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

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

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

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

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

As of ~~December 1, 2017, 21,309,941~~August 31, 2018, 22,233,789 shares of registrant’s common stock were outstanding.

	October 28,			January 28,			August 4,			February 3,
	2017			2017			2018			2018
ASSETS
Current assets:
Cash and cash equivalents	$	22,162		$	87,023		$	22,199		$	17,907
Short-term investments		—			142,677
Accounts receivable—net		34,447			34,191			40,706			31,412
Merchandise inventories		557,345			752,304			551,343			527,026
Asset held for sale		—			4,900
Prepaid expense and other current assets		75,041			117,162			78,254			68,585
Total current assets		688,995			1,138,257			692,502			644,930
Long-term investments		—			33,212
Property and equipment—net		778,320			682,056			833,232			800,698
Goodwill		175,553			173,603			141,835			141,893
Trademarks and other intangible assets		100,726			100,757			100,663			100,702
Deferred tax assets		29,214			28,466			29,437			23,311
Other non-current assets		28,758			36,169			16,438			21,332
Total assets	$	1,801,566		$	2,192,520		$	1,814,107		$	1,732,866
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	252,569		$	226,980		$	284,942		$	318,765
Deferred revenue and customer deposits		166,579			145,918			164,979			149,404
Convertible senior notes due 2019—net								335,670			—
Other current liabilities		50,609			43,271			51,354			51,166
Total current liabilities		469,757			416,169			836,945			519,335
Asset based credit facility		341,000			—			—			199,970
Term loan—net		79,471			—			—			79,499
Convertible senior notes due 2019—net		323,828			312,379			—			327,731
Convertible senior notes due 2020—net		248,633			235,965			261,929			252,994
Convertible senior notes due 2023—net								240,804			—
Financing obligations under build-to-suit lease transactions		230,259			203,015			225,700			229,323
Deferred rent and lease incentives		63,499			60,439			54,821			54,983
Other non-current obligations		70,395			44,684			47,847			76,367
Total liabilities		1,826,842			1,272,651			1,668,046			1,740,202
Commitments and contingencies (Note 17)		—			—
Commitments and contingencies (Note 14)								—			—
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
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of August 4, 2018 and February 3, 2018								—			—
Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 42,452,371 shares issued and 22,229,439 shares outstanding as of August 4, 2018; 41,737,470 shares issued and 21,517,338 shares outstanding as of February 3, 2018								2			2
Additional paid-in capital		843,965			790,866			944,610			860,288
Accumulated other comprehensive loss		(1,527	)		(1,692	)		(1,918	)		(171	)
Retained earnings		152,133			150,214			223,459			152,394
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	)
Treasury stock—at cost, 20,222,932 shares as of August 4, 2018 and 20,220,132 shares as of February 3, 2018								(1,020,092	)		(1,019,849	)
Total stockholders’ equity (deficit)		(25,276	)		919,869			146,061			(7,336	)
Total liabilities and stockholders’ equity (deficit)	$	1,801,566		$	2,192,520		$	1,814,107		$	1,732,866

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

	Three Months Ended				Nine Months Ended					Three Months Ended					Six Months Ended
	October 28,		October 29,		October 28,		October 29,			August 4,		July 29,			August 4,		July 29,
	2017		2016		2017		2016			2018		2017			2018		2017
Net revenues	$	592,473	$	549,328	$	1,769,879	$	1,548,165		$	640,798	$	615,326		$	1,198,204	$	1,177,406
Cost of goods sold		378,148		373,509		1,179,485		1,065,032			369,198		409,513			714,569		801,337
Gross profit		214,325		175,819		590,394		483,133			271,600		205,813			483,635		376,069
Selling, general and administrative expenses		171,163		160,433		528,213		457,207			186,225		193,690			344,659		357,050
Income from operations		43,162		15,386		62,181		25,926			85,375		12,123			138,976		19,019
Other expenses
Interest expense—net		18,915		11,091		45,496		32,528			17,480		14,402			34,515		26,581
Loss on extinguishment of debt		4,880		—		4,880		—			917		—			917		—
Total other expenses		23,795		11,091		50,376		32,528			18,397		14,402			35,432		26,581
Income (loss) before income taxes		19,367		4,295		11,805		(6,602	)		66,978		(2,279	)		103,544		(7,562	)
Income tax expense (benefit)		6,216		1,778		9,886		(2,567	)
Income tax expense											2,936		5,583			11,443		3,670
Net income (loss)	$	13,151	$	2,517	$	1,919	$	(4,035	)	$	64,042	$	(7,862	)	$	92,101	$	(11,232	)
Weighted-average shares used in computing basic net income (loss) per share		21,221,848		40,730,059		29,076,556		40,653,091			21,925,702		28,398,307			21,735,364		35,667,217
Basic net income (loss) per share	$	0.62	$	0.06	$	0.07	$	(0.10	)	$	2.92	$	(0.28	)	$	4.24	$	(0.31	)
Weighted-average shares used in computing diluted net income (loss) per share		23,535,617		40,926,450		30,593,382		40,653,091			27,496,561		28,398,307			26,363,395		35,667,217
Diluted net income (loss) per share	$	0.56	$	0.06	$	0.06	$	(0.10	)	$	2.33	$	(0.28	)	$	3.49	$	(0.31	)

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

	Three Months Ended						Nine Months Ended					Three Months Ended						Six Months Ended
	October 28,			October 29,			October 28,		October 29,			August 4,			July 29,			August 4,			July 29,
	2017			2016			2017		2016			2018			2017			2018			2017
Net income (loss)	$	13,151		$	2,517		$	1,919	$	(4,035	)	$	64,042		$	(7,862	)	$	92,101		$	(11,232	)
Net gains (losses) from foreign currency translation		(723	)		(915	)		154		485			(482	)		2,069			(1,747	)		877
Net unrealized holding gains (losses) on available-for-sale investments		—			(59	)		11		84
Net unrealized holding gains on available-for-sale investments													—			—			—			11
Total comprehensive income (loss)	$	12,428		$	1,543		$	2,084	$	(3,466	)	$	63,560		$	(5,793	)	$	90,354		$	(10,344	)

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

	Nine Months Ended
	October 28,			October 29,			Six Months Ended
	2017			2016			August 4,			July 29,
				As Revised			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,919		$	(4,035	)	$	92,101		$	(11,232	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		51,092			41,248			34,803			32,546
Lease impairment adjustment								(1,157	)		—
Non-cash charges resulting from inventory step-up		2,108			5,187			380			1,860
Amortization of debt discount		22,685			21,467			17,645			15,018
Excess tax shortfall from exercise of stock options		—			2,275
Stock-based compensation expense		42,929			21,711			14,092			36,166
Non-cash loss on extinguishment of debt		1,880			—
Loss on extinguishment of debt								917			—
Other non-cash interest expense		4,914			2,971			2,902			2,314
Change in assets and liabilities—net of acquisition:
Change in assets and liabilities:
Accounts receivable		(319	)		(1,445	)		(9,350	)		(617	)
Merchandise inventories		190,620			(23,261	)		(24,995	)		140,331
Prepaid expense and other assets		38,419			(30,378	)		(43,174	)		35,287
Accounts payable and accrued expenses		10,491			(63,435	)		(42,717	)		29,874
Deferred revenue and customer deposits		20,617			22,652			20,800			30,349
Other current liabilities		448			(25,372	)		9,895			2,269
Deferred rent and lease incentives		846			2,953			(81	)		1,166
Other non-current obligations		(1,887	)		8,477			(1,832	)		(975	)
Net cash provided by (used in) operating activities		386,762			(18,985	)
Net cash provided by operating activities								70,229			314,356
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(76,789	)		(104,152	)		(61,212	)		(56,697	)
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			—			—			15,123
Purchase of investments		(16,109	)		(186,967	)		—			(16,109	)
Maturities of investments		46,890			115,938			—			46,890
Sales of investments		145,020			31,896			—			145,020
Acquisition of business—net of cash acquired		—			(116,100	)
Net cash provided by (used in) investing activities		101,324			(263,378	)		(61,212	)		134,227
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under asset based credit facility		446,000			—			510,000			323,000
Repayments under asset based credit facility		(105,000	)		—			(709,970	)		(40,000	)
Borrowings under term loans		180,000			—
Borrowing under term loans								—			180,000
Repayments under term loans		(100,000	)		—			(80,000	)		—
Borrowing under promissory and equipment security notes		34,000			—			—			14,000
Repayments under promissory and equipment security notes		(841	)		—			(31,974	)		(117	)
Proceeds from issuance of convertible senior notes								335,000			—
Proceeds from issuance of warrants								51,021			—
Purchase of convertible note hedges								(91,857	)		—
Debt issuance costs related to convertible senior notes								(6,349	)		—
Debt issuance costs		(8,298	)		—			—			(7,939	)
Repurchases of common stock—including commissions		(1,000,326	)		—			—			(1,000,326	)
Proceeds from exercise of stock options								29,209			11,170
Tax withholdings related to issuance of stock-based awards								(7,863	)		(3,106	)
Payments on build-to-suit lease transactions		(8,734	)		—			(6,190	)		(4,601	)
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	)		(290	)		(158	)
Net cash used in financing activities		(552,969	)		(2,311	)		(9,263	)		(528,077	)
Effects of foreign currency exchange rate translation		22			342			(124	)		55
Net decrease in cash and cash equivalents		(64,861	)		(284,332	)
Net decrease in cash and cash equivalents and restricted cash equivalents								(370	)		(79,439	)
Cash and cash equivalents
Beginning of period		87,023			331,467
End of period	$	22,162		$	47,135
Beginning of period—cash and cash equivalents								17,907			87,023
Beginning of period—restricted cash equivalents (construction related deposits)								7,407			28,044
Beginning of period—cash and cash equivalents and restricted cash equivalents								25,314			115,067

End of period—cash and cash equivalents								22,199			21,637
End of period—restricted cash equivalents (construction related deposits)								2,745			13,991
End of period—cash and cash equivalents and restricted cash equivalents							$	24,944		$	35,628

Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end							$	24,896		$	23,860
Property and equipment additions due to build-to-suit lease transactions	$	35,463		$	46,193			2,478			27,340
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		$	—			1,191			753
Property and equipment additions from unpaid construction related deposits								517			5,848
Issuance of non-current notes payable related to share repurchases from former employees								243			—

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

RH, a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.

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

As of ~~October 28, 2017,~~August 4, 2018, the Company operated a total of 8485 retail Galleries and 3136 outlet stores in 32 states, the District of Columbia and Canada, and includes 15 Waterworks showrooms in the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of ~~October 28, 2017,~~August 4, 2018, and the results of operations for the three and ~~nine~~six months ended ~~October 28, 2017~~August 4, 2018 and ~~October~~July 29, ~~2016.~~2017. The Company’s current fiscal year, which consists of 5352 weeks, ends on February ~~3, 2018~~2, 2019 (“fiscal ~~2017”~~2018”).

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.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017~~February 3, 2018 (the ~~“2016~~“2017 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. ~~Refer to “Revision” below.~~This reclassification had no effect on the previously reported consolidated financial position or consolidated results of operations, and did not have a material effect on the previously reported consolidated cash flows.

The results of operations for the three and ~~nine~~six months ended ~~October 28, 2017~~August 4, 2018 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

~~During the fourth quarter of fiscal 2016, management determined that~~In June 2018, the Company ~~had incorrectly reported negative cash balances~~issued in a private offering $300 million principal amount of 0.00% convertible senior notes due 2023 and issued an additional $35 million principal amount in connection with the overallotment option granted to ~~outstanding checks in~~ the ~~accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying~~initial purchasers (collectively, the ~~limited right of offset against cash and cash equivalents in accordance~~“2023 Notes”). In connection 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 by operating activities on the condensed consolidated statements of cash flows. There was no impact on the condensed consolidated statements of income or stockholders’ equity related to these misstatements.

