What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-03 compared with 2021-12-09 · 293 added, 396 removed, 186 unchanged (79% of the section changed)

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

The following discussion and analysis of our financial condition and the results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2020 Form 10-K.

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

Refer to “Forward-Looking Statements and Market Data” below and Item 1A — Risk Factors in our 2021 Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements.

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

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in our 2021 Form 10-K.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three months ended April 30, 2022 and a comparison to the three months ended May 1, 2021.

The discussion for related to cash flows for the three months ended May 1, 2021 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended May 1, 2021, filed with the Securities and Exchange Commission (“SEC”) on June 10, 2021.

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

Our MD&A is organized as follows:

This section provides a general description of our business and describes our key value-driving strategies.

Basis of Presentation and Results of Operations .

These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current periods as compared to the prior year’s comparative period, as well as non-GAAP measures we use for financial and operational decision making and as a means to evaluate period-to-period comparisons.

Liquidity and Capital Resources .

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

Critical Accounting Policies and Estimates .

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

Recently Issued Accounting Pronouncements .

This section provides a summary of recent authoritative accounting pronouncements that were adopted during the three months ended April 30, 2022 and that will be adopted in future periods.

FINANCIAL INFORMATION

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FORWARD-LOOKING STATEMENTS AND MARKET DATA

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While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results, and matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may, in fact, recur in one or more future financial reporting periods.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the section entitled Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the “2020 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly periods ended May 1, 2021 (the “First Quarter Form 10-Q”) and July 31, 2021 (the “Second Quarter Form 10-Q”) and in our 2020 Form 10-K.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the section entitled Risk Factors in our 2021 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 2021 Form 10-K.

All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements.

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We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

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

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

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

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

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

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

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

As of October 30, 2021, we have an integrated RH Hospitality experience in 12 of our locations, which include Restaurants and Wine Bars.

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

We operate our retail locations throughout the United States, Canada, and the U.K., and, after the opening of RH San Francisco, The Gallery at the Historic Bethlehem Steel Building in May 2022, we have an integrated RH Hospitality experience in 14 of our Design Gallery locations, which includes Restaurants and Wine Bars.

FINANCIAL INFORMATION

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As of October 30, 2021, we operated the following number of Galleries, Outlets and Showrooms:

2022 FIRST QUARTER FORM 10-Q | 31

As of April 30, 2022, we operated the following number of Galleries, Outlets and Showrooms:

Design Galleries

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Waterworks Showrooms

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

The pandemic has continued since the initial outbreak and has included spikes and operating restrictions in various locations around the world, as well as new strains of the COVID-19 virus such as the “Delta” and other variants.

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

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

Operational restrictions related to the pandemic affecting our retail locations and Restaurants continued to fluctuate through the second quarter of 2021 based upon changes in local conditions and regulations.

All of our retail locations and Restaurants were open during the third quarter of fiscal 2021.

While our business strengthened during the period from the second quarter of fiscal 2020 and continuing into fiscal 2021, consumer spending patterns may shift away from spending on the home and home-related categories, such as home furnishings, as pandemic restrictions are lifted and consumers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

In addition, various constraints in our supply chain, including port delays, have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the evolving nature of the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during the remainder of fiscal 2021.

It may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand and, as a result, the exact timing cannot be accurately predicted due to ongoing uncertainty of the continuing impact of the pandemic on our global supply chain.

In particular, business circumstances and operational conditions in numerous international locations where our vendors operate are subject to ongoing risks, and regions in which our vendors have production facilities, most notably Vietnam, have experienced various surges in outbreaks and, in some cases, facility closures and other restrictions related to the pandemic.

As a result, the ongoing nature of the pandemic may continue to adversely affect our business operations in various jurisdictions, which could, in turn, have a negative impact on our vendors and supply chain, and therefore, our business.

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.

COVID-19 Pandemic and Macro-Economic Factors

The COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates.

While our performance during the pandemic demonstrates the desirability of our exclusive products, we may see consumer spending patterns shift away from spending on the home and home-related categories as customers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business including increased inflation and rising interest rates.

These factors may have a number of adverse effects on overall economic conditions and markets in which we operate.

A slowdown in the housing market or continued negative trends in stock market prices could have a negative impact on our customers and demand for our products.

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

For more information, refer to the section entitled “Risk Factors” in our 2021 Form 10-K.

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In order to drive growth across our business, we are focused on the following long-term key strategies and business initiatives:

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FINANCIAL INFORMATION

Product Elevation .

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

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

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

Our customers know them as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby & Child, RH TEEN and Waterworks.

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

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

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

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

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

FINANCIAL INFORMATION

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Brand Elevation .

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

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

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

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

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

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

Digital Reimagination .

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

Internally regarding how we innovate, curate, and integrate all the dynamic aspects of our brand, and externally as we introduce our customers to The World of RH, a new digital portal presenting our Products, Places, Services and Spaces.

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

Our external efforts will begin with the launch of phase one of our new digital portal, The World of RH, which will include rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable.

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 37

2022 FIRST QUARTER FORM 10-Q | 33

Basis of Presentation and Results of Operations

Matters Affecting Comparability

The disruption to our business operations from the pandemic has had a significant impact on the comparability of year-over-year and sequential trends for our operating results for the three and nine months ended October 30, 2021, as compared to the three and nine months ended October 31, 2020.

The initial negative impact to our revenues from closures occurred during the first half of fiscal 2020.

Despite the reopening of most of our Galleries during the second and third quarters of fiscal 2020 and a strong resurgence in customer demand for our products, we have continued to address a range of business circumstances though the third quarter of fiscal 2021 related to the pandemic.

The ongoing pandemic has resulted in disruptions to our supply chain, which continues to negatively impact our revenues and costs.

These circumstances include delays in manufacturing and inventory receipts as our supply chain recovers from the impact of the global health crisis and responds to virus outbreaks and surges, including new strains such as the “Delta” variant, which has had a severe impact in certain jurisdictions, most notably Vietnam.

We have also delayed the opening of certain new Gallery locations due to issues related to the pandemic, such as extensive travel restrictions that have been in place.

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

Although we have experienced strong demand for our products since the second quarter of fiscal 2020, some of the demand may have been driven by consumers electing to spend more money on home-related purchases due to stay-at-home restrictions that were in place throughout many parts of the United States and Canada.

The continued relaxation of COVID-19-related restrictions may trigger a shift in consumer spending patterns toward other categories, such as travel and leisure activities, and away from the purchase of merchandise related to the home, including home furnishings, of which could affect our results of operation in fiscal 2021.

Additionally, resurgences of COVID-19 in various jurisdictions have had direct and indirect effects on our business and operations that have, and will continue to, affect the comparability of our results during fiscal 2021, including continued supply chain disruptions.

38 | 2021 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Results of Operations

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

The following table sets forth our condensed consolidated statements of income:

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Condensed Consolidated Statements of Income:

(dollars in thousands)

Cost of goods sold

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Interest expense—net

Tradename impairment

(Gain) loss on extinguishment of debt

Loss on extinguishment of debt

Other income—net

Total other expenses

Income before income taxes

Income tax expense

Income tax expense (benefit)

Income before equity method investments

Share of equity method investments losses

Other Financial and Operating Data:

Adjusted net income (1)

Adjusted EBITDA (2)

Capital expenditures

Landlord assets under construction—net of tenant allowances

Adjusted capital expenditures (3)

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

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

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

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

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

Non-GAAP Financial Measures

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

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

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

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

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

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

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

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

FINANCIAL INFORMATION

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2022 FIRST QUARTER FORM 10-Q | 34

Adjusted Operating Income .

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

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

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

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Adjustments pre-tax:

(Gain) loss on extinguishment of debt (a)

Non-cash compensation (b)

Amortization of debt discount (c)

Asset impairments and change in useful lives (d)

Recall accrual (e)

Reorganization related costs (f)

Tradename impairment (g)

Loss on sale leaseback transaction (h)

Subtotal adjusted items

Impact of income tax items (i)

Share of equity method investments losses (j)

Adjusted net income

(a) The adjustment in each of the three and nine months ended October 30, 2021 represents a loss on extinguishment of debt for a portion of the 2023 Notes (defined below) and 2024 Notes (defined below) that were early converted at the option of the noteholders.

The adjustment in the nine months ended October 31, 2020 represents a gain on extinguishment of debt upon the maturity and settlement of the 2020 Notes (defined below) in July 2020.

(b) Represents the amortization of the non-cash compensation charge related to a fully vested option grant made to Mr.

Interest expense—net (1)

Loss on extinguishment of debt (1)

Other income—net (1)

Income tax expense (benefit) (1)

Share of equity method investments losses (1)

Operating income

Employer payroll taxes on option exercise (2)

Professional fee (3)

Asset impairments (4)

Non-cash compensation (5)

Recall accrual (6)

Adjusted operating income

(1) Refer to discussion “Three Months Ended April 30, 2022 Compared to Three Months Ended May 1, 2021” below for a discussion of our results of operations for the three months ended April 30, 2022 and May 1, 2021.

(2) Represents employer payroll tax expense related to the option exercise by Mr.

Friedman in the first quarter of fiscal 2022.

(3) Represents professional fee contingent upon the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and Notes Repurchase (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements).

(4) Represents asset impairments related to property and equipment of Galleries under construction.

(5) Represents the amortization of the non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020.

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

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

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

Amounts are presented net of interest capitalized for capital projects of $2.8 million and $1.1 million during the three months ended October 30, 2021 and October 31, 2020, respectively.

Amounts are presented net of interest capitalized for capital projects of $8.4 million and $4.2 million during the nine months ended October 30, 2021 and October 31, 2020, respectively.

The 2020 Notes matured on July 15, 2020 and did not impact amortization of debt discount post-maturity.

(d) The adjustment in the nine months ended October 30, 2021 represents asset impairments.

The adjustment includes the acceleration of depreciation expense due to a change in the estimated useful lives of certain assets of $1.3 million and $3.9 million for the three and nine months ended October 31, 2020, respectively.

The adjustment in the three months ended October 31, 2020 also includes asset impairments of $0.8 million and the adjustment in the nine months ended October 31, 2020 also includes asset impairments of $5.6 million and inventory reserves of $2.4 million related to Outlet inventory resulting from retail closures in response to the pandemic.

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(6) Represents accruals associated with product recalls.

FINANCIAL INFORMATION

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

The recall adjustments had the following effect on our income before taxes:

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Adjusted Net Income .

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

Reconciliation of GAAP Net Income to Adjusted Net Income

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Decrease to net revenues

Increase to cost of goods sold

Decrease to gross profit

Increase to selling, general and administrative expenses

Decrease to income before income taxes

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

(g) Represents tradename impairment related to the Waterworks reporting unit.

Refer to “Waterworks Tradename Impairment” within Note 4— Goodwill, Tradenames, Trademarks and Other Intangible Assets in our condensed consolidated financial statements.

(h) Represents the loss on a sale leaseback transaction related to our previously owned Design Galleries.

(i) The adjustment for the three and nine months ended October 30, 2021 is based on an adjusted tax rate of 22.6% and 15.3%, respectively, which excludes the tax impact associated with our share of equity method investments losses.

The adjustment for the three months ended October 31, 2020 is based on an adjusted tax rate of 23.3%, which excludes the tax impact associated with the non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020.

The adjustment for the nine months ended October 31, 2020 is based on an adjusted tax rate of 20.8%, which excludes the tax impact associated with the non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020 and the Waterworks reporting unit tradename impairment recorded in the first quarter of fiscal 2020.

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

Refer to Note 5— Equity Method Investments in our condensed consolidated financial statements.

Adjustments pre-tax:

Loss on extinguishment of debt (1)

Employer payroll taxes on option exercise (1)

Professional fee (1)

Asset impairments (1)

Non-cash compensation (1)

Recall accrual (1)

Amortization of debt discount (2)

Gain on derivative instruments—net (3)

Subtotal adjusted items

Impact of income tax items (4)

Share of equity method investments losses (1)

Adjusted net income

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

(2) Prior to the adoption of Accounting Standards Update (“ASU”) 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (which was adopted as of the first quarter of fiscal 2022) (“ASU 2020-06”), certain convertible debt instruments that may be settled in cash on conversion were required to be separately accounted for as liability and equity components of the instrument in a manner that reflected the issuer’s non-convertible debt borrowing rate.

Accordingly, in accounting for GAAP purposes through fiscal 2021 for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”) and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the “2024 Notes”), we separated the 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we amortized as debt discount an amount equal to the fair value of the equity components as interest expense on the 2023 Notes and 2024 Notes over their expected lives.

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

Amounts were presented net of interest capitalized for capital projects of $2.7 million during the three months ended May 1, 2021.

No amortization of the debt discounts were recognized during the three months ended April 30, 2022, since we recombined the previously outstanding equity component of the 2023 Notes and 2024 Notes upon the adoption of ASU 2020-06.

(3) Represents net gain on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and Notes Repurchase (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements).

(4) The adjustment for the three months ended April 30, 2022 is based on an adjusted tax rate of 0%, which represents our expected cash tax liability associated with anticipated fiscal 2022 results as we do not expect to pay taxes for fiscal 2022 due to the tax benefits primarily resulting from Mr.

Friedman’s option exercise in the first quarter of fiscal 2022.

The adjustment for the three months ended May 1, 2021 is based on an adjusted tax rate of 23.9%, which excludes the tax impact associated with our share of equity method investments losses.

FINANCIAL INFORMATION

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2022 FIRST QUARTER FORM 10-Q | 36

EBITDA and Adjusted EBITDA .

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

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

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

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

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

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

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

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

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Depreciation and amortization

Interest expense—net

Income tax expense

Non-cash compensation (a)

(Gain) loss on extinguishment of debt (b)

Asset impairments (b)

Share of equity method investments losses (b)

Capitalized cloud computing amortization (c)

Recall accrual (b)

Reorganization related costs (b)

Loss on sale leaseback transaction (b)

Tradename impairment (b)

Income tax expense (benefit)

Loss on extinguishment of debt (1)

Non-cash compensation (1)

Employer payroll taxes on option exercise (1)

Professional fee (1)

Asset impairments (1)

Share of equity method investments losses (1)

Capitalized cloud computing amortization (2)

Recall accrual (1)

Other income—net (1)

Adjusted EBITDA

(a) Represents non-cash compensation related to equity awards granted to employees, including the non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020.

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

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

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

Adjusted Capital Expenditures.

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

42 | 2021 THIRD QUARTER FORM 10-Q

Reconciliation of Adjusted Capital Expenditures

THREE MONTHS ENDED

(in thousands)

Capital expenditures

Landlord assets under construction—net of tenant allowances

Adjusted capital expenditures

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 37

The following table presents RH Gallery and Waterworks Showroom metrics, and excludes Outlets:

NINE MONTHS ENDED

THREE MONTHS ENDED

SELLING SQUARE

3 unchanged sentences

Beginning of period

RH Design Galleries:

Dallas Design Gallery

Marin Design Gallery

Charlotte Design Gallery

Oak Brook Design Gallery

RH Modern Galleries:

Dallas RH Modern Gallery

RH Baby & Child and TEEN Galleries:

Santa Monica Baby & Child and TEEN Gallery

RH Legacy Galleries:

Tysons legacy Gallery (relocation)

Dallas legacy Gallery

Oak Brook legacy Gallery

Raleigh legacy Gallery

Charlotte legacy Gallery

Corte Madera legacy Gallery

Westport legacy Gallery

Waterworks Showrooms:

New York 59th Street Showroom

End of period

4 unchanged sentences

Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose, as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops.

Leased selling square footage includes approximately 4,800 square feet as of both October 30, 2021 and October 31, 2020 related to one owned retail location.

(2) Total leased square footage includes approximately 5,400 square feet as of both October 30, 2021 and October 31, 2020 related to one owned retail location.

Leased selling square footage includes approximately 4,800 square feet as of April 30, 2022 and May 1, 2021 related to one owned retail location.

(2) Total leased square footage includes approximately 5,400 square feet as of both April 30, 2022 and May 1, 2021 related to one owned retail location.

(3) Weighted-average leased square footage and leased selling square footage are calculated based on the number of days a retail location was opened during the period divided by the total number of days in the period.

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 43

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

THREE MONTHS ENDED

NINE MONTHS ENDED

Condensed Consolidated Statements of Income:

Cost of goods sold

Selling, general and administrative expenses

Income from operations

Other expenses

Interest expense—net

Tradename impairment

(Gain) loss on extinguishment of debt

Total other expenses

Income before income taxes

Income tax expense

Income before equity method investments

Share of equity method investments losses

Three Months Ended October 30, 2021 Compared to Three Months Ended October 31, 2020

Three Months Ended April 30, 2022 Compared to Three Months Ended May 1, 2021

THREE MONTHS ENDED

3 unchanged sentences

Income from operations

Consolidated net revenues increased $162.4 million, or 19.2%, to $1.0 billion in the three months ended October 30, 2021 compared to $844.0 million in the three months ended October 31, 2020.

Consolidated net revenues increased $97 million, or 11.2%, to $957 million in the three months ended April 30, 2022 compared to $861 million in the three months ended May 1, 2021.

RH Segment net revenues

RH Segment net revenues increased $152.1 million, or 18.7%, to $964.9 million in the three months ended October 30, 2021 compared to $812.8 million in the three months ended October 31, 2020.

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

44 | 2021 THIRD QUARTER FORM 10-Q

RH Segment net revenues increased $89 million, or 10.9%, to $909 million in the three months ended April 30, 2022 compared to $820 million in the three months ended May 1, 2021.

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

FINANCIAL INFORMATION

The increase in RH Segment net revenues for the three months ended October 30, 2021 was driven primarily by continued strong customer demand for our products, aided by elements of our supply chain beginning to catch up with customer demand.

Outlet sales increased $14.4 million to $77.2 million in the three months ended October 30, 2021 compared to $62.8 million in the three months ended October 31, 2020.

Additionally, RH Segment net revenues increased in our RH Hospitality business compared to the three months ended October 31, 2020 due to reduced operational restrictions in the third quarter of fiscal 2021 and new Restaurant openings in fiscal 2021.

2022 FIRST QUARTER FORM 10-Q | 38

RH Segment net revenues for the three months ended April 30, 2022 increased due to strong customer demand for our products and fulfillment of orders generated in prior quarters as elements of our supply chain continued to catch up with customer demand.

However, during the three months April 30, 2022 we began to experience softening demand trends which began at the time of the Russian invasion of Ukraine and have further slowed during the market disruption over the past several months.

RH Segment net revenues increased in our RH Hospitality business compared to the three months ended May 1, 2021 due to new Restaurant openings in fiscal 2021.

Outlet sales increased $7.4 million to $70 million in the three months ended April 30, 2022 compared to $62 million in the three months ended May 1, 2021.

Despite our revenue growth during the three months ended April 30, 2022, the slowdown in customer demand during the quarter, together with the overall uncertainty about macro-economic conditions, has caused us to take a conservative view about our near-term revenue trends for fiscal 2022.

Waterworks net revenues

Waterworks net revenues increased $10.3 million, or 33.1%, to $41.6 million in the three months ended October 30, 2021 compared to $31.2 million in the three months ended October 31, 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners.

Waterworks net revenues for the three months ended October 31, 2020 was negatively impacted by construction delays, as well as temporary showroom closures, in response to the pandemic.

Consolidated gross profit increased $96.9 million, or 23.7%, to $505.3 million in the three months ended October 30, 2021 compared to $408.3 million in the three months ended October 31, 2020.

As a percentage of net revenues, consolidated gross margin increased 180 basis points to 50.2% of net revenues in the three months ended October 30, 2021 from 48.4% of net revenues in the three months ended October 31, 2020.

Waterworks net revenues increased $7.4 million, or 18.0%, to $48 million in the three months ended April 30, 2022 compared to $41 million in the three months ended May 1, 2021.

Consolidated gross profit increased $92 million, or 22.5%, to $499 million in the three months ended April 30, 2022 compared to $407 million in the three months ended May 1, 2021.

As a percentage of net revenues, consolidated gross margin increased 480 basis points to 52.1% of net revenues in the three months ended April 30, 2022 from 47.3% of net revenues in the three months ended May 1, 2021.

RH Segment gross profit

RH Segment gross profit increased $89.7 million, or 22.7%, to $484.4 million in the three months ended October 30, 2021 from $394.7 million in the three months ended October 31, 2020.

As a percentage of net revenues, RH Segment gross margin increased 160 basis points to 50.2% of net revenues in the three months ended October 30, 2021 from 48.6% of net revenues in the three months ended October 31, 2020.

The increase in gross margin was primarily driven by higher product margins in the Core business in the three months ended October 30, 2021.

RH Segment gross profit increased $86 million, or 22.3%, to $473 million in the three months ended April 30, 2022 from $387 million in the three months ended May 1, 2021.

As a percentage of net revenues, RH Segment gross margin increased 480 basis points to 52.0% of net revenues in the three months ended April 30, 2022 from 47.2% of net revenues in the three months ended May 1, 2021.

The change in gross margin was primarily driven by a 390 basis point increase in product margins in the Core business, as well as leverage in our RH Segment shipping costs during the three month period ended April 30, 2022.

Waterworks gross profit

Waterworks gross profit increased $7.3 million, or 53.1%, to $20.9 million in the three months ended October 30, 2021 from $13.6 million in the three months ended October 31, 2020.

As a percentage of net revenues, Waterworks gross margin increased 660 basis points to 50.3% of net revenues in the three months ended October 30, 2021 from 43.7% of net revenues in the three months ended October 31, 2020 primarily driven by higher revenues, favorable changes in product mix, and leverage in Waterworks occupancy costs, offset by an increase in shipping costs related to customer deliveries.

Waterworks gross profit increased $5.3 million, or 26.1%, to $26 million in the three months ended April 30, 2022 from $20 million in the three months ended May 1, 2021.

As a percentage of net revenues, Waterworks gross margin increased 340 basis points to 53.3% of net revenues in the three months ended April 30, 2022 from 49.9% of net revenues in the three months ended May 1, 2021.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses decreased $64.4 million, or 21.7%, to $232.7 million in the three months ended October 30, 2021 compared to $297.1 million in the three months ended October 31, 2020.

Consolidated selling, general and administrative expenses increased $74 million, or 33.9%, to $293 million in the three months ended April 30, 2022 from $219 million in the three months ended May 1, 2021.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses decreased $71.6 million, or 25.1%, to $214.1 million in the three months ended October 30, 2021 compared $285.7 million in the three months ended October 31, 2020.

RH Segment selling, general and administrative expenses for the three months ended October 30, 2021 include amortization of the non-cash compensation of $5.8 million related to a fully vested option grant made to Mr.

RH Segment selling, general and administrative expenses increased $71 million, or 34.8%, to $276 million in the three months ended April 30, 2022 compared to $204 million in the three months ended May 1, 2021.

RH Segment selling, general and administrative expenses for the three months ended April 30, 2022 include $12 million of employer payroll tax expense associated with Mr.

Friedman’s stock option exercise during the first quarter of fiscal 2021, a $7.2 million professional fee which was contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $5.9 million of asset impairments, and $0.6 million related to product recalls.

RH Segment selling, general and administrative expenses for both the three months ended April 30, 2022 and May 1, 2021 included amortization of the non-cash compensation of $5.9 million related to a fully vested option grant made to Mr.

Friedman in October 2020.

RH Segment selling, general and administrative expenses for the three months ended October 31, 2020 includes a non-cash compensation charge of $111.2 million due to a fully vested option grant made to Mr.

Friedman in October 2020, $1.3 million due to accelerated asset depreciation and $0.8 million due to asset impairments.

Excluding the adjustments mentioned above, RH Segment selling, general and administrative expenses would have been 21.6% and 21.2% of net revenues for the three months ended October 30, 2021 and October 31, 2020, respectively.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by increases in travel-related expenses and preopening costs associated with Gallery openings, partially offset by leverage in compensation and advertising costs.

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 45

2022 FIRST QUARTER FORM 10-Q | 39

RH Segment selling, general and administrative expenses were 26.9% and 24.2% of net revenues for the three months ended April 30, 2022 and May 1, 2021, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by higher pre-opening costs and professional fees, as well as increases in employment and employment-related costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $7.2 million, or 62.8%, to $18.6 million in the three months ended October 30, 2021 compared to $11.4 million in the three months ended October 31, 2020.

Waterworks selling, general and administrative expenses increased to 44.8% from 36.6% of net revenues for the three months ended October 30, 2021 and October 31, 2020, respectively, primarily due to compensation related charges.

Waterworks selling, general and administrative expenses increased $3.1 million, or 21.1%, to $18 million in the three months ended April 30, 2022 compared to $15 million in the three months ended May 1, 2021.

Waterworks selling, general and administrative expenses for the three months ended May 1, 2021 included $0.5 million related to product recalls.

Excluding the product recall adjustment mentioned above, Waterworks selling, general and administrative expenses would have been 36.8% and 34.6% of net revenues for the three months ended April 30, 2022 and May 1, 2021, respectively.

Interest expense—net

Interest expense—net decreased $2.4 million to $13.2 million for the three months ended October 30, 2021 compared to $15.7 million for the three months ended October 31, 2020.

Interest expense—net consisted of the following:

Interest expense—net increased $7.5 million in the three months ended April 30, 2022 compared to the three months ended May 1, 2021, which consisted of the following in each period:

THREE MONTHS ENDED

(in thousands)

Amortization of convertible senior notes debt discount

Finance lease interest expense

Term loan interest expense

Amortization of debt issuance costs and deferred financing fees

Other interest expense

Promissory notes

Asset based credit facility

Capitalized interest for capital projects

Interest income

Total interest expense—net

(Gain) loss on extinguishment of debt

During the three months ended October 30, 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $18.5 million (See Note 9— Convertible Senior Notes ).

We did not incur any gain or loss on extinguishment of debt in the three months ended October 31, 2020.

Income tax expense

Income tax expense was $54.4 million and $49.2 million in the three months ended October 30, 2021 and October 31, 2020, respectively.

Our effective tax rate was 22.8% and 51.4% for the three months ended October 30, 2021 and October 31, 2020, respectively.

The decrease in our effective tax rate is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based compensation in the three months ended October 30, 2021 as compared to the three months ended October 31, 2020 and non-deductible stock-based compensation related to a fully vested option grant made to Mr.

Friedman in October 2020 in the three months ended October 31, 2020.

46 | 2021 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $2.3 million loss during the three months ended October 30, 2021.

Nine Months Ended October 30, 2021 Compared to Nine Months Ended October 31, 2020

NINE MONTHS ENDED

(in thousands)

Cost of goods sold

Selling, general and administrative expenses

Income (loss) from operations

Consolidated net revenues increased $819.9 million, or 40.3%, to $2.9 billion in the nine months ended October 30, 2021 compared to $2.0 billion in the nine months ended October 31, 2020.

RH Segment net revenues

RH Segment net revenues increased $783.2 million, or 40.2%, to $2.7 billion in the nine months ended October 30, 2021 compared to $1.9 billion in the nine months ended October 31, 2020.

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

RH Segment net revenues for the nine months ended October 31, 2020 was negatively impacted by Gallery closures and macroeconomic conditions resulting from the COVID-19 pandemic.

RH Segment net revenues for the nine months ended October 30, 2021 increased due to strong customer demand for our products, aided by elements of our supply chain beginning to catch up with customer demand.

Outlet sales increased $81.2 million to $207.8 million in the nine months ended October 30, 2021 compared to $126.6 million in the nine months ended October 31, 2020 due to pandemic-related retail closures in the first half of fiscal 2020.

Additionally, RH Segment net revenues increased in our RH Hospitality business compared to the nine month ended October 31, 2020 due to reduced COVID-19 operational restrictions in the third quarter of fiscal 2021 and new Restaurant openings in fiscal 2021.

Waterworks net revenues

Waterworks net revenues increased $36.7 million, or 42.2%, to $123.8 million in the nine months ended October 30, 2021 compared to $87.1 million in the nine months ended October 31, 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners.

Consolidated gross profit increased $459.5 million, or 48.9%, to $1.4 billion in the nine months ended October 30, 2021 from $940.4 million in the nine months ended October 31, 2020.

As a percentage of net revenues, consolidated gross margin increased 280 basis points to 49.0% of net revenues in the nine months ended October 30, 2021 from 46.2% of net revenues in the nine months ended October 31, 2020.

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 47

RH Segment gross profit for the nine months ended October 31, 2020 was negatively impacted by $5.6 million related to product recalls and includes inventory reserves of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

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

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

Excluding the adjustments mentioned above, consolidated gross margin would have increased 250 basis points to 49.0% of net revenues in the nine months ended October 30, 2021 from 46.5% of net revenues in the nine months ended October 31, 2020.

RH Segment gross profit

RH Segment gross profit increased $435.1 million, or 48.2%, to $1.3 billion in the nine months ended October 30, 2021 from $902.9 million in the nine months ended October 31, 2020.

As a percentage of net revenues, RH Segment gross margin increased 270 basis points to 49.0% of net revenues in the nine months ended October 30, 2021 from 46.3% of net revenues in the nine months ended October 31, 2020.

Excluding the adjustments mentioned above, RH Segment gross margin would have increased 230 basis points to 49.0% of net revenues in the nine months ended October 30, 2021 from 46.7% of net revenues in the nine months ended October 31, 2020.

The increase in gross margin was primarily driven by higher product margins in the Core and Outlet businesses and leverage in our RH Segment occupancy costs in the nine months ended October 30, 2021.

Waterworks gross profit

Waterworks gross profit increased $24.5 million, or 65.3%, to $61.9 million in the nine months ended October 30, 2021 from $37.5 million in the nine months ended October 31, 2020.

As a percentage of net revenues, Waterworks gross margin increased 700 basis points to 50.0% of net revenues in the nine months ended October 30, 2021 from 43.0% of net revenues in the nine months ended October 31, 2020 primarily driven by higher revenues, favorable changes in product mix, and leverage in Waterworks occupancy costs, offset by an increase in shipping costs related to customer deliveries.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $33.3 million, or 5.1%, to $690.5 million in the nine months ended October 30, 2021 compared to $657.2 million in the nine months ended October 31, 2020.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $21.6 million, or 3.5%, to $642.0 million in the nine months ended October 30, 2021 compared to $620.4 million in the nine months ended October 31, 2020.

RH Segment selling, general and administrative expenses for the nine months ended October 30, 2021 include amortization of non-cash compensation of $17.6 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $7.4 million related to asset impairments and $0.4 million related to severance costs and related payroll taxes associated with reorganizations.

RH Segment selling, general and administrative expenses for the nine months ended October 31, 2020 includes a non-cash compensation charge of $111.2 million due to a fully vested option grant made to Mr.

Friedman in October 2020, a loss of $9.4 million related to a sale leaseback transaction, $7.0 million related to severance costs and related payroll taxes associated with the termination of associates and a reorganization undertaken in response to the impact of retail closures on our business, $5.6 million related to asset impairments and $3.9 million due to accelerated asset depreciation.

Excluding adjustments mentioned above, RH Segment selling, general and administrative expenses would have been 23.5% and 24.9% of net revenues for the nine months ended October 30, 2021 and October 31, 2020, respectively.

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

48 | 2021 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $11.8 million, or 32.0%, to $48.5 million in the nine months ended October 30, 2021 compared to $36.7 million in the nine months ended October 31, 2020.

Waterworks selling, general and administrative expenses for the nine months ended October 30, 2021 include $0.8 million related to product recalls and for the nine months ended October 31, 2020 include $1.6 million related to asset impairments.

Excluding the product recall and asset impairment adjustments mentioned above, Waterworks selling, general and administrative expenses would have been 38.5% and 40.4% of net revenues for the nine months ended October 30, 2021 and October 31, 2020.

Interest expense—net

Interest expense—net decreased $14.6 million to $40.1 million for the nine months ended October 30, 2021 compared to $54.7 million for the nine months ended October 31, 2020.

Interest expense—net consisted of the following:

NINE MONTHS ENDED

(in thousands)

Amortization of convertible senior notes debt discount

Finance lease interest expense

Amortization of debt issuance costs and deferred financing fees

Term loan interest expense

Other interest expense

Promissory notes

Asset based credit facility

Amortization of convertible senior notes debt discount

Capitalized interest for capital projects

1 unchanged sentence

Total interest expense—net

(Gain) loss on extinguishment of debt

During the nine months ended October 30, 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $21.8 million.

During the nine months ended October 31, 2020, we recognized a $0.2 million gain on extinguishment of debt related to the maturity and settlement of the 2020 Notes in July 2020.

Income tax expense

Income tax expense was $99.1 million and $66.6 million in the nine months ended October 30, 2021 and October 31, 2020, respectively.

Our effective tax rate was 15.5% and 32.0% for the nine months ended October 30, 2021 and October 31, 2020, respectively.

The decrease in our effective tax rate is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based compensation in the nine months ended October 30, 2021 as compared to the nine months ended October 31, 2020 and non-deductible stock-based compensation related to a fully vested option grant made to Mr.

Friedman in October 2020 in the nine months ended October 31, 2020.

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $6.9 million loss during the nine months ended October 30, 2021.

Loss on extinguishment of debt

During the three months ended April 30, 2022 we recognized a loss on extinguishment of debt of $146 million related to the repurchase of $180 million of principal value of convertible senior notes, which includes the acceleration of amortization of debt issuance costs of approximately $1.0 million.

The loss represents the difference between the carrying value and the fair value of the convertible senior notes upon entering into the repurchase agreements with the noteholders.

Refer to Note 9— Convertible Senior Notes .

During the three months ended May 1, 2021, we recognized a loss on extinguishment of debt for a portion of the 2023 Notes that were early converted at the option of the noteholders of $0.1 million.

Other income—net

Other income—net was $0.3 million during the three months ended April 30, 2022, which included a net gain on derivative instruments of $3.2 million, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and Notes Repurchase (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements).

The net gain was partially offset by a $2.9 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

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

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 49

2022 FIRST QUARTER FORM 10-Q | 40

Income tax expense (benefit)

We recorded an income tax benefit of $163 million and income tax expense of $42 million in the three months ended April 30, 2022 and May 1, 2021, respectively.

Our effective tax rate was (438.3)% and 24.2% for the three months ended April 30, 2022 and May 1, 2021, respectively.

The decrease in our effective tax rate is primarily attributable to significantly higher net excess tax benefits from stock-based compensation partially offset by nondeductible amounts related to the extinguishment of debt.

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $1.4 million and $2.1 million loss during the three months ended April 30, 2022 and May 1, 2021, respectively.

Liquidity and Capital Resources

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

In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan in the amount of $2,000 million pursuant to the Term Loan Credit Agreement.

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

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

Refer to Note 10— Credit Facilities .

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

Additionally, in May 2022, we entered into the 2022 Incremental Amendment, which amended the Term Loan Credit Agreement and raised an incremental $500 million of Term Debt Financing.

The issuance of the 2022 Incremental Amendment was assigned a Ba3 rating from Moody’s Investors Service and BB rating from S&P Global.

Refer to Note 10 —Credit Facilities in our condensed consolidated financial statements.

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

THREE MONTHS ENDED

(in millions)

Asset based credit facility

Term loan (a)

Equipment promissory notes (a)

Convertible senior notes due 2023 (a)

Convertible senior notes due 2024 (a)

Term loan (1)

Equipment promissory notes (1)

Convertible senior notes due 2023 (1)

Convertible senior notes due 2024 (1)

Convertible senior notes repurchase obligation (2)

Notes payable for share repurchases

1 unchanged sentence

Total net debt

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

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

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

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

Availability under the asset based credit facility—net (3)

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

(2) The convertible senior notes repurchase obligation was repaid in full on May 3, 2022 .

Refer to Note 9 —Convertible Senior Notes .

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

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 41

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

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

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

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

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

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

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

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

50 | 2021 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Credit Facilities and Debt Arrangements

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

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

The accordion feature may be added as a first-in, last-out term loan facility.

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

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

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

The Term Loan Credit Agreement provides for a Term Loan in an aggregate principal amount of $2,000 million and the maturity date of the Term Loan Credit Agreement is October 20, 2028.

We had $411 million remaining in aggregate principal amount of convertible notes outstanding as of October 30, 2021, comprised of $128 million of 2023 Notes and $283 million of 2024 Notes.

Due to early conversions at the option of the noteholders, $54 million of the 2023 Notes and $57 million of the 2024 Notes were recorded within current liabilities on our condensed consolidated financial statements as of October 30, 2021.

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

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

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

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

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

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

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

We entered into a $2.0 billion term debt financing in October 2021 (the “October 2021 Term Loans”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A.

as administrative agent and collateral agent, and the various lenders party thereto (the “Term Loan Credit Agreement”).

The October 2021 Term Loans have a maturity date of October 20, 2028.

As of April 30, 2022, we had $1,990 million outstanding under the Term Loan Credit Agreement.

We are required to make quarterly principal payments of $5.0 million with respect to the October 2021 Term Loans.

On May 13, 2022, we entered into an incremental term debt financing (the “ 2022 Incremental Term Debt”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A.

as administrative agent and the various lenders parties thereto (the “Amended Term Loan Credit Agreement”).

The 2022 Incremental Term Debt has a maturity date of October 20, 2028.

The 2022 Incremental Term Debt constitutes a separate class from the existing October 2021 Term Loan under the Term Loan Credit Agreement.

Certain Transactions Related to Convertible Senior Notes

During the three months ended April 30, 2022, we entered into certain transactions in connection with the 2023 Notes and 2024 Notes.

Warrant Termination Agreements

We entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants previously issued in connection with the 2023 Notes and 2024 Notes.

Upon closing of these transactions, we paid an aggregate of $391 million in cash to terminate warrants representing 3,385,580 shares of our common stock.

Convertible Bond Hedge Unwind Transactions

We entered into agreements with the Counterparties to terminate all of the remaining convertible note bond hedges previously entered into in connection with the 2023 Notes and 2024 Notes.

Upon closing of these transactions, we received an aggregate of $232 million in cash for the termination of the bond hedges.

Convertible Notes Repurchase

We entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase $180 million in aggregate principal amount of the convertible senior notes (the “Notes Repurchase”) representing $45 million and $135 million in principal amount of 2023 Notes and 2024 Notes, respectively.

Upon closing of these transactions, we paid an aggregate of $314 million in cash to repurchase such convertible senior notes .

Result of the Convertible Notes Transactions

In aggregate, we expended a net total amount of approximately $481 million in cash (inclusive of expenses) to complete the above transactions.

FINANCIAL INFORMATION

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As a result of the bond hedge termination agreements, all convertible note hedges entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including convertible note hedges with respect to any 2023 Notes and 2024 Notes that remain outstanding.

As a result of the warrant termination agreements, all warrants entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including warrants with respect to any 2023 Notes and 2024 Notes that remain outstanding.

Following the completion of the Notes Repurchase, we had $101 million remaining in aggregate principal amount of convertible notes outstanding as of April 30, 2022, comprised of $20 million of 2023 Notes and $81 million of 2024 Notes.

The remaining 2023 Notes have a scheduled maturity in June 2023 and the remaining 2024 Notes have a scheduled maturity in September 2024.

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

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

Our near-term decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to the pandemic and macro-economic factors affecting business conditions including inflation.

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

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

FINANCIAL INFORMATION

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

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

Any adverse developments in the U.S.

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

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

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

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

FINANCIAL INFORMATION

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

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

During the three months ended April 30, 2022, adjusted capital expenditures were $42 million in aggregate, net of cash received related to landlord tenant allowances of $2.3 million.

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

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

During the nine months ended October 30, 2021, adjusted capital expenditures were $204 million, net of cash received related to landlord tenant allowances of $13 million.

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

There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business including increased inflation and rising interest rates and we may make adjustments to our allocation of capital in fiscal 2022 or beyond in response to these changing or other circumstances.

We may also invest in other uses of our liquidity such as share repurchases, acquisitions, and growth initiatives, including through joint ventures and real estate investments.

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

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

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

As we develop new Galleries, as well as other potential strategic initiatives in the future like our integrated hospitality experience, we are exploring other models for our real estate activities, which include different terms and conditions for real estate transactions.

These transactions may involve longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings that we wish to develop for new Gallery locations or other aspects of our business.

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

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

We also are pursuing change in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the objective of ultimately (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent.

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

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

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FINANCIAL INFORMATION

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

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

and internationally.

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

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 44

Cash Flow Analysis

A summary of operating, investing, and financing activities is set forth in the following table:

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net increase in cash and cash equivalents and restricted cash equivalents

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Net Cash Provided By Operating Activities

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

For the nine months ended October 30, 2021, net cash provided by operating activities was $533.7 million and consisted of net income of $541.5 million and an increase in non-cash items of $198.2 million, partially offset by a change in working capital and other activities of $206.0 million.

The source of cash from working capital was primarily driven by an increase in deferred revenue and customer deposits of $104.4 million primarily due to strong consumer demand for our products.

This source of cash from working capital was partially offset by uses of cash driven by an increase in merchandise inventory of $89.2 million, a decrease in operating lease liabilities of $59.2 million primarily due to payments made under the related lease agreements, an increase in landlord assets under construction of $50.4 million, an increase in prepaid expenses and other assets of $39.2 million, and a decrease in other current liabilities of $28.1 million.

For the nine months ended October 31, 2020, net cash provided by operating activities was $347.3 million and consisted of net income of $141.6 million and non-cash items of $266.3 million, partially offset by cash used for working capital and other activities of $60.7 million.

Working capital and other activities consisted primarily of an increase in merchandise inventory of $57.8 million, an increase in prepaid expenses and other assets of $47.3 million, an increase in landlord assets under construction of $44.9 million, a decrease in operating lease liabilities of $36.8 million primarily due to payments made under the related lease agreements, and a decrease in other non-current obligations of $20.8 million.

These uses of cash from working capital were partially offset by increases in deferred revenue and customer deposits of $111.4 million primarily due to strong consumer demand for our products during the second and third quarters of fiscal 2020.

FINANCIAL INFORMATION

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Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, impairments, stock-based compensation, loss on extinguishment of debt, cash paid attributable to accretion of debt discount upon settlement of debt (prior to the adoption of ASU 2020-06 in fiscal 2022) and the effect of changes in working capital and other activities.

For the three months ended April 30, 2022, net cash provided by operating activities was $136 million and consisted of net income of $201 million and an increase in non-cash items of $221 million, partially offset by a change in working capital and other activities of $286 million.

The use of cash from working capital was primarily driven by an increase in prepaid expenses and other assets of $160 million primarily due to federal and state tax receivables, an increase in merchandise inventory of $83 million, a decrease in other current liabilities of $30 million and a decrease in operating lease liabilities of $19 million primarily due to payments made under the related lease agreements.

These uses of cash from working capital were partially offset by an increase in deferred revenue and customer deposits of $49 million primarily due to strong consumer demand for our products.

Net Cash Used In Investing Activities

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Investing activities also include our strategic investments.

For the nine months ended October 30, 2021, net cash used in investing activities was $158.6 million and was comprised of investments in retail stores, information technology and systems infrastructure of $153.8 million and additional funding of our equity method investments of $4.8 million.

For the nine months ended October 31, 2020, net cash used in investing activities was $67.3 million primarily due to investments in retail stores, information technology and systems infrastructure, and supply chain of $57.6 million, as well as the acquisition of building and land assets of $14.2 million.

In August 2020, we completed the acquisition of a business and paid $13.1 million of the $15.0 million purchase price in the nine months ended October 31, 2020.

In addition, we made $7.5 million of investments in joint ventures in the nine months ended October 31, 2020.

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

Net Cash Provided By (Used In) Financing Activities

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

For the nine months ended October 30, 2021, net cash provided by financing activities was $1.7 billion, primarily due to the issuance of the Term Loan in October 2021 in the amount of $2,000 million pursuant to the Term Loan Credit Agreement.

This source of cash was offset by uses of cash, partially due to the repayment of $274.2 million of the 2023 Notes and 2024 Notes in the nine months ended October 30, 2021 as a result of early conversion at the option of the noteholders, of which $235.1 million is presented as repayments of convertible senior notes within cash from financing activities and $39.1 million is reflected as cash paid attributable to accretion of debt discount upon settlement of debt within cash from operating activities.

In addition, we incurred $22.7 million of debt issuance costs related to the Term Loan Credit Agreement and $3.7 million of debt issuance costs related to the ABL Credit Agreement, as well as made repayments of $17.2 million on our equipment notes and $10.5 million of principal payments under finance lease agreements.

Equity related transactions provided $10.7 million due to $30.1 million of proceeds from exercise of employee stock options, partially offset by $19.4 million of cash paid for employee taxes related to net settlement of equity awards.

For the nine months ended October 31, 2020, net cash used in financing activities was $230.8 million.

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

Net cash used in financing activities also included repayments under promissory and equipment notes of $10.9 million.

Non-Cash Transactions

Non-cash transactions consist of non-cash additions of property and equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets.

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

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For the three months ended April 30, 2022, net cash used in investing activities was $30 million and was comprised of investments in retail stores, information technology and systems infrastructure of $29 million and additional funding of our equity method investments of $1.1 million.

Net Cash Used In Financing Activities

For the three months ended April 30, 2022, net cash used in financing activities was $42 million, primarily due to certain transactions entered into in the first quarter of fiscal 2022 related to the 2023 Notes and 2024 Notes, and the related bond hedge and warrant agreements.

These transactions resulted in payments of $391 million for the termination of all such outstanding common stock warrants, partially offset by proceeds of $232 million from the termination of all of the remaining convertible note bond hedges.

In addition, we repaid $13 million in aggregate principal amount of certain 2023 Notes and 2024 Notes as a result of early conversions during the quarter, as well as made payments on equipment notes of $11 million, term loans of $5.0 million and finance lease agreements of $3.6 million.

These cash outflows were partially offset by proceeds from option exercises of $150 million, primarily due to Mr.

Friedman’s option exercise activity in the first quarter of fiscal 2022.

FINANCIAL INFORMATION

Free Cash Flow

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

NINE MONTHS ENDED

(in thousands)

Net cash provided by operating activities

Capital expenditures

Free cash flow (a)

(a) Free cash flow is net cash provided by operating activities less capital expenditures.

Free cash flow for the nine months ended October 30, 2021 and October 31, 2020 includes the effect of $39.1 million and $84.0 million, respectively, relating to the portion of repayments of convertible senior notes attributable to debt discount upon settlement (such portion of the debt settlement reduces net cash provided by operating activities in the reported period).

Free cash flow is a non-GAAP financial measure and is included in this filing because we believe that this measure provides useful information to our senior leadership team and investors in understanding the strength of our liquidity, available cash and our ability to generate additional cash from our business operations.

Free cash flow should not be considered in isolation or as an alternative to cash flows from operations calculated in accordance with GAAP, and should be considered alongside our other liquidity performance measures that are calculated in accordance with GAAP, such as net cash provided by operating activities and our other GAAP financial results.

Additionally, our definition of free cash flow is not necessarily representative of residual cash flows from the business since free cash flow as reported is reduced by certain cash payments made in settlement of our convertible debt upon conversion or maturity, as well as other obligations or payments made for business acquisitions.

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

Our measure of free cash flow is not necessarily comparable to other similarly titled measures for other companies due to different methods of calculation.

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Non-Cash Transactions

In addition, non-cash transactions consist of shares issued and received related to convertible senior note transactions, as well as a financing liability and an embedded derivative arising from the Notes Repurchase (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements).

Cash Requirements from Contractual Obligations

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

Refer to Note 8— Leases in our condensed consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.

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

The table presenting the maturities of our lease liabilities included in Note 8— Leases in our condensed consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

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

Convertible Senior Notes

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements for further information on our 0.00% Convertible Senior Notes due 2024 and 0.00% Convertible Senior Notes due 2023.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements for further information on the 2023 Notes and 2024 Notes.

Asset Based Credit Facility

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our asset based credit facility.

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our Term Loan.

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

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 55

$950 Million Share Repurchase Program

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

We completed $250.0 million in share repurchases in fiscal 2018 under the 950 Million Repurchase Program.

In the first quarter of fiscal 2019, we repurchased approximately 2.2 million shares of our common stock at an average price of $115.36 per share, for an aggregate repurchase amount of approximately $250.0 million under the 950 Million Repurchase Program.

We did not make any repurchases under the 950 Million Repurchase Program during either the three or nine months ended October 30, 2021 or October 31, 2020.

The total current authorized size of this share repurchase program is up to $950 million, of which $450 million remained available as of October 30, 2021 for future share investments.

Contractual Obligations

As of October 30, 2021, there were no material changes to our contractual obligations described within Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations in the 2020 Form 10-K other than lease agreements entered into in the normal course of business (refer to Note 8 —Leases ).

Off Balance Sheet Arrangements

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

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

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

We did not make any repurchases under this share repurchase program during fiscal 2020, fiscal 2021 or the first quarter of fiscal 2022.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 46

The total current authorized size of the share purchase program is up to $950 million (the “Share Repurchase Program”), of which $450 million remained available as of April 30, 2022 for future share repurchases under this share repurchase program.

On June 2, 2022, the Board of Directors authorized an additional $2.0 billion for the purchase of shares of our outstanding common stock, which is effective immediately and is an addition to the $450 million remaining under the Share Repurchase Program.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The preparation of financial statements in accordance with GAAP requires senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We evaluate our accounting policies, estimates, and judgments on an on-going basis.

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Incremental Borrowing Rate

Fair Market Value

Stock-Based Compensation—Performance-Based Awards

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For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the 2021 Form 10-K.

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FINANCIAL INFORMATION

Recent Accounting Pronouncements

Refer to Note 2— Recently Issued Accounting Standards in our condensed consolidated financial statements for a description of recently issued accounting standards that may impact us in future reporting periods.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis