UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October 28, 2017~~July 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-35720

(Exact name of registrant as specified in its charter)


Delaware		45-3052669
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

15 Koch Road ~~Suite K~~ Corte Madera, CA		94925
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: ~~(415)~~ (415) 924-1005

Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $0.0001 par value		RH	New York Stock Exchange, Inc.
(Title of each class)		(Trading symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~December 1, 2017, 21,309,941~~September 3, 2021, 21,413,557 shares of the registrant’s common stock were outstanding.

Table of Contents

INDEX TO FORM 10-Q

July 31, 2021
		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~October 28, 2017,~~July 31, 2021 and January ~~28, 2017~~30, 2021	3
	Condensed Consolidated Statements of ~~Operations~~Income (Unaudited) for the three and ~~nine~~six months ended ~~October 28, 2017,~~July 31, 2021 and ~~October 29, 2016~~August 1, 2020	4
	Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited) for the three and ~~nine~~six months ended ~~October 28, 2017,~~July 31, 2021 and ~~October 29, 2016~~August 1, 2020	5
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended July 31, 2021 and August 1, 2020	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016~~August 1, 2020	68
	Notes to Condensed Consolidated Financial Statements (Unaudited)	710
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2734
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49
~~Item 4.~~	~~Controls and Procedures~~	50
		55
Item 4.	Controls and Procedures	57

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5158
Item 1A.	Risk Factors	5158
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5159
Item 3.	Defaults Upon Senior Securities	51
~~Item 4.~~	~~Mine Safety Disclosures~~	52
~~Item 5.~~	~~Other Information~~	52
~~Item 6.~~	~~Exhibits~~	5359
~~Signatures~~Item 4.	54Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61


2 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

PART I

~~PART~~ I

~~Item~~ITEM 1. ~~Financial Statements~~FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts) (Unaudited)


	JULY 31,		JANUARY 30,
	2021		2021
ASSETS
Current assets:
Cash and cash equivalents	$	291,461	$	100,446
Accounts receivable—net		59,798		59,474
Merchandise inventories		645,987		544,227
Prepaid expense and other current assets		140,570		97,337
Total current assets		1,137,816		801,484
Property and equipment—net		1,131,501		1,077,198
Operating lease right-of-use assets		553,834		456,164
Goodwill		141,132		141,100
Tradenames, trademarks and other intangible assets		72,584		71,663
Deferred tax assets		50,047		49,924
Equity method investments		97,412		100,603
Other non-current assets		282,826		200,177
Total assets	$	3,467,152	$	2,898,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	426,785	$	424,422
Deferred revenue and customer deposits		397,161		280,641
Convertible senior notes due 2023—net		172,141		2,354
Convertible senior notes due 2024—net		66,503		—
Operating lease liabilities		74,074		71,524
Other current liabilities		92,336		142,691
Total current liabilities		1,229,000		921,632
Asset based credit facility		—		—
Equipment promissory notes—net		2,115		14,614
Convertible senior notes due 2023—net		93,867		282,956
Convertible senior notes due 2024—net		223,547		281,454
Non-current operating lease liabilities		542,510		448,169
Non-current finance lease liabilities		523,797		485,481
Other non-current obligations		15,458		16,981
Total liabilities		2,630,294		2,451,287
Commitments and contingencies (Note 16)
Mezzanine equity—convertible senior notes (Note 9)		30,515		—
Stockholders’ equity:
Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, 0 shares issued or outstanding as of July 31, 2021 and January 30, 2021		—		—
Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 21,407,717 shares issued and outstanding as of July 31, 2021; 20,995,387 shares issued and outstanding as of January 30, 2021		2		2
Additional paid-in capital		583,112		581,897
Accumulated other comprehensive income		3,265		2,565
Retained earnings (accumulated deficit)		219,964		(137,438)
Total stockholders’ equity		806,343		447,026
Total liabilities, mezzanine equity and stockholders’ equity	$	3,467,152	$	2,898,313

~~(Unaudited)~~

October 28,

January 28,

2017

2017

ASSETS

Current assets:

Cash and cash equivalents

$
22,162

$
87,023

Short-term investments

—

142,677

Accounts receivable—net

34,447

34,191

Merchandise inventories

557,345

752,304

Asset held for sale

—

4,900

Prepaid expense and other current assets

75,041

117,162

Total current assets

688,995

1,138,257

Long-term investments

—

33,212

Property and equipment—net

778,320

682,056

Goodwill

175,553

173,603

Trademarks and other intangible assets

100,726

100,757

Deferred tax assets

29,214

28,466

Other non-current assets

28,758

36,169

Total assets

$
1,801,566

$
2,192,520

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:

Accounts payable and accrued expenses

$
252,569

$
226,980

Deferred revenue and customer deposits

166,579

145,918

Other current liabilities

50,609

43,271

Total current liabilities

469,757

416,169

Asset based credit facility

341,000

—

Term loan—net

79,471

—

Convertible senior notes due 2019—net

323,828

312,379

Convertible senior notes due 2020—net

248,633

235,965

Financing obligations under build-to-suit lease transactions

230,259

203,015

Deferred rent and lease incentives

63,499

60,439

Other non-current obligations

70,395

44,684

Total liabilities

1,826,842

1,272,651

Commitments and contingencies (Note 17)

—

—

Stockholders’ equity (deficit):

Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares
   issued or outstanding as of October 28, 2017 and January 28, 2017

—

—

Common stock, $0.0001 par value per share, 180,000,000 shares authorized,
   41,525,393 shares issued and 21,305,261 shares outstanding as of October 28, 2017;
   41,123,521 shares issued and 40,828,633 shares outstanding as of January 28, 2017

2

4

Additional paid-in capital

843,965

790,866

Accumulated other comprehensive loss

(1,527
)

(1,692
)
Retained earnings

152,133

150,214

Treasury stock—at cost, 20,220,132 shares as of October 28, 2017 and 294,888 shares
   as of January 28, 2017

(1,019,849
)

(19,523
)
Total stockholders’ equity (deficit)

(25,276
)

919,869

Total liabilities and stockholders’ equity (deficit)

$
1,801,566

$
2,192,520

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 3

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except share and per share amounts) (Unaudited)


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Net revenues	$	988,859	$	709,282	$	1,849,651	$	1,192,177
Cost of goods sold		501,183		376,863		954,998		660,104
Gross profit		487,676		332,419		894,653		532,073
Selling, general and administrative expenses		238,688		195,851		457,777		360,052
Income from operations		248,988		136,568		436,876		172,021
Other expenses
Interest expense—net		13,581		19,418		26,889		39,047
Tradename impairment		—		—		—		20,459
(Gain) loss on extinguishment of debt		3,166		(152)		3,271		(152)
Total other expenses		16,747		19,266		30,160		59,354
Income before income taxes		232,241		117,302		406,716		112,667
Income tax expense		3,009		18,879		44,733		17,456
Income before equity method investments		229,232		98,423		361,983		95,211
Share of equity method investments losses		(2,486)		—		(4,581)		—
Net income	$	226,746	$	98,423	$	357,402	$	95,211
Weighted-average shares used in computing basic net income per share		21,166,638		19,386,115		21,084,941		19,314,479
Basic net income per share	$	10.71	$	5.08	$	16.95	$	4.93
Weighted-average shares used in computing diluted net income per share		31,979,098		26,564,705		31,594,555		25,383,730
Diluted net income per share	$	7.09	$	3.71	$	11.31	$	3.75

~~(Unaudited)~~

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Net revenues

$
592,473

$
549,328

$
1,769,879

$
1,548,165

Cost of goods sold

378,148

373,509

1,179,485

1,065,032

Gross profit

214,325

175,819

590,394

483,133

Selling, general and administrative expenses

171,163

160,433

528,213

457,207

Income from operations

43,162

15,386

62,181

25,926

Other expenses

Interest expense—net

18,915

11,091

45,496

32,528

Loss on extinguishment of debt

4,880

—

4,880

—

Total other expenses

23,795

11,091

50,376

32,528

Income (loss) before income taxes

19,367

4,295

11,805

(6,602
)
Income tax expense (benefit)

6,216

1,778

9,886

(2,567
)
Net income (loss)

$
13,151

$
2,517

$
1,919

$
(4,035
)
Weighted-average shares used in computing
basic net income (loss) per share

21,221,848

40,730,059

29,076,556

40,653,091

Basic net income (loss) per share

$
0.62

$
0.06

$
0.07

$
(0.10
)
Weighted-average shares used in computing
diluted net income (loss) per share

23,535,617

40,926,450

30,593,382

40,653,091

Diluted net income (loss) per share

$
0.56

$
0.06

$
0.06

$
(0.10
)

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.


4 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of ContentsRH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(In thousands) (Unaudited)


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Net income	$	226,746	$	98,423	$	357,402	$	95,211
Net gains (losses) from foreign currency translation		(648)		3,290		700		918
Total comprehensive income	$	226,098	$	101,713	$	358,102	$	96,129

~~(Unaudited)~~

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Net income (loss)

$
13,151

$
2,517

$
1,919

$
(4,035
)
Net gains (losses) from foreign currency translation

(723
)

(915
)

154

485

Net unrealized holding gains (losses) on available-for-sale
investments

—

(59
)

11

84

Total comprehensive income (loss)

$
12,428

$
1,543

$
2,084

$
(3,466
)

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 5

Table of ContentsRH

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

(In thousands, except share amounts) (Unaudited)


	THREE MONTHS ENDED
			COMMON STOCK									TREASURY STOCK
								ACCUMULATED		RETAINED
						ADDITIONAL		OTHER		EARNINGS					TOTAL
	MEZZANINE					PAID-IN		COMPREHENSIVE		(ACCUMULATED					STOCKHOLDERS'
	EQUITY		SHARES	AMOUNT		CAPITAL		INCOME (LOSS)		DEFICIT)		SHARES	AMOUNT		EQUITY
Balances—May 1, 2021	$	—	21,020,538	$	2	$	597,329	$	3,913	$	(6,782)	—	$	—	$	594,462
Stock-based compensation		—	—		—		10,089		—		—	—		—		10,089
Issuance of restricted stock		—	1,260		—		—		—		—	—		—		—
Vested and delivered restricted stock units		—	34,891		—		(17,721)		—		—	—		—		(17,721)
Exercise of stock options		—	351,027		—		24,586		—		—	—		—		24,586
Settlement of convertible senior notes		—	112,297		—		(78,621)		—		—	(112,296)		77,965		(656)
Exercise of call option under bond hedge upon settlement of convertible senior notes		—	(112,296)		—		77,965		—		—	112,296		(77,965)		—
Reclassification of equity component related to early converted senior notes outstanding		30,515	—		—		(30,515)		—		—	—		—		(30,515)
Net income		—	—		—		—		—		226,746	—		—		226,746
Net losses from foreign currency translation		—	—		—		—		(648)		—	—		—		(648)
Balances—July 31, 2021	$	30,515	21,407,717	$	2	$	583,112	$	3,265	$	219,964	—	$	—	$	806,343

Balances—May 2, 2020	$	—	19,264,127	$	2	$	436,799	$	(5,132)	$	(412,465)	600	$	(72)	$	19,132
Stock-based compensation		—	—		—		6,755		—		—	—		—		6,755
Issuance of restricted stock		—	3,192		—		—		—		—	—		—		—
Vested and delivered restricted stock units		—	60,006		—		(6,437)		—		—	—		—		(6,437)
Exercise of stock options		—	158,518		—		7,328		—		—	—		—		7,328
Retirement of treasury stock		—	—		—		(72)		—		—	(600)		72		—
Settlement of convertible senior notes		—	1,131,645		—		(315,708)		—		—	(1,131,645)		315,708		—
Exercise of call option under bond hedge upon settlement of convertible senior notes		—	(1,131,662)		—		315,713		—		—	1,131,662		(315,713)		—
Net income		—	—		—		—		—		98,423	—		—		98,423
Net gains from foreign currency translation		—	—		—		—		3,290		—	—		—		3,290
Balances—August 1, 2020	$	—	19,485,826	$	2	$	444,378	$	(1,842)	$	(314,042)	17	$	(5)	$	128,491


6 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands)

(Unaudited)

Nine Months Ended

October 28,

October 29,

2017

2016

As Revised

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$
1,919

$
(4,035
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

51,092

41,248

Non-cash charges resulting from inventory step-up

2,108

5,187

Amortization of debt discount

22,685

21,467

Excess tax shortfall from exercise of stock options

—

2,275

Stock-based compensation expense

42,929

21,711

Non-cash loss on extinguishment of debt

1,880

—

Other non-cash interest expense

4,914

2,971

Change in assets and liabilities—net of acquisition:

Accounts receivable

(319
)

(1,445
)
Merchandise inventories

190,620

(23,261
)
Prepaid expense and other assets

38,419

(30,378
)
Accounts payable and accrued expenses

10,491

(63,435
)
Deferred revenue and customer deposits

20,617

22,652

Other current liabilities

448

(25,372
)
Deferred rent and lease incentives

846

2,953

Other non-current obligations

(1,887
)

8,477

Net cash provided by (used in) operating activities

386,762

(18,985
)
CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures

(76,789
)

(104,152
)
Construction related deposits

(12,772
)

(3,829
)
Purchase of trademarks and domain names

(39
)

(164
)
Proceeds from sale of assets held for sale—net

15,123

—

Purchase of investments

(16,109
)

(186,967
)
Maturities of investments

46,890

115,938

Sales of investments

145,020

31,896

Acquisition of business—net of cash acquired

—

(116,100
)
Net cash provided by (used in) investing activities

101,324

(263,378
)
CASH FLOWS FROM FINANCING ACTIVITIES

Borrowing under asset based credit facility

446,000

—

Repayments under asset based credit facility

(105,000
)

—

Borrowings under term loans

180,000

—

Repayments under term loans

(100,000
)

—

Borrowing under promissory and equipment security notes

34,000

—

Repayments under promissory and equipment security notes

(841
)

—

Debt issuance costs

(8,298
)

—

Repurchases of common stock—including commissions

(1,000,326
)

—

Payments on build-to-suit lease transactions

(8,734
)

—

Proceeds from exercise of stock options

15,369

1,591

Excess tax shortfall from exercise of stock options

—

(2,275
)
Tax withholdings related to issuance of stock-based awards

(4,881
)

(1,365
)
Payments on capital leases

(258
)

(262
)
Net cash used in financing activities

(552,969
)

(2,311
)
Effects of foreign currency exchange rate translation

22

342

Net decrease in cash and cash equivalents

(64,861
)

(284,332
)
Cash and cash equivalents

Beginning of period

87,023

331,467

End of period

$
22,162

$
47,135

Non-cash transactions:

Property and equipment additions due to build-to-suit lease transactions

$
35,463

$
46,193

Property and equipment additions from use of construction related deposits

$
27,077

$
3,965

Property and equipment additions in accounts payable and accrued expenses at period-end

$
24,081

$
23,440

Property and equipment acquired under capital lease

$
753

$
—


	SIX MONTHS ENDED
			COMMON STOCK									TREASURY STOCK
								ACCUMULATED		RETAINED
						ADDITIONAL		OTHER		EARNINGS					TOTAL
	MEZZANINE					PAID-IN		COMPREHENSIVE		(ACCUMULATED					STOCKHOLDERS'
	EQUITY		SHARES	AMOUNT		CAPITAL		INCOME (LOSS)		DEFICIT)		SHARES	AMOUNT		EQUITY
Balances—January 30, 2021	$	—	20,995,387	$	2		581,897	$	2,565	$	(137,438)	—	$	—	$	447,026
Stock-based compensation		—	—		—		25,289		—		—	—		—		25,289
Issuance of restricted stock		—	1,260		—		—		—		—	—		—		—
Vested and delivered restricted stock units		—	37,698		—		(18,648)		—		—	—		—		(18,648)
Exercise of stock options		—	373,369		—		25,979		—		—	—		—		25,979
Settlement of convertible senior notes		—	119,604		—		(82,135)		—		—	(119,601)		81,245		(890)
Exercise of call option under bond hedge upon settlement of convertible senior notes		—	(119,601)		—		81,245		—		—	119,601		(81,245)		—
Reclassification of equity component related to early converted senior notes outstanding		30,515	—		—		(30,515)		—		—	—		—		(30,515)
Net income		—	—		—		—		—		357,402	—		—		357,402
Net gains from foreign currency translation		—	—		—		—		700		—	—		—		700
Balances—July 31, 2021	$	30,515	21,407,717	$	2	$	583,112	$	3,265	$	219,964	—	$	—	$	806,343

Balances—February 1, 2020	$	—	19,236,681	$	2	$	430,662	$	(2,760)	$	(409,253)	—	$	—		18,651
Stock-based compensation		—	—		—		12,476		—		—	—		—		12,476
Issuance of restricted stock		—	3,192		—		—		—		—	—		—		—
Vested and delivered restricted stock units		—	70,292		—		(6,818)		—		—	—		—		(6,818)
Exercise of stock options		—	176,278		—		8,125		—		—	—		—		8,125
Repurchases of common stock		—	(600)		—		—		—		—	600		(72)		(72)
Retirement of treasury stock		—	—		—		(72)		—		—	(600)		72		—
Settlement of convertible senior notes		—	1,131,645		—		(315,708)		—		—	(1,131,645)		315,708		—
Exercise of call option under bond hedge upon settlement of convertible senior notes		—	(1,131,662)		—		315,713		—		—	1,131,662		(315,713)		—
Net income		—	—		—		—		—		95,211	—		—		95,211
Net gains from foreign currency translation		—	—		—		—		918		—	—		—		918
Balances—August 1, 2020	$	—	19,485,826	$	2	$	444,378	$	(1,842)	$	(314,042)	17	$	(5)	$	128,491

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 7

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	357,402	$	95,211
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		46,556		50,212
Non-cash operating lease cost		35,541		31,355
Tradename impairment		—		20,459
Asset impairments		7,354		4,783
Loss on sale leaseback transaction		—		9,352
Amortization of debt discount		17,461		25,378
Accretion of debt discount upon settlement of debt		(5,070)		(84,003)
Stock-based compensation expense		25,431		12,689
Non-cash finance lease interest expense		12,757		11,729
Product recalls		500		4,780
Deferred income taxes		(239)		—
Loss on extinguishment of debt		3,271		—
Share of equity method investments losses		4,581		—
Other non-cash items		(4,069)		2,404
Change in assets and liabilities:
Accounts receivable		(306)		(6,431)
Merchandise inventories		(101,641)		(48,984)
Prepaid expense and other assets		(57,919)		(10,307)
Landlord assets under construction—net of tenant allowances		(43,352)		(22,934)
Accounts payable and accrued expenses		6,930		(13,127)
Deferred revenue and customer deposits		116,492		67,647
Other current liabilities		(51,661)		8,777
Current and non-current operating lease liabilities		(38,933)		(18,388)
Other non-current obligations		(14,368)		(12,327)
Net cash provided by operating activities		316,718		128,275


8 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands) (Unaudited)


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(82,138)		(47,531)
Equity method investments		(1,939)		(3,050)
Proceeds from sale of assets		—		25,006
Net cash used in investing activities		(84,077)		(25,575)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under asset based credit facility		—		283,200
Repayments under asset based credit facility		—		(191,600)
Repayments under promissory and equipment security notes		(11,446)		(5,408)
Debt issuance costs		(3,634)		—
Repayments of convertible senior notes		(28,111)		(215,846)
Principal payments under finance leases		(7,108)		(4,641)
Proceeds from exercise of stock options		25,979		8,125
Tax withholdings related to issuance of stock-based awards		(18,648)		(6,818)
Net cash used in financing activities		(42,968)		(132,988)
Effects of foreign currency exchange rate translation		92		17
Net increase (decrease) in cash and cash equivalents and restricted cash equivalents		189,765		(30,271)
Cash and cash equivalents and restricted cash equivalents
Beginning of period—cash and cash equivalents		100,446		47,658
Beginning of period—restricted cash equivalents (acquisition related escrow deposits)		6,625		—
Beginning of period—cash and cash equivalents	$	107,071	$	47,658
End of period—cash and cash equivalents		291,461		17,387
End of period—restricted cash equivalents (acquisition related escrow deposits)		5,375		—
End of period—cash and cash equivalents and restricted cash equivalents	$	296,836	$	17,387
Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end	$	14,696	$	19,978
Landlord asset additions in accounts payable and accrued expenses at period-end		32,290		17,515
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets		—		68,441
Shares issued on settlement of convertible senior notes		(82,135)		(315,708)
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes		81,245		315,713

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.


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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or the “Company”), is a leading luxury retailer in the home furnishings ~~retailer~~market that offers merchandise assortments across a ~~growing~~ number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, ~~tableware,~~ and child and teen furnishings. These products are sold through ~~the Company’s stores, catalogs~~our retail locations, websites and ~~websites.~~

~~On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. Refer to Note 3—Business Combination~~.Source Books.

As of ~~October 28, 2017, the Company~~July 31, 2021, we operated a total of ~~84 retail~~66 RH Galleries and 3138 RH outlet stores in 3230 states, the District of Columbia and Canada, ~~and includes 15~~as well as 14 Waterworks ~~showrooms in~~Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from ~~the Company’s~~our records and, in ~~management’s~~our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state ~~the Company’s~~our financial position as of ~~October 28, 2017,~~July 31, 2021, and the results of operations for the three and ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016. The Company’s~~August 1, 2020. Our current fiscal year, which consists of 5352 weeks, ends on ~~February 3, 2018~~January 29, 2022 (“fiscal ~~2017”~~2021”).

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires our senior leadership team to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19” or “the pandemic”) using information that is reasonably available to us at this time. The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets. Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and six months ended July 31, 2021. As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended January ~~28, 2017~~30, 2021 (the ~~“2016~~“2020 Form 10-K”). ~~Certain prior year amounts have been reclassified for consistency with the current period presentation. Refer to “Revision” below.~~

The results of operations for the three and ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 presented herein are not necessarily indicative of the results to be expected for the full fiscal year. Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the pandemic as discussed in Recent Developments—COVID-19 below.


10 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

Recent Developments—COVID-19

~~Revision~~

~~During~~The COVID-19 outbreak in the ~~fourth~~first quarter of fiscal ~~2016, management determined~~2020 caused disruption to our business operations beginning in the first quarter of fiscal 2020. The pandemic has continued since the initial outbreak and has included spikes and outbreaks in various locations around the world including as a result of new strains of the COVID virus such as the “Delta” variant. In our initial response to the health crisis, we undertook immediate adjustments to our business operations including temporarily closing all of our retail locations and Restaurants, curtailing expenses, and delaying investments including scaling back some inventory orders while we assessed the status of our business. Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth fiscal quarters of fiscal 2020 as a result of both the reopening of most of our retail locations and also strong consumer demand for our products. Operational restrictions related to the pandemic affecting our Galleries and hospitality locations continued to fluctuate through the second quarter of 2021 based upon changes in local conditions and regulations. As of September 3, 2021, all of our Galleries, Outlets and Restaurants were open.

Our overall customer demand in specific markets has generally correlated favorably with our customers’ ability to experience our Galleries and Outlets. Although our business has strengthened during the period from the second quarter of fiscal 2020 and continuing into fiscal 2021, consumer spending patterns may shift away from spending on the home and home-related categories, such as home furnishings, as pandemic restrictions are lifted and consumers return to pre-COVID consumption trends, such as spending on travel and leisure and other activities. In addition, various constraints in our merchandise supply chain have resulted in some delays in our ability to convert business demand into revenues at normal historical rates. We anticipate that the ~~Company had incorrectly reported negative cash balances~~backlog of orders for merchandise from our vendors, coupled with business conditions related to the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during fiscal 2021. It may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand and as a result the exact timing cannot be accurately predicted due to outstanding checks in the accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC ~~210~~—~~Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement~~ongoing uncertainty of the ~~cash provided by operating activities~~continuing impact of the pandemic on our global supply chain. In particular, business circumstances and operational conditions in numerous international locations where our vendors operate are subject to ongoing risks, and regions in which our vendors have production facilities, most notably Vietnam, have experienced various surges in outbreaks and, in some cases, facility closures related to the ~~condensed consolidated statements~~pandemic. As a result, the ongoing nature of ~~cash flows. There was no~~the pandemic may continue to adversely affect our business operations in various jurisdictions, which could, in turn, have a negative impact on our vendors and supply chain, and therefore, our business.

Our decisions regarding the ~~condensed consolidated statements~~sources and uses of ~~income or stockholders’ equity related~~capital in our business will continue to ~~these misstatements.~~

~~The Company assessed~~reflect and adapt to changes in market conditions and our business including further developments with respect to the ~~materiality of these misstatements on prior periods~~’ ~~financial statements~~pandemic. For more information, refer to the section entitled Risk Factors in ~~accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99~~—~~Materiality, codified in Accounting Standards Codification (“ASC”) 250~~—~~Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108~~—~~Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the~~ ~~condensed~~ ~~consolidated statements of cash flows.~~

~~The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections~~ ~~(in thousands)~~:

Nine Months Ended

October 29,

2016

As Reported

Adjustment

As Revised

Cash flows from operating activities:

Change in accounts payable and accrued expenses

$
(73,574
)

$
10,139

$
(63,435
)
Net cash used in operating activities

$
(29,124
)

$
10,139

$
(18,985
)
Cash and cash equivalents:

Beginning of period

$
349,897

$
(18,430
)

$
331,467

End of period

$
55,426

$
(8,291
)

$
47,135

our 2020 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

~~Stock-Based Compensation~~New Accounting Standards or Updates Adopted

Income Taxes

In ~~March 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update ~~No. 2016-09~~—~~Improvements to Employee Share Based Payment~~(“ASU”) 2019-12—Income Taxes (Topic 740): Simplifying the Accounting ~~(“ASU 2016-09”)~~for Income Taxes. The ~~new guidance simplifies several aspects of the~~ASU impacts various topic areas within ASC 740, including accounting for ~~employee share-based payment transactions including the~~taxes under hybrid tax regimes, accounting for ~~income taxes, forfeitures,~~increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and ~~statutory tax withholding requirements, as well as classification~~accounting for ownership changes in ~~the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense~~investments, among other minor codification improvements. The guidance in ~~the statement of operations, rather than within additional paid-in capital on the balance sheet.~~ ~~The new guidance was~~this ASU became effective for ~~the Company beginning on January 29, 2017. As a result of the adoption of this new guidance, the Company recognized an excess tax benefit of $1.9 million~~fiscal years, and $4.3 million in the provision for income taxes as a discrete item during the three and nine months ended October 28, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the ~~condensed~~ ~~consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.~~

~~In May 2017, the FASB issued~~ ~~Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The new guidance is effective for~~interim periods within those fiscal years, beginning after December 15, ~~2017,~~2020. We adopted this standard in the first quarter of fiscal 2021 and the adoption did not have an impact on our condensed consolidated financial statements.


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New Accounting Standards or Updates Not Yet Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for fiscal years, and interim periods within ~~that reporting period, with early adoption permitted. The standard will be applied prospectively.~~ ~~The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.~~

~~Revenue from Contracts with Customers~~

~~In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606)~~. This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under GAAP for one year from the original effective date. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts.

The Company continues to assess all potential impacts of the standard. In applying the guidance under Topic 606, specifically related to the indicators of transfer of control, the Company continues to assess the guidance and has not yet concluded how such guidance will be applied to its revenue streams. The Company plans to elect to adopt the practical expedient related to shipping and handling activities. The Company has concluded that the new standard will have an impact related to the accounting for gift card breakage. Under Topic 606 the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and breakage will be recognized proportional to actual gift card redemptions.

~~Topic 606 is effective for~~those fiscal years, beginning after December 15, ~~2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company~~2021. We will adopt ~~Topic 606~~the ASU in

the first quarter of fiscal 2018. The Company has elected to adopt using a modified retrospective approach with the cumulative effect of initially applying the new standard recognized in retained earnings at the date of adoption.

~~Accounting for Leases~~

~~In February 2016, the FASB issued~~ ~~Accounting Standards Update 2016-02~~—~~Leases,~~ ~~which, for operating leases, requires a lessee to recognize a right-of-use asset~~2022, and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currentlywe are evaluating the effects that the adoption of this ASU ~~2016-02~~ will have on ~~its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.~~

~~Financial Instruments~~

~~In January 2016, the FASB issued~~ ~~Accounting Standards Update 2016-01~~—~~Financial Instruments~~—~~Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,~~ which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

~~Cash Flow Classification~~

~~In August 2016, the FASB issued~~ ~~Accounting Standard Update No. 2016-15~~—~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

~~Income Taxes: Intra-Entity Asset Transfers~~

~~In October 2016, the FASB issued~~ ~~Accounting Standard Update No. 2016-16~~—~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

~~Goodwill and Intangible~~s

~~In January 2017, the FASB issued~~ ~~Accounting Standard Update No.~~ ~~2017-04~~—~~Intangibles~~—~~Goodwill and Other (Topic 350)~~. The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. ~~The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.~~

~~NOTE 3—BUSINESS COMBINATION~~

On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. The purchase price of the acquisition was approximately $119.9 million consisting of $118.4 million funded with available cash and $1.5 million representing the fair value of rollover units, which amount is subject to adjustment for changes in working capital and other items. The rollover units, which are classified as a liability, are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 15—~~Stock-Based Compensation~~). After the transaction, and giving effect to equity interests acquired by management in the business, the Company owns in excess of 90% of the total equity interest in Waterworks, and owns 100% of the voting equity interest.

~~During the nine months ended October 29, 2016, the Company~~ ~~incurred $2.8 million,~~ of acquisition-related costs associated with the transaction. The Company did not incur any acquisition-related costs during the three months ended October 29, 2016. These costs and expenses include fees associated with financial, legal and accounting advisors, and employment related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of operations.

The Company recorded a purchase price allocation adjustment of $1.9 million during the first half of 2017. The adjustment primarily related to a subset of inventory acquired for which the Company completed a fair value analysis based on the facts and circumstances that existed as of the acquisition date. Subsequent to the acquisition date, only a small portion of such inventory had been sold and therefore the impact on the Company’s results of operations for historical periods since the acquisition was insignificant. The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities, prior to and after the purchase price allocation adjustments (~~in thousands~~):

Purchase Price

January 28,

Allocation

October 28,

2017

Adjustments

2017

Tangible assets acquired and liabilities assumed

$
18,615

$
(1,916
)

$
16,699

Trademarks

52,100

—

52,100

Goodwill

49,229

1,916

51,145

Total

$
119,944

$
—

$
119,944

~~Any future changes to the purchase price will be recorded directly to the consolidated statements of operations and will not impact the goodwill recorded as a result of this acquisition.~~

Under purchase accounting rules, the Company valued the acquired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the Company’s selling effort. This valuation resulted in an increase in inventory carrying value of approximately $9.7 million for marketable inventory.

Trademarks have been assigned an indefinite life and therefore are not subject to amortization. The goodwill is representative of the benefits and expected synergies from the integration of Waterworks products and Waterworks’ management and employees, which do not qualify for separate recognition as an intangible asset. A portion of the trademarks and goodwill are not deductible for tax purposes.

Results of operations of Waterworks have been included in the Company’s condensed consolidated statements of operations since the May 27, 2016 acquisition date. Pro forma results of the acquired business have not been presented as the results were not considered material to the Company’sour condensed consolidated financial statements, ~~for all periods presented and would not have been material had~~including the ~~acquisition occurred at the beginning of fiscal 2016.~~adoption approach.

NOTE ~~4—ASSET HELD FOR SALE~~

~~Building and Land~~

During the first quarter of fiscal 2017, the Company committed to a plan to sell the building and land at one of its owned retail Galleries, resulting in a reclassification of building and land of $8.2 million from property and equipment to asset held for sale on the condensed consolidated balance sheets as of April 29, 2017. In May 2017, the Company completed the sale of the building and land for approximately $10.2 million and entered into a short-term five month lease agreement to lease the property. As a result, the gain associated with the sale of this property was amortized over a five month period. During the three and nine months ended October 28, 2017, the Company recorded a gain of $0.8 million and $2.1 million, respectively, which is included as a reduction of selling, general and administrative expenses on the condensed consolidated statements of operations. No additional gain associated with this transaction will be recognized in future periods.

~~Aircraft~~

During the fourth quarter of fiscal 2016, the Company committed to a plan to sell an aircraft, which resulted in a reclassification of such aircraft from property and equipment to asset held for sale on the condensed consolidated balance sheets as of January 28, 2017. The asset held for sale had a carrying value of $4.9 million as of January 28, 2017. In April 2017, the sale of the aircraft was completed for a purchase price of $5.2 million and the Company incurred costs of $0.3 million to dispose of the asset.

~~NOTE 5—~~3—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Prepaid expense and other current assets	$	53,970	$	42,079
Vendor deposits		27,796		12,519
Capitalized catalog costs		17,606		19,067
Federal and state tax receivable		15,863		—
Promissory notes receivable, including interest⁽¹⁾		14,083		13,569
Right of return asset for merchandise		6,502		7,453
Acquisition related escrow deposits		4,750		2,650
Total prepaid expense and other current assets	$	140,570	$	97,337

(1)	Represents promissory notes, including principal and accrued interest, due from a related party. Refer to Note 5—Equity Method Investments.

October 28,

January 28,

2017

2017

Capitalized catalog costs

$
44,252

$
61,258

Vendor deposits

8,374

13,276

Federal and state tax receivable

5,598

13,124

Prepaid expense and other current assets

16,817

29,504

Total prepaid expense and other current assets

$
75,041

$
117,162


12 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

Other non-current assets consist of the following (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Landlord assets under construction—net of tenant allowances	$	201,375	$	135,531
Initial direct costs prior to lease commencement		46,531		36,770
Capitalized cloud computing costs—net⁽¹⁾		10,300		7,254
Other deposits		7,534		5,287
Deferred financing fees		4,235		1,525
Acquisition related escrow deposits		1,030		3,975
Other non-current assets		11,821		9,835
Total other non-current assets	$	282,826	$	200,177

(1)	Presented net of accumulated amortization of $1.9 million and $0.5 million as of July 31, 2021 and January 30, 2021, respectively.

October 28,

January 28,

2017

2017

Construction related deposits

$
13,739

$
28,044

Other deposits

4,926

4,706

Deferred financing fees

4,698

1,530

Other non-current assets

5,395

1,889

Total other non-current assets

$
28,758

$
36,169

NOTE 6—4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (See Note 17—Segment Reporting), for the six months ended July 31, 2021 (in thousands):


					FOREIGN
	JANUARY 30,				CURRENCY		JULY 31,
	2021		ADDITIONS		TRANSLATION		2021
RH Segment
Goodwill	$	141,100	$	—	$	32	$	141,132
Tradenames, trademarks and other intangible assets		54,663		921		—		55,584
Waterworks⁽¹⁾
Tradename ⁽²⁾		17,000		—		—		17,000

(1)	Waterworks reporting unit goodwill of $51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $17.4 million and $33.7 million of impairment recorded in fiscal 2018 and fiscal 2017, respectively.

(2)	Presented net of an impairment charge of $35.1 million, with $20.5 million and $14.6 million recorded in fiscal 2020 and fiscal 2018, respectively.

Waterworks Tradename Impairment

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related Showroom closures and slowdown in construction activity, management updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability. We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount. We determined fair value utilizing a discounted cash flow methodology under the relief-from-royalty method. Significant assumptions under this method include forecasted net revenues and the estimated royalty rate, expressed as a percentage of revenues, in addition to the discount rate based on the weighted-average cost of capital. Based on the impairment test performed, we concluded that the Waterworks reporting unit tradename was impaired as of ~~October 28, 2017 (in thousands~~):May 2, 2020. As a result, we recognized a $20.5 million non-cash impairment charge for the Waterworks reporting unit tradename during the three months ended May 2, 2020.

Gross
Carrying
Amount

Accumulated
Amortization

Foreign
Currency
Translation

Net Book
Value

Intangible assets subject to amortization

Fair value of leases⁽¹⁾

Fair market write-up

$
1,925

$
(1,862
)

$
—

$
63

Fair market write-down ⁽²⁾

(1,467
)

1,393

—

(74
)
Total intangible assets subject to amortization

$
458

$
(469
)

$
��

$
(11
)
Intangible assets not subject to amortization

Goodwill ⁽³⁾⁽⁴⁾

$
175,605

$
—

$
(52
)

$
175,553

Trademarks and domain names ⁽⁴⁾

$
100,663

$
—

$
—

$
100,663


~~(1)~~PART I. FINANCIAL INFORMATION	~~The fair value of each lease is amortized over the life of the respective lease.~~

~~(2)~~

~~The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.~~

~~(3)~~

~~Waterworks goodwill increased $1.9 million during the nine months ended October 28, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination~~.

~~(4)~~

~~Refer to Note 18—Segment Reporting~~ ~~for goodwill and trademarks and domain names by reportable segment.~~2021 SECOND QUARTER FORM 10-Q | 13

Table of Contents~~The following sets forth~~

NOTE 5—EQUITY METHOD INVESTMENTS

Equity method investments represent our 50 percent membership interests in 3 privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the ~~goodwill~~“Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020, and ~~intangible assets~~have the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. As we do not have a controlling financial interest in the Aspen LLCs but have the ability to exercise significant influence over the Aspen LLCs, we account for these investments using the equity method of accounting.

During the three and six months ended July 31, 2021, we recorded our proportionate share of equity method investments losses of $2.5 million and $4.6 million, respectively, which is included in the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of ~~January 28, 2017 (~~July 31, 2021.

As of July 31, 2021, $14.1 million of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member, which are included in ~~thousands~~):prepaid expense and other current assets on the condensed consolidated balance sheets. These promissory notes are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

An affiliate of the managing member of the Aspen LLCs became the landlord of an additional RH Design Gallery in the first quarter of fiscal 2021.

Gross
Carrying
Amount

Accumulated
Amortization

Foreign
Currency
Translation

Net Book
Value

Intangible assets subject to amortization

Fair value of leases ⁽¹⁾

Fair market write-up

$
1,925

$
(1,792
)

$
—

$
133

Fair market write-down ⁽²⁾

(1,467
)

1,350

—

(117
)
Total intangible assets subject to amortization

$
458

$
(442
)

$
—

$
16

Intangible assets not subject to amortization

Goodwill ⁽³⁾⁽⁴⁾

$
173,690

$
—

$
(87
)

$
173,603

Trademarks and domain names ⁽³⁾⁽⁴⁾

$
100,624

$
—

$
—

$
100,624

~~(1)~~

~~The fair value of each lease is amortized over the life of the respective lease.~~

~~(2)~~

~~The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.~~

~~(3)~~

~~The Company recorded goodwill and trademarks of $49.2 million and $52.1 million, respectively, in fiscal 2016 related to its acquisition of Waterworks. Refer to Note 3—Business Combination~~.

~~(4)~~

~~Refer to Note 18—Segment Reporting~~ ~~for goodwill and trademarks and domain names by reportable segment.~~

NOTE 7—6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Accounts payable	$	238,607	$	224,906
Accrued compensation		71,748		84,860
Accrued freight and duty		30,685		29,754
Accrued sales taxes		27,158		23,706
Accrued occupancy		26,680		17,671
Accrued professional fees		9,135		5,383
Accrued catalog costs		3,979		4,354
Deferred consideration for asset purchase		—		14,387
Other accrued expenses		18,793		19,401
Total accounts payable and accrued expenses	$	426,785	$	424,422

October 28,

January 28,

2017

2017

Accounts payable

$
130,902

$
134,720

Accrued compensation

43,697

26,886

Accrued freight and duty

21,952

27,955

Accrued sales taxes

15,517

14,908

Accrued catalog costs

13,296

3,874

Accrued occupancy

11,422

8,137

Accrued professional fees

3,801

2,082

Other accrued expenses

11,982

8,418

Total accounts payable and accrued expenses

$
252,569

$
226,980


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Other current liabilities consist of the following (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Current portion of equipment promissory notes	$	24,072	$	22,747
Allowance for sales returns		23,574		25,559
Unredeemed gift card and merchandise credit liability		20,322		19,173
Finance lease liabilities		14,231		14,671
Product recall reserve		5,780		8,181
Federal and state tax payable		—		49,539
Other current liabilities		4,357		2,821
Total other current liabilities	$	92,336	$	142,691

October 28,

January 28,

2017

2017

Unredeemed gift card and merchandise credit liability

$
27,448

$
24,524

Allowance for sales returns

10,999

10,077

Current portion of non-current debt

5,986

—

Product recall reserves

2,218

4,324

Other current liabilities

3,958

4,346

Total other current liabilities

$
50,609

$
43,271

12Contract Liabilities

We defer revenue associated with merchandise delivered via the home-delivery channel. We expect that substantially all of the deferred revenue and customer deposits as of July 31, 2021 will be recognized within the next six months as the performance obligations are satisfied. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year.

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards. During the three months ended July 31, 2021 and August 1, 2020, we recognized $4.9 million and $6.5 million, respectively, of revenue related to previous deferrals related to our gift cards. During the six months ended July 31, 2021 and August 1, 2020, we recognized $9.8 million and $10.6 million, respectively, of revenue related to previous deferrals related to our gift cards. During the three months ended July 31, 2021 and August 1, 2020, we recorded gift card breakage of $0.5 million and $0.2 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we recorded gift card breakage of $0.9 million and $0.8 million, respectively. We expect that approximately 75% of the remaining gift card liabilities as of July 31, 2021 will be recognized when the gift cards are redeemed by customers.

NOTE 8—7—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Deferred payroll taxes	$	4,461	$	4,461
Rollover units and profit interests⁽¹⁾		3,632		3,490
Unrecognized tax benefits		3,346		3,114
Other non-current obligations		4,019		5,916
Total other non-current obligations	$	15,458	$	16,981

October 28,

January 28,

2017

2017

Notes payable for share repurchases

$
19,390

$
19,390

Equipment security notes ⁽¹⁾

15,040

—

Promissory note ⁽²⁾

11,968

—

Capital lease obligations—non-current

7,553

7,242

Deferred contract incentive ⁽³⁾

5,953

7,739

Unrecognized tax benefits

2,617

2,508

Rollover units and profit interests ⁽⁴⁾

2,104

1,784

Other non-current obligations

5,770

6,021

Total other non-current obligations

$
70,395

$
44,684

(1)	~~Represents the non-current portion of equipment security notes secured by certain of the Company’s distribution center property and equipment.~~

~~(2)~~

~~Represents the non-current portion of a promissory note secured by the Company’s aircraft.~~

~~(3)~~

~~Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement.~~

~~(4)~~

Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 15

Table of Contents

NOTE 8—LEASES

Lease costs—net consist of the following (in thousands):


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Operating lease cost⁽¹⁾	$	25,590	$	20,181	$	49,157	$	40,907
Finance lease costs
Amortization of leased assets⁽¹⁾		10,796		10,125		21,714		19,713
Interest on lease liabilities⁽²⁾		6,607		5,948		12,757		11,729
Variable lease costs ⁽³⁾		7,913		3,920		16,340		7,480
Sublease income⁽⁴⁾		(1,136)		(2,119)		(2,318)		(4,694)
Total lease costs—net	$	49,770	$	38,055	$	97,650	$	75,135

(1)

Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or selling, general and administrative expenses on the condensed consolidated statements of income based on our accounting policy. Refer to Note 3—Significant Accounting Policies in the 2020 Form 10-K.

(2)	Included in interest expense—net on the condensed consolidated statements of income.

(3)

Represents variable lease payments under operating and finance lease agreements. The amounts primarily represent contingent rent based on a percentage of retail sales over contractual levels of $5.6 million and $2.2 for the three months ended July 31, 2021 and August 1, 2020, respectively, and $11.9 million and $4.2 million for the six months ended July 31, 2021 and August 1, 2020, respectively. Other variable costs, which include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material in any period.

(4)	Included in selling, general and administrative expenses on the condensed consolidated statements of income.


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Lease right-of-use assets and lease liabilities consist of the following (in thousands):


		JULY 31,		JANUARY 30,
		2021		2021
	Balance Sheet Classification
Assets
Operating leases	Operating lease right-of-use assets	$	553,834	$	456,164
Finance leases ⁽¹⁾⁽²⁾	Property and equipment—net		731,620		711,804
Total lease right-of-use assets		$	1,285,454	$	1,167,968
Liabilities
Current⁽³⁾
Operating leases	Operating lease liabilities	$	74,074	$	71,524
Finance leases	Other current liabilities		14,231		14,671
Total lease liabilities—current			88,305		86,195
Non-current
Operating leases	Non-current operating lease liabilities		542,510		448,169
Finance leases	Non-current finance lease liabilities		523,797		485,481
Total lease liabilities—non-current			1,066,307		933,650
Total lease liabilities		$	1,154,612	$	1,019,845

(1)	Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement.

(2)	Finance lease right-of-use assets are recorded net of accumulated amortization of $152.3 million and $133.0 million as of July 31, 2021 and January 30, 2021, respectively.

(3)	Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months.

The maturities of lease liabilities are as follows as of July 31, 2021 (in thousands):


	OPERATING		FINANCE
FISCAL YEAR	LEASES		LEASES		TOTAL
Remainder of fiscal 2021	$	48,990	$	19,982	$	68,972
2022		93,163		40,356		133,519
2023		84,601		40,770		125,371
2024		78,145		41,162		119,307
2025		77,631		42,377		120,008
2026		74,864		43,156		118,020
Thereafter		292,992		673,365		966,357
Total lease payments⁽¹⁾⁽²⁾		750,386		901,168		1,651,554
Less—imputed interest ⁽³⁾		(133,802)		(363,140)		(496,942)
Present value of lease liabilities	$	616,584	$	538,028	$	1,154,612

(1)

Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Total lease payments exclude $656.8 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of July 31, 2021, of which $12.3 million, $32.6 million, $37.8 million, $39.3 million, $40.2 million and $38.9 million will be paid in fiscal 2021, fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $455.7 million will be paid subsequent to fiscal 2026.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 17

Table of Contents

(2)	Excludes future commitments under short-term lease agreements of $1.2 million as of July 31, 2021.

(3)	Calculated using the discount rate for each lease at lease commencement.

Supplemental information related to leases consists of the following:


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020
Weighted-average remaining lease term (years)
Operating leases		9.4		9.0
Finance leases		20.0		18.8
Weighted-average discount rate
Operating leases		3.98%		3.91%
Finance leases		5.04%		5.04%

Other information related to leases consists of the following (in thousands):


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	(50,914)	$	(26,413)
Operating cash flows from finance leases		(12,943)		(6,767)
Financing cash flows from finance leases		(7,108)		(4,641)
Total cash outflows from leases	$	(70,965)	$	(37,821)
Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash)
Operating leases	$	134,763	$	27,880
Finance leases		44,432		57,286

Build-to-Suit Asset

During the second quarter of fiscal 2021, we opened the Dallas Design Gallery. During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property & equipment—net on our condensed consolidated balance sheets. Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we cannot derecognize the build-to-suit asset. Therefore, the asset will remain classified as a build-to-suit asset within property and equipment—net and will depreciate over the term of the useful life of the asset.

Sale-Leaseback Transaction

During the second quarter of fiscal 2020, we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $25.5 million, which qualified for sale-leaseback accounting in accordance with ASC 842. Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 20 years and a renewal option for an additional 10 years. We recognized a loss related to the execution of the sale transaction of $9.4 million in the second quarter of fiscal 2020, which was recorded in selling, general and administrative expenses on the condensed consolidated statements of income.

Long-lived Asset Impairment

During the first quarter of fiscal 2020, we recognized long-lived asset impairment charges of $3.5 million related to 1 RH Baby & Child and TEEN Gallery and 1 Waterworks showroom, comprised of lease right-of-use asset impairment of $2.0 million and property and equipment impairment of $1.5 million.


18 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

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NOTE 9—CONVERTIBLE SENIOR NOTES

$350 million 0.00% Convertible Senior Notes due ~~2020~~2024

In ~~June 2015, the Company~~September 2019, we issued in a private offering ~~$250~~$350 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “20202024 (the “2024 Notes”). The ~~2020~~2024 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The ~~2020~~2024 Notes will mature on ~~July~~September 15, ~~2020,~~2024, unless earlier purchased by ~~the Company~~us or converted. The ~~2020~~2024 Notes will not bear interest, except that the ~~2020~~2024 Notes will be subject to “special interest” in certain limited circumstances in the event of ~~the~~our failure ~~of the Company~~ to perform certain of ~~its~~our obligations under the indenture governing the ~~2020~~2024 Notes. The ~~2020~~2024 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by ~~the Company~~us or any of ~~its~~our subsidiaries. Certain events are also considered “events of default” under the ~~2020~~2024 Notes, which may result in the acceleration of the maturity of the ~~2020~~2024 Notes, as described in the indenture governing the ~~2020~~2024 Notes. ~~The 2020~~Events of default under the indenture for the 2024 Notes ~~are guaranteed~~include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the ~~Company’s primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is~~Trustee or to the ~~unsecured obligation~~Company and the Trustee by the holders of at least 25% of the ~~Guarantor and is subordinated to~~aggregate principal amount of the ~~Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.~~2024 Notes then outstanding.

The initial conversion rate applicable to the ~~2020~~2024 Notes is ~~8.4656~~4.7304 shares of common stock per $1,000 principal amount of ~~2020~~2024 Notes, ~~which~~or a total of approximately 1.656 million shares for the total $350 million principal amount. This initial conversion rate is equivalent to an initial conversion price of approximately ~~$118.13~~$211.40 per ~~share.~~share, which represents a 25% premium to the $169.12 closing share price on the day the 2024 Notes were priced. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the ~~Company~~2024 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its ~~2020~~2024 Notes in connection with such make-whole fundamental change.

Prior to ~~March~~June 15, ~~2020,~~2024, the ~~2020~~2024 Notes ~~will be~~are convertible only under the following circumstances: (1) during any calendar quarter commencing after ~~September 30, 2015,~~December 31, 2019, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding ~~fiscal~~calendar quarter, the last reported sale price of ~~the Company’s~~our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the ~~five~~5 consecutive business day period after any ~~ten~~10 consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of ~~2020~~2024 Notes for such trading day was less than 98% of the product of the last reported sale price of ~~the Company’s~~our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. ~~As of October 28, 2017, none of these conditions have occurred~~The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2021 and, ~~as a result,~~accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes ~~are not convertible as of October 28, 2017.~~during the calendar quarter ending September 30, 2021. On and after ~~March~~June 15, ~~2020,~~2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their ~~2020~~2024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the ~~2020~~2024 Notes will be settled, at ~~the Company’s~~our election, in cash, shares

of ~~the Company’s~~our common stock, or a combination of cash and shares of ~~the Company’s~~our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.

~~The Company~~We may not redeem the ~~2020~~2024 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require ~~the Company~~us to purchase all or a portion of their ~~2020~~2024 Notes for cash at a price equal to 100% of the principal amount of the ~~2020~~2024 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 19

Table of Contents

Debt issuance costs related to the 2024 Notes were comprised of discounts upon original issuance of $3.5 million and third party offering costs of $1.3 million. In accounting for the debt issuance costs related to the issuance of the ~~2020~~2024 Notes, ~~the Company~~we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the ~~2020~~2024 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

~~Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million.~~ Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due ~~2020~~2024 balance on the condensed consolidated balance sheets. During both the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016, the Company~~August 1, 2020, we recorded ~~$0.3~~$0.1 million ~~and $0.2 million, respectively,~~ related to the amortization of debt issuance ~~costs.~~costs related to the 2024 Notes. During both the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016, the Company~~August 1, 2020, we recorded ~~$0.8~~$0.3 million ~~and $0.7 million, respectively,~~ related to the amortization of debt issuance ~~costs.~~costs related to the 2024 Notes.

During the second quarter of fiscal 2021, holders of $67.0 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value. In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period. As of July 31, 2021, the observation periods of these converted 2024 Notes had not been completed and, as a result, these converted 2024 Notes remain outstanding as of July 31, 2021. During the third quarter of fiscal 2021, we expect to pay $67.0 million in cash and to deliver shares of common stock to settle the early conversion of these 2024 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below. Accordingly, as of July 31, 2021, we reclassified $67.0 million of the outstanding principal balance to current liabilities, as well as reclassified $11.0 million of the equity component of the 2024 Notes to mezzanine equity from permanent equity on our condensed consolidated balance sheets and statements of stockholders’ equity, representing the difference between the current portion of aggregate principal of our converted 2024 Notes required to be settled in cash based on our irrevocable elections and the current portion of the carrying value of the converted 2024 Notes outstanding as of July 31, 2021. As the settlement of conversion of the remainder of the 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2024 Notes is classified as a non-current obligation on our condensed consolidated balance sheets.


20 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

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The carrying ~~values~~value of the ~~2020~~2024 Notes, excluding the discounts upon original issuance and third party offering costs, ~~are~~is as follows (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Liability component
Principal	$	350,000	$	350,000
Less: Debt discount		(57,563)		(65,818)
Net carrying amount ⁽¹⁾	$	292,437	$	284,182
Equity component ⁽²⁾	$	87,252	$	87,252

October 28,

January 28,

2017

2017

Liability component

Principal

$
300,000

$
300,000

Less: Debt discount

(48,229
)

(60,124
)
Net carrying amount

$
251,771

$
239,876

Equity component ⁽¹⁾

$
84,003

$
84,003

(1)	~~Included~~Includes $67.0 million classified within total current liabilities on the condensed consolidated balance sheets as of July 31, 2021 for the early conversion of $67.0 million in principal amount of 2024 Notes to be settled in the third quarter of fiscal 2021.

(2)	Includes $11.0 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of July 31, 2021. As of January 30, 2021, the full amount is included in additional paid-in capital on the condensed consolidated balance sheets.

~~The Company~~We recorded interest expense of ~~$4.0~~$4.2 million and ~~$3.8~~$3.9 million for the amortization of the debt discount related to the ~~2020~~2024 Notes during the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. ~~The Company~~We recorded interest expense of ~~$11.9~~$8.3 million and ~~$11.2~~$7.8 million for the amortization of the debt discount related to the ~~2020~~2024 Notes during the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively.

~~2020~~2024 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the ~~2020~~2024 Notes ~~in June 2015~~ and ~~the~~ exercise ~~in full~~ of the overallotment option in ~~July 2015, the Company~~September 2019, we entered into convertible note hedge transactions whereby ~~the Company has~~we have the option to purchase a total of approximately ~~2.5~~1.656 million shares of ~~its~~our common stock at a price of approximately ~~$118.13~~$211.40 per share. The total cost of the convertible note hedge transactions was ~~$68.3~~approximately $91.4 million. In addition, ~~the Company~~we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately ~~2.5~~1.656 million shares of ~~the Company’s~~our common stock at a price of ~~$189.00~~$338.24 per ~~share.~~share, which represents a 100% premium to the $169.12 closing share price on the day the 2024 Notes were priced. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of ~~5.1~~approximately 3.3 million shares of common stock (which cap may also be subject to adjustment). ~~The Company~~We received ~~$30.4~~approximately $50.2 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of

the warrants are intended to offset any actual earnings dilution from the conversion of the ~~2020~~2024 Notes until ~~the Company’s~~our common stock is above approximately ~~$189.00~~$338.24 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

~~The Company~~We recorded a deferred tax liability of ~~$32.8~~$21.7 million in connection with the debt discount associated with the ~~2020~~2024 Notes and recorded a deferred tax asset of ~~$26.6~~$22.7 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.


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$335 million 0.00% Convertible Senior Notes due ~~2019~~2023

In June ~~2014, the Company~~2018, we issued ~~$350~~in a private offering $300 million principal amount of 0.00% convertible senior notes due ~~2019 (the “2019~~2023 and issued an additional $35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”) ~~in a private offering.~~. The ~~2019~~2023 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The ~~2019~~2023 Notes will mature on June 15, ~~2019,~~2023, unless earlier purchased by ~~the Company~~us or converted. The ~~2019~~2023 Notes will not bear interest, except that the ~~2019~~2023 Notes will be subject to “special interest” in certain limited circumstances in the event of ~~the~~our failure ~~of the Company~~ to perform certain of ~~its~~our obligations under the indenture governing the ~~2019~~2023 Notes. The ~~2019~~2023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by ~~the Company~~us or any of ~~its~~our subsidiaries. Certain events are also considered “events of default” under the ~~2019~~2023 Notes, which may result in the acceleration of the maturity of the ~~2019~~2023 Notes, as described in the indenture governing the ~~2019~~2023 Notes. Events of default under the indenture for the 2023 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% of the aggregate principal amount of the 2023 Notes then outstanding.

The initial conversion rate applicable to the ~~2019~~2023 Notes is ~~8.6143~~5.1640 shares of common stock per $1,000 principal amount of ~~2019~~2023 Notes, which is equivalent to an initial conversion price of approximately ~~$116.09~~$193.65 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental ~~change,”~~change” as defined in the ~~Company~~indenture governing the 2023 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its ~~2019~~2023 Notes in connection with such make-whole fundamental change.

Prior to March 15, ~~2019,~~2023, the ~~2019~~2023 Notes ~~will be~~are convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, ~~2014,~~2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding ~~fiscal~~calendar quarter, the last reported sale price of ~~the Company’s~~our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the ~~five~~5 consecutive business day period after any ~~ten~~10 consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of ~~2019~~2023 Notes for such trading day was less than 98% of the product of the last reported sale price of ~~the Company’s~~our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. ~~As of October 28, 2017, none of these conditions have occurred~~The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2021 and, ~~as a result,~~accordingly, holders were eligible to convert their 2023 Notes beginning in the ~~2019~~calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes ~~are not convertible as of October 28, 2017.~~during the calendar quarter ending September 30, 2021. On and after March 15, ~~2019,~~2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their ~~2019~~2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the ~~2019~~2023 Notes will be settled, at ~~the Company’s~~our election, in cash, shares of ~~the Company’s~~our common stock, or a combination of cash and shares of ~~the Company’s~~our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.

~~The Company~~We may not redeem the ~~2019~~2023 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require ~~the Company~~us to purchase all or a portion of their ~~2019~~2023 Notes for cash at a price equal to 100% of the principal amount of the ~~2019~~2023 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.


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Debt issuance costs related to the 2023 Notes were comprised of discounts upon original issuance of $1.7 million and third party offering costs of $4.6 million. In accounting for the debt issuance costs related to the issuance of the ~~2019~~2023 Notes, ~~the Company~~we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the ~~2019~~2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

~~Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million.~~ Discounts ~~commissions payable to the initial purchasers~~ and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due ~~2019~~2023 balance on the condensed consolidated balance sheets. During both the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016, the Company~~August 1, 2020, we recorded ~~$0.2~~$0.3 million related to the amortization of debt issuance costs. During both the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016, the Company~~August 1, 2020, we recorded ~~$0.6~~$0.5 million related to the amortization of debt issuance costs.

In December 2020, holders of $2.4 million in aggregate principal amount of the 2023 Notes elected early conversion at the option of the noteholders. During the three months ended May 1, 2021, we paid $2.4 million in cash and delivered 7,307 shares of common stock to settle the early conversion of these 2023 Notes. As a result, we recognized a loss on extinguishment of the liability component of $0.1 million in the three months ended May 1, 2021. We also received 7,305 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 2 shares of our common stock in respect to such settlement of the converted 2023 Notes.

During the second quarter of fiscal 2021, holders of $30.8 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. During the three months ended July 31, 2021, we paid $30.8 million in cash and delivered 112,297 shares of common stock to settle the early conversion of these 2023 Notes. As a result, we recognized a loss on extinguishment of $3.2 million in the three months ended July 31, 2021. We also received 112,296 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 1 share of our common stock in respect to such settlement of the converted 2023 Notes.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 23

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During the second quarter of fiscal 2021, holders of $173.5 million in aggregate principal amount of the 2023 Notes elected to exercise the conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period. As of July 31, 2021, the observation periods of these converted 2023 Notes had not been completed and, as a result, these converted 2023 Notes remain outstanding as of July 31, 2021. During the third quarter of fiscal 2021, we expect to pay $173.5 million in cash and to deliver shares of common stock to settle the early conversion of these 2023 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below. Accordingly, as of July 31, 2021, we reclassified $173.5 million of the outstanding principal balance to current liabilities, as well as reclassified $19.5 million of the equity component of the 2023 Notes to mezzanine equity from permanent equity on our condensed consolidated balance sheets as of July 31, 2021, representing the difference between the current portion of aggregate principal of our converted 2023 Notes required to be settled in cash based on our irrevocable elections and the current portion of the carrying value of the converted 2023 Notes outstanding as of July 31, 2021. As the settlement of conversion of the remainder of the 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2023 Notes is classified as a non-current obligation on our condensed consolidated balance sheets.

The carrying values of the ~~2019~~2023 Notes, excluding the discounts ~~and commissions payable to the initial purchasers~~upon original issuance and third party offering costs, are as follows (in thousands):


	JULY 31,		JANUARY 30,
	2021		2021
Liability component
Principal	$	301,819	$	335,000
Less: Debt discount		(33,914)		(47,064)
Net carrying amount ⁽¹⁾	$	267,905	$	287,936
Equity component ⁽²⁾	$	90,099	$	90,990

October 28,

January 28,

2017

2017

Liability component

Principal

$
350,000

$
350,000

Less: Debt discount

(24,666
)

(35,457
)
Net carrying amount

$
325,334

$
314,543

Equity component ⁽¹⁾

$
70,482

$
70,482

(1)

~~Included in additional paid-in capital~~Includes $173.5 million classified within total current liabilities on the condensed consolidated balance ~~sheets.~~

sheets as of July 31, 2021 for the early conversion of $173.5 million in principal amount of 2023 Notes to be settled in the third quarter of fiscal 2021.

(2)	Includes $19.5 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of July 31, 2021. As of January 30, 2021, the full amount is included in additional paid-in capital on the condensed consolidated balance sheets.

~~The Company~~We recorded interest expense of ~~$3.6~~$4.6 million and ~~$3.5~~$4.4 million for the amortization of the debt discount related to the ~~2019~~2023 Notes during the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. ~~The Company~~We recorded interest expense of ~~$10.8~~$9.2 million and ~~$10.3~~$8.7 million for the amortization of the debt discount related to the ~~2019~~2023 Notes during the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively.

~~2019~~


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2023 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the ~~2019~~2023 Notes and exercise of the ~~Company~~overallotment option in June 2018, we entered into convertible note hedge transactions whereby ~~the Company has~~we have the option to purchase a total of approximately ~~3.0~~1.730 million shares of ~~its~~our common stock at a price of approximately ~~$116.09~~$193.65 per share. The total cost of the convertible note hedge transactions was ~~$73.3~~approximately $91.9 million. In addition, ~~the Company~~we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately ~~3.0~~1.730 million shares of ~~the Company’s~~our common stock at a price of ~~$171.98~~$309.84 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of ~~6.0~~approximately 3.5 million shares of common stock (which cap may also be subject to adjustment). ~~The Company~~We received ~~$40.4~~approximately $51.0 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the ~~2019~~2023 Notes ~~and to effectively increase the overall conversion price from $116.09 per share to $171.98~~until our common stock is above approximately $309.84 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

~~The Company~~We recorded a deferred tax liability of ~~$27.5~~$22.3 million in connection with the debt discount associated with the ~~2019~~2023 Notes and recorded a deferred tax asset of ~~$28.6~~$22.5 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax ~~assets~~asset are ~~included~~recorded in deferred tax assets on the condensed consolidated balance sheets.

NOTE 10—CREDIT FACILITIES

The ~~following~~outstanding balances under our credit facilities were ~~outstanding~~ as ~~of October 28, 2017~~follows (in thousands):


	JULY 31,						JANUARY 30,
	2021						2021
			UNAMORTIZED						UNAMORTIZED
			DEBT		NET				DEBT		NET
	OUTSTANDING		ISSUANCE		CARRYING		OUTSTANDING		ISSUANCE		CARRYING
	AMOUNT		COSTS		AMOUNT		AMOUNT		COSTS		AMOUNT
Asset based credit facility⁽¹⁾	$	—	$	—	$	—	$	—	$	—	$	—
Equipment promissory notes⁽²⁾		26,288		(101)		26,187		37,532		(171)		37,361
Total credit facilities	$	26,288	$	(101)	$	26,187	$	37,532	$	(171)	$	37,361

Outstanding

Unamortized Debt

Net Carrying

Amount

Issuance Costs

Amount

Asset based credit facility

$
341,000

$
—

$
341,000

LILO term loan

80,000

(529
)

79,471

Total credit facilities

$
421,000

$
(529
)

$
420,471

~~There were no amounts outstanding under any credit facilities as of January 28, 2017.~~

(1)

Deferred financing fees associated with the asset based credit facility as of July 31, 2021 and January 30, 2021 were $4.2 million and $1.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets. The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit. In July 2021, Restoration Hardware, Inc. entered into a twelfth amended and restated credit agreement which extended the maturity date of the revolving line of credit from June 28, 2022 to July 29, 2026.

(2)

Represents total equipment security notes secured by certain of our property and equipment, of which $24.1 million outstanding was included in other current liabilities on the condensed consolidated balance sheets. The remaining $2.2 million outstanding, included in equipment promissory notes—net on the condensed consolidated balance sheets, has principal payments due of $1.0 million and $1.2 million in fiscal 2022 and fiscal 2023, respectively.

Asset Based Credit Facility ~~& LILO Term Loan~~

In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into athe ninth amended and restated credit agreement with Bank of America, N.A., as administrative agent and collateral agent (“First Lien Administrative Agent”), and certain other ~~lenders.~~lenders (as amended prior to June 28, 2017, the “Original Credit Agreement”).

On June 28, 2017, Restoration Hardware, Inc. entered into anthe eleventh amended and restated credit agreement (as amended prior to July 29, 2021, the “Credit Agreement”) among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., ~~various~~certain subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and ~~Bank~~First Lien Administrative Agent, which amended and restated the Original Credit Agreement.


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Table of ~~America, N.A.~~Contents

On July 29, 2021, Restoration Hardware, Inc. entered into the twelfth amended and restated credit agreement (as amended, the “Amended Credit Agreement”) among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., certain subsidiaries of RH named therein as ~~administrative agent~~borrowers or guarantors, the lenders party thereto and ~~collateral agent (the “credit agreement”).~~First Lien Administrative Agent, which amended and restated the Credit Agreement. The ~~credit agreement~~Amended Credit Agreement has a revolving line of credit with initial availability of up to $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a ~~$200.0~~$300.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to ~~$800~~$900.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. ~~In addition,~~The Amended Credit Agreement provides that the ~~credit agreement establishes an up to $80.0~~$300.0 million ~~LILO~~accordion, or a portion thereof, may be added as a first-in, last-out term loan ~~facility.~~

~~The Company incurred $3.9 million of deferred financing fees related~~facility if and to the extent the lenders revise their credit ~~agreement, which are included in other non-current assets on~~commitments for such facility. The Amended Credit Agreement further provides the ~~condensed consolidated balance sheets, and will be amortized on~~borrowers may request a ~~straight line basis over the life of~~European sub-credit facility under the revolving line of credit ~~which has a~~or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the Amended Credit Agreement are met. The maturity date of ~~June 28, 2022. As a result~~the Amended Credit Agreement is July 29, 2026.

The availability of credit at any given time under the Amended Credit Agreement will be constrained by the terms and conditions of the ~~credit agreement, unamortized deferred financing fees~~Amended Credit Agreement, including the amount of ~~$0.1 million related to~~collateral available, a borrowing base formula based upon numerous factors, including the ~~previous facility were expensed during~~value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ~~nine months ended October 28, 2017 and $1.1 million related to~~Amended Credit Agreement. All obligations under the ~~previous facility will be amortized over the life~~Amended Credit Agreement are secured by substantial assets of the ~~new revolving line~~loan parties, including inventory, receivables and certain types of ~~credit.~~

The Company incurred $0.6 million of debt issuance costs related to the LILO term loan facility, which are presented net against the term loans balance on the condensed consolidated balance sheets, and will be amortized over the life of the revolving line of credit.intellectual property.

Borrowings under the revolving line of credit ~~and LILO term loan facility~~(other than swing line loans, which are subject to interest at the ~~borrowers’~~base rate) are subject to interest, at the borrower’s option, at either the ~~bank’s reference~~base rate or ~~LIBOR~~London Inter-bank Offered Rate (“LIBOR”) (or, in the case of the ~~revolving line of credit,~~Canadian borrowings, the ~~Bank of America “BA” Rate~~“BA Rate” or the ~~Canadian~~“Canadian Prime ~~Rate,~~Rate”, as such terms are defined in the ~~credit agreement,~~Amended Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the ~~United States~~“U.S. Index ~~Rate~~Rate”, as such term is defined in the Amended Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The ~~credit agreement~~Amended Credit Agreement contains various restrictive and affirmative covenants, including ~~among others,~~required financial reporting, limitations on the ability to ~~incur~~grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations ~~typical~~similar to ~~credit agreements of this type and size.~~ ~~As of~~ ~~October 28, 2017~~, ~~Restoration Hardware, Inc.~~ ~~was~~those frequently found in ~~compliance with all applicable covenants of the credit agreement.~~

As of October 28, 2017, the Company had $341.0 million in outstanding borrowings and $189.0 million of availability under the revolving line of credit, net of $27.7 million in outstanding letters of credit. As of October 28, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated fixed-charge coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit is approximately $125.2 million as of October 28, 2017.

~~Second Lien Credit Agreement~~

On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agent with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”). The second lien term loan of $100.0 million was repaid in full on October 10, 2017. As a result of the repayment, the Company incurred a $4.9 million loss on extinguishment of debt, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.

~~The Company incurred $3.6 million of debt issuance costs related to the second lien credit agreement.~~

The second lien term loan bore interest at an annual rate generally based on LIBOR plus 8.25%. This rate was a floating rate that reset periodically based upon changes in LIBOR rates during the life of the second lien term loan. At the date of borrowing, the rate was set at one month LIBOR plus 8.25%.

All obligations under the second lien term loan were secured by a second lien security interest in assets of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest was granted with respect to substantially the same collateral that secures the credit agreement. The second lien ranked junior in priority and is subordinated to the first lien in favor of the lenders with respect to the credit agreement.

The second lien credit agreement contained various restrictive and affirmative covenants generally in line with the covenants and restrictions contained in the credit agreement including required financial reporting, limitations on the ability to incur liens, make loans or other investments, incur additional debt, make certain restricted payments, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The ~~second lien credit agreement also contained a~~Amended Credit Agreement does not contain any significant financial ratio ~~covenant not found in the credit agreement based upon a senior secured leverage~~covenants or coverage ratio ~~of consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”).~~

~~The second lien credit agreement also contained~~covenants other than a consolidated fixed charge coverage ratio ~~generally~~(“FCCR”) covenant based on the ~~same formulation set forth~~ratio of (i) consolidated EBITDA to the amount of (ii) debt service costs plus certain other amounts, including dividends and distributions and prepayments of debt as defined in the ~~credit~~Amended Credit Agreement (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Amended Credit Agreement drops below the greater of (A) $40.0 million and (B) an amount based on 10% of the total borrowing availability at the time. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis. As of July 31, 2021, Restoration Hardware, Inc. was in compliance with the FCCR Covenant.

The Amended Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement ~~such that~~while (i) an event of default exists or (ii) when the ~~borrower may not make certain “restricted payments” in~~unused availability under the ~~event that certain ratios were not met~~Amended Credit Agreement drops below the greater of (A) $40.0 million and ~~contained certain~~(B) an amount based on 10% of the total borrowing availability at the time.

The Amended Credit Agreement includes customary events of default, in certain cases subject to customary periods to cure. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, terminate any existing commitments under the Amended Credit Agreement and declare the unpaid principal, accrued and unpaid interest and all other ~~customary~~amounts payable under the Amended Credit Agreement to be immediately due and payable.


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As of July 31, 2021, we had 0 outstanding borrowings under the revolving credit facility portion of the Amended Credit Agreement. The availability of the revolving line of credit at any given time under the Amended Credit Agreement is limited by the terms and conditions of the Amended Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Amended Credit Agreement. As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). As of July 31, 2021, the amount available for ~~a second lien~~borrowing under the revolving line of credit ~~agreement.~~under the Amended Credit Agreement was $389.1 million, net of $20.1 million in outstanding letters of credit.

~~Intercreditor Agreement~~Equipment Loan Facility

On ~~July 7,~~September 5, 2017, ~~in connection with the second lien credit agreement,~~ Restoration Hardware, Inc. entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and we agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an ~~intercreditor agreement (the “intercreditor agreement”) with~~equipment security note setting forth the ~~administrative agent and collateral agent~~terms for each particular equipment loan. Each equipment loan is secured by a purchase money security interest in the financed equipment. The maturity dates of the equipment security notes vary, but generally have a maturity of three or four years. We are required to make monthly installment payments under the credit agreement and the administrative agent and collateral agent under the second lien credit agreement. The intercreditor agreement established various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the credit agreement and the second lien credit agreement without the consent of the other party. The intercreditor agreement was terminated upon repayment of the second lien term loan on October 10, 2017.equipment security notes.

NOTE 11—FAIR VALUE ~~OF FINANCIAL INSTRUMENTS~~

~~Financial Assets and Liabilities~~MEASUREMENTS

Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, ~~the Company utilizes~~we utilize market data or assumptions that ~~it believes~~we believe market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

~~The Company’s~~Our financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant management judgment or estimation.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 27

~~Fair Value Measurements~~

~~All~~Table of the Company’s investments are classified as available-for-sale and are carried at fair value. The Company did not hold any short-term or long-term investments as of October 28, 2017. Assets measured at fair value were as follows as of January 28, 2017 (~~in thousands~~):Contents

Level 1

Level 2

Total

Cash equivalents

Money market funds

$
2,510

$
—

$
2,510

Commercial paper

—

5,493

5,493

Total cash equivalents

2,510

5,493

8,003

Short-term investments

Commercial paper

—

34,534

34,534

Government agency obligations

2,553

105,590

108,143

Total short-term investments

2,553

140,124

142,677

Long-term investments

Government agency obligations

—

33,212

33,212

Total long-term investments

—

33,212

33,212

Total

$
5,063

$
178,829

$
183,892

The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within the Company’s investment portfolio as of January 28, 2017 based on stated maturities, which are recorded within cash and cash equivalents, short-term investments and long-term investments on the condensed consolidated balance sheets (~~in thousands~~):

Cost

Fair Value

Range of maturity

Due within 1 year

$
148,155

$
148,170

Due in 1 to 2 years

$
33,238

$
33,212

The Company invests excess cash primarily in investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper, government agency obligations and guaranteed obligations of the U.S. government, all of which are subject to minimal credit and market risks. The Company estimates the fair value of its commercial paper and U.S. government agency bonds by taking into consideration valuations obtained from third party pricing services. The pricing services utilize industry standard valuation models, including both income and market based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trade dates of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities, prepayment/default projections based on historical data; and other observable inputs.

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the three and nine months ended October 28, 2017 or October 29, 2016. There were no transfers into or out of level 1 and level 2 during the three and nine months ended October 28, 2017 or October 29, 2016.

Fair Value ~~of Financial Instruments~~Measurements—Recurring

Amounts reported as cash and equivalents ~~receivables,~~, accounts receivables—net, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts. The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently. The estimated fair value and carrying value of the ~~2019~~2023 Notes and ~~2020~~2024 Notes ~~(carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity)~~ were as follows (in thousands):


	JULY 31,				JANUARY 30,
	2021				2021
	FAIR		CARRYING		FAIR		CARRYING
	VALUE		VALUE ⁽¹⁾		VALUE		VALUE ⁽¹⁾
Convertible senior notes due 2023	$	287,314	$	267,905	$	301,794	$	287,936
Convertible senior notes due 2024		314,630		292,437		286,161		284,182

October 28,

January 28,

2017

2017

Fair
Value

Carrying
Value

Fair
Value

Carrying
Value

Convertible senior notes due 2019

$
312,281

$
325,334

$
295,381

$
314,543

Convertible senior notes due 2020

$
247,300

$
251,771

$
232,463

$
239,876

(1)

Carrying value represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity, and does not exclude the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

The fair value of each of the ~~2019~~2023 Notes and ~~2020~~2024 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of ~~the Company’s~~our convertible

notes, when available, ~~the Company’s~~our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ~~the Company (level~~ours (Level 2).

Fair Value Measurements—Non-Recurring

The ~~estimated~~ fair value of the ~~asset~~Waterworks reporting unit tradename was determined based ~~credit facility was $341.0 million, which approximates cost,~~on unobservable (Level 3) inputs and valuation techniques, as ~~of October 28, 2017. Fair value approximates cost as the interest rate associated with the facility is variable~~discussed in Note 4—Goodwill, Tradenames,Trademarks and ~~resets frequently.~~Other Intangible Assets.

The ~~estimated~~ fair value of the ~~LILO term loan is $80.0 million, which approximates cost, as of October 28, 2017. Fair value approximates cost as the interest rate~~acquired goodwill and tradename associated with acquisitions by the ~~facility is variable~~RH Segment in fiscal 2020 were determined based on unobservable (Level 3) inputs and ~~resets frequently.~~valuation techniques.

The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in Note 5—Equity MethodInvestments, were determined based on unobservable (Level 3) inputs and valuation techniques.

NOTE 12—INCOME TAXES

~~The Company~~We recorded income tax expense of ~~$6.2~~$3.0 million and ~~$1.8~~$18.9 million in the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. ~~The Company~~We recorded income tax expense of ~~$9.9~~$44.7 million and ~~an income tax benefit of $2.6~~$17.5 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. The effective tax rate was ~~32.1%~~1.3% and ~~41.4%~~16.1% for the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. The effective tax rate was ~~83.7%~~11.1% and ~~38.9%~~15.5% for the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. The effective tax rates for the three and nine months ended October 28, 2017 were impacted by net excess tax benefits from stock-based compensation of $1.9 million and $4.3 million, respectively, resulting from the Company’s adoption of ASU 2016-09decrease in ~~the first quarter of fiscal 2017. The~~our effective tax rate for both the ~~nine~~three and six months ended ~~October 28, 2017 was also significantly impacted by non-deductible~~July 31, 2021 as compared to the three and six months ended August 1, 2020 is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based ~~compensation.~~compensation in 2021 as compared to 2020.

As of ~~October 28, 2017 and January 28, 2017, $6.8~~July 31, 2021, we had $8.9 million ~~and $1.4 million, respectively,~~ of ~~the exposures related to~~ unrecognized tax benefits, of which $8.1 million would ~~affect~~reduce income tax expense and the effective tax rate, if ~~realized, of which, as of both October 28, 2017 and January 28, 2017, $1.4 million is included in~~recognized. The remaining unrecognized tax benefits would offset other ~~non-current obligations on the condensed consolidated balance sheets. In October 2017, the Company filed an amended federal~~deferred tax return claiming a $5.4 million refund, however, no income tax benefit was recorded during the three months ended October 28, 2017 given the technical nature and amount of the refund claim. An income tax benefit related to this refund claim could be recorded in a future period upon settlement with the respective taxing authority.assets, if recognized. As of ~~October 28, 2017, the Company does not have any~~July 31, 2021, we had $6.2 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.


28 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

NOTE 13—NET INCOME ~~(LOSS)~~ PER SHARE

The weighted-average shares used for net income ~~(loss)~~ per share ~~is presented~~are as follows:


	THREE MONTHS ENDED		SIX MONTHS ENDED
	JULY 31,	AUGUST 1,	JULY 31,	AUGUST 1,
	2021	2020	2021	2020
Weighted-average shares—basic	21,166,638	19,386,115	21,084,941	19,314,479
Effect of dilutive stock-based awards	6,757,728	5,205,159	6,737,107	4,787,988
Effect of dilutive convertible senior notes⁽¹⁾	4,054,732	1,973,431	3,772,507	1,281,263
Weighted-average shares—diluted	31,979,098	26,564,705	31,594,555	25,383,730

(1)

The $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), the 2023 Notes and the 2024 Notes would have an impact on our dilutive share count beginning at stock prices at or above $118.13 per share, $193.65 per share and $211.40 per share, respectively. The 2020 Notes matured on July 15, 2020 and did not have an impact on our dilutive share count post-termination. The warrants associated with our 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices at or above $189.00 per share, $309.84 per share and $338.24 per share, respectively. The warrants associated with our 2020 Notes expired on January 7, 2021.

While the ~~table below. As~~share price for our common stock trades above the ~~Company was in a net loss position~~applicable conversion price of each series of notes or the applicable exercise price of each series of warrants for the ~~nine months ended October 29, 2016,~~notes, these instruments will have a dilutive effect with respect to our common stock to the ~~weighted-average shares outstanding for basic~~extent that the price per share of our common stock continues to exceed the applicable conversion or exercise price of the notes and ~~diluted are the same.~~warrants. Refer to Note 9—Convertible Senior Notes.

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Weighted-average shares—basic

21,221,848

40,730,059

29,076,556

40,653,091

Effect of dilutive stock-based awards

2,313,769

196,391

1,516,826

—

Weighted-average shares—diluted

23,535,617

40,926,450

30,593,382

40,653,091

~~The following number~~Dilutive options of ~~options~~82,562 and ~~restricted stock units~~800,854 were excluded from the calculation of diluted net income ~~(loss)~~ per share for the three months ended July 31, 2021 and August 1, 2020, respectively, because their inclusion would have been ~~anti-dilutive:~~anti-dilutive. Dilutive options of 68,918 and 521,717 were excluded from the calculation of diluted net income per share for the six months ended July 31, 2021 and August 1, 2020, respectively, because their inclusion would have been anti-dilutive.

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Options

2,222,103

7,995,703

3,701,484

8,594,487

Restricted stock units

128,723

892,279

305,744

1,151,993

Total anti-dilutive stock-based awards

2,350,826

8,887,982

4,007,228

9,746,480

NOTE 14—SHARE ~~REPURCHASES~~REPURCHASE PROGRAM

~~$700 Million Share Repurchase Program~~

~~On May 2, 2017, the Company’s~~In 2018, our Board of Directors authorized a ~~stock~~share repurchase ~~program of up to $700 million (the “$700 Million Repurchase Program”). Under the $700 Million Repurchase Program, the Company~~program. In fiscal 2018, we repurchased approximately ~~12.4~~2.0 million shares of ~~its~~our common stock under this share repurchase program at an average price of ~~$56.60~~$122.10 per share, for an aggregate repurchase amount of approximately $700 million, during the three months ended July 29, 2017. As the $700 Million Repurchase Program was completed during the three months ended July 29, 2017, no additional shares were repurchased during the three months ended October 28, 2017 and there will be no repurchases in future periods under this repurchase authorization.

~~$300 Million Share Repurchase Program~~

On February 21, 2017, the Company’s Board of Directors authorized a stock repurchase program of up to $300 million (the “$300 Million Repurchase Program”). Under the $300 Million Repurchase Program, the Company$250.0 million. In fiscal 2019, we repurchased approximately ~~7.8~~2.2 million shares of ~~its~~our common stock under this program at an average price of ~~$38.24~~$115.36 per share, for an aggregate repurchase amount of approximately ~~$300~~$250.0 million. We did not make any repurchases under this program during either the six months ended July 31, 2021 or August 1, 2020. The total current authorized size of the share repurchase program is up to $950 million (the “950 Million Repurchase Program”), of which $450.0 million remained available as of July 31, 2021 for future share investments.

NOTE 15—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $10.1 million and $6.9 million during the three months ended ~~April 29, 2017. As the $300 Million Repurchase Program was completed during the three months ended April 29, 2017, no additional shares were repurchased during the three months ended October 28, 2017~~July 31, 2021 and ~~there will be no repurchases in future periods under this repurchase authorization.~~

~~Share Repurchases Under Equity Plans~~

Certain options and awards granted under the Company’s equity plans contain a repurchase right, which may be exercised at the Company’s discretion in the event of the termination of an employee’s employment with the Company. No shares were repurchased under equity plans during either the three and nine months ended October 28, 2017 or October 29, 2016. As of both October 28, 2017 and January 28, 2017, the aggregate unpaid principal amount of the notes payable for share repurchases was $19.4 million,August 1, 2020, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets. During both the three months ended October 28, 2017 and October 29, 2016, the Company recorded interest expense on the outstanding notes of $0.2 million. During both the nine months ended October 28, 2017 and October 29, 2016, the Company recorded interest expense on the outstanding notes of $0.7 million.

~~Of the $19.4 million notes payable for share repurchases outstanding as of both October 28, 2017 and January 28, 2017, $15.5 million was due to a current board member of the Company.~~

~~NOTE 15—STOCK-BASED COMPENSATION~~

The Company estimates the value of equity grants based upon an option-pricing model and recognizes this estimated value as compensation expense over the vesting periods. The Company recognizes expense associated with performance-based awards when it becomes probable that the performance condition will be met. Once it becomes probable that an award will vest, the Company recognizes compensation expense equal to the number of shares which are probable to vest multiplied by the fair value of the related shares measured at the grant date.

~~Stock-based compensation expense is included in~~ selling, general and administrative expenses on the condensed consolidated statements of ~~operations. The Company~~income. We recorded stock-based compensation expense of ~~$6.7~~$25.4 million and ~~$7.4~~$12.7 million during the ~~three~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. ~~The Company recorded stock-based compensation expense of $42.9 million and $21.7 million during the nine months ended October 28, 2017 and October 29, 2016, respectively. No~~NaN stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

~~2012 Stock Incentive Plan and 2012 Stock Option Plan~~

As of October 28, 2017, 8,837,586 options were outstanding with a weighted-average exercise price of $50.20 per share and 6,318,980 options were vested with a weighted-average exercise price of $51.96 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 28, 2017 was $323.7 million, $283.8 million, and $220.6 million, respectively. Stock options exercisable as of October 28, 2017 had a weighted-average remaining contractual life of 6.37 years. As of October 28, 2017, the total unrecognized compensation expense related to unvested options was $26.8 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.33 years.

As of October 28, 2017, the Company had 825,307 restricted stock units outstanding with a weighted-average grant date fair value of $52.20 per share. During the three months ended October 28, 2017, 18,590 restricted stock units vested with a weighted-average grant date and vest date fair value of $73.95 per share and $73.06 per share, respectively. During the nine months ended

October 28, 2017, 264,843 restricted stock units vested with a weighted-average grant date and vest date fair value of $59.11 per share and $54.71 per share, respectively. As of October 28, 2017, there was $22.5 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of 3.26 years.

Chairman and Chief Executive Officer Option Grant

On ~~May 2, 2017, the Company’s~~October 18, 2020, our Board of Directors granted Mr. Friedman an option to purchase ~~1,000,000~~700,000 shares of ~~the Company’s~~our common stock with an exercise price equal to ~~$50~~$385.30 per ~~share.~~share under the 2012 Stock Incentive Plan. See Note 18—Stock-Based Compensation in the 2020 Form 10-K.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 29

Table of Contents

The option contains ~~dual-condition~~selling restrictions ~~consisting~~on the underlying shares that lapse upon the achievement of both time-based service ~~restrictions over four years~~requirements and ~~performance-based restrictions linked to achieving the Company’s common~~ stock price ~~objectives of $100, $125 and $150 per share.~~performance-based metrics as described further below. The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option ~~resulted~~will result in ~~a one-time~~aggregate non-cash stock compensation ~~charge~~expense of ~~$23.9~~$173.6 million, of which $5.8 million and $11.7 million was recognized during the three and six months ended July 31, 2021, respectively (which is included in the ~~nine~~stock-based compensation expense recorded during the three and six months ended ~~October 28, 2017. The Company did not record any~~July 31, 2021 noted above). As of July 31, 2021, the total unrecognized compensation expense ~~related to this grant in the three months ended October 28, 2017.~~

~~Time-Based Restrictions~~

~~The time-based restrictions are measured over~~was $44.8 million, which will be recognized on an initial four year service period from the date of the award and these restrictions will lapse at the end of each of these first four years at a rate of 250,000 shares per year if (i) Mr. Friedman remains employed at the end of such year, and (ii) the stock price goals have been achieved in such year as described further below.

~~Performance-Based Restrictions~~

The stock price objectives are measured each year and are set at prices for the Company’s common stock of $100, $125 and $150 per share. If all three stock price objectives are met in the first performance year, restrictions will lapse as to 250,000 shares in aggregate at the end of such year, with 83,333 shares tied to a $100 price per share, 83,333 shares tied to a $125 price per share and 83,334 shares tied to a $150 price per share.

The same price performance tests are applied in the second year of performance such that restrictions will lapse for an additional 250,000 shares at the end of the second year and then again as to an additional 250,000 shares at the end of each of the third and fourth years so long as Mr. Friedman remains employed at the end of each year.

To the extent that any of the price performance objectives is not reached within one of these first four performance years, the stock price objective can be achieved in any subsequent year until the 8th anniversary of the date of grant.accelerated basis through May 2025.

2012 Stock Incentive Plan ~~Grant to Waterworks Associates~~

~~On May 27, 2016, on the date of our acquisition of Waterworks, the Company granted stock options to certain Waterworks associates under the~~and 2012 Stock ~~Incentive~~Option Plan ~~to purchase 322,784 shares~~

As of ~~its common stock,~~July 31, 2021, 7,895,050 options were outstanding with ana weighted-average exercise price of ~~$33.54~~$107.35 per share and 7,555,774 options were vested with a weighted-average exercise price of $102.88 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 31, 2021 was $4,395.8 million, $4,240.6 million, and $3,794.8 million, respectively. Stock options exercisable as of July 31, 2021 had a weighted-average remaining contractual life of 3.38 years. As of July 31, 2021, the total unrecognized compensation expense related to unvested options was $97.7 million, which is ~~equal~~expected to be recognized on a straight-line basis over a weighted-average period of 5.04 years. In addition, as of July 31, 2021, the total unrecognized compensation expense related to the ~~closing price of the Company’s common stock on the date of grant. These options are~~ fully vested ~~as of the date of~~option grant ~~but any shares issued upon exercise of such options~~made to Mr. Friedman in October 2020 was $44.8 million, which will be ~~subject~~recognized on an accelerated basis through May 2025 (refer to ~~selling restrictions~~Chairman and Chief Executive Officer Option Grant above).

As of July 31, 2021, we had 23,690 restricted stock units outstanding with a weighted-average grant date fair value of $157.52 per share. During the three months ended July 31, 2021, 61,340 restricted stock units vested with a weighted-average grant date fair value of $42.47 per share. During the six months ended July 31, 2021, 65,760 restricted stock units vested with a weighted-average grant date fair value of $43.06 per share. As of July 31, 2021, there was $2.9 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which ~~are scheduled~~is expected to ~~lapse in five equal installments on the first, second, third, fourth and fifth anniversaries~~be recognized over a weighted-average period of ~~the grant date. The fully vested options resulted in a one-time non-cash stock-based compensation charge of $3.7 million in the second quarter of fiscal 2016.~~1.76 years.

Rollover Units

In connection with the acquisition of Waterworks in May 2016, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of ~~operations.~~income. The fair value of the Appreciation Rights is determined based on an ~~option pricing method~~option-pricing model (“OPM”). ~~The Company~~We did not record any expense related to the Appreciation Rights during both the three ~~or nine~~and six months ended ~~October 28, 2017 or October 29, 2016.~~July 31, 2021 and August 1, 2020. As of both ~~October 28, 2017~~July 31, 2021 and January ~~28, 2017,~~30, 2021, the liability associated with the Rollover Units and related Appreciation Rights was $1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

Profit Interests

In connection with the acquisition of Waterworks in May 2016, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates. The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years. The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of ~~operations.~~income. The fair value of the Profit Interests is determined based on an OPM. ~~For~~During the ~~three and nine~~six months ended ~~October 28, 2017, the Company~~July 31, 2021 and August 1, 2020, we recorded $0.1 million and ~~$0.3~~$0.2 million ~~respectively,~~ related to the Profit Interests, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of ~~operations. For the three and nine months ended October 29, 2016 the Company recorded $0.1 million and $0.2 million, respectively, related to the Profit Interests.~~income. As of ~~October 28, 2017~~July 31, 2021 and January ~~28, 2017,~~30, 2021, the liability associated with the Profit Interests was ~~$0.6~~$2.1 million and ~~$0.3~~$2.0 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

NOTE 16—~~RELATED PARTY TRANSACTIONS~~

~~Aircraft Time Sharing Agreement~~

On March 29, 2016, Restoration Hardware, Inc., a wholly-owned subsidiary of the Company entered into an Amended and Restated Aircraft Time Sharing Agreement (the “Time Sharing Agreement”) with Gary Friedman, its Chairman and Chief Executive Officer. The Time Sharing Agreement governs use of any of the Company’s aircraft (“Corporate Aircraft”) by Mr. Friedman for personal trips and provides that Mr. Friedman will lease such Corporate Aircraft and pay Restoration Hardware, Inc. an amount equal to the aggregate actual expenses of each personal use flight based on the variable costs of the flight, with the amount of such lease payments not to exceed the maximum payment level established under the Federal Aviation Administration rules. Mr. Friedman maintains a deposit with the Company, to be used towards payment of amounts due under the Time Sharing Agreement. The amount of the deposit is immaterial to the condensed consolidated financial statements.

~~NOTE 17—~~COMMITMENTS AND CONTINGENCIES

Commitments

~~The Company~~We had no0 material off balance sheet commitments as of ~~October 28, 2017.~~July 31, 2021.


30 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

Contingencies

~~The Company is~~We are involved in lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of ~~its~~our business. These disputes are increasing in number as the business expands and ~~the Company grows~~we grow larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which ~~the Company is~~we are involved could result in unexpected expenses and liability that could adversely affect ~~the Company’s~~our operations. In addition, any claims against ~~the Company,~~us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of ~~management~~our senior leadership team’s time and result in the diversion of significant operational resources.

~~The Company reviews~~We review the need for any loss contingency reserves and ~~establishes~~establish reserves when, in the opinion of ~~management,~~our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that ~~the Company does~~we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what ~~the Company accrues~~we accrue from time to time. ~~The Company believes~~Although we believe that the ultimate resolution of ~~its~~our current ~~matters~~legal proceedings will not have a material adverse effect on ~~its~~our condensed consolidated financial ~~statements.~~

~~RH Modern Securities Class Action~~

On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaint in the United States District Court, Northern District of California, against the Company, Gary Friedman, and Karen Boone. On March 16, 2017, Peter J. Errichiello, Jr. filed a similar class action complaint in the same forum and against the same parties. On April 26, 2017, the court consolidated the two actions. The consolidated action is captioned In re RH, Inc. Securities Litigation. The complaints allege, among other things, fraud in connection with alleged misstatements under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Both complaints purport to make claims on behalf of a class of purchasers of Company common stock from March 26, 2015 to June 8, 2016. The alleged misstatements relate to forward looking statements, regarding the roll out of the RH Modern product line. The claims are currently at an early stage and it is not possible to estimate the amount or range of any potential loss at this time. An amended consolidated complaint was filed in June 2017 and the Company and its officers have moved

~~to dismiss the complaint. While~~ the outcome of ~~litigation~~legal matters is ~~inherently uncertain, the Company and its officers intend~~subject to ~~vigorously defend the claims and believe the complaints lack merit~~.inherent uncertainty.

NOTE ~~18—~~17—SEGMENT REPORTING

~~The Company defines~~We define reportable and operating segments on the same basis that ~~it uses~~we use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”)~~. The Company has~~, which we have determined ~~that the~~is our Chief Executive ~~Officer is its CODM. As of October 28, 2017, the Company had two~~Officer. We have 3 operating segments: RH Segment, Waterworks and ~~Waterworks.~~Real Estate Development. The ~~two~~RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by ~~the Company’s~~our customers, including sales through ~~catalogs, sales through the Company’s~~retail locations and outlets, websites, ~~sales through stores,~~Source Books, and ~~sales through~~ the commercial ~~channel~~channel. The Real Estate Development segment represents operations associated with our equity method investments entered into in fiscal 2020, as described in Note 5—Equity Method Investments.

The ~~Company’s two~~retail operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared ~~management~~senior leadership team and customer base, ~~the Company has~~we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

~~The Company uses~~We use operating income to evaluate segment ~~profitability.~~profitability for the retail operating segments. Operating income is defined as net income ~~(loss)~~ before interest expense—net, tradename impairment, (gain) loss on extinguishment of debt, income tax expense and ~~income taxes.~~

~~Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition~~our share of Waterworks was completed on May 27, 2016, reportable segment financial information for Waterworks below represents twenty-two weeks of results for the nine months ended October 29, 2016, whereas the RH Segment results represent thirty-nine weeks for the nine months ended October 29, 2016. The results for both the three months ended October 28, 2017 and October 29, 2016 include thirteen weeks for both the RH Segment and Waterworks.equity method investments losses.

Segment Information

The following table presents the statements of ~~operations~~income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting (in ~~thousands)~~thousands):


	THREE MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	947,618	$	41,241	$	988,859	$	681,387	$	27,895	$	709,282
Gross profit		467,067		20,609		487,676		320,481		11,938		332,419
Depreciation and amortization		21,484		1,186		22,670		24,234		1,108		25,342

Three Months Ended

Three Months Ended

October 28,

October 29,

2017

2016

RH Segment

Waterworks

Total

RH Segment

Waterworks

Total

Net revenues

$
563,174

$
29,299

$
592,473

$
521,027

$
28,301

$
549,328

Gross profit

$
203,221

$
11,104

$
214,325

$
166,124

$
9,695

$
175,819

Depreciation and amortization

$
17,474

$
1,072

$
18,546

$
13,966

$
1,070

$
15,036


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 31

Nine Months Ended

Nine Months Ended

October 28,

October 29,

2017

2016

RH Segment

Waterworks

Total

RH Segment

Waterworks

Total

Net revenues

$
1,680,495

$
89,384

$
1,769,879

$
1,499,101

$
49,064

$
1,548,165

Gross profit

$
555,844

$
34,550

$
590,394

$
467,402

$
15,731

$
483,133

Depreciation and amortization

$
47,761

$
3,331

$
51,092

$
39,484

$
1,764

$
41,248

Table of Contents


	SIX MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	1,767,441	$	82,210	$	1,849,651	$	1,136,344	$	55,833	$	1,192,177
Gross profit		853,620		41,033		894,653		508,243		23,830		532,073
Depreciation and amortization		44,164		2,392		46,556		47,951		2,261		50,212

24The Real Estate Development segment share of equity method investments losses were $2.5 million and $4.6 million during the three and six months ended July 31, 2021, respectively.

The following table presents the balance sheet metrics ~~reviewed by the CODM to evaluate performance internally~~ as required under ASC 280—Segment Reporting (in ~~thousands)~~thousands):


	JULY 31,								JANUARY 30,
	2021								2021
					REAL ESTATE								REAL ESTATE
	RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL		RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL
Goodwill ⁽¹⁾	$	141,132	$	—	$	—	$	141,132	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets ⁽²⁾		55,584		17,000		—		72,584		54,663		17,000		—		71,663
Equity method investments		—		—		97,412		97,412		—		—		100,603		100,603
Total assets		3,215,534		154,206		97,412		3,467,152		2,659,944		137,766		100,603		2,898,313

October 28,

January 28,

2017

2017

RH Segment

Waterworks

Total

RH Segment

Waterworks

Total

Goodwill ⁽¹⁾

$
124,409

$
51,144

$
175,553

$
124,374

$
49,229

$
173,603

Trademarks and domain names

$
48,563

$
52,100

$
100,663

$
48,524

$
52,100

$
100,624

Total assets

$
1,649,057

$
152,509

$
1,801,566

$
2,040,346

$
152,174

$
2,192,520

(1)

The Waterworks reporting unit goodwill ~~increased $1.9~~of $51.1 million ~~during the nine months ended October 28,~~recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $17.4 million and $33.7 million impairment recorded in fiscal 2018 and fiscal 2017, ~~due to purchase price accounting adjustments. Refer to Note 3—Business Combination~~.

respectively.

(2)	The Waterworks reporting unit tradename is presented net of an impairment charge of $35.1 million, with $20.5 million and $14.6 million recorded in fiscal 2020 and fiscal 2018, respectively.

~~The Company uses~~We use segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) a non-cash compensation ~~charges~~charge related to a fully vested option grant made to Mr. Friedman in October 2020, (ii) asset impairments and ~~the fully vested option grants made~~ ~~in connection with the acquisition of Waterworks, (ii)~~ ~~reduction of net revenues, incremental costs and inventory charges associated with~~lease losses, (iii) product ~~recalls, (iii) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks,~~recall accruals, (iv) severance costs associated with ~~anticipated distribution center closures,~~reorganizations and (v) ~~gain~~loss on sale of building and land, (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim, (vii) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, and ~~(viii)~~ ~~costs incurred in connection with the acquisition of Waterworks including professional fees.~~leaseback transaction. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that ~~management reviews.~~the CODM and our senior leadership team review.


32 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

The following table ~~shows~~presents segment operating income ~~(loss)~~ and income ~~(loss)~~ before ~~tax~~income taxes (in thousands):


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Operating income:
RH Segment	$	257,242	$	153,350	$	445,252	$	202,867
Waterworks		5,413		1,573		11,655		123
Non-cash compensation		(5,864)		—		(11,728)		—
Asset impairments and lease losses		(7,354)		(1,339)		(7,354)		(9,810)
Recall accrual		—		(4,780)		(500)		(4,780)
Reorganization related costs		(449)		(2,884)		(449)		(7,027)
Loss on sale leaseback transaction		—		(9,352)		—		(9,352)
Income from operations		248,988		136,568		436,876		172,021
Interest expense—net		13,581		19,418		26,889		39,047
(Gain) loss on extinguishment of debt		3,166		(152)		3,271		(152)
Tradename impairment		—		—		—		20,459
Income before income taxes	$	232,241	$	117,302	$	406,716	$	112,667

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Operating income (loss):

RH Segment

$
48,724

$
18,660

$
98,332

$
51,687

Waterworks

(719
)

(514
)

(2,143
)

344

Non-cash compensation

—

—

(23,872
)

(3,672
)
Recall accrual

(3,552
)

—

(8,285
)

—

Impact of inventory step-up

(248
)

(1,786
)

(2,108
)

(5,187
)
Distribution center closures

(1,862
)

—

(1,862
)

—

Gain on sale of building and land

819

—

2,119

—

Legal claim

—

—

—

(8,701
)
Reorganization related costs

—

(974
)

—

(5,698
)
Acquisition related costs

—

—

—

(2,847
)
Operating income

43,162

15,386

62,181

25,926

Interest expense—net

18,915

11,091

45,496

32,528

Loss on extinguishment of debt

4,880

—

4,880

—

Income (loss) before tax

$
19,367

$
4,295

$
11,805

$
(6,602
)

~~The Company classifies its~~We classify our sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor. Net revenues in each category were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016

									THREE MONTHS ENDED				SIX MONTHS ENDED
									JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
									2021		2020		2021		2020
Furniture	$	383,281	$	343,946	$	1,125,220	$	985,639	$	699,729	$	483,205	$	1,279,740	$	795,728
Non-furniture		209,192		205,382		644,659		562,526		289,130		226,077		569,911		396,449
Total net revenues	$	592,473	$	549,328	$	1,769,879	$	1,548,165	$	988,859	$	709,282	$	1,849,651	$	1,192,177

~~The Company is~~During the third fiscal quarter of 2020, we reviewed our segments and product lines and updated certain products and categories in our reporting of furniture and non-furniture product lines. While this reporting change did not impact our consolidated results, prior period segment data has been recast for consistency in reporting.

We are domiciled in the United States and primarily ~~operates its~~operate our retail and outlet ~~stores~~locations in the United States. As of ~~October 28, 2017, the Company operates~~July 31, 2021, we operated 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K. ~~Revenues from Canadian~~

~~and U.K. operations, and the long-lived assets~~Geographical revenues in Canada and the U.K., are based upon revenues recognized at the retail locations in the respective country and were not material ~~to the Company. Geographic revenues are determined based upon where service is rendered.~~in any fiscal period presented. Long-lived assets held internationally were not material in any fiscal period presented.

NoNaN single customer accounted for more than 10% of ~~the Company’s~~our revenues in the three or ~~nine~~six months ended ~~October 28, 2017 or October 29, 2016.~~July 31, 2021 and August 1, 2020.

~~NOTE 19—SUBSEQUENT EVENT~~

~~Distribution Center Closures~~

~~During the third quarter~~


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 33

Table of fiscal 2017, the Company committed to a plan to close its Mira Loma, CA and Dallas, TX furniture distribution centers by the end of fiscal 2017, prior to the end of the respective lease terms. The Mira Loma, CA distribution center closed in November 2017 and the Dallas, TX distribution center is expected to close by the end of fiscal 2017. During the three months ended October 28, 2017, the Company incurred costs in its RH Segment of $1.9 million associated with the distribution center closures, including $1.4 million of severance which is included in selling, general and administrative expenses on the condensed consolidated statements of operations and $0.5 million of inventory transfers costs which is included in cost of goods sold on the condensed consolidated statements of operations. As of October 28, 2017, the remaining accrual associated with these closures was $1.7 million which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. The Company expects to record additional expenses related to the distribution center closures during the fourth quarter of fiscal 2017, primarily related to liabilities for lease losses and losses on disposal of capitalized property and equipment. The Company estimates that the remaining charge will be approximately $0.5 million to $1.0 million for the Mira Loma, CA distribution center closure. The Company is not currently able to estimate the remaining charge expected to be incurred upon the Dallas, TX distribution center closure due to the uncertainty in the timing and the market rental rates the Company will be able to obtain for a sublease agreement for the space.Contents

~~Item~~

ITEM 2. ~~Management’s Discussion and Analysis of~~ ~~Financial Condition and Results of Operations~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of ~~the~~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 ~~2016~~2020 Form 10-K.

FORWARD-LOOKING STATEMENTS AND MARKET DATA

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. 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.

Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results, and matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may, in fact, 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, include those factors disclosed under the ~~sections~~section entitled Risk Factors ~~in Part II of this quarterly report,~~ in our Annual Report on Form 10-K for the fiscal year ended January ~~28, 2017 (“2016~~30, 2021 (the “2020 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2021 (the “First Quarter Form 10-Q”) and in our ~~2016~~2020 Form 10-K. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this quarterly report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as ~~otherwise~~ required by law.

Overview

We are a leading luxury retailer in the home furnishings ~~marketplace.~~market. Our curated and ~~fully-integrated~~fully integrated assortments are presented consistently across our sales channels in sophisticated and unique lifestyle ~~settings that we believe are on par with world-class interior designers.~~settings. We offer ~~dominant~~ merchandise assortments across a ~~growing~~ number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, ~~tableware,~~ and child and teen furnishings. We position our Galleries as showrooms for our brand, while our websites and Source Books ~~and websites~~ act as virtual extensions of our ~~stores.~~

physical spaces. Our retail business is fully integrated across our multiple channels of distribution, consisting of our ~~stores,~~retail locations, websites and Source ~~Books~~Books. We have an integrated RH Hospitality experience in 11 of our locations, which include Restaurants and ~~websites.~~ Wine Bars.


34 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

As of ~~October 28, 2017,~~July 31, 2021, we operated ~~a total~~the following number of ~~84 retail~~ Galleries, ~~consisting of 48 legacy Galleries, 6 larger format Design Galleries, 9 next generation Design Galleries, 1 RH Modern Gallery~~Outlets and ~~5 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms~~Showrooms:


		COUNT
RH
Design Galleries		25
Legacy Galleries		37
Modern Galleries		1
Baby & Child and TEEN Galleries		3
Total Galleries		66
Outlets		38
Waterworks Showrooms		14

The COVID-19 outbreak in the ~~United States~~first quarter of fiscal 2020 caused disruption to our business operations beginning in the first quarter of fiscal 2020. The pandemic has continued since the initial outbreak and has included spikes and outbreaks in various locations around the world including as a result of new strains of the COVID virus such as the “Delta” variant. In our initial response to the health crisis we undertook immediate adjustments to our business operations including temporarily closing all of our retail locations and Restaurants, curtailing expenses, and delaying investments including scaling back some inventory orders while we assessed the status of our business. Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth fiscal quarters of fiscal 2020 as a result of both the reopening of most of our retail locations and also strong consumer demand for our products. Operational restrictions related to the pandemic affecting our Galleries and hospitality locations continued to fluctuate through the second quarter of 2021 based upon changes in local conditions and regulations. As of September 3, 2021, all of our Galleries, Outlets and Restaurants were open.

In fiscal 2016, we experienced a slowdown in sales and substantially lower level of profits than in prior periods. We have undertaken initiatives to specifically address the temporal factors affecting our results in fiscal 2016, in additionsome cases, facility closures related to the ~~other numerous initiatives we are undertaking~~pandemic. As a result, the ongoing nature of the pandemic may continue to ~~improve~~adversely affect our business ~~and financial performance~~operations in ~~fiscal~~ ~~2017 and beyond. If these initiatives are successful, we may return to rates of growth~~various jurisdictions, which could, in ~~revenues and improvements in margins and profitability that are more in line with our historical growth patterns prior to the downturn~~ that we experienced in fiscal 2016. However, there can be no assurance that these efforts will be successful or that we will not encounter other operational difficulties during fiscal 2017 and future time periods that mayturn, have a negative impact on ~~growth~~our vendors and ~~profitability. For further information on~~supply chain, and therefore, our business.

Our decisions regarding the ~~temporal factors affecting our results~~sources and ~~our initiatives, see~~ ~~Item 2—Management’s Discussion and Analysis~~uses of ~~Financial Condition and Results of Operations—Overview—Key Value Driving Strategies~~ ~~in this Quarterly Report on Form 10-Q and~~ ~~Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations~~ capital in our ~~2016 Form 10-K.~~

~~Over the past 18 months, we transformed our~~ business ~~from a promotional to a membership model that is enhancing our brand, streamlining our operations, and improving the customer experience. We believe that the transition to a membership model has had a~~

favorable impact on our business and financial performance including through a reduction in our return rate, exchange rate and cancel rate resulting in higher conversion of demand into revenues. As of October 28, 2017, we had approximately 380,000 members which drove approximately 95% of sales of our core RH business during the three months ended October 28, 2017.

Simultaneously we began the redesign of our supply chain network, rationalizing our product offerings, and transitioning inventory into fewer facilities, creating a more capital efficient model. As a result, we were able to forego building a fifth furniture distribution center planned to open in 2017 and we expect to consolidate our current furniture distribution center network from four to two locations by the fourth quarter of 2017. We anticipate that managing our business in fewer facilities will ~~reduce inventory risk, increase turns, improve merchandise margins and eliminate the occupancy and overhead of approximately 1.75 million square feet of distribution space.~~

We continue to ~~pursue~~reflect and ~~test numerous initiatives~~adapt to ~~improve many aspects of~~changes in market conditions and our business including through efforts to optimize inventory, elevate the home delivery experience and simplify our distribution network, as well as to expand our product offering and transform our real estate. There can be no assurance as to the timing and extent of the operational benefits and financial contributions of these strategic efforts. In addition, our pursuit of multiple initiativesfurther developments with respect to ~~our business in any given period may result in period-to-period changes in, and increased fluctuation~~the pandemic. For more information, refer to the section entitled Risk Factors in our results of operations. For example, our efforts to optimize our distribution network could cause us to incur costs and expenses in the short term with respect to changes in the way in which we operate our business such as charges related to closure of distribution centers. The above factors and other current and future operational initiatives of the Company may create additional uncertainty with respect to our consolidated net revenues and profit in the near term.

~~Acquisition of Waterworks~~

On May 27, 2016, we acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks,” for consideration consisting of approximately $119.9 million, consisting of $118.4 million funded with available cash and $1.5 million representing the fair value of rollover units, which amount is subject to adjustment for changes in working capital and other items. After the transaction, and giving effect to equity interests acquired by management in the business, we own in excess of 90% of the total equity interests in Waterworks.

Waterworks has long been the definition of the well-appointed bath, and is the only complete bath and kitchen business offering fittings, fixtures, furniture, furnishings, accessories, lighting, hardware and surfaces under one brand in the market. Waterworks is composed of the Waterworks, Waterworks Kitchen and Waterworks Studio brands, all built on a foundation of impeccable style, design integrity, quality and craftsmanship. Waterworks prides itself on its deep relationships in the design community and the technical expertise and tenure of its people.

~~Waterworks products are sold through its 15 showrooms in the United States and in the U.K., as well as through its boutique retail partners, hospitality division and online.~~2020 Form 10-K.

Key Value Driving Strategies

In order to drive growth across our business, we are focused on the following long-term key ~~strategies:~~strategies and business initiatives:


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 35

~~Transform~~Table of Contents

Product Elevation. We have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our ~~Real Estate Platform.~~products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve industry leading revenues and margins. Our customers know them as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby & Child, RH Teen and Waterworks. Our strategy to elevate the design and quality of our product will continue as we introduce RH Contemporary in 2022. We also have plans to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color over the next several years.

Gallery Transformation. Our product is elevated and rendered more valuable by our architecturally inspiring Galleries. We believe our strategy to open new Design Galleries in every major market will unlock the value of our vast assortment, generating a revenue opportunity for our business of $5 to $6 billion in North America. We believe we ~~have an opportunity to~~can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of ~~next generation~~ Design Galleries that ~~are~~is sized to the potential of each market and the size of our assortment. ~~New next generation Design Gallery sites are identified based on a variety~~In addition, we plan to incorporate Hospitality into most of ~~factors, including timing of legacy Gallery lease expiration, availability of suitable new site locations, the negotiation of favorable economic terms to the Company for~~ the new ~~location, as well as satisfactory and timely completion of real estate development including procurement of permits and completion of construction. The number of next generation~~ Design Galleries that we open in ~~any fiscal year is highly dependent upon these variables~~the future, which further elevates and ~~individual new Design Galleries may be subject to delay or postponement depending on the circumstances of specific projects. We opened RH Toronto in October 2017~~renders our product and ~~RH West Palm in November 2017, both with integrated food and beverage offerings, and expect to open at least three Design Galleries in fiscal 2018.~~

~~Expand Our Offering and Increase Our Market Share.~~brand more valuable. We believe ~~we have~~Hospitality has created a ~~significant opportunity to increase our market share by:~~

~~growing our merchandise assortment;~~

~~introducing~~unique new ~~products~~retail experience that cannot be replicated online, and ~~categories, including our introduction of RH Modern, RH TEEN and~~that the addition of Hospitality will help drive incremental sales of home furnishings in these Galleries.

Brand Elevation. We are beginning to evolve the ~~Waterworks business;~~

•

~~expanding our service offerings, including the introduction of the RH Interior Design program and cafes, wine vaults and coffee bars at our next generation Design Galleries;~~

~~exploring~~brand beyond curating and ~~testing new~~selling product, towards conceptualizing and selling spaces, by building an ecosystem of products, services, places and spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world.

Digital Reimagination. Our strategy is to digitally reimagine the RH brand and business ~~opportunities complementary to our core business;~~model both internally and

~~increasing~~ externally. Internally regarding how we innovate, curate, and integrate all the dynamic aspects of our brand, ~~awareness~~ and ~~customer loyalty through~~externally as we introduce our ~~Source Book circulation strategy,~~customers to The World of RH, a new digital portal presenting our ~~digital marketing initiatives~~Products, Services, Places and ~~our advertising and public relations activities and events.~~

•

~~Elevate the Customer Experience~~. We are focused on improving the end-to-end customer experience. As we have elevated our brand, especially at retail, we are also working to enhance the brand experience in other aspects of our business. We are making changes in many aspects of our business processes that affect our customers, including improvements in product quality and enhancements in sourcing, product availability, in-home delivery and all aspects of customer care and service. We have invested significant time in fiscal 2017 architecting a new fully integrated back-end operating platform, inclusive of the supply chain network, the home delivery experience ~~as well as a~~ new metric driven quality system and company-wide decision data. We also believe that the introduction of experiential brand-enhancing products and services, such as expanded design ateliers, the RH Interior Design program and ~~the planned launch of an integrated food and beverage experience in a number of our new Galleries,~~ ~~will further~~ ~~enhance our customers’ in-store experience, in addition to allowing us to further disrupt the highly fragmented home furnishings landscape and achieve market share gains.~~

~~Increase Operating Margins.~~ ~~We have~~Spaces. This multi-year effort began internally last year with the opportunity to continue to improve our operating margins by leveraging our fixed occupancy, advertising and corporate general and administrative costs, as well as leveraging our scalable infrastructure. Key areas in which we believe we will increase operating margins include:

~~Occupancy leverage;~~

~~Advertising cost leverage;~~

~~Improved product margin and shipping efficiencies; and~~

~~Other selling, general and administrative expenses.~~

~~Optimize the Allocation of Capital in the Business.~~ We believe that our operations and current initiatives present a significant opportunity to optimize the allocation of capital in our business, including generating free cash flow and optimizing cash on our balance sheet as well as deploying capital to repurchase sharesreimagination of our ~~common stock~~Center of Innovation & Product Leadership, which ~~we believe creates a long term benefit~~will incorporate digitally integrated visuals and decision data designed to ~~our shareholders. We have also incurred additional debt~~amplify the creative process from product ideation to ~~fund a portion~~product presentation.

Our external efforts will begin with the launch of our share repurchase programs and we believe that was a good capital allocation given favorable interest rates on debt and the ability of our business to generate cash in light of current business initiatives in order to paydown and service such debt. During fiscal 2017,phase one of our ~~initiatives has been~~new digital portal, The World of RH, which will include rich, immersive content with simplified navigation and search functionality, all designed to ~~generate additional cash flow through~~enhance the ~~optimization of inventory~~shopping experience and ~~other efforts~~render our product and brand more valuable. We believe an opportunity exists to make our business more efficient in its use of capital to support operations. Our current efforts to generate more cash flow in our business include rationalizing our SKU count and reducing overall levels of inventory, which involves selling slower moving, discontinued and other inventory through markdowns and through our outlet channel. We have also undertaken initiatives to optimize our distribution network and make significant improvements in the way that we handle merchandise in the distribution and delivery part of our business. We expect that these improvements will result in operational efficiencies in the handling and transportation of merchandise and will enable us to achieve greater efficiency and lower requirements for carrying inventory to meet customer demand. We plan to lower our new Gallery opening cadence to three to five Galleries per year, which we believe will result in improved deal economics, lower build out costs and higher returns and will lower our capital requirements and execution risk over the course of our real estate transformation. We also believe the slower opening cadence will put less pressure on our infrastructure, enabling greater capital discipline throughout the organization. In addition,create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a ~~number of assets that~~website can ~~be sold to third parties in order to generate cash. We expect to transition from a lease to a development model~~ and may enter into sale leaseback transactions with respect to certain real estate that we own, for example, and may enter into capital or operating leases in lieu of purchasing or holding certain assets that are used in our business. We intend to continue to seek out and evaluate opportunities for effectively managing and deploying capital in ways that support and enhance our business initiatives and strategies.should be.

~~Pursue International Expansion.~~ ~~We plan to strategically expand our business into select countries outside of the United States, Canada and the U.K. in the future.~~

Global Expansion. We believe that our luxury brand positioning and unique aesthetic ~~will~~ have strong international ~~appeal.~~

Additionally, in fiscal 2017, we expect incremental revenues from the four new Design Galleries opened in 2016, our new Design Gallery in Toronto which opened in October 2017, and the Design Gallery in West Palm Beach which opened in November 2017. The majority


36 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of our new Design Galleries under development include a dedicated floor for RH Modern as well as an RH Hospitality offering including restaurants, wine vaults, and pantries, similar to our successful hospitality offering at RH Chicago, The Gallery at the Three Arts Club.Contents

Basis of Presentation and Results of Operations

Matters Affecting Comparability

The disruption to our business operations from the pandemic has had a significant impact on the comparability of year-over-year and sequential trends for our operating results for the three and six months ended July 31, 2021, as compared to the three and six months ended August 1, 2020. The ongoing pandemic has resulted in escalating disruption in our supply chain, which continues to negatively impact our revenues and costs. The initial negative impact to our revenues from store closures occurred during the first half of fiscal 2020. Despite the reopening of most of our Galleries during the second and third quarters of fiscal 2020 and a strong resurgence in customer demand for our products, we have continued to address a range of business circumstances in the first half of fiscal 2021 related to the pandemic. These circumstances include delays in manufacturing and inventory receipts as our supply chain recovers from the impact of the global health crisis and responds to virus outbreaks and surges, including new strains such as the “Delta” variant, which has had a severe impact in certain jurisdictions, most notably Vietnam. We have also delayed the opening of certain new Gallery locations due to issues related to the pandemic, including the extensive travel restrictions that have been in place with respect to travel to various locations in Europe. Beginning in the second quarter of fiscal 2020, we resumed many investments and previously deferred expenditures, and our decisions regarding these matters will continue to evolve in response to changing business circumstances, including further developments with respect to the pandemic. Although we have experienced strong demand for our products since the second half of fiscal 2020, for example, some of the demand may have been driven by consumers electing to spend more money on home-related purchases due to stay-at-home restrictions that were in place throughout many parts of the United States and Canada. The relaxation of COVID-19-related restrictions may trigger a shift in consumer spending patterns toward other categories, such as travel and leisure activities, and away from the purchase of merchandise related to the home, including home furnishings, of which could affect our results of operation in fiscal 2021. Additionally, recent COVID-19 resurgences in various jurisdictions are expected to have direct and indirect effects on our business and operations that will continue to affect the comparability of our results during fiscal 2021.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 37

Table of Contents

Results of Operations

The following table sets forth our condensed consolidated statements of ~~operations~~income and other financial and operating ~~data.~~data:


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
	(in thousands)				(in thousands)
Condensed Consolidated Statements of Income:
Net revenues	$	988,859	$	709,282	$	1,849,651	$	1,192,177
Cost of goods sold		501,183		376,863		954,998		660,104
Gross profit		487,676		332,419		894,653		532,073
Selling, general and administrative expenses		238,688		195,851		457,777		360,052
Income from operations		248,988		136,568		436,876		172,021
Other expenses
Interest expense—net		13,581		19,418		26,889		39,047
Tradename impairment		—		—		—		20,459
(Gain) loss on extinguishment of debt		3,166		(152)		3,271		(152)
Total other expenses		16,747		19,266		30,160		59,354
Income before income taxes		232,241		117,302		406,716		112,667
Income tax expense		3,009		18,879		44,733		17,456
Income before equity method investments		229,232		98,423		361,983		95,211
Share of equity method investments losses		(2,486)		—		(4,581)		—
Net income	$	226,746	$	98,423	$	357,402	$	95,211
Other Financial and Operating Data:
Adjusted net income ⁽¹⁾	$	251,625	$	123,013	$	393,875	$	152,962
Adjusted EBITDA ⁽²⁾	$	290,370	$	185,787	$	518,628	$	263,214
Capital expenditures	$	31,887	$	30,899	$	82,138	$	47,531
Landlord assets under construction—net of tenant allowances		29,774		15,334		43,352		22,934
Adjusted capital expenditures ⁽³⁾	$	61,661	$	46,233	$	125,490	$	70,465

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

(dollars in thousands)

Condensed Consolidated Statements of Operations:

Net revenues

$
592,473

$
549,328

$
1,769,879

$
1,548,165

Cost of goods sold

378,148

373,509

1,179,485

1,065,032

Gross profit

214,325

175,819

590,394

483,133

Selling, general and administrative expenses

171,163

160,433

528,213

457,207

Income from operations

43,162

15,386

62,181

25,926

Other expenses

Interest expense—net

18,915

11,091

45,496

32,528

Loss on extinguishment of debt

4,880

—

4,880

—

Total other expenses

23,795

11,091

50,376

32,528

Income (loss) before income taxes

19,367

4,295

11,805

(6,602
)
Income tax expense (benefit)

6,216

1,778

9,886

(2,567
)
Net income (loss)

$
13,151

$
2,517

$
1,919

$
(4,035
)
Other Financial and Operating Data:

Net revenues:

Stores⁽¹⁾

$
343,222

$
306,800

$
1,010,120

$
872,662

Direct

$
249,251

$
242,528

$
759,759

$
675,503

Direct as a percentage of net revenues ⁽²⁾

42
%

44
%

43
%

44
%
Growth in net revenues:

Stores ⁽¹⁾

12
%

9
%

16
%

14
%
Direct

3
%

-3
%

12
%

-3
%
Total

8
%

3
%

14
%

6
%
Comparable brand revenue growth⁽³⁾

6
%

-6
%

7
%

-2
%
Adjusted net income ⁽⁴⁾

$
24,424

$
8,019

$
45,919

$
23,861

Capital:

Capital expenditures

$
37,427

$
58,876

$
76,789

$
104,152

Construction related deposits ⁽⁵⁾

7,487

168

12,772

3,829

Total capital

$
44,914

$
59,044

$
89,561

$
107,981

(1)

Stores data represents retail stores, including Waterworks showrooms, plus outlet stores. Net revenues for outlet stores, which include warehouse sales, were $41.2 million and $36.0 million for the three months ended October 28, 2017 and October 29, 2016, respectively, and were $148.4 million and $99.1 million for the nine months ended October 28, 2017 and October 29, 2016, respectively.

~~(2)~~

~~Direct revenues include sales through our Source Books, websites, and phone orders, including our Contract business and a portion of our Trade business.~~

~~(3)~~

Comparable brand revenue growth includes direct net revenues and retail comparable store sales, including RH Baby & Child and RH Modern Galleries. Comparable brand revenue growth excludes retail non-comparable store sales, closed store sales and outlet net revenues. Comparable store sales have been calculated based upon retail stores, excluding outlet stores, that were open at least fourteen full months as of the end of the reporting period and did not change square footage by more than 20% between periods. If a store is closed for seven days during a month, that month will be excluded from comparable store sales. Membership revenue was included in comparable brand revenue growth beginning April 2017, which is the first full month following the one-year anniversary of the program launch. Waterworks revenue was included in comparable brand revenue growth beginning June 2017, which is the first full month following the one-year anniversary of the acquisition.

~~(4)~~

Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, ~~GAAP.~~generally accepted accounting principles (“GAAP”). We define adjusted net income as consolidated net income, ~~(loss),~~ adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net income is included in this filing because ~~management~~our senior leadership team believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of actual results on a comparable basis with historical results. Our ~~management~~senior leadership team uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. The following table presents a reconciliation of net income, ~~(loss),~~ the most directly comparable GAAP financial measure, to adjusted net income for the periods indicated below.


38 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

(in thousands)

Net income (loss)

$
13,151

$
2,517

$
1,919

$
(4,035
)
Adjustments pre-tax:

Executive non-cash compensation^(a)

—

—

23,872

—

Amortization of debt discount^(b)

6,879

6,629

20,384

19,550

Recall accrual ^(c)

3,552

—

8,285

—

Loss on extinguishment of debt ^(d)

4,880

—

4,880

—

Distribution center closure^(e)

1,862

—

1,862

—

Gain on sale of building and land ^(f)

(819
)

—

(2,119
)

—

Legal claim ^(g)

—

—

—

8,701

Reorganization related costs^(h)

—

974

—

5,698

Waterworks acquisition related:

Non-cash compensation⁽ⁱ⁾

—

—

—

3,672

Impact of inventory step-up^(j)

248

1,786

2,108

5,187

Acquisition related costs ^(k)

—

—

—

2,847

Subtotal adjusted items

16,602

9,389

59,272

45,655

Impact of income tax items ^(l)

(5,329
)

(3,887
)

(15,272
)

(17,759
)
Adjusted net income

$
24,424

$
8,019

$
45,919

$
23,861

Table of Contents


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020

	(in thousands)				(in thousands)
Net income	$	226,746	$	98,423	$	357,402	$	95,211
Adjustments pre-tax:
Amortization of debt discount^(a)		5,865		11,113		11,846		22,238
Non-cash compensation^(b)		5,864		—		11,728		—
Asset impairments and change in useful lives ^(c)		7,354		1,339		7,354		9,810
(Gain) loss on extinguishment of debt ^(d)		3,166		(152)		3,271		(152)
Recall accrual ^(e)		—		4,780		500		4,780
Reorganization related costs ^(f)		449		2,884		449		7,027
Tradename impairment^(g)		—		—		—		20,459
Loss on sale leaseback transaction ^(h)		—		9,352		—		9,352
Subtotal adjusted items		22,698		29,316		35,148		73,514
Impact of income tax items ⁽ⁱ⁾		(305)		(4,726)		(3,256)		(15,763)
Share of equity method investments losses ^(j)		2,486		—		4,581		—
Adjusted net income	$	251,625	$	123,013	$	393,875	$	152,962

~~(a)~~

~~Represents a non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in May 2017.~~

~~(b)~~

(a)

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for GAAP purposes ~~for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”) and for~~ the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), 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 ~~2019~~2020 Notes, 2023 Notes and ~~2020~~2024 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the ~~2019~~2020 Notes, 2023 Notes and ~~2020~~2024 Notes over their expected lives. The equity components represent the difference between the proceeds from the issuance of the ~~2019~~2020 Notes, 2023 Notes and ~~2020~~2024 Notes and the fair value of the liability components of the ~~2019~~2020 Notes, 2023 Notes and ~~2020~~2024 Notes, respectively. Amounts are presented net of interest capitalized for capital projects of ~~$0.8~~$2.9 million and ~~$0.6~~$1.3 million during the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. Amounts are presented net of interest capitalized for capital projects of ~~$2.3~~$5.6 million and ~~$1.9~~$3.1 million during the ~~nine~~six months ended July 31, 2021 and August 1, 2020, respectively. The 2020 Notes matured on July 15, 2020 and did not impact amortization of debt discount post-maturity.

(b)

Represents the amortization of the non-cash compensation charge related to an option grant made to Mr. Friedman in October ~~28, 2017~~2020.

(c)

The adjustment in the six months ended July 31, 2021 represents asset impairments. The adjustments for the three and ~~October 29, 2016,~~six months ended August 1, 2020 include the acceleration of depreciation expense due to a change in the estimated useful lives of certain assets of $1.3 million and $2.6 million, respectively. The adjustment in the six months ended August 1, 2020 also includes asset impairments of $4.8 million and inventory reserves of $2.4 million related to Outlet inventory resulting from retail closures in response to the pandemic.

(d)

The adjustment in each of the three and six months ended July 31, 2021 represents a loss on extinguishment of debt for a portion of the 2023 Notes that were early converted at the option of the noteholders. The adjustment in each of the three and six months ended August 1, 2020 represents a gain on extinguishment of debt of upon the maturity and settlement of the 2020 Notes in July 2020.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 39

Table of Contents

~~(c)~~

(e)

Represents ~~costs~~adjustments to net revenues, cost of goods sold and inventory charges associated with a product ~~recall initiated in the second quarter of fiscal 2017,~~recalls, as well as ~~an adjustment in the nine months ended October 28, 2017 of the~~ accrual ~~related to certain product recalls initiated in the fourth quarter of fiscal 2016.~~adjustments. The recall adjustments ~~which affected our results for the three and nine months ended October 28, 2017,~~ had the following effect on our income before taxes:


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020

	(in thousands)
Decrease to net revenues	$	—	$	406	$	—	$	406
Increase to cost of goods sold		—		4,374		—		4,374
Decrease to gross profit		—		4,780		—		4,780
Increase to selling, general and administrative expenses		—		—		500		—
Decrease to income before income taxes	$	—	$	4,780	$	500	$	4,780

Three Months Ended

Nine Months Ended

October 28,

October 28,

2017

2017

(in thousands)

Reduction of net revenues

$
—

$
3,813

Incremental cost of goods sold and inventory charges

3,552

4,315

Impact on gross profit

3,552

8,128

Incremental selling, general and administrative expenses

—

157

Impact on income (loss) before income taxes

$
3,552

$
8,285

~~(d)~~

(f)

Represents severance costs and related payroll taxes associated with reorganizations.

(g)

Represents tradename impairment related to the Waterworks reporting unit. Refer to “Waterworks Tradename Impairment” within Note 4—Goodwill, Tradenames, Trademarks and Other Intangible Assets in our condensed consolidated financial statements.

(h)

Represents the loss on ~~extinguishment of debt~~a sale leaseback transaction related to ~~the second lien term loan which was repaid in full in October 2017.~~

~~(e)~~

~~Represents severance expense and certain inventory transfer costs associated with two distribution center closures,~~ one of ~~which was completed in November 2017 and one which is expected to occur in January 2018.~~

our previously owned Design Galleries.

~~(f)~~

Represents the gain on the sale of building and land. As we entered into a short-term lease agreement to lease the property subsequent to the sale, the total gain associated with the sale of this property was amortized over a five month period.

~~(g)~~

(i)

Represents the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards.

~~(h)~~

Represents costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards.

~~(i)~~

~~Represents a non-cash compensation charge related to the fully vested option grants made in connection with our acquisition of Waterworks.~~

~~(j)~~

~~Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks.~~

~~(k)~~

~~Represents costs incurred in connection with our acquisition of Waterworks including professional fees.~~

~~(l)~~

The adjustment for the three and six months ended July 31, 2021 is based on an adjusted tax rate of 1.3% and 9.3%, respectively, which excludes the tax impact associated with our share of equity method investments losses. The adjustment for the three months ended ~~October 28, 2017~~ ~~represents the tax effect of the adjusted items~~August 1, 2020 is based on our effective tax rate of ~~32.1%~~16.1%.The ~~nine~~adjustment for the six months ended ~~October 28, 2017 includes an adjustment to calculate income tax expense at~~August 1, 2020 is based on an adjusted tax rate of ~~35.4%~~17.8%, which ~~is calculated based on the weighted-average fiscal 2017 quarterly adjusted effective tax rates. The adjustments for the three and nine months ended October 29, 2016 represent~~excludes the tax ~~effect~~impact associated with the Waterworks reporting unit tradename impairment recorded in the first quarter of fiscal 2020.

(j)

Represents our proportionate share of the ~~adjusted items based on~~losses of our ~~effective tax rates of 41.4% and 38.9%, respectively.~~

equity method investments. Refer to Note 5—Equity Method Investments in our condensed consolidated financial statements.


~~(5)~~40 \| 2021 SECOND QUARTER FORM 10-Q	~~Construction related deposits relate to payments to escrow accounts for future construction of Design Galleries.~~PART I. FINANCIAL INFORMATION

Table of Contents~~The following tables present retail Gallery metrics, which have been~~ ~~calculated based upon retail stores, which includes our RH Baby & Child, RH Modern Galleries and Waterworks Showrooms, and excludes outlet stores.~~

(2)

EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit). Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, certain non-recurring, and other items that we do not consider representative of our underlying operating performance. EBITDA and Adjusted EBITDA are included in this filing because our senior leadership team believes that these metrics provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of operating results on a comparable basis with historical results. Our senior leadership team uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions for other companies due to different methods of calculation. The following table presents a reconciliation of net income, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the periods indicated below.


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Net income	$	226,746	$	98,423	$	357,402	$	95,211
Depreciation and amortization		22,670		25,342		46,556		50,212
Interest expense—net		13,581		19,418		26,889		39,047
Income tax expense		3,009		18,879		44,733		17,456
EBITDA		266,006		162,062		475,580		201,926
Non-cash compensation^(a)		10,124		6,861		25,431		12,689
Asset impairments^(b)		7,354		—		7,354		7,133
Share of equity method investments losses^(b)		2,486		—		4,581		—
(Gain) loss on extinguishment of debt ^(b)		3,166		(152)		3,271		(152)
Capitalized cloud computing amortization^(c)		785		—		1,462		—
Recall accrual^(b)		—		4,780		500		4,780
Reorganization related costs^(b)		449		2,884		449		7,027
Loss on sale leaseback transaction^(b)		—		9,352		—		9,352
Tradename impairment^(b)		—		—		—		20,459
Adjusted EBITDA	$	290,370	$	185,787	$	518,628	$	263,214

(a)

Represents non-cash compensation related to equity awards granted to employees.

(b)

Refer to the reconciliation of net income to adjusted net income table above and the related footnotes for additional information.

(c)

Represents amortization associated with capitalized cloud computing costs.

(3)	We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.

Nine Months Ended

October 28,

October 29,

2017

2016

Store Count

Total Leased Selling Square Footage⁽¹⁾

Store Count

Total Leased Selling Square Footage⁽¹⁾

(in thousands)

(in thousands)

Beginning of period

85

912

69

725

Waterworks Showrooms acquired

—

—

15

51.0

Retail Galleries opened:

Waterworks Boston Showroom

1

5.0

—

—

Yorkdale next generation Design Gallery

1

43.3

—

—

Leawood next generation Design Gallery

—

—

1

33.5

Waterworks San Francisco Showroom

—

—

1

5.8

Austin next generation Design Gallery

—

—

1

39.6

Las Vegas next generation Design Gallery

—

—

1

47.6

Retail Galleries closed:

Waterworks Boston Showroom

(1
)

(2.1
)

—

—

Toronto (Bayview) Legacy Gallery

(1
)

(6.0
)

—

—

Toronto (Yonge Street) Legacy Gallery

(1
)

(8.6
)

—

—

Kansas City Legacy Gallery

—

—

(1
)

(9.9
)
Waterworks - Kansas Street, SF

—

—

(1
)

(2.0
)
Austin Legacy Gallery

—

—

(1
)

(6.2
)
End of period

84

944

85

884


(1)PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 41

Table of Contents

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


	SIX MONTHS ENDED
	JULY 31,			AUGUST 1,
	2021			2020
		TOTAL LEASED			TOTAL LEASED
		SELLING SQUARE			SELLING SQUARE
	COUNT	FOOTAGE ⁽¹⁾		COUNT	FOOTAGE ⁽¹⁾
		(in thousands)			(in thousands)
Beginning of period	82		1,162	83		1,111
RH Design Galleries:
Dallas Design Gallery	1		38.0	—		—
Marin Design Gallery	—		—	1		32.9
Charlotte Design Gallery	—		—	1		32.4
RH Modern Galleries:
Dallas RH Modern Gallery	(1)		(3.9)	—		—
RH Baby & Child and TEEN Galleries:
Santa Monica Baby & Child and TEEN Gallery	(1)		(7.3)	—		—
RH Legacy Galleries:
Dallas legacy Gallery	(1)		(8.4)	—		—
Raleigh legacy Gallery	—		—	1		4.4
Charlotte legacy Gallery	—		—	(1)		(7.0)
Corte Madera legacy Gallery	—		—	(1)		(7.0)
Westport legacy Gallery	—		—	(1)		(6.5)
End of period	80		1,180	83		1,160
Total leased square footage at end of period⁽²⁾			1,580			1,560
Weighted-average leased square footage⁽³⁾			1,573			1,513
Weighted-average leased selling square footage⁽³⁾			1,172			1,123

(1)

Leased selling square footage is retail space at our ~~stores~~retail locations used to sell our ~~products.~~products, as well as space for our Restaurants. Leased selling square footage excludes backrooms at retail ~~stores~~locations used for storage, office space, food preparation, kitchen space or similar purpose, as well as exterior sales space located outside a ~~store,~~retail location, such as courtyards, gardens and rooftops. Leased selling square footage ~~for the three and nine months ended October 28, 2017~~ includes approximately 4,800 square feet as of both July 31, 2021 and August 1, 2020 related to one owned ~~store location~~. ~~Leased selling square footage for the three and nine months ended October 29, 2016 includes approximately 13,000 square feet related to two owned store locations.~~

retail location.

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

(in thousands)

Total leased square footage at end of period⁽¹⁾

1,276

1,208

1,276

1,208

Weighted-average leased square footage⁽²⁾

1,250

1,146

1,245

1,066

Weighted-average leased selling square footage⁽²⁾

918

816

914

767

Retail sales per leased selling square foot (in dollars)⁽³⁾

$
329

$
330

$
941

$
1,004

~~(1)~~

(2)

Total leased square footage ~~as of October 28, 2017~~ includes approximately 5,400 square feet as of both July 31, 2021 and August 1, 2020 related to one owned ~~store~~retail location. ~~Total leased square footage as of October 29, 2016 includes approximately 24,000 square feet related to two owned store locations.~~

~~(2)~~

(3)

Weighted-average leased square footage and leased selling square footage isare calculated based on the number of days a ~~Gallery~~retail location was opened during the period divided by the total number of days in the period.


~~(3)~~42 \| 2021 SECOND QUARTER FORM 10-Q	Retail sales per leased selling square foot is calculated by dividing total net revenues for all retail stores, comparable and non-comparable, by the weighted-average leased selling square footage for the period.PART I. FINANCIAL INFORMATION

Table of Contents

The following table sets forth our condensed consolidated statements of ~~operations~~income as a percentage of total net revenues.


	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Condensed Consolidated Statements of Income:
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	50.7		53.1		51.6		55.4
Gross profit	49.3		46.9		48.4		44.6
Selling, general and administrative expenses	24.1		27.6		24.8		30.2
Income from operations	25.2		19.3		23.6		14.4
Other expenses
Interest expense—net	1.4		2.8		1.4		3.2
Tradename impairment	—		—		—		1.7
(Gain) loss on extinguishment of debt	0.3		—		0.2		—
Total other expenses	1.7		2.8		1.6		4.9
Income before income taxes	23.5		16.5		22.0		9.5
Income tax expense	0.3		2.6		2.4		1.5
Income before equity method investments	23.2		13.9		19.6		8.0
Share of equity method investments losses	(0.3)		—		(0.3)		—
Net income	22.9	%	13.9	%	19.3	%	8.0	%

Three Months Ended

Nine Months Ended

October 28,

October 29,

October 28,

October 29,

2017

2016

2017

2016

Condensed Consolidated Statements of Operations:

Net revenues

100.0
%

100.0
%

100.0
%

100.0
%
Cost of goods sold

63.8

68.0

66.6

68.8

Gross profit

36.2

32.0

33.4

31.2

Selling, general and administrative expenses

28.9

29.2

29.9

29.5

Income from operations

7.3

2.8

3.5

1.7

Other expenses

Interest expense—net

3.2

2.0

2.5

2.1

Loss on extinguishment of debt

0.8

—

0.3

—

Total other expenses

4.0

2.0

2.8

2.1

Income (loss) before income taxes

3.3

0.8

0.7

(0.4
)
Income tax expense (benefit)

1.1

0.3

0.6

(0.1
)
Net income (loss)

2.2
%

0.5
%

0.1
%

(0.3
%)

Three Months Ended ~~October 28, 2017~~July 31, 2021 Compared to Three Months Ended ~~October 29, 2016~~August 1, 2020

Three Months Ended

October 28,

October 29,

2017

2016

RH Segment

Waterworks⁽¹⁾

Total

RH Segment

Waterworks⁽¹⁾

Total

(in thousands)

Net revenues

$
563,174

$
29,299

$
592,473

$
521,027

$
28,301

$
549,328

Cost of goods sold

359,953

18,195

378,148

354,903

18,606

373,509

Gross profit

203,221

11,104

214,325

166,124

9,695

175,819

Selling, general and administrative
expenses

159,092

12,071

171,163

148,438

11,995

160,433

Income (loss) from operations

$
44,129

$
(967
)

$
43,162

$
17,686

$
(2,300
)

$
15,386

~~(1)~~

Waterworks results include non-cash amortization of $0.2 million and $1.8 million related to the inventory fair value adjustment recorded in connection with our acquisition of Waterworks during the three months ended October 28, 2017 and October 29, 2016, respectively.


	THREE MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL

	(in thousands)
Net revenues	$	947,618	$	41,241	$	988,859	$	681,387	$	27,895	$	709,282
Cost of goods sold		480,551		20,632		501,183		360,906		15,957		376,863
Gross profit		467,067		20,609		487,676		320,481		11,938		332,419
Selling, general and administrative expenses		223,492		15,196		238,688		185,486		10,365		195,851
Income from operations	$	243,575	$	5,413	$	248,988	$	134,995	$	1,573	$	136,568

Net revenues

Consolidated net revenues increased ~~$43.1~~$279.6 million, or ~~7.9%~~39.4%, to ~~$592.5~~$988.9 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$549.3~~$709.3 million in the three months ended October 29, 2016. Stores net revenues increased $36.4 million, or 11.9%, to $343.2 million in the three months ended October 28, 2017 compared to $306.8 million in the three months ended October 29, 2016. Direct net revenues increased $6.7 million, or 2.8%, to $249.3 million in the three months ended October 28, 2017 compared to $242.5 million in the three months ended October 29, 2016. Comparable brand revenue was 6% for the three months ended October 28, 2017.August 1, 2020.

RH Segment net revenues

RH Segment net revenues increased ~~$42.1~~$266.2 million, or ~~8.1%~~39.1%, to ~~$563.2~~$947.6 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$521.0~~$681.4 million in the three months ended ~~October 29, 2016.~~

~~A number of~~August 1, 2020. The below discussion highlights several significant factors ~~contributed to the~~that resulted in an increase in RH Segment net revenues, ~~during~~which are listed in order of magnitude.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 43

Table of Contents

RH Segment net revenues for the three months ended ~~October 28, 2017, including,~~July 31, 2021 was driven primarily by a strong increase in ~~order of magnitude, the introduction of new product categories and the expansion of existing product categories, the performance~~customer demand for our products, aided by elements of our ~~new Design Galleries and an increase in retail weighted-average leased selling square footage, as well as an increase in revenues from our Contract business which represents sales~~supply chain beginning to ~~commercial customers.~~catch up with customer demand.

Outlet sales ~~which include sales via warehouse locations,~~ increased ~~$5.1~~$16.7 million to $68.3 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to $51.6 million in the three months ended August 1, 2020 due to pandemic related retail closures in the second quarter of fiscal 2020. Additionally, RH Segment net revenues increased in our RH Hospitality business as COVID-19 operating restrictions continued to ease during the quarter compared to the three months ended ~~October 29, 2016. We also had an increase in Membership revenue recognized of $4.6 million.~~

~~The above increases were partially offset by an approximate 1% negative impact of Hurricanes Harvey and Irma primarily due to store closures and lost sales.~~August 1, 2020.

Waterworks net revenues

Waterworks net revenues increased ~~$1.0~~$13.3 million, or ~~3.5%~~47.8%, to ~~$29.3~~$41.2 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$28.3~~$27.9 million in the three months ended ~~October 29, 2016.~~August 1, 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners. Waterworks ~~net revenues represented 4.9% and 5.2% of our~~ net revenues for the three months ended ~~October 28, 2017 and October 29, 2016, respectively.~~August 1, 2020 was negatively impacted by construction delays, as well as temporary showroom closures, in response to the pandemic.

Gross profit

Consolidated gross profit increased ~~$38.5~~$155.3 million, or ~~21.9%~~46.7%, to ~~$214.3~~$487.7 million in the three months ended ~~October 28, 2017 from $175.8~~July 31, 2021 compared to $332.4 million in the three months ended ~~October 29, 2016.~~August 1, 2020. As a percentage of net revenues, consolidated gross margin increased ~~4.2%~~240 basis points to ~~36.2%~~49.3% of net revenues in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~32.0%~~46.9% of net revenues in the three months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment gross profit for the three months ended ~~October 28, 2017~~August 1, 2020 was negatively impacted by ~~$3.6~~$4.8 million related to ~~inventory charges associated with~~ product recalls and $0.5 million related to costs associated with anticipated distribution center closures. Waterworks gross profit for the three months ended October 28, 2017 and October 29, 2016 was negatively impacted by ~~$0.2 million and $1.8 million, respectively,~~ ~~of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.~~recalls.

Excluding the product recall ~~costs, costs associated with anticipated distribution center closures and the impact of the amortization related to the inventory fair value~~ adjustment mentioned above, consolidated gross margin would have increased ~~4.6%~~180 basis points to ~~36.9%~~49.3% of net revenues in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~32.3%~~47.5% of net revenues in the three months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment gross profit

RH Segment gross profit increased ~~$37.1~~$146.6 million, or ~~22.3%~~45.7%, to ~~$203.2~~$467.1 million in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~$166.1~~$320.5 million in the three months ended ~~October 29, 2016.~~August 1, 2020. As a percentage of net revenues, RH Segment gross margin increased ~~4.2%~~230 basis points to ~~36.1%~~49.3% of net revenues in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~31.9%~~47.0% of net revenues in the three months ended ~~October 29, 2016.~~August 1, 2020.

Excluding the product ~~recalls and costs associated with anticipated distribution center closures~~recall adjustment mentioned above, RH Segment gross margin would have increased ~~4.9%~~160 basis points to ~~36.8%~~49.3% of net revenues in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~31.9%~~47.7% of net revenues in the three months ended ~~October 29, 2016.~~August 1, 2020. The increase in ~~order of magnitude,~~gross margin was ~~due to improvements in our core merchandise margins as our SKU rationalization efforts had a reduced impact on our margins this year compared to last year, partially offset~~primarily driven by higher ~~outlet~~product margins in the Outlet and ~~warehouse sales driven by increased promotions and~~Core business. Additionally, we drove higher ~~discounts. Additionally, gross margin increased due to improvement~~margins through leveraging our RH Segment occupancy costs in ~~shipping costs as a percentage of net revenues.~~the three months ended July 31, 2021.

Waterworks gross profit

Waterworks gross profit increased ~~$1.4~~$8.7 million, or ~~14.5%~~72.6%, to ~~$11.1~~$20.6 million in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~$9.7~~$11.9 million in the three months ended ~~October 29, 2016.~~August 1, 2020. As a percentage of net revenues, Waterworks gross margin increased ~~3.6%~~720 basis points to ~~37.9%~~50.0% of net revenues in the three months ended ~~October 28, 2017~~July 31, 2021 from ~~34.3%~~42.8% of net revenues in the three months ended ~~October 29, 2016.~~

~~Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 1.9% to 38.7% of net~~August 1, 2020 primarily driven by higher revenues, ~~in the three months ended October 28, 2017 from 40.6% of net revenues in the three months ended October 29, 2016. The decrease in gross margin is primarily due to~~favorable changes in product mix, and ~~deleverage~~leverage in Waterworks occupancy ~~costs.~~costs, offset by an increase in shipping costs related to customer deliveries.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased ~~$10.7~~$42.8 million, or ~~6.7%~~21.9%, to ~~$171.2~~$238.7 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$160.4~~$195.9 million in the three months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased ~~$10.7~~$38.0 million, or ~~7.2%~~20.5%, to ~~$159.1~~$223.5 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared ~~$148.4~~$185.5 million in the three months ended ~~October 29, 2016.~~August 1, 2020.


44 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

RH Segment selling, general and administrative expenses for the three months ended ~~October 28, 2017 included $1.4~~July 31, 2021 include $7.4 million ~~related to costs associated with anticipated distribution center closures and a gain~~ of ~~$0.8~~asset impairments, amortization of the non-cash compensation of $5.8 million related to the ~~sale of building~~option grant made to Mr. Friedman in October 2020 and ~~land~~. $0.4 million related to severance costs and related payroll taxes associated with reorganizations. RH Segment selling, general and administrative expenses for the three months ended ~~October 29, 2016 included $1.0~~August 1, 2020 includes a loss of $9.4 million related to a sale leaseback transaction, $2.9 million related to severance costs and related payroll taxes associated with ~~a reorganization, including severance~~reorganizations and ~~related taxes.~~

~~Advertising and marketing costs increased $9.8~~$1.3 million ~~during the three months ended October 28, 2017 as compared to October 29, 2016, primarily~~ due to accelerated asset depreciation.

Excluding the timing of our Source Book mailings. In the third quarter of fiscal 2017 we amortized costs related to our 2016 Interiors Source Book which was circulated in the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in the third quarter of fiscal 2017, whereas the third quarter of fiscal 2016 did not incur similarly timed expenses.

adjustments mentioned above, RH Segment selling, general and administrative expenses were ~~28.2%~~22.1% and ~~28.3%~~25.2% of net revenues for the three months ended ~~October 28, 2017~~July 31, 2021 and October 29, 2016, respectively, excluding the costs associated with anticipated distribution center closures, the gain related to the sale of building and land and the reorganization costs mentioned above.August 1, 2020, respectively. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by reduction in costs and leverage in ~~employment and employment related costs and, to a lesser extent,~~advertising, as well as leverage in our corporate occupancy costs, partially offset by ~~an increase~~deleverage in ~~advertising and marketing~~other corporate costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased ~~$0.1~~$4.8 million, or ~~0.6%~~46.6%, to ~~$12.1~~$15.2 million in the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$12.0~~$10.4 million in the three months ended ~~October 29, 2016.~~August 1, 2020. Waterworks selling, general and administrative expenses were 36.8% and 37.2% of net revenues for the three months ended July 31, 2021 and August 1, 2020, respectively.

Interest ~~expense~~—expense—net

Interest ~~expense increased $7.8~~expense—net decreased $5.8 million to ~~$18.9~~$13.6 million for the three months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$11.1~~$19.4 million for the three months ended ~~October 29, 2016.~~August 1, 2020. Interest ~~expense~~expense—net consisted of the following:


	THREE MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020

	(in thousands)
Amortization of convertible senior notes debt discount	$	8,791	$	12,462
Finance lease interest expense		6,607		5,948
Amortization of debt issuance costs and deferred financing fees		797		982
Other interest expense		473		436
Promissory notes		352		1,072
Asset based credit facility		—		130
Capitalized interest for capital projects		(3,048)		(1,426)
Interest income		(391)		(186)
Total interest expense—net	$	13,581	$	19,418

Three Months Ended

October 28,

October 29,

2017

2016

(in thousands)

Amortization of convertible senior notes debt discount

$
7,667

$
7,254

Build-to-suit lease transactions

4,133

3,083

Term loans

2,721

—

Asset based credit facility

2,622

584

Amortization of debt issuance costs and deferred financing fees

1,996

634

Other interest expense

772

833

Capitalized interest for capital projects

(966
)

(625
)
Interest income

(30
)

(672
)
Total interest expense—net

$
18,915

$
11,091

~~Loss~~(Gain) loss on extinguishment of debt

~~We incurred~~During the three months ended July 31, 2021 we recognized a ~~$4.9 million~~ loss on extinguishment of debt infor a portion of the 2023 Notes that were early converted at the option of the noteholders of $3.2 million. During the three months ended ~~October 28, 2017 due~~August 1, 2020, we recognized a $0.2 million gain on extinguishment of debt related to the ~~repayment in full~~maturity and settlement of the ~~second lien term loan on October 10, 2017, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.~~2020 Notes in July 2020.

Income tax expense

Income tax expense was ~~$6.2~~$3.0 million and ~~$1.8~~$18.9 million in the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. Our effective tax rate was ~~32.1%~~1.3% and ~~41.4%~~16.1% for the three months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. The decrease in our effective tax rate is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based compensation in the three months ended ~~October 28, 2017 was impacted~~July 31, 2021 as compared to the three months ended August 1, 2020.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 45

Table of Contents

Equity method investments losses

Equity method investments losses consists of our proportionate share of the losses of our equity method investments by ~~net excess tax benefits from stock-based compensation of $1.9~~applying the hypothetical liquidation at book value methodology, which resulted in a $2.5 million ~~resulting from~~loss during the ~~Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.~~three months ended July 31, 2021.

~~Nine~~Six Months Ended ~~October 28, 2017~~July 31, 2021 Compared to ~~Nine~~Six Months Ended ~~October 29, 2016~~August 1, 2020

Prior to the Waterworks acquisition on May 27, 2016, we had one reportable segment. As we acquired the Waterworks business on May 27, 2016, reportable segment information presented below for Waterworks includes results for twenty-two weeks during the nine months ended October 29, 2016 and includes results for thirty-nine weeks during the nine months ended October 28, 2017. The RH Segment includes results for thirty-nine weeks during both the nine months ended October 28, 2017 and October 29, 2016.

Nine Months Ended

October 28,

October 29,

2017

2016

RH Segment

Waterworks⁽¹⁾

Total

RH Segment

Waterworks⁽¹⁾

Total

(in thousands)

Net revenues

$
1,680,495

$
89,384

$
1,769,879

$
1,499,101

$
49,064

$
1,548,165

Cost of goods sold

1,124,651

54,834

1,179,485

1,031,699

33,333

1,065,032

Gross profit

555,844

34,550

590,394

467,402

15,731

483,133

Selling, general and administrative
expenses

489,412

38,801

528,213

432,961

24,246

457,207

Income (loss) from operations

$
66,432

$
(4,251
)

$
62,181

$
34,441

$
(8,515
)

$
25,926

~~(1)~~

Waterworks results include non-cash amortization of $2.1 million and $5.2 million related to the inventory fair value adjustment recorded in connection with our acquisition of Waterworks during the nine months ended October 28, 2017 and October 29, 2016, respectively.


	SIX MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL

	(in thousands)
Net revenues	$	1,767,441	$	82,210	$	1,849,651	$	1,136,344	$	55,833	$	1,192,177
Cost of goods sold		913,821		41,177		954,998		628,101		32,003		660,104
Gross profit		853,620		41,033		894,653		508,243		23,830		532,073
Selling, general and administrative expenses		427,899		29,878		457,777		334,762		25,290		360,052
Income (loss) from operations	$	425,721	$	11,155	$	436,876	$	173,481	$	(1,460)	$	172,021

Net revenues

Consolidated net revenues increased ~~$221.7~~$657.5 million, or ~~14.3%~~55.1%, to ~~$1,769.9~~$1,849.7 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$1,548.2~~$1,192.2 million in the ~~nine~~six months ended October 29, 2016. Stores net revenues increased $137.5 million, or 15.8%, to $1,010.1 million in the nine months ended October 28, 2017 compared to $872.7 million in the nine months ended October 29, 2016. Direct net revenues increased $84.3 million, or 12.5%, to $759.8 million in the nine months ended October 28, 2017 compared to $675.5 million in the nine months ended October 29, 2016. Comparable brand revenue was 7% for the nine months ended October 28, 2017.August 1, 2020.

RH Segment net revenues

RH Segment net revenues increased ~~$181.4~~$631.1 million, or ~~12.1%~~55.5%, to ~~$1,680.5~~$1,767.4 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$1,499.1~~$1,136.3 million in the ~~nine~~six months ended ~~October 29, 2016.~~

~~A number of~~August 1, 2020. The below discussion highlights several significant factors ~~contributed to the~~that resulted in an increase in RH Segment net revenues during the nine months ended October 28, 2017, the most significant of which was our decision to move the mailing of our 2016 Interiors Source Book to the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore was a contributor to net revenues in the first three quarters of fiscal 2017, whereas the first three quarters of fiscal 2016 did not benefit from a similarly timed mailing.

~~In addition, the following factors resulted in increased~~ ~~RH Segment~~ net revenues, which are listed in order of magnitude.Outlet sales, which include sales via warehouse locations, increased $49.2 million in the nine months ended October 28, 2017 compared to the nine months ended October 29, 2016, representing 3.3% of growth in RH Segment net revenues. Increased outlet sales occurred primarily as a result of our inventory optimization efforts as we increased our outlet promotional activity, including through warehouse sales, and we increased outlet selling square footage by approximately 32% compared to the prior period. Additionally, the performance of our new Design Galleries and an increase in retail weighted-average leased selling square footage contributed to the increase in RH Segment net revenues. Net revenues also increased related to deeper markdowns on discontinued merchandise based on our continued efforts to rationalize our SKU count. We also had an increase in Membership revenue recognized of $18.2 million.

RH Segment net revenues for the ~~nine~~six months ended ~~October 28, 2017 were~~August 1, 2020 was negatively impacted by ~~$3.8 million related to~~Gallery closures and macroeconomic conditions resulting from the ~~reduction of revenue associated with product recalls. During the nine months ended October 29, 2016,~~COVID-19 pandemic. RH Segment net revenues ~~were reduced by an estimated $16 million~~for the six months ended July 31, 2021 increased due to strong customer ~~accommodation and related expenses as a result~~demand for our products, aided by elements of our ~~initiative~~supply chain beginning to ~~elevate~~catch up with customer demand.

Outlet sales increased $66.8 million to $130.6 million in the ~~customer experience, including~~six months ended July 31, 2021 compared to $63.8 million in ~~response~~the six months ended August 1, 2020 due to ~~production delays~~pandemic related retail closures in the first half of fiscal 2020. Additionally, RH Segment net revenues increased in our RH Hospitality business as COVID-19 operating restrictions continued to ~~RH Modern. We did not experience similar production delays~~ease during the ~~nine months ended October 28, 2017.~~first half of fiscal 2021 and in our Contract business driven by increased commercial purchasing activities as compared to the first half of fiscal 2020.

Waterworks net revenues

On May 27, 2016, we acquired a controlling interest in Waterworks. As a result of this acquisition, we acquired 15 Waterworks showrooms and included such additional retail stores in our weighted-average leased selling square footage for both the nine months

~~ended October 28, 2017 and October 29, 2016.~~ Waterworks net revenues increased ~~$40.3~~$26.4 million, or ~~82.2%~~47.2%, to ~~$89.4~~$82.2 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$49.1~~$55.8 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020 due to an increase in demand related to resumed construction activity and significant residential investments by high-end homeowners. Waterworks ~~net revenues represented 5.1% and 3.2% of our~~ net revenues for the ~~nine~~six months ended ~~October 28, 2017 and October 29, 2016, respectively. The increase~~August 1, 2020 was negatively impacted by construction delays, as well as temporary showroom closures, in ~~Waterworks net revenues is primarily due~~response to the nine months ended October 28, 2017 representing thirty-nine weeks of results, whereas the nine months ended October 29, 2016 only includes twenty-two weeks of results as Waterworks was acquired on May 27, 2016.pandemic.

Gross profit

Consolidated gross profit increased ~~$107.3~~$362.6 million, or ~~22.2%~~68.1%, to ~~$590.4~~$894.7 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~$483.1~~$532.1 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020. As a percentage of net revenues, consolidated gross margin increased ~~2.2%~~380 basis points to ~~33.4%~~48.4% of net revenues in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~31.2%~~44.6% of net revenues in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020.


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RH Segment gross profit for the ~~nine~~six months ended ~~October 28, 2017~~August 1, 2020 was negatively impacted by ~~$8.2~~$4.8 million related to ~~the reduction of revenue, incremental costs and inventory charges associated with~~ product recalls and ~~$0.5~~includes inventory reserves of $2.4 million related to ~~costs associated with anticipated distribution center closures. RH Segment gross profit for the nine months ended October 29, 2016 was negatively impacted by $7.7 million related~~Outlet inventory resulting from retail closures in response to the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards. The coupons expired in March 2016.

~~Waterworks gross profit for the nine months ended October 28, 2017 and October 29, 2016 was negatively impacted by~~ ~~$2.1 million and $5.2 million, respectively,~~ ~~of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.~~COVID-19 pandemic.

Excluding the product recall costs, costs associated with the distribution center closure, impact of the coupons redeemed in connection with the legal claim and amortization related to the inventory fair value adjustmentadjustments mentioned above, consolidated gross margin would have increased ~~1.9%~~320 basis points to ~~33.9%~~48.4% of net revenues in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~32.0%~~45.2% of net revenues in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment gross profit

RH Segment gross profit increased ~~$88.4~~$345.4 million, or ~~18.9%~~68.0%, to ~~$555.8~~$853.6 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~$467.4~~$508.2 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020. As a percentage of net revenues, RH Segment gross margin increased ~~1.9%~~360 basis points to ~~33.1%~~48.3% of net revenues in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~31.2%~~44.7% of net revenues in the ~~nine~~six months ended ~~October 29, 2016.~~ August 1, 2020.

Excluding the ~~product recall costs, costs associated with anticipated distribution center closures and impact of the coupons redeemed in connection with the legal claim~~adjustments mentioned above, RH Segment gross margin would have increased ~~1.8%~~300 basis points to ~~33.5%~~48.3% of net revenues in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~31.7%~~45.3% of net revenues in the ~~nine~~six months ended ~~October 29, 2016.~~

August 1, 2020. The increase in gross margin was primarily due to incremental shipping charges incurred during the nine months ended October 29, 2016 related to RH Modern production delays and our investment to elevate the customer experience. In addition, our merchandise margins were impacted by our SKU rationalization efforts that had a reduced impact on our margins this year compared to last year, partially offset by higher outlet and warehouse sales driven by ~~increased promotions and higher discounts. During the nine months ended October 28, 2017, we experienced occupancy~~ leverage in our ~~fixed distribution and retail~~RH Segment occupancy costs ~~partially offset by increased outlet occupancy costs.~~and higher product margins in the Core and Outlet businesses in the six months ended July 31, 2021.

Waterworks gross profit

Waterworks gross profit increased ~~$18.8~~$17.2 million, or ~~119.6%~~72.2%, to ~~$34.6~~$41.0 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~$15.7~~$23.8 million in the ~~nine~~six months ended October 29, 2016. The increase in Waterworks gross profit is primarily due to the nine months ended October 28, 2017 representing thirty-nine weeks of results, whereas the nine months ended October 29, 2016 only includes twenty-two weeks of results as Waterworks was acquired on May 27, 2016.August 1, 2020. As a percentage of net revenues, Waterworks gross margin increased ~~6.6%~~720 basis points to ~~38.7%~~49.9% of net revenues in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 from ~~32.1%~~42.7% of net revenues in the ~~nine~~six months ended ~~October 29, 2016. Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 1.6% to 41.0% of net~~August 1, 2020 primarily driven by higher revenues, ~~in the nine months ended October 28, 2017 from 42.6% of net revenues in the nine months ended October 29, 2016. The decrease in gross margin is primarily due to~~favorable changes in product mix, and ~~deleverage~~leverage in Waterworks occupancy ~~costs.~~costs, offset by an increase in shipping costs related to customer deliveries.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased ~~$71.0~~$97.7 million, or ~~15.5%~~27.1%, to ~~$528.2~~$457.8 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$457.2~~$360.1 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased ~~$56.5~~$93.1 million, or ~~13.0%~~27.8%, to ~~$489.4~~$427.9 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared ~~$433.0~~to $334.8 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020.

RH Segment selling, general and administrative expenses for the ~~nine~~six months ended ~~October 28, 2017 included $23.9~~July 31, 2021 include amortization of the non-cash compensation of $11.7 million related to ~~a fully vested~~the option grant made to Mr. Friedman in ~~May 2017, $0.1 million incremental costs associated with product recalls, $1.4 million costs associated with anticipated distribution center closures and a gain of $2.1~~October 2020, $7.4 million related to ~~the sale of building~~asset impairments and ~~land~~.$0.4 million related to severance costs and related payroll taxes associated with reorganizations.

RH Segment selling, general and administrative expenses for the ~~nine~~six months ended ~~October 29, 2016 included $5.7 million associated with~~August 1, 2020 include a ~~reorganization, including severance and related taxes, $2.8~~loss of $9.4 million related to ~~charges and expenses incurred as~~ a ~~result of the Waterworks~~sale leaseback transaction, ~~and $1.0~~$7.0 million related to severance costs and related payroll taxes associated with the ~~estimated cumulative~~termination of associates and a reorganization undertaken in response to the impact of ~~coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting~~retail closures on our business, $3.3 million related to asset impairments and ~~recording ZIP codes from customers paying with credit cards~~.

~~Advertising and marketing costs increased $26.9~~$2.6 million ~~during the nine months ended October 28, 2017 as compared to October 29, 2016, primarily~~ due to ~~the timing of our Source Book mailings. In the~~ ~~nine months ended October 28, 2017~~ we amortized costs related to our 2016 Interiors Source Book which was circulated in the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in the ~~nine months ended October 28, 2017, whereas the nine months ended October 29, 2016 did not incur similarly timed expenses. In addition, we had an increase in employment and employment related costs.~~accelerated asset depreciation.

Excluding adjustments mentioned above, RH Segment selling, general and administrative expenses were ~~27.7%~~23.1% and ~~28.2%~~27.5% of net revenues for the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and October 29, 2016, respectively, excluding the fully vested option grant made to Mr. Friedman in May 2017, the product recall costs, costs associated with anticipated distribution center closures, the gain related to the sale of building and land, the reorganization costs, the charges and expenses incurred as a result of the Waterworks transaction, and the impact of coupons redeemed in connection with the legal claim mentioned above.August 1, 2020, respectively. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by reduction in costs and leverage in advertising costs due to our decision to not mail the Spring 2021 Source Books, leverage in employment and employment related costs, ~~and, to a lesser extent,~~as well as leverage in our corporate occupancy ~~costs, partially offset by an increase in advertising and marketing~~ costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased ~~$14.6~~$4.6 million, or ~~60.0%~~18.1%, to ~~$38.8~~$29.9 million in the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared ~~$24.2~~to $25.3 million in the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020.

~~The increase in~~ Waterworks selling, general and administrative expenses ~~is primarily due to~~for the ~~nine~~six months ended October 28, 2017 representing thirty-nine weeks of results, whereas the nine months ended October 29, 2016 only includes twenty-two weeks of results as Waterworks was acquired on May 27, 2016. This increase is partially offset by stock-based compensation of $3.7July 31, 2021 include $0.5 million related to product recalls and for the ~~fully vested option grants made in connection with our acquisition of Waterworks during the nine~~six months ended ~~October 29, 2016.~~August 1, 2020 include $1.6 million related to asset impairments.

E~~xcluding~~


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Excluding the ~~fully vested option grants made in connection with our acquisition of~~adjustments mentioned above, Waterworks~~Waterworks~~ selling, general and administrative expenses ~~would have been 43.4%~~were 35.7% and ~~41.9%~~42.5% of net revenues infor the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016, respectively. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by increased employment and employment related costs.~~

~~Interest expense~~—~~net~~August 1, 2020.

Interest ~~expense increased $13.0~~expense—net

Interest expense—net decreased $12.2 million to ~~$45.5~~$26.9 million for the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 compared to ~~$32.5~~$39.0 million for the ~~nine~~six months ended ~~October 29, 2016.~~August 1, 2020. Interest ~~expense~~expense—net consisted of the following:


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020

	(in thousands)
Amortization of convertible senior notes debt discount	$	17,461	$	25,378
Finance lease interest expense		12,757		11,729
Amortization of debt issuance costs and deferred financing fees		1,542		1,995
Other interest expense		937		879
Promissory notes		777		2,526
Asset based credit facility		—		232
Capitalized interest for capital projects		(5,849)		(3,312)
Interest income		(736)		(380)
Total interest expense—net	$	26,889	$	39,047

Nine Months Ended

October 28,

October 29,

2017

2016

(in thousands)

Amortization of convertible senior notes debt discount

$
22,685

$
21,467

Build-to-suit lease transactions

12,360

9,418

Asset based credit facility

4,049

1,465

Amortization of debt issuance costs and deferred financing fees

3,933

1,884

Term loans

3,545

—

Other interest expense

1,910

2,515

Capitalized interest for capital projects

(2,547
)

(1,917
)
Interest income

(439
)

(2,304
)
Total interest expense—net

$
45,496

$
32,528

~~Loss~~(Gain) loss on extinguishment of debt

~~We incurred~~During the six months ended July 31, 2021 we recognized a ~~$4.9 million~~ loss on extinguishment of debt infor a portion of the ~~nine~~2023 Notes that were early converted at the option of the noteholders of $3.3 million. During the six months ended ~~October 28, 2017 due~~August 1, 2020, we recognized a $0.2 million gain on extinguishment of debt related to the ~~repayment in full~~maturity and settlement of the ~~second lien term loan on October 10, 2017, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.~~2020 Notes in July 2020.

Income tax expense ~~(benefit)~~

Income tax expense was ~~$9.9~~$44.7 million and $17.5 million in the ~~nine~~six months ended ~~October 28, 2017 compared to an income tax benefit of $2.6 million in the nine months ended October 29, 2016.~~July 31, 2021 and August 1, 2020, respectively. Our effective tax rate was ~~83.7%~~11.1% and ~~38.9%~~15.5% for the ~~nine~~six months ended ~~October 28, 2017~~July 31, 2021 and ~~October 29, 2016,~~August 1, 2020, respectively. The decrease in our effective tax rate ~~in the nine months ended October 28, 2017 was significantly impacted by non-deductible stock-based compensation~~is primarily due to higher discrete tax benefits related to ~~the May 2017 grant to Mr. Friedman of an option to purchase 1,000,000 shares of the Company’s common stock and~~ net excess tax ~~benefits~~windfalls from stock-based compensation ~~of $4.3 million resulting from the Company’s adoption of ASU 2016-09~~ in the ~~first quarter~~six months ended July 31, 2021 as compared to the six months ended August 1, 2020.

Equity method investments losses

Equity method investments losses consists of ~~fiscal 2017. Refer to Note 15—Stock-Based Compensation~~ in our ~~condensed consolidated financial statements for a description~~proportionate share of the ~~option grant to Mr. Friedman.~~losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $4.6 million loss during the six months ended July 31, 2021.


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Liquidity and Capital Resources

General

The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as the development of our infrastructure and information technology. 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. ~~We completed~~In the past we have pursued substantial repurchases of our ~~first share repurchase program in an amount~~common stock when we believed that such investments represented a good long term investment for the benefit of ~~$300 million during the first quarter of fiscal 2017 and completed~~ our ~~second repurchase program in an amount of $700 million during the second quarter of fiscal 2017 (refer~~shareholders. Refer to “Share Repurchase Programs” ~~below).~~below. We ~~intend to~~ evaluate our capital allocation from time to time and may engage in future investments in connection with existing or new share ~~repurchases~~repurchase programs in circumstances where buying shares of our common stock ~~represents~~or related investments, which may include investments in derivatives or other equity linked instruments, represent a good value and provides a favorable return for our shareholders. We have in the past been opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Our use of convertible notes financings has enabled us to pursue various investments, such as our share repurchase programs which we consider to have been an excellent allocation of capital for the benefit of our shareholders. We regularly evaluate various debt and other financing alternatives, including convertible notes and other equity-linked instruments. Financing that we arrange through the sale of equity linked instruments such as our convertible notes financings may lead to substantial dilution to our investors if the price of our common stock exceeds the upper strike exercise price of the warrants in connection with our bond hedge transactions, which has been the case in connection with our convertible notes which matured in 2019 and 2020. At the same time, the investments we have previously made in connection with our share repurchase programs have more than offset the amount of dilution we experienced in relation to these warrants. We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business.

We have ~~$650~~$652 million remaining in aggregate principal amount of convertible notes outstanding as of July 31, 2021, of which ~~$350~~$67 million of the 2024 Notes and $174 million of the 2023 Notes will be settled in the third quarter of fiscal 2021 due to early conversions at the option of the noteholders. As a result, $128 million of the remaining 2023 Notes will mature in June ~~2019~~2023 (absent further early conversion elections) and ~~$300~~$283 million of the remaining 2024 Notes will mature in ~~June~~September 2024 (absent further early conversion elections). Based on the strong cash flow generated in fiscal 2020 and first half of fiscal 2021, as well as the continued strong cash flow anticipated in future years, we expect to repay the outstanding principal amount of our convertible notes at maturity in June 2023 and September 2024 in cash, in each case in order to minimize dilution. Likewise, we expect to pay the principal amount in cash with respect to any convertible notes for which the holder elects early conversion of such convertible notes in order to minimize dilution. While we purchased convertible note hedges and sold warrants with respect to each convertible note transaction, which are intended to offset any actual earnings dilution from the conversion of the 2024 Notes until our common stock is above approximately $338.24 per share and from the conversion of the 2023 Notes until our common stock is above approximately $309.84 per share, our shareholders may still experience dilution to the extent our common stock trades above such levels at the time of the maturity of the warrants with respect to the bond hedge and warrant transactions. While we anticipate using excess cash, free cash flow and borrowings on our asset based credit facility to repay the convertible notes in cash in order to minimize dilution, we may need to pursue additional sources of liquidity to repay such convertible notes in cash at their respective maturity ~~dates.~~dates or upon early conversion, as applicable. There can be no assurance as to the availability of capital to fund such repayments, or that if capital is available through additional debt issuances or refinancing of the convertible notes, that such capital will be available on terms that are favorable to us.

We extended and amended our revolving line of credit in June 2017, which has a total availability of $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, we have an $80.0 million last out, delayed draw term loan (“LILO term loan”) facility. The revolving line of credit and LILO term loan facility have a maturity date of June 28, 2022.

In July 2017, Restoration Hardware, Inc. entered into a credit agreement (the “second lien credit agreement”) with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”). Refer to ~~Second Lien Credit Agreement~~ ~~below. The proceeds of the second lien term loan were used to support our share repurchase program. We repaid this debt in full in October 2017.~~

We believe that cash expected to be generated from operations, net cash proceeds from the issuance of the convertible senior notes, borrowing availability under the revolving line of credit, borrowings under our term loan and other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and other capital needs for the next 12 months.

Our business has historically relied on cash flows from operations, net cash proceeds from the issuance of the convertible senior notes, as well as borrowings under our credit facilities as our primary sources of liquidity. We continue to closely manage our business and our investments while considering both the overall economic environment as well as the needs of our operations. In addition, our near term 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 the pandemic. We believe our 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.


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While we have continued to serve our customers and operate our business through the ongoing COVID-19 health crisis, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains uncertain. Future adverse developments in connection with the pandemic, including waves or resurgences of COVID-19 outbreaks in certain jurisdictions, including with regard to new strains or variants of the virus, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 health crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance for fiscal 2021 and beyond.

We extended and amended our asset based credit facility in July 2021, which has a total 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 Amended Credit Agreement provides that the $300 million accordion, or a portion thereof, may be added as a first-in, last-out term loan facility if and to the extent the lenders revise their credit commitments for such facility. The Amended 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 Amended Credit Agreement are met. The maturity date of the Amended Credit Agreement is July 29, 2026.

While we do not require additional debt to fund our operations, our goal continues to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations. We have pursued in the past, and may pursue in the future, additional strategies to generate ~~liquidity for our operations,~~capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, ~~and~~ entry into various second lien credit agreements and other new debt financing arrangements that present attractive terms.

~~During the first quarter of fiscal 2017, we received cash of $4.9 million for the sale of an aircraft, net of $0.3 million of costs~~ We expect to dispose of the aircraft, which was classified as asset held for sale, and during the second quarter of fiscal 2017 we received cash of $10.2 million for the sale of a real estate parcel that we owned on which one of our retail Galleries was located, which was classified as asset held for sale. We may in the future pursuecontinue to use additional ~~strategies, through the use of existing assets and debt facilities, or through the pursuit of new external~~ sources of liquidity and debt financings, to fund our strategies to enhance stockholder value. There can be no assurance that additional capital, whether raised through the sale of assets, utilization of our existing debt financing ~~sources, or pursuit of additional debt financing sources, will be available to us on a timely manner, on favorable terms or at all. To the extent we pursue additional debt~~in future periods as a source of ~~liquidity,~~additional capital to fund our ~~capitalization profile may change and may include significant leverage, and as a result~~various investments. In addition to funding the normal operations of our business, we ~~may be required to use future~~have used our liquidity to ~~repay~~fund significant investments and strategies such ~~indebtedness~~as our share repurchase programs, various acquisitions and ~~may be subject to additional terms~~growth initiatives, including through joint ventures and ~~restrictions~~real estate investments. For example, in fiscal 2019 we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $23.5 million and in fiscal 2020 we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $25.5 million, both of which ~~affect our operations and future uses of capital.~~qualified for sale-leaseback accounting in accordance with ASC 842.

In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue. We have invested significant capital expenditures in ~~remodeling~~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 ~~next generation~~ Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. ~~During~~

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. Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may adjust our investments in various business initiatives including our capital expenditures over the course of fiscal ~~2016, we spent $157.6 million for capital expenditures. Additionally, we made payments of $23.4 million in fiscal 2016 to escrow accounts for future construction of next generation Design Galleries.~~

2021 and beyond. We anticipate our ~~gross~~adjusted capital expenditures to be ~~approximately $120~~$250 million to ~~$130~~$300 million ~~for~~in fiscal ~~2017. Our fiscal 2017~~2021, primarily related to our efforts to continue our growth and expansion, including construction of new Design Galleries and infrastructure investments. During the six months ended July 31, 2021, adjusted capital expenditures ~~will be offset by~~were $125.5 million, net of cash ~~flows from operating activities. Our efforts~~received related to ~~optimize inventory and reduce capital spending generated substantial free cash flow in~~landlord tenant allowances of $11.2 million.


50 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of Contents

Certain lease arrangements require the ~~nine months ended October 28, 2017, and we expect~~landlord to ~~generate additional free cash flow for the remainder~~fund a portion of the ~~year.~~

~~The majority of the current~~construction related costs through payments directly to us. Other lease arrangements for our new Design Galleries require the landlord to fund a portion of the construction related costs directly to third parties, rather than through traditional construction allowances and accordingly, under these arrangements we do not expect to receive ~~significant~~ contributions directly from our landlords related to the building of our ~~larger format and next generation~~ Design ~~Galleries in fiscal 2017.~~Galleries. As we develop new Galleries, as well as ~~potentially~~ other potential strategic initiatives in the future like our integrated hospitality ~~experience;~~experience, we may explore other models for our real estate, which could include longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings. These approaches might require ~~greater~~different levels of capital investment on our part than a traditional store lease with a landlord. We also believe there is an opportunity to transition our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries then recoup the investments through a sale-leaseback arrangement resulting in lower capital investment and lower rent. For example, we have used this strategy in fiscal 2019 through the sale-leaseback transaction for the Yountville Design Gallery and in fiscal 2020 through the sale-leaseback transaction for the Minneapolis Design Gallery. In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurances that we will be successful in securing additional funding on attractive terms or at all.

In addition, we continue to address the effects of the pandemic on our business with respect to real estate development and the introduction of new Galleries in both the U.S. and internationally. A range of factors involved in the development of new Gallery and RH Hospitality may continue to be affected by the pandemic including delays in construction as well as permitting and other necessary governmental actions. In addition, the scope and cadence of investments by third parties including landlords and other real estate counterparties may be adversely affected by the health crisis. Actions taken by international as well as federal, state and local government authorities, and in some instances mall and shopping center owners, in response to the pandemic, may require changes to our real estate strategy and related capital expenditure and financing plans. In addition, we may continue to be required to make lease payments in whole or in part for our Galleries, Outlets and Restaurants that were temporarily closed or are required to close in the future in the event of resurgences in COVID-19 outbreaks or for other reasons. Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from the pandemic, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.

There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing on favorable terms to the extent necessary to fund all of our initiatives, or that sufficient incremental debt will be available to us in order to fund our cash payments in respect of the repayment of ~~our~~the remaining outstanding convertible senior notes in an aggregate principal amount of ~~$650~~$652 million at maturity or early conversion of such senior convertible ~~notes~~notes. To the extent we need to secure additional sources of liquidity, we cannot assure you that we will be able to raise necessary funds on favorable terms, if at all, or that future financing requirements would not require us to raise money through an equity financing or by other means that could be dilutive to holders of our ~~terms loan at~~capital stock. Any adverse developments in the ~~maturity dates~~U.S. or global credit markets as a result of ~~such term loan.~~the pandemic or any other reason could affect our ability to manage our debt obligations and our ability to access future debt. In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments including the repayment of the principal amount of our convertible senior notes in cash upon maturity of such senior notes. To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations including triggering cross defaults or other consequences with respect to other indebtedness. Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations. Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 51

~~Any weakening~~Table of or other adverse developments in, the U.S. or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt. We cannot assure you that we will be able to raise necessary funds on favorable terms, if at all, or that future financing requirements would not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock. If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.Contents

Cash Flow Analysis

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

Nine Months Ended

October 28,

October 29,

2017

2016

As Revised

(in thousands)

Provided by (used in) operating activities

$
386,762

$
(18,985
)
Provided by (used in) investing activities

$
101,324

$
(263,378
)
Used in financing activities

$
(552,969
)

$
(2,311
)
Decrease in cash and cash equivalents

$
(64,861
)

$
(284,332
)
Cash and cash equivalents at end of period

$
22,162

$
47,135


	SIX MONTHS ENDED
	JULY 31,		AUGUST 1,
	2021		2020

	(in thousands)
Net cash provided by operating activities	$	316,718	$	128,275
Net cash used in investing activities		(84,077)		(25,575)
Net cash used in financing activities		(42,968)		(132,988)
Net increase (decrease) in cash and cash equivalents and restricted cash equivalents		189,765		(30,271)
Cash and cash equivalents and restricted cash equivalents at end of period		296,836		17,387

Net Cash Provided By ~~(Used In)~~ Operating Activities

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

For the ~~nine~~six months ended ~~October 28, 2017,~~July 31, 2021, net cash provided by operating activities was ~~$386.8~~$316.7 million and consisted of net income of ~~$1.9~~$357.4 million and an increase in ~~cash provided~~non-cash items of $144.1 million, partially offset by a change in working capital and other activities of ~~$259.3~~$184.8 million. The source of cash from working capital was primarily driven by an increase in deferred revenue and customer deposits of $116.5 million primarily due to strong consumer demand for our products. These sources of cash from working capital were partially offset by uses of cash driven by an increase in merchandise inventory of $101.6 million, a decrease in other current liabilities of $51.7 million, an increase in landlord assets under construction of $43.4 million, an increase in prepaid expenses and other assets of $57.9 million, and a decrease in operating lease liabilities of $38.9 million primarily due to payments made under the related lease agreements.

For the six months ended August 1, 2020, net cash provided by operating activities was $128.3 million and consisted of net income of $95.2 million and non-cash items of ~~$125.6~~$89.1 million, partially offset by cash used for working capital and other activities of $56.0 million. Working capital and other activities consisted primarily of ~~decreases~~an increase in merchandise inventory of ~~$190.6~~$49.0 million, ~~due to our SKU rationalization initiative, outlet inventory optimization efforts and revised DC network strategy. We also had decreases~~an increase in ~~prepaid expense and other current~~landlord assets under construction of ~~$38.4~~$22.9 million, a decrease in operating lease liabilities of $18.4 million primarily due to ~~amortization of our capitalized catalog costs, reduction of federal and state tax receivables, and~~payments made under the related lease agreements, a ~~reduction in prepaid rent. In addition, we had increases in deferred revenue and customer deposits of $20.6 million and increases~~decrease in accounts payable and accrued ~~liabilities~~expenses of ~~$10.5~~$13.1 million due to ~~the timing of payments.~~

For the nine months ended October 29, 2016, net cash used in operating activities was $19.0 million and consisted of a net loss of $4.0 million and an increase in uses of working capital and other activities of $109.8 million, offset by non-cash items of $94.8 million. Working capital and other activities consisted primarily of decreases in accounts payable and accrued liabilities of $63.4 million primarily due to the timing of payments, ~~to our vendors,~~ and ~~prepaid expense and~~a decrease in other ~~current assets increased $30.4 million due to an increase~~non-current obligations of $12.3 million. These decreases in capitalized catalog costs related to our decision to move the mailing of our annual Source Books from the Spring to the Fall. In addition, other current liabilities decreased $25.4 million primarily due to federal and state tax payments, and inventory increased $23.3 million related to the increase in both existing and new products. This wasworking capital were partially offset by increases in deferred revenue and customer deposits of ~~$22.7 million and an increase in other non-current obligations of $8.5 million primarily due to a deferred contract incentive.~~$67.6 million.

Net Cash ~~Provided By (Used In)~~Used In Investing Activities

Investing activities consist primarily of investments in capital expenditures related to ~~new Gallery openings,~~investments in retail stores, information technology and systems infrastructure, as well as supply chain investments. Investing activities also include our strategic investments.

For the six months ended July 31, 2021, net cash used in investing activities was $84.1 million and was comprised of investments in retail stores, information technology and systems infrastructure of $82.1 million and additional funding of our equity method investments of $1.9 million.

For the six months ended August 1, 2020, net cash used in investing activities was $25.6 million primarily due to investments in information technology and systems infrastructure, supply chain investments and retail stores of $32.1 million, as well as the acquisition of ~~buildings~~building and land ~~investments~~assets of $14.2 million. Net cash used in ~~supply chain and systems infrastructure, construction related deposits, acquisition of businesses, as well as activities associated with investing in available-for-sale securities.~~

~~For the nine months ended October 28, 2017, net cash provided by~~ investing activities was $101.3 million primarily as a result of sales and maturities of investments in available-for-sale securities of $145.0 million and $46.9 million, respectively, the proceeds of which were used to fund the share repurchases made under the $300 Million Repurchase Program. In addition, we hadpartially offset by net proceeds from the sale of building and land ~~and the sale~~ of ~~an aircraft~~$25.0 million.


52 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

Table of $10.2 million and $4.9 million, respectively. These increases to cash were partially offset by investments in new Galleries, information technology and systems infrastructure, and supply chain investments of $76.8 million, purchases of investments in available-for-sale securities of $16.1 million and payments of $12.8 million to escrow accounts for future construction of next generation Design Galleries.Contents

For the nine months ended October 29, 2016, net cash used in investing activities was $263.4 million primarily as a result of our acquisition of Waterworks, net of cash acquired, of $116.1 million. In addition, we made $104.2 million of investments in new

galleries, information technology and systems infrastructure, supply chain and other corporate assets, as well as payments of $3.8 million to escrow accounts for future construction of next generation Design Galleries. In addition, we made investments in available-for-sale securities of $187.0 million, partially offset by maturities and sales of such investments of $115.9 million and $31.9 million, respectively.

Net Cash Used In Financing Activities

Financing activities consist primarily of borrowings and repayments related to ~~the~~ convertible senior notes, ~~offerings,~~ credit facilities ~~as well as~~and other financing arrangements, and cash used in connection with such financing activities include investments in share ~~repurchases~~repurchase programs, repayment of indebtedness including principal payments under finance lease agreements and other equity related ~~transactions.~~transactions such as the convertible note bond hedge and warrant transactions in connection with our convertible notes financings.

For the ~~nine~~six months ended ~~October 28, 2017,~~July 31, 2021, net cash used in financing activities was ~~$553.0~~$43.0 million, ~~primarily~~partially due to ~~$1.0 billion~~the repayment of ~~share repurchases~~$33.2 million of the 2023 Notes in the six months ended July 31, 2021 as a result of early conversion at the option of the noteholders, of which $28.1 million is presented as repayments of convertible senior notes within cash from financing activities and $5.1 million is reflected as non-cash accretion of debt discount upon settlement of debt within cash from operating activities. In addition, we made repayments of $11.4 million on our equipment notes, $7.1 million of principal payments under finance lease agreements and incurred $3.6 million of debt issuance costs related to the ~~$300 Million Repurchase Program and $700 Million Repurchase Program. Cash funding for the share repurchase programs was~~Amended Credit Agreement. Equity related transactions provided ~~by available cash balances, net borrowings under the asset based credit facility~~$7.3 million due to $25.9 million of $341.0 million, as well as borrowings under the term loans of $180.0 million, borrowings under loans secured by certain equipment of $20.0 million and borrowings under a promissory note secured by our aircraft of $14.0 million. Additionally, proceeds from exercise of employee stock options, ~~were $15.4 million. The cash provided by these financing activities was~~ partially offset by ~~repayment of the second lien term loan of $100.0 million, $8.7~~$18.6 million of ~~payments on build-to-suit transactions, debt issuance costs of $8.3 million and $4.9 million~~ cash paid for employee taxes related to net settlement of equity awards.

For the ~~nine~~six months ended ~~October 29, 2016,~~August 1, 2020, net cash used in financing activities was ~~$2.3~~$133.0 million. The $300 million ~~primarily due to tax shortfalls from the exercise~~2020 Notes matured in July 2020, of ~~stock options~~which $215.8 million is presented within net cash used in financing activities and $84.0 million is reflected as non-cash accretion of ~~$2.3 million and cash paid for employee taxes related to net~~debt discount upon settlement of ~~equity awards~~debt presented in net cash provided by operating activities. Net cash used in financing activities was partially offset by net borrowings of ~~$1.4 million.~~$91.6 million under the asset based credit facility.

Non-Cash Transactions

Non-cash transactions consist of non-cash additions of property and ~~equipment.~~

~~Build-to-Suit Lease Transactions~~

~~The~~equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets. In addition, non-cash ~~additions~~transactions consist of ~~property~~shares issued and ~~equipment due~~received related to ~~build-to-suit lease transactions are~~ the ~~result~~settlement of ~~the accounting requirements of Accounting Standards Codification (“ASC”) 840—Leases~~ (“ASC 840”) for those construction projects for which we are the “deemed owner” of the construction project given the extent to which we are involved in constructing the leased asset. If we are the “deemed owner” for accounting purposes, upon commencement of the construction project, we are required to capitalize contributions by the landlord toward construction as property and equipment on our condensed consolidated balance sheets. The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of our condensed consolidated statements of cash flows.

Over the lease term, these non-cash additions to property and equipment due to build-to-suit lease transactions do not impact our cash outflows, nor do they impact net income within our condensed consolidated statements of operations.convertible senior note transactions.

Convertible Senior Notes

Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements for further information on our 0.00% Convertible Senior Notes due ~~2020~~

~~In June 2015, we issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020~~2024 and in July 2015, we issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of our June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between us and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by us or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.

The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of October 28, 2017, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of October 28, 2017. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

We may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

In accounting for the debt issuance costs related to the issuance of the 2020 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets.

~~2020 Notes—Convertible Bond Hedge and Warrant Transactions~~

In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 2.5 million shares of our common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.5 million shares of our common stock at a price of $189.00 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 5.1 million shares of common stock (which cap may also be subject to adjustment). We received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 Notes until our common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

We recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

0.00% Convertible Senior Notes due ~~2019~~

In June 2014, we issued $350 million aggregate principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between us and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by us or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of October 28, 2017, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of October 28, 2017. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

We may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

In accounting for the debt issuance costs related to the issuance of the 2019 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets.

~~2019 Notes—Convertible Bond Hedge and Warrant Transactions~~

In connection with the offering of the 2019 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 3.0 million shares of our common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of our common stock at a price of $171.98 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 6.0 million shares of common stock (which cap may also be subject to adjustment). We received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

We recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.2023.

Asset Based Credit Facility

~~In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a~~Refer to Note 10—Credit Facilities in our condensed consolidated financial statements for further information on our asset based credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders. On June 28, 2017, Restoration Hardware, Inc. entered into an eleventh amended and restated credit agreement among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., various subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (the “credit agreement”). The credit agreement has a revolving line of credit with availability of upfacility.

Equipment Loan Facility

Refer to $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, the credit agreement establishes an up to $80.0 million LILO termNote 10—Credit Facilities in our condensed consolidated financial statements for further information on our equipment loan facility.

~~The availability of credit at any given time under the credit agreement is limited by reference~~Share Repurchase Program

We regularly review share repurchase activity and consider various factors in determining whether and when to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable. As a result of the borrowing base formula, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). All obligations under the credit agreement are secured by substantially all of the assets, including accounts receivable, inventory, intangible assets, property, equipment, goods and fixtures of Restoration Hardware, Inc., Restoration Hardware Canada, Inc., RH US, LLC, Waterworks Operating Co., LLC and Waterworks IP Co., LLC.

~~Borrowings under the revolving line of credit and LILO term loan facility are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or,~~execute investments in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

~~The credit agreement contains various restrictive covenants,~~connection with our share repurchase programs, including, among others, ~~limitations on~~current cash needs, capacity for leverage, cost of borrowings, results of operations and the ~~ability~~market price of our common stock. We believe that share repurchase programs will continue to ~~incur liens, make loans or~~be an excellent allocation of capital for the long-term benefit of our shareholders. We may undertake other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The credit agreement does not contain any significant financial or coverage ratio covenants unless the domestic availability under the revolving line of credit is less than the greater of (i) $40.0 million and (ii) 10% of the sum of (a) the lesser of (x) the aggregate revolving commitments under the credit agreement and (y) the aggregate revolving borrowing base, plus (b) the lesser of (x) the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing base . If the availability under the credit agreement is less than the foregoing amount, then Restoration Hardware, Inc. is required to maintain a consolidated fixed-charge coverage ratio (“FCCR”) of at least one to one. The consolidated FCCR is based upon the ratio on the last day of each month on a trailing twelve-month basis of (a) (i) consolidated EBITDA (as definedrepurchase programs in the agreement) minus (ii) capital expenditures, minus (iii) the income taxes paid in cash to (b) the sum of (i) debt service charges plus (ii) certain dividends and distributions paid. As of October 28, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

The credit agreement requires a daily sweep of cash to prepay the loans under the agreement while (i) an event of default exists or (ii) the availability under the revolving line of credit for extensions of credit is less than the greater of (A) $40.0 million and (B) 10% of the sum of (a) the lesser of (x) the aggregate revolving commitments under the credit agreement and (y) the aggregate revolving borrowing base, plus (b) the lesser of (x) the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing base.

As of October 28, 2017, Restoration Hardware, Inc. had $341.0 million in outstanding borrowings and $189.0 million of availability under the revolving line of credit, net of $27.7 million in outstanding letters of credit. As of October 28, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit would be approximately $125.2 million.

~~Second Lien Credit Agreement~~

On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into the second lien credit agreement, dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agentfuture with respect to our securities.


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Table of Contents

Our free cash flow has historically supported our current and completed share repurchase programs. We generated $405 million, $330 million and $163 million in free cash flow in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Free cash flow excludes all non-cash items. Free cash flow is net cash provided by operating activities adjusted by the second lien term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023. The second lien term loan of $100.0 million was repaid in full on October 10, 2017. As a result of the repayment, we incurred a $4.9 million loss on extinguishmentnon-cash accretion of debt ~~which includes a prepayment penalty of $3.0 million and acceleration of amortization~~discount upon settlement of debt, ~~issuance costs~~proceeds from sale of ~~$1.9 million~~.

~~Intercreditor Agreement~~

~~On July 7, 2017,~~asset, capital expenditures, principal payments under finance leases and equity method investments. Free cash flow is included in ~~connection~~this filing because our senior leadership team believes that free cash flow provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with the second lien credit agreement, Restoration Hardware, Inc. entered into an intercreditor agreement (the “intercreditor agreement”) with the administrative agent and collateral agent under the credit agreement and the administrative agent and collateral agent under the second lien credit agreement. The intercreditor agreement established various customary inter-lender terms, including, without limitation, with respecthistorical results. Our senior leadership team uses this non-GAAP financial measure in order to ~~priority~~have comparable financial results to analyze changes in our underlying business. A reconciliation of ~~liens, permitted actions~~our net cash provided by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the credit agreement and the second lien credit agreement without the consent of the other party. The intercreditor agreement was terminated upon repayment of the second lien term loan on October 10, 2017.operating activities to free cash flow is as follows:


	YEAR ENDED
	JANUARY 30,		FEBRUARY 1,		FEBRUARY 2,
	2021		2020		2019

	(in thousands)
Net cash provided by operating activities	$	500,770	$	339,188	$	249,603
Accretion of debt discount upon settlement of debt		84,003		70,482		—
Proceeds from sale of assets		25,006		24,078		—
Capital expenditures		(111,126)		(93,623)		(79,992)
Principal payments under finance leases		(12,498)		(9,682)		(6,885)
Equity method investments		(80,723)		—		—
Free cash flow	$	405,432	$	330,443	$	162,726

$950 Million Share Repurchase ~~Programs~~Program

~~On February 21, 2017,~~In 2018, our ~~board~~Board of ~~directors~~Directors authorized a ~~stock~~share repurchase program ~~of up to $300 million (the “$300 Million Repurchase Program”)~~ through open market purchases, privately negotiated transactions or other means, including through Rule ~~10b18~~10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as ~~accelerated share repurchases. During~~ the three months ended April 29, 2017, we repurchased approximately 7.8 million shares of our common stock under the $300 Million Repurchase Program at an average price of $38.24 per share, for an aggregate repurchase amount of approximately $300 million. No additional shares will be repurchased in future periods under the $300 Million Repurchase Program.

Following completion of the $300 Million Repurchase Program, our board of directors authorized on May 2, 2017 an additional stock repurchase program of up to $700 million (the “$700 Million Repurchase Program”) through open market purchases, privately negotiated transactions or other means, including through Rule 10b18 open market repurchases, Rule 10b5-1 trading plans or through the useacquisition of other ~~techniques such as~~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. ~~During~~We completed $250.0 million in share repurchases in fiscal 2018 under this program. In the ~~three months ended July 29, 2017,~~first quarter of fiscal 2019, we repurchased approximately ~~12.4~~2.2 million shares of our common stock ~~under the $700 Million Repurchase Program~~ at an average price of ~~$56.60~~$115.36 per share, for an aggregate repurchase amount of approximately ~~$700 million. No additional shares will be repurchased in future periods~~$250.0 million under this share repurchase program. We did not make any repurchases under this program during either the ~~$700~~three or six months ended July 31, 2021 or August 1, 2020. The total current authorized size of this share repurchase program is up to $950 million (the “950 Million Repurchase ~~Program.~~Program”), of which $450.0 million remained available as of July 31, 2021 for future share investments.

Contractual Obligations

~~We enter into long-term~~As of July 31, 2021, there were no material changes to our contractual obligations described within Management’s Discussion and ~~commitments, primarily debt obligations~~Analysis of Financial Condition and ~~non-cancelable operating leases,~~Results of Operations—Contractual Obligations in the 2020 Form 10-K other than lease agreements entered into in the normal course of ~~business. As of October 28, 2017, our contractual cash obligations were as follows (in thousands~~business (refer to Note 8—Leases):.

Payments Due by Period

Total

Remainder of
2017

2018-2019

2020–2021

Thereafter

(in thousands)

Convertible senior notes due 2019

$
350,000

$
—

$
350,000

$
—

$
—

Convertible senior notes due 2020

300,000

—

—

300,000

—

Asset based credit facility ⁽¹⁾

341,000

—

—

—

341,000

Term loan ⁽²⁾

80,000

—

—

—

80,000

Operating leases ⁽³⁾

683,685

23,058

163,223

122,998

374,406

Other non-current obligations ⁽⁴⁾

792,723

9,335

78,971

86,513

617,904

Capital lease obligations

14,913

357

2,832

2,569

9,155

Equipment security notes

19,626

1,129

10,281

8,216

—

Notes payable for share repurchases

19,390

—

893

—

18,497

Promissory note

13,533

350

2,800

2,800

7,583

Letters of credit

27,718

27,718

—

—

—

Total

$
2,642,588

$
61,947

$
609,000

$
523,096

$
1,448,545

~~(1)~~

~~Under the credit agreement, the asset based credit facility has a maturity date of June 28, 2022.~~

~~(2)~~

~~Under the credit agreement, the $80.0 million LILO term loan facility has a maturity date of June 28, 2022.~~

~~(3)~~

We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The table above does not include future obligations for renewal options that have not yet been exercised. The future operating lease obligations would change if we were to exercise these options. Amounts above do not include estimated contingent rent due under operating leases. Our obligation for contingent rent as of October 28, 2017 was $3.6 million.

~~(4)~~

Other non-current obligations include estimated payments for rent associated with build-to-suit lease transactions. These amounts may be reduced in the event we are able to effect a sale-leaseback on any of these locations.

Off Balance Sheet Arrangements

We have no material off balance sheet arrangements as of ~~October 28, 2017.~~July 31, 2021.


54 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with ~~GAAP~~accounting principles generally accepted in the United States requires ~~management~~senior leadership to make estimates and assumptions that affect amounts reported in our 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. ~~Management evaluates its~~We evaluate our accounting policies, estimates, and judgments on an on-going basis. ~~Management bases its~~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 the consolidated financial statements.

~~Management evaluated~~We evaluate the development and selection of ~~its~~our critical accounting policies and estimates and ~~believes~~believe that ~~the following~~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:

~~Revenue Recognition~~

Merchandise ~~Inventories~~Inventories—Reserves

~~Advertising Expenses~~

Impairment ~~of Goodwill~~

Tradenames, Trademarks and Other Intangible Assets

Long-Lived Assets

Lease Accounting

Reasonably Certain Lease Term

Incremental Borrowing Rate

Fair Market Value

Stock-Based ~~Compensation~~Compensation—Performance-Based Awards

~~Income Taxes~~Equity Method Investments

~~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 2016 Form 10-K.~~ There have been no material changes to the critical accounting policies and estimates listed above from the disclosures included in the ~~2016~~2020 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 2020 Form 10-K.

Recent Accounting Pronouncements

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

~~Item~~

ITEM 3. ~~Quantitative and Qualitative Disclosure of Market Risks~~QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

Interest Rate Risk

We currently do not engage in any interest rate hedging activity and we have no intention to do so in the foreseeable future.


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We are subject to interest rate risk in connection with borrowings under our revolving line of credit ~~which~~under the Amended Credit Agreement that bears interest at variable rates and we may incur additional indebtedness that bears interest at variable rates. ~~At October 28, 2017, $341.0 million was~~As of July 31, 2021, we had no outstanding borrowings under the revolving line of credit. AsThe Amended Credit Agreement provides for a borrowing amount based on the value of ~~October 28, 2017,~~eligible collateral and a formula linked to certain borrowing percentages based on certain categories of collateral. Under the ~~undrawn borrowing availability~~terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the Amended Credit Agreement as of July 31, 2021 was ~~$189.0~~$389.1 million, net of ~~$27.7~~$20.1 million in outstanding letters of credit. ~~As a result of the FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available under the revolving line of credit would be approximately $125.2 million.~~ Based on the average interest rate on the revolving line of credit during the three months ended ~~October 28, 2017,~~July 31, 2021, and to the extent that borrowings were outstanding on such line of credit, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition. To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.

~~We are subject to~~A number of our current debt agreements, including the Amended Credit Agreement, have an interest rate ~~risk~~tied to LIBOR, which is expected to be discontinued after 2021. A number of alternatives to LIBOR have been proposed or are being developed, but it is not clear which, if any, will be adopted. Any of these alternative methods may result in ~~connection with borrowings under our LILO term loan, which bears~~ interest at variable rates. At October 28, 2017, $80.0 million was outstanding under the LILO term loan. Based on the average interest rates on the LILO term loan during the three months ended October 28, 2017, wepayments that are higher than expected or that do not ~~believe~~otherwise correlate over time with the payments that ~~a 10% change in~~would have been made on such indebtedness for the interest periods if the applicable LIBOR rate ~~would have a material effect on our consolidated results of operations or financial condition.~~was available in its current form.

As of ~~October 28, 2017,~~July 31, 2021, we had ~~$350~~$302 million principal amount of 0.00% convertible senior notes due ~~2019~~2023 outstanding (the ~~“2019~~“2023 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.

As of ~~October 28, 2017,~~July 31, 2021, we had ~~$300~~$350 million principal amount of 0.00% convertible senior notes due ~~2020~~2024 outstanding (the ~~“2020~~“2024 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.

Market Price Sensitive Instruments

0.00% Convertible Senior Notes due ~~2019~~2023

In connection with the issuance of the ~~2019~~2023 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, ~~3.0~~1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the ~~2019~~2023 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the ~~2019~~2023 Notes. These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the ~~2019~~2023 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the ~~2019~~2023 Notes.

We also entered into separate warrant transactions with the same group of counterparties initially relating to the number of shares of our common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially ~~$171.98~~$309.84 per share. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.

0.00% Convertible Senior Notes due ~~2020~~2024

In connection with the issuance of the ~~2020~~2024 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, ~~2.5~~1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the ~~2020~~2024 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the ~~2020~~2024 Notes. These convertible note hedge transactions are expected to reduce the potential earnings

dilution with respect to our common stock upon conversion of the ~~2020~~2024 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the ~~2020~~2024 Notes.

We also entered into separate warrant transactions with the same group of counterparties initially relating to the number of shares of our common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially ~~$189.00~~$338.24 per share. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.


56 \| 2021 SECOND QUARTER FORM 10-Q	PART I. FINANCIAL INFORMATION

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Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our consolidated results of operations and financial condition have been immaterial.

~~Item~~

ITEM 4. ~~Controls and Procedures~~CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our ~~management,~~senior leadership team, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our ~~management,~~senior leadership team, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our ~~most recent~~ fiscal quarter ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART I. FINANCIAL INFORMATION	2021 SECOND QUARTER FORM 10-Q \| 57

Table of Contents

PART II

~~PART~~ II

~~Item~~ITEM 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS

From time to time, we and/or our ~~management~~senior leadership team are involved in litigation, claims and other proceedings relating to the conduct of our business, including purported class action litigation, as well as securities class action litigation. Such legal proceedings may include claims related to our employment practices, wage and hour claims, claims of intellectual property infringement, including with respect to trademarks and trade dress, claims asserting unfair competition and unfair business practices, claims with respect to our collection and sale of reproduction products, and consumer class action claims relating to our consumer practices including the collection of zip code or other information from customers. In addition, from time to time, we are subject to product liability and personal injury claims for the products that we sell and the stores we operate. Subject to certain exceptions, our purchase orders generally require the vendor to indemnify us against any product liability claims; however, if the vendor does not have insurance or becomes insolvent, we may not be indemnified. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims. Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant ~~management~~senior leadership team’s time. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability and could also materially adversely affect our operations and our reputation.

For additional information refer to Note ~~17—~~16—Commitments and Contingencies in our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.

~~Item~~

ITEM 1A. ~~Risk Factors~~RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. For a detailed discussion of certain risks that affect our business, refer to the ~~section~~sections entitled ~~“Risk Factors”~~Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January ~~28, 2017~~30, 2021 (“~~2016~~2020 Form 10-K”) and our Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2021 (“First Quarter Form 10-Q”). There have been no material changes to the risk factors disclosed in our ~~2016~~2020 Form ~~10-K.~~10-K and First Quarter Form 10-Q.

The risks described in our ~~2016~~2020 Form 10-K and in our First Quarter Form 10-Q are not the only risks we face. We describe in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report certain known trends and uncertainties that affect our business. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business, operating results and financial condition.

~~Item~~


58 \| 2021 SECOND QUARTER FORM 10-Q	PART II. OTHER INFORMATION

Table of Contents

ITEM 2. ~~Unregistered Sales of Equity Securities and Use of Proceeds~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases of Common Stock ~~during the Three Months Ended October 28, 2017~~

During the three months ended ~~October 28, 2017,~~July 31, 2021, we repurchased the following shares of our common stock:


				APPROXIMATE DOLLAR
		AVERAGE		VALUE OF SHARES THAT
		PURCHASE		MAY YET BE
	NUMBER OF	PRICE PER		PURCHASED UNDER THE
	SHARES ⁽¹⁾	SHARE		PLANS OR PROGRAMS ⁽²⁾
				(in millions)
May 2, 2021 to May 29, 2021	9,264	$	687.20	$	450
May 30, 2021 to July 3, 2021	17,185	$	660.77	$	450
July 4, 2021 to July 31, 2021	7	$	664.35	$	450
Total	26,456

Number of
Shares ⁽¹⁾

Average
Purchase
Price Per
Share

Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs

(in millions)

July 30, 2017 to August 26, 2017

—

$
—

—

$
—

August 27, 2017 to September 30, 2017

40,414

$
72.18

—

$
—

October 1, 2017 to October 28, 2017

752

$
77.20

—

$
—

Total

41,166

$
72.28

—

(1)	~~Represents~~Reflects shares withheld from delivery to satisfy exercise price and tax withholding obligations of employee recipients that occur upon the ~~exercise of stock options and~~ vesting of restricted stock units granted under ~~the Company’s~~our 2012 Stock Incentive Plan.

(2)	Reflects the dollar value of shares that may yet be repurchased under the $950 Million Repurchase Program authorized by the Board of Directors on October 10, 2018 and replenished on March 25, 2019. There were no shares repurchased under this plan during the three months ended July 31, 2021.

~~Item~~

ITEM 3. ~~Defaults Upon Senior Securities~~DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

~~Item 4. Mine Safety Disclosures~~

~~Not applicable.~~

~~Item 5. Other Information~~

~~Not applicable.~~

~~Item 6.~~ ~~Exhibits~~

~~Incorporated by Reference~~

Exhibit
NumberPART II. OTHER INFORMATION

~~Exhibit Description~~

~~Form~~

~~File~~

~~Number~~

~~Date of~~

~~First Filing~~

~~Exhibit~~

~~Number~~

~~Filed~~

~~Herewith~~

~~31.1~~

~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended~~.

—

~~31.2~~

~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended~~.

—

~~32.1~~

~~Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~.

—

~~32.2~~

~~Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~.

—

~~101.INS~~

~~XBRL Instance Document~~

—

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document~~

—

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document~~

—

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document~~

—

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~

—

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document~~

—

X2021 SECOND QUARTER FORM 10-Q | 59

53Table of Contents

ITEM 6. EXHIBITS



			INCORPORATED BY REFERENCE
EXHIBIT NUMBER	EXHIBIT DESCRIPTION	FORM	FILE NUMBER	DATE OF FIRST FILING	EXHIBIT NUMBER	FILED HEREWITH
10.1	Twelfth Amended and Restated Credit Agreement, dated as of July 29, 2021, by and among Restoration Hardware, Inc., as lead borrower, various other subsidiaries of RH named therein as borrowers, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent.	8-K	001-35720	July 30, 2021	10.1
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	—	—	—	—	X
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	—	—	—	—	X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	—	X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	—	X
101.INS	XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	—	—	—	—	X
101.SCH	Inline XBRL Taxonomy Extension Schema Document	—	—	—	—	X
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	—	—	—	—	X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	—	—	—	—	X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	—	—	—	—	X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	—	—	—	—	X
104	Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	—	—	—	—	X

*	Indicates management contract or compensatory plan or arrangement.


60 \| 2021 SECOND QUARTER FORM 10-Q	PART II. OTHER INFORMATION

Table of Contents

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	RH

Date: ~~December 6, 2017~~September 9, 2021	By:		/s/ Gary Friedman
				Gary Friedman
				Chairman and Chief Executive Officer
				(Principal Executive Officer)


Date: ~~December 6, 2017~~September 9, 2021	By:	/s/ Jack Preston
	Jack Preston
	Chief Financial Officer
	(Principal Financial Officer)


Date: September 9, 2021	By:	/s/ ~~Karen Boone~~Christina Hargarten
				~~Karen Boone~~Christina Hargarten
				~~President,~~Interim Chief ~~Financial and Administrative~~Accounting Officer
				(~~Principal Financial Officer and~~ Principal Accounting Officer)


SIGNATURES	2021 SECOND QUARTER FORM 10-Q \| 61

	October 28,			January 28,
	2017			2017
ASSETS
Current assets:
Cash and cash equivalents	$	22,162		$	87,023
Short-term investments		—			142,677
Accounts receivable—net		34,447			34,191
Merchandise inventories		557,345			752,304
Asset held for sale		—			4,900
Prepaid expense and other current assets		75,041			117,162
Total current assets		688,995			1,138,257
Long-term investments		—			33,212
Property and equipment—net		778,320			682,056
Goodwill		175,553			173,603
Trademarks and other intangible assets		100,726			100,757
Deferred tax assets		29,214			28,466
Other non-current assets		28,758			36,169
Total assets	$	1,801,566		$	2,192,520
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	252,569		$	226,980
Deferred revenue and customer deposits		166,579			145,918
Other current liabilities		50,609			43,271
Total current liabilities		469,757			416,169
Asset based credit facility		341,000			—
Term loan—net		79,471			—
Convertible senior notes due 2019—net		323,828			312,379
Convertible senior notes due 2020—net		248,633			235,965
Financing obligations under build-to-suit lease transactions		230,259			203,015
Deferred rent and lease incentives		63,499			60,439
Other non-current obligations		70,395			44,684
Total liabilities		1,826,842			1,272,651
Commitments and contingencies (Note 17)		—			—
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of October 28, 2017 and January 28, 2017		—			—
Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 41,525,393 shares issued and 21,305,261 shares outstanding as of October 28, 2017; 41,123,521 shares issued and 40,828,633 shares outstanding as of January 28, 2017		2			4
Additional paid-in capital		843,965			790,866
Accumulated other comprehensive loss		(1,527	)		(1,692	)
Retained earnings		152,133			150,214
Treasury stock—at cost, 20,220,132 shares as of October 28, 2017 and 294,888 shares as of January 28, 2017		(1,019,849	)		(19,523	)
Total stockholders’ equity (deficit)		(25,276	)		919,869
Total liabilities and stockholders’ equity (deficit)	$	1,801,566		$	2,192,520

			Purchase Price
	January 28,		Allocation			October 28,
	2017		Adjustments			2017
Tangible assets acquired and liabilities assumed	$	18,615	$	(1,916	)	$	16,699
Trademarks		52,100		—			52,100
Goodwill		49,229		1,916			51,145
Total	$	119,944	$	—		$	119,944

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases⁽¹⁾
Fair market write-up	$	1,925		$	(1,862	)	$	—		$	63
Fair market write-down ⁽²⁾		(1,467	)		1,393			—			(74	)
Total intangible assets subject to amortization	$	458		$	(469	)	$	��		$	(11	)
Intangible assets not subject to amortization
Goodwill ⁽³⁾⁽⁴⁾	$	175,605		$	—		$	(52	)	$	175,553
Trademarks and domain names ⁽⁴⁾	$	100,663		$	—		$	—		$	100,663

	Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount
Asset based credit facility	$	341,000	$	—		$	341,000
LILO term loan		80,000		(529	)		79,471
Total credit facilities	$	421,000	$	(529	)	$	420,471

	Level 1		Level 2		Total
Cash equivalents
Money market funds	$	2,510	$	—	$	2,510
Commercial paper		—		5,493		5,493
Total cash equivalents		2,510		5,493		8,003
Short-term investments
Commercial paper		—		34,534		34,534
Government agency obligations		2,553		105,590		108,143
Total short-term investments		2,553		140,124		142,677
Long-term investments
Government agency obligations		—		33,212		33,212
Total long-term investments		—		33,212		33,212
Total	$	5,063	$	178,829	$	183,892

	Cost		Fair Value
Range of maturity
Due within 1 year	$	148,155	$	148,170
Due in 1 to 2 years	$	33,238	$	33,212

	Payments Due by Period
	Total		Remainder of 2017		2018-2019		2020–2021		Thereafter
	(in thousands)
Convertible senior notes due 2019	$	350,000	$	—	$	350,000	$	—	$	—
Convertible senior notes due 2020		300,000		—		—		300,000		—
Asset based credit facility ⁽¹⁾		341,000		—		—		—		341,000
Term loan ⁽²⁾		80,000		—		—		—		80,000
Operating leases ⁽³⁾		683,685		23,058		163,223		122,998		374,406
Other non-current obligations ⁽⁴⁾		792,723		9,335		78,971		86,513		617,904
Capital lease obligations		14,913		357		2,832		2,569		9,155
Equipment security notes		19,626		1,129		10,281		8,216		—
Notes payable for share repurchases		19,390		—		893		—		18,497
Promissory note		13,533		350		2,800		2,800		7,583
Letters of credit		27,718		27,718		—		—		—
Total	$	2,642,588	$	61,947	$	609,000	$	523,096	$	1,448,545

	Number of Shares ⁽¹⁾		Average Purchase Price Per Share		Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
							(in millions)
July 30, 2017 to August 26, 2017		—	$	—		—	$	—
August 27, 2017 to September 30, 2017		40,414	$	72.18		—	$	—
October 1, 2017 to October 28, 2017		752	$	77.20		—	$	—
Total		41,166	$	72.28		—

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