What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-12-07 compared with 2023-09-07 · 205 added, 200 removed, 383 unchanged (51% 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 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.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and nine months ended October 28, 2023, and a comparison to the three and nine months ended October 29, 2022.

The discussion related to cash flows for the nine months ended October 29, 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 October 29, 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.

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Basis of Presentation and Results of Operations .

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.

This section provides our condensed consolidated statements of income (loss) 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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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 condensed consolidated financial statements.

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FINANCIAL INFORMATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

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

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FINANCIAL INFORMATION

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

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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.

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, in our Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2023 (the “First Quarter Form 10-Q”) and in our 2022 Form 10-K.

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, in our Quarterly Report on Form 10-Q for the quarterly periods ended April 29, 2023 and July 29, 2023 and in our 2022 Form 10-K.

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

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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 operate our retail locations throughout the United States, Canada, the United Kingdom and Germany, 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 November 2023, we opened the Champagne & Caviar Bar at the RH Guesthouse New York, featuring a luminous and alluring 32-seat lounge with elegant dishes topped with caviar, a library of the world’s finest champagnes and vodkas, and a select menu of timeless cocktails.

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.

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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.

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

In November 2023, we opened RH Munich, The Gallery on Sendlinger Strasse in Germany, and RH Düsseldorf, The Gallery on the Königsallee.

The opening of these two Galleries marks the beginning of our expansion into continental Europe.

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 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:

In fiscal 2023, our investment in Sourcebooks has increased in connection with introducing these new products, which we expect to continue over the next several quarters.

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 37

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

Design 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, 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.

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

With the recent launch of the fall RH Interiors and RH Contemporary Sourcebooks, we have begun the introduction of the most prolific collection of new products in our history, which will continue into next year.

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

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FINANCIAL INFORMATION

Gallery Transformation .

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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, 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

The following table sets forth our condensed consolidated statements of income:

The following table sets forth our condensed consolidated statements of income (loss):

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

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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)

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Share of equity method investments loss

Net income (loss)

Non-GAAP Financial Measures

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

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 (loss), 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 to adjust for the impact of income tax items related to such adjustments to our GAAP financial statements.

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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

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

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

Reconciliation of GAAP Net Income (Loss) to Operating Income and Adjusted Operating Income

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Interest expense—net (1)

Loss on extinguishment of debt (1)

Other (income) expense—net (1)

Other expense—net (1)

Income tax expense (benefit) (1)

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Non-cash compensation (4)

Employer payroll taxes on option exercise (5)

Asset impairments (5)

Recall accrual (6)

Employer payroll taxes on option exercise (7)

Professional fees (8)

Compensation settlements (9)

Recall accrual (9)

Gain on sale of building and land (10)

Adjusted operating income

(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.

(1) Refer to discussion “Three Months Ended October 28, 2023 Compared to Three Months Ended October 29, 2022” and “Nine Months Ended October 28, 2023 Compared to Nine Months Ended October 29, 2022” below for a discussion of our results of operations for the three and nine months ended October 28, 2023 and October 29, 2022.

(2) The adjustment in the nine months ended October 28, 2023 represents certain legal settlements associated with class action litigation matters.

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

The adjustment in the three and nine months ended October 29, 2022 represents a favorable legal settlement associated with a lease agreement.

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

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Friedman in October 2020.

(5) The adjustment in the three and nine months ended October 28, 2023 includes impairment of property and equipment of $2.2 million related to the interior refresh of our Design Galleries, as well as impairment of a loan receivable of $1.3 million.

The adjustment in the three and nine months ended October 29, 2022 includes inventory impairment of $11 million.

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

(6) The adjustment in the three and nine months ended October 28, 2023 represents accrual adjustments related to product recall charges.

The adjustment in the nine months ended October 29, 2022 represents charges associated with product recalls.

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

Friedman in the first quarter of fiscal 2022.

(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.

(8) 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.

Adjusted Net Income .

Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.

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

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

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

Adjusted Net Income (Loss) .

Adjusted net income (loss) is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.

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

Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income (Loss)

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Adjustments pre-tax:

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Non-cash compensation (1)

Asset impairments (1)

Recall accrual (1)

Loss on extinguishment of debt (1)

Employer payroll taxes on option exercise (1)

Asset impairments (1)

Professional fees (1)

Compensation settlements (1)

Recall accrual (1)

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

Gain on derivative instruments—net (2)

Gain on sale of building and land (1)

Subtotal adjusted items

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Share of equity method investments loss (1)

Adjusted net income

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

(2) Represents net (gain) loss on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge 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 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.

Adjusted net income (loss)

(1) Refer to table titled “Reconciliation of GAAP Net Income (Loss) 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).

(3) We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income (loss), (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 and the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery in the third quarter of fiscal 2023.

The adjustments for the three months ended October 28, 2023 and October 29, 2022 are based on adjusted tax rates of (63.1)% and 24.9%, respectively.

The adjustments for the nine months ended October 28, 2023 and October 29, 2022 are based on adjusted tax rates of 27.5% and 20.9%, respectively.

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FINANCIAL INFORMATION

EBITDA and Adjusted EBITDA .

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

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

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

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

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FINANCIAL INFORMATION

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

Reconciliation of GAAP Net Income (Loss) to EBITDA and Adjusted EBITDA

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Depreciation and amortization

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Legal settlements (2)

Reorganization related costs (2)

Share of equity method investments loss (2)

Reorganization related costs (2)

Capitalized cloud computing amortization (3)

Other (income) expense—net (2)

Other expense—net (2)

Asset impairments (2)

Recall accrual (2)

Loss on extinguishment of debt (2)

Employer payroll taxes on option exercise (2)

Asset impairments (2)

Professional fees (2)

Compensation settlements (2)

Recall accrual (2)

Gain on sale of building and land (2)

Adjusted EBITDA

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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.

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

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

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Adjusted Capital Expenditures.

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Reconciliation of Adjusted Capital Expenditures

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

NINE MONTHS ENDED

Capital expenditures

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Adjusted capital expenditures

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 43

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.

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 and $4.2 million for the nine months ended October 28, 2023 and October 29, 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:

SIX MONTHS ENDED

THREE MONTHS ENDED

NINE MONTHS ENDED

SELLING SQUARE

(square footage in thousands)

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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

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

Leased selling square footage includes approximately 35,000 square feet as of October 28, 2023 related to one owned retail location.

(2) Total leased square footage includes approximately 56,000 square feet as of October 28, 2023 related to one owned retail location.

Three Months Ended October 28, 2023 Compared to Three Months Ended October 29, 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 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.

(1) The results for the Real Estate segment were immaterial for both the three months ended October 28, 2023 and October 29, 2022, therefore, such results are presented within the RH Segment for such period.

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

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.

Consolidated net revenues decreased $118 million, or 13.6%, to $751 million in the three months ended October 28, 2023 compared to $869 million in the three months ended October 29, 2022.

RH Segment net revenues

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.

RH Segment net revenues decreased $116 million, or 14.1%, to $705 million in the three months ended October 28, 2023 compared to $821 million in the three months ended October 29, 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.

RH Segment net revenues for the three months ended October 28, 2023 decreased primarily due to lower demand compared to the third quarter of fiscal 2022, reflecting a continuation of trends following the elevated pandemic-driven home spending.

Outlet sales decreased $3.4 million to $61 million in the three months ended October 28, 2023 compared to $64 million in the three months ended October 29, 2022.

Waterworks net revenues

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.

Waterworks net revenues decreased $1.6 million, or 3.4%, to $46 million in the three months ended October 28, 2023 compared to $48 million in the three months ended October 29, 2022.

Consolidated gross profit decreased $80 million, or 19.1%, to $340 million in the three months ended October 28, 2023 compared to $421 million in the three months ended October 29, 2022.

As a percentage of net revenues, consolidated gross margin decreased 310 basis points to 45.3% of net revenues in the three months ended October 28, 2023 from 48.4% of net revenues in the three months ended October 29, 2022.

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

Excluding the asset impairment adjustment, consolidated gross margin would have decreased 440 basis points to 45.3% of net revenues in the three months ended October 28, 2023 from 49.7% of net revenues in the three months ended October 29, 2022.

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 45

RH Segment gross profit

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.

RH Segment gross profit decreased $79 million, or 20.0%, to $316 million in the three months ended October 28, 2023 compared to $395 million in the three months ended October 29, 2022.

As a percentage of net revenues, RH Segment gross margin decreased 330 basis points to 44.8% of net revenues in the three months ended October 28, 2023 from 48.1% of net revenues in the three months ended October 29, 2022.

Excluding the $11 million asset impairment adjustment, RH Segment gross margin would have decreased 460 basis points to 44.8% of net revenues in the three months ended October 28, 2023 from 49.4% of net revenues in the three months ended October 29, 2022.

The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the Core business, largely driven by higher mix of, and discounts on, discontinued product collections, as well as the impact of our pricing strategy on certain products.

In addition, our lower net revenues year over year resulted in deleverage in occupancy costs.

Waterworks gross profit

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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Waterworks gross profit decreased $1.4 million, or 5.3%, to $24 million in the three months ended October 28, 2023 compared to $26 million in the three months ended October 29, 2022.

As a percentage of net revenues, Waterworks gross margin decreased 100 basis points to 53.0% of net revenues in the three months ended October 28, 2023 from 54.0% of net revenues in the three months ended October 29, 2022.

Selling, general and administrative expenses

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.

Consolidated selling, general and administrative expenses increased $39 million, or 15.4%, to $289 million in the three months ended October 28, 2023 compared to $251 million in the three months ended October 29, 2022.

RH Segment selling, general and administrative expenses

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 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.

RH Segment selling, general and administrative expenses increased $38 million, or 16.3%, to $270 million in the three months ended October 28, 2023 compared to $232 million in the three months ended October 29, 2022.

RH Segment selling, general and administrative expenses for the three months ended October 28, 2023 include asset impairments of $2.2 million and $1.3 million related to the interior refresh of our Design Galleries and a loan receivable, respectively, and amortization of non-cash compensation of $2.0 million related to an option grant made to Mr.

Friedman in October 2020, offset by accrual adjustments related to product recall charges of $1.6 million.

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

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

RH Segment selling, general and administrative expenses would have been 37.6% and 28.3% of net revenues for the three months ended October 28, 2023 and October 29, 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 incremental advertising costs of $52 million related to the mailing of the 604-page RH Interiors and 352-page RH Contemporary Sourcebooks as compared to the third quarter of fiscal 2022, as well as deleverage in compensation and other corporate costs driven by lower net revenues.

Waterworks selling, general and administrative expenses

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.

Waterworks selling, general and administrative expenses increased $0.9 million, or 4.6%, to $20 million in the three months ended October 28, 2023 compared to $19 million in the three months ended October 29, 2022.

Waterworks selling, general and administrative expenses were 42.3% and 39.0% of net revenues for the three months ended October 28, 2023 and October 29, 2022, respectively.

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FINANCIAL INFORMATION

Interest expense—net

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:

Interest expense—net increased $23 million, or 73.9%, in the three months ended October 28, 2023 compared to the three months ended October 29, 2022, which consisted of the following in each period:

THREE MONTHS ENDED

6 unchanged sentences

Total interest expense—net

46 | 2023 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Loss on extinguishment of debt

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

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

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

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:

Other expense—net

Other expense—net was $5.3 million and $2.0 million in the three months ended October 28, 2023 and October 29, 2022, respectively, which primarily represents foreign exchange losses of $3.7 million and $1.8 million, respectively, from the remeasurement of intercompany loans with subsidiaries in Switzerland and the U.K., as well as net losses due to unfavorable exchange rate changes affecting foreign currency denominated transactions of $1.6 million and $0.2 million, respectively, primarily between the U.S.

dollar as compared to Euro and Pound Sterling.

Income tax expense (benefit)

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

THREE MONTHS ENDED

(dollars in thousands)

Income tax expense

Income tax expense (benefit)

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.

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.

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.

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 $2.7 million and $1.9 million loss during the three months ended October 28, 2023 and October 29, 2022, respectively.

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 47

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

SIX MONTHS ENDED

2023 THIRD QUARTER FORM 10-Q | 47

Nine Months Ended October 28, 2023 Compared to Nine Months Ended October 29, 2022

NINE MONTHS ENDED

(in thousands)

2 unchanged sentences

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.

(1) The results for the Real Estate segment were immaterial for both the nine months ended October 28, 2023 and October 29, 2022, therefore, such results are presented within the RH Segment for such period.

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.

Consolidated net revenues decreased $527 million, or 18.7%, to $2,291 million in the nine months ended October 28, 2023 compared to $2,818 million in the nine months ended October 29, 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.

RH Segment net revenues decreased $524 million, or 19.6%, to $2,146 million in the nine months ended October 28, 2023 compared to $2,670 million in the nine months ended October 29, 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.

RH Segment net revenues for the nine months ended October 28, 2023 decreased primarily due to lower demand compared to the first three quarters of fiscal 2022, reflecting a continuation of trends following the elevated pandemic-driven home spending.

Outlet sales decreased $26 million to $177 million in the nine months ended October 28, 2023 compared to $203 million in the nine months ended October 29, 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.

Waterworks net revenues decreased $2.9 million, or 2.0%, to $145 million in the nine months ended October 28, 2023 compared to $148 million in the nine months ended October 29, 2022.

Consolidated gross profit decreased $375 million, or 26.0%, to $1,068 million in the nine months ended October 28, 2023 compared to $1,443 million in the nine months ended October 29, 2022.

As a percentage of net revenues, consolidated gross margin decreased 460 basis points to 46.6% of net revenues in the nine months ended October 28, 2023 from 51.2% of net revenues in the nine months ended October 29, 2022.

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

Excluding the asset impairment adjustment, consolidated gross margin would have decreased 500 basis points to 46.6% of net revenues in the nine months ended October 28, 2023 from 51.6% of net revenues in the nine months ended October 29, 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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RH Segment gross profit decreased $372 million, or 27.3%, to $990 million in the nine months ended October 28, 2023 from $1,363 million in the nine months ended October 29, 2022.

As a percentage of net revenues, RH Segment gross margin decreased 480 basis points to 46.2% of net revenues in the nine months ended October 28, 2023 from 51.0% of net revenues in the nine months ended October 29, 2022.

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FINANCIAL INFORMATION

Excluding the $11 million asset impairment adjustment, RH Segment gross margin would have decreased 520 basis points to 46.2% of net revenues in the nine months ended October 28, 2023 from 51.4% of net revenues in the three months ended October 29, 2022.

In addition, our lower net revenues year over year resulted in deleverage in occupancy costs.

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.

Waterworks gross profit decreased $2.2 million, or 2.7%, to $78 million in the nine months ended October 28, 2023 from $80 million in the nine months ended October 29, 2022.

As a percentage of net revenues, Waterworks gross margin decreased 40 basis points to 53.6% of net revenues in the nine months ended October 28, 2023 from 54.0% of net revenues in the nine months ended October 29, 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.

Consolidated selling, general and administrative expenses decreased $66 million, or 8.0%, to $766 million in the nine months ended October 28, 2023 compared to $833 million in the nine months ended October 29, 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.

RH Segment selling, general and administrative expenses decreased $64 million, or 8.2%, to $708 million in the nine months ended October 28, 2023 compared to $772 million in the nine months ended October 29, 2022.

RH Segment selling, general and administrative expenses for the nine months ended October 28, 2023 include legal settlements of $8.0 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million, amortization of non-cash compensation of $7.5 million related to an option grant made to Mr.

Friedman in October 2020 and asset impairments of $2.2 million and $1.3 million related to the interior refresh of our Design Galleries and a loan receivable, respectively, offset by accrual adjustments related to product recall charges of $1.6 million.

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

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

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

RH Segment selling, general and administrative expenses would have been 31.8% and 27.5% of net revenues for the nine months ended October 28, 2023 and October 29, 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 incremental advertising costs of $31 million related to the mailing of the 604-page fall RH Interiors Sourcebook, as well as deleverage in compensation and other corporate costs driven by lower net revenues.

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.

Waterworks selling, general and administrative expenses decreased $2.8 million, or 4.5%, to $58 million in the nine months ended October 28, 2023 compared to $61 million in the nine months ended October 29, 2022.

Waterworks selling, general and administrative expenses were 40.3% and 41.3% of net revenues for the nine months ended October 28, 2023 and October 29, 2022, respectively.

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

Excluding the adjustments, Waterworks selling, general and administrative expenses would have been 40.2% and 38.9% of net revenues for the nine months ended October 28, 2023 and October 29, 2022, respectively.

FINANCIAL INFORMATION

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2023 THIRD 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

Interest expense—net increased $60 million, or 76.8%, in the nine months ended October 28, 2023 compared to the nine months ended October 29, 2022, which consisted of the following in each period:

NINE MONTHS ENDED

(in thousands)

6 unchanged sentences

Loss on extinguishment of debt

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

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

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

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

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.

Other expense—net

Other expense—net was $4.5 million and $4.8 million in the nine months ended October 28, 2023 and October 29, 2022, respectively, which primarily represents foreign exchange losses of $2.8 million and $5.4 million, respectively, from the remeasurement of intercompany loans with subsidiaries in Switzerland and the U.K., as well as net losses due to unfavorable exchange rate changes affecting foreign currency denominated transactions of $1.7 million and $1.1 million, respectively, primarily between the U.S.

dollar as compared to Euro and Pound Sterling.

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

Income tax expense (benefit)

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

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

1 unchanged sentence

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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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.

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FINANCIAL INFORMATION

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.

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 $7.7 million and $6.1 million loss during the nine months ended October 28, 2023 and October 29, 2022, respectively.

Liquidity and Capital Resources

14 unchanged sentences

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

(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.

(2) Net debt as of October 28, 2023 and January 28, 2023 excludes restricted cash of $2.0 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 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

(3) As of October 28, 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 $44 million and $27 million, respectively, 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 Sourcebooks.

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.

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).

During the nine months ended October 28, 2023, we invested $1,261 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program.

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.

2 unchanged sentences

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

FINANCIAL INFORMATION

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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 increases in interest rates.

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 trends in luxury housing, increases in interest rates, equity market performance and inflation.

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.

14 unchanged sentences

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

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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.

1 unchanged sentence

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

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

As of October 28, 2023, we had $1,960 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 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.

As of October 28, 2023, we had $495 million outstanding under the Amended Term Loan Credit Agreement.

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

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FINANCIAL INFORMATION

Convertible Senior 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”).

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.

As of October 28, 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.

1 unchanged sentence

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

During the six months ended July 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.

During the nine months ended October 28, 2023, adjusted capital expenditures were $150 million in aggregate, net of cash received related to landlord tenant allowances of $4.1 million.

In addition, we also received landlord tenant allowances under finance leases 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.

2 unchanged sentences

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

FINANCIAL INFORMATION

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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

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Cash Flow Analysis

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

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

3 unchanged sentences

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

Cash, cash equivalents and restricted cash at end of period

Net Cash Provided By Operating Activities

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

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.

For the nine months ended October 28, 2023, net cash provided by operating activities was $316 million and consisted of net income of $116 million and an increase in non-cash items of $263 million, partially offset by a change in working capital and other activities of $63 million.

The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $65 million primarily due to payments made under the related lease agreements, a decrease in other non-current obligations of $25 million, a decrease in deferred revenue and customer deposits of $23 million, an increase in landlord assets under construction, net of tenant allowance of $19 million and an increase in prepaid expense and other assets of $13 million.

These uses of cash from working capital were partially offset by a decrease in merchandise inventory of $81 million.

2 unchanged sentences

Investing activities also include our strategic investments.

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

For the nine months ended October 28, 2023, net cash used in investing activities was $166 million and was comprised of investments in retail stores, information technology and systems infrastructure of $132 million and additional contributions to our equity method investments of $34 million.

Net Cash Used In Financing Activities

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

For the six months ended July 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.

For the nine months ended October 28, 2023, net cash used in financing activities was $1,278 million, primarily due to the repurchase of 3,887,965 shares of our common stock for an aggregate repurchase amount of $1,249 million, payments on term loans of $19 million, net payments under finance lease agreements of $9.6 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 $5.8 million.

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FINANCIAL INFORMATION

Non-Cash Transactions

13 unchanged sentences

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

FINANCIAL INFORMATION

2023 SECOND QUARTER FORM 10-Q | 55

Share Repurchase Program and Share Retirement

5 unchanged sentences

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.

56 | 2023 SECOND QUARTER FORM 10-Q

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 $1,261 million, inclusive of $12 million of excise taxes.

As of October 28, 2023, $201 million remains available for future share repurchases under the Share Repurchase Program.

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 55

Share Retirement

During 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.

Critical Accounting Policies and Estimates

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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 2. Management’s Discussion and Analysis