What changed in this filing

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Item 1. Financial Statements

2022-09-08 compared with 2022-06-03 · 278 added, 185 removed, 514 unchanged (47% of the section changed)

16 unchanged sentences

Deferred revenue and customer deposits

Convertible senior notes due 2023

Convertible senior notes due 2023—net

Convertible senior notes due 2024

Convertible senior notes repurchase obligation (Note 9)

Operating lease liabilities

2 unchanged sentences

Asset based credit facility

Term loan—net

Term loan B—net

Term loan B-2—net

Convertible senior notes due 2023—net

6 unchanged sentences

Stockholders’ equity:

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of April 30, 2022 and January 29, 2022

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 24,661,781 shares issued and outstanding as of April 30, 2022;

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of July 30, 2022 and January 29, 2022

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 23,715,191 shares issued and outstanding as of July 30, 2022;

21,506,967 shares issued and outstanding as of January 29, 2022

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss

Retained earnings

3 unchanged sentences

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands, except share and per share amounts)

5 unchanged sentences

Loss on extinguishment of debt

Other income—net

Other expense—net

Total other expenses

8 unchanged sentences

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

3 unchanged sentences

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

5 unchanged sentences

(in thousands, except share amounts)

Balances—April 30, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

( 1,000,000 )

Retirement of treasury stock

( 1,000,000 )

Settlement of convertible senior notes

Net losses from foreign currency translation

Balances—July 30, 2022

Balances—May 1, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Settlement of convertible senior notes

Exercise of call option under bond hedge upon settlement of convertible senior notes

Reclassification of equity component to mezzanine equity related to early converted senior notes outstanding

Net losses from foreign currency translation

Balances—July 31, 2021

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

SIX MONTHS ENDED

TREASURY STOCK

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

(in thousands, except share amounts)

Balances—January 29, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

( 1,000,000 )

Retirement of treasury stock

( 1,000,000 )

Exercise of call option under bond hedge upon settlement of convertible senior notes

4 unchanged sentences

Net losses from foreign currency translation

Balances—April 30, 2022

Balances—July 30, 2022

Balances—January 30, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Exercise of call option under bond hedge upon settlement of convertible senior notes

Settlement of convertible senior notes

Net losses from foreign currency translation

Balances—May 1, 2021

Exercise of call option under bond hedge upon settlement of convertible senior notes

Reclassification of equity component to mezzanine equity related to early converted senior notes outstanding

Net gains from foreign currency translation

Balances—July 31, 2021

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

25 unchanged sentences

Net cash provided by operating activities

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

THREE MONTHS ENDED

(in thousands)

CASH FLOWS FROM INVESTING ACTIVITIES

2 unchanged sentences

Net cash used in investing activities

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED

(in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings under term loans

Repayments under term loans

1 unchanged sentence

Repayments of convertible senior notes

Principal payments under finance leases

Repayment under convertible senior notes repurchase obligation

Debt issuance costs

Principal payments under finance leases—net

Proceeds from termination of convertible senior note hedges

Payments for termination of common stock warrants

Repurchases of common stock—including commissions

Proceeds from exercise of stock options

2 unchanged sentences

Effects of foreign currency exchange rate translation

Net increase in cash and cash equivalents and restricted cash equivalents

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

Cash and cash equivalents and restricted cash equivalents

15 unchanged sentences

FINANCIAL INFORMATION

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4 unchanged sentences

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

As of April 30, 2022, we operated a total of 67 RH Galleries and 39 RH Outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

As of July 30, 2022, we operated a total of 67 RH Galleries and 39 RH Outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of April 30, 2022, and the results of operations for the three months ended April 30, 2022, and May 1, 2021.

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of July 30, 2022, and the results of operations for the three and six months ended July 30, 2022 and July 31, 2021.

Our current fiscal year, which consists of 52 weeks, ends on January 28, 2023 (“fiscal 2022”).

3 unchanged sentences

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19” or “the pandemic”) using information that is reasonably available to us at this time.

The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three months ended April 30, 2022.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and six months ended July 30, 2022.

As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the “2021 Form 10-K”).

The results of operations for the three months ended April 30, 2022, presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the pandemic and other factors as discussed in COVID-19 Pandemic and Macro-Economic Factors below.

The results of operations for the three and six months ended July 30, 2022 and July 31, 2021 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the pandemic and other factors as discussed in Macro-Economic Factors and COVID-19 Pandemic below.

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FINANCIAL INFORMATION

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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.

Macro-Economic Factors and COVID-19 Pandemic

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.

These factors may have a number of adverse effects on macro-economic conditions and markets in which we operate, with the potential for an economic recession and a sustained downturn in the housing market.

Factors such as a slowdown in the housing market or negative trends in stock market prices could have a negative impact on demand for our products.

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

6 unchanged sentences

As a result, after adopting ASU 2020-06’s guidance, we no longer separately present in equity an embedded conversion feature of such debt.

Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium.

Instead, we account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium.

Additionally, ASU 2020-06 removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity.

9 unchanged sentences

FINANCIAL INFORMATION

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Reference Rate Reform

3 unchanged sentences

Scope , (“ASU 2021-01” and, together with ASU 2020-04, the “ASUs”).

The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”).

The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”).

These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity.

7 unchanged sentences

Prepaid expense and other current assets

Promissory notes receivable, including interest (2)

Vendor deposits

1 unchanged sentence

Tenant allowance receivable

Promissory notes receivable, including interest (2)

Right of return asset for merchandise

4 unchanged sentences

Refer to Note 5— Equity Method Investments .

FINANCIAL INFORMATION

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Other non-current assets consist of the following:

(in thousands)

Landlord assets under construction—net of tenant allowances

Initial direct costs prior to lease commencement

Landlord assets under construction—net of tenant allowances

Capitalized cloud computing costs—net (1)

3 unchanged sentences

Total other non-current assets

(1) Presented net of accumulated amortization of $ 5.4 million and $ 4.0 million as of April 30, 2022 and January 29, 2022, respectively.

(1) Presented net of accumulated amortization of $ 7.1 million and $ 4.0 million as of July 30, 2022 and January 29, 2022, respectively.

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FINANCIAL INFORMATION

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (Refer to Note 17— Segment Reporting ), for the three months ended April 30, 2022:

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (refer to Note 17— Segment Reporting ) for the six months ended July 30, 2022:

(in thousands)

5 unchanged sentences

NOTE 5—EQUITY METHOD INVESTMENTS

Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020 for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

As we do not have a controlling financial interest in the Aspen LLCs but have the ability to exercise significant influence over the Aspen LLCs, we account for these investments using the equity method of accounting.

As of April 30, 2022 and January 29, 2022, $ 9.6 million and $ 8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member, which are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

These promissory notes are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

We have made $ 105 million in capital contributions to the Aspen LLCs as contractually required and no further capital contributions are required other than payments made under a management services arrangement.

Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of April 30, 2022.

Equity method investments represent our membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020 for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent interest in the third Aspen LLC.

As we have the ability to exercise significant influence over the Aspen LLCs, but do not have a controlling financial interest in the Aspen LLCs, we account for these investments using the equity method of accounting.

As of July 30, 2022 and January 29, 2022, $ 35 million and $ 8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

Promissory notes related specifically to the Aspen LLCs are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

Certain of the promissory notes outstanding as of July 30, 2022 are related to other real estate joint ventures with entities affiliated with the managing member and such promissory notes are expected to be converted in additional investments in future privately-held limited liability companies for real estate development activities related to our Gallery transformation global expansion strategies.

We have made in excess of $ 100 million in capital contributions to the Aspen LLCs as contractually required.

Our maximum exposure to loss with respect to these real estate joint ventures that are accounted for under the equity method is the carrying value of equity capital contributed to the equity method investments as of July 30, 2022.

During the three months ended July 30, 2022 and July 31, 2021, we recorded our proportionate share of equity method investments losses of $ 2.8 million and $ 2.5 million, respectively, which is included in the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets.

During the six months ended July 30, 2022 and July 31, 2021, we recorded our proportionate share of equity method investments losses of $ 4.2 million and $ 4.6 million, respectively.

During the three and six months ended July 30, 2022, we did not receive any distributions or have any undistributed earnings of equity method investments.

FINANCIAL INFORMATION

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During the three months ended April 30, 2022 and January 29, 2022, we recorded our proportionate share of equity method investments losses of $ 1.4 million and $ 2.1 million, respectively, which is included in the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of April 30, 2022.

During the three months ended April 30, 2022, we did not receive any distributions or have any undistributed earnings of equity method investments.

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NOTE 6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

3 unchanged sentences

Accrued compensation

Accrued occupancy

Accrued freight and duty

Accrued sales taxes

Accrued occupancy

Accrued professional fees

Accrued catalog costs

Accrued professional fees

Other accrued expenses

2 unchanged sentences

(in thousands)

Unredeemed gift card and merchandise credit liability

Allowance for sales returns

Current portion of term loan

Unredeemed gift card and merchandise credit liability

Current portion of term loans

Finance lease liabilities

6 unchanged sentences

We defer revenue associated with merchandise delivered via the home-delivery channel.

We expect that substantially all of the deferred revenue and customer deposits as of April 30, 2022 will be recognized within the next six months as the performance obligations are satisfied.

We expect that substantially all of the deferred revenue and customer deposits as of July 30, 2022 will be recognized within the next six months as the performance obligations are satisfied.

Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee.

1 unchanged sentence

Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year .

FINANCIAL INFORMATION

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In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards.

During the three months ended April 30, 2022 and May 1, 2021, we recognized $ 4.7 million and $ 4.9 million, respectively, of revenue related to previous deferrals related to our gift cards .

During the three months ended July 30, 2022 and July 31, 2021, we recognized $ 6.0 million and $ 4.9 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the six months ended July 30, 2022 and July 31, 2021, we recognized $ 11 million and $ 9.8 million, respectively, of revenue related to previous deferrals related to our gift cards.

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FINANCIAL INFORMATION

We recognize breakage associated with gift cards proportional to actual gift card redemptions.

Breakage of $ 0.7 million and $ 0.4 million was recorded in net revenues in the three months ended April 30, 2022 and May 1, 2021, respectively.

Breakage of $ 0.4 million and $ 0.5 million was recorded in net revenues in the three months ended July 30, 2022 and July 31, 2021, respectively.

Breakage of $ 1.1 million and $ 0.9 million was recorded in net revenues in the six months ended July 30, 2022 and July 31, 2021, respectively.

We expect that approximately 75 % of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.

9 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

9 unchanged sentences

(2) Included in interest expense—net on the condensed consolidated statements of income.

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 6.7 million and $ 6.3 million for the three months ended April 30, 2022 and May 1, 2021, respectively, and charges associated with common area maintenance of $ 2.4 million and $ 2.1 million for the three months ended April 30, 2022 and May 1, 2021, respectively.

Other variable costs, which include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material in either period.

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 5.0 million and $ 5.6 million for the three months ended July 30, 2022 and July 31, 2021, respectively, and $ 12 million for each of the six months ended July 30, 2022 and July 31, 2021, and charges associated with common area maintenance of $ 2.2 million and $ 2.3 million for the three months ended July 30, 2022 and July 31, 2021, respectively, and $ 4.6 million and $ 4.4 million for the six months ended July 30, 2022 and July 31, 2021, respectively.

(4) Included as an offset to selling, general and administrative expenses on the condensed consolidated statements of income.

FINANCIAL INFORMATION

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Lease right-of-use assets and lease liabilities consist of the following:

18 unchanged sentences

(1) Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 185 million and $ 174 million as of April 30, 2022 and January 29, 2022, respectively.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 198 million and $ 174 million as of July 30, 2022 and January 29, 2022, respectively.

(3) Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months.

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FINANCIAL INFORMATION

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The maturities of lease liabilities are as follows as of April 30, 2022:

The maturities of lease liabilities are as follows as of July 30, 2022:

(in thousands)

4 unchanged sentences

(1) Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

Total lease payments exclude $ 512 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of April 30, 2022, of which $ 17 million, $ 27 million, $ 33 million, $ 34 million, $ 33 million and $ 31 million will be paid in fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 337 million will be paid subsequent to fiscal 2027.

(2) Excludes future commitments under short-term lease agreements of $ 0.9 million as of April 30, 2022.

Total lease payments exclude $ 598 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of July 30, 2022, of which $ 12 million, $ 27 million, $ 36 million, $ 38 million, $ 36 million and $ 35 million will be paid in the remainder of fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 414 million will be paid subsequent to fiscal 2027.

(2) Excludes an immaterial amount of future commitments under short-term lease agreements.

(3) Calculated using the discount rate for each lease at lease commencement.

Supplemental information related to leases consists of the following:

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

6 unchanged sentences

FINANCIAL INFORMATION

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Other information related to leases consists of the following:

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

2 unchanged sentences

Operating cash flows from finance leases

Financing cash flows from finance leases

Financing cash flows from finance leases—net (1)

Total cash outflows from leases

2 unchanged sentences

Finance leases

(1) Represents the principal portion of lease payments offset by tenant allowances received subsequent to lease commencement.

Build-to-Suit Asset

During the second quarter of fiscal 2021, we opened the Dallas Design Gallery.

During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property & equipment—net on our condensed consolidated balance sheets.

Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we could not derecognize the build-to-suit asset.

Therefore, the asset remains classified as a build-to-suit asset within property and equipment—net and is depreciated over the term of the useful life of the asset.

NOTE 9—CONVERTIBLE SENIOR NOTES

3 unchanged sentences

In connection with our adoption of ASU 2020-06 in the first quarter of fiscal 2022, we recombined the previously outstanding equity component, which resulted in an increase in the balance of convertible debt outstanding.

Refer to Note 2— Recently Issued Accounting Standards for further discussion of the impact of our adoption of ASU 2020-06 on our condensed consolidated financial statements.

Refer to Note 2— Recently Issued Accounting Standards for further discussion of the impact of our adoption of ASU 2020-06 in our condensed consolidated financial statements.

The outstanding balances under the 2023 Notes and 2024 Notes were as follows:

3 unchanged sentences

Total convertible senior notes

(1) As of April 30, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount.

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FINANCIAL INFORMATION

(1) As of July 30, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount.

As of January 29, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount, as well as the previously outstanding equity component that was recombined upon the adoption of ASU 2020-06 in the first quarter of fiscal 2022, which was $ 5.7 million for the 2023 Notes and $ 30 million for the 2024 Notes.

Refer to Note 2 —Recently Issued Accounting Standards .

(2) As of April 30, 2022, $ 20 million of the 2023 Notes remains outstanding and is classified as convertible senior notes due 2023—net.

(2) As of July 30, 2022, the 2023 Notes outstanding are current liabilities and are classified as convertible senior notes due 2023—net.

The 2023 Notes outstanding as of January 29, 2022 included a current portion of $ 9.4 million and a non-current portion of $ 59 million.

(3) As of April 30, 2022, $ 81 million of the 2024 Notes remains outstanding and is classified as convertible senior notes due 2024—net.

(3) As of July 30, 2022, the 2024 Notes outstanding are non-current liabilities and are classified as convertible senior notes due 2024—net.

The 2024 Notes outstanding as of January 29, 2022 included a current portion of $ 3.6 million and a non-current portion of $ 184 million.

FINANCIAL INFORMATION

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2023 Notes and 2024 Notes—Bond Hedge and Warrant Terminations and Notes Repurchase

During the three months ended April 30, 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days .

Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $ 4.2 million, which is classified within other income—net in the condensed consolidated statements of income.

During the first quarter of fiscal 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days .

Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $ 4.2 million, which is classified within other expense—net in the condensed consolidated statements of income.

Upon settlement of these agreements in April 2022, we paid an aggregate of $ 391 million in cash to terminate the warrants.

During the three months ended April 30, 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period.

Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $ 4.3 million, which is classified within other income—net in the condensed consolidated statements of income.

During the first quarter of fiscal 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period.

Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $ 4.3 million, which is classified within other expense—net in the condensed consolidated statements of income.

Upon settlement of these agreements in April 2022, we received an aggregate of $ 232 million in cash for the termination of the bond hedges.

During the three months ended April 30, 2022, we entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase in cash $ 45 million and $ 135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”).

During the first quarter of fiscal 2022, we entered into individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 45 million and $ 135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”).

The Notes Repurchase provided for an estimated settlement cost of $ 325 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a five day volatility weighted-average price measurement period that ended on April 29, 2022.

2 unchanged sentences

An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 278 million, with the remaining $ 47 million classified as debt and recognized at its amortized cost basis.

Accordingly, we recognized a loss on extinguishment of debt of $ 146 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of approximately $ 1.0 million.

Accordingly, we recognized a loss on extinguishment of debt of $ 146 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 1.0 million.

Upon the completion of the price measurement period in April 2022, a total of $ 314 million was due to the holders, representing the combined carrying value of the debt liability of $ 47 million, as well as the fair value of the bifurcated embedded equity derivative of $ 267 million.

Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $ 11 million, which is classified within other income—net in the condensed consolidated statements of income.

Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $ 11 million, which is classified within other expense—net in the condensed consolidated statements of income.

The resulting debt liability and bifurcated embedded equity derivative were settled in full for $ 314 million in cash upon closing of the Notes Repurchase on May 3, 2022.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 18

2022 SECOND QUARTER FORM 10-Q | 19

During the second quarter of fiscal 2022, we entered into additional individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 18 million and $ 39 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Additional Notes Repurchase”) .

The Additional Notes Repurchase provided for an estimated settlement cost of $ 80 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a one day volatility weighted-average price measurement period occurring in July 2022.

Upon execution of these agreements, we determined that we had modified the debt substantially and applied an extinguishment accounting model.

Accordingly, we derecognized the aggregate principal amount of $ 57 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 25 million.

An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 55 million.

We recognized a loss on extinguishment of debt of $ 23 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 0.3 million.

Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 82 million was paid in cash to the holders, representing the combined carrying value of the financing liability of $ 25 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 57 million.

Accordingly, we recognized a loss on the fair value adjustment of the bifurcated embedded equity derivative of $ 1.5 million, which is classified within other expense—net in the condensed consolidated statements of income.

$ 350 million 0.00 % Convertible Senior Notes due 2024

3 unchanged sentences

or (3) upon the occurrence of specified corporate transactions.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 and, accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes during the calendar quarter ending June 30, 2022.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended March 31, 2022.

However, this condition was not met for the calendar quarter ended June 30, 2022 and, as a result, the 2024 Notes were not convertible as of June 30, 2022.

On and after June 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2024 Notes at any time, regardless of the foregoing circumstances.

1 unchanged sentence

If the Company has not delivered a notice of its election of settlement method prior to the final conversion period, it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 .

During the three months ended April 30, 2022, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

During the three months ended April 30, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

During the six months ended July 30, 2022, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

During the six months ended July 30, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

We also received 9,760 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes.

The remaining liability for the 2024 Notes is classified as a non-current obligation on our condensed consolidated balance sheets since the settlement of the outstanding 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

20 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

$ 335 million 0.00 % Convertible Senior Notes due 2023

3 unchanged sentences

or (3) upon the occurrence of specified corporate transactions.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending June 30, 2022.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending September 30, 2022.

On and after March 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless of the foregoing circumstances.

1 unchanged sentence

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 19

During the three months ended April 30, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the three months ended April 30, 2022, we paid $ 9.4 million in cash and delivered 27,213 shares of common stock to settle the early conversion of these 2023 Notes.

During the six months ended July 30, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the six months ended July 30, 2022, we paid $ 9.4 million in cash and delivered 27,214 shares of common stock to settle the early conversion of these 2023 Notes.

We also received 27,208 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes, and therefore, on a net basis issued 6 shares of our common stock in respect to such settlement of the converted 2023 Notes.

The remaining liability for the 2023 Notes is classified as a non-current obligation on our condensed consolidated balance sheets since the settlement of the outstanding 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

The remaining liability for the 2023 Notes is classified as a current obligation on our condensed consolidated balance sheets since the settlement of the outstanding 2023 Notes is due on June 15, 2023.

The settlement of additional early conversions received, if any, will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

NOTE 10—CREDIT FACILITIES

The outstanding balances under our credit facilities were as follows:

(in thousands)

(dollars in thousands)

Asset based credit facility (2)

Term loan credit agreement (2)

Term loan B (3)

Term loan B-2 (4)

Equipment promissory notes (5)

Total credit facilities

(1) Deferred financing fees associated with the asset based credit facility as of April 30, 2022 and January 29, 2022, were $ 3.9 million and $ 4.1 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

(1) The interest rates for the asset based credit facility, term loans and equipment promissory note represent the weighted-average interest rates as of July 30, 2022.

(2) Deferred financing fees associated with the asset based credit facility as of July 30, 2022 and January 29, 2022 were $ 3.7 million and $ 4.1 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit, which has a maturity date of July 29, 2026.

(2) Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $ 2.0 billion and $ 20 million were included in term loan—net and other current liabilities on the condensed consolidated balance sheets, respectively, in both periods presented.

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 21

(3) Represents the outstanding balance of the Term Loan B (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 1,965 million and $ 20 million were included in term loan B—net and other current liabilities , respectively, on the condensed consolidated balance sheets, respectively, in both periods presented.

The maturity date of the Term Loan Credit Agreement is October 20, 2028.

(3) Represents total equipment security notes secured by certain of our property and equipment, all of which was included in other current liabilities on the condensed consolidated balance sheets as of April 30, 2022.

(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 496 million and $ 3.8 million were included in term loan B-2—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of July 30, 2022.

The maturity date of the Term Loan Credit Agreement is October 20, 2028.

(5) Represents total equipment security notes secured by certain of our property and equipment, all of which was included in other current liabilities on the condensed consolidated balance sheets as of July 30, 2022 .

Asset Based Credit Facility & Term Loan Facilities

2 unchanged sentences

On June 28, 2017, RHI entered into the Eleventh Amended and Restated Credit Agreement (as amended prior to July 29, 2021, the “11 th A&R Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the Original Credit Agreement.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 20

On July 29, 2021, RHI entered into the Twelfth Amended and Restated Credit Agreement (as amended, the “ABL Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the 11 th A&R Credit Agreement.

1 unchanged sentence

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

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

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

The maturity date of the ABL Credit Agreement is July 29, 2026.

5 unchanged sentences

The ABL Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size.

22 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

The ABL Credit Agreement does not contain any significant financial ratio covenants or coverage ratio covenants other than a consolidated fixed charge coverage ratio (“FCCR”) covenant based on the ratio of (i) consolidated EBITDA to the amount of (ii) debt service costs plus certain other amounts, including dividends and distributions and prepayments of debt as defined in the ABL Credit Agreement (the “FCCR Covenant”).

1 unchanged sentence

The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

As of April 30, 2022, RHI was in compliance with the FCCR Covenant.

As of July 30, 2022, RHI was in compliance with the FCCR Covenant.

The ABL Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the ABL Credit Agreement drops below the greater of (A) $ 40 million and (B) an amount based on 10 % of the total borrowing availability at the time.

2 unchanged sentences

As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit).

As of April 30, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 444 million, net of $ 20 million in outstanding letters of credit.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 21

As of July 30, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 528 million, net of $ 25 million in outstanding letters of credit.

Term Loan Credit Agreement

On October 20, 2021, RHI entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among RHI as the borrower, the lenders party thereto and Bank of America, N.A.

as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan”) in an aggregate principal amount equal to $ 2,000,000,000 with a maturity date of October 20, 2028.

The Term Loan bears interest at an annual rate based on LIBOR subject to a 0.50 % LIBOR floor plus an interest rate margin of 2.50 % (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating).

LIBOR is a floating interest rate that resets periodically during the life of the Term Loan.

At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50 % plus 2.50 % and the Term Loan was issued at a discount of 0.50 % to face value.

as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan B”) in an aggregate principal amount equal to $ 2,000,000,000 with a maturity date of October 20, 2028.

The Term Loan B bears interest at an annual rate based on LIBOR subject to a 0.50 % LIBOR floor plus an interest rate margin of 2.50 % (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating).

LIBOR is a floating interest rate that resets periodically during the life of the Term Loan B.

At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50 % plus 2.50 % and the Term Loan B was issued at a discount of 0.50 % to face value.

The Term Loan Credit Agreement contains customary provisions addressing future transition from LIBOR.

All obligations under the Term Loan are guaranteed by certain domestic subsidiaries of RHI.

Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan.

Substantially all of the collateral securing the Term Loan also secures the loans and other credit extensions under the ABL Credit Agreement.

On May 13, 2022, RHI entered into a 2022 Incremental Amendment (the “2022 Incremental Amendment”) with Bank of America, N.A., as administrative agent, amending the Term Loan Credit Agreement (the Term Loan Credit Agreement as amended by the 2022 Incremental Amendment, the “Amended Term Loan Credit Agreement”).

Pursuant to the terms of the 2022 Incremental Amendment, RHI incurred incremental term loans (the “Term Loan B-2”) in an aggregate principal amount equal to $ 500 million with a maturity date of October 20, 2028.

The Term Loan B-2 constitutes a separate class from the Term Loan B under the Term Loan Credit Agreement.

The Term Loan B-2 bears interest at an annual rate based on the SOFR subject to a 0.50 % SOFR floor plus an interest rate margin of 3.25 % plus a credit spread adjustment of 0.10 %.

Other than the terms relating to the Term Loan B-2, the terms of the Amended Term Loan Credit Agreement remain substantially the same as the terms of the existing Term Loan Credit Agreement, including representations and warranties, covenants and events of default.

All obligations under the Term Loan B are guaranteed by certain domestic subsidiaries of RHI.

Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan B.

Substantially all of the collateral securing the Term Loan B also secures the loans and other credit extensions under the ABL Credit Agreement.

On October 20, 2021, in connection with the Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the ABL Credit Agreement, as the case may be, entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the Term Agent and the ABL Agent.

The Intercreditor Agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the ABL Credit Agreement and the Term Loan Credit Agreement without the consent of the other parties.

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 23

The borrowings under the Term Loan Credit Agreement may be prepaid in whole or in part at any time, subject to a prepayment premium of 1.0 % in connection with any repricing transaction within the six months following the closing date of the Term Loan Credit Agreement.

2 unchanged sentences

The Term Loan Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for a term loan credit agreement.

On May 13, 2022, subsequent to our first quarter of fiscal 2022, RHI entered into a 2022 Incremental Amendment (the “2022 Incremental Amendment”) with Bank of America, N.A., as administrative agent, amending the Term Loan Credit Agreement (the Term Loan Credit Agreement as amended by the 2022 Incremental Amendment, the “Amended Term Loan Credit Agreement”).

Pursuant to the terms of the 2022 Incremental Amendment, RHI incurred incremental term loans (the “2022 Incremental Term Debt”) in an aggregate principal amount equal to $ 500 million with a maturity date of October 20, 2028.

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

The 2022 Incremental Term Debt bears interest at an annual rate based on the SOFR subject to a 0.50 % SOFR floor plus an interest rate margin of 3.25 % plus a credit spread adjustment of 0.10 %.

Other than the terms relating the 2022 Incremental Term Debt, the terms of the Amended Term Loan Credit Agreement remain substantially the same as the terms of the existing Term Loan Credit Agreement, including representations and warranties, covenants and events of default.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 22

Equipment Loan Facility

1 unchanged sentence

Each equipment loan is secured by a purchase money security interest in the financed equipment.

As of April 30, 2022, the equipment security notes bore interest at a weighted-average rate of 4.53 %.

The maturity dates of the equipment security notes vary, but generally have a maturity of three or four years .

We are required to make monthly installment payments under the equipment security notes.

The maturity dates of the equipment security notes varied, but generally had a maturity of three or four years and required us to make monthly installment payments.

As of July 30, 2022, one equipment security note remains outstanding with a maturity date in April 2023.

NOTE 11—FAIR VALUE MEASUREMENTS

2 unchanged sentences

The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently (Level 2).

The estimated fair value of the Term Loan Credit Agreement approximates cost as it was recently issued and the interest rate associated with the credit agreement is variable and resets frequently (Level 2).

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes were as follows:

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes and the Term Loan Credit Agreement were as follows:

(in thousands)

1 unchanged sentence

Convertible senior notes due 2024

(1) The carrying value as of April 30, 2022 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer to Note 2— Recently Issued Accounting Standards ).

Term loan B-2

(1) The carrying value of the convertible senior notes as of July 30, 2022 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer to Note 2— Recently Issued Accounting Standards ).

The carrying value as of January 29, 2022 represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity , which was required prior to the adoption of ASU 2020-06.

The carrying value in both periods excludes the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

The carrying values of the Term Loan B and Term Loan B-2 represent the outstanding amount under each class excluding discounts upon original issuance and third party offering costs.

24 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

The fair value of each of the 2023 Notes and 2024 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

The estimated fair values of the Term Loan B and Term Loan B-2 were derived from discounted cash flows using risk-adjusted rates (Level 2).

Fair Value Measurements—Non-Recurring

3 unchanged sentences

The fair value of each of the 2023 Notes and 2024 Notes related to the settlement of the early conversions was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 23

NOTE 12—INCOME TAXES

We recorded an income tax benefit of $ 163 million and an income tax expense of $ 41.7 million in the three months ended April 30, 2022 and May 1, 2021, respectively.

The 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 the effective tax rate for the three months ended April 30, 2022 as compared to the three months ended May 1, 2021 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.

As of April 30, 2022, we had $ 8.6 million of unrecognized tax benefits, of which $ 7.9 million would reduce income tax expense and the effective tax rate, if recognized.

We recorded income tax expense of $ 56 million and $ 3.0 million in the three months ended July 30, 2022 and July 31, 2021, respectively.

We recorded an income tax benefit of $ 107 million and income tax expense of $ 45 million in the six months ended July 30, 2022 and July 31, 2021, respectively.

The effective tax rate was 31.6 % and 1.3 % in the three months ended July 30, 2022 and July 31, 2021, respectively.

The effective tax rate was ( 49.6 )% and 11.1 % in the six months ended July 30, 2022 and July 31, 2021, respectively.

The increase in our effective tax rate for the three months ended July 30, 2022 as compared to the three months ended July 31, 2021 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation and amounts related to the extinguishment of debt in the three months ended July 30, 2022.

The decrease in our effective tax rate for the six months ended July 30, 2022 as compared to the six months ended July 31, 2021 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation in the six months ended July 30, 2022.

As of July 30, 2022, we had $ 8.6 million of unrecognized tax benefits, of which $ 7.9 million would reduce income tax expense and the effective tax rate, if recognized.

The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized.

As of April 30, 2022, we had $ 5.9 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

As of July 30, 2022, we had $ 5.9 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 25

NOTE 13—NET INCOME PER SHARE

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands, except share and per share amounts)

12 unchanged sentences

The warrants associated with the 2023 Notes and 2024 Notes had an impact on our dilutive share count beginning at stock prices of $ 309.84 per share and $ 338.24 per share, respectively.

The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of April 30, 2022.

Refer to Note 9— Convertible Senior Notes .

The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of July 30, 2022.

Accordingly, the warrants have no impact on our dilutive shares post-repurchase.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 24

Refer to Note 9— Convertible Senior Notes .

The following number of options and restricted stock units were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive:

THREE MONTHS ENDED

(in thousands)

SIX MONTHS ENDED

Restricted stock units

Total anti-dilutive stock-based awards

NOTE 14—SHARE REPURCHASE PROGRAM

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FINANCIAL INFORMATION

NOTE 14—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENT

Share Repurchase Program

In 2018, our Board of Directors authorized a share repurchase program.

In fiscal 2018, we repurchased approximately 2.0 million shares of our common stock under this share repurchase program at an average price of $ 122.10 per share, for an aggregate repurchase amount of approximately $ 250 million.

In fiscal 2019, we repurchased approximately 2.2 million shares of our common stock under this program at an average price of $ 115.36 per share, for an aggregate repurchase amount of approximately $ 250 million.

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

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.

On June 2, 2022, the Board of Directors authorized an additional $ 2.0 billion for the purchase of shares of our outstanding common stock, increasing the total authorized size of the share repurchase program to $ 2,450 million (the “Share Repurchase Program”).

During the second quarter of fiscal 2022, we repurchased 1,000,000 shares of our common stock under the Share Repurchase Program at an average price of $ 254.72 per share, for an aggregate repurchase amount of approximately $ 255 million.

As of July 30, 2022, $ 2,195 million remains available for future share repurchases under this program.

Share Retirement

During the second quarter of fiscal 2022, we retired 1,000,000 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $ 255 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of shareholders’ equity as of July 30, 2022.

NOTE 15—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 13 million and $ 15 million during the three months ended April 30, 2022 and May 1, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

We recorded stock-based compensation expense of $ 11 million and $ 10 million during the three months ended July 30, 2022 and July 31, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

We recorded stock-based compensation expense of $ 24 million and $ 25 million during the six months ended July 30, 2022 and July 31, 2021, respectively.

No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 25

2012 Stock Incentive Plan and 2012 Stock Option Plan

Information about stock options outstanding, vested or expected to vest, and exercisable as of April 30, 2022 is as follows:

Information about stock options outstanding, vested or expected to vest, and exercisable as of July 30, 2022 is as follows:

OPTIONS OUTSTANDING

10 unchanged sentences

Vested or expected to vest

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of April 30, 2022 was $ 889 million, $ 856 million and $ 751 million, respectively.

Stock options exercisable as of April 30, 2022 had a weighted-average remaining contractual life of 4.45 years.

As of April 30, 2022, the total unrecognized compensation expense related to unvested options was $ 97 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.63 years.

In addition, as of April 30, 2022, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 30, 2022 was $ 676 million, $ 656 million, and $ 586 million, respectively.

Stock options exercisable as of July 30, 2022 had a weighted-average remaining contractual life of 4.26 years.

As of July 30, 2022, the total unrecognized compensation expense related to unvested options was $ 90 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.44 years.

In addition, as of July 30, 2022, the total unrecognized compensation expense related to a fully vested option grant made to Mr.

Friedman in October 2020 was $ 23 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

As of April 30, 2022, we had 24,690 restricted stock units outstanding with a weighted-average grant date fair value of $ 423.88 per share.

During the three months ended April 30, 2022, 2,220 restricted stock units vested with a weighted-average grant date fair value of $ 193.82 per share.

As of April 30, 2022, there was $ 7.8 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of 4.37 years.

FINANCIAL INFORMATION

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As of July 30, 2022, we had 22,670 restricted stock units outstanding with a weighted-average grant date fair value of $ 436.17 per share.

During the three months ended July 30, 2022, 700 restricted stock units vested with a weighted-average grant date fair value of $ 51.28 per share.

During the six months ended July 30, 2022, 2,920 restricted stock units vested with a weighted-average grant date fair value of $ 159.65 per share.

As of July 30, 2022, there was $ 7.6 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 4.29 years.

Chairman and Chief Executive Officer Option Grant

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Refer to Note 18— Stock-Based Compensation in the 2021 Form 10-K.

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 5.9 million was recognized during each of the three months ended April 30, 2022 and May 1, 2021 (which is included in the stock-based compensation expense recorded during the three months ended April 30, 2022 and May 1, 2021 noted above).

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 4.3 million and $ 5.8 million was recognized during the three months ended July 30, 2022 and July 31, 2021, respectively, and $ 10 million and $ 12 million was recognized during the six months ended July 30, 2022 and July 31, 2021, respectively (which is included in the stock-based compensation expense recorded during the three and six months ended July 30, 2022 and July 31, 2021 noted above).

NOTE 16—COMMITMENTS AND CONTINGENCIES

We had no material off-balance sheet commitments as of April 30, 2022.

FINANCIAL INFORMATION

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We had no material off balance sheet commitments as of July 30, 2022.

Contingencies

We are involved in lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of our business.

These disputes are increasing in number as the business expands and we grow larger.

Litigation is inherently unpredictable.

As a result, the outcome of matters in which we are involved could result in unexpected expenses and liability that could adversely affect our operations.

In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of our senior leadership team’s time and result in the diversion of significant operational resources.

We review the need for any loss contingency reserves and establish reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated.

Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time.

We are subject to contingencies, including in connection with lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of our business.

These disputes are increasing in number as we expand our business and provide new product and service offerings, such as restaurants and hospitality, and as we enter new markets and legal jurisdictions and face increased complexity related to compliance and regulatory requirements.

In addition, we are subject to governmental and regulatory examinations, information requests, and investigations from time to time at the state and federal levels.

With respect to such matters and others, we review the need for any loss contingency reserves and establish reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated.

In view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time.

When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time.

Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on our condensed consolidated financial statements, the outcome of legal matters is subject to inherent uncertainty.

Certain legal proceedings that we currently face involve various class-action allegations regarding employment practices, including under state wage-and-hour laws.

We have faced similar litigation in the past.

Due to the inherent difficulty of predicting the course of legal actions related to these class-action allegations, such as the eventual scope, duration or outcome, we are unable to estimate the amount or range of any potential loss that could result from an unfavorable outcome arising from such matters.

Although we are self-insured or maintain deductibles in the United States for workers’ compensation, general liability and product liability up to predetermined amounts, above which third party insurance applies, depending on the facts and circumstances of the underlying claims, coverage under our insurance policies may not be available.

Even if we believe coverage does apply under our insurance programs, our insurance carriers may dispute coverage based on the underlying facts and circumstances.

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FINANCIAL INFORMATION

As a result, the outcome of any matters in which we are involved could result in unexpected expenses and liability that could adversely affect our operations.

In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of our senior leadership team’s time, result in the diversion of significant operational resources, and require changes to our business operations, policies and practices.

NOTE 17—SEGMENT REPORTING

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We use operating income to evaluate segment profitability for the retail operating segments and allocate resources.

Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other income—net, income tax expense (benefit) and our share of equity method investments losses.

Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other expense—net, income tax expense (benefit) and our share of equity method investments losses.

Segment operating income excludes (i) employer payroll tax expense related to the option exercise by Mr.

Friedman, (ii) asset impairments, (iii) non-cash compensation amortization related to the fully vested option grant made to Mr.

Friedman in October 2020 and (iv) professional fee related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ).

Friedman, (ii) asset impairments, (iii) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr.

Friedman in October 2020, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ), (v) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vi) product recalls and (vii) severance costs associated with reorganizations.

These items are excluded from segment operating income in order to provide better transparency of segment operating results.

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FINANCIAL INFORMATION

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The following table presents segment operating income and income before income taxes:

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

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Employer payroll taxes on option exercise

Professional fee

Asset impairments

Non-cash compensation

Asset impairments

Professional fees

Compensation settlements

Recall accrual

Reorganization related costs

Income from operations

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Loss on extinguishment of debt

Other income—net

Other expense—net

Income before income taxes

The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting :

The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting :

THREE MONTHS ENDED

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Depreciation and amortization

In the three months ended April 30, 2022 and May 1, 2021, the Real Estate Development segment share of equity method investments losses were $ 1.4 million and $ 2.1 million, respectively.

SIX MONTHS ENDED

(in thousands)

Depreciation and amortization

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FINANCIAL INFORMATION

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In the three months ended July 30, 2022 and July 31, 2021, the Real Estate Development segment share of equity method investments losses were $ 2.8 million and $ 2.5 million, respectively, and were $ 4.2 million and $ 4.6 million in the six months ended July 30, 2022 and July 31, 2021, respectively.

For both the three and six months ended July 30, 2022, our share of equity method investments for the Waterworks segment was immaterial.

The following table presents the balance sheet metrics as required under ASC 280— Segment Reporting :

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THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

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We are domiciled in the United States and primarily operate our retail locations and outlets in the United States.

As of April 30, 2022, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

As of July 30, 2022, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

Geographic revenues in Canada and the U.K.

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Long-lived assets held internationally were not material in any fiscal period presented.

No single customer accounted for 10 % or more of our consolidated net revenues in the three months ended April 30, 2022 or May 1, 2021.

No single customer accounted for 10% or more of our consolidated net revenues in any fiscal period presented.

FINANCIAL INFORMATION

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

What changed 10-Q

Item 1. Financial Statements