What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-09-12 compared with 2024-06-13 · 223 added, 125 removed, 318 unchanged (52% of the section changed)

5 unchanged sentences

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 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.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended August 3, 2024, and a comparison to the three and six months ended July 29, 2023.

The discussion related to cash flows for the six months ended July 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 July 29, 2023, filed with the Securities and Exchange Commission (“SEC”) on September 7, 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.

2 unchanged sentences

Basis of Presentation and Results of Operations .

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

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

Liquidity and Capital Resources .

2 unchanged sentences

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

2024 FIRST QUARTER FORM 10-Q | 29

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

3 unchanged sentences

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.

30 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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

2 unchanged sentences

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.

8 unchanged sentences

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 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 operate our retail locations throughout the United States and Canada as well as in the United Kingdom, Germany, Belgium and Spain and have an integrated RH Hospitality experience in 18 of our Design Gallery locations, which includes restaurants and wine bars.

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.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 30

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

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

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

Design Galleries

4 unchanged sentences

Waterworks Showrooms

FINANCIAL INFORMATION

2024 SECOND QUARTER FORM 10-Q | 31

Business Conditions

2 unchanged sentences

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 expectation is that these factors, which have contributed to the slowdown in demand in our business, will moderate in the future when the housing market rebounds, 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.

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.

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.

While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter.

Delays in the rate of opening new Galleries and pursuit of our international expansion have resulted in delays in the corresponding increase in net revenues that we experience as new Design Galleries are introduced.

In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives.

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.

6 unchanged sentences

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

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.

With the launch of the RH Interiors and RH Contemporary Sourcebooks in 2023, as well as the launch of the RH Outdoor, RH Modern and RH Interiors 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.

5 unchanged sentences

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.

32 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 31

Brand Elevation .

13 unchanged sentences

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.

Our plans include launching a number of international locations in the United Kingdom and Europe, which began with the opening of RH England in June 2023, followed by RH Munich and RH Düsseldorf in November 2023, RH Brussels in March 2024, and RH Madrid in June 2024.

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

Digital Reimagination .

6 unchanged sentences

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 32

2024 SECOND QUARTER FORM 10-Q | 33

Basis of Presentation and Results of Operations

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

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

THREE MONTHS ENDED

SIX MONTHS ENDED

(dollars in thousands)

6 unchanged sentences

Total other expenses

Income (loss) before income taxes and equity method investments

Income tax expense (benefit)

Income (loss) before equity method investments

Income before taxes and equity method investments

Income tax expense

Income before equity method investments

Share of equity method investments loss—net

Net income (loss)

Non-GAAP Financial Measures

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”).

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, 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.

5 unchanged sentences

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.

34 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 33

Adjusted Operating Income .

1 unchanged sentence

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

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

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

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

Net income (loss)

Interest expense—net (1)

Other (income) expense—net (1)

Income tax expense (benefit) (1)

Income tax expense (1)

Share of equity method investments loss—net (2)

4 unchanged sentences

Adjusted operating income

(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.

(1) Refer to discussion “Three Months Ended August 3, 2024 Compared to Three Months Ended July 29, 2023” and “Six Months Ended August 3, 2024 Compared to Six Months Ended July 29, 2023” below for a discussion of our results of operations for the three and six months ended August 3, 2024 and July 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.

(3) The adjustment in the six months ended August 3, 2024 represents favorable legal settlements received of $10 million, partially offset by costs incurred in connection with one of the matters.

The adjustments in the three and six months ended July 29, 2023 represent legal settlements associated with class action litigation matters.

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

2 unchanged sentences

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 34

Adjusted Net Income (Loss) .

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

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

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

2024 SECOND QUARTER FORM 10-Q | 35

Adjusted Net Income .

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

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

Reconciliation of GAAP Net Income to Adjusted Net Income

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

Net income (loss)

Adjustments pre-tax:

5 unchanged sentences

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) 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.

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) 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.

The adjustments for the three months ended August 3, 2024 and July 29, 2023 are based on adjusted tax rates of 12.8% and 24.3%, respectively.

The adjustments for the six months ended August 3, 2024 and July 29, 2023 are based on adjusted tax rates of 5.6% and 25.2%, respectively.

36 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 35

EBITDA and Adjusted EBITDA .

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

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

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

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.

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

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

Net income (loss)

Depreciation and amortization

Interest expense—net

Income tax expense (benefit)

Income tax expense

Non-cash compensation (1)

Capitalized cloud computing amortization (2)

Share of equity method investments loss—net (2)

Capitalized cloud computing amortization (3)

Other (income) expense—net (2)

4 unchanged sentences

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.

(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.

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

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 during the construction period.

Reconciliation of Adjusted Capital Expenditures

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

2 unchanged sentences

Adjusted capital expenditures

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

No such amounts were received from landlords during the six months ended August 3, 2024.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 36

2024 SECOND QUARTER FORM 10-Q | 37

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

THREE MONTHS ENDED

SIX MONTHS ENDED

SELLING SQUARE

3 unchanged sentences

RH Design Galleries:

Brussels Design Gallery

Cleveland Design Gallery

Palo Alto Design Gallery

Brussels Design Gallery

Madrid Design Gallery

England Design Gallery

Indianapolis Design Gallery

1 unchanged sentence

Cleveland Legacy Gallery

Palo Alto Legacy Gallery

Indianapolis temporary Gallery

Detroit Legacy Gallery (relocation)

End of period

Total leased square footage at end of period (2)

Weighted-average leased square footage (3)

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 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.

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

Leased selling square footage includes approximately 89,000 square feet as of August 3, 2024 related to three owned retail locations and 35,000 square feet as of July 29, 2023 related to one owned retail location.

(2) Total leased square footage includes approximately 142,000 square feet as of August 3, 2024 related to three owned retail locations and 56,000 square feet as of July 29, 2023 related to one owned retail location.

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, and were as follows:

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

Weighted-average leased square footage

Weighted-average leased selling square footage

38 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Three Months Ended August 3, 2024 Compared to Three Months Ended July 29, 2023

THREE MONTHS ENDED

(in thousands)

Net revenues (2)

Cost of goods sold

1 unchanged sentence

Income from operations

(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.

(1) The results for the Real Estate segment were immaterial in both the three months ended August 3, 2024 and July 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.

(2) RH Segment net revenues include outlet revenues of $64 million and $59 million for the three months ended August 3, 2024 and July 29, 2023, respectively.

Consolidated net revenues increased $29 million, or 3.6%, to $830 million in the three months ended August 3, 2024 compared to $800 million in the three months ended July 29, 2023.

RH Segment net revenues

RH Segment net revenues increased $27 million, or 3.6%, to $781 million in the three months ended August 3, 2024 compared to $754 million in the three months ended July 29, 2023.

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 three months ended August 3, 2024 increased primarily due to higher revenue in our core business, driven by the introduction of new collections and the mailings of our RH Interiors and RH Modern Sourcebooks, and higher Contract revenue driven by an increase in completed projects.

We also recognized higher hospitality revenue, due to new Gallery openings, including RH England, RH Indianapolis, RH Cleveland and RH Palo Alto, and higher outlet revenue.

Waterworks net revenues

Waterworks net revenues increased $1.8 million, or 3.8%, to $49 million in the three months ended August 3, 2024 compared to $47 million in the three months ended July 29, 2023.

Consolidated gross profit decreased $5.3 million, or 1.4%, to $375 million in the three months ended August 3, 2024 compared to $380 million in the three months ended July 29, 2023.

As a percentage of net revenues, consolidated gross margin decreased 230 basis points to 45.2% of net revenues in the three months ended August 3, 2024 from 47.5% of net revenues in the three months ended July 29, 2023.

RH Segment gross profit

RH Segment gross profit decreased $5.8 million, or 1.6%, to $349 million in the three months ended August 3, 2024 compared to $354 million in the three months ended July 29, 2023.

As a percentage of net revenues, RH Segment gross margin decreased 240 basis points to 44.6% of net revenues in the three months ended August 3, 2024 from 47.0% of net revenues in the three months ended July 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.

RH Segment experienced deleverage in occupancy costs year over year due to higher expenses related to our Galleries and supply chain in support of the continued global expansion in Europe.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 37

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.

2024 SECOND QUARTER FORM 10-Q | 39

Waterworks gross profit

Waterworks gross profit was $26 million in both the three months ended August 3, 2024 and July 29, 2023.

As a percentage of net revenues, Waterworks gross margin decreased 110 basis points to 53.6% of net revenues in the three months ended August 3, 2024 from 54.7% of net revenues in the three months ended July 29, 2023.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $50 million, or 21.8%, to $279 million in the three months ended August 3, 2024 compared to $229 million in the three months ended July 29, 2023.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $48 million, or 22.7%, to $259 million in the three months ended August 3, 2024 compared to $211 million in the three months ended July 29, 2023.

RH Segment selling, general and administrative expenses for the three months ended August 3, 2024 include amortization of non-cash compensation of $0.9 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 July 29, 2023 include legal settlements of $8.0 million and non-cash compensation of $2.0 million related to an option grant made to Mr.

Friedman in October 2020.

RH Segment selling, general and administrative expenses would have been 33.0% and 26.6% of net revenues for the three months ended August 3, 2024 and July 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 $33 million related to the mailings of the Spring 2024 RH Modern and Summer 2024 RH Interiors Sourcebooks as compared to limited mailings in the second quarter of 2023.

Additionally, compensation and occupancy costs were higher year over year .

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $2.0 million, or 11.4%, to $20 million in the three months ended August 3, 2024 compared to $18 million in the three months ended July 29, 2023.

Waterworks selling, general and administrative expenses were 40.4% and 37.6% of net revenues for the three months ended August 3, 2024 and July 29, 2023, respectively.

Interest expense—net

Interest expense—net increased $15 million, or 33.4%, in the three months ended August 3, 2024 compared to the three months ended July 29, 2023, which consisted of the following in each period:

THREE MONTHS ENDED

(in thousands)

Term loan interest expense

Finance lease interest expense

Other interest expense

Capitalized interest for capital projects

Interest income

Total interest expense—net

40 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

Other income—net

Other income—net consisted of the following in each period:

THREE MONTHS ENDED

(in thousands)

Foreign exchange from transactions (1)

Foreign exchange from remeasurement of intercompany loans (2)

Other income—net

(1) Represents net foreign exchange gains and losses related to exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to the euro and pound sterling.

(2) Represents remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom.

Income tax expense

THREE MONTHS ENDED

(dollars in thousands)

Income tax expense

Effective tax rate

The decrease in our effective tax rate for the three months ended August 3, 2024 compared to the three months ended July 29, 2023 is primarily attributable to higher net excess tax benefits from stock-based compensation year over year.

Six Months Ended August 3, 2024 Compared to Six Months Ended July 29, 2023

SIX MONTHS ENDED

(in thousands)

Net revenues (2)

Cost of goods sold

Selling, general and administrative expenses

Income from operations

(1) The results for the Real Estate segment were immaterial in both the six months ended August 3, 2024 and July 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.

(2) RH Segment net revenues include outlet revenues of $126 million and $116 million for the six months ended August 3, 2024 and July 29, 2023, respectively.

FINANCIAL INFORMATION

2024 SECOND QUARTER FORM 10-Q | 41

Consolidated net revenues increased $17 million, or 1.1%, to $1,557 million in the six months ended August 3, 2024 compared to $1,540 million in the six months ended July 29, 2023.

RH Segment net revenues

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.

RH Segment net revenues increased $14 million, or 1.0%, to $1,458 million in the six months ended August 3, 2024 compared to $1,444 million in the six months ended July 29, 2023.

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

RH Segment net revenues for the six months ended August 3, 2024 increased primarily due to increased outlet revenue, increased hospitality revenue as a result of new Gallery openings, including RH England, RH Indianapolis, RH Cleveland and RH Palo Alto, as well as a slight increase in the combined core and Contract businesses due to the introduction of new collections, the mailings of our RH Interiors and RH Modern Sourcebooks and an increase in completed projects.

Waterworks net revenues

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.

Waterworks net revenues increased $3.0 million, or 3.2%, to $99 million in the six months ended August 3, 2024 compared to $96 million in the six months ended July 29, 2023.

Consolidated gross profit decreased $37 million, or 5.1%, to $691 million in the six months ended August 3, 2024 compared to $728 million in the six months ended July 29, 2023.

As a percentage of net revenues, consolidated gross margin decreased 290 basis points to 44.4% of net revenues in the six months ended August 3, 2024 from 47.3% of net revenues in the six months ended July 29, 2023.

RH Segment gross profit

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.

RH Segment gross profit decreased $38 million, or 5.6%, to $638 million in the six months ended August 3, 2024 from $676 million in the six months ended July 29, 2023.

As a percentage of net revenues, RH Segment gross margin decreased 300 basis points to 43.8% of net revenues in the six months ended August 3, 2024 from 46.8% of net revenues in the six months ended July 29, 2023.

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.

RH Segment experienced deleverage in occupancy costs year over year due to higher expense related to our Galleries and supply chain in support of the continued global expansion in Europe.

Waterworks gross profit

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.

Waterworks gross profit was $52 million in both the six months ended August 3, 2024 and July 29, 2023.

As a percentage of net revenues, Waterworks gross margin decreased 90 basis points to 53.1% of net revenues in the six months ended August 3, 2024 from 54.0% of net revenues in the six months ended July 29, 2023.

Selling, general and administrative expenses

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.

Consolidated selling, general and administrative expenses increased $63 million, or 13.2%, to $540 million in the six months ended August 3, 2024 compared to $477 million in the six months ended July 29, 2023.

RH Segment selling, general and administrative expenses

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.

RH Segment selling, general and administrative expenses increased $63 million, or 14.3%, to $503 million in the six months ended August 3, 2024 compared to $440 million in the six months ended July 29, 2023.

RH Segment selling, general and administrative expenses for the six months ended August 3, 2024 include favorable net legal settlements of $6.2 million and non-cash compensation of $2.8 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.

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

Friedman in October 2020.

42 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

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.

RH Segment selling, general and administrative expenses would have been 34.7% and 29.0% of net revenues for the six months ended August 3, 2024 and July 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 $48 million related to the increased circulation in connection with the mailing of the RH Outdoor Sourcebook in fiscal 2024, and mailings of the Spring 2024 RH Modern and Summer 2024 RH Interiors Sourcebooks with no comparative mailings in fiscal 2023.

Additionally, compensation and occupancy costs were higher 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.

Waterworks selling, general and administrative expenses was $37 million in both the six months ended August 3, 2024 and July 29, 2023.

Waterworks selling, general and administrative expenses were 37.4% and 38.7% of net revenues for the six months ended August 3, 2024 and July 29, 2023, respectively.

Waterworks selling, general and administrative expenses in the six months ended August 3, 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 been 40.7% and 38.7% of net revenues for the six months ended August 3, 2024 and July 29, 2023, respectively.

Interest expense—net

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

Interest expense—net increased $32 million, or 37.7%, in the six months ended August 3, 2024 compared to the six months ended July 29, 2023, which consisted of the following in each period:

SIX MONTHS ENDED

(in thousands)

6 unchanged sentences

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.

Other (income) expense—net consisted of the following in each period:

SIX MONTHS ENDED

(in thousands)

Foreign exchange from transactions (1)

Foreign exchange from remeasurement of intercompany loans (2)

Other (income) expense—net

(1) Represents net foreign exchange gains and losses related to exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S.

dollar as compared to the euro and pound sterling.

(2) Represents remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 39

Income tax expense (benefit)

THREE MONTHS ENDED

2024 SECOND QUARTER FORM 10-Q | 43

Income tax expense

SIX MONTHS ENDED

(dollars in thousands)

Income tax expense (benefit)

Income tax expense

Effective tax rate

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.

The decrease in our effective tax rate for the six months ended August 3, 2024 compared to the six months ended July 29, 2023 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation year over year.

Liquidity and Capital Resources

10 unchanged sentences

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

(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.

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

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

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

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

(3) 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.

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

44 | 2024 SECOND QUARTER FORM 10-Q

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.

19 unchanged sentences

Credit Facilities and Debt Arrangements

We amended and restated our asset based credit facility in July 2021, which has an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility.

We amended and restated the ABL Credit Agreement in July 2021, which provides an asset based credit facility with an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility.

The accordion feature may be added as a first-in, last-out term loan facility.

The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met.

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

As of August 3, 2024, we had $25 million outstanding under the asset based credit facility, which increased to $110 million as of September 6, 2024.

The additional borrowings support our continued investments, including into inventory of new collections and existing collections, as well as capital expenditures for our Design Gallery expansion.

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 41

2024 SECOND QUARTER FORM 10-Q | 45

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

1 unchanged sentence

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.

As of August 3, 2024, we had $1,945 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.

3 unchanged sentences

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.

As of August 3, 2024, we had $491 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.

1 unchanged sentence

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.

As of August 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 borrowing additional funds under the asset based credit facility 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 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.

During the six months ended August 3, 2024, adjusted capital expenditures were $133 million in aggregate, net of cash received related to landlord tenant allowances of $7.7 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.

10 unchanged sentences

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

46 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 42

Cash Flow Analysis

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

THREE MONTHS ENDED

SIX MONTHS ENDED

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash used in financing activities

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

Net cash provided by (used in) financing activities

Net 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 (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.

Operating activities consist primarily of net income 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 six months ended August 3, 2024, net cash provided by operating activities was $67 million and consisted of net income of $25 million and an increase in non-cash items of $161 million, partially offset by a change in working capital and other activities of $119 million.

The use of cash from working capital was primarily driven by an increase in merchandise inventory of $163 million, a decrease in operating lease liabilities of $48 million, a decrease in other current and non-current liabilities of $28 million, an increase in landlord assets under construction, net of tenant allowances, of $17 million and an increase in accounts receivable of $12 million.

These uses of cash from working capital were partially offset by an increase of accounts payable and accrued expenses of $123 million, an increase of deferred revenue and customer deposits of $20 million and a decrease in prepaid expense and other assets of $6.2 million.

Net Cash Used in Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

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

For the six months ended August 3, 2024, net cash used in investing activities was $125 million and was comprised of investments in retail stores, information technology and systems infrastructure of $115 million and additional contributions to our equity method investments of $9.4 million.

Net Cash Provided by (Used in) Financing Activities

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

For the three months ended 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.

For the six months ended August 3, 2024, net cash provided by financing activities was $12 million, primarily due to proceeds from borrowings under the asset based credit facility of $25 million and proceeds from the exercise of stock options of $11 million.

These cash inflows were partially offset by payments on term loans of $13 million and net payments under finance lease agreements of $12 million.

Non-Cash Transactions

2 unchanged sentences

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 43

2024 SECOND QUARTER FORM 10-Q | 47

Cash Requirements from Contractual Obligations

19 unchanged sentences

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

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.

We did not repurchase any shares of our common stock under the Share Repurchase Program during the six months ended August 3, 2024.

As of August 3, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program.

48 | 2024 SECOND QUARTER FORM 10-Q

FINANCIAL INFORMATION

2024 FIRST QUARTER FORM 10-Q | 44

Critical Accounting Policies and Estimates

15 unchanged sentences

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