What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-08 · 217 added, 187 removed, 393 unchanged (51% of the section changed)

5 unchanged sentences

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

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended July 30, 2022 and a comparison to the three and six months ended July 31, 2021.

The discussion related to cash flows for the six months ended July 31, 2021 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended July 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on September 9, 2021.

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

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and nine months ended October 29, 2022, and a comparison to the three and nine months ended October 30, 2021.

The discussion related to cash flows for the nine months ended October 30, 2021 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended October 30, 2021, filed with the Securities and Exchange Commission (“SEC”) on December 9, 2021.

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

Our MD&A is organized as follows:

8 unchanged sentences

This section provides a summary of recent authoritative accounting pronouncements that have been adopted in fiscal 2022 and that will be adopted in future periods.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 37

FORWARD-LOOKING STATEMENTS AND MARKET DATA

3 unchanged sentences

These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “short-term,” “non-recurring,” “one-time,” “unusual,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

32 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected.

1 unchanged sentence

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

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the section entitled Risk Factors in our 2021 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2022 (the “First Quarter Form 10-Q”) and in our 2021 Form 10-K.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the section entitled Risk Factors in our 2021 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly periods ended April 30, 2022 (the “First Quarter Form 10-Q”), July 30, 2022 (the “Second Quarter Form 10-Q”) and in our 2021 Form 10-K.

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

5 unchanged sentences

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

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

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

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

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

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

We operate our retail locations throughout the United States, Canada, and the U.K., and have an integrated RH Hospitality experience in 14 of our Design Gallery locations, which includes Restaurants and Wine Bars.

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

In addition, we opened our first RH Guesthouse in New York in September 2022, a first-of-its-kind hospitality experience for travelers seeking privacy and luxury.

The property features six guest rooms, three guest suites, a private residence as well as The Dining Room & Terrace.

The RH Guesthouse Champagne & Caviar Bar is expected to open in 2023.

38 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

As of October 29, 2022, we operated the following number of locations:

Design Galleries

8 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.

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 33

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 patterns 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.

11 unchanged sentences

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

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

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

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

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

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 39

Brand Elevation .

8 unchanged sentences

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

Externally, our strategy comes to life digitally with The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

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

Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

Launched in the spring of 2022, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable.

We expect to continue to elevate the customer experience on The World of RH with further enhancements to content, navigation and search functionality.

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

34 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Global Expansion .

3 unchanged sentences

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

40 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Basis of Presentation and Results of Operations

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

11 unchanged sentences

Share of equity method investments losses

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 35

Non-GAAP Financial Measures

7 unchanged sentences

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

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 41

Adjusted Operating Income .

3 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

5 unchanged sentences

Operating income

Employer payroll taxes on option exercise (2)

Non-cash compensation (3)

Asset impairments (2)

Non-cash compensation (3)

Employer payroll taxes on option exercise (4)

Professional fees (5)

1 unchanged sentence

Recall accrual (7)

Legal settlements (8)

Gain on sale of building and land (9)

Reorganizational related costs (10)

Adjusted operating income

(1) Refer to discussion “Three Months Ended July 30, 2022 Compared to Three Months Ended July 31, 2021” and “Six Months Ended July 30, 2022 Compared to Six Months Ended July 31, 2021” below for a discussion of our results of operations for the three and six months ended July 30, 2022 and July 31, 2021.

36 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

Friedman in the first quarter of fiscal 2022.

(1) Refer to discussion “Three Months Ended October 29, 2022 Compared to Three Months Ended October 30, 2021” and “Nine Months Ended October 29, 2022 Compared to Nine Months Ended October 30, 2021” below for a discussion of our results of operations for the three and nine months ended October 29, 2022 and October 30, 2021.

(2) The three and nine months ended October 29, 2022 include inventory impairment of $11 million.

The nine months ended October 29, 2022 also includes asset impairment related to property and equipment of Galleries under construction, as well as lease impairment of $1.0 million due to the early exit of a leased facility.

The nine months ended October 30, 2021 represents asset impairments.

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

Friedman in October 2020.

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

The three and six months ended July 30, 2022 includes lease impairment of $1.0 million due to the early exit of a leased facility.

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

Friedman in the first quarter of fiscal 2022.

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

1 unchanged sentence

(7) Represents accruals associated with product recalls.

(8) Represents a favorable legal settlement associated with a lease arrangement.

(9) Represents gain on sale of building and land.

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

42 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Adjusted Net Income .

3 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

1 unchanged sentence

Loss on extinguishment of debt (1)

Employer payroll taxes on option exercise (1)

Non-cash compensation (1)

Asset impairments (1)

Non-cash compensation (1)

Employer payroll taxes on option exercise (1)

Professional fees (1)

1 unchanged sentence

Recall accrual (1)

(Gain) loss on derivative instruments—net (2)

Legal settlements (1)

Gain on derivative instruments—net (2)

Gain on sale of building and land (1)

Amortization of debt discount (3)

5 unchanged sentences

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

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

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 37

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

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

1 unchanged sentence

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

Amounts were presented net of interest capitalized for capital projects of $2.9 million and $5.6 million during the three and six months ended July 31, 2021, respectively.

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

(4) The adjustment for both the three and six months ended July 30, 2022 is based on an adjusted tax rate of 0.0%, which represents our expected cash tax liability associated with anticipated fiscal 2022 results as we do not expect to pay taxes for fiscal 2022 due to the tax benefits primarily resulting from Mr.

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

The adjustment for the three and six months ended July 31, 2021 is based on an adjusted tax rate of 1.3% and 9.3%, respectively, which excludes the tax impact associated with our share of equity method investments losses.

38 | 2022 SECOND QUARTER FORM 10-Q

Amounts were presented net of interest capitalized for capital projects of $2.8 million and $8.4 million during the three and nine months ended October 30, 2021, respectively.

No amortization of the debt discounts were recognized during the three and nine months ended October 29, 2022, since we recombined the previously outstanding equity component of the 2023 Notes and 2024 Notes upon the adoption of ASU 2020-06.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 43

(4) The adjustment for both the three and nine months ended October 29, 2022 is based on an adjusted tax rate of 0.0%, which represents our expected cash tax liability associated with anticipated fiscal 2022 results as we do not expect to pay taxes for fiscal 2022 due to the tax benefits primarily resulting from Mr.

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

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

EBITDA and Adjusted EBITDA .

4 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

4 unchanged sentences

Non-cash compensation (2)

Employer payroll taxes on option exercise (1)

Asset impairments (1)

Employer payroll taxes on option exercise (1)

Professional fees (1)

Share of equity method investments losses (1)

Compensation settlements (1)

Capitalized cloud computing amortization (3)

Compensation settlements (1)

Other expense—net (1)

Recall accrual (1)

Legal settlements (1)

Gain on sale of building and land (1)

Reorganization related costs (1)

3 unchanged sentences

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

44 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 39

Adjusted Capital Expenditures.

2 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

3 unchanged sentences

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

SIX MONTHS ENDED

NINE MONTHS ENDED

SELLING SQUARE

(in thousands)

(square footage in thousands)

Beginning of period

2 unchanged sentences

Dallas Design Gallery

Oak Brook Design Gallery

RH Modern Galleries:

3 unchanged sentences

RH Legacy Galleries:

Tysons legacy Gallery (relocation)

San Francisco legacy Gallery

Dallas legacy Gallery

Oak Brook legacy Gallery

End of period

4 unchanged sentences

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

Leased selling square footage includes approximately 4,800 square feet as of July 31, 2021 related to one owned retail location.

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

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

40 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Three Months Ended July 30, 2022 Compared to Three Months Ended July 31, 2021

2022 THIRD QUARTER FORM 10-Q | 45

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

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

In addition, we operated one RH Guesthouse with leased square footage of approximately 24,800 square feet as of October 29, 2022.

Three Months Ended October 29, 2022 Compared to Three Months Ended October 30, 2021

THREE MONTHS ENDED

3 unchanged sentences

Income from operations

Consolidated net revenues increased $2.8 million, or 0.3%, to $992 million in the three months ended July 30, 2022 compared to $989 million in the three months ended July 31, 2021.

(1) The results for the Real Estate segment were immaterial in the three months ended October 29, 2022 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in the three months ended October 29, 2022.

Refer to Note 17— Segment Reporting in our condensed consolidated financial statements.

Consolidated net revenues decreased $137 million, or 13.6%, to $869 million in the three months ended October 29, 2022 compared to $1,006 million in the three months ended October 30, 2021.

RH Segment net revenues

RH Segment net revenues decreased $7.4 million, or 0.8%, to $940 million in the three months ended July 30, 2022 compared to $948 million in the three months ended July 31, 2021.

RH Segment net revenues decreased $144 million, or 14.9%, to $821 million in the three months ended October 29, 2022 compared to $965 million in the three months ended October 30, 2021.

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

The decrease in RH Segment net revenues for the three months ended July 30, 2022 was driven primarily by softening demand trends, which began in the first quarter of fiscal 2022, and have remained below prior year trends during the second quarter of fiscal 2022.

This decrease was partially offset by backlog relief, as well as increased revenue in our RH Hospitality business compared to the three months ended July 31, 2021 due to new Restaurant openings in fiscal 2021 and fiscal 2022.

Outlet sales were $69 million in both the three months ended July 30, 2022 and July 31, 2021.

The decrease in RH Segment net revenues for the three months ended October 29, 2022 was driven primarily by softening demand trends, which began in the first quarter of fiscal 2022, and have remained below prior year trends for the balance of fiscal 2022.

This decrease was partially offset by backlog relief, as well as increased revenue in our RH Hospitality business compared to the three months ended October 30, 2021 due to new Restaurant openings in the second half of fiscal 2021 and fiscal 2022.

Outlet sales decreased $13 million to $64 million in the three months ended October 29, 2022 compared to $77 million in the three months ended October 30, 2021.

Waterworks net revenues

Waterworks net revenues increased $10 million, or 24.7%, to $51 million in the three months ended July 30, 2022 compared to $41 million in the three months ended July 31, 2021.

Consolidated gross profit increased $36 million, or 7.3%, to $523 million in the three months ended July 30, 2022 compared to $488 million in the three months ended July 31, 2021.

As a percentage of net revenues, consolidated gross margin increased 350 basis points to 52.8% of net revenues in the three months ended July 30, 2022 from 49.3% of net revenues in the three months ended July 31, 2021.

Waterworks net revenues increased $6.2 million, or 15.0%, to $48 million in the three months ended October 29, 2022 compared to $42 million in the three months ended October 30, 2021.

Consolidated gross profit decreased $85 million, or 16.7%, to $421 million in the three months ended October 29, 2022 compared to $505 million in the three months ended October 30, 2021.

As a percentage of net revenues, consolidated gross margin decreased 180 basis points to 48.4% of net revenues in the three months ended October 29, 2022 from 50.2% of net revenues in the three months ended October 30, 2021.

46 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

RH Segment gross profit for the three months ended October 29, 2022 was negatively affected by $11 million of inventory impairment.

Excluding the asset impairment adjustment, consolidated gross margin would have decreased 50 basis points to 49.7% of net revenues in the three months ended October 29, 2022 from 50.2% of net revenues in the three months ended October 30, 2021.

RH Segment gross profit

RH Segment gross profit increased $28 million, or 6.0%, to $495 million in the three months ended July 30, 2022 from $467 million in the three months ended July 31, 2021.

As a percentage of net revenues, RH Segment gross margin increased 340 basis points to 52.7% of net revenues in the three months ended July 30, 2022 from 49.3% of net revenues in the three months ended July 31, 2021.

The increase in gross margin was primarily driven by an increase in product margins in the Core business, as well as leverage in our shipping costs during the three month period ended July 30, 2022, offset by increases in retail occupancy costs due to new Gallery openings in fiscal 2021 and fiscal 2022.

RH Segment gross profit decreased $89 million, or 18.5%, to $395 million in the three months ended October 29, 2022 from $484 million in the three months ended October 30, 2021.

As a percentage of net revenues, RH Segment gross margin decreased 210 basis points to 48.1% of net revenues in the three months ended October 29, 2022 from 50.2% of net revenues in the three months ended October 30, 2021.

Excluding the $11 million asset impairment adjustment, RH Segment gross margin would have decreased 80 basis points to 49.4% of net revenues in the three months ended October 29, 2022 from 50.2% of net revenues in the three months ended October 30, 2021.

The decrease in gross margin was primarily driven by deleverage in fixed occupancy costs, partially offset by an increase in product margins in the Core business, as well as leverage in our shipping costs during the three months ended October 29, 2022.

Waterworks gross profit

Waterworks gross profit increased $7.5 million, or 36.6%, to $28 million in the three months ended July 30, 2022 from $21 million in the three months ended July 31, 2021.

As a percentage of net revenues, Waterworks gross margin increased 470 basis points to 54.7% of net revenues in the three months ended July 30, 2022 from 50.0% of net revenues in the three months ended July 31, 2021.

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 41

Waterworks gross profit increased $4.9 million, or 23.6%, to $26 million in the three months ended October 29, 2022 from $21 million in the three months ended October 30, 2021.

As a percentage of net revenues, Waterworks gross margin increased 370 basis points to 54.0% of net revenues in the three months ended October 29, 2022 from 50.3% of net revenues in the three months ended October 30, 2021.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $50 million, or 21.0%, to $289 million in the three months ended July 30, 2022 compared to $239 million in the three months ended July 31, 2021.

Consolidated selling, general and administrative expenses increased $18 million, or 7.7%, to $251 million in the three months ended October 29, 2022 compared to $233 million in the three months ended October 30, 2021.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $41 million, or 18.2%, to $264 million in the three months ended July 30, 2022 compared $224 million in the three months ended July 31, 2021.

RH Segment selling, general and administrative expenses for the three months ended July 30, 2022 include amortization of non-cash compensation of $4.3 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $2.0 million of asset impairments and a $0.3 million professional fee which was contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes.

RH Segment selling, general and administrative expenses for the three months ended July 31, 2021 include $7.4 million related to asset impairments, amortization of the non-cash compensation of $5.8 million related to the option grant made to Mr.

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

Excluding the adjustments mentioned above, RH Segment selling, general and administrative expenses would have been 27.4% and 22.1% of net revenues for the three months ended July 30, 2022 and July 31, 2021, respectively.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by increased advertising costs due to the mailing of the new RH Contemporary Source Book, the launch of The World of RH, as well as higher employment and employment-related costs, occupancy costs, professional fees and pre-opening costs.

RH Segment selling, general and administrative expenses increased $18 million, or 8.3%, to $232 million in the three months ended October 29, 2022 compared $214 million in the three months ended October 30, 2021.

RH Segment selling, general and administrative expenses were 28.2% and 22.2% of net revenues for the three months ended October 29, 2022 and October 30, 2021, respectively.

RH Segment selling, general and administrative expenses for the three months ended October 29, 2022 include amortization of non-cash compensation of $4.1 million related to a fully vested option grant made to Mr.

Friedman in October 2020, partially offset by a $4.2 million legal settlement received and a $0.8 million gain on sale of building and land.

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

Friedman in October 2020.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by deleverage due to lower revenues.

Additionally, we incurred higher employment and employment-related costs and professional fees, as well as pre-opening and other corporate costs related to the opening of RH Guesthouse New York.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $9.4 million, or 61.9%, to $25 million in the three months ended July 30, 2022 compared to $15 million in the three months ended July 31, 2021.

Waterworks selling, general and administrative expenses were 47.8% and 36.8% of net revenues for the three months ended July 30, 2022 and July 31, 2021, respectively.

Waterworks selling, general and administrative expenses for the three months ended July 30, 2022 include $3.5 million in compensation settlements related to the Rollover Units and Profit Interests Units and a $0.2 million asset impairment.

Excluding the adjustments, Waterworks Segment selling, general and administrative expenses would have been 40.7% and 36.8% of net revenues for the three months ended July 30, 2022 and July 31, 2021, respectively.

42 | 2022 SECOND QUARTER FORM 10-Q

Waterworks selling, general and administrative expenses remained consistent at $19 million in both the three months ended October 29, 2022 and October 30, 2021.

Waterworks selling, general and administrative expenses were 39.0% and 44.8% of net revenues for the three months ended October 29, 2022 and October 30, 2021, respectively.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 47

Interest expense—net

Interest expense—net increased $13 million in the three months ended July 30, 2022 compared to the three months ended July 31, 2021 consisted of the following in each period:

Interest expense—net increased $18 million in the three months ended October 29, 2022 compared to the three months ended October 30, 2021, which consisted of the following in each period:

THREE MONTHS ENDED

3 unchanged sentences

Other interest expense

Amortization of convertible senior notes debt discount

Interest income

2 unchanged sentences

Loss on extinguishment of debt

During the three months ended July 30, 2022, we recognized a loss on extinguishment of debt of $23 million related to the repurchase of $57 million of principal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $0.3 million.

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

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

During the three months ended July 31, 2021, we recognized a loss on extinguishment of debt of $3.2 million for a portion of the 2023 Notes that were early converted at the option of the noteholders.

We did not recognize a loss on extinguishment of debt in the three months ended October 29, 2022.

During the three months ended October 30, 2021 we recognized a loss on extinguishment of debt of $19 million for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders.

Other expense—net

Other expense—net was $3.2 million during the three months ended July 30, 2022, which included a loss on derivative instruments of $1.5 million resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

Other expense—net also includes a $1.7 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

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

Income tax expense (benefit)

Income tax expense was $56 million and $3.0 million in the three months ended July 30, 2022 and July 31, 2021, respectively.

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

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

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 43

Other expense—net was $2.0 million during the three months ended October 29, 2022 as a result of a foreign exchange loss from the remeasurement of an intercompany loan with a U.K.

subsidiary, as well as a loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to Pound Sterling and Euro.

Income tax expense

Income tax expense was $36 million and $54 million in the three months ended October 29, 2022 and October 30, 2021, respectively.

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

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

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $2.8 million and $2.5 million loss during the three months ended July 30, 2022 and July 31, 2021, respectively.

Six Months Ended July 30, 2022 Compared to Six Months Ended July 31, 2021

SIX MONTHS ENDED

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $1.9 million and $2.3 million loss during the three months ended October 29, 2022 and October 30, 2021, respectively.

48 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Nine Months Ended October 29, 2022 Compared to Nine Months Ended October 30, 2021

NINE MONTHS ENDED

(in thousands)

2 unchanged sentences

Income from operations

Consolidated net revenues increased $99 million, or 5.4%, to $1,949 million in the six months ended July 30, 2022 compared to $1,850 million in the six months ended July 31, 2021.

(1) The results for the Real Estate segment were immaterial in the nine months ended October 29, 2022 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in the nine months ended October 29, 2022.Refer to Note 17— Segment Reporting in our condensed consolidated financial statements.

Consolidated net revenues decreased $38 million, or 1.3%, to $2,818 million in the nine months ended October 29, 2022 compared to $2,856 million in the nine months ended October 30, 2021.

RH Segment net revenues

RH Segment net revenues increased $82 million, or 4.6%, to $1,849 million in the six months ended July 30, 2022 compared to $1,767 million in the six months ended July 31, 2021.

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

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

However, beginning in the first quarter of fiscal 2022, we began to experience softening demand trends that have remained below prior year trends during the first half of fiscal 2022.

Additionally, net revenues from our RH Hospitality business increased compared to the six months ended July 31, 2021 due to new Restaurant openings in fiscal 2021 and fiscal 2022.

Outlet sales increased $8.0 million to $139 million in the six months ended July 30, 2022 compared to $131 million in the six months ended July 31, 2021.

RH Segment net revenues decreased $62 million, or 2.3%, to $2,670 million in the nine months ended October 29, 2022 compared to $2,732 million in the nine months ended October 30, 2021.

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

The decrease in RH Segment net revenues for the nine months ended October 29, 2022 was driven primarily by softening demand trends, which began in the first quarter of fiscal 2022, and have remained below prior year trends for the balance of fiscal 2022.

This decrease was partially offset by backlog relief, as well as increased revenue in our RH Hospitality business compared to the nine months ended October 30, 2021 due to new Restaurant openings in the second half of fiscal 2021 and fiscal 2022.

Outlet sales decreased $5.1 million to $203 million in the nine months ended October 29, 2022 compared to $208 million in the nine months ended October 30, 2021.

Waterworks net revenues

Waterworks net revenues increased $18 million, or 21.4%, to $100 million in the six months ended July 30, 2022 compared to $82 million in the six months ended July 31, 2021.

Consolidated gross profit increased $127 million, or 14.2%, to $1,022 million in the six months ended July 30, 2022 from $895 million in the six months ended July 31, 2021.

As a percentage of net revenues, consolidated gross margin increased 400 basis points to 52.4% of net revenues in the six months ended July 30, 2022 from 48.4% of net revenues in the six months ended July 31, 2021.

44 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Waterworks net revenues increased $24 million, or 19.2%, to $148 million in the nine months ended October 29, 2022 compared to $124 million in the nine months ended October 30, 2021.

Consolidated gross profit increased $43 million, or 3.0%, to $1,443 million in the nine months ended October 29, 2022 from $1,400 million in the nine months ended October 30, 2021.

As a percentage of net revenues, consolidated gross margin increased 220 basis points to 51.2% of net revenues in the nine months ended October 29, 2022 from 49.0% of net revenues in the nine months ended October 30, 2021.

RH Segment gross profit for the nine months ended October 29, 2022 was negatively affected by $11 million of inventory impairment.

Excluding the asset impairment adjustment, consolidated gross margin would have increased 260 basis points to 51.6% of net revenues in the three months ended October 29, 2022 from 49.0% of net revenues in the three months ended October 30, 2021.

RH Segment gross profit

RH Segment gross profit increased $114 million, or 13.4%, to $968 million in the six months ended July 30, 2022 from $854 million in the six months ended July 31, 2021.

As a percentage of net revenues, RH Segment gross margin increased 400 basis points to 52.3% of net revenues in the six months ended July 30, 2022 from 48.3% of net revenues in the six months ended July 31, 2021.

The increase in gross margin was primarily driven by an increase in product margins in the Core business, as well as leverage in shipping costs during the six month period ended July 30, 2022, offset by increases in retail occupancy costs driven by new Gallery openings in fiscal 2021 and fiscal 2022.

RH Segment gross profit increased $25 million, or 1.9%, to $1,363 million in the nine months ended October 29, 2022 from $1,338 million in the nine months ended October 30, 2021.

As a percentage of net revenues, RH Segment gross margin increased 200 basis points to 51.0% of net revenues in the nine months ended October 29, 2022 from 49.0% of net revenues in the nine months ended October 30, 2021.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 49

Excluding the $11 million asset impairment adjustment, RH Segment gross margin would have increased 240 basis points to 51.4% of net revenues in the nine months ended October 29, 2022 from 49.0% of net revenues in the nine months ended October 30, 2021.

The increase in gross margin was primarily driven by increase in product margins in the Core business, as well as leverage in our shipping costs, partially offset by deleverage in fixed occupancy costs during the nine months ended October 29, 2022.

Waterworks gross profit

Waterworks gross profit increased $13 million, or 31.4%, to $54 million in the six months ended July 30, 2022 from $41 million in the six months ended July 31, 2021.

As a percentage of net revenues, Waterworks gross margin increased 410 basis points to 54.0% of net revenues in the six months ended July 30, 2022 from 49.9% of net revenues in the six months ended July 31, 2021 primarily driven by higher revenues, favorable changes in product mix, and leverage in Waterworks occupancy costs, offset by an increase in shipping costs related to customer deliveries.

Waterworks gross profit increased $18 million, or 28.8%, to $80 million in the nine months ended October 29, 2022 from $62 million in the nine months ended October 30, 2021.

As a percentage of net revenues, Waterworks gross margin increased 400 basis points to 54.0% of net revenues in the nine months ended October 29, 2022 from 50.0% of net revenues in the nine months ended October 30, 2021 primarily driven by higher revenues, leverage in shipping and occupancy costs, as well as favorable changes in product mix.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $124 million, or 27.2%, to $582 million in the six months ended July 30, 2022 compared to $458 million in the six months ended July 31, 2021.

Consolidated selling, general and administrative expenses increased $142 million, or 20.6%, to $833 million in the nine months ended October 29, 2022 compared to $691 million in the nine months ended October 30, 2021.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $112 million, or 26.1%, to $540 million in the six months ended July 30, 2022 compared to $428 million in the six months ended July 31, 2021.

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

Friedman’s stock option exercise during the first quarter of fiscal 2022, amortization of non-cash compensation of $10 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $8.0 million related to asset impairments, $7.5 million of professional fees which were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes and $0.6 million related to product recalls.

RH Segment selling, general and administrative expenses for the six months ended July 31, 2021 include amortization of the non-cash compensation of $12 million related to the option grant made to Mr.

RH Segment selling, general and administrative expenses increased $130 million, or 20.2%, to $772 million in the nine months ended October 29, 2022 compared to $642 million in the nine months ended October 30, 2021.

RH Segment selling, general and administrative expenses were 28.9% and 23.5% of net revenues for the nine months ended October 29, 2022 and October 30, 2021, respectively.

RH Segment selling, general and administrative expenses for the nine months ended October 29, 2022 include amortization of non-cash compensation of $14 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $12 million of employer payroll tax expense associated with Mr.

Friedman’s stock option exercise during the first quarter of fiscal 2022, $7.5 million of professional fees which were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes and $0.6 million related to product recalls, partially offset by a $4.2 million legal settlement received and a $0.8 million gain on sale of building and land.

RH Segment selling, general and administrative expenses for the nine months ended October 30, 2021 include amortization of non-cash compensation of $18 million related to a fully vested option grant made to Mr.

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

RH Segment selling, general and administrative expenses would have been 27.1% and 23.1% of net revenues for the six months ended July 30, 2022 and July 31, 2021, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by higher employment and employment-related costs, increased advertising costs due to the mailing of the new RH Contemporary Source Book, the launch of The World of RH, as well as increases in professional fees.

In addition, we incurred increased pre-opening and other corporate costs related to the opening of RH San Francisco and RH Guesthouse New York.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $12 million, or 41.8%, to $42 million in the six months ended July 30, 2022 compared to $30 million in the six months ended July 31, 2021.

Waterworks selling, general and administrative expenses were 42.5% and 36.3% of net revenues for the six months ended July 30, 2022 and July 31, 2021, respectively.

Waterworks selling, general and administrative expenses for the six months ended July 30, 2022 include $3.5 million in compensation settlements related to the Rollover Units and Profit Interest Units and a $0.2 million asset impairment.

Waterworks selling, general and administrative expenses for the six months ended July 31, 2021 include $0.5 million related to product recalls.

Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have been 38.8% and 35.7% of net revenues for the six months ended July 30, 2022 and July 31, 2021.

Waterworks selling, general and administrative expenses increased $13 million, or 25.8%, to $61 million in the nine months ended October 29, 2022 compared to $48 million in the nine months ended October 30, 2021.

Waterworks selling, general and administrative expenses were 41.3% and 39.2% of net revenues for the nine months ended October 29, 2022 and October 30, 2021, respectively.

Waterworks selling, general and administrative expenses for the nine months ended October 29, 2022 include $3.5 million in compensation settlements related to the Rollover Units and Profit Interest Units and a $0.2 million asset impairment.

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

Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have been 38.9% and 38.5% of net revenues for the nine months ended October 29, 2022 and October 30, 2021, respectively.

50 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 45

Interest expense—net

Interest expense—net increased $20 million in the six months ended July 30, 2022 compared to the six months ended July 31, 2021 consisted of the following in each period:

SIX MONTHS ENDED

Interest expense—net increased $38 million in the nine months ended October 29, 2022 compared to the nine months ended October 30, 2021, which consisted of the following in each period:

NINE MONTHS ENDED

(in thousands)

7 unchanged sentences

Loss on extinguishment of debt

During the six months ended July 30, 2022, we recognized a loss on extinguishment of debt of $170 million related to the repurchase of $237 million of principal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $1.3 million.

During the nine months ended October 29, 2022, we recognized a loss on extinguishment of debt of $170 million related to the repurchase of $237 million of principal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $1.3 million.

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

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

During the six months ended July 31, 2021, we recognized a loss on extinguishment of debt of $3.3 million for a portion of the 2023 Notes that were early converted at the option of the noteholders.

During the nine months ended October 30, 2021 we recognized a loss on extinguishment of debt of $22 million for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders.

Other expense—net

Other expense—net was $2.9 million during the six months ended July 30, 2022, which included a $4.6 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

Other expense—net was $4.8 million during the nine months ended October 29, 2022, which included a $6.5 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

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

The foreign currency loss was partially offset by a net gain on derivative instruments of $1.7 million during the six months ended July 30, 2022, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and convertible senior notes repurchases.

The foreign currency loss was partially offset by a net gain on derivative instruments of $1.7 million during the nine months ended October 29, 2022, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and convertible senior notes repurchases.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

Income tax expense (benefit)

Income tax benefit was $107 million and income tax expense was $45 million in the six months ended July 30, 2022 and July 31, 2021, respectively.

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

The decrease in our effective tax rate is primarily due to significantly higher discrete tax benefits from stock-based compensation in fiscal 2022.

46 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Income tax benefit was $71 million and income tax expense was $99 million in the nine months ended October 29, 2022 and October 30, 2021, respectively.

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

The decrease in our effective tax rate is primarily due to significantly higher discrete tax benefits from stock-based compensation in the nine months ended October 29, 2022.

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $4.2 million and $4.6 million loss during the six months ended July 30, 2022 and July 31, 2021, respectively.

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $6.1 million and $6.9 million loss during the nine months ended October 29, 2022 and October 30, 2021, respectively.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 51

Liquidity and Capital Resources

18 unchanged sentences

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

(2) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $25 million and $20 million in outstanding letters of credit as of July 30, 2022 and January 29, 2022, respectively.

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

(3) Net debt excludes restricted cash of $3.9 million and non-recourse real estate loans of $18 million as of October 29, 2022 related to our consolidated variable interest entities from our joint venture activities.

These real estate loans are secured by the assets of such entities and the associated creditors do not have recourse against RH’s general assets.

Refer to Note 5— Variable Interest Entities in our condensed consolidated financial statements.

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

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

1 unchanged sentence

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

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

Capital raised from debt financings has enabled us to pursue various investments, including our investments in joint ventures.

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

52 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 47

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

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

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

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

2 unchanged sentences

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

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

In 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.

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

13 unchanged sentences

The Term Loan B has a maturity date of October 20, 2028.

As of July 30, 2022, we had $1,985 million outstanding under the Term Loan Credit Agreement.

As of October 29, 2022, we had $1,980 million outstanding under the Term Loan Credit Agreement.

We are required to make quarterly principal payments of $5.0 million with respect to the Term Loan B.

48 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

On May 13, 2022, we entered into an incremental term debt financing (the “ Term Loan B-2”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A.

In May 2022, we entered into an incremental term debt financing (the “ Term Loan B-2”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A.

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

1 unchanged sentence

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

As of July 30, 2022, we had $500 million outstanding under the Amended Term Loan Credit Agreement.

We are not required to make quarterly principal payments with respect to the Term Loan B-2 until December 2022.

As of October 29, 2022, we had $500 million outstanding under the Amended Term Loan Credit Agreement.

Beginning in December 2022, we are required to make quarterly principal payments of $1.3 million with respect to the Term Loan B-2.

Certain Transactions Related to Convertible Senior Notes

In the first and second quarters of fiscal 2022, we entered into certain transactions in connection with the 2023 Notes and 2024 Notes.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 53

Warrant Termination Agreements

8 unchanged sentences

Result of the Convertible Notes Transactions

In aggregate, we expended a net total amount of approximately $563 million in cash (inclusive of expenses) in the six months ended July 30, 2022 to complete the above transactions.

In aggregate, we expended a net total amount of approximately $563 million in cash (inclusive of expenses) in the first half of fiscal 2022 to complete the above transactions.

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

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

Following the completion of the above convertible senior notes repurchases, we had $44 million remaining in aggregate principal amount of convertible notes outstanding as of July 30, 2022, comprised of $1.7 million of 2023 Notes and $42 million of 2024 Notes.

We had $44 million remaining in aggregate principal amount of convertible notes outstanding as of October 29, 2022, comprised of $1.7 million of 2023 Notes and $42 million of 2024 Notes.

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

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

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 49

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

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

During the six months ended July 30, 2022, adjusted capital expenditures were $95 million in aggregate, net of cash received related to landlord tenant allowances of $5.4 million.

In addition, we also received landlord tenant allowances of $4.4 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.

During the nine months ended October 29, 2022, adjusted capital expenditures were $153 million in aggregate, net of cash received related to landlord tenant allowances of $10 million.

In addition, we also received landlord tenant allowances after construction completion of $4.4 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.

We anticipate our adjusted capital expenditures to be $200 million to $225 million in fiscal 2022, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

2 unchanged sentences

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

54 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

2 unchanged sentences

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

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

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

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

Additionally, we have entered into arrangements with a third-party development partner to develop real estate for future RH Design Galleries.

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

2 unchanged sentences

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

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash used in financing activities

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

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

50 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Net cash provided by (used in) financing activities

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

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

Net Cash Provided By Operating Activities

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

For the six months ended July 30, 2022, net cash provided by operating activities was $193 million and consisted of net income of $323 million and an increase in non-cash items of $317 million, partially offset by a change in working capital and other activities of $447 million.

The use of cash from working capital was primarily driven by an increase in prepaid expenses and other assets of $153 million primarily due to federal and state tax receivables and the issuance of additional promissory notes receivable, an increase in merchandise inventory of $125 million, a decrease in accounts payable and accrued expenses of $64 million, a decrease in operating lease liabilities of $38 million primarily due to payments made under the related lease agreements, an increase in landlord asset under construction, net of tenant allowances, of $32 million and a decrease in other current liabilities of $25 million.

For the nine months ended October 29, 2022, net cash provided by operating activities was $336 million and consisted of net income of $422 million and an increase in non-cash items of $397 million, partially offset by a change in working capital and other activities of $483 million.

The use of cash from working capital was primarily driven by an increase in prepaid expenses and other assets of $153 million primarily due to federal and state tax receivables and the issuance of additional promissory notes receivable, an increase in merchandise inventory of $97 million, a decrease in operating lease liabilities of $57 million primarily due to payments made under the related lease agreements, a decrease in accounts payable and accrued expenses of $45 million, an increase in landlord asset under construction, net of tenant allowances, of $43 million and a decrease in other current liabilities of $37 million.

Net Cash Used In Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

For the six months ended July 30, 2022, net cash used in investing activities was $64 million and was comprised of investments in retail stores, information technology and systems infrastructure of $63 million and additional funding of our equity method investments of $1.5 million.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 55

For the nine months ended October 29, 2022, net cash used in investing activities was $107 million and was comprised of investments in retail stores, information technology and systems infrastructure of $110 million and additional funding of our equity method investments of $2.3 million, partially offset by proceeds from sale of assets of $5.3 million.

Net Cash Used In Financing Activities

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

For the six months ended July 30, 2022, net cash used in financing activities was $224 million, primarily due to the completion of certain transactions related to the 2023 Notes and 2024 Notes in the first quarter of fiscal 2022.

For the nine months ended October 29, 2022, net cash used in financing activities was $256 million, primarily due to the completion of certain transactions related to the 2023 Notes and 2024 Notes in the first quarter of fiscal 2022.

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

Net cash used in financing activities also included uses of cash of $395 million for the settlement of the convertible senior notes repurchase obligation, as well as payments of $13 million in aggregate principal amount of certain 2023 Notes and 2024 Notes as a result of early conversions by the noteholders.

Net cash used in financing activities also included uses of cash of $395 million for the settlement of the convertible senior notes repurchase obligation and payments of $13 million in aggregate principal amount of certain 2023 Notes and 2024 Notes as a result of early conversions by the noteholders.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

These cash outflows were partially offset by the issuance of the Term Loan B-2 in May 2022 in the amount of $500 million pursuant to the 2022 Incremental Amendment to the Term Loan Credit Agreement, for which we incurred debt issuance costs of $28 million.

During the six months ended July 30, 2022, we made payments on equipment notes of $13 million, payments under our term loans of $10 million and net payments under finance lease agreements of $3.1 million.

During the six months ended July 30, 2022, we repurchased 1,000,000 shares of our common stock for an aggregate repurchase amount of $255 million and we received proceeds from option exercises of $152 million, primarily due to Mr.

In addition, we received proceeds of $16 million from the issuance of real estate loans related to our consolidated variable interest entities.

During the nine months ended October 29, 2022, we made payments under our term loans of $15 million, payments on equipment notes of $13 million, net payments under finance lease agreements of $6.8 million and paid debt extinguishment costs of $8.1 million.

During the nine months ended October 29, 2022, we repurchased 1,127,557 shares of our common stock for an aggregate repurchase amount of $286 million and we received proceeds from option exercises of $154 million, primarily due to Mr.

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

Non-Cash Transactions

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

In addition, non-cash transactions consist of the extinguishment of convertible senior notes related to our repurchase obligations and associated financing liabilities and embedded derivatives arising from the convertible senior notes repurchases (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements), as well as shares issued and received related to convertible senior note transactions.

FINANCIAL INFORMATION

2022 SECOND QUARTER FORM 10-Q | 51

Cash Requirements from Contractual Obligations

6 unchanged sentences

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

56 | 2022 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

Asset Based Credit Facility

4 unchanged sentences

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our equipment loan facility.

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.

Real Estate Loans

Refer to Note 5— Variable Interest Entities in our condensed consolidated financial statements for further information on the real estate loans held as part of our joint ventures with a third-party development partner.

Share Repurchase Program and Share Retirement

5 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, which increased the total authorized size of the share repurchase program to $2,450 million (the “Share Repurchase Program”).

As of July 30, 2022, approximately $2,195 million remains available for future share repurchases under the Share Repurchase Program.

52 | 2022 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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, approximately $2,164 million remains available for future share repurchases under the Share Repurchase 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.

FINANCIAL INFORMATION

2022 THIRD QUARTER FORM 10-Q | 57

Critical Accounting Policies and Estimates

17 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis