RH 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RH INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ ​ Report of Independent Registered Public Accounting Firm (PCAOB ID: 238 ) ​ 66 Consolidated Balance Sheets ​ 69 Consolidated Statements of Income ​ 70 Consolidated Statements of Comprehensive Income ​ 71 Consolidated Statements of Stockholders’ Equity (Deficit) ​ 72 Consolidated Statements of Cash Flows ​ 74 Notes to Consolidated Financial Statements ​ 77 ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 65 ​ Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of RH Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of RH and its subsidiaries (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 29, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. ​ ​ ​ 66 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Determination of the Classification of New Real Estate Lease Contracts As described in Notes 3 and 11 to the consolidated financial statements, certain of the Company’s real estate leases are classified as finance leases. Leases that do not meet the definition of a finance lease are considered operating leases. For the year ended January 29, 2022, lease right-of-use assets obtained in exchange for lease obligations (net of lease terminations) totaled $172 million related to operating leases and $90 million related to finance leases, of which a significant portion of the operating and finance leases relates to new real estate leases. Lease characteristics that management evaluates to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset. The principal considerations for our determination that performing procedures relating to the determination of the classification of new real estate lease contracts is a critical audit matter are (i) the significant judgment by management when determining the classification of new real estate lease contracts based on its evaluation of the lease characteristics; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 67 ​ Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to lease accounting, including controls over management’s determination of the classification of new real estate lease contracts based on the lease characteristics. These procedures also included, among others (i) reading the lease agreements; (ii) testing management’s process for determining the classification of new real estate lease contracts based the lease characteristics; (iii) testing the completeness and accuracy of the underlying data used; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset. Evaluating management’s significant assumptions related to the reasonably certain lease term and incremental borrowing rate involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of the Company; (ii) consistency with external market and industry data; and (iii) whether the significant assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the significant assumptions related to the incremental borrowing rate and fair value of the leased asset. ​ ​ /s/ PricewaterhouseCoopers LLP San Francisco, California March 30, 2022 We have served as the Company’s auditor since 2008. ​ ​ ​ ​ ​ ​ 68 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 ASSETS ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 2,177,889 ​ $ 100,446 Accounts receivable—net ​ 57,914 ​ 59,474 Merchandise inventories ​ 734,289 ​ 544,227 Prepaid expense and other current assets ​ 121,350 ​ 97,337 Total current assets ​ 3,091,442 ​ 801,484 Property and equipment—net ​ 1,227,920 ​ 1,077,198 Operating lease right-of-use assets ​ ​ 551,045 ​ ​ 456,164 Goodwill ​ 141,100 ​ 141,100 Tradenames, trademarks and other intangible assets ​ 73,161 ​ 71,663 Deferred tax assets ​ 56,843 ​ 49,924 Equity method investments ​ ​ 100,810 ​ ​ 100,603 Other non-current assets ​ 298,149 ​ 200,177 Total assets ​ $ 5,540,470 ​ $ 2,898,313 LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ Current liabilities: ​ ​ Accounts payable and accrued expenses ​ $ 442,379 ​ $ 424,422 Deferred revenue and customer deposits ​ ​ 387,933 ​ 280,641 Convertible senior notes due 2023—net ​ ​ 9,389 ​ ​ 2,354 Convertible senior notes due 2024—net ​ ​ 3,600 ​ ​ — Operating lease liabilities ​ ​ 73,834 ​ ​ 71,524 Other current liabilities ​ 146,623 ​ 142,691 Total current liabilities ​ 1,063,758 ​ 921,632 Asset based credit facility ​ — ​ — Term loan—net ​ 1,953,203 ​ — Convertible senior notes due 2023—net ​ 59,002 ​ 282,956 Convertible senior notes due 2024—net ​ ​ 184,461 ​ ​ 281,454 Non-current operating lease liabilities ​ 540,513 ​ 448,169 Non-current finance lease liabilities ​ ​ 560,550 ​ ​ 485,481 Other non-current obligations ​ 8,706 ​ 31,595 Total liabilities ​ 4,370,193 ​ 2,451,287 Commitments and contingencies (Note 20) ​ ​ ​ ​ Stockholders’ equity: ​ ​ Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of January 29, 2022 and January 30, 2021 ​ — ​ ​ — Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 21,506,967 shares issued and outstanding as of January 29, 2022; 20,995,387 shares issued and outstanding as of January 30, 2021 ​ 2 ​ 2 Additional paid-in capital ​ 620,577 ​ 581,897 Accumulated other comprehensive income (loss) ​ ( 1,410 ) ​ 2,565 Retained earnings (accumulated deficit) ​ 551,108 ​ ( 137,438 ) Total stockholders’ equity ​ 1,170,277 ​ 447,026 Total liabilities and stockholders’ equity ​ $ 5,540,470 ​ $ 2,898,313 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 69 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Net revenues ​ $ 3,758,820 ​ $ 2,848,626 ​ $ 2,647,437 Cost of goods sold ​ 1,903,409 ​ 1,523,095 ​ 1,552,426 Gross profit ​ 1,855,411 ​ 1,325,531 ​ 1,095,011 Selling, general and administrative expenses ​ 928,230 ​ 858,673 ​ 732,180 Income from operations ​ 927,181 ​ 466,858 ​ 362,831 Other expenses ​ ​ ​ Interest expense—net ​ 64,947 ​ 69,250 ​ 87,177 Tradename impairment ​ ​ — ​ ​ 20,459 ​ ​ — (Gain) loss on extinguishment of debt ​ 29,138 ​ ( 152 ) ​ 6,472 Other expense—net ​ ​ 2,778 ​ ​ — ​ ​ — Total other expenses ​ 96,863 ​ 89,557 ​ 93,649 Income before income taxes ​ 830,318 ​ 377,301 ​ 269,182 Income tax expense ​ 133,558 ​ 104,598 ​ 48,807 Income before equity method investments ​ ​ 696,760 ​ ​ 272,703 ​ ​ 220,375 Share of equity method investments losses ​ ​ ( 8,214 ) ​ ​ ( 888 ) ​ ​ — Net income ​ $ 688,546 ​ $ 271,815 ​ $ 220,375 Weighted-average shares used in computing basic net income per share ​ 21,270,448 ​ 19,668,976 ​ 19,082,303 Basic net income per share ​ $ 32.37 ​ $ 13.82 ​ $ 11.55 Weighted-average shares used in computing diluted net income per share ​ 31,113,395 ​ 27,302,268 ​ 24,299,034 Diluted net income per share ​ $ 22.13 ​ $ 9.96 ​ $ 9.07 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ 70 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 2021 2020 Net income ​ $ 688,546 ​ $ 271,815 ​ $ 220,375 Net gains (losses) from foreign currency translation ​ ( 3,975 ) ​ 5,325 ​ ( 426 ) Total comprehensive income ​ $ 684,571 ​ $ 277,140 ​ $ 219,949 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 71 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ COMMON STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TREASURY STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ACCUMULATED RETAINED ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ADDITIONAL OTHER EARNINGS ​ ​ ​ ​ ​ TOTAL ​ ​ ​ PAID-IN COMPREHENSIVE (ACCUMULATED ​ STOCKHOLDERS' ​ SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT) SHARES AMOUNT EQUITY Balances—February 2, 2019 ​ 20,477,813 $ 2 $ 356,422 $ ( 2,334 ) $ ( 392,537 ) 2,800 $ ( 243 ) $ ( 38,690 ) Stock-based compensation ​ — ​ — ​ 21,406 ​ — ​ — — ​ — ​ 21,406 Issuance of restricted stock ​ 7,014 ​ — ​ — ​ — ​ — — ​ — ​ — Vested and delivered restricted stock units ​ 109,062 ​ — ​ ( 7,069 ) ​ — ​ — — ​ — ​ ( 7,069 ) Exercise of stock options ​ 643,090 ​ — ​ 27,138 ​ — ​ — — ​ — ​ 27,138 Repurchases of common stock ​ ( 2,167,396 ) ​ — ​ — ​ — ​ — 2,167,396 ​ ( 250,032 ) ​ ( 250,032 ) Retirement of treasury stock ​ — ​ — ​ ( 13,180 ) ​ — ​ ( 237,091 ) ( 2,170,154 ) ​ 250,271 ​ — Shares issued in connection with warrant agreements ​ 167,056 ​ — ​ — ​ — ​ — — ​ — ​ — Equity component value of convertible note issuance—net ​ — ​ — ​ 87,070 ​ — ​ — — ​ — ​ 87,070 Sale of common stock warrant ​ — ​ — ​ 50,225 ​ — ​ — — ​ — ​ 50,225 Purchase of convertible note hedge ​ — ​ ​ — ​ ​ ( 91,350 ) ​ ​ ​ ​ ​ — ​ — ​ ​ — ​ ​ ( 91,350 ) Conversion of convertible senior notes ​ 42 ​ ​ — ​ ​ — ​ ​ ​ ​ ​ — ​ ( 42 ) ​ ​ 4 ​ ​ 4 Net income ​ — ​ — ​ — ​ — ​ 220,375 — ​ — ​ 220,375 Net losses from foreign currency translation ​ — ​ — ​ — ​ ( 426 ) ​ — — ​ — ​ ( 426 ) ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 72 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued) (In thousands, except share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ COMMON STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TREASURY STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ACCUMULATED RETAINED ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ADDITIONAL OTHER EARNINGS ​ ​ ​ ​ ​ TOTAL ​ ​ ​ PAID-IN COMPREHENSIVE (ACCUMULATED ​ STOCKHOLDERS' ​ SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT) SHARES AMOUNT EQUITY Balances—February 1, 2020 ​ 19,236,681 $ 2 $ 430,662 $ ( 2,760 ) $ ( 409,253 ) — $ — $ 18,651 Stock-based compensation ​ — ​ ​ — ​ ​ 145,278 ​ ​ — ​ ​ — ​ — ​ ​ — ​ 145,278 Issuance of restricted stock ​ 3,192 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ — Vested and delivered restricted stock units ​ 76,602 ​ ​ — ​ ​ ( 8,348 ) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ( 8,348 ) Exercise of stock options ​ 292,949 ​ ​ — ​ ​ 14,377 ​ ​ — ​ ​ — ​ — ​ ​ — ​ 14,377 Repurchases of common stock ​ ( 600 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ 600 ​ ​ ( 72 ) ​ ( 72 ) Retirement of treasury stock ​ — ​ ​ — ​ ​ ( 77 ) ​ ​ — ​ ​ — ​ ( 617 ) ​ ​ 77 ​ — Shares issued in connection with warrant agreements ​ 1,386,580 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ — Settlement of convertible senior notes ​ 1,131,645 ​ ​ — ​ ​ ( 315,708 ) ​ ​ — ​ ​ — ​ ( 1,131,645 ) ​ ​ 315,708 ​ — Exercise of call option under bond hedge upon settlement of convertible senior notes ​ ( 1,131,662 ) ​ ​ — ​ ​ 315,713 ​ ​ — ​ ​ — ​ 1,131,662 ​ ​ ( 315,713 ) ​ — Net income ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 271,815 ​ — ​ ​ — ​ 271,815 Net gains from foreign currency translation ​ — ​ ​ — ​ ​ — ​ ​ 5,325 ​ ​ — ​ — ​ ​ — ​ 5,325 Balances—January 30, 2021 ​ 20,995,387 $ 2 $ 581,897 $ 2,565 $ ( 137,438 ) — $ — $ 447,026 Stock-based compensation ​ — ​ ​ — ​ ​ 48,478 ​ ​ — ​ ​ — ​ — ​ ​ — ​ 48,478 Issuance of restricted stock ​ 1,260 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ — Vested and delivered restricted stock units ​ 43,320 ​ ​ — ​ ​ ( 20,671 ) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ( 20,671 ) Exercise of stock options ​ 466,967 ​ ​ — ​ ​ 32,045 ​ ​ — ​ ​ — ​ — ​ ​ — ​ 32,045 Settlement of convertible senior notes ​ 1,377,512 ​ ​ — ​ ​ ( 901,379 ) ​ ​ — ​ ​ — ​ ( 1,377,479 ) ​ ​ 880,207 ​ ​ ( 21,172 ) Exercise of call option under bond hedge upon settlement of convertible senior notes ​ ( 1,377,479 ) ​ ​ — ​ ​ 880,207 ​ ​ — ​ ​ — ​ 1,377,479 ​ ​ ( 880,207 ) ​ ​ — Net income ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 688,546 ​ — ​ ​ — ​ 688,546 Net losses from foreign currency translation ​ — ​ ​ — ​ ​ — ​ ​ ( 3,975 ) ​ ​ — ​ — ​ ​ — ​ ( 3,975 ) Balances—January 29, 2022 ​ 21,506,967 $ 2 $ 620,577 $ ( 1,410 ) $ 551,108 — $ — $ 1,170,277 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 73 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 688,546 ​ $ 271,815 ​ $ 220,375 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 96,022 ​ ​ 100,040 ​ ​ 100,739 Non-cash operating lease cost ​ ​ 72,479 ​ ​ 64,132 ​ ​ 65,195 Tradename impairment ​ ​ — ​ ​ 20,459 ​ ​ — Asset impairments ​ ​ 9,630 ​ ​ 6,484 ​ ​ 15,168 (Gain) loss on sale leaseback transaction ​ ​ — ​ ​ 9,352 ​ ​ ( 1,196 ) Amortization of debt discount ​ 28,816 ​ ​ 42,372 ​ ​ 46,245 Stock-based compensation expense ​ 48,478 ​ ​ 145,704 ​ ​ 21,832 Non-cash finance lease interest expense ​ ​ 26,412 ​ ​ 24,011 ​ ​ 22,608 Product recalls ​ ​ 1,940 ​ ​ 7,370 ​ ​ ( 3,517 ) Deferred income taxes ​ ( 6,921 ) ​ ​ ( 4,920 ) ​ ​ ( 7,709 ) (Gain) loss on extinguishment of debt ​ ​ 29,138 ​ ​ ( 152 ) ​ ​ 6,472 Share of equity method investments losses ​ ​ 8,214 ​ ​ 888 ​ ​ — Other non-cash items ​ ( 6,649 ) ​ ​ 3,998 ​ ​ 4,001 Cash paid attributable to accretion of debt discount upon settlement of debt ​ ​ ( 55,243 ) ​ ​ ( 84,003 ) ​ ​ ( 70,482 ) Change in assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ 1,564 ​ ​ ( 10,485 ) ​ ​ ( 7,309 ) Merchandise inventories ​ ( 190,074 ) ​ ​ ( 104,621 ) ​ ​ 93,266 Prepaid expense and other assets ​ ( 49,555 ) ​ ​ ( 67,349 ) ​ ​ 28,404 Landlord assets under construction—net of tenant allowances ​ ( 68,454 ) ​ ​ ( 69,508 ) ​ ​ ( 64,300 ) Accounts payable and accrued expenses ​ 43,435 ​ ​ 63,583 ​ ​ 7,445 Deferred revenue and customer deposits ​ 107,306 ​ ​ 116,205 ​ ​ 9,799 Other current liabilities ​ ( 9,778 ) ​ ​ 43,856 ​ ​ ( 45,767 ) Current and non-current operating lease liabilities ​ ( 77,252 ) ​ ​ ( 58,920 ) ​ ​ ( 77,004 ) Other non-current obligations ​ ( 35,940 ) ​ ​ ( 19,541 ) ​ ​ ( 25,077 ) Net cash provided by operating activities ​ 662,114 ​ 500,770 ​ 339,188 CASH FLOWS FROM INVESTING ACTIVITIES ​ ​ ​ ​ ​ ​ Capital expenditures ​ ( 185,383 ) ​ ​ ( 111,126 ) ​ ​ ( 93,623 ) Equity method investments ​ ( 8,970 ) ​ ​ ( 80,723 ) ​ ​ — Acquisition of business and assets ​ — ​ ​ ( 17,900 ) ​ ​ — Deposits on asset under construction ​ ​ — ​ ​ ( 12,857 ) ​ ​ ( 53,000 ) Proceeds from sale of assets ​ — ​ ​ 25,006 ​ ​ 24,078 Net cash used in investing activities ​ ( 194,353 ) ​ ( 197,600 ) ​ ( 122,545 ) ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 74 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 2021 2020 CASH FLOWS FROM FINANCING ACTIVITIES ​ ​ ​ Borrowings under asset based credit facility ​ — ​ ​ 359,401 ​ ​ 322,500 Repayments under asset based credit facility ​ — ​ ​ ( 359,401 ) ​ ​ ( 380,000 ) Borrowings under term loan ​ 2,000,000 ​ ​ — ​ ​ 320,000 Repayments under term loans ​ ​ ( 5,000 ) ​ ​ — ​ ​ ( 324,000 ) Borrowings under promissory and equipment security notes ​ — ​ ​ 12,857 ​ ​ 122,000 Repayments under promissory and equipment security notes ​ ( 22,949 ) ​ ​ ( 34,456 ) ​ ​ ( 16,520 ) Debt issuance costs ​ ( 26,411 ) ​ ​ — ​ ​ ( 4,636 ) Proceeds from issuance of convertible senior notes ​ — ​ ​ — ​ ​ 350,000 Proceeds from issuance of warrants ​ — ​ ​ — ​ ​ 50,225 Purchase of convertible note hedges ​ — ​ ​ — ​ ​ ( 91,350 ) Debt issuance costs related to convertible senior notes ​ — ​ ​ — ​ ​ ( 4,818 ) Repayments of convertible senior notes ​ ​ ( 335,729 ) ​ ​ ( 215,846 ) ​ ​ ( 278,560 ) Principal payments under finance leases ​ ​ ( 14,158 ) ​ ​ ( 12,498 ) ​ ​ ( 9,682 ) Repurchases of common stock—including commissions ​ — ​ ​ — ​ ​ ( 250,032 ) Proceeds from exercise of stock options ​ 32,045 ​ ​ 14,377 ​ ​ 27,138 Tax withholdings related to issuance of stock-based awards ​ ​ ( 20,671 ) ​ ​ ( 8,348 ) ​ ​ ( 7,069 ) Net cash provided by (used in) financing activities ​ 1,607,127 ​ ( 243,914 ) ​ ( 174,804 ) Effects of foreign currency exchange rate translation ​ ( 95 ) ​ ​ 157 ​ ​ 16 Net increase in cash and cash equivalents and restricted cash equivalents ​ 2,074,793 ​ 59,413 ​ 41,855 Cash and cash equivalents and restricted cash equivalents ​ ​ ​ ​ Beginning of period—cash and cash equivalents ​ 100,446 ​ 47,658 ​ ​ 5,803 Beginning of period—restricted cash equivalents (acquisition related escrow deposits) ​ 6,625 ​ ​ — ​ ​ — Beginning of period—cash and cash equivalents ​ $ 107,071 ​ $ 47,658 ​ $ 5,803 End of period—cash and cash equivalents ​ 2,177,889 ​ 100,446 ​ ​ 47,658 End of period—restricted cash equivalents (acquisition related escrow deposits) ​ 3,975 ​ 6,625 ​ ​ — End of period—cash and cash equivalents and restricted cash equivalents ​ $ 2,181,864 ​ $ 107,071 ​ $ 47,658 Cash paid for interest ​ $ 39,466 ​ $ 27,249 ​ $ 43,278 Cash paid for taxes ​ ​ 158,910 ​ ​ 74,219 ​ ​ 40,126 ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 75 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 2021 2020 Non-cash transactions: ​ ​ ​ ​ ​ ​ Property and equipment additions in accounts payable and accrued expenses at period-end ​ $ 14,651 ​ $ 28,377 ​ $ 5,161 Landlord asset additions in accounts payable and accrued expenses at period-end ​ ​ 13,180 ​ ​ 19,943 ​ ​ 19,640 Reclassification of assets from landlord assets under construction to finance lease right-of-use assets ​ ​ 61,900 ​ ​ 68,459 ​ ​ 19,503 Promissory notes forgiven in exchange for assets ​ ​ — ​ ​ 65,857 ​ ​ — Conversion of loan receivables into equity method investments ​ ​ — ​ ​ 20,219 ​ ​ — Shares issued on settlement of convertible senior notes ​ ​ ( 901,379 ) ​ ​ ( 315,708 ) ​ ​ — Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes ​ ​ 880,207 ​ ​ 315,713 ​ ​ — The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ 76 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—NATURE OF BUSINESS RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or the “Company”), is a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings. As of January 29, 2022, we operated a total of 67 RH Galleries and 38 RH outlet stores in 30 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong. ​ NOTE 2—ORGANIZATION The Company was formed on August 18, 2011 and capitalized on September 2, 2011 as a holding company for the purposes of facilitating an initial public offering of common equity and was at such time a direct subsidiary of Home Holdings, LLC, a Delaware limited liability company (“Home Holdings”). On November 1, 2012, we acquired all of the outstanding shares of capital stock of Restoration Hardware, Inc., a Delaware corporation, and Restoration Hardware, Inc. became our direct, wholly owned subsidiary. Restoration Hardware, Inc. was a direct, wholly owned subsidiary of Home Holdings prior to our initial public offering. Outstanding units issued by Home Holdings under its equity compensation plan, referred to as the Team Resto Ownership Plan, were replaced with our common stock at the time of our initial public offering. These transactions are referred to as the “Reorganization.” On November 7, 2012, we completed our initial public offering. On December 15, 2016, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change our name to “RH,” effective January 1, 2017. Impact of the COVID-19 Pandemic upon our Financial Condition and Results of Operations 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 have 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. Our 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. For more information, refer to Item 1A — Risk Factors in Part I of this Annual Report on Form 10-K. NOTE 3—SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 77 ​ Table of Contents Fiscal Years Our fiscal year ends on the Saturday closest to January 31. As a result, our fiscal year may include 53 weeks. The fiscal years ended January 29, 2022 (“fiscal 2021”), January 30, 2021 (“fiscal 2020) and February 1, 2020 (“fiscal 2019”) each consisted of 52 weeks. Use of Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements. Cash and Cash Equivalents We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Concentration of Credit Risk We maintain our cash and cash equivalent accounts in high-quality financial institutions. The amount of cash and cash equivalents held with certain financial institutions exceeds government-insured limits. We perform ongoing evaluations of these institutions to limit our concentration of credit risk. Accounts Receivable Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our Contract business and other miscellaneous receivables. Accounts receivable is presented net of allowance for expected credit losses, which is recorded on a specific identification basis, and was $ 3.6 million and $ 3.3 million as of January 29, 2022 and January 30, 2021, respectively. Merchandise Inventories Our merchandise inventories consist primarily of finished goods and are carried at the lower of cost or net realizable value, with cost determined on a weighted-average cost method. To determine if the value of inventory should be marked down below original cost, we use estimates to determine the lower of cost or net realizable value, which considers current and anticipated demand, customer preference and the merchandise age. The inventory value is adjusted periodically to reflect current market conditions, which requires judgments that may significantly affect the ending inventory valuation, as well as gross margin. The estimates used in inventory valuation are lower of cost or net realizable value reserves and obsolescence (including excess and slow-moving inventory). In addition, we estimate and accrue for inventory shrinkage. 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. We adjust inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices. Reserves for shrinkage are estimated and recorded throughout the year as a percentage of shipped sales for the direct channels, and as a percentage of cost of goods sold for the outlet business, based on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year based upon periodic physical inventory counts. Actual inventory shrinkage and obsolescence can vary from estimates due to factors including the volume of inventory movement and execution against loss prevention initiatives in our distribution centers, home delivery center locations, off-site storage locations and with our third-party transportation providers. Our inventory reserve balances were $ 24 million as of both January 29, 2022 and January 30, 2021. Product Recalls When necessary, we initiate product recalls for certain of our products, as well as adjusted accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries. The product recall accrual was $ 5.5 million and $ 8.2 million as of January 29, 2022 and January 30, 2021, respectively, and is included in other current liabilities on the consolidated balance sheets. ​ ​ ​ 78 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Advertising Expenses Advertising expenses primarily represent the costs associated with our catalog mailings, which we refer to as Source Books, as well as print and website marketing. Total advertising expense, which is recorded in selling, general and administrative expenses on the consolidated statements of income, was $ 40 million, $ 59 million and $ 108 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Our advertising expenses may vary due to the timing and volume of our Source Book circulation. Capitalized Catalog Costs Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and distribute our Source Books. Such costs are capitalized and recognized as expense upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier. We had $ 22 million and $ 19 million of capitalized catalog costs as of January 29, 2022 and January 30, 2021, respectively, which are included in prepaid expense and other current assets on the consolidated balance sheets. Website and Print Advertising Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the initial advertisement. Property and Equipment Property and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method, generally using the following useful lives: ​ ​ ​ CATEGORY OF PROPERTY AND EQUIPMENT ​ USEFUL LIFE Building and building improvements 40 years Machinery, equipment and aircraft 3 to 10 years Furniture, fixtures and equipment 3 to 7 years Computer software 3 to 10 years The cost of leasehold improvements is amortized over the lesser of the useful life of the asset or the reasonably certain lease term. We expense all internal-use software and website development costs incurred in the preliminary project stage and capitalize certain direct costs associated with the development and purchase of internal-use software or website development costs, including external costs of materials and services and internal payroll costs related to the software project, within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally between three and ten years . Interest is capitalized on construction in progress and software projects during the period in which expenditures have been made and activities are in progress to prepare the asset for its intended use. We capitalized interest of $ 12 million, $ 5.6 million and $ 4.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. During fiscal 2021, fiscal 2020 and fiscal 2019, $ 10 million, $ 5.3 million and $ 3.7 million, respectively, of the $ 12 million, $ 5.6 million and $ 4.9 million capitalized interest relates to the capitalization of non-cash interest associated with the amortization of the convertible senior notes debt discount. Land purchases are recorded at cost and are non-depreciable assets. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. For further discussion regarding the impairment accounting policy refer to “Impairment—Long-Lived Assets” below. Asset Held for Sale Upon designation as an asset held for sale, the carrying value of the asset is recorded at the lower of its carrying value or its estimated fair value less estimated costs to sell, and we cease depreciating the asset. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 79 ​ Table of Contents Lease Accounting 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. The initial lease terms of our real estate leases generally range from ten to fifteen years , and certain leases contain renewal options for up to an additional 25 years , the exercise of which is at our sole discretion. We also lease certain equipment with lease terms generally ranging from three to seven years . Our lease agreements generally do not contain any material residual value guarantees or material restrictions or covenants. We account for lease and non-lease components as a single lease component for real estate leases, and for all other asset classes we account for the components separately. We determine the lease classification and begin to recognize lease and any related financing expenses upon the lease’s commencement, which for real estate leases is generally upon store opening or, to a lesser extent, when we take possession or control of the asset. We sublease certain real estate locations to third parties under operating leases and recognize rental income received on a straight-line basis over the lease term, which is recorded as an offset to selling, general and administrative expenses on the consolidated statements of income. Lease arrangements may require the landlord to provide tenant allowances directly to us. Standard tenant allowances received from landlords, typically those received under operating lease agreements, are recorded as cash and cash equivalents with an offset recorded in lease right-of-use assets on the consolidated balance sheets. Tenant allowances that are reasonably certain to be received subsequent to lease commencement are reflected as a reduction of both the lease liabilities and right-of-use assets on the consolidated balance sheets at the commencement date. In the case of leases with associated construction, tenant allowances are provided for us to design and build the leased asset. Tenant allowances received from landlords during the construction phase of a leased asset and prior to lease commencement are recorded as cash and cash equivalents with an offset recorded in other non-current assets (to the extent we have incurred related capital expenditure for construction costs) or in other current liabilities (to the extent that payments are received prior to capital construction expenditures by us) on the consolidated balance sheets. After the leased asset is constructed and the lease commences, we reclassify the tenant allowance from other non-current assets or other current liabilities to lease right-of-use assets on the consolidated balance sheets, and such allowances are amortized over the reasonably certain lease term. Lease Classification Certain of our real estate and equipment leases are classified as finance leases. Lease characteristics that we evaluate to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate and fair value of the leased asset. Additionally, the economic life of the leased asset impacts the lease classification, particularly related to historical buildings that tend to have longer lives. Lease related assets under such classification are included in “finance lease right-of-use assets” within property and equipment—net on the consolidated balance sheets. Leases that do not meet the definition of a finance lease are considered operating leases. Lease related assets classified as operating leases are included in operating lease right-of-use assets on the consolidated balance sheets. Reasonably Certain Lease Term In recognizing the lease right-of-use assets and lease liabilities, we utilize the lease term for which we are reasonably certain to use the underlying asset, including consideration of options to extend or terminate the lease. At lease commencement, we evaluate whether it is reasonably certain to exercise available options based on consideration of a variety of economic factors and the circumstances related to the leased asset. Factors considered include, but are not limited to, (i) the contractual terms compared to estimated market rates, (ii) the uniqueness or importance of the asset or its location, (iii) the potential costs of obtaining an alternative asset, (iv) the potential costs of relocating or ceasing use of the asset, including the consideration of leasehold improvements and other invested capital, and (v) any potential tax consequences. The determination of the reasonably certain lease term affects the inclusion of rental payments utilized in the incremental borrowing rate calculations, the results of the lease classification test, and consideration of certain assets held for sale or planned for sale-leaseback. The reasonably certain lease term may materially impact our financial position related to certain Design Galleries or distribution center facilities which typically have greater lease payments. Although the above factors are considered in our analysis, the assessment involves subjectivity considering our strategy, expected future events and market conditions. While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination. ​ ​ ​ 80 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Leases, or lease extensions, with a term of twelve months or less are not recorded on the consolidated balance sheets, and we recognize lease expense for these leases on a straight-line basis over the lease term. Lease Payments The majority of our real estate lease agreements include minimum rent payments which are subject to stated lease escalations over the lease term and eligible renewal periods. These stated fixed payments, through the reasonably certain lease term, are included in our measurement of the lease right-of-use assets and lease liabilities upon lease commencement. Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels. Additionally, certain lease agreements include rental payments based solely on a percentage of retail sales. Due to the variable and unpredictable nature of such payments, we do not recognize a lease right-of-use asset and lease liability related to such payments. Estimated variable rental payments are included in accounts payable and accrued expenses on the consolidated balance sheets in the period they are incurred and until such payments are made, and the related lease cost is included in cost of goods sold on the consolidated statements of income. We have a small group of real estate leases that include rental payments periodically adjusted for inflation (e.g., based on the consumer price index). We include these variable payments in the initial measurement of the lease right-of-use asset and lease liability according to the index or rate at the commencement date and incorporates adjustments to rental payments in future periods if such increases have a minimum rent escalation (e.g., floor). Changes due to differences between the variable lease payments estimated at least commencement and actual amounts incurred are recognized in the consolidated statements of income in the period such costs are incurred. Lease concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee are accounted for as if no change to the lease contract were made. Under this approach, we recognize a separate non-interest bearing payable for any deferred payments in the concession period, which is recorded in accounts payable and accrued expenses on the consolidated balance sheets, and there is no change to the recognized lease expense on the consolidated statements of income. We account for COVID-19 related rent abatements as variable lease payments on the consolidated statements of income. Lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 29, 2022 and January 30, 2021 were not material. Incremental Borrowing Rate As our real estate leases and most of our equipment leases do not include an implicit interest rate, we determine the discount rate for each lease based upon the incremental borrowing rate (“IBR”) in order to calculate the present value of lease payments at the commencement date. 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 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. In determining the yield rates, for Design Galleries we utilize market information on the lease commencement date and for leases other than new Design Galleries, we utilize market information as of the beginning of the quarter in which the lease commenced. Fair Value We determine the fair value of the underlying asset, considering lease components such as land and building, for purposes of determining the lease classification and allocating our contractual rental payments to the lease components. The fair value of the underlying asset and lease components also impact the evaluation and accounting for assets held for sale and sale-leaseback transactions. The fair value assessments may materially impact our financial position related to certain Design Galleries or distribution center facilities. 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. Where real estate valuation expertise is required, we obtain independent third-party appraisals to determine the fair value of the underlying asset and lease components. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 81 ​ Table of Contents Construction Related Activities We are often involved in the construction of leased stores for our new Design Galleries. Upon construction commencement, we evaluate whether or not we, as lessee, control the asset being constructed and, depending on the extent to which we are involved, we may be the “deemed owner” of the leased asset for accounting purposes during the construction period under a build-to-suit arrangement. If we are the “deemed owner” for accounting purposes, upon commencement of the construction project we are required to capitalize (i) costs incurred by us and (ii) the cash and non-cash assets contributed by the landlord for construction as property and equipment on our consolidated balance sheets as build-to-suit assets, with an offsetting financing obligation under build-to-suit lease transactions. The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of the consolidated statements of cash flows. Over the lease term, these non-cash additions to property and equipment do not impact our cash outflows, nor do they impact net income on the consolidated statements of income. Upon completion of the construction project where we are the deemed owner, we perform a sale-leaseback analysis to determine if we can derecognize the build-to-suit asset and corresponding financing obligation. If the asset and liability cannot be derecognized, we account for the agreement as a debt-like arrangement. If we are involved in a debt-like arrangement for a non-real estate asset under construction for which we plan to lease such asset upon construction completion and make deposits during the construction period, we recognize the related deposits as “Deposits on asset under construction” within other non-current assets on the consolidated balance sheets (refer to Note 4— Prepaid Expense and Other Assets ). In the event we execute promissory notes related to the deposits, such promissory notes are recorded as “Promissory notes on asset under construction” within other current liabilities on the consolidated balance sheets (refer to Note 9— Accounts Payable, Accrued Expenses and Other Current Liabilities ). We recognize the constructive disbursements and receipts of such debt-like arrangements on a gross basis on the consolidated statements of cash flows within cash flows from investing activities and cash flows from financing activities, respectively. If we are not the “deemed owner” for accounting purposes during the construction period, such lease is classified as either an operating or finance lease upon lease commencement. During the construction period and prior to lease commencement, any capital amounts contributed by us toward the construction of the leased asset (excluding normal leasehold improvements, which are recorded within property and equipment—net) are recorded as “Landlord assets under construction” within other non-current assets on the consolidated balance sheets (refer to Note 4— Prepaid Expense and Other Assets ). Upon completion of the construction project, and upon lease commencement, we reclassify amounts of the construction project determined to be the landlord asset to lease right-of-use assets on the consolidated balance sheets based on the lease classification determined at lease commencement. The construction costs determined not to be part of the leased asset are classified as property and equipment—net on the consolidated balance sheets. Sale-Leaseback Activities We occasionally enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell the property to a third party and agree to lease the property back for a certain period of time. To determine whether the transfer of the property should be accounted for as a sale, we evaluate whether we have transferred control to the third party in accordance with the guidance set forth in Topic 606. If the transfer of the asset is a sale at market terms, we recognize the transaction price for the sale based on the cash proceeds received, derecognize the carrying amount of the underlying asset and recognize a gain or loss in the consolidated statements of income for any difference between the carrying value of the asset and the transaction price. We then account for the leaseback in accordance with our lease accounting policy. If the transfer of the asset is determined not to be a sale, we account for the transaction as a financing arrangement. We continue to present the asset within property and equipment—net on the consolidated balance sheets and recognize a non-current obligation on the consolidated balance sheets for the transaction price, with the financial liability measured in accordance with other applicable GAAP. Intangible Assets Intangible assets reflect the value assigned to tradenames, trademarks, domain names and other intangible assets. The cost of purchasing transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses are capitalized as an intangible asset. We do not amortize our intangible assets as we define the life of these assets as indefinite. ​ ​ ​ 82 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Impairment Goodwill We evaluate goodwill annually to determine whether it is impaired or whenever events occur or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset; general economic conditions, such as increasing Treasury rates or unexpected changes in gross domestic product growth; a change in our market share; budget-to-actual performance and consistency of operating margins and capital expenditures; a product recall or an adverse action or assessment by a regulator; or changes in management or key personnel. We perform our annual goodwill impairment testing in the fourth fiscal quarter by comparing the fair value of a reporting unit with its carrying amount, limited to the total amount of goodwill of the reporting unit. We will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We determine fair values using the discounted cash flow approach (“income approach”) or the market multiple valuation approach (“market approach”), when available and appropriate, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each respective reporting unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods. A reporting unit is an operating segment, or a business unit one level below that operating segment for which discrete financial information is prepared and regularly reviewed by the Chief Operating Decision Maker (“CODM”), which is our Chief Executive Officer. We have deemed RH Segment and Waterworks to be the reporting units for which goodwill is independently tested, as these operating segments are the lowest level for which discrete financial information is prepared and regularly reviewed by the CODM. RH Segment Reporting Unit During fiscal 2021, fiscal 2020 and fiscal 2019, we reviewed the RH Segment reporting unit goodwill for impairment by assessing qualitative factors to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Based on the qualitative tests performed in each fiscal year, we determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount for fiscal 2021, fiscal 2020 and fiscal 2019, and therefore we did not recognize goodwill impairment with respect to the RH Segment in any such fiscal year. Waterworks Reporting Unit The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 83 ​ Table of Contents Tradenames, Trademarks and Other Intangible Assets We annually evaluate whether tradenames, trademarks and other intangible assets continue to have an indefinite life. Intangible assets are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. We qualitatively assess indefinite-lived intangible assets to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If tradenames, trademarks and other intangible assets are not qualitatively assessed or if such intangible assets are qualitatively assessed and it is determined it is more likely than not that the asset’s fair value is less than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology, which requires judgments that may significantly affect the ending asset valuation. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, our plans for future operations, brand initiatives, recent results of operations and projected future cash flows. In the event we quantitatively assess a reporting unit’s indefinite-lived intangible asset for impairment, we perform an impairment test which utilizes the discounted cash flow methodology under the relief-from-royalty method. Under the relief-from-royalty method, significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues. RH Segment Reporting Unit During the fourth quarters of fiscal 2021, fiscal 2020 and fiscal 2019, we qualitatively assessed the indefinite-lived intangible assets of the RH Segment reporting unit for impairment and determined it was not more likely than not that the fair value of the assets were less than their carrying amounts. Based on the qualitative tests performed in each fiscal year, we did not perform quantitative impairment tests in any year. We did not recognize any impairment with respect to intangible assets for the RH Segment reporting unit in fiscal 2021, fiscal 2020 and fiscal 2019. Waterworks Reporting Unit During the fourth quarter of fiscal 2019, we performed our annual impairment procedures on the Waterworks tradename utilizing the discounted cash flow methodology under the relief-from-royalty method. 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. Based on the quantitative impairment test performed, we did not recognize any impairment with respect to the Waterworks reporting unit tradename. During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability. We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount. We determined fair value utilizing a discounted cash flow methodology under the relief-from-royalty method. Significant assumptions under this method include forecasted net revenues and the estimated royalty rate, expressed as a percentage of revenues, in addition to the discount rate based on the weighted-average cost of capital. Based on the impairment test performed, we concluded that the Waterworks tradename was impaired as of May 2, 2020. As a result, we recognized a $ 20 million non-cash impairment charge for the Waterworks tradename in the first quarter of fiscal 2020. The impairment charge was recorded in goodwill and tradename impairment on the consolidated statements of income. During the fourth quarters of fiscal 2021 and fiscal 2020, we performed a qualitative impairment test on the Waterworks tradename and determined it was not more likely than not that the fair value of the asset was less than its carrying amount. Accordingly, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename in either period. The carrying value of the Waterworks indefinite-lived tradename asset as of both January 29, 2022 and January 30, 2021 was $ 17 million. ​ ​ ​ 84 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Long-Lived Assets Long-lived assets, such as property and equipment and lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, change in intended use of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash flows over the remaining life of the primary asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the asset or asset group. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for the stores is the individual Gallery level. Since there is typically no active market for our long-lived assets, we estimate fair values based on the expected future cash flows of the asset or asset group, using a discount rate commensurate with the related risk. The estimate of fair value requires judgments that may significantly affect the ending asset valuation. Future cash flows are estimated based on Gallery-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside of our control, including general economic conditions and the competitive environment. 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. We also review our capital expenditures for Galleries under construction and recognize impairment charges when there is a change in the intended use of an asset, including asset disposals. We recognized long-lived asset impairment charges related to such construction expenditures of $ 9.6 million, $ 3.1 million and $ 9.1 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary retail location closures, we performed an impairment review of long-lived assets at the individual retail location level. As a result of such analysis, we recognized long-lived asset impairment charges of $ 3.5 million related to one RH Baby & Child Gallery and one Waterworks showroom, comprising lease right-of-use asset impairment of $ 2.0 million and property and equipment impairment of $ 1.5 million. Except as noted above, we did not record impairment for long-lived tangible assets at the individual retail location level in fiscal 2021, fiscal 2020 and fiscal 2019. Due to certain distribution center closures and business line integrations in fiscal 2019, we recorded impairment for certain corporate assets and other long-lived assets as discussed below under “Distribution Center and Home Delivery Location Center Closures” and “RH Contemporary Art Impairment.” No additional impairment has been recorded for corporate assets and other long-lived assets in fiscal 2021, fiscal 2020 and fiscal 2019. Distribution Center and Home Delivery Location Center Closures In fiscal 2019, we initiated and executed a plan to consolidate certain of our home delivery location centers. We recorded operating lease right-of-use asset impairment associated with this effort of $ 1.3 million in fiscal 2019. In fiscal 2020, we recorded additional operating lease right-of-use asset impairment associated with this effort of $ 0.9 million resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income. RH Contemporary Art Impairment In fiscal 2016, we initiated and executed a plan to integrate the RH Contemporary Art (“RHCA”) product line into the broader RH platform and no longer operates RHCA as a separate division. We recorded additional operating lease right-of-use asset impairment associated with RHCA of $ 4.6 million during fiscal 2019. This impairment charge, which was recorded in the RH Segment, resulted from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 85 ​ Table of Contents Equity Method Investments Our consolidated financial statements present the results of operations and the financial position of RH and subsidiaries in which we have a controlling financial interest as if the consolidated group were a single economic entity. When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether we are the primary beneficiary of the VIE. We evaluate a legal entity for consolidation under the VIE model if no scope exceptions apply and, by design, the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any of the characteristics of a controlling financial interest. We consolidate a VIE if our involvement indicates that we are the primary beneficiary. We would be the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors including the purpose of the VIE, contractual rights and obligations of the variable interest holders, and mechanisms for the resolution of disputes among the variable interest holders. We account for investments under the equity method of accounting when we are not the primary beneficiary with a controlling financial interest but we have significant influence over the operations of the investee. In evaluating if we exert control or significant influence we consider factors such as the terms and structure of the investment agreement and the legal structure of the investee, including investor voting or other rights, and other agreements with the investee. During fiscal 2020, we were admitted as a non-managing member in three privately-held limited liability companies (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that have the purpose of acquiring, developing, operating, and selling certain real estate projects in Aspen, Colorado. The Aspen LLCs are financed by capital contributions from the members on an as-needed basis, as well as via third-party debt secured by the underlying real estate projects. Each Aspen LLC is designed to require future additional subordinated financial support to finance its activities and thus is qualitatively determined to be a VIE due to insufficient equity investment at risk. The decisions of each Aspen LLC are made by a managing member not under common control with us, and we hold consent rights with respect to certain major decisions that represent some, but not all, of the most significant activities of each Aspen LLC. As we are not the managing member and do not have the ability to liquidate the Aspen LLCs or otherwise remove the managing member, we do not have the power to direct the most significant activities of each Aspen LLC and therefore are not the primary beneficiary. Each Aspen LLC maintains a specific ownership account for each member, similar to a partnership capital account structure. We account for our investments in the Aspen LLCs using the equity method of accounting because we do not have a controlling financial interest but have the ability to exercise significant influence over the Aspen LLCs. Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the Aspen LLCs are included in share of equity method investments losses on the consolidated statements of income. We did not elect the fair value option and the equity method investments are initially measured at cost. As of our initial investment date, we determine the fair value of the underlying assets and liabilities held by the Aspen LLCs for purposes of determining whether or not we have basis differences arising in connection with our investment. The determination of fair value of the underlying real estate assets requires subjectivity and estimates, including the use of various valuation techniques and Level 3 inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable. If specialized expertise is required we obtain independent third-party appraisals to determine the fair value of the underlying assets and liabilities. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment, related to the real estate assets. We account for these basis differences as if the Aspen LLCs were consolidated subsidiaries, thereby affecting the determination of the amount of our share of earnings or losses of the equity method investments. ​ ​ ​ 86 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The operating agreements for each Aspen LLC specifies distributions from operations and upon liquidation that may be disproportionate to the members’ relative ownership percentages. Distributions are made to the members in proportion to, and in repayment of, various categories of capital contributions plus certain preferred returns, after which distributions are made to the members in proportion to their membership interests. To reflect the substance of these arrangements, we measure our proportionate share of the earnings or losses of each Aspen LLC using the hypothetical liquidation at book value (“HLBV”) method, which is a balance sheet oriented approach to determining our share of earnings or losses of the equity method investments that reflects changes in our claims to the net assets of each Aspen LLC. Due to the presence of basis differences and liquidation preferences, we use the recast financial statements approach in applying the HLBV method whereby we recast the financial statements of each Aspen LLC to reflect our perspective or basis (thus eliminating the basis differences) when determining our share of the Aspen LLCs earnings or losses. Our proportionate share of earnings or losses of the equity method investments follow the Aspen LLCs’ distribution priorities, which may change upon the achievement of certain investment return thresholds. Our equity method investment balance is subsequently adjusted for our share of the Aspen LLCs’ earnings and losses, cash contributions and distributions. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary. Deferred Financing Fees and Debt Issuance Costs Deferred financing fees related to the asset based credit facility are included in other non-current assets on the consolidated balance sheets and are amortized utilizing the straight-line method. Debt issuance costs are recorded as a contra-liability and are presented net against the respective debt balance on the consolidated balance sheets and are amortized utilizing the effective interest method over the expected life of the respective debt. Amortization of deferred financing fees and debt issuance costs are included in interest expense—net on the consolidated statements of income. Revenue Recognition We recognize revenues and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise. Revenue recognized for merchandise delivered via the home-delivery channel is recognized upon delivery. Revenues recognized for merchandise delivered via all other delivery channels are recognized upon shipment. Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store. Discounts or other accommodations provided to customers are accounted for as a reduction of net revenues on the consolidated statements of income. We recognize shipping and handling fees as activities to fulfill the promise to transfer the merchandise to customers. We apply this policy consistently across all of our distribution channels. In instances where revenue is recognized for the related merchandise upon delivery to customers, the related costs of shipping and handling activities are accrued for in the same period. In instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities are accrued for in the same period. Costs of shipping and handling are included in cost of goods sold on the consolidated statements of income. Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities. Our customers may return purchased items for a refund. Projected merchandise returns, which are often resalable merchandise, are reserved on a gross basis based on historical return rates. The allowance for sales returns is presented within other current liabilities and the estimated value of the right of return asset for merchandise is presented within prepaid expense and other assets on the consolidated balance sheets. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 87 ​ Table of Contents A summary of the allowance for sales returns is as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ 2022 2021 2020 Balance at beginning of fiscal year ​ $ 25,559 ​ $ 19,206 ​ $ 19,821 Provision for sales returns ​ 161,876 ​ 133,226 ​ 107,811 Actual sales returns ​ ( 162,179 ) ​ ( 126,873 ) ​ ( 108,426 ) Balance at end of fiscal year ​ $ 25,256 ​ $ 25,559 ​ $ 19,206 ​ Deferred Revenue and Customer Deposits We defer revenue associated with merchandise delivered via the home-delivery channel, which is included as deferred revenue and customer deposits on the consolidated balance sheets while in-transit, in instances where we recognize revenue when the merchandise is delivered to customers. Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year . Customer deposits represent payments made by customers on custom orders. At the time of purchase we collect deposits for all custom orders equivalent to 50 % of the purchase price. Custom order deposits are recognized as revenue when the customer obtains control of the merchandise. We expect that substantially all of the deferred revenue and customer deposits as of January 29, 2022 will be recognized within the next six months as the performance obligations are satisfied, and membership fees will be recognized over the membership period. Gift Cards We sell gift cards to our customers in our stores and through our websites and product catalogs. Such gift cards and merchandise credits do not have expiration dates. We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards. During fiscal 2021, fiscal 2020 and fiscal 2019, we recognized $ 20 million, $ 16 million and $ 20 million, respectively, of revenue related to previous deferrals related to our gift cards. Customer liabilities related to gift cards was $ 23 million and $ 19 million as of January 29, 2022 and January 30, 2021, respectively. We recognize breakage associated with gift cards proportional to actual gift card redemptions. Breakage of $ 1.8 million, $ 1.8 million and $ 1.6 million was recorded in net revenues in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. We expect that approximately 75 % of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers. Self-Insurance We maintain insurance coverage for significant exposures as well as those risks that, by law, must be insured. In the case of our health care coverage for employees, we have a managed self-insurance program related to claims filed. Expenses related to this self-insured program are computed on an actuarial basis, based on claims experience, regulatory requirements, an estimate of claims incurred but not yet reported (“IBNR”) and other relevant factors. The projections involved in this process are subject to uncertainty related to the timing and amount of claims filed, levels of IBNR, fluctuations in health care costs and changes to regulatory requirements. We had liabilities of $ 2.9 million and $ 2.6 million related to health care coverage as of January 29, 2022 and January 30, 2021, respectively. We carry workers’ compensation insurance subject to a deductible amount for which we are responsible on each claim. We had liabilities of $ 4.8 million and $ 4.5 million related to workers’ compensation claims, primarily for claims that do not meet the per-incident deductible, as of January 29, 2022 and January 30, 2021, respectively. ​ ​ ​ 88 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Stock-Based Compensation We recognize the fair value of stock-based awards as compensation expense over the requisite service period and include the expense within selling, general and administrative expenses on the consolidated statements of income. For service-only awards, compensation expense is recognized on a straight-line basis, net of forfeitures, over the requisite service period for the fair value of awards that actually vest. Fair value for restricted stock units is valued using the closing price of our stock on the date of grant. The fair value of each option award granted under our award plan is estimated on the date of grant using a Black-Scholes Merton option pricing model (“OPM”) which requires the input of assumptions regarding the expected term, expected volatility, dividend yield and risk-free interest rate. We elected to calculate the expected term of the option awards using the “simplified method.” This election was made based on the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Under the “simplified” calculation method, the expected term is calculated as an average of the vesting period and the contractual life of the options. For awards with performance-based criteria, compensation expense is recognized on an accelerated basis over the requisite service period. The fair value of each performance-based option award granted is estimated on the date of grant using a Monte Carlo simulation option pricing model that requires the input of subjective assumptions regarding the future exercise behavior, expected volatility and a discount for illiquidity. 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. Cost of Goods Sold Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory reserves and write-downs, inventory shrinkage, inbound freight, all freight costs to get merchandise to our retail and outlet locations, design and buying costs, occupancy costs related to retail operations and supply chain, such as rent, utilities, depreciation and amortization and all logistics costs associated with shipping product to customers, property tax and common area maintenance. 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, retail related expenses other than occupancy, and the expense related to the operations at our corporate headquarters, including rent, utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes catalog production, mailing and print advertising costs. All retail pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred. Net Income Per Share Basic net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period, common share equivalents under equity plans using the treasury-stock method and the calculated common share equivalents in excess of the respective conversion rates related to each of the convertible senior notes. Potential dilutive securities are excluded from the computation of diluted net income per share if their effect is anti-dilutive. Treasury Stock We record our purchases of treasury stock at cost as a separate component of stockholders’ equity (deficit) in the consolidated financial statements. Upon retirement of treasury stock, we allocate the excess of the purchase price over par value to additional paid-in capital subject to certain limitations with any remaining purchase price allocated to retained earnings (accumulated deficit). ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 89 ​ Table of Contents Income Taxes We account for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally take into account all expected future events then known to it, other than changes in the tax law or rates which have not yet been enacted and which are not permitted to be considered. Accordingly, we may record a valuation allowance to reduce our net deferred tax assets to the amount that is more-likely-than-not to be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based upon our best estimate of the recoverability of our net deferred tax assets. Future taxable income and ongoing prudent and feasible tax planning are considered in determining the amount of the valuation allowance, and the amount of the allowance is subject to adjustment in the future. Specifically, in the event we were to determine that it is not more-likely-than-not able to realize our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination is made. This allowance does not alter our ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of which is limited to achieving future taxable income. The accounting standard for uncertainty in income taxes prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Differences between tax positions taken in a tax return and amounts recognized in the financial statements generally result in an increase in liability for income taxes payable or a reduction of an income tax refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on the consolidated statements of income. Foreign Currency Matters The functional currency of our foreign subsidiaries is generally the local currency of the country in which the subsidiary operates. Assets and liabilities of the foreign subsidiaries denominated in non-U.S. dollar currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets, and revenues and expenses are translated at average rates of exchange for the period. The related translation gains (losses) are reflected in the accumulated other comprehensive income section on the consolidated statements of stockholders’ equity (deficit), and net gains (losses) on foreign currency translation , which includes intercompany gains and losses, is presented net of tax on the consolidated statements of comprehensive income. Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive income on the consolidated balance sheets. Foreign currency gains (losses) resulting from foreign currency transactions denominated in a currency other than the subsidiary's functional currency are included in other expense—net on the consolidated statements of income. Such foreign exchange gains and losses are due to the net impact of changes in foreign exchange rates as compared to the U.S. dollar from our third-party transactions denominated in foreign currencies, and intercompany loans held in U.S. dollars by our international subsidiaries other than those of a long-term investment nature, where repayment is not planned or anticipated in the foreseeable future. The foreign exchange gains or losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within accumulated other comprehensive income on the consolidated balance sheets. Recently Issued Accounting Standards New Accounting Standards or Updates Adopted Income Taxes In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this standard in the first quarter of fiscal 2021 and the adoption did not have an impact on our consolidated financial statements. ​ ​ ​ 90 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents New Accounting Standards or Updates Not Yet Adopted Convertible Instruments and Contracts in an Entity’s Own Equity In August 2020, the FASB issued ASU 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. ​ We will adopt the ASU in the first quarter of fiscal 2022 using a modified retrospective approach. We anticipate that the adoption of the ASU will impact our consolidated financial statements through the cumulative effect of initially applying the ASU as an adjustment to the opening balance of retained earnings on the consolidated balance sheets of approximately $ 20 million and a related reduction to additional paid in capital of approximately $ 55 million and increase to deferred tax assets of approximately $ 15 million. In addition, upon adoption, as a result of the removal of the separation of the outstanding equity component, the balance of convertible debt outstanding will increase by approximately $ 35 million and the resulting balance will represent the carrying amount of the outstanding par value of our convertible senior notes. Additionally, we anticipate a reduction to property and equipment—net on the consolidated balance sheets of approximately $ 15 million related to previously capitalized interest for construction in progress. ​ Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 — Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848): Scope , together with ASU 2020-04 the “ASUs”. The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. The primary contracts for which we currently use LIBOR include our asset based credit facility and term loan debt arrangements. The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022, when the reference rate replacement activity is expected to be completed. We are evaluating the impact that the ASUs will have on our consolidated financial statements and related disclosures, including the timing of adoption, and do not believe the adoption will materially impact our financial condition, results of operations or cash flows. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 91 ​ Table of Contents NOTE 4—PREPAID EXPENSE AND OTHER ASSETS Prepaid expense and other current assets consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Prepaid expense and other current assets ​ $ 45,386 ​ $ 35,689 Capitalized catalog costs ​ 22,194 ​ 19,067 Vendor deposits ​ ​ 19,610 ​ ​ 12,519 Tenant allowance receivable ​ ​ 15,355 ​ ​ 6,390 Promissory notes receivable, including interest (1) ​ 8,401 ​ 13,569 Right of return asset for merchandise ​ 6,429 ​ 7,453 Acquisition related escrow deposits ​ ​ 3,975 ​ ​ 2,650 Total prepaid expense and other current assets ​ $ 121,350 ​ $ 97,337 (1) Represents promissory notes, including principal and accrued interest, due from a related party. Refer to Note 8— Equity Method Investments . Other non-current assets consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Landlord assets under construction—net of tenant allowances ​ $ 204,013 ​ $ 135,531 Initial direct costs prior to lease commencement ​ ​ 57,087 ​ 36,770 Capitalized cloud computing costs—net (1) ​ ​ 14,910 ​ ​ 7,254 Other deposits ​ 6,877 ​ 5,287 Deferred financing fees ​ 4,123 ​ 1,525 Other non-current assets ​ 11,139 ​ 9,835 Acquisition related escrow deposits ​ ​ — ​ ​ 3,975 Total other non-current assets ​ $ 298,149 ​ $ 200,177 ​ ​ (1) Presented net of accumulated amortization of $ 4.0 million and $ 0.5 million as of January 29, 2022 and January 30, 2021. ​ ​ ​ 92 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 5—PROPERTY AND EQUIPMENT Property and equipment consists of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Finance lease right-of-use assets (1) ​ $ 958,148 ​ $ 844,832 Leasehold improvements (2) ​ ​ 389,179 ​ ​ 340,546 Computer software ​ 122,552 ​ 143,571 Furniture, fixtures and equipment ​ 86,058 ​ 92,736 Machinery, equipment and aircraft ​ 73,968 ​ 67,080 Building and building improvements (3) ​ 54,061 ​ 43,193 Built-to-suit property ​ ​ 37,057 ​ ​ 24,881 Land ​ 20,614 ​ 9,059 Total property and equipment ​ 1,741,637 ​ 1,565,898 Less—accumulated depreciation and amortization (4) ​ ( 513,717 ) ​ ( 488,700 ) Total property and equipment—net ​ $ 1,227,920 ​ $ 1,077,198 (1) Refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases . (2) Leasehold improvements include construction in progress of $ 11 million and $ 32 million as of January 29, 2022 and January 30, 2021, respectively. (3) Building and building improvements as of January 29, 2022 and January 30, 2021 includes $ 51 million and $ 40 million of owned buildings under construction related to future Design Galleries. (4) Includes accumulated amortization related to finance lease right-of-use assets of $ 174 million and $ 133 million as of January 29, 2022 and January 30, 2021, respectively. Refer to Note 11— Leases. We recorded depreciation and amortization of property and equipment, excluding amortization for finance lease right-of-use assets, of $ 52 million, $ 59 million and $ 64 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. NOTE 6—BUSINESS COMBINATIONS On August 28, 2020, we acquired a business for total consideration of $ 15 million funded through available cash, of which $ 1.9 million was deposited into an escrow account for any potential post-closing adjustments. We have deposited into escrow an additional $ 5.0 million, which represents a deferred acquisition related payment subject to mutually agreed to conditions and expected to be paid over two years . On December 7, 2020, we acquired the net assets of a business for $ 4.7 million funded through available cash, of which $ 0.5 million was deposited into an escrow account for any potential post-closing adjustments. Additional consideration of $ 4.6 million is expected to be paid over five years . We believe that these additions to the RH platform further position us as a leader in the luxury design market as we continue to enhance the RH product assortment. During fiscal 2020, we incurred acquisition-related costs associated with these transactions such as financial, legal and accounting advisors, as well as employment related costs, which are included in selling, general and administrative expenses on the consolidated statements of income. No additional acquisition-related costs were incurred in fiscal 2021. Acquisition related escrow deposits, included within prepaid expense and other current assets and other non-current assets on the consolidated balance sheets, were $ 4.0 million and $ 6.6 million as of January 29, 2022 and January 30, 2021, respectively. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 93 ​ Table of Contents The following table summarizes the purchase price allocation based on the fair value of the assets acquired and liabilities assumed ( in thousands ): ​ ​ ​ ​ Goodwill ​ $ 16,689 Tradename ​ ​ 4,800 Tangible assets acquired and liabilities assumed—net ​ ​ ( 1,839 ) Total ​ $ 19,650 ​ The tradename has been assigned an indefinite life and therefore is not subject to amortization. The goodwill, included in the RH Segment, is representative of the benefits and expected synergies from the integration of the acquired companies’ products, leadership team and employees, which do not qualify for separate recognition as an intangible asset. The tradename and goodwill are deductible for tax purposes. Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates. Pro forma results of the acquired businesses have not been presented as the results were not considered material to our consolidated financial statements for all periods presented and would not have been material had the acquisitions occurred at the beginning of fiscal 2020. NOTE 7—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS The following sets forth the fiscal 2021 goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ FOREIGN ​ ​ ​ ​ JANUARY 30, ​ ​ ​ CURRENCY ​ JANUARY 29, ​ ​ 2021 ​ ADDITIONS ​ TRANSLATION ​ 2022 RH Segment ​ ​ ​ ​ Goodwill ​ $ 141,100 ​ $ — ​ $ — ​ $ 141,100 Tradenames, trademarks and other intangible assets ​ 54,663 ​ 1,498 ​ — ​ 56,161 Waterworks ​ ​ ​ ​ ​ ​ Tradename ​ 17,000 ​ — ​ — ​ 17,000 ​ The following sets forth the fiscal 2020 goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ FOREIGN ​ ​ ​ ​ ​ FEBRUARY 1, ​ ​ ​ ​ ​ CURRENCY ​ JANUARY 30, ​ 2020 ACQUISITION IMPAIRMENT TRANSLATION 2021 RH Segment ​ ​ ​ ​ ​ Goodwill ​ $ 124,367 ​ $ 16,689 ​ $ — ​ $ 44 ​ $ 141,100 Tradenames, trademarks and other intangible assets ​ 48,563 ​ 6,100 ​ — ​ — ​ 54,663 Waterworks (1) ​ ​ ​ ​ ​ Tradename (2) ​ 37,459 ​ — ​ ( 20,459 ) ​ — ​ 17,000 (1) Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. (2) Presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020 . ​ ​ ​ 94 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 8—EQUITY METHOD INVESTMENTS Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020, and have the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. As we do not have a controlling financial interest in the Aspen LLCs but have the ability to exercise significant influence over the Aspen LLCs, we account for these investments using the equity method of accounting. Refer to Note 3— Significant Accounting Policies for further discussion. In fiscal 2020, we contributed capital of $ 99 million for our membership interest in the Aspen LLCs and our investment includes $ 2.1 million of direct transaction costs incurred to acquire the investments. Capital contributions comprised $ 79 million in cash and $ 20 million of promissory notes receivable from the managing member that were converted into equity upon investment in the Aspen LLCs. In fiscal 2021, we purchased an additional 20 % interest in one of the Aspen LLCs, which continues to be accounted for as an equity method investment. As of January 29, 2022 and January 30, 2021, $ 8.4 million and $ 14 million of promissory notes receivable, respectively, are outstanding with the managing member, which are included in prepaid expense and other current assets on the consolidated balance sheets. These promissory notes are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs. We are contractually required to make capital contributions to the Aspen LLCs up to a total aggregate $ 105 million investment. Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of January 29, 2022. The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment. We account for these basis differences as if the Aspen LLCs were consolidated subsidiaries, thereby affecting the determination of the amount of our share of earnings or losses of the equity method investments. During fiscal 2021 and fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 8.2 million and $ 0.9 million, respectively, which is included in the consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of January 29, 2022 and January 30, 2021. During fiscal 2021 and fiscal 2020, we did not receive any distributions or have any undistributed earnings of equity method investments. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 95 ​ Table of Contents NOTE 9 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accounts payable and accrued expenses consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Accounts payable ​ $ 242,035 ​ $ 224,906 Accrued compensation ​ 96,859 ​ 84,860 Accrued occupancy ​ 28,088 ​ 17,671 Accrued sales taxes ​ 24,811 ​ 23,706 Accrued freight and duty ​ 21,888 ​ 29,754 Accrued professional fees ​ 5,892 ​ 5,383 Accrued catalog costs ​ 4,127 ​ 4,354 Other accrued expenses ​ 18,679 ​ 19,401 Deferred consideration for asset purchase ​ ​ — ​ ​ 14,387 Total accounts payable and accrued expenses ​ $ 442,379 ​ $ 424,422 ​ Other current liabilities consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Federal and state tax payable ​ $ 31,364 ​ $ 49,539 Allowance for sales returns ​ ​ 25,256 ​ ​ 25,559 Unredeemed gift card and merchandise credit liability ​ 22,712 ​ 19,173 Current portion of term loan ​ ​ 20,000 ​ ​ — Finance lease liabilities ​ ​ 15,511 ​ ​ 14,671 Current portion of equipment promissory notes ​ ​ 13,625 ​ ​ 22,747 Other current liabilities ​ 18,155 ​ 11,002 Total other current liabilities ​ $ 146,623 ​ $ 142,691 ​ ​ NOTE 10—OTHER NON-CURRENT OBLIGATIONS Other non-current obligations consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Unrecognized tax benefits ​ $ 3,471 ​ $ 3,114 Non-current portion of equipment promissory notes—net ​ ​ 1,129 ​ ​ 14,614 Other non-current obligations ​ 4,106 ​ 9,406 Deferred payroll taxes ​ ​ — ​ ​ 4,461 Total other non-current obligations ​ $ 8,706 ​ $ 31,595 ​ ​ ​ ​ ​ ​ 96 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 11—LEASES Lease costs—net consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 2021 2020 Operating lease cost (1) $ 99,985 ​ $ 84,852 ​ $ 86,448 Finance lease costs ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortization of leased assets (1) ​ ​ 43,964 ​ ​ 41,292 ​ ​ 36,991 Interest on lease liabilities (2) ​ ​ 26,412 ​ ​ 24,011 ​ ​ 22,608 Variable lease costs (3) ​ ​ 36,914 ​ ​ 20,485 ​ ​ 23,471 Sublease income (4) ​ ​ ( 4,184 ) ​ ​ ( 7,723 ) ​ ​ ( 9,609 ) Total lease costs—net ​ $ 203,091 ​ $ 162,917 ​ $ 159,909 (1) Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or s elling, general and administrative expenses on the consolidated statements of income based on our accounting policy. Refer to Note 3— Significant Accounting Policies . (2) Included in interest expense—net on the consolidated statements of income. (3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 28 million, $ 13 million and $ 15 million, respectively, and charges associated with common area maintenance of $ 8.8 million, $ 7.1 million and $ 8.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Other variable costs include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset were not material in fiscal 2021, fiscal 2020 and fiscal 2019. (4) Included as an offset to selling, general and administrative expenses on the consolidated statements of income. Lease right-of-use assets and lease liabilities consist of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ ​ 2022 2021 ​ ​ Balance Sheet Classification ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Operating lease right-of-use assets ​ $ 551,045 ​ $ 456,164 Finance leases (1)(2) ​ Property and equipment—net ​ ​ 784,327 ​ ​ 711,804 Total lease right-of-use assets ​ ​ ​ $ 1,335,372 ​ $ 1,167,968 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ Current (3) ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Operating lease liabilities ​ $ 73,834 ​ $ 71,524 Finance leases ​ Other current liabilities ​ ​ 15,511 ​ ​ 14,671 Total lease liabilities—current ​ ​ ​ ​ 89,345 ​ ​ 86,195 Non-current ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Non-current operating lease liabilities ​ ​ 540,513 ​ ​ 448,169 Finance leases ​ Non-current finance lease liabilities ​ ​ 560,550 ​ ​ 485,481 Total lease liabilities—non-current ​ ​ ​ ​ 1,101,063 ​ ​ 933,650 Total lease liabilities ​ ​ ​ $ 1,190,408 ​ $ 1,019,845 (1) Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 97 ​ Table of Contents (2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 174 million and $ 133 million as of January 29, 2022 and January 30, 2021, respectively. (3) Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months. The maturities of lease liabilities are as follows as of January 29, 2022 ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ OPERATING ​ FINANCE ​ ​ FISCAL YEAR ​ ​ LEASES LEASES TOTAL 2022 ​ ​ ​ $ 96,463 ​ $ 42,832 ​ $ 139,295 2023 ​ ​ ​ ​ 89,438 ​ ​ 43,238 ​ ​ 132,676 2024 ​ ​ ​ ​ 83,816 ​ ​ 43,608 ​ ​ 127,424 2025 ​ ​ ​ ​ 82,506 ​ ​ 44,818 ​ ​ 127,324 2026 ​ ​ ​ ​ 79,239 ​ ​ 45,598 ​ ​ 124,837 Thereafter ​ ​ ​ ​ 310,472 ​ ​ 734,173 ​ ​ 1,044,645 Total lease payments (1)(2) ​ ​ ​ ​ 741,934 ​ ​ 954,267 ​ ​ 1,696,201 Less—imputed interest (3) ​ ​ ​ ​ ( 127,587 ) ​ ​ ( 378,206 ) ​ ​ ( 505,793 ) Present value of lease liabilities ​ ​ ​ $ 614,347 ​ $ 576,061 ​ $ 1,190,408 (1) Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Total lease payments exclude $ 700 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of January 29, 2022, of which $ 31 million, $ 35 million, $ 39 million, $ 41 million and $ 40 million will be paid in fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $ 514 million will be paid subsequent to fiscal 2026. (2) Excludes future commitments under short-term lease agreements of $ 0.7 million as of January 29, 2022. (3) Calculated using the discount rate for each lease at lease commencement. Supplemental information related to leases consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 Weighted-average remaining lease term (years) ​ ​ ​ ​ ​ ​ Operating leases ​ ​ 9.1 ​ ​ 8.7 Finance leases ​ ​ 20.0 ​ ​ 18.4 Weighted-average discount rate ​ ​ ​ ​ ​ ​ Operating leases ​ ​ 3.94 % ​ ​ 3.97 % Finance leases ​ ​ 4.96 % ​ ​ 5.04 % ​ ​ ​ ​ 98 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Other information related to leases consists of the following ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ ( 102,097 ) ​ $ ( 75,794 ) ​ $ ( 95,329 ) Operating cash flows from finance leases ​ ​ ( 26,775 ) ​ ​ ( 20,839 ) ​ ​ ( 25,260 ) Financing cash flows from finance leases ​ ​ ( 14,158 ) ​ ​ ( 12,498 ) ​ ​ ( 9,682 ) Total cash outflows from leases ​ $ ( 143,030 ) ​ $ ( 109,131 ) ​ $ ( 130,271 ) Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash) ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ $ 172,393 ​ $ 113,828 ​ $ 34,063 Finance leases ​ ​ 89,617 ​ ​ 57,873 ​ ​ 42,122 ​ Build-to-Suit Asset During fiscal 2021, we opened the Dallas Design Gallery. During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property & equipment—net on our consolidated balance sheets. Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we cannot derecognize the build-to-suit asset. Therefore, the asset will remain classified as a build-to-suit asset within property and equipment—net and will depreciate over the term of the useful life of the asset. Asset Held for Sale and Sale-Leaseback Transaction During fiscal 2020, we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $ 26 million, which qualified for sale-leaseback accounting in accordance with ASC 842. Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 20 years and a renewal option for an additional 10 years . We recognized a loss related to the execution of the sale transaction of $ 9.4 million in fiscal 2020, which was recorded in selling, general and administrative expenses on the consolidated statements of income. During fiscal 2019, we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $ 24 million, which qualified for sale-leaseback accounting in accordance with ASC 842. Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 15 years and renewal options for up to an additional 30 years . We recognized a gain related to the execution of the sale transaction of $ 1.2 million in fiscal 2019, which was recorded in selling, general and administrative expenses on the consolidated statements of income. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 99 ​ Table of Contents NOTE 12—CONVERTIBLE SENIOR NOTES $ 350 million 0.00 % Convertible Senior Notes due 2024 In September 2019 , we issued in a private offering $ 350 million principal amount of 0.00 % convertible senior notes due 2024 (the “2024 Notes”). The 2024 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2024 Notes will mature on September 15, 2024 , unless earlier purchased by us or converted. The 2024 Notes will not bear interest, except that the 2024 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2024 Notes. The 2024 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2024 Notes, which may result in the acceleration of the maturity of the 2024 Notes, as described in the indenture governing the 2024 Notes. Events of default under the indenture for the 2024 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $ 20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25 % of the aggregate principal amount of the 2024 Notes then outstanding. The initial conversion rate applicable to the 2024 Notes is 4.7304 shares of common stock per $ 1,000 principal amount of 2024 Notes, or a total of approximately 1.656 million shares for the total $ 350 million principal amount. This initial conversion rate is equivalent to an initial conversion price of approximately $ 211.40 per share, which represents a 25 % premium to the $ 169.12 closing share price on the day the 2024 Notes were priced. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2024 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change. Prior to June 15, 2024 , the 2024 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after December 31, 2019, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130 % of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $ 1,000 principal amount of 2024 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2021 and, accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes during the calendar quarter ending March 31, 2022. On and after June 15, 2024 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2024 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 . We may not redeem the 2024 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2024 Notes for cash at a price equal to 100 % of the principal amount of the 2024 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date. ​ ​ ​ 100 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents 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 the issuance of the 2024 Notes, we separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2024 Notes and the fair value of the liability component of the 2024 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 5.74 % over the expected life of the 2024 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. Debt issuance costs related to the 2024 Notes were comprised of discounts upon original issuance of $ 3.5 million and third party offering costs of $ 1.3 million. In accounting for the debt issuance costs related to the issuance of the 2024 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2024 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity (deficit) . Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2024 balance on the consolidated balance sheets. During fiscal 2021, fiscal 2020 and fiscal 2019, we recorded $ 0.7 million, $ 0.7 million and $ 0.2 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively. During fiscal 2021, holders of $ 130 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2021, we paid $ 130 million in cash and delivered 419,182 shares of common stock to settle the early conversion of these 2024 Notes. As a result, we recognized a loss on extinguishment of the liability component of $ 10 million in fiscal 2021. We also received 419,172 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below, and therefore, on a net basis issued 10 shares of our common stock in respect to such settlement of the converted 2024 Notes. During the fourth quarter of fiscal 2021, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value. In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period. As of January 29, 2022, the observation periods of these converted 2024 Notes had not been completed and, as a result, these converted 2024 Notes remain outstanding as of January 29, 2022. In the first quarter of fiscal 2022, we expect to pay $ 3.6 million in cash and to deliver shares of common stock to settle the early conversion of these 2024 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below. Accordingly, as of January 29, 2022, we reclassified $ 3.6 million of the outstanding principal balance to current liabilities on our consolidated balance sheets. As the settlement of conversion of the remainder of the 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2024 Notes is classified within other non-current obligations on our consolidated balance sheets. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 101 ​ Table of Contents The carrying value of the 2024 Notes, excluding the discounts upon original issuance and third party offering costs, is as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Liability component ​ ​ Principal ​ $ 219,638 ​ $ 350,000 Less: Debt discount ​ ( 30,341 ) ​ ( 65,818 ) Net carrying amount (1) ​ $ 189,297 ​ $ 284,182 Equity component ​ $ 54,754 ​ $ 87,252 (1) Included in additional paid-in capital on the consolidated balance sheets. We recorded interest expense of $ 15 million, $ 16 million and $ 6 million for the amortization of the debt discount related to the 2024 Notes during fiscal 2021, fiscal 2020 and fiscal 2019, respectively. 2024 Notes—Convertible Bond Hedge and Warrant Transactions In connection with the offering of the 2024 Notes and exercise of the overallotment option in September 2019 , we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of approximately $ 211.40 per share. The total cost of the convertible note hedge transactions was approximately $ 91 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of $ 338.24 per share, which represents a 100 % premium to the $ 169.12 closing share price on the day the 2024 Notes were priced. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of approximately 3.3 million shares of common stock (which cap may also be subject to adjustment). We received approximately $ 50 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants 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. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets. We recorded a deferred tax liability of $ 22 million in connection with the debt discount associated with the 2024 Notes and recorded a deferred tax asset of $ 23 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the consolidated balance sheets. $ 335 million 0.00 % Convertible Senior Notes due 2023 In June 2018 , we issued in a private offering $ 300 million principal amount of 0.00 % convertible senior notes due 2023 and issued an additional $ 35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”). The 2023 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2023 Notes will mature on June 15, 2023 , unless earlier purchased by us or converted. The 2023 Notes will not bear interest, except that the 2023 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure to perform certain of our obligations under the indenture governing the 2023 Notes. The 2023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2023 Notes, which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes. Events of default under the indenture for the 2023 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $ 20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25 % of the aggregate principal amount of the 2023 Notes then outstanding. ​ ​ ​ 102 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The initial conversion rate applicable to the 2023 Notes is 5.1640 shares of common stock per $ 1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $ 193.65 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2023 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2023 Notes in connection with such make-whole fundamental change. Prior to March 15, 2023 , the 2023 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130 % of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $ 1,000 principal amount of 2023 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2021 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending March 31, 2022. On and after March 15, 2023 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2023 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 . We may not redeem the 2023 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the 2023 Notes), holders may require us to purchase all or a portion of their 2023 Notes for cash at a price equal to 100 % of the principal amount of the 2023 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date. 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 the issuance of the 2023 Notes, we separated the 2023 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2023 Notes and the fair value of the liability component of the 2023 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.35 % over the expected life of the 2023 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. Debt issuance costs related to the 2023 Notes were comprised of discounts upon original issuance of $ 1.7 million and third party offering costs of $ 4.6 million. In accounting for the debt issuance costs related to the issuance of the 2023 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity (deficit) . Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2023 balance on the consolidated balance sheets. We recorded $ 0.8 million, $ 1.0 million and $ 0.9 million related to the amortization of debt issuance costs in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, related to the 2023 Notes. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 103 ​ Table of Contents During fiscal 2021, holders of $ 261 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2021, we paid $ 261 million in cash and delivered 958,330 shares of common stock to settle the early conversion of these 2023 Notes. As a result, we recognized a loss on extinguishment of the liability component of $ 19 million in fiscal 2021. We also received 958,307 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 23 shares of our common stock in respect to such settlement of the converted 2023 Notes. During the fourth quarter of fiscal 2021, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period. As of January 29, 2022, the observation periods of these converted 2023 Notes had not been completed and, as a result, these converted 2023 Notes remain outstanding as of January 29, 2022. In the first quarter of fiscal 2022, we expect to pay $ 9.4 million in cash and to deliver shares of common stock to settle the early conversion of these 2023 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below. Accordingly, as of January 29, 2022, we reclassified $ 9.4 million of the outstanding principal balance to current liabilities on our consolidated balance sheets. As the settlement of conversion of the remainder of the 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2023 Notes is classified within other non-current obligations on our consolidated balance sheets. The carrying values of the 2023 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ ​ 2022 ​ 2021 Liability component ​ ​ Principal ​ $ 74,390 ​ $ 335,000 Less: Debt discount ​ ( 5,684 ) ​ ( 47,064 ) Net carrying amount (1) ​ $ 68,706 ​ $ 287,936 Equity component ​ $ 20,205 ​ $ 90,990 (1) Included in additional paid-in capital on the consolidated balance sheets. We recorded interest expense of $ 14 million, $ 18 million and $ 17 million for the amortization of the debt discount related to the 2023 Notes during fiscal 2021, fiscal 2020 and fiscal 2019, respectively. 2023 Notes—Convertible Bond Hedge and Warrant Transactions In connection with the offering of the 2023 Notes and exercise of the overallotment option in June 2018 , we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.730 million shares of our common stock at a price of approximately $ 193.65 per share . The total cost of the convertible note hedge transactions was approximately $ 92 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.730 million shares of our common stock at a price of $ 309.84 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of approximately 3.5 million shares of common stock (which cap may also be subject to adjustment). We received approximately $ 51 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2023 Notes until our common stock is above approximately $ 309.84 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity (deficit), are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets. ​ ​ ​ 104 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents We recorded a deferred tax liability of $ 22 million in connection with the debt discount associated with the 2023 Notes and recorded a deferred tax asset of $ 23 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the consolidated balance sheets. $ 300 million 0.00 % Convertible Senior Notes due 2020 In June 2015 , we issued in a private offering $ 250 million principal amount of 0.00 % convertible senior notes due 2020 and, in July 2015 , we issued an additional $ 50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of our June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes were governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes did not bear interest, except that the 2020 Notes were subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2020 Notes. The 2020 Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events were also considered “events of default” under the 2020 Notes, which could have resulted in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes were guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. 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 the issuance of the 2020 Notes, we separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The debt discount was amortized to interest expense using an effective interest rate of 6.47 % over the expected life of the 2020 Notes. The equity component was not remeasured as it continued to meet the conditions for equity classification. In May 2020, $ 9.4 million in aggregate principal amount of 2020 Notes were converted at the option of the noteholders. We paid $ 9.2 million in cash and delivered 14,927 shares of common stock to settle the converted 2020 Notes. As a result, we recognized a gain on extinguishment of the liability component of $ 0.2 million in fiscal 2020. We also received 14,927 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis did not issue any shares of our common stock in respect to such settlement of the 2020 Notes. In July 2020, upon the maturity of the 2020 Notes, the remaining $ 291 million in aggregate principal amount of the 2020 Notes settled for $ 291 million in cash and 1,116,718 shares of common stock. No gain or loss arose on extinguishment of the liability component. We also received 1,116,735 shares of common stock from the exercise of the remainder of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis received 17 shares of our common stock (which were recorded as treasury stock within the consolidated statements of stockholders’ equity (deficit) in respect to such settlement of the 2020 Notes. We recorded interest expense of $ 8.9 million and $ 18 million for the amortization of the debt discount related to the 2020 Notes during fiscal 2020 and fiscal 2019, respectively. We recorded $ 0.6 million and $ 1.2 million related to the amortization of debt issuance costs in fiscal 2020 and fiscal 2019, respectively, related to the 2020 Notes. 2020 Notes—Convertible Bond Hedge and Warrant Transactions In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, we entered into convertible note hedge transactions whereby we had the option to purchase a total of approximately 2.540 million shares of our common stock at a price of approximately $ 118.13 per share. The total cost of the convertible note hedge transactions was approximately $ 68 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.540 million shares of our common stock at a strike price of $ 189.00 per share (the “2020 warrants”). We received approximately $ 30 million in cash proceeds from the sale of the 2020 warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants were intended to offset any actual earnings dilution from the conversion of the 2020 Notes until our common stock is above approximately $ 189.00 per share. As these transactions met certain accounting criteria, the convertible note hedges and warrants were recorded in stockholders’ equity, not accounted for as derivatives and not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 105 ​ Table of Contents As a result of the operation of the bond hedge in connection with the maturity of the 2020 Notes, we were not required to issue any new shares to settle the notes as these shares were delivered to us under the terms of the bond hedge. The bond hedge was exercised in connection with the maturity date of the 2020 Notes. During fiscal 2020, we delivered 1,386,580 shares upon exercise of the warrants under the terms of the warrant agreements. The warrants expired on January 7, 2021. $ 350 million 0.00 % Convertible Senior Notes due 2019 In June 2014 , we issued $ 350 million principal amount of 0.00 % convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes were governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes did not bear interest, except that the 2019 Notes were subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes. The 2019 Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of its subsidiaries. Certain events were also considered “events of default” under the 2019 Notes, which could result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes. In June 2019, upon the maturity of the 2019 Notes, $ 350 million in aggregate principal amount of the 2019 Notes were settled for $ 349 million in cash and 42 shares of common stock. As a result, we recognized a gain on extinguishment of debt of $ 1.0 million during fiscal 2019. We recorded interest expense of $ 5.9 million for the amortization of the debt discount related to the 2019 Notes in fiscal 2019, respectively. We recorded $ 0.4 million related to the amortization of debt issuance costs in fiscal 2019 related to the 2019 Notes. 2019 Notes—Convertible Bond Hedge and Warrant Transactions In connection with the offering of the 2019 Notes, we entered into convertible note hedge transactions whereby we had the option to purchase a total of approximately 3.015 million shares of our common stock at a price of approximately $ 116.09 per share. The total cost of the convertible note hedge transactions was approximately $ 73 million. The convertible note hedge terminated upon the maturity date of the 2019 Notes. In addition, we sold warrants whereby the holders of the warrants had the option to purchase a total of approximately 3.015 million shares of our common stock at a price of $ 171.98 per share. We received $ 40 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants were intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $ 116.09 per share to $ 171.98 per share. As these transactions met certain accounting criteria, the convertible note hedges and warrants were recorded in stockholders’ equity (deficit), were not accounted for as derivatives and were not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets. During fiscal 2019, we delivered approximately 167,100 shares upon exercise of the warrants under the terms of the warrant agreements. The warrants expired on December 6, 2019. ​ ​ ​ 106 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 13—CREDIT FACILITIES The outstanding balances under our credit facilities were as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ ​ ​ DEBT ​ NET ​ ​ ​ ​ DEBT ​ NET ​ ​ OUTSTANDING ​ ISSUANCE ​ CARRYING ​ OUTSTANDING ​ ISSUANCE ​ CARRYING ​ ​ AMOUNT COSTS AMOUNT AMOUNT COSTS AMOUNT Asset based credit facility (1) ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Term loan credit agreement (2) ​ ​ 1,995,000 ​ ​ ( 21,797 ) ​ ​ 1,973,203 ​ ​ — ​ ​ — ​ ​ — Equipment promissory notes (3) ​ 14,785 ​ ​ ( 31 ) ​ ​ 14,754 ​ 37,532 ​ ( 171 ) ​ 37,361 Total credit facilities ​ $ 2,009,785 ​ $ ( 21,828 ) ​ $ 1,987,957 ​ $ 37,532 ​ $ ( 171 ) ​ $ 37,361 (1) Deferred financing fees associated with the asset based credit facility as of January 29, 2022 and January 30, 2021 were $ 4.1 million and $ 1.5 million, respectively, and are included in other non-current assets on the consolidated balance sheets. The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit. In July 2021, Restoration Hardware, Inc. entered into the ABL Credit Agreement (defined below) which extended the maturity date of the revolving line of credit from June 28, 2022 to July 29, 2026. (2) Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $ 2.0 billion and $ 20 million were included in term loan—net and other current liabilities on the consolidated balance sheets, respectively. The maturity date of the Term Loan Credit Agreement is October 20, 2028. (3) Represents total equipment security notes secured by certain of our property and equipment, of which $ 14 million outstanding was included in other current liabilities on the consolidated balance sheets. The remaining $ 1.2 million outstanding, included in other non-current obligations on the consolidated balance sheets, has principal payments due in fiscal 2023. Asset Based Credit Facility & Term Loan Facilities On August 3, 2011 , Restoration Hardware, Inc. (“RHI”), a wholly-owned subsidiary of RH, along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into the Ninth Amended and Restated Credit Agreement (as amended prior to June 28, 2017, the “Original Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “ABL Agent”). On June 28, 2017 , RHI entered into the Eleventh Amended and Restated Credit Agreement (as amended prior to July 29, 2021, the “11 th A&R Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the Original Credit Agreement. On July 29, 2021 , RHI entered into the Twelfth Amended and Restated Credit Agreement (as amended, the “ABL Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the 11 th A&R Credit Agreement. The ABL Credit Agreement has a revolving line of credit with 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 ABL Credit Agreement are met. The maturity date of the ABL Credit Agreement is July 29, 2026. The availability of credit at any given time under the ABL Credit Agreement will be constrained by the terms and conditions of the ABL Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ABL Credit Agreement. All obligations under the ABL Credit Agreement are secured by substantial assets of the loan parties, including inventory, receivables and certain types of intellectual property. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 107 ​ Table of Contents Borrowings under the revolving line of credit (other than swing line loans, which are subject to interest at the base rate) bear interest, at the borrower’s option, at either the base rate or London Inter-bank Offered Rate (“LIBOR”) subject to a 0.00 % LIBOR floor (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S. Index Rate”, as such term is defined in the ABL Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable interest rate margin, in each case. The ABL Credit Agreement contains customary provisions addressing future transition from LIBOR. The ABL Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size. The ABL Credit Agreement does not contain any significant financial ratio covenants or coverage ratio covenants other than a consolidated fixed charge coverage ratio (“FCCR”) covenant based on the ratio of (i) consolidated EBITDA to the amount of (ii) debt service costs plus certain other amounts, including dividends and distributions and prepayments of debt as defined in the ABL Credit Agreement (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the ABL Credit Agreement drops below the greater of (A) $ 40 million and (B) an amount based on 10 % of the total borrowing availability at the time. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis. As of January 29, 2022, RHI was in compliance with all applicable financial covenants of the ABL Credit Agreement. The ABL Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the ABL Credit Agreement drops below the greater of (A) $40 million and (B) an amount based on 10% of the total borrowing availability at the time. The ABL Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for an asset based credit facility. The availability of the revolving line of credit at any given time under the ABL Credit Agreement is limited by the terms and conditions of the ABL Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ABL Credit Agreement. As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). As of January 29, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 347 million, net of $ 20 million in outstanding letters of credit. Term Loan Credit Agreement On October 20, 2021 , RHI entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among RHI as the borrower, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan”) in an aggregate principal amount equal to $ 2,000,000,000 with a maturity date of October 20, 2028 . The Term Loan bears interest at an annual rate based on LIBOR subject to a 0.50 % LIBOR floor plus an interest rate margin of 2.50 % (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating). LIBOR is a floating interest rate that resets periodically during the life of the Term Loan. At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50 % plus 2.50 % and the Term Loan was issued at a discount of 0.50 % to face value. The Term Loan Credit Agreement contains customary provisions addressing future transition from LIBOR. All obligations under the Term Loan are guaranteed by certain domestic subsidiaries of RHI. Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan. Substantially all of the collateral securing the Term Loan also secures the loans and other credit extensions under the ABL Credit Agreement. On October 20, 2021, in connection with the Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the ABL Credit Agreement, as the case may be, entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the Term Agent and the ABL Agent. The Intercreditor Agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the ABL Credit Agreement and the Term Loan Credit Agreement without the consent of the other parties. ​ ​ ​ 108 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The borrowings under the Term Loan Credit Agreement may be prepaid in whole or in part at any time, subject to a prepayment premium of 1.0 % in the event the facility is prepaid or repriced within the six months following the closing date of the Term Loan Credit Agreement. The Term Loan Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size, but provides for unlimited exceptions in the case of incurring indebtedness, granting of liens and making investments, dividend payments, and payments of material junior indebtedness, subject to satisfying specified leverage ratio tests. The Term Loan Credit Agreement does not contain a financial maintenance covenant. The Term Loan Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for a term loan credit agreement. Equipment Loan Facility On September 5, 2017, Restoration Hardware, Inc. entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and we agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan. Each equipment loan is secured by a purchase money security interest in the financed equipment. As of January 29, 2022, the equipment security notes bore interest at a weighted-average rate of 4.56 %. The maturity dates of the equipment security notes vary, but generally have a maturity of three or four years . We are required to make monthly installment payments under the equipment security notes. Second Lien Credit Agreement On April 10, 2019, Restoration Hardware, Inc., entered into a credit agreement, dated as of April 9, 2019 and effective as of April 10, 2019 (the “Second Lien Credit Agreement”), among (i) Restoration Hardware, Inc., as lead borrower, (ii) the guarantors party thereto, (iii) the lenders party thereto, each of whom were managed or advised by either Benefit Street Partners L.L.C. and its affiliated investment managers or Apollo Capital Management, L.P. and its affiliated investment managers, and (iv) BSP Agency, LLC, as administrative agent and collateral agent (the “Second Lien Administrative Agent”) with respect to a second lien term loan in an aggregate principal amount equal to $ 200 million with a maturity date of April 9, 2024 (the “Second Lien Term Loan”). The second lien term loan of $ 200 million in principal was repaid in full on September 20, 2019. As a result of the repayment, in fiscal 2019 we incurred a $ 6.7 million loss on extinguishment of debt, which includes a prepayment penalty of $ 4.0 million and acceleration of amortization of debt issuance costs of $ 2.7 million. The Second Lien Term Loan bore interest at an annual rate generally based on LIBOR plus 6.50 % . This rate was a floating rate that reset periodically based upon changes in LIBOR rates during the life of the Second Lien Term Loan. At the date of the initial borrowing, the rate was set at one-month LIBOR plus 6.50 % . Intercreditor Agreement On April 10, 2019, in connection with the Second Lien Credit Agreement, Restoration Hardware, Inc. entered into an Intercreditor Agreement (the “Intercreditor Agreement”), dated as of April 9, 2019 and effective as of April 10, 2019, with the First Lien Administrative Agent and the Second Lien Administrative Agent. The Intercreditor Agreement established various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the Credit Agreement and the Second Lien Credit Agreement without the consent of the other party. The Intercreditor Agreement is no longer in effect after repayment of the Second Lien Term Loan on September 20, 2019. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 109 ​ Table of Contents NOTE 14—FAIR VALUE MEASUREMENTS Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, we utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value. Our financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories: Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant judgment or estimation. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair Value Measurements—Recurring Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts. The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently. The estimated fair value of the Term Loan Credit Agreement approximates cost as it was recently issued and the interest rate associated with the credit agreement is variable and resets frequently. The estimated fair value and carrying value of the 2023 Notes and 2024 Notes were as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 ​ FAIR CARRYING FAIR CARRYING ​ ​ VALUE ​ VALUE (1) ​ VALUE ​ VALUE (1) Convertible senior notes due 2023 ​ $ 70,857 ​ $ 68,706 ​ $ 301,794 ​ $ 287,936 Convertible senior notes due 2024 ​ 198,087 ​ ​ 189,297 ​ 286,161 ​ 284,182 (1) Carrying value represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity, and does not exclude the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable. The fair value of each of the 2023 Notes and 2024 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). ​ ​ ​ 110 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Fair Value Measurements—Non-Recurring The fair value of the Waterworks tradename was determined based on unobservable (Level 3) inputs and valuation techniques, as discussed in “Impairment” within Note 3— Significant Accounting Policies . The fair value of the acquired goodwill and tradename associated with the acquisitions by the RH Segment in fiscal 2020, as discussed in Note 6— Business Combinations , were determined based on unobservable (Level 3) inputs and valuation techniques. The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in discussed in “Equity Method Investments” within Note 3— Significant Accounting Policies and Note 8— Equity Method Investments , were determined based on unobservable (Level 3) inputs and valuation techniques. Upon settlement of our convertible senior notes, including the settlements in which holders of the 2023 Notes and 2024 Notes elected to exercise the early conversion option, we recognized a gain or loss on extinguishment of debt in the consolidated statements of income, which represents the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date. The fair value of each of the 2023 Notes and 2024 Notes related to the settlement of the early conversions was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). NOTE 15—INCOME TAXES The following is a summary of our income before income taxes, inclusive of our share of equity method investments losses ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Domestic ​ $ 821,001 ​ $ 378,267 ​ $ 267,538 Foreign ​ 1,103 ​ ( 1,854 ) ​ 1,644 Total ​ $ 822,104 ​ $ 376,413 ​ $ 269,182 ​ The following is a summary of our income tax expense ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Current ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ $ 111,975 ​ $ 85,708 ​ $ 45,985 State ​ 28,141 ​ 23,684 ​ 10,806 Foreign ​ 363 ​ 126 ​ 403 Total current tax expense ​ 140,479 ​ 109,518 ​ 57,194 Deferred ​ ​ ​ Federal ​ ( 3,841 ) ​ ( 2,251 ) ​ ( 7,173 ) State ​ ( 2,885 ) ​ ( 2,536 ) ​ ( 1,477 ) Foreign ​ ( 195 ) ​ ( 133 ) ​ 263 Total deferred tax benefit ​ ( 6,921 ) ​ ( 4,920 ) ​ ( 8,387 ) Total income tax expense ​ $ 133,558 ​ $ 104,598 ​ $ 48,807 ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 111 ​ Table of Contents A reconciliation of the federal statutory tax rate to our effective tax rate is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 2021 2020 ​ Provision at federal statutory tax rate 21.0 % 21.0 % 21.0 % State income taxes—net of federal tax impact 2.4 4.2 2.5 ​ Non-deductible stock-based compensation 0.6 6.5 — ​ Tax rate adjustments and other 0.2 0.3 0.4 ​ Stock compensation—excess benefits ( 8.0 ) ( 4.9 ) ( 6.6 ) ​ Valuation allowance — 0.1 — ​ Other permanent items — 0.6 0.8 ​ Effective tax rate 16.2 % 27.8 % 18.1 % ​ We have recorded deferred tax assets and liabilities based upon estimates of their realizable value, such estimates are based upon likely future tax consequences. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance. Significant components of our deferred tax assets and liabilities are as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, JANUARY 30, ​ 2022 2021 Non-current deferred tax assets (liabilities) ​ ​ Lease liabilities ​ $ 317,971 ​ $ 275,517 Stock-based compensation ​ ​ 26,205 ​ ​ 24,922 Accrued expenses ​ 19,572 ​ 21,308 Merchandise inventories ​ 10,318 ​ 9,097 Deferred lease credits ​ 4,854 ​ 4,917 Net operating loss carryforwards ​ 2,884 ​ 1,988 Deferred revenue ​ 1,739 ​ 635 Convertible senior notes ​ 779 ​ 914 Other ​ 1,152 ​ 2,269 Non-current deferred tax assets—net ​ 385,474 ​ 341,567 Valuation allowance ​ ( 1,959 ) ​ ( 2,049 ) Non-current deferred tax assets ​ $ 383,515 ​ $ 339,518 Property and equipment ​ $ ( 154,821 ) ​ $ ( 147,143 ) Lease right-of-use assets ​ ( 146,368 ) ​ ( 122,306 ) Tradename, trademarks and intangibles ​ ( 12,603 ) ​ ( 10,349 ) Prepaid expense and other ​ ( 11,077 ) ​ ( 8,010 ) State benefit ​ ( 1,803 ) ​ ( 1,786 ) Non-current deferred tax liabilities ​ ( 326,672 ) ​ ( 289,594 ) Total net non-current deferred tax assets ​ $ 56,843 ​ $ 49,924 ​ ​ ​ ​ 112 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents A reconciliation of our valuation allowance against deferred tax assets in certain state and foreign jurisdictions due to historical losses is as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ 2022 2021 2020 Balance at beginning of fiscal year ​ $ 2,049 ​ $ 1,007 ​ $ 1,623 Net changes in deferred tax assets and liabilities ​ ( 90 ) ​ 1,042 ​ ( 616 ) Balance at end of fiscal year ​ $ 1,959 ​ $ 2,049 ​ $ 1,007 ​ As of January 29, 2022, we had state net operating loss carryovers of $ 20 million and foreign net operating loss carryovers of $ 13 million. The state net operating loss carryovers will begin to expire in 2022, and the foreign net operating loss carryovers will begin to expire in 2023. Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable income which can be offset by net operating loss carryforwards after a change in ownership (generally greater than 50 % change in ownership). We cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses. A reconciliation of the exposures related to unrecognized tax benefits is as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ 2022 2021 2020 Balance at beginning of fiscal year ​ $ 8,456 ​ $ 8,514 ​ $ 8,459 Gross increases (decreases)—prior period tax positions ​ ( 143 ) ​ ( 129 ) ​ ( 2 ) Gross increases—current period tax positions ​ 933 ​ 690 ​ 438 Reductions based on the lapse of the applicable statutes of limitations ​ ( 642 ) ​ ( 619 ) ​ ( 381 ) Balance at end of fiscal year ​ $ 8,604 ​ $ 8,456 ​ $ 8,514 ​ As of January 29, 2022, $ 7.9 million of our unrecognized tax benefits would reduce income tax expense and the effective tax rate, if recognized. The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized. In October 2017, we filed an amended federal tax return claiming a $ 5.4 million refund, however, no income tax benefit has been recorded in any fiscal year given the technical nature and amount of the refund claim. An income tax benefit related to this refund claim could be recorded in a future period upon settlement with the respective taxing authority. As of January 29, 2022, we have $ 5.9 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months . We account for interest and penalties related to exposures as a component of income tax expense. We had interest accruals of $ 0.3 million and $ 0.5 million associated with exposures as of January 29, 2022 and January 30, 2021, respectively. We are subject to taxation in the United States and various states and foreign jurisdictions. As of January 29, 2022, we are subject to examination by the tax authorities for fiscal 2017 through fiscal 2020. With few exceptions, as of January 29, 2022, we are no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before fiscal 2017. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 113 ​ Table of Contents NOTE 16—NET INCOME PER SHARE The weighted-average shares used for net income per share are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Weighted-average shares—basic ​ 21,270,448 ​ 19,668,976 ​ 19,082,303 Effect of dilutive stock-based awards 6,506,399 5,470,980 4,554,682 Effect of dilutive convertible senior notes (1) 3,336,548 2,162,312 662,049 Weighted-average shares—diluted 31,113,395 27,302,268 24,299,034 (1) The 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 116.09 per share, $ 118.13 per share, $ 193.65 per share and $ 211.40 per share, respectively. The 2019 Notes matured on June 15, 2019 and did not have an impact of our dilutive share count post-maturity. The 2020 Notes matured on July 15, 2020 and did not have an impact on our dilutive share count post-maturity. The warrants associated with our 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 171.98 per share, $ 189.00 per share, $ 309.84 per share and $ 338.24 per share, respectively. The warrants associated with our 2019 Notes and 2020 Notes expired through December 2019 and January 2021, respectively. While the share price for our common stock trades above the applicable conversion price of each series of notes or the applicable exercise price of each series of warrants for the notes, these instruments will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock continues to exceeds the applicable conversion or exercise price of the notes and warrants. Refer to Note 12— Convertible Senior Notes . The following number of options and restricted stock units were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Options ​ 102,374 ​ 389,830 ​ 360,496 Restricted stock units 1,379 316 — Total anti-dilutive stock-based awards 103,753 390,146 360,496 ​ NOTE 17—SHARE REPURCHASES AND SHARE RETIREMENTS Share Repurchase Program In 2018, our Board of Directors authorized a share repurchase program. In fiscal 2018, we repurchased approximately 2.0 million shares of our common stock under this share repurchase program at an average price of $ 122.10 per share, for an aggregate repurchase amount of approximately $ 250 million. In fiscal 2019, we repurchased approximately 2.2 million shares of our common stock under this program at an average price of $ 115.36 per share, for an aggregate repurchase amount of approximately $ 250 million. We did no t make any repurchases under this program during either fiscal 2021 or fiscal 2020. The total current authorized size of the share repurchase program is up to $ 950 million (the “950 Million Repurchase Program”), of which $ 450 million remained available as of January 29, 2022 for future share investments. Share Repurchases under Equity Plans As of both January 29, 2022 and January 30, 2021, the aggregate unpaid principal amount of notes payable for share repurchases was $ 0.6 million, of which $ 0.3 million was recorded in other current liabilities on the consolidated balance sheets and $ 0.3 million was recorded in other non-current obligations on the consolidated balance sheets as of January 29, 2022, and $ 0.6 million was recorded in other non-current obligations on the consolidated balance sheets as of January 30, 2021. During fiscal 2020, we elected to repay $ 18 million of aggregate principal amount of the notes payable for share repurchases, of which, $ 16 million was paid to a current board member of the Company. We recorded interest expense on the notes of $ 0.1 million, $ 0.8 million and $ 0.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. ​ ​ ​ 114 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Share Retirements In fiscal 2020, we retired 600 shares of our common stock related to shares we had repurchased under equity plans and we retired 17 shares of our common stock related to shares we received upon the maturity of the 2020 Notes (refer to Note 12— Convertible Senior Notes ). As a result of the retirements, we reclassified a total of $ 0.1 million from treasury stock to additional paid-in capital on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of January 30, 2021. In fiscal 2019, we retired 2,170,154 shares of our common stock related to shares we had repurchased under the $ 950 Million Repurchase Program. As a result of this retirement, we reclassified a total of $ 250 million from treasury stock , of which $ 13 million was allocated to additional paid-in capital and $ 237 million was allocated to retained earnings (accumulated deficit) on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of February 1, 2020. There was no impact on the consolidated statements of income or cash flows related to these share retirement activities. NOTE 18—STOCK-BASED COMPENSATION We recorded stock-based compensation expense of $ 48 million, $ 146 million and $ 22 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income. No stock-based compensation cost has been capitalized in the accompanying consolidated financial statements. 2012 Stock Incentive Plan and 2012 Stock Option Plan The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012. The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants. The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors. Aside from these options granted on November 1, 2012, no other awards will be granted under the Option Plan. As of January 30, 2021, there were a total of 427,062 shares issuable under the Stock Incentive Plan. On February 1, 2021, an additional 419,908 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 846,970 . Awards under the plans reduce the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increase the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance. The number of shares available for future issuance under the Stock Incentive Plan as of January 29, 2022 was 1,185,322 . Shares issued as a result of award exercises under the Stock Incentive Plan and Option Plan will be funded with the issuance of new shares. On January 31, 2022 an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 115 ​ Table of Contents 2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options A summary of stock option activity under the Stock Incentive Plan and the Option Plan is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ WEIGHTED-AVERAGE ​ ​ OPTIONS ​ EXERCISE PRICE Outstanding—January 30, 2021 8,477,506 ​ $ 102.44 Granted 150,450 ​ ​ 618.79 Exercised ( 466,974 ) ​ ​ 68.63 Cancelled ( 460,875 ) ​ ​ 149.75 Outstanding—January 29, 2022 7,700,107 ​ $ 111.76 ​ The fair value of stock options issued was estimated on the date of grant using the following assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 Expected volatility 64.2 % 58.9 % 55.7 % Expected life (years) 7.3 8.3 7.1 ​ Risk-free interest rate 1.4 % 0.6 % 2.3 % Dividend yield — — — ​ ​ A summary of additional information about stock options is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 Weighted-average fair value per share of stock options granted ​ $ 392.65 ​ $ 168.90 ​ $ 63.35 Aggregate intrinsic value of stock options exercised (in thousands) ​ 280,060 ​ 75,011 ​ 82,718 Fair value of stock options vested (in thousands) ​ 59,074 ​ 12,429 ​ 11,816 ​ ​ ​ ​ 116 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Information about stock options outstanding, vested or expected to vest, and exercisable as of January 29, 2022 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ OPTIONS OUTSTANDING ​ OPTIONS EXERCISABLE ​ ​ WEIGHTED- ​ ​ ​ ​ ​ ​ ​ ​ ​ AVERAGE ​ WEIGHTED- ​ ​ ​ WEIGHTED- ​ ​ ​ ​ REMAINING ​ AVERAGE ​ ​ ​ AVERAGE ​ ​ NUMBER OF ​ CONTRACTUAL ​ EXERCISE ​ NUMBER OF ​ EXERCISE RANGE OF EXERCISE PRICES ​ OPTIONS ​ LIFE (IN YEARS) ​ PRICE ​ OPTIONS ​ PRICE $ 25.39 — $ 45.82 489,583 ​ 3.07 ​ $ 36.24 ​ 485,203 ​ $ 36.21 $ 46.50 — $ 46.50 2,876,826 ​ 0.75 ​ ​ 46.50 ​ 2,876,826 ​ ​ 46.50 $ 50.00 — $ 75.43 ​ 2,262,747 ​ 3.16 ​ ​ 62.54 ​ 2,260,367 ​ ​ 62.54 $ 87.31 — $ 385.30 1,923,901 ​ 7.93 ​ ​ 248.75 ​ 931,071 ​ ​ 323.89 $ 389.34 — $ 716.75 ​ 147,050 ​ 9.31 ​ ​ 604.75 ​ 1,770 ​ ​ 469.87 Total 7,700,107 ​ ​ $ 111.76 6,555,237 ​ $ 90.78 Vested or expected to vest 7,424,028 ​ ​ $ 106.68 ​ ​ The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 29, 2022 was $ 2.2 billion, $ 2.1 billion and $ 2.0 billion, respectively. Stock options exercisable as of January 29, 2022 had a weighted-average remaining contractual life of 2.77 years. We recorded stock-based compensation expense related to stock options of $ 45 million, $ 140 million and $ 14 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The fiscal 2021 and fiscal 2020 expense includes $ 24 million and $ 117 million, respectively, associated with the option grant to Mr. Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant below). As of January 29, 2022, the total unrecognized compensation expense related to unvested options was $ 102 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.82 years. In addition, as of January 29, 2022, the total unrecognized compensation expense related to the fully vested option grant made to Mr. Friedman in October 2020 was $ 33 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below). Chairman and Chief Executive Officer Option Grant On October 18, 2020, our Board of Directors granted Mr. Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $ 385.30 per share under the 2012 Stock Incentive Plan. The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics as described further below. The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 24 million and $ 117 million was recognized in fiscal 2021 and fiscal 2020, respectively, (which is included in the stock-based compensation expense amounts noted above). Time-Based Restrictions The time-based restrictions are measured over a four-year performance year period which will begin in May 2021, on the anniversary of the option granted to Mr. Friedman in 2017. The time-based restrictions will lapse at the end of each of the successive anniversary dates from May 2022 through May 2025 at a rate of 175,000 shares per year if (i) Mr. Friedman remains in service with us at the end of such year with the authority, duties, or responsibilities of a chief executive officer at such date and (ii) the stock price performance-based metrics have been achieved in such year as described further below. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 117 ​ Table of Contents Performance-Based Restrictions The stock price performance-based restrictions of the option are measured annually over the performance year period and may lapse as to only one-quarter of the option in each of the first four performance years, with the first performance year beginning in May 2021. The stock price performance-based metrics for the option are set at $ 500 per share, $ 650 per share and $ 800 per share. With respect to any given performance year, if the “twenty day average trading price” our common stock exceeds $ 500 per share, $ 650 per share, or $ 800 per share during such performance year, then the selling restrictions will lapse as to 58,333 shares, 58,333 share and 58,334 shares, respectively, on the last day of such performance year, if Mr. Friedman remains in service with us at such date. Any selling restrictions that have not lapsed in any performance year during the first four performance years may be achieved in a successive performance year through the end of the eighth performance year which ends in May 2029, provided Mr. Friedman continues to satisfy the service requirement through the date the performance target is achieved. Any selling restrictions that have not lapsed by the end of the eighth performance year will thereafter only lapse in May 2041, the 20 th anniversary of the beginning of the first performance year. 2012 Stock Incentive Plan—Restricted Stock Awards We grant restricted stock awards, which include restricted stock and restricted stock units, to our employees and members of our Board of Directors. A summary of restricted stock award activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ WEIGHTED- ​ ​ ​ ​ ​ ​ AVERAGE ​ ​ ​ ​ ​ ​ ​ GRANT DATE FAIR ​ INTRINSIC ​ ​ AWARDS ​ VALUE ​ VALUE Outstanding—January 30, 2021 92,250 ​ $ 61.04 ​ Granted 12,010 ​ ​ 582.79 ​ Released ( 76,010 ) ​ ​ 56.00 ​ Cancelled ( 8,500 ) ​ ​ 55.96 ​ Outstanding—January 29, 2022 19,750 ​ $ 399.89 ​ $ 7,740,420 ​ A summary of additional information about restricted stock awards is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 Weighted-average fair value per share of awards granted ​ $ 582.79 ​ $ 371.36 ​ $ 129.21 Grant date fair value of awards released (in thousands) ​ 4,257 ​ 6,710 ​ 10,522 ​ We recorded stock-based compensation expense related to restricted stock awards of $ 3.0 million, $ 4.9 million and $ 7.3 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. As of January 29, 2022, the total unrecognized compensation expense related to unvested restricted stock awards was $ 5.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.07 years. NOTE 19—EMPLOYEE BENEFIT PLANS We have a 401(k) plan for our employees who meet certain service and age requirements. Participants may contribute up to 50 % of their salaries limited to the maximum allowed by the Internal Revenue Service regulations. We, at our discretion, may contribute funds to the 401(k) plan. We made no contributions to the 401(k) plan during fiscal 2021, fiscal 2020 or fiscal 2019. ​ ​ ​ 118 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 20—COMMITMENTS AND CONTINGENCIES Commitments We had no material off balance sheet commitments as of January 29, 2022. Contingencies We are involved in lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of our business. These disputes are increasing in number as the business expands and we grow larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which we are involved could result in unexpected expenses and liability that could adversely affect our operations. In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of our senior leadership team’s time and result in the diversion of significant operational resources. We review the need for any loss contingency reserves and establish reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time. Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on our consolidated financial statements, the outcome of legal matters is subject to inherent uncertainty. NOTE 21—SEGMENT REPORTING We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”), which we have determined is our Chief Executive Officer. We have three operating segments: RH Segment, Waterworks and Real Estate Development. The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, websites, Source Books, and the commercial channel. The Real Estate Development segment represents operations associated with our equity method investments, as described in Note 8— Equity Method Investments. The retail operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared senior leadership team and customer base, we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors. We use operating income to evaluate segment profitability for the retail operating segments. Operating income is defined as net income before interest expense—net, tradename impairment, (gain) loss on extinguishment of debt, other expenses—net, income tax expense and our share of equity method investments losses. Segment Information The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting (in thousands) : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 ​ ​ RH SEGMENT WATERWORKS TOTAL RH SEGMENT WATERWORKS TOTAL RH SEGMENT WATERWORKS TOTAL Net revenues ​ $ 3,593,842 ​ $ 164,978 ​ $ 3,758,820 ​ $ 2,729,422 ​ $ 119,204 ​ $ 2,848,626 ​ $ 2,514,296 ​ $ 133,141 ​ $ 2,647,437 Gross profit ​ 1,772,668 ​ 82,743 ​ 1,855,411 ​ 1,274,148 ​ 51,383 ​ 1,325,531 ​ 1,038,722 ​ 56,289 ​ 1,095,011 Depreciation and amortization ​ 91,252 ​ 4,770 ​ 96,022 ​ 95,071 ​ 4,969 ​ 100,040 ​ 96,148 ​ 4,591 ​ 100,739 ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 119 ​ Table of Contents In fiscal 2021 and fiscal 2020, the Real Estate Development segment share of equity method investments losses were $ 8.2 million and $ 0.9 million, respectively. The following table presents the balance sheet metrics as required under ASC 280— Segment Reporting (in thousands) : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 ​ ​ ​ ​ ​ ​ ​ ​ REAL ESTATE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ REAL ESTATE ​ ​ ​ ​ RH SEGMENT WATERWORKS DEVELOPMENT TOTAL RH SEGMENT WATERWORKS DEVELOPMENT TOTAL Goodwill (1) ​ $ 141,100 ​ $ — ​ $ — ​ $ 141,100 ​ $ 141,100 ​ $ — ​ $ — ​ $ 141,100 Tradenames, trademarks and other intangible assets (2) ​ 56,161 ​ 17,000 ​ — ​ 73,161 ​ 54,663 ​ 17,000 ​ — ​ 71,663 Equity method investments ​ ​ — ​ ​ — ​ ​ 100,810 ​ ​ 100,810 ​ ​ — ​ ​ — ​ ​ 100,603 ​ ​ 100,603 Total assets ​ 5,259,719 ​ 179,941 ​ 100,810 ​ 5,540,470 ​ 2,659,944 ​ 137,766 ​ 100,603 ​ 2,898,313 (1) The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. (2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020. We use segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) a non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in October 2020, (ii) asset impairments and changes in useful lives, (iii) product recall accruals and adjustments—net, (iv) severance costs associated with reorganizations, (v) gain (loss) on sale leaseback transactions, (vi) legal settlements, net of legal expenses and (vii) asset held for sale gain. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and our senior leadership team reviews. The following table presents, for our retail operating segments, the segment operating income and income before income taxes ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Operating income: ​ ​ ​ ​ ​ ​ ​ ​ ​ RH Segment ​ $ 944,881 ​ $ 616,523 ​ $ 375,315 Waterworks ​ 17,747 ​ 4,019 ​ 3,780 Non-cash compensation ​ ​ ( 23,428 ) ​ ​ ( 117,084 ) ​ ​ — Asset impairments and change in useful lives ​ ( 9,630 ) ​ ( 12,851 ) ​ ( 21,899 ) Recall accrual ​ ( 1,940 ) ​ ( 7,370 ) ​ 3,988 Reorganization related costs ​ ( 449 ) ​ ( 7,027 ) ​ ( 1,075 ) (Gain) loss on sale leaseback transaction ​ ​ — ​ ​ ( 9,352 ) ​ ​ 1,196 Legal settlements ​ — ​ — ​ 1,193 Asset held for sale gain ​ ​ — ​ ​ — ​ ​ 333 Income from operations ​ 927,181 ​ 466,858 ​ 362,831 Interest expense—net ​ 64,947 ​ 69,250 ​ 87,177 (Gain) loss on extinguishment of debt ​ 29,138 ​ ( 152 ) ​ 6,472 Other expense—net ​ ​ 2,778 ​ ​ — ​ ​ — Tradename impairment ​ ​ — ​ ​ 20,459 ​ ​ — Income before income taxes ​ $ 830,318 ​ $ 377,301 ​ $ 269,182 ​ ​ ​ ​ 120 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents We classify our sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor. Net revenues in each category were as follows ( in thousands ): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 Furniture ​ $ 2,599,540 ​ $ 1,940,658 ​ $ 1,762,034 Non-furniture ​ 1,159,280 ​ 907,968 ​ 885,403 Total net revenues ​ $ 3,758,820 ​ $ 2,848,626 ​ $ 2,647,437 We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of January 29, 2022 we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K. Geographic revenues in Canada and the U.K. are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented. Long-lived assets held internationally were not material in any fiscal period presented. No single customer accounted for more than 10 % of our revenues in fiscal 2021, fiscal 2020 or fiscal 2019. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 121 ​ Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.