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, 2017July 29, 2023
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 DecemberSeptember 1, 2017, 21,309,9412023, 18,400,192 shares of the registrant’s common stock were outstanding.
RH
INDEX TO FORM 10-Q
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| Page |
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3 | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
| |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |||
| ||||
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| |||
57 | ||||
58 | ||||
| | | | |
| ||||
| ||||
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| | 60 | ||
| | 60 | ||
61 | ||||
62 |
2
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
RH
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
ASSETS |
| |
|
| |
|
Cash and cash equivalents | | $ | 417,047 | | $ | 1,508,101 |
Restricted cash | | | 3,538 | | | 3,662 |
Accounts receivable—net | |
| 54,447 | |
| 59,763 |
Merchandise inventories | |
| 737,663 | |
| 801,841 |
Prepaid expense and other current assets | |
| 143,831 | |
| 139,297 |
Total current assets | |
| 1,356,526 | |
| 2,512,664 |
Property and equipment—net | |
| 1,655,326 | |
| 1,635,984 |
Operating lease right-of-use assets | | | 532,090 | | | 527,246 |
Goodwill | |
| 141,053 | |
| 141,048 |
Tradenames, trademarks and other intangible assets | |
| 75,472 | |
| 74,633 |
Deferred tax assets | |
| 123,405 | |
| 167,039 |
Equity method investments | | | 130,211 | | | 101,468 |
Other non-current assets | |
| 198,748 | |
| 149,207 |
Total assets | | $ | 4,212,831 | | $ | 5,309,289 |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
|
| |
|
|
Accounts payable and accrued expenses | | $ | 357,479 | | $ | 374,949 |
Deferred revenue and customer deposits | | | 331,031 | |
| 325,754 |
Convertible senior notes due 2023 | | | — | | | 1,696 |
Operating lease liabilities | | | 83,489 | | | 80,384 |
Other current liabilities | |
| 100,667 | |
| 103,190 |
Total current liabilities | |
| 872,666 | |
| 885,973 |
Asset based credit facility | |
| — | |
| — |
Term loan B—net | |
| 1,928,180 | |
| 1,936,529 |
Term loan B-2—net | |
| 468,934 | |
| 469,245 |
Real estate loans | | | 17,902 | | | 17,909 |
Convertible senior notes due 2024—net | | | 41,779 | | | 41,724 |
Non-current operating lease liabilities | |
| 506,535 | |
| 505,809 |
Non-current finance lease liabilities | | | 646,900 | | | 653,050 |
Deferred tax liabilities | | | 6,401 | | | 6,315 |
Other non-current obligations | |
| 8,116 | |
| 8,074 |
Total liabilities | | | 4,497,413 | | | 4,524,628 |
Commitments and contingencies (Note 16) | |
| | |
| |
Stockholders’ equity: | |
|
| |
|
|
Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of July 29, 2023 and January 28, 2023 | |
| — | | | — |
Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 18,397,853 shares issued and outstanding as of July 29, 2023; 22,045,385 shares issued and outstanding as of January 28, 2023 | |
| 2 | |
| 2 |
Additional paid-in capital | |
| 261,803 | |
| 247,076 |
Accumulated other comprehensive income (loss) | |
| 3,272 | |
| (2,403) |
Retained earnings (accumulated deficit) | |
| (549,659) | |
| 539,986 |
Total stockholders’ equity (deficit) | | | (284,582) | | | 784,661 |
Total liabilities and stockholders’ equity (deficit) | | $ | 4,212,831 | | $ | 5,309,289 |
|
| 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 | | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (in thousands, except share and per share amounts) | ||||||||||
Net revenues | | $ | 800,479 | | $ | 991,620 | | $ | 1,539,641 | | $ | 1,948,912 |
Cost of goods sold | |
| 420,406 | | | 468,402 | |
| 812,023 | | | 927,111 |
Gross profit | |
| 380,073 | |
| 523,218 | |
| 727,618 | |
| 1,021,801 |
Selling, general and administrative expenses | |
| 228,733 | | | 288,804 | | | 477,038 | | | 582,099 |
Income from operations | |
| 151,340 | |
| 234,414 | |
| 250,580 | |
| 439,702 |
Other expenses | | | | | | | |
| | | | |
Interest expense—net | | | 44,422 | | | 26,264 | | | 84,238 | | | 47,119 |
Loss on extinguishment of debt | |
| — | | | 23,462 | |
| — | | | 169,578 |
Other (income) expense—net | | | (186) | | | 3,195 | | | (839) | | | 2,852 |
Total other expenses | |
| 44,236 | | | 52,921 | |
| 83,399 | | | 219,549 |
Income before income taxes and equity method investments | | | 107,104 | | | 181,493 | |
| 167,181 | | | 220,153 |
Income tax expense (benefit) | | | 27,245 | | | 56,397 | |
| 43,830 | | | (107,029) |
Income before equity method investments | | | 79,859 | | | 125,096 | | | 123,351 | | | 327,182 |
Share of equity method investments loss | | | 3,382 | | | 2,821 | | | 4,984 | | | 4,196 |
Net income | | $ | 76,477 | | $ | 122,275 | | $ | 118,367 | | $ | 322,986 |
Weighted-average shares used in computing basic net income per share | | | 20,960,329 | | | 24,475,373 | |
| 21,503,090 | |
| 23,541,955 |
Basic net income per share | | $ | 3.65 | | $ | 5.00 | | $ | 5.50 | | $ | 13.72 |
Weighted-average shares used in computing diluted net income per share | | | 22,727,560 | | | 26,934,914 | |
| 23,242,585 | |
| 27,371,500 |
Diluted net income per share | | $ | 3.36 | | $ | 4.54 | | $ | 5.09 | | $ | 11.80 |
|
| 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.
RH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||
| | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 76,477 | | $ | 122,275 | | $ | 118,367 | | $ | 322,986 |
Net gains (losses) from foreign currency translation | | | 3,380 | | | (2,240) | |
| 5,675 | |
| (6,385) |
Comprehensive income | | $ | 79,857 | | $ | 120,035 | | $ | 124,042 | | $ | 316,601 |
|
| 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 | 2023 SECOND QUARTER FORM 10-Q | 5 |
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)(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 (DEFICIT) | ||||||
| | (in thousands, except share amounts) | ||||||||||||||||||||
Balances—April 29, 2023 | | 22,051,251 |
| $ | 2 |
| $ | 257,616 |
| $ | (108) |
| $ | 581,876 |
| — |
| $ | — |
| $ | 839,386 |
Stock-based compensation | | — | | | — | | | 8,538 | | | — | | | — | | — | | | — | | | 8,538 |
Issuance of restricted stock | | 2,961 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Vested and delivered restricted stock units | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Exercise of stock options | | 40,599 | | | — | | | 4,272 | | | — | | | — | | — | | | — | | | 4,272 |
Settlement of convertible senior notes | | 1,929 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Repurchases of common stock—including excise tax | | (3,698,887) | | | — | | | — | | | — | | | — | | 3,698,887 | | | (1,216,635) | | | (1,216,635) |
Retirement of treasury stock | | — | | | — | | | (8,623) | | | — | | | (1,208,012) | | (3,698,887) | | | 1,216,635 | | | — |
Net income | | — | | | — | | | — | | | — | | | 76,477 | | — | | | — | | | 76,477 |
Net gains from foreign currency translation | | — | | | — | | | — | | | 3,380 | | | — | | — | | | — | | | 3,380 |
Balances—July 29, 2023 | | 18,397,853 |
| $ | 2 |
| $ | 261,803 |
| $ | 3,272 |
| $ | (549,659) |
| — |
| $ | — |
| $ | (284,582) |
| | | | | | | | | | | | | | | | | | | | | | |
Balances—April 30, 2022 | | 24,661,781 |
| $ | 2 |
| $ | 575,635 |
| $ | (5,555) |
| $ | 771,708 |
| — |
| $ | — |
| $ | 1,341,790 |
Stock-based compensation | | — | | | — | | | 10,736 | | | — | | | — | | — | | | — | | | 10,736 |
Issuance of restricted stock | | 3,577 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Vested and delivered restricted stock units | | 457 | | | — | | | (57) | | | — | | | — | | — | | | — | | | (57) |
Exercise of stock options | | 49,375 | | | — | | | 2,471 | | | — | | | — | | — | | | — | | | 2,471 |
Settlement of convertible senior notes | | 1 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Repurchases of common stock | | (1,000,000) | | | — | | | — | | | — | | | — | | 1,000,000 | | | (254,731) | | | (254,731) |
Retirement of treasury stock | | — | | | — | | | (254,731) | | | — | | | — | | (1,000,000) | | | 254,731 | | | — |
Net income | | — | | | — | | | — | | | — | | | 122,275 | | — | | | — | | | 122,275 |
Net losses from foreign currency translation | | — | | | — | | | — | | | (2,240) | | | — | | — | | | — | | | (2,240) |
Balances—July 30, 2022 | | 23,715,191 |
| $ | 2 |
| $ | 334,054 |
| $ | (7,795) |
| $ | 893,983 |
| — |
| $ | — |
| $ | 1,220,244 |
RH
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| October 28, |
|
| October 29, |
| ||
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
| As Revised |
| |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1,919 |
|
| $ | (4,035 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 51,092 |
|
|
| 41,248 |
|
Non-cash charges resulting from inventory step-up |
|
| 2,108 |
|
|
| 5,187 |
|
Amortization of debt discount |
|
| 22,685 |
|
|
| 21,467 |
|
Excess tax shortfall from exercise of stock options |
|
| — |
|
|
| 2,275 |
|
Stock-based compensation expense |
|
| 42,929 |
|
|
| 21,711 |
|
Non-cash loss on extinguishment of debt |
|
| 1,880 |
|
|
| — |
|
Other non-cash interest expense |
|
| 4,914 |
|
|
| 2,971 |
|
Change in assets and liabilities—net of acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (319 | ) |
|
| (1,445 | ) |
Merchandise inventories |
|
| 190,620 |
|
|
| (23,261 | ) |
Prepaid expense and other assets |
|
| 38,419 |
|
|
| (30,378 | ) |
Accounts payable and accrued expenses |
|
| 10,491 |
|
|
| (63,435 | ) |
Deferred revenue and customer deposits |
|
| 20,617 |
|
|
| 22,652 |
|
Other current liabilities |
|
| 448 |
|
|
| (25,372 | ) |
Deferred rent and lease incentives |
|
| 846 |
|
|
| 2,953 |
|
Other non-current obligations |
|
| (1,887 | ) |
|
| 8,477 |
|
Net cash provided by (used in) operating activities |
|
| 386,762 |
|
|
| (18,985 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (76,789 | ) |
|
| (104,152 | ) |
Construction related deposits |
|
| (12,772 | ) |
|
| (3,829 | ) |
Purchase of trademarks and domain names |
|
| (39 | ) |
|
| (164 | ) |
Proceeds from sale of assets held for sale—net |
|
| 15,123 |
|
|
| — |
|
Purchase of investments |
|
| (16,109 | ) |
|
| (186,967 | ) |
Maturities of investments |
|
| 46,890 |
|
|
| 115,938 |
|
Sales of investments |
|
| 145,020 |
|
|
| 31,896 |
|
Acquisition of business—net of cash acquired |
|
| — |
|
|
| (116,100 | ) |
Net cash provided by (used in) investing activities |
|
| 101,324 |
|
|
| (263,378 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowing under asset based credit facility |
|
| 446,000 |
|
|
| — |
|
Repayments under asset based credit facility |
|
| (105,000 | ) |
|
| — |
|
Borrowings under term loans |
|
| 180,000 |
|
|
| — |
|
Repayments under term loans |
|
| (100,000 | ) |
|
| — |
|
Borrowing under promissory and equipment security notes |
|
| 34,000 |
|
|
| — |
|
Repayments under promissory and equipment security notes |
|
| (841 | ) |
|
| — |
|
Debt issuance costs |
|
| (8,298 | ) |
|
| — |
|
Repurchases of common stock—including commissions |
|
| (1,000,326 | ) |
|
| — |
|
Payments on build-to-suit lease transactions |
|
| (8,734 | ) |
|
| — |
|
Proceeds from exercise of stock options |
|
| 15,369 |
|
|
| 1,591 |
|
Excess tax shortfall from exercise of stock options |
|
| — |
|
|
| (2,275 | ) |
Tax withholdings related to issuance of stock-based awards |
|
| (4,881 | ) |
|
| (1,365 | ) |
Payments on capital leases |
|
| (258 | ) |
|
| (262 | ) |
Net cash used in financing activities |
|
| (552,969 | ) |
|
| (2,311 | ) |
Effects of foreign currency exchange rate translation |
|
| 22 |
|
|
| 342 |
|
Net decrease in cash and cash equivalents |
|
| (64,861 | ) |
|
| (284,332 | ) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
| 87,023 |
|
|
| 331,467 |
|
End of period |
| $ | 22,162 |
|
| $ | 47,135 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Property and equipment additions due to build-to-suit lease transactions |
| $ | 35,463 |
|
| $ | 46,193 |
|
Property and equipment additions from use of construction related deposits |
| $ | 27,077 |
|
| $ | 3,965 |
|
Property and equipment additions in accounts payable and accrued expenses at period-end |
| $ | 24,081 |
|
| $ | 23,440 |
|
Property and equipment acquired under capital lease |
| $ | 753 |
|
| $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | SIX MONTHS ENDED | ||||||||||||||||||||
| | COMMON STOCK | | | | | | | | | | | TREASURY STOCK | | | | ||||||
| | | | | | | | |
| ACCUMULATED |
| RETAINED | | | | | | | | |||
| | | | | |
| ADDITIONAL |
| OTHER |
| EARNINGS | | | | | | | TOTAL | ||||
| | |
| PAID-IN |
| COMPREHENSIVE |
| (ACCUMULATED |
| |
| STOCKHOLDERS' | ||||||||||
|
| SHARES |
| AMOUNT |
| CAPITAL |
| INCOME (LOSS) |
| DEFICIT) |
| SHARES |
| AMOUNT |
| EQUITY (DEFICIT) | ||||||
| | (in thousands, except share amounts) | ||||||||||||||||||||
Balances—January 28, 2023 | | 22,045,385 |
| $ | 2 |
| $ | 247,076 |
| $ | (2,403) |
| $ | 539,986 |
| — |
| $ | — |
| $ | 784,661 |
Stock-based compensation | | — | | | — | | | 18,718 | | | — | | | — | | — | | | — | | | 18,718 |
Issuance of restricted stock | | 2,961 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Vested and delivered restricted stock units | | 847 | | | — | | | (96) | | | — | | | — | | — | | | — | | | (96) |
Exercise of stock options | | 45,616 | | | — | | | 4,728 | | | — | | | — | | — | | | — | | | 4,728 |
Settlement of convertible senior notes | | 1,931 | | | — | | | — | | | — | | | — | | — | | | — | | | — |
Repurchase of common stock—including excise tax | | (3,698,887) | | | — | | | — | | | — | | | — | | 3,698,887 | | | (1,216,635) | | | (1,216,635) |
Retirement of treasury stock | | — | | | — | | | (8,623) | | | — | | | (1,208,012) | | (3,698,887) | | | 1,216,635 | | | — |
Net income | | — | | | — | | | — | | | — | | | 118,367 | | — | | | — | | | 118,367 |
Net gains from foreign currency translation | | — | | | — | | | — | | | 5,675 | | | — | | — | | | — | | | 5,675 |
Balances—July 29, 2023 | | 18,397,853 |
| $ | 2 |
| $ | 261,803 |
| $ | 3,272 |
| $ | (549,659) |
| — |
| $ | — |
| $ | (284,582) |
| | | | | | | | | | | | | | | | | | | | | | |
Balances—January 29, 2022 | | 21,506,967 |
| $ | 2 |
| $ | 620,577 |
| $ | (1,410) |
| $ | 551,108 |
| — |
| $ | — |
| $ | 1,170,277 |
Stock-based compensation | | — |
| | — |
| | 23,538 |
| | — |
| | — |
| — |
| | — |
| | 23,538 |
Issuance of restricted stock | | 3,577 |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
Vested and delivered restricted stock units | | 1,866 |
| | — |
| | (323) |
| | — |
| | — |
| — |
| | — |
| | (323) |
Exercise of stock options | | 3,202,775 |
| | — |
| | 152,041 |
| | — |
| | — |
| — |
| | — |
| | 152,041 |
Repurchases of common stock | | (1,000,000) | | | — | | | — | | | — | | | — | | 1,000,000 | | | (254,731) | | | (254,731) |
Retirement of treasury stock | | — | | | — | | | (254,731) | | | — | | | — | | (1,000,000) | | | 254,731 | | | — |
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 | | 36,974 |
| | — |
| | (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 | | — |
| | — |
| | — |
| | — |
| | 322,986 |
| — |
| | — |
| | 322,986 |
Net losses from foreign currency translation | | — |
| | — |
| | — |
| | (6,385) |
| | — |
| — |
| | — |
| | (6,385) |
Balances—July 30, 2022 | | 23,715,191 |
| $ | 2 |
| $ | 334,054 |
| $ | (7,795) |
| $ | 893,983 |
| — |
| $ | — |
| $ | 1,220,244 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
---|---|---|---|---|---|---|
| | SIX MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
| | 2023 |
| 2022 | ||
| | (in thousands) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 118,367 | | $ | 322,986 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Depreciation and amortization | |
| 55,906 | | | 51,728 |
Non-cash operating lease cost | | | 38,858 | | | 37,190 |
Asset impairments | | | 2,894 | | | 8,154 |
Stock-based compensation expense | |
| 18,718 | | | 23,538 |
Non-cash finance lease interest expense | | | 17,280 | | | 14,962 |
Product recalls | | | — | | | 560 |
Deferred income taxes | | | 43,717 | | | 5,493 |
Loss on extinguishment of debt | | | — | | | 169,578 |
Gain on derivative instruments—net | | | — | | | (1,724) |
Share of equity method investments loss | | | 4,984 | | | 4,196 |
Other non-cash items | |
| 4,454 | | | 3,348 |
Change in assets and liabilities: | |
| | | | |
Accounts receivable | |
| 5,332 | | | 2,332 |
Merchandise inventories | |
| 64,848 | | | (124,958) |
Prepaid expense and other assets | |
| (24,680) | | | (153,471) |
Landlord assets under construction—net of tenant allowances | |
| (13,959) | | | (32,460) |
Accounts payable and accrued expenses | |
| (32,205) | | | (63,820) |
Deferred revenue and customer deposits | |
| 5,216 | | | 2,911 |
Other current liabilities | |
| (2,315) | | | (24,902) |
Current and non-current operating lease liabilities | |
| (41,654) | | | (38,329) |
Other non-current obligations | |
| (17,406) | | | (14,796) |
Net cash provided by operating activities | |
| 248,355 | |
| 192,516 |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| |
Capital expenditures | |
| (81,596) | | | (62,558) |
Equity method investments | |
| (33,727) | | | (1,520) |
Net cash used in investing activities | |
| (115,323) | |
| (64,078) |
| | | | | | |
---|---|---|---|---|---|---|
| | SIX MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
| | 2023 |
| 2022 | ||
| | (in thousands) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Borrowings under term loans | | | — | | | 500,000 |
Repayments under term loans | | | (12,500) | | | (10,000) |
Repayments under real estate loans | | | (13) | | | — |
Repayments under promissory and equipment security notes | |
| (1,160) | | | (12,807) |
Repayments of convertible senior notes | | | (1,696) | | | (13,048) |
Repayment under convertible senior notes repurchase obligation | | | — | | | (395,372) |
Debt issuance costs | |
| — | | | (27,646) |
Principal payments under finance lease agreements—net of tenant allowances | | | (5,454) | | | (3,132) |
Proceeds from termination of convertible senior note hedges | | | — | | | 231,796 |
Payments for termination of common stock warrants | | | — | | | (390,934) |
Repurchases of common stock—inclusive of excise taxes paid | | | (1,208,290) | | | (254,731) |
Proceeds from exercise of stock options | |
| 4,728 | | | 152,041 |
Tax withholdings related to issuance of stock-based awards | | | (96) | | | (323) |
Net cash used in financing activities | |
| (1,224,481) | |
| (224,156) |
Effects of foreign currency exchange rate translation | |
| 271 | | | (440) |
Net decrease in cash and cash equivalents, restricted cash and restricted cash equivalents | |
| (1,091,178) | |
| (96,158) |
Cash and cash equivalents, restricted cash and restricted cash equivalents | |
| | |
|
|
Beginning of period—cash and cash equivalents | |
| 1,508,101 | |
| 2,177,889 |
Beginning of period—restricted cash | |
| 3,662 | |
| — |
Beginning of period—restricted cash equivalents (acquisition related escrow deposits) | |
| — | | | 3,975 |
Beginning of period—cash and cash equivalents, restricted cash and restricted cash equivalents | | $ | 1,511,763 | | $ | 2,181,864 |
End of period—cash and cash equivalents | |
| 417,047 | |
| 2,085,081 |
End of period—restricted cash | |
| 3,538 | |
| — |
End of period—restricted cash equivalents (acquisition related escrow deposits) | |
| — | |
| 625 |
End of period—cash and cash equivalents, restricted cash and restricted cash equivalents | | $ | 420,585 | | $ | 2,085,706 |
| | | | | | |
---|---|---|---|---|---|---|
| | SIX MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
| | 2023 |
| 2022 | ||
| | (in thousands) | ||||
Non-cash transactions: | |
| | |
| |
Property and equipment additions in accounts payable and accrued expenses at period-end | | $ | 25,140 | | $ | 14,431 |
Landlord asset additions in accounts payable and accrued expenses at period-end | | | 2,863 | | | 10,967 |
Excise tax from share repurchases in accounts payable and accrued expenses at period-end | | | 12,045 | | | — |
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets | | | — | | | 215,749 |
Extinguishment of convertible senior notes related to repurchase obligation | | | — | | | (261,988) |
Financing liability and embedded derivative arising from convertible senior notes repurchase | | | — | | | 405,577 |
Shares issued on settlement of convertible senior notes | | | — | | | (14,705) |
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes | | | — | | | 14,705 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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 Sourcebooks. We offer merchandise assortments across a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and baby, 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 CompanyJuly 29, 2023, we operated a total of 84 retail68 RH Galleries and 31 outlet40 RH Outlet stores, in 32 states, the District of Columbia and Canada, and includes 15one RH Guesthouse, as well as 14 Waterworks showrooms inShowrooms throughout the United States, Canada and in the U.K.,United Kingdom 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,July 29, 2023, and the results of operations for the three and ninesix months ended October 28, 2017July 29, 2023 and October 29, 2016. The Company’sJuly 30, 2022. Our current fiscal year, which consists of 53 weeks, ends on February 3, 20182024 (“fiscal 2017”2023”).
The condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.
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, 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, and intangible and other long-lived assets. Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and six months ended July 29, 2023. As additional information becomes available to us, our future assessment of these estimates, as well as other factors, could change and the results of any such change 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, 20172023 (the “2016“2022 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 ninesix months ended October 28, 2017July 29, 2023, 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 factors as discussed in Business Conditions below.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 11 |
Business Conditions
RevisionThere are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, substantially higher interest and mortgage rates, and unpredictability in the global financial markets related to the foregoing as well as, among other things, the recent failures of several financial institutions. We experienced increased demand for our products during the pandemic, and there have been significant shifts in consumer consumption patterns with the easing of the pandemic including increases in travel and services rather than spending on home furnishings. These and other macroeconomic factors may have a number of adverse effects on macroeconomic conditions and markets in which we operate, including the housing market, with the potential for an economic recession and a sustained downturn in the housing market. Factors such as a slowdown in the housing market or negative trends in stock market prices could have an adverse impact on demand for our products. We believe that these macroeconomic and other factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.
DuringOur decisions regarding the fourthsources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors.
For more information, refer to the section entitled “Risk Factors” in our 2022 Form 10-K.
NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS
New Accounting Standards or Updates Adopted
Disclosure of Supplier Finance Program Obligations
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04—Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). ASU 2022-04 requires entities to disclose a program’s nature, activity during the period, changes from period to period and potential magnitude. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. With the exception of the disclosure of rollforward information, the guidance is effective for fiscal years beginning after December 15, 2022, and is required to be applied retrospectively to all periods for which a balance sheet is presented. The rollforward requirement is effective for fiscal years beginning after December 15, 2023, and is required to be applied prospectively. We adopted ASU 2022-04 in the first quarter of fiscal 2016, management determined that2023.
Supplier Finance Program
We facilitate a voluntary supply chain financing program (the “Financing Program”) with a third-party financial institution (the “Bank”) to provide participating suppliers with the Company had incorrectly reported negative cash balances dueopportunity to outstanding checksreceive early payment on invoices, net of a discount charged to the supplier by the Bank. We are not a party to the supplier agreements with the Bank, and the terms of our payment obligations to suppliers are not impacted by a supplier’s participation in the Financing Program. Our responsibility is limited to making payments to the Bank on the terms originally negotiated with our suppliers, which are typically either 30 days or 60 days. There are no assets pledged as security or other forms of guarantees provided under the Financing Program.
The Financing Program is not indicative of a borrowing arrangement and the liabilities under the Financing Program are included in accounts payableand accrued expenses financial statement line item in its on the condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC 210—Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement of the cash provided byassociated payments are included within operating activities on the condensed consolidated statements of cash flows. There was no impact onAs of July 29, 2023 and January 28, 2023, supplier invoices that have been confirmed as valid under the condensed consolidated statementsFinancing Program included in accounts payableand accrued expenses were $20 million and $26 million, respectively.
12 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99—Materiality, codified inNew Accounting Standards Codification (“ASC”) 250—Presentation of Financial Statements,or Updates Not Yet Adopted
Joint Venture Formations: Recognition 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.
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 CompensationInitial Measurement
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense 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. As a result of the adoption of this new guidance, the Company recognized an excess tax benefit of $1.9 million and $4.3 million in the provision for income taxes as a discrete item during the three and nine months ended October 28, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the condensed consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.
In May 2017,August 2023, the FASB issued Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718)ASU 2023-05—Business Combinations—Joint Venture Formations (Subtopic 805-60): Scope of Modification AccountingRecognition and Initial Measurement (“ASU 2023-05”). The new guidance clarifies when modification accounting should be applied for changesASU 2023-05 applies to terms or conditionsthe formation of a share-based payment award.“joint venture” or a “corporate joint venture” and requires a joint venture to initially measure all contributions received upon its formation at fair value. The guidance does not impact accounting by the venturers. The new guidance is effective for fiscal years beginningapplicable to joint venture entities with a formation date on or 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 indicators of transfer of control, the Company continues to assess the guidance and has not yet concluded how such guidance will be applied to its revenue streams. The Company plans to elect to adopt the practical expedient related to shipping and handling activities. The Company has concluded that the new standard will have an impact related to the accounting for gift card breakage. Under Topic 606 the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and breakage will be recognized proportional to actual gift card redemptions.
Topic 606 is effective for 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 in
8
the first quarter of fiscal 2018. The Company has elected to adopt using a modified retrospective approach with the cumulative effect of initially applying the new standard recognized in retained earnings at the date of adoption.
Accounting for Leases
In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is 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
In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Cash Flow Classification
In August 2016, the FASB issued Accounting Standard Update No. 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers
In October 2016, the FASB issued Accounting Standard Update No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Goodwill and 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 applied1, 2025 on a prospective basis. The newWhile ASU 2023-05 is not currently applicable to us because our existing arrangements in variable interest entities do not meet the definition of joint ventures as described in the proposed standard, we will apply this guidance in future reporting periods after the guidance 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 evaluatingto any future arrangements meeting the impactdefinition of adopting this new accounting standard on its consolidated financial statements.a joint venture.
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:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
Capitalized catalog costs | | $ | 29,790 | | $ | 26,522 |
Prepaid expenses | | | 25,595 | | | 24,352 |
Vendor deposits | | | 18,940 | | | 21,201 |
Federal and state tax receivable | | | 15,519 | | | 12,322 |
Value added tax (VAT) receivable | | | 10,612 | | | 7,465 |
Tenant allowance receivable | | | 6,041 | | | 8,336 |
Right of return asset for merchandise | |
| 5,380 | |
| 4,983 |
Promissory notes receivable, including interest(1) | |
| 3,081 | |
| 2,991 |
Interest income receivable | | | 1,786 | | | 4,878 |
Other current assets | | | 27,087 | | | 26,247 |
Total prepaid expense and other current assets | | $ | 143,831 | | $ | 139,297 |
(1) | Represents promissory notes, including principal and accrued interest, due from an affiliate of the managing member of the Aspen LLCs (refer to Note 5—Variable Interest Entities). |
|
| 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 |
|
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 13 |
Other non-current assets consist of the following (in thousands):following:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
Landlord assets under construction—net of tenant allowances | | $ | 76,951 | | $ | 45,511 |
Initial direct costs prior to lease commencement | | | 66,954 | | | 51,249 |
Capitalized cloud computing costs—net(1) | | | 22,528 | | | 21,529 |
Vendor deposits—non-current | | | 10,055 | | | 10,593 |
Other deposits | |
| 7,761 | |
| 7,143 |
Deferred financing fees | |
| 3,024 | |
| 3,528 |
Other non-current assets | |
| 11,475 | |
| 9,654 |
Total other non-current assets | | $ | 198,748 | | $ | 149,207 |
|
| 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 |
|
(1) | Presented net of accumulated amortization of $14 million and $11 million as of July 29, 2023 and January 28, 2023, respectively. |
NOTE 6—4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS
The following sets forth the goodwill, tradenames, trademarks and other intangible assets as of October 28, 2017 (in thousandsactivity for the RH Segment and Waterworks (refer to Note 17—Segment Reporting):
| | | | | | | | | | | | |
|
| RH SEGMENT |
| WATERWORKS | ||||||||
| | | | TRADENAMES, | | | | TRADENAMES, | ||||
| | | | | TRADEMARKS AND | | | | | TRADEMARKS AND | ||
| | | | | OTHER INTANGIBLE | | | | | OTHER INTANGIBLE | ||
| | GOODWILL | | ASSETS | | GOODWILL(1) | | ASSETS(2) | ||||
| | (in thousands) | ||||||||||
January 28, 2023 | | $ | 141,048 | | $ | 57,633 | | $ | — | | $ | 17,000 |
Additions | |
| — | |
| 839 | |
| — | |
| — |
Foreign currency translation | | | 5 | | | — | | | — | | | — |
July 29, 2023 | | $ | 141,053 | | $ | 58,472 | | $ | — | | $ | 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 prior fiscal years. |
There are no goodwill, tradenames, trademarks and other intangible assets for the Real Estate segment.
|
| 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
NOTE 5—VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entities (“VIE”) and Noncontrolling Interests
In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for real estate development activities related to our Gallery transformation and global expansion strategies. We hold a 50 percent membership interest in seven of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by a third-party real estate development partner affiliated with the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below). In one Member LLC we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held in the same way by a real estate development partner affiliated with the managing member of the Aspen LLCs.
The following sets forthMember LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support. Upon the goodwillformation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs. In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and intangibledetermined that we are most closely associated with each Member LLC. Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements.
We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC. As of July 29, 2023 and January 28, 2023, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions. Accordingly, we did not recognize any noncontrolling interests as of July 29, 2023 and January 28, 2017 (in thousands):2023.
|
| 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 |
|
|
|
|
|
|
|
|
|
The carrying amounts and classification of the VIEs’ assets and liabilities included in the condensed consolidated balance sheets were as follows:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
ASSETS |
| |
|
| |
|
Cash and cash equivalents | | $ | 6,096 | | $ | 6,653 |
Restricted cash(1) | | | 3,538 | | | 3,662 |
Prepaid expense and other current assets | |
| 5,387 | |
| 3,670 |
Total current assets | |
| 15,021 | |
| 13,985 |
Property and equipment—net(2) | |
| 228,546 | |
| 187,093 |
Other non-current assets | | | 214 | |
| 122 |
Total assets | | $ | 243,781 | | $ | 201,200 |
LIABILITIES | |
|
| |
|
|
Accounts payable and accrued expenses | | $ | 6,541 | | $ | 6,685 |
Other current liabilities | | | 5,609 | | | — |
Total current liabilities | | | 12,150 | | | 6,685 |
Real estate loans(3) | | | 17,902 | | | 17,909 |
Other non-current obligations | | | 963 | |
| 929 |
Total liabilities | | $ | 31,015 | | $ | 25,523 |
(1) | Restricted cash deposits are held in escrow for one Member LLC and represent a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for tenant allowances specified in a lease agreement between us and the Member LLC. |
(2) | Includes$46 million and $125 million of construction in progress as of July 29, 2023 and January 28, 2023, respectively. |
(3) | Real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets. |
On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $2.0 million with a maturity date of August 1, 2032. The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00%.
On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $16 million with a maturity date of September 9, 2032. The Promissory Note bears interest at a fixed rate per annum equal to 5.37% until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00%, subject to a total interest rate floor of 3.00%.
Equity Method Investments
Equity method investments represent our membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that were formed for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent membership interest in the third Aspen LLC. The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Accordingly, we account for these investments using the equity method of accounting.
16 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
We have previously made contractually required contributions to the Aspen LLCs in an aggregate amount of $105 million in prior periods. In February 2023, we elected to make equity contributions to two of the Aspen LLCs totaling $31 million whereby such funding was used to repay a portion of third-party debt secured by certain real estate assets held by the Aspen LLCs. In April 2023, we made an additional equity contribution to one Aspen LLC of $1.8 million whereby such funding was used in connection with the acquisition of additional real estate assets. Inclusive of the equity contributions made during the six months ended July 29, 2023, we have made in excess of $135 million in capital contributions to the Aspen LLCs. Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of July 29, 2023.
During the six months ended July 29, 2023 and July 30, 2022, we did not receive any distributions or have any undistributed earnings of equity method investments.
NOTE 7—6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following (following:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
Accounts payable | | $ | 150,339 | | $ | 166,082 |
Accrued compensation | |
| 51,257 | |
| 76,650 |
Accrued occupancy | |
| 27,432 | |
| 28,830 |
Accrued sales and use tax(1) | |
| 24,250 | |
| 21,950 |
Accrued legal settlements(1)(2) | | | 17,800 | | | 47 |
Accrued interest | | | 15,863 | | | 14,456 |
Accrued freight and duty | |
| 13,169 | |
| 17,497 |
Excise tax payable on share repurchases(1) | | | 12,045 | | | 3,700 |
Accrued professional fees | |
| 7,653 | |
| 7,447 |
Accrued legal contingencies(1)(2) | | | 3,206 | | | 8,874 |
Accrued catalog costs(1) | |
| 1,880 | |
| 1,546 |
Other accrued expenses(1) | |
| 32,585 | |
| 27,870 |
Total accounts payable and accrued expenses | | $ | 357,479 | | $ | 374,949 |
(1) | Prior year amounts have been adjusted to conform to the current period presentation. |
(2) | Refer to Note 16¾Commitments and Contingencies. |
Reorganization
As reported in thousands):our 2022 Form 10-K, we implemented a restructuring on March 24, 2023 that includes workforce and expense reductions in order to improve and simplify our organizational structure, streamline certain aspects of our business operations and better position us for further growth. The workforce reduction associated with the initiative included the elimination of numerous leadership and other positions throughout the organization, which affected approximately 440 roles. The reorganization was completed during the first quarter of fiscal 2023. During the six months ended July 29, 2023, we incurred total charges relating to the reorganization of $7.6 million consisting primarily of severance costs and related taxes. As of July 29, 2023, we had accruals of $2.1 million included in accounts payable and accrued expenses related to the reorganization.
|
| 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 |
|
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 17 |
Other current liabilities consist of the following (following:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
Current portion of term loans | | $ | 25,000 | | $ | 25,000 |
Unredeemed gift card and merchandise credit liability | | | 24,212 | | | 26,733 |
Allowance for sales returns | | | 21,409 | | | 20,747 |
Finance lease liabilities | | | 17,795 | | | 17,007 |
Foreign tax payable | | | 4,524 | | | 4,365 |
Other current liabilities | |
| 7,727 | |
| 9,338 |
Total other current liabilities | | $ | 100,667 | | $ | 103,190 |
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 July 29, 2023 will be recognized within the next six months as the performance obligations are satisfied. 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 July 29, 2023 and July 30, 2022, we recognized $5.3 million and $6.0 million, respectively, of revenue related to previous deferrals related to our gift cards. During each of the six months ended July 29, 2023 and July 30, 2022, we recognized $11 million of revenue related to previous deferrals related to our gift cards. We expect that approximately 70 percent of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.
|
| 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 |
|
12
NOTE 8—7—OTHER NON-CURRENT OBLIGATIONS
Other non-current obligations consist of the following (in thousands):following:
| | | | | | |
|
| JULY 29, |
| JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | (in thousands) | ||||
Unrecognized tax benefits | | $ | 3,021 | | $ | 2,962 |
Other non-current obligations | | | 5,095 | | | 5,112 |
Total other non-current obligations | | $ | 8,116 | | $ | 8,074 |
|
| 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 |
|
|
|
NOTE 8—LEASES
Lease costs—net consist of the following:
| | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | | JULY 29, |
| JULY 30, | | JULY 29, |
| JULY 30, | ||||
|
|
| 2023 |
| 2022 | | 2023 |
| 2022 | ||||
| | | (in thousands) | ||||||||||
Operating lease cost(1) | | | $ | 27,454 | | $ | 24,904 |
| $ | 53,754 | | $ | 50,037 |
Finance lease costs | | | | | | | | | | | | | |
Amortization of leased assets(1) | | | | 13,641 | | | 12,872 | | | 27,345 | | | 24,370 |
Interest on lease liabilities(2) | | | | 8,794 | | | 7,891 | | | 17,280 | | | 14,962 |
Variable lease costs(3) | | | | 5,997 | | | 7,247 | | | 12,165 | | | 16,334 |
Sublease income(4) | | | | (1,420) | | | (1,085) | | | (2,966) | | | (2,213) |
Total lease costs—net | | | $ | 54,466 | | $ | 51,829 | | $ | 107,578 | | $ | 103,490 |
|
|
|
|
|
|
(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 $3.7 million and $5.0 million for the three months ended July 29, 2023 and July 30, 2022, respectively, and $7.6 million and $12 million for the six months ended July 29, 2023 and July 30, 2022, respectively, as well as charges associated with common area maintenance of $2.3 million and $2.2 million for the three months ended July 29, 2023 and July 30, 2022, respectively, and $4.6 million for both the six months ended July 29, 2023 and July 30, 2022. Other variable costs, which include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material in any period presented. |
(4) | Included in selling, general and administrative expenses on the condensed consolidated statements of income. |
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 19 |
Lease right-of-use assets and lease liabilities consist of the following:
| | | | | | | | |
| | | | JULY 29, | | JANUARY 28, | ||
| | |
| 2023 |
| 2023 | ||
| | | | (in thousands) | ||||
| | Balance Sheet Classification | | | | | | |
Assets | | | | | | | | |
Operating leases | | Operating lease right-of-use assets | | $ | 532,090 | | $ | 527,246 |
Finance leases(1)(2)(3) | | Property and equipment—net | | | 1,051,694 | | | 1,078,979 |
Total lease right-of-use assets | | | | $ | 1,583,784 | | $ | 1,606,225 |
Liabilities | | | | | | | | |
Current(4) | | | | | | | | |
Operating leases | | Operating lease liabilities | | $ | 83,489 | | $ | 80,384 |
Finance leases | | Other current liabilities | | | 17,795 | | | 17,007 |
Total lease liabilities—current | | | | | 101,284 | | | 97,391 |
Non-current | | | | | | | | |
Operating leases | | Non-current operating lease liabilities | | | 506,535 | | | 505,809 |
Finance leases | | Non-current finance lease liabilities | | | 646,900 | | | 653,050 |
Total lease liabilities—non-current | | | | | 1,153,435 | | | 1,158,859 |
Total lease liabilities | | | | $ | 1,254,719 | | $ | 1,256,250 |
(1) | Includes capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement. |
(2) | Recorded net of accumulated amortization of $250 million and $224 million as of July 29, 2023 and January 28, 2023, respectively. |
(3) | Includes $38 million and $39 million as of July 29, 2023 and January 28, 2023, respectively, related to an RH Design Gallery lease with a landlord that is an affiliate of the managing member of the Aspen LLCs (refer to Note 5—Variable Interest Entities). |
(4) | Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months. |
20 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
The maturities of lease liabilities are as follows as of July 29, 2023:
| | | | | | | | | | | |
| | | | OPERATING | | FINANCE | | | |||
FISCAL YEAR | | |
| LEASES |
| LEASES |
| TOTAL | |||
| | | | (in thousands) | |||||||
Remainder of fiscal 2023 | | | | $ | 53,884 | | $ | 25,051 | | $ | 78,935 |
2024 | | | | | 103,187 | | | 50,233 | | | 153,420 |
2025 | | | | | 97,724 | | | 51,649 | | | 149,373 |
2026 | | | | | 93,329 | | | 52,416 | | | 145,745 |
2027 | | | | | 88,494 | | | 53,556 | | | 142,050 |
2028 | | | | | 57,494 | | | 52,674 | | | 110,168 |
Thereafter | | | | | 211,792 | | | 914,392 | | | 1,126,184 |
Total lease payments(1)(2) | | | | | 705,904 | | | 1,199,971 | | | 1,905,875 |
Less—imputed interest(3) | | | | | (115,880) | | | (535,276) | | | (651,156) |
Present value of lease liabilities | | | | $ | 590,024 | | $ | 664,695 | | $ | 1,254,719 |
(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 $792 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of July 29, 2023, of which $16 million, $43 million, $49 million, $50 million, $50 million and $47 million will be paid in the remainder of fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026, fiscal 2027 and fiscal 2028, respectively, and $537 million will be paid subsequent to fiscal 2028. |
(2) | Excludes an immaterial amount of future commitments under short-term lease agreements. |
(3) | Calculated using the discount rate for each lease at lease commencement. |
Supplemental information related to leases consists of the following:
| | | | | | | | |
| | | SIX MONTHS ENDED | | ||||
| | | JULY 29, | | JULY 30, | | ||
| | | 2023 | | 2022 | | ||
Weighted-average remaining lease term (years) | | | | | | | | |
Operating leases | | | | 8.1 | | | 8.7 | |
Finance leases | | | | 21.5 | | | 22.3 | |
Weighted-average discount rate | | | | | | | | |
Operating leases | | | | 4.31% | | | 4.00% | |
Finance leases | | | | 5.33% | | | 5.32% | |
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 21 |
Other information related to leases consists of the following:
| | | | | | | |
| | | SIX MONTHS ENDED | ||||
| | | JULY 29, | | JULY 30, | ||
| | | 2023 | | 2022 | ||
| | | (in thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | |
Operating cash flows from operating leases | | | $ | (53,745) | | $ | (50,838) |
Operating cash flows from finance leases | | | | (17,280) | | | (14,962) |
Financing cash flows from finance leases—net(1) | | | | (5,454) | | | (3,132) |
Total cash outflows from leases | | | $ | (76,479) | | $ | (68,932) |
Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash) | | | | | | | |
Operating leases | | | $ | 45,219 | | $ | 27,538 |
Finance leases | | | | 750 | | | 108,547 |
(1) | Represents the principal portion of lease payments, partially offset by tenant allowances received subsequent to lease commencement of $2.4 million and $4.2 million for the six months ended July 29, 2023 and July 30, 2022, respectively. |
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, which is equivalentthe “Convertible Senior Notes” or the “Notes”). The outstanding balances under the 2023 Notes and 2024 Notes were as follows:
| | | | | | | | | | | | | | | | | | | |
| | JULY 29, | | | JANUARY 28, | ||||||||||||||
| | 2023 | | | 2023 | ||||||||||||||
| | | | UNAMORTIZED | | | | | | | | UNAMORTIZED | | | |||||
| | | | DEBT | | NET | | | | | DEBT | | NET | ||||||
| | PRINCIPAL | | ISSUANCE | | CARRYING | | | PRINCIPAL | | ISSUANCE | | CARRYING | ||||||
| | AMOUNT |
| COST |
| AMOUNT |
| | AMOUNT |
| COST | | AMOUNT | ||||||
| | (in thousands) | |||||||||||||||||
Convertible senior notes due 2023(1) | | $ | — | | $ | — | | $ | — | | $ | 1,696 | | $ | — | | $ | 1,696 | |
Convertible senior notes due 2024(2) | | | 41,904 | | | (125) | | | 41,779 | | | 41,904 | | | (180) | | | 41,724 | |
Total convertible senior notes | | $ | 41,904 | | $ | (125) | | $ | 41,779 | | $ | 43,600 | | $ | (180) | | $ | 43,420 | |
(1) | As of January 28, 2023, the 2023 Notes outstanding were classified as convertible senior notes due 2023 within current liabilities. The 2023 Notes matured and were repaid June 2023 and, as of July 29, 2023, the 2023 Notes are no longer outstanding. |
(2) | As of both July 29, 2023 and January 28, 2023, the 2024 Notes outstanding were classified as convertible senior notes due 2024—net within non-current liabilities. |
22 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
2023 Notes and 2024 Notes—Bond Hedge and Warrant Terminations and Notes Repurchase
Bond Hedge and Warrant Terminations
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 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, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that electssettlement feature based on pricing formulations linked to convert its 2020 Notesthe trading price of our 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 accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $4.2 million, which is classified within other (income) expense—net on the 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 warrants.
During the three months ended April 30, 2022, we entered into agreements with the Counterparties to terminate all of the 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) expense—net on 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.
Notes Repurchase
During the first quarter of fiscal 2022, we entered into individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 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 $1.0 million. Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $314 million was paid in cash 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 upon settlement 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) expense—net on the condensed consolidated statements of income.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 23 |
During the second quarter of fiscal 2022, we entered into additional individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $18 million and $39 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Additional Notes Repurchase”). The Additional Notes Repurchase provided for an estimated settlement cost of $80 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 one day volatility weighted-average price measurement period occurring in July 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 $57 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $80 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 $55 million, with the remaining $25 million classified as debt and recognized at its amortized cost basis. Accordingly, we recognized a loss on extinguishment of debt of $23 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $0.3 million. Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $82 million was paid in cash to the holders, representing the combined carrying value of the debt liability of $25 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $57 million. Accordingly, we recognized a loss on the fair value adjustment of the bifurcated embedded equity derivative of $1.5 million, which is classified within other (income) expense—net on the condensed consolidated statements of income.
$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 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 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 March 31, 2022. However, this condition was not met for the calendar quarter ended June 30, 2022 through the calendar quarter ended June 30, 2023, and as a result, the 20202024 Notes arewere not convertible as of October 28, 2017.June 30, 2023. 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, uponsix months ended July 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,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 six months ended July 30, 2022, we paid $3.6 million in cash onand delivered 9,760 shares of common stock to settle the early conversion are required to be separately accounted for as liability and equity componentsof these 2024 Notes. We also received 9,760 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 2020 Notes, the Company separated the 2020 Notes into2024 Notes.
The remaining 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 20202024 Notes the Company allocated the total amount incurred to the liability and equity components basedis classified as anon-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 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 theour condensed consolidated balance sheets. Duringsheets since the three months ended October 28, 2017 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 valuessettlement of the 2020outstanding 2024 Notes excluding the discounts upon original issuancewill be made, at our election, in cash, shares of our common stock, or a combination of cash and third party offering costs, are as follows (in thousands):shares of our common stock.
|
| 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
$335 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 million shares of common stock (which cap may also be subject to adjustment). The Company 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
14
the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 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 recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
The Company 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, 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 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 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 were eligible to convert their 2023 Notes are not convertible as of October 28, 2017.through March 15, 2023. On and after March 15, 2019,2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders maywere able to convert all or a portion of their 20192023 Notes at any time, regardless of the foregoing circumstances. Upon conversion,
During the 2019 Notes will be settled, at the Company’s election,six months ended July 30, 2022, holders of $9.4 million in cash, sharesaggregate principal amount of the Company’s common stock, or a2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash and shares of the Company’s 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 of $1,000.
The Company 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 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 six months ended July 30, 2022, we paid $9.4 million in cash onand delivered 27,214 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, and therefore, on a net basis issued six shares of our common stock in respect to such settlement of the converted 2023 Notes.
In June 2023, upon the maturity of the 2023 Notes, the Company 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 excess of theremaining $1.7 million in aggregate principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate2023 Notes settled for $1.7 million in cash. During the six months ended July 29, 2023, we issued in aggregate 1,931 shares of 4.51% over the expected lifecommon stock upon settlement of the 20192023 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 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. During both the three months ended October 28, 2017 and October 29, 2016, the Company recorded $0.2 million related to the amortization 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.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:
| | | | | | | | | | | | | | | | | | | | |
| | JULY 29, | | JANUARY 28, | ||||||||||||||||
| | 2023 | | 2023 | ||||||||||||||||
| | | | | | UNAMORTIZED | | | | | | UNAMORTIZED | | | ||||||
| | | | | | | DEBT | | NET | | | | | DEBT | | NET | ||||
| | INTEREST | | OUTSTANDING | | ISSUANCE | | CARRYING | | OUTSTANDING | | ISSUANCE | | CARRYING | ||||||
| | RATE(1) |
| AMOUNT |
| COSTS |
| AMOUNT |
| AMOUNT |
| COSTS |
| AMOUNT | ||||||
| | (dollars in thousands) | ||||||||||||||||||
Asset based credit facility(2) | | 6.67% | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Term loan B(3) | | 7.69% | | | 1,965,000 | | | (16,820) | | | 1,948,180 | | | 1,975,000 | | | (18,471) | | | 1,956,529 |
Term loan B-2(4) | | 8.45% | | | 496,250 | | | (22,316) | | | 473,934 | | | 498,750 | | | (24,505) | | | 474,245 |
Equipment promissory notes(5) |
| — | | | — | | | — | | | — |
| | 1,160 |
| | — |
| | 1,160 |
Total credit facilities | | | | $ | 2,461,250 | | $ | (39,136) | | $ | 2,422,114 | | $ | 2,474,910 | | $ | (42,976) | | $ | 2,431,934 |
|
| 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) | Deferred financing fees associated with the asset based credit facility as of July 29, 2023 and January 28, 2023 were $3.0 million and $3.5 million, respectively, and are included in |
(3) | Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $1,945 million and $1,955 million were included in term loan—net on the condensed consolidated balance sheets as of July 29, 2023 and January 28, 2023, respectively, and $20 million was included in other current liabilities on the condensed consolidated balance sheets as of both July 29, 2023 and January 28, 2023. |
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 25 |
The Company recorded interest expense
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.
(4) | Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $491 million and $494 million were included in term loan B-2—net on the condensed consolidated balance sheets as of July 29, 2023 and January 28, 2023, respectively, and $5.0 million was included in other current liabilities on the condensed consolidated balance sheets as of both July 29, 2023 and January 28, 2023. |
(5) | Represents total equipment security notes secured by certain of our property and equipment, which were included in other current liabilities on the condensed consolidated balance sheets as of January 28, 2023. The equipment security note was repaid in full in April 2023. |
Asset Based Credit Facility & LILO Term Loan
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.
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 that 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 was amended in December 2022 to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”).
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.As
26 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
The ABL Credit Agreement does not contain any significant financial ratio covenants of the credit agreement.
As of October 28, 2017, the Company had $341.0 million in outstanding borrowings and $189.0 million of availability under the revolving line of credit, net of $27.7 million in outstanding letters of credit. As of October 28, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated fixed-chargeor coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and thecovenants other affiliated parties under the revolving line of credit is approximately $125.2 million as of October 28, 2017.
Second Lien Credit Agreement
On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agent with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”). The second lien term loan of $100.0 million was repaid in full on October 10, 2017. As a result of the repayment, the Company incurred a $4.9 million loss on extinguishment of debt, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.
The Company incurred $3.6 million of debt issuance costs related to the second lien credit agreement.
The second lien term loan bore interest at an annual rate generally based on LIBOR plus 8.25%. This rate was a floating rate that reset periodically based upon changes in LIBOR rates during the life of the second lien term loan. At the date of borrowing, the rate was set at one month LIBOR plus 8.25%.
17
All obligations under the second lien term loan were secured by a second lien security interest in assets of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest was granted with respect to substantially the same collateral that secures the credit agreement. The second lien ranked junior in priority and is subordinated to the first lien in favor of the lenders with respect to the credit agreement.
The second lien credit agreement contained various restrictive and affirmative covenants generally in line with the covenants and restrictions contained in the credit agreement including required financial reporting, limitations on the ability to incur liens, make loans or other investments, incur additional debt, make certain restricted payments, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.
The second lien credit agreement also contained a 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 containedthan a consolidated fixed charge coverage ratio generally(“FCCR”) covenant based on the same formulation set forthratio 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 creditABL 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 July 29, 2023, RHI was in compliance with the FCCR Covenant.
The ABL Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement such thatwhile (i) an event of default exists or (ii) when the borrower may not make certain “restricted payments” inunused availability under the event that certain ratios were not metABL Credit Agreement drops below the greater of (A) $40 million and contained certain(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 default and other customary terms and conditions for an asset based credit 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 second lienborrowing 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 a result, actual borrowing availability under the revolving line of credit agreement.could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). As of July 29, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $454 million, net of $27 million in outstanding letters of credit.
IntercreditorTerm Loan Credit Agreement
On July 7, 2017, in connection with the second lien credit agreement, Restoration Hardware, Inc.October 20, 2021, RHI entered into an intercreditor agreementa Term Loan Credit Agreement (the “intercreditor agreement”“Term Loan Credit Agreement”) withby and among RHI as the borrower, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan B”) in an aggregate principal amount equal to $2,000 million with a maturity date of October 20, 2028.
Through the second quarter of fiscal 2023, the Term Loan B bore interest at an annual rate based on LIBOR subject to a 0.50% LIBOR floor plus an interest rate margin of 2.50% (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating). LIBOR was a floating interest rate that reset periodically during the life of the Term Loan B. At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50% plus 2.50% and the Term Loan B was issued at a discount of 0.50% to face value. As of June 30, 2023, LIBOR is no longer a referenced rate and Term Loan Credit Agreement has transitioned from LIBOR to SOFR. Beginning in August 2023, the Term Loan B bears interest at an annual rate based on SOFR subject to a 0.50% SOFR floor plus an interest rate margin of 2.50% plus a credit spread adjustment.
On May 13, 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 “Term Loan B-2”) in an aggregate principal amount equal to $500 million with a maturity date of October 20, 2028. The Term Loan B-2 constitutes a separate class from the Term Loan B under the Term Loan Credit Agreement.
The Term Loan B-2 bears interest at an annual rate based on the SOFR subject to a 0.50% SOFR floor plus an interest rate margin of 3.25% plus a credit agreementspread adjustment of 0.10%. Other than the terms relating to the Term Loan B-2, 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 | 2023 SECOND QUARTER FORM 10-Q | 27 |
All obligations under the Term Loan B are guaranteed by certain domestic subsidiaries of RHI. Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan B. Substantially all of the collateral securing the Term Loan B also secures the loans and other credit extensions under the ABL Credit Agreement. On October 20, 2021, in connection with the Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the administrative agentABL Credit Agreement, as the case may be, entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the Term 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 default and other customary terms and conditions for a term loan on October 10, 2017.credit agreement.
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, restricted cash, 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 and carrying value of the 20192023 Notes, the 2024 Notes, the Term Loan Credit Agreement and 2020 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity)real estate loans were as follows (in thousands):follows:
| | | | | | | | | | | | |
| | JULY 29, | | JANUARY 28, | ||||||||
| | 2023 | | 2023 | ||||||||
|
| |
| PRINCIPAL |
| |
| PRINCIPAL | ||||
| | FAIR | | CARRYING | | FAIR | | CARRYING | ||||
| | VALUE | | VALUE(1) | | VALUE | | VALUE(1) | ||||
| | (in thousands) | ||||||||||
Convertible senior notes due 2023 | | $ | — | | $ | — | | $ | 1,622 | | $ | 1,696 |
Convertible senior notes due 2024 | |
| 38,178 | | | 41,904 | |
| 37,351 | |
| 41,904 |
Term loan B | | | 1,939,895 | | | 1,965,000 | | | 1,961,056 | | | 1,975,000 |
Term loan B-2 | |
| 505,871 | | | 496,250 | |
| 500,215 | |
| 498,750 |
Real estate loans | | | 17,361 | | | 17,902 | | | 17,909 | | | 17,909 |
(1) | The principal carrying value of the 2023 Notes and 2024 Notes excludes the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third-party offering costs, as applicable. The principal carrying values of the Term Loan B and Term Loan B-2 represent the outstanding amount under each class and exclude discounts upon original issuance and third-party offering costs. |
|
| 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 |
|
28 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
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 ours (Level 2). The fair values of the Company (levelTerm Loan B, Term Loan B-2 and real estate loans were derived from discounted cash flows using risk-adjusted rates (Level 2).
The estimated fair value of the asset 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 variable and resets frequently.
The estimated fair value of the LILO term loan is $80.0 million, which approximates cost, as of October 28, 2017. Fair value approximates cost as the interest rate associated with the facility is variable and resets frequently.
NOTE 12—INCOME TAXES
The Company recordedOur income tax expense of $6.2 million(benefit) and $1.8 million in the three months ended October 28, 2017 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, respectively. The effective tax rates were as follows:
| | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | | JULY 29, |
| JULY 30, | | JULY 29, |
| JULY 30, | ||||
|
|
| 2023 |
| 2022 | | 2023 |
| 2022 | ||||
| | | (dollars in thousands) | ||||||||||
Income tax expense (benefit) | | | $ | 27,245 | | $ | 56,397 |
| $ | 43,830 | | $ | (107,029) |
Effective tax rate | | | | 26.3% | | | 31.6% | | | 27.0% | | | (49.6)% |
The decrease in our effective tax rate was 32.1% and 41.4% for the three months ended October 28, 2017 and OctoberJuly 29, 2016, respectively. The effective tax rate was 83.7% and 38.9% for2023 compared to the ninethree 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 byJuly 30, 2022 is primarily attributable to net excess tax benefits from stock-based compensation and amounts related to the extinguishment of $1.9 million and $4.3 million, respectively, resulting from the Company’s adoption of ASU 2016-09debt in the first quarter of fiscal 2017.three months ended July 30, 2022. The increase in our effective tax rate for the ninesix months ended October 28, 2017 was alsoJuly 29, 2023 compared to the six months ended July 30, 2022, is primarily attributable to significantly impacted by non-deductiblelower net excess tax benefits from stock-based compensation.compensation in fiscal 2023 as compared to fiscal 2022.
As of October 28, 2017 and January 28, 2017, $6.8July 29, 2023, we had $8.4 million and $1.4 million, respectively, of the exposures related to unrecognized tax benefits, of which $7.6 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 anyJuly 29, 2023, we had $5.5 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 for net income (loss) per share is presented in the table below. As the Company was in a net loss position for the nine months ended October 29, 2016, the weighted-average shares outstanding for basic and diluted are the same.were as follows:
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | | JULY 30, | | JULY 29, | | JULY 30, | |||
|
| 2023 |
| | 2022 |
| 2023 |
| 2022 | |||
Weighted-average shares—basic | | | 20,960,329 | | | 24,475,373 | | | 21,503,090 | | | 23,541,955 |
Effect of dilutive stock-based awards |
| | 1,564,678 |
| | 2,252,480 |
| | 1,534,731 |
| | 3,310,044 |
Effect of dilutive convertible senior notes(1) |
| | 202,553 |
| | 207,061 |
| | 204,764 |
| | 519,501 |
Weighted-average shares—diluted |
| | 22,727,560 |
| | 26,934,914 |
| | 23,242,585 |
| | 27,371,500 |
(1) | The dilutive effect of the 2023 Notes and 2024 Notes is calculated under the if-converted method, which assumes share settlement of the entire convertible debt instrument. The 2023 Notes terminated in June 2023 and did not have an impact on our diluted share count post-termination. 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 were outstanding as of and after April 30, 2022. Accordingly, the warrants have no impact on our dilutive shares post-repurchase. Refer to Note 9—Convertible Senior Notes. |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 28, |
|
| October 29, |
|
| October 28, |
|
| October 29, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Weighted-average shares—basic |
|
| 21,221,848 |
|
|
| 40,730,059 |
|
|
| 29,076,556 |
|
|
| 40,653,091 |
|
Effect of dilutive stock-based awards |
|
| 2,313,769 |
|
|
| 196,391 |
|
|
| 1,516,826 |
|
|
| — |
|
Weighted-average shares—diluted |
|
| 23,535,617 |
|
|
| 40,926,450 |
|
|
| 30,593,382 |
|
|
| 40,653,091 |
|
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 29 |
The following number of options and restricted stock units, as well as shares issuable under convertible senior notes prior to extinguishment in fiscal 2022, were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||
|
| October 28, |
|
| October 29, |
|
| October 28, |
|
| October 29, |
| ||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
| | | | | | | | | ||||||||||||||||
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||||||||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||
Options |
|
| 2,222,103 |
|
|
| 7,995,703 |
|
|
| 3,701,484 |
|
|
| 8,594,487 |
| | 1,283,437 | | 1,079,767 | | 1,196,603 | | 1,083,158 |
Restricted stock units |
|
| 128,723 |
|
|
| 892,279 |
|
|
| 305,744 |
|
|
| 1,151,993 |
|
| 15,310 | | 19,468 |
| 16,002 |
| 19,510 |
Total anti-dilutive stock-based awards |
|
| 2,350,826 |
|
|
| 8,887,982 |
|
|
| 4,007,228 |
|
|
| 9,746,480 |
| ||||||||
Convertible senior notes | | — | | 207,309 | | — | | 463,235 |
20
NOTE 14—SHARE REPURCHASESREPURCHASE PROGRAM AND SHARE RETIREMENT
$700 Million Share Repurchase Program
On May 2, 2017, the Company’sIn 2018, our Board of Directors authorized a share repurchase program. On June 2, 2022, the Board of Directors authorized an additional $2,000 million for the purchase of shares of our outstanding common stock, increasing the total authorized size of the share repurchase program of up to $700$2,450 million (the “$700 Million“Share Repurchase Program”). Under
In the $700 Million Repurchase Program, the Companythree months ended July 30, 2022, we repurchased approximately 12.4 million1,000,000 shares of itsour common stock under the Share Repurchase Program at an average price of $56.60$254.72 per share, for an aggregate repurchase amount of approximately $700 million, during$255 million.
In the three months ended July 29, 2017. As2023, we repurchased 3,698,887 shares of our common stock under 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 repurchased approximately 7.8 million shares of its common stock at an average price of $38.24$325.65 per share, for an aggregate repurchase amount of approximately $300$1,205 million. In addition, we recorded $12 million of excise taxes related to the share repurchases during the three months ended July 29, 2023, which are recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets as of July 29, 2023.
As of July 29, 2023, $245 million remains available for future share repurchases under this program.
Share Retirement
In the three months ended July 30, 2022, we retired 1,000,000 shares of common stock related to shares we repurchased under the Share Repurchase Program. As a result of this retirement, we reclassified a total of $255 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of shareholders’ equity (deficit) as of and for the three and six months ended July 30, 2022.
In the three months ended July 29, 2023, we retired 3,698,887 shares of common stock related to shares we repurchased under the Share Repurchase Program. As a result of this retirement, we reclassified a total of $8.6 million and $1,208 million from treasury stock to additional paid-in capital and retained earnings (accumulated deficit), respectively, on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity (deficit) as of and for the three and six months ended July 29, 2023.
NOTE 15—STOCK-BASED COMPENSATION
We recorded stock-based compensation expense of $8.5 million and $11 million during the three months ended AprilJuly 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, 20172023 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,July 30, 2022, 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 Companyincome. We recorded stock-based compensation expense of $6.7$19 million and $7.4$24 million during the threesix months ended October 28, 2017July 29, 2023 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,July 30, 2022, respectively. No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.
30 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012. The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.
The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors. Aside from these options granted on November 1, 2012, no other awards were granted under the Option Plan.
On November 1, 2022, both the Stock Incentive Plan and Option Plan expired. Upon expiration of the Stock Incentive Plan, a total of 1,607,508 shares that were available for future issuance under the plan were cancelled and were no longer available for the grant of awards under the plan.
The RH 2023 Stock Incentive Plan (the “2023 Stock Incentive Plan”, together with the Stock Incentive Plan and Option Plan, “the Plans”) was approved by stockholders on April 4, 2023. The 2023 Stock Incentive Plan provides for the grant of incentive stock options to our employees and the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.
The maximum number of shares that may be issued pursuant to all awards under the 2023 Stock Incentive Plan is (i) 3,000,000, plus (ii) any shares of our common stock covered by any outstanding award (or portion of any such award) that has been granted under the 2012 Stock Incentive Plan (as defined below) if such award (or a portion of such award) is forfeited, is canceled or expires (whether voluntarily or involuntarily) without the issuance of shares of our common stock or if the shares underlying such award (or a portion of such award) that are surrendered or withheld in payment of the award’s exercise or purchase price or in satisfaction of tax withholding obligations with respect to an award would be deemed not to have been issued for purposes of determining the maximum number of shares of our common stock that may be issued under the 2023 Stock Incentive Plan had such award been an award granted under the 2023 Stock Incentive Plan. The 2023 Stock Incentive Plan has a ten-year term.
Awards under the 2023 Stock Incentive Plan reduce the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the 2023 Stock Incentive Plan increase the number of shares available for future issuance. Shares issued as a result of award exercises under the 2023 Stock Incentive Plan will be funded with the issuance of new shares.
As of October 28, 2017, 8,837,586July 29, 2023, 3,639,976 options granted under the Plans were outstanding with a weighted-average exercise price of $50.20$188.11 per share and 6,318,9803,339,622 options were vested or expected to vest with a weighted-average exercise price of $51.96$181.50 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 28, 2017July 29, 2023 was $323.7$750 million, $283.8$706 million and $220.6$580 million, respectively. Stock options exercisable as of October 28, 2017July 29, 2023 had a weighted-average remaining contractual life of 6.374.72 years. As of October 28, 2017,July 29, 2023, the total unrecognized compensation expense related to unvested options was $26.8$102 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.334.74 years. In addition, as of July 29, 2023, the total unrecognized compensation expense related to the fully vested option grant made to Mr. Friedman in October 2020 was $9.5 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 Company had 825,307July 29, 2023, 18,910 restricted stock units under the Plans were outstanding with a weighted-average grant date fair value of $52.20$439.49 per share. During the three months ended October 28, 2017, 18,590July 29, 2023, no restricted stock units vested. During the six months ended July 29, 2023, 1,250 restricted stock units vested with a weighted-average grant date and vest date fair value of $73.95$437.82 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,July 29, 2023, there was $22.5$6.6 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 3.263.67 years.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 31 |
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 Plan to purchase 322,784 sharesPlan. 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 of the Company’s common stock on 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$2.0 million 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$4.3 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”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of operations. 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 Rightswas recognized during the three or nine months ended October 28, 2017 or OctoberJuly 29, 2016. As of both October 28, 20172023 and January 28, 2017,July 30, 2022, respectively, and $5.6 million and $10 million was recognized during the liability associated with the Rollover Unitssix months ended July 29, 2023 and related Appreciation Rights was $1.5 million, whichJuly 30, 2022, respectively (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 measurementsstock-based compensation expense recorded 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 ninesix months ended October 28, 2017, the Company recorded $0.1 millionJuly 29, 2023 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.July 30, 2022 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 no material off balance sheet commitments as of October 28, 2017.July 29, 2023.
Contingencies
The Company is involvedWe are subject to contingencies, including in connection with lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of itsour business. These disputes are increasing in number as we expand our business and provide new product and service offerings, such as restaurants and hospitality, and as we enter new markets and legal jurisdictions and face increased complexity related to compliance and regulatory requirements. In addition, we are subject to governmental and regulatory examinations, information requests, and investigations from time to time at the business expandsstate and federal levels.
Certain legal proceedings that we currently face involve various class-action allegations, including cases related to our employment practices, the Company grows larger. Litigation is inherently unpredictable. As a result,application of state wage-and-hour laws and other causes of action. We have faced similar litigation in the past, including class action cases. Due to the inherent difficulty of predicting the course of legal actions related to complex legal matters, including class-action allegations, such as the eventual scope, duration or outcome, we may be unable to estimate the amount or range of matters in which the Company is involvedany potential loss that could result from an unfavorable outcome arising from such matters. Our assessment of these legal proceedings, as well as other lawsuits, could change based upon the discovery of facts that are not presently known or developments during the course of the litigation. We have settled certain class action cases but continue to defend a variety of legal actions and our estimates of our exposure in unexpected expenses and liability that could adversely affectsuch cases may evolve over time. Accordingly, the Company’s operations. In addition, any claims against the Company, whether meritoriousultimate costs to resolve litigation, including class action cases, may be substantially higher or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.lower than our estimates.
The Company reviewsWith respect to such contingencies, we 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,Loss contingencies determined to be probable and estimable are recorded inaccounts payable and accrued expenses on the condensed consolidated balance sheets (refer to Note 6—Accounts Payable, Accrued Expenses and Other Current Liabilities). These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to each matter. In view of the inherent difficulty of predicting the outcome of thosecertain matters, particularly in cases in which claimants seek substantial or indeterminate damages, it ismay not be 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 itsthe condensed consolidated financial statements.statements, the outcome of legal matters is subject to inherent uncertainty.
RH Modern Securities Class Action
On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaintAlthough we are self-insured or maintain deductibles in the United States District Court, Northern District of California, againstfor workers’ compensation, general liability and product liability up to predetermined amounts, above which third-party insurance applies, depending on the Company, Gary Friedman,facts 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)circumstances of the Securities Exchange Actunderlying claims, coverage under our insurance policies may not be available. Even if we believe coverage does apply under our insurance programs, our insurance carriers may dispute coverage based on the underlying facts and circumstances.
32 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
As 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. Whileresult, the outcome of any matters in which we are involved could result in unexpected expenses and liability that could adversely affect our operations. In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, is inherently uncertain,require significant amounts of our senior leadership team’s time, result in the Companydiversion of significant operational resources, and its officers intendrequire changes to vigorously defend theour business operations, policies and practices. Legal costs related to such claims and believe the complaints lack merit.are expensed as incurred.
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”chief operating decision maker (“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 three operating segments: RH Segment, Waterworks and Waterworks.Real Estate. 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 throughretail locations and outlets, including hospitality, websites, Sourcebooks, and the Company’s websites, sales through stores,Trade and sales through the commercial channelContract channels. The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 5—Variable Interest Entities).
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 to allocate resources. Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other (income) expense—net, income tax expense (benefit) and our share of equity method investments loss. Segment operating income excludes (i) legal settlements, (ii) severance costs associated with a reorganization, (iii) non-cash compensation chargesamortization related to a fully vestedan option grant made to Mr. Friedman 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,October 2020, (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 compensationemployer payroll tax expense related to unvested equity awards,an option exercise by Mr. Friedman, (v) asset impairments, (vi) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes), (vii) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, and (viii) costs incurred in connection with the acquisition of Waterworks including professional fees.product recalls. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that management reviews.the CODM and our senior leadership team review.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 33 |
The following table presents segment operating income and income before income taxes and equity method investments:
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (in thousands) | ||||||||||
Operating income: | | | | | | | | | | | | |
RH Segment | | $ | 153,369 | | $ | 237,512 | | $ | 257,090 | | $ | 466,057 |
Waterworks | |
| 7,995 | |
| 7,222 | |
| 14,666 | |
| 15,207 |
Total segment operating income | | | 161,364 | | | 244,734 | | | 271,756 | | | 481,264 |
Legal settlements | | | (8,000) | |
| — | | | (8,000) | |
| — |
Reorganization related costs | | | — | |
| — | | | (7,621) | |
| — |
Non-cash compensation | | | (2,024) | |
| (4,321) | | | (5,555) | |
| (10,179) |
Employer payroll taxes on option exercise | | | — | |
| — | | | — | |
| (11,717) |
Asset impairments | |
| — | |
| (2,231) | |
| — | |
| (8,154) |
Professional fees | |
| — | |
| (285) | |
| — | |
| (7,469) |
Compensation settlements | |
| — | |
| (3,483) | |
| — | |
| (3,483) |
Recall accrual | |
| — | |
| — | |
| — | |
| (560) |
Income from operations | |
| 151,340 | |
| 234,414 | |
| 250,580 | |
| 439,702 |
Interest expense—net | |
| 44,422 | |
| 26,264 | |
| 84,238 | |
| 47,119 |
Loss on extinguishment of debt | |
| — | |
| 23,462 | |
| — | |
| 169,578 |
Other (income) expense—net | | | (186) | |
| 3,195 | | | (839) | |
| 2,852 |
Income before income taxes and equity method investments | | $ | 107,104 | | $ | 181,493 | | $ | 167,181 | | $ | 220,153 |
The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting:
| | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||||||||||
| | JULY 29, | | JULY 30, | ||||||||||||||
| | 2023 | | 2022 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
|
| RH SEGMENT |
| WATERWORKS |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| TOTAL | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 753,550 | | $ | 46,929 | | $ | 800,479 | | $ | 940,182 | | $ | 51,438 | | $ | 991,620 |
Gross profit | |
| 354,425 | |
| 25,648 | |
| 380,073 | |
| 495,074 | |
| 28,144 | |
| 523,218 |
Depreciation and amortization | |
| 26,828 | | | 1,308 | |
| 28,136 | |
| 25,671 | |
| 1,299 | |
| 26,970 |
34 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
| | | | | | | | | | | | | | | | | | |
| | SIX MONTHS ENDED | ||||||||||||||||
| | JULY 29, | | JULY 30, | ||||||||||||||
| | 2023 | | 2022 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
|
| RH SEGMENT |
| WATERWORKS |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| TOTAL | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 1,444,066 | | $ | 95,575 | | $ | 1,539,641 | | $ | 1,849,130 | | $ | 99,782 | | $ | 1,948,912 |
Gross profit | |
| 676,009 | |
| 51,609 | |
| 727,618 | |
| 967,896 | |
| 53,905 | |
| 1,021,801 |
Depreciation and amortization | |
| 53,253 | | | 2,653 | |
| 55,906 | |
| 49,195 | | | 2,533 | |
| 51,728 |
In the three months ended July 29, 2023, and July 30, 2022, the Real Estate segment share of equity method investments loss were $3.4 million and $2.8 million, respectively, and were $5.0 million and $4.2 million in the six months ended July 29, 2023, and July 30, 2022, respectively. Our share of income from equity method investments for the Waterworks segment were immaterial for all fiscal periods presented.
The following table shows segment operating income (loss) and income (loss) before tax (in thousands)presents the balance sheet metrics as required under ASC 280—Segment Reporting:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | JULY 29, | | JANUARY 28, | ||||||||||||||||||||
| | 2023 | | 2023 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||
|
| RH SEGMENT |
| WATERWORKS |
| REAL ESTATE |
| TOTAL |
| RH SEGMENT |
| WATERWORKS |
| REAL ESTATE |
| TOTAL | ||||||||
| | (in thousands) | ||||||||||||||||||||||
Goodwill(1) | | $ | 141,053 | | $ | — | | $ | — | | $ | 141,053 | | $ | 141,048 | | $ | — | | $ | — | | $ | 141,048 |
Tradenames, trademarks and other intangible assets(2) | |
| 58,472 | |
| 17,000 | |
| — | |
| 75,472 | |
| 57,633 | |
| 17,000 | |
| — | |
| 74,633 |
Equity method investments | | | — | | | 773 | | | 129,437 | | | 130,211 | | | — | | | 623 | | | 100,845 | | | 101,468 |
Total assets | |
| 3,818,843 | |
| 227,683 | |
| 166,305 | |
| 4,212,831 | |
| 4,953,610 | |
| 217,228 | |
| 138,451 | |
| 5,309,289 |
(1) | The Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. |
(2) | The Waterworks reporting unit tradename is presented net of an impairment charge of $35 million recognized in prior fiscal years. |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 28, |
|
| October 29, |
|
| October 28, |
|
| October 29, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RH Segment |
| $ | 48,724 |
|
| $ | 18,660 |
|
| $ | 98,332 |
|
| $ | 51,687 |
|
Waterworks |
|
| (719 | ) |
|
| (514 | ) |
|
| (2,143 | ) |
|
| 344 |
|
Non-cash compensation |
|
| — |
|
|
| — |
|
|
| (23,872 | ) |
|
| (3,672 | ) |
Recall accrual |
|
| (3,552 | ) |
|
| — |
|
|
| (8,285 | ) |
|
| — |
|
Impact of inventory step-up |
|
| (248 | ) |
|
| (1,786 | ) |
|
| (2,108 | ) |
|
| (5,187 | ) |
Distribution center closures |
|
| (1,862 | ) |
|
| — |
|
|
| (1,862 | ) |
|
| — |
|
Gain on sale of building and land |
|
| 819 |
|
|
| — |
|
|
| 2,119 |
|
|
| — |
|
Legal claim |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,701 | ) |
Reorganization related costs |
|
| — |
|
|
| (974 | ) |
|
| — |
|
|
| (5,698 | ) |
Acquisition related costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,847 | ) |
Operating income |
|
| 43,162 |
|
|
| 15,386 |
|
|
| 62,181 |
|
|
| 25,926 |
|
Interest expense—net |
|
| 18,915 |
|
|
| 11,091 |
|
|
| 45,496 |
|
|
| 32,528 |
|
Loss on extinguishment of debt |
|
| 4,880 |
|
|
| — |
|
|
| 4,880 |
|
|
| — |
|
Income (loss) before tax |
| $ | 19,367 |
|
| $ | 4,295 |
|
| $ | 11,805 |
|
| $ | (6,602 | ) |
The Company classifies itsWe 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.cor, as well as our hospitality operations. Net revenues in each category were as follows (in thousands):follows:
| | | | | | | | | | | | | ||||||||||||||||
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||||||||||||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||||||||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||||||
|
| 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 |
| | $ | 560,602 | | $ | 699,720 | | $ | 1,056,993 | | $ | 1,362,240 |
Non-furniture |
|
| 209,192 |
|
|
| 205,382 |
|
|
| 644,659 |
|
|
| 562,526 |
| |
| 239,877 | |
| 291,900 | |
| 482,648 | |
| 586,672 |
Total net revenues |
| $ | 592,473 |
|
| $ | 549,328 |
|
| $ | 1,769,879 |
|
| $ | 1,548,165 |
| | $ | 800,479 | | $ | 991,620 | | $ | 1,539,641 | | $ | 1,948,912 |
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 operates 4July 29, 2023, we operated four retail locations and 2 outlet storestwo outlets in Canada, and 1two retail storelocations 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.
No 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, 2017 or October 29, 2016.any fiscal period presented.
NOTE 19—SUBSEQUENT EVENT
Distribution Center Closures
During the third quarter
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 35 |
26
ITEM 2. ItemManagement’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 20162022 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 2022 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 2022 Form 10-K.
The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended July 29, 2023 and a comparison to the three and six months ended July 30, 2022. The discussion related to cash flows for the six months ended July 30, 2022 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/A for the quarter ended July 30, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2023.
MD&A is a supplement to our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A is organized as follows:
Overview. This section provides a general description of our business, including our key value-driving strategies and an overview of certain known trends and uncertainties.
Basis of Presentation and Results of Operations. This section provides our condensed consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current period as compared to the prior year’s comparative period, as well as non-GAAP measures we use for financial and operational decision-making and as a means to evaluate period-to-period comparisons.
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 condensed consolidated financial statements.
36 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
SPECIAL NOTE REGARDING 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 mattersresults. Matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may, in fact, not be short term and may recur in one or more future financial reporting periods. 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, or that future developments affecting us will be those that we have anticipated. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factorsare disclosed under the sectionssection entitled Risk Factors in Part II of this quarterly report, in our Annual Report on2022 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, in our Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2023 (the “First Quarter Form 10-Q”) and in our 20162022 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 retailer and luxury retailerlifestyle brand operating primarily in the home furnishings marketplace.market. Our curated and fully-integratedfully integrated assortments are presented consistently across our sales channels, in sophisticatedincluding our retail locations, websites and unique lifestyle settings that we believe are on par with world-class interior designers.Sourcebooks. We offer dominant merchandise assortments across a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and baby, child and teen furnishings. Our retail business is fully integrated across our multiple channels of distribution. We position our Galleries as showrooms for our brand, while our Source Bookswebsites and websitesSourcebooks act as virtual and print extensions of our stores.
Our business is fully integrated acrossphysical spaces, respectively. We operate our multiple channels of distribution, consisting of our stores, Source Books and websites. As of October 28, 2017, we operated a total of 84 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 the United Kingdom, and have an integrated RH Hospitality experience in 15 Waterworks showroomsof our Design Gallery locations, which includes Restaurants and Wine Bars.
We opened the RH Guesthouse in New York in September 2022, a first-of-its-kind hospitality experience for travelers seeking privacy and luxury. The property features six guest rooms, three guest suites and a private residence, as well as The Dining Room & Terrace.
In June 2023, we opened RH England, The Gallery at the Historic Aynho Park, a 400-year-old landmark estate representing the most inspiring and immersive physical expression of the brand to date. RH England marks the beginning of our global expansion beyond North America and our continued foray into hospitality with two primary restaurants: The Orangery, a live fire concept; and The Loggia, an outdoor venue featuring wood-fired pizzas. The Gallery also includes a Wine Lounge and Tea Salon, as well as a Juicery. Spanning 73 acres and over 60 rooms, RH England seamlessly integrates luxury home furnishings collections from RH Interiors, Contemporary, Modern and Outdoor.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 37 |
We have recently undertaken substantial efforts to introduce the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby & Child and TEEN. These new collections reflect a level of design and quality inaccessible in our current market, and a value proposition that will be disruptive across multiple markets. Over the next several quarters we will be increasing our investment in Sourcebooks in connection with the introduction of these new products.
As of July 29, 2023, we operated the following number of locations:
| | |
| | COUNT |
RH | | |
Design Galleries | | 28 |
Legacy Galleries | | 36 |
Modern Gallery | | 1 |
Baby & Child and TEEN Galleries | | 3 |
Total Galleries | | 68 |
Outlets | | 40 |
Guesthouse | | 1 |
Waterworks Showrooms | | 14 |
Business Conditions
There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, substantially higher interest and mortgage rates, and unpredictability in the United States and 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 additionglobal financial markets related to the foregoing as well as, among other numerous initiatives we are undertaking to improvethings, the recent failures of several financial institutions. We experienced increased demand for our businessproducts during the pandemic and financial performancethere have been significant shifts in fiscal 2017consumer consumption patterns with the easing of the pandemic, including increases in travel and beyond. If these initiatives are successful, we may return to rates of growth in revenuesservices rather than spending on home furnishings. These 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 thatmacroeconomic factors may have a negative impactnumber of adverse effects on growthmacroeconomic conditions and profitability. For further information on the temporal factors affecting our results and our initiatives, see Item 2—Management’s Discussion and Analysis 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 pursue and test numerous initiatives to improve many aspects of 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 initiatives with respect to our business in any given period may result in period-to-period changes in, and increased fluctuation 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 waymarkets in which we operate, including the housing market, with the potential for an economic recession and a sustained downturn in the housing market. Factors such as a slowdown in the housing market or negative trends in stock market prices could have an adverse impact on demand for our products. We believe that these macroeconomic and other factors have contributed to the slowdown in demand that we have experienced in our business such as charges relatedover the last several fiscal quarters.
Our decisions regarding the sources and uses of capital will continue to closure of distribution centers. The above factorsreflect and other currentadapt to changes in market conditions and future operational initiatives of the Company may create additional uncertaintyour business, including further developments with respect to macroeconomic factors.
We also face uncertainties related to the large number of new business initiatives that we are undertaking at the same time, including efforts to grow our consolidated net revenuesbusiness through (i) international expansion, (ii) developing innovative new Gallery designs and profit in the near term.
Acquisitionlocations for our business, (iii) pursuing new areas 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 cashoperations including real estate development 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.,real estate joint ventures, as well as through its boutique retail partners, hospitality divisionthe expansion of RH Hospitality, and online.(iv) substantial enhancement of our merchandise assortment and improvements to the quality of our products and services as we seek to climb the luxury mountain.
For more information, refer to the section entitled “Risk Factors” in our 2022 Form 10-K.
Key Value DrivingValue-Driving Strategies
In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following long-term key strategies:strategies and business initiatives:
38 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
Transform Our Real Estate Platform.Table of Contents
Product Elevation. We believe we have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve industry-leading revenues and margins. Our customers know our brand concepts as RH Interiors, RH Modern, RH Contemporary, RH Outdoor, RH Beach House, RH Ski House, RH Baby & Child, RH TEEN and Waterworks. Our strategy is to continue to elevate the design and quality of our product. Over the next year we will be introducing a large number of new products as we have continued our efforts to enhance our merchandise assortment. In addition, over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color.
Gallery Transformation. Our product is elevated and rendered more valuable by our architecturally inspiring Galleries. We believe our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion. 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 are 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 hospitality drives incremental sales of home furnishings in these Galleries.
Brand Elevation. We are evolving the Waterworks business;
28
|
|
exploringRH 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. We entered this industry with the opening of the RH Guesthouse in New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen. 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 comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Launched in the spring of 2022, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand 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.more valuable. We have the opportunityexpect to continue to improve our operating margins by leveraging our fixed occupancy, advertisingelevate the customer experience on The World of RH with further enhancements to content, navigation 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.search functionality. 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 with a substantial opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues. Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, and brand of RH. As such, we 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, which began 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, in June 2023. We have secured a number of locations in various markets in the U.K. and continental Europe for future Design Galleries and are currently in lease or purchase negotiations for additional locations.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 39 |
Basis of Presentation and Results of Operations
The following table sets forth our condensed consolidated statements of operationsincome:
| | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| ||||||||||||||
| | JULY 29, | % OF NET | JULY 30, | % OF NET | | JULY 29, | % OF NET | JULY 30, | % OF NET | | ||||||||
| | 2023 | REVENUES | 2022 | REVENUES | | 2023 | REVENUES | 2022 | REVENUES | | ||||||||
| | (dollars in thousands) |
| ||||||||||||||||
Net revenues | | $ | 800,479 | 100.0 | % | $ | 991,620 | 100.0 | % | | $ | 1,539,641 | 100.0 | % | $ | 1,948,912 | 100.0 | % | |
Cost of goods sold | |
| 420,406 | 52.5 | |
| 468,402 | 47.2 | | |
| 812,023 | 52.7 | |
| 927,111 | 47.6 | | |
Gross profit | |
| 380,073 | 47.5 | |
| 523,218 | 52.8 | | |
| 727,618 | 47.3 | |
| 1,021,801 | 52.4 | | |
Selling, general and administrative expenses | |
| 228,733 | 28.6 | |
| 288,804 | 29.2 | | |
| 477,038 | 31.0 | |
| 582,099 | 29.8 | | |
Income from operations | |
| 151,340 | 18.9 | |
| 234,414 | 23.6 | | |
| 250,580 | 16.3 | |
| 439,702 | 22.6 | | |
Other expenses | |
| | | |
| | | | |
|
| | |
|
| | | |
Interest expense—net | |
| 44,422 | 5.5 | |
| 26,264 | 2.6 | | |
| 84,238 | 5.5 | |
| 47,119 | 2.5 | | |
Loss on extinguishment of debt | |
| — | — | |
| 23,462 | 2.4 | | |
| — | — | |
| 169,578 | 8.7 | | |
Other (income) expense—net | | | (186) | — | | | 3,195 | 0.3 | | | | (839) | (0.1) | | | 2,852 | 0.1 | | |
Total other expenses | |
| 44,236 | 5.5 | |
| 52,921 | 5.3 | | |
| 83,399 | 5.4 | |
| 219,549 | 11.3 | | |
Income before income taxes and equity method investments | |
| 107,104 | 13.4 | |
| 181,493 | 18.3 | | |
| 167,181 | 10.9 | |
| 220,153 | 11.3 | | |
Income tax expense (benefit) | |
| 27,245 | 3.4 | |
| 56,397 | 5.7 | | |
| 43,830 | 2.9 | |
| (107,029) | (5.5) | | |
Income before equity method investments | | | 79,859 | 10.0 | | | 125,096 | 12.6 | | | | 123,351 | 8.0 | | | 327,182 | 16.8 | | |
Share of equity method investments loss | | | 3,382 | 0.4 | | | 2,821 | 0.3 | | | | 4,984 | 0.3 | | | 4,196 | 0.2 | | |
Net income | | $ | 76,477 | 9.6 | % | $ | 122,275 | 12.3 | % | | $ | 118,367 | 7.7 | % | $ | 322,986 | 16.6 | % | |
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures. We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and to adjust for the impact of income tax items related to such adjustments to our GAAP financial statements. 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.
40 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
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 | | SIX MONTHS ENDED | ||||||||
|
| JULY 29, |
| JULY 30, |
| JULY 29, |
| JULY 30, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 76,477 | | $ | 122,275 | | $ | 118,367 | | $ | 322,986 |
Interest expense—net(1) | |
| 44,422 | |
| 26,264 | |
| 84,238 | |
| 47,119 |
Loss on extinguishment of debt(1) | |
| — | |
| 23,462 | |
| — | |
| 169,578 |
Other (income) expense—net(1) | | | (186) | |
| 3,195 | | | (839) | |
| 2,852 |
Income tax expense (benefit)(1) | |
| 27,245 | |
| 56,397 | |
| 43,830 | |
| (107,029) |
Share of equity method investments loss(1) | | | 3,382 | | | 2,821 | | | 4,984 | | | 4,196 |
Operating income | |
| 151,340 | |
| 234,414 | |
| 250,580 | |
| 439,702 |
Legal settlements(2) | |
| 8,000 | |
| — | |
| 8,000 | |
| — |
Reorganization related costs(3) | |
| — | |
| — | |
| 7,621 | |
| — |
Non-cash compensation(4) | | | 2,024 | | | 4,321 | | | 5,555 | | | 10,179 |
Employer payroll taxes on option exercise(5) | | | — | | | — | | | — | | | 11,717 |
Asset impairments(6) | |
| — | |
| 2,231 | |
| — | |
| 8,154 |
Professional fees(7) | |
| — | |
| 285 | |
| — | |
| 7,469 |
Compensation settlements(8) | | | — | | | 3,483 | | | — | | | 3,483 |
Recall accrual(9) | |
| — | |
| — | |
| — | |
| 560 |
Adjusted operating income | | $ | 161,364 | | $ | 244,734 | | $ | 271,756 | | $ | 481,264 |
|
| 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 certain legal settlements associated with class action litigation matters. Refer to Note 16—Commitments and |
|
|
30
|
|
(3) | Represents severance costs and related payroll taxes associated with a |
(4) | Represents the amortization of |
|
| 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 asset impairments related to property and equipment of Galleries under construction. The three and six months ended July 30, 2022 includes lease impairment of $1.0 million due to the early exit of a leased facility. |
(7) | Represents professional fees contingent upon the completion of certain |
(8) | Represents compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary. |
(9) | Represents accruals associated with product recalls. |
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.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 41 |
Reconciliation of GAAP Net Income to Adjusted Net Income
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
|
| (in thousands) | ||||||||||
Net income | | $ | 76,477 | | $ | 122,275 | | $ | 118,367 | | $ | 322,986 |
Adjustments pre-tax: | |
|
| |
|
| |
|
| |
|
|
Legal settlements(1) | | | 8,000 | | | — | | | 8,000 | | | — |
Reorganization related costs(1) | |
| — | |
| — | | | 7,621 | | | — |
Non-cash compensation(1) | |
| 2,024 | |
| 4,321 | |
| 5,555 | |
| 10,179 |
Loss on extinguishment of debt(1) | |
| — | |
| 23,462 | |
| — | |
| 169,578 |
Employer payroll taxes on option exercise(1) | |
| — | |
| — | |
| — | |
| 11,717 |
Asset impairments(1) | | | — | | | 2,231 | | | — | | | 8,154 |
Professional fees(1) | |
| — | |
| 285 | |
| — | |
| 7,469 |
Compensation settlements(1) | | | — | | | 3,483 | | | — | | | 3,483 |
Recall accrual(1) | |
| — | |
| — | |
| — | |
| 560 |
(Gain) loss on derivative instruments—net(2) | | | — | | | 1,453 | | | — | | | (1,724) |
Subtotal adjusted items | |
| 10,024 | |
| 35,235 | |
| 21,176 | |
| 209,416 |
Impact of income tax items(3) | | | (1,203) | | | 3,732 | |
| (3,636) | |
| (191,194) |
Share of equity method investments loss(1) | |
| 3,382 | | | 2,821 | | | 4,984 | |
| 4,196 |
Adjusted net income | | $ | 88,680 | | $ | 164,063 | | $ | 140,891 | | $ | 345,404 |
(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 net (gain) loss on derivative instruments resulting from certain transactions related to the |
(3) | We exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that |
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 underlying operating performance.
|
|
| 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 |
|
Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA
| | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | | JULY 29, | | JULY 30, | | JULY 29, | | JULY 30, | ||||
|
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | | (in thousands) | ||||||||||
Net income | | | $ | 76,477 | | $ | 122,275 | | $ | 118,367 | | $ | 322,986 |
Depreciation and amortization | | |
| 28,136 | |
| 26,970 | |
| 55,906 | |
| 51,728 |
Interest expense—net | | |
| 44,422 | |
| 26,264 | |
| 84,238 | |
| 47,119 |
Income tax expense (benefit) | | |
| 27,245 | |
| 56,397 | |
| 43,830 | |
| (107,029) |
EBITDA | | |
| 176,280 | |
| 231,906 | |
| 302,341 | |
| 314,804 |
Non-cash compensation(1) | | |
| 8,538 | |
| 10,736 | |
| 18,718 | |
| 23,538 |
Legal settlements(2) | | | | 8,000 | | | — | | | 8,000 | | | — |
Reorganization related costs(2) | | | | — | | | — | | | 7,621 | | | — |
Share of equity method investments loss(2) | | |
| 3,382 | |
| 2,821 | |
| 4,984 | |
| 4,196 |
Capitalized cloud computing amortization(3) | | | | 1,923 | | | 1,699 | | | 3,772 | | | 3,053 |
Other (income) expense—net(2) | | | | (186) | | | 3,195 | | | (839) | | | 2,852 |
Loss on extinguishment of debt(2) | | | | — | | | 23,462 | | | — | | | 169,578 |
Employer payroll taxes on option exercise(2) | | | | — | | | — | | | — | | | 11,717 |
Asset impairments(2) | | |
| — | |
| 2,231 | |
| — | |
| 8,154 |
Professional fees(2) | | | | — | | | 285 | | | — | | | 7,469 |
Compensation settlements(2) | | | | — | | | 3,483 | | | — | | | 3,483 |
Recall accrual(2) | | |
| — | |
| — | |
| — | |
| 560 |
Adjusted EBITDA | | | $ | 197,937 | | $ | 279,818 | | $ | 344,597 | | $ | 549,404 |
| Represents |
|
|
|
|
|
|
|
|
|
|
(2) | Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information. |
(3) | Represents amortization associated with capitalized cloud computing costs. |
Adjusted Capital Expenditures. We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received.
Reconciliation of Adjusted Capital Expenditures
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED | ||||||||
| | JULY 29, |
| JULY 30, | | JULY 29, |
| JULY 30, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
|
| (in thousands) | ||||||||||
Capital expenditures | | $ | 47,406 | | $ | 33,194 | | $ | 81,596 | | $ | 62,558 |
Landlord assets under construction—net of tenant allowances | | | 4,376 | | | 20,312 | | | 13,959 | | | 32,460 |
Adjusted capital expenditures | | $ | 51,782 | | $ | 53,506 | | $ | 95,555 | | $ | 95,018 |
|
|
|
|
|
|
|
|
32
In addition, we also received landlord tenant allowances subsequent to lease commencement of $2.4 million and $4.2 million for the three and six months ended July 29, 2023 and July 30, 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows.
The following tables present retailtable presents RH Gallery metrics, which have been calculated based upon retail stores, which includes our RH Baby & Child, RH Modern Galleries and Waterworks Showrooms,Showroom metrics, and excludes outlet stores.Outlets:
| | | | | | | | | | |
| | SIX MONTHS ENDED | ||||||||
| | JULY 29, | | JULY 30, | ||||||
| | 2023 | | 2022 | ||||||
|
| |
| TOTAL LEASED |
| |
| TOTAL LEASED | ||
| | | | SELLING SQUARE | | | | SELLING SQUARE | ||
| | COUNT | | FOOTAGE(1) | | COUNT | | FOOTAGE(1) | ||
| | (square footage in thousands) | ||||||||
Beginning of period |
| 81 |
| | 1,286 |
| 81 |
| | 1,254 |
RH Design Galleries: |
|
|
| |
|
|
|
| |
|
England Design Gallery | | 1 | | | 35.1 | | — | | | — |
Indianapolis Design Gallery | | (1) | | | (13.0) | | — | | | — |
San Francisco Design Gallery | | — | | | — | | 1 | | | 42.1 |
RH Legacy Galleries: | | | | | | | | | | |
Indianapolis temporary Gallery | | 1 | | | 5.7 | | — | | | — |
San Francisco legacy Gallery | | — | | | — | | (1) | | | (4.8) |
Detroit legacy Gallery (relocation) | | — | | | 1.5 | | — | | | — |
End of period |
| 82 |
| | 1,315 |
| 81 |
| | 1,291 |
Total leased square footage at end of period(2) | | | | | 1,791 | | | | | 1,737 |
Weighted-average leased square footage(3) |
| | |
| 1,747 | |
| |
| 1,700 |
Weighted-average leased selling square footage(3) | | | | | 1,292 | | | | | 1,270 |
|
| 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 |
|
| Leased selling square footage is retail space at our |
Leased selling square footage includes approximately 35,000 square feet as of July 29, 2023 related to one owned retail location.
(2) | Total leased square footage |
|
| 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 |
|
|
|
| Weighted-average leased square footage and leased selling square footage |
|
|
33
The following table sets forth our condensed consolidated statementsTable of operations as a percentage of total net revenues.Contents
|
| 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, 2017July 29, 2023 Compared to Three Months Ended October 29, 2016July 30, 2022
| | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | ||||||||||||||||
| | JULY 29, | | JULY 30, | ||||||||||||||
| | 2023 | | 2022 | ||||||||||||||
|
| RH SEGMENT |
| WATERWORKS | | TOTAL(1) |
| RH SEGMENT |
| WATERWORKS |
| TOTAL(1) | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 753,550 | | $ | 46,929 | | $ | 800,479 | | $ | 940,182 | | $ | 51,438 | | $ | 991,620 |
Cost of goods sold | |
| 399,125 | |
| 21,281 | |
| 420,406 | |
| 445,108 | |
| 23,294 | |
| 468,402 |
Gross profit | |
| 354,425 | |
| 25,648 | |
| 380,073 | |
| 495,074 | |
| 28,144 | |
| 523,218 |
Selling, general and administrative expenses | |
| 211,080 | |
| 17,653 | |
| 228,733 | |
| 264,206 | |
| 24,598 | |
| 288,804 |
Income from operations | | $ | 143,345 | | $ | 7,995 | | $ | 151,340 | | $ | 230,868 | | $ | 3,546 | | $ | 234,414 |
|
| Three Months Ended |
| |||||||||||||||||||||
|
| October 28, |
|
| October 29, |
| ||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| RH Segment |
|
| Waterworks (1) |
|
| Total |
|
| RH Segment |
|
| Waterworks (1) |
|
| Total |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Net revenues |
| $ | 563,174 |
|
| $ | 29,299 |
|
| $ | 592,473 |
|
| $ | 521,027 |
|
| $ | 28,301 |
|
| $ | 549,328 |
|
Cost of goods sold |
|
| 359,953 |
|
|
| 18,195 |
|
|
| 378,148 |
|
|
| 354,903 |
|
|
| 18,606 |
|
|
| 373,509 |
|
Gross profit |
|
| 203,221 |
|
|
| 11,104 |
|
|
| 214,325 |
|
|
| 166,124 |
|
|
| 9,695 |
|
|
| 175,819 |
|
Selling, general and administrative expenses |
|
| 159,092 |
|
|
| 12,071 |
|
|
| 171,163 |
|
|
| 148,438 |
|
|
| 11,995 |
|
|
| 160,433 |
|
Income (loss) from operations |
| $ | 44,129 |
|
| $ | (967 | ) |
| $ | 43,162 |
|
| $ | 17,686 |
|
| $ | (2,300 | ) |
| $ | 15,386 |
|
(1) |
|
Net revenues
Consolidated net revenues increased $43.1decreased $191 million, or 7.9%19.3%, to $592.5$800 million in the three months ended October 28, 2017July 29, 2023 compared to $549.3$992 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.July 30, 2022.
RH Segment net revenues
RH Segment net revenues increased $42.1decreased $187 million, or 8.1%19.9%, to $563.2$754 million in the three months ended October 28, 2017July 29, 2023 compared to $521.0$940 million in the three months ended October 29, 2016.
A number ofJuly 30, 2022. The below discussion highlights several significant factors contributed to the increasethat resulted in a decrease in RH Segment net revenues, duringwhich are listed in order of magnitude.
RH Segment net revenues for the three months ended October 28, 2017, including, in orderJuly 29, 2023 decreased primarily due to lower demand compared to the second quarter of magnitude,fiscal 2022, during which demand and net revenues still benefited from 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.
elevated pandemic-driven home spending. Outlet sales which include sales via warehouse locations, increased $5.1decreased $9.7 million to $59 million in the three months ended October 28, 2017July 29, 2023 compared to $69 million in the three months ended October 29, 2016. We also had an increase in Membership 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.July 30, 2022.
Waterworks net revenues
Waterworks net revenues increased $1.0decreased $4.5 million, or 3.5%8.8%, to $29.3$47 million in the three months ended October 28, 2017July 29, 2023 compared to $28.3$51 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.July 30, 2022.
Gross profit
Consolidated gross profit increased $38.5decreased $143 million, or 21.9%27.4%, to $214.3$380 million in the three months ended October 28, 2017 from $175.8July 29, 2023 compared to $523 million in the three months ended October 29, 2016.July 30, 2022. As a percentage of net revenues, consolidated gross margin increased 4.2%decreased 530 basis points to 36.2%47.5% of net revenues in the three months ended October 28, 2017July 29, 2023 from 32.0%52.8% 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.July 30, 2022.
RH Segment gross profit
RH Segment gross profit increased $37.1decreased $141 million, or 22.3%28.4%, to $203.2$354 million in the three months ended October 28, 2017 from $166.1July 29, 2023 compared to $495 million in the three months ended October 29, 2016.July 30, 2022. As a percentage of net revenues, RH Segment gross margin increased 4.2%decreased 570 basis points to 36.1%47.0% of net revenues in the three months ended October 28, 2017July 29, 2023 from 31.9%52.7% of net revenues in the three months ended October 29, 2016.
Excluding the product recalls and costs associated with anticipated distribution center closures mentioned above,July 30, 2022. The decrease in RH Segment gross margin would have increased 4.9%was primarily attributable to 36.8% ofa decrease in product margins in the Core business, primarily driven by higher discounts on discontinued product collections, as well as lower net revenues resulting in the three months ended October 28, 2017 from 31.9% of net revenuesdeleverage 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.occupancy costs.
Waterworks gross profit
Waterworks gross profit increased $1.4decreased $2.5 million, or 14.5%8.9%, to $11.1$26 million in the three months ended October 28, 2017 from $9.7July 29, 2023 compared to $28 million in the three months ended October 29, 2016.July 30, 2022. As a percentage of net revenues, Waterworks gross margin increased 3.6% to 37.9%was 54.7% of net revenues in both the three months ended October 28, 2017 from 34.3%July 29, 2023 and July 30, 2022.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 45 |
Table of net revenues in the three months ended October 29, 2016.Contents
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.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $10.7decreased $60 million, or 6.7%20.8%, to $171.2$229 million in the three months ended October 28, 2017July 29, 2023 compared to $160.4$289 million in the three months ended October 29, 2016.July 30, 2022.
35
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $10.7decreased $53 million, or 7.2%20.1%, to $159.1$211 million in the three months ended October 28, 2017July 29, 2023 compared $148.4to $264 million in the three months ended October 29, 2016.July 30, 2022.
RH Segment selling, general and administrative expenses for the three months ended October 28, 2017 included $1.4July 29, 2023 include legal settlements of $8.0 million and non-cash compensation of $2.0 million related to costs associated with anticipated distribution center closures and a gain of $0.8 million relatedan option grant made to the sale of building and land. Mr. Friedman in October 2020.
RH Segment selling, general and administrative expenses for the three months ended July 30, 2022 include amortization of non-cash compensation of $4.3 million related to an option grant made to Mr. Friedman in October 29, 2016 included $1.02020, $2.0 million associated withof asset impairments and a reorganization, including severance and related taxes.
Advertising and marketing costs increased $9.8$0.3 million duringprofessional fee which was contingent upon the three months ended October 28, 2017 as compared to October 29, 2016, primarily due to the timingcompletion of our Source Book mailings. In the third quarter of fiscal 2017 we amortized costsdebt transactions 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-December2023 Notes 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.2024 Notes.
RH Segment selling, general and administrative expenses were 28.2%would have been 26.6% and 28.3%27.4% of net revenues for the three months ended October 28, 2017July 29, 2023 and October 29, 2016,July 30, 2022, respectively, excluding the costs associatedincurred in connection with anticipated distribution center closures, the gain related to the sale of building and land and the reorganization costsadjustments mentioned above. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarilydue to lower advertising costs compared to the second quarter of fiscal 2022 driven by leverage in employment and employment related costs and, to a lesser extent, leverage in our corporate occupancy costs,the mailing of the new RH Contemporary Sourcebook, partially offset by an increaselower net revenues resulting in advertisingleverage in deleverage in occupancy and marketingother corporate costs.
Waterworks selling, general and administrative expenses
Waterworks selling, general and administrative expenses increased $0.1decreased $6.9 million, or 0.6%28.2%, to $12.1$18 million in the three months ended October 28, 2017July 29, 2023 compared to $12.0$25 million in the three months ended October 29, 2016.
Interest expense—July 30, 2022. Waterworks selling, general and administrative expenses were 37.6% and 47.8% of net
Interest expense increased $7.8 million to $18.9 million revenues for the three months ended October 28, 2017 compared to $11.1 millionJuly 29, 2023 and July 30, 2022, respectively.
Waterworks selling, general and administrative expenses for the three months ended OctoberJuly 30, 2022 include $3.5 million in compensation settlements related to the Rollover Units and Profit Interests Units and a $0.2 million asset impairment. Excluding the adjustments, Waterworks selling, general and administrative expenses would have been 37.6% and 40.7% of net revenues for the three months ended July 29, 2016. 2023 and July 30, 2022, respectively.
Interest expenseexpense—net
Interest expense—net increased $18 million in the three months ended July 29, 2023 compared to the three months ended July 30, 2022, which consisted of the following:following in each period:
| | | | | | |
| | THREE MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
| | 2023 |
| 2022 | ||
| | (in thousands) | ||||
Term loan interest expense | | $ | 50,435 | | $ | 24,982 |
Finance lease interest expense | |
| 8,794 | |
| 7,891 |
Other interest expense | |
| 1,198 | |
| 832 |
Interest income | |
| (14,741) | |
| (6,393) |
Capitalized interest for capital projects | |
| (1,264) | |
| (1,048) |
Total interest expense—net | | $ | 44,422 | | $ | 26,264 |
|
| 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 |
|
46 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
Loss on extinguishment of debt
We incurredDuring the three months ended July 30, 2022, we recognized a $4.9loss on extinguishment of debt of $23 million related to the repurchase of $57 million of principal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $0.3 million. The loss represents the difference between the carrying value and the fair value of the convertible senior notes upon entering into the repurchase agreements with the noteholders. Refer to Note 9—Convertible Senior Notesin our condensed consolidated financial statements.
Other (income) expense—net
Other (income) expense—net was income of $0.2 million in the three months ended July 29, 2023, which represents a foreign exchange gain from the remeasurement of intercompany loans with U.K. and Switzerland subsidiaries, partially offset by a 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.
Other (income) expense—net was an expense of $3.2 million during the three months ended July 30, 2022, which included a loss on derivative instruments of $1.5 million resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements. Other (income) expense—net also includes a $1.7 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.
Income tax expense
Our income tax expense and effective tax rates were as follows:
| | | | | | | |
| | | THREE MONTHS ENDED | ||||
| | | JULY 29, |
| JULY 30, | ||
|
|
| 2023 |
| 2022 | ||
| | | (dollars in thousands) | ||||
Income tax expense | | | $ | 27,245 | | $ | 56,397 |
Effective tax rate | | | | 26.3% | | | 31.6% |
The decrease in our effective tax rate for the three months ended July 29, 2023 compared to the three months ended July 30, 2022 is primarily attributable to net excess tax benefits from stock-based compensation and amounts related to the loss on extinguishment of debt in the three months ended October 28, 2017 due to the repayment in fullJuly 30, 2022.
Equity method investments loss
Equity method investments loss consists of our proportionate share of the second lien term loan on October 10, 2017,loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which includesresulted in a prepayment penalty of $3.0$3.4 million and acceleration of amortization of debt issuance costs of $1.9 million.
Income tax expense
Income tax expense was $6.2$2.8 million and $1.8 million inloss during the three months ended October 28, 2017July 29, 2023 and October 29, 2016,July 30, 2022, 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
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 47 |
36
NineSix Months Ended October 28, 2017July 29, 2023 Compared to NineSix Months Ended October 29, 2016July 30, 2022
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.
| | | | | | | | | | | | | | | | | | |
| | SIX MONTHS ENDED | ||||||||||||||||
| | JULY 29, | | JULY 30, | ||||||||||||||
| | 2023 | | 2022 | ||||||||||||||
| | RH SEGMENT |
| WATERWORKS | | TOTAL(1) |
| RH SEGMENT |
| WATERWORKS |
| TOTAL | ||||||
| | (in thousands) | ||||||||||||||||
Net revenues | | $ | 1,444,066 | | $ | 95,575 | | $ | 1,539,641 | | $ | 1,849,130 | | $ | 99,782 | | $ | 1,948,912 |
Cost of goods sold | |
| 768,057 | |
| 43,966 | |
| 812,023 | |
| 881,234 | |
| 45,877 | |
| 927,111 |
Gross profit | | | 676,009 | | | 51,609 | | | 727,618 | | | 967,896 | |
| 53,905 | |
| 1,021,801 |
Selling, general and administrative expenses | |
| 440,095 | |
| 36,943 | |
| 477,038 | |
| 539,725 | |
| 42,374 | |
| 582,099 |
Income from operations | | $ | 235,914 | | $ | 14,666 | | $ | 250,580 | | $ | 428,171 | | $ | 11,531 | | $ | 439,702 |
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| October 28, |
|
| October 29, |
| ||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| RH Segment |
|
| Waterworks (1) |
|
| Total |
|
| RH Segment |
|
| Waterworks (1) |
|
| Total |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Net revenues |
| $ | 1,680,495 |
|
| $ | 89,384 |
|
| $ | 1,769,879 |
|
| $ | 1,499,101 |
|
| $ | 49,064 |
|
| $ | 1,548,165 |
|
Cost of goods sold |
|
| 1,124,651 |
|
|
| 54,834 |
|
|
| 1,179,485 |
|
|
| 1,031,699 |
|
|
| 33,333 |
|
|
| 1,065,032 |
|
Gross profit |
|
| 555,844 |
|
|
| 34,550 |
|
|
| 590,394 |
|
|
| 467,402 |
|
|
| 15,731 |
|
|
| 483,133 |
|
Selling, general and administrative expenses |
|
| 489,412 |
|
|
| 38,801 |
|
|
| 528,213 |
|
|
| 432,961 |
|
|
| 24,246 |
|
|
| 457,207 |
|
Income (loss) from operations |
| $ | 66,432 |
|
| $ | (4,251 | ) |
| $ | 62,181 |
|
| $ | 34,441 |
|
| $ | (8,515 | ) |
| $ | 25,926 |
|
(1) |
|
Net revenues
Consolidated net revenues increased $221.7decreased $409 million, or 14.3%21.0%, to $1,769.9$1,540 million in the ninesix months ended October 28, 2017July 29, 2023 compared to $1,548.2$1,949 million in the ninesix 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.July 30, 2022.
RH Segment net revenues
RH Segment net revenues increased $181.4decreased $405 million, or 12.1%21.9%, to $1,680.5$1,444 million in the ninesix months ended October 28, 2017July 29, 2023 compared to $1,499.1$1,849 million in the ninesix months ended October 29, 2016.
A number ofJuly 30, 2022. The below discussion highlights several significant factors contributed to the increase inthat impacted 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 ninesix months ended October 28, 2017 were negatively impacted by $3.8 million relatedJuly 29, 2023 decreased primarily due to lower demand compared to the reductionfirst half of revenue associated with product recalls. Duringfiscal 2022, during which demand still benefited from the nineelevated pandemic-driven home spending. Outlet sales decreased $23 million to $116 million in the six months ended OctoberJuly 29, 2016, RH Segment net revenues were reduced by an estimated $162023 compared to $139 million due to customer accommodation and related expenses as a result of our initiative to elevatein the customer experience, including in response to production delays related to RH Modern. We did not experience similar production delays during the ninesix months ended October 28, 2017.July 30, 2022.
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 $40.3decreased $4.2 million, or 82.2%4.2%, to $89.4$96 million in the ninesix months ended October 28, 2017July 29, 2023 compared to $49.1$100 million in the ninesix 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.July 30, 2022.
Gross profit
Consolidated gross profit increased $107.3decreased $294 million, or 22.2%28.8%, to $590.4$728 million in the ninesix months ended October 28, 2017 from $483.1July 29, 2023 compared to $1,022 million in the ninesix months ended October 29, 2016.July 30, 2022. As a percentage of net revenues, consolidated gross margin increased 2.2%decreased 510 basis points to 33.4%47.3% of net revenues in the ninesix months ended October 28, 2017July 29, 2023 from 31.2%52.4% of net revenues in the ninesix 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.July 30, 2022.
RH Segment gross profit
RH Segment gross profit increased $88.4decreased $292 million, or 18.9%30.2%, to $555.8$676 million in the ninesix months ended October 28, 2017July 29, 2023 from $467.4$968 million in the ninesix months ended October 29, 2016.July 30, 2022. As a percentage of net revenues, RH Segment gross margin increased 1.9%decreased 550 basis points to 33.1%46.8% of net revenues in the ninesix months ended October 28, 2017July 29, 2023 from 31.2%52.3% of net revenues in the ninesix months ended October 29, 2016. Excluding the product recall costs, costs associated with anticipated distribution center closures and impact of the coupons redeemedJuly 30, 2022. The decrease in connection with the legal claim mentioned above, RH Segment gross margin would have increased 1.8%was primarily attributable to 33.5% ofa decrease in product margins in the Core business, primarily driven by higher discounts on discontinued product collections, as well as lower net revenues resulting in the nine months ended October 28, 2017 from 31.7% of net revenuesdeleverage 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.
48 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
Waterworks gross profit
Waterworks gross profit increased $18.8decreased $2.3 million, or 119.6%4.3%, to $34.6$52 million in the ninesix months ended October 28, 2017July 29, 2023 from $15.7$54 million in the ninesix 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.July 30, 2022. As a percentage of net revenues, Waterworks gross margin increased 6.6% to 38.7%was 54.0% of net revenues in both the ninesix months ended October 28, 2017 from 32.1% of net revenues in the nine months ended OctoberJuly 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 mix2023 and deleverage in occupancy costs.July 30, 2022.
38
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased $71.0decreased $105 million, or 15.5%18.0%, to $528.2$477 million in the ninesix months ended October 28, 2017July 29, 2023 compared to $457.2$582 million in the ninesix months ended October 29, 2016.July 30, 2022.
RH Segment selling, general and administrative expenses
RH Segment selling, general and administrative expenses increased $56.5decreased $100 million, or 13.0%18.5%, to $489.4$440 million in the ninesix months ended October 28, 2017July 29, 2023 compared $433.0to $540 million in the ninesix months ended October 29, 2016.July 30, 2022.
RH Segment selling, general and administrative expenses for the ninesix months ended October 28, 2017 included $23.9July 29, 2023 include legal settlements of $8.0 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million and non-cash compensation of $5.6 million related to a fully vestedan option grant made to Mr. Friedman in May 2017, $0.1 million incremental costs associated with product recalls, $1.4 million costs associated with anticipated distribution center closures and a gain of $2.1 million related to the sale of building and land.October 2020.
RH Segment selling, general and administrative expenses for the ninesix months ended October 29, 2016 included $5.7July 30, 2022 include $12 million of employer payroll tax expense associated with a reorganization, including severance and related taxes, $2.8Mr. Friedman’s stock option exercise during the first quarter of fiscal 2022, amortization of non-cash compensation of $10 million related to charges and expenses incurred as a result of the Waterworks transaction, and $1.0an option grant made to Mr. Friedman in October 2020, $8.0 million related to asset impairments, $7.5 million of professional fees which were contingent upon 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 timingcompletion of our Source Book mailings. In the nine months ended October 28, 2017 we amortized costsdebt transactions 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-December2023 Notes 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 employment2024 Notes and employment$0.6 million related costs.to product recalls.
RH Segment selling, general and administrative expenses were 27.7%would have been 29.0% and 28.2%27.1% of net revenues for the ninesix months ended October 28, 2017July 29, 2023 and October 29, 2016,July 30, 2022, 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 increased employmentlower net revenues resulting in deleverage in compensation, occupancy and employmentother corporate costs, partially offset by lower advertising costs due to the mailing of the new RH Contemporary Sourcebook in the second quarter of fiscal 2022 and lower pre-opening costs.
Waterworks selling, general and administrative expenses
Waterworks selling, general and administrative expenses decreased $5.4 million, or 12.8%, to $37 million in the six months ended July 29, 2023 compared to $42 million in the six months ended July 30, 2022. Waterworks selling, general and administrative expenses were 38.7% and 42.5% of net revenues for the six months ended July 29, 2023 and July 30, 2022, respectively.
Waterworks selling, general and administrative expenses for the six months ended July 30, 2022 include $3.5 million in compensation settlements related costs.to the Rollover Units and Profit Interest Units and a $0.2 million asset impairment. Excluding the adjustments, Waterworks selling, general and administrative expenses would have been 38.7% and 38.8% of net revenues for the six months ended July 29, 2023 and July 30, 2022, respectively.
39
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 49 |
Interest expense—expense—net
Interest expenseexpense—net increased $13.0$37 million to $45.5 million forin the ninesix months ended October 28, 2017July 29, 2023 compared to $32.5 million for the ninesix months ended October 29, 2016. Interest expenseJuly 30, 2022, which consisted of the following:following in each period:
|
| Nine Months Ended |
| |||||
|
| October 28, |
|
| October 29, |
| ||
|
| 2017 |
|
| 2016 |
| ||
|
| (in thousands) |
| |||||
Amortization of convertible senior notes debt discount |
| $ | 22,685 |
|
| $ | 21,467 |
|
Build-to-suit lease transactions |
|
| 12,360 |
|
|
| 9,418 |
|
Asset based credit facility |
|
| 4,049 |
|
|
| 1,465 |
|
Amortization of debt issuance costs and deferred financing fees |
|
| 3,933 |
|
|
| 1,884 |
|
Term loans |
|
| 3,545 |
|
|
| — |
|
Other interest expense |
|
| 1,910 |
|
|
| 2,515 |
|
Capitalized interest for capital projects |
|
| (2,547 | ) |
|
| (1,917 | ) |
Interest income |
|
| (439 | ) |
|
| (2,304 | ) |
Total interest expense—net |
| $ | 45,496 |
|
| $ | 32,528 |
|
| | | | | | |
| | SIX MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
| | 2023 |
| 2022 | ||
| | (in thousands) | ||||
Term loan interest expense | | $ | 98,228 | | $ | 40,983 |
Finance lease interest expense | |
| 17,280 | |
| 14,962 |
Other interest expense | |
| 2,414 | |
| 1,905 |
Interest income | |
| (31,365) | |
| (7,574) |
Capitalized interest for capital projects | |
| (2,319) | |
| (3,157) |
Total interest expense—net | | $ | 84,238 | | $ | 47,119 |
Loss on extinguishment of debt
We incurredDuring the six months ended July 30, 2022, we recognized a $4.9 million loss on extinguishment of debt in the nine months ended October 28, 2017 dueof $170 million related to the repayment in fullrepurchase of the second lien term loan on October 10, 2017, which includes a prepayment penalty$237 million of $3.0 million andprincipal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $1.9$1.3 million. The loss represents the difference between the carrying value and the fair value of the convertible senior notes upon entering into the repurchase agreements with the noteholders. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.
Other (income) expense—net
Other income (expense)—net was income of $0.8 million in the six months ended July 29, 2023, which represents a foreign exchange gain from the remeasurement of intercompany loans with U.K. and Switzerland subsidiaries, offset by a 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.
Other income (expense)—net was an expense of $2.9 million during the six months ended July 30, 2022, which included a $4.6 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. The foreign currency loss was partially offset by a net gain on derivative instruments of $1.7 million during the six months ended July 30, 2022, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge and warrant terminations and convertible senior notes repurchases. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.
Income tax expense (benefit)
IncomeOur income tax expense was $9.9 million(benefit) and effective tax rates were as follows:
| | | | | | | |
| | | SIX MONTHS ENDED | ||||
| | | JULY 29, |
| JULY 30, | ||
|
| | 2023 |
| 2022 | ||
| | | (dollars in thousands) | ||||
Income tax expense (benefit) | |
| $ | 43,830 | | $ | (107,029) |
Effective tax rate | | | | 27.0% | | | (49.6)% |
The increase in the nine months ended October 28, 2017 compared to an income tax benefit of $2.6 million in the nine months ended October 29, 2016. Ourour effective tax rate was 83.7% and 38.9% for the ninesix months ended October 28, 2017 and OctoberJuly 29, 2016, respectively. The effective tax rate in2023 compared to the ninesix months ended October 28, 2017 wasJuly 30, 2022 is 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 andlower net excess tax benefits from stock-based compensation in fiscal 2023 as compared to fiscal 2022.
50 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
Equity method investments loss
Equity method investments loss 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.loss of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $5.0 million and $4.2 million loss during the six months ended July 29, 2023 and July 30, 2022, 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.
A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table:
| | | | | | |
| | JULY 29, | | JANUARY 28, | ||
| | 2023 | | 2023 | ||
| | | (in thousands) | |||
Asset based credit facility | | $ | — | | $ | — |
Term loan B(1) | | | 1,965,000 | | | 1,975,000 |
Term loan B-2(1) | | | 496,250 | | | 498,750 |
Equipment promissory notes(1) | | | — | | | 1,160 |
Convertible senior notes due 2023(1) | | | — | | | 1,696 |
Convertible senior notes due 2024(1) | | | 41,904 | | | 41,904 |
Notes payable for share repurchases | | | 315 | | | 315 |
Total debt(2) | | $ | 2,503,469 | | $ | 2,518,825 |
Cash and cash equivalents | | | (417,047) | | | (1,508,101) |
Total net debt | | $ | 2,086,422 | | $ | 1,010,724 |
Availability under the asset based credit facility—net(3) | | $ | 453,792 | | $ | 533,482 |
(1) | Amounts exclude discounts upon original issuance and third party offering and debt issuance cost. |
(2) | Net debt as of July 29, 2023 and January 28, 2023 excludes restricted cash of $3.5 million and $3.7 million, respectively, as well as non-recourse real estate loans of $18 million as of both periods related to our consolidated variable interest entities from our joint venture activities. These real estate loans are secured by the assets of such entities and the associated creditors do not have recourse against RH’s general assets. Refer to Note 5—Variable Interest Entities in our condensed consolidated financial statements. |
(3) | As of both July 29, 2023 and January 28, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $27 million in outstanding letters of credit. |
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 51 |
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 stores andlocations, updating existing stores,locations, as well as the development of our infrastructure and information technology.technology, and Sourcebooks. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. We completedDuring the three months ended July 29, 2023, we invested $1,208 million of cash, inclusive of excise taxes paid, in the purchase of shares of our first share repurchase program in an amount of $300 million during the first quarter of fiscal 2017 and completedcommon stock pursuant to our second repurchase program in an amount of $700 million during the second quarter of fiscal 2017Share Repurchase Program (refer to “Share Repurchase Programs” below)Item 2¾Unregistered Sales of Equity Securities and Use of Proceeds within Part II of this Quarterly Report on Form 10-Q for information related to timing). 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 and Share Retirement” 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, including our common stock represents a good valueinvestments in joint ventures. We expect to continue to take an opportunistic approach regarding both sources and provides a favorable return foruses of capital in connection with our shareholders.business.
We have $650 million in aggregate principal amount of convertible notes outstanding, of which $350 million mature in June 2019believe our capital structure provides us with substantial optionality regarding capital allocation. Our near-term decisions regarding the sources 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 the availabilityuses of capital will continue 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 favorablereflect and adapt to us.
We extendedchanges in market conditions and amended our revolving line of credit in June 2017, which has a total availability of $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, we have an $80.0 million last out, delayed draw term loan (“LILO term loan”) facility. The revolving line of credit and LILO term loan facility have a maturity date of June 28, 2022.
40
In July 2017, Restoration Hardware, Inc. entered into a credit agreement (the “second lien credit agreement”)business, including further developments with respect to an initial term loanmacroeconomic factors affecting business conditions, such as the pandemic, inflation and increases in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”). Refer to Second Lien Credit Agreement below. The proceeds of the second lien term loan were used to support our share repurchase program. We repaid this debt in full in October 2017.
interest rates. We believe thatour existing cash expected to be generated from operations, netbalances and operating cash proceeds from the issuance of the convertible senior notes, borrowing availability under the revolving line of credit, borrowings under our term loan and otherflows, 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 strategies to enhance stockholder value. There can be no assurance that additional capital, whether raised through the sale of assets, utilization of our existing debt financing sources, or pursuit of additional debt financing sources, will be available to us on a timely manner, on favorable terms or at all. various 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 incrementalglobal credit markets could affect our ability to manage our debt will be availableobligations and our ability to us in order to fund our cash payments in respect of the repayment of our outstanding convertible senior notes in an aggregate principal amount of $650 million at maturity of such senior convertible notes or our terms loan at the maturity dates of such term loan.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.
41Credit Facilities and Debt Arrangements
We amended and restated our asset based credit facility in July 2021, which has an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. The accordion feature may be added as a first-in, last-out term loan facility. The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met. The maturity date of the asset based credit facility is July 29, 2026.
52 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
We entered into a $2,000 million term debt financing in October 2021 (the “Term Loan B”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A. as administrative agent and collateral agent, and the various lenders party thereto (the “Term Loan Credit Agreement”). The Term Loan B has a maturity date of October 20, 2028. As of July 29, 2023, we had $1,965 million outstanding under the Term Loan Credit Agreement. We are required to make quarterly principal payments of $5.0 million with respect to the Term Loan B.
In May 2022, we entered into an incremental term debt financing (the “Term Loan B-2”) in an aggregate principal amount equal to $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 Term Loan B-2 has a maturity date of October 20, 2028. The Term Loan B-2 constitutes a separate class from the existing Term Loan B under the Term Loan Credit Agreement. As of July 29, 2023, we had $496 million outstanding under the Amended Term Loan Credit Agreement. We are required to make quarterly principal payments of $1.3 million with respect to the Term Loan B-2 from December 2022.
Convertible Senior Notes
In September 2019, we issued in a private offering $350 million principal amount of 0.00% convertible senior notes due 2024 (the “2024 Notes”).
As of July 29, 2023, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024. We anticipate having sufficient cash available to repay the principal amount of the 2024 Notes in cash with respect to any convertible notes for which the holders elect early conversion, as well as upon maturity of the 2024 Notes in September 2024.
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 construction period. During the six months ended July 29, 2023, adjusted capital expenditures were $96 million in aggregate, net of cash received related to landlord tenant allowances of $4.1 million. In addition, we also received landlord tenant allowances subsequent to lease commencement of $2.4 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the condensed consolidated statements of cash flows. We anticipate our adjusted capital expenditures to be $225 million to $275 million in fiscal 2023, 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 macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and higher interest rates and we may make adjustments to our allocation of capital in fiscal 2023 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.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 53 |
Table of ContentsAny weakening
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 have also begun executing changes 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 abilityultimate objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent. For example, we have entered into arrangements with a third-party development partner to manage our debt obligationsdevelop real estate for future RH Design Galleries. In the event that such capital and our abilityother expenditures require us 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. If we failneeds and uses of capital may change in the future due to raise sufficient additional funds,changes in our business or new opportunities that we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.pursue.
Cash Flow Analysis
A summary of operating, investing, and financing activities is set forth in the following table:
|
| Nine Months Ended |
| |||||
|
| October 28, |
|
| October 29, |
| ||
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
| As Revised |
| |
|
| (in thousands) |
| |||||
Provided by (used in) operating activities |
| $ | 386,762 |
|
| $ | (18,985 | ) |
Provided by (used in) investing activities |
| $ | 101,324 |
|
| $ | (263,378 | ) |
Used in financing activities |
| $ | (552,969 | ) |
| $ | (2,311 | ) |
Decrease in cash and cash equivalents |
| $ | (64,861 | ) |
| $ | (284,332 | ) |
Cash and cash equivalents at end of period |
| $ | 22,162 |
|
| $ | 47,135 |
|
| | | | | | |
| | SIX MONTHS ENDED | ||||
| | JULY 29, | | JULY 30, | ||
|
| 2023 |
| 2022 | ||
| | (in thousands) | ||||
Net cash provided by operating activities | | $ | 248,355 | | $ | 192,516 |
Net cash used in investing activities | |
| (115,323) | |
| (64,078) |
Net cash used in financing activities | |
| (1,224,481) | |
| (224,156) |
Net decrease in cash and cash equivalents, restricted cash and restricted cash equivalents | |
| (1,091,178) | |
| (96,158) |
Cash and cash equivalents, restricted cash and restricted cash equivalents at end of period | |
| 420,585 | |
| 2,085,706 |
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 discount and the effect of changes in working capital and other activities.
For the ninesix months ended October 28, 2017,July 29, 2023, net cash provided by operating activities was $386.8$248 million and consisted of net income of $1.9$118 million and an increase in cash providednon-cash items of $188 million, partially offset by a change in working capital and other activities of $259.3$57 million. The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $42 million and non-cash items of $125.6 million. Working capital and other activities consisted primarily of decreases in inventory of $190.6 million due to our SKU rationalization initiative, outlet inventory optimization effortspayments made under the related lease agreements, a decrease in accounts payable and revised DC network strategy. We also had decreasesaccrued expenses of $32 million, an increase in prepaid expenseexpenses and other current assets of $38.4$25 million, primarily due to amortizationa decrease in other non-current obligations 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$17 million and an increase in landlord assets under construction, net of tenant allowances, of $14 million. These uses of cash from working capital and other activities of $109.8 million, offset by non-cash items of $94.8 million. Working capital and other activities consisted primarily of decreases in accounts payable and accrued liabilities of $63.4 million primarily due to the timing of payments to our vendors, and prepaid expense and 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 million primarily due to federal and state tax payments, and inventory increased $23.3 million related to the increase in both existing and new products. This waswere partially offset by increasesa decrease in deferred revenue and customer depositsmerchandise inventory of $22.7 million and an increase in other non-current obligations of $8.5 million primarily due to a deferred contract incentive.$65 million.
Net Cash Provided By (Used In)Used In Investing Activities
Investing activities consist primarily of investments in capital expenditures related to new Gallery openings, 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 ninesix months ended OctoberJuly 29, 2016,2023, net cash used in investing activities was $263.4$115 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
42
galleries,retail stores, information technology and systems infrastructure supply chainof $82 million and other corporate assets, as well as payments of $3.8 millionadditional contributions 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.$34 million.
54 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
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 our share repurchasesrepurchase program, repayment of indebtedness, including principal payments under finance lease agreements and other equity related transactions.
For the ninesix months ended October 28, 2017,July 29, 2023, net cash used in financing activities was $553.0$1,224 million, primarily due to $1.0 billionthe repurchase of 3,698,887 shares of our common stock for an aggregate repurchase amount of $1,205 million, payments on term loans of $13 million, net payments under finance lease agreements of $5.5 million and repayments of the 2023 Notes of $1.7 million and equipment notes of $1.2 million. In addition, we paid $3.7 million of excise taxes related to share repurchases made under the $300 Million Repurchase Program and $700 Million Repurchase Program. Cash funding for the share repurchase programs was provided by availablein fiscal 2022. These cash balances, net borrowings under the asset based credit facility of $341.0 million, as well as borrowings under the term loans of $180.0 million, borrowings under loans secured by certain equipment of $20.0 million and borrowings under a promissory note secured by our aircraft of $14.0 million. Additionally, proceeds from exercise of employee stock optionsoutflows 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 million primarily due to tax shortfalls from the exercise of stock options of $2.3 million and cash paid for employee taxes related to net settlement of equity awards of $1.4$4.7 million.
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. In addition, non-cash additionstransactions consist of propertyexcise tax from share repurchases included in accounts payable and equipment dueaccrued expenses at period-end, the extinguishment of convertible senior notes related to build-to-suit lease transactions areour repurchase obligations and associated financing liabilities and embedded derivatives 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 extentconvertible senior notes 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), as well as shares issued and any amounts paid by the landlordreceived related to those responsible for construction, are includedconvertible senior note transactions.
Cash Requirements from Contractual Obligations
Leases
We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as propertywell as other storage and equipment additions dueoffice space. Refer 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 2020our condensed consolidated financial statements for further information on the 2023 Notes 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 20202024 Notes. The 20202023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.
43
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 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, 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 Notesmatured 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.2023.
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.
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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.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 55 |
Share Repurchase Program and Share Retirement
We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase program, including, among others, current cash needs, capacity for leverage, cost of borrowings, 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 our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our stockholders. We may undertake other 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.
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.our securities.
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-negotiatedprivately negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives. During
On June 2, 2022, the threeBoard of Directors authorized an additional $2,000 million for the purchase of shares of our outstanding common stock, which increased the total authorized size of the share repurchase program to $2,450 million (the “Share Repurchase Program”). In the six months ended July 29, 2017,2023, we repurchased approximately 12.4 million3,698,887 shares of our common stock under the $700 MillionShare Repurchase Program at an average price of $56.60$325.65 per share, for an aggregate repurchase amount of approximately $700$1,205 million. No additional shares will be repurchased inAs of July 29, 2023, $245 million remains available for future periodsshare repurchases under the $700 MillionShare Repurchase Program.
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Contractual ObligationsShare Retirement
We enter into long-term contractual obligationsDuring the six months ended July 29, 2023, we retired 3,698,887 shares of common stock related to shares we repurchased under the Share Repurchase Program. As a result of this retirement, we reclassified a total of $8.6 million and commitments, primarily debt obligations$1,208 million from treasury stock to additional paid-in capital and non-cancelable operating leases, inretained earnings (accumulated deficit), respectively, on the normal coursecondensed consolidated balance sheets and condensed consolidated statements of business. Asstockholders’ equity (deficit) as of October 28, 2017, our contractual cash obligations were as follows (in thousands):and for the three and six months ended July 29, 2023.
|
| 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 |
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Off Balance Sheet Arrangements
We have no material off balance sheet arrangements asTable of October 28, 2017.Contents
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 condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 theour condensed 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 TaxesVariable Interest Entities
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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 2016our 2022 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 our 2022 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 statementsresults in future reporting periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
There have been no significant changes in our exposures to market risk since January 28, 2023, other than factors discussed below. Refer to Part II, Item 3. 7A—Quantitative and Qualitative Disclosure ofDisclosures about Market RisksRisk in our 2022 Form 10-K for a discussion on our exposures to market risk.
Interest Rate Risk
We currently do not engageAs described in any interest rate hedging activity and we have no intention to do so in the foreseeable future.
We are subject to interest rate risk in connection with borrowings under our revolving line of credit which2022 Form 10-K, our Term Loan Credit Agreement bears interest at variable rates and we may incur additional indebtedness that bears interest at variable rates. At October 28, 2017, $341.0 million was outstanding under the revolving line of credit. As of October 28, 2017, the undrawn borrowing availability under the revolving line of credit was $189.0 million, net of $27.7 million in outstanding letters of credit. As a result of the FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available under the revolving line of credit would be approximately $125.2 million. Based on the average interest rate on the revolving line of credit during the three months ended October 28, 2017, and to the extent that borrowings were outstanding on such line of credit, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition. To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.
We are subjectexposed to interest rate risk in connection with borrowings underrelated to 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 averagedebt. For every 100-basis point change in interest rates, on the LILO term loan during the three months ended October 28, 2017, we do not believe that a 10%our annual interest expense could change in the interest rate would have a material effect on our consolidated resultsby approximately $39 million.
PART I. FINANCIAL INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 57 |
Table of operations or financial condition.Contents
As of October 28, 2017, we had $350 million principal amount of 0.00% convertible senior notes due 2019 outstanding (the “2019 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, we had $300 million principal amount of 0.00% convertible senior notes due 2020 outstanding (the “2020 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
Market Price Sensitive Instruments
0.00% Convertible Senior Notes due 2019
In connection with the issuance of the 2019 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 will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially $171.98 per share. 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 hedge 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 applicable to the 2020 Notes. These convertible note hedge transactions are expected to reduce the potential earnings
49
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 impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our consolidated results of operations and financial condition have been immaterial.
ITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ourWe maintain disclosure controls and procedures (as defined in RulesRule 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. Our disclosure controls and procedures were effectiveare designed 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 ensureprovide reasonable assurance 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.
Our 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 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 our disclosure controls and procedures were effective to provide the reasonable assurance described above as of July 29, 2023.
Remediation of Material Weakness in Internal Control Over Financial Reporting
As previously disclosed in our 2022 Form 10-K, the Quarterly Reports on Form 10-Q/A for the fiscal periods ended April 30, 2022, July 30, 2022, and October 29, 2022, and the Quarterly Report on Form 10-Q for the fiscal period ended April 29, 2023, we identified the following material weakness:
We did not design and maintain an effective control activity over the presentation and disclosure of net income per share, specifically the application of authoritative guidance, including new accounting standards, to the net income per share computations.
This material weakness resulted in errors in the unaudited condensed consolidated financial statements for the fiscal periods ended April 30, 2022, July 30, 2022, and October 29, 2022 that were restated on Form 10-Q/A.
As previously disclosed in our 2022 Form 10-K, we designed and implemented an enhanced control activity related to the presentation and disclosure of net income per share, including the application of authoritative guidance and new accounting standards, to the net income per share computations. The enhanced control activity has operated for a sufficient period of time in order for us to conclude, through testing, that the control is designed and is operating effectively. As such, we concluded that the previously reported material weakness has been remediated as of July 29, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended July 29, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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58 | 2023 SECOND QUARTER FORM 10-Q | PART I. FINANCIAL INFORMATION |
PART II
ItemITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
From time to time, we and/or members of our managementsenior leadership team are involved in litigation, claims, investigations 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.practices. 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 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 regarding legal proceedings, including certain securities litigation, refer to Note 17—16—Commitments and Contingenciesin our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.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 on2022 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 20162022 Form 10-K.
The risks described in our 20162022 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,July 29, 2023, we repurchased the following shares of our common stock:
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| TOTAL NUMBER OF | | APPROXIMATE DOLLAR | |
| | | | AVERAGE | | SHARES REPURCHASED | | VALUE OF SHARES THAT | ||
| | | | PURCHASE | | AS PART OF PUBLICLY | | MAY YET BE | ||
| | NUMBER OF | | PRICE PER | | ANNOUNCED PLANS | | PURCHASED UNDER THE | ||
| | SHARES(1) | | SHARE | | OR PROGRAMS | | PLANS OR PROGRAMS(2) | ||
| | | | | | | | | (in millions) | |
April 30, 2023 to May 27, 2023 |
| — | | $ | — | | — | | $ | 1,450 |
May 28, 2023 to July 1, 2023 |
| 1,797,409 | | $ | 299.23 | | 1,797,409 | | $ | 912 |
July 2, 2023 to July 29, 2023 |
| 1,901,478 | | $ | 350.64 | | 1,901,478 | | $ | 245 |
Total |
| 3,698,887 | | | | | 3,698,887 | |
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| Number of Shares (1) |
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| Average Purchase Price Per Share |
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| Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs |
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| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
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| (in millions) |
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July 30, 2017 to August 26, 2017 |
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| — |
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| $ | — |
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| — |
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| $ | — |
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August 27, 2017 to September 30, 2017 |
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| 40,414 |
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| $ | 72.18 |
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| — |
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| $ | — |
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October 1, 2017 to October 28, 2017 |
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| 752 |
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| $ | 77.20 |
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| — |
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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, replenished on March 25, 2019 and June 2, 2022. |
ITEM 3. Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. ItemMine Safety DisclosuresMINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended July 29, 2023, none of our directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in Item 5. Other Information408(c) of Regulation S-K.
Not applicable.
ITEM 6. EXHIBITS
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31.1 | | | — | | — | | — | | — | | X | |||||||||
31.2 | | | — | | — | | — | | — | | X | |||||||||
32.1 | | | — | | — | | — | | — | | X | |||||||||
32.2 | | | — | | — | | — | | — | | X | |||||||||
101.INS | | XBRL Instance | | — | | — | | — | | — | | X | ||||||||
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | — | | — | | — | | — | | X | ||||||||
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | — | | — | | — | | — | | X | ||||||||
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | — | | — | | — | | — | | X | ||||||||
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | — | | — | | — | | — | | X | ||||||||
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | — | | — | | — | | — | | X | ||||||||
104 | | Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | — | | — | | — | | — | | X |
* | Indicates management contract or compensatory plan or arrangement. |
PART II. OTHER INFORMATION | 2023 SECOND QUARTER FORM 10-Q | 61 |
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 | |||
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Date: | | By: | /s/ Jack Preston | ||
| | Jack Preston | |||
| | Chief Financial Officer | |||
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Date: September 7, 2023 | | By: | /s/ | ||
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