What changed in this filing

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Item 1. Financial Statements

2023-12-07 compared with 2023-09-07 · 207 added, 199 removed, 642 unchanged (39% of the section changed)

18 unchanged sentences

Convertible senior notes due 2023

Convertible senior notes due 2024—net

Operating lease liabilities

12 unchanged sentences

Commitments and contingencies (Note 16)

Stockholders’ equity:

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of July 29, 2023 and January 28, 2023

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 18,397,853 shares issued and outstanding as of July 29, 2023;

Stockholders’ equity (deficit):

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of October 28, 2023 and January 28, 2023

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 18,218,397 shares issued and outstanding as of October 28, 2023;

22,045,385 shares issued and outstanding as of January 28, 2023

6 unchanged sentences

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

2023 THIRD QUARTER FORM 10-Q | 3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share amounts)

5 unchanged sentences

Loss on extinguishment of debt

Other (income) expense—net

Other expense—net

Total other expenses

Income before income taxes and equity method investments

Income (loss) before income taxes and equity method investments

Income tax expense (benefit)

1 unchanged sentence

Share of equity method investments loss

Weighted-average shares used in computing basic net income per share

Basic net income per share

Weighted-average shares used in computing diluted net income per share

Diluted net income per share

Net income (loss)

Weighted-average shares used in computing basic net income (loss) per share

Basic net income (loss) per share

Weighted-average shares used in computing diluted net income (loss) per share

Diluted net income (loss) per share

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

4 | 2023 SECOND QUARTER FORM 10-Q

4 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net gains (losses) from foreign currency translation

Comprehensive income

Net income (loss)

Net loss from foreign currency translation

Comprehensive income (loss)

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 5

2023 THIRD QUARTER FORM 10-Q | 5

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

6 unchanged sentences

(in thousands, except share amounts)

Balances—April 29, 2023

Balances—July 29, 2023

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Settlement of convertible senior notes

Repurchases of common stock — including excise tax

( 3,698,887 )

( 1,216,635 )

Repurchase of common stock — including excise tax

Retirement of treasury stock

( 1,208,012 )

( 3,698,887 )

Net gains from foreign currency translation

Net loss from foreign currency translation

Balances—October 28, 2023

Balances—July 30, 2022

Balances—April 30, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

1 unchanged sentence

Settlement of convertible senior notes

Repurchases of common stock

( 1,000,000 )

Repurchase of common stock

Retirement of treasury stock

( 1,000,000 )

Net losses from foreign currency translation

Balances—July 30, 2022

6 | 2023 SECOND QUARTER FORM 10-Q

Net loss from foreign currency translation

Balances—October 29, 2022

6 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

SIX MONTHS ENDED

NINE MONTHS ENDED

TREASURY STOCK

17 unchanged sentences

( 3,887,965 )

Net gains from foreign currency translation

Balances—July 29, 2023

Net loss from foreign currency translation

Balances—October 28, 2023

Balances—January 29, 2022

3 unchanged sentences

Exercise of stock options

Repurchases of common stock

Repurchase of common stock

( 1,127,557 )

6 unchanged sentences

Impact of ASU 2020-06 adoption

Net losses from foreign currency translation

Balances—July 30, 2022

Net loss from foreign currency translation

Balances—October 29, 2022

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 7

2023 THIRD QUARTER FORM 10-Q | 7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

4 unchanged sentences

Asset impairments

Gain on sale of building and land

Stock-based compensation expense

17 unchanged sentences

Net cash provided by operating activities

8 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NINE MONTHS ENDED

(in thousands)

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Equity method investments

Proceeds from sale of asset

Net cash used in investing activities

8 | 2023 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED

(in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

1 unchanged sentence

Repayments under term loans

Borrowings under real estate loans

Repayments under real estate loans

2 unchanged sentences

Repayment under convertible senior notes repurchase obligation

Debt extinguishment costs

Debt issuance costs

11 unchanged sentences

( 1,129,108 )

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 9

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NINE MONTHS ENDED

(in thousands)

Cash and cash equivalents, restricted cash and restricted cash equivalents

5 unchanged sentences

End of period—restricted cash

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

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 9

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED

(in thousands)

End of period—cash and cash equivalents and restricted cash

Non-cash transactions:

1 unchanged sentence

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

Property and equipment additions acquired under real estate loans

Excise tax from share repurchases in accounts payable and accrued expenses at period-end

4 unchanged sentences

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

Conversion of loan receivables into equity of consolidated variable interest entities

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

10 | 2023 SECOND QUARTER FORM 10-Q

10 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

5 unchanged sentences

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 July 29, 2023, we operated a total of 68 RH Galleries and 40 RH Outlet stores, one RH Guesthouse, as well as 14 Waterworks Showrooms throughout the United States, Canada and the United Kingdom and had sourcing operations in Shanghai and Hong Kong.

As of October 28, 2023, we operated a total of 68 RH Galleries and 42 RH Outlet stores, one RH Guesthouse, as well as 14 Waterworks Showrooms throughout the United States, Canada, and the United Kingdom.

We also have sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of July 29, 2023, and the results of operations for the three and six months ended July 29, 2023 and July 30, 2022.

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of October 28, 2023, and the results of operations for the three and nine months ended October 28, 2023 and October 29, 2022.

Our current fiscal year, which consists of 53 weeks, ends on February 3, 2024 (“fiscal 2023”).

6 unchanged sentences

The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, and intangible and other long-lived assets.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and six months ended July 29, 2023.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and nine months ended October 28, 2023.

As additional information becomes available to us, our future assessment of these estimates, as well as other factors, could change and the results of any such change could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (the “2022 Form 10-K”).

The results of operations for the three and six months ended July 29, 2023, presented herein, are not necessarily indicative of the results to be expected for the full fiscal year.

The results of operations for the three and nine months ended October 28, 2023, presented herein, are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the factors as discussed in Business Conditions below.

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 11

2023 THIRD QUARTER FORM 10-Q | 11

Business Conditions

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.

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

16 unchanged sentences

We are not a party to the supplier agreements with the Bank, and the terms of our payment obligations to suppliers are not impacted by a supplier’s participation in the Financing Program.

Our responsibility is limited to making payments to the Bank on the terms originally negotiated with our suppliers, which are typically either 30 days or 60 days.

Our responsibility is limited to making payments to the Bank on the terms originally negotiated with our suppliers, which are typically between 30 days and 60 days.

There are no assets pledged as security or other forms of guarantees provided under the Financing Program.

The Financing Program is not indicative of a borrowing arrangement and the liabilities under the Financing Program are included in accounts payable and accrued expenses on the condensed consolidated balance sheets and associated payments are included within operating activities on the condensed consolidated statements of cash flows.

As of July 29, 2023 and January 28, 2023, supplier invoices that have been confirmed as valid under the Financing Program included in accounts payable and accrued expenses were $ 20 million and $ 26 million, respectively.

12 | 2023 SECOND QUARTER FORM 10-Q

As of October 28, 2023 and January 28, 2023, supplier invoices that have been confirmed as valid under the Financing Program included in accounts payable and accrued expenses were $ 30 million and $ 26 million, respectively.

12 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

7 unchanged sentences

The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis.

While ASU 2023-05 is not currently applicable to us because our existing arrangements in variable interest entities do not meet the definition of joint ventures as described in the proposed standard, we will apply this guidance in future reporting periods after the guidance is effective to any future arrangements meeting the definition of a joint venture.

While ASU 2023-05 is not currently applicable to us because our existing arrangements in variable interest entities do not meet the definition of joint ventures as described in the updated standard, we will apply this guidance in future reporting periods after the guidance is effective to any future arrangements we enter into that meet the definition of a joint venture.

NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

1 unchanged sentence

(in thousands)

Capitalized catalog costs

Prepaid expenses

Vendor deposits

Federal and state tax receivable

Vendor deposits

Prepaid expenses

Capitalized catalog costs

Value added tax (VAT) receivable

Tenant allowance receivable

Right of return asset for merchandise

Promissory notes receivable, including interest (1)

Right of return asset for merchandise

Interest income receivable

3 unchanged sentences

FINANCIAL INFORMATION

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2023 THIRD QUARTER FORM 10-Q | 13

Other non-current assets consist of the following:

8 unchanged sentences

Total other non-current assets

(1) Presented net of accumulated amortization of $ 14 million and $ 11 million as of July 29, 2023 and January 28, 2023, respectively.

(1) Presented net of accumulated amortization of $ 16 million and $ 11 million as of October 28, 2023 and January 28, 2023, respectively.

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

7 unchanged sentences

Foreign currency translation

July 29, 2023

October 28, 2023

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

1 unchanged sentence

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

14 | 2023 SECOND QUARTER FORM 10-Q

14 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

9 unchanged sentences

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 July 29, 2023 and 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 July 29, 2023 and January 28, 2023.

As of October 28, 2023 and 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 October 28, 2023 and January 28, 2023.

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 15

2023 THIRD QUARTER FORM 10-Q | 15

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

13 unchanged sentences

(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 $ 46 million and $ 125 million of construction in progress as of July 29, 2023 and January 28, 2023, respectively.

(2) Includes $ 63 million and $ 125 million of construction in progress as of October 28, 2023 and January 28, 2023, respectively.

(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.

8 unchanged sentences

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

16 | 2023 SECOND QUARTER FORM 10-Q

16 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

2 unchanged sentences

In April 2023, we made an additional equity contribution to one Aspen LLC of $ 1.8 million whereby such funding was used in connection with the acquisition of additional real estate assets.

Inclusive of the equity contributions made during the six months ended July 29, 2023, we have made in excess of $ 135 million in capital contributions to the Aspen LLCs.

Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of July 29, 2023.

During the six months ended July 29, 2023 and July 30, 2022, we did no t receive any distributions or have any undistributed earnings of equity method investments.

Inclusive of the equity contributions made during the nine months ended October 28, 2023, we have made in excess of $ 135 million in capital contributions to the Aspen LLCs.

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

During the nine months ended October 28, 2023 and October 29, 2022, we did no t receive any distributions or have any undistributed earnings of equity method investments.

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

9 unchanged sentences

Excise tax payable on share repurchases (1)

Accrued catalog costs (1)

Accrued professional fees

Accrued legal contingencies (1)(2)

Accrued catalog costs (1)

Other accrued expenses (1)

3 unchanged sentences

Reorganization

As reported in our 2022 Form 10-K, we implemented a restructuring on March 24, 2023 that includes workforce and expense reductions in order to improve and simplify our organizational structure, streamline certain aspects of our business operations and better position us for further growth.

As reported in our 2022 Form 10-K, we implemented a restructuring on March 24, 2023 that included workforce and expense reductions in order to improve and simplify our organizational structure, streamline certain aspects of our business operations and better position us for further growth.

The workforce reduction associated with the initiative included the elimination of numerous leadership and other positions throughout the organization, which affected approximately 440 roles.

The reorganization was completed during the first quarter of fiscal 2023.

During the six months ended July 29, 2023, we incurred total charges relating to the reorganization of $ 7.6 million consisting primarily of severance costs and related taxes.

As of July 29, 2023, we had accruals of $ 2.1 million included in accounts payable and accrued expenses related to the reorganization.

During the nine months ended October 28, 2023, we incurred total charges relating to the reorganization of $ 7.6 million consisting primarily of severance costs and related taxes.

As of October 28, 2023, we had accruals of $ 1.3 million included in accounts payable and accrued expenses related to the reorganization.

FINANCIAL INFORMATION

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2023 THIRD QUARTER FORM 10-Q | 17

Other current liabilities consist of the following:

(in thousands)

Current portion of term loans

Unredeemed gift card and merchandise credit liability

Current portion of term loans

Allowance for sales returns

5 unchanged sentences

We defer revenue associated with merchandise delivered via the home-delivery channel.

We expect that substantially all of the deferred revenue and customer deposits as of July 29, 2023 will be recognized within the next six months as the performance obligations are satisfied.

We expect that substantially all of the deferred revenue and customer deposits as of October 28, 2023 will be recognized within six months as the performance obligations are satisfied.

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards.

During the three months ended July 29, 2023 and July 30, 2022, we recognized $ 5.3 million and $ 6.0 million, respectively, of revenue related to previous deferrals related to our gift cards .

During each of the six months ended July 29, 2023 and July 30, 2022, we recognized $ 11 million of revenue related to previous deferrals related to our gift cards .

During the three months ended October 28, 2023 and October 29, 2022, we recognized $ 7.5 million and $ 5.0 million, respectively, of revenue related to previous deferrals related to our gift cards .

During the nine months ended October 28, 2023 and October 29, 2022, we recognized $ 19 million and $ 16 million, respectively, of revenue related to previous deferrals related to our gift cards .

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

5 unchanged sentences

Total other non-current obligations

18 | 2023 SECOND QUARTER FORM 10-Q

18 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

2 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

6 unchanged sentences

Total lease costs—net

(1) Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or selling, general and administrative expenses on the condensed consolidated statements of income based on our accounting policy.

Refer to Note 3— Significant Accounting Policies in our 2022 Form 10-K.

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

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 3.7 million and $ 5.0 million for the three months ended July 29, 2023 and July 30, 2022, respectively, and $ 7.6 million and $ 12 million for the six months ended July 29, 2023 and July 30, 2022, respectively, as well as charges associated with common area maintenance of $ 2.3 million and $ 2.2 million for the three months ended July 29, 2023 and July 30, 2022, respectively, and $ 4.6 million for both the six months ended July 29, 2023 and July 30, 2022.

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

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 3.2 million and $ 3.4 million for the three months ended October 28, 2023 and October 29, 2022, respectively, and $ 11 million and $ 15 million for the nine months ended October 28, 2023 and October 29, 2022, respectively, as well as charges associated with common area maintenance of $ 2.2 million and $ 2.3 million for the three months ended October 28, 2023 and October 29, 2022, respectively, and $ 6.8 million and $ 6.9 million for the nine months ended October 28, 2023 and October 29, 2022 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 condensed consolidated statements of income.

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 19

2023 THIRD QUARTER FORM 10-Q | 19

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

18 unchanged sentences

(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 $ 250 million and $ 224 million as of July 29, 2023 and January 28, 2023, respectively.

(3) Includes $ 38 million and $ 39 million as of July 29, 2023 and January 28, 2023, 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 5— Variable Interest Entities ).

(2) Recorded net of accumulated amortization of $ 263 million and $ 224 million as of October 28, 2023 and January 28, 2023, respectively.

(3) Includes $ 38 million and $ 39 million as of October 28, 2023 and January 28, 2023, 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 5— Variable Interest Entities ).

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

20 | 2023 SECOND QUARTER FORM 10-Q

20 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

The maturities of lease liabilities are as follows as of July 29, 2023:

The maturities of lease liabilities are as follows as of October 28, 2023:

(in thousands)

4 unchanged sentences

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

Total lease payments exclude $ 792 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of July 29, 2023, of which $ 16 million, $ 43 million, $ 49 million, $ 50 million, $ 50 million and $ 47 million will be paid in the remainder of fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026, fiscal 2027 and fiscal 2028, respectively, and $ 537 million will be paid subsequent to fiscal 2028.

Total lease payments exclude $ 694 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of October 28, 2023, of which $ 8.0 million, $ 27 million, $ 42 million, $ 39 million, $ 41 million and $ 41 million will be paid in the remainder of fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026, fiscal 2027 and fiscal 2028, respectively, and $ 496 million will be paid subsequent to fiscal 2028.

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

1 unchanged sentence

Supplemental information related to leases consists of the following:

SIX MONTHS ENDED

NINE MONTHS ENDED

Weighted-average remaining lease term (years)

5 unchanged sentences

FINANCIAL INFORMATION

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2023 THIRD QUARTER FORM 10-Q | 21

Other information related to leases consists of the following:

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

7 unchanged sentences

Finance leases

(1) Represents the principal portion of lease payments, partially offset by tenant allowances received subsequent to lease commencement of $ 2.4 million and $ 4.2 million for the six months ended July 29, 2023 and July 30, 2022, respectively.

(1) Represents the principal portion of lease payments, partially offset by tenant allowances received under finance leases subsequent to lease commencement of $ 2.4 million and $ 4.2 million for the nine months ended October 28, 2023 and October 29, 2022, respectively.

NOTE 9—CONVERTIBLE SENIOR NOTES

7 unchanged sentences

(1) As of January 28, 2023, the 2023 Notes outstanding were classified as convertible senior notes due 2023 within current liabilities .

The 2023 Notes matured and were repaid June 2023 and, as of July 29, 2023, the 2023 Notes are no longer outstanding.

(2) As of both July 29, 2023 and January 28, 2023, the 2024 Notes outstanding were classified as convertible senior notes due 2024—net within non-current liabilities .

22 | 2023 SECOND QUARTER FORM 10-Q

The 2023 Notes matured and were repaid June 2023 and, as of October 28, 2023, the 2023 Notes are no longer outstanding.

(2) As of October 28, 2023, the 2024 Notes outstanding were classified as convertible seniors notes due 2024—net within current liabilities.

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

22 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

1 unchanged sentence

Bond Hedge and Warrant Terminations

During the three months ended April 30, 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days .

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

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

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

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

During the three months ended April 30, 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period.

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

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

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

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

7 unchanged sentences

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 (income) expense—net on the condensed consolidated statements of income.

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

FINANCIAL INFORMATION

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

5 unchanged sentences

Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 82 million was paid in cash to the holders, representing the combined carrying value of the 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 (income) expense—net on the condensed consolidated statements of income.

$ 350 million 0.00 % Convertible Senior Notes due 2024

4 unchanged sentences

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

However, this condition was not met for the calendar quarter ended June 30, 2022 through the calendar quarter ended June 30, 2023, and as a result, the 2024 Notes were not convertible as of June 30, 2023.

However, this condition was not met for the calendar quarter ended June 30, 2022 through the calendar quarter ended June 30, 2023, but was met for the calendar quarter ended September 30, 2023, and as a result, the 2024 Notes are convertible as of September 30, 2023.

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

1 unchanged sentence

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

During the six months ended July 30, 2022, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

During the six months ended July 30, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

During the nine months ended October 29, 2022, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

During the nine months ended October 29, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

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

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

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The remaining liability for the 2024 Notes is classified as a current obligation on our condensed consolidated balance sheets since the maturity date of the outstanding 2024 Notes is on September 15, 2024.

The settlement will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

24 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

6 unchanged sentences

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

During the six months ended July 30, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the six months ended July 30, 2022, we paid $ 9.4 million in cash and delivered 27,214 shares of common stock to settle the early conversion of these 2023 Notes.

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 six shares of our common stock in respect to such settlement of the converted 2023 Notes.

During the nine months ended October 29, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the nine months ended October 29, 2022, we paid $ 9.4 million in cash and delivered 27,220 shares of common stock to settle the early conversion of these 2023 Notes.

We also received 27,208 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes, and therefore, on a net basis issued 12 shares of our common stock in respect to such settlement of the converted 2023 Notes.

In June 2023, upon the maturity of the 2023 Notes, the remaining $ 1.7 million in aggregate principal amount of the 2023 Notes settled for $ 1.7 million in cash.

During the six months ended July 29, 2023, we issued in aggregate 1,931 shares of common stock upon settlement of the 2023 Notes.

During fiscal 2023 through the maturity of the 2023 Notes, we issued in aggregate 1,931 shares of common stock upon settlement of the 2023 Notes.

NOTE 10—CREDIT FACILITIES

6 unchanged sentences

Total credit facilities

(1) Interest rates for the asset based credit facility and term loans represent the weighted-average interest rates as of July 29, 2023.

(2) Deferred financing fees associated with the asset based credit facility as of July 29, 2023 and January 28, 2023 were $ 3.0 million and $ 3.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

(1) Interest rates for the asset based credit facility and term loans represent the weighted-average interest rates as of October 28, 2023.

(2) Deferred financing fees associated with the asset based credit facility as of October 28, 2023 and January 28, 2023 were $ 2.8 million and $ 3.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

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

(3) Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $ 1,945 million and $ 1,955 million were included in term loan—net on the condensed consolidated balance sheets as of July 29, 2023 and January 28, 2023, respectively, and $ 20 million was included in other current liabilities on the condensed consolidated balance sheets as of both July 29, 2023 and January 28, 2023.

(3) Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $ 1,940 million and $ 1,955 million were included in term loan—net on the condensed consolidated balance sheets as of October 28, 2023 and January 28, 2023, respectively, and $ 20 million was included in other current liabilities on the condensed consolidated balance sheets as of both October 28, 2023 and January 28, 2023.

FINANCIAL INFORMATION

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(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 491 million and $ 494 million were included in term loan B-2—net on the condensed consolidated balance sheets as of July 29, 2023 and January 28, 2023, respectively, and $ 5.0 million was included in other current liabilities on the condensed consolidated balance sheets as of both July 29, 2023 and January 28, 2023.

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(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 490 million and $ 494 million were included in term loan B-2—net on the condensed consolidated balance sheets as of October 28, 2023 and January 28, 2023, respectively, and $ 5.0 million was included in other current liabilities on the condensed consolidated balance sheets as of both October 28, 2023 and January 28, 2023.

(5) Represents total equipment security notes secured by certain of our property and equipment, which were included in other current liabilities on the condensed consolidated balance sheets as of January 28, 2023.

15 unchanged sentences

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

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FINANCIAL INFORMATION

2 unchanged sentences

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

As of July 29, 2023, RHI was in compliance with the FCCR Covenant.

As of October 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.

2 unchanged sentences

As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit).

As of July 29, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 454 million, net of $ 27 million in outstanding letters of credit.

As of October 28, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 430 million, net of $ 44 million in outstanding letters of credit.

Term Loan Credit Agreement

1 unchanged sentence

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 million with a maturity date of October 20, 2028.

Through the second quarter of fiscal 2023, the Term Loan B bore 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).

Through July 31, 2023, the Term Loan B bore 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 was a floating interest rate that reset 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.

As of June 30, 2023, LIBOR is no longer a referenced rate and Term Loan Credit Agreement has transitioned from LIBOR to SOFR.

Beginning in August 2023, the Term Loan B bears interest at an annual rate based on SOFR subject to a 0.50 % SOFR floor plus an interest rate margin of 2.50 % plus a credit spread adjustment.

Effective August 1, 2023, the Term Loan B bears interest at an annual rate based on SOFR subject to a 0.50 % SOFR floor plus an interest rate margin of 2.50 % plus a credit spread adjustment.

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”).

4 unchanged sentences

FINANCIAL INFORMATION

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

18 unchanged sentences

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

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FINANCIAL INFORMATION

4 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

1 unchanged sentence

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 extinguishment of debt in the three months ended July 30, 2022.

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.

As of July 29, 2023, we had $ 8.4 million of unrecognized tax benefits, of which $ 7.6 million would reduce income tax expense and the effective tax rate, if recognized.

The increase in our effective tax rate for the three months ended October 28, 2023 compared to the three months ended October 29, 2022 is primarily attributable to the net loss in the current period and tax benefits from the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery.

The increase in our effective tax rate for the nine months ended October 28, 2023 compared to the nine months ended October 29, 2022 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023 as compared to fiscal 2022.

As of October 28, 2023, we had $ 8.3 million of unrecognized tax benefits, of which $ 7.5 million would reduce income tax expense and the effective tax rate, if recognized.

The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized.

As of July 29, 2023, we had $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

NOTE 13—NET INCOME PER SHARE

The weighted-average shares used for net income per share were as follows:

As of October 28, 2023, we had $ 5.7 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

NOTE 13—NET INCOME (LOSS) PER SHARE

The weighted-average shares used for net income (loss) per share are presented in the table below.

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Weighted-average shares—basic

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Weighted-average shares—diluted

(1) As we reported a net loss for the three months ended October 28, 2023, the weighted-average shares outstanding for basic and diluted are the same for the corresponding period.

(2) The dilutive effect of the 2023 Notes and 2024 Notes is calculated under the if-converted method, which assumes share settlement of the entire convertible debt instrument.

5 unchanged sentences

FINANCIAL INFORMATION

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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:

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The following number of options and restricted stock units, as well as shares issuable under convertible senior notes, were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Restricted stock units

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On June 2, 2022, the Board of Directors authorized an additional $ 2,000 million 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”).

In the three months ended July 30, 2022, we repurchased 1,000,000 shares of our common stock under the Share Repurchase Program at an average price of $ 254.72 per share, for an aggregate repurchase amount of approximately $ 255 million.

In the three 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.

In addition, we recorded $ 12 million of excise taxes related to the share repurchases during the three months ended July 29, 2023, which are recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets as of July 29, 2023.

As of July 29, 2023, $ 245 million remains available for future share repurchases under this program.

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

In the nine months ended October 28, 2023, we repurchased 3,887,965 shares of our common stock under the Share Repurchase Program at an average price of $ 321.28 per share, for an aggregate repurchase amount of approximately $ 1,261 million, inclusive of $ 12 million of excise taxes.

The excise tax liability is recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets as of October 28, 2023.

As of October 28, 2023, $ 201 million remains available for future share repurchases under this program.

Share Retirement

In the three months ended July 30, 2022, we retired 1,000,000 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $ 255 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of shareholders’ equity (deficit) as of and for the three and six months ended July 30, 2022.

In the three 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.

In the nine months ended October 29, 2022, we retired 1,127,557 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $ 286 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity (deficit) as of and for the nine months ended October 29, 2022.

In the nine months ended October 28, 2023, we retired 3,887,965 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 $ 10 million and $ 1,251 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 nine months ended October 28, 2023.

Refer to the condensed consolidated statements of stockholders’ equity (deficit) for shares repurchased and subsequently retired in the three months ended October 28, 2023.

NOTE 15—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 8.5 million and $ 11 million during the three months ended July 29, 2023 and July 30, 2022, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

We recorded stock-based compensation expense of $ 19 million and $ 24 million during the six months ended July 29, 2023 and July 30, 2022, respectively.

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

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FINANCIAL INFORMATION

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

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

30 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

9 unchanged sentences

Shares issued as a result of award exercises under the 2023 Stock Incentive Plan will be funded with the issuance of new shares.

As of July 29, 2023, 3,639,976 options granted under the Plans were outstanding with a weighted-average exercise price of $ 188.11 per share and 3,339,622 options were vested or expected to vest with a weighted-average exercise price of $ 181.50 per share.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 29, 2023 was $ 750 million, $ 706 million and $ 580 million, respectively.

Stock options exercisable as of July 29, 2023 had a weighted-average remaining contractual life of 4.72 years.

As of July 29, 2023, the total unrecognized compensation expense related to unvested options was $ 102 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.74 years.

In addition, as of July 29, 2023, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

Friedman in October 2020 was $ 9.5 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

As of July 29, 2023, 18,910 restricted stock units under the Plans were outstanding with a weighted-average grant date fair value of $ 439.49 per share.

During the three months ended July 29, 2023, no restricted stock units vested.

During the six months ended July 29, 2023, 1,250 restricted stock units vested with a weighted-average grant date fair value of $ 437.82 per share.

As of July 29, 2023, there was $ 6.6 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 3.67 years.

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 31

Chairman and Chief Executive Officer Option Grant

A summary of options outstanding, vested or expected to vest, and exercisable as of October 28, 2023 was as follows:

REMAINING TERM

(in thousands)

Options outstanding

Options vested or expected to vest

Options exercisable

Stock-based compensation expense, which is included in selling, general and administrative expenses on the condensed consolidated statements of income (loss), was as follows:

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Stock-based compensation expense (1)

(1) On October 18, 2020, our Board of Directors granted Mr.

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 will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 2.0 million and $ 4.3 million was recognized during the three months ended July 29, 2023 and July 30, 2022, respectively, and $ 5.6 million and $ 10 million was recognized during the six months ended July 29, 2023 and July 30, 2022, respectively (which is included in the stock-based compensation expense recorded during the three and six months ended July 29, 2023 and July 30, 2022 noted above).

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 2.0 million and $ 4.1 million was recognized during the three months ended October 28, 2023 and October 29, 2022, respectively, and $ 7.5 million and $ 14 million was recognized during the nine months ended October 28, 2023 and October 29, 2022, respectively.

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

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 31

As of October 28, 2023, the total unrecognized compensation expense and weighted average remaining term was as follows:

REMAINING TERM

(in thousands)

Unvested options (1)

Unvested restricted stock and restricted stock units

(1) Includes unrecognized compensation expense related to the fully vested option grant made to Mr.

Friedman in October 2020 of $ 7.5 million, which will be recognized on an accelerated basis through May 2025 .

NOTE 16—COMMITMENTS AND CONTINGENCIES

We had no material off balance sheet commitments as of July 29, 2023.

We had no material off balance sheet commitments as of October 28, 2023.

Contingencies

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Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on the condensed consolidated financial statements, the outcome of legal matters is subject to inherent uncertainty.

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FINANCIAL INFORMATION

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.

32 | 2023 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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.

11 unchanged sentences

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 (income) expense—net, income tax expense (benefit) and our share of equity method investments loss.

Operating income is defined as net income (loss) before interest expense—net, loss on extinguishment of debt, other expense—net, income tax expense (benefit) and our share of equity method investments loss.

Segment operating income excludes (i) legal settlements, (ii) severance costs associated with a reorganization, (iii) non-cash compensation amortization related to an option grant made to Mr.

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

Friedman, (v) asset impairments, (vi) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ), (vii) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, and (viii) product recalls.

Friedman in October 2020, (iv) asset impairments, (v) product recalls, (vi) employer payroll tax expense related to an option exercise by Mr.

Friedman, (vii) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ), (viii) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary and (ix) gain on sale of building and land.

These items are excluded from segment operating income in order to provide better transparency of segment operating results.

1 unchanged sentence

FINANCIAL INFORMATION

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The following table presents segment operating income and income before income taxes and equity method investments:

2023 THIRD QUARTER FORM 10-Q | 33

The following table presents segment operating income and income (loss) before income taxes and equity method investments:

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

4 unchanged sentences

Non-cash compensation

Employer payroll taxes on option exercise

Asset impairments

Recall accrual

Employer payroll taxes on option exercise

Professional fees

Compensation settlements

Recall accrual

Gain on sale of building and land

Income from operations

1 unchanged sentence

Loss on extinguishment of debt

Other (income) expense—net

Income before income taxes and equity method investments

The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting :

Other expense—net

Income (loss) before income taxes and equity method investments

The following tables present the results of operations metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting :

THREE MONTHS ENDED

1 unchanged sentence

Depreciation and amortization

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FINANCIAL INFORMATION

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Depreciation and amortization

In the three months ended July 29, 2023, and July 30, 2022, the Real Estate segment share of equity method investments loss were $ 3.4 million and $ 2.8 million, respectively, and were $ 5.0 million and $ 4.2 million in the six months ended July 29, 2023, and July 30, 2022, respectively.

The Real Estate segment share of equity method investments loss was $ 2.7 million and $ 1.9 million in the three months ended October 28, 2023 and October 29, 2022, respectively, and $ 7.7 million and $ 6.1 million in the nine months ended October 28, 2023 and October 29, 2022, respectively.

Our share of income from equity method investments for the Waterworks segment were immaterial for all fiscal periods presented.

The following table presents the balance sheet metrics as required under ASC 280— Segment Reporting :

The following table presents the financial position metrics as required under ASC 280— Segment Reporting :

(in thousands)

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THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

2 unchanged sentences

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States.

As of July 29, 2023, we operated four retail locations and two outlets in Canada, and two retail locations in the U.K.

As of October 28, 2023, we operated four retail locations and two outlets in Canada and two retail locations and one outlet in the U.K.

Geographic revenues in Canada and the U.K.

2 unchanged sentences

FINANCIAL INFORMATION

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

What changed 10-Q

Item 1. Financial Statements