What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-04-02 compared with 2024-03-28 · 181 added, 196 removed, 411 unchanged (48% of the section changed)

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The discussion of our financial condition and changes in our results of operations, liquidity and capital resources are presented in this section for fiscal 2024 and a comparison to fiscal 2023.

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

The discussion for fiscal 2023 and fiscal 2022 has been omitted from this Annual Report, but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, filed with the Securities and Exchange Commission (“SEC”) on March 28, 2024.

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

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How We Assess the Performance of Our Business.

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

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

Basis of Presentation and Results of Operations .

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

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

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 21 of our Design Gallery locations, which includes restaurants and wine bars.

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

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

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

PART II — FINANCIAL STATEMENTS

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 Modern, RH Contemporary, 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 we believe will be disruptive across multiple markets.

As of February 1, 2025, we operated the following number of locations:

North America

Design Galleries

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Baby & Child and TEEN Galleries

Total Galleries

Interior Design Office

Total RH retail locations—North America

Europe Design Galleries

Total RH retail locations

Waterworks Showrooms

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Business Conditions

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

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

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

In recent years, our business has been negatively affected and limited by macroeconomic conditions, including high 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.

Since the majority of our product assortment is imported from vendors outside the U.S., we also face uncertainty and risks related to tariffs and other trade policies, which may increase the costs of securing products from our vendors.

Tariffs and other non-tariff trade practices and policies may adversely affect our business in other ways beyond increased costs for our products.

We have taken steps to move our supply chain away from countries with higher tariff rates in favor of other jurisdictions, but these countermeasures may prove to be ineffective and the ability to predict tariff rates in different countries may be difficult as policies may change on short notice.

Uncertainty about trade policy, tariff rates, and other changes in practices affecting international trade might have an adverse effect on our business and results of operation and we may face challenges in implementing the optimal responses to changing trade conditions.

In addition, there is meaningful uncertainty related to the confluence of different macroeconomic factors that could influence business conditions in the U.S.

While our expectation is that these different factors will moderate in the future, the timing and precise outlook for these improvements is uncertain.

We also believe we have positioned the business to take advantage of any favorable progression in macroeconomic conditions.

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.

Key Value-Driving Strategies

In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives:

In order to achieve our long-term strategies of product transformation, platform expansion and cash generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives:

PART II — FINANCIAL STATEMENTS

FORM 10-K | 43

Product Elevation .

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

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

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

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

Beginning with the mailing of our RH Interiors Sourcebook in the fall of 2023 and with additional Sourcebook mailings throughout 2024, we have 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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Gallery Transformation .

Our product is elevated and rendered more valuable by our architecturally inspiring Galleries.

Our products are elevated and rendered more valuable by our architecturally inspiring Galleries.

We believe our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion.

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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 offer 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.

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

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

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

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

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

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

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

As such, we are actively pursuing the expansion of the RH brand globally, which began with the opening of RH England, RH Munich and RH Düsseldorf in 2023, followed by the opening of RH Brussels in March 2024 and RH Madrid in June 2024.

We are also under construction in Paris, London and Milan in inspiring spaces that will celebrate the heritage of the historic structures and will integrate full expressions of our hospitality experiences.

In addition, we plan to open RH Sydney, The Gallery in Double Bay, in Australia in the coming years.

Digital Reimagination .

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

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

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

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

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.

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

We are making meaningful investments to elevate and differentiate our online experience with plans to upgrade our website throughout 2025.

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PART II — FINANCIAL STATEMENTS

Factors Affecting Our Results of Operations

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

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

We have experienced significant changes in our business from fiscal 2022 through fiscal 2024, including the impact of macroeconomic factors such as the pandemic, high interest and mortgage rates, increased inflation and volatility in the global financial markets and the slowdown in the housing market.

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

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

We rely upon vendors outside the U.S.

for the majority of our product assortment and we face resulting uncertainty and risks related to tariffs and other trade policies which may increase the costs of securing products from our vendors.

Tariffs and other non-tariff trade practices and policies may adversely affect our business in other ways beyond increased costs for our products.

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

FORM 10-K | 41

Our Strategic Initiatives.

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

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

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

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

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

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

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

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

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

However, throughout fiscal 2023 and fiscal 2024 we experienced softening demand trends as compared to fiscal 2022.

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

Based on total dollar volume of purchases for fiscal 2024, 72% of our products were sourced from Asia, including 35% from Vietnam, 23% from China and the remainder predominantly from Indonesia and India, 18% from North America, including 10% from the United States, as well as 10% from Europe and other countries.

Consumer Preferences and Demand .

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 45

Overall Economic Trends .

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

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

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

Shifts in consumption patterns may also have an impact on consumer spending in the high-end housing market.

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We collect annual membership fees related to the RH Members Program, which are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period.

We also track “demand” in our business, which is a non-GAAP metric linked to the level of customer orders.

We also track “demand” in our business, which is an operating metric linked to the level of customer orders.

Demand is an operating metric that we use in reference to the dollar value of orders placed (orders convert to net revenue upon a customer obtaining control of the merchandise) and excludes exchanges and shipping fees.

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

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PART II — FINANCIAL STATEMENTS

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

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

FORM 10-K | 43

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

In addition, certain of our retail leases are accounted for as finance leases, which result in our recording a portion of the expense related to these agreements in interest expense—net on the consolidated statements of income.

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

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

Selling, General and Administrative Expenses.

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

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

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

Non-GAAP Financial Measures.

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 47

Basis of Presentation and Results of Operations

The following table sets forth our consolidated statements of income:

Our consolidated statements of income were as follows:

(dollars in thousands)

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Income before equity method investments

Share of equity method investments loss

Share of equity method investments loss—net

Non-GAAP Financial Measures

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PART II — FINANCIAL STATEMENTS

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

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Income tax expense (benefit) (1)

Share of equity method investments loss (1)

Share of equity method investments loss—net (1)

Operating income

Asset impairments (2)

Non-cash compensation (3)

Legal settlements (3)

Reorganization related costs (4)

Asset impairments (5)

Legal settlements—net (5)

Recall accrual (6)

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Adjusted operating income

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

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

(1) Refer to discussion “Fiscal 2024 Compared to Fiscal 2023” below for a discussion of our results of operations for the year ended February 1, 2025 and February 3, 2024.

Information on the year ended January 28, 2023 (fiscal 2022) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended February 3, 2024, filed with the SEC on March 28, 2024.

(2) The adjustment in fiscal 2024 includes $19 million of long-lived asset impairment for our two Design Galleries in Germany (refer to “Impairment—Long-Lived Assets” within Note 3— Significant Accounting Policies in our consolidated financial statements), $17 million for property and equipment of Galleries under construction, as well as impairment of pre-acquisition costs related to an unsuccessful joint venture arrangement of $1.0 million.

The adjustment in fiscal 2023 includes impairment of property and equipment of $2.2 million related to the interior refresh of our Design Galleries, as well as impairment of a loan receivable of $1.3 million.

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

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

Friedman in October 2020.

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

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

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

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

(5) The adjustment to selling, general and administrative expenses in fiscal 2023 includes impairment of property and equipment of $2.2 million related to the interior refresh of our Design Galleries, as well as impairment of a loan receivable of $1.3 million.

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

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

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

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

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

(5) The adjustment in fiscal 2024 represents favorable legal settlements received of $10 million, partially offset by costs incurred in connection with one of the matters.

The adjustment in fiscal 2023 represents certain legal settlements associated with class action litigation matters (refer to Note 19— Commitments and Contingencies in our consolidated financial statements).

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

(6) The adjustment in fiscal 2023 represents accrual adjustments related to product recall charges.

The adjustment in fiscal 2022 represents charges associated with product recalls.

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

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(8) Represents professional fees contingent upon the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchase (refer to Note 11— Convertible Senior Notes in our consolidated financial statements).

PART II — FINANCIAL STATEMENTS

FORM 10-K | 49

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Adjustments pre-tax:

Asset impairments (1)

Non-cash compensation (1)

Legal settlements (1)

Reorganization related costs (1)

Asset impairments (1)

Legal settlements—net (1)

Recall accrual (1)

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Gain on sale of building and land (1)

Amortization of debt discount (3)

Subtotal adjusted items

Impact of income tax items (3)

Share of equity method investments loss (1)

Share of equity method investments loss—net (1)

Adjusted net income

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(2) Represents net gain on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchase (refer to Note 11— Convertible Senior Notes in our consolidated financial statements).

(3) We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent, such as the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery in fiscal 2023.

The adjustments for fiscal 2024, fiscal 2023 and fiscal 2022 are based on adjusted tax rates of 13.7%, 24.2% and 21.7%, respectively.

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

Accordingly, in accounting for GAAP purposes through fiscal 2021 for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”) and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the “2024 Notes”), we separated the 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we amortized as debt discount an amount equal to the fair value of the equity components as interest expense on the 2023 Notes and 2024 Notes over their expected lives.

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

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

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

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

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

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

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

PART II — FINANCIAL STATEMENTS

EBITDA and Adjusted EBITDA .

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

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Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA

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Non-cash compensation (1)

Share of equity method investments loss (2)

Legal settlements (2)

Asset impairments (2)

Share of equity method investments loss—net (2)

Capitalized cloud computing amortization (3)

Reorganization related costs (2)

Asset impairments (2)

Other expense—net (2)

Legal settlements—net (2)

Recall accrual (2)

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 51

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Adjusted capital expenditures

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

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $4.8 million, $2.4 million and $4.7 million in fiscal 2024, fiscal 2023 and fiscal 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the consolidated statements of cash flows.

Fiscal 2024 Compared to Fiscal 2023

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

The results for fiscal 2024 and fiscal 2023 included fifty-two weeks and fifty-three weeks, respectively.

(in thousands)

Net revenues (2)

Cost of goods sold

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

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

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

Additionally, all intercompany transactions are immaterial and have been eliminated.

(2) RH Segment net revenues include outlet revenues of $258 million and $245 million in fiscal 2024 and fiscal 2023, respectively.

Consolidated net revenues increased $152 million, or 5.0%, to $3,181 million in fiscal 2024 compared to $3,029 million in fiscal 2023.

RH Segment net revenues

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

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

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

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

Waterworks net revenues

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

RH Segment net revenues increased $152 million, or 5.4%, to $2,988 million in fiscal 2024 compared to $2,836 million in fiscal 2023.

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

RH Segment net revenues for fiscal 2024 increased primarily due to higher revenue in our core business, driven by the introduction of new collections, and the nearly doubling of our Sourcebook circulation, as well as higher hospitality revenue as a result of new Gallery openings.

We also recognized higher outlet revenue.

Fiscal 2023 included fifty-three weeks of results and the fifty-third week contributed approximately $50 million of net revenues, whereas fiscal 2024 included fifty-two weeks of results.

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

PART II — FINANCIAL STATEMENTS

Waterworks net revenues

Waterworks net revenues decreased $0.6 million, or 0.3%, to $193 million in fiscal 2024 compared to $194 million in fiscal 2023.

Consolidated gross profit increased $26 million, or 1.9%, to $1,415 million in fiscal 2024 compared to $1,389 million in fiscal 2023.

As a percentage of net revenues, gross margin decreased 140 basis points to 44.5% of net revenues in fiscal 2024 compared to 45.9% of net revenues in fiscal 2023.

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

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

RH Segment gross profit

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

RH Segment gross profit increased $27 million, or 2.1%, to $1,313 million in fiscal 2024 compared to $1,286 million in fiscal 2023.

As a percentage of net revenues, RH Segment gross margin decreased 140 basis points to 44.0% of net revenues in fiscal 2024 compared to 45.4% of net revenues in fiscal 2023.

Excluding the adjustment for the inventory impairment mentioned above, RH Segment gross margin would have decreased 520 basis points to 45.4% of net revenues in fiscal 2023 from 50.6% of net revenues in fiscal 2022.

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

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

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

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 continued global expansion.

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

Waterworks gross profit

2 unchanged sentences

Selling, general and administrative expenses

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

Consolidated selling, general and administrative expenses increased $69 million, or 6.8%, to $1,092 million in fiscal 2024 compared to $1,023 million in fiscal 2023.

RH Segment selling, general and administrative expenses

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

RH Segment selling, general and administrative expenses increased $71 million, or 7.6%, to $1,016 million in fiscal 2024 compared to $944 million in fiscal 2023.

RH Segment selling, general and administrative expenses were 34.0% and 33.3% of net revenues in fiscal 2024 and fiscal 2023, respectively.

RH Segment selling, general and administrative expenses for fiscal 2024 included asset impairments of $19 million related to two Design Galleries in Germany, $17 million for property and equipment of Galleries under construction and $1.0 million related to pre-acquisition costs for an unsuccessful joint venture arrangement.

In addition, in fiscal 2024 we had favorable net legal settlements of $6.2 million, non-cash compensation of $4.5 million related to an option grant made to Mr.

Friedman in October 2020, as well as severance expense and other payroll related costs associated with a reorganization of $4.4 million.

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

Friedman in October 2020, legal settlements of $8.5 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million and asset impairments of $2.2 million and $1.3 million related to the interior refresh of our Design Galleries and a loan receivable, respectively, offset by accrual adjustments related to product recall charges of $1.6 million.

RH Segment selling, general and administrative expenses for fiscal 2022 included amortization of non-cash compensation of $18 million related to a fully vested option grant made to Mr.

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

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

RH Segment selling, general and administrative expenses would have been 32.7% and 32.3% of net revenues for fiscal 2024 and fiscal 2023, respectively, when excluding the adjustments to RH Segment selling, general and administrative expenses mentioned above.

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

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

FORM 10-K | 51

The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by higher compensation costs, higher opening costs driven by new Gallery openings, most of which include hospitality, and additional advertising costs due to increased Sourcebook circulation 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 decreased $0.4 million, or 0.4%, and was $79 million in both fiscal 2023 and fiscal 2022.

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

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

Waterworks selling, general and administrative expenses decreased $2.1 million, or 2.6%, to $77 in fiscal 2024 compared to $79 million in fiscal 2023.

Waterworks selling, general and administrative expenses for fiscal 2024 included $3.2 million related to a favorable legal settlement.

Excluding the favorable legal settlement, Waterworks selling, general and administrative expenses would have increased 70 basis points to 41.3% of net revenues in fiscal 2024 compared to 40.6% of net revenues in fiscal 2023.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 53

Interest expense—net

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

Interest expense—net increased $32 million, or 16.3%, in fiscal 2024 compared in fiscal 2023, which consisted of the following:

(in thousands)

1 unchanged sentence

Finance lease interest expense

Interest income

Capitalized interest for capital projects

Asset based credit facility

Other interest expense

Total interest expense—net

Loss on extinguishment of debt

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

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

Capitalized interest for capital projects

Interest income

Interest expense—net

Other expense—net

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

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

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

dollar as compared to Euro and Pound Sterling.

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

52 | FORM 10-K

Income tax expense (benefit)

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

Other expense—net consisted of the following:

(in thousands)

Foreign exchange from transactions (1)

Foreign exchange from remeasurement of intercompany loans (2)

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.

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

Our income tax expense and effective tax rates were as follows:

(dollars in thousands)

Income tax expense (benefit)

Income tax expense

Effective tax rate

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

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $11 million and $2.1 million loss in fiscal 2023 and fiscal 2022, respectively.

The decrease in our effective tax rate for the year ended February 1, 2025 compared to the year ended February 3, 2024 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.

54 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Liquidity and Capital Resources

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

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

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

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

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

Net debt and availability under the ABL Credit Agreement were as follows:

(in thousands)

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Term loan B-2 (1)

Equipment promissory note (1)

Convertible senior notes due 2024 (1)

Notes payable for share repurchases

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

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

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

Refer to Note 7— Variable Interest Entities in our consolidated financial statements.

FORM 10-K | 53

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

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.

(2) Net debt as of February 1, 2025 and February 3, 2024 excludes non-recourse real estate loans of $18 million as of both periods, which are secured by specific real estate assets and the associated creditors do not have recourse against RH’s general assets.

(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 periods.

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.

During fiscal 2023, we invested $1,253 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program.

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

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

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

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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 continues to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations.

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

We expect to continue to use additional sources of debt financing in future periods as a source of additional capital to fund our various investments.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 55

To the extent we choose to secure additional sources of liquidity through incremental debt financing, there can be no assurances that we will be able to raise such financing on favorable terms, if at all, or that future financing requirements will not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock.

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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.

54 | FORM 10-K

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

1 unchanged sentence

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

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

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

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

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

Certain Transactions Related to Convertible Senior Notes

In the first and second quarters of fiscal 2022, we entered into certain transactions in connection with the 2023 Notes and 2024 Notes.

Warrant Termination Agreements

In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with a limited number of sophisticated financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants previously issued in connection with the 2023 Notes and 2024 Notes.

Upon closing of these transactions, we paid an aggregate of $391 million in cash to terminate warrants representing 3,385,580 shares of our common stock.

Convertible Bond Hedge Unwind Transactions

In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with the Counterparties to terminate all of the remaining convertible note bond hedges previously entered into in connection with the 2023 Notes and 2024 Notes.

Upon closing of these transactions, we received an aggregate of $232 million in cash for the termination of the bond hedges.

Convertible Senior Notes Repurchases

In the first and second quarters of fiscal 2022, we entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase $237 million in aggregate principal amount of the convertible senior notes representing $63 million and $174 million in principal amount of 2023 Notes and 2024 Notes, respectively.

Upon closing of these transactions, we paid an aggregate of $396 million in cash to repurchase such convertible senior notes .

Result of the Convertible Notes Transactions

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

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

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

As of February 3, 2024, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024.

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

56 | FORM 10-K

PART II — FINANCIAL STATEMENTS

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.

1 unchanged sentence

During fiscal 2024, adjusted capital expenditures were $282 million in aggregate, net of cash received related to landlord tenant allowances of $28 million.

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

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $4.8 million.

We anticipate our adjusted capital expenditures to be $275 million to $325 million in fiscal 2025, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.

11 unchanged sentences

Cash Flow Analysis

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

Cash flows from operating, investing, and financing activities were as follows:

(in thousands)

2 unchanged sentences

Net cash provided by (used in) financing activities

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

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

Cash and cash equivalents, restricted cash and restricted cash equivalents at end of period

PART II — FINANCIAL STATEMENTS

FORM 10-K | 57

Net Cash Provided by Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, impairments, stock-based compensation, loss on extinguishment of debt, cash paid attributable to accretion of debt discount upon settlement of debt (prior to the adoption of ASU 2020-06 in fiscal 2022) and the effect of changes in working capital and other 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 fiscal 2024, net cash provided by operating activities was $17 million and consisted of net income of $72 million and an increase in non-cash items of $359 million, partially offset by a change in working capital and other activities of $415 million.

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

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

The use of cash from working capital was primarily driven by an increase in merchandise inventory of $269 million, a decrease in operating lease liabilities of $90 million, an increase in landlord assets under construction, net of tenant allowances, of $52 million, a decrease in other current and non-current liabilities of $33 million, an increase in prepaid expense and other assets of $19 million and an increase in accounts receivable of $8.5 million.

These uses of cash from working capital were partially offset by an increase in accounts payable and accrued expenses of $47 million and an increase in deferred revenue and customer deposits of $9.4 million.

Net Cash Used in Investing Activities

2 unchanged sentences

For fiscal 2024, net cash used in investing activities was $240 million and was comprised of investments in retail stores, information technology and systems infrastructure of $231 million and additional contributions to our equity method investments of $9.6 million.

Net Cash Used in Financing Activities

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 fiscal 2023, net cash used in financing activities was $1,283 million, primarily due to the repurchase of 3,887,965 shares of our common stock for an aggregate repurchase amount of $1,249 million, payments on term loans of $25 million, net payments under finance lease agreements of $14 million and repayments of the 2023 Notes of $1.7 million and equipment notes of $1.2 million.

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

These cash outflows were partially offset by proceeds from option exercises of $12 million.

For fiscal 2024, net cash provided by financing activities was $131 million primarily due to net borrowings under the asset based credit facility of $200 million and proceeds from the exercise of stock options of $31 million.

These cash inflows were partially offset by the settlement of the 2024 Notes of $42 million, payments under term loans of $25 million and net payments under finance lease agreements of $21 million.

In addition, during the year ended February 1, 2025, we paid $12 million of excise taxes related to share repurchases made in fiscal 2023.

Non-Cash Transactions

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

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

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

Refer to Note 10— Leases .

Non-cash transactions consist of non-cash additions of property and equipment and landlord assets under construction, as well as excise tax from share repurchases, included in accounts payable and accrued expenses at period-end.

In addition, non-cash transactions consist of shares issued and received related to convertible senior note transactions, including in aggregate 39,121 and 1,931 shares of common stock issued in fiscal 2024 and fiscal 2023, respectively (refer to Note 11— Convertible Senior Notes in our consolidated financial statements).

Cash Requirements from Contractual Obligations

1 unchanged sentence

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

FORM 10-K | 57

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

1 unchanged sentence

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.

Convertible Senior Notes

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

The 2023 Notes matured in June 2023.

58 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Asset Based Credit Facility

2 unchanged sentences

Real Estate Loans

Refer to Note 7— Variable Interest Entities in our consolidated financial statements for further information on the real estate loans held as part of our joint ventures with a third-party development partner.

Share Repurchase Program and Share Retirement

Refer to Note 7— Variable Interest Entities in our consolidated financial statements for further information on our real estate loans.

Share Repurchase Program

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

2 unchanged sentences

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

Share Repurchase Program

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

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

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”).

Refer to Note 16— Share Repurchase and Share Retirements in our consolidated financial statements.

As of February 1, 2025, $201 million remains available for future share repurchases under the Share Repurchase Program.

Share Retirement

In fiscal 2023, we retired 3,887,965 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $10 million and $1,251 million from treasury stock to additional paid-in capital and retained earnings (accumulated deficit) , respectively, on the consolidated balance sheets and consolidated statements of stockholders’ equity (deficit) as of and for the year ended February 3, 2024.

Other Commitments

1 unchanged sentence

As of February 1, 2025, these merchandise inventory purchase commitments were $462 million.

58 | FORM 10-K

We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $4.0 million as of February 1, 2025 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.

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

Refer to Note 14— Income Taxes in our consolidated financial statements.

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 the consolidated financial statements.

Information on all of our significant accounting policies can be found in Note 3— Significant Accounting Policies in our audited consolidated financial statements.

Information on all of our significant accounting policies can be found in Note 3— Significant Accounting Policies in our consolidated financial statements.

Our senior leadership team evaluates the development and selection of our critical accounting policies and estimates and believes 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.

The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 59

Merchandise Inventories—Reserves

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

Lease Accounting

Impairment—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 generally 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.

Lease Accounting—Determination of the Classification of New Real Estate Lease Contracts

Reasonably Certain Lease Term

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At lease commencement, we evaluate whether we are reasonably certain to exercise available options based on consideration of a variety of economic factors and the circumstances related to the leased asset.

Factors considered include, but are not limited to, (i) the contractual terms compared to estimated market rates, (ii) the uniqueness or importance of the asset or its location, (iii) the potential costs of obtaining an alternative asset, (iv) the potential costs of relocating or ceasing use of the asset, including the consideration of leasehold improvements and other invested capital, and (v) any potential tax consequences.

Factors considered include, but are not limited to, (i) the contractual terms, including renewal periods compared to estimated market rates, (ii) the uniqueness or importance of the asset or its location, (iii) the potential costs of obtaining an alternative asset, (iv) the potential costs of relocating or ceasing use of the asset, including the consideration of leasehold improvements and other invested capital, and (v) any potential tax consequences.

The determination of the reasonably certain lease term affects the inclusion of rental payments utilized in the incremental borrowing rate calculations, the results of the lease classification test, and our consideration of certain assets held for sale or planned for sale-leaseback.

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Although the above factors are considered in our analysis, the assessment involves subjectivity considering our strategy, expected future events and market conditions.

While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination.

While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur that may require us to reassess this determination.

60 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Incremental Borrowing Rate

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

Stock-Based Compensation—Performance-Based Awards

For awards with performance-based criteria, compensation expense is recognized on an accelerated basis over the requisite service period.

The fair value of each performance-based option award granted is estimated on the date of grant using a Monte Carlo simulation option pricing model that requires the input of subjective assumptions regarding the future exercise behavior, expected volatility and a discount for illiquidity.

We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock and (iii) a discount for illiquidity estimated using the Finnerty method.

Variable Interest Entities

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

60 | FORM 10-K

Recently Issued Accounting Pronouncements

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 61

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

What changed 10-K

Item 7. Management’s Discussion and Analysis