Gain) loss on extinguishment of debt (2)

Asset impairments (2)

Share of equity method investments losses (2)

Capitalized cloud computing amortization (3)

Other expense—net (2)

Recall accrual (2)

Reorganization related costs (2)

(Gain) loss on sale leaseback transaction (2)

Tradename impairment (2)

Legal settlements (2)

Gain on sale of building and land (2)

Adjusted EBITDA

(1) Represents non-cash compensation related to equity awards granted to employees, including non-cash compensation charges related to an option grant made to Mr.

Friedman in October 2020.

(2) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.

(3) Represents amortization associated with capitalized cloud computing costs.

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Adjusted Capital Expenditures.

We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.

Reconciliation of Adjusted Capital Expenditures

(in thousands)

Capital expenditures

Landlord assets under construction—net of tenant allowances

Adjusted capital expenditures

Fiscal 2021 Compared to Fiscal 2020

3 unchanged sentences

Income from operations

Consolidated net revenues increased $201.2 million, or 7.6%, to $2,848.6 million in fiscal 2020 compared to $2,647.4 million in fiscal 2019.

RH Segment net revenues for fiscal 2020 were negatively impacted by $1.4 million and for fiscal 2019 were favorably impacted by $0.4 million, in each case related to product recalls.

Excluding the product recall adjustments, consolidated net revenues increased $203.0 million, or 7.7%, to $2,850.0 million in fiscal 2020 compared to $2,647.0 million in fiscal 2019.

Consolidated net revenues increased $910 million, or 32.0%, to $3.8 billion in fiscal 2021 compared to $2.8 billion in fiscal 2020.

RH Segment net revenues for fiscal 2021 were favorably impacted by $1.2 million and for fiscal 2020 were negatively impacted by $1.4 million, in each case related to product recalls.

Excluding the product recall adjustments, consolidated net revenues increased $908 million, or 31.8%, to $3.8 billion in fiscal 2021 compared to $2.8 billion in fiscal 2020.

Product recalls and the establishment or adjustment of any related recall accruals can affect our results and cause quarterly fluctuations affecting the period-to-period comparisons of our results.

No assurance can be provided that any accruals will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time, which could further affect results.

FORM 10-K | 61

RH Segment net revenues

RH Segment net revenues increased $215.1 million, or 8.6%, to $2,729.4 million in fiscal 2020 compared to $2,514.3 million in fiscal 2019.

The below discussion highlights several significant factors that resulted in increased RH Segment net revenues, which are listed in order of magnitude .

RH Segment core net revenues increased due to strong customer demand for our products primarily beginning in June 2020 through the end of fiscal 2020.

The strong customer demand in the second half of fiscal 2020 more than offset the negative impact to demand we experienced in our business due to Gallery closures and macroeconomic conditions resulting from COVID-19 in March and April of 2020.

Outlet sales decreased $33.9 million to $187.5 million in fiscal 2020 compared to $221.4 million in fiscal 2019 due to COVID-19 related closures in the first quarter of fiscal 2020.

RH Segment net revenues also decreased in our Contract business and RH Hospitality operations due to COVID-19 related factors including a slowdown in commercial purchasing activities, as well as closures and reduced capacity in our RH Hospitality locations.

Despite our revenue growth during the year, the growth in revenue was lower than the growth in customer demand for our products during the second half of fiscal 2020 primarily due to the effects of higher than anticipated demand and disruptions across our global supply chain as a result of COVID-19.

It may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand.

RH Segment net revenues increased $864 million, or 31.7%, to $3.6 billion in fiscal 2021 compared to $2.7 billion in the fiscal 2020.

The below discussion highlights several significant factors that resulted in an increase in RH Segment net revenues, which are listed in order of magnitude.

RH Segment net revenues in fiscal 2021 increased due to strong customer demand for our products, aided by elements of our supply chain continuing to catch up with customer demand.

RH Segment net revenues in fiscal 2020 were negatively impacted by Gallery closures and macroeconomic conditions resulting from the COVID-19 pandemic, whereby our revenue growth lagged customer demand primarily due to the effects of higher than anticipated demand and disruptions across our global supply chain as a result of COVID-19.

RH Segment net revenues in both fiscal 2021 and fiscal 2020 were impacted by product recalls as noted above.

FORM 10-K | 51

Outlet sales increased $92 million to $279 million in fiscal 2021 compared to $187 million in fiscal 2020.

The first half of fiscal 2020 was impacted by pandemic-related retail closures.

Additionally, RH Segment net revenues increased in our RH Hospitality business compared to fiscal 2020 due to reduced COVID-19 operational restrictions in fiscal 2021 and new Restaurant openings in fiscal 2021.

Waterworks net revenues

Waterworks net revenues decreased $13.9 million, or 10.5%, to $119.2 million in fiscal 2020 compared to $133.1 million in fiscal 2019 primarily due to temporary showroom closures and construction delays related to COVID-19.

Consolidated gross profit increased $230.5 million, or 21.1%, to $1,325.5 million in fiscal 2020 compared to $1,095.0 million in fiscal 2019.

Waterworks net revenues increased $46 million, or 38.4%, to $165 million in fiscal 2021 compared to $119 million in fiscal 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners.

Consolidated gross profit increased $530 million, or 40.0%, to $1.9 billion in fiscal 2021 compared to $1.3 billion in fiscal 2020.

As a percentage of net revenues, gross margin increased 290 basis points to 49.4% of net revenues in fiscal 2021 compared to 46.5% of net revenues in fiscal 2020.

RH Segment gross profit for fiscal 2021 was favorably impacted by $1.2 million related to product recalls.

RH Segment gross profit for fiscal 2020 was negatively impacted by $5.9 million related to product recalls and includes asset impairments of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

RH Segment gross profit for fiscal 2019 was negatively impacted by $4.9 million related to accelerated depreciation for reductions in the estimated useful life of certain assets and was favorably impacted by $3.8 million related to product recalls.

Excluding the product recall, inventory reserves and accelerated asset depreciation adjustments mentioned above, consolidated gross margin would have increased 540 basis points to 46.8% of net revenues in fiscal 2020 compared to 41.4% of net revenues in fiscal 2019.

Excluding the adjustments mentioned above, consolidated gross margin would have increased 250 basis points to 49.3% of net revenues in fiscal 2021 compared to 46.8% of net revenues in fiscal 2020.

RH Segment gross profit

RH Segment gross profit increased $235.4 million, or 22.7%, to $1,274.1 million in fiscal 2020 compared to $1,038.7 million in fiscal 2019.

RH Segment gross profit increased $499 million, or 39.1%, to $1.8 billion in fiscal 2021 compared to $1.3 billion in fiscal 2020.

As a percentage of net revenues, RH Segment gross margin increased 260 basis points to 49.3% of net revenues in fiscal 2021 compared to 46.7% of net revenues in fiscal 2020.

Excluding the product recall, inventory reserves and acceleration of depreciation adjustments mentioned above, RH Segment gross margin would have increased 560 basis points to 47.0% of net revenues in fiscal 2020 from 41.4% of net revenues in fiscal 2019.

The increase was primarily driven by product mix and price increases, as well as higher product margins in select categories in our Core business.

Additionally, we had lower Outlet promotional activity during the period and drove leverage in our RH Segment occupancy costs.

Excluding the adjustments mentioned above, RH Segment gross margin would have increased 230 basis points to 49.3% of net revenues in fiscal 2021 from 47.0% of net revenues in fiscal 2020.

The increase in gross margin was primarily driven by higher product margins in the Core and Outlet businesses and leverage in our RH Segment shipping and occupancy costs in fiscal 2021.

Waterworks gross profit

Waterworks gross profit decreased $4.9 million, or 8.7%, to $51.4 million in fiscal 2020 compared to $56.3 million in fiscal 2019.

As a percentage of net revenues, Waterworks gross margin increased 80 basis points to 43.1% of net revenues in fiscal 2020 compared to 42.3% of net revenues in fiscal 2019.

Waterworks gross profit increased $31 million, or 61.0%, to $83 million in fiscal 2021 compared to $51 million in fiscal 2020.

As a percentage of net revenues, Waterworks gross margin increased 710 basis points to 50.2% of net revenues in fiscal 2021 compared to 43.1% of net revenues in fiscal 2020 primarily driven by higher revenues, favorable changes in product mix, and leverage in Waterworks occupancy costs, offset by an increase in shipping costs related to customer deliveries.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $126.5 million, or 17.3%, to $858.7 million in fiscal 2020 compared to $732.2 million in fiscal 2019, primarily due to non-cash compensation of $117.1 million related to an option grant made to Mr.

Friedman in October 2020.

62 | FORM 10-K

Consolidated selling, general and administrative expenses increased $70 million, or 8.1%, to $928 million in fiscal 2021 compared to $859 million in fiscal 2020.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $53 million, or 6.6%, to $862 million in fiscal 2021 compared to $808 million in fiscal 2020.

RH Segment selling, general and administrative expenses for fiscal 2021 included amortization of non-cash compensation of $24 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $9.6 million related to asset impairments, $1.7 million related to product recalls and $0.4 million related to severance costs and related payroll taxes associated with reorganizations.

RH Segment selling, general and administrative expenses for fiscal 2020 includes non-cash compensation of $117 million related to an option grant made to Mr.

Friedman in October 2020, loss of $9.4 million related to a sale leaseback transaction, $7.0 million related to severance costs and related payroll taxes associated with the termination of associates and a reorganization undertaken in response to the impact of retail closures on our business, $5.0 million related to asset impairments and $3.9 million due to accelerated asset depreciation.

RH Segment selling, general and administrative expenses for fiscal 2019 included impairments of $15.2 million which consisted of asset impairments of $9.1 million, an RH Contemporary Art lease impairment of $4.6 million, resulting from an update to both the timing and the amount of future estimated lease related cash inflows, and other lease impairments of $1.5 million due to early exit of leased facilities.

RH Segment selling, general and administrative expenses for fiscal 2019 also included acceleration of depreciation due to a change the estimated useful life of certain assets of $1.3 million, reorganization related costs of $1.1 million and a $0.5 million charge related to the termination of a service agreement, partially offset by a gain on real estate related to asset previously classified as held for sale and other land sales of $1.5 million, a favorable $1.2 million legal settlement related to historical freight charges and $0.2 million related to product recalls.

52 | FORM 10-K

Excluding the adjustments mentioned above, RH Segment selling, general and administrative expenses would have been 23.0% and 24.4% of net revenues for fiscal 2021 and fiscal 2020, respectively.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by a reduction in advertising costs due to our decision to not mail the Fall 2020 Source Books, leverage in employment and employment related costs, and reduced travel related expenses, partially offset by increased professional fees and incremental COVID-19 related expenses.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by reduction in costs and leverage in advertising costs due to our decision to not mail the Spring 2021 Source Books, leverage in employment and employment-related costs, as well as leverage in our corporate occupancy expenses, partially offset by increased travel-related costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses decreased $2.2 million, or 4.2%, to $50.3 million in fiscal 2020 compared to $52.5 million in fiscal 2019.

Waterworks selling, general and administrative expenses for fiscal 2020 included $1.6 million related to asset impairments and $1.3 million related to product recalls.

Excluding the asset impairments and product recalls, Waterworks selling, general and administrative expenses would have increased 30 basis points to 39.7% of net revenues in fiscal 2020 compared to 39.4% of net revenues in fiscal 2019.

Waterworks selling, general and administrative expenses increased $16 million, or 32.1%, to $66 million in fiscal 2021 compared to $50 million in fiscal 2020.

Waterworks selling, general and administrative expenses for fiscal 2021 included $1.4 million related to product recalls and for fiscal 2020 included $1.6 million related to asset impairments and $1.3 million related to product recalls.

Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 30 basis points to 39.4% of net revenues in fiscal 2021 compared to 39.7% of net revenues in fiscal 2020.

Interest expense—net

3 unchanged sentences

Finance lease interest expense

Promissory notes

Term loan interest expense

Amortization of debt issuance costs and deferred financing fees

Other interest expense

Promissory notes

Asset based credit facility

2 unchanged sentences

Total interest expense—net

FORM 10-K | 63

Goodwill and tradename impairment

Tradename impairment

We incurred a $20 million tradename impairment charge in fiscal 2020 for our Waterworks reporting unit.

We did not recognize goodwill impairment in fiscal 2020 or goodwill or tradename impairment in fiscal 2019.

We did not recognize any tradename impairment in fiscal 2021.

Refer to “Impairment” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

(Gain) loss on extinguishment of debt—net

During fiscal 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $29 million.

We recognized a $0.2 million gain on extinguishment of debt in fiscal 2020 related to the maturity and settlement of the 2020 Notes in July 2020.

We incurred $6.5 million of loss on extinguishment of debt in fiscal 2019 primarily due to a $6.7 million loss from the repayment in full of the second lien term loan in September 2019, which resulted in a prepayment penalty of $4.0 million and acceleration of amortization of debt issuance costs of $2.7 million.

In addition, we recognized a $1.0 million gain on extinguishment of debt in fiscal 2019 due to the maturity and settlement of the 2019 Notes in June 2019 and a $0.8 million loss due to accelerated debt issuance costs related to the early repayment of the FILO term loan.

Other expense—net

Other expense—net was $2.8 million in fiscal 2021 due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to Pound Sterling and Euro, in addition to a foreign exchange loss from the remeasurement of an intercompany loan with a U.K.

FORM 10-K | 53

Income tax expense

1 unchanged sentence

Our effective tax rate was 16.2% in fiscal 2021 compared to 27.8% in fiscal 2020.

The effective tax rate was significantly impacted by non-deductible stock-based compensation related to an option grant made to Mr.

Friedman in October 2020, which resulted in income tax expense of $29.1 million in fiscal 2020.

In addition, the effective tax rate in fiscal 2020 was favorably impacted by net excess tax benefits from stock-based compensation of $22.2 million and $21.4 million in fiscal 2019 resulting from increased option exercise activity and appreciation of our stock price.

The decrease in our effective tax rate is due primarily to higher net excess tax benefits from stock-based compensation of $79 million in fiscal 2021 as compared to $22 million in fiscal 2020 resulting from increased option exercise activity and appreciation of our stock price.

Fiscal 2020 was also impacted by non-deductible stock-based compensation related to an option grant made to Mr.

Friedman in October 2020, which resulted in income tax expense of $29 million.

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $0.9 million loss in fiscal 2020.

Fiscal 2019 Compared to Fiscal 2018

WATERWORKS (1)

(in thousands)

Cost of goods sold

Selling, general and administrative expenses

Income (loss) from operations

(1) Waterworks results include non-cash amortization of $0.4 million related to the inventory fair value adjustment recorded in connection with our acquisition of Waterworks during fiscal 2018.

Consolidated net revenues increased $141.8 million, or 5.7%, to $2,647.4 million in fiscal 2019 compared to $2,505.7 million in fiscal 2018.

Consolidated net revenues for fiscal 2019 were positively impacted by $0.4 million and for fiscal 2018 were negatively impacted by $4.7 million, in each case related to product recalls.

Excluding the product recall adjustments, consolidated net revenues increased $136.7 million, or 5.4%, to $2,647.0 million in fiscal 2019 compared to $2,510.4 million in fiscal 2018.

Product recalls and the establishment or adjustment of any related recall accruals can affect our results and cause quarterly fluctuations affecting the period-to-period comparisons of our results.

64 | FORM 10-K

RH Segment net revenues

RH Segment net revenues increased $138.8 million, or 5.8%, to $2,514.3 million in fiscal 2019 compared to $2,375.5 million in fiscal 2018.

The below discussion highlights several significant factors that resulted in increased RH Segment net revenues, which are listed in order of magnitude .

RH Segment core net revenues increased primarily due to existing Galleries, as well as an increase in retail weighted-average selling square footage related to new store openings, including New York, Nashville, Minneapolis, Columbus and Yountville.

Net revenues also increased from our RH Hospitality operations and Contract business.

In addition, we believe that our net revenues were negatively impacted by a decline in sales in the fourth quarter resulting from several factors, including higher than expected backorders due to a year-over-year decrease in inventories as well as our decision to eliminate most seasonal holiday merchandising from our business, which decision we believe contributed a larger than anticipated impact to sales as customers who might otherwise purchase our Holiday merchandise chose to shop at other retailers offering holiday merchandise selections and, as a result, our net revenues were less than the prior period not only due to elimination of the sale of the holiday merchandise but also the loss of additional sales of non-holiday merchandise that would typically been made at the same time by customers attracted to our product offerings of holiday merchandise.

Outlet sales increased $42.4 million in fiscal 2019 compared to fiscal 2018 primarily due to increased promotional activity as a result of our efforts to reduce inventory subsequent to the distribution center closures as part of the distribution center network redesign.

RH Segment net revenues for fiscal 2019 were positively impacted by $0.4 million and for fiscal 2018 were negatively impacted by $4.7 million, in each case related to product recalls.

Waterworks net revenues

Waterworks net revenues increased $3.0 million, or 2.3%, to $133.1 million in fiscal 2019 compared to $130.2 million in fiscal 2018.

Consolidated gross profit increased $109.4 million, or 11.1%, to $1,095.0 million in fiscal 2019 compared to $985.6 million in fiscal 2018.

As a percentage of net revenues, gross margin increased 210 basis points to 41.4% of net revenues in fiscal 2019 compared to 39.3% of net revenues in fiscal 2018.

RH Segment gross profit for fiscal 2019 was negatively impacted by $4.9 million related to acceleration of depreciation due to a change in the estimated useful life of certain assets and was positively impacted by $3.8 million related to product recalls.

RH Segment gross profit for fiscal 2018 was negatively impacted by $2.6 million related to acceleration of depreciation due to a change in the estimated useful life of certain assets, $1.5 million related to costs associated with distribution center closures, $1.2 million due to inventory impairment related to Holiday merchandise and $0.6 million related to product recalls.

Waterworks gross profit for fiscal 2018 was negatively impacted by $0.4 million of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.

Excluding the accelerated asset depreciation, product recall adjustments, costs associated with the distribution center closures, inventory impairment and impact of the amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased 190 basis points to 41.4% of net revenues in fiscal 2019 compared to 39.5% of net revenues in fiscal 2018.

RH Segment gross profit

RH Segment gross profit increased $104.9 million, or 11.2%, to $1,038.7 million in fiscal 2019 compared to $933.8 million in fiscal 2018.

As a percentage of net revenues, RH Segment gross margin increased 200 basis points to 41.3% of net revenues in fiscal 2019 compared to 39.3% of net revenues in fiscal 2018.

Excluding the accelerated asset depreciation, product recall adjustments, costs associated with distribution center closures and inventory impairment mentioned above, RH Segment gross margin would have increased 190 basis points to 41.4% of net revenues in fiscal 2019 compared to 39.5% of net revenues in fiscal 2018.

The increase was primarily related to improvements in our distribution center network redesign resulting in reduced delivery expense and leverage in occupancy costs, as well as improvements in our core merchandise margins.

The overall increase was partially offset by lower outlet product margins due to increased promotional activity and higher discounts due to our efforts to reduce inventory.

FORM 10-K | 65

Waterworks gross profit

Waterworks gross profit increased $4.5 million, or 8.7%, to $56.3 million in fiscal 2019 compared to $51.8 million in fiscal 2018.

As a percentage of net revenues, Waterworks gross margin increased 250 basis points to 42.3% of net revenues in fiscal 2019 compared to 39.8% of net revenues in fiscal 2018.

Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have increased 220 basis points to 42.3% of net revenues in fiscal 2019 compared to 40.1% of net revenues in fiscal 2018.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $8.3 million, or 1.2%, to $732.2 million in fiscal 2019 compared to $723.8 million in fiscal 2018.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $8.9 million, or 1.3%, to $679.7 million in fiscal 2019 compared to $670.8 million in fiscal 2018.

Additionally, RH Segment selling, general and administrative expenses for fiscal 2019 included advertising and marketing costs which increased $10.7 million primarily due to an increase in circulation and pages of our Source Books.

This was partially offset by a decrease in corporate expenses of $3.4 million, primarily due to reduced preopening expense associated with our Design Gallery openings, partially offset by an increase in credit card fees and other corporate costs.

RH Segment selling, general and administrative expenses for fiscal 2018 included a $10.0 million charge related to reorganizations primarily due to streamlining and realigning our home office operations, $8.5 million impairment recorded upon reclassification of an owned Design Gallery as asset held for sale, $3.4 million related to impairment of the RH Contemporary Art lease, $1.6 million related to costs associated with distribution center closures and $1.0 million related to product recalls, partially offset by a favorable $5.3 million legal settlement, net of related legal expenses.

RH Segment selling, general and administrative expenses would have been 26.4% and 27.4% of net revenues for fiscal 2019 and fiscal 2018, respectively, excluding the asset impairments, accelerated asset depreciation, reorganization related costs, product recall adjustments, costs associated with distribution center closures and legal settlements mentioned above.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by other corporate costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $1.4 million, or 2.6%, to $53.1 million in fiscal 2018 compared to $51.7 million in fiscal 2017.

Waterworks selling, general and administrative expenses were 40.8% and 42.8% of net revenues in fiscal 2018 and fiscal 2017, respectively.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in corporate costs.

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Interest expense—net

Interest expense—net increased $19.4 million in fiscal 2019 compared to fiscal 2018, which consisted of the following in each fiscal year:

(in thousands)

Amortization of convertible senior notes debt discount

Finance lease interest expense

Amortization of debt issuance costs and deferred financing fees

Promissory notes

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement.

In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement.

The issuance of the Term Loan was assigned a Ba2 rating from Moody’s Investors Service and BB rating from S&P Global.

Refer to Note 13— Credit Facilities in our consolidated financial statements.

A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table:

(in millions)

Asset based credit facility

Other interest expense

Capitalized interest for capital projects

Interest income

Total interest expense—net

Goodwill and tradename impairment

We did not recognize goodwill or tradename impairment in fiscal 2019.

We incurred a $32.1 million goodwill and tradename impairment charge in fiscal 2018 for our Waterworks reporting unit.

Refer to “Impairment” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

(Gain) loss on extinguishment of debt—net

We incurred a $0.9 million loss on extinguishment of debt in fiscal 2018 due to the repayment in full of the LILO term loan, the promissory note secured by our aircraft and the equipment security notes in June 2018, which resulted in accelerated amortization of debt issuance costs of $0.6 million and a prepayment penalty of $0.3 million.

Income tax expense

Income tax expense was $48.8 million in fiscal 2019 compared to $25.2 million in fiscal 2018.

Our effective tax rate was 18.1% in fiscal 2019 compared to 15.7% in fiscal 2018.

The effective tax rate was significantly impacted by discrete tax benefits related to net excess tax windfalls from stock-based compensation of $21.4 million in fiscal 2019 and $19.0 million in fiscal 2018 resulting from increased option exercise activity and appreciation of our stock price.

Additionally, the effective tax rate in fiscal 2018 was impacted by the goodwill impairment for the Waterworks reporting unit.

FORM 10-K | 67

Quarterly Results

The following table sets forth our historical quarterly consolidated statements of income for each of the last eight fiscal quarters ended through January 30, 2021.

This quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments that we consider necessary to fairly state the financial information for the fiscal quarters presented.

The quarterly data should be read in conjunction with our consolidated financial statements and the related notes included in Item 8 — Financial Statements and Supplementary Data .

As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year and results of a period shorter than a full year may not be indicative of results expected for the entire year.

(in thousands)

Cost of goods sold

Selling, general and administrative expenses

Income from operations

Other expenses

Interest expense—net

Tradename impairment

(Gain) loss on extinguishment of debt

Total other expenses

Income (loss) before income taxes

Income tax expense (benefit)

Income (loss) before equity method investments

Share of equity method investments losses

Net income (loss)

Adjusted net income (1)

Adjusted EBITDA (2)

(1) Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.

Adjusted net income is included in this filing because our senior leadership team believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of actual results on a comparable basis with historical results.

Our senior leadership team uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to adjusted net income for the periods indicated below.

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(in thousands)

Net income (loss)

Adjustments pre-tax:

Non-cash compensation (a)

Amortization of debt discount (b)

Tradename impairment (c)

Asset impairments and lease losses (d)

(Gain) loss on sale leaseback transaction (e)

Reorganization related costs (f)

Recall accrual (g)

(Gain) loss on extinguishment of debt—net (h)

Legal settlements (i)

Asset held for sale gain (j)

Subtotal adjusted items

Impact of income tax items (k)

Share of equity method investments losses (l)

Adjusted net income

(a) The adjustments in the third and fourth quarters of fiscal 2020 represent non-cash compensation charges related to an option grant made to Mr.

Friedman in October 2020.

(b) Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.

Amounts are presented net of interest capitalized for capital projects of $0.7 million, $0.7 million, $0.9 million and $1.4 million during the first, second, third and fourth quarters of fiscal 2019, respectively.

Amounts are presented net of interest capitalized for capital projects of $1.8 million, $1.3 million, $1.1 million and $1.1 million during the first, second, third and fourth quarters of fiscal 2020, respectively.

The 2019 Notes matured on June 15, 2019 and the 2020 Notes matured on July 15, 2020 and neither impacted amortization of debt discount post-maturity.

Refer to “Impairment” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

FORM 10-K | 69

(d) The adjustment in the first quarter of fiscal 2019 includes acceleration of depreciation expense of $3.0 million due to a change in the estimated useful lives of certain assets and a $0.5 million charge related to the termination of a service agreement associated with such assets.

The adjustment in the second quarter of fiscal 2019 includes acceleration of depreciation expense of $1.9 million and lease impairments of $0.7 million due to early exit of leased facilities.

The adjustment in the third quarter of fiscal 2019 includes lease impairments of $0.8 million due to early exit of leased facilities and asset impairments of $0.2 million.

The adjustment in the fourth quarter of fiscal 2019 includes asset impairments of $8.9 million, an RH Contemporary Art lease impairment of $4.6 million and acceleration of depreciation expense of $1.3 million.

The adjustment in first quarter of fiscal 2020 includes asset impairments of $4.8 million, asset impairments of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic and acceleration of depreciation expense of $1.3 million.

The adjustment in the second quarter of fiscal 2020 includes $1.3 million of accelerated depreciation expense driven by a reduction in the estimated useful lives of certain assets.

The adjustment in the third quarter of fiscal 2020 includes $1.3 million of accelerated depreciation expense driven by a reduction in the estimated useful lives of certain assets the acceleration of depreciation expense of $1.3 million and asset impairments of $0.8 million.

The adjustment in the fourth quarter of fiscal 2020 represents right-of-use asset impairments resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions of exited locations.

(e) The adjustment in the third quarter of fiscal 2019 represents the gain on a real estate sale related to an asset previously classified as held for sale.

The adjustment in the second quarter of fiscal 2020 represents a loss from a sale-leaseback transaction related to one of our previously owned Design Galleries.

(f) Represents severance costs and related taxes associated with reorganizations.

(g) Represents adjustments to net revenues, cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments, and vendor and insurance claims.

(h) The adjustment in the second quarter of fiscal 2019 represents the gain on extinguishment of debt upon the maturity and settlement of the 2019 Notes in June 2019.

The adjustment in the third quarter of fiscal 2019 includes the loss on extinguishment of debt related to a second lien term loan which was repaid in full in September 2019.

The adjustments in the third and fourth quarters of fiscal 2019 include the acceleration of debt issuance costs related to early repayment of the FILO term loan.

The adjustment in the second quarter of fiscal 2020 represents a gain on extinguishment of debt upon the maturity and settlement of the 2020 Notes in July 2020.

(i) Represents legal settlements, net of related legal expenses.

(j) Represents the gain on real estate land sales.

(k) The first and second quarters of fiscal 2019 assume a normalized tax rate of 21%.

The adjustment in the third and fourth quarters of fiscal 2019 represents the tax effect of the adjusted items based on our effective tax rates of 13.7% and 14.9%, respectively.

The adjustment in the first quarter of fiscal 2020 is based on an adjusted tax rate of 24.3%, which excludes the tax impact associated with the Waterworks reporting unit tradename impairment.

The adjustment in the second quarter of fiscal 2020 represents the tax effect of the adjusted items based on our effective tax rate of 16.1%.

The adjustment in the third quarter of fiscal 2020 is based on an adjusted tax rate of 23.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.

Friedman in October 2020.

The adjustment in the fourth quarter of fiscal 2020 is based on an adjusted tax rate of 22.5%, which excludes our share of equity method investments losses.

(l) Represents our proportionate share of the losses of our equity method investments.

Refer to Note 8— Equity Method Investments in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

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(2) EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP.

We define EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense—net and income tax expense (benefit).

Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, certain non-recurring, and other items that we do not consider representative of our underlying operating performance.

EBITDA and Adjusted EBITDA are included in this filing because our senior leadership team believes that these metrics provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of operating results on a comparable basis with historical results.

Our senior leadership team uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions for other companies due to different methods of calculation .

The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the periods indicated below.

(in thousands)

Net income (loss)

Depreciation and amortization

Interest expense—net

Income tax expense (benefit)

Non-cash compensation (a)

Asset impairment and lease losses (b)

(Gain) loss on sale leaseback transaction (b)

(Gain) loss on extinguishment of debt (b)

Reorganization related costs (b)

Recall accrual (b)

Share of equity method investments losses (b)

Capitalized cloud computing amortization (c)

Gain on sale of land (b)

Legal settlements (b)

Tradename impairment (b)

Adjusted EBITDA

(a) Represents non-cash compensation related to equity awards granted to employees, including non-cash compensation charges related to an option grant made to Mr.

Friedman in October 2020.

(b) Refer to the reconciliation of net income (loss) to adjusted net income table above and the related footnotes for additional information.

Term loan (1)

Equipment promissory notes (1)

Convertible senior notes due 2023 (1)

Convertible senior notes due 2024 (1)

Notes payable for share repurchases

Cash and cash equivalents

Total net debt

Availability under the asset based credit facility—net (2)

(1) Amounts exclude discounts upon original issuance and third party offering and debt issuance costs.

(2) As of January 29, 2022 and January 30, 2021, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $20 million and $15 million in outstanding letters of credit, respectively.

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Liquidity and Capital Resources

The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as the development of our infrastructure and information technology.

The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, rent for our retail and outlet locations, capital expenditures associated with opening new locations and updating existing locations, as well as the development of our infrastructure and information technology.

We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies.

In the past we have pursued substantial repurchases of our common stock when we believed that such investments represented a good long term investment for the benefit of our shareholders.

In October 2018, our Board of Directors approved a $700 million share repurchase program, of which $250 million in share repurchases were completed in fiscal 2018 at an average price of $122.10 per share, and the $700 million authorization amount was replenished by the Board of Directors in March 2019.

During the first quarter of fiscal 2019, we repurchased approximately 2.2 million shares of our common stock at an average price of $115.36 per share, for an aggregate repurchase amount of approximately $250 million, with $450 million still available under this share repurchase program.

Refer to “Share Repurchase Programs” below.

We evaluate our capital allocation from time to time and may engage in future investments in connection with existing or new share repurchase programs in circumstances where buying shares of our common stock or related investments, which may include investments in derivatives or other equity linked instruments, represent a good value and provides a favorable return for our shareholders.

We have in the past been opportunistic in responding to favorable market conditions regarding both sources and uses of capital.

Our use of convertible notes financings has enabled us to pursue various investments, such as our share repurchase programs which we consider to have been an excellent allocation of capital for the benefit of our shareholders.

We regularly evaluate various debt and other financing alternatives, including convertible notes and other equity-linked instruments.

Financing that we arrange through the sale of equity linked instruments such as our convertible notes financings may lead to substantial dilution to our investors if the price of our common stock exceeds the upper strike exercise price of the warrants in connection with our bond hedge transactions, which has been the case in connection with our convertible notes which matured in 2019 and 2020.

At the same time, the investments we have previously made in connection with our share repurchase programs have more than offset the amount of dilution we experienced in relation to these warrants.

We continuously evaluate our capital allocation strategy and may engage in future investments in connection with existing or new share repurchase programs (refer to “Share Repurchase Programs” below), which may include investments in derivatives or other equity linked instruments.

We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital.

Capital raised from debt financings has enabled us to pursue various investments.

Financing that we arrange through the sale of equity linked instruments, such as our convertible notes financings, may lead to substantial dilution to our investors if the price of our common stock continues to exceed the upper strike exercise price of the warrants in connection with our bond hedge transactions.

We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business.

We have $685 million in aggregate principal amount of convertible notes outstanding as of January 30, 2021, of which $335 million mature in June 2023 and $350 million mature in September 2024.

Based on the strong cash flow generated in 2020 and continued strong cash flow anticipated in future years, we expect to repay the outstanding principal amount of our convertible notes at maturity in June 2023 and September 2024 in cash, in each case to minimize dilution.

While we purchased convertible note hedges and sold warrants with respect to each convertible note transaction, which are intended to offset any actual earnings dilution from the conversion of the 2024 Notes until our common stock is above approximately $338.24 per share and from the conversion of the 2023 Notes until our common stock is above approximately $309.84 per share, our shareholders may still experience dilution to the extent our common stock trades above such levels.

While we anticipate using excess cash, free cash flow and borrowings on our asset based credit facility to repay the convertible notes in cash to minimize dilution, we may need to pursue additional sources of liquidity to repay such convertible notes in cash at their respective maturity dates or upon early conversion, as applicable.

There can be no assurance as to the availability of capital to fund such repayments, or that if capital is available through additional debt issuances or refinancing of the convertible notes, that such capital will be available on terms that are favorable to us.

Our business has historically relied on cash flows from operations, net cash proceeds from the issuance of the convertible senior notes, as well as borrowings under our credit facilities as our primary sources of liquidity.

We believe our operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements and fulfill other capital needs for more than the next 12 months.

From the second quarter of fiscal 2020, we have resumed many investments and previously deferred expenditures in response to the COVID-19 pandemic, but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further developments with respect to the pandemic.

We will continue to closely manage our investments while considering both the overall economic environment as well as the needs of our business operations.

In addition, our near term decisions regarding the sources and uses of capital in our business will continue to reflect and adapt to changes in market conditions and our business including further developments with respect to the pandemic.

Credit Facilities and Debt Arrangements

We amended and restated our asset based credit facility in July 2021, which has an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility.

The ABL Credit Agreement provides that the $300 million accordion, or a portion thereof, may be added as a first-in, last-out term loan facility if and to the extent the lenders revise their credit commitments for such facility.

The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met.

The maturity date of the asset based credit facility is July 29, 2026.

We entered into a term loan credit agreement in October 2021.

The Term Loan Credit Agreement provides for a Term Loan in an aggregate principal amount of $2.0 billion and the maturity date of the Term Loan Credit Agreement is October 20, 2028.

As of January 29, 2022, we have $1,995 million outstanding under the Term Loan Credit Agreement, and we are required to make quarterly principal payments of $5.0 million.

We had $294 million remaining in aggregate principal amount of convertible notes outstanding as of January 29, 2022, comprised of $74 million of 2023 Notes and $220 million of 2024 Notes.

Due to early conversions at the option of the noteholders, $9.4 million of the 2023 Notes and $3.6 million of the 2024 Notes were recorded within current liabilities on our consolidated financial statements as of January 29, 2022.

Absent further early conversion elections, the remaining 2023 Notes have a scheduled maturity in June 2023 and the remaining 2024 Notes have a scheduled maturity in September 2024.

We anticipate having ample cash available in order to repay the principal amount of our convertible notes in cash with respect to any convertible notes for which the holders elect early conversion, as well as upon maturity in June 2023 and September 2024, in each case in order to minimize dilution.

Based upon the strength in our common stock price, we expect that holders of the convertible notes may continue to elect early conversion of such notes in advance of the scheduled maturity dates.

We believe our capital structure provides us with substantial optionality regarding our capital allocation.

We continue to closely manage our business and our investments while considering both the overall economic environment as well as the needs of our operations.

In addition, our near-term decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to the pandemic.

We believe our existing cash balances and operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements and fulfill other capital needs for more than the next 12 months.

FORM 10-K | 55

We extended and amended our asset based credit facility in June 2017, which has a total availability of $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $200 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $800 million if and to the extent the lenders revise their credit commitments to encompass a larger facility.

The revolving line of credit has a maturity date of June 28, 2022.

While we do not require additional debt to fund our operations, our goal continues to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations.

We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, entry into various second lien credit agreements and other new debt financing arrangements that present attractive terms.

We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, entry into various credit agreements and other new debt financing arrangements that present attractive terms.

We expect to continue to use additional sources of debt financing in future periods as a source of additional capital to fund our various investments.

In addition to funding the normal operations of our business, we have used our liquidity to fund significant investments and strategies such as our share repurchase programs, various acquisitions, and growth initiatives, including through joint ventures and real estate investments.

For example, in fiscal 2019 we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $23.5 million and in fiscal 2020 we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $25.5 million, both of which qualified for sale-leaseback accounting in accordance with ASC 842.

During fiscal 2017, we increased the aggregate level of our indebtedness through various forms of debt financing and our net debt to trailing twelve months adjusted EBITDA reached a level in excess of 5X during this time period.

Our business has performed very well since that time and we have increased earnings, generated substantial cash flow, paid down debt and reduced this leverage ratio to a level of 0.7X as of January 30, 2021.

While our cash flow has enabled this significant reduction in the aggregate since fiscal 2017 and we currently have multiple financing alternatives available to us on favorable terms that could provide us with additional financial flexibility with respect to capital allocation, there can be no assurance that additional capital, whether raised through the sale of assets, utilization of our existing debt financing sources, or pursuit of additional debt financing sources, will be available to us on a timely manner, on favorable terms or at all.

We may elect to incur additional debt and increase the level of indebtedness in our leverage ratio in the future.

Any increase in debt and the level of indebtedness in our leverage ratio could expose us to greater risks in the event of a financial or operational downturn or other events including unanticipated adverse developments that affect our financial performance or the ability to access financial markets.

To the extent we pursue additional debt as a source of liquidity, our capitalization profile may change and may include significant leverage, and as a result we may be required to use future liquidity to repay such indebtedness and may be subject to additional terms and restrictions which affect our operations and future uses of capital.

See Item 1A—Risk Factors—Our operations have significant liquidity and capital requirements and depend on the availability of adequate financing and sources of capital on reasonable terms.

If we fail to use our financial resources effectively, or if we are unable to obtain sufficient capital when needed, it could have a significant negative effect on our ability to grow our business.

In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue.

To the extent we choose to secure additional sources of liquidity through incremental debt financing, there can be no assurances that we will be able to raise such financing on favorable terms, if at all, or that future financing requirements will not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock.

Any adverse developments in the U.S.

or global credit markets as a result of the pandemic or any other reason could affect our ability to manage our debt obligations and our ability to access future debt.

In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments including the repayment of the principal amount of our convertible senior notes in cash, whether upon stated maturity, early conversion or otherwise of such senior notes.

To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations including triggering cross defaults or other consequences with respect to other indebtedness.

Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations.

Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks.

We have invested significant capital expenditures in developing and opening new Design Galleries, and these capital expenditures have increased in the past, and may continue to increase in future periods, as we open additional Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings.

Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.

Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may adjust our investments in various business initiatives including our capital expenditures over the course of fiscal 2021.

We anticipate our adjusted capital expenditures to be $250 million to $300 million in fiscal 2021, primarily related to our efforts to continue our growth and expansion, including construction of new Design Galleries and infrastructure investments.

Adjusted capital expenditures in fiscal 2020 were $180.6 million, net of cash received related to landlord tenant allowances of $17.3 million.

Our fiscal 2020 adjusted capital expenditures are partially offset by net proceeds from sales of assets of $25.0 million.

FORM 10-K | 73

During fiscal 2021, adjusted capital expenditures were $254 million, net of cash received related to landlord tenant allowances of $22 million.

We anticipate our adjusted capital expenditures to be $200 million to $250 million in fiscal 2022, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

Nevertheless, we may elect to pursue additional capital expenditures beyond those that are anticipated during any given fiscal period inasmuch as our strategy is to be opportunistic with respect to our investments and we may choose to pursue certain capital transactions based on the availability and timing of unique opportunities.

Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may adjust our investments in various business initiatives, including our capital expenditures, during fiscal 2022 and beyond.

Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us.

Other lease arrangements for our new Design Galleries require the landlord to fund a portion of the construction related costs directly to third parties, rather than through traditional construction allowances and accordingly, under these arrangements we do not expect to receive contributions directly from our landlords related to the building of our Design Galleries.

As we develop new Galleries, as well as other potential strategic initiatives in the future like our integrated hospitality experience, we may explore other models for our real estate, which could include longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings.

These approaches might require different levels of capital investment on our part than a traditional store lease with a landlord.

We also believe there is an opportunity to transition our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries then recoup the investments through a sale-leaseback arrangement resulting in lower capital investment and lower rent.

For example, we have used this strategy in fiscal 2019 through the sale-leaseback transaction for the Yountville Design Gallery and in July 2020 through the sale-leaseback transaction for the Minneapolis Design Gallery.

In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurances that we will be successful in securing additional funding on attractive terms or at all.

In addition, we continue to address the effects of COVID-19 on our business with respect to real estate development and the introduction of new Galleries in both the US and internationally.

A range of factors involved in the development of new Gallery and RH Hospitality may continue to be affected by the COVID-19 health crisis including delays in construction as well as permitting and other necessary governmental actions.

We also believe there is an opportunity to transition some portion of our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries with the objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent.

For example, in fiscal 2019 we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $24 million and in fiscal 2020 we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $26 million, both of which qualified for sale-leaseback accounting.

In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurance that we will be successful in securing additional funding on attractive terms or at all.

In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we may pursue.

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In addition, we continue to address the effects of the COVID-19 pandemic on our business with respect to real estate development and the introduction of new Galleries in both the U.S.

and internationally.

A range of factors involved in the development of new Galleries and RH Hospitality may continue to be affected by the pandemic, including delays in construction as well as permitting and other necessary governmental actions.

In addition, the scope and cadence of investments by third parties, including landlords and other real estate counterparties, may be adversely affected by the health crisis.

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In addition, we may continue to be required to make lease payments in whole or in part for our Galleries, Outlets and Restaurants that were temporarily closed or are required to close in the future in the event of resurgences in COVID-19 outbreaks or for other reasons.

Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from COVID-19, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.

There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing on favorable terms to the extent necessary to fund all of our initiatives, or that sufficient incremental debt will be available to us in order to fund our cash payments in respect of the repayment of our outstanding convertible senior notes in an aggregate principal amount of $685 million at maturity of such senior convertible notes.

To the extent we need to secure additional sources of liquidity, we cannot assure you that we will be able to raise necessary funds on favorable terms, if at all, or that future financing requirements would not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock.

Any adverse developments in the U.S.

or global credit markets as a result of COVID-19 could affect our ability to manage our debt obligations and our ability to access future debt.

Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations.

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Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from the pandemic, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.

Cash Flow Analysis

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Net cash used in investing activities

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents and restricted cash equivalents

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents and restricted cash equivalents

Cash and cash equivalents and restricted cash equivalents at end of period

Net Cash Provided By Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, impairments, stock-based compensation, amortization of debt discount and the effect of changes in working capital and other activities.

For fiscal 2020, net cash provided by operating activities was $500.8 million and consisted of net income of $271.8 million and an increase in non-cash items of $335.7 million, partially offset by a change in working capital and other activities of $106.7 million.

The sources of cash from working capital were primarily driven by increases in deferred revenue and customer deposits of $116.2 million primarily due to strong consumer demand for our products during the second half of fiscal 2020, as well as an increase in accounts payable and accrued expenses of $63.6 million and other current liabilities of $43.9 million.

These sources of cash from working capital were partially offset by uses of cash driven by an increase in merchandise inventory of $104.6 million, an increase in landlord assets under construction of $69.5 million, an increase in prepaid expenses and other assets of $67.3 million and a decrease in operating lease liabilities of $58.9 million primarily due to payments made under the related lease agreements.

For fiscal 2019, net cash provided by operating activities was $339.2 million and consisted of net income of $220.4 million and an increase in non-cash items of $199.3 million, partially offset by a change in working capital and other activities of $80.5 million.

The sources of cash from working capital were primarily driven by decreases in merchandise inventories of $93.3 million, and prepaid expenses and other current assets of $28.4 million.

These sources of cash from working capital were partially offset by uses of cash driven by a decrease in operating lease liabilities of $77.0 million primarily due to payments made under the agreements, an increase in landlord assets under construction of $64.3 million, as well as decreases in other current liabilities and other non-current obligations of $45.8 million and $25.1 million, respectively.

Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, impairments, stock-based compensation, cash paid attributable to accretion of debt discount upon settlement of debt and the effect of changes in working capital and other activities.

For fiscal 2021, net cash provided by operating activities was $662 million and consisted of net income of $689 million and an increase in non-cash items of $252 million, partially offset by a change in working capital and other activities of $279 million.

The sources of cash from working capital were primarily driven by increases in other current liabilities of $51.2 million.

These sources of cash from working capital were partially offset by uses of cash driven by an increase in prepaid expenses and other current assets of $88.4 million related to (i) adoption of Topic 606, (ii) vendor deposits and (iii) federal and state tax receivables due to prepayments, a decrease in operating lease liabilities of $70.9 million, an increase in landlord assets under construction of $59.0 million and a decrease in other non-current obligations of $18.1 million.

The source of cash from working capital was primarily driven by an increase in deferred revenue and customer deposits of $107 million primarily due to strong consumer demand for our products.

This source of cash from working capital was offset by uses of cash driven by an increase in merchandise inventory of $190 million, a decrease in operating lease liabilities of $77 million due to payments made under the related lease agreements, an increase in landlord assets under construction of $68 million and an increase in prepaid expenses and other assets of $50 million.

Net Cash Used In Investing Activities

Investing activities consist primarily of investments in capital expenditures related to investments in retail stores, information technology and systems infrastructure, as well as supply chain investments.

Investing activities also include strategic investments made by the Company.

For fiscal 2020, net cash used in investing activities was $197.6 million primarily due to investments in retail stores, information technology and systems infrastructure, and supply chain of $111.1 million.

In fiscal 2020, we completed the acquisition of equity method investments with $80.7 million in cash payments and invested $17.9 million to acquire a business and assets.

Net cash used in investing activities was partially offset by net proceeds from the sale of building and land of $25.0 million.

Investing activities also include our strategic investments.

For fiscal 2021, net cash used in investing activities was $194 million and was comprised of investments in retail stores, information technology and systems infrastructure of $185 million and additional funding of our equity method investments of $9.0 million.

FORM 10-K | 57

For fiscal 2019, net cash used in investing activities was $122.5 million, of which $93.6 million primarily related to investments in retail stores, information technology and systems infrastructure, and supply chain investments.

In addition, we made deposits on an asset under construction of $53.0 million, offset by net proceeds from the sale of building and land of $24.1 million.

For fiscal 2018, net cash used in investing activities was $80.0 million due to investments in retail stores, information technology and systems infrastructure, and supply chain investments.

Net Cash Used In Financing Activities

Financing activities consist primarily of borrowings related to convertible senior notes, credit facilities and other financing arrangements, and cash used in connection with such financing activities include investments in share repurchase programs, repayment of indebtedness including principal payments under finance lease agreements and other equity related transactions such as the convertible note bond hedge and warrant transactions in connection with our convertible notes financings.

For fiscal 2020, net cash used in financing activities was $243.9 million.

The $300 million 2020 Notes matured in July 2020, of which $215.8 million is presented as repayments of convertible senior notes within net cash used in financing activities and $84.0 million is reflected as non-cash accretion of debt discount upon settlement of debt presented in net cash provided by operating activities.

Net cash used in financing activities also included repayments under promissory and equipment notes of $34.5 million.

For fiscal 2019, net cash used in financing activities was $174.8 million.

The $350.0 million 2019 Notes matured in June 2019, of which $278.6 million is presented as repayments of convertible senior notes within net cash used in financing activities and $70.5 million is reflected as non-cash accretion of debt discount upon settlement of debt presented in net cash provided by operating activities.

Net cash used in financing activities included repurchases of approximately 2.2 million shares of our common stock for an aggregate repurchase amount of $250.0 million, as well as net repayments of $57.5 million under the asset based credit facility.

Net cash used in financing activities included borrowings under a $350.0 million convertible senior notes agreement issued in September 2019, which provided net proceeds of $304.1 million after taking into consideration the convertible note hedge and warrant transactions, as well as discounts upon original issuance and offering costs.

Net repayments under the term loan facilities (as defined below) were $4.0 million, and net borrowings under promissory and equipment notes of $105.5 million were comprised of $52.5 million of promissory notes secured by certain equipment and $53.0 million related to promissory notes on asset under construction.

Equity related transactions provided $20.1 million due to $27.1 million of proceeds from exercise of employee stock options, partially offset by $7.1 million of cash paid for employee taxes related to net settlement of equity awards.

Principal payments under finance lease agreements totaled $9.7 million.

For fiscal 2018, net cash used in financing activities was $189.0 million primarily due to net repayments of debt of $254.4 million under the asset based credit facility, LILO term loan, equipment loans and promissory note secured by our aircraft, as well as due to $250 million of share repurchases made under the $950 Million Repurchase Program.

The repayments of debt described above were partially funded by the $335 million convertible senior notes issued in June 2018, which provided net proceeds of $287.8 million after taking into consideration the convertible note hedge and warrant transactions, as well as discounts upon original issuance and offering costs.

Net Cash Provided By (Used In) Financing Activities

Financing activities consist primarily of borrowings and repayments related to convertible senior notes, credit facilities and other financing arrangements, and cash used in connection with such financing activities include investments in share repurchase programs, repayment of indebtedness including principal payments under finance lease agreements and other equity related transactions such as the convertible note bond hedge and warrant transactions in connection with our convertible notes financings.

For fiscal 2021, net cash provided by financing activities was $1.6 billion, primarily due to the issuance of the Term Loan in October 2021 in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement.

This source of cash was offset by uses of cash, partially due to the repayment of $391 million of the 2023 Notes and 2024 Notes in fiscal 2021 as a result of early conversion at the option of the noteholders, of which $336 million is presented as repayments of convertible senior notes within cash from financing activities and $55 million is reflected as cash paid attributable to accretion of debt discount upon settlement of debt within cash from operating activities.

In addition, we incurred $26 million of debt issuance costs related to the Term Loan Credit Agreement and the ABL Credit Agreement, as well as made repayments of $23 million on our equipment notes, $14 million of principal payments under finance lease agreements and $5.0 million of principal payments under the Term Loan Credit Agreement.

Equity related transactions provided $11 million due to $32 million of proceeds from exercise of employee stock options, partially offset by $21 million of cash paid for employee taxes related to net settlement of equity awards.

Principal payments under finance lease agreements totaled $6.9 million.

Non-Cash Transactions

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In addition, non-cash transactions consist of shares issued and received related to convertible senior note transactions.

Cash Requirements from Contractual Obligations

We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.

Refer to “Leases” within Note 3— Significant Accounting Policies and Note 11— Leases in our consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.

Most lease arrangements provide us with the option to renew the leases at defined terms.

The table presenting the maturities of our lease liabilities included in Note 11— Leases includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases.

Convertible Senior Notes

Refer to Note 12— Convertible Senior Notes in our consolidated financial statements within Part II of this Annual Report on Form 10-K for further information on our 0.00% Convertible Senior Notes due 2024, 0.00% Convertible Senior Notes due 2023 and 0.00% Convertible Senior Notes due 2020.

Our 0.00% Convertible Senior Notes due 2020 matured on July 15, 2020.

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Refer to Note 12— Convertible Senior Notes in our consolidated financial statements for further information on our 0.00% Convertible Senior Notes due 2024 and 0.00% Convertible Senior Notes due 2023.

Asset Based Credit Facility

Refer to Note 13— Credit Facilities in our consolidated financial statements within Part II of this Annual Report on Form 10-K for further information on our asset based credit facility.

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our Term Loan.

Equipment Loan Facility

Refer to Note 13— Credit Facilities in our consolidated financial statements within Part II of this Annual Report on Form 10-K for further information on our equipment loan facility.

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our equipment loan facility.

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Share Repurchase Programs

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We may undertake other repurchase programs in the future with respect to our securities.

We generated $405 million, $330 million and $163 million in free cash flow in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, which provides us the financial flexibility to execute investments, such as our share repurchase programs.

Refer to “How We Assess the Performance of Our Business” for our definition of free cash flow.

A reconciliation of our net cash provided by operating activities to free cash flow is as follows:

(in thousands)

Net cash provided by operating activities

Accretion of debt discount upon settlement of debt

Proceeds from sale of assets

Capital expenditures

Principal payments under finance leases

Equity method investments

Free cash flow

$950 Million Share Repurchase Program

In 2018, our Board of Directors authorized a share repurchase program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases including through privately-negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives.

We completed $250.0 million in share repurchases in fiscal 2018 under this program.

In the first quarter of fiscal 2019, we repurchased approximately 2.2 million shares of our common stock at an average price of $115.36 per share, for an aggregate repurchase amount of approximately $250.0 million under this share repurchase program.

We did not make any repurchases under this program in fiscal 2020.

The total current authorized size of this share purchase program is up to $950 million (the “950 Million Repurchase Program”).

As of January 30, 2021, there was $450 million remaining for future share repurchases under this program.

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Contractual Obligations

As of January 30, 2021, our future contractual cash obligations were as follows:

PAYMENTS DUE BY FISCAL YEAR

(in thousands)

Asset based credit facility (1)

Equipment promissory notes (2)

Convertible senior notes due 2023

Convertible senior notes due 2024

Notes payable for share repurchases

Operating lease liabilities (3)

Finance lease liabilities (3)

Letters of credit

(1) Under the Credit Agreement, the asset based credit facility has a maturity date of June 28, 2022.

As of January 30, 2021, we had no outstanding borrowings under our asset based credit facility.

(2) Equipment promissory note obligations do not include interest of $1.3 million and $0.2 million for the fiscal periods 2021 and 2022-2023, respectively.

(3) We enter into operating and finance leases in the normal course of business.

Most lease arrangements provide us with the option to renew the leases at defined terms.

The table above includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

Amounts above do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases.

As of January 30, 2021, our obligation for leases signed but not yet commenced and contingent rent was $7.0 million.

As of January 30, 2021, our obligation for legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy was $793.5 million, of which $28.3 million, $82.8 million and $92.7 million will be paid in fiscal periods 2021, 2022-2023 and 2024-2025, respectively, and $589.7 million will be paid subsequent to fiscal 2025.

Refer to Note 11— Leases in our consolidated financial statements within Part II of this Annual Report on Form 10-K .

In 2018, our Board of Directors authorized the 950 Million Repurchase Program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases including through privately-negotiated arrangements in which a portion of the 950 Million Repurchase Program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives.

We completed $250 million in share repurchases in fiscal 2018 under the 950 Million Repurchase Program.

We did not make any repurchases under the 950 Million Repurchase Program during either fiscal 2021 or fiscal 2020.

The total current authorized size of this share repurchase program is up to $950 million, of which $450 million remained available as of January 29, 2022 for future share investments.

Other Commitments

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As of January 29, 2022, these merchandise inventory purchase commitments were $756 million.

As of January 30, 2021, the liability of $8.5 million for unrecognized tax benefits associated with uncertain tax positions (refer to Note 15— Income Taxes in our consolidated financial statements within Part II of this Annual Report on Form 10-K) has not been included in the contractual obligations table above as we are not able to reasonably estimate when cash payments for these liabilities will occur or the amount by which these liabilities will increase or decrease over time.

As of January 30, 2021, future capital funding requirements of $5.8 million related to our equity method investments (refer to Note 8— Equity Method Investments in our consolidated financial statements within Part II of this Annual Report on Form 10-K) has not been included in the contractual obligations table above as we are not able to reasonably estimate when cash payments for these funding requirements will occur.

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements as of January 30, 2021.

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We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.5 million as of January 29, 2022 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.

Refer to Note 15— Income Taxes in our consolidated financial statements for further information on our uncertain tax positions.

Critical Accounting Policies and Estimates

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The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements.

The following items require significant estimation or judgment in the preparation of the consolidated financial statements.

Merchandise Inventories—Reserves

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The estimates used in inventory valuation are lower of cost or net realizable value reserves and obsolescence (including excess and slow-moving inventory).

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Our inventory reserves contain uncertainties that require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends.

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Under the relief-from-royalty method, our significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues.

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Long-Lived Assets

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While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.

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Lease Accounting

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The IBR is computed as the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the total lease payments in a similar economic environment.

We utilize our asset based credit facility as the basis for determining the applicable IBR for each lease.

We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement issued in October 2021, as the basis for determining the applicable IBR for each lease.

We estimate the incremental borrowing rate for each lease primarily by reference to yield rates on debt issuances by companies of a similar credit rating, the weighted-average lease term and adjustments for differences between the yield rates and the actual term of the credit facility.

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The fair value assessments may materially impact our financial position related to certain Design Galleries or distribution center facilities which typically have greater fair values.

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The determination of fair value requires subjectivity and estimates, including the use of multiple valuation techniques and uncertain inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable.

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We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock, and (iii) a discount for illiquidity estimated using the Finnerty method.

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Equity Method Investments

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Refer to “Recently Issued Accounting Standards” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis