What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-09-07 compared with 2023-05-26 · 262 added, 137 removed, 321 unchanged (55% of the section changed)

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The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, but not limited to, those listed in our 2022 Form 10-K.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three months ended April 29, 2023 and a comparison to the three months ended April 30, 2022.

The discussion related to cash flows for the three months ended April 30, 2022 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q/A for the quarter ended April 30, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2023.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended July 29, 2023 and a comparison to the three and six months ended July 30, 2022.

The discussion related to cash flows for the six months ended July 30, 2022 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q/A for the quarter ended July 30, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2023.

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

Our MD&A is organized as follows:

This section provides a general description of our business, including our key value-driving strategies and overview of certain known trends and uncertainties.

This section provides a general description of our business, including our key value-driving strategies and an overview of certain known trends and uncertainties.

Basis of Presentation and Results of Operations .

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

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

Liquidity and Capital Resources .

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Critical Accounting Policies and Estimates .

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

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FINANCIAL INFORMATION

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

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We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions.

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

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled Risk Factors in our 2022 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 2022 Form 10-K.

Matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may, in fact, not be short term and may recur in one or more future financial reporting periods.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect, or that future developments affecting us will be those that we have anticipated.

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

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

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

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

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

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

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

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

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

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

We operate our retail locations throughout the United States, Canada, and the United Kingdom, and have an integrated RH Hospitality experience in 15 of our Design Gallery locations, which includes Restaurants and Wine Bars.

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

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

In June 2023, we opened RH England, The Gallery at the Historic Aynho Park, a 400-year-old landmark estate representing the most inspiring and immersive physical expression of the brand to date.

RH England marks the beginning of our global expansion beyond North America and our continued foray into hospitality with two primary restaurants:

The Orangery, a live fire concept;

and The Loggia, an outdoor venue featuring wood-fired pizzas.

The Gallery also includes a Wine Lounge and Tea Salon, as well as a Juicery.

Spanning 73 acres and over 60 rooms, RH England seamlessly integrates luxury home furnishings collections from RH Interiors, Contemporary, Modern and Outdoor.

FINANCIAL INFORMATION

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As of April 29, 2023, we operated the following number of locations:

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We have recently undertaken substantial efforts to introduce the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby & Child and TEEN.

These new collections reflect a level of design and quality inaccessible in our current market, and a value proposition that will be disruptive across multiple markets.

Over the next several quarters we will be increasing our investment in Sourcebooks in connection with the introduction of these new products.

As of July 29, 2023, we operated the following number of locations:

Design Galleries

Legacy Galleries

Modern Galleries

Modern Gallery

Baby & Child and TEEN Galleries

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Business Conditions

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

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, substantially higher interest and mortgage rates, and unpredictability in the global financial markets related to the foregoing as well as, among other things, the recent failures of several financial institutions.

We experienced increased demand for our products during the pandemic and there have been significant shifts in consumer consumption patterns with the easing of the pandemic, including increases in travel and services rather than spending on home furnishings.

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

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FINANCIAL INFORMATION

Product Elevation .

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

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

FINANCIAL INFORMATION

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Over the next year we will be introducing a large number of new products as we have continued our efforts to enhance our merchandise assortment.

In addition, over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color.

Gallery Transformation .

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Brand Elevation .

We are evolving the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker.

We are evolving the RH brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker.

We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world.

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

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

Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley;

RH1 & RH2, our private jets;

and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation.

These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.

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

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

As such, we are actively pursuing the expansion of the RH brand globally with the objective of launching international locations in Europe, which began with the opening of RH England, The Gallery at the Historic Aynho Park, in June 2023.

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

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FINANCIAL INFORMATION

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Basis of Presentation and Results of Operations

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THREE MONTHS ENDED

SIX MONTHS ENDED

(dollars in thousands)

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Loss on extinguishment of debt

Other income—net

Other (income) expense—net

Total other expenses

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

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

We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and to adjust for the impact of income tax items related to such adjustments to our GAAP financial statements.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

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

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FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 35

Adjusted Operating Income .

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THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

1 unchanged sentence

Loss on extinguishment of debt (1)

Other income—net (1)

Other (income) expense—net (1)

Income tax expense (benefit) (1)

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Operating income

Legal settlements (2)

Reorganization related costs (3)

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Employer payroll taxes on option exercise (5)

Professional fee (5)

Asset impairments (6)

Professional fees (7)

Compensation settlements (8)

Recall accrual (9)

Adjusted operating income

(1) Refer to discussion “Three Months Ended April 29, 2023 Compared to Three Months Ended April 30, 2022” below for a discussion of our results of operations for the three months ended April 29, 2023 and April 30, 2022.

(1) Refer to discussion “Three Months Ended July 29, 2023 Compared to Three Months Ended July 30, 2022” and “July 29, 2023 Compared to July 30, 2022” below for a discussion of our results of operations for the three and six months ended July 29, 2023 and July 30, 2022.

(2) Represents certain legal settlements associated with class action litigation matters.

Refer to Note 16 — Commitments and Contingencies in our condensed consolidated financial statements.

(3) Represents severance costs and related payroll taxes associated with a reorganization.

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Friedman in the first quarter of fiscal 2022.

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

(6) Represents asset impairments related to property and equipment of Galleries under construction.

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

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

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

(9) Represents accruals associated with product recalls.

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 36

Adjusted Net Income .

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 41

Reconciliation of GAAP Net Income to Adjusted Net Income

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

Adjustments pre-tax:

Legal settlements (1)

Reorganization related costs (1)

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Employer payroll taxes on option exercise (1)

Professional fee (1)

Asset impairments (1)

Professional fees (1)

Compensation settlements (1)

Recall accrual (1)

Gain on derivative instruments—net (2)

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

Subtotal adjusted items

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

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

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

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

Friedman in first quarter of fiscal 2022.

The adjustments for the three months ended April 29, 2023 and April 30, 2022 are based on adjusted tax rates of 26.7% and 14.8%, respectively.

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 37

The adjustments for both the three months ended July 29, 2023 and July 30, 2022 are based on an adjusted tax rate of 24.3%, and the adjustments for the six months ended July 29, 2023 and July 30, 2022 are based on adjusted tax rates of 25.2% and 19.6%, respectively.

EBITDA and Adjusted EBITDA .

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

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FINANCIAL INFORMATION

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

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Income tax expense (benefit)

Reorganization related costs (1)

Non-cash compensation (1)

Legal settlements (2)

Reorganization related costs (2)

Share of equity method investments loss (2)

Capitalized cloud computing amortization (3)

Other income—net (1)

Other (income) expense—net (2)

Loss on extinguishment of debt (2)

Employer payroll taxes on option exercise (2)

Professional fee (1)

Asset impairments (2)

Share of equity method investments loss (1)

Professional fees (2)

Compensation settlements (2)

Recall accrual (2)

Adjusted EBITDA

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

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

Friedman in October 2020.

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

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

FINANCIAL INFORMATION

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Adjusted Capital Expenditures.

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THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

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Adjusted capital expenditures

FINANCIAL INFORMATION

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In addition, we also received landlord tenant allowances subsequent to lease commencement of $2.4 million and $4.2 million for the three and six months ended July 29, 2023 and July 30, 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.

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

THREE MONTHS ENDED

SIX MONTHS ENDED

SELLING SQUARE

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RH Design Galleries:

England Design Gallery

Indianapolis Design Gallery

San Francisco Design Gallery

RH Legacy Galleries:

Indianapolis temporary Gallery

San Francisco legacy Gallery

Detroit legacy Gallery (relocation)

End of period

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

Leased selling square footage includes approximately 35,000 square feet as of July 29, 2023 related to one owned retail location.

(2) Total leased square footage includes approximately 56,000 square feet as of July 29, 2023 related to one owned retail location.

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

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FINANCIAL INFORMATION

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Three Months Ended April 29, 2023 Compared to Three Months Ended April 30, 2022

Three Months Ended July 29, 2023 Compared to Three Months Ended July 30, 2022

THREE MONTHS ENDED

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Income from operations

(1) The results for the Real Estate segment were immaterial in the three months ended April 29, 2023 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in the three months ended April 30, 2022.

(1) The results for the Real Estate segment were immaterial in the three months ended July 29, 2023 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in the three months ended July 30, 2022.

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

Consolidated net revenues decreased $218 million, or 22.8%, to $739 million in the three months ended April 29, 2023 compared to $957 million in the three months ended April 30, 2022.

Consolidated net revenues decreased $191 million, or 19.3%, to $800 million in the three months ended July 29, 2023 compared to $992 million in the three months ended July 30, 2022.

RH Segment net revenues

RH Segment net revenues decreased $218 million, or 24.0%, to $691 million in the three months ended April 29, 2023 compared to $909 million in the three months ended April 30, 2022.

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

RH Segment net revenues for the three months ended April 29, 2023 decreased primarily due to lower demand compared to the first quarter of fiscal 2022, during which demand still benefited from the elevated pandemic-driven home spending.

Outlet sales decreased $13 million to $57 million in the three months ended April 29, 2023 compared to $70 million in the three months ended April 30, 2022.

RH Segment net revenues decreased $187 million, or 19.9%, to $754 million in the three months ended July 29, 2023 compared to $940 million in the three months ended July 30, 2022.

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

RH Segment net revenues for the three months ended July 29, 2023 decreased primarily due to lower demand compared to the second quarter of fiscal 2022, during which demand and net revenues still benefited from the elevated pandemic-driven home spending.

Outlet sales decreased $9.7 million to $59 million in the three months ended July 29, 2023 compared to $69 million in the three months ended July 30, 2022.

Waterworks net revenues

Waterworks net revenues increased $0.3 million, or 0.6%, to $49 million in the three months ended April 29, 2023 compared to $48 million in the three months ended April 30, 2022.

Consolidated gross profit decreased $151 million, or 30.3%, to $348 million in the three months ended April 29, 2023 compared to $499 million in the three months ended April 30, 2022.

As a percentage of net revenues, consolidated gross margin decreased 510 basis points to 47.0% of net revenues in the three months ended April 29, 2023 from 52.1% of net revenues in the three months ended April 30, 2022.

Waterworks net revenues decreased $4.5 million, or 8.8%, to $47 million in the three months ended July 29, 2023 compared to $51 million in the three months ended July 30, 2022.

Consolidated gross profit decreased $143 million, or 27.4%, to $380 million in the three months ended July 29, 2023 compared to $523 million in the three months ended July 30, 2022.

As a percentage of net revenues, consolidated gross margin decreased 530 basis points to 47.5% of net revenues in the three months ended July 29, 2023 from 52.8% of net revenues in the three months ended July 30, 2022.

RH Segment gross profit

RH Segment gross profit decreased $151 million, or 32.0%, to $322 million in the three months ended April 29, 2023 from $473 million in the three months ended April 30, 2022.

As a percentage of net revenues, RH Segment gross margin decreased 540 basis points to 46.6% of net revenues in the three months ended April 29, 2023 from 52.0% of net revenues in the three months ended April 30, 2022.

The decrease in gross margin was primarily driven by lower net revenues, resulting in deleverage in occupancy costs, as well as a decrease in product margins in the Core business, partially offset by leverage in our shipping costs.

RH Segment gross profit decreased $141 million, or 28.4%, to $354 million in the three months ended July 29, 2023 compared to $495 million in the three months ended July 30, 2022.

As a percentage of net revenues, RH Segment gross margin decreased 570 basis points to 47.0% of net revenues in the three months ended July 29, 2023 from 52.7% of net revenues in the three months ended July 30, 2022.

The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the Core business, primarily driven by higher discounts on discontinued product collections, as well as lower net revenues resulting in deleverage in occupancy costs.

Waterworks gross profit

Waterworks gross profit was $26 million in both the three months ended April 29, 2023 and April 30, 2022.

As a percentage of net revenues, Waterworks gross margin increased 10 basis points to 53.4% of net revenues in the three months ended April 29, 2023 from 53.3% of net revenues in the three months ended April 30, 2022.

Waterworks gross profit decreased $2.5 million, or 8.9%, to $26 million in the three months ended July 29, 2023 compared to $28 million in the three months ended July 30, 2022.

As a percentage of net revenues, Waterworks gross margin was 54.7% of net revenues in both the three months ended July 29, 2023 and July 30, 2022.

FINANCIAL INFORMATION

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Selling, general and administrative expenses

Consolidated selling, general and administrative expenses decreased $45 million, or 15.3%, to $248 million in the three months ended April 29, 2023 from $293 million in the three months ended April 30, 2022.

Consolidated selling, general and administrative expenses decreased $60 million, or 20.8%, to $229 million in the three months ended July 29, 2023 compared to $289 million in the three months ended July 30, 2022.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses decreased $47 million, or 17.0%, to $229 million in the three months ended April 29, 2023 compared to $276 million in the three months ended April 30, 2022.

RH Segment selling, general and administrative expenses for the three months ended April 29, 2023 include severance expense and other payroll related costs associated with a reorganization of $7.6 million and non-cash compensation of $3.5 million related to an option grant made to Mr.

RH Segment selling, general and administrative expenses decreased $53 million, or 20.1%, to $211 million in the three months ended July 29, 2023 compared to $264 million in the three months ended July 30, 2022.

RH Segment selling, general and administrative expenses for the three months ended July 29, 2023 include legal settlements of $8.0 million and non-cash compensation of $2.0 million related to an option grant made to Mr.

Friedman in October 2020.

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

Friedman’s stock option exercise during the first quarter of fiscal 2021, a $7.2 million professional fee which was contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $5.9 million of asset impairments, amortization of the non-cash compensation of $5.9 million related to an option grant made to Mr.

Friedman in October 2020 and $0.6 million related to product recalls.

RH Segment selling, general and administrative expenses were 31.5% and 26.9% of net revenues for the three months ended April 29, 2023 and April 30, 2022, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by lower net revenues, resulting in deleverage in compensation, occupancy and advertising costs, partially offset by lower pre-opening costs.

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

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

RH Segment selling, general and administrative expenses would have been 26.6% and 27.4% of net revenues for the three months ended July 29, 2023 and July 30, 2022, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The decrease in selling, general and administrative expenses as a percentage of net revenues was due to lower advertising costs compared to the second quarter of fiscal 2022 driven by the mailing of the new RH Contemporary Sourcebook, partially offset by lower net revenues resulting in leverage in deleverage in occupancy and other corporate costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $1.5 million, or 8.5%, to $19 million in the three months ended April 29, 2023 compared to $18 million in the three months ended April 30, 2022.

Waterworks selling, general and administrative expenses were 39.7% and 36.8% of net revenues for the three months ended April 29, 2023 and April 30, 2022, respectively.

Waterworks selling, general and administrative expenses decreased $6.9 million, or 28.2%, to $18 million in the three months ended July 29, 2023 compared to $25 million in the three months ended July 30, 2022.

Waterworks selling, general and administrative expenses were 37.6% and 47.8% of net revenues for the three months ended July 29, 2023 and July 30, 2022, respectively.

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

Excluding the adjustments, Waterworks selling, general and administrative expenses would have been 37.6% and 40.7% of net revenues for the three months ended July 29, 2023 and July 30, 2022, respectively.

Interest expense—net

Interest expense—net increased $19 million in the three months ended April 29, 2023 compared to the three months ended April 30, 2022, which consisted of the following in each period:

Interest expense—net increased $18 million in the three months ended July 29, 2023 compared to the three months ended July 30, 2022, which consisted of the following in each period:

THREE MONTHS ENDED

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Total interest expense—net

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FINANCIAL INFORMATION

Loss on extinguishment of debt

During the three months ended April 30, 2022 we recognized a loss on extinguishment of debt of $146 million related to the repurchase of $180 million of principal value of convertible senior notes, which includes the acceleration of amortization of debt issuance costs of $1.0 million.

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

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

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

Other (income) expense—net

Other (income) expense—net was income of $0.2 million in the three months ended July 29, 2023, which represents a foreign exchange gain from the remeasurement of intercompany loans with U.K.

and Switzerland subsidiaries, partially offset by a loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to Pound Sterling and Euro.

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

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

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

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

Income tax expense

Our income tax expense and effective tax rates were as follows:

THREE MONTHS ENDED

(dollars in thousands)

Income tax expense

Effective tax rate

The decrease in our effective tax rate for the three months ended July 29, 2023 compared to the three months ended July 30, 2022 is primarily attributable to net excess tax benefits from stock-based compensation and amounts related to the loss on extinguishment of debt in the three months ended July 30, 2022.

Equity method investments loss

Equity method investments loss consists of our proportionate share of the loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $3.4 million and $2.8 million loss during the three months ended July 29, 2023 and July 30, 2022, respectively.

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 41

Other income—net

Other income—net in the three months ended April 29, 2023 represents a net gain due to favorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to Pound Sterling and Euro, and a net foreign exchange gain from the remeasurement of intercompany loans with U.K.

and Switzerland subsidiaries.

Other income—net during the three months ended April 30, 2022 included a net gain on derivative instruments of $3.2 million, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and Notes Repurchase (refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements).

The net gain was partially offset by a $2.9 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

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

2023 SECOND QUARTER FORM 10-Q | 47

Six Months Ended July 29, 2023 Compared to Six Months Ended July 30, 2022

SIX MONTHS ENDED

(in thousands)

Cost of goods sold

Selling, general and administrative expenses

Income from operations

(1) The results for the Real Estate segment were immaterial in the six months ended July 29, 2023 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in the six months ended July 30, 2022.

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

Consolidated net revenues decreased $409 million, or 21.0%, to $1,540 million in the six months ended July 29, 2023 compared to $1,949 million in the six months ended July 30, 2022.

RH Segment net revenues

RH Segment net revenues decreased $405 million, or 21.9%, to $1,444 million in the six months ended July 29, 2023 compared to $1,849 million in the six months ended July 30, 2022.

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

RH Segment net revenues for the six months ended July 29, 2023 decreased primarily due to lower demand compared to the first half of fiscal 2022, during which demand still benefited from the elevated pandemic-driven home spending.

Outlet sales decreased $23 million to $116 million in the six months ended July 29, 2023 compared to $139 million in the six months ended July 30, 2022.

Waterworks net revenues

Waterworks net revenues decreased $4.2 million, or 4.2%, to $96 million in the six months ended July 29, 2023 compared to $100 million in the six months ended July 30, 2022.

Consolidated gross profit decreased $294 million, or 28.8%, to $728 million in the six months ended July 29, 2023 compared to $1,022 million in the six months ended July 30, 2022.

As a percentage of net revenues, consolidated gross margin decreased 510 basis points to 47.3% of net revenues in the six months ended July 29, 2023 from 52.4% of net revenues in the six months ended July 30, 2022.

RH Segment gross profit

RH Segment gross profit decreased $292 million, or 30.2%, to $676 million in the six months ended July 29, 2023 from $968 million in the six months ended July 30, 2022.

As a percentage of net revenues, RH Segment gross margin decreased 550 basis points to 46.8% of net revenues in the six months ended July 29, 2023 from 52.3% of net revenues in the six months ended July 30, 2022.

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FINANCIAL INFORMATION

Waterworks gross profit

Waterworks gross profit decreased $2.3 million, or 4.3%, to $52 million in the six months ended July 29, 2023 from $54 million in the six months ended July 30, 2022.

As a percentage of net revenues, Waterworks gross margin was 54.0% of net revenues in both the six months ended July 29, 2023 and July 30, 2022.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses decreased $105 million, or 18.0%, to $477 million in the six months ended July 29, 2023 compared to $582 million in the six months ended July 30, 2022.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses decreased $100 million, or 18.5%, to $440 million in the six months ended July 29, 2023 compared to $540 million in the six months ended July 30, 2022.

RH Segment selling, general and administrative expenses for the six months ended July 29, 2023 include legal settlements of $8.0 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million and non-cash compensation of $5.6 million related to an option grant made to Mr.

Friedman in October 2020.

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

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

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

RH Segment selling, general and administrative expenses would have been 29.0% and 27.1% of net revenues for the six months ended July 29, 2023 and July 30, 2022, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by lower net revenues resulting in deleverage in compensation, occupancy and other corporate costs, partially offset by lower advertising costs due to the mailing of the new RH Contemporary Sourcebook in the second quarter of fiscal 2022 and lower pre-opening costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses decreased $5.4 million, or 12.8%, to $37 million in the six months ended July 29, 2023 compared to $42 million in the six months ended July 30, 2022.

Waterworks selling, general and administrative expenses were 38.7% and 42.5% of net revenues for the six months ended July 29, 2023 and July 30, 2022, respectively.

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

Excluding the adjustments, Waterworks selling, general and administrative expenses would have been 38.7% and 38.8% of net revenues for the six months ended July 29, 2023 and July 30, 2022, respectively.

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 49

Interest expense—net

Interest expense—net increased $37 million in the six months ended July 29, 2023 compared to the six months ended July 30, 2022, which consisted of the following in each period:

SIX MONTHS ENDED

(in thousands)

Term loan interest expense

Finance lease interest expense

Other interest expense

Interest income

Capitalized interest for capital projects

Total interest expense—net

Loss on extinguishment of debt

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

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

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

Other (income) expense—net

Other income (expense)—net was income of $0.8 million in the six months ended July 29, 2023, which represents a foreign exchange gain from the remeasurement of intercompany loans with U.K.

and Switzerland subsidiaries, offset by a loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to Pound Sterling and Euro.

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

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

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

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

Income tax expense (benefit)

We recorded income tax expense of $17 million and an income tax benefit of $163 million in the three months ended April 29, 2023 and April 30, 2022, respectively.

Our effective tax rate was 28.4% and (438.3)% for the three months ended April 29, 2023 and April 30, 2022, respectively.

The increase in our effective tax rate is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023.

Equity method investments loss

Equity method investments loss consists of our proportionate share of the loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $1.6 million and $1.4 million loss during the three months ended April 29, 2023 and April 30, 2022, respectively.

Our income tax expense (benefit) and effective tax rates were as follows:

SIX MONTHS ENDED

(dollars in thousands)

Income tax expense (benefit)

Effective tax rate

The increase in our effective tax rate for the six months ended July 29, 2023 compared to the six months ended July 30, 2022 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023 as compared to fiscal 2022.

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FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 42

Equity method investments loss

Equity method investments loss consists of our proportionate share of the loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $5.0 million and $4.2 million loss during the six months ended July 29, 2023 and July 30, 2022, respectively.

Liquidity and Capital Resources

1 unchanged sentence

A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table:

(in millions)

(in thousands)

Asset based credit facility

10 unchanged sentences

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

(2) Net debt as of April 29, 2023 and January 28, 2023 excludes restricted cash of $3.5 million and $3.7 million, respectively, as well as non-recourse real estate loans of $18 million as of both periods related to our consolidated variable interest entities from our joint venture activities.

(2) Net debt as of July 29, 2023 and January 28, 2023 excludes restricted cash of $3.5 million and $3.7 million, respectively, as well as non-recourse real estate loans of $18 million as of both periods related to our consolidated variable interest entities from our joint venture activities.

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

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

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

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

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 51

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

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

During the three months ended July 29, 2023, we invested $1,208 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program (refer to Item 2 ¾ Unregistered Sales of Equity Securities and Use of Proceeds within Part II of this Quarterly Report on Form 10-Q for information related to timing).

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

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

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

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

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

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 43

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

3 unchanged sentences

Any adverse developments in the U.S.

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

or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt.

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

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

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

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FINANCIAL INFORMATION

We entered into a $2,000 million term debt financing in October 2021 (the “Term Loan B”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A.

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

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

As of April 29, 2023, we had $1,970 million outstanding under the Term Loan Credit Agreement.

As of July 29, 2023, we had $1,965 million outstanding under the Term Loan Credit Agreement.

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

3 unchanged sentences

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

As of April 29, 2023, we had $498 million outstanding under the Amended Term Loan Credit Agreement.

As of July 29, 2023, we had $496 million outstanding under the Amended Term Loan Credit Agreement.

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

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”).

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 44

As of April 29, 2023, we had $44 million remaining in aggregate principal amount of the Notes outstanding, comprised of $1.7 million of 2023 Notes and $42 million of 2024 Notes.

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

We anticipate having sufficient cash available to repay the principal amount of the Notes in cash with respect to any convertible notes for which the holders elect early conversion, as well as upon maturity of the 2023 Notes and the 2024 Notes in June 2023 and September 2024, respectively.

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

As of July 29, 2023, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024.

We anticipate having sufficient cash available to repay the principal amount of the 2024 Notes in cash with respect to any convertible notes for which the holders elect early conversion, as well as upon maturity of the 2024 Notes in September 2024.

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

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

During the three months ended April 29, 2023, adjusted capital expenditures were $44 million in aggregate, net of cash received related to landlord tenant allowances of $4.1 million.

During the six months ended July 29, 2023, adjusted capital expenditures were $96 million in aggregate, net of cash received related to landlord tenant allowances of $4.1 million.

In addition, we also received landlord tenant allowances subsequent to lease commencement of $2.4 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.

We anticipate our adjusted capital expenditures to be $225 million to $275 million in fiscal 2023, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

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

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and rising interest rates and we may make adjustments to our allocation of capital in fiscal 2023 or beyond in response to these changing or other circumstances.

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and higher interest rates and we may make adjustments to our allocation of capital in fiscal 2023 or beyond in response to these changing or other circumstances.

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 53

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

6 unchanged sentences

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

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 45

Cash Flow Analysis

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

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

2 unchanged sentences

Net cash used in financing activities

Net increase in cash and cash equivalents, restricted cash and restricted cash equivalents

Net decrease in cash and cash equivalents, restricted cash and restricted cash equivalents

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

1 unchanged sentence

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, impairments, stock-based compensation, loss on extinguishment of debt and the effect of changes in working capital and other activities.

For the three months ended April 29, 2023, net cash provided by operating activities was $87 million and consisted of net income of $42 million and an increase in non-cash items of $89 million, partially offset by a change in working capital and other activities of $44 million.

The use of cash from working capital was primarily driven by a decrease in accounts payable and accrued expenses of $54 million, an increase in merchandise inventory of $36 million, a decrease in operating lease liabilities of $22 million primarily due to payments made under the related lease agreements and an increase in landlord assets under construction, net of tenant allowances, of $9.6 million.

These uses of cash from working capital were partially offset by an increase in deferred revenue and customer deposits of $19 million.

For the six months ended July 29, 2023, net cash provided by operating activities was $248 million and consisted of net income of $118 million and an increase in non-cash items of $188 million, partially offset by a change in working capital and other activities of $57 million.

The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $42 million primarily due to payments made under the related lease agreements, a decrease in accounts payable and accrued expenses of $32 million, an increase in prepaid expenses and other current assets of $25 million, a decrease in other non-current obligations of $17 million and an increase in landlord assets under construction, net of tenant allowances, of $14 million.

These uses of cash from working capital were partially offset by a decrease in merchandise inventory of $65 million.

Net Cash Used In Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

For the three months ended April 29, 2023, net cash used in investing activities was $67 million and was comprised of investments in retail stores, information technology and systems infrastructure of $34 million and additional contributions to our equity method investments of $33 million.

For the six months ended July 29, 2023, net cash used in investing activities was $115 million and was comprised of investments in retail stores, information technology and systems infrastructure of $82 million and additional contributions to our equity method investments of $34 million.

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FINANCIAL INFORMATION

Net Cash Used In Financing Activities

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

For the three months ended April 29, 2023, net cash used in financing activities was $11 million, primarily due to payments on term loans of $6.2 million, finance lease agreements of $3.9 million and equipment notes of $1.2 million.

For the six months ended July 29, 2023, net cash used in financing activities was $1,224 million, primarily due to the repurchase of 3,698,887 shares of our common stock for an aggregate repurchase amount of $1,205 million, payments on term loans of $13 million, net payments under finance lease agreements of $5.5 million and repayments of the 2023 Notes of $1.7 million and equipment notes of $1.2 million.

In addition, we paid $3.7 million of excise taxes related to share repurchases made in fiscal 2022.

These cash outflows were partially offset by proceeds from option exercises of $4.7 million.

Non-Cash Transactions

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

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

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 46

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

Cash Requirements from Contractual Obligations

6 unchanged sentences

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

The 2023 Notes matured in June 2023.

Asset Based Credit Facility

1 unchanged sentence

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our Term Loan.

Share Repurchase Program

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 55

Share Repurchase Program and Share Retirement

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

1 unchanged sentence

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

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

Share Repurchase Program

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

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

As of April 29, 2023, $1,450 million remains available for future share repurchases under the Share Repurchase Program.

On June 2, 2022, the Board of Directors authorized an additional $2,000 million for the purchase of shares of our outstanding common stock, which increased the total authorized size of the share repurchase program to $2,450 million (the “Share Repurchase Program”).

In the six months ended July 29, 2023, we repurchased 3,698,887 shares of our common stock under the Share Repurchase Program at an average price of $325.65 per share, for an aggregate repurchase amount of approximately $1,205 million.

As of July 29, 2023, $245 million remains available for future share repurchases under the Share Repurchase Program.

Share Retirement

During the six months ended July 29, 2023, we retired 3,698,887 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 $8.6 million and $1,208 million from treasury stock to additional paid-in capital and retained earnings (accumulated deficit) , respectively, on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity (deficit) as of and for the three and six months ended July 29, 2023.

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FINANCIAL INFORMATION

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The preparation of financial statements in accordance with GAAP requires senior leadership to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We evaluate our accounting policies, estimates, and judgments on an on-going basis.

We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 47

Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to our condensed consolidated financial statements.

We evaluate the development and selection of our critical accounting policies and estimates and believe that certain of our significant accounting policies involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, and are therefore discussed as critical:

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Variable Interest Entities

There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in the 2022 Form 10-K.

For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the 2022 Form 10-K.

There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in our 2022 Form 10-K.

Recent Accounting Pronouncements

Refer to Note 2— Recently Issued Accounting Standards in our condensed consolidated financial statements for a description of recently issued accounting standards that may impact our consolidated financial statements in future reporting periods.

QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

There have been no significant changes in our exposures to market risk since January 28, 2023.

Refer to Part II, Item 7A— Quantitative and Qualitative Disclosures about Market Risk in our 2022 Form 10-K for a discussion on our exposures to market risk.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis