What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-12-12 compared with 2024-09-12 · 207 added, 176 removed, 365 unchanged (51% of the section changed)

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

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 November 2, 2024, and a comparison to the three and nine months ended October 28, 2023.

The discussion related to cash flows for the nine months ended October 28, 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 October 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on December 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.

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Basis of Presentation and Results of Operations .

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

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

Liquidity and Capital Resources .

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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

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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, 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, in our Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2024 and in our 2023 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, not be short term and may recur in one or more future financial reporting periods.

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

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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:

As of November 2, 2024, we operated the following number of locations:

North America

Design Galleries

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Baby & Child and TEEN Galleries

Total North America Galleries

Design Galleries

Total Galleries

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FINANCIAL INFORMATION

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Business Conditions

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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 when the housing market rebounds, and we believe we have positioned the business to take advantage of any improvements in macroeconomic factors.

Our expectation is that these factors 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.

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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.

In addition, we anticipate that our net revenues, adjusted net income (loss) 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.

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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 strong revenues and margins.

Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity have 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 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.

With the mailings of the RH Outdoor, RH Interiors and RH Contemporary Sourcebooks in 2023, as well as the mailings of the RH Outdoor, RH Modern and RH Interiors Sourcebooks in 2024, we introduced 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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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.

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FINANCIAL INFORMATION

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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;

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

RH1 & RH2, our private jets;

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

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

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

Global Expansion .

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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.

We have also secured locations in Paris, London, Milan and Sydney.

Digital Reimagination .

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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.

Launched in the spring of 2022, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable.

We expect to continue to elevate the customer experience on The World of RH with further enhancements to content, navigation and search functionality.

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FINANCIAL INFORMATION

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Basis of Presentation and Results of Operations

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

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

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

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Interest expense—net

Other (income) expense—net

Other expense—net

Total other expenses

Income before taxes and equity method investments

Income tax expense

Income (loss) before income taxes and equity method investments

Income tax expense (benefit)

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, 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 (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.

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

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FINANCIAL INFORMATION

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

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

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

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Interest expense—net (1)

Other (income) expense—net (1)

Income tax expense (1)

Other expense—net (1)

Income tax expense (benefit) (1)

Share of equity method investments loss—net (2)

Operating income

Legal settlements—net (3)

Asset impairments (3)

Non-cash compensation (4)

Legal settlements—net (5)

Reorganization related costs (6)

Recall accrual (7)

Adjusted operating income

(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.

(1) Refer to discussion “Three Months Ended November 2, 2024 Compared to Three Months Ended October 28, 2023” and “Nine Months Ended November 2, 2024 Compared to Nine Months Ended October 28, 2023” below for a discussion of our results of operations for the three and nine months ended November 2, 2024 and October 28, 2023.

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

(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.

(3) The adjustment in the three and nine months ended November 2, 2024 includes $19 million of long-lived asset impairment for our two Design Galleries in Germany (refer to “Long-Lived Asset Impairment” within Note 8— Leases ), as well as impairment of pre-acquisition costs related to an unsuccessful joint venture arrangement of $1.0 million.

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.

(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 nine months ended November 2, 2024 represents favorable legal settlements received of $10 million, partially offset by costs incurred in connection with one of the matters.

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

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

(7) Represents accrual adjustments related to product recall charges.

FINANCIAL INFORMATION

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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

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Adjusted Net Income (Loss) .

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

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

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

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Adjustments pre-tax:

Legal settlements—net (1)

Asset impairments (1)

Non-cash compensation (1)

Legal settlements—net (1)

Reorganization related costs (1)

Recall accrual (1)

Subtotal adjusted items

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Share of equity method investments loss—net (1)

Adjusted net income

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

(2) 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.

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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, such as 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 November 2, 2024 and October 28, 2023 are based on adjusted tax rates of 23.2% and (63.1)%, respectively.

The adjustments for the nine months ended November 2, 2024 and October 28, 2023 are based on adjusted tax rates of 17.9% and 27.5%, respectively.

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FINANCIAL INFORMATION

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

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

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

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

Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

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

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net income (loss)

Depreciation and amortization

Interest expense—net

Income tax expense

Income tax expense (benefit)

Non-cash compensation (1)

Asset impairments (2)

Share of equity method investments loss—net (2)

Capitalized cloud computing amortization (3)

Other (income) expense—net (2)

Other expense—net (2)

Legal settlements—net (2)

Reorganization related costs (2)

Recall accrual (2)

Adjusted EBITDA

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Friedman in October 2020.

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

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

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

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Reconciliation of Adjusted Capital Expenditures

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Adjusted capital expenditures

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million 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

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In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million for the nine months ended October 28, 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 nine months ended November 2, 2024.

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

SIX MONTHS ENDED

NINE MONTHS ENDED

SELLING SQUARE

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RH Design Galleries:

Raleigh Design Galley

Cleveland Design Gallery

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RH Legacy Galleries:

Plano Legacy Gallery

Cleveland Legacy Gallery

Palo Alto Legacy Gallery

Raleigh Legacy Gallery

Indianapolis temporary Gallery

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

Leased selling square footage includes approximately 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.

Leased selling square footage includes approximately 89,000 square feet as of November 2, 2024 related to three owned retail locations and approximately 35,000 square feet as of October 28, 2023 related to one owned retail location.

(2) Total leased square footage includes approximately 142,000 square feet as of November 2, 2024 related to three owned retail locations and approximately 56,000 square feet as of October 28, 2023 related to one owned retail location.

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FINANCIAL INFORMATION

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

NINE MONTHS ENDED

(in thousands)

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Weighted-average leased selling square footage

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FINANCIAL INFORMATION

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

Three Months Ended November 2, 2024 Compared to Three Months Ended October 28, 2023

THREE MONTHS ENDED

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Income from operations

(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.

(1) The results for the Real Estate segment were immaterial in both the three months ended November 2, 2024 and October 28, 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.

(2) RH Segment net revenues include outlet revenues of $64 million and $61 million for the three months ended November 2, 2024 and October 28, 2023, respectively.

Consolidated net revenues increased $61 million, or 8.1%, to $812 million in the three months ended November 2, 2024 compared to $751 million in the three months ended October 28, 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.

RH Segment net revenues increased $63 million, or 8.9%, to $768 million in the three months ended November 2, 2024 compared to $705 million in the three months ended October 28, 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.

RH Segment net revenues for the three months ended November 2, 2024 increased primarily due to higher revenue in our core business, driven by the introduction of new collections and mailings of our RH Interiors and RH Modern Sourcebooks in the second quarter of fiscal 2024.

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

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.

Waterworks net revenues decreased $2.5 million, or 5.4%, to $44 million in the three months ended November 2, 2024 compared to $46 million in the three months ended October 28, 2023.

Consolidated gross profit increased $21 million, or 6.1%, to $361 million in the three months ended November 2, 2024 compared to $340 million in the three months ended October 28, 2023.

As a percentage of net revenues, consolidated gross margin decreased 80 basis points to 44.5% of net revenues in the three months ended November 2, 2024 from 45.3% of net revenues in the three months ended October 28, 2023.

FINANCIAL INFORMATION

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RH Segment gross profit

RH Segment gross profit increased $23 million, or 7.3%, to $339 million in the three months ended November 2, 2024 compared to $316 million in the three months ended October 28, 2023.

As a percentage of net revenues, RH Segment gross margin decreased 70 basis points to 44.1% of net revenues in the three months ended November 2, 2024 from 44.8% of net revenues in the three months ended October 28, 2023.

The decrease in RH Segment gross margin was primarily attributable to 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.

In addition, product margin decreased as a result of elevated inventory transfer costs in the period to support our product expansion and was partially offset by leverage in our shipping costs.

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.

Waterworks gross profit decreased $2.1 million, or 8.5%, to $22 million in the three months ended November 2, 2024 compared to $24 million in the three months ended October 28, 2023.

As a percentage of net revenues, Waterworks gross margin decreased 170 basis points to 51.3% of net revenues in the three months ended November 2, 2024 from 53.0% of net revenues in the three months ended October 28, 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.

Consolidated selling, general and administrative expenses decreased $29 million, or 10.1%, to $260 million in the three months ended November 2, 2024 compared to $289 million in the three months ended October 28, 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.

RH Segment selling, general and administrative expenses decreased $29 million, or 10.8%, to $241 million in the three months ended November 2, 2024 compared to $270 million in the three months ended October 28, 2023.

RH Segment selling, general and administrative expenses for the three months ended November 2, 2024 include asset impairments of $19 million related to certain of our Galleries and $1.0 million related to pre-acquisition costs for an unsuccessful joint venture arrangement, as well as 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 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 .

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 would have been 28.6% and 37.6% of net revenues for the three months ended November 2, 2024 and October 28, 2023, respectively, excluding the costs incurred in connection with the adjustments mentioned above.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by a decrease in advertising costs of $46 million related to timing differences of Sourcebook mailings as compared to the third quarter of 2023.

Additionally, travel expense, professional fees and other corporate costs were lower 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.

Waterworks selling, general and administrative expenses decreased $0.2 million, or 1.0%, to $19 million in the three months ended November 2, 2024 compared to $20 million in the three months ended October 28, 2023.

Waterworks selling, general and administrative expenses were 44.2% and 42.3% of net revenues for the three months ended November 2, 2024 and October 28, 2023, respectively.

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FINANCIAL INFORMATION

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:

Interest expense—net increased $3.0 million, or 5.4%, in the three months ended November 2, 2024 compared to the three months ended October 28, 2023, which consisted of the following in each period:

THREE MONTHS ENDED

2 unchanged sentences

Finance lease interest expense

Asset based credit facility

Other interest expense

2 unchanged sentences

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:

Other expense—net

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

THREE MONTHS ENDED

2 unchanged sentences

Foreign exchange from remeasurement of intercompany loans (2)

Other income—net

Other 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.

1 unchanged sentence

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

Income tax expense

Income tax expense (benefit)

THREE MONTHS ENDED

(dollars in thousands)

Income tax expense

Income tax expense (benefit)

Effective tax rate

The decrease in our effective tax rate for the three months ended 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

The decrease in our effective tax rate for the three months ended November 2, 2024 compared to the three months ended October 28, 2023 is primarily attributable to reporting net income in the current year and the impact of higher net excess tax benefits from stock-based compensation in fiscal 2024.

The effective tax rate for the three months ended October 28, 2023 was impacted by reporting a net loss in the period, as well as tax benefits from the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery.

FINANCIAL INFORMATION

2024 THIRD QUARTER FORM 10-Q | 41

Nine Months Ended November 2, 2024 Compared to Nine Months Ended October 28, 2023

NINE MONTHS ENDED

(in thousands)

3 unchanged sentences

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.

(1) The results for the Real Estate segment were immaterial in both the nine months ended November 2, 2024 and October 28, 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.

(2) RH Segment net revenues include outlet revenues of $189 million and $177 million for the nine months ended November 2, 2024 and October 28, 2023, respectively.

Consolidated net revenues increased $77 million, or 3.4%, to $2,368 million in the nine months ended November 2, 2024 compared to $2,291 million in the nine months ended October 28, 2023.

RH Segment net revenues

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.

RH Segment net revenues increased $80 million, or 3.7%, to $2,226 million in the nine months ended November 2, 2024 compared to $2,146 million in the nine months ended October 28, 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.

RH Segment net revenues for the nine months ended November 2, 2024 increased primarily due to higher revenue in our core business, driven by the introduction of new collections, as well as higher outlet revenue.

We also recognized higher hospitality revenue as a result of new Gallery openings, including RH England, RH Indianapolis, RH Cleveland and RH Palo Alto.

Waterworks net revenues

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.

Waterworks net revenues decreased $2.4 million, or 1.6%, to $142 million in the nine months ended November 2, 2024 compared to $145 million in the nine months ended October 28, 2023.

Consolidated gross profit decreased $16 million, or 1.5%, to $1,052 million in the nine months ended November 2, 2024 compared to $1,068 million in the nine months ended October 28, 2023.

As a percentage of net revenues, consolidated gross margin decreased 220 basis points to 44.4% of net revenues in the nine months ended November 2, 2024 from 46.6% of net revenues in the nine months ended October 28, 2023.

RH Segment gross profit

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.

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.

RH Segment gross profit decreased $13 million, or 1.3%, to $977 million in the nine months ended November 2, 2024 from $990 million in the nine months ended October 28, 2023.

As a percentage of net revenues, RH Segment gross margin decreased 230 basis points to 43.9% of net revenues in the nine months ended November 2, 2024 from 46.2% of net revenues in the nine months ended October 28, 2023.

The decrease in RH Segment gross margin was partially due to 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.

Additionally, we experienced a decrease in product margin in the core business driven by price adjustments and a higher mix of, and discounts on, discontinued products.

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FINANCIAL INFORMATION

Waterworks gross profit

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.

Waterworks gross profit decreased $2.8 million, or 3.6%, to $75 million in the nine months ended November 2, 2024 compared to $78 million in the nine months ended October 28, 2023.

As a percentage of net revenues, Waterworks gross margin decreased 110 basis points to 52.5% of net revenues in the nine months ended November 2, 2024 from 53.6% of net revenues in the nine months ended October 28, 2023.

Selling, general and administrative expenses

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.

Consolidated selling, general and administrative expenses increased $34 million, or 4.4%, to $800 million in the nine months ended November 2, 2024 compared to $766 million in the nine months ended October 28, 2023.

RH Segment selling, general and administrative expenses

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 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.

RH Segment selling, general and administrative expenses increased $36 million, or 5.0%, to $744 million in the nine months ended November 2, 2024 compared to $708 million in the nine months ended October 28, 2023.

RH Segment selling, general and administrative expenses for the nine months ended November 2, 2024 include asset impairments of $19 million related to certain of our Galleries and $1.0 million related to pre-acquisition costs for an unsuccessful joint venture arrangement, favorable net legal settlements of $6.2 million, as well as non-cash compensation of $3.7 million related to an option grant made to Mr.

Friedman in October 2020.

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FINANCIAL INFORMATION

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.

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 would have been 32.6% and 31.8% of net revenues for the nine months ended November 2, 2024 and October 28, 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 higher compensation and occupancy costs year over year, partially offset by lower professional fees and other corporate costs.

Waterworks selling, general and administrative expenses

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.

Waterworks selling, general and administrative expenses decreased $2.0 million, or 3.5%, to $56 million in the nine months ended November 2, 2024 compared to $58 million in the nine months ended October 28, 2023.

Waterworks selling, general and administrative expenses were 39.5% and 40.3% of net revenues for the nine months ended November 2, 2024 and October 28, 2023, respectively.

Waterworks selling, general and administrative expenses in the nine months ended November 2, 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 41.7% and 40.2% of net revenues for the nine months ended November 2, 2024 and October 28, 2023, respectively.

FINANCIAL INFORMATION

2024 THIRD QUARTER FORM 10-Q | 43

Interest expense—net

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

Interest expense—net increased $35 million, or 25.0%, in the nine months ended November 2, 2024 compared to the nine months ended October 28, 2023, which consisted of the following in each period:

NINE MONTHS ENDED

(in thousands)

1 unchanged sentence

Finance lease interest expense

Asset based credit facility

Other interest expense

2 unchanged sentences

Total interest expense—net

Other (income) expense—net

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

SIX MONTHS ENDED

Other expense—net

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

NINE MONTHS ENDED

(in thousands)

1 unchanged sentence

Foreign exchange from remeasurement of intercompany loans (2)

Other (income) expense—net

Other 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.

1 unchanged sentence

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

FINANCIAL INFORMATION

2024 SECOND QUARTER FORM 10-Q | 43

Income tax expense

SIX MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

1 unchanged sentence

Effective tax rate

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.

The decrease in our effective tax rate for the nine months ended November 2, 2024 compared to the nine months ended October 28, 2023 is primarily attributable to reporting lower net income in the current year and the impact of higher net excess tax benefits from stock-based compensation in fiscal 2024.

The effective tax rate for the nine months ended October 28, 2023 was also impacted by lower net excess tax benefits from stock-based compensation in fiscal 2023.

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FINANCIAL INFORMATION

Liquidity and Capital Resources

11 unchanged sentences

(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.

(2) Net debt as of November 2, 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 $45 million in outstanding letters of credit as of both August 3, 2024 and February 3, 2024.

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FINANCIAL INFORMATION

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.

(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 November 2, 2024 and February 3, 2024, respectively.

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 and related real estate investments, 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.

7 unchanged sentences

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 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.

FINANCIAL INFORMATION

2024 THIRD QUARTER FORM 10-Q | 45

While we do not anticipate that we will require additional debt financing 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 .

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 SECOND QUARTER FORM 10-Q | 45

As of November 2, 2024, we had $190 million outstanding under the asset based credit facility.

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 August 3, 2024, we had $1,945 million outstanding under the Term Loan Credit Agreement.

As of November 2, 2024, we had $1,940 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 August 3, 2024, we had $491 million outstanding under the Amended Term Loan Credit Agreement.

As of November 2, 2024, we had $490 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,” the “Convertible Senior Notes” or the “Notes”).

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.

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FINANCIAL INFORMATION

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 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.

During the nine months ended November 2, 2024, adjusted capital expenditures were $213 million in aggregate, net of cash received related to landlord tenant allowances of $13 million.

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

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

9 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.

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FINANCIAL INFORMATION

Cash Flow Analysis

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

SIX MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

4 unchanged sentences

Cash and cash equivalents and restricted cash at end of period

FINANCIAL INFORMATION

2024 THIRD QUARTER FORM 10-Q | 47

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 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.

For the nine months ended November 2, 2024, net cash provided by operating activities was $36 million and consisted of net income of $58 million and an increase in non-cash items of $266 million, partially offset by a change in working capital and other activities of $288 million.

The use of cash from working capital was primarily driven by an increase in merchandise inventory of $224 million, a decrease in operating lease liabilities of $73 million, a decrease in other current and non-current liabilities of $33 million, an increase in landlord assets under construction, net of tenant allowances, of $33 million and an increase in accounts receivable of $7.9 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.

These uses of cash from working capital were partially offset by an increase in accounts payable and accrued expenses of $44 million, an increase in deferred revenue and customer deposits of $25 million and a decrease in prepaid expense and other assets of $13 million.

Net Cash Used in Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

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.

For the nine months ended November 2, 2024, net cash used in investing activities was $190 million and was comprised of investments in retail stores, information technology and systems infrastructure of $180 million and additional contributions to our equity method investments of $9.6 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 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.

For the nine months ended November 2, 2024, net cash provided by financing activities was $117 million, primarily due to borrowings under the asset based credit facility of $190 million and proceeds from the exercise of stock options of $19 million.

These cash inflows were partially offset by the settlement of the 2024 Notes of $42 million, net payments under finance lease agreements of $20 million and payments under term loans of $19 million.

In addition, during the nine months ended November 2, 2024, we paid $12 million of excise taxes related to share repurchases made in fiscal 2023.

Non-Cash Transactions

1 unchanged sentence

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 SECOND QUARTER FORM 10-Q | 47

In addition, non-cash transactions consist of shares issued and received related to convertible senior note transactions.

For the nine months ended November 2, 2024, we issued in aggregate 39,121 shares of common stock.

Cash Requirements from Contractual Obligations

4 unchanged sentences

Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases.

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FINANCIAL INFORMATION

Convertible Senior Notes

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

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

Asset Based Credit Facility

8 unchanged sentences

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

In 2018, our Board of Directors authorized a share repurchase program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases, including through privately negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives.

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 six months ended August 3, 2024.

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

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FINANCIAL INFORMATION

We did not repurchase any shares of our common stock under the Share Repurchase Program during the nine months ended November 2, 2024.

As of November 2, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program.

Critical Accounting Policies and Estimates

3 unchanged sentences

Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to our condensed consolidated financial statements.

FINANCIAL INFORMATION

2024 THIRD QUARTER FORM 10-Q | 49

We evaluate the development and selection of our critical accounting policies and estimates and believe that certain of our significant accounting policies involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, and are therefore discussed as critical:

5 unchanged sentences

Variable Interest Entities

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.

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 other than the long-lived assets policy discussed below.

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 the 2023 Form 10-K.

Long-Lived Assets

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

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

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

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

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

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

Future cash flows are estimated considering the highest and best use of the assets, which may be based on a number of factors, including gallery-level historical results, current trends, operating cash flow projections or market-based rental rates.

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

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

Recent Accounting Pronouncements

1 unchanged sentence

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