What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-29 compared with 2022-03-30 · 285 added, 232 removed, 365 unchanged (59% of the section changed)

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

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

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

Refer to “Special Note Regarding Forward-Looking Statements and Market Data” and Item 1A — Risk Factors in this Annual Report on Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements.

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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 Item 1A — Risk Factors and included elsewhere in this Annual Report on 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 fiscal 2021 and a comparison to fiscal 2020.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources are presented in this section for fiscal 2022 and a comparison to fiscal 2021.

The discussion for fiscal 2021 and fiscal 2020 has been omitted from this Annual Report on Form 10-K, but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 29, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2022.

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

Our MD&A is organized as follows:

This section provides a general description of our business, including the impacts of the COVID-19 pandemic, and describes our key value-driving strategies.

Our MD&A includes these primary sections:

This section provides a general description of our business, including the impacts of macroeconomic factors, and describes our key value-driving strategies and business initiatives.

Factors Affecting Our Results of Operations .

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How We Assess the Performance of Our Business.

This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income and adjusted capital expenditures.

This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, operating income and operating margin, and net income and the related non-GAAP financial measures, in addition to adjusted EBITDA.

Basis of Presentation and Results of Operations .

These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in fiscal 2021 compared to fiscal 2020, as well as non-GAAP measures we use for financial and operational decision making and as a means to evaluate period-to-period comparisons.

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

Liquidity and Capital Resources .

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

Recently Issued Accounting Pronouncements .

This section provides a summary of recent authoritative accounting pronouncements that were adopted during fiscal 2021 and that will be adopted in future periods.

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

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

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

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

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 are a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market.

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

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

Our retail business is fully integrated across our multiple channels of distribution.

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 January 29, 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 and a private residence, as well as The Dining Room & Terrace.

As of January 28, 2023, we operated the following number of locations:

Design Galleries

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For more information on our company and operations, refer to Item 1—Business .

COVID-19 Pandemic

We have experienced a significant improvement in our business during fiscal 2021 despite the ongoing challenges presented by the COVID-19 pandemic and the disruption it has caused in our business operations beginning in the first quarter of fiscal 2020 and throughout fiscal 2021.

Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges, including port delays, which impacted our ability to convert business demand into revenues at normal historical rates.

We have continued to navigate changes in operational restrictions based upon changes in local conditions and regulations, and as pandemic-related restrictions continue to be lifted in fiscal 2022 we may see consumer spending patterns shift away from spending on the home and home-related categories, such as home furnishings, and consumers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

Macroeconomic Factors

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, rising interest and mortgage rates, and uncertainties in the global financial markets related to the foregoing as well as, among other things, the war in Ukraine and recent failures of several financial institutions, including Silicon Valley Bank and others.

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

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

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

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 macroeconomic factors.

Key Value-Driving Strategies

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

In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives:

Product Elevation .

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

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

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

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

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

We also have plans to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color over the next several years.

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

Our strategy is to continue to elevate the design and quality of our product.

Over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color.

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Our product is elevated and rendered more valuable by our architecturally inspiring Galleries.

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

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 sized to the potential of each market and the size of our assortment.

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

We entered this industry with the opening of our RH Guesthouse in New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen.

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

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

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

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

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.

Global Expansion.

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

We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that pursuit of global expansion will provide RH a substantial opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues.

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

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

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

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

We have secured a number of locations in various markets in the U.K.

and continental Europe for future Design Galleries and are currently in lease or purchase negotiations for additional locations .

Factors Affecting Our Results of Operations

Substantially all of our retail locations were open for most of fiscal 2021 and demand for our products has been strong, resulting in our record financial performance achieved in fiscal 2021.

The emergence of new variants such as the “Delta” and “Omicron” variants have continued to present new challenges, especially constraints in our supply chain, including port delays, which have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the evolving nature of the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels for at least the next several quarters.

Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges that we continue to experience.

For more information, refer to Item 1A—Risk Factors—The COVID-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.

Apart from the impact of the COVID-19 pandemic on our business operations and on macroeconomic conditions, below are certain factors that affect our results of operations.

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We have experienced significant changes in our business from fiscal 2020 through fiscal 2022, including the impact of macroeconomic factors such as the COVID-19 pandemic, increased inflation, rising interest and mortgage rates, uncertainties in the global financial markets and the slowdown in the housing market.

We believe that COVID-19 and the resulting trends in housing markets drove increased demand in our business during a substantial portion of the pandemic.

At the same time, the demand for home furnishings has decreased since the reopening of the economy after the peak of the pandemic and consumption patterns have shifted into other areas such as travel and leisure.

Apart from the impact of macroeconomic factors on our business operations and on general economic conditions, below are certain factors that affect our results of operations.

Our Strategic Initiatives.

We are in the process of implementing a number of significant business initiatives that have had, and will continue to have, an impact on our results of operations.

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As a result of the number of current business initiatives we are pursuing, we have experienced in the past, and may experience in the future, significant period-to-period variability in our financial performance and results of operations.

While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter.

Delays in the rate of opening new Galleries and in pursuit of our international expansion as a result of COVID-19 have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.

Delays in the rate of opening new Galleries and pursuit of our international expansion have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.

In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives.

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Our current and anticipated demand and our level of net revenues have been adversely affected in prior periods by constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise to match market demand from our customers, leading to higher levels of customer back orders and lost sales.

For example, a number of our vendors have experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.

For example, a number of our vendors experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.

In addition, as we introduce new products and expand our merchandise assortments into new categories, we expect to experience delays in the production of some new offerings, as we have had similar experiences during prior periods when we adopted substantial newness in our business such as with the introduction of RH Modern in 2015.

During fiscal 2021 and 2020, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues, and our global supply chain has not fully recovered from the impact of this dislocation.

While we expect this dislocation to be resolved in the near term, there can be no assurance as to the exact course that the recovery in our supply chain will take and a number of factors could contribute to further complications in our supply chain, including COVID-19 developments in countries where our vendors produce merchandise.

During fiscal 2020 and 2021, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues.

During the first half of fiscal 2022 we experienced increased net revenues due to fulfillment of orders generated in prior quarters as elements of our supply chain continued to catch up with customer demand.

However, throughout fiscal 2022 we experience softening demand trends as compared to fiscal 2022.

While we believe the majority of the supply chain dislocation has now been resolved, there can be no assurance as to the exact course that our supply chain will take and a number of factors could contribute to further complications in our supply chain, including increased in raw material costs related to inflation and other macroeconomic factors, including negative effects in countries where our vendors produce merchandise.

Based on total dollar volume of purchases for fiscal 2022, 71% of our products were sourced from Asia, with 29% sourced from China, 12% from the U.S.

and the remainder from other countries and regions .

Consumer Preferences and Demand .

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If we misjudge the market for our products or the product lines that we acquire, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net revenues and gross profit.

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Overall Economic Trends .

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As a result, we believe that our sales are sensitive to a number of macroeconomic factors that influence consumer spending generally, but that our sales are particularly affected by the health of the higher-end customer and demand levels from that customer demographic.

While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, demographics of new household formation and the affordability of homes for the first-time home buyer, the higher-end of the housing market may be disproportionately influenced by other factors, including stock market prices, restrictions on travel due to the COVID-19 pandemic, the number of second and third homes being bought and sold, the number of foreign buyers in higher-end real estate markets in the U.S., tax policies and interest rates, and the perceived prospect for capital appreciation in higher-end real estate.

Shifts in consumption patterns linked to the reopening of businesses in light of improvements relating to the COVID-19 pandemic may also have an impact on consumer spending in the high-end housing market.

While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, demographics of new household formation and the affordability of homes for first-time home buyers, the higher-end of the housing market may be disproportionately influenced by other factors, including stock market prices, disruption in financial markets, the number of second and third homes being bought and sold, the number of foreign buyers in higher-end real estate markets in the U.S., foreign currency volatility, inflation, tax policies and interest rates, and the perceived prospect for capital appreciation in higher-end real estate.

Shifts in consumption patterns may also have an impact on consumer spending in the high-end housing market.

We have in the past experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods.

These headwinds tied to macroeconomic factors may continue in future quarters.

For more information, refer to Item 1A—Risk Factors — Changes in consumer spending and factors that influence spending of the specific categories of consumers that purchase from us, including the health of the high-end housing market, may significantly impact our revenue and results of operations and —The COVID-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate .

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Fluctuation in Quarterly Results .

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inbound freight;

all freight costs to get merchandise to our Galleries;

all freight costs to get merchandise to our retail locations and outlets;

design, buying and allocation costs;

occupancy costs related to Gallery operations and our supply chain, such as rent and common area maintenance for our leases;

depreciation and amortization of leasehold improvements, equipment and other assets in our Galleries and distribution centers.

occupancy costs related to retail and outlet operations and our supply chain, such as rent and common area maintenance for our leases;

depreciation and amortization of leasehold improvements, equipment and other assets in our retail locations, outlets and distribution centers.

In addition, cost of goods sold includes all logistics costs associated with shipping product to our customers, which are partially offset by shipping income collected from customers (recorded in net revenues on the consolidated statements of income).

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Our gross profit and gross margin can be favorably impacted by sales volume increases, as occupancy and certain other costs that are largely fixed do not necessarily increase proportionally with sales volume increases.

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We place orders with merchandise vendors primarily in United States dollars and, as a result, are not currently exposed to significant foreign currency exchange risk.

However, our exposure may increase in connection with our global expansion strategy.

Our gross profit and gross margin may not be comparable to other specialty retailers, as some companies may not include all or a portion of the costs related to their distribution network and store occupancy in calculating gross profit and gross margin as we and many other retailers do, but instead may include them in selling, general and administrative expenses.

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We plan to refine our strategies to continue to address these impacts as they occur.

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Selling, General and Administrative Expenses.

Selling, general and administrative expenses include all operating costs not included in cost of goods sold .

These expenses include payroll and payroll-related expenses, retail expenses other than occupancy and expenses related to many of our operations at our corporate headquarters, including utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.

All pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred.

These expenses include payroll and payroll-related expenses, retail related expenses other than occupancy, and expenses related to the operations at our corporate headquarters, including rent, utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.

All retail pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred.

We expect certain of these expenses to continue to increase as we open new retail locations and outlets, develop new product categories and otherwise pursue our current business initiatives.

Selling, general and administrative expenses as a percentage of net revenues are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed.

In addition, in recent periods we have experienced increased selling, general and administrative expenses, including certain non-cash compensation expenses and costs associated with asset impairments and lease losses, sale leaseback transactions, reorganizations and product recalls, as discussed in “Basis of Presentation and Results of Operations” below.

In addition, in recent periods we have experienced increased selling, general and administrative expenses, including asset impairments, non-cash compensation expenses, employer payroll taxes on CEO option exercises, professional fees associated with debt transactions, compensation settlement arrangements, product recalls, sale leaseback transactions and reorganizations, as discussed in “Basis of Presentation and Results of Operations” below.

Adjusted Operating Income, Adjusted Net Income and Adjusted EBITDA.

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

We believe that adjusted operating income, adjusted net income and adjusted EBITDA are useful measures of operating performance, as the adjustments eliminate non-recurring and other items that are not reflective of underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business.

We also use adjusted operating income, adjusted net income and adjusted EBITDA as methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations.

We also use these adjusted measures as methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis our actual results against such expectations.

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

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

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

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

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Interest expense—net

Tradename impairment

(Gain) loss on extinguishment of debt

Tradename impairment

Other expense—net

Total other expenses

Income before income taxes

Income tax expense

Income before income taxes and equity method investments

Income tax expense (benefit)

Income before equity method investments

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Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures.

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

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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.

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Adjusted Operating Income .

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

(in thousands)

Income tax expense (1)

(Gain) loss on extinguishment of debt (1)

Interest expense—net (1)

Share of equity method investments losses (1)

Other expense—net (1)

(Gain) loss on extinguishment of debt (1)

Tradename impairment (1)

Other expense—net (1)

Income tax expense (benefit) (1)

Share of equity method investments losses (1)

Operating income

Asset impairments (2)

Non-cash compensation (3)

Asset impairments and change in useful lives (3)

Employer payroll taxes on option exercises (4)

Professional fees (5)

Non-cash compensation related to consolidated VIEs (6)

Compensation settlements (7)

Recall accrual (8)

Reorganization related costs (5)

(Gain) loss on sale leaseback transaction (6)

Legal settlements (9)

Gain on sale of building and land (10)

Loss on sale leaseback transaction (11)

Reorganizational related costs (12)

Adjusted operating income

(1) Refer to discussion “Fiscal 2022 Compared to Fiscal 2021” below for a discussion of our results of operations for the year ended January 28, 2023 and January 29, 2022.

Information on the year ended February 1, 2020 (fiscal 2019) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 30, 2021, filed with the SEC on March 30, 2021.

(2) The adjustment in fiscal 2021 represents the amortization of the non-cash compensation charge related to an option grant made to Mr.

Friedman in October 2020.

The adjustment in fiscal 2020 represents the non-cash compensation charge upon grant date related to an option grant made to Mr.

Friedman in October 2020 and amortization in the fourth quarter of fiscal 2020.

Information on the year ended January 30, 2021 (fiscal 2020) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 29, 2022, filed with the SEC on March 30, 2022.

(2) The adjustment in fiscal 2022 represents inventory impairment of $11 million to cost of goods sold and asset impairment of $12 million to selling, general and administrative expenses 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 adjustment in fiscal 2021 represents asset impairments of $9.6 million.

The adjustments in fiscal 2020 include asset impairments of $6.6 million, acceleration of depreciation expense of $3.9 million due to a change in the estimated useful lives of certain assets and asset impairment of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

The adjustment in fiscal 2019 includes (i) asset impairments of $9.1 million, (ii) acceleration of depreciation expense of $6.2 million due to a change in the estimated useful lives of certain assets and a $0.5 million charge related to the termination of a service agreement associated with such assets, (iii) an RH Contemporary Art lease impairment of $4.6 million, resulting from an update to both the timing and the amount of future estimated lease related cash inflows, and (iv) other lease impairments of $1.5 million due to early exit of leased facilities.

The adjustments in fiscal 2020 include asset impairments of $6.6 million, acceleration of depreciation expense of $3.9 million due to a change in the estimated useful lives of certain assets and impairment of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

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

Friedman in October 2020 .

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

Friedman in fiscal 2022.

(5) Represents professional fees contingent upon the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchases (refer to Note 12— Convertible Senior Notes in our consolidated financial statements).

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(6) Represents non-cash compensation attributed to the noncontrolling interest holder of our consolidated real estate joint ventures in fiscal 2022 based on the fair value of the noncontrolling interests upon the closing of such joint venture transactions (refer to “Consolidated Variable Interest Entities and Noncontrolling Interests” within Note 3— Significant Accounting Policies in our consolidated financial statements).

(7) Represents compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary.

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

In fiscal 2022, the recall adjustments increased selling, general and administrative expenses by $0.6 million.

In fiscal 2021, the recall adjustments increased net revenues by $1.2 million and increased selling, general and administrative expenses by $3.1 million.

In fiscal 2020, the recall adjustments decreased net revenues by $1.4 million, increased cost of goods sold by $4.6 million and increased selling, general and administrative expenses by $1.4 million.

In fiscal 2019, the recall adjustments increased net revenues by $0.4 million, decreased cost of goods sold by $3.4 million and decreased selling, general and administrative expenses by $0.2 million.

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

(10) Represents the gain on the sale of building and land.

(11) Represents the loss on a sale-leaseback transaction related to one of our previously owned Design Galleries.

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

(6) The adjustment in fiscal 2020 represents the loss on a sale-leaseback transaction related to one of our previously owned Design Galleries.

The adjustment in fiscal 2019 represents the gain on a real estate sale related to an asset previously classified as held for sale.

(7) Represents legal settlements, net of related legal expenses.

(8) Represents the gain on the sale of building and land of one of our previously owned retail Galleries, and other land sales.

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Adjusted Net Income .

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(Gain) loss on extinguishment of debt (1)

Asset impairments (1)

Non-cash compensation (1)

Amortization of debt discount (2)

Asset impairments and change in useful lives (1)

Employer payroll taxes on option exercises (1)

Professional fees (1)

Non-cash compensation related to consolidated VIEs (1)

Compensation settlements (1)

Recall accrual (1)

Reorganization related costs (1)

Tradename impairment (1)

(Gain) loss on sale leaseback transaction (1)

Legal settlements (1)

Gain on derivative instruments—net (2)

Gain on sale of building and land (1)

Amortization of debt discount (3)

Tradename impairment (1)

Loss on sale leaseback transaction (1)

Reorganization related costs (1)

Subtotal adjusted items

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

Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”), the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”) and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the “2024 Notes”), we separated the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes over their expected lives.

The equity components represent the difference between the proceeds from the issuance of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes and the fair value of the liability components of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes, respectively.

Amounts are presented net of interest capitalized for capital projects of $10 million, $5.3 million and $3.7 million during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

The 2019 Notes matured on June 15, 2019 and the 2020 Notes matured on July 15, 2020 and neither impacted amortization of debt discount post-maturity.

FORM 10-K | 45

(2) Represents net gain on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchases (refer to Note 12— Convertible Senior Notes in our 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.

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

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

Amounts were presented net of interest capitalized for capital projects of $10 million and $5.3 million during fiscal 2021 and fiscal 2020 , respectively.

No amortization of the debt discounts were recognized during fiscal 2022, as we recombined the previously outstanding equity component of the 2023 Notes and 2024 Notes upon the adoption of ASU 2020-06 .

(4) For fiscal 2022, we exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) and the exclusion of material discrete tax items that are unusual or infrequent, such as tax benefits related to the option exercises by Mr.

Friedman in fiscal 2022.

The adjustment for fiscal 2022 is based on an adjusted tax rate of 21.7%.

The adjustment for fiscal 2021 is based on an adjusted tax rate of 16.1%, which excludes the tax impact associated with our share of equity method investments losses.

The adjustment in fiscal 2020 is based on an adjusted tax rate of 21.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.

Friedman in the third quarter of fiscal 2020, the Waterworks reporting unit tradename impairment recorded in the first quarter of fiscal 2020 and our share of equity method investments losses.

The adjustment in fiscal 2019 is based on an adjusted tax rate of 17.4%, which is calculated using a 21% normalized tax rate for the first and second quarters and the effective tax rates of 13.7% and 14.9% for the third and fourth quarters, respectively.

T he adjustment for fiscal 2020 is based on an adjusted tax rate of 21.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.

Friedman in the third quarter of fiscal 2020, the Waterworks reporting unit tradename impairment recorded in the first quarter of fiscal 2020 and our proportionate share of the loss of our equity method investments.

46 | FORM 10-K

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

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

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

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Interest expense—net

Income tax expense

Non-cash compensation (1)

Income tax expense (benefit)

(Gain) loss on extinguishment of debt (1)

Non-cash compensation (2)

Asset impairments (1)

Share of equity method investments losses (2)

Employer payroll taxes on option exercises (1)

Professional fees (1)

Capitalized cloud computing amortization (3)

Other expense—net (2)

Non-cash compensation related to consolidated VIEs (1)

Compensation settlements (1)

Share of equity method investments losses (1)

Recall accrual (1)

Reorganization related costs (2)

(Gain) loss on sale leaseback transaction (2)

Tradename impairment (2)

Other expense—net (1)

Legal settlements (1)

Gain on sale of building and land (1)

Reorganization related costs (1)

Tradename impairment (1)

Loss on sale leaseback transaction (1)

Adjusted EBITDA

(1) Represents non-cash compensation related to equity awards granted to employees, including non-cash compensation charges related to an option grant made to Mr.

Friedman in October 2020.

(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 non-cash compensation related to equity awards granted to employees, including the amortization of the non-cash compensation charge related to an option grant made to Mr.

Friedman in October 2020.

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

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Income from operations

Consolidated net revenues increased $910 million, or 32.0%, to $3.8 billion in fiscal 2021 compared to $2.8 billion in fiscal 2020.

RH Segment net revenues for fiscal 2021 were favorably impacted by $1.2 million and for fiscal 2020 were negatively impacted by $1.4 million, in each case related to product recalls.

Excluding the product recall adjustments, consolidated net revenues increased $908 million, or 31.8%, to $3.8 billion in fiscal 2021 compared to $2.8 billion in fiscal 2020.

(1) The results for the Real Estate segment were immaterial in fiscal 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 fiscal 2021.

Refer to Note 21— Segment Reporting in our consolidated financial statements.

Consolidated net revenues decreased $168 million, or 4.5%, to $3,591 million in fiscal 2022 compared to $3,759 million in fiscal 2021.

RH Segment net revenues for fiscal 2021 were favorably impacted by $1.2 million related to product recalls.

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

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RH Segment net revenues

RH Segment net revenues increased $864 million, or 31.7%, to $3.6 billion in fiscal 2021 compared to $2.7 billion in the fiscal 2020.

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

RH Segment net revenues decreased $195 million, or 5.4%, to $3,399 million in fiscal 2022 compared to $3,594 million in the fiscal 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.

RH Segment net revenues in fiscal 2022 decreased primarily due to softening demand trends, which began in the first quarter of fiscal 2022, and 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 fiscal 2021 due to new Restaurant openings in the second half of fiscal 2021 and during fiscal 2022.

RH Segment net revenues in fiscal 2021 increased due to strong customer demand for our products, aided by elements of our supply chain continuing to catch up with customer demand.

RH Segment net revenues in fiscal 2020 were negatively impacted by Gallery closures and macroeconomic conditions resulting from the COVID-19 pandemic, whereby our revenue growth lagged customer demand primarily due to the effects of higher than anticipated demand and disruptions across our global supply chain as a result of COVID-19.

RH Segment net revenues in both fiscal 2021 and fiscal 2020 were impacted by product recalls as noted above.

RH Segment net revenues in fiscal 2021 were impacted by product recalls as noted above.

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Outlet sales increased $92 million to $279 million in fiscal 2021 compared to $187 million in fiscal 2020.

The first half of fiscal 2020 was impacted by pandemic-related retail closures.

Additionally, RH Segment net revenues increased in our RH Hospitality business compared to fiscal 2020 due to reduced COVID-19 operational restrictions in fiscal 2021 and new Restaurant openings in fiscal 2021.

Outlet sales decreased $19 million to $260 million in fiscal 2022 compared to $279 million in fiscal 2021.

Waterworks net revenues

Waterworks net revenues increased $46 million, or 38.4%, to $165 million in fiscal 2021 compared to $119 million in fiscal 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners.

Consolidated gross profit increased $530 million, or 40.0%, to $1.9 billion in fiscal 2021 compared to $1.3 billion in fiscal 2020.

Waterworks net revenues increased $27 million, or 16.3%, to $192 million in fiscal 2022 compared to $165 million in fiscal 2021 due to significant residential investments by high-end homeowners, elevated product assortment, and supply chain execution.

Consolidated gross profit decreased $43 million, or 2.3%, to $1,812 million in fiscal 2022 compared to $1,855 million in fiscal 2021.

As a percentage of net revenues, gross margin increased 110 basis points to 50.5% of net revenues in fiscal 2022 compared to 49.4% of net revenues in fiscal 2021.

RH Segment gross profit for fiscal 2022 was negatively impacted by $11 million of inventory impairment.

RH Segment gross profit for fiscal 2021 was favorably impacted by $1.2 million related to product recalls.

RH Segment gross profit for fiscal 2020 was negatively impacted by $5.9 million related to product recalls and includes asset impairments of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.

Excluding the adjustments mentioned above, consolidated gross margin would have increased 150 basis points to 50.8% of net revenues in fiscal 2022 compared to 49.3% of net revenues in fiscal 2021.

RH Segment gross profit

RH Segment gross profit increased $499 million, or 39.1%, to $1.8 billion in fiscal 2021 compared to $1.3 billion in fiscal 2020.

RH Segment gross profit decreased $64 million, or 3.6%, to $1,708 million in fiscal 2021 compared to $1,773 million in fiscal 2020.

As a percentage of net revenues, RH Segment gross margin increased 100 basis points to 50.3% of net revenues in fiscal 2022 compared to 49.3% of net revenues in fiscal 2021.

Excluding the adjustments mentioned above, RH Segment gross margin would have increased 130 basis points to 50.6% of net revenues in fiscal 2022 from 49.3% of net revenues in fiscal 2021.

The increase in gross margin was primarily driven by higher product margins in the Core and Outlet businesses and leverage in our RH Segment shipping and occupancy costs in fiscal 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 in fiscal 2022.

Waterworks gross profit

Waterworks gross profit increased $21 million, or 25.1%, to $104 million in fiscal 2022 compared to $83 million in fiscal 2021.

As a percentage of net revenues, Waterworks gross margin increased 710 basis points to 50.2% of net revenues in fiscal 2021 compared to 43.1% of net revenues in fiscal 2020 primarily driven by higher revenues, favorable changes in product mix, and leverage in Waterworks occupancy costs, offset by an increase in shipping costs related to customer deliveries.

As a percentage of net revenues, Waterworks gross margin increased 380 basis points to 54.0% of net revenues in fiscal 2021 compared to 50.2% of net revenues in fiscal 2021 primarily driven by favorable changes in product mix and higher product margins in select categories, as well as leverage on fixed occupancy costs.

Selling, general and administrative expenses

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RH Segment selling, general and administrative expenses increased $149 million, or 17.3%, to $1,011 million in fiscal 2022 compared to $862 million in fiscal 2021.

RH Segment selling, general and administrative expenses were 29.7% and 24.0% of net revenues in fiscal 2022 and fiscal 2021, respectively.

RH Segment selling, general and administrative expenses for fiscal 2022 included amortization of non-cash compensation of $18 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $14 million of employer payroll tax expense associated with Mr.

Friedman’s stock option exercises during the fiscal 2022, $13 million of asset impairment, $7.5 million of professional fees which were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $4.5 million of non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities, 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 fiscal 2021 included amortization of non-cash compensation of $24 million related to a fully vested option grant made to Mr.

Friedman in October 2020, $9.6 million related to asset impairments, $1.7 million related to product recalls and $0.4 million related to severance costs and related payroll taxes associated with reorganizations.

RH Segment selling, general and administrative expenses for fiscal 2020 includes non-cash compensation of $117 million related to an option grant made to Mr.

Friedman in October 2020, loss of $9.4 million related to a sale leaseback transaction, $7.0 million related to severance costs and related payroll taxes associated with the termination of associates and a reorganization undertaken in response to the impact of retail closures on our business, $5.0 million related to asset impairments and $3.9 million due to accelerated asset depreciation.

FORM 10-K | 49

Excluding the adjustments mentioned above, RH Segment selling, general and administrative expenses would have been 23.0% and 24.4% of net revenues for fiscal 2021 and fiscal 2020, respectively.

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

Excluding the adjustments to selling, general and administrative expenses mentioned above, RH Segment selling, general and administrative expenses would have been 28.2% and 23.0% of net revenues for fiscal 2022 and fiscal 2021, respectively.

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, as well as increases in professional fees and pre-opening costs.

A portion of the increase in these costs is due to the investments related to the launch of RH Contemporary, the opening of RH San Francisco and RH Guesthouse, the development of RH International and the rollout of RH In-Your-Home.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $13 million, or 18.8%, to $79 million in fiscal 2022 compared to $66 million in fiscal 2021.

Waterworks selling, general and administrative expenses for fiscal 2021 included $1.4 million related to product recalls and for fiscal 2020 included $1.6 million related to asset impairments and $1.3 million related to product recalls.

Waterworks selling, general and administrative expenses for fiscal 2022 included $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 fiscal 2021 included $1.4 million related to product recalls.

Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 20 basis points to 39.2% of net revenues in fiscal 2022 compared to 39.4% of net revenues in fiscal 2021.

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(in thousands)

Amortization of convertible senior notes debt discount

Finance lease interest expense

Term loan interest expense

Amortization of debt issuance costs and deferred financing fees

Finance lease interest expense

Other interest expense

Promissory notes

Asset based credit facility

Capitalized interest for capital projects

Amortization of convertible senior notes debt discount

Interest income

Capitalized interest for capital projects

Total interest expense—net

Tradename impairment

We incurred a $20 million tradename impairment charge in fiscal 2020 for our Waterworks reporting unit.

We did not recognize any tradename impairment in fiscal 2021.

Refer to “Impairment” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report on Form 10-K.

(Gain) loss on extinguishment of debt—net

Loss on extinguishment of debt

During fiscal 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.

During fiscal 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $29 million.

We recognized a $0.2 million gain on extinguishment of debt in fiscal 2020 related to the maturity and settlement of the 2020 Notes in July 2020.

Other expense—net

Other expense—net was $2.8 million in fiscal 2021 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.

Other expense—net was $0.1 million and $2.8 million in fiscal 2022 and 2021, respectively, which included losses of $1.8 million and $2.8 million, respectively, 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 intercompany loans with our U.K.

and Switzerland subsidiaries in fiscal 2022 and an intercompany loan with our U.K.

subsidiary in fiscal 2021, respectively.

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

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Income tax expense

Income tax expense was $134 million in fiscal 2021 compared to $105 million in fiscal 2020.

Income tax expense (benefit)

Income tax benefit was $91 million in fiscal 2022 and income tax expense was $134 million in fiscal 2021.

Our effective tax rate was (20.9)% in fiscal 2022 compared to 16.2% in fiscal 2021.

The decrease in our effective tax rate is due primarily to higher net excess tax benefits from stock-based compensation of $79 million in fiscal 2021 as compared to $22 million in fiscal 2020 resulting from increased option exercise activity and appreciation of our stock price.

Fiscal 2020 was also impacted by non-deductible stock-based compensation related to an option grant made to Mr.

Friedman in October 2020, which resulted in income tax expense of $29 million.

The decrease in our effective tax rate is primarily due to significantly higher discrete tax benefits from stock-based compensation in fiscal 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 $8.2 million loss in fiscal 2021 compared to a $0.9 million loss in fiscal 2020.

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 $2.1 million and $8.2 million loss in fiscal 2022 and fiscal 2021, respectively.

Liquidity and Capital Resources

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

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

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

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

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

Additionally, in May 2022, we entered into the 2022 Incremental Amendment, which amended the Term Loan Credit Agreement and raised an incremental $500 million of financing by means of the Term Loan B-2.

The issuance of the Term Loan B-2 was assigned a Ba3 rating from Moody’s Investors Service and BB rating from S&P Global.

Refer to Note 13— Credit Facilities in our consolidated financial statements.

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Asset based credit facility

Term loan (1)

Term loan B (1)

Term loan B-2 (1)

Equipment promissory notes (1)

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Notes payable for share repurchases

Total debt (2)

Cash and cash equivalents

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

(2) As of January 29, 2022 and January 30, 2021, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $20 million and $15 million in outstanding letters of credit, respectively.

(2) Net debt excludes restricted cash of $3.7 million and non-recourse real estate loans of $18 million as of January 28, 2023 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 8— Variable Interest Entities in our consolidated financial statements.

(3) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $27 million and $20 million in outstanding letters of credit as of January 28, 2023 and January 29, 2022, respectively.

FORM 10-K | 51

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

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.

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

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

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

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

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

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.

Credit Facilities and Debt Arrangements

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

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

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

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

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

The Term Loan Credit Agreement provides for a Term Loan in an aggregate principal amount of $2.0 billion and the maturity date of the Term Loan Credit Agreement is October 20, 2028.

As of January 29, 2022, we have $1,995 million outstanding under the Term Loan Credit Agreement, and we are required to make quarterly principal payments of $5.0 million.

We had $294 million remaining in aggregate principal amount of convertible notes outstanding as of January 29, 2022, comprised of $74 million of 2023 Notes and $220 million of 2024 Notes.

Due to early conversions at the option of the noteholders, $9.4 million of the 2023 Notes and $3.6 million of the 2024 Notes were recorded within current liabilities on our consolidated financial statements as of January 29, 2022.

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

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

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

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

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

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

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

We 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 macroeconomic factors affecting business conditions, such as the pandemic, inflation and rising interest rates.

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.

FORM 10-K | 55

While we do not require additional debt to fund our operations, our goal continues to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations.

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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 programs, various acquisitions, and growth initiatives, including through joint ventures and real estate investments.

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.

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

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

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

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

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

Credit Facilities and Debt Arrangements

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

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

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

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

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

As of January 28, 2023, we had $1,975 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.

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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”).

The Term Loan B-2 has a maturity date of October 20, 2028.

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

As of January 28, 2023, we had $499 million outstanding under the Amended Term Loan Credit Agreement.

We are required to make quarterly principal payments of $1.3 million with respect to the Term Loan B-2 from December 2022.

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.

Warrant Termination Agreements

In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with a limited number of sophisticated financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants previously issued in connection with the 2023 Notes and 2024 Notes.

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

Convertible Bond Hedge Unwind Transactions

In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with the Counterparties to terminate all of the remaining convertible note bond hedges previously entered into in connection with the 2023 Notes and 2024 Notes.

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

Convertible Senior Notes Repurchases

In the first and second quarters of fiscal 2022, we entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase $237 million in aggregate principal amount of the convertible senior notes representing $63 million and $174 million in principal amount of 2023 Notes and 2024 Notes, respectively.

Upon closing of these transactions, we paid an aggregate of $396 million in cash to repurchase such convertible senior notes .

Result of the Convertible Notes Transactions

In aggregate, we expended a net total amount of approximately $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.

We had $44 million remaining in aggregate principal amount of convertible notes outstanding as of January 28, 2023, 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.

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

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

During fiscal 2021, adjusted capital expenditures were $254 million, net of cash received related to landlord tenant allowances of $22 million.

During fiscal 2022, adjusted capital expenditures were $225 million in aggregate, net of cash received related to landlord tenant allowances of $13 million.

In addition, we received landlord tenant allowances after construction completion of $4.7 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the consolidated statements of cash flows.

We anticipate our adjusted capital expenditures to be $275 million to $325 million in fiscal 2023, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

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

Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may adjust our investments in various business initiatives, including our capital expenditures, during fiscal 2022 and beyond.

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

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

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

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

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

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

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

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

We 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 ultimate objective of (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.

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

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

and internationally.

A range of factors involved in the development of new Galleries and RH Hospitality may continue to be affected by the pandemic, including delays in construction as well as permitting and other necessary governmental actions.

In addition, the scope and cadence of investments by third parties, including landlords and other real estate counterparties, may be adversely affected by the health crisis.

Actions taken by international as well as federal, state and local government authorities, and in some instances mall and shopping center owners, in response to the pandemic, may require changes to our real estate strategy and related capital expenditure and financing plans.

In addition, we may continue to be required to make lease payments in whole or in part for our Galleries, Outlets and Restaurants that were temporarily closed or are required to close in the future in the event of resurgences in COVID-19 outbreaks or for other reasons.

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

Cash Flow Analysis

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Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents and restricted cash equivalents

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

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

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Net Cash Provided By Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, impairments, stock-based compensation, cash paid attributable to accretion of debt discount upon settlement of debt and the effect of changes in working capital and other 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 fiscal 2022, net cash provided by operating activities was $404 million and consisted of net income of $529 million and an increase in non-cash items of $373 million, partially offset by a change in working capital and other activities of $498 million.

The source of cash from working capital was primarily driven by an increase in deferred revenue and customer deposits of $107 million primarily due to strong consumer demand for our products.

This source of cash from working capital was offset by uses of cash driven by an increase in merchandise inventory of $190 million, a decrease in operating lease liabilities of $77 million due to payments made under the related lease agreements, an increase in landlord assets under construction of $68 million and an increase in prepaid expenses and other assets of $50 million.

The use of cash from working capital was primarily driven by an increase in prepaid expenses and other assets of $103 million mainly due to federal and state tax receivables and the issuance of additional promissory notes receivable, an increase in merchandise inventory of $77 million, a decrease in operating lease liabilities of $77 million primarily due to payments made under the related lease agreements, a decrease in deferred revenue and customer deposits of $62 million, a decrease in accounts payable and accrued expenses of $56 million, an increase in landlord asset under construction, net of tenant allowances, of $51 million and a decrease in other current liabilities of $38 million.

Net Cash Used In Investing Activities

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Investing activities also include our strategic investments.

For fiscal 2021, net cash used in investing activities was $194 million and was comprised of investments in retail stores, information technology and systems infrastructure of $185 million and additional funding of our equity method investments of $9.0 million.

FORM 10-K | 57

For fiscal 2022, net cash used in investing activities was $171 million and was comprised of investments in retail stores, information technology and systems infrastructure of $174 million and additional funding of our equity method investments of $2.7 million, partially offset by proceeds from sale of assets of $5.3 million.

Net Cash Provided By (Used In) Financing Activities

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

For fiscal 2021, net cash provided by financing activities was $1.6 billion, primarily due to the issuance of the Term Loan in October 2021 in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement.

This source of cash was offset by uses of cash, partially due to the repayment of $391 million of the 2023 Notes and 2024 Notes in fiscal 2021 as a result of early conversion at the option of the noteholders, of which $336 million is presented as repayments of convertible senior notes within cash from financing activities and $55 million is reflected as cash paid attributable to accretion of debt discount upon settlement of debt within cash from operating activities.

In addition, we incurred $26 million of debt issuance costs related to the Term Loan Credit Agreement and the ABL Credit Agreement, as well as made repayments of $23 million on our equipment notes, $14 million of principal payments under finance lease agreements and $5.0 million of principal payments under the Term Loan Credit Agreement.

Equity related transactions provided $11 million due to $32 million of proceeds from exercise of employee stock options, partially offset by $21 million of cash paid for employee taxes related to net settlement of equity awards.

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 fiscal 2022, net cash used in financing activities was $902 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 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 12— Convertible Senior Notes in our 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.

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

During fiscal 2022, we made payments under our term loans of $21 million, payments on equipment notes of $14 million, net payments under finance lease agreements of $10 million and paid debt extinguishment costs of $8.1 million.

In fiscal 2022, we repurchased 3,719,550 shares of our common stock for an aggregate repurchase amount of $1.0 billion and we received proceeds from option exercises of $231 million, primarily due to Mr.

Friedman’s option exercise activity in the first and fourth quarters 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, as well as promissory notes forgiven in exchange for assets and the conversion of loan receivables into equity method investments.

In addition, non-cash transactions consist of shares issued and received related to convertible senior note 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, as well as conversion of loan receivables into equity of variable interest entities.

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 12— Convertible Senior Notes in our consolidated financial statements), as well as shares issued and received related to convertible senior note transactions.

FORM 10-K | 55

Cash Requirements from Contractual Obligations

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

The table presenting the maturities of our lease liabilities included in Note 11— Leases includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

The table presenting the maturities of our lease liabilities included in Note 11— Leases in our consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

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

Convertible Senior Notes

Refer to Note 12— Convertible Senior Notes in our consolidated financial statements for further information on our 0.00% Convertible Senior Notes due 2024 and 0.00% Convertible Senior Notes due 2023.

Refer to Note 12— Convertible Senior Notes in our consolidated financial statements for further information on the 2023 Notes and 2024 Notes.

Asset Based Credit Facility

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our Term Loan.

Term Loan Facilities

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our term loans facilities, including our Term Loan B and Term Loan B-2.

Equipment Loan Facility

Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our equipment loan facility.

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Share Repurchase Programs

We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase programs, including, among others, current cash needs, capacity for leverage, cost of borrowings, results of operations and the market price of our common stock.

We believe that share repurchase programs will continue to be an excellent allocation of capital for the long-term benefit of our shareholders.

As of January 28, 2023, one equipment security note remains outstanding with a maturity date in April 2023.

Real Estate Loans

Refer to Note 8— Variable Interest Entities in our 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

We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase program, including, among others, current cash needs, capacity for leverage, cost of borrowings, results of operations and the market price of our common stock.

We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our shareholders.

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

$950 Million Share Repurchase Program

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

We completed $250 million in share repurchases in fiscal 2018 under the 950 Million Repurchase Program.

In the first quarter of fiscal 2019, we repurchased approximately 2.2 million shares of our common stock at an average price of $115.36 per share, for an aggregate repurchase amount of approximately $250 million under the 950 Million Repurchase Program.

We did not make any repurchases under the 950 Million Repurchase Program during either fiscal 2021 or fiscal 2020.

The total current authorized size of this share repurchase program is up to $950 million, of which $450 million remained available as of January 29, 2022 for future share investments.

Starting on January 1, 2023, share repurchases under our Share Repurchase Program (as defined below) are subject to a 1% excise tax imposed under the IRA.

Share Repurchase Program

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

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”).

In fiscal 2022, we repurchased 3,719,550 shares of our common stock under the Share Repurchase Program at an average price of $268.83 per share, for an aggregate repurchase amount of approximately $1.0 billion.

As of January 28, 2023, approximately $1,450 million remains available for future share repurchases under the Share Repurchase Program.

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Share Retirement

In fiscal 2022, we retired 3,719,550 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified $444 million from treasury stock to additional paid-in capital and $560 million from treasury stock to retained earnings on the consolidated balance sheets and consolidated statements of stockholders’ equity as of January 28, 2023.

Other Commitments

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Our merchandise inventories are comprised of finished goods and are carried at the lower of cost or net realizable value, with cost determined on a weighted-average cost method.

To determine if the value of inventory should be marked down below original cost, we use estimates to determine the lower of cost or net realizable value, which considers current and anticipated demand, customer preference and the merchandise age.

The inventory value is adjusted periodically to reflect current market conditions, which requires judgments that may significantly affect the ending inventory valuation, as well as gross margin.

The estimates used in inventory valuation are lower of cost or net realizable value reserves and obsolescence (including excess and slow-moving inventory).

FORM 10-K | 59

Our inventory reserves contain uncertainties that require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends.

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Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator.

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We qualitatively assess indefinite-lived intangible asset impairment to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount.

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While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.

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Lease Accounting

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While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination.

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Incremental Borrowing Rate

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We estimate the incremental borrowing rate for each lease primarily by reference to yield rates on debt issuances by companies of a similar credit rating, the weighted-average lease term and adjustments for differences between the yield rates and the actual term of the credit facility.

In determining the yield rates, for Design Galleries we utilize market information on the lease commencement date and for leases other than new Design Galleries, we utilize market information as of the beginning of the quarter in which the lease commenced.

In determining the yield rates, for newly constructed Design Galleries or significant distribution centers we utilize market information on the lease commencement date and, for all other leases, we utilize market information as of the beginning of the quarter in which the lease commenced.

We determine the fair value of the underlying asset, and the lease components such as land and building, for purposes of determining the lease classification and allocating our contractual rental payments to the lease components.

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We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock and (iii) a discount for illiquidity estimated using the Finnerty method.

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Equity Method Investments

In fiscal 2020, we entered into equity method investments in connection with real estate development initiatives in Aspen, Colorado.

These investments in privately-held limited liability companies (the “Aspen LLCs” or “equity method investments”) meet the criteria of variable interest entities (“VIEs”) and are not consolidated.

When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the VIE model and, if so, whether we are the primary beneficiary of the VIE.

Variable Interest Entities

We make investments in privately-held limited liability companies in connection with real estate development initiatives.

When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether we are the primary beneficiary of the VIE.

We evaluate a legal entity for consolidation under the VIE model if no scope exceptions apply and, by design, the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any of the characteristics of a controlling financial interest.

The Aspen LLCs are qualitatively determined to be VIEs due to insufficient equity investment at risk.

We consolidate a VIE if our involvement indicates that we are the primary beneficiary.

We would be the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors including the purpose of the VIE, contractual rights and obligations of the variable interest holders, and mechanisms for the resolution of disputes among the variable interest holders.

We account for investments under the equity method of accounting when we are not the primary beneficiary with a controlling financial interest but we have significant influence over the operations of the investee.

In evaluating if we exert control or significant influence we consider factors such as the terms and structure of the investment agreement and the legal structure of the investee, including investor voting or other rights, and other agreements with the investee.

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

Equity method investments are initially measured at cost.

As of our investment date, we determine the fair value of the underlying assets and liabilities held by the Aspen LLCs for purposes of determining whether or not we have basis differences arising in connection with our investment.

The determination of fair value of the underlying real estate assets requires subjectivity and estimates, including the use of various valuation techniques and Level 3 inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable.

If specialized expertise is required we obtain independent third-party appraisals to determine the fair value of the underlying assets and liabilities.

While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable.

We are the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors, including the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders.

We account for investments in VIEs that are limited liability companies where we are not the primary beneficiary using the equity method of accounting.

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In certain instances, we are required to recognize non-cash compensation expense related to equity interests given to the noncontrolling interest holder of consolidated VIEs.

There are no explicit or implicit vesting conditions associated with these deemed compensation arrangements.

Equity-classified compensation arrangements are measured upon the noncontrolling interest holders being admitted as a member of the VIEs, and liability-classified compensation arrangements are measured at the end of each reporting period.

The fair-value-based measure of the equity interests is determined using a Black-Scholes option pricing model that requires the input of subjective assumptions regarding the future cash flows of the VIE, including consideration of future expected debt financing and the expected volatility of the equity interests.

We determined these assumptions based on entity specific considerations of (i) the primary expected future cash flows of property rents and expected debt and debt service payments, (ii) discount rates appropriate for the economic environment and anticipated future interest rates and (iii) expected volatility based on historical observed stock prices of publicly traded peer companies, including those involved in real estate development.

Recently Issued Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis