What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-06-12 compared with 2024-12-12 · 185 added, 299 removed, 273 unchanged (64% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and the results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2023 Form 10-K.

The following discussion and analysis of our financial condition and the results of our operations should be read together with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2024 Form 10-K.

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

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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 2024 Form 10-K.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and nine months ended 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.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three months ended May 3, 2025, and a comparison to the three months ended May 4, 2024.

The discussion related to cash flows for the three months ended May 4, 2024, 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 May 4, 2024, filed with the Securities and Exchange Commission (“SEC”) on June 13, 2024.

MD&A is a supplement to the 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.

Our MD&A is organized as follows:

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Basis of Presentation and Results of Operations .

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

This section provides the 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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Critical Accounting Policies and Estimates .

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

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

FINANCIAL INFORMATION

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

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

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FINANCIAL INFORMATION

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

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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.

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 periods ended May 4, 2024 and August 3, 2024 and in our 2023 Form 10-K.

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 2024 Form 10-K, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 2024 Form 10-K.

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

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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.

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

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

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

FINANCIAL INFORMATION

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As of May 3, 2025, we operated the following number of locations:

North America

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Legacy Galleries

Outdoor Gallery

Modern Gallery

Baby & Child and TEEN Galleries

Total North America Galleries

Design Galleries

Total Galleries

Baby & Child and TEEN Gallery

Interior Design Office

Total RH retail locations—North America

Europe Design Galleries

Total RH retail locations

Waterworks Showrooms

FINANCIAL INFORMATION

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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.

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

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

Our expectation is that these factors 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.

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.

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Strategic Initiatives

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

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

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

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

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

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 ordinarily experience as new Design Galleries are introduced.

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.

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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:

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 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 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 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 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.

Beginning with the mailing of our RH Interiors Sourcebook in the fall of 2023 and with additional Sourcebook mailings throughout 2024 and the beginning of 2025, 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.

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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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

Brand Elevation .

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

Additionally, we create 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;

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

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

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.

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

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2024 THIRD QUARTER FORM 10-Q | 33

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

Basis of Presentation and Results of Operations

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

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

THREE MONTHS ENDED

NINE MONTHS ENDED

(dollars in thousands)

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Selling, general and administrative expenses

Income from operations

Operating income

Other expenses

Interest expense—net

Other expense—net

Other (income) expense—net

Total other expenses

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Income tax expense (benefit)

Income before equity method investments

Share of equity method investments loss—net

Loss before equity method investments

Share of equity method investments (income) loss—net

Net income (loss)

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Non-GAAP Financial Measures

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

To supplement the 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

Adjusted Operating Income .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Interest expense—net (1)

Other expense—net (1)

Other (income) expense—net (1)

Income tax expense (benefit) (1)

Share of equity method investments loss—net (2)

Share of equity method investments (income) loss—net (1)

Operating income

Asset impairments (3)

Non-cash compensation (2)

Legal settlements—net (3)

Reorganization related costs (6)

Recall accrual (7)

Adjusted operating income

(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 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.

(1) Refer to discussion “Three Months Ended May 3, 2025 Compared to Three Months Ended May 4, 2024” below for a discussion of our results of operations for the three months ended May 3, 2025 and May 4, 2024.

(2) 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.

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

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2025 FIRST QUARTER FORM 10-Q | 33

Adjusted Net Income (Loss) .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Adjustments pre-tax:

Asset impairments (1)

Non-cash compensation (1)

Legal settlements—net (1)

Reorganization related costs (1)

Recall accrual (1)

Subtotal adjusted items

Impact of income tax items (2)

Share of equity method investments loss—net (1)

Share of equity method investments (income) loss—net (1)

Adjusted net income (loss)

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

(2) We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income (loss), (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent, 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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The adjustments for the three months ended May 3, 2025 and May 4, 2024 are based on adjusted tax rates of 32.0% and 31.5%, respectively.

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EBITDA and Adjusted EBITDA .

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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Non-cash compensation (1)

Asset impairments (2)

Share of equity method investments loss—net (2)

Capitalized cloud computing amortization (2)

Other expense—net (2)

Share of equity method investments (income) loss—net (3)

Other (income) expense—net (3)

Legal settlements—net (3)

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 (Loss) to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.

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

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

Adjusted Capital Expenditures.

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Reconciliation of Adjusted Capital Expenditures

NINE MONTHS ENDED

THREE 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 $1.4 million in the three months ended May 3, 2025, which are reflected as a reduction to principal payments under finance leases—net of tenant allowances within financing activities on the condensed consolidated statements of cash flows.

No such payments were received in the three months ended May 4, 2024.

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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:

NINE MONTHS ENDED

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Our retail location square footage metrics and activity were as follows:

THREE MONTHS ENDED

SELLING SQUARE

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RH Design Galleries

Raleigh Design Galley

Cleveland Design Gallery

Palo Alto Design Gallery

Brussels Design Gallery

Madrid Design Gallery

England Design Gallery

Indianapolis Design Gallery

RH Legacy Galleries:

Plano Legacy Gallery

Cleveland Legacy Gallery

Palo Alto Legacy Gallery

Raleigh Legacy Gallery

Indianapolis temporary Gallery

Detroit Legacy Gallery (relocation)

RH Legacy Gallery

RH Outdoor Gallery

RH Baby & Child and TEEN Gallery

Waterworks Showroom

Dallas (remodel)

End of period

Total leased square footage at end of period (2)

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

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

Leased selling square footage includes approximately 89,000 square feet as of 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:

Total square footage at end of period (2)

(1) Represents retail space at our retail locations used to sell our products, as well as space for our restaurants and wine bars.

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.

Includes approximately 89,000 square feet related to three owned retail locations as of both May 3, 2025 and May 4, 2024.

(2) Includes approximately 142,000 square feet related to three owned retail locations as of both May 3, 2025 and May 4, 2024.

Weighted-average square footage and 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

NINE MONTHS ENDED

(in thousands)

Weighted-average leased square footage

Weighted-average leased selling square footage

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

Weighted-average square footage

Weighted-average selling square footage

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Three Months Ended May 3, 2025 Compared to Three Months Ended May 4, 2024

THREE MONTHS ENDED

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Selling, general and administrative expenses

Income from operations

(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 $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.

Operating income

(1) The results for the Real Estate segment were immaterial in the three months ended May 3, 2025 and May 4, 2024, thus, such results are presented within the RH Segment each period.

Refer to Note 14— Segment Reporting in the condensed consolidated financial statements.

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

(2) RH Segment net revenues include outlet revenues of $67 million and $62 million for the three months ended May 3, 2025 and May 4, 2024, respectively.

Consolidated net revenues increased $87 million, or 12.0%, to $814 million in the three months ended May 3, 2025 compared to $727 million in the three months ended May 4, 2024.

RH Segment net revenues

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 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.

RH Segment net revenues increased $88 million, or 13.0%, to $765 million in the three months ended May 3, 2025 compared to $677 million in the three months ended May 4, 2024.

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

RH Segment net revenues for the three months ended May 3, 2025 increased primarily due to higher revenue in our core business driven by our continued product transformation and platform expansion.

In addition, hospitality revenue increased as a result of new Gallery openings and we had higher outlet revenue.

Waterworks net revenues

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.

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Waterworks net revenues decreased $0.9 million, or 1.9%, to $49 million in the three months ended May 3, 2025 compared to $50 million in the three months ended May 4, 2024.

Consolidated gross profit increased $39 million, or 12.4%, to $355 million in the three months ended May 3, 2025 compared to $316 million in the three months ended May 4, 2024.

As a percentage of net revenues, consolidated gross margin increased 20 basis points to 43.7% of net revenues in the three months ended May 3, 2025 from 43.5% of net revenues in the three months ended May 4, 2024.

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.

RH Segment gross profit increased $40 million, or 13.8%, to $330 million in the three months ended May 3, 2025 from $290 million in the three months ended May 4, 2024.

As a percentage of net revenues, RH Segment gross margin increased 30 basis points to 43.1% of net revenues in the three months ended May 3, 2025 from 42.8% of net revenues in the three months ended May 4, 2024.

The increase in RH Segment gross margin was primarily attributable to leverage in occupancy costs and shipping costs as well as increased margins in the RH core business year over year.

This increase in gross margin was partially offset by an increase in other product costs.

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Waterworks gross profit

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.

Waterworks gross profit was $26 million in both the three months ended May 3, 2025 and May 4, 2024.

As a percentage of net revenues, Waterworks gross margin decreased 40 basis points to 52.2% of net revenues in the three months ended May 3, 2025 from 52.6% of net revenues in the three months ended May 4, 2024.

Selling, general and administrative expenses

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.

Consolidated selling, general and administrative expenses increased $38 million, or 14.6%, to $299 million in the three months ended May 3, 2025 from $261 million in the three months ended May 4, 2024.

RH Segment selling, general and administrative expenses

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.

RH Segment selling, general and administrative expenses increased $35 million, or 14.4%, to $279 million in the three months ended May 3, 2025 compared to $244 million in the three months ended May 4, 2024.

RH Segment selling, general and administrative expenses for the three months ended May 3, 2025 and May 4, 2024 included non-cash compensation of $0.9 million and $1.9 million, respectively, related to an option grant made to Mr.

Friedman in October 2020.

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.

In addition, RH Segment selling, general and administrative expenses for the three months ended May 4, 2024 included favorable net legal settlements of $6.2 million.

RH Segment selling, general and administrative expenses were 36.4% and 36.7% of net revenues for the three months ended May 3, 2025 and May 4, 2024, respectively, excluding the adjustments mentioned above.

The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in pre-opening and travel, occupancy and compensation costs year over year.

We also recognized an increase in advertising costs primarily due to the circulation of the Spring 2025 RH Interiors Sourcebook with no comparable mailing in the prior year, which was partially offset by a decrease in costs for the RH Outdoor Sourcebook in 2025 as compared to 2024.

Waterworks selling, general and administrative expenses

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

Waterworks selling, general and administrative expenses increased $3.0 million, or 17.5%, to $20 million in the three months ended May 3, 2025 compared to $17 million in the three months ended May 4, 2024.

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

Excluding the adjustment for the legal settlement, Waterworks selling, general and administrative expenses would have increased 40 basis points to 41.4% of net revenues in the three months ended May 3, 2025, compared to 41.0% of net revenues for the three months ended May 4, 2024.

Interest expense—net

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:

Interest expense—net consisted of the following:

THREE MONTHS ENDED

4 unchanged sentences

Other interest expense

Capitalized interest for capital projects

Interest income

Total interest expense—net

Other expense—net

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

Capitalized interest for capital projects

Interest expense—net

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Other (income) expense—net

Other (inome) expense—net consisted of the following:

THREE MONTHS ENDED

2 unchanged sentences

Foreign exchange from remeasurement of intercompany loans (2)

Other expense—net

Other (income) expense—net

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

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Effective tax rate

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.

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

NINE MONTHS ENDED

(in thousands)

Net revenues (2)

Cost of goods sold

Selling, general and administrative expenses

Income from operations

(1) The results for the Real Estate segment were immaterial in both the 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 $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 $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 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 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 $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 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 $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 $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.

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 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.

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Interest expense—net

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)

Term loan interest expense

Finance lease interest expense

Asset based credit facility

Other interest expense

Capitalized interest for capital projects

Interest income

Total interest expense—net

Other expense—net

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

NINE MONTHS ENDED

(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

NINE MONTHS ENDED

(dollars in thousands)

Income tax expense

Effective tax rate

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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The decrease in our effective tax rate for the three months ended May 3, 2025 compared to the three months ended May 4, 2024 is primarily attributable to pre-tax net income in the current fiscal period compared to pre-tax net loss in the prior fiscal period.

The three months ended May 3, 2025 was also impacted by a net tax shortfall from stock-based compensation as compared to a net tax benefit in the three months ended May 4, 2024.

Share of equity method investments (income) loss—net

Our share of equity method investments income of $8.2 million in the three months ended May 3, 2025 was primarily attributable to an Aspen LLC distribution of $7.9 million (refer to Note 5— Variable Interest Entities in the condensed consolidated financial statements).

Our share of equity method investments loss in the three months ended May 4, 2024 was $2.4 million.

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2025 FIRST QUARTER FORM 10-Q | 39

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.

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)

2 unchanged sentences

Term loan B-2 (1)

Convertible senior notes due 2024 (1)

Notes payable for share repurchases

2 unchanged sentences

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

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

(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 $46 million and $45 million in outstanding letters of credit as of November 2, 2024 and February 3, 2024, respectively.

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

(2) Net debt as of May 3, 2025 and February 1, 2025 excludes non-recourse real estate loans of $18 million as of both periods.

These loans 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 $47 million and $45 million in outstanding letters of credit as of May 3, 2025 and February 1, 2025, respectively.

As a result of the FCCR Covenant that limits the last 10% of borrowing availability, actual incremental borrowing available under the revolving line of credit would be $308 million as of May 3, 2025.

Refer to Note 8— Credit Facilities in the condensed consolidated financial statements for further information on our ABL Credit Agreement.

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.

During fiscal 2022 and fiscal 2023, we invested $2,265 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program.

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

6 unchanged sentences

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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.

13 unchanged sentences

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

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 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 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.

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FINANCIAL INFORMATION

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

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

During the nine months ended 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.

During the three months ended May 3, 2025, adjusted capital expenditures were $70 million in aggregate, net of cash received related to landlord tenant allowances of $4.1 million.

In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $1.4 million during the three months ended May 3, 2025.

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.

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.

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Cash Flow Analysis

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

NINE MONTHS ENDED

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

THREE MONTHS ENDED

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net decrease in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at end of period

FINANCIAL INFORMATION

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Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at end of period

Net Cash Provided by Operating Activities

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

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 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.

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

FINANCIAL INFORMATION

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For the three months ended May 3, 2025, net cash provided by operating activities was $87 million and consisted of net income of $8.0 million and an increase in non-cash items of $81 million, partially offset by a change in working capital and other activities of $2.0 million.

The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $35 million, an increase in landlord assets under construction, net of tenant allowances, of $18 million, a decrease in other current and non-current liabilities of $12 million and a decrease in accounts payable and accrued expenses of $10 million.

These uses of cash from working capital were partially offset by an increase in deferred revenue and customer deposits of $54 million and a decrease in merchandise inventory of $18 million.

Net Cash Used in Investing Activities

1 unchanged sentence

Investing activities also include our strategic investments.

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 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.

For the three months ended May 3, 2025, net cash used in investing activities was $45 million and was comprised of investments in retail stores, information technology and systems infrastructure of $53 million and an acquisition of an intangible asset of $2.8 million.

These cash outflows were partially offset by cash received from a distribution of return of equity method investments of $7.9 million and receipt of a promissory note repaid by our equity method investee of $1.8 million.

Net Cash Used in Financing Activities

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

For the three months ended May 3, 2025, net cash used in financing activities was $27 million primarily due to net repayments under the asset based credit facility of $15 million, net payments under finance lease agreements of $6.5 million and payments under term loans of $6.3 million.

Non-Cash Transactions

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

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

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.

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.

Cash Requirements from Contractual Obligations

We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.

Refer to Note 8— Leases in our condensed consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.

Refer to Note 7— Leases in the condensed consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities.

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

The table presenting the maturities of our lease liabilities included in Note 8— Leases in our condensed consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

The table presenting the maturities of our lease liabilities included in Note 7— Leases in the condensed consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

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, which matured in September 2024.

Asset Based Credit Facility

Refer to Note 10— Credit Facilities in our condensed consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

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

Refer to Note 8— Credit Facilities in the condensed consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit.

Refer to Note 8— Credit Facilities in the condensed consolidated financial statements for further information on our Term Loan.

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Real Estate Loans

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

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

Share Repurchase Program

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

We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our stockholders.

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

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

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 nine months ended November 2, 2024.

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

We did not repurchase any shares of our common stock under the Share Repurchase Program during the three months ended May 3, 2025.

As of May 3, 2025, $201 million remains available for future share repurchases under the Share Repurchase Program.

We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our shareholders.

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

Since January 1, 2023, share repurchases under our Share Repurchase Program are subject to a 1% excise tax imposed under the Inflation Reduction Act.

Critical Accounting Policies and Estimates

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

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

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

We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances.

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

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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:

Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the condensed 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:

Merchandise Inventories—Reserves

Lease Accounting

Impairment—Long-Lived Assets

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

Reasonably Certain Lease Term

Incremental Borrowing Rate

Stock-Based Compensation—Performance-Based Awards

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 other than the long-lived assets policy discussed below.

There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in the 2024 Form 10-K.

For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the 2024 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

Refer to Note 2— Recently Issued Accounting Standards in our condensed consolidated financial statements for a description of recently issued accounting standards that may impact our results in future reporting periods.

FINANCIAL INFORMATION

2025 FIRST QUARTER FORM 10-Q | 44

Recently Issued Accounting Pronouncements

Refer to Note 2— Recently Issued Accounting Standards in the condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis