What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-06-13 compared with 2023-12-07 · 164 added, 309 removed, 279 unchanged (63% of the section changed)

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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 “Forward-Looking Statements and Market Data” below and Item 1A — Risk Factors in our 2022 Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements.

Refer to “Special Note Regarding Forward-Looking Statements and Market Data” below and Item 1A — Risk Factors in our 2023 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 Quarterly Report on Form 10-Q.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, but not limited to, those listed in our 2023 Form 10-K.

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

The discussion related to cash flows for the nine months ended October 29, 2022 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q/A for the quarter ended October 29, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2023.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three months ended May 4, 2024, and a comparison to the three months ended April 29, 2023.

The discussion related to cash flows for the three months ended April 29, 2023, has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended April 29, 2023, filed with the Securities and Exchange Commission (“SEC”) on May 26, 2023.

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

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

FINANCIAL INFORMATION

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

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

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FINANCIAL INFORMATION

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

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While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results.

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

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

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled Risk Factors in our 2022 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly periods ended April 29, 2023 and July 29, 2023 and in our 2022 Form 10-K.

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

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled Risk Factors in our 2023 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 2023 Form 10-K.

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

You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.

The forward-looking statements included in this quarterly report are made only as of the date hereof.

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

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

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

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

In November 2023, we opened the Champagne & Caviar Bar at the RH Guesthouse New York, featuring a luminous and alluring 32-seat lounge with elegant dishes topped with caviar, a library of the world’s finest champagnes and vodkas, and a select menu of timeless cocktails.

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

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

The Orangery, a live fire concept;

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

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

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

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

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

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

We operate our retail locations throughout the United States and Canada as well as in the United Kingdom, Germany and Belgium and have an integrated RH Hospitality experience in 17 of our Design Gallery locations, which includes restaurants and wine bars.

Additionally, we opened RH Palo Alto, the Gallery at Stanford, in May 2024 and we plan to open RH Madrid, the Gallery at Plaza del Marqués de Salamanca, in June 2024.

We have recently undertaken efforts to introduce the most prolific collection of new products in our history, with a substantial number of 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.

FINANCIAL INFORMATION

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

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As of May 4, 2024, we operated the following number of locations:

Design Galleries

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Business Conditions

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

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

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 an adverse impact on demand for our products.

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

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

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.

Our business has also been negatively affected by macroeconomic conditions, including substantially higher interest rates and mortgage rates, volatility in the global financial markets and 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 moderate in the future and we believe 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.

We also face uncertainties related to the large number of new business initiatives that we are undertaking at the same time, including efforts to grow our business through (i) international expansion, (ii) developing innovative new Gallery designs and locations for our business, (iii) pursuing new areas of business operations including real estate development and real estate joint ventures, as well as the expansion of RH Hospitality, and (iv) substantial enhancement of our merchandise assortment and improvements to the quality of our products and services as we seek to climb the luxury mountain.

For more information, refer to the section entitled “Risk Factors” in our 2022 Form 10-K.

For more information, refer to the sections entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors in our 2023 Form 10-K.

Key Value-Driving Strategies

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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.

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.

With the launch of the RH Interiors and RH Contemporary Sourcebooks in 2023, as well as the launch of the RH Outdoor and RH Modern Sourcebooks in 2024, we have begun the introduction of the most prolific collection of new products in our history.

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

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FINANCIAL INFORMATION

Gallery Transformation .

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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.

FINANCIAL INFORMATION

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Brand Elevation .

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

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 the RH Guesthouse in New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen.

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;

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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 .

Our strategy is to digitally reimagine the RH brand and business model both internally and externally.

Internally, our multi-year effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation.

Internally, our multiyear effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation.

Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

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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 .

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

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.

FINANCIAL INFORMATION

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Basis of Presentation and Results of Operations

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THREE MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

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Interest expense—net

Loss on extinguishment of debt

Other expense—net

Other (income) expense—net

Total other expenses

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Income tax expense (benefit)

Income before equity method investments

Share of equity method investments loss

Income (loss) before equity method investments

Share of equity method investments loss—net

Net income (loss)

Non-GAAP Financial Measures

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

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

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

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

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

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

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FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 33

Adjusted Operating Income .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Interest expense—net (1)

Loss on extinguishment of debt (1)

Other expense—net (1)

Other (income) expense—net (1)

Income tax expense (benefit) (1)

Share of equity method investments loss (1)

Share of equity method investments loss—net (2)

Operating income

Legal settlements (2)

Reorganization related costs (3)

Legal settlements—net (3)

Non-cash compensation (4)

Asset impairments (5)

Recall accrual (6)

Employer payroll taxes on option exercise (7)

Professional fees (8)

Compensation settlements (9)

Gain on sale of building and land (10)

Reorganization related costs (5)

Adjusted operating income

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

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

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

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

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

(1) Refer to discussion “Three Months Ended May 4, 2024 Compared to Three Months Ended April 29, 2023” below for a discussion of our results of operations for the three months ended May 4, 2024 and April 29, 2023.

(2) Represents our proportionate share of the net loss of our equity method investments.

(3) Represents favorable legal settlements received of $10 million, partially offset by costs incurred in connection with one of the matters.

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

Friedman in October 2020.

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

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

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

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

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

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

Friedman in the first quarter of fiscal 2022.

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

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

FINANCIAL INFORMATION

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

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

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Adjusted Net Income (Loss) .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Adjustments pre-tax:

Legal settlements (1)

Reorganization related costs (1)

Legal settlements—net (1)

Non-cash compensation (1)

Asset impairments (1)

Recall accrual (1)

Loss on extinguishment of debt (1)

Employer payroll taxes on option exercise (1)

Professional fees (1)

Compensation settlements (1)

Gain on derivative instruments—net (2)

Gain on sale of building and land (1)

Reorganization related costs (1)

Subtotal adjusted items

Impact of income tax items (2)

Share of equity method investments loss (1)

Share of equity method investments loss—net (1)

Adjusted net income (loss)

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

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

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

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

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

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

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(2) We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income (loss), (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent.

The adjustments for the three months ended May 4, 2024 and April 29, 2023 are based on adjusted tax rates of 31.5% and 26.7%, respectively.

FINANCIAL INFORMATION

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EBITDA and Adjusted EBITDA .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Non-cash compensation (1)

Legal settlements (2)

Share of equity method investments loss (2)

Reorganization related costs (2)

Capitalized cloud computing amortization (2)

Other expense—net (2)

Asset impairments (2)

Recall accrual (2)

Loss on extinguishment of debt (2)

Employer payroll taxes on option exercise (2)

Professional fees (2)

Compensation settlements (2)

Gain on sale of building and land (2)

Share of equity method investments loss—net (3)

Other (income) expense—net (3)

Legal settlements—net (3)

Reorganization related costs (3)

Adjusted EBITDA

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Friedman in October 2020.

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

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

FINANCIAL INFORMATION

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

Adjusted Capital Expenditures.

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.

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

Reconciliation of Adjusted Capital Expenditures

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

Capital expenditures

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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 and $4.2 million for the nine months ended October 28, 2023 and October 29, 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.

FINANCIAL INFORMATION

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

THREE MONTHS ENDED

NINE MONTHS ENDED

SELLING SQUARE

(square footage in thousands)

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RH Design Galleries:

England Design Gallery

Brussels Design Gallery

Cleveland Design Gallery

Indianapolis Design Gallery

San Francisco Design Gallery

RH Legacy Galleries:

Cleveland Legacy Gallery

Indianapolis temporary Gallery

San Francisco legacy Gallery

Detroit legacy Gallery (relocation)

End of period

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Weighted-average leased selling square footage (3)

(1) Leased selling square footage is retail space at our retail locations used to sell our products, as well as space for our Restaurants.

(1) Leased selling square footage is retail space at our retail locations used to sell our products, as well as space for our restaurants and wine bars.

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

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FINANCIAL INFORMATION

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

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

Leased selling square footage includes approximately 89,000 square feet as of May 4, 2024 related to three owned retail locations.

(2) Total leased square footage includes approximately 142,000 square feet as of May 4, 2024 related to three owned retail locations.

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

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

Three Months Ended May 4, 2024 Compared to Three Months Ended April 29, 2023

THREE MONTHS ENDED

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Income from operations

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

(1) The results for the Real Estate segment were immaterial in both the three months ended May 4, 2024 and April 29, 2023, thus, such results are presented within the RH Segment in each period.

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

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

FINANCIAL INFORMATION

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Consolidated net revenues decreased $12 million, or 1.7%, to $727 million in the three months ended May 4, 2024 compared to $739 million in the three months ended April 29, 2023.

RH Segment net revenues

RH Segment net revenues decreased $116 million, or 14.1%, to $705 million in the three months ended October 28, 2023 compared to $821 million in the three months ended October 29, 2022.

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

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

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

RH Segment net revenues decreased $13 million, or 1.9%, to $677 million in the three months ended May 4, 2024 compared to $691 million in the three months ended April 29, 2023.

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

RH Segment net revenues for the three months ended May 4, 2024 decreased primarily due to lower demand compared to the first quarter of fiscal 2023 due to sustained challenging macroeconomic conditions, including elevated interest rates and a challenging luxury housing market.

Waterworks net revenues

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

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

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

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

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

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2023 THIRD QUARTER FORM 10-Q | 45

Waterworks net revenues increased $1.2 million, or 2.6%, to $50 million in the three months ended May 4, 2024 compared to $49 million in the three months ended April 29, 2023.

Consolidated gross profit decreased $32 million, or 9.1%, to $316 million in the three months ended May 4, 2024 compared to $348 million in the three months ended April 29, 2023.

As a percentage of net revenues, consolidated gross margin decreased 350 basis points to 43.5% of net revenues in the three months ended May 4, 2024 from 47.0% of net revenues in the three months ended April 29, 2023.

RH Segment gross profit

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

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

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

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

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

RH Segment gross profit decreased $32 million, or 9.9%, to $290 million in the three months ended May 4, 2024 from $322 million in the three months ended April 29, 2023.

As a percentage of net revenues, RH Segment gross margin decreased 380 basis points to 42.8% of net revenues in the three months ended May 4, 2024 from 46.6% of net revenues in the three months ended April 29, 2023.

The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the Core business driven by price adjustments, as well as a higher mix of, and discounts on, discontinued products.

The decrease in RH Segment net revenues resulted in deleverage in occupancy costs year over year, and we also experienced an increase in occupancy costs related to our Galleries and supply chain in support of the continued global expansion efforts in Europe.

Waterworks gross profit

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

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

Waterworks gross profit was $26 million in both the three months ended May 4, 2024 and April 29, 2023.

As a percentage of net revenues, Waterworks gross margin decreased 80 basis points to 52.6% of net revenues in the three months ended May 4, 2024 from 53.4% of net revenues in the three months ended April 29, 2023.

Selling, general and administrative expenses

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

Consolidated selling, general and administrative expenses increased $13 million, or 5.3%, to $261 million in the three months ended May 4, 2024 from $248 million in the three months ended April 29, 2023.

RH Segment selling, general and administrative expenses

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

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

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

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

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

RH Segment selling, general and administrative expenses would have been 37.6% and 28.3% of net revenues for the three months ended October 28, 2023 and October 29, 2022, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by incremental advertising costs of $52 million related to the mailing of the 604-page RH Interiors and 352-page RH Contemporary Sourcebooks as compared to the third quarter of fiscal 2022, as well as deleverage in compensation and other corporate costs driven by lower net revenues.

Waterworks selling, general and administrative expenses

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

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

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RH Segment selling, general and administrative expenses increased $15 million, or 6.6%, to $244 million in the three months ended May 4, 2024 compared to $229 million in the three months ended April 29, 2023.

RH Segment selling, general and administrative expenses for the three months ended May 4, 2024 include favorable net legal settlements of $6.2 million and non-cash compensation of $1.9 million related to an option grant made to Mr.

Friedman in October 2020.

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

Friedman in October 2020.

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2024 FIRST QUARTER FORM 10-Q | 38

RH Segment selling, general and administrative expenses were 36.7% and 31.5% of net revenues for the three months ended May 4, 2024 and April 29, 2023, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by incremental advertising costs of $15 million related to the increased circulation in connection with the mailing of the Spring 2024 RH Outdoor Sourcebook.

Additionally, we had an increase in compensation due to new Gallery openings, as well as higher occupancy and other corporate costs year over year.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses decreased $2.1 million, or 10.7%, to $17 million in the three months ended May 4, 2024 compared to $19 million in the three months ended April 29, 2023.

Waterworks selling, general and administrative expenses in the three months ended May 4, 2024 include $3.2 million related to a favorable legal settlement.

Excluding the adjustment for the legal settlement, Waterworks selling, general and administrative expenses would have increased 130 basis points to 41.0% of net revenues in the three months ended May 4, 2024, compared to 39.7% of net revenues for the three months ended April 29, 2023.

Interest expense—net

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

Interest expense—net increased $17 million in the three months ended May 4, 2024 compared to the three months ended April 29, 2023, which consisted of the following in each period:

THREE MONTHS ENDED

3 unchanged sentences

Other interest expense

Interest income

Capitalized interest for capital projects

Total interest expense—net

Other expense—net

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

dollar as compared to Euro and Pound Sterling.

Income tax expense (benefit)

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

THREE MONTHS ENDED

(dollars in thousands)

Income tax expense (benefit)

Effective tax rate

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

Equity method investments loss

Equity method investments loss consists of our proportionate share of the loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $2.7 million and $1.9 million loss during the three months ended October 28, 2023 and October 29, 2022, respectively.

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 47

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

NINE MONTHS ENDED

(in thousands)

Cost of goods sold

Selling, general and administrative expenses

Income from operations

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

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

Consolidated net revenues decreased $527 million, or 18.7%, to $2,291 million in the nine months ended October 28, 2023 compared to $2,818 million in the nine months ended October 29, 2022.

RH Segment net revenues

RH Segment net revenues decreased $524 million, or 19.6%, to $2,146 million in the nine months ended October 28, 2023 compared to $2,670 million in the nine months ended October 29, 2022.

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

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

Outlet sales decreased $26 million to $177 million in the nine months ended October 28, 2023 compared to $203 million in the nine months ended October 29, 2022.

Waterworks net revenues

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

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

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

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

Excluding the asset impairment adjustment, consolidated gross margin would have decreased 500 basis points to 46.6% of net revenues in the nine months ended October 28, 2023 from 51.6% of net revenues in the nine months ended October 29, 2022.

RH Segment gross profit

RH Segment gross profit decreased $372 million, or 27.3%, to $990 million in the nine months ended October 28, 2023 from $1,363 million in the nine months ended October 29, 2022.

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

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FINANCIAL INFORMATION

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

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

Waterworks gross profit

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

As a percentage of net revenues, Waterworks gross margin decreased 40 basis points to 53.6% of net revenues in the nine months ended October 28, 2023 from 54.0% of net revenues in the nine months ended October 29, 2022.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses decreased $66 million, or 8.0%, to $766 million in the nine months ended October 28, 2023 compared to $833 million in the nine months ended October 29, 2022.

RH Segment selling, general and administrative expenses

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

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

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

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

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

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

RH Segment selling, general and administrative expenses would have been 31.8% and 27.5% of net revenues for the nine months ended October 28, 2023 and October 29, 2022, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by incremental advertising costs of $31 million related to the mailing of the 604-page fall RH Interiors Sourcebook, as well as deleverage in compensation and other corporate costs driven by lower net revenues.

Waterworks selling, general and administrative expenses

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

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

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

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

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2023 THIRD QUARTER FORM 10-Q | 49

Interest expense—net

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

NINE MONTHS ENDED

(in thousands)

Term loan interest expense

Finance lease interest expense

Other interest expense

Interest income

Capitalized interest for capital projects

Total interest expense—net

Loss on extinguishment of debt

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

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

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

Other expense—net

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

Other (income) expense—net

We recorded other expense of $1.2 million for the three months ended May 4, 2024, which includes foreign exchange losses from unfavorable exchange rate changes affecting foreign currency denominated transactions of $1.0 million, primarily between the U.S.

dollar as compared to Euro and Pound Sterling, as well as a loss from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom of $0.2 million.

We recorded net other income of $0.7 million for the three months ended April 29, 2023, which includes a foreign exchange gain from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom of $1.8 million, partially offset by foreign exchange losses related to unfavorable exchange rate changes affecting foreign currency denominated transactions of $1.1 million, primarily between the U.S.

dollar as compared to Euro and Pound Sterling.

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

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2024 FIRST QUARTER FORM 10-Q | 39

Income tax expense (benefit)

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

NINE MONTHS ENDED

THREE MONTHS ENDED

(dollars in thousands)

1 unchanged sentence

Effective tax rate

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

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FINANCIAL INFORMATION

Equity method investments loss

Equity method investments loss consists of our proportionate share of the loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $7.7 million and $6.1 million loss during the nine months ended October 28, 2023 and October 29, 2022, respectively.

The increase in our effective tax rate is primarily attributable to the net loss in the current period, as well as higher net excess tax benefits from stock-based compensation in the three months ended May 4, 2024 as compared to the three months ended April 29, 2023.

Liquidity and Capital Resources

5 unchanged sentences

Term loan B-2 (1)

Equipment promissory notes (1)

Convertible senior notes due 2024 (1)

Notes payable for share repurchases

Total debt (2)

Cash and cash equivalents

1 unchanged sentence

Availability under the asset based credit facility—net (3)

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

(2) Net debt as of October 28, 2023 and January 28, 2023 excludes restricted cash of $2.0 million and $3.7 million, respectively, as well as non-recourse real estate loans of $18 million as of both periods related to our consolidated variable interest entities from our joint venture activities.

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

(2) Net debt excludes non-recourse real estate loans of $18 million as of both May 4, 2024 and February 3, 2024 related to our consolidated variable interest entities from our joint venture activities.

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

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

(3) As of October 28, 2023 and January 28, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $44 million and $27 million, respectively, in outstanding letters of credit.

(3) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $46 million and $45 million in outstanding letters of credit as of May 4, 2024 and February 3, 2024, respectively.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 40

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

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

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

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

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” 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.

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2023 THIRD QUARTER FORM 10-Q | 51

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

1 unchanged sentence

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 is to continue 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.

12 unchanged sentences

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

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 41

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

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

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

As of October 28, 2023, we had $1,960 million outstanding under the Term Loan Credit Agreement.

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

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

As of May 4, 2024, we had $1,950 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 October 28, 2023, we had $495 million outstanding under the Amended Term Loan Credit Agreement.

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

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FINANCIAL INFORMATION

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 May 4, 2024, we had $493 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.

Convertible Senior Notes

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

As of October 28, 2023, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024.

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

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

As of May 4, 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.

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

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

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

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

During the three months ended May 4, 2024, adjusted capital expenditures were $75 million in aggregate, net of cash received related to landlord tenant allowances of $2.9 million.

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.

11 unchanged sentences

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 53

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Cash Flow Analysis

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

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

2 unchanged sentences

Net cash used in financing activities

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

Cash, cash equivalents and restricted cash at end of period

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

Cash and cash equivalents and restricted cash at end of period

Net Cash Provided by Operating Activities

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

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

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

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

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

For the three months ended May 4, 2024, net cash provided by operating activities was $56 million and consisted of an increase in non-cash items of $78 million, partially offset by a change in working capital and other activities of $18 million and a net loss of $3.6 million.

The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $24 million, a decrease in other current and non-current liabilities of $18 million and an increase in prepaid expense and other assets of $15 million.

These uses of cash from working capital were partially offset by a decrease in merchandise inventory of $48 million, an increase of accounts payable and accrued expenses of $41 million, an increase of deferred revenue and customer deposits of $33 million, a decrease in landlord assets under construction, net of tenant allowances, of $8.8 million, and a decrease in accounts receivable of $7.8 million.

Net Cash Used in Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

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

For the three months ended May 4, 2024, net cash used in investing activities was $69 million and was comprised of investments in retail stores, information technology and systems infrastructure of $66 million and additional contributions to our equity method investments of $2.7 million.

Net Cash Used in Financing Activities

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

For the nine months ended October 28, 2023, net cash used in financing activities was $1,278 million, primarily due to the repurchase of 3,887,965 shares of our common stock for an aggregate repurchase amount of $1,249 million, payments on term loans of $19 million, net payments under finance lease agreements of $9.6 million and repayments of the 2023 Notes of $1.7 million and equipment notes of $1.2 million.

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

These cash outflows were partially offset by proceeds from option exercises of $5.8 million.

54 | 2023 THIRD QUARTER FORM 10-Q

FINANCIAL INFORMATION

For the three months ended May 4, 2024, net cash used in financing activities was $8.9 million, primarily due to payments on term loans of $6.3 million and payments under finance lease agreements of $4.5 million.

These cash outflows were partially offset by equity related transactions of $1.8 million.

Non-Cash Transactions

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

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

Non-cash transactions consist of non-cash additions of property and equipment and landlord assets under construction.

In addition, non-cash transactions consist of excise tax from share repurchases included in accounts payable and accrued expenses at period-end.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 43

Cash Requirements from Contractual Obligations

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Convertible Senior Notes

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

The 2023 Notes matured in June 2023.

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

Asset Based Credit Facility

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

Share Repurchase Program and Share Retirement

Real Estate Loans

Refer to Note 5— Variable Interest Entities in our condensed consolidated financial statements for further information on the real estate loans held as part of our joint ventures with a third-party development partner.

Share Repurchase Program

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

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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 Inflation Reduction Act.

Share Repurchase Program

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

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

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

We did not repurchase any shares of our common stock under the Share Repurchase Program during the three months ended May 4, 2024.

As of May 4, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program.

FINANCIAL INFORMATION

2023 THIRD QUARTER FORM 10-Q | 55

Share Retirement

During the nine months ended October 28, 2023, we retired 3,887,965 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $10 million and $1,251 million from treasury stock to additional paid-in capital and retained earnings (accumulated deficit) , respectively, on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity (deficit) as of and for the nine months ended October 28, 2023.

2024 FIRST QUARTER FORM 10-Q | 44

Critical Accounting Policies and Estimates

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

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

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

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Merchandise Inventories—Reserves

Tradenames, Trademarks and Other Intangible Assets

Long-Lived Assets

Lease Accounting

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Variable Interest Entities

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

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

There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in the 2023 Form 10-K.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis