What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-29 compared with 2022-03-30 · 658 added, 660 removed, 828 unchanged (61% of the section changed)

5 unchanged sentences

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity (Deficit)

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2023 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as the Company did not design and maintain an effective control activity over the presentation and disclosure of net income per share, specifically the application of authoritative guidance, including new accounting standards, to the net income per share computations.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity, and the computation of net income per share for such instruments and contracts in fiscal 2022.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

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PART II — FINANCIAL STATEMENTS

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinions .

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PART II — FINANCIAL STATEMENTS

Definition and Limitations of Internal Control over Financial Reporting

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Determination of the Classification of New Real Estate Lease Contracts

As described in Notes 3 and 11 to the consolidated financial statements, certain of the Company’s real estate leases are classified as finance leases.

Leases that do not meet the definition of a finance lease are considered operating leases.

For the year ended January 29, 2022, lease right-of-use assets obtained in exchange for lease obligations (net of lease terminations) totaled $172 million related to operating leases and $90 million related to finance leases, of which a significant portion of the operating and finance leases relates to new real estate leases.

Lease characteristics that management evaluates to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset.

The principal considerations for our determination that performing procedures relating to the determination of the classification of new real estate lease contracts is a critical audit matter are (i) the significant judgment by management when determining the classification of new real estate lease contracts based on its evaluation of the lease characteristics;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Consolidation of Variable Interest Entities

As described in Notes 3 and 8 to the consolidated financial statements, when the Company has a variable interest in another legal entity, management evaluates whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether the Company is the primary beneficiary of the VIE.

Management consolidates a VIE if the Company’s involvement indicates that it is the primary beneficiary.

The Company is the primary beneficiary of a VIE if it has 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.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 65

In fiscal 2022, the Company formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs”) for real estate development activities related to Gallery transformation and global expansion strategies.

The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support.

Upon the formation of each Member LLC, the Company determined that the power to direct the most significant activities of each Member LLC is either controlled by the Company or shared between the members of the Member LLCs.

In the instances where there is shared power between the members, the Company determined that the Company is most closely associated with each Member LLC.

Accordingly, the Company is the primary beneficiary of the Member LLCs and consolidates the results of operations, financial condition and cash flows of the Member LLCs in the consolidated financial statements.

As of January 28, 2023, the carrying amounts of these VIEs’ total assets and liabilities included in the consolidated balance sheet are $201 million and $26 million, respectively.

The principal considerations for our determination that performing procedures relating to the consolidation of the Member LLCs as VIEs is a critical audit matter are (i) the significant judgment by management when determining whether the Company is the primary beneficiary of the VIE based on whether the Company has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the purpose of each Member LLC, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among variable interest holders, and other agreements with the legal entity and its variable interest holders.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to lease accounting, including controls over management’s determination of the classification of new real estate lease contracts based on the lease characteristics.

These procedures also included, among others (i) reading the lease agreements;

(ii) testing management’s process for determining the classification of new real estate lease contracts based the lease characteristics;

(iii) testing the completeness and accuracy of the underlying data used;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset.

Evaluating management’s significant assumptions related to the reasonably certain lease term and incremental borrowing rate involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of the Company;

(ii) consistency with external market and industry data;

and (iii) whether the significant assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the significant assumptions related to the incremental borrowing rate and fair value of the leased asset.

These procedures included testing the effectiveness of management’s controls over the assessment of each Member LLC for consolidation, including controls over the judgments used to reach consolidation conclusions regarding these entities.

These procedures also included, among others (i) reading the operating agreements;

(ii) evaluating management’s determination of whether each Member LLC constitutes a variable interest entity;

and (iii) evaluating management’s determination of which member has the power to direct the most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to each Member LLC based on 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 .

/s/ PricewaterhouseCoopers LLP

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CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

Current assets:

(in thousands)

Cash and cash equivalents

Restricted cash

Accounts receivable—net

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LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

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Asset based credit facility

Term loan—net

Term loan B—net

Term loan B-2—net

Real estate loans

Convertible senior notes due 2023—net

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Non-current finance lease liabilities

Deferred tax liabilities

Other non-current obligations

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Retained earnings (accumulated deficit)

Accumulated other comprehensive loss

Retained earnings

Total stockholders’ equity

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CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(in thousands)

Cost of goods sold

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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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Net gains (losses) from foreign currency translation

Total comprehensive income

Comprehensive income

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

1 unchanged sentence

FORM 10-K | 69

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

TREASURY STOCK

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INCOME (LOSS)

Balances—February 2, 2019

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

( 2,167,396 )

Retirement of treasury stock

( 2,170,154 )

Shares issued in connection with warrant agreements

Equity component value of convertible note issuance—net

Sale of common stock warrant

Purchase of convertible note hedge

Conversion of convertible senior notes

Net losses from foreign currency translation

PART II — FINANCIAL STATEMENTS

FORM 10-K | 72

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued)

(in thousands, except share amounts)

TREASURY STOCK

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

Balances—February 1, 2020

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Balances—January 29, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchase of common stock—including excise tax

( 3,719,550 )

( 1,003,700 )

Retirement of treasury stock

( 3,719,550 )

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

Settlement of convertible senior notes

Termination of common stock warrants

Termination of convertible note hedge

Impact of ASU 2020-06 adoption

Non-cash equity compensation related to consolidated variable interest entities

Net losses from foreign currency translation

Balances—January 28, 2023

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

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Asset impairments

(Gain) loss on sale leaseback transaction

Loss on sale leaseback transaction

Amortization of debt discount

Stock-based compensation expense

Non-cash compensation related to consolidated variable interest entities

Non-cash finance lease interest expense

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Net cash provided by operating activities

PART II — FINANCIAL STATEMENTS

FORM 10-K | 71

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures

Proceeds from sale of asset

Equity method investments

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Deposits on asset under construction

Proceeds from sale of assets

Net cash used in investing activities

PART II — FINANCIAL STATEMENTS

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

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Repayments under asset based credit facility

Borrowings under term loan

Borrowings under term loans

Repayments under term loans

Borrowings under real estate loans

Repayments under real estate loans

Borrowings under promissory and equipment security notes

Repayments under promissory and equipment security notes

Debt issuance costs

Proceeds from issuance of convertible senior notes

Proceeds from issuance of warrants

Purchase of convertible note hedges

Debt issuance costs related to convertible senior notes

Repayments of convertible senior notes

Principal payments under finance leases

Repurchases of common stock—including commissions

Repayment under convertible senior notes repurchase obligation

Debt extinguishment costs

Debt issuance costs

Principal payments under finance lease agreements—net of tenant allowances

Proceeds from termination of convertible senior note hedges

Payments for termination of common stock warrants

Repurchases of common stock

( 1,000,000 )

Proceeds from exercise of stock options

2 unchanged sentences

Effects of foreign currency exchange rate translation

Net increase in cash and cash equivalents and restricted cash equivalents

Cash and cash equivalents and restricted cash equivalents

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

72 | FORM 10-K

PART II — FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

Cash and cash equivalents, restricted cash and restricted cash equivalents

Beginning of period—cash and cash equivalents

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

Beginning of period—cash and cash equivalents

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

End of period—cash and cash equivalents

End of period—restricted cash

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

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

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

Cash paid for interest

Cash paid for taxes

PART II — FINANCIAL STATEMENTS

FORM 10-K | 75

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

Non-cash transactions:

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

Property and equipment additions acquired under real estate loans

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

Reclassification of assets from landlord assets under construction to finance lease right-of-use assets

Promissory notes forgiven in exchange for assets

Conversion of loan receivables into equity method investments

Extinguishment of convertible senior notes related to repurchase obligation

Financing liability and embedded derivative arising from convertible senior notes repurchase

Shares issued on settlement of convertible senior notes

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

Conversion of loan receivables into equity of consolidated variable interest entities

Promissory notes forgiven in exchange for assets

Conversion of loan receivables into equity method investments

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

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

As of January 28, 2023, we operated a total of 67 RH Galleries and 37 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

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

NOTE 2—ORGANIZATION

The Company was formed on August 18, 2011 and capitalized on September 2, 2011 as a holding company for the purposes of facilitating an initial public offering of common equity and was at such time a direct subsidiary of Home Holdings, LLC, a Delaware limited liability company (“Home Holdings”).

Our company was formed on August 18, 2011 and capitalized on September 2, 2011 as a holding company for the purpose of facilitating an initial public offering of common equity and was at such time a direct subsidiary of Home Holdings, LLC, a Delaware limited liability company (“Home Holdings”).

On November 1, 2012, we acquired all of the outstanding shares of capital stock of Restoration Hardware, Inc., a Delaware corporation, and Restoration Hardware, Inc.

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was a direct, wholly owned subsidiary of Home Holdings prior to our initial public offering.

Outstanding units issued by Home Holdings under its equity compensation plan, referred to as the Team Resto Ownership Plan, were replaced with our common stock at the time of our initial public offering.

These transactions are referred to as the “Reorganization.” On November 7, 2012, we completed our initial public offering.

On November 7, 2012, we completed our initial public offering.

On December 15, 2016, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change our name to “RH,” effective January 1, 2017.

Impact of the COVID-19 Pandemic upon our Financial Condition and Results of Operations

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 have 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.

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

For more information, refer to Item 1A — Risk Factors in Part I of this Annual Report on Form 10-K.

Macroeconomic Factors

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 and mortgage rates, which impacted consumer spending on the home and the home-related categories.

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

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

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.

NOTE 3—SIGNIFICANT ACCOUNTING POLICIES

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These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

The consolidated financial statements include our accounts and those of our wholly owned subsidiaries.

The consolidated financial statements include our accounts and those of our wholly owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance (refer to Note 8— Variable Interest Entities ).

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

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

Our fiscal year ends on the Saturday closest to January 31.

As a result, our fiscal year may include 53 weeks.

The fiscal years ended January 29, 2022 (“fiscal 2021”), January 30, 2021 (“fiscal 2020) and February 1, 2020 (“fiscal 2019”) each consisted of 52 weeks.

Our fiscal years ended January 28, 2023 (“fiscal 2022”), January 29, 2022 (“fiscal 2021”) and January 30, 2021 (“fiscal 2020”) each consisted of 52 weeks.

Our next 53-week fiscal year is the fiscal year ending February 3, 2024 (“fiscal 2023”).

Use of Accounting Estimates

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We perform ongoing evaluations of these institutions to limit our concentration of credit risk.

Restricted Cash

Our restricted cash deposits represent an escrow balance for one real estate development limited liability company that is a consolidated variable interest entity.

Refer to Note 8— Variable Interest Entities .

Accounts Receivable

Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our Contract business and other miscellaneous receivables.

Accounts receivable is presented net of allowance for expected credit losses, which is recorded on a specific identification basis, and was $ 3.6 million and $ 3.3 million as of January 29, 2022 and January 30, 2021, respectively.

Accounts receivable is presented net of allowance for expected credit losses of $ 3.4 million and $ 3.6 million as of January 28, 2023 and January 29, 2022, respectively.

Merchandise Inventories

Our merchandise inventories consist primarily 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.

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Actual inventory shrinkage and obsolescence can vary from estimates due to factors, including the volume of inventory movement and execution against loss prevention initiatives in our distribution centers, home delivery center locations, off-site storage locations and with our third-party transportation providers.

Our inventory reserve balances were $ 24 million as of both January 29, 2022 and January 30, 2021.

Our inventory reserve balances were $ 40 million and $ 24 million as of January 28, 2023 and January 29, 2022, respectively.

Product Recalls

When necessary, we initiate product recalls for certain of our products, as well as adjusted accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries.

When necessary, we initiate product recalls for certain of our products, as well as adjust accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries.

The product recall accrual was $ 6.9 million and $ 5.5 million as of January 28, 2023 and January 29, 2022, respectively, and is included in other current liabilities on the consolidated balance sheets.

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 75

Advertising Expenses

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The cost of leasehold improvements is amortized over the lesser of the useful life of the asset or the reasonably certain lease term.

We expense all internal-use software and website development costs incurred in the preliminary project stage and capitalize certain direct costs associated with the development and purchase of internal-use software or website development costs, including external costs of materials and services and internal payroll costs related to the software project, within property and equipment.

Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally between three and ten years .

Interest is capitalized on construction in progress and software projects during the period in which expenditures have been made and activities are in progress to prepare the asset for its intended use.

We capitalized interest of $ 4.9 million, $ 12 million and $ 5.6 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

During fiscal 2021, fiscal 2020 and fiscal 2019, $ 10 million, $ 5.3 million and $ 3.7 million, respectively, of the $ 12 million, $ 5.6 million and $ 4.9 million capitalized interest relates to the capitalization of non-cash interest associated with the amortization of the convertible senior notes debt discount.

During fiscal 2021 and fiscal 2020, $ 10 million and $ 5.3 million, respectively, of the $ 12 million and $ 5.6 million capitalized interest relates to the capitalization of non-cash interest associated with the amortization of the convertible senior notes debt discount.

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 Accounting Standards Update (“ASU”) 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) in the first quarter of fiscal 2022.

Land purchases are recorded at cost and are non-depreciable assets.

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.

For further discussion regarding the impairment accounting policy refer to “Impairment—Long-Lived Assets” below.

Asset Held for Sale

Upon designation as an asset held for sale, the carrying value of the asset is recorded at the lower of its carrying value or its estimated fair value less estimated costs to sell, and we cease depreciating the asset.

PART II — FINANCIAL STATEMENTS

Refer to “Impairment—Long-Lived Assets.”

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PART II — FINANCIAL STATEMENTS

Lease Accounting

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The initial lease terms of our real estate leases generally range from ten to fifteen years , and certain leases contain renewal options for up to an additional 25 years , the exercise of which is at our sole discretion.

We also lease certain equipment with lease terms generally ranging from three to seven years .

We also lease certain equipment with lease terms generally ranging from two to seven years .

Our lease agreements generally do not contain any material residual value guarantees or material restrictions or covenants.

We account for lease and non-lease components as a single lease component for real estate leases, and for all other asset classes we account for the components separately.

We determine the lease classification and begin to recognize lease and any related financing expenses upon the lease’s commencement, which for real estate leases is generally upon store opening or, to a lesser extent, when we take possession or control of the asset.

We determine the lease classification and begin to recognize lease and any related financing expenses upon lease commencement, which for real estate leases is generally upon store opening or, to a lesser extent, when we take possession or control of the asset.

We sublease certain real estate locations to third parties under operating leases and recognize rental income received on a straight-line basis over the lease term, which is recorded as an offset to selling, general and administrative expenses on the consolidated statements of income.

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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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PART II — FINANCIAL STATEMENTS

Leases, or lease extensions, with a term of twelve months or less are not recorded on the consolidated balance sheets, and we recognize lease expense for these leases on a straight-line basis over the lease term.

FORM 10-K | 77

Leases, or lease extensions, with a term of twelve months or less are not recorded on the consolidated balance sheets, and we recognize lease expense as incurred over the lease term.

Lease Payments

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We have a small group of real estate leases that include rental payments periodically adjusted for inflation (e.g., based on the consumer price index).

We include these variable payments in the initial measurement of the lease right-of-use asset and lease liability according to the index or rate at the commencement date and incorporates adjustments to rental payments in future periods if such increases have a minimum rent escalation (e.g., floor).

Changes due to differences between the variable lease payments estimated at least commencement and actual amounts incurred are recognized in the consolidated statements of income in the period such costs are incurred.

Lease concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee are accounted for as if no change to the lease contract were made.

Under this approach, we recognize a separate non-interest bearing payable for any deferred payments in the concession period, which is recorded in accounts payable and accrued expenses on the consolidated balance sheets, and there is no change to the recognized lease expense on the consolidated statements of income.

We account for COVID-19 related rent abatements as variable lease payments on the consolidated statements of income.

Lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 29, 2022 and January 30, 2021 were not material.

We include these variable payments in the initial measurement of the lease right-of-use asset and lease liability according to the index or rate at the commencement date and incorporate adjustments to rental payments in future periods if such increases have a minimum rent escalation (e.g., floor).

Changes due to differences between the variable lease payments estimated at lease commencement and actual amounts incurred are recognized in the consolidated statements of income in the period such costs are incurred.

Lease concessions granted in fiscal 2020 related to the effects of the COVID-19 pandemic that did not result in a substantial increase in the rights of the lessor or our obligations as the lessee were accounted for as if no change to the lease contract were made.

Under this approach, we recognized a separate non-interest bearing payable for any deferred payments in the concession period, which was recorded in accounts payable and accrued expenses on the consolidated balance sheets, and there was no change to the recognized lease expense on the consolidated statements of income.

We accounted for COVID-19 related rent abatements as variable lease payments on the consolidated statements of income.

Remaining lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 28, 2023 and January 29, 2022 were immaterial.

Incremental Borrowing Rate

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The IBR is computed as the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the total lease payments in a similar economic environment.

We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement issued in October 2021, as the basis for determining the applicable IBR for each lease.

We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement issued in October 2021 and amended in May 2022, as the basis for determining the applicable IBR for each lease.

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

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

Construction Related Activities

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Upon construction commencement, we evaluate whether or not we, as lessee, control the asset being constructed and, depending on the extent to which we are involved, we may be the “deemed owner” of the leased asset for accounting purposes during the construction period under a build-to-suit arrangement.

If we are the “deemed owner” for accounting purposes, upon commencement of the construction project we are required to capitalize (i) costs incurred by us and (ii) the cash and non-cash assets contributed by the landlord for construction as property and equipment on our consolidated balance sheets as build-to-suit assets, with an offsetting financing obligation under build-to-suit lease transactions.

The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of the consolidated statements of cash flows.

If we are the “deemed owner” for accounting purposes during the construction period, upon construction commencement we are required to capitalize (i) costs incurred by us and (ii) the cash and non-cash assets contributed by the landlord for construction as property and equipment on our consolidated balance sheets as “build-to-suit property”, with an offsetting financing obligation under build-to-suit lease transactions.

The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of the consolidated statements of cash flows.

Over the lease term, these non-cash additions to property and equipment do not impact our cash outflows, nor do they impact net income on the consolidated statements of income.

Upon completion of the construction project where we are the deemed owner, we perform a sale-leaseback analysis to determine if we can derecognize the build-to-suit asset and corresponding financing obligation.

If the asset and liability cannot be derecognized, we account for the agreement as a debt-like arrangement.

If we are involved in a debt-like arrangement for a non-real estate asset under construction for which we plan to lease such asset upon construction completion and make deposits during the construction period, we recognize the related deposits as “Deposits on asset under construction” within other non-current assets on the consolidated balance sheets (refer to Note 4— Prepaid Expense and Other Assets ).

In the event we execute promissory notes related to the deposits, such promissory notes are recorded as “Promissory notes on asset under construction” within other current liabilities on the consolidated balance sheets (refer to Note 9— Accounts Payable, Accrued Expenses and Other Current Liabilities ).

We recognize the constructive disbursements and receipts of such debt-like arrangements on a gross basis on the consolidated statements of cash flows within cash flows from investing activities and cash flows from financing activities, respectively.

If the asset and liability cannot be derecognized, we account for the agreement as a debt-like financing arrangement.

If we are not the “deemed owner” for accounting purposes during the construction period, such lease is classified as either an operating or finance lease upon lease commencement.

During the construction period and prior to lease commencement, any capital amounts contributed by us toward the construction of the leased asset (excluding normal leasehold improvements, which are recorded within property and equipment—net) are recorded as “Landlord assets under construction” within other non-current assets on the consolidated balance sheets (refer to Note 4— Prepaid Expense and Other Assets ).

Upon completion of the construction project, and upon lease commencement, we reclassify amounts of the construction project determined to be the landlord asset to lease right-of-use assets on the consolidated balance sheets based on the lease classification determined at lease commencement.

The construction costs determined not to be part of the leased asset are classified as property and equipment—net on the consolidated balance sheets.

Sale-Leaseback Activities

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We then account for the leaseback in accordance with our lease accounting policy.

If the transfer of the asset is determined not to be a sale, we account for the transaction as a financing arrangement.

If the transfer of the asset is determined not to be a sale, we account for the transaction as a debt-like financing arrangement.

We continue to present the asset within property and equipment—net on the consolidated balance sheets and recognize a non-current obligation on the consolidated balance sheets for the transaction price, with the financial liability measured in accordance with other applicable GAAP.

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Intangible assets reflect the value assigned to tradenames, trademarks, domain names and other intangible assets.

The cost of purchasing transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses are capitalized as an intangible asset.

The cost of purchasing transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses is capitalized as an intangible asset.

We do not amortize our intangible assets as we define the life of these assets as indefinite.

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Goodwill is initially recorded as of the acquisition date, is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired and is assigned to the applicable reporting unit.

A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed.

As of January 28, 2023 and January 29, 2022, goodwill relates to the RH Segment only.

PART II — FINANCIAL STATEMENTS

We evaluate goodwill annually to determine whether it is impaired or whenever events occur or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount.

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Goodwill is not amortized, but rather is subject to impairment testing annually to determine whether it is impaired or whenever events occur or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount.

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;

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or changes in management or key personnel.

We perform our annual goodwill impairment testing in the fourth fiscal quarter by comparing the fair value of a reporting unit with its carrying amount, limited to the total amount of goodwill of the reporting unit.

We will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

We determine fair values using the discounted cash flow approach (“income approach”) or the market multiple valuation approach (“market approach”), when available and appropriate, or a combination of both.

We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation.

If multiple valuation methodologies are used, the results are weighted appropriately.

Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each respective reporting unit.

Actual results may differ from those assumed in our forecasts.

We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing.

We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts.

Valuations using the market approach are derived from metrics of publicly traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services.

A market approach is limited to reporting units for which there are publicly traded companies that have the characteristics similar to our businesses.

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results.

It is reasonably possible that the judgments and estimates described above could change in future periods.

A reporting unit is an operating segment, or a business unit one level below that operating segment for which discrete financial information is prepared and regularly reviewed by the Chief Operating Decision Maker (“CODM”), which is our Chief Executive Officer.

We have deemed RH Segment and Waterworks to be the reporting units for which goodwill is independently tested, as these operating segments are the lowest level for which discrete financial information is prepared and regularly reviewed by the CODM.

We perform our annual goodwill impairment testing in the fourth fiscal quarter.

We first perform a qualitative assessment to evaluate goodwill for potential impairment by evaluating events and circumstances relevant to the reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If, based on that assessment, it is more likely than not that the fair value of the reporting unit is below its carrying value, a quantitative impairment test is necessary to determine the fair value of the reporting unit.

We will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill of the reporting unit.

RH Segment Reporting Unit

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Based on the qualitative tests performed in each fiscal year, we determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount for fiscal 2022, fiscal 2021 and fiscal 2020, and therefore we did not recognize goodwill impairment with respect to the RH Segment in any such fiscal year.

Waterworks Reporting Unit

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

PART II — FINANCIAL STATEMENTS

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Tradenames, Trademarks and Other Intangible Assets

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Waterworks Reporting Unit

During the fourth quarter of fiscal 2019, we performed our annual impairment procedures on the Waterworks tradename utilizing the discounted cash flow methodology under the relief-from-royalty method.

Under the relief-from-royalty method, our significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues.

Based on the quantitative impairment test performed, we did not recognize any impairment with respect to the Waterworks reporting unit tradename.

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability.

We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount.

We determined fair value utilizing a discounted cash flow methodology under the relief-from-royalty method.

Significant assumptions under this method include forecasted net revenues and the estimated royalty rate, expressed as a percentage of revenues, in addition to the discount rate based on the weighted-average cost of capital.

Based on the impairment test performed, we concluded that the Waterworks tradename was impaired as of May 2, 2020.

As a result, we recognized a $ 20 million non-cash impairment charge for the Waterworks tradename in the first quarter of fiscal 2020.

The impairment charge was recorded in goodwill and tradename impairment on the consolidated statements of income.

During the fourth quarters of fiscal 2021 and fiscal 2020, we performed a qualitative impairment test on the Waterworks tradename and determined it was not more likely than not that the fair value of the asset was less than its carrying amount.

Accordingly, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename in either period.

The carrying value of the Waterworks indefinite-lived tradename asset as of both January 29, 2022 and January 30, 2021 was $ 17 million.

During fiscal 2020, as a result of the COVID-19 health crisis and related temporary showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability.

We recognized a $ 20 million non-cash impairment charge for the Waterworks tradename in the first quarter of fiscal 2020.

The impairment charge was recorded in tradename impairment on the consolidated statements of income.

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PART II — FINANCIAL STATEMENTS

During the fourth quarters of fiscal 2022, fiscal 2021 and fiscal 2020, we performed a qualitative impairment test on the Waterworks tradename and determined it was not more likely than not that the fair value of the asset was less than its carrying amount.

Accordingly, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename in any period.

The carrying value of the Waterworks indefinite-lived tradename asset as of both January 28, 2023 and January 29, 2022 was $ 17 million.

Long-Lived Assets

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Except as noted above, we did not record impairment for long-lived tangible assets at the individual retail location level in fiscal 2022, fiscal 2021 and fiscal 2020.

Due to certain distribution center closures and business line integrations in fiscal 2019, we recorded impairment for certain corporate assets and other long-lived assets as discussed below under “Distribution Center and Home Delivery Location Center Closures” and “RH Contemporary Art Impairment.” No additional impairment has been recorded for corporate assets and other long-lived assets in fiscal 2021, fiscal 2020 and fiscal 2019.

Distribution Center and Home Delivery Location Center Closures

In fiscal 2019, we initiated and executed a plan to consolidate certain of our home delivery location centers.

We recorded operating lease right-of-use asset impairment associated with this effort of $ 1.3 million in fiscal 2019.

In fiscal 2020, we recorded additional operating lease right-of-use asset impairment associated with this effort of $ 0.9 million resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income.

RH Contemporary Art Impairment

In fiscal 2016, we initiated and executed a plan to integrate the RH Contemporary Art (“RHCA”) product line into the broader RH platform and no longer operates RHCA as a separate division.

We recorded additional operating lease right-of-use asset impairment associated with RHCA of $ 4.6 million during fiscal 2019.

This impairment charge, which was recorded in the RH Segment, resulted from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income.

From time to time, we record impairment for certain corporate assets and other long-lived assets, including our home delivery location centers, resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions.

Such impairment charges are included in s elling, general and administrative expenses on the consolidated statements of income.

Variable Interest Entities (VIE)

Our consolidated financial statements include the results of operations and the financial position of subsidiaries in which we have a controlling financial interest as if the consolidated group were a single economic entity.

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.

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.

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

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.

PART II — FINANCIAL STATEMENTS

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

We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary of our consolidated VIEs, or whether we have become the primary beneficiary of the VIEs we do not consolidate.

Consolidated Variable Interest Entities and Noncontrolling Interests

We consolidate the results of operations, financial condition and cash flows of real estate development limited liability companies (a “Member LLC”) in our consolidated financial statements when we are the primary beneficiary of the VIE.

We account for each acquisition of our controlling interest in a Member LLC as an asset acquisition since substantially all of the fair value of the net assets of each VIE is concentrated in its real estate assets.

The operating agreements of each Member LLC specify distributions from operations and upon certain events or liquidation that may be disproportionate to the members’ relative ownership percentages.

Distributions are made to the members in proportion to, and in repayment of, various categories of capital contributions and certain preferred returns, after which distributions are made to the members in proportion to their membership interests.

To reflect the substance of these arrangements, we measure attributions to noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements for each Member LLC.

This is a balance sheet oriented approach that calculates changes in the noncontrolling interest holders’ claim to the net assets of each Member LLC from period to period to determine the income or loss attributable to noncontrolling interests, which are recognized in the consolidated statements of income.

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.

Equity Method Investments

Our consolidated financial statements present the results of operations and the financial position of RH and subsidiaries in which we have a controlling financial interest as if the consolidated group were a single economic entity.

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 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.

During fiscal 2020, we were admitted as a non-managing member in three privately-held limited liability companies (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that have the purpose of acquiring, developing, operating, and selling certain real estate projects in Aspen, Colorado.

The Aspen LLCs are financed by capital contributions from the members on an as-needed basis, as well as via third-party debt secured by the underlying real estate projects.

Each Aspen LLC is designed to require future additional subordinated financial support to finance its activities and thus is qualitatively determined to be a VIE due to insufficient equity investment at risk.

The decisions of each Aspen LLC are made by a managing member not under common control with us, and we hold consent rights with respect to certain major decisions that represent some, but not all, of the most significant activities of each Aspen LLC.

As we are not the managing member and do not have the ability to liquidate the Aspen LLCs or otherwise remove the managing member, we do not have the power to direct the most significant activities of each Aspen LLC and therefore are not the primary beneficiary.

Each Aspen LLC maintains a specific ownership account for each member, similar to a partnership capital account structure.

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.

Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the Aspen LLCs are included in share of equity method investments losses on the consolidated statements of income.

We did not elect the fair value option and the equity method investments are initially measured at cost.

As of our initial 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.

For certain of our investments in VIEs where we are not the managing member and do not have the ability to liquidate the VIE or otherwise remove the managing member, we do not have the power to direct the most significant activities of the VIE and therefore are not the primary beneficiary.

We account for such investments using the equity method of accounting.

Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the equity method investments are included in share of equity method investments losses on the consolidated statements of income.

We do not elect the fair value option and the equity method investments are initially measured at cost.

As of our initial investment date, we determine the fair value of the underlying assets and liabilities held by our equity method investments 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.

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

The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment, related to the real estate assets.

We account for these basis differences as if the Aspen LLCs were consolidated subsidiaries, thereby affecting the determination of the amount of our share of earnings or losses of the equity method investments.

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PART II — FINANCIAL STATEMENTS

The operating agreements for each Aspen LLC specifies distributions from operations and upon liquidation that may be disproportionate to the members’ relative ownership percentages.

The operating agreements for each equity method investment specify distributions from operations and upon liquidation that may be disproportionate to the members’ relative ownership percentages.

Distributions are made to the members in proportion to, and in repayment of, various categories of capital contributions plus certain preferred returns, after which distributions are made to the members in proportion to their membership interests.

To reflect the substance of these arrangements, we measure our proportionate share of the earnings or losses of each Aspen LLC using the hypothetical liquidation at book value (“HLBV”) method, which is a balance sheet oriented approach to determining our share of earnings or losses of the equity method investments that reflects changes in our claims to the net assets of each Aspen LLC.

Due to the presence of basis differences and liquidation preferences, we use the recast financial statements approach in applying the HLBV method whereby we recast the financial statements of each Aspen LLC to reflect our perspective or basis (thus eliminating the basis differences) when determining our share of the Aspen LLCs earnings or losses.

Our proportionate share of earnings or losses of the equity method investments follow the Aspen LLCs’ distribution priorities, which may change upon the achievement of certain investment return thresholds.

Our equity method investment balance is subsequently adjusted for our share of the Aspen LLCs’ earnings and losses, cash contributions and distributions.

To reflect the substance of these arrangements, we measure our proportionate share of the earnings or losses of each equity method investment using the hypothetical liquidation at book value (“HLBV”) method, which is a balance sheet oriented approach to determine our share of earnings or losses that reflects changes in our claims to the net assets of each equity method investment.

Due to the presence of basis differences and liquidation preferences, we use the recast financial statements approach in applying the HLBV method whereby we recast the financial statements of each entity to reflect our perspective or basis (thus eliminating the basis differences) when determining our share of the earnings or losses.

Our proportionate share of earnings or losses of the equity method investments follow the entities’ distribution priorities, which may change upon the achievement of certain investment return thresholds.

Our equity method investment balance is subsequently adjusted for our share of earnings and losses, cash contributions and distributions.

We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.

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Revenue Recognition

We recognize revenues and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise.

We recognize revenue and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise.

Revenue recognized for merchandise delivered via the home delivery channel is recognized upon delivery.

Revenues recognized for merchandise delivered via all other delivery channels are recognized upon shipment.

Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store.

Revenue recognized for merchandise delivered via all other delivery channels are recognized upon shipment.

Revenue from “cash-and-carry” store sales are recognized at the point of sale in the store.

Discounts or other accommodations provided to customers are accounted for as a reduction of net revenues on the consolidated statements of income.

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A summary of the allowance for sales returns is as follows ( in thousands ):

A summary of the allowance for sales returns is as follows:

(in thousands)

Balance at beginning of fiscal year

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Deferred Revenue and Customer Deposits

We defer revenue associated with merchandise delivered via the home-delivery channel, which is included as deferred revenue and customer deposits on the consolidated balance sheets while in-transit, in instances where we recognize revenue when the merchandise is delivered to customers.

We defer revenue associated with merchandise delivered via the home delivery channel, which is included as deferred revenue and customer deposits on the consolidated balance sheets while in-transit.

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

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Customer deposits represent payments made by customers on custom orders.

At the time of purchase we collect deposits for all custom orders equivalent to 50 % of the purchase price.

At the time of order placement we collect deposits for all custom orders equivalent to 50 % of the purchase price.

Custom order deposits are recognized as revenue when the customer obtains control of the merchandise.

We expect that substantially all of the deferred revenue and customer deposits as of January 28, 2023 will be recognized within the next six months as the performance obligations are satisfied, and membership fees will be recognized over the membership period.

We sell gift cards to our customers in our stores and through our websites and product catalogs.

We sell gift cards to our customers in our stores and through our websites and Source Books.

Such gift cards and merchandise credits do not have expiration dates.

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Customer liabilities related to gift cards was $ 27 million and $ 23 million as of January 28, 2023 and January 29, 2022, respectively.

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

Breakage of $ 1.8 million, $ 1.8 million and $ 1.6 million was recorded in net revenues in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

We recognize breakage income associated with gift cards proportional to actual gift card redemptions in net revenues on the consolidated statements of income.

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

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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.

Refer to “ Consolidated Variable Interest Entities and Noncontrolling Interests ” for discussion of compensation expense related to noncontrolling interests.

Cost of Goods Sold

Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory reserves and write-downs, inventory shrinkage, inbound freight, all freight costs to get merchandise to our retail and outlet locations, design and buying costs, occupancy costs related to retail operations and supply chain, such as rent, utilities, depreciation and amortization and all logistics costs associated with shipping product to customers, property tax and common area maintenance.

Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory reserves and write-downs, inventory shrinkage, inbound freight, all freight costs to get merchandise to our retail and outlet locations, design and buying costs, occupancy costs related to retail operations and supply chain, such as rent, utilities, depreciation and amortization, property tax and common area maintenance and all logistics costs associated with shipping product to customers.

Selling, General and Administrative Expenses

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

Interest Expense—Net

Interest expense primarily relates to interest incurred on our term loans and finance lease arrangements.

Refer to Note 13— Credit Facilities and Note 11— Leases.

Amounts in fiscal 2021 and fiscal 2020 also include amortization of convertible senior notes debt discount, prior to the adoption of ASU 2020-06 in the first quarter of fiscal 2022.

Interest income primarily represents interest received related to our cash and cash equivalent balances.

PART II — FINANCIAL STATEMENTS

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Interest expense—net consists of the following:

(in thousands)

Interest expense

Interest income

Total interest expense—net

Net Income Per Share

Basic net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period.

Diluted net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period, common share equivalents under equity plans using the treasury-stock method and the calculated common share equivalents in excess of the respective conversion rates related to each of the convertible senior notes.

Diluted net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period, including additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued using the if-converted method for convertible senior notes and the treasury stock method for all other instruments.

Potential dilutive securities are excluded from the computation of diluted net income per share if their effect is anti-dilutive.

The if-converted method is applicable for the convertible senior notes beginning in fiscal 2022 due to the adoption of ASU 2020-06.

The treasury stock method was applied in fiscal 2021 and fiscal 2020 prior to the adoption of this accounting standard update discussed in “Recently Issued Accounting Standards.”

Treasury Stock

We record our purchases of treasury stock at cost as a separate component of stockholders’ equity (deficit) in the consolidated financial statements.

Upon retirement of treasury stock, we allocate the excess of the purchase price over par value to additional paid-in capital subject to certain limitations with any remaining purchase price allocated to retained earnings (accumulated deficit).

PART II — FINANCIAL STATEMENTS

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We record our purchases of treasury stock at cost as a separate component of stockholders’ equity in the consolidated financial statements.

The excise tax on share repurchases initiated on and after January 1, 2023 is included in the cost basis of treasury stock.

We account for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

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Differences between tax positions taken in a tax return and amounts recognized in the financial statements generally result in an increase in liability for income taxes payable or a reduction of an income tax refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense on the consolidated statements of income.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on the consolidated statements of income.

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PART II — FINANCIAL STATEMENTS

Foreign Currency Matters

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dollar currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets, and revenues and expenses are translated at average rates of exchange for the period.

The related translation gains (losses) are reflected in the accumulated other comprehensive income section on the consolidated statements of stockholders’ equity (deficit), and net gains (losses) on foreign currency translation , which includes intercompany gains and losses, is presented net of tax on the consolidated statements of comprehensive income.

Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive income on the consolidated balance sheets.

Foreign currency gains (losses) resulting from foreign currency transactions denominated in a currency other than the subsidiary's functional currency are included in other expense—net on the consolidated statements of income.

The related translation gains and losses are reflected in the accumulated other comprehensive income (loss) section on the consolidated statements of stockholders’ equity, and net gains (losses) on foreign currency translation , which includes intercompany gains and losses, is presented net of tax on the consolidated statements of comprehensive income.

Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive loss on the consolidated balance sheets.

Foreign currency gains and losses resulting from foreign currency transactions denominated in a currency other than the subsidiary’s functional currency are included in other expense—net on the consolidated statements of income.

Such foreign exchange gains and losses are due to the net impact of changes in foreign exchange rates as compared to the U.S.

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dollars by our international subsidiaries other than those of a long-term investment nature, where repayment is not planned or anticipated in the foreseeable future.

The foreign exchange gains or losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within accumulated other comprehensive income on the consolidated balance sheets.

The foreign exchange gains and losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within accumulated other comprehensive loss on the consolidated balance sheets.

Recently Issued Accounting Standards

New Accounting Standards or Updates Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12—Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements.

The guidance in this ASU became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We adopted this standard in the first quarter of fiscal 2021 and the adoption did not have an impact on our consolidated financial statements.

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PART II — FINANCIAL STATEMENTS

New Accounting Standards or Updates Not Yet Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity .

The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature.

As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt.

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

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

We will adopt the ASU in the first quarter of fiscal 2022 using a modified retrospective approach.

We anticipate that the adoption of the ASU will impact our consolidated financial statements through the cumulative effect of initially applying the ASU as an adjustment to the opening balance of retained earnings on the consolidated balance sheets of approximately $ 20 million and a related reduction to additional paid in capital of approximately $ 55 million and increase to deferred tax assets of approximately $ 15 million.

In addition, upon adoption, as a result of the removal of the separation of the outstanding equity component, the balance of convertible debt outstanding will increase by approximately $ 35 million and the resulting balance will represent the carrying amount of the outstanding par value of our convertible senior notes.

Additionally, we anticipate a reduction to property and equipment—net on the consolidated balance sheets of approximately $ 15 million related to previously capitalized interest for construction in progress.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity .

ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

Specifically, ASU 2020-06 removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature.

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

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

Additionally, ASU 2020-06 removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance that affects our computation of net income per share.

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

Accordingly, the cumulative effect of the adoption on our opening fiscal 2022 consolidated balance sheets was as follows:

(in thousands)

Property and equipment—net

Deferred tax assets

Convertible senior notes due 2023—net

Convertible senior notes due 2024—net

Additional paid-in capital

Retained earnings

PART II — FINANCIAL STATEMENTS

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Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04 — Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) .

In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848):

Scope , together with ASU 2020-04 the “ASUs”.

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

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

Scope (“ASU 2021-01”) and in December 2022, the FASB issued ASU 2022-06— Reference Rate Reform:

Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”), together with ASU 2020-04 and ASU 2021-01, the “ASUs”.

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

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

The primary contracts for which we currently use LIBOR include our asset based credit facility and term loan debt arrangements.

The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022, when the reference rate replacement activity is expected to be completed.

We are evaluating the impact that the ASUs will have on our consolidated financial statements and related disclosures, including the timing of adoption, and do not believe the adoption will materially impact our financial condition, results of operations or cash flows.

PART II — FINANCIAL STATEMENTS

The primary contracts for which we currently use LIBOR include our Term Loan B (as defined in Note 13 — Credit Facilities ).

The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through the deferred date of December 31, 2024.

All new arrangements use alternative reference rates and we are evaluating the impact of adoption on our existing contracts, including with respect to our Term Loan B.

We anticipate the Term Loan B will transition to SOFR in fiscal 2023.

New Accounting Standards or Updates Not Yet Adopted

Disclosure of Supplier Finance Program Obligations

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

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

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

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

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

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

We will disclose the information required under ASU 2020-04 beginning with the first quarter of fiscal 2023.

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PART II — FINANCIAL STATEMENTS

NOTE 4—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following ( in thousands ):

Prepaid expense and other current assets

Prepaid expense and other current assets consist of the following:

(in thousands)

Capitalized catalog costs

Prepaid expenses

Vendor deposits

Federal and state tax receivable (1)

Tenant allowance receivable

Promissory notes receivable, including interest (1)

Value added tax (VAT) receivable

Right of return asset for merchandise

Acquisition related escrow deposits

Interest income receivable

Promissory notes receivable, including interest (2)

Other current assets

Total prepaid expense and other current assets

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

Refer to Note 8— Equity Method Investments .

Other non-current assets consist of the following ( in thousands ):

Landlord assets under construction—net of tenant allowances

(1) Refer to Note 15— Income Taxes .

(2) Represents promissory notes, including principal and accrued interest, due from an affiliate of the managing member of the Aspen LLCs (refer to Note 8— Variable Interest Entities ).

Other non-current assets consist of the following:

(in thousands)

Initial direct costs prior to lease commencement

Landlord assets under construction—net of tenant allowances

Capitalized cloud computing costs—net (1)

Vendor deposits—non-current

Other deposits

1 unchanged sentence

Other non-current assets

Acquisition related escrow deposits

Total other non-current assets

(1) Presented net of accumulated amortization of $ 11 million and $ 4.0 million as of January 28, 2023 and January 29, 2022.

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 89

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment consists of the following ( in thousands ):

Property and equipment consists of the following:

(in thousands)

Finance lease right-of-use assets (1)

1 unchanged sentence

Computer software

Building and building improvements (3)

Furniture, fixtures and equipment

Machinery, equipment and aircraft

Building and building improvements (3)

Built-to-suit property

3 unchanged sentences

(1) Refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases .

(2) Leasehold improvements include construction in progress of $ 11 million and $ 32 million as of January 29, 2022 and January 30, 2021, respectively.

(3) Building and building improvements as of January 29, 2022 and January 30, 2021 includes $ 51 million and $ 40 million of owned buildings under construction related to future Design Galleries.

(2) Includes construction in progress of $ 8.0 million and $ 48 million as of January 28, 2023 and January 29, 2022, respectively.

The balance as of January 29, 2022 was disclosed as $ 11 million in our fiscal 2021 Form 10-K and has been updated with the amount presented herein.

(3) Includes $ 92 million and $ 51 million of owned buildings under construction related to future Design Galleries as of January 28, 2023 and January 29, 2022, respectively.

(4) Includes accumulated amortization related to finance lease right-of-use assets of $ 224 million and $ 174 million as of January 28, 2023 and January 29, 2022, respectively.

3 unchanged sentences

On August 28, 2020, we acquired a business for total consideration of $ 15 million funded through available cash, of which $ 1.9 million was deposited into an escrow account for any potential post-closing adjustments.

We have deposited into escrow an additional $ 5.0 million, which represents a deferred acquisition related payment subject to mutually agreed to conditions and expected to be paid over two years .

On December 7, 2020, we acquired the net assets of a business for $ 4.7 million funded through available cash, of which $ 0.5 million was deposited into an escrow account for any potential post-closing adjustments.

Additional consideration of $ 4.6 million is expected to be paid over five years .

We believe that these additions to the RH platform further position us as a leader in the luxury design market as we continue to enhance the RH product assortment.

We deposited into escrow an additional $ 5.0 million, which represented a deferred acquisition related payment subject to mutually agreed to conditions and was paid over two years .

Acquisition related escrow deposits, included within prepaid expense and other current assets on the consolidated balance sheets, were $ 4.0 million as of January 29, 2022 and were paid in fiscal 2022.

Additional consideration of $ 4.6 million is expected to be paid over five years , of which $ 2.3 million was paid as of January 28, 2023.

During fiscal 2020, we incurred acquisition-related costs associated with these transactions such as financial, legal and accounting advisors, as well as employment related costs, which are included in selling, general and administrative expenses on the consolidated statements of income.

No additional acquisition-related costs were incurred in fiscal 2021.

Acquisition related escrow deposits, included within prepaid expense and other current assets and other non-current assets on the consolidated balance sheets, were $ 4.0 million and $ 6.6 million as of January 29, 2022 and January 30, 2021, respectively.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 93

The following table summarizes the purchase price allocation based on the fair value of the assets acquired and liabilities assumed ( in thousands ):

Tangible assets acquired and liabilities assumed—net

The tradename has been assigned an indefinite life and therefore is not subject to amortization.

The goodwill, included in the RH Segment, is representative of the benefits and expected synergies from the integration of the acquired companies’ products, leadership team and employees, which do not qualify for separate recognition as an intangible asset.

The tradename and goodwill are deductible for tax purposes.

No additional acquisition-related costs were incurred in fiscal 2021 or fiscal 2022.

Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates.

Pro forma results of the acquired businesses have not been presented as the results were not considered material to our consolidated financial statements for all periods presented and would not have been material had the acquisitions occurred at the beginning of fiscal 2020.

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PART II — FINANCIAL STATEMENTS

We believe that these additions to the RH platform further position us as a leader in the luxury design market as we continue to enhance the RH product assortment.

Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates.

NOTE 7—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the fiscal 2021 goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks ( in thousands ):

Tradenames, trademarks and other intangible assets

The following sets forth the fiscal 2020 goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks ( in thousands ):

Tradenames, trademarks and other intangible assets

Waterworks (1)

Tradename (2)

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks:

TRADEMARKS AND

OTHER INTANGIBLE

(in thousands)

January 30, 2021

Foreign current translation

January 29, 2022

Foreign current translation

January 28, 2023

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

(2) Presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020 .

There are no goodwill, tradenames, trademarks and other intangible assets for the Real Estate Segment.

NOTE 8—VARIABLE INTEREST ENTITIES

Consolidated Variable Interest Entities and Noncontrolling Interests

In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for real estate development activities related to our Gallery transformation and global expansion strategies.

We hold a 50 percent membership interest in seven of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by a third-party real estate development partner who is also the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below).

In one Member LLC we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held by the same Aspen LLCs managing member.

The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support.

Upon the formation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs.

In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and determined that we are most closely associated with each Member LLC.

Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 91

In fiscal 2022, we recognized compensation expense of $ 4.5 million related to the equity interests given to the noncontrolling interest holders of the consolidated VIEs, of which $ 3.6 million is included in additional paid-in capital and $ 0.9 million is included in other non-current obligations on the consolidated balance sheets.

The additional paid-in capital portion relates to equity-classified compensation arrangements and represents the fair-value-based measure of the equity interests upon the noncontrolling interest holders being admitted as a member of the VIEs.

The other non-current obligations portion relates to liability-classified compensation arrangements and represents the fair-value-based measure of the equity interests at the end of the reporting period.

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

We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC.

As of January 28, 2023, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions .

Accordingly, we did not recognize any noncontrolling interests as of and in fiscal 2022.

The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets were as follows:

(in thousands)

Cash and cash equivalents

Restricted cash (1)

Prepaid expense and other current assets

Total current assets

Property and equipment—net (2)

Other non-current assets

Accounts payable and accrued expenses

Real estate loans (3)

Other non-current obligations

Total liabilities

(1) Restricted cash deposits are held in escrow for one Member LLC and represent a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for tenant allowances specified in a lease agreement between us and the Member LLC.

(2) Includes $ 125 million of construction in progress, which is included in “building and building improvements” within property and equipment —net .

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

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

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

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

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

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PART II — FINANCIAL STATEMENTS

NOTE 8—EQUITY METHOD INVESTMENTS

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

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

Refer to Note 3— Significant Accounting Policies for further discussion.

In fiscal 2020, we contributed capital of $ 99 million for our membership interest in the Aspen LLCs and our investment includes $ 2.1 million of direct transaction costs incurred to acquire the investments.

Capital contributions comprised $ 79 million in cash and $ 20 million of promissory notes receivable from the managing member that were converted into equity upon investment in the Aspen LLCs.

In fiscal 2021, we purchased an additional 20 % interest in one of the Aspen LLCs, which continues to be accounted for as an equity method investment.

As of January 29, 2022 and January 30, 2021, $ 8.4 million and $ 14 million of promissory notes receivable, respectively, are outstanding with the managing member, which are included in prepaid expense and other current assets on the consolidated balance sheets.

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

We are contractually required to make capital contributions to the Aspen LLCs up to a total aggregate $ 105 million investment.

Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of January 29, 2022.

The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment.

During fiscal 2021 and fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 8.2 million and $ 0.9 million, respectively, which is included in the consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of January 29, 2022 and January 30, 2021.

During fiscal 2021 and fiscal 2020, we did not receive any distributions or have any undistributed earnings of equity method investments.

Equity Method Investments

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

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

The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance.

Accordingly, we account for these investments using the equity method of accounting.

As of January 28, 2023 and January 29, 2022, $ 3.0 million and $ 8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes are included in prepaid expense and other current assets on the consolidated balance sheets.

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

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

Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of January 28, 2023.

During fiscal 2022, fiscal 2021 and fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 2.1 million, $ 8.2 million and $ 0.9 million, respectively, which is included on the consolidated statements of income with a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of January 28, 2023 and January 29, 2022.

We did not receive any distributions or have any undistributed earnings of equity method investments in any fiscal year.

In February 2023, subsequent to fiscal 2022, we made equity contributions to two of the Aspen LLCs totaling $ 31 million whereby such funding was used to repay a portion of third-party debt secured by certain real estate assets held by the Aspen LLCs.

PART II — FINANCIAL STATEMENTS

1 unchanged sentence

NOTE 9—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following ( in thousands ):

Accounts payable and accrued expenses consist of the following:

(in thousands)

Accounts payable

3 unchanged sentences

Accrued freight and duty

Accrued interest

Accrued legal reserves

Accrued professional fees

1 unchanged sentence

Other accrued expenses

Deferred consideration for asset purchase

Total accounts payable and accrued expenses

Other current liabilities consist of the following ( in thousands ):

Federal and state tax payable

Allowance for sales returns

Other current liabilities consist of the following:

(in thousands)

Unredeemed gift card and merchandise credit liability

Current portion of term loan

Current portion of term loans

Allowance for sales returns

Finance lease liabilities

Foreign tax payable

Current portion of equipment promissory notes

Federal and state tax payable

Other current liabilities

1 unchanged sentence

NOTE 10—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following ( in thousands ):

Other non-current obligations consist of the following:

(in thousands)

Unrecognized tax benefits

Non-current portion of equipment promissory notes—net

Other non-current obligations

Deferred payroll taxes

Total other non-current obligations

2 unchanged sentences

NOTE 11—LEASES

Lease costs—net consist of the following ( in thousands ):

Lease costs—net consist of the following:

(in thousands)

Operating lease cost (1)

8 unchanged sentences

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

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 28 million, $ 13 million and $ 15 million, respectively, and charges associated with common area maintenance of $ 8.8 million, $ 7.1 million and $ 8.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

Other variable costs include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset were not material in fiscal 2021, fiscal 2020 and fiscal 2019.

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

Lease right-of-use assets and lease liabilities consist of the following ( in thousands ):

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 19 million, $ 28 million and $ 13 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively, as well as charges associated with common area maintenance of $ 9.3 million, $ 8.8 million and $ 7.1 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

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

(4) Included in selling, general and administrative expenses on the consolidated statements of income.

PART II — FINANCIAL STATEMENTS

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

(in thousands)

Balance Sheet Classification

15 unchanged sentences

Total lease liabilities

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 97

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 174 million and $ 133 million as of January 29, 2022 and January 30, 2021, respectively.

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

(2) Recorded net of accumulated amortization of $ 224 million and $ 174 million as of January 28, 2023 and January 29, 2022, respectively.

(3) Includes $ 39 million and $ 41 million as of January 28, 2023 and January 29, 2022, respectively, related to an RH Design Gallery lease with a landlord that is an affiliate of the managing member of the Aspen LLCs (refer to Note 8— Variable Interest Entities ).

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

The maturities of lease liabilities are as follows as of January 29, 2022 ( in thousands ):

The maturities of lease liabilities were as follows as of January 28, 2023:

(in thousands)

Total lease payments (1)(2)

1 unchanged sentence

Present value of lease liabilities

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PART II — FINANCIAL STATEMENTS

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

Total lease payments exclude $ 663 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of January 28, 2023, of which $ 28 million, $ 38 million, $ 42 million, $ 42 million and $ 40 million will be paid in fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 473 million will be paid subsequent to fiscal 2027.

(2) Excludes future commitments under short-term lease agreements of $ 0.7 million as of January 29, 2022.

(2) Excludes an immaterial amount of future commitments under short-term lease agreements as of January 28, 2023.

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

6 unchanged sentences

Finance leases

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PART II — FINANCIAL STATEMENTS

Other information related to leases consists of the following ( in thousands ):

Other information related to leases consists of the following:

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities

1 unchanged sentence

Operating cash flows from finance leases

Financing cash flows from finance leases

Financing cash flows from finance leases—net (1)

Total cash outflows from leases

2 unchanged sentences

Finance leases

(1) Represents the principal portion of finance lease payments offset by tenant allowances received subsequent to lease commencement of $ 4.7 million in fiscal 2022.

No such tenant allowances were received in fiscal 2021 or fiscal 2020.

Build-to-Suit Asset

During fiscal 2021, we opened the Dallas Design Gallery.

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

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

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

Therefore, the asset will remain classified as a build-to-suit asset within property and equipment—net and will depreciate over the term of the useful life of the asset.

Asset Held for Sale and Sale-Leaseback Transaction

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

PART II — FINANCIAL STATEMENTS

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Sale-Leaseback Transaction

During fiscal 2020, we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $ 26 million, which qualified for sale-leaseback accounting in accordance with ASC 842.

1 unchanged sentence

We recognized a loss related to the execution of the sale transaction of $ 9.4 million in fiscal 2020, which was recorded in selling, general and administrative expenses on the consolidated statements of income.

During fiscal 2019, we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $ 24 million, which qualified for sale-leaseback accounting in accordance with ASC 842.

Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 15 years and renewal options for up to an additional 30 years .

We recognized a gain related to the execution of the sale transaction of $ 1.2 million in fiscal 2019, which was recorded in selling, general and administrative expenses on the consolidated statements of income.

NOTE 12—CONVERTIBLE SENIOR NOTES

In June 2018, we issued in a private offering $ 300 million principal amount of 0.00 % convertible senior notes due 2023 and issued an additional $ 35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”).

In September 2019, we issued in a private offering $ 350 million principal amount of 0.00 % convertible senior notes due 2024 (the “2024 Notes” and, together with the 2023 Notes, the “Convertible Senior Notes” or the “Notes”).

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

Refer to Recently Issued Accounting Standards in Note 3— Significant Accounting Policies for further discussion of the impact of our adoption of ASU 2020-06 in our consolidated financial statements.

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

(in thousands)

Convertible senior notes due 2023 (2)

Convertible senior notes due 2024 (3)

Total convertible senior notes

(1) As of January 28, 2023, the balance includes debt issuance costs inclusive of original issuers’ discount.

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

Refer to Recently Issued Accounting Standards in Note 3— Significant Accounting Policies .

(2) As of January 28, 2023, the 2023 Notes outstanding are classified as convertible senior notes due 2023—net within current liabilities .

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

(3) As of January 28, 2023, the 2024 Notes outstanding are classified as convertible senior notes due 2024—net within non-current liabilities .

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

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

Bond Hedge and Warrant Terminations

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

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

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

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PART II — FINANCIAL STATEMENTS

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

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

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

Notes Repurchase

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

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

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

Accordingly, we derecognized the aggregate principal amount of $ 180 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 325 million.

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

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

Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 314 million was paid in cash to the holders, representing the combined carrying value of the debt liability of $ 47 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 267 million.

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

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

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

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

Accordingly, we derecognized the aggregate principal amount of $ 57 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 80 million.

An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 55 million, with the remaining $ 25 million classified as debt and recognized at its amortized cost basis.

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

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

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 99

NOTE 12—CONVERTIBLE SENIOR NOTES

$ 350 million 0.00 % Convertible Senior Notes due 2024

In September 2019 , we issued in a private offering $ 350 million principal amount of 0.00 % convertible senior notes due 2024 (the “2024 Notes”).

The 2024 Notes are governed by the terms of an indenture between the Company and U.S.

Bank National Association, as the Trustee.

The 2024 Notes will mature on September 15, 2024 , unless earlier purchased by us or converted.

The 2024 Notes will not bear interest, except that the 2024 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2024 Notes.

The 2024 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Certain events are also considered “events of default” under the 2024 Notes, which may result in the acceleration of the maturity of the 2024 Notes, as described in the indenture governing the 2024 Notes.

Events of default under the indenture for the 2024 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $ 20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25 % of the aggregate principal amount of the 2024 Notes then outstanding.

The initial conversion rate applicable to the 2024 Notes is 4.7304 shares of common stock per $ 1,000 principal amount of 2024 Notes, or a total of approximately 1.656 million shares for the total $ 350 million principal amount.

This initial conversion rate is equivalent to an initial conversion price of approximately $ 211.40 per share, which represents a 25 % premium to the $ 169.12 closing share price on the day the 2024 Notes were priced.

The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest.

In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2024 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.

Prior to June 15, 2024 , the 2024 Notes are convertible only under the following circumstances:

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

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2021 and, accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes during the calendar quarter ending March 31, 2022.

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

However, this condition was not met for the calendar quarters ended June 30, 2022, September 30, 2022 and December 31, 2022, as a result, the 2024 Notes were not convertible as of December 31, 2022.

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

1 unchanged sentence

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

We may not redeem the 2024 Notes;

however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2024 Notes for cash at a price equal to 100 % of the principal amount of the 2024 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

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PART II — FINANCIAL STATEMENTS

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 the issuance of the 2024 Notes, we separated the 2024 Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2024 Notes and the fair value of the liability component of the 2024 Notes.

The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 5.74 % over the expected life of the 2024 Notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Debt issuance costs related to the 2024 Notes were comprised of discounts upon original issuance of $ 3.5 million and third party offering costs of $ 1.3 million.

In accounting for the debt issuance costs related to the issuance of the 2024 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values.

Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2024 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity (deficit) .

Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2024 balance on the consolidated balance sheets.

During fiscal 2021, fiscal 2020 and fiscal 2019, we recorded $ 0.7 million, $ 0.7 million and $ 0.2 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively.

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

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

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

During fiscal 2021, holders of $ 130 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

During fiscal 2021, we paid $ 130 million in cash and delivered 419,182 shares of common stock to settle the early conversion of these 2024 Notes.

As a result, we recognized a loss on extinguishment of the liability component of $ 10 million in fiscal 2021.

We also received 419,172 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below, and therefore, on a net basis issued 10 shares of our common stock in respect to such settlement of the converted 2024 Notes.

During the fourth quarter of fiscal 2021, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period.

As of January 29, 2022, the observation periods of these converted 2024 Notes had not been completed and, as a result, these converted 2024 Notes remain outstanding as of January 29, 2022.

In the first quarter of fiscal 2022, we expect to pay $ 3.6 million in cash and to deliver shares of common stock to settle the early conversion of these 2024 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below.

Accordingly, as of January 29, 2022, we reclassified $ 3.6 million of the outstanding principal balance to current liabilities on our consolidated balance sheets.

As the settlement of conversion of the remainder of the 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2024 Notes is classified within other non-current obligations on our consolidated balance sheets.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 101

The carrying value of the 2024 Notes, excluding the discounts upon original issuance and third party offering costs, is as follows ( in thousands ):

Liability component

Debt discount

Net carrying amount (1)

Equity component

(1) Included in additional paid-in capital on the consolidated balance sheets.

We recorded interest expense of $ 15 million, $ 16 million and $ 6 million for the amortization of the debt discount related to the 2024 Notes during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

2024 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2024 Notes and exercise of the overallotment option in September 2019 , we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of approximately $ 211.40 per share.

The total cost of the convertible note hedge transactions was approximately $ 91 million.

In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of $ 338.24 per share, which represents a 100 % premium to the $ 169.12 closing share price on the day the 2024 Notes were priced.

The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of approximately 3.3 million shares of common stock (which cap may also be subject to adjustment).

We received approximately $ 50 million in cash proceeds from the sale of these warrants.

Taken together, the purchase of the convertible note hedges and sale of the warrants 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.

As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

We recorded a deferred tax liability of $ 22 million in connection with the debt discount associated with the 2024 Notes and recorded a deferred tax asset of $ 23 million in connection with the convertible note hedge transactions.

The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the consolidated balance sheets.

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

$ 335 million 0.00 % Convertible Senior Notes due 2023

In June 2018 , we issued in a private offering $ 300 million principal amount of 0.00 % convertible senior notes due 2023 and issued an additional $ 35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”).

The 2023 Notes are governed by the terms of an indenture between the Company and U.S.

Bank National Association, as the Trustee.

The 2023 Notes will mature on June 15, 2023 , unless earlier purchased by us or converted.

The 2023 Notes will not bear interest, except that the 2023 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure to perform certain of our obligations under the indenture governing the 2023 Notes.

The 2023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Certain events are also considered “events of default” under the 2023 Notes, which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes.

Events of default under the indenture for the 2023 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $ 20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25 % of the aggregate principal amount of the 2023 Notes then outstanding.

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PART II — FINANCIAL STATEMENTS

The initial conversion rate applicable to the 2023 Notes is 5.1640 shares of common stock per $ 1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $ 193.65 per share.

The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest.

In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2023 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2023 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2023 , the 2023 Notes are convertible only under the following circumstances:

2 unchanged sentences

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

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2021 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending March 31, 2022.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes through March 15, 2023.

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

1 unchanged sentence

We may not redeem the 2023 Notes;

however, upon the occurrence of a fundamental change (as defined in the indenture governing the 2023 Notes), holders may require us to purchase all or a portion of their 2023 Notes for cash at a price equal to 100 % of the principal amount of the 2023 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Accordingly, in accounting for the issuance of the 2023 Notes, we separated the 2023 Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2023 Notes and the fair value of the liability component of the 2023 Notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Debt issuance costs related to the 2023 Notes were comprised of discounts upon original issuance of $ 1.7 million and third party offering costs of $ 4.6 million.

In accounting for the debt issuance costs related to the issuance of the 2023 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values.

Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity (deficit) .

We recorded $ 0.8 million, $ 1.0 million and $ 0.9 million related to the amortization of debt issuance costs in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, related to the 2023 Notes.

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

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

During fiscal 2022, we paid $ 9.4 million in cash and delivered 27,234 shares of common stock to settle the early conversion of these 2023 Notes.

We also received 27,208 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes, and therefore, on a net basis issued 26 shares of our common stock in respect to such settlement of the converted 2023 Notes.

During fiscal 2021, holders of $ 261 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During fiscal 2021, we paid $ 261 million in cash and delivered 958,330 shares of common stock to settle the early conversion of these 2023 Notes.

As a result, we recognized a loss on extinguishment of the liability component of $ 19 million in fiscal 2021.

We also received 958,307 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 23 shares of our common stock in respect to such settlement of the converted 2023 Notes.

During the fourth quarter of fiscal 2021, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period.

As of January 29, 2022, the observation periods of these converted 2023 Notes had not been completed and, as a result, these converted 2023 Notes remain outstanding as of January 29, 2022.

In the first quarter of fiscal 2022, we expect to pay $ 9.4 million in cash and to deliver shares of common stock to settle the early conversion of these 2023 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below.

Accordingly, as of January 29, 2022, we reclassified $ 9.4 million of the outstanding principal balance to current liabilities on our consolidated balance sheets.

As the settlement of conversion of the remainder of the 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2023 Notes is classified within other non-current obligations on our consolidated balance sheets.

The carrying values of the 2023 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows ( in thousands ):

Liability component

Debt discount

Net carrying amount (1)

Equity component

(1) Included in additional paid-in capital on the consolidated balance sheets.

We recorded interest expense of $ 14 million, $ 18 million and $ 17 million for the amortization of the debt discount related to the 2023 Notes during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

2023 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2023 Notes and exercise of the overallotment option in June 2018 , we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.730 million shares of our common stock at a price of approximately $ 193.65 per share .

The total cost of the convertible note hedge transactions was approximately $ 92 million.

In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.730 million shares of our common stock at a price of $ 309.84 per share.

The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of approximately 3.5 million shares of common stock (which cap may also be subject to adjustment).

We received approximately $ 51 million in cash proceeds from the sale of these warrants.

Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2023 Notes until our common stock is above approximately $ 309.84 per share.

As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity (deficit), are not accounted for as derivatives and are not remeasured each reporting period.

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

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PART II — FINANCIAL STATEMENTS

We recorded a deferred tax liability of $ 22 million in connection with the debt discount associated with the 2023 Notes and recorded a deferred tax asset of $ 23 million in connection with the convertible note hedge transactions.

The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the consolidated balance sheets.

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

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

$ 300 million 0.00 % Convertible Senior Notes due 2020

6 unchanged sentences

The 2020 Notes were guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor.

Accordingly, in accounting for the issuance of the 2020 Notes, we separated the 2020 Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes.

The debt discount was amortized to interest expense using an effective interest rate of 6.47 % over the expected life of the 2020 Notes.

The equity component was not remeasured as it continued to meet the conditions for equity classification.

In May 2020, $ 9.4 million in aggregate principal amount of 2020 Notes were converted at the option of the noteholders.

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No gain or loss arose on extinguishment of the liability component.

We also received 1,116,735 shares of common stock from the exercise of the remainder of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis received 17 shares of our common stock (which were recorded as treasury stock within the consolidated statements of stockholders’ equity (deficit) in respect to such settlement of the 2020 Notes.

We recorded interest expense of $ 8.9 million and $ 18 million for the amortization of the debt discount related to the 2020 Notes during fiscal 2020 and fiscal 2019, respectively.

We recorded $ 0.6 million and $ 1.2 million related to the amortization of debt issuance costs in fiscal 2020 and fiscal 2019, respectively, related to the 2020 Notes.

We recorded interest expense of $ 8.9 million for the amortization of the debt discount related to the 2020 Notes and $ 0.6 million related to the amortization of debt issuance costs in fiscal 2020.

2020 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, we entered into convertible note hedge transactions whereby we had the option to purchase a total of approximately 2.540 million shares of our common stock at a price of approximately $ 118.13 per share.

The total cost of the convertible note hedge transactions was approximately $ 68 million.

In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.540 million shares of our common stock at a strike price of $ 189.00 per share (the “2020 warrants”).

We received approximately $ 30 million in cash proceeds from the sale of the 2020 warrants.

Taken together, the purchase of the convertible note hedges and sale of the warrants were intended to offset any actual earnings dilution from the conversion of the 2020 Notes until our common stock is above approximately $ 189.00 per share.

As these transactions met certain accounting criteria, the convertible note hedges and warrants were recorded in stockholders’ equity, not accounted for as derivatives and not remeasured each reporting period.

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

For more information, refer to “2020 Notes—Convertible Bond Hedge and Warrant Transactions” within Note 12— Convertible Senior Notes in our 2021 Form 10-K.

PART II — FINANCIAL STATEMENTS

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The warrants expired on January 7, 2021.

$ 350 million 0.00 % Convertible Senior Notes due 2019

In June 2014 , we issued $ 350 million principal amount of 0.00 % convertible senior notes due 2019 (the “2019 Notes”) in a private offering.

The 2019 Notes were governed by the terms of an indenture between the Company and U.S.

Bank National Association, as the Trustee.

The 2019 Notes did not bear interest, except that the 2019 Notes were subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes.

The 2019 Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of its subsidiaries.

Certain events were also considered “events of default” under the 2019 Notes, which could result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

In June 2019, upon the maturity of the 2019 Notes, $ 350 million in aggregate principal amount of the 2019 Notes were settled for $ 349 million in cash and 42 shares of common stock.

As a result, we recognized a gain on extinguishment of debt of $ 1.0 million during fiscal 2019.

We recorded interest expense of $ 5.9 million for the amortization of the debt discount related to the 2019 Notes in fiscal 2019, respectively.

We recorded $ 0.4 million related to the amortization of debt issuance costs in fiscal 2019 related to the 2019 Notes.

2019 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2019 Notes, we entered into convertible note hedge transactions whereby we had the option to purchase a total of approximately 3.015 million shares of our common stock at a price of approximately $ 116.09 per share.

The total cost of the convertible note hedge transactions was approximately $ 73 million.

The convertible note hedge terminated upon the maturity date of the 2019 Notes.

In addition, we sold warrants whereby the holders of the warrants had the option to purchase a total of approximately 3.015 million shares of our common stock at a price of $ 171.98 per share.

We received $ 40 million in cash proceeds from the sale of these warrants.

Taken together, the purchase of the convertible note hedges and sale of the warrants were intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $ 116.09 per share to $ 171.98 per share.

As these transactions met certain accounting criteria, the convertible note hedges and warrants were recorded in stockholders’ equity (deficit), were not accounted for as derivatives and were not remeasured each reporting period.

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

During fiscal 2019, we delivered approximately 167,100 shares upon exercise of the warrants under the terms of the warrant agreements.

The warrants expired on December 6, 2019.

106 | FORM 10-K

PART II — FINANCIAL STATEMENTS

NOTE 13—CREDIT FACILITIES

The outstanding balances under our credit facilities were as follows ( in thousands ):

The outstanding balances under our credit facilities were as follows:

(dollars in thousands)

Asset based credit facility (2)

Term loan credit agreement (2)

Term loan B (3)

Term loan B-2 (4)

Equipment promissory notes (5)

Total credit facilities

(1) The interest rates for the asset based credit facility, term loans and equipment promissory notes represent the weighted-average interest rates as of January 28, 2023.

(2) Deferred financing fees associated with the asset based credit facility as of January 28, 2023 and January 29, 2022 were $ 3.5 million and $ 4.1 million, respectively, and are included in other non-current assets on the consolidated balance sheets.

The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit.

In July 2021, Restoration Hardware, Inc.

entered into the ABL Credit Agreement (defined below) which extended the maturity date of the revolving line of credit from June 28, 2022 to July 29, 2026.

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

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

(3) Represents the outstanding balance of the Term Loan B (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 1,955 million and $ 20 million were included in term loan B—net and other current liabilities , respectively, on the consolidated balance sheets as of January 28, 2023.

Outstanding amounts of $ 1,975 million and $ 20 million were included in term loan—net and other current liabilities , respectively, on the consolidated balance sheets as of January 29, 2022.

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

(3) Represents total equipment security notes secured by certain of our property and equipment, of which $ 14 million outstanding was included in other current liabilities on the consolidated balance sheets.

The remaining $ 1.2 million outstanding, included in other non-current obligations on the consolidated balance sheets, has principal payments due in fiscal 2023.

(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 494 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the consolidated balance sheets as of January 28, 2023.

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

(5) Represents the net carrying amount of equipment security notes secured by certain of our property and equipment.

The remaining $ 1.2 million outstanding balance, included in other current liabilities on the consolidated balance sheets as of January 28, 2023, represents principal payments due in fiscal 2023.

Outstanding amounts of $ 14 million were included in other current liabilities on the consolidated balance sheets as of January 29, 2022.

Asset Based Credit Facility & Term Loan Facilities

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

102 | FORM 10-K

PART II — FINANCIAL STATEMENTS

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

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

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

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

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

1 unchanged sentence

All obligations under the ABL Credit Agreement are secured by substantial assets of the loan parties, including inventory, receivables and certain types of intellectual property.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 107

Borrowings under the revolving line of credit (other than swing line loans, which are subject to interest at the base rate) bear interest, at the borrower’s option, at either the base rate or London Inter-bank Offered Rate (“LIBOR”) subject to a 0.00 % LIBOR floor (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S.

Borrowings under the revolving line of credit (other than swing line loans, which are subject to interest at the base rate) bear interest, at the borrower’s option, at either the base rate or LIBOR subject to a 0.00 % LIBOR floor (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S.

Index Rate”, as such term is defined in the ABL Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable interest rate margin, in each case.

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

The ABL Credit Agreement was amended in December 2022 to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

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

2 unchanged sentences

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

As of January 29, 2022, RHI was in compliance with all applicable financial covenants of the ABL Credit Agreement.

As of January 28, 2023, RHI was in compliance with the FCCR Covenant.

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

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As of January 28, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 533 million, net of $ 27 million in outstanding letters of credit.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 103

Term Loan Credit Agreement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We incurred debt issuance costs of $ 28 million and $ 26 million in fiscal 2022 and fiscal 2021, respectively, in connection with the issuance of the Term Loan Credit Agreement.

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

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

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

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

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

108 | FORM 10-K

PART II — FINANCIAL STATEMENTS

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

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

The Term Loan Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size, but provides for unlimited exceptions in the case of incurring indebtedness, granting of liens and making investments, dividend payments, and payments of material junior indebtedness, subject to satisfying specified leverage ratio tests.

1 unchanged sentence

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

104 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Equipment Loan Facility

On September 5, 2017, Restoration Hardware, Inc.

entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and we agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan.

On September 5, 2017, RHI entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and RHI agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan.

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

As of January 29, 2022, the equipment security notes bore interest at a weighted-average rate of 4.56 %.

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

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

Second Lien Credit Agreement

On April 10, 2019, Restoration Hardware, Inc., entered into a credit agreement, dated as of April 9, 2019 and effective as of April 10, 2019 (the “Second Lien Credit Agreement”), among (i) Restoration Hardware, Inc., as lead borrower, (ii) the guarantors party thereto, (iii) the lenders party thereto, each of whom were managed or advised by either Benefit Street Partners L.L.C.

and its affiliated investment managers or Apollo Capital Management, L.P.

and its affiliated investment managers, and (iv) BSP Agency, LLC, as administrative agent and collateral agent (the “Second Lien Administrative Agent”) with respect to a second lien term loan in an aggregate principal amount equal to $ 200 million with a maturity date of April 9, 2024 (the “Second Lien Term Loan”).

The second lien term loan of $ 200 million in principal was repaid in full on September 20, 2019.

As a result of the repayment, in fiscal 2019 we incurred a $ 6.7 million loss on extinguishment of debt, which includes a prepayment penalty of $ 4.0 million and acceleration of amortization of debt issuance costs of $ 2.7 million.

The Second Lien Term Loan bore interest at an annual rate generally based on LIBOR plus 6.50 % .

This rate was a floating rate that reset periodically based upon changes in LIBOR rates during the life of the Second Lien Term Loan.

At the date of the initial borrowing, the rate was set at one-month LIBOR plus 6.50 % .

Intercreditor Agreement

On April 10, 2019, in connection with the Second Lien Credit Agreement, Restoration Hardware, Inc.

entered into an Intercreditor Agreement (the “Intercreditor Agreement”), dated as of April 9, 2019 and effective as of April 10, 2019, with the First Lien Administrative Agent and the Second Lien Administrative Agent.

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

The Intercreditor Agreement is no longer in effect after repayment of the Second Lien Term Loan on September 20, 2019.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 109

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

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

NOTE 14—FAIR VALUE MEASUREMENTS

Certain financial assets and liabilities are required to be carried at fair value.

The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

In determining the fair value, we utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability.

Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value.

Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

Our financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Our recurring and non-recurring fair values measurements of financial and non-financial assets and liabilities are classified and disclosed in one of the following categories in accordance with ASC 820— Fair Value Measurements :

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date.

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The inputs used in the determination of fair value require significant judgment or estimation.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Fair Value Measurements—Recurring

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts.

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

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

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes were as follows ( in thousands ):

Amounts reported as cash and equivalents, restricted cash, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts.

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

The estimated fair value of the real estate loans approximate their carrying values as they were recently issued.

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

(in thousands)

Convertible senior notes due 2023

Convertible senior notes due 2024

(1) Carrying value represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity, and does not exclude the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

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

110 | FORM 10-K

Term loan B-2

(1) The carrying value of the convertible senior notes as of January 28, 2023 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer to Note 3— Significant Accounting Policies ).

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

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

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 105

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

Fair Value Measurements—Non-Recurring

The fair value of the non-cash compensation related to noncontrolling interests in the Member LLCs in fiscal 2022, as discussed in “Consolidated Variable Interest Entities and Noncontrolling Interests” within Note 3— Significant Accounting Policies and Note 8— Variable Interest Entities , were determined based on unobservable (Level 3) inputs and valuation techniques.

The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in “Variable Interest Entities (VIE)” within Note 3— Significant Accounting Policies and Note 8— Variable Interest Entities , were determined based on unobservable (Level 3) inputs and valuation techniques.

The fair value of the Waterworks tradename was determined based on unobservable (Level 3) inputs and valuation techniques, as discussed in “Impairment” within Note 3— Significant Accounting Policies .

The fair value of the acquired goodwill and tradename associated with the acquisitions by the RH Segment in fiscal 2020, as discussed in Note 6— Business Combinations , were determined based on unobservable (Level 3) inputs and valuation techniques.

The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in discussed in “Equity Method Investments” within Note 3— Significant Accounting Policies and Note 8— Equity Method Investments , were determined based on unobservable (Level 3) inputs and valuation techniques.

Upon settlement of our convertible senior notes, including the settlements in which holders of the 2023 Notes and 2024 Notes elected to exercise the early conversion option, we recognized a gain or loss on extinguishment of debt in the consolidated statements of income, which represents the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date.

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NOTE 15—INCOME TAXES

The following is a summary of our income before income taxes, inclusive of our share of equity method investments losses ( in thousands ):

The following is a summary of our income tax expense ( in thousands ):

The following table presents our income before income taxes, inclusive of our share of equity method investments losses:

(in thousands)

106 | FORM 10-K

PART II — FINANCIAL STATEMENTS

The following table presents a summary of our income tax expense (benefit):

(in thousands)

Total current tax expense

Total deferred tax benefit

Total income tax expense

PART II — FINANCIAL STATEMENTS

FORM 10-K | 111

A reconciliation of the federal statutory tax rate to our effective tax rate is as follows:

Total income tax expense (benefit)

A reconciliation of the federal statutory tax rate to our effective tax rate was as follows:

Provision at federal statutory tax rate

State income taxes—net of federal tax impact

Non-deductible stock-based compensation

Tax rate adjustments and other

Stock compensation—excess benefits

Tax impact of convertible senior notes repurchase

Non-deductible stock-based compensation

Valuation allowance

Tax rate adjustments and other

Other permanent items

3 unchanged sentences

If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.

Significant components of our deferred tax assets and liabilities are as follows ( in thousands ):

PART II — FINANCIAL STATEMENTS

FORM 10-K | 107

Significant components of our deferred tax assets and liabilities were as follows:

(in thousands)

Non-current deferred tax assets (liabilities)

Lease liabilities

Stock-based compensation

Net operating loss carryforwards

Accrued expenses

Interest expense carryforwards

Stock-based compensation

Merchandise inventories

Deferred lease credits

Net operating loss carryforwards

Deferred revenue

Deferred lease credits

Convertible senior notes

Non-current deferred tax assets—net

Valuation allowance

Non-current deferred tax assets

Valuation allowance

Non-current deferred tax assets—net

Property and equipment

Lease right-of-use assets

Tradename, trademarks and intangibles

Prepaid expense and other

Tradename, trademarks and intangibles

State benefit

Non-current deferred tax liabilities

Total net non-current deferred tax assets

112 | FORM 10-K

PART II — FINANCIAL STATEMENTS

A reconciliation of our valuation allowance against deferred tax assets in certain state and foreign jurisdictions due to historical losses is as follows ( in thousands ):

Total non-current deferred tax assets—net

A reconciliation of our valuation allowance against deferred tax assets in certain state and foreign jurisdictions due to historical losses was as follows:

(in thousands)

Balance at beginning of fiscal year

1 unchanged sentence

Balance at end of fiscal year

As of January 29, 2022, we had state net operating loss carryovers of $ 20 million and foreign net operating loss carryovers of $ 13 million.

The state net operating loss carryovers will begin to expire in 2022, and the foreign net operating loss carryovers will begin to expire in 2023.

As of January 28, 2023, we had federal, state and foreign net operating loss carryovers of $ 478 million, $ 217 million and $ 16 million, respectively.

The federal net operating losses do not expire.

The state and foreign net operating losses will begin to expire in 2023.

Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable income which can be offset by net operating loss carryforwards after a change in ownership (generally greater than 50 % change in ownership).

We cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses.

A reconciliation of the exposures related to unrecognized tax benefits is as follows ( in thousands ):

108 | FORM 10-K

PART II — FINANCIAL STATEMENTS

A reconciliation of the exposures related to unrecognized tax benefits was as follows:

(in thousands)

Balance at beginning of fiscal year

Gross increases (decreases)—prior period tax positions

Gross decreases—prior period tax positions

Gross increases—current period tax positions

6 unchanged sentences

As of January 28, 2023, we have $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

We account for interest and penalties related to exposures as a component of income tax expense.

We had interest accruals of $ 0.3 million and $ 0.5 million associated with exposures as of January 29, 2022 and January 30, 2021, respectively.

We are subject to taxation in the United States and various states and foreign jurisdictions.

1 unchanged sentence

With few exceptions, as of January 28, 2023, we are no longer subject to U.S.

federal, state, local, or foreign examinations by tax authorities for years before fiscal 2017.

federal, state, local, or foreign examinations by tax authorities for years prior to fiscal 2018.

We have not provided U.S.

income or foreign withholding taxes on the undistributed earnings of our foreign subsidiaries as of January 28, 2023 because we intend to permanently reinvest such earnings outside of the U.S.

If these foreign earnings were to be repatriated in the future, the related U.S.

tax liability is expected to be immaterial, due to the participation exemption put in place in the Tax Cuts and Jobs Act of 2017.

Inflation Reduction Act

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law.

The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions.

We are evaluating the provisions included under the IRA and do not expect the provisions to have a material impact to our consolidated financial statements.

PART II — FINANCIAL STATEMENTS

1 unchanged sentence

NOTE 16—NET INCOME PER SHARE

The weighted-average shares used for net income per share are as follows:

The weighted-average shares used for net income per share were as follows:

Weighted-average shares—basic

2 unchanged sentences

Weighted-average shares—diluted

(1) The 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 116.09 per share, $ 118.13 per share, $ 193.65 per share and $ 211.40 per share, respectively.

The 2019 Notes matured on June 15, 2019 and did not have an impact of our dilutive share count post-maturity.

The 2020 Notes matured on July 15, 2020 and did not have an impact on our dilutive share count post-maturity.

The warrants associated with our 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 171.98 per share, $ 189.00 per share, $ 309.84 per share and $ 338.24 per share, respectively.

The warrants associated with our 2019 Notes and 2020 Notes expired through December 2019 and January 2021, respectively.

While the share price for our common stock trades above the applicable conversion price of each series of notes or the applicable exercise price of each series of warrants for the notes, these instruments will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock continues to exceeds the applicable conversion or exercise price of the notes and warrants.

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

Prior to adoption of ASU 2020-06, we applied the treasury stock method to determine the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes, and the 2020 Notes, 2023 Notes and the 2024 Notes impact our dilutive share count beginning at stock prices of $ 118.13 per share, $ 193.65 per share and $ 211.40 per share, respectively.

The warrants associated with our 2020 Notes, 2023 Notes and 2024 Notes had an impact on our dilutive share count beginning at stock prices of $ 189.00 per share, $ 309.84 per share and $ 338.24 per share, respectively.

The warrants associated with our 2020 Notes expired in January 2021.

The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of January 28, 2023.

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

Refer to Note 12— Convertible Senior Notes .

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

The following number of options and restricted stock units, as well as shares issuable under convertible senior notes prior to extinguishment in fiscal 2022, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive:

Restricted stock units

Total anti-dilutive stock-based awards

NOTE 17—SHARE REPURCHASES AND SHARE RETIREMENTS

Convertible senior notes

NOTE 17—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENT

Share Repurchase Program

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

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

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

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

We did no t make any repurchases under this program during either fiscal 2021 or fiscal 2020.

The total current authorized size of the share repurchase program is up to $ 950 million (the “950 Million Repurchase Program”), of which $ 450 million remained available as of January 29, 2022 for future share investments.

Share Repurchases under Equity Plans

As of both January 29, 2022 and January 30, 2021, the aggregate unpaid principal amount of notes payable for share repurchases was $ 0.6 million, of which $ 0.3 million was recorded in other current liabilities on the consolidated balance sheets and $ 0.3 million was recorded in other non-current obligations on the consolidated balance sheets as of January 29, 2022, and $ 0.6 million was recorded in other non-current obligations on the consolidated balance sheets as of January 30, 2021.

During fiscal 2020, we elected to repay $ 18 million of aggregate principal amount of the notes payable for share repurchases, of which, $ 16 million was paid to a current board member of the Company.

We recorded interest expense on the notes of $ 0.1 million, $ 0.8 million and $ 0.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

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, $ 1,450 million remains available for future share repurchases under this program.

Share Retirements

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 a total of $ 444 million and $ 560 million from treasury stock to additional paid-in capital and retained earnings , respectively, on the consolidated balance sheets and consolidated statements of stockholders’ equity.

There was no impact on the consolidated statements of income or cash flows related to the share retirement activity.

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PART II — FINANCIAL STATEMENTS

Share Retirements

In fiscal 2020, we retired 600 shares of our common stock related to shares we had repurchased under equity plans and we retired 17 shares of our common stock related to shares we received upon the maturity of the 2020 Notes (refer to Note 12— Convertible Senior Notes ).

As a result of the retirements, we reclassified a total of $ 0.1 million from treasury stock to additional paid-in capital on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of January 30, 2021.

In fiscal 2019, we retired 2,170,154 shares of our common stock related to shares we had repurchased under the $ 950 Million Repurchase Program.

As a result of this retirement, we reclassified a total of $ 250 million from treasury stock , of which $ 13 million was allocated to additional paid-in capital and $ 237 million was allocated to retained earnings (accumulated deficit) on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of February 1, 2020.

There was no impact on the consolidated statements of income or cash flows related to these share retirement activities.

NOTE 18—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 44 million, $ 48 million and $ 146 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income.

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

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

2012 Stock Incentive Plan and 2012 Stock Option Plan

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

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

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

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

On February 1, 2021, an additional 419,908 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 846,970 .

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

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

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

The number of shares available for future issuance under the Stock Incentive Plan as of January 29, 2022 was 1,185,322 .

Shares issued as a result of award exercises under the Stock Incentive Plan and Option Plan will be funded with the issuance of new shares.

On January 31, 2022 an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 115

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

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

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

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

On November 1, 2022, both the Stock Incentive Plan and Option Plan expired.

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

2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options

A summary of stock option activity under the Stock Incentive Plan and the Option Plan is as follows:

A summary of stock option activity under the Stock Incentive Plan and the Option Plan was as follows:

WEIGHTED-AVERAGE

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Outstanding—January 29, 2022

( 4,249,285 )

Outstanding—January 28, 2023

The fair value of stock options issued was estimated on the date of grant using the following assumptions:

The fair value of stock options granted was estimated on the date of grant using the following assumptions:

Expected volatility

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Dividend yield

A summary of additional information about stock options is as follows:

Weighted-average fair value per share of stock options granted

Aggregate intrinsic value of stock options exercised (in thousands)

Fair value of stock options vested (in thousands)

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 111

A summary of additional information about stock options was as follows:

(in thousands, except per share amounts)

Weighted-average fair value per share of stock options granted

Aggregate intrinsic value of stock options exercised

Fair value of stock options vested

(1) The fair value of stock options vested in fiscal 2021 was disclosed as $ 59,074 in our fiscal 2021 Form 10-K and has been updated with the amount presented herein.

Information about stock options outstanding, vested or expected to vest, and exercisable as of January 28, 2023 is as follows:

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$ 174.32 — $ 380.53

$ 385.30 — $ 385.30

$ 389.34 — $ 713.52

Vested or expected to vest

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 29, 2022 was $ 2.2 billion, $ 2.1 billion and $ 2.0 billion, respectively.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 28, 2023 was $ 537 million, $ 516 million and $ 427 million, respectively.

Stock options exercisable as of January 28, 2023 had a weighted-average remaining contractual life of 5.15 years.

We recorded stock-based compensation expense related to stock options of $ 41 million, $ 45 million and $ 140 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

The fiscal 2021 and fiscal 2020 expense includes $ 24 million and $ 117 million, respectively, associated with the option grant to Mr.

The expense includes $ 18 million, $ 24 million and $ 117 million, respectively, associated with the option grant to Mr.

Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant below).

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Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $ 385.30 per share under the 2012 Stock Incentive Plan.

The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics as described further below.

The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met.

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 24 million and $ 117 million was recognized in fiscal 2021 and fiscal 2020, respectively, (which is included in the stock-based compensation expense amounts noted above).

Time-Based Restrictions

The time-based restrictions are measured over a four-year performance year period which will begin in May 2021, on the anniversary of the option granted to Mr.

Friedman in 2017.

The time-based restrictions will lapse at the end of each of the successive anniversary dates from May 2022 through May 2025 at a rate of 175,000 shares per year if (i) Mr.

Friedman remains in service with us at the end of such year with the authority, duties, or responsibilities of a chief executive officer at such date and (ii) the stock price performance-based metrics have been achieved in such year as described further below.

PART II — FINANCIAL STATEMENTS

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Performance-Based Restrictions

The stock price performance-based restrictions of the option are measured annually over the performance year period and may lapse as to only one-quarter of the option in each of the first four performance years, with the first performance year beginning in May 2021.

The stock price performance-based metrics for the option are set at $ 500 per share, $ 650 per share and $ 800 per share.

With respect to any given performance year, if the “twenty day average trading price” our common stock exceeds $ 500 per share, $ 650 per share, or $ 800 per share during such performance year, then the selling restrictions will lapse as to 58,333 shares, 58,333 share and 58,334 shares, respectively, on the last day of such performance year, if Mr.

Friedman remains in service with us at such date.

Any selling restrictions that have not lapsed in any performance year during the first four performance years may be achieved in a successive performance year through the end of the eighth performance year which ends in May 2029, provided Mr.

Friedman continues to satisfy the service requirement through the date the performance target is achieved.

Any selling restrictions that have not lapsed by the end of the eighth performance year will thereafter only lapse in May 2041, the 20 th anniversary of the beginning of the first performance year.

PART II — FINANCIAL STATEMENTS

The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics.

The option was fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met.

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 18 million, $ 24 million and $ 117 million was recognized in fiscal 2022, fiscal 2021 and fiscal 2020, respectively (which is included in the stock-based compensation expense amounts noted above).

2012 Stock Incentive Plan—Restricted Stock Awards

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As of January 28, 2023, the total unrecognized compensation expense related to unvested restricted stock awards was $ 7.2 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.97 years.

Compensation Related to Consolidated VIEs

Refer to Note 8— Variable Interest Entities for details of non-cash compensation related to consolidated variable interest entities.

NOTE 19—EMPLOYEE BENEFIT PLANS

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We made no contributions to the 401(k) plan during fiscal 2022, fiscal 2021 or fiscal 2020.

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PART II — FINANCIAL STATEMENTS

NOTE 20—COMMITMENTS AND CONTINGENCIES

We had no material off balance sheet commitments as of January 28, 2023.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 113

Contingencies

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

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

Litigation is inherently unpredictable.

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

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

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

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

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

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

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

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

We have faced similar litigation in the past.

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

Our assessment of these legal proceedings, as well as other lawsuits, could change from future determinations or the discovery of facts that are not presently known.

We continue to defend such cases and our estimates may evolve over time.

Accordingly, the ultimate costs to resolve these cases may be substantially higher or lower than our estimates.

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

Loss contingencies determined to be probable and estimable are recorded in accounts payable and accrued expenses on the consolidated balance sheets (refer to Note 9 — Accounts Payable, Accrued Expenses and Other Current Liabilities ).

These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to each matter.

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

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

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

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

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

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

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

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

Legal costs related to such claims are expensed as incurred.

NOTE 21—SEGMENT REPORTING

We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”), which we have determined is our Chief Executive Officer.

We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the chief operating decision maker (“CODM”), which we have determined is our Chief Executive Officer.

We have three operating segments:

RH Segment, Waterworks and Real Estate Development.

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

The Real Estate Development segment represents operations associated with our equity method investments, as described in Note 8— Equity Method Investments.

RH Segment, Waterworks and Real Estate.

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

The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 8— Variable Interest Entities ).

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PART II — FINANCIAL STATEMENTS

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

While RH Segment and Waterworks have a shared senior leadership team and customer base, we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

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

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

Segment Information

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

Depreciation and amortization

PART II — FINANCIAL STATEMENTS

FORM 10-K | 119

In fiscal 2021 and fiscal 2020, the Real Estate Development segment share of equity method investments losses were $ 8.2 million and $ 0.9 million, respectively.

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

Tradenames, trademarks and other intangible assets (2)

Equity method investments

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

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020.

We use segment operating income to evaluate segment performance and allocate resources.

Segment operating income excludes (i) a non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020, (ii) asset impairments and changes in useful lives, (iii) product recall accruals and adjustments—net, (iv) severance costs associated with reorganizations, (v) gain (loss) on sale leaseback transactions, (vi) legal settlements, net of legal expenses and (vii) asset held for sale gain.

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

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

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

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

Friedman, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 12— Convertible Senior Notes ), (v) non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities (refer to Note 8— Variable Interest Entities ), (vi) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vii) product recalls, (viii) favorable legal settlement, (ix) gain on sale of building and land, (x) loss on sale leaseback transaction and (xi) severance costs associated with reorganizations.

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

Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and our senior leadership team reviews.

The following table presents, for our retail operating segments, the segment operating income and income before income taxes ( in thousands ):

The following table presents segment operating income and income before income taxes and equity method investments:

(in thousands)

Operating income:

Asset impairments

Non-cash compensation

Asset impairments and change in useful lives

Employer payroll taxes on option exercises

Professional fees

Non-cash compensation related to consolidated VIEs

Compensation settlements

Recall accrual

Legal settlement

Gain on sale of building and land

Loss on sale leaseback transaction

Reorganization related costs

(Gain) loss on sale leaseback transaction

Legal settlements

Asset held for sale gain

Income from operations

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Other expense—net

Tradename impairment

Income before income taxes

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Income before income taxes and equity method investments

PART II — FINANCIAL STATEMENTS

FORM 10-K | 115

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

(in thousands)

Depreciation and amortization

In fiscal 2022, fiscal 2021 and fiscal 2020, the Real Estate segment share of equity method investments losses were $ 2.1 million, $ 8.2 million and $ 0.9 million, respectively.

Our share of income from equity method investments for the Waterworks segment was immaterial.

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

(in thousands)

Tradenames, trademarks and other intangible assets (2)

Equity method investments

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

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million.

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

Furniture includes both indoor and outdoor furniture.

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

Net revenues in each category were as follows ( in thousands ):

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

Net revenues in each category were as follows:

(in thousands)

Non-furniture

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are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented.

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

No single customer accounted for more than 10 % of our revenues in fiscal 2022, fiscal 2021 or fiscal 2020.

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PART II — FINANCIAL STATEMENTS

The following table presents our long-lived assets by geographic information:

(in thousands)

North America

All other countries

Total long-lived assets

Long-lived assets held internationally were not material as of January 29, 2022.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 117

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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 8. Financial Statements and Supplementary Data