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, 2017April 30, 2022
or
☐ | 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
|
| (I.R.S. Employer
|
15 Koch Road
|
| 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):
Large accelerated filer |
| ☒ |
| Accelerated filer |
| ☐ |
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ |
| | | | Emerging growth company | | ☐ |
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, 21,309,941May 27, 2022, 24,681,191 shares of the registrant’s common stock were outstanding.
RH
INDEX TO FORM 10-Q
| | | | | ||
|
| |
| Page | ||
| | | | | ||
3 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
| ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
| |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |||||
47 | ||||||
49 | ||||||
| | | | | ||
50 | ||||||
50 | ||||||
Item | |
| ||||
|
| |||||
| | 51 | ||||
| | 51 | ||||
| | 51 | ||||
| | 51 | ||||
52 | ||||||
|
| |||||
| 53 |
PART I
ITEM 1. FINANCIAL STATEMENTS
RH
RH
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
c | | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
ASSETS |
| |
|
| |
|
Cash and cash equivalents | | $ | 2,243,255 | | $ | 2,177,889 |
Accounts receivable—net | |
| 65,602 | |
| 57,914 |
Merchandise inventories | |
| 817,327 | |
| 734,289 |
Prepaid expense and other current assets | |
| 272,877 | |
| 121,350 |
Total current assets | |
| 3,399,061 | |
| 3,091,442 |
Property and equipment—net | |
| 1,357,064 | |
| 1,227,920 |
Operating lease right-of-use assets | | | 544,797 | | | 551,045 |
Goodwill | |
| 141,092 | |
| 141,100 |
Tradenames, trademarks and other intangible assets | |
| 73,488 | |
| 73,161 |
Deferred tax assets | |
| 63,256 | |
| 56,843 |
Equity method investments | | | 100,550 | | | 100,810 |
Other non-current assets | |
| 208,629 | |
| 298,149 |
Total assets | | $ | 5,887,937 | | $ | 5,540,470 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Accounts payable and accrued expenses | | $ | 428,949 | | $ | 442,379 |
Deferred revenue and customer deposits | | | 436,765 | |
| 387,933 |
Convertible senior notes due 2023 | | | — | | | 9,389 |
Convertible senior notes due 2024 | | | — | | | 3,600 |
Convertible senior notes repurchase obligation (Note 9) | | | 313,706 | | | — |
Operating lease liabilities | | | 74,309 | | | 73,834 |
Other current liabilities | |
| 107,801 | |
| 146,623 |
Total current liabilities | |
| 1,361,530 | |
| 1,063,758 |
Asset based credit facility | |
| — | |
| — |
Term loan—net | |
| 1,949,038 | |
| 1,953,203 |
Convertible senior notes due 2023—net | |
| 19,658 | |
| 59,002 |
Convertible senior notes due 2024—net | | | 80,388 | | | 184,461 |
Non-current operating lease liabilities | |
| 533,074 | |
| 540,513 |
Non-current finance lease liabilities | | | 594,728 | | | 560,550 |
Other non-current obligations | |
| 7,731 | |
| 8,706 |
Total liabilities | |
| 4,546,147 | |
| 4,370,193 |
Commitments and contingencies (Note 16) | |
| | |
| |
Stockholders’ equity: | |
|
| |
|
|
Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, 0 shares issued or outstanding as of April 30, 2022 and January 29, 2022 | |
| — | | | — |
Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 24,661,781 shares issued and outstanding as of April 30, 2022; 21,506,967 shares issued and outstanding as of January 29, 2022 | |
| 2 | |
| 2 |
Additional paid-in capital | |
| 575,635 | |
| 620,577 |
Accumulated other comprehensive income (loss) | |
| (5,555) | |
| (1,410) |
Retained earnings | |
| 771,708 | |
| 551,108 |
Total stockholders’ equity | |
| 1,341,790 | |
| 1,170,277 |
Total liabilities and stockholders’ equity | | $ | 5,887,937 | | $ | 5,540,470 |
(In thousands, except share amounts)
(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.
3
RH
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)INCOME
(Unaudited)
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands, except share and per share amounts) | ||||
Net revenues | | $ | 957,292 | | $ | 860,792 |
Cost of goods sold | |
| 458,709 | |
| 453,815 |
Gross profit | |
| 498,583 | |
| 406,977 |
Selling, general and administrative expenses | | | 293,295 | |
| 219,089 |
Income from operations | |
| 205,288 | |
| 187,888 |
Other expenses | |
| | | | |
Interest expense—net | | | 20,855 | |
| 13,308 |
Loss on extinguishment of debt | |
| 146,116 | |
| 105 |
Other income—net | | | (343) | | | — |
Total other expenses | |
| 166,628 | |
| 13,413 |
Income before income taxes | |
| 38,660 | |
| 174,475 |
Income tax expense (benefit) | |
| (163,426) | |
| 41,724 |
Income before equity method investments | | | 202,086 | | | 132,751 |
Share of equity method investments losses | | | (1,375) | | | (2,095) |
Net income | | $ | 200,711 | | $ | 130,656 |
Weighted-average shares used in computing basic net income per share | |
| 22,608,537 | |
| 21,003,244 |
Basic net income per share (Note 13) | | $ | 15.34 | | $ | 6.22 |
Weighted-average shares used in computing diluted net income per share | |
| 28,527,246 | |
| 31,210,011 |
Diluted net income per share (Note 13) | | $ | 12.16 | | $ | 4.19 |
|
| 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
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 4 |
RH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)(Unaudited)
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net income | | $ | 200,711 | | $ | 130,656 |
Net gains (losses) from foreign currency translation | |
| (4,145) | |
| 1,348 |
Total comprehensive income | | $ | 196,566 | | $ | 132,004 |
(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.
5
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 5 |
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||||||||||||||
| | COMMON STOCK | | | | | | | | | | | TREASURY STOCK | | | | ||||||
| | | | | | | | |
| ACCUMULATED |
| RETAINED | | | | | |
| | |||
| | | | | |
| ADDITIONAL |
| OTHER |
| EARNINGS | | | | | |
| TOTAL | ||||
| | |
| PAID-IN |
| COMPREHENSIVE |
| (ACCUMULATED |
| |
| STOCKHOLDERS' | ||||||||||
| | SHARES |
| AMOUNT |
| CAPITAL |
| INCOME (LOSS) |
| DEFICIT) |
| SHARES |
| AMOUNT |
| EQUITY | ||||||
| | (in thousands, except share amounts) | ||||||||||||||||||||
Balances—January 29, 2022 | | 21,506,967 |
| $ | 2 |
| $ | 620,577 |
| $ | (1,410) |
| $ | 551,108 |
| — |
| $ | — |
| $ | 1,170,277 |
Stock-based compensation | | — | | | — | | | 12,802 | | | — | | | — | | — | | | — |
| | 12,802 |
Vested and delivered restricted stock units | | 1,409 | | | — | | | (266) | | | — | | | — | | — | | | — |
| | (266) |
Exercise of stock options | | 3,153,400 | | | — | | | 149,570 | | | — | | | — | | — | | | — |
| | 149,570 |
Exercise of call option under bond hedge upon settlement of convertible senior notes | | (36,968) | | | — | | | 14,705 | | | — | | | — | | 36,968 | | | (14,705) | | | — |
Settlement of convertible senior notes | | 36,973 | | | — | | | (14,705) | | | — | | | — | | (36,968) | | | 14,705 | | | — |
Termination of common stock warrants | | — | | | — | | | (386,708) | | | — | | | — | | — | | | — |
| | (386,708) |
Termination of convertible note hedge | | — | | | — | | | 236,050 | | | — | | | — | | — | | | — |
| | 236,050 |
Impact of ASU 2020-06 adoption | | — | | | — | | | (56,390) | | | — | | | 19,889 | | — | | | — |
| | (36,501) |
Net income | | — | | | — | | | — | | | — | | | 200,711 | | — | | | — |
| | 200,711 |
Net losses from foreign currency translation | | — | | | — | | | — | | | (4,145) | | | — | | — | | | — |
| | (4,145) |
Balances—April 30, 2022 | | 24,661,781 |
| $ | 2 |
| $ | 575,635 |
| $ | (5,555) |
| $ | 771,708 |
| — |
| $ | — |
| $ | 1,341,790 |
| | | | | | | | | | | | | | | | | | | | | | |
Balances—January 30, 2021 | | 20,995,387 |
| $ | 2 |
| $ | 581,897 |
| $ | 2,565 |
| $ | (137,438) |
| — |
| $ | — |
| $ | 447,026 |
Stock-based compensation | | — | | | — | | | 15,200 | | | — | | | — | | — | | | — |
| | 15,200 |
Vested and delivered restricted stock units | | 2,807 | | | — | | | (927) | | | — | | | — | | — | | | — |
| | (927) |
Exercise of stock options | | 22,342 | | | — | | | 1,393 | | | — | | | — | | — | | | — |
| | 1,393 |
Exercise of call option under bond hedge upon settlement of convertible senior notes | | (7,305) | | | — | | | 3,280 | | | — | | | — | | 7,305 | | | (3,280) | | | — |
Settlement of convertible senior notes | | 7,307 | | | — | | | (3,514) | | | — | | | — | | (7,305) | | | 3,280 | | | (234) |
Net income | | — | | | — | | | — | | | — | | | 130,656 | | — | | | — |
| | 130,656 |
Net losses from foreign currency translation | | — | | | — | | | — | | | 1,348 | | | — | | — | | | — |
| | 1,348 |
Balances—May 1, 2021 | | 21,020,538 |
| $ | 2 |
| $ | 597,329 |
| $ | 3,913 |
| $ | (6,782) |
| — |
| $ | — |
| $ | 594,462 |
|
| 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 |
|
| $ | — |
|
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 6 |
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
---|---|---|---|---|---|---|
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
| | 2022 |
| 2021 | ||
| | (in thousands) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 200,711 | | $ | 130,656 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Depreciation and amortization | |
| 24,758 | | | 23,886 |
Non-cash operating lease cost | | | 18,391 | | | 16,603 |
Asset impairments | | | 5,923 | | | — |
Amortization of debt discount | |
| — | | | 8,670 |
Stock-based compensation expense | |
| 12,802 | | | 15,307 |
Non-cash finance lease interest expense | | | 7,071 | | | 6,150 |
Product recalls | | | 560 | | | 500 |
Deferred income taxes | | | 5,493 | | | — |
Loss on extinguishment of debt | | | 146,116 | | | 105 |
Gain on derivative instruments—net | | | (3,177) | | | — |
Share of equity method investments losses | | | 1,375 | | | 2,095 |
Other non-cash items | |
| 1,269 | | | (1,944) |
Cash paid attributable to accretion of debt discount upon settlement of debt | | | — | | | (319) |
Change in assets and liabilities: | |
| | | | |
Accounts receivable | |
| (7,715) | | | (722) |
Merchandise inventories | |
| (83,115) | | | (49,540) |
Prepaid expense and other assets | |
| (160,116) | | | (12,575) |
Landlord assets under construction—net of tenant allowances | |
| (12,148) | | | (13,578) |
Accounts payable and accrued expenses | |
| (14,778) | | | (32,250) |
Deferred revenue and customer deposits | |
| 48,909 | | | 82,744 |
Other current liabilities | |
| (30,057) | | | 41,981 |
Current and non-current operating lease liabilities | |
| (19,379) | | | (19,379) |
Other non-current obligations | |
| (6,944) | | | (7,515) |
Net cash provided by operating activities | |
| 135,949 | |
| 190,875 |
| | | | | | |
---|---|---|---|---|---|---|
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
| | 2022 |
| 2021 | ||
| | (in thousands) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |
|
| |
| |
Capital expenditures | |
| (29,364) | | | (50,251) |
Equity method investments | |
| (1,115) | | | (1,172) |
Net cash used in investing activities | |
| (30,479) | |
| (51,423) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Repayments under term loans | | | (5,000) | | | — |
Repayments under promissory and equipment security notes | |
| (10,910) | | | (5,792) |
Repayments of convertible senior notes | | | (13,048) | | | (2,035) |
Principal payments under finance leases | | | (3,559) | | | (3,671) |
Proceeds from termination of convertible senior note hedges | | | 231,796 | | | — |
Payments for termination of common stock warrants | | | (390,934) | | | — |
Proceeds from exercise of stock options | |
| 149,570 | | | 1,393 |
Tax withholdings related to issuance of stock-based awards | | | (266) | | | (927) |
Net cash used in financing activities | |
| (42,351) | |
| (11,032) |
Effects of foreign currency exchange rate translation | |
| (278) | | | 36 |
Net increase in cash and cash equivalents and restricted cash equivalents | |
| 62,841 | |
| 128,456 |
Cash and cash equivalents and restricted cash equivalents | |
| | |
|
|
Beginning of period—cash and cash equivalents | |
| 2,177,889 | |
| 100,446 |
Beginning of period—restricted cash equivalents (acquisition related escrow deposits) | |
| 3,975 | | | 6,625 |
Beginning of period—cash and cash equivalents | | $ | 2,181,864 | | $ | 107,071 |
End of period—cash and cash equivalents | |
| 2,243,255 | |
| 229,527 |
End of period—restricted cash equivalents (acquisition related escrow deposits) | |
| 1,450 | |
| 6,000 |
End of period—cash and cash equivalents and restricted cash equivalents | | $ | 2,244,705 | | $ | 235,527 |
Non-cash transactions: | |
| | |
| |
Property and equipment additions in accounts payable and accrued expenses at period-end | | $ | 12,248 | | $ | 14,463 |
Landlord asset additions in accounts payable and accrued expenses at period-end | | | 16,823 | | | 33,568 |
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets | | | 109,677 | | | — |
Extinguishment of convertible senior notes related to repurchase obligation (Note 9) | | | (180,322) | | | — |
Financing liability and embedded derivative arising from convertible senior notes repurchase (Note 9) | | | 325,363 | | | — |
Shares issued on settlement of convertible senior notes | | | (14,705) | | | (3,280) |
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes | | | 14,705 | | | 3,280 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 8 |
RH
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,” “our” or the “Company”), is a leading retailer and luxury lifestyle brand operating primarily in the home furnishings retailer that offersmarket. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books. We offer 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 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.
As of October 28, 2017, the CompanyApril 30, 2022, we operated a total of 84 retail67 RH Galleries and 31 outlet39 RH Outlet stores in 3231 states, the District of Columbia and Canada, and includes 15as well as 14 Waterworks showrooms inShowrooms 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’sour records and, in management’sour senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’sour financial position as of October 28, 2017,April 30, 2022, and the results of operations for the three and nine months ended October 28, 2017April 30, 2022, and October 29, 2016. The Company’sMay 1, 2021. Our current fiscal year, which consists of 5352 weeks, ends on February 3, 2018January 28, 2023 (“fiscal 2017”2022”).
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 months ended April 30, 2022. 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’sour Annual Report on Form 10-K for the fiscal year ended January 28, 201729, 2022 (the “2016“2021 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 months ended October 28, 2017April 30, 2022, 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 and other factors as discussed in COVID-19 Pandemic and Macro-Economic Factors below.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 9 |
COVID-19 Pandemic and Macro-Economic Factors
RevisionThe COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates. While our performance during the pandemic demonstrates the desirability of our exclusive products, we may see consumer spending patterns shift away from spending on the home and home-related categories as customers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.
DuringThere are a number of macro-economic factors and uncertainties affecting the fourth quarter of fiscal 2016, management determined that the Company had incorrectly reported negative cash balances 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,overall business climate as well as our business including increased inflation and rising interest rates. These factors may have a misstatementnumber of adverse effects on overall economic conditions and markets in which we operate. A slowdown in the cash provided by operating activities on the condensed consolidated statements of cash flows. There was nohousing market or continued negative trends in stock market prices could have a negative impact on our customers and demand for our products.
Our decisions regarding the condensed consolidated statementssources and uses of income or stockholders’ equity relatedcapital will continue to these misstatements.
The Company assessedreflect 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 statementspandemic. 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.our 2021 Form 10-K.
7
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 |
|
NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-Based CompensationNew Accounting Standards or Updates Adopted
Convertible Instruments and Contracts in an Entity’s Own Equity
In March 2016,August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardStandards Update No. 2016-09—Improvements to Employee Share Based Payment 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2016-09”2020-06”). The new guidanceASU 2020-06 simplifies several aspects of the accounting for employee share-based payment transactionscertain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, ASU 2020-06 removes the accountingseparation models for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement ofconvertible debt with a 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 in the statement of operations, rather than within additional paid-in capital on the balance sheet. The new guidance was effective for the Company beginning on January 29, 2017.conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting ASU 2020-06’s guidance, we no longer separately present in equity an embedded conversion feature of the adoption of this new guidance, the Company recognized an excess tax benefit of $1.9 million and $4.3 million in the provisionsuch debt. Instead, we will account for income taxesa convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a discrete item during the threederivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) 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 newamends certain 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 fiscal years beginning after December 15, 2017, including 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 indicatorscomputation of transfer of control, the Company continues to assess the guidanceearnings per share for convertible instruments 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 havecontracts on 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.entity’s own equity.
Topic 606 is effective for 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 will adopt Topic 606
We adopted ASU 2020-06 in
8
the first quarter of fiscal 2018. The Company has elected to adopt2022 using a modified retrospective approach withtransition method. Accordingly, the cumulative effect of initially applying the new standard recognized in retained earnings at the dateadoption on our opening fiscal 2022 condensed consolidated balance sheets was as follows:
| | | | | | | | | | |
|
| |
| ASU 2020-06 |
| | | |||
| | JANUARY 29, | | ADOPTION | | JANUARY 29, | | |||
| | 2022 | | ADJUSTMENTS | | 2022 | | |||
| | (in thousands) | | |||||||
Assets |
| |
|
| |
|
| |
| |
Property and equipment—net | | $ | 1,227,920 | | $ | (12,385) | | $ | 1,215,535 | |
Deferred tax assets | | | 56,843 | | | 11,909 | | | 68,752 | |
Liabilities |
| |
|
| |
|
| |
| |
Convertible senior notes due 2023—net | | | 59,002 | | | 5,684 | | | 64,686 | |
Convertible senior notes due 2024—net | | | 184,461 | | | 30,341 | | | 214,802 | |
Equity |
| |
|
| | |
| |
| |
Additional paid-in capital | | | 620,577 | | | (56,390) | | | 564,187 | |
Retained earnings | | | 551,108 | | | 19,889 | | | 570,997 | |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 10 |
Accounting for LeasesReference Rate Reform
In February 2016,March 2020, the FASB issued Accounting Standards Update 2016-02ASU 2020-04—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present valueReference Rate Reform (Topic 848): Facilitation of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the costEffects of the lease is allocated over the lease term,Reference Rate Reform on a generally straight-line basis. The Financial Reporting (“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 currently evaluating the effects that the adoption of 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
2020-04”).In January 2016,2021, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10)ASU 2021-01—Reference Rate Reform (Topic 848): RecognitionScope, (“ASU 2021-01” and, Measurementtogether with ASU 2020-04, the “ASUs”). The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These transactions include contract modifications, hedge accounting, and the sale or transfer of Financial Assetsdebt securities classified as held-to-maturity. The primary contracts for which we currently use LIBOR include our asset based credit facility and Financial Liabilities, which amends various aspects ofcertain term loan debt arrangements. The guidance was effective upon issuance and allows entities to adopt the recognition, measurement, presentationamendments on a prospective basis through December 31, 2022. All new arrangements are using alternative reference rates 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 iswe are evaluating the impact of adopting this new accounting standardadoption 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 anour 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.contracts.
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 Intangibles
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.
9
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’s condensed consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.
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.
10
NOTE 5—PREPAID EXPENSE AND OTHER ASSETS
Prepaid expense and other current assets consist of the following (in thousands):following:
| | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
Federal and state tax receivable(1) | | $ | 139,080 | | $ | — |
Prepaid expense and other current assets | | | 52,713 | | | 45,386 |
Vendor deposits | | | 24,343 | | | 19,610 |
Capitalized catalog costs | |
| 21,859 | |
| 22,194 |
Tenant allowance receivable | | | 17,761 | | | 15,355 |
Promissory notes receivable, including interest(2) | |
| 9,601 | |
| 8,401 |
Right of return asset for merchandise | |
| 6,070 | |
| 6,429 |
Acquisition related escrow deposits | | | 1,450 | | | 3,975 |
Total prepaid expense and other current assets | | $ | 272,877 | | $ | 121,350 |
|
| 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 |
|
(1) | Refer to Note 12—Income Taxes. |
(2) | Represents promissory notes, including principal and accrued interest, due from a related party. Refer to Note 5—Equity Method Investments. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 11 |
Other non-current assets consist of the following (in thousands):following:
| | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
Landlord assets under construction—net of tenant allowances | | $ | 115,977 | | $ | 204,013 |
Initial direct costs prior to lease commencement | | | 50,361 | |
| 57,087 |
Capitalized cloud computing costs—net(1) | | | 17,991 | | | 14,910 |
Other deposits | |
| 6,872 | |
| 6,877 |
Deferred financing fees | |
| 5,192 | |
| 4,123 |
Other non-current assets | |
| 12,236 | |
| 11,139 |
Total other non-current assets | | $ | 208,629 | | $ | 298,149 |
(1) | Presented net of accumulated amortization of $5.4 million and $4.0 million as of April 30, 2022 and January 29, 2022, 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 (Refer to Note 17—Segment Reporting), for the three months ended April 30, 2022:
| | | | | | | | | | | | |
|
| | |
| |
| FOREIGN |
| | | ||
| | JANUARY 29, | | | | CURRENCY | | APRIL 30, | ||||
| | 2022 | | ADDITIONS | | TRANSLATION | | 2022 | ||||
| | (in thousands) | ||||||||||
RH Segment |
| |
|
| |
|
| |
|
| |
|
Goodwill | | $ | 141,100 | | $ | — | | $ | (8) | | $ | 141,092 |
Tradenames, trademarks and other intangible assets | |
| 56,161 | |
| 327 | |
| — | |
| 56,488 |
Waterworks(1) | |
| | |
|
| |
|
| |
| |
Tradename(2) | |
| 17,000 | |
| — | |
| — | |
| 17,000 |
(1) | Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. |
(2) | Presented net of an impairment charge of $35 million recognized in previous fiscal years. |
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 “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020 for 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.
As of April 30, 2022 and January 29, 2022, $9.6 million and $8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member, which are included in 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. We have made $105 million in capital contributions to the Aspen LLCs as contractually required and no further capital contributions are required other than payments made under a management services arrangement. Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of October 28, 2017 (in thousands):April 30, 2022.
|
| 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 |
|
|
|
|
|
|
|
|
|
11
Table of ContentsThe following sets forth
During the goodwillthree months ended April 30, 2022 and intangible assetsJanuary 29, 2022, we recorded our proportionate share of equity method investments losses of $1.4 million and $2.1 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 (in thousands):April 30, 2022. During the three months ended April 30, 2022, we did not receive any distributions or have any undistributed earnings of equity method investments.
|
| 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 |
|
|
|
|
|
|
|
|
|
NOTE 7—6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following (in thousands):following:
| | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
Accounts payable | | $ | 254,537 | | $ | 242,035 |
Accrued compensation | |
| 54,471 | |
| 96,859 |
Accrued freight and duty | |
| 27,339 | |
| 21,888 |
Accrued sales taxes | |
| 26,732 | |
| 24,811 |
Accrued occupancy | |
| 26,208 | |
| 28,088 |
Accrued professional fees | |
| 17,134 | |
| 5,892 |
Accrued catalog costs | |
| 7,946 | |
| 4,127 |
Other accrued expenses | |
| 14,582 | |
| 18,679 |
Total accounts payable and accrued expenses | | $ | 428,949 | | $ | 442,379 |
|
| 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 |
|
Other current liabilities consist of the following (following:
| | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
Unredeemed gift card and merchandise credit liability | | $ | 25,237 | | $ | 22,712 |
Allowance for sales returns | | | 24,709 | | | 25,256 |
Current portion of term loan | | | 20,000 | | | 20,000 |
Finance lease liabilities | | | 15,982 | | | 15,511 |
Current portion of equipment promissory notes | | | 3,875 | | | 13,625 |
Federal and state tax payable(1) | | | — | | | 31,364 |
Other current liabilities | |
| 17,998 | |
| 18,155 |
Total other current liabilities | | $ | 107,801 | | $ | 146,623 |
(1) | Refer to Note 12—Income Taxes. |
Contract 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 April 30, 2022 will be recognized within the next six months as the performance obligations are satisfied. Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee. 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.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 13 |
In addition, we defer revenue when cash payments are received in thousands):advance of performance for unsatisfied obligations related to our gift cards. During the three months ended April 30, 2022 and May 1, 2021, we recognized $4.7 million and $4.9 million, respectively, of revenue related to previous deferrals related to our gift cards.
|
| 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 |
|
We recognize breakage associated with gift cards proportional to actual gift card redemptions. Breakage of $0.7 million and $0.4 million was recorded in net revenues in the three months ended April 30, 2022 and May 1, 2021, respectively.
12We expect that approximately 75% of the remaining gift card liabilities 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):following:
| | | | | | |
|
| APRIL 30, |
| JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | (in thousands) | ||||
Unrecognized tax benefits | | $ | 3,491 | | $ | 3,471 |
Non-current portion of equipment promissory notes—net | | | — | | | 1,129 |
Other non-current obligations | |
| 4,240 | |
| 4,106 |
Total other non-current obligations | | $ | 7,731 | | $ | 8,706 |
.
NOTE 8—LEASES
Lease costs—net consist of the following:
| | | | | | | |
| | | THREE MONTHS ENDED | ||||
| | | APRIL 30, |
| MAY 1, | ||
| | | 2022 |
| 2021 | ||
| | | (in thousands) | ||||
Operating lease cost(1) | |
| $ | 25,133 | | $ | 23,567 |
Finance lease costs | | | | | | | |
Amortization of leased assets(1) | | | | 11,498 | | | 10,918 |
Interest on lease liabilities(2) | | | | 7,071 | | | 6,150 |
Variable lease costs(3) | | | | 9,087 | | | 8,427 |
Sublease income(4) | | | | (1,128) | | | (1,182) |
Total lease costs—net | | | $ | 51,661 | | $ | 47,880 |
|
| 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) |
|
|
|
|
|
|
|
(2) | Included in interest expense—net on the condensed consolidated statements of income. |
(3) | Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $6.7 million and $6.3 million for the three months ended April 30, 2022 and May 1, 2021, respectively, and charges associated with common area maintenance of $2.4 million and $2.1 million for the three months ended April 30, 2022 and May 1, 2021, 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 either period. |
(4) | Included as an offset to selling, general and administrative expenses on the condensed consolidated statements of income. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 14 |
Lease right-of-use assets and lease liabilities consist of the following:
| | | | | | | | |
| | | | APRIL 30, | | JANUARY 29, | ||
| | |
| 2022 |
| 2022 | ||
| | | | (in thousands) | ||||
| | Balance Sheet Classification | | | | | | |
Assets | | | | | | | | |
Operating leases | | Operating lease right-of-use assets | | $ | 544,797 | | $ | 551,045 |
Finance leases(1)(2) | | Property and equipment—net | | | 918,605 | | | 784,327 |
Total lease right-of-use assets | | | | $ | 1,463,402 | | $ | 1,335,372 |
Liabilities | | | | | | | | |
Current(3) | | | | | | | | |
Operating leases | | Operating lease liabilities | | $ | 74,309 | | $ | 73,834 |
Finance leases | | Other current liabilities | | | 15,982 | | | 15,511 |
Total lease liabilities—current | | | | | 90,291 | | | 89,345 |
Non-current | | | | | | | | |
Operating leases | | Non-current operating lease liabilities | | | 533,074 | | | 540,513 |
Finance leases | | Non-current finance lease liabilities | | | 594,728 | | | 560,550 |
Total lease liabilities—non-current | | | | | 1,127,802 | | | 1,101,063 |
Total lease liabilities | | | | $ | 1,218,093 | | $ | 1,190,408 |
(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 othernon-current assets upon lease commencement. |
(2) | Finance lease right-of-use assets are recorded net of accumulated amortization of $185 million and $174 million as of April 30, 2022 and January 29, 2022, respectively. |
(3) | Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 15 |
The maturities of lease liabilities are as follows as of April 30, 2022:
| | | | | | | | | | | |
| | | | OPERATING | | FINANCE | | | |||
FISCAL YEAR | | |
| LEASES |
| LEASES |
| TOTAL | |||
| | | | (in thousands) | |||||||
Remainder of fiscal 2022 | | | | $ | 73,005 | | $ | 34,056 | | $ | 107,061 |
2023 | | | | | 91,430 | | | 45,762 | | | 137,192 |
2024 | | | | | 86,055 | | | 46,131 | | | 132,186 |
2025 | | | | | 84,275 | | | 47,338 | | | 131,613 |
2026 | | | | | 80,949 | | | 48,111 | | | 129,060 |
2027 | | | | | 76,416 | | | 49,052 | | | 125,468 |
Thereafter | | | | | 238,655 | | | 773,145 | | | 1,011,800 |
Total lease payments(1)(2) | | | | | 730,785 | | | 1,043,595 | | | 1,774,380 |
Less—imputed interest(3) | | | | | (123,402) | | | (432,885) | | | (556,287) |
Present value of lease liabilities | | | | $ | 607,383 | | $ | 610,710 | | $ | 1,218,093 |
(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 $512 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of April 30, 2022, of which $17 million, $27 million, $33 million, $34 million, $33 million and $31 million will be paid in fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $337 million will be paid subsequent to fiscal 2027. |
(2) | Excludes future commitments under short-term lease agreements of $0.9 million as of April 30, 2022. |
(3) | Calculated using the discount rate for each lease at lease commencement. |
Supplemental information related to leases consists of the following:
| | | | | | | |
| | | THREE MONTHS ENDED | ||||
| | | APRIL 30, | | MAY 1, | ||
| | | 2022 | | 2021 | ||
| | | (in thousands) | ||||
Weighted-average remaining lease term (years) | | | | | | | |
Operating leases | | | | 8.9 | | | 9.5 |
Finance leases | | | | 21.1 | | | 18.2 |
Weighted-average discount rate | | | | | | | |
Operating leases | | | | 3.95% | | | 4.00% |
Finance leases | | | | 5.06% | | | 4.99% |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 16 |
Other information related to leases consists of the following:
| | | | | | | |
| | | THREE MONTHS ENDED | ||||
| | | APRIL 30, | | MAY 1, | ||
| | | 2022 | | 2021 | ||
| | | (in thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | |
Operating cash flows from operating leases | | | $ | (25,199) | | $ | (25,456) |
Operating cash flows from finance leases | | | | (7,071) | | | (6,253) |
Financing cash flows from finance leases | | | | (3,559) | | | (3,671) |
Total cash outflows from leases | | | $ | (35,829) | | $ | (35,380) |
Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash) | | | | | | | |
Operating leases | | | $ | 12,459 | | $ | 103,088 |
Finance leases | | | | 38,252 | | | 19,611 |
NOTE 9—CONVERTIBLE SENIOR NOTES
0.00% Convertible Senior Notes due 2020
In June 2015, the Company2018, we issued in a private offering $250$300 million principal amount of 0.00% convertible senior notes due 20202023 and in July 2015, the Company issued an additional $50$35 million principal amount pursuant to the exercise ofin connection with the overallotment option granted to the initial purchasers as part of its June 2015the offering (collectively, the “2020“2023 Notes”). The 2020 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by the Company or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest”In September 2019, we issued in certain limited circumstances in the event of the failure of the Company to perform certain of its 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 the Company or any of its 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 the Company’s 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 $1,000a private offering $350 million principal amount of 20200.00% convertible senior notes due 2024 (the “2024 Notes” and, together with the 2023 Notes, the “Convertible Senior Notes” or the “Notes”). Refer to Note 12—Convertible Senior Notes in our consolidated financial statements in our 2021 Form 10-K for further information and terms of the Notes, including the accounting policies related to the Notes that were in effect through fiscal 2021. In connection with our adoption of ASU 2020-06 in the first quarter of fiscal 2022, we recombined the previously outstanding equity component, which is equivalentresulted in an increase in the balance of convertible debt outstanding. Refer to Note 2—Recently Issued Accounting Standards for further discussion of the impact of our adoption of ASU 2020-06 on our condensed consolidated financial statements.
The outstanding balances under the 2023 Notes and 2024 Notes were as follows:
| | | | | | | | | | | | | | | | | | | |
| | APRIL 30, | | | JANUARY 29, | ||||||||||||||
| | 2022 | | | 2022 | ||||||||||||||
| | | | UNAMORTIZED | | | | | | | | UNAMORTIZED | | | |||||
| | | | DEBT | | NET | | | | | DEBT | | NET | ||||||
| | PRINCIPAL | | ISSUANCE | | CARRYING | | | PRINCIPAL | | ISSUANCE | | CARRYING | ||||||
| | AMOUNT |
| COST(1) |
| AMOUNT |
| | AMOUNT |
| COST(1) | | AMOUNT | ||||||
| | (in thousands) | |||||||||||||||||
Convertible senior notes due 2023(2) | | $ | 19,778 | | $ | (120) | | $ | 19,658 | | $ | 74,390 | | $ | (5,999) | | $ | 68,391 | |
Convertible senior notes due 2024(3) | | | 80,880 | | | (492) | | | 80,388 | | | 219,638 | | | (31,577) | | | 188,061 | |
Total convertible senior notes | | $ | 100,658 | | $ | (612) | | $ | 100,046 | | $ | 294,028 | | $ | (37,576) | | $ | 256,452 | |
(1) | As of April 30, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount. As of January 29, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount, as well as the previously outstanding equity component that was recombined upon the adoption of ASU 2020-06 in the first quarter of fiscal 2022, which was $5.7 million for the 2023 Notes and $30 million for the 2024 Notes. Refer to Note 2—Recently Issued Accounting Standards. |
(2) | As of April 30, 2022, $20 million of the 2023 Notes remains outstanding and is classified as convertible senior notes due 2023—net. The 2023 Notes outstanding as of January 29, 2022 included a current portion of $9.4 million and a non-current portion of $59 million. |
(3) | As of April 30, 2022, $81 million of the 2024 Notes remains outstanding and is classified as convertible senior notes due 2024—net. The 2024 Notes outstanding as of January 29, 2022 included a current portion of $3.6 million and a non-current portion of $184 million. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 17 |
2023 Notes and 2024 Notes—Bond Hedge and Warrant Terminations and Notes Repurchase
During the three months ended April 30, 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an initial conversionaggregate purchase price of approximately $118.13 per share. The conversion rate will be$184 million and $203 million, respectively, subject to adjustment uponfor a settlement feature based on pricing formulations linked to the occurrencetrading price of certain specified events, but will not be adjusted for any accruedour common stock over a volume weighted-average price measurement period of two or three days. Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the condensed consolidated balance sheets, and unpaid special interest. In addition, uponaccordingly, we recognized a corresponding net loss on the occurrencefair value adjustment of a “make-whole fundamental change” as definedthe warrants of $4.2 million, which is classified within other income—net in the indenture,condensed consolidated statements of income. Upon settlement of these agreements in April 2022, we paid an aggregate of $391 million in cash to terminate the Company will, in certain circumstances, increasewarrants.
During the conversion rate by a numberthree months ended April 30, 2022, we entered into agreements with the Counterparties to terminate all of additional shares for a holder that elects to convert its 2020 Notesthe convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $56 million and $180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period. Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $4.3 million, which is classified within other income—net in the condensed consolidated statements of income. Upon settlement of these agreements in April 2022, we received an aggregate of $232 million in cash for the termination of the bond hedges.
During the three months ended April 30, 2022, we entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase in cash $45 million and $135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”). The Notes Repurchase provided for an estimated settlement cost of $325 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a five day volatility weighted-average price measurement period that ended on April 29, 2022. Upon execution of these agreements, we determined that we had modified the debt substantially and applied an extinguishment accounting model. Accordingly, we derecognized the aggregate principal amount of $180 million of the Convertible Senior Notes related to the extinguishment of such make-whole fundamental change.notes, and subsequently recognized a new financing liability with a fair value of $325 million. An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $278 million, with the remaining $47 million classified as debt and recognized at its amortized cost basis. Accordingly, we recognized a loss on extinguishment of debt of $146 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of approximately $1.0 million. Upon the completion of the price measurement period in April 2022, a total of $314 million was due to the holders, representing the combined carrying value of the debt liability of $47 million, as well as the fair value of the bifurcated embedded equity derivative of $267 million. Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $11 million, which is classified within other income—net in the condensed consolidated statements of income. The resulting debt liability and bifurcated embedded equity derivative were settled in full for $314 million in cash upon closing of the Notes Repurchase on May 3, 2022.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 18 |
$350 million 0.00% Convertible Senior Notes due 2024
Prior to MarchJune 15, 2020,2024, the 20202024 Notes will beare 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 fiscalcalendar quarter, the last reported sale price of the Company’sour 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 five5 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 20202024 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’sour 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 occurredThe first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 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 June 30, 2022. On and after MarchJune 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 20202024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 20202024 Notes will be settled, at the Company’sour election, in cash, shares
13
of the Company’sour common stock, or a combination of cash and shares of the Company’sour 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 may not redeemDuring the 2020 Notes; however, uponthree months ended April 30, 2022, holders of $3.6 million in aggregate principal amount of the occurrence2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 20202024 Notes to be purchased plus any accruedconverted and unpaid special interest to, but excluding, the fundamental change purchase date.
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 componentsshares of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accountingour common stock for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs related to the issuance of the 2020 Notes, the Company 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.remaining conversion value. During the three months ended October 28, 2017April 30, 2022, we paid $3.6 million in cash and October 29, 2016, the Company recorded $0.3 million and $0.2 million, respectively, related to the amortization of debt issuance costs. During the nine months ended October 28, 2017 and October 29, 2016, the Company recorded $0.8 million and $0.7 million, respectively, related to the amortization of debt issuance costs.
The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):
|
| 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 |
|
|
|
The Company recorded interest expense of $4.0 million and $3.8 million for the amortization of the debt discount related to the 2020 Notes during the three months ended October 28, 2017 and October 29, 2016, respectively. The Company recorded interest expense of $11.9 million and $11.2 million for the amortization of the debt discount related to the 2020 Notes during the nine months ended October 28, 2017 and October 29, 2016, respectively.
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, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 2.5 million shares of its 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, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.5 million shares of the Company’s 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 milliondelivered 9,760 shares of common stock (which cap mayto settle the early conversion of these 2024 Notes. We also be subject to adjustment). The Company received $30.4 million in cash proceeds9,760 shares of common stock from the saleexercise of these warrants. Taken together, the purchasea portion of the convertible note hedges and sale of
14
bond hedge we purchased concurrently with the warrants are intended to offset any actual earnings dilution from the conversionissuance of the 20202024 Notes.
The remaining liability for the 2024 Notes until the Company’s 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 recordedclassified as a reduction to additional paid-in capitalnon-current obligation on theour condensed consolidated balance sheets.sheets since the settlement of the outstanding 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 Company recorded a deferred tax liability of $32.8$335 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, the Company issued $350 million 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 the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company 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 the failure of the Company to perform certain of its 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 the Company or any of its 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,” the Company 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.2023
Prior to March 15, 2019,2023, the 20192023 Notes will beare 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 fiscalcalendar quarter, the last reported sale price of the Company’sour 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 five5 consecutive business day period after any ten10 consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 20192023 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’sour 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 occurredThe first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 and, as a result,accordingly, holders were eligible to convert their 2023 Notes beginning in the 2019calendar 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 June 30, 2022. 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 20192023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 20192023 Notes will be settled, at the Company’sour election, in cash, shares of the Company’sour common stock, or a combination of cash and shares of the Company’sour 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 may not redeem
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 19 |
During the 2019 Notes; however, uponthree months ended April 30, 2022, holders of $9.4 million in aggregate principal amount of the occurrence2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 20192023 Notes to be purchased plus any accruedconverted and unpaid special interest to, but excluding,shares of our common stock for the fundamental change purchase date.
Under GAAP, certain convertible debt instruments that may be settledremaining conversion value. During the three months ended April 30, 2022, we paid $9.4 million in cash onand delivered 27,213 shares of common stock to settle the early conversion are required to be separately accounted for as liability and equity componentsof these 2023 Notes. We also received 27,208 shares of common stock from the exercise of a portion of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting forconvertible bond hedge we purchased concurrently with the issuance of the 20192023 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amounttherefore, on a net basis issued 5 shares of our common stock in respect to such settlement of the converted 2023 Notes.
The remaining liability component was calculated by measuringfor the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which2023 Notes is recognizedclassified as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
15
In accounting for the debt issuance costs related to the issuance of the 2019 Notes, the Company allocated the total amount incurred to the liability and equity components basednon-current obligation 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 theour condensed consolidated balance sheets. During bothsheets since the three months ended October 28, 2017settlement of the outstanding 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and October 29, 2016, the Company recorded $0.2 million related to the amortizationshares of debt issuance costs. During both the nine months ended October 28, 2017 and October 29, 2016, the Company recorded $0.6 million related to the amortization of debt issuance costs.our common stock.
NOTE 10—CREDIT FACILITIES
The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, areoutstanding balances under our credit facilities were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | |
| | APRIL 30, | | JANUARY 29, | ||||||||||||||
| | 2022 | | 2022 | ||||||||||||||
| | | | UNAMORTIZED | | | | | | UNAMORTIZED | | | ||||||
| | | | | DEBT | | NET | | | | | DEBT | | NET | ||||
| | OUTSTANDING | | ISSUANCE | | CARRYING | | OUTSTANDING | | ISSUANCE | | CARRYING | ||||||
| | AMOUNT |
| COSTS |
| AMOUNT |
| AMOUNT |
| COSTS |
| AMOUNT | ||||||
| | (in thousands) | ||||||||||||||||
Asset based credit facility(1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Term loan credit agreement(2) | | | 1,990,000 | | | (20,962) | | | 1,969,038 | | | 1,995,000 | | | (21,797) | | | 1,973,203 |
Equipment promissory notes(3) |
| | 3,875 | | | (2) | | | 3,873 |
| | 14,785 |
| | (31) |
| | 14,754 |
Total credit facilities | | $ | 1,993,875 | | $ | (20,964) | | $ | 1,972,911 | | $ | 2,009,785 | | $ | (21,828) | | $ | 1,987,957 |
|
| 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) |
|
(2) | Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $2.0 billion and $20 million were included in term loan—net and other current liabilities on the condensed consolidated balance sheets, respectively, in both periods presented. The maturity date of the Term Loan Credit Agreement is October 20, 2028. |
(3) | Represents total equipment security notes secured by certain of our property and equipment, all of which was included in other current liabilities on the condensed consolidated balance sheets as of April 30, 2022. |
The Company recorded interest expense of $3.6 million and $3.5 million for the amortization of the debt discount related to the 2019 Notes during the three months ended October 28, 2017 and October 29, 2016, respectively. The Company recorded interest expense of $10.8 million and $10.3 million for the amortization of the debt discount related to the 2019 Notes during the nine months ended October 28, 2017 and October 29, 2016, respectively.
2019 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its 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, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s 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). The Company 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, 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 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 assets are included in deferred tax assets on the condensed consolidated balance sheets.
NOTE 10—CREDIT FACILITIES
The following credit facilities were outstanding as of October 28, 2017 (in thousands):
|
| 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.
Asset Based Credit Facility & LILO Term Loan Facilities
InOn August 3, 2011, Restoration Hardware, Inc. (“RHI”), a wholly-owned subsidiary of RH, along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent,the Ninth Amended and certain other lenders.
OnRestated Credit Agreement (as amended prior to June 28, 2017, Restoration Hardware, Inc. entered into an eleventh amendedthe “Original Credit Agreement”) by and restated credit agreement among Restoration Hardware, Inc.,RHI, Restoration Hardware Canada, Inc., variouscertain other 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”“ABL Agent”).
On June 28, 2017, RHI entered into the Eleventh Amended and Restated Credit Agreement (as amended prior to July 29, 2021, the “11th A&R Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the Original Credit Agreement.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 20 |
On July 29, 2021, RHI entered into the Twelfth Amended and Restated Credit Agreement (as amended, the “ABL Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the 11th A&R Credit Agreement. The credit agreementABL Credit Agreement has a revolving line of credit with initial availability of up to $600.0$600 million, of which $10.0$10 million is available to Restoration Hardware Canada, Inc., and includes a $200.0$300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0$600 million to up to $800$900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition,The ABL Credit Agreement provides that the credit agreement establishes an up to $80.0$300 million LILOaccordion, 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 relatedfacility if and to the extent the lenders revise their credit agreement, which are included in other non-current assets oncommitments for such facility. The ABL Credit Agreement further provides the condensed consolidated balance sheets, and will be amortized onborrowers may request a straight line basis over the life ofEuropean sub-credit facility under the revolving line of credit which has aor under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the ABL Credit Agreement are met. The maturity date of June 28, 2022. As a resultthe ABL Credit Agreement is July 29, 2026.
The availability of credit at any given time under the ABL Credit Agreement will be constrained by the terms and conditions of the credit agreement, unamortized deferred financing feesABL Credit Agreement, including the amount of $0.1 million related tocollateral available, a borrowing base formula based upon numerous factors, including the previous facility were expensed duringvalue of eligible inventory and eligible accounts receivable, and other restrictions contained in the nine months ended October 28, 2017 and $1.1 million related toABL Credit Agreement. All obligations under the previous facility will be amortized over the lifeABL Credit Agreement are secured by substantial assets of the new revolving lineloan 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) bear interest, at the borrower’s option, at either the bank’s referencebase rate or LIBOR subject to a 0.00% LIBOR floor (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,ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the United States“U.S. Index RateRate”, as such term is defined in the ABL Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable interest rate margin, rate, in each case. The ABL Credit Agreement contains customary provisions addressing the transition from LIBOR.
The credit agreementABL Credit Agreement contains various restrictive and affirmative covenants, including among others,required financial reporting, limitations on the ability to incurgranting certain liens, makelimitations on making certain loans or other investments, incurlimitations on incurring additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, payrestricted payment limitations limiting the payment of dividends or makeand certain other transactions and distributions, or enter intolimitations on transactions with affiliates, along with other restrictions and limitations typicalsimilar to those frequently found in credit agreements of thisa similar type and size.
The ABL Credit Agreement does not contain any significant financial ratio covenants or coverage ratio covenants other than a consolidated fixed charge coverage ratio (“FCCR”) covenant based on the 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 ABL Credit Agreement (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the ABL Credit Agreement drops below the greater of (A) $40 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 October 28, 2017, Restoration Hardware, Inc. April 30, 2022, RHI was in compliance with the FCCR Covenant.
The ABL Credit Agreement requires a daily sweep of all applicable covenantscash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the ABL Credit Agreement drops below the greater of (A) $40 million and (B) an amount based on 10% of the total borrowing availability at the time.
The ABL Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for an asset based credit agreement.facility.
The availability of the revolving line of credit at any given time under the ABL Credit Agreement is limited by the terms and conditions of the ABL 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 ABL Credit Agreement. As of October 28, 2017, the Company had $341.0 million in outstanding borrowings and $189.0 million ofa 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 April 30, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $444 million, net of $27.7$20 million in outstanding letters of credit. As
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 21 |
Second LienTerm Loan Credit Agreement
On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH,October 20, 2021, RHI entered into a credit agreementTerm Loan Credit Agreement (the “second lien credit agreement”“Term Loan Credit Agreement”), dated by and among RHI as of July 7, 2017, among Restoration Hardware, Inc., as leadthe borrower, the guarantors party thereto, the lenders party thereto eachand Bank of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National AssociationAmerica, N.A. as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan”) in an aggregate principal amount equal to $100.0 million$2,000,000,000 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.20, 2028.
The Company incurred $3.6 million of debt issuance costs related to the second lien credit agreement.
The second lien term loan boreTerm Loan bears interest at an annual rate generally based on LIBOR subject to a 0.50% LIBOR floor plus 8.25%an interest rate margin of 2.50% (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating). This rate wasLIBOR is a floating interest rate that resetresets periodically based upon changes in LIBOR rates during the life of the second lien term loan.Term Loan. At the date of borrowing, the interest rate was set at one monththe LIBOR floor of 0.50% plus 8.25%.2.50% and the Term Loan was issued at a discount of 0.50% to face value. The Term Loan Credit Agreement contains customary provisions addressing future transition from LIBOR.
17
All obligations under the second lien term loan were securedTerm Loan are guaranteed by certain domestic subsidiaries of RHI. Further, RHI and such subsidiaries have granted a second lien security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan. Substantially all of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest was granted with respect to substantiallycollateral securing the same collateral thatTerm Loan also 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 financial ratio covenant not found in the credit agreement based upon a senior secured leverage ratio of consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”).
The second lien credit agreement also contained a consolidated fixed charge coverage ratio generally based on the same formulation set forth in the credit agreement such that the borrower may not make certain “restricted payments” in the event that certain ratios were not met and contained certain events of default and other customary terms and conditions for a second lien credit agreement.
Intercreditor Agreement
extensions under the ABL Credit Agreement. On July 7, 2017,October 20, 2021, in connection with the second lien credit agreement, Restoration Hardware, Inc.Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the ABL Credit Agreement, as the case may be, entered into an intercreditor agreementIntercreditor Agreement (the “intercreditor agreement”“Intercreditor Agreement”) with the administrative agent and collateral agent under the credit agreementTerm Agent and the administrative agent and collateral agent under the second lien credit agreement.ABL Agent. The intercreditor agreement establishedIntercreditor Agreement establishes 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 agreementABL Credit Agreement and the second lien credit agreementTerm Loan Credit Agreement without the consent of the other party. parties.
The intercreditor agreement was terminated upon repaymentborrowings under the Term Loan Credit Agreement may be prepaid in whole or in part at any time, subject to a prepayment premium of 1.0% in connection with any repricing transaction within the six months following the closing date of the second lienTerm Loan Credit Agreement.
The Term Loan Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size, but provides for unlimited exceptions in the case of incurring indebtedness, granting of liens and making investments, dividend payments, and payments of material junior indebtedness, subject to satisfying specified leverage ratio tests.
The Term Loan Credit Agreement does not contain a financial maintenance covenant.
The Term Loan Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for a term loan credit agreement.
On May 13, 2022, subsequent to our first quarter of fiscal 2022, RHI entered into a 2022 Incremental Amendment (the “2022 Incremental Amendment”) with Bank of America, N.A., as administrative agent, amending the Term Loan Credit Agreement (the Term Loan Credit Agreement as amended by the 2022 Incremental Amendment, the “Amended Term Loan Credit Agreement”). Pursuant to the terms of the 2022 Incremental Amendment, RHI incurred incremental term loans (the “2022 Incremental Term Debt”) in an aggregate principal amount equal to $500 million with a maturity date of October 20, 2028. The 2022 Incremental Term Debt constitutes a separate class from the existing term loans under the Term Loan Credit Agreement.
The 2022 Incremental Term Debt bears interest at an annual rate based on October 10, 2017.the SOFR subject to a 0.50% SOFR floor plus an interest rate margin of 3.25% plus a credit spread adjustment of 0.10%. Other than the terms relating the 2022 Incremental Term Debt, the terms of the Amended Term Loan Credit Agreement remain substantially the same as the terms of the existing Term Loan Credit Agreement, including representations and warranties, covenants and events of default.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 22 |
Equipment Loan Facility
On September 5, 2017, RHI entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and RHI agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan. Each equipment loan is secured by a purchase money security interest in the financed equipment. As of April 30, 2022, the equipment security notes bore interest at a weighted-average rate of 4.53%. 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 equipment security notes.
NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Assets and Liabilities
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 market data or assumptions that it believes 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 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.
18
All 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):
|
| 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.MEASUREMENTS
Fair Value of Financial InstrumentsMeasurements—Recurring
Amounts reported as cash and equivalents, receivables, 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 (Level 2). The estimated fair value of the Term Loan Credit Agreement approximates cost as it was recently issued and the interest rate associated with the credit agreement is variable and resets frequently (Level 2). The estimated fair value and carrying value of the 20192023 Notes and 20202024 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity) were as follows (in thousands):follows:
| | | | | | | | | | | | |
| | APRIL 30, | | JANUARY 29, | ||||||||
| | 2022 | | 2022 | ||||||||
|
| |
| PRINCIPAL |
| |
| PRINCIPAL | ||||
| | FAIR | | CARRYING | | FAIR | | CARRYING | ||||
| | VALUE | | VALUE(1) | | VALUE | | VALUE(1) | ||||
| | (in thousands) | ||||||||||
Convertible senior notes due 2023 | | $ | 18,692 | | $ | 19,778 | | $ | 70,857 | | $ | 68,706 |
Convertible senior notes due 2024 | |
| 70,801 | | | 80,880 | |
| 198,087 | |
| 189,297 |
|
| 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) | The carrying value as of April 30, 2022 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer toNote 2—Recently Issued Accounting Standards). The carrying value as of January 29, 2022 represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity, which was required prior to the adoption of ASU 2020-06. The carrying value in both periods excludes 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 20192023 Notes and 20202024 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’sour convertible
19
notes, when available, the Company’sour stock price and interest rates based on similar debt issued by parties with credit ratings similar to the Company (levelours (Level 2).
Fair Value Measurements—Non-Recurring
The estimated fair value of the assetWaterworks reporting unit tradename was determined based credit facility was $341.0 million, which approximates cost, as of October 28, 2017. Fair value approximates cost as the interest rate associated with the facility is variableon unobservable (Level 3) inputs and resets frequently.valuation techniques.
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 ratereal estate assets associated with our investment in the facility is variableAspen LLCs in fiscal 2020, as discussed in Note 5—Equity MethodInvestments, were determined based on unobservable (Level 3) inputs and resets frequently.valuation techniques.
Prior to the adoption of ASU 2020-06 and through fiscal 2021, upon settlement of our convertible senior notes, including the settlements in which holders of the 2023 Notes and 2024 Notes elected to exercise the early conversion option, we recognized a gain or loss on extinguishment of debt in the condensed consolidated statements of income, which represented the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date. The fair value of each of the 2023 Notes and 2024 Notes related to the settlement of the early conversions 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 our convertible notes, when available, our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 23 |
NOTE 12—INCOME TAXES
The CompanyWe recorded an income tax benefit of $163 million and an income tax expense of $6.2 million and $1.8$41.7 million in the three months ended October 28, 2017April 30, 2022 and October 29, 2016, respectively. The Company recorded income tax expense of $9.9 million and an income tax benefit of $2.6 million in the nine months ended October 28, 2017 and October 29, 2016,May 1, 2021, respectively. The effective tax rate was 32.1%(438.3)% and 41.4%24.2% for the three months ended October 28, 2017April 30, 2022 and October 29, 2016,May 1, 2021, respectively. The decrease in the effective tax rate was 83.7% and 38.9% for the nine months ended October 28, 2017 and October 29, 2016, respectively. The effective tax rates for the three and nine months ended October 28, 2017 were impacted byApril 30, 2022 as compared to the three months ended May 1, 2021 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation partially offset by nondeductible amounts related to the extinguishment of $1.9 million and $4.3 million, respectively, resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017. The effective tax rate for the nine months ended October 28, 2017 was also significantly impacted by non-deductible stock-based compensation.debt.
As of October 28, 2017 and January 28, 2017, $6.8April 30, 2022, we had $8.6 million and $1.4 million, respectively, of the exposures related to unrecognized tax benefits, of which $7.9 million would affectreduce 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 inrecognized. 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 federaldeferred 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 anyApril 30, 2022, we had $5.9 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.
NOTE 13—NET INCOME (LOSS) PER SHARE
The weighted-average shares used forcalculation of our net income (loss) per share is presentedas follows:
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands, except share and per share amounts) | ||||
Net income | | $ | 200,711 | | $ | 130,656 |
Loss on extinguishment of debt |
| | 146,116 |
|
|
|
Net income available to common shareholders(1) |
| $ | 346,827 |
|
|
|
| | | | | | |
Weighted-average shares—basic | | | 22,608,537 | | | 21,003,244 |
Effect of dilutive stock-based awards |
| | 4,367,607 |
| | 6,716,485 |
Effect of dilutive convertible senior notes(2) |
| | 1,551,102 |
| | 3,490,282 |
Weighted-average shares—diluted |
| | 28,527,246 |
| | 31,210,011 |
Basic net income per share | | $ | 15.34 | | $ | 6.22 |
Diluted net income per share |
| $ | 12.16 |
| $ | 4.19 |
(1) | Effective the first quarter of fiscal 2022 upon adoption of ASU 2020-06, the loss on extinguishment of debt related to convertible securities is added back to net income to calculate net income per share. |
(2) | We adopted ASU 2020-06 in the first quarter of fiscal 2022, and the adoption requires the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes to be determined under the if-converted methodwhich assumes share settlement of the entire convertible debt instrument. Prior to adoption of ASU 2020-06, we applied the treasury stock method to determine the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes. |
The 2023 Notes and the 2024 Notes have an impact on our dilutive share count beginning at stock prices of $193.65 per share and $211.40 per share, respectively. The warrants associated with the 2023 Notes and 2024 Notes had an impact on our dilutive share count beginning at stock prices of $309.84 per share and $338.24 per share, respectively. The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of April 30, 2022. Refer to Note 9—Convertible Senior Notes. Accordingly, the table below. As the Company was in a net loss position for the nine months ended October 29, 2016, the weighted-averagewarrants have no impact on our dilutive shares outstanding for basic and diluted are the same.post-repurchase.
|
| 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 |
|
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 24 |
The following number of options and restricted stock units were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:
| | | | | ||||||||||||||||
| | THREE MONTHS ENDED | ||||||||||||||||||
| | APRIL 30, | | MAY 1, | ||||||||||||||||
|
| 2022 |
| 2021 | ||||||||||||||||
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||
|
| October 28, |
|
| October 29, |
|
| October 28, |
|
| October 29, |
| ||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||
| | (in thousands) | ||||||||||||||||||
Options |
|
| 2,222,103 |
|
|
| 7,995,703 |
|
|
| 3,701,484 |
|
|
| 8,594,487 |
| | 1,086,549 | | 55,273 |
Restricted stock units |
|
| 128,723 |
|
|
| 892,279 |
|
|
| 305,744 |
|
|
| 1,151,993 |
|
| 19,552 |
| — |
Total anti-dilutive stock-based awards |
|
| 2,350,826 |
|
|
| 8,887,982 |
|
|
| 4,007,228 |
|
|
| 9,746,480 |
|
| 1,106,101 |
| 55,273 |
20
NOTE 14—SHARE REPURCHASESREPURCHASE PROGRAM
$700 Million Share Repurchase Program
On May 2, 2017, the Company’sIn 2018, our Board of Directors authorized a stockshare repurchase program of up to $700 million (the “$700 Million Repurchase Program”). Under the $700 Million Repurchase Program, the Companyprogram. In fiscal 2018, we repurchased approximately 12.42.0 million shares of itsour 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 million. In fiscal 2019, we repurchased approximately 7.82.2 million shares of itsour 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 million. We did not make any repurchases under this share repurchase program during fiscal 2020, fiscal 2021 or the first quarter of fiscal 2022. The total current authorized size of the share purchase program is up to $950 million (the “Share Repurchase Program”), of which $450 million remained available as of April 30, 2022 for future share repurchases under this share repurchase program.
On June 2, 2022, theBoard of Directors authorized an additional $2.0 billion for the purchase of shares of our outstanding common stock, which is effective immediately and is an addition to the $450 million remaining under the Share Repurchase Program.
NOTE 15—STOCK-BASED COMPENSATION
We recorded stock-based compensation expense of $13 million and $15 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, 201730, 2022 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,May 1, 2021, 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 recorded stock-based compensation expense of $6.7 million and $7.4 million during the three months ended October 28, 2017 and October 29, 2016, 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. Noincome. NaN stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 25 |
2012 Stock Incentive Plan and 2012 Stock Option Plan
AsInformation about stock options outstanding, vested or expected to vest, and exercisable 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. April 30, 2022 is as follows:
| | | | | | | | | | | | |
| | OPTIONS OUTSTANDING | | OPTIONS EXERCISABLE | ||||||||
|
| |
| WEIGHTED- |
| | |
| |
| | |
| | | | AVERAGE | | WEIGHTED- | | | | WEIGHTED- | ||
| | | | REMAINING | | AVERAGE | | | | AVERAGE | ||
| | NUMBER OF | | CONTRACTUAL | | EXERCISE | | NUMBER OF | | EXERCISE | ||
RANGE OF EXERCISE PRICES | | OPTIONS | | LIFE (IN YEARS) | | PRICE | | OPTIONS | | PRICE | ||
$25.39 — $45.82 |
| 331,888 | | 3.67 | | $ | 35.06 | | 330,448 | | $ | 35.01 |
$50.00 — $50.00 |
| 1,000,000 | | 5.01 | | | 50.00 | | 1,000,000 | | | 50.00 |
$53.47 — $69.09 | | 199,700 | | 2.07 | | | 61.16 | | 197,660 | | | 61.20 |
$75.43 — $75.43 |
| 1,000,000 | | 1.17 | | | 75.43 | | 1,000,000 | | | 75.43 |
$87.31 — $154.82 | | 849,939 | | 7.20 | | | 133.43 | | 222,484 | | | 124.06 |
$156.40 — $380.53 | | 302,230 | | 8.18 | | | 287.75 | | 36,495 | | | 264.61 |
$385.30 — $716.75 | | 843,820 | | 8.58 | | | 422.73 | | 706,610 | | | 386.64 |
Total |
| 4,527,577 |
| | | $ | 156.01 |
| 3,493,697 | | $ | 131.54 |
Vested or expected to vest |
| 4,275,803 |
| | | $ | 150.42 |
|
| |
|
|
The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 28, 2017April 30, 2022 was $323.7$889 million, $283.8$856 million and $220.6$751 million, respectively. Stock options exercisable as of October 28, 2017April 30, 2022 had a weighted-average remaining contractual life of 6.374.45 years. As of October 28, 2017,April 30, 2022, the total unrecognized compensation expense related to unvested options was $26.8$97 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.334.63 years. In addition, as of April 30, 2022, the total unrecognized compensation expense related to the fully vested option grant made to Mr. Friedman in October 2020 was $27 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).
As of October 28, 2017, the CompanyApril 30, 2022, we had 825,30724,690 restricted stock units outstanding with a weighted-average grant date fair value of $52.20$423.88 per share. During the three months ended October 28, 2017, 18,590April 30, 2022, 2,220 restricted stock units vested with a weighted-average grant date and vest date fair value of $73.95$193.82 per share and $73.06 per share, respectively. During the nine months ended
21
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.share. As of October 28, 2017,April 30, 2022, there was $22.5$7.8 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 3.264.37 years.
Chairman and Chief Executive Officer Option Grant
On May 2, 2017, the Company’sOctober 18, 2020, our Board of Directors granted Mr. Friedman an option to purchase 1,000,000700,000 shares of the Company’sour common stock with an exercise price equal to $50$385.30 per share.
The option contains dual-condition restrictions consisting of both time-based service restrictions over four years and performance-based restrictions linked to achieving the Company’s common stock price objectives of $100, $125 and $150 per share. 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 in a one-time non-cash stock compensation charge of $23.9 million in the nine months ended October 28, 2017. The Company did not record any expense related to this grant in the three months ended October 28, 2017.
Time-Based Restrictions
The time-based restrictions are measured over 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.
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 2012 Stock Incentive PlanPlan. Refer to purchase 322,784 sharesNote 18—Stock-Based Compensation in the 2021 Form 10-K. The option will result in aggregate non-cash stock compensation expense of its common stock, with an exercise price$174 million, of $33.54 per share, which is equal to the closing price$5.9 million was recognized during each of the Company’s common stock onthree months ended April 30, 2022 and May 1, 2021 (which is included in the date of grant. These options are fully vested as of the date of grant but any shares issued upon exercise of such options will be subject to selling restrictions which are scheduled to lapse in five equal installments on the first, second, third, fourth and fifth anniversaries 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.
Rollover Units
In connection with the acquisition of Waterworks, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) wereexpense 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. The fair value of the Appreciation Rights is determined based on an option pricing method (“OPM”). The Company did not record any expense related to the Appreciation Rights during the three or nine months ended October 28, 2017 or October 29, 2016. As of both October 28, 2017April 30, 2022 and January 28, 2017, 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.
22
In connection with the acquisition of Waterworks, 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. The fair value of the Profit Interests is determined based on an OPM. For the three and nine months ended October 28, 2017, the Company recorded $0.1 million and $0.3 million, respectively, related to the Profit Interests, 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. As of October 28, 2017 and January 28, 2017, the liability associated with the Profit Interests was $0.6 million and $0.3 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.
May 1, 2021 noted above).
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 CompanyWe had no0 material off balanceoff-balance sheet commitments as of October 28, 2017.April 30, 2022.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 26 |
Contingencies
The Company isWe are involved in lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of itsour business. These disputes are increasing in number as the business expands and the Company growswe grow larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which the Company iswe are involved could result in unexpected expenses and liability that could adversely affect the Company’sour 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 managementour senior leadership team’s time and result in the diversion of significant operational resources.
The Company reviewsWe review the need for any loss contingency reserves and establishesestablish 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 doeswe 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 accrueswe accrue from time to time. The Company believesAlthough we believe that the ultimate resolution of itsour current matterslegal proceedings will not have a material adverse effect on itsour 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
23
to dismiss the complaint. While the outcome of litigationlegal matters is inherently uncertain, the Company and its officers intendsubject to vigorously defend the claims and believe the complaints lack merit.
inherent uncertainty.
NOTE 18—17—SEGMENT REPORTING
The Company definesWe define reportable and operating segments on the same basis that it useswe use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”). The Company has, which we have determined that theis our Chief Executive Officer is its CODM. As of October 28, 2017, the Company had twoOfficer. We have 3 operating segments: RH Segment, Waterworks and Waterworks.Real Estate Development. The twoRH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by the Company’sour customers, including sales through catalogs, sales through the Company’sretail locations and outlets, websites, sales through stores,Source Books, and sales through the commercial channelchannel. The Real Estate Development segment represents operations associated with our equity method investments (refer to Note 5—Equity Method Investments).
The Company’s tworetail operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared managementsenior leadership team and customer base, the Company haswe 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 operating income to evaluate segment profitability. Operating income is defined as net income (loss) before interest expense—net and income taxes.
Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition 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.
Segment Information
The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally (in thousands):
|
| 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 |
|
|
| 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 |
|
24
The following table presents the balance sheet metrics reviewed by the CODM to evaluate performance internally (in thousands):
|
| 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 |
|
|
|
The Company uses segmentWe use operating income to evaluate segment performanceprofitability for the retail operating segments and allocate resources. Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other income—net, income tax expense (benefit) and our share of equity method investments losses. Segment operating income excludes (i) employer payroll tax expense related to the option exercise by Mr. Friedman, (ii) asset impairments, (iii) non-cash compensation chargesamortization related to athe fully vested option grant made to Mr. Friedman in October 2020 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 product recalls, (iii) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, (iv) costs associated with anticipated distribution center closures, (v) gain 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 expenseprofessional fee related to unvested equity awards,the 2023 Notes and (viii) costs incurred in connection with the acquisition of Waterworks including professional fees.2024 Notes transactions (refer to Note 9—Convertible Senior Notes). 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 managementthe CODM and our senior leadership team reviews.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 27 |
The following table presents segment operating income and income before income taxes:
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Operating income: | | | | | | |
RH Segment | | $ | 228,545 | | $ | 188,010 |
Waterworks | |
| 7,985 | |
| 6,242 |
Employer payroll taxes on option exercise | | | (11,717) | | | — |
Professional fee | |
| (7,184) | |
| — |
Asset impairments | |
| (5,923) | |
| — |
Non-cash compensation | | | (5,858) | | | (5,864) |
Recall accrual | |
| (560) | |
| (500) |
Income from operations | |
| 205,288 | |
| 187,888 |
Interest expense—net | |
| 20,855 | |
| 13,308 |
Loss on extinguishment of debt | |
| 146,116 | |
| 105 |
Other income—net | | | (343) | | | — |
Income before income taxes | | $ | 38,660 | | $ | 174,475 |
The following table showspresents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting:
| | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||||||||||
| | APRIL 30, | | MAY 1, | ||||||||||||||
| | 2022 | | 2021 | ||||||||||||||
|
| RH SEGMENT |
| WATERWORKS |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| TOTAL | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 908,948 | | $ | 48,344 | | $ | 957,292 | | $ | 819,823 | | $ | 40,969 | | $ | 860,792 |
Gross profit | |
| 472,822 | |
| 25,761 | |
| 498,583 | |
| 386,553 | |
| 20,424 | |
| 406,977 |
Depreciation and amortization | |
| 23,524 | | | 1,234 | |
| 24,758 | |
| 22,680 | |
| 1,206 | |
| 23,886 |
In the three months ended April 30, 2022 and May 1, 2021, the Real Estate Development segment operating income (loss)share of equity method investments losses were $1.4 million and income (loss) before tax (in thousands):$2.1 million, respectively.
|
| 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 | ) |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 28 |
The Company classifies itsfollowing table presents the balance sheet metrics as required under ASC 280—Segment Reporting:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | APRIL 30, | | JANUARY 29, | ||||||||||||||||||||
| | 2022 | | 2022 | ||||||||||||||||||||
| | | | | | | | REAL ESTATE | | | | | | | | | | | REAL ESTATE | | | | ||
|
| RH SEGMENT |
| WATERWORKS |
| DEVELOPMENT |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| DEVELOPMENT |
| TOTAL | ||||||||
| | (in thousands) | ||||||||||||||||||||||
Goodwill(1) | | $ | 141,092 | | $ | — | | $ | — | | $ | 141,092 | | $ | 141,100 | | $ | — | | $ | — | | $ | 141,100 |
Tradenames, trademarks and other intangible assets(2) | |
| 56,488 | |
| 17,000 | |
| — | |
| 73,488 | |
| 56,161 | |
| 17,000 | |
| — | |
| 73,161 |
Equity method investments | | | — | | | 520 | | | 100,030 | | | 100,550 | | | — | | | — | | | 100,810 | | | 100,810 |
Total assets | |
| 5,595,677 | |
| 192,230 | |
| 100,030 | |
| 5,887,937 | |
| 5,259,719 | |
| 179,941 | |
| 100,810 | |
| 5,540,470 |
(1) | The Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. |
(2) | Presented net of an impairment charge of $35 million recognized in previous fiscal years. |
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):follows:
| | | | | | | ||||||||||||||||
| | THREE MONTHS ENDED | ||||||||||||||||||||
| | APRIL 30, | | MAY 1, | ||||||||||||||||||
|
| 2022 |
| 2021 | ||||||||||||||||||
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||
|
| October 28, |
|
| October 29, |
|
| October 28, |
|
| October 29, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||||
| | (in thousands) | ||||||||||||||||||||
Furniture |
| $ | 383,281 |
|
| $ | 343,946 |
|
| $ | 1,125,220 |
|
| $ | 985,639 |
| | $ | 662,520 | | $ | 580,011 |
Non-furniture |
|
| 209,192 |
|
|
| 205,382 |
|
|
| 644,659 |
|
|
| 562,526 |
| |
| 294,772 | |
| 280,781 |
Total net revenues |
| $ | 592,473 |
|
| $ | 549,328 |
|
| $ | 1,769,879 |
|
| $ | 1,548,165 |
| | $ | 957,292 | | $ | 860,792 |
The Company isWe are domiciled in the United States and primarily operates itsoperate our retail locations and outlet storesoutlets in the United States. As of October 28, 2017, the Company operatesApril 30, 2022, we operated 4 retail locations and 2 outlet storesoutlets in Canada, and 1 retail storelocation in the U.K. Revenues from Canadian
25
and U.K. operations, and the long-lived assetsGeographic 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 10% or more than 10% of the Company’sour consolidated net revenues in the three or nine months ended October 28, 2017April 30, 2022 or October 29, 2016.May 1, 2021.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 29 |
NOTE 19—SUBSEQUENT EVENT
ITEM 2. Management’s Discussion and Analysis of
The following discussion and analysis of theour 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 2016Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the “2021 Form 10 K”).
Management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that are subject to risks and uncertainties. Refer to “Forward-Looking Statements and Market Data” below and Item 1A—Risk Factors in our 2021 Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements. MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in our 2021 Form 10-K.
The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three months ended April 30, 2022 and a comparison to the three months ended May 1, 2021. The discussion for related to cash flows for the three months ended May 1, 2021 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended May 1, 2021, filed with the Securities and Exchange Commission (“SEC”) on June 10, 2021.
MD&A is a supplement to our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A is organized as follows:
Overview. This section provides a general description of our business and describes our key value-driving strategies.
Basis of Presentation and Results of Operations. These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current periods as compared to the prior year’s comparative period, as well as non-GAAP measures we use for financial and operational decision making and as a means to evaluate period-to-period comparisons.
Liquidity and Capital Resources. This section provides an overview of our sources and uses of cash and our financing arrangements, including our credit facilities and debt arrangements, in addition to the cash requirements for our business, such as our capital expenditures.
Critical Accounting Policies and Estimates. This section discusses the accounting policies and estimates that involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, including the significant estimates and judgments used in the preparation of our consolidated financial statements.
Recently Issued Accounting Pronouncements. This section provides a summary of recent authoritative accounting pronouncements that were adopted during the three months ended April 30, 2022 and that will be adopted in future periods.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 30 |
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 sectionssection entitled Risk Factors in Part II of this quarterly report, in our Annual Report on2021 Form 10-K, for the fiscal year ended January 28, 2017 (“2016 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 20162021 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 retailercurator of design, taste and style in the home furnishings marketplace.luxury lifestyle market. Our curated and fully-integratedfully 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 Source Books and websites act as virtual extensions of our stores.
Our retail business is fully integrated across our multiple channels of distribution, consisting of our stores,retail locations, websites and Source Books. We position our Galleries as showrooms for our brand, while our websites and Source Books act as virtual and websites. Asprint extensions of October 28, 2017, we operated a total of 84our physical spaces. We operate our retail Galleries, consisting of 48 legacy Galleries, 6 larger format Design Galleries, 9 next generation Design Galleries, 1 RH Modern Gallery and 5 RH Baby & Child Gallerieslocations throughout the United States, and Canada, and 15 Waterworks showroomsthe U.K., and, after the opening of RH San Francisco, The Gallery at the Historic Bethlehem Steel Building in May 2022, we have an integrated RH Hospitality experience in 14 of our Design Gallery locations, which includes Restaurants and Wine Bars.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 31 |
As of April 30, 2022, we operated the following number of Galleries, Outlets and Showrooms:
| | |
| | COUNT |
RH | | |
Design Galleries | | 27 |
Legacy Galleries | | 36 |
Modern Galleries | | 1 |
Baby & Child and TEEN Galleries | | 3 |
Total Galleries | | 67 |
Outlets | | 39 |
Waterworks Showrooms | | 14 |
COVID-19 Pandemic and Macro-Economic Factors
The COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates. While our performance during the pandemic demonstrates the desirability of our exclusive products, we may see consumer spending patterns shift away from spending on the home and home-related categories as customers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.
There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business including increased inflation and rising interest rates. These factors may have a number of adverse effects on overall economic conditions and markets in which we operate. A slowdown in the United States andhousing market or continued negative trends in the U.K. In addition, as of October 28, 2017, we operated 31 outlet stores throughout the United States and Canada.
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 addition to the other numerous initiatives we are undertaking to improve our business and financial performance in fiscal 2017 and beyond. If these initiatives are successful, we may return to rates of growth 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 maystock market prices could have a negative impact on growthour customers and profitability. For further information ondemand for our products.
Our decisions regarding the temporal factors affecting our resultssources and our initiatives, see Item 2—Management’s Discussion and Analysisuses 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 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
27
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 pursuereflect and test numerous initiativesadapt to improve many aspects ofchanges 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 fluctuationthe 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.2021 Form 10-K.
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.
Key Value DrivingValue-Driving Strategies
In order to drive growth across our business, we are focused on the following long-term key strategies:strategies and business initiatives:
Transform Our Real Estate Platform.Product Elevation. We believe we have anbuilt the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve industry-leading revenues and margins. Our customers know our brand concepts as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, 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 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 areis sized to the potential of each market and the size of our assortment. New next generation Design Gallery sites are identified based on a varietyIn 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 variablesthe 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 2017renders 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 havehospitality has created a significant opportunity to increase our market share by:
growing our merchandise assortment;
introducingunique new productsretail experience that cannot be replicated online, and categories, including our introduction of RH Modern, RH TEEN andthat the addition of the Waterworks business;hospitality drives incremental sales of home furnishings in these Galleries.
exploringTable of Contents
Brand Elevation. We are evolving the brand beyond curating and testingselling product to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services 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. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new business opportunities complementarymarket for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 & RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our core business;evolving authority in architecture, interior design and landscape architecture.
increasing
Digital Reimagination. Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally our multi-year effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation. Externally our strategy is designed to come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. The World of RH will include rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand awareness and customer loyalty through our Source Book circulation strategy, our digital marketing initiatives and our advertising and public relations activities and events.
Increase Operating Margins. We have 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.more valuable. We believe that our operations and current initiatives present a significantan opportunity exists to optimize the allocation of capital in our business, including generating free cash flow and optimizing cash on our balance sheetcreate similar strategic separation online as well as deploying capital to repurchase shares of our common stock which we believe creates a long term benefit to our shareholders. We have also incurred additional debt to fund a portion 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, one of our initiatives has been to generate additional cash flow through the optimization of inventory and other efforts 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, we have with our Galleries offline, reconceptualizing what a number of assets thatwebsite 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.
In fiscal 2016,appeal, and that pursuit of global expansion will provide RH a substantial long-term market opportunity to build a $20 to $25 billion global brand over time. Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, and brand of RH. As such, we made several strategic investments and changes to our business modelare actively pursuing the expansion of the RH brand globally with the objective of launching international locations in order to strengthen our brand and positionEurope, beginning in 2022 with the business for growth in the future. Our fiscal 2016 results also reflected the effect of temporal issues that we faced, including the costs related to the launchopening of RH Modern; the timing of recognizing Membership revenues related to the transition from
29
a promotional to a membership model; efforts to reduce inventories and rationalize our SKU count; and the decision to move our 2016 Source Book mailing from the spring to the fall.
In fiscal 2017, we have continued our efforts to optimize inventory and rationalize our SKU count. In the nine months ended October 28 2017, net revenues increased 14%, of which 3 points of growth was related to higher outlet and warehouse sales stemming from our accelerated inventory optimization efforts. While our higher outlet revenues and inventory optimization efforts had a positive impact on revenues and working capital in the first nine months of the year, they had a negative impact on margins and earnings.
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 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,England, The Gallery at the Three Arts Club.Historic Aynho Park. We have secured a number of locations in various markets in the United Kingdom and continental Europe for future Design Galleries and are in lease or purchase negotiations for additional locations.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 33 |
Basis of Presentation and Results of Operations
The following table sets forth our condensed consolidated statements of operationsincome:
| | | | | | | | | |
| | THREE MONTHS ENDED | |||||||
| | APRIL 30, | % OF NET | MAY 1, | % OF NET | ||||
| | (dollars in thousands) | |||||||
Net revenues | | $ | 957,292 | 100.0 | % | $ | 860,792 | 100.0 | % |
Cost of goods sold | |
| 458,709 | 47.9 | |
| 453,815 | 52.7 | |
Gross profit | |
| 498,583 | 52.1 | |
| 406,977 | 47.3 | |
Selling, general and administrative expenses | |
| 293,295 | 30.7 | |
| 219,089 | 25.5 | |
Income from operations | |
| 205,288 | 21.4 | |
| 187,888 | 21.8 | |
Other expenses | |
|
| | |
|
| | |
Interest expense—net | |
| 20,855 | 2.2 | |
| 13,308 | 1.5 | |
Loss on extinguishment of debt | |
| 146,116 | 15.3 | |
| 105 | — | |
Other income—net | | | (343) | — | | | — | — | |
Total other expenses | |
| 166,628 | 17.4 | |
| 13,413 | 1.5 | |
Income before income taxes | |
| 38,660 | 4.0 | |
| 174,475 | 20.3 | |
Income tax expense (benefit) | |
| (163,426) | (17.1) | |
| 41,724 | 4.7 | |
Income before equity method investments | | | 202,086 | 21.1 | | | 132,751 | 15.4 | |
Share of equity method investments losses | | | (1,375) | (0.1) | | | (2,095) | (0.2) | |
Net income | | $ | 200,711 | 21.0 | % | $ | 130,656 | 15.2 | % |
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures (collectively, our “non-GAAP financial measures”). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision making. The non-GAAP financial measures used by us in this Quarterly Report on Form 10-Q may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.
For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 34 |
Adjusted Operating Income. Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other financialitems that we do not consider representative of our underlying operating performance.
Reconciliation of GAAP Net Income to Operating Income and operating data.Adjusted Operating Income
| | | | | | |
| | THREE MONTHS ENDED | ||||
|
| APRIL 30, |
| MAY 1, | ||
| | 2022 | | 2021 | ||
| | (in thousands) | ||||
Net income | | $ | 200,711 | | $ | 130,656 |
Interest expense—net(1) | |
| 20,855 | |
| 13,308 |
Loss on extinguishment of debt(1) | |
| 146,116 | |
| 105 |
Other income—net(1) | | | (343) | |
| — |
Income tax expense (benefit)(1) | |
| (163,426) | |
| 41,724 |
Share of equity method investments losses(1) | | | 1,375 | | | 2,095 |
Operating income | |
| 205,288 | |
| 187,888 |
Employer payroll taxes on option exercise(2) | | | 11,717 | | | — |
Professional fee(3) | |
| 7,184 | |
| — |
Asset impairments(4) | |
| 5,923 | |
| — |
Non-cash compensation(5) | | | 5,858 | | | 5,864 |
Recall accrual(6) | |
| 560 | |
| 500 |
Adjusted operating income | | $ | 236,530 | | $ | 194,252 |
|
| 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) |
|
(2) | Represents employer payroll tax expense related to the |
|
|
30
(3) | Represents professional fee contingent upon the |
|
|
(4) | Represents asset impairments related to |
(5) | Represents the |
|
| 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 |
|
|
|
(6) | Represents accruals associated with product recalls. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 35 |
Adjusted Net Income. Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.
Reconciliation of GAAP Net Income to Adjusted Net Income
| | | | | | | |
| | | THREE MONTHS ENDED | ||||
| | | APRIL 30, | | MAY 1, | ||
| |
| 2022 |
| 2021 | ||
| | | (in thousands) | ||||
Net income | | | $ | 200,711 | | $ | 130,656 |
Adjustments pre-tax: | | |
|
| |
|
|
Loss on extinguishment of debt(1) | | |
| 146,116 | |
| 105 |
Employer payroll taxes on option exercise(1) | | |
| 11,717 | |
| — |
Professional fee(1) | | |
| 7,184 | |
| — |
Asset impairments(1) | | | | 5,923 | | | — |
Non-cash compensation(1) | | |
| 5,858 | |
| 5,864 |
Recall accrual(1) | | |
| 560 | |
| 500 |
Amortization of debt discount(2) | | |
| — | |
| 5,981 |
Gain on derivative instruments—net(3) | | | | (3,177) | | | — |
Subtotal adjusted items | | |
| 174,181 | |
| 12,450 |
Impact of income tax items(4) | | |
| (163,426) | |
| (2,951) |
Share of equity method investments losses(1) | | |
| 1,375 | |
| 2,095 |
Adjusted net income | | | $ | 212,841 | | $ | 142,250 |
|
|
(2) | Prior to the adoption of Accounting Standards Update (“ASU”) 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (which was adopted as of the first quarter of fiscal 2022) (“ASU 2020-06”), certain convertible debt instruments that may be settled in cash on conversion |
|
|
(3) | Represents net gain on derivative instruments resulting from certain |
31
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| The adjustment for the three months ended |
|
|
32
Table of ContentsThe following tables present retail Gallery metrics, which have been calculated based upon retail stores, which includes
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit). Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our RH Baby & Child, RH Modern Galleriesunderlying operating performance.
Reconciliation of GAAP Net Income to EBITDA and Waterworks Showrooms,Adjusted EBITDA
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net income | | $ | 200,711 | | $ | 130,656 |
Depreciation and amortization | |
| 24,758 | |
| 23,886 |
Interest expense—net | |
| 20,855 | |
| 13,308 |
Income tax expense (benefit) | |
| (163,426) | |
| 41,724 |
EBITDA | |
| 82,898 | |
| 209,574 |
Loss on extinguishment of debt(1) | | | 146,116 | | | 105 |
Non-cash compensation(1) | |
| 12,802 | |
| 15,307 |
Employer payroll taxes on option exercise(1) | | | 11,717 | | | — |
Professional fee(1) | | | 7,184 | | | — |
Asset impairments(1) | |
| 5,923 | |
| — |
Share of equity method investments losses(1) | |
| 1,375 | |
| 2,095 |
Capitalized cloud computing amortization(2) | | | 1,354 | | | 677 |
Recall accrual(1) | |
| 560 | |
| 500 |
Other income—net(1) | | | (343) | | | — |
Adjusted EBITDA | | $ | 269,586 | | $ | 228,258 |
(1) | Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information. |
(2) | Represents amortization associated with capitalized cloud computing costs. |
Adjusted Capital Expenditures. We define adjusted capital expenditures as capital expenditures from investing activities and excludes outlet stores.cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.
Reconciliation of Adjusted Capital Expenditures
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, |
| MAY 1, | ||
| | 2022 | | 2021 | ||
|
| (in thousands) | ||||
Capital expenditures | | $ | 29,364 | | $ | 50,251 |
Landlord assets under construction—net of tenant allowances | | | 12,148 | | | 13,578 |
Adjusted capital expenditures | | $ | 41,512 | | $ | 63,829 |
|
| 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 |
|
| 2022 FIRST QUARTER FORM 10-Q | 37 |
The following table presents RH Gallery and Waterworks Showroom metrics, and excludes Outlets:
| | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||
| | APRIL 30, | | MAY 1, | ||||||
| | 2022 | | 2021 | ||||||
|
| |
| TOTAL LEASED |
| |
| TOTAL LEASED | ||
| | | | SELLING SQUARE | | | | SELLING SQUARE | ||
| | COUNT | | FOOTAGE(1) | | COUNT | | FOOTAGE(1) | ||
| | | | (in thousands) | | | | (in thousands) | ||
Beginning of period |
| 81 |
| | 1,254 |
| 82 |
| | 1,162 |
End of period |
| 81 |
| | 1,254 |
| 82 |
| | 1,162 |
Total leased square footage at end of period(2) | | | | | 1,672 | | | | | 1,559 |
Weighted-average leased square footage(3) |
| | |
| 1,672 | |
| |
| 1,559 |
Weighted-average leased selling square footage(3) | | | | | 1,254 | | | | | 1,162 |
(1) | Leased selling square footage is retail space at our |
Leased selling square footage includes approximately 4,800 square feet as of April 30, 2022 and May 1, 2021 related to one owned 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 |
|
| Total leased square footage |
| Weighted-average leased square footage and leased selling square footage |
|
|
33
The following table sets forth our condensed consolidated statements of operations as a percentage of total net revenues.
|
| 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, 2017April 30, 2022 Compared to Three Months Ended October 29, 2016May 1, 2021
|
| 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 |
|
|
|
| | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||||||||||
| | APRIL 30, | | MAY 1, | ||||||||||||||
| | 2022 | | 2021 | ||||||||||||||
|
| RH SEGMENT |
| WATERWORKS |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| TOTAL | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 908,948 | | $ | 48,344 | | $ | 957,292 | | $ | 819,823 | | $ | 40,969 | | $ | 860,792 |
Cost of goods sold | |
| 436,126 | |
| 22,583 | |
| 458,709 | |
| 433,270 | |
| 20,545 | |
| 453,815 |
Gross profit | |
| 472,822 | |
| 25,761 | |
| 498,583 | |
| 386,553 | |
| 20,424 | |
| 406,977 |
Selling, general and administrative expenses | |
| 275,519 | |
| 17,776 | |
| 293,295 | |
| 204,407 | |
| 14,682 | |
| 219,089 |
Income from operations | | $ | 197,303 | | $ | 7,985 | | $ | 205,288 | | $ | 182,146 | | $ | 5,742 | | $ | 187,888 |
Net revenues
Consolidated net revenues increased $43.1$97 million, or 7.9%11.2%, to $592.5$957 million in the three months ended October 28, 2017April 30, 2022 compared to $549.3$861 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.May 1, 2021.
RH Segment net revenues
RH Segment net revenues increased $42.1$89 million, or 8.1%10.9%, to $563.2$909 million in the three months ended October 28, 2017April 30, 2022 compared to $521.0$820 million in the three months ended October 29, 2016.
A number ofMay 1, 2021. The below discussion highlights several significant factors contributed to the increasethat resulted in increased RH Segment net revenues, which are listed in order of magnitude.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 38 |
RH Segment net revenues for the three months ended April 30, 2022 increased due to strong customer demand for our products and fulfillment of orders generated in prior quarters as elements of our supply chain continued to catch up with customer demand. However, during the three months April 30, 2022 we began to experience softening demand trends which began at the time of the Russian invasion of Ukraine and have further slowed during the market disruption over the past several months.
RH Segment net revenues increased in our RH Hospitality business compared to the three months ended October 28, 2017, including,May 1, 2021 due to new Restaurant openings in order of magnitude, the introduction of new product categories and the expansion of existing product categories, the performance 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 to commercial customers.
fiscal 2021. Outlet sales which include sales via warehouse locations, increased $5.1$7.4 million to $70 million in the three months ended October 28, 2017April 30, 2022 compared to $62 million in the three months ended October 29, 2016. We also had an increaseMay 1, 2021.
Despite our revenue growth during the three months ended April 30, 2022, the slowdown in Membershipcustomer demand during the quarter, together with the overall uncertainty about macro-economic conditions, has caused us to take a conservative view about our near-term revenue recognized of $4.6 million.
34
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.trends for fiscal 2022.
Waterworks net revenues
Waterworks net revenues increased $1.0$7.4 million, or 3.5%18.0%, to $29.3$48 million in the three months ended October 28, 2017April 30, 2022 compared to $28.3$41 million in the three months ended October 29, 2016. 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.May 1, 2021.
Gross profit
Consolidated gross profit increased $38.5$92 million, or 21.9%22.5%, to $214.3$499 million in the three months ended October 28, 2017 from $175.8April 30, 2022 compared to $407 million in the three months ended October 29, 2016.May 1, 2021. As a percentage of net revenues, consolidated gross margin increased 4.2%480 basis points to 36.2%52.1% of net revenues in the three months ended October 28, 2017April 30, 2022 from 32.0%47.3% of net revenues in the three months ended October 29, 2016.
RH Segment gross profit for the three months ended October 28, 2017 was negatively impacted by $3.6 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.
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% to 36.9% of net revenues in the three months ended October 28, 2017 from 32.3% of net revenues in the three months ended October 29, 2016.May 1, 2021.
RH Segment gross profit
RH Segment gross profit increased $37.1$86 million, or 22.3%, to $203.2$473 million in the three months ended October 28, 2017April 30, 2022 from $166.1$387 million in the three months ended October 29, 2016.May 1, 2021. As a percentage of net revenues, RH Segment gross margin increased 4.2%480 basis points to 36.1%52.0% of net revenues in the three months ended October 28, 2017April 30, 2022 from 31.9%47.2% of net revenues in the three months ended October 29, 2016.
ExcludingMay 1, 2021. The change in gross margin was primarily driven by a 390 basis point increase in product margins in the product recalls and costs associated with anticipated distribution center closures mentioned above,Core business, as well as leverage in our RH Segment gross margin would have increased 4.9% to 36.8% of net revenues inshipping costs during the three monthsmonth period ended October 28, 2017 from 31.9% of net revenues in the three months ended October 29, 2016. The increase, in order of magnitude, 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 by higher outlet and warehouse sales driven by increased promotions and higher discounts. Additionally, gross margin increased due to improvement in shipping costs as a percentage of net revenues.April 30, 2022.
Waterworks gross profit
Waterworks gross profit increased $1.4$5.3 million, or 14.5%26.1%, to $11.1$26 million in the three months ended October 28, 2017April 30, 2022 from $9.7$20 million in the three months ended October 29, 2016.May 1, 2021. As a percentage of net revenues, Waterworks gross margin increased 3.6%340 basis points to 37.9%53.3% of net revenues in the three months ended October 28, 2017April 30, 2022 from 34.3%49.9% 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 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 changes in product mix and deleverage in occupancy costs.May 1, 2021.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $10.7$74 million, or 6.7%33.9%, to $171.2$293 million in the three months ended October 28, 2017 compared to $160.4April 30, 2022 from $219 million in the three months ended October 29, 2016.
35
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $10.7 million, or 7.2%, to $159.1 million in the three months ended October 28, 2017 compared $148.4 million in the three months ended October 29, 2016.
RH Segment selling, general and administrative expenses for the three months ended October 28, 2017 included $1.4 million related to costs associated with anticipated distribution center closures and a gain of $0.8 million related to the sale of building and land. RH Segment selling, general and administrative expenses for the three months ended October 29, 2016 included $1.0 million associated with a reorganization, including severance and related taxes.
Advertising and marketing costs increased $9.8 million during the three months ended October 28, 2017 as compared to October 29, 2016, primarily due to 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.
RH Segment selling, general and administrative expenses were 28.2% and 28.3% of net revenues for the three months ended October 28, 2017 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. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in employment and employment related costs and, to a lesser extent, 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 $0.1 million, or 0.6%, to $12.1 million in the three months ended October 28, 2017 compared to $12.0 million in the three months ended October 29, 2016.
Interest expense—net
Interest expense increased $7.8 million to $18.9 million for the three months ended October 28, 2017 compared to $11.1 million for the three months ended October 29, 2016. Interest expense consisted of the following:
|
| 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 on extinguishment of debt
We incurred a $4.9 million loss on extinguishment of debt in the three months ended October 28, 2017 due to the repayment in full 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.
Income tax expense
Income tax expense was $6.2 million and $1.8 million in the three months ended October 28, 2017 and October 29, 2016, respectively. Our effective tax rate was 32.1% and 41.4% for the three months ended October 28, 2017 and October 29, 2016, respectively. The effective tax rate in the three months ended October 28, 2017 was impacted by net excess tax benefits from stock-based compensation of $1.9 million resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.
36
Nine Months Ended October 28, 2017 Compared to Nine Months Ended October 29, 2016
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 |
|
|
|
Net revenues
Consolidated net revenues increased $221.7 million, or 14.3%, to $1,769.9 million in the nine months ended October 28, 2017 compared to $1,548.2 million in the nine 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.
RH Segment net revenues
RH Segment net revenues increased $181.4 million, or 12.1%, to $1,680.5 million in the nine months ended October 28, 2017 compared to $1,499.1 million in the nine months ended October 29, 2016.
A number of factors contributed to the 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 months ended October 28, 2017 were negatively impacted by $3.8 million related to the reduction of revenue associated with product recalls. During the nine months ended October 29, 2016, RH Segment net revenues were reduced by an estimated $16 million due to customer accommodation and related expenses as a result of our initiative to elevate the customer experience, including in response to production delays related to RH Modern. We did not experience similar production delays during the nine months ended October 28, 2017.
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
37
ended October 28, 2017 and October 29, 2016. Waterworks net revenues increased $40.3 million, or 82.2%, to $89.4 million in the nine months ended October 28, 2017 compared to $49.1 million in the nine months ended October 29, 2016. Waterworks net revenues represented 5.1% and 3.2% of our net revenues for the nine months ended October 28, 2017 and October 29, 2016, respectively. The increase in Waterworks net revenues 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.
Gross profit
Consolidated gross profit increased $107.3 million, or 22.2%, to $590.4 million in the nine months ended October 28, 2017 from $483.1 million in the nine months ended October 29, 2016. As a percentage of net revenues, consolidated gross margin increased 2.2% to 33.4% of net revenues in the nine months ended October 28, 2017 from 31.2% of net revenues in the nine months ended October 29, 2016.
RH Segment gross profit for the nine months ended October 28, 2017 was negatively impacted by $8.2 million related to the reduction of revenue, incremental costs and inventory charges associated with product recalls and $0.5 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 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.
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 adjustment mentioned above, consolidated gross margin would have increased 1.9% to 33.9% of net revenues in the nine months ended October 28, 2017 from 32.0% of net revenues in the nine months ended October 29, 2016.
RH Segment gross profit
RH Segment gross profit increased $88.4 million, or 18.9%, to $555.8 million in the nine months ended October 28, 2017 from $467.4 million in the nine months ended October 29, 2016. As a percentage of net revenues, RH Segment gross margin increased 1.9% to 33.1% of net revenues in the nine months ended October 28, 2017 from 31.2% of net revenues in the nine months ended October 29, 2016. Excluding the product recall costs, costs associated with anticipated distribution center closures and impact of the coupons redeemed in connection with the legal claim mentioned above, RH Segment gross margin would have increased 1.8% to 33.5% of net revenues in the nine months ended October 28, 2017 from 31.7% of net revenues in the nine months ended October 29, 2016.
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 occupancy costs, partially offset by increased outlet occupancy costs.
Waterworks gross profit
Waterworks gross profit increased $18.8 million, or 119.6%, to $34.6 million in the nine months ended October 28, 2017 from $15.7 million in the nine 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. As a percentage of net revenues, Waterworks gross margin increased 6.6% to 38.7% of net revenues in the nine months ended October 28, 2017 from 32.1% of net revenues in the nine 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 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 changes in product mix and deleverage in occupancy costs.
38
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $71.0 million, or 15.5%, to $528.2 million in the nine months ended October 28, 2017 compared to $457.2 million in the nine months ended October 29, 2016.1, 2021.
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $56.5$71 million, or 13.0%34.8%, to $489.4$276 million in the ninethree months ended October 28, 2017April 30, 2022 compared $433.0to $204 million in the ninethree months ended October 29, 2016.May 1, 2021.
RH Segment selling, general and administrative expenses for the ninethree months ended October 28, 2017April 30, 2022 include $12 million of employer payroll tax expense associated with Mr. Friedman’s stock option exercise during the first quarter of fiscal 2021, a $7.2 million professional fee which was contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $5.9 million of asset impairments, and $0.6 million related to product recalls. RH Segment selling, general and administrative expenses for both the three months ended April 30, 2022 and May 1, 2021 included $23.9amortization of the non-cash compensation of $5.9 million related to a fully vested 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 gainOctober 2020.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 39 |
Table of $2.1 million related to the sale of building and land.Contents
RH Segment selling, general and administrative expenses for the nine months ended October 29, 2016 included $5.7 million associated with a reorganization, including severance and related taxes, $2.8 million related to charges and expenses incurred as a result of the Waterworks transaction, and $1.0 million related 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.
Advertising and marketing costs increased $26.9 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.
RH Segment selling, general and administrative expenses were 27.7%26.9% and 28.2%24.2% of net revenues for the ninethree months ended October 28, 2017April 30, 2022 and October 29, 2016,May 1, 2021, 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 claimadjustments mentioned above. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in our employment and employment related costs and, to a lesser extent, 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 million, or 60.0%, to $38.8 million in the nine months ended October 28, 2017 compared $24.2 million in the nine months ended October 29, 2016.
The increase in Waterworks selling, general and administrative expenses 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. This increase is partially offset by stock-based compensation of $3.7 million related to the fully vested option grants made in connection with our acquisition of Waterworks during the nine months ended October 29, 2016.
Excluding the fully vested option grants made in connection with our acquisition of Waterworks, Waterworks selling, general and administrative expenses would have been 43.4% and 41.9% of net revenues in the nine months ended October 28, 2017 and October 29, 2016, respectively. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by increasedhigher pre-opening costs and professional fees, as well as increases in employment and employmentemployment-related costs.
Waterworks selling, general and administrative expenses
Waterworks selling, general and administrative expenses increased $3.1 million, or 21.1%, to $18 million in the three months ended April 30, 2022 compared to $15 million in the three months ended May 1, 2021.
Waterworks selling, general and administrative expenses for the three months ended May 1, 2021 included $0.5 million related costs.to product recalls.
39
Interest expense—Excluding the product recall adjustment mentioned above, Waterworks selling, general and administrative expenses would have been 36.8% and 34.6% of net revenues for the three months ended April 30, 2022 and May 1, 2021, respectively.
Interest expenseexpense—net
Interest expense—net increased $13.0$7.5 million to $45.5 million forin the ninethree months ended October 28, 2017April 30, 2022 compared to $32.5 million for the ninethree months ended October 29, 2016. Interest expenseMay 1, 2021, which consisted of the following:following in each period:
| | | | | | | ||||||||
| | THREE MONTHS ENDED | ||||||||||||
| | APRIL 30, | | MAY 1, | ||||||||||
|
| 2022 |
| 2021 | ||||||||||
|
| Nine Months Ended |
| |||||||||||
|
| October 28, |
|
| October 29, |
| ||||||||
|
| 2017 |
|
| 2016 |
| ||||||||
|
| (in thousands) |
| |||||||||||
| | (in thousands) | ||||||||||||
Term loan interest expense | | $ | 16,001 | | $ | — | ||||||||
Finance lease interest expense | |
| 7,071 | |
| 6,150 | ||||||||
Other interest expense | |
| 1,073 | |
| 1,634 | ||||||||
Amortization of convertible senior notes debt discount |
| $ | 22,685 |
|
| $ | 21,467 |
| | | — | | | 8,670 |
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 | ) | |
| (2,109) | |
| (2,801) |
Interest income |
|
| (439 | ) |
|
| (2,304 | ) | |
| (1,181) | |
| (345) |
Total interest expense—net |
| $ | 45,496 |
|
| $ | 32,528 |
| | $ | 20,855 | | $ | 13,308 |
Loss on extinguishment of debt
We incurredDuring the three months ended April 30, 2022 we recognized a $4.9 million loss on extinguishment of debt in the nine months ended October 28, 2017 dueof $146 million related to the repayment in fullrepurchase of the second lien term loan on October 10, 2017,$180 million of principal value of convertible senior notes, which includes a prepayment penalty of $3.0 million andthe acceleration of amortization of debt issuance costs of $1.9approximately $1.0 million. The loss represents the difference between the carrying value and the fair value of the convertible senior notes upon entering into the repurchase agreements with the noteholders. Refer to Note 9—Convertible Senior Notes. During the three months ended May 1, 2021, we recognized a loss on extinguishment of debt for a portion of the 2023 Notes that were early converted at the option of the noteholders of $0.1 million.
Other income—net
Other income—net was $0.3 million during the three months ended April 30, 2022, which included a net gain on derivative instruments of $3.2 million, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and Notes Repurchase (refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements). The net gain was partially offset by a $2.9 million loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S. dollar as compared to Pound Sterling and Euro, in addition to a foreign exchange loss from the remeasurement of an intercompany loan with a U.K. subsidiary.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 40 |
Income tax expense (benefit)
Income tax expense was $9.9 million in the nine months ended October 28, 2017 compared toWe recorded an income tax benefit of $2.6$163 million and income tax expense of $42 million in the ninethree months ended October 29, 2016.April 30, 2022 and May 1, 2021, respectively. Our effective tax rate was 83.7%(438.3)% and 38.9%24.2% for the ninethree months ended October 28, 2017April 30, 2022 and October 29, 2016,May 1, 2021, respectively. The decrease in our effective tax rate in the nine months ended October 28, 2017 wasis primarily attributable to significantly impacted by non-deductible stock-based compensation related to the May 2017 grant to Mr. Friedman of an option to purchase 1,000,000 shares of the Company’s common stock andhigher net excess tax benefits from stock-based compensation partially offset by nondeductible amounts related to the extinguishment of $4.3 million resulting from the Company’s adoptiondebt.
Equity method investments losses
Equity method investments losses consists of ASU 2016-09 in the first quarter of fiscal 2017. Refer to Note 15—Stock-Based Compensation in our condensed consolidated financial statements for a descriptionproportionate 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 $1.4 million and $2.1 million loss during the three months ended April 30, 2022 and May 1, 2021, respectively.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement. In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement. The issuance of the Term Loan was assigned a Ba2 rating from Moody’s Investors Service and BB rating from S&P Global. Additionally, in May 2022, we entered into the 2022 Incremental Amendment, which amended the Term Loan Credit Agreement and raised an incremental $500 million of Term Debt Financing. The issuance of the 2022 Incremental Amendment was assigned a Ba3 rating from Moody’s Investors Service and BB rating from S&P Global. Refer to Note 10—Credit Facilities in our condensed consolidated financial statements.
A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table:
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | JANUARY 29, | ||
| | 2022 | | 2022 | ||
| | | (in millions) | |||
Asset based credit facility | | $ | — | | $ | — |
Term loan(1) | | | 1,990 | | | 1,995 |
Equipment promissory notes(1) | | | 4 | | | 15 |
Convertible senior notes due 2023(1) | | | 20 | | | 69 |
Convertible senior notes due 2024(1) | | | 81 | | | 189 |
Convertible senior notes repurchase obligation(2) | | | 314 | | | — |
Notes payable for share repurchases | | | 1 | | | 1 |
Total debt | | $ | 2,410 | | $ | 2,269 |
Cash and cash equivalents | | | (2,243) | | | (2,178) |
Total net debt | | $ | 167 | | $ | 91 |
Availability under the asset based credit facility—net(3) | | $ | 444 | | $ | 347 |
(1) | Amounts exclude discounts upon original issuance and third party offering and debt issuance cost. |
(2) | The convertible senior notes repurchase obligation was repaid in full on May 3, 2022. Refer to Note 9—Convertible Senior Notes. |
(3) | As of both April 30, 2022 and January 29, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $20 million in outstanding letters of credit. |
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 41 |
General
The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, store rent for our retail and outlet locations, capital expenditures associated with opening new storeslocations and updating existing stores,locations, 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 our first share repurchase program in an amount 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 to “Share Repurchase Programs” below). We intend tocontinuously evaluate our capital allocation from time to timestrategy and may engage in future investments in connection with existing or new share repurchasesrepurchase programs (refer to “Share Repurchase Program” below), which may include investments in circumstances where buying sharesderivatives or other equity linked instruments. We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Capital raised from debt financings has enabled us to pursue various investments. We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our common stock represents a good valuebusiness.
Credit Facilities and provides a favorable return for our shareholders.Debt Arrangements
We have $650 millionamended and restated our asset based credit facility in aggregate principal amount of convertible notes outstanding, ofJuly 2021, which $350 million mature in June 2019 and $300 million mature in June 2020, and we may need to pursue additional sources of liquidity to repay such convertible notes in cash at their respective maturity dates. There can be no assurance as to thehas an initial availability of capitalup 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$600 million, of which $10.0$10 million is available to Restoration Hardware Canada, Inc., and includes a $200.0$300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0$600 million to up to $800.0$900 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 drawThe accordion feature may be added as a first-in, last-out term loan (“LILO term loan”) facility. The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met. The maturity date of the asset based credit facility is July 29, 2026.
We entered into a $2.0 billion term debt financing in October 2021 (the “October 2021 Term Loans”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A. as administrative agent and LILO term loan facilitycollateral agent, and the various lenders party thereto (the “Term Loan Credit Agreement”). The October 2021 Term Loans have a maturity date of June 28, 2022.
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In July 2017, Restoration Hardware, Inc. entered into a credit agreement (the “second lien credit agreement”)October 20, 2028. As of April 30, 2022, we had $1,990 million outstanding under the Term Loan Credit Agreement. We are required to make quarterly principal payments of $5.0 million with respect to the October 2021 Term Loans.
On May 13, 2022, we entered into an initialincremental term loandebt financing (the “2022 Incremental Term Debt”) in an aggregate principal amount equal to $100.0$500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A. as administrative agent and the various lenders parties thereto (the “Amended Term Loan Credit Agreement”). The 2022 Incremental Term Debt has a maturity date of January 7,October 20, 2028. The 2022 Incremental Term Debt constitutes a separate class from the existing October 2021 Term Loan under the Term Loan Credit Agreement.
Certain Transactions Related to Convertible Senior Notes
During the three months ended April 30, 2022, we entered into certain transactions in connection with the 2023 (the “second lien term loan”Notes and 2024 Notes.
Warrant Termination Agreements
We entered into agreements with certain financial institutions (collectively, the “Counterparties”). Refer to Second Lien Credit Agreement below. The proceedsrepurchase all of the second lien term loan were usedwarrants previously issued in connection with the 2023 Notes and 2024 Notes. Upon closing of these transactions, we paid an aggregate of $391 million in cash to supportterminate warrants representing 3,385,580 shares of our share repurchase program. We repaid this debt in full in October 2017.common stock.
Convertible Bond Hedge Unwind Transactions
We believe thatentered into agreements with the Counterparties to terminate all of the remaining convertible note bond hedges previously entered into in connection with the 2023 Notes and 2024 Notes. Upon closing of these transactions, we received an aggregate of $232 million in cash expected for the termination of the bond hedges.
Convertible Notes Repurchase
We entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to be generated from operations, net cash proceeds from the issuancerepurchase $180 million in aggregate principal amount of the convertible senior notes borrowing availability under(the “Notes Repurchase”) representing $45 million and $135 million in principal amount of 2023 Notes and 2024 Notes, respectively. Upon closing of these transactions, we paid an aggregate of $314 million in cash to repurchase such convertible senior notes.
Result of the revolving lineConvertible Notes Transactions
In aggregate, we expended a net total amount of credit, borrowings underapproximately $481 million in cash (inclusive of expenses) to complete the above transactions.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 42 |
As a result of the bond hedge termination agreements, all convertible note hedges entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including convertible note hedges with respect to any 2023 Notes and 2024 Notes that remain outstanding.
As a result of the warrant termination agreements, all warrants entered into in connection with the issuance of the 2023 Notes and 2024 Notes have been terminated, including warrants with respect to any 2023 Notes and 2024 Notes that remain outstanding.
Following the completion of the Notes Repurchase, we had $101 million remaining in aggregate principal amount of convertible notes outstanding as of April 30, 2022, comprised of $20 million of 2023 Notes and $81 million of 2024 Notes. The remaining 2023 Notes have a scheduled maturity in June 2023 and the remaining 2024 Notes have a scheduled maturity in September 2024. We anticipate having ample cash available in order to repay the principal amount of our term loanconvertible notes in cash with respect to any convertible notes for which the holders elect early conversion, as well as upon maturity in June 2023 and otherSeptember 2024, in each case in order to minimize dilution.
We believe our capital structure provides us with substantial optionality regarding capital allocation. 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 and macro-economic factors affecting business conditions including inflation. We believe our existing cash balances and operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements anticipated capital expenditures and fulfill other capital needs for more than the next 12 months.
Our business has relied on cash flows fromWhile we do not require additional debt to fund our operations, net cash proceeds from the issuanceour goal continues to be in a position to take advantage of the convertible senior notes, as well as borrowings undermany opportunities that we identify in connection with our credit facilities as our primary sources of liquidity.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 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,financing in future periods as a source of additional capital to fund our strategiesvarious investments. In addition to enhance stockholder value. There can be no assurance that additional capital, whether raised throughfunding the sale of assets, utilizationnormal operations of our existing debt financing sources, or pursuit of additional debt financing sources, will be availablebusiness, we have used our liquidity to us on a timely manner, on favorable terms or at all. fund significant investments and strategies such as our share repurchase programs, various acquisitions, and growth initiatives, including through joint ventures and real estate investments.
To the extent we pursuechoose to secure additional debt as a sourcesources of liquidity our capitalization profile may change and may include significant leverage, and as a result we maythrough incremental debt financing, there can be required to use future liquidity to repay such indebtedness and may be subject to additional terms and restrictions which affect our operations and future uses of capital.
In addition, our capital needs 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 and opening new 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 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.
We anticipate our gross capital expenditures to be approximately $120 million to $130 million for fiscal 2017. Our fiscal 2017 capital expenditures will be offset by cash flows from operating activities. Our efforts to optimize inventory and reduce capital spending generated substantial free cash flow in the nine months ended October 28, 2017, and we expect to generate additional free cash flow for the remainder of the year.
The majority of the current lease arrangements for our new 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, 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. As we develop new Galleries, as well as potentially other strategic initiatives in the future like our integrated hospitality 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 capital investment on our part than a traditional store lease with a landlord. 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.
There can be no assurance that we will have sufficient financial resources, or will be able to arrangeraise such financing on favorable terms, if at all, or that future financing requirements will not require us to the extent necessaryraise money through an equity financing or by other means that could be dilutive to fund allholders of our initiatives,capital stock. Any adverse developments in the U.S. or that sufficient incremental debt will be available to us in order to fund our cash payments in respectglobal credit markets as a result of the repayment ofpandemic or any other reason could affect our outstanding convertible senior notes in an aggregate principal amount of $650 million at maturity of such senior convertible notes orability to manage our terms loan at the maturity dates of such term loan.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, whether upon stated maturity, early conversion or otherwise of such convertible 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.
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PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 43 |
Table of ContentsAny weakening
Capital
We have invested significant capital expenditures in developing and opening new Design Galleries, and these capital expenditures have increased in the past, and may continue to increase in future periods, as we open additional Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received. During the three months ended April 30, 2022, adjusted capital expenditures were $42 million in aggregate, net of cash received related to landlord tenant allowances of $2.3 million. We anticipate our adjusted capital expenditures to be $200 million to $250 million in fiscal 2022, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments. Nevertheless, we may elect to pursue additional capital expenditures beyond those that are anticipated during any given fiscal period inasmuch as our strategy is to be opportunistic with respect to our investments and we may choose to pursue certain capital transactions based on the availability and timing of unique opportunities. There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business including increased inflation and rising interest rates and we may make adjustments to our allocation of capital in fiscal 2022 or beyond in response to these changing or other circumstances. We may also invest in other uses of our liquidity such as share repurchases, acquisitions, and growth initiatives, including through joint ventures and real estate investments.
Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us. As we develop new Galleries, as well as other potential strategic initiatives in the future like our integrated hospitality experience, we are exploring other models for our real estate activities, which include different terms and conditions for real estate transactions. These transactions may involve longer lease terms or further purchases of, or joint ventures or other adverse developmentsforms of equity ownership in, real estate interests associated with new sites and buildings that we wish to develop for new Gallery locations or other aspects of our business. These approaches might require different levels of capital investment on our part than a traditional store lease with a landlord. We also are pursuing change in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the U.S. or global credit markets could affect our abilityobjective of ultimately (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent. For example, in fiscal 2019 we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $24 million and in fiscal 2020 we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $26 million, both of which qualified for sale-leaseback accounting. In the event that such capital and other expenditures require us to manage our debt obligations and our ability to access future debt. We cannot assure youpursue additional funding sources, we can provide no assurance that we will be able to raise necessary fundssuccessful in securing additional funding on favorableattractive terms ifor 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 ofall. In addition, our capital stock. Ifneeds and uses of capital may change in the future due to changes in our business or new opportunities that we failmay pursue.
In addition, we continue to raise sufficient additional funds,address the effects of the COVID-19 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 Galleries 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 delaymake lease payments in whole or abandon somein 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 future expenditures or aspectsoperations and expansion cadence.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 44 |
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 |
|
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | APRIL 30, | | MAY 1, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net cash provided by operating activities | | $ | 135,949 | | $ | 190,875 |
Net cash used in investing activities | |
| (30,479) | |
| (51,423) |
Net cash used in financing activities | |
| (42,351) | |
| (11,032) |
Net increase in cash and cash equivalents and restricted cash equivalents | |
| 62,841 | |
| 128,456 |
Cash and cash equivalents and restricted cash equivalents at end of period | |
| 2,244,705 | |
| 235,527 |
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, amortizationloss on extinguishment of debt, cash paid attributable to accretion of debt discount upon settlement of debt (prior to the adoption of ASU 2020-06 in fiscal 2022) and the effect of changes in working capital and other activities.
For the ninethree months ended October 28, 2017,April 30, 2022, net cash provided by operating activities was $386.8$136 million and consisted of net income of $1.9$201 million and an increase in cash providednon-cash items of $221 million, partially offset by a change in working capital and other activities of $259.3 million and non-cash items$286 million. The use of $125.6 million. Workingcash from working capital and other activities consistedwas primarily of decreases in inventory of $190.6 million due to our SKU rationalization initiative, outlet inventory optimization efforts and revised DC network strategy. We also had decreases in prepaid expense and other current assets of $38.4 million primarily due to amortization of our capitalized catalog costs, reduction of federal and state tax receivables, and a reduction in prepaid rent. In addition, we had increases in deferred revenue and customer deposits of $20.6 million and increases in accounts payable and accrued liabilities of $10.5 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 anddriven by an increase in uses of working capitalprepaid expenses and other activitiesassets 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 other current assets increased $30.4 million due to an increase 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$160 million primarily due to federal and state tax payments, and inventory increased $23.3 million related to thereceivables, an increase in both existingmerchandise inventory of $83 million, a decrease in other current liabilities of $30 million and new products. This wasa decrease in operating lease liabilities of $19 million primarily due to payments made under the related lease agreements. These uses of cash from working capital were partially offset by increasesan increase in deferred revenue and customer deposits of $22.7 million and an increase in other non-current obligations of $8.5$49 million primarily due to a deferred contract incentive.strong consumer demand for our products.
Net Cash Provided By (Used In)Used In Investing Activities
Investing activities consist primarily of investments in capital expenditures related to new Gallery openings, the acquisition of buildings and land, investments 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 had net proceeds from the sale of building and land and the sale of an aircraft of $10.2 million and $4.9 million, respectively. These increases to cash were partially offset by investments in new Galleries,retail stores, information technology and systems infrastructure, andas well as 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.investments. Investing activities also include our strategic investments.
For the ninethree months ended October 29, 2016,April 30, 2022, net cash used in investing activities was $263.4$30 million primarily as a result of our acquisition of Waterworks, net of cash acquired, of $116.1 million. In addition, we made $104.2 millionand was comprised of investments in new
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galleries,retail stores, information technology and systems infrastructure supply chainof $29 million and other corporate assets, as well as paymentsadditional funding 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 suchour equity method investments of $115.9 million and $31.9 million, respectively.$1.1 million.
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 asand other financing arrangements, and cash used in connection with such financing activities include investments in share repurchasesrepurchase programs, repayment of indebtedness including principal payments under finance lease agreements and other equity related transactions.
For the ninethree months ended October 28, 2017,April 30, 2022, net cash used in financing activities was $553.0$42 million, primarily due to $1.0 billioncertain transactions entered into in the first quarter of share repurchases made underfiscal 2022 related to the $300 Million Repurchase Program2023 Notes and $700 Million Repurchase Program. Cash funding2024 Notes, and the related bond hedge and warrant agreements. These transactions resulted in payments of $391 million for the share repurchase programs was providedtermination of all such outstanding common stock warrants, partially offset by available cash balances, net borrowings underproceeds of $232 million from the asset based credit facilitytermination of $341.0all of the remaining convertible note bond hedges. In addition, we repaid $13 million in aggregate principal amount of certain 2023 Notes and 2024 Notes as a result of early conversions during the quarter, as well as borrowings under themade payments on equipment notes of $11 million, term loans of $180.0 million, borrowings under loans secured by certain equipment of $20.0$5.0 million and borrowings under a promissory note secured by our aircraftfinance lease agreements of $14.0$3.6 million. Additionally, proceeds from exercise of employee stock optionsThese cash outflows were $15.4 million. The cash provided by these financing activities was partially offset by repaymentproceeds from option exercises of the second lien term loan of $100.0 million, $8.7 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 months ended October 29, 2016, net cash used in financing activities was $2.3$150 million, primarily due to tax shortfalls fromMr. Friedman’s option exercise activity in the exercisefirst quarter of stock optionsfiscal 2022.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 45 |
Non-Cash Transactions
Non-cash transactions consist of non-cash additions of property and equipment.
Build-to-Suit Lease Transactions
Theequipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets, as well as promissory notes forgiven in exchange for assets. In addition, non-cash additionstransactions consist of propertyshares issued and equipment duereceived related to build-to-suit leaseconvertible senior note transactions, areas well as a financing liability and an embedded derivative arising from the result 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 extentNotes Repurchase (refer to which we are involvedNote 9—Convertible Senior Notes 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 commencementfinancial statements).
Cash Requirements from Contractual Obligations
Leases
We lease nearly all of our retail and any amounts paid by the landlordoutlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space. Refer to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section ofNote 8—Leases in our condensed consolidated financial statements for further information on our lease arrangements, including the maturities of cash flows.our operating and finance lease liabilities.
OverMost lease arrangements provide us with the option to renew the leases at defined terms. The table presenting the maturities of our 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 withinliabilities included in Note 8—Leases in our condensed consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of operations.the lease liability. Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases.
Convertible Senior Notes
0.00% Refer to Note 9—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 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 anycondensed consolidated financial covenants or restrictionsstatements for further information 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.
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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.
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 the issuance of the 2020 Notes, we separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 20202023 Notes and the fair value of the liability component of the 20202024 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
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.
44
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.
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 the issuance of the 2019 Notes, we separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The debt discount will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
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.
45
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.
Asset Based Credit Facility
In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into aRefer 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 up 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 term loan facility.
The availability of credit at any given time under the credit agreement is limited by reference to a borrowing base formula based upon numerous factors,facility, including the value of eligible inventory and eligible accounts receivable. As a result of theamount available for 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, 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, including, among others, limitations on the ability to incur 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 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 defined 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.
46
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
Term Loan
Refer to Note 10—Credit Facilities in our condensed consolidated financial statements for further information on our Term Loan.
Equipment Loan Facility
Refer to Note 10—Credit Facilities in our condensed consolidated financial statements for further information on our equipment loan facility.
Share Repurchase Program
We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase programs, including, among others, current cash needs, capacity for leverage, cost of October 28, 2017, the Company had $80.0 million outstanding borrowings, under the LILO term loan facility. As a resultresults of the consolidated FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Companyoperations and the market price of our common stock. We believe that share repurchase programs will continue to be an excellent allocation of capital for the long-term benefit of our shareholders. We may undertake other affiliated parties underrepurchase programs in 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 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 extinguishment of debt, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.our securities.
Intercreditor Agreement
On July 7, 2017, in connection 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 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.
$950 Million Share Repurchase ProgramsProgram
On February 21, 2017,In 2018, our boardBoard of directorsDirectors authorized a stockshare 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 10b1810b-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 asequity 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. DuringWe 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 12.42.2 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 share repurchase program during fiscal 2020, fiscal 2021 or the $700 Million Repurchase Program.
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We enter into long-term contractual obligations and commitments, primarily debt obligations and non-cancelable operating leases, in the normal coursefirst quarter of business. As of October 28, 2017, our contractual cash obligations were as follows (in thousands):fiscal 2022.
|
| 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 |
|
|
|
|
|
|
|
|
|
Off Balance Sheet Arrangements
We have no material off balance sheet arrangementsTable of Contents
The total current authorized size of the share purchase program is up to $950 million (the “Share Repurchase Program”), of which $450 million remained available as of October 28, 2017.April 30, 2022 for future share repurchases under this share repurchase program.
On June 2, 2022, theBoard of Directors authorized an additional $2.0 billion for the purchase of shares of our outstanding common stock, which is effective immediately and is an addition to the $450 million remaining under the Share Repurchase Program.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires managementsenior 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 itsWe evaluate our accounting policies, estimates, and judgments on an on-going basis. Management bases itsWe 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 evaluatedWe evaluate the development and selection of itsour critical accounting policies and estimates and believesbelieve that the followingcertain 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 InventoriesInventories—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 Value
Stock-Based CompensationCompensation—Performance-Based Awards
Income TaxesEquity Method Investments
48
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 20162021 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 2021 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 proposedissued accounting standards whichthat may impact our consolidated financial statements in future reporting periods.
ITEM 3. Quantitative and Qualitative Disclosure of Market RisksQUANTITATIVE 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.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 47 |
We are subject to interest rate risk in connection with borrowings under our revolving line of credit which bearsthe ABL Credit Agreement and the Term Loan Credit Agreement, as amended, in each case bearing interest at variable rates and we may incur additional indebtedness that bears interest at variable rates. At October 28, 2017, $341.0 million was outstanding underThe Federal Reserve continued increasing short-term interest rates in the revolving linefirst quarter of credit.2022, compared to the historically low levels in the same period in 2021 and there is widespread expectation in the market for rate increases to continue during the remainder of 2022. Such interest rate increases, if they continue, may increase the interest rate applicable to our borrowings that have rates that are subject to adjustment pursuant to floating rate indices such as LIBOR or SOFR. As of October 28, 2017, the undrawn borrowing availabilityApril 30, 2022, we had no outstanding borrowings under the revolving line of credit and $1,990 million outstanding under the Term Loan Credit Agreement. In May, 2022, we issued an additional $500 million in principal amount of term debt under the Term Loan Credit Agreement, as amended. The ABL Credit Agreement provides for a borrowing amount based on the value of eligible collateral and a formula linked to certain borrowing percentages based on certain categories of collateral. Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the ABL Credit Agreement as of April 30, 2022 was $189.0$444 million, net of $27.7$20 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 under the ABL Credit Agreement and the Term Loan under the Term Loan Credit Agreement during the three months ended October 28, 2017,April 30, 2022, and to the extent that borrowings were outstanding on such line of credit,under any facility, 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 subjectFollowing announcements by the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, and the Intercontinental Exchange Benchmark Administration, the administrator of LIBOR, publication of 1-week and 2-month U.S. Dollar LIBOR settings and all tenors for other currencies ceased after December 31, 2021. While publication of the remaining U.S. Dollar settings (overnight and 1, 3, 6 and 12 month U.S. Dollar LIBOR) is expected to cease after June 20, 2023. U.S. banking and other global financial services regulators have directed regulated institutions to cease entering into new LIBOR-based contracts as soon as practicable and in any event by the end of 2021.
A number of our current debt facilities entered into prior to the end of 2021, including the facilities under the ABL Credit Agreement and the Term Loan Credit Agreement, have an interest rate risktied to LIBOR. At this time, it is not possible to predict the effect of transitioning from LIBOR. SOFR, which is currently published by the Federal Reserve Bank of New York based on overnight U.S. Treasury repurchase agreement transactions, has been recommended as the alternative to LIBOR by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York and is provided as an alternative rate for our current debt facilities having an interest rate tied to LIBOR. However, SOFR or any other alternative rates 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 believeotherwise correlate over time with the payments that a 10% change inwould have been made on such indebtedness for the interest periods if the applicable LIBOR rate would have a material effect onwas available in its current form. We intend to continue to evaluate and monitor the risks associated with the LIBOR transition which include identifying and monitoring our consolidated resultsexposure to LIBOR and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the overall impact of operations or financial condition.this change at this time.
As of October 28, 2017,April 30, 2022, we had $350$20 million principal amount of 0.00% convertible senior notes due 20192023 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,April 30, 2022, we had $300$81 million principal amount of 0.00% convertible senior notes due 20202024 outstanding (the “2020“2024 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
Foreign Currency Risk
Our revenues are predominately denominated in U.S. dollars, and accordingly, our net revenues are not currently subject to significant foreign currency risk. However, as we are currently expanding our operations into select European markets, fluctuations in foreign currency exchange rates are beginning to impact our results of operations. Certain of our operating expenses are denominated in the currencies of the countries in which our operations exist or are expanding, and accordingly, we have exposure to adverse movements in foreign currency exchange rates, particularly changes in the Pound sterling, Euro and Canadian Dollar, as our international operations are translated from local currency, or functional currency, into U.S. dollars upon consolidation. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of income, which are presented in other income—net on the consolidated statements of income. We minimize this exposure by managing cash balances at levels appropriate to meet forthcoming expenses in U.S. dollars and applicable foreign currencies.
PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 48 |
To date, we have not engaged in foreign currency hedging transactions because our foreign currency transaction gains and losses have not been material to our consolidated financial statements, but we may begin foreign currency risk management strategies in the future.
Market Price Sensitive Instruments
0.00% Convertible Senior Notes due 2019
In connection with the issuance of the 20192023 Notes and 2024 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, 3.0 million shares of our common stock, which represents the number of shares of our common stock underlying the 2019 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2019 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 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2019 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 willDuring the first quarter of fiscal 2022, we have a dilutive effect with respectentered into agreements to our common stock to the extent that the price per sharerepurchases $180 million in aggregate principal amount of our common stock exceeds the strike priceconvertible senior notes consisting of approximately $45 million and $135 million in aggregate principal amount of the warrants unless2023 Notes and 2024 Notes, respectively. In addition to such notes repurchase, we elect, subject to certain conditions, to settle the warrants in cash. The strike pricehave also terminated all of the warrant transactions is initially $171.98 per share.remaining bond hedges as well as all of the outstanding warrants originally issued in conjunction with the 2023 Notes and the 2024 Notes. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.
0.00% Convertible Senior Notes due 2020
In connection with the issuance of the 2020 Notes, we entered into privately-negotiated convertible note hedgestatements for further information on these transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, 2.5 million shares of our common stock, which represents the number of shares of our common stock underlying the 2020 Notes, subject to anti-dilution adjustments substantially similar to those applicablerelated to the 20202023 Notes and 2024 Notes. These convertible note hedge transactions are expected to reduce the potential earnings
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dilution with respect to our common stock upon conversion of the 2020 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2020 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 per share. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the historical 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.immaterial to date. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future, including by heightened levels of inflation that were being experienced globally at the end of our first fiscal quarter. We may be unable to overcome these issues through measures such as price increases for our products. Risks related to inflation could include increased costs for many products and services that are necessary for the operation of our business, as well as the impact of interest rate increases, which could have among other consequences a negative effect on the housing market and impact to consumer demand for our products.
ITEM 4. Controls and ProceduresCONTROLS 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 April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART I. FINANCIAL INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 49 |
PART II
ItemITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
From time to time, we and/or our managementsenior 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 managementsenior 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 1A. Risk FactorsRISK 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 entitled “Risk Factors” in our Annual Report on2021 Form 10-K for the fiscal year ended January 28, 2017 (“2016 Form 10-K”).10-K. There have been no material changes to the risk factors disclosed in our 20162021 Form 10-K.
The risks described in our 20162021 Form 10-K 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 reportQuarterly Report on Form 10-Q 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 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED 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,April 30, 2022, we repurchased the following shares of our common stock:
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| | |
| 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) | |
January 30, 2022 to February 26, 2022 |
| — | | $ | — | | $ | 450 |
February 27, 2022 to April 2, 2022 |
| 811 | | $ | 328.57 | | $ | 450 |
April 3, 2022 to April 30, 2022 |
| 35 | | $ | 335.07 | | $ | 450 |
Total |
| 846 | | | | |
|
|
|
| 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 |
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|
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| (in millions) |
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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 |
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|
| — |
|
| $ | — |
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Total |
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| 41,166 |
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| $ | 72.28 |
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| — |
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(1) |
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(2) | Reflects the dollar value of shares that may yet be repurchased under the Share Repurchase Program authorized by the Board of Directors on October 10, 2018 and replenished on March 25, 2019. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
PART II. OTHER INFORMATION | 2022 FIRST QUARTER FORM 10-Q | 51 |
ITEM 6. EXHIBITS
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| | | | INCORPORATED BY REFERENCE | | | | | ||
EXHIBIT |
| EXHIBIT DESCRIPTION |
| FORM |
| FILE |
| DATE OF |
| EXHIBIT |
| FILED |
10.1 | | | 8-K | | 001-35720 | | April 13, 2022 | | 10.1 | | | |
10.2 | | | 8-K | | 001-35720 | | April 13, 2022 | | 10.2 | | | |
10.3 | | | 8-K | | 001-35720 | | April 18, 2022 | | 10.1 | | | |
10.4 | | Form of Bond Hedge Termination Agreement by and between RH and the applicable Hedge Counterparty. | | 8-K | | 001-35720 | | April 18, 2022 | | 10.2 | | |
31.1 | | | — | | — | | — | | — | | X | |
31.2 | | | — | | — | | — | | — | | X | |
32.1 | | | — | | — | | — | | — | | X | |
32.2 | | | — | | — | | — | | — | | 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 |
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
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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.
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Date: | | By: | /s/ Gary Friedman | ||
| | Gary Friedman | |||
| | Chairman and Chief Executive Officer | |||
| | (Principal Executive Officer) | |||
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Date: | | By: | /s/ Jack Preston | ||
| | Jack Preston | |||
| | Chief Financial Officer | |||
| | (Principal Financial Officer) | |||
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Date: June 3, 2022 | | By: | /s/ | ||
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