What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-29 · 219 added, 262 removed, 388 unchanged (55% of the section changed)

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

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

MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in Item 1A — Risk Factors and included elsewhere in this Annual Report on Form 10-K.

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

MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources are presented in this section for fiscal 2023 and a comparison to fiscal 2022.

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

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

The discussion for fiscal 2022 and fiscal 2021 has been omitted from this Annual Report but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2023.

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

Our MD&A includes these primary sections:

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

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

Factors Affecting Our Results of Operations .

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How We Assess the Performance of Our Business.

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

Basis of Presentation and Results of Operations .

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

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

Liquidity and Capital Resources .

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

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

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

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

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

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

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

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

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

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

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

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, the United Kingdom and Germany, and have an integrated RH Hospitality experience in 16 of our Design Gallery locations, which includes restaurants and wine bars.

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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, RH Contemporary, RH Modern, RH Outdoor, RH Baby & Child and RH 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.

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.

As of February 3, 2024, we operated the following number of locations:

Design Galleries

Legacy Galleries

Modern Galleries

Modern Gallery

Baby & Child and TEEN Galleries

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

Macroeconomic Factors

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

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

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

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

Business Conditions

While we experienced increased demand for our products during the pandemic, recently there have been significant shifts in consumer spending away from home furnishings.

Our business has also been negatively affected by macroeconomic conditions including higher interest rates, the slowdown in the luxury home market as well as other negative factors related to the effects of lingering higher inflation and increased costs including higher construction expenses.

Our expectation is that these factors, which have contributed to the slowdown in demand in our business, will begin to moderate in the coming quarters and that we have positioned the business to take advantage of any improvements in macroeconomic factors.

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

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

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

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

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

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

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

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

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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We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries sized to the potential of each market and the size of our assortment.

In addition, we plan to incorporate hospitality into most of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable.

In addition, we plan to incorporate hospitality into many of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable.

We believe hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of hospitality drives incremental sales of home furnishings in these Galleries.

Brand Elevation.

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

Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker.

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

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

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

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

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

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

RH England marked the beginning of our global expansion beyond North America.

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

RH1 & RH2, our private jets;

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

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

Global Expansion.

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

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

As such, we are actively pursuing the expansion of the RH brand globally.

Our plans include launching a number of international locations in the United Kingdom and Europe, which began with the opening of RH England, The Gallery at the Historic Aynho Park, in June 2023;

followed by the November 2023 openings of RH Munich, The Gallery on Sendlinger Strasse, and RH Düsseldorf, The Gallery on the Königsallee;

as well as RH Brussels, The Gallery on Boulevard de Waterloo, in March 2024.

We have secured a number of locations in various markets in the United Kingdom, continental Europe and Australia, including in Madrid, Paris, London, Milan and Sydney.

Digital Reimagination.

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We believe an opportunity exists to create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a website can and should be.

Global Expansion.

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

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

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

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

Factors Affecting Our Results of Operations

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

We have experienced significant changes in our business from fiscal 2021 through fiscal 2023, including the impact of macroeconomic factors such as the COVID-19 pandemic, substantially higher interest and mortgage rates, increased inflation and volatility in the global financial markets and the slowdown in the housing market.

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

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

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

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

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Our Strategic Initiatives.

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

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

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

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

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

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

For example, a number of our vendors experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic, as well as other geopolitical conflicts that have occurred in recent years.

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

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

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

However, throughout fiscal 2023 we experienced softening demand trends as compared to fiscal 2022.

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

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

and the remainder from other countries and regions .

Based on total dollar volume of purchases for fiscal 2023, 66% of our products were sourced from Asia, including 30% from Vietnam and 22% from China and the remainder predominantly from India and Indonesia, as well as 14% from the United States and the remainder from other countries and regions.

Consumer Preferences and Demand .

Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends.

We have successfully introduced a large number of new products in past periods, which we believe has been a contributing factor in our sales growth and results of operations.

Periods in which our products have achieved strong customer acceptance generally have had more favorable results.

We have successfully introduced a large number of new products in past and current periods, which we believe has been a contributing factor in our sales growth and results of operations.

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

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The industry in which we operate is cyclical, and consequently our net revenues are affected by general economic conditions, including conditions that affect the housing market.

For example, reduced consumer confidence and lower availability and higher cost of consumer credit reduce demand for our products and limit our ability to increase prices or sustain price increases.

For example, substantially higher interest and mortgage rates and higher cost of consumer credit may reduce demand for our products.

We have determined that our customer purchasing patterns are influenced by economic factors, including the health and volatility of the stock market.

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

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

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

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

We expect the impact of such macroeconomic factors on our business may continue in future quarters.

For more information, refer to Item 1A—Risk Factors — Changes in consumer spending and factors that influence spending of the specific categories of consumers that purchase from us may significantly impact our revenue and results of operations.

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Fluctuation in Quarterly Results .

Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Source Book releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.

Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Sourcebook releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.

As a result of these factors, our working capital requirements and demands may fluctuate during the year.

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Cost of goods sold includes the direct cost of purchased merchandise;

inventory shrinkage, inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves;

inventory shrinkage, inventory reserves and write-downs and lower of cost or net realizable value reserves;

inbound freight;

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The timing and extent of markdowns are driven primarily by customer acceptance of our merchandise.

The primary drivers of the costs of individual goods are raw materials costs, which fluctuate based on a number of factors beyond our control, including commodity prices, changes in supply and demand, general economic conditions, competition, import duties, tariffs and government regulation, logistics costs (which may increase in the event of, for example, expansions of or interruptions in the operation of our distribution centers, furniture home delivery centers and customer service center or damage or interruption to our information systems) and labor costs in the countries where we source our merchandise.

The primary drivers of our product cost of individual goods are raw materials costs, which fluctuate based on a number of factors beyond our control, including commodity prices, changes in supply and demand, general economic conditions, competition, import duties, tariffs and government regulation and labor costs in the countries where we source our merchandise.

In addition, our gross profit is also impacted by logistics costs, which may increase in the event of, for example, expansions of or interruptions in the operation of our distribution centers, furniture home delivery centers and customer service center or damage or interruption to our information systems.

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

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

However, our exposure may increase in connection with our global expansion strategy as we expect to have more operations related to currencies other than the United States dollar.

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

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In recent periods we have experienced higher cost of goods sold primarily related to our increased costs of merchandise and inbound freight.

Our strategy is to offset these higher costs through price increases, as well as efficiencies in our operations.

These cost increases are reasonably likely to continue to affect our business in the future given the current macroeconomic conditions.

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

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Our strategy is to address cost factors as they occur, where possible, including through strategic pricing and efficiency in our operations.

Selling, General and Administrative Expenses.

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

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

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

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

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

Additionally, our selling, general and administrative expenses as a percentage of net revenues can be impacted by the timing of our Sourcebook distributions.

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

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

Adjusted Operating Income, Adjusted Net Income and Adjusted EBITDA.

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

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

Non-GAAP Financial Measures.

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

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

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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.

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.

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

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

Because adjusted EBITDA omits non-cash items, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance.

We define adjusted capital expenditures as 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.

Refer to “Non-GAAP Financial Measures” below for further information.

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Interest expense—net

(Gain) loss on extinguishment of debt

Tradename impairment

Loss on extinguishment of debt

Other expense—net

Total other expenses

Income before income taxes and equity method investments

Income before taxes and equity method investments

Income tax expense (benefit)

Income before equity method investments

Share of equity method investments losses

Share of equity method investments loss

Non-GAAP Financial Measures

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We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision-making.

The non-GAAP financial measures used by us in this Annual Report on Form 10-K may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

The non-GAAP financial measures used by us in this Annual Report may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below.

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

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Adjusted Operating Income .

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

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Interest expense—net (1)

(Gain) loss on extinguishment of debt (1)

Tradename impairment (1)

Loss on extinguishment of debt (1)

Other expense—net (1)

Income tax expense (benefit) (1)

Share of equity method investments losses (1)

Share of equity method investments loss (1)

Operating income

Asset impairments (2)

Non-cash compensation (2)

Legal settlements (3)

Reorganization related costs (4)

Asset impairments (5)

Recall accrual (6)

Employer payroll taxes on option exercises (7)

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Compensation settlements (10)

Recall accrual (8)

Legal settlements (9)

Gain on sale of building and land (11)

Loss on sale leaseback transaction (11)

Reorganizational related costs (12)

Adjusted operating income

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

(1) Refer to discussion “Fiscal 2023 Compared to Fiscal 2022” below for a discussion of our results of operations for the year ended February 3, 2024 and January 28, 2023.

Information on the year ended January 29, 2022 (fiscal 2021) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 29, 2023.

(2) The adjustment in fiscal 2022 represents inventory impairment of $11 million to cost of goods sold and asset impairment of $12 million to selling, general and administrative expenses related to property and equipment of Galleries under construction, as well as lease impairment of $1.0 million due to the early exit of a leased facility.

The adjustment in fiscal 2021 represents asset impairments of $9.6 million.

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

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

Friedman in October 2020.

(3) The adjustment in fiscal 2023 represents certain legal settlements associated with class action litigation matters.

Refer to Note 19— Commitments and Contingencies in our consolidated financial statements.

The adjustment in fiscal 2022 represents a favorable legal settlement associated with a lease agreement.

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

(5) The adjustment to selling, general and administrative expenses in fiscal 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 fiscal 2022 represents inventory impairment of $11 million to cost of goods sold and asset impairment of $12 million to selling, general and administrative expenses related to property and equipment of Galleries under construction, as well as lease impairment of $1.0 million due to the early exit of a leased facility to selling, general and administrative expenses .

The adjustment to selling, general and administrative expenses in fiscal 2021 represents asset impairments of $9.6 million.

(6) Represents adjustments to net revenues associated with product recalls, as well as accrual adjustments, and vendor and insurance claims.

In fiscal 2023, the recall adjustment decreased s elling, general and administrative expenses by $1.6 million due to accrual adjustments.

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

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

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

Friedman in fiscal 2022.

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

(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 11— Convertible Senior Notes in our consolidated financial statements).

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

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

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

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

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

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

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

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

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

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

Adjusted Net Income .

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

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

2 unchanged sentences

Adjustments pre-tax:

(Gain) loss on extinguishment of debt (1)

Asset impairments (1)

Non-cash compensation (1)

Legal settlements (1)

Reorganization related costs (1)

Asset impairments (1)

Recall accrual (1)

Loss on extinguishment of debt (1)

Employer payroll taxes on option exercises (1)

2 unchanged sentences

Compensation settlements (1)

Recall accrual (1)

Legal settlements (1)

Gain on derivative instruments—net (2)

1 unchanged sentence

Amortization of debt discount (3)

Tradename impairment (1)

Loss on sale leaseback transaction (1)

Reorganization related costs (1)

Subtotal adjusted items

Impact of income tax items (4)

Share of equity method investments losses (1)

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 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 11— Convertible Senior Notes in our consolidated financial statements).

FORM 10-K | 47

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

(3) Prior to the adoption of Accounting Standards Update (“ASU”) 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (which was adopted as of the first quarter of fiscal 2022) (“ASU 2020-06”) , certain convertible debt instruments that may be settled in cash on conversion were required to be separately accounted for as liability and equity components of the instrument in a manner that reflected the issuer’s non-convertible debt borrowing rate.

1 unchanged sentence

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

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

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

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

Friedman in fiscal 2022.

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

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

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

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

46 | FORM 10-K

Amounts were presented net of interest capitalized for capital projects of $10 million during fiscal 2021 .

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

(4) For fiscal 2023 and fiscal 2022, we exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent, such as tax benefits related to the option exercises by Mr.

Friedman in fiscal 2022 and the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery in fiscal 2023.

The adjustments for fiscal 2023 and fiscal 2022 are based on adjusted tax rates of 24.2% and 21.7%, respectively.

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

EBITDA and Adjusted EBITDA .

2 unchanged sentences

48 | FORM 10-K

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

3 unchanged sentences

Income tax expense (benefit)

(Gain) loss on extinguishment of debt (1)

Non-cash compensation (1)

Share of equity method investments loss (2)

Legal settlements (2)

Capitalized cloud computing amortization (3)

Reorganization related costs (2)

Asset impairments (2)

Other expense—net (2)

Recall accrual (2)

Loss on extinguishment of debt (2)

Employer payroll taxes on option exercises (2)

Professional fees (2)

Capitalized cloud computing amortization (3)

Non-cash compensation related to consolidated VIEs (2)

Compensation settlements (2)

Share of equity method investments losses (1)

Recall accrual (1)

Other expense—net (1)

Legal settlements (1)

Gain on sale of building and land (2)

Reorganization related costs (1)

Tradename impairment (1)

Loss on sale leaseback transaction (1)

Adjusted EBITDA

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

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

Friedman in October 2020.

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

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

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Adjusted capital expenditures

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million and $4.7 million for fiscal 2023 and 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the consolidated statements of cash flows.

Fiscal 2023 Compared to Fiscal 2022

The results for fiscal 2023 and fiscal 2022 included fifty-three weeks and fifty-two weeks, respectively.

(in thousands)

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Income from operations

(1) The results for the Real Estate segment were immaterial in fiscal 2022 and, therefore, such results are presented within the RH Segment for such period.

There was no income from operations for the Real Estate segment in fiscal 2021.

(1) The results for the Real Estate segment were immaterial in fiscal 2023 and fiscal 2022, thus, such results are presented within the RH Segment each period.

Refer to Note 20— Segment Reporting in our consolidated financial statements.

Consolidated net revenues decreased $561 million, or 15.6%, to $3,029 million in fiscal 2023 compared to $3,590 million in fiscal 2022.

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

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

No assurance can be provided that any accruals will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time, which could further affect results.

Fiscal 2023 includes approximately $50 million of net revenues, which represents revenue recognized in the fifty third week in the fiscal year, whereas fiscal 2022 included only fifty-two weeks of results.

RH Segment net revenues

RH Segment net revenues decreased $195 million, or 5.4%, to $3,399 million in fiscal 2022 compared to $3,594 million in the fiscal 2021.

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

RH Segment net revenues in fiscal 2022 decreased primarily due to softening demand trends, which began in the first quarter of fiscal 2022, and remained below prior year trends for the balance of fiscal 2022.

This decrease was partially offset by backlog relief, as well as increased revenue in our RH Hospitality business compared to fiscal 2021 due to new Restaurant openings in the second half of fiscal 2021 and during fiscal 2022.

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

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

48 | FORM 10-K

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

RH Segment net revenues decreased $563 million, or 16.6%, to $2,836 million in fiscal 2023 compared to $3,399 million in fiscal 2022.

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

RH Segment net revenues for fiscal 2023 decreased primarily due to lower demand compared to fiscal 2022, reflecting a continuation of trends following the elevated pandemic-driven home spending and higher interest rates resulting in a challenging luxury housing market.

Outlet sales were also impacted by these market conditions and decreased $15 million to $245 million in fiscal 2023 compared to $260 million in fiscal 2022.

Waterworks net revenues

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

Waterworks net revenues increased $1.7 million, or 0.9%, to $194 million in fiscal 2023 compared to $192 million in fiscal 2022.

50 | FORM 10-K

Consolidated gross profit decreased $423 million, or 23.3%, to $1,389 million in fiscal 2023 compared to $1,812 million in fiscal 2022.

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

As a percentage of net revenues, gross margin decreased 460 basis points to 45.9% of net revenues in fiscal 2023 compared to 50.5% of net revenues in fiscal 2022.

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

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

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

Excluding the adjustment for the inventory impairment mentioned above, consolidated gross margin would have decreased 490 basis points to 45.9% of net revenues in fiscal 2023 compared to 50.8% of net revenues in fiscal 2022.

RH Segment gross profit

RH Segment gross profit decreased $422 million, or 24.7%, to $1,286 million in fiscal 2023 compared to $1,708 million in fiscal 2022.

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

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

The increase in gross margin was primarily driven by increase in product margins in the core business, as well as leverage in our shipping costs, partially offset by deleverage in fixed occupancy costs in fiscal 2022.

As a percentage of net revenues, RH Segment gross margin decreased 490 basis points to 45.4% of net revenues in fiscal 2023 compared to 50.3% of net revenues in fiscal 2022.

Excluding the adjustment for the inventory impairment mentioned above, RH Segment gross margin would have decreased 520 basis points to 45.4% of net revenues in fiscal 2023 from 50.6% of net revenues in fiscal 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.

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

Furthermore, occupancy increased year over year due to new Galleries and additional distribution centers costs in support of our continued global expansion efforts in Europe.

Waterworks gross profit

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

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

Waterworks gross profit decreased $0.6 million, or 0.6%, to $103 million in fiscal 2023 compared to $104 million in fiscal 2022.

As a percentage of net revenues, Waterworks gross margin decreased 80 basis points to 53.2% of net revenues in fiscal 2023 compared to 54.0% of net revenues in fiscal 2022.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $162 million, or 17.4%, to $1,090 million in fiscal 2022 compared to $928 million in fiscal 2021.

Consolidated selling, general and administrative expenses decreased $67 million, or 6.1%, to $1,023 million in fiscal 2023 compared to $1,090 million in fiscal 2022.

RH Segment selling, general and administrative expenses

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

RH Segment selling, general and administrative expenses decreased $67 million, or 6.6%, to $944 million in fiscal 2023 compared to $1,011 million in fiscal 2022.

RH Segment selling, general and administrative expenses were 33.3% and 29.7% of net revenues in fiscal 2023 and fiscal 2022, respectively.

RH Segment selling, general and administrative expenses for fiscal 2023 included amortization of non-cash compensation of $9.6 million related to an option grant made to Mr.

Friedman in October 2020, legal settlements of $8.5 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million 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 fiscal 2022 included amortization of non-cash compensation of $18 million related to a fully vested option grant made to Mr.

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

Friedman’s stock option exercises during the fiscal 2022, $13 million of asset impairment, $7.5 million of professional fees which were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $4.5 million of non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities, and $0.6 million related to product recalls, partially offset by a $4.2 million legal settlement received and a $0.8 million gain on sale of building and land.

RH Segment selling, general and administrative expenses for fiscal 2021 included amortization of non-cash compensation of $24 million related to a fully vested option grant made to Mr.

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

Friedman’s stock option exercises during fiscal 2022, $13 million of asset impairment, $7.5 million of professional fees that were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $4.5 million of non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities, and $0.6 million related to product recalls, partially offset by a $4.2 million legal settlement received and a $0.8 million gain on sale of building and land.

RH Segment selling, general and administrative expenses would have been 32.3% and 28.2% of net revenues for fiscal 2023 and fiscal 2022, respectively, when excluding the adjustments to RH Segment selling, general and administrative expenses mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily due to lower net revenues driving deleverage in compensation and other fixed occupancy expenses, in addition to incremental advertising costs of $36 million in fiscal 2023 primarily related to the mailing of the 604-page fall RH Interiors Sourcebook and 352-page RH Contemporary Sourcebook.

This was partially offset by a reduction in corporate expenses, including lower credit card and professional fees, as well as reduced preopening and travel expense associated with our Design Gallery openings.

FORM 10-K | 51

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

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by higher employment and employment-related costs, increased advertising costs due to the mailing of the new RH Contemporary Source Book, as well as increases in professional fees and pre-opening costs.

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

Waterworks selling, general and administrative expenses

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

Waterworks selling, general and administrative expenses decreased $0.4 million, or 0.4%, and was $79 million in both fiscal 2023 and fiscal 2022.

Waterworks selling, general and administrative expenses for fiscal 2022 included $3.5 million in compensation settlements related to the Rollover Units and Profit Interest Units and a $0.2 million asset impairment.

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

Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 140 basis points to 40.6% of net revenues in fiscal 2023 compared to 39.2% of net revenues in fiscal 2022.

Interest expense—net

Interest expense—net decreased $48 million in fiscal 2022 compared in fiscal 2021, which consisted of the following in each fiscal year:

Interest expense—net increased $85 million, or 75.2%, in fiscal 2023 compared in fiscal 2022, which consisted of the following in each fiscal year:

(in thousands)

1 unchanged sentence

Finance lease interest expense

Other interest expense

Amortization of convertible senior notes debt discount

Interest income

Capitalized interest for capital projects

Other interest expense

Total interest expense—net

2 unchanged sentences

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

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

Other expense—net

Other expense—net was $0.1 million and $2.8 million in fiscal 2022 and 2021, respectively, which included losses of $1.8 million and $2.8 million, respectively, due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

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

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

subsidiary in fiscal 2021, respectively.

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

Other expense—net was $1.1 million in fiscal 2023, which primarily represents a net loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions of $2.5 million, primarily between the U.S.

dollar as compared to Euro and Pound Sterling, partially offset by a foreign exchange gain of $1.4 million from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom.

Other expense—net was $0.1 million in fiscal 2022, which primarily represents a foreign exchange loss of $2.2 million from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom, partially offset by a net gain due to favorable exchange rate changes affecting foreign currency denominated transactions of $0.4 million, primarily between the U.S.

dollar as compared to Euro and Pound Sterling.

In addition, we recorded a net gain on derivative instruments of $1.7 million, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchases.

52 | FORM 10-K

Income tax expense (benefit)

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

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

The decrease in our effective tax rate is primarily due to significantly higher discrete tax benefits from stock-based compensation in fiscal 2022.

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

(dollars in thousands)

Income tax expense (benefit)

Effective tax rate

The increase in our effective tax rate in fiscal 2023 compared to fiscal 2022 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023 as compared to fiscal 2022.

Equity method investments losses

1 unchanged sentence

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

Refer to Note 12— Credit Facilities in our consolidated financial statements.

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

(in millions)

(in thousands)

Asset based credit facility

1 unchanged sentence

Term loan B-2 (1)

Equipment promissory notes (1)

Equipment promissory note (1)

Convertible senior notes due 2023 (1)

1 unchanged sentence

Notes payable for share repurchases

Total debt (2)

Cash and cash equivalents

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

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

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

(2) Net debt excludes restricted cash of $3.7 million as of January 28, 2023 and non-recourse real estate loans of $18 million as of both February 3, 2024 and January 28, 2023 related to our consolidated variable interest entities from our joint venture activities.

The 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 7— Variable Interest Entities in our consolidated financial statements.

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

FORM 10-K | 53

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

(3) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $45 million and $27 million in outstanding letters of credit as of February 3, 2024 and January 28, 2023, respectively.

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

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

During fiscal 2023, we invested $1,253 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.

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

Capital raised from debt financings has enabled us to pursue various investments, including our investments in joint ventures.

Capital raised from debt financing arrangements has enabled us to pursue various investments, including our investments in joint ventures.

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

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

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

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

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

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

We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, entry into various credit agreements and other new debt financing arrangements that present attractive terms.

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Any adverse developments in the U.S.

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

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

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

7 unchanged sentences

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

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

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

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

As of January 28, 2023, we had $1,975 million outstanding under the Term Loan Credit Agreement.

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

54 | FORM 10-K

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

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

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

As of February 3, 2024, we had $1,955 million outstanding under the Term Loan Credit Agreement.

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

In May 2022, we entered into an incremental term debt financing (the “Term Loan B-2”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A.

as administrative agent and the various lenders parties thereto (the “Amended Term Loan Credit Agreement”).

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

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

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

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

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

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

As of February 3, 2024, we had $494 million outstanding under the Amended Term Loan Credit Agreement.

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

Certain Transactions Related to Convertible Senior Notes

11 unchanged sentences

In aggregate, we expended a net total amount of approximately $563 million in cash (inclusive of expenses) in the first half of fiscal 2022 to complete the above transactions.

As a result of the bond hedge termination agreements, all convertible note hedges entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including convertible note hedges with respect to any 2023 Notes and 2024 Notes that remain outstanding.

As a result of the warrant termination agreements, all warrants entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including warrants with respect to any 2023 Notes and 2024 Notes that remain outstanding.

We had $44 million remaining in aggregate principal amount of convertible notes outstanding as of January 28, 2023, comprised of $1.7 million of 2023 Notes and $42 million of 2024 Notes.

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

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

As a result of the bond hedge termination agreements, all convertible note hedges entered into in connection with the issuance of the 2023 Notes and 2024 Notes were terminated in fiscal 2022, including convertible note hedges with respect to any 2023 Notes and 2024 Notes that remained outstanding.

As a result of the warrant termination agreements, all warrants entered into in connection with the issuance of the 2023 Notes and 2024 Notes were terminated in fiscal 2022, including warrants with respect to any 2023 Notes and 2024 Notes that remained outstanding.

As of February 3, 2024, 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 (if applicable), as well as upon maturity of the 2024 Notes in September 2024.

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During fiscal 2023, adjusted capital expenditures were $295 million in aggregate, net of cash received related to landlord tenant allowances of $2.5 million.

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

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 consolidated statements of cash flows.

We anticipate our adjusted capital expenditures to be $250 million to $300 million in fiscal 2024, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

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

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

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and higher interest rates and we may make adjustments to our allocation of capital in fiscal 2024 or beyond in response to these changing or other circumstances.

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

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We have also begun executing changes in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the ultimate objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent.

For example, in fiscal 2019 we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $24 million and in fiscal 2020 we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $26 million, both of which qualified for sale-leaseback accounting.

Additionally, we have entered into arrangements with a third-party development partner to develop real estate for future RH Design Galleries.

For example, we have entered into arrangements with a third-party development partner to develop real estate for future RH Design Galleries.

In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurance that we will be successful in securing additional funding on attractive terms or at all.

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For fiscal 2023, net cash provided by operating activities was $202 million and consisted of net income of $128 million and an increase in non-cash items of $331 million, partially offset by a change in working capital and other activities of $257 million.

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

The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $96 million primarily due to payments made under the related lease agreements, an increase in prepaid expense and other assets of $66 million, a decrease in deferred revenue and customer deposits of $43 million, a decrease in accounts payable and accrued expenses of $41 million, a decrease in other non-current obligations of $31 million and an increase in landlord assets under construction, net of tenant allowances, of $25 million.

These uses of cash from working capital were partially offset by a decrease in merchandise inventory of $47 million.

Net Cash Used in Investing Activities

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Investing activities also include our strategic investments.

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

Net Cash Provided By (Used In) Financing Activities

For fiscal 2023, net cash used in investing activities was $307 million and was comprised of investments in retail stores, information technology and systems infrastructure of $269 million and additional contributions to our equity method investments of $38 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 fiscal 2022, net cash used in financing activities was $902 million, primarily due to the completion of certain transactions related to the 2023 Notes and 2024 Notes in the first quarter of fiscal 2022.

These transactions resulted in payments of $391 million for the termination of all such outstanding common stock warrants, partially offset by proceeds of $232 million from the termination of all of the remaining convertible note bond hedges.

Net cash used in financing activities also included uses of cash of $395 million for the settlement of the convertible senior notes repurchase obligation and payments of $13 million in aggregate principal amount of certain 2023 Notes and 2024 Notes as a result of early conversions by the noteholders.

Refer to Note 12— Convertible Senior Notes in our consolidated financial statements.

These cash outflows were partially offset by the issuance of the Term Loan B-2 in May 2022 in the amount of $500 million pursuant to the 2022 Incremental Amendment to the Term Loan Credit Agreement, for which we incurred debt issuance costs of $28 million.

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

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

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

Friedman’s option exercise activity in the first and fourth quarters of fiscal 2022.

For fiscal 2023, net cash used in financing activities was $1,283 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 $25 million, net payments under finance lease agreements of $14 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 $12 million.

Non-Cash Transactions

Non-cash transactions consist of non-cash additions of property and equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets, as well as conversion of loan receivables into equity of variable interest entities.

In addition, non-cash transactions consist of the extinguishment of convertible senior notes related to our repurchase obligations and associated financing liabilities and embedded derivatives arising from the convertible senior notes repurchases (refer to Note 12— Convertible Senior Notes in our consolidated financial statements), as well as shares issued and received related to convertible senior note transactions.

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In addition, non-cash transactions consist of excise tax from share repurchases included in accounts payable and accrued expenses at period-end, the extinguishment of convertible senior notes related to our repurchase obligations and associated financing liabilities and embedded derivatives arising from the convertible senior notes repurchase (refer to Note 11— Convertible Senior Notes in our consolidated financial statements), as well as shares issued and received related to convertible senior note transactions.

Non-cash transactions also include the recognition of lease right-of-use assets obtained in exchange for lease liabilities, net of lease terminations, and the reclassification of finance lease right-of use assets and lease liabilities to property and equipment upon purchase of the underlying asset.

Refer to Note 10— Leases .

Cash Requirements from Contractual Obligations

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Refer to “Leases” within Note 3— Significant Accounting Policies and Note 10— Leases in our consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.

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

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Refer to Note 11— Convertible Senior Notes in our consolidated financial statements for further information on the 2023 Notes and 2024 Notes.

The 2023 Notes matured in June 2023.

Asset Based Credit Facility

Refer to Note 12— Credit Facilities in our consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

Term Loan Facilities

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

Equipment Loan Facility

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

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

Refer to Note 12— Credit Facilities in our consolidated financial statements for further information on our Term Loan.

Real Estate Loans

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

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

Beginning January 1, 2023, share repurchases under our Share Repurchase Program (as defined below) are subject to a 1% excise tax imposed under the Inflation Reduction Act, H.R 5376.

Share Repurchase Program

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

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

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

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In fiscal 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 February 3, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program.

Share Retirement

In fiscal 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 $444 million from treasury stock to additional paid-in capital and $560 million from treasury stock to retained earnings on the consolidated balance sheets and consolidated statements of stockholders’ equity as of January 28, 2023.

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 consolidated balance sheets and consolidated statements of stockholders’ equity (deficit) as of and for the year ended February 3, 2024.

Other Commitments

We enter into various commitments related to the procurement of merchandise inventory.

As of January 28, 2023, these merchandise inventory purchase commitments were $303 million.

We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.0 million as of January 28, 2023 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.

As of February 3, 2024, these merchandise inventory purchase commitments were $465 million.

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We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.6 million as of February 3, 2024 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.

Refer to Note 14— Income Taxes in our consolidated financial statements for further information on our uncertain tax positions.

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Merchandise Inventories—Reserves

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

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

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

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

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

We adjust our inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices.

If actual results change from our prior estimates, we adjust our inventory reserves accordingly throughout the period.

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

Net realizable value requires judgments that may significantly affect the ending inventory valuation, as well as gross margin.

We adjust our inventory reserves for net realizable value and obsolescence (including excess and slow-moving inventory) based on current and anticipated demand trends, merchandise aging reports, specific product identification, estimates of future retail sales prices and historical results.

We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the periods presented.

Tradenames, Trademarks and Other Intangible Assets

We annually evaluate whether tradenames, trademarks and other intangible assets continue to have an indefinite life.

Tradenames, trademarks and other intangible assets are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present.

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

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

If tradenames, trademarks and other intangible assets are not qualitatively assessed or if such intangible assets are qualitatively assessed and it is determined it is not more likely than not that the asset’s fair value is greater than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology, which requires us to make judgments that may significantly affect the ending asset valuation.

Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, our plans for future operations, brand initiatives, recent results of operations and projected future cash flows.

In the event we quantitatively assess a reporting unit’s indefinite-lived intangible asset for impairment, we perform an impairment test which utilizes the discounted cash flow methodology under the relief-from-royalty method.

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

Long-Lived Assets

Long-lived assets, such as property and equipment and lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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

If the sum of the estimated undiscounted future cash flows over the remaining life of the primary asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the asset or asset group.

The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our stores is the individual Gallery level.

Since there is typically no active market for our long-lived assets, we estimate fair values based on the expected future cash flows of the asset or asset group, using a discount rate commensurate with the related risk.

The estimate of fair value requires judgments that may significantly affect the ending asset valuation.

Future cash flows are estimated based on Gallery-level historical results, current trends, and operating and cash flow projections.

Our estimates are subject to uncertainty and may be affected by a number of factors outside our control, including general economic conditions and the competitive environment.

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

Lease Accounting

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

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

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

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

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Where real estate valuation expertise is required we obtain independent third-party appraisals to determine the fair value of the underlying asset and lease components.

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

Stock-Based Compensation—Performance-Based Awards

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Variable Interest Entities

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

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

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

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

As described in our significant accounting policy, we evaluate whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether we are the primary beneficiary of the VIE.

This determination includes an assessment of whether we have the power to direct the activities that most significantly impact economic performance of the VIE, which requires judgement and evaluation of numerous factors.

These include the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders.

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

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

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

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

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

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

In certain instances, we are required to recognize non-cash compensation expense related to equity interests given to the noncontrolling interest holder of consolidated VIEs in connection with real estate development initiatives.

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

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

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Recently Issued Accounting Pronouncements

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

Refer to “Recently Issued Accounting Standards” within Note 3— Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis