What changed in this filing

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Item 1. Financial Statements

2022-12-08 compared with 2022-09-08 · 262 added, 180 removed, 612 unchanged (42% of the section changed)

3 unchanged sentences

Cash and cash equivalents

Restricted cash (Note 5)

Accounts receivable—net

19 unchanged sentences

Term loan B-2—net

Real estate loans (Note 5)

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 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;

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

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 23,609,536 shares issued and outstanding as of October 29, 2022;

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

6 unchanged sentences

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share amounts)

16 unchanged sentences

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

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FINANCIAL INFORMATION

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net gains (losses) from foreign currency translation

Total comprehensive income

Net losses from foreign currency translation

Comprehensive income

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

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

5 unchanged sentences

(in thousands, except share amounts)

Balances—April 30, 2022

Balances—July 30, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

1 unchanged sentence

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—October 29, 2022

Balances—July 31, 2021

Balances—May 1, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

2 unchanged sentences

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

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

Net losses from foreign currency translation

Balances—July 31, 2021

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Balances—October 30, 2021

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

SIX MONTHS ENDED

NINE MONTHS ENDED

TREASURY STOCK

18 unchanged sentences

Net losses from foreign currency translation

Balances—July 30, 2022

Balances—October 29, 2022

Balances—January 30, 2021

5 unchanged sentences

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

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

Net gains from foreign currency translation

Balances—July 31, 2021

Balances—October 30, 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

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

4 unchanged sentences

Asset impairments

Gain on sale of building and land

Amortization of debt discount

21 unchanged sentences

Capital expenditures

Proceeds from sale of asset

Equity method investments

Net cash used in investing activities

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

2 unchanged sentences

Repayments under term loans

Borrowings under real estate loans

Repayments under real estate loans

Repayments under promissory and equipment security notes

1 unchanged sentence

Repayment under convertible senior notes repurchase obligation

Debt extinguishment costs

Debt issuance costs

5 unchanged sentences

Tax withholdings related to issuance of stock-based awards

Net cash used in financing activities

Net cash provided by (used in) financing activities

Effects of foreign currency exchange rate translation

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

Cash and cash equivalents and restricted cash equivalents

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

Cash and cash equivalents, restricted cash and restricted cash equivalents

Beginning of period—cash and cash equivalents

Beginning of period—restricted cash equivalents (acquisition related escrow deposits)

Beginning of period—cash and cash equivalents

Beginning of period—cash and cash equivalents, restricted cash and restricted cash equivalents

End of period—cash and cash equivalents

End of period—restricted cash

End of period—restricted cash equivalents (acquisition related escrow deposits)

End of period—cash and cash equivalents and restricted cash equivalents

End of period—cash and cash equivalents, restricted cash and restricted cash equivalents

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands) (Unaudited)

NINE MONTHS ENDED

(in thousands)

Non-cash transactions:

Property and equipment additions in accounts payable and accrued expenses at period-end

Property and equipment additions acquired under real estate loans

Landlord asset additions in accounts payable and accrued expenses at period-end

4 unchanged sentences

Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes

Conversion of loan receivables into equity of variable interest entities (Note 5)

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

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FINANCIAL INFORMATION

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books.

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

As of 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.

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

As of October 29, 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.

In September 2022, we opened our first RH Guesthouse in New York.

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 July 30, 2022, and the results of operations for the three and six months ended July 30, 2022 and July 31, 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 October 29, 2022, and the results of operations for the three and nine months ended October 29, 2022 and October 30, 2021.

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

The condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance.

Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.

Noncontrolling interests represent third-party interests in the net assets under VIEs determined by applying the hypothetical liquidation at book value methodology.

Noncontrolling interests in VIEs are immaterial as of October 29, 2022.

Refer to Note 5— Variable Interest Entities .

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.

3 unchanged sentences

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, and 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 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.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and nine months ended October 29, 2022.

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 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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The results of operations for the three and nine months ended October 29, 2022 and October 30, 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

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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.

Macro-Economic Factors and COVID-19 Pandemic

2 unchanged sentences

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.

We believe that these macro-economic factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.

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 toward travel and leisure and other areas.

While our performance during the pandemic demonstrates the desirability of our exclusive products, consumer spending have shifted away from spending on the home and home-related categories toward travel and leisure and other areas.

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 macro-economic factors and the pandemic.

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

Refer to the section entitled “Risk Factors” in our 2021 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

7 unchanged sentences

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.

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FINANCIAL INFORMATION

We adopted ASU 2020-06 in the first quarter of fiscal 2022 using a modified retrospective transition method.

7 unchanged sentences

Retained earnings

FINANCIAL INFORMATION

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Reference Rate Reform

7 unchanged sentences

The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022.

All new arrangements are using alternative reference rates and we are evaluating the impact of adoption on our existing contracts.

All new arrangements are using alternative reference rates and we are evaluating the impact of adoption on our existing contracts, including with respect to our asset based credit facility and Term Loan B (as defined in Note 10 — Credit Facilities ), which we anticipate amending in the fourth quarter of fiscal 2022 to reference SOFR.

New Accounting Standards or Updates Not Yet Adopted

Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued ASU 2022-04 — Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”).

ASU 2022-04 requires entities to disclose the program’s nature, activity during the period, changes from period to period and potential magnitude.

Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented.

With the exception of the disclosure of rollforward information, the guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied retrospectively to all periods for which a balance sheet is presented.

The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and is required to be applied prospectively.

We are evaluating the impact that ASU 2022-04 will have on our consolidated financial statements and related disclosures, but do not believe the adoption will impact our financial condition, results of operations or cash flows.

FINANCIAL INFORMATION

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NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

2 unchanged sentences

Federal and state tax receivable (1)

Prepaid expense and other current assets

Promissory notes receivable, including interest (2)

Vendor deposits

Other current assets

Capitalized catalog costs

Vendor deposits

Prepaid expenses

Tenant allowance receivable

Value added tax (VAT) receivable

Right of return asset for merchandise

3 unchanged sentences

(2) Represents promissory notes, including principal and accrued interest, due from a related party.

Refer to Note 5— Equity Method Investments .

Refer to Note 5— Variable Interest Entities .

Other non-current assets consist of the following:

7 unchanged sentences

Total other non-current assets

(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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(1) Presented net of accumulated amortization of $ 8.8 million and $ 4.0 million as of October 29, 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 six months ended July 30, 2022:

(in thousands)

3 unchanged sentences

(1) Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2) Presented net of an impairment charge of $ 35 million recognized in previous fiscal years.

NOTE 5—EQUITY METHOD INVESTMENTS

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.

(2) Presented net of an impairment charge of $ 35 million recognized in prior fiscal years.

NOTE 5—VARIABLE INTEREST ENTITIES

Equity Method Investments

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”) that 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.

These investments meet the criteria of VIEs, however, we are not the primary beneficiary of these arrangements.

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.

As of October 29, 2022 and January 29, 2022, $ 8.8 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.

Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity capital contributed as of October 29, 2022.

During the three months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $ 1.9 million and $ 2.3 million, respectively, which is included on 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 nine months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $ 6.1 million and $ 6.9 million, respectively.

During the three and nine months ended October 29, 2022 and October 30, 2021, we did no t receive any distributions or have any undistributed earnings of equity method investments.

Consolidated Variable Interest Entities and Noncontrolling Interests

In the third quarter of fiscal 2022, we formed two real estate development limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for the purpose of acquiring, developing, operating and selling certain real estate projects, one of which is intended to be a future RH Design Gallery.

We hold a 50 percent membership interest in each Member LLC, and the remaining 50 percent is held by an affiliate of the managing member of the Aspen LLCs.

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We have determined that each Member LLC is a VIE and that the power to direct the most significant activities of each Member LLC is shared amongst related parties.

We have determined that we are most closely associated with each Member LLC, and, accordingly, consolidate the results of operations, financial condition and cash flows of the Member LLCs in our condensed consolidated financial statements.

Noncontrolling interests in the consolidated variable interest entities are measured using the hypothetical liquidation at book value methodology.

Noncontrolling interests in consolidated variable interest entities are immaterial as of October 29, 2022.

As of October 29, 2022, $ 27 million of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member of the Member LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

The promissory notes outstanding as of October 29, 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 into equity in future privately-held limited liability companies for real estate development activities related to our Gallery transformation and global expansion strategies.

Restricted Cash

As of October 29, 2022, $ 3.9 million of restricted cash deposits are held in escrow for one Member LLC, which escrow balances are included in restricted cash on the condensed consolidated balance sheets.

The escrow represents a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for expenditures that qualify as tenant improvements under an allowance specified in a lease agreement between us and the Member LLC.

Real Estate Loans

On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $ 2.0 million with a maturity date of August 1, 2032.

The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00 %.

In addition, we entered into an immaterial loan with the Member LLC that is eliminated upon consolidation.

On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $ 16 million with a maturity date of September 9, 2032.

The Promissory Note bears interest at a fixed rate per annum equal to 5.37 % until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00 %, subject to a total interest rate 3.00 % floor.

These real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

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FINANCIAL INFORMATION

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

6 unchanged sentences

Accrued sales taxes

Accrued catalog costs

Accrued interest

Accrued professional fees

Accrued catalog costs

Other accrued expenses

2 unchanged sentences

(in thousands)

Allowance for sales returns

Unredeemed gift card and merchandise credit liability

Current portion of term loans

Allowance for sales returns

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 July 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 October 29, 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.

2 unchanged sentences

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 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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During the three months ended October 29, 2022 and October 30, 2021, we recognized $ 5.0 million and $ 4.4 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the nine months ended October 29, 2022 and October 30, 2021, we recognized $ 16 million and $ 14 million, respectively, of revenue related to previous deferrals related to our gift cards.

FINANCIAL INFORMATION

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

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.

Breakage of $ 0.7 million and $ 0.5 million was recorded in net revenues in the three months ended October 29, 2022 and October 30, 2021, respectively.

Breakage of $ 1.8 million and $ 1.4 million was recorded in net revenues in the nine months ended October 29, 2022 and October 30, 2021, respectively.

We expect that approximately 70 % of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.

3 unchanged sentences

Unrecognized tax benefits

Non-current portion of equipment promissory notes—net

Other non-current obligations

3 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE 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 $ 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.

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 any 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 $ 3.4 million and $ 6.9 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 15 million and $ 19 million for the nine months ended October 29, 2022 and October 30, 2021, respectively, as well as charges associated with common area maintenance of $ 2.3 million and $ 2.2 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 6.9 million and $ 6.6 million for the nine months ended October 29, 2022 and October 30, 2021, respectively.

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

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FINANCIAL INFORMATION

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

17 unchanged sentences

Total lease liabilities

(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 $ 198 million and $ 174 million as of July 30, 2022 and January 29, 2022, respectively.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 211 million and $ 174 million as of October 29, 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

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

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The maturities of lease liabilities are as follows as of October 29, 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 $ 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.

Total lease payments exclude $ 640 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of October 29, 2022, of which $ 5.0 million, $ 25 million, $ 36 million, $ 39 million, $ 40 million and $ 38 million will be paid in the remainder of fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 457 million will be paid subsequent to fiscal 2027.

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

1 unchanged sentence

Supplemental information related to leases consists of the following:

SIX MONTHS ENDED

(in thousands)

NINE MONTHS ENDED

Weighted-average remaining lease term (years)

4 unchanged sentences

Finance leases

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FINANCIAL INFORMATION

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Other information related to leases consists of the following:

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

10 unchanged sentences

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.

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

NOTE 9—CONVERTIBLE SENIOR NOTES

4 unchanged sentences

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.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 21

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

3 unchanged sentences

Total convertible senior notes

18 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

(1) As of October 29, 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 July 30, 2022, the 2023 Notes outstanding are current liabilities and are classified as convertible senior notes due 2023—net.

(2) As of October 29, 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 July 30, 2022, the 2024 Notes outstanding are non-current liabilities and are classified as convertible senior notes due 2024—net.

(3) As of October 29, 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.

1 unchanged sentence

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 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 on 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 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 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 on 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.

22 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

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”).

5 unchanged sentences

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 expense—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 on 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 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”) .

5 unchanged sentences

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.

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 on the condensed consolidated statements of income.

$ 350 million 0.00 % Convertible Senior Notes due 2024

4 unchanged sentences

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.

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

2022 THIRD QUARTER FORM 10-Q | 23

During the nine months ended October 29, 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 nine months ended October 29, 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 the 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.

$ 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 September 30, 2022.

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

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

1 unchanged sentence

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.

During the nine months ended October 29, 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 nine months ended October 29, 2022, we paid $ 9.4 million in cash and delivered 27,220 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 12 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 current obligation on our condensed consolidated balance sheets since the settlement of the outstanding 2023 Notes is due on June 15, 2023.

The remaining liability for the 2023 Notes is classified as a current obligation on the 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.

24 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

NOTE 10—CREDIT FACILITIES

6 unchanged sentences

Total credit facilities

(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.

(1) The interest rates for the asset based credit facility, term loans and equipment promissory note represent the weighted-average interest rates as of October 29, 2022.

(2) Deferred financing fees associated with the asset based credit facility as of October 29, 2022 and January 29, 2022 were $ 3.4 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.

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 $ 1,961 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.

(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.

(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 474 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of October 29, 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

7 unchanged sentences

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

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 25

The availability of credit at any given time under the ABL Credit Agreement will be constrained by the terms and conditions of the ABL Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ABL Credit Agreement.

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

As of October 29, 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 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.

As of October 29, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 578 million, net of $ 25 million in outstanding letters of credit.

Term Loan Credit Agreement

5 unchanged sentences

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

26 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

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”).

8 unchanged sentences

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.

6 unchanged sentences

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.

As of October 29, 2022, one equipment security note remains outstanding with a maturity date in April 2023.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 27

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 real estate loans approximate their carrying values as they were recently issued.

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

3 unchanged sentences

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 ).

(1) The carrying value of the convertible senior notes as of October 29, 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.

1 unchanged sentence

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.

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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).

5 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).

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FINANCIAL INFORMATION

NOTE 12—INCOME TAXES

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.

We recorded income tax expense of $ 36 million and $ 54 million in the three months ended October 29, 2022 and October 30, 2021, respectively.

We recorded an income tax benefit of $ 71 million and income tax expense of $ 99 million in the nine months ended October 29, 2022 and October 30, 2021, respectively.

The effective tax rate was 26.8 % and 22.8 % in the three months ended October 29, 2022 and October 30, 2021, respectively.

The effective tax rate was ( 20.2 )% and 15.5 % in the nine months ended October 29, 2022 and October 30, 2021, respectively.

The increase in our effective tax rate for the three months ended October 29, 2022 as compared to the three months ended October 30, 2021 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in the three months ended October 29, 2022.

The decrease in our effective tax rate for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation in the nine months ended October 29, 2022.

As of October 29, 2022, we had $ 8.2 million of unrecognized tax benefits, of which $ 7.6 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 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

As of October 29, 2022, we had $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

Inflation Reduction Act

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S.

corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income” and a one percent excise tax on net repurchases of stock after December 31, 2022.

We are continuing to evaluate the Inflation Reduction Act and its requirements, including the application to our business.

NOTE 13—NET INCOME PER SHARE

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share amounts)

Loss on extinguishment of debt

Net income available to common shareholders (1)

Net income available to common stockholders (1)

Weighted-average shares—basic

5 unchanged sentences

(1) Effective the first quarter of fiscal 2022 upon adoption of ASU 2020-06, the loss on extinguishment of debt related to convertible securities is added back to net income to calculate net income per share.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 29

(2) We adopted ASU 2020-06 in the first quarter of fiscal 2022, and the adoption requires the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes to be determined under the if-converted method which assumes share settlement of the entire convertible debt instrument.

2 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 July 30, 2022.

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 October 29, 2022.

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

2 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Restricted stock units

Total anti-dilutive stock-based awards

26 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

NOTE 14—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENT

2 unchanged sentences

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.

During the nine months ended October 29, 2022, we repurchased 1,127,557 shares of our common stock under the Share Repurchase Program at an average price of $ 254.02 per share, for an aggregate repurchase amount of approximately $ 286 million.

As of October 29, 2022, $ 2,164 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.

During the nine months ended October 29, 2022, we retired 1,127,557 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 $ 286 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity as of October 29, 2022.

NOTE 15—STOCK-BASED COMPENSATION

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.

We recorded stock-based compensation expense of $ 10 million and $ 12 million during the three months ended October 29, 2022 and October 30, 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 $ 34 million and $ 37 million during the nine months ended October 29, 2022 and October 30, 2021, respectively.

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

2012 Stock Incentive Plan and 2012 Stock Option Plan

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

The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012.

The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.

30 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors.

Aside from these options granted on November 1, 2012, no other awards were granted under the Option Plan.

As of January 29, 2022, there were a total of 1,185,322 shares issuable under the Stock Incentive Plan.

On January 31, 2022, an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 1,615,461 .

Awards under the plans reduce the number of shares available for future issuance.

Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increase the number of shares available for future issuance.

Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance.

On October 31, 2022, both the Stock Incentive Plan and Option Plan expired.

Upon expiration of the Stock Incentive Plan, a total of 1,607,508 shares that were available for future issuance under the plan were cancelled and are no longer available for the grant of awards under the plan.

Information about stock options outstanding, vested or expected to vest, and exercisable as of October 29, 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 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.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 29, 2022 was $ 588 million, $ 574 million, and $ 517 million, respectively.

Stock options exercisable as of October 29, 2022 had a weighted-average remaining contractual life of 4.03 years.

As of October 29, 2022, the total unrecognized compensation expense related to unvested options was $ 91 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.39 years.

In addition, as of October 29, 2022, the total unrecognized compensation expense related to a fully vested option grant made to Mr.

Friedman in October 2020 was $ 19 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

As of October 29, 2022, we had 24,390 restricted stock units outstanding with a weighted-average grant date fair value of $ 437.37 per share.

During the three months ended October 29, 2022, 1,780 restricted stock units vested with a weighted-average grant date fair value of $ 49.53 per share.

During the nine months ended October 29, 2022, 4,700 restricted stock units vested with a weighted-average grant date fair value of $ 117.94 per share.

As of October 29, 2022, there was $ 7.7 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 4.49 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.

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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 $ 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).

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 4.1 million and $ 5.8 million was recognized during the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 14 million and $ 18 million was recognized during the nine months ended October 29, 2022 and October 30, 2021, respectively (which is included in the stock-based compensation expense recorded during the three and nine months ended October 29, 2022 and October 30, 2021 noted above).

NOTE 16—COMMITMENTS AND CONTINGENCIES

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

We had no material off balance sheet commitments as of October 29, 2022.

Contingencies

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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.

Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on the 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.

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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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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.

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NOTE 17—SEGMENT REPORTING

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We have three operating segments:

RH Segment, Waterworks and Real Estate Development.

The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, websites, Source Books, and the commercial channel.

The Real Estate Development segment represents operations associated with our equity method investments (refer to Note 5— Equity Method Investments ).

RH Segment, Waterworks and Real Estate.

The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, including hospitality, websites, Source Books, and the Trade and Contract channel.

The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 5— Variable Interest Entities ).

The retail operating segments are strategic business units that offer products for the home furnishings customer.

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Segment Information

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

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

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) 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.

Segment operating income excludes (i) asset impairments, (ii) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr.

Friedman in October 2020, (iii) employer payroll tax expense related to the option exercise by Mr.

Friedman, (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, (vii) favorable legal settlement, (viii) gain on sale of building and land, and (ix) 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

NINE MONTHS ENDED

(in thousands)

Operating income:

Employer payroll taxes on option exercise

Non-cash compensation

Asset impairments

Non-cash compensation

Employer payroll taxes on option exercise

Professional fees

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Recall accrual

Legal settlement

Gain on sale of building and land

Reorganization related costs

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Depreciation and amortization

SIX MONTHS ENDED

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NINE MONTHS ENDED

(in thousands)

Depreciation and amortization

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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 statements of income metrics for the Real Estate segment were immaterial in the three and nine months ended October 29, 2022 and, therefore, such results are presented within the RH Segment for the respective periods.

In the three months ended October 29, 2022 and October 30, 2021, the Real Estate segment share of equity method investments losses were $ 1.9 million and $ 2.3 million, respectively, and were $ 6.1 million and $ 6.9 million in the nine months ended October 29, 2022 and October 30, 2021, respectively.

For both the three and nine months ended October 29, 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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(1) The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2) Presented net of an impairment charge of $ 35 million recognized in previous fiscal years.

(2) Presented net of an impairment charge of $ 35 million recognized in prior fiscal years.

We classify our sales into furniture and non-furniture product lines.

Furniture includes both indoor and outdoor furniture.

Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor.

Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor, as well as our hospitality operations.

Net revenues in each category were as follows:

THREE MONTHS ENDED

SIX MONTHS ENDED

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

As of October 29, 2022, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

Geographic revenues in Canada and the U.K.

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FINANCIAL INFORMATION

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NOTE 18—SUBSEQUENT EVENTS

In December 2022, we entered into investments in VIEs with an affiliate of the managing member of the Aspen LLCs.

We converted $ 27 million of promissory notes receivable and accrued interest as of October 29, 2022 into an equity contribution of one of the limited liability companies (“LLC”) to acquire 50 percent of the membership interests in the LLC.

Additionally, we entered into four separate LLCs by which we contributed three owned properties in certain domestic locations, each for a 50 percent membership interest in the respective LLC, as well as one owned property in the United Kingdom.

Due to the close proximity of the acquisition date to the filing date of our Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2022, the accounting for these recently completed VIEs is incomplete.

Such information will be included in our Annual Report on Form 10-K for the year ending January 28, 2023.

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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