~~The Company assessed the materiality~~issuance of these ~~misstatements on prior periods~~’ ~~financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99~~—~~Materiality, codified in Accounting Standards Codification (“ASC”) 250~~—~~Presentation~~notes, the Company entered into convertible note hedge transactions for which it paid an aggregate amount of ~~Financial Statements~~,$91.9 million. In addition, the Company sold warrants for which it received aggregate proceeds of $51.0 million. Taken together, the Company received total cash proceeds of $287.8 million, net of discounts upon original issuance and ~~concluded that these misstatements were not material~~offering costs of $6.3 million. Refer to ~~any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108~~Note 7——Convertible Senior Notes~~Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the~~ ~~condensed~~ ~~consolidated statements of cash flows.~~

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

~~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, the FASB issued~~ ~~Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting~~. The new guidance clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The standard will be applied prospectively. ~~The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.~~

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued their converged accounting ~~standard~~standards 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,

The Company ~~continues~~adopted Topic 606 on February 4, 2018 using the modified retrospective transition method and recorded a decrease to ~~assess all potential impacts~~opening retained earnings of $21.0 million, inclusive of the ~~standard. In applying~~tax impact. Results reported within the ~~guidance~~Company’s condensed consolidated financial statements for reporting periods beginning February 4, 2018 are presented under Topic 606 ~~specifically~~while prior periods are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605—Revenue Recognition (Topic 605).

Under Topic 606, changes were made to the recognition timing or classification of revenues and expenses for the following:

Advertising expenses—The adoption of Topic 606 materially impacts the timing of recognizing advertising expense related to direct response advertising, including costs associated with 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.Company’s Source Books. Under Topic 606, the Company ~~expects~~will recognize expense associated with the Source Books upon the delivery of the Source Books to ~~recognize~~the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier. Prior to adoption of Topic 606, costs associated with Source Books were capitalized and amortized over their expected period of future benefit. Such amortization was based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual Source Book basis. Each Source Book was generally fully amortized within a twelve-month period after they were mailed and the majority of the amortization occurred within the first five to nine months, with the exception of the Holiday Source Books, which were generally fully amortized within a three-month period after they were mailed. Upon adoption of Topic 606, capitalized costs associated with Source Books of $37.8 million that had been delivered to the carrier prior to or on February 3, 2018 were reclassified to retained earnings on the consolidated balance sheets, resulting in a decrease to the opening retained earnings balance.

Gift card breakage ~~which~~—Under Topic 606, the Company recognizes gift card breakage proportional to actual gift card redemptions and such breakage is ~~currently~~recorded within net revenues on the condensed consolidated statements of operations. Gift card breakage was previously recorded as a reduction to selling, general and administrative expenses when the likelihood of redemption was remote. Upon adoption of Topic 606, gift card liabilities of $6.0 million were reclassified to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

Membership revenue—Under Topic 606, the annual fee for new memberships in the RH Members Program is recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. Prior to the adoption of Topic 606, new memberships were recorded as deferred revenue when collected from customers and ~~breakage~~recognized as revenue on a straight-line basis over the twelve month membership period. This will result in a majority of revenue being recognized during the first six months of the membership period. The adoption of Topic 606 will not have an impact on membership renewal fees, which will continue to be recognized as revenue on a straight-line basis over the twelve month membership period, until the Company has more information regarding membership renewal purchasing trends. Upon adoption of Topic 606, deferred membership revenue of $3.8 million was reclassified to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

Revenue recognition—Under Topic 606, the Company will continue to recognize revenue for merchandise delivered via the home-delivery channel upon delivery. Under Topic 606, revenue for merchandise delivered via all other delivery channels will be recognized ~~proportional to actual gift card redemptions.~~

upon shipment, whereas previously such revenue was recognized upon delivery. Upon adoption of 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. deferred revenue (net of cost of goods sold) of $1.3 million was reclassified to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

The Company adopted the practical expedient related to shipping and handling activities. Under this option, in instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities will ~~adopt Topic 606~~be accrued for in the same period. Costs of shipping and handling continue to be included in cost of goods sold.

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.

~~In February 2016, the FASB issued~~ ~~Accounting Standards Update 2016-02~~sales returns—~~Leases,~~ ~~which, for operating leases, requires a lessee~~In connection with adoption of Topic 606, the Company is required 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,~~allowance for sales returns on a ~~generally straight-line basis. The ASU is effective~~gross basis rather than as a net liability. Upon adoption, this resulted in an increase to prepaid and other current assets (“right of return asset for ~~public companies~~merchandise”), with a corresponding increase to other current liabilities on the consolidated balance sheets, and did not impact the consolidated statements of operations. As of August 4, 2018, the right of return asset 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 givenmerchandise was $6.9 million.

Sales tax collection from customers—Under Topic 606, the Company has not changed its policy regarding sales tax collected from customers. Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.

In connection with adoption of Topic 606, the Company recorded a ~~significant number~~$6.6 million tax adjustment associated with the charges listed above to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

The Company defers revenue associated with merchandise delivered via the home-delivery channel. As the Company recognizes revenue when the merchandise is delivered to our customers, it is included as deferred revenue on the consolidated balance sheets while in-transit. Customer deposits represent payments made by customers on custom orders. At the time of ~~leases.~~order placement the Company collects deposits for all custom orders equivalent to 50% of the purchase price. Custom order deposits are recognized as revenue when a customer obtains control of the merchandise. In addition, the Company collects annual membership fees related to the RH Members Program. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year. The Company expects that substantially all of the deferred revenue, customer deposits and deferred membership fees as of August 4, 2018 will be recognized within the next six months as the performance obligations are satisfied.

In addition, the Company defers revenue when cash payments are received in advance of performance for unsatisfied obligations related to its gift cards and merchandise credits. Customer liabilities related to gift cards and merchandise credits was $19.1 million and $24.1 million as of August 4, 2018 and February 3, 2018, respectively. As discussed above, $6.0 million of the decrease was due to the reclassification of gift card liabilities to retained earnings upon adoption of Topic 606. During the three and six months ended August 4, 2018, the Company recognized $4.8 million and $9.7 million of revenue related to previous deferrals related to its gift cards and merchandise credits, respectively, and recorded gift card breakage of $0.4 million and $0.8 million, respectively. The Company expects that approximately 70% of the remaining gift card and merchandise credit liabilities will be recognized when the gift cards are redeemed by customers.

The Company recognizes revenue from its stores and direct sales channels. Stores net revenues represent sales originating in retail stores, including Waterworks showrooms, and outlet stores. Direct net revenues include sales through the Company’s Source Books, websites, and phone orders, including its Contract business and a portion of its Trade business. During the three months ended August 4, 2018, net revenues recognized from the stores and direct sales channels were $361.9 million and $278.9 million, respectively. During the six months ended August 4, 2018, net revenues recognized from the stores and direct sales channels were $676.4 million and $521.8 million, respectively.

The following tables summarize the impact of adopting Topic 606 on the Company’s condensed consolidated statements of operations (in thousands):

The following table summarizes the impact of adopting Topic 606 on certain line items of the Company’s condensed consolidated balance sheets (in thousands):

In January 2016, the FASB issued Accounting Standards Update ~~2016-01~~—2016-01—Financial ~~Instruments~~—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~~adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have an impact on its consolidated financial statements.

In August 2016, the FASB issued Accounting ~~Standard~~Standards Update No. ~~2016-15~~—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~~practice regarding the ~~matter~~manner 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~~adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18—Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statement 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. Adoption of the standard will be applied using a retrospective transition method to each period presented. The Company adopted this new accounting standard in the first quarter of fiscal 2018 which resulted in a change to the presentation of the construction related deposits within the statement of cash flows. The Company considers the construction related deposits to be “restricted cash equivalents” and therefore, under the new accounting guidance, is required to include such deposits in beginning and ending “cash and cash equivalents and restricted cash equivalents” on the statement of cash flows. Previously, funding of the construction related deposit accounts was included within the “investing” section of the statement of cash flows and usage of the deposits was presented as a non-cash transaction. Under the new accounting guidance, funding of the construction related deposit accounts will not be presented within the statement of cash flows and the usage of the deposits will be presented within the “capital expenditures” line item under the “investing” section. Adoption of this new accounting standard resulted in an increase of the beginning and ending “cash and cash equivalents and restricted cash equivalents” amounts for the six months ended July 29, 2017 of $28.0 million and $14.0 million, respectively, as well as resulted in an increase in capital expenditures for the six months ended July 29, 2017 of $17.3 million and a decrease in construction related deposits of $5.3 million for the six months ended July 29, 2017.

In October 2016, the FASB issued Accounting ~~Standard~~Standards Update No. ~~2016-16~~—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~~adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have an impact on its consolidated financial statements.

In ~~January~~May 2017, the FASB issued Accounting ~~Standard~~Standards Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting~~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 amendmentsclarifies when modification accounting should be applied onfor changes to terms or conditions of a ~~prospective basis.~~share-based payment award. The new ~~standard~~guidance is effective for fiscal years beginning after December 15, ~~2019~~2017, including interim periods within that reporting period, with early adoption ~~permitted for interim or annual goodwill impairment tests performed after January 1, 2017.~~ permitted. The standard will be applied prospectively. The Company ~~is evaluating the impact of adopting~~adopted this new accounting standard ~~on its consolidated financial statements.~~

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

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

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

~~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.

~~During~~ the first quarter of fiscal ~~2017,~~2018 and such adoption did not have an impact on its consolidated financial statements.

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. In July 2018, the FASB issued Accounting Standards Update 2018-10—Codification Improvements to Topic 842 (Leases), and Accounting Standards Update 2018-11—Leases (Topic 842)—Targeted Improvements, which (i) narrows amendments to clarify how to apply certain aspects of the new lease standard, (ii) provides entities with an additional transition method to adopt the new standard, and (ii) provides lessors with a practical expedient for separating components of a contract. The ASUs are 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 this guidance will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given that the Company ~~committed to~~has a ~~plan to sell the building and land at one~~significant number 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.

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.leases.

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

	October 28,		January 28,		August 4,		February 3,
	2017		2017		2018		2018
Vendor deposits					$	20,767	$	9,701
Capitalized catalog costs	$	44,252	$	61,258		14,285		44,122
Vendor deposits		8,374		13,276
Federal and state tax receivable		5,598		13,124		9,682		—
Right of return asset for merchandise						6,888		—
Prepaid expense and other current assets		16,817		29,504		26,632		14,762
Total prepaid expense and other current assets	$	75,041	$	117,162	$	78,254	$	68,585

	October 28,		January 28,		August 4,		February 3,
	2017		2017		2018		2018
Deferred financing fees					$	3,915	$	4,446
Construction related deposits	$	13,739	$	28,044		2,745		7,407
Other deposits		4,926		4,706		5,139		4,997
Deferred financing fees		4,698		1,530
Other non-current assets		5,395		1,889		4,639		4,482
Total other non-current assets	$	28,758	$	36,169	$	16,438	$	21,332

The following sets forth the goodwill and ~~intangible assets as of October 28, 2017~~trademarks and domain names activity for the RH Segment and Waterworks for the six months ended August 4, 2018 (in thousands):

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

			Foreign
	February 3,		Currency			August 4,
	2018		Translation			2018
RH Segment
Goodwill	$	124,448	$	(58	)	$	124,390
Trademarks and domain names		48,563		—			48,563

Waterworks
Goodwill ⁽¹⁾		17,445		—			17,445
Trademarks		52,100		—			52,100

~~The following sets forth the goodwill and intangible assets as of January 28, 2017 (in thousands~~):

	October 28,		January 28,		August 4,		February 3,
	2017		2017		2018		2018
Accounts payable	$	130,902	$	134,720	$	164,706	$	195,313
Accrued compensation		43,697		26,886		47,562		47,534
Accrued freight and duty		21,952		27,955		20,412		23,757
Accrued sales taxes		15,517		14,908		17,346		19,525
Accrued occupancy						12,460		8,612
Accrued catalog costs		13,296		3,874		10,427		9,000
Accrued occupancy		11,422		8,137
Accrued professional fees		3,801		2,082		2,971		3,555
Other accrued expenses		11,982		8,418		9,058		11,469
Total accounts payable and accrued expenses	$	252,569	$	226,980	$	284,942	$	318,765

	October 28,		January 28,		August 4,		February 3,
	2017		2017		2018		2018
Allowance for sales returns					$	23,069	$	10,565
Unredeemed gift card and merchandise credit liability	$	27,448	$	24,524		19,110		24,138
Allowance for sales returns		10,999		10,077
Product recall reserves						3,501		1,201
Current portion of non-current debt		5,986		—		892		6,033
Product recall reserves		2,218		4,324
Federal and state tax payable						—		5,391
Other current liabilities		3,958		4,346		4,782		3,838
Total other current liabilities	$	50,609	$	43,271	$	51,354	$	51,166

	October 28,		January 28,		August 4,		February 3,
	2017		2017		2018		2018
Notes payable for share repurchases	$	19,390	$	19,390	$	18,741	$	19,390
Equipment security notes ⁽¹⁾		15,040		—
Promissory note ⁽²⁾		11,968		—
Capital lease obligations—non-current		7,553		7,242		8,012		7,509
Deferred contract incentive ⁽³⁾		5,953		7,739
Lease loss liabilities						7,393		9,684
Deferred contract incentive ⁽¹⁾						4,167		5,358
Unrecognized tax benefits		2,617		2,508		3,955		3,728
Rollover units and profit interests ⁽⁴⁾		2,104		1,784
Rollover units and profit interests ⁽²⁾						2,424		2,211
Other non-current obligations		5,770		6,021		3,155		2,996
Equipment security notes ⁽³⁾						—		13,864
Promissory note ⁽⁴⁾						—		11,627
Total other non-current obligations	$	70,395	$	44,684	$	47,847	$	76,367

In June 2018, the Company issued in a private offering $300 million principal amount of 0.00% convertible senior notes due 2023 and issued an additional $35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”). The 2023 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2023 Notes will mature on June 15, 2023, unless earlier purchased by the Company or converted. The 2023 Notes will not bear interest, except that the 2023 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 2023 Notes. The 2023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2023 Notes, which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes.

The initial conversion rate applicable to the 2023 Notes is 5.1640 shares of common stock per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $193.65 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” 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 elects to convert its 2023 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2023, the 2023 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 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 calendar quarter, the last reported sale price of the Company’s 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 2023 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of August 4, 2018, none of these conditions have occurred and, as a result, the 2023 Notes are not convertible as of August 4, 2018. On and after March 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless

of the foregoing circumstances. Upon conversion, the 2023 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination 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 per note to be received upon conversion of $1,000.

The Company may not redeem the 2023 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 2023 Notes for cash at a price equal to 100% of the principal amount of the 2023 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 2023 Notes, the Company separated the 2023 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 2023 Notes and the fair value of the liability component of the 2023 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 6.35% over the expected life of the 2023 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 2023 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 2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2023 Notes were comprised of discounts upon original issuance of $1.7 million and third party offering costs of $4.6 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 2023 balance on the condensed consolidated balance sheets. During both the three and six months ended August 4, 2018, the Company recorded $0.1 million related to the amortization of debt issuance costs.

The carrying values of the 2023 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):

The Company recorded interest expense of $1.8 million for the amortization of the debt discount related to the 2023 Notes during both the three and six months ended August 4, 2018.

In connection with the offering of the 2023 Notes and exercise of the overallotment option in June 2018, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 1.7 million shares of its common stock at a price of approximately $193.65 per share. The total cost of the convertible note hedge transactions was $91.9 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.7 million shares of the Company’s common stock at a price of $309.84 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 3.5 million shares of common stock (which cap may also be subject to adjustment). The Company received $51.0 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2023 Notes until the Company’s common stock is above approximately

$309.84 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded a deferred tax liability of $22.3 million in connection with the debt discount associated with the 2023 Notes and recorded a deferred tax asset of $22.5 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.

In June 2015, the Company issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “2020 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 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 $1,000 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, the Company 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~~calendar quarter, the last reported sale price of the Company’s 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 the Company’s 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,~~August 4, 2018, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of ~~October 28, 2017.~~August 4, 2018. 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 the Company’s election, in cash, shares

of the Company’s common stock, or a combination 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 per note to be received upon conversion of $1,000.

The Company 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 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 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, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The ~~excess of the principal amount of the liability component over its carrying amount (“~~debt ~~discount”)~~discount will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

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

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets. During both the three months ended ~~October 28,~~August 4, 2018 and July 29, 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 both the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ the Company recorded ~~$0.8~~$0.5 million ~~and $0.7 million, respectively,~~ related to the amortization of debt issuance costs.

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

	October 28,			January 28,			August 4,			February 3,
	2017			2017			2018			2018
Liability component
Principal	$	300,000		$	300,000		$	300,000		$	300,000
Less: Debt discount		(48,229	)		(60,124	)		(35,745	)		(44,135	)
Net carrying amount	$	251,771		$	239,876		$	264,255		$	255,865
Equity component ⁽¹⁾	$	84,003		$	84,003		$	84,003		$	84,003

The Company recorded interest expense of ~~$4.0~~$4.2 million and ~~$3.8~~$4.0 million for the amortization of the debt discount related to the 2020 Notes during the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The Company recorded interest expense of ~~$11.9~~$8.4 million and ~~$11.2~~$7.9 million ~~for the amortization of the debt discount related to the 2020 Notes~~ during the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively.

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

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.

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.

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~~calendar quarter, the last reported sale price of the Company’s 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 the Company’s 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,~~August 4, 2018, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of ~~October 28, 2017.~~August 4, 2018. 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 the Company’s election, in cash, shares of the Company’s common stock, or a combination 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 per note to be received upon conversion 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 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, 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 the principal amount of the liability component over its carrying amount (“~~debt ~~discount”)~~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, 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,~~August 4, 2018 and July 29, 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 ~~both~~ the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ the Company recorded ~~$0.6~~$0.5 million and $0.4 million, respectively, related to the amortization of debt issuance costs.

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

	October 28,			January 28,			August 4,			February 3,
	2017			2017			2018			2018
Liability component
Principal	$	350,000		$	350,000		$	350,000		$	350,000
Less: Debt discount		(24,666	)		(35,457	)		(13,506	)		(20,988	)
Net carrying amount	$	325,334		$	314,543		$	336,494		$	329,012
Equity component ⁽¹⁾	$	70,482		$	70,482		$	70,482		$	70,482

The Company recorded interest expense of ~~$3.6~~$3.8 million and ~~$3.5~~$3.6 million for the amortization of the debt discount related to the 2019 Notes during the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The Company recorded interest expense of ~~$10.8~~$7.5 million and ~~$10.3~~$7.2 million for the amortization of the debt discount related to the 2019 Notes during the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively.

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.

~~The following~~There were no balances outstanding under the Company’s credit facilities ~~were outstanding~~ as of ~~October 28, 2017~~August 4, 2018. Balances outstanding under the Company’s credit facilities as of February 3, 2018 were as follows (in thousands):

								February 3,
								2018
	Outstanding		Unamortized Debt			Net Carrying		Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount		Amount		Issuance Costs			Amount
Asset based credit facility	$	341,000	$	—		$	341,000	$	199,970	$	—		$	199,970
LILO term loan		80,000		(529	)		79,471		80,000		(501	)		79,499
Total credit facilities	$	421,000	$	(529	)	$	420,471	$	279,970	$	(501	)	$	279,469

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

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 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, the credit agreement ~~establishes~~established an ~~up to~~ $80.0 million LILO term loan facility.

The ~~Company incurred $3.9 million of deferred financing fees related to the~~ credit agreement ~~which are included in other non-current assets on the condensed consolidated balance sheets,~~ and ~~will be amortized on a straight line basis over the life of the revolving line of credit, which has~~LILO term loan have a maturity date of June 28, 2022.

In June 2018, the Company repaid the LILO term loan in full. As a result of the ~~credit agreement, unamortized deferred financing fees of $0.1 million related to~~repayment, the ~~previous facility were expensed during the nine months ended October 28, 2017 and $1.1 million related to the previous facility will be amortized over the life of the new revolving line of credit.~~

~~The~~ Company incurred ~~$0.6~~a $0.5 million loss on extinguishment of debt, which represents the acceleration of amortization of debt issuance ~~costs related to~~costs. The Company did not incur any prepayment penalties upon the early extinguishment of the LILO term ~~loan facility, which are presented net against~~loan.

On June 12, 2018, Restoration Hardware, Inc. entered into a First Amendment (the “Amendment”) to credit agreement. The Amendment (i) changes the ~~term loans balance on~~credit agreement’s definition of “Eligible In-Transit Inventory” to clarify the ~~condensed consolidated balance sheets,~~requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and ~~will be amortized over the life~~(ii) clarifies that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory. Eligible In-Transit Inventory consists of inventory being shipped from vendor locations outside of the ~~revolving line~~United States. Qualifying in-transit inventory is included within the Company’s borrowing base for eligible collateral for purposes of ~~credit.~~determining the amount of borrowing available to borrowers under the credit agreement.

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. As of ~~October 28, 2017~~,August 4, 2018, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

As of ~~October 28, 2017,~~August 4, 2018, the Company had ~~$341.0 million in~~no outstanding borrowings and ~~$189.0~~$437.8 million of availability under the revolving line of credit, net of ~~$27.7~~$12.8 million in outstanding letters of credit. ~~As of October 28, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility.~~ As a result of the consolidated fixed-charge coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit ~~is approximately $125.2~~was $392.8 million as of ~~October 28, 2017.~~August 4, 2018.

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

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

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

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

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

The second lien credit agreement also contained a financial ratio covenant not found in the credit agreement based upon a senior secured leverage ratio of consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The second lien credit agreement also contained a consolidated fixed charge coverage ratio generally based on the same formulation set forth in the credit agreement such that the borrower may not make certain “restricted payments” in the event that certain ratios were not met and contained certain events of default and other customary terms and conditions for a second lien credit agreement.

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.

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:~~

~~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.~~

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~~):

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~~):

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.

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts. The estimated fair value and carrying value of the 2019 Notes, ~~and~~ 2020 Notes ~~(carrying value excludes the equity component of the 2019~~and 2023 Notes ~~and 2020 Notes classified in stockholders’ equity)~~ were as follows (in thousands):

	October 28,				January 28,				August 4,				February 3,
	2017				2017				2018				2018
	Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value ⁽¹⁾		Fair Value		Carrying Value ⁽¹⁾
Convertible senior notes due 2019	$	312,281	$	325,334	$	295,381	$	314,543	$	332,232	$	336,494	$	324,866	$	329,012
Convertible senior notes due 2020	$	247,300	$	251,771	$	232,463	$	239,876		265,796		264,255		261,047		255,865
Convertible senior notes due 2023										245,275		245,783		—		—

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

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

The Company recorded income tax expense of ~~$6.2~~$2.9 million and ~~$1.8~~$5.6 million in the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The Company recorded income tax expense of ~~$9.9~~$11.4 million and ~~an income tax benefit of $2.6~~$3.7 million in the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017. The effective tax rate was 4.4% and -245.0% for the three months ended August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The effective tax rate was ~~32.1%~~11.1% and ~~41.4%~~-48.5% for the ~~three~~six months ended ~~October 28, 2017~~August 4, 2018 and ~~October~~July 29, ~~2016, respectively.~~2017. The effective tax rate ~~was 83.7%~~in the three and ~~38.9% for the nine~~six months ended ~~October 28, 2017~~August 4, 2018 was significantly impacted by discrete tax benefits related to net excess tax windfalls from stock-based compensation resulting from increased option exercise activity and ~~October 29, 2016, respectively.~~appreciation of the stock price, the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018 due to the passage of the Tax Cuts and Jobs Act (the “Tax Act”), and discrete tax impact related to a legal settlement. The effective tax ~~rates for~~rate in the three and ~~nine~~six months ended ~~October 28,~~July 29, 2017 ~~were~~was significantly impacted by non-deductible stock-based compensation, as well as the Company reporting a net loss before income taxes and, to a lesser extent, the net excess tax benefits from stock-based ~~compensation of $1.9 million and $4.3 million, respectively, resulting from~~compensation.

On December 22, 2017, the ~~Company’s adoption of ASU 2016-09~~Tax Act was enacted in the ~~first quarter~~United States. The Company recognized the income tax effects of the Tax Act in its fiscal ~~2017. The effective tax rate~~2017 financial statements in accordance with Staff Accounting Bulletin 118, which provides SEC staff guidance for the ~~nine~~application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As noted in its fiscal 2017 consolidated financial statements, the Company was able to reasonably estimate certain effects and, therefore, recorded provisional amounts associated with the one-time transition tax on indefinitely reinvested foreign earnings and the adjustment to our deferred tax assets and liabilities for the reduction in the corporate income tax rate.

The Company has not made any additional measurement period adjustments related to these items during the three and six months ended ~~October 28, 2017 was also significantly impacted by non-deductible stock-based compensation.~~August 4, 2018. As the Company continues its analysis of the Tax Act and interprets any additional guidance, it may make adjustments to the provisional amounts that have been recorded that may materially impact the Company's provision for income taxes.

As of ~~October 28, 2017 and January 28, 2017, $6.8~~August 4, 2018, the Company had $8.4 million ~~and $1.4 million, respectively,~~ of ~~the exposures related to~~ unrecognized tax benefits, of which $6.8 million would ~~affect~~reduce income tax expense and the effective tax rate, if ~~realized,~~recognized. As of February 3, 2018, the Company had $8.2 million of unrecognized tax benefits, of which as$6.5 million would reduce income tax expense and the effective tax rate, if recognized. The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized. As of ~~both October 28, 2017 and January 28, 2017, $1.4 million is included in other non-current obligations on the condensed consolidated balance sheets. In October 2017,~~August 4, 2018, the Company ~~filed an amended federal tax return claiming a $5.4~~had $0.4 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. As of October 28, 2017, the Company does not have any exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

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~~three and six months ended ~~October~~July 29, ~~2016,~~2017, the weighted-average shares outstanding for basic and diluted are the same.

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 28,		October 29,		October 28,		October 29,		August 4,		July 29,		August 4,		July 29,
	2017		2016		2017		2016		2018		2017		2018		2017
Weighted-average shares—basic		21,221,848		40,730,059		29,076,556		40,653,091		21,925,702		28,398,307		21,735,364		35,667,217
Effect of dilutive stock-based awards		2,313,769		196,391		1,516,826		—		5,158,591		—		4,421,897		—
Effect of dilutive convertible senior notes⁽¹⁾										412,268		—		206,134		—
Weighted-average shares—diluted		23,535,617		40,926,450		30,593,382		40,653,091		27,496,561		28,398,307		26,363,395		35,667,217

The following number of options and restricted stock units were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 28,		October 29,		October 28,		October 29,		August 4,		July 29,		August 4,		July 29,
	2017		2016		2017		2016		2018		2017		2018		2017
Options		2,222,103		7,995,703		3,701,484		8,594,487		209,441		8,997,210		347,978		8,997,210
Restricted stock units		128,723		892,279		305,744		1,151,993		—		838,377		5,250		838,377
Total anti-dilutive stock-based awards		2,350,826		8,887,982		4,007,228		9,746,480		209,441		9,835,587		353,228		9,835,587

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

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 per share, for an aggregate repurchase amount of approximately $300 million, during the three months ended April 29, 2017. As the $300 Million Repurchase Program was completed during the three months ended April 29, 2017 ~~no additional shares were repurchased during the three months ended October 28, 2017 and~~ there will be no repurchases in future periods under this repurchase authorization.

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~~August 4, 2018 and ~~January 28, 2017,~~February 3, 2018, the aggregate unpaid principal amount of the notes payable for share repurchases was $19.6 million and $19.4 million, ~~which is~~respectively. As of August 4, 2018, $0.9 million and $18.7 million were included in other current liabilities and other non-current obligations on the condensed consolidated balance sheets. As of February 3, 2018, $19.4 million was included in other non-current obligations. During both the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ the Company recorded interest expense on the outstanding notes of ~~$0.2~~$0.3 million. During both the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ the Company recorded interest expense on the outstanding notes of ~~$0.7~~$0.5 million.

Of the $19.6 million and $19.4 million notes payable for share repurchases outstanding as of ~~both October 28, 2017~~August 4, 2018 and ~~January 28, 2017,~~February 3, 2018, respectively, $15.5 million was due to a current board member of the Company.

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

Stock-based compensation expense is included in selling, general and administrative expenses on the condensed consolidated statements of operations. The Company recorded stock-based compensation expense of ~~$6.7~~$6.1 million and ~~$7.4~~$30.9 million during the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The Company recorded stock-based compensation expense of ~~$42.9~~$14.1 million and ~~$21.7~~$36.2 million during the ~~nine~~six months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

As of ~~October 28, 2017, 8,837,586~~August 4, 2018, 8,031,998 options were outstanding with a weighted-average exercise price of ~~$50.20~~$52.63 per share and ~~6,318,980~~6,125,419 options were vested with a weighted-average exercise price of ~~$51.96~~$52.03 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of ~~October 28, 2017~~August 4, 2018 was ~~$323.7~~$660.2 million, ~~$283.8~~$605.6 million, and ~~$220.6~~$506.6 million, respectively. Stock options exercisable as of ~~October 28, 2017~~August 4, 2018 had a weighted-average remaining contractual life of ~~6.37~~5.62 years. As of ~~October 28, 2017,~~August 4, 2018, the total unrecognized compensation expense related to unvested options was ~~$26.8~~$25.6 million, which is expected to be recognized on a straight-line basis over a weighted-average period of ~~3.33~~2.90 years.

As of ~~October 28, 2017,~~August 4, 2018, the Company had ~~825,307~~594,408 restricted stock units outstanding with a weighted-average grant date fair value of ~~$52.20~~$52.74 per share. During the three months ended ~~October 28, 2017, 18,590~~August 4, 2018, 132,660 restricted stock units vested with a weighted-average grant date and vest date fair value of ~~$73.95~~$58.73 per ~~share and $73.06 per share, respectively.~~share. During the ~~nine~~six months ended

~~October 28, 2017, 264,843~~ August 4, 2018, 163,275 restricted stock units vested with a weighted-average grant date and vest date fair value of ~~$59.11~~$57.54 per ~~share and $54.71 per share, respectively.~~share. As of ~~October 28, 2017,~~August 4, 2018, there was ~~$22.5~~$16.4 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of ~~3.26~~2.57 years.

On May 2, 2017, the Company’s Board of Directors granted Mr. Friedman an option to purchase 1,000,000 shares of the Company’s common stock with an exercise price equal to $50 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~~three and six months ended ~~October 28, 2017. The Company did not record any expense related to this grant in the three months ended October 28,~~July 29, 2017.

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.

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.

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 shares of its common stock, with an exercise price 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 and fifth anniversaries of the grant date. The fully vested options resulted in a one-time non-cash stock-based compensation charge of $3.7 million in the second quarter of fiscal 2016.

In connection with the acquisition of Waterworks in May 2016, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Appreciation Rights is determined based on an ~~option pricing method (“OPM”).~~OPM. The Company did not record any expense related to the Appreciation Rights during the three ~~or nine~~and six months ended ~~October 28, 2017 or October~~August 4, 2018 and July 29, ~~2016.~~2017. As of both ~~October 28, 2017~~August 4, 2018 and ~~January 28, 2017,~~February 3, 2018, the liability associated with the Rollover Units and related Appreciation Rights was $1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

In connection with the acquisition of Waterworks in May 2016, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates. The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years. The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Profit Interests is determined based on an OPM. For both the three ~~and nine~~ months ended ~~October 28,~~August 4, 2018 and July 29, 2017, the Company recorded $0.1 million ~~and $0.3 million, respectively,~~ related to the Profit Interests, which is included in selling, general and administrative expenses on the condensed consolidated statements of operations. For both the ~~three and nine~~six months ended ~~October~~August 4, 2018 and July 29, ~~2016~~2017, the Company recorded ~~$0.1 million and~~ $0.2 million ~~respectively,~~ related to the Profit ~~Interests.~~Interests, which is included in selling, general and administrative expenses on the condensed consolidated statements of operations. As of ~~October 28, 2017~~August 4, 2018 and ~~January 28, 2017,~~February 3, 2018, the liability associated with the Profit Interests was ~~$0.6~~$0.9 million and ~~$0.3~~$0.7 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

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.

The Company had no material off balance sheet commitments as of ~~October 28, 2017.~~August 4, 2018.

The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business. These disputes are increasing in number as the business expands and the Company grows larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which the Company is involved could result in unexpected expenses and liability that could adversely affect the Company’s operations. In addition, any claims against the Company, whether meritorious 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.

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

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

other appropriate relief, including an award of costs and attorneys’ fees. On February 26, 2018, the Court filed an order denying the Company’s motion to dismiss the ~~complaint.~~complaint and the case is in discovery. While the outcome of litigation is inherently uncertain, the Company and its officers intend to vigorously defend the claims and believe the ~~complaints lack~~complaint lacks merit.

On April 24, 2018, purported Company shareholder David Magnani filed a purported shareholder derivative suit in the United States District Court, Northern District of California, captioned Magnani v. Friedman et al. (No. 18-cv-02452). The suit names the Company as nominal defendant and also names as defendants Gary Friedman, Karen Boone, Carlos Alberini, Keith Belling, Eri Chaya, Mark Demilio, Katie Mitic, Ali Rowghani, and Leonard Schlesinger. On June 29, 2018, Hosrof Izmirliyan filed a similar purported shareholder derivative complaint in the same forum against Gary Friedman, Karen Boone, Carlos Alberini, Eri Chaya, Mark Demilio, Katie Mitic, Ali Rowghani and Leonard Schlesinger, captioned Izmirliyan v. Friedman et al. (No. 18-cv-03930). On July 29, 2018, the court consolidated both derivative actions, and the consolidated action is captioned In re RH Shareholder Derivative

Litigation. The allegations in the complaints substantially track those in the securities class action described above. Plaintiffs bring claims against all individual defendants under Section 14(a) of the Exchange Act, as well as claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets. Magnani also alleges insider trading and misappropriation of information claims against two of the individual defendants. On August 24, 2018, plaintiffs filed an amended complaint. The amended complaint seeks monetary damages, corporate governance changes, restitution, and an award of costs and attorneys’ fees. The Company believes that plaintiffs lack standing to bring this derivative action.

The Company defines reportable and operating segments on the same basis that it uses to evaluate performance internally by the Chief Operating Decision Maker (the “CODM”). The Company has determined that the Chief Executive Officer is its CODM. As of ~~October 28, 2017,~~August 4, 2018, the Company had two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by the Company’s customers, including sales through catalogs, sales through the Company’s websites, sales through stores, and sales through the commercial channel.

The Company’s two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared management team and customer base, the Company has 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, loss on extinguishment of debt and income ~~taxes.~~tax expense.

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.

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

	Nine Months Ended						Nine Months Ended						Three Months Ended
	October 28,						October 29,						August 4,						July 29,
	2017						2016						2018						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		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	$	607,604	$	33,194	$	640,798	$	583,793	$	31,533	$	615,326
Gross profit	$	555,844	$	34,550	$	590,394	$	467,402	$	15,731	$	483,133		258,181		13,419		271,600		192,996		12,817		205,813
Depreciation and amortization	$	47,761	$	3,331	$	51,092	$	39,484	$	1,764	$	41,248		16,638		1,118		17,756		15,386		1,140		16,526

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

	October 28,						January 28,						August 4,						February 3,
	2017						2017						2018						2018
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill ⁽¹⁾	$	124,409	$	51,144	$	175,553	$	124,374	$	49,229	$	173,603	$	124,390	$	17,445	$	141,835	$	124,448	$	17,445	$	141,893
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624		48,563		52,100		100,663		48,563		52,100		100,663
Total assets	$	1,649,057	$	152,509	$	1,801,566	$	2,040,346	$	152,174	$	2,192,520		1,685,089		129,018		1,814,107		1,608,290		124,576		1,732,866

The Company uses segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) ~~non-cash~~ a legal settlement, net of legal expenses, (ii) the lease loss liability adjustment associated with the Dallas distribution center closure, (iii) product recall accruals and adjustments, (iv) severance costs associated with the supply chain reorganization, including the closure of the Dallas customer call center, partially offset by a reversal of stock-based compensation ~~charges~~expense related to ~~a fully vested 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)~~unvested equity awards, (v) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, ~~(iv) costs associated with anticipated distribution center closures, (v)~~(vi) non-cash compensation charges related to a fully vested option grant made to Mr. Friedman and (vii) gain on sale of building and land, (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim, (vii) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, and ~~(viii)~~ ~~costs incurred in connection with the acquisition of Waterworks including professional fees.~~land. 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 following table ~~shows~~presents segment operating income (loss) and income (loss) before tax (in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28,			October 29,			October 28,			October 29,			August 4,			July 29,			August 4,			July 29,
	2017			2016			2017			2016			2018			2017			2018			2017
Operating income (loss):
RH Segment	$	48,724		$	18,660		$	98,332		$	51,687		$	78,777		$	39,550		$	132,673		$	49,608
Waterworks		(719	)		(514	)		(2,143	)		344			241			358			(275	)		(1,424	)
Legal settlement														7,204			—			5,289			—
Distribution center closures														—			—			2,072			—
Recall accrual														1,064			(4,733	)		1,318			(4,733	)
Reorganization related costs														(1,721	)		—			(1,721	)		—
Impact of inventory step-up														(190	)		(480	)		(380	)		(1,860	)
Non-cash compensation		—			—			(23,872	)		(3,672	)		—			(23,872	)		—			(23,872	)
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			—			—			1,300			—			1,300
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			85,375			12,123			138,976			19,019
Interest expense—net		18,915			11,091			45,496			32,528			17,480			14,402			34,515			26,581
Loss on extinguishment of debt		4,880			—			4,880			—			917			—			917			—
Income (loss) before tax	$	19,367		$	4,295		$	11,805		$	(6,602	)	$	66,978		$	(2,279	)	$	103,544		$	(7,562	)

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

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 28,		October 29,		October 28,		October 29,		August 4,		July 29,		August 4,		July 29,
	2017		2016		2017		2016		2018		2017		2018		2017
Furniture	$	383,281	$	343,946	$	1,125,220	$	985,639	$	430,196	$	388,983	$	782,842	$	741,939
Non-furniture		209,192		205,382		644,659		562,526		210,602		226,343		415,362		435,467
Total net revenues	$	592,473	$	549,328	$	1,769,879	$	1,548,165	$	640,798	$	615,326	$	1,198,204	$	1,177,406

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of ~~October 28, 2017,~~August 4, 2018, the Company operates 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian

and U.K. operations, and the long-lived assets in Canada and the U.K., are not material to the Company. ~~Geographic~~Canada and U.K. geographic revenues are ~~determined~~ based upon ~~where service is rendered.~~revenues recognized at the retail store locations in the respective country.

No single customer accounted for more than 10% of the Company’s revenues in the three ~~or nine~~and six months ended ~~October 28, 2017~~August 4, 2018 or ~~October~~July 29, ~~2016.~~2017.

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our ~~2016~~2017 Form 10-K.

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “short-term,” “non-recurring,” “one-time,” “unusual,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results and matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the sections entitled Risk Factors in Part II of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2018 (the “First Quarter Form 10-Q”), in our Annual Report on Form 10-K for the fiscal year ended ~~January 28,~~ February 3, 2018 (“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 First Quarter Form 10-Q and in our ~~2016~~2017 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 as a result of new information, future events or otherwise, except as otherwise required by law.

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

Our business is fully integrated across our multiple channels of distribution, consisting of our stores, Source Books and websites. As of ~~October 28, 2017,~~August 4, 2018, we operated a total of 8485 retail Galleries, consisting of 4818 Design Galleries, 44 legacy Galleries, ~~6 larger format Design Galleries, 9 next generation Design Galleries, 1~~2 RH Modern ~~Gallery~~Galleries and 56 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms in the United States and in the U.K. In addition, as of ~~October 28, 2017,~~August 4, 2018, we operated 3136 outlet stores throughout the United States and Canada.

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

InNew Design Gallery sites are identified based on a variety of factors, including timing of legacy Gallery lease expiration, availability of suitable new site locations based on several store specific aspects including geographic location, demographics, and proximity to affluent consumers, and the negotiation of favorable economic terms to us for the new location, as well as satisfactory and timely completion of real estate development including procurement of permits and completion of construction. Based on our analysis, we believe we have the opportunity to operate Design Galleries in 60 to

70 locations in the United States and Canada. The increased cadence should support an increase in the rate of our long-term revenue growth as new Design Gallery openings are one of the key drivers of our long-term revenue growth. The number of Design Galleries we open in any fiscal ~~2016, we experienced a slowdown~~year is highly dependent upon these variables and individual new Design Galleries may be subject to delay or postponement depending on the circumstances of specific projects.

We opened our Portland Design Gallery in ~~sales~~March 2018 and ~~substantially lower level of profits than~~our Nashville Design Gallery in ~~prior periods.~~ June 2018. We expect to open our Design Gallery in New York, as well as our smaller Gallery in Yountville, California in the Napa Valley, in September 2018, both with integrated cafés, wine vaults and barista bars.

We have ~~undertaken initiatives~~identified key learnings from our real estate transformation that have supported the development of a new multi-tier market approach that we believe will optimize both market share and return on invested capital.

First, we have developed a new RH prototype Design Gallery that will enable us to ~~specifically address~~more quickly place our disruptive product assortment and immersive retail experience into the ~~temporal factors affecting~~market. The new prototype is based on key learnings from our ~~results~~recent Gallery openings and will range in size from 33,000 square feet inclusive of our integrated hospitality experience to 29,000 square feet without. These new Galleries will present our assortments from RH Interiors, Modern, Baby & Child, Teen and Outdoor. Due to the reduced square footage and efficient design, we believe these new prototypes will be more capital efficient with less time and cost risk, but yield similar productivity. We anticipate these new Galleries will represent approximately two thirds of our target markets and enable us to ramp our opening cadence from three to five new Galleries per year, to a pace of five to seven new Galleries per year.

Second, we are developing a Gallery tailored to secondary markets. Targeted to be 10,000 to 18,000 square feet, we believe these smaller expressions of our brand will enable us to gain share in markets currently only served by smaller competitors. We expect these Galleries to require a substantially smaller net investment than our larger Design Galleries and to pay back our capital investment within two years in most instances.

Third, we will continue to develop and open larger Bespoke Design Galleries in the top metropolitan markets as we are doing in New York this year and as we are doing in San Francisco with a target opening date in 2019. We expect these iconic locations to be highly profitable statements for our brand and we believe they create a long-term competitive advantage that will be difficult to duplicate.

Fourth, we will continue to open indigenous Bespoke Galleries in the best second home markets where the wealthy and affluent visit and vacation. These Galleries will be tailored to reflect the local culture and be sized to the potential of each market. Examples of current and future Bespoke Galleries include the Hamptons and Palm Beach, and the Bespoke Gallery opening this year in Yountville.

Like our evolving multi-tier Gallery strategy, we have developed a multi-tier real estate strategy that is designed to significantly increase our unit level profitability and return on invested capital. Our three primary deal constructs are outlined below:

We anticipate that all of the above deal structures should lead to ~~the other numerous~~lower capital requirements, higher unit profitability, and significantly higher returns on invested capital.

During fiscal 2017 and ~~future time periods that may~~fiscal 2018 we have deferred the introduction of major new product category expansions other than the ongoing development of RH Hospitality in conjunction with new Design Galleries. We plan a ~~negative impact~~return to our product and business expansion strategy in fiscal 2019, which has been on ~~growth and profitability. For further information~~hold as we focus on the ~~temporal factors affecting our results~~architecture of a new operating platform 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~~move to a membership ~~model~~model. We also plan to increase our investment in RH Interior Design in fiscal 2019 with a goal of building the leading Interior Design Firm in North America. We believe there is a significant revenue opportunity by offering world class design and installation services as we move the brand beyond creating and selling products, to conceptualizing and selling spaces.

~~Simultaneously we began~~We expect our work architecting a new operating platform, inclusive of our distribution center network redesign, the redesign of our ~~supply chain network, rationalizing~~reverse logistics and outlet business, and the reconceptualization of our ~~product offerings,~~home delivery and ~~transitioning~~customer experience, will drive lower costs and 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~~levels, and higher earnings and inventory turns throughout the balance of fiscal 2018.

Looking forward, we expect this multi-year effort to ~~consolidate our current furniture distribution center network from four to two locations by~~result in a dramatically improved customer experience, continued margin enhancement and significant cost savings over the ~~fourth quarter of 2017.~~next several years.

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 way in which we operate our ~~business such as charges related to closure of distribution centers.~~business. The above factors and other current and future operational initiatives ~~of the Company~~ may create additional uncertainty with respect to our consolidated net revenues and profit in the near term.

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

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

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

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

In fiscal 2016, we made several strategic investments and changes to our business model in order to strengthen our brand and position 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 launch of RH Modern; the timing of recognizing Membership revenues related to the transition from

~~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, The Gallery at the Three Arts Club.

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

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28,			October 29,			October 28,			October 29,			August 4,			July 29,			August 4,			July 29,
	2017			2016			2017			2016			2018			2017			2018			2017
	(dollars in thousands)												(dollars in thousands)
Condensed Consolidated Statements of Operations:
Net revenues	$	592,473		$	549,328		$	1,769,879		$	1,548,165		$	640,798		$	615,326		$	1,198,204		$	1,177,406
Cost of goods sold		378,148			373,509			1,179,485			1,065,032			369,198			409,513			714,569			801,337
Gross profit		214,325			175,819			590,394			483,133			271,600			205,813			483,635			376,069
Selling, general and administrative expenses		171,163			160,433			528,213			457,207			186,225			193,690			344,659			357,050
Income from operations		43,162			15,386			62,181			25,926			85,375			12,123			138,976			19,019
Other expenses
Interest expense—net		18,915			11,091			45,496			32,528			17,480			14,402			34,515			26,581
Loss on extinguishment of debt		4,880			—			4,880			—			917			—			917			—
Total other expenses		23,795			11,091			50,376			32,528			18,397			14,402			35,432			26,581
Income (loss) before income taxes		19,367			4,295			11,805			(6,602	)		66,978			(2,279	)		103,544			(7,562	)
Income tax expense (benefit)		6,216			1,778			9,886			(2,567	)
Income tax expense														2,936			5,583			11,443			3,670
Net income (loss)	$	13,151		$	2,517		$	1,919		$	(4,035	)	$	64,042		$	(7,862	)	$	92,101		$	(11,232	)
Other Financial and Operating Data:
Net revenues:
Stores⁽¹⁾	$	343,222		$	306,800		$	1,010,120		$	872,662		$	361,883		$	350,174		$	676,400		$	666,898
Direct	$	249,251		$	242,528		$	759,759		$	675,503		$	278,915		$	265,152		$	521,804		$	510,508
Direct as a percentage of net revenues ⁽²⁾		42	%		44	%		43	%		44	%		44	%		43	%		44	%		43	%
Growth in net revenues:
Stores ⁽¹⁾		12	%		9	%		16	%		14	%		3	%		13	%		1	%		18	%
Direct		3	%		-3	%		12	%		-3	%		5	%		14	%		2	%		18	%
Total		8	%		3	%		14	%		6	%		4	%		13	%		2	%		18	%
Comparable brand revenue growth⁽³⁾		6	%		-6	%		7	%		-2	%		5	%		7	%		3	%		8	%
Adjusted net income ⁽⁴⁾	$	24,424		$	8,019		$	45,919		$	23,861		$	67,434		$	19,701		$	100,888		$	21,495
Capital:
Adjusted EBITDA ⁽⁵⁾													$	103,008		$	63,439		$	181,432		$	93,024
Capital expenditures	$	37,427		$	58,876		$	76,789		$	104,152		$	34,091		$	35,524		$	61,212		$	56,697
Construction related deposits ⁽⁵⁾		7,487			168			12,772			3,829
Total capital	$	44,914		$	59,044		$	89,561		$	107,981

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

	Three Months Ended						Six Months Ended
	August 4,			July 29,			August 4,			July 29,
	2018			2017			2018			2017
	(in thousands)
Net income (loss)	$	64,042		$	(7,862	)	$	92,101		$	(11,232	)
Adjustments pre-tax:
Amortization of debt discount^(a)		9,000			6,790			16,272			13,505
Reorganization related costs ^(b)		1,721			—			1,721			—
Loss on extinguishment of debt ^(c)		917			—			917			—
Impact of inventory step-up^(d)		190			480			380			1,860
Legal settlement ^(e)		(7,204	)		—			(5,289	)
Distribution center closures^(f)		—			—			(2,072	)		—
Recall accrual ^(g)		(1,064	)		4,733			(1,318	)		4,733
Executive non-cash compensation ^(h)		—			23,872			—			23,872
Gain on sale of building and land ⁽ⁱ⁾		—			(1,300	)		—			(1,300	)
Subtotal adjusted items		3,560			34,575			10,611			42,670
Impact of income tax items ^(j)		(168	)		(7,012	)		(1,824	)		(9,943	)
Adjusted net income	$	67,434		$	19,701		$	100,888		$	21,495

	Three Months Ended						Six Months Ended
	August 4,			July 29,			August 4,			July 29,
	2018			2017			2018			2017
	(in thousands)
Net income (loss)	$	64,042		$	(7,862	)	$	92,101		$	(11,232	)
Depreciation and amortization		17,756			16,526			34,803			32,546
Interest expense—net		17,480			14,402			34,515			26,581
Loss on extinguishment of debt ^(a)		917			—			917			—
Income tax expense		2,936			5,583			11,443			3,670
EBITDA		103,131			28,649			173,779			51,565
Non-cash compensation^(b)		6,234			30,877			14,231			36,166
Reorganization related costs ^(a)		1,721			—			1,721			—
Impact of inventory step-up^(a)		190			480			380			1,860
Legal settlement ^(a)		(7,204	)		—			(5,289	)		—
Distribution center closures^(a)		—			—			(2,072	)		—
Recall accrual ^(a)		(1,064	)		4,733			(1,318	)		4,733
Gain on sale of building and land ^(a)		—			(1,300	)		—			(1,300	)
Adjusted EBITDA	$	103,008		$	63,439		$	181,432		$	93,024

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

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

	Six Months Ended
	August 4,						July 29,
	2018						2017
	Store Count			Total Leased Selling Square Footage⁽¹⁾			Store Count			Total Leased Selling Square Footage⁽¹⁾
				(in thousands)						(in thousands)
Beginning of period		83			981			85			912
Retail Galleries opened:
Portland Design Gallery		1			26.0		—			—
RH Modern Dallas		1			8.2		—			—
Nashville Design Gallery		1			45.6		—			—
Portland RH Baby&Child Design Gallery		1			4.7		—			—
Dallas RH Baby&Child Design Gallery		1			3.7		—			—
Waterworks Scottsdale Showroom		1			2.2		—			—
Waterworks Boston Showroom	—			—				1			5.0
Retail Galleries closed:
Portland legacy Gallery		(1	)		(4.7	)	—			—
Nashville legacy Gallery		(1	)		(7.1	)	—			—
Washington DC legacy Gallery		(1	)		(5.6	)	—			—
Waterworks Scottsdale Showroom		(1	)		(1.1	)	—			—
Waterworks Boston Showroom	—			—				(1	)		(2.1	)
End of period		85			1,053			85			915

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 28,		October 29,		October 28,		October 29,		August 4,		July 29,		August 4,		July 29,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in thousands)								(in thousands)
Total leased square footage at end of period⁽¹⁾		1,276		1,208		1,276		1,208		1,414		1,248		1,414		1,248
Weighted-average leased square footage⁽²⁾		1,250		1,146		1,245		1,066		1,392		1,243		1,362		1,243
Weighted-average leased selling square footage⁽²⁾		918		816		914		767		1,035		913		1,013		912
Retail sales per leased selling square foot (in dollars)⁽³⁾	$	329	$	330	$	941	$	1,004	$	313	$	327	$	587	$	612

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

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 28,			October 29,			October 28,			October 29,			August 4,			July 29,			August 4,			July 29,
	2017			2016			2017			2016			2018			2017			2018			2017
Condensed Consolidated Statements of Operations:
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		63.8			68.0			66.6			68.8			57.6			66.6			59.6			68.1
Gross profit		36.2			32.0			33.4			31.2			42.4			33.4			40.4			31.9
Selling, general and administrative expenses		28.9			29.2			29.9			29.5			29.1			31.4			28.8			30.3
Income from operations		7.3			2.8			3.5			1.7			13.3			2.0			11.6			1.6
Other expenses
Interest expense—net		3.2			2.0			2.5			2.1			2.7			2.4			2.9			2.2
Loss on extinguishment of debt		0.8			—			0.3			—			0.1			—			0.1			—
Total other expenses		4.0			2.0			2.8			2.1			2.8			2.4			3.0			2.2
Income (loss) before income taxes		3.3			0.8			0.7			(0.4	)		10.5			(0.4	)		8.6			(0.6	)
Income tax expense (benefit)		1.1			0.3			0.6			(0.1	)
Income tax expense														0.5			0.9			0.9			0.4
Net income (loss)		2.2	%		0.5	%		0.1	%		(0.3	%)		10.0	%		(1.3	)%		7.7	%		(1.0	)%

Three Months Ended ~~October 28, 2017~~August 4, 2018 Compared to Three Months Ended ~~October~~July 29, ~~2016~~2017

	Three Months Ended														Three Months Ended
	October 28,							October 29,							August 4,						July 29,
	2017							2016							2018						2017
	RH Segment		Waterworks⁽¹⁾			Total		RH Segment		Waterworks⁽¹⁾			Total		RH Segment		Waterworks⁽¹⁾		Total		RH Segment		Waterworks⁽¹⁾			Total
	(in thousands)														(in thousands)
Net revenues	$	563,174	$	29,299		$	592,473	$	521,027	$	28,301		$	549,328	$	607,604	$	33,194	$	640,798	$	583,793	$	31,533		$	615,326
Cost of goods sold		359,953		18,195			378,148		354,903		18,606			373,509		349,423		19,775		369,198		390,797		18,716			409,513
Gross profit		203,221		11,104			214,325		166,124		9,695			175,819		258,181		13,419		271,600		192,996		12,817			205,813
Selling, general and administrative expenses		159,092		12,071			171,163		148,438		11,995			160,433		172,857		13,368		186,225		180,751		12,939			193,690
Income (loss) from operations	$	44,129	$	(967	)	$	43,162	$	17,686	$	(2,300	)	$	15,386	$	85,324	$	51	$	85,375	$	12,245	$	(122	)	$	12,123

Consolidated net revenues increased ~~$43.1~~$25.5 million, or ~~7.9%~~4.1%, to ~~$592.5~~$640.8 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$549.3~~$615.3 million in the three months ended ~~October~~July 29, ~~2016.~~2017. Stores net revenues increased ~~$36.4~~$11.7 million, or ~~11.9%~~3.3%, to ~~$343.2~~$361.9 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$306.8~~$350.2 million in the three months ended ~~October~~July 29, ~~2016.~~2017. Direct net revenues increased ~~$6.7~~$13.8 million, or ~~2.8%~~5.2%, to ~~$249.3~~$278.9 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$242.5~~$265.2 million in the three months ended ~~October~~July 29, ~~2016.~~2017. Comparable brand revenue was 6%5% for the three months ended ~~October 28, 2017.~~August 4, 2018.

RH Segment net revenues increased ~~$42.1~~$23.8 million, or ~~8.1%~~4.1%, to ~~$563.2~~$607.6 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$521.0~~$583.8 million in the three months ended ~~October~~July 29, ~~2016.~~

~~A number of~~2017. The below discussion highlights several significant factors ~~contributed to~~that resulted in increased RH Segment net revenues. Given the overall increase in RH Segment net revenues, ~~during the three months ended October 28, 2017, including,~~our discussion below first lists, which we believe are in order of magnitude, all factors that contributed to the increase and then lists the factors that partially offset the overall increase.

RH Segment core net revenues increased due to the timing of our Source Book mailings, the introduction of new products and new product categories, ~~and~~including the ~~expansion of existing product categories, the~~strong performance of our ~~new Design Galleries and~~RH Outdoor product line in the second quarter of fiscal 2018 as compared to the second quarter of fiscal 2017. In addition, RH Segment core net revenues increased due to an increase in retail weighted-average leased selling square footage ~~as well as an~~related to new store openings, including West Palm Beach, Toronto, Portland and Nashville. The overall increase in RH Segment core net revenues was partially offset by additional discounts offered on discontinued merchandise related to the optimization of our inventory and SKU rationalization during the second quarter of fiscal 2017. RH Segment core net revenues also increased during the second quarter of fiscal 2018 as compared to the second quarter of fiscal 2017 due to increased revenues from our Contract business ~~which represents sales to commercial customers.~~and RH Hospitality operations and increased Membership revenue.

Outlet sales, which include sales via warehouse locations, ~~increased $5.1~~decreased $13.2 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to the three months ended ~~October~~July 29, ~~2016. We also had an increase~~2017 primarily as a result of our inventory optimization efforts during the second quarter of fiscal 2017 as we increased our outlet promotional activity and offered higher discounts. Similar promotions and discounts were not offered in ~~Membership revenue recognized~~the second quarter of ~~$4.6 million.~~

~~The above increases were~~fiscal 2018. This overall decrease was partially offset by an increase of eight outlet locations year over year, resulting in an approximate ~~1% negative impact~~33% increase in outlet selling square footage.

RH Segment net revenues for the three months ended August 4, 2018 and July 29, 2017 were negatively impacted by $1.9 million and $3.8 million, respectively, related to the reduction of ~~Hurricanes Harvey~~revenue associated with product recalls. Product recalls and ~~Irma primarily due~~the establishment or adjustment of any related recall accruals can affect our results and cause quarterly fluctuations affecting the period-to-period comparisons of our results. No assurance can be provided that any accruals will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to ~~store closures and lost sales.~~time, which could further affect results.

Waterworks net revenues increased ~~$1.0~~$1.7 million, or ~~3.5%~~5.3%, to ~~$29.3~~$33.2 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$28.3~~$31.5 million in the three months ended ~~October~~July 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.~~2017.

Consolidated gross profit increased ~~$38.5~~$65.8 million, or ~~21.9%~~32.0%, to ~~$214.3~~$271.6 million in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~$175.8~~$205.8 million in the three months ended ~~October~~July 29, ~~2016.~~2017. As a percentage of net revenues, consolidated gross margin increased ~~4.2%~~9.0% to ~~36.2%~~42.4% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~32.0%~~33.4% of net revenues in the three months ended ~~October~~July 29, ~~2016.~~2017.

RH Segment gross profit for the three months ended ~~October 28,~~August 4, 2018 was positively impacted by $1.4 million related to insurance reimbursements and vendor credits associated with product recalls initiated in prior years, partially offset by the reduction of revenue and incremental costs associated with product recalls initiated in fiscal 2018. RH Segment gross profit for the three months ended July 29, 2017 was negatively impacted by ~~$3.6~~$4.6 million related to ~~inventory charges~~the reduction of revenue and incremental costs associated with product recalls ~~and $0.5 million related to costs associated with anticipated distribution center closures.~~ initiated in fiscal 2017.

Waterworks gross profit for the three months ended ~~October 28,~~August 4, 2018 and July 29, 2017 ~~and October 29, 2016~~ was negatively impacted by $0.2 million and ~~$1.8~~$0.5 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~~adjustment and the impact of the amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased ~~4.6%~~8.0% to ~~36.9%~~42.1% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~32.3%~~34.1% of net revenues in the three months ended ~~October~~July 29, ~~2016.~~2017.

RH Segment gross profit increased ~~$37.1~~$65.2 million, or ~~22.3%~~33.8%, to ~~$203.2~~$258.2 million in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~$166.1~~$193.0 million in the three months ended ~~October~~July 29, ~~2016.~~2017. As a percentage of net revenues, RH Segment gross margin increased ~~4.2%~~9.4% to ~~36.1%~~42.5% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~31.9%~~33.1% of net revenues in the three months ended ~~October~~July 29, ~~2016.~~2017.

Excluding the product ~~recalls and costs associated with anticipated distribution center closures~~recall adjustment mentioned above, RH Segment gross margin would have increased ~~4.9%~~8.5% to ~~36.8%~~42.1% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~31.9%~~33.6% of net revenues in the three months ended ~~October~~July 29, ~~2016.~~2017. The increase ~~in order~~was related to higher outlet product margins due to higher outlet and warehouse sales during the second quarter of ~~magnitude, was due to~~fiscal 2017 driven by increased promotions and higher discounts versus fiscal 2018, as well as 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~~year. In addition, we achieved leverage in our occupancy costs primarily related to ~~improvement in shipping costs as a percentage of net revenues.~~our distribution center network redesign.

Waterworks gross profit increased ~~$1.4~~$0.6 million, or ~~14.5%~~4.7%, to ~~$11.1~~$13.4 million in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~$9.7~~$12.8 million in the three months ended ~~October~~July 29, ~~2016.~~2017. As a percentage of net revenues, Waterworks gross margin ~~increased 3.6%~~decreased 0.2% to ~~37.9%~~40.4% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~34.3%~~40.6% of net revenues in the three months ended ~~October~~July 29, ~~2016.~~2017.

Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased ~~1.9%~~1.2% to ~~38.7%~~41.0% of net revenues in the three months ended ~~October 28, 2017~~August 4, 2018 from ~~40.6%~~42.2% of net revenues in the three months ended ~~October~~July 29, ~~2016. The decrease in gross margin is primarily due to changes in product mix and deleverage in occupancy costs.~~2017.

Consolidated selling, general and administrative expenses ~~increased $10.7~~decreased $7.5 million, or ~~6.7%~~3.9%, to ~~$171.2~~$186.2 million in the three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$160.4~~$193.7 million in the three months ended ~~October~~July 29, ~~2016.~~

RH Segment selling, general and administrative expenses increased $10.7 million, or 7.2%, to $159.1 million in the three months ended October 28, 2017 compared $148.4 million in the three months ended October 29, 2016.

RH Segment selling, general and administrative expenses for the three months ended October 28, 2017 included $1.4 million related to costs associated with anticipated distribution center closures and a gain of $0.8 million related to the sale of building and land. ~~RH Segment selling, general and administrative expenses for the three months ended October 29, 2016 included $1.0 million associated with a reorganization, including severance and related taxes.~~

~~Advertising and marketing costs increased $9.8 million during the three months ended October 28, 2017 as compared to October 29, 2016, primarily due to~~ the timing of our Source Book mailings. In the third quarter of fiscal 2017 we amortized costs related to our 2016 Interiors Source Book which was circulated in the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in the third quarter of fiscal 2017, whereas the third quarter of fiscal 2016 did not incur similarly timed expenses.

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

Waterworks selling, general and administrative expenses increased $0.1 million, or 0.6%, to $12.1 million in the three months ended October 28, 2017 compared to $12.0 million in the three months ended October 29, 2016.

Interest expense increased $7.8 million to $18.9 million for the three months ended October 28, 2017 compared to $11.1 million for the three months ended October 29, 2016. Interest expense consisted of the following:

We incurred a $4.9 million loss on extinguishment of debt in the three months ended October 28, 2017 due to the repayment in full of the second lien term loan on October 10, 2017, which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million.

Income tax expense was $6.2 million and $1.8 million in the three months ended October 28, 2017 and October 29, 2016, respectively. Our effective tax rate was 32.1% and 41.4% for the three months ended October 28, 2017 and October 29, 2016, respectively. The effective tax rate in the three months ended October 28, 2017 was impacted by net excess tax benefits from stock-based compensation of $1.9 million resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.

~~Nine Months Ended October 28, 2017 Compared to Nine Months Ended October 29, 2016~~

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

Consolidated net revenues increased $221.7 million, or 14.3%, to $1,769.9 million in the nine months ended October 28, 2017 compared to $1,548.2 million in the nine months ended October 29, 2016. Stores net revenues increased $137.5 million, or 15.8%, to $1,010.1 million in the nine months ended October 28, 2017 compared to $872.7 million in the nine months ended October 29, 2016. Direct net revenues increased $84.3 million, or 12.5%, to $759.8 million in the nine months ended October 28, 2017 compared to $675.5 million in the nine months ended October 29, 2016. Comparable brand revenue was 7% for the nine months ended October 28, 2017.

~~RH Segment net revenues increased $181.4 million, or 12.1%, to $1,680.5 million in the nine months ended October 28, 2017 compared to $1,499.1 million in the nine months ended October 29, 2016.~~

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

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

RH Segment net revenues for the nine months ended October 28, 2017 were negatively impacted by $3.8 million related to the reduction of revenue associated with product recalls. During the nine months ended October 29, 2016, RH Segment net revenues were reduced by an estimated $16 million due to customer accommodation and related expenses as a result of our initiative to elevate the customer experience, including in response to production delays related to RH Modern. We did not experience similar production delays during the nine months ended October 28, 2017.

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

ended October 28, 2017 and October 29, 2016. Waterworks net revenues increased $40.3 million, or 82.2%, to $89.4 million in the nine months ended October 28, 2017 compared to $49.1 million in the nine months ended October 29, 2016. Waterworks net revenues represented 5.1% and 3.2% of our net revenues for the nine months ended October 28, 2017 and October 29, 2016, respectively. The increase in Waterworks net revenues is primarily due to the nine months ended October 28, 2017 representing thirty-nine weeks of results, whereas the nine months ended October 29, 2016 only includes twenty-two weeks of results as Waterworks was acquired on May 27, 2016.

Consolidated gross profit increased $107.3 million, or 22.2%, to $590.4 million in the nine months ended October 28, 2017 from $483.1 million in the nine months ended October 29, 2016. As a percentage of net revenues, consolidated gross margin increased 2.2% to 33.4% of net revenues in the nine months ended October 28, 2017 from 31.2% of net revenues in the nine months ended October 29, 2016.

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

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

Excluding the product recall costs, costs associated with the distribution center closure, impact of the coupons redeemed in connection with the legal claim and amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased 1.9% to 33.9% of net revenues in the nine months ended October 28, 2017 from 32.0% of net revenues in the nine months ended October 29, 2016.

RH Segment gross profit increased $88.4 million, or 18.9%, to $555.8 million in the nine months ended October 28, 2017 from $467.4 million in the nine months ended October 29, 2016. As a percentage of net revenues, RH Segment gross margin increased 1.9% to 33.1% of net revenues in the nine months ended October 28, 2017 from 31.2% of net revenues in the nine months ended October 29, 2016. Excluding the product recall costs, costs associated with anticipated distribution center closures and impact of the coupons redeemed in connection with the legal claim mentioned above, RH Segment gross margin would have increased 1.8% to 33.5% of net revenues in the nine months ended October 28, 2017 from 31.7% of net revenues in the nine months ended October 29, 2016.

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

Waterworks gross profit increased $18.8 million, or 119.6%, to $34.6 million in the nine months ended October 28, 2017 from $15.7 million in the nine months ended October 29, 2016. The increase in Waterworks gross profit is primarily due to the nine months ended October 28, 2017 representing thirty-nine weeks of results, whereas the nine months ended October 29, 2016 only includes twenty-two weeks of results as Waterworks was acquired on May 27, 2016. As a percentage of net revenues, Waterworks gross margin increased 6.6% to 38.7% of net revenues in the nine months ended October 28, 2017 from 32.1% of net revenues in the nine months ended October 29, 2016. Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 1.6% to 41.0% of net revenues in the nine months ended October 28, 2017 from 42.6% of net revenues in the nine months ended October 29, 2016. The decrease in gross margin is primarily due to changes in product mix and deleverage in occupancy costs.

Consolidated selling, general and administrative expenses increased $71.0 million, or 15.5%, to $528.2 million in the nine months ended October 28, 2017 compared to $457.2 million in the nine months ended October 29, 2016.

RH Segment selling, general and administrative expenses ~~increased $56.5~~decreased $7.9 million, or ~~13.0%~~4.4%, to ~~$489.4~~$172.9 million in the ~~nine~~three months ended ~~October 28, 2017~~August 4, 2018 compared ~~$433.0~~$180.8 million in the ~~nine~~three months ended ~~October~~July 29, ~~2016.~~2017.

RH Segment selling, general and administrative expenses for the ~~nine~~three months ended ~~October 28,~~August 4, 2018 included a $7.2 million legal settlement, net of related legal expenses, a $1.7 million charge related to the supply chain reorganization, including the closure of the Dallas customer call center, and $0.3 million related to product recalls.

RH Segment selling, general and administrative expenses for the three months ended July 29, 2017 included $23.9 million related to a fully vested option grant made to Mr. Friedman in May 2017, $0.1 million incremental costs associated with product recalls ~~$1.4 million costs associated with anticipated distribution center closures~~ and a gain of ~~$2.1~~$1.3 million related to the sale of building and ~~land~~.land.

~~RH Segment selling, general~~Employment and ~~administrative expenses for~~employee related costs, excluding the ~~nine~~fully vested option grant to Mr. Friedman mentioned and severance costs associated with the supply chain reorganization above, increased $8.7 million during the three months ended ~~October~~August 4, 2018 as compared to the three months ended July 29, ~~2016 included $5.7 million associated with a reorganization, including severance and related taxes, $2.8 million~~2017, primarily related to ~~charges~~growth in our retail business and ~~expenses incurred~~Hospitality operations, as a result of the Waterworks transaction, and $1.0 million related to the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards.

~~Advertising~~well as increased incentive compensation. In addition, advertising and marketing costs increased ~~$26.9~~$7.4 million ~~during the nine months ended October 28, 2017 as compared to October 29, 2016, primarily~~ due to the circulation of the Spring Interiors and Modern Source Books in the second quarter of fiscal 2018. These Source Books had a significant impact to our advertising and marketing expense due to the adoption of Topic 606 in the first quarter of fiscal 2018, which resulted in the costs associated with Source Books being fully expensed upon delivery to the carrier. In addition, advertising and marketing costs increased due to the timing of our ~~Source Book mailings. In the~~ ~~nine months ended October 28, 2017~~ ~~we amortized costs related to our 2016 Interiors Source Book~~spring website launch, which ~~was circulated~~occurred in the ~~fall~~second quarter of ~~2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in~~fiscal 2018 versus the ~~nine months ended October 28, 2017, whereas the nine months ended October 29, 2016 did not incur similarly timed expenses. In addition, we had an increase in employment and employment related costs.~~first quarter of fiscal 2017.

RH Segment selling, general and administrative expenses were ~~27.7%~~29.2% and ~~28.2%~~26.9% of net revenues for the ~~nine~~three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively, excluding the ~~fully vested option grant made to Mr. Friedman in May 2017, the product recall costs, costs associated with anticipated distribution center closures, the gain~~adjustment related to the ~~sale of building and land,~~legal settlement, the reorganization ~~costs, the charges and expenses incurred as a result of the Waterworks transaction,~~ and the ~~impact of coupons redeemed in connection with the legal claim~~product recalls 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 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.

E~~xcluding 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~~an increase in advertising and marketing costs primarily due to the adoption of Topic 606 and the timing of our spring website launch, as well as increases in employment and employment related costs.

Waterworks selling, general and administrative expenses increased $0.4 million, or 3.3%, to $13.4 million in the three months ended August 4, 2018 compared to $12.9 million in the three months ended July 29, 2017. Waterworks selling, general and administrative expenses were 40.3% and 41.0% of net revenues for the three months ended August 4, 2018 and July 29, 2017, respectively.

Interest expense increased ~~$13.0~~$3.1 million to ~~$45.5~~$17.5 million for the ~~nine~~three months ended ~~October 28, 2017~~August 4, 2018 compared to ~~$32.5~~$14.4 million for the ~~nine~~three months ended ~~October~~July 29, ~~2016.~~2017. Interest expense consisted of the following:

	Nine Months Ended						Three Months Ended
	October 28,			October 29,			August 4,			July 29,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Amortization of convertible senior notes debt discount	$	22,685		$	21,467		$	9,764		$	7,561
Build-to-suit lease transactions		12,360			9,418			4,985			4,074
Asset based credit facility		4,049			1,465			1,485			996
Amortization of debt issuance costs and deferred financing fees		3,933			1,884			881			1,290
Term loans		3,545			—			645			824
Other interest expense		1,910			2,515			830			591
Capitalized interest for capital projects		(2,547	)		(1,917	)		(911	)		(839	)
Interest income		(439	)		(2,304	)		(199	)		(95	)
Total interest expense—net	$	45,496		$	32,528		$	17,480		$	14,402

We incurred a ~~$4.9~~$0.9 million loss on extinguishment of debt in the ~~nine~~three months ended ~~October 28, 2017~~August 4, 2018 due to the repayment in full of the ~~second lien~~LILO term loan, ~~on October 10, 2017,~~the promissory note secured by our aircraft and the equipment security notes in June 2018, which includes ~~a prepayment penalty of $3.0 million and~~ acceleration of amortization of debt issuance costs of ~~$1.9~~$0.6 million and a prepayment penalty of $0.3 million.

Income tax expense was ~~$9.9~~$2.9 million and $5.6 million in the ~~nine~~three months ~~ended October 28,~~August 4, 2018 and July 29, 2017, ~~compared to an income tax benefit of $2.6 million in the nine months ended October 29, 2016.~~respectively. Our effective tax rate was ~~83.7%~~4.4% and ~~38.9%~~-245.0% for the ~~nine~~three months ended ~~October 28,~~August 4, 2018 and July 29, 2017, ~~and October 29, 2016,~~ respectively. The effective tax rate in the ~~nine~~three months ended ~~October 28,~~August 4, 2018 was significantly impacted by discrete tax benefits related to net excess tax windfalls from stock-based compensation of $13.9 million resulting from increased option exercise activity and appreciation of the stock price, the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018 due to the passage of the Tax Cuts and Jobs Act (the “Tax Act”), and discrete tax impact related to a legal settlement. The effective tax rate in the three months ended July 29, 2017 was significantly impacted by non-deductible stock-based compensation, ~~related~~as well as our reporting a net loss before income taxes and, to a lesser extent, the ~~May 2017 grant to Mr. Friedman of an option to purchase 1,000,000 shares of the Company’s common stock and~~ net excess tax benefits from stock-based ~~compensation~~compensation.

Consolidated net revenues increased $20.8 million, or 1.8% to $1,198.2 million in the six months ended August 4, 2018 compared to $1,177.4 million in the six months ended July 29, 2017. Stores net revenues increased $9.5 million, or 1.4%, to $676.4 million in the six months ended August 4, 2018 compared to $666.9 million in the six months ended July 29, 2017. Direct net revenues increased $11.3 million, or 2.2%, to $521.8 million in the six months ended August 4, 2018 compared to $510.5 million in the six months ended July 29, 2017. Comparable brand revenue was 3% for the six months ended August 4, 2018.

RH Segment net revenues increased $16.3 million, or 1.5%, to $1,133.6 million in the six months ended August 4, 2018 compared to $1,117.3 million in the six months ended July 29, 2017. The below discussion highlights several significant factors that resulted in increased RH Segment net revenues. Given the overall increase in RH Segment net revenues, our discussion below first lists, which we believe are in order of ~~$4.3~~magnitude, all factors that contributed to the increase and then lists the factors that partially offset the overall increase.

RH Segment core net revenues increased due to the timing of our Source Book mailings, the introduction of new products and new product categories, including the strong performance of our Outdoor product line in fiscal 2018 as compared to fiscal 2017. In addition, RH Segment core net revenues increased due to an increase in retail weighted-average leased selling square footage related to new store openings, including West Palm Beach, Toronto, Portland and Nashville. The overall increase in RH Segment core net revenues was partially offset by additional discounts offered on discontinued merchandise related to the optimization of our inventory and SKU rationalization during the first half of fiscal 2017. RH Segment core net revenues also increased during the first half of fiscal 2018 as compared to the first half of fiscal 2017 due to increased revenues from our Contract business and RH Hospitality operations and increased Membership revenue.

Outlet sales, which include sales via warehouse locations, decreased $26.1 million ~~resulting from~~in the ~~Company’s adoption~~six months ended August 4, 2018 compared to the six months ended July 29, 2017 primarily as a result of ~~ASU 2016-09~~our inventory optimization efforts during the first half of fiscal 2017 as we increased our outlet promotional activity and offered higher discounts. Similar promotions and discounts were not offered in the first ~~quarter~~half of fiscal 2018. This overall decrease was partially offset by an increase of eight outlet locations year over year, resulting in an approximate 33% increase in outlet selling square footage.

RH Segment net revenues for the six months ended August 4, 2018 and July 29, 2017 were negatively impacted by $1.9 million and $3.8 million, respectively, related to the reduction of revenue associated with product recalls.

Waterworks net revenues increased $4.5 million, or 7.5%, to $64.6 million in the six months ended August 4, 2018 compared to $60.1 million in the six months ended July 29, 2017, primarily due to new product launches, particularly fittings for bath and kitchen, as well as growth in cabinet sales driven by our showrooms.

Consolidated gross profit increased $107.6 million, or 28.6%, to $483.6 million in the six months ended August 4, 2018 from $376.1 million in the six months ended July 29, 2017. ~~Refer~~As a percentage of net revenues, consolidated gross margin increased 8.5% to ~~Note 15—~~40.4% of net revenues in the six months ended August 4, 2018 from 31.9% of net revenues in the six months ended July 29, 2017.

RH Segment gross profit for the six months ended August 4, 2018 was positively impacted by $1.7 million related to insurance reimbursements and vendor credits associated with product recalls initiated in prior years, partially offset by the reduction of revenue and incremental costs associated with product recalls initiated in fiscal 2018. RH Segment gross profit for the six months ended July 29, 2017 was negatively impacted by $4.6 million related to the reduction of revenue and incremental costs associated with product recalls initiated in fiscal 2017.

Waterworks gross profit for the six months ended August 4, 2018 and July 29, 2017 was negatively impacted by ~~Stock-Based Compensation~~$0.4 million and $1.9 million, respectively, of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.

Excluding the product recall adjustment and the impact of the amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased 7.8% to 40.2% of net revenues in the six months ended August 4, 2018 from 32.4% of net revenues in the six months ended July 29, 2017.

RH Segment gross profit increased $104.6 million, or 29.7%, to $457.2 million in the six months ended August 4, 2018 from $352.6 million in the six months ended July 29, 2017. As a percentage of net revenues, RH Segment gross margin increased 8.7% to 40.3% of net revenues in the six months ended August 4, 2018 from 31.6% of net revenues in the six months ended July 29, 2017.

Excluding the product recall adjustment mentioned above, RH Segment gross margin would have increased 8.2% to 40.1% of net revenues in the six months ended August 4, 2018 from 31.9% of net revenues in the six months ended July 29, 2017. The increase was related to higher outlet product margins due to higher outlet and warehouse sales during the first half of fiscal 2017 driven by increased promotions and higher discounts versus fiscal 2018, as well as improvements in our ~~condensed consolidated financial statements~~core merchandise margins as our SKU rationalization efforts had a reduced impact on our margins this year compared to last year. In addition, we achieved leverage in our occupancy costs primarily related to our distribution center network redesign.

Waterworks gross profit increased $3.0 million, or 12.7%, to $26.4 million in the six months ended August 4, 2018 from $23.4 million in the six months ended July 29, 2017. As a percentage of net revenues, Waterworks gross margin increased 1.9% to 40.9% of net revenues in the six months ended August 4, 2018 from 39.0% of net revenues in the six months ended July 29, 2017.

Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 0.6% to 41.5% of net revenues in the six months ended August 4, 2018 from 42.1% of net revenues in the six months ended July 29, 2017.

Consolidated selling, general and administrative expenses decreased $12.4 million, or 3.5%, to $344.7 million in the six months ended August 4, 2018 compared to $357.1 million in the six months ended July 29, 2017.

RH Segment selling, general and administrative expenses decreased $12.7 million, or 3.9%, to $317.6 million in the six months ended August 4, 2018 compared $330.3 million in the six months ended July 29, 2017.

RH Segment selling, general and administrative expenses for the six months ended August 4, 2018 included a ~~description~~$5.3 million legal settlement, net of related legal expenses, a $2.1 million lease loss liability reversal associated with the Dallas distribution center closure completed in fiscal 2017, a $1.7 million charge related to the supply chain reorganization, including the closure of the Dallas customer call center, and a $0.3 million charge related to product recalls.

RH Segment selling, general and administrative expenses for the six months ended July 29, 2017 included $23.9 million related to a fully vested option grant made to Mr. Friedman in May 2017, $0.1 million incremental costs associated with product recalls and a gain of $1.3 million related to the sale of building and land.

Employment and employee related costs, excluding the fully vested option grant to Mr. ~~Friedman.~~Friedman and severance costs associated with the supply chain reorganization mentioned above, increased $14.8 million during the six months ended August 4, 2018 as compared to the six months ended July 29, 2017, primarily related to incentive compensation, as well as growth in our retail business and Hospitality operations. This overall increase was partially offset by a decrease in advertising and marketing costs of $5.2 million due to the timing of our Source Book mailings, partially offset by an increase in costs associated with the adoption of Topic 606 in fiscal 2018.

RH Segment selling, general and administrative expenses were 28.4% and 27.4% of net revenues for the six months ended August 4, 2018 and July 29, 2017, respectively, excluding the adjustment related to the legal settlement, the distribution center closure lease loss liability, the reorganization, the product recalls, the fully vested option grant made to Mr. Friedman in May 2017 and the gain related to the sale of building and land mentioned above. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily driven by increases in employment and employment related costs. Advertising and marketing costs as a percentage of revenues decreased primarily due to the timing of our Source Book mailings, partially offset by the impact of the adoption of Topic 606.

Waterworks selling, general and administrative expenses increased $0.3 million, or 1.3%, to $27.1 million in the six months ended August 4, 2018 compared to $26.7 million in the six months ended July 29, 2017. Waterworks selling, general and administrative expenses were 41.9% and 44.5% of net revenues for the six months ended August 4, 2018 and July 29, 2017, respectively.

Interest expense increased $7.9 million to $34.5 million for the six months ended August 4, 2018 compared to $26.6 million for the six months ended July 29, 2017. Interest expense consisted of the following:

We incurred a $0.9 million loss on extinguishment of debt in the six months ended August 4, 2018 due to the repayment in full of the LILO term loan, the promissory note secured by our aircraft and the equipment security notes in June 2018, which includes acceleration of amortization of debt issuance costs of $0.6 million and a prepayment penalty of $0.3 million.

Income tax expense was $11.4 million and $3.7 million in the six months August 4, 2018 and July 29, 2017, respectively. Our effective tax rate was 11.1% and -48.5% for the six months August 4, 2018 and July 29, 2017, respectively. The effective tax rate in the six months ended August 4, 2018 was significantly impacted by discrete tax benefits related to net excess tax windfalls from stock-based compensation of $14.9 million resulting from increased option exercise activity and appreciation of the stock price, the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018 due to the passage of the Tax Act, and discrete tax impact related to a legal settlement. The effective tax rate in the six months ended July 29, 2017 was significantly impacted by non-deductible stock-based compensation, as well as our reporting a net loss before income taxes and, to a lesser extent, the net excess tax benefits from stock-based compensation.

The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as the development of our infrastructure and information technology. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. WeIn fiscal 2017, we completed ~~our first~~two share repurchase ~~program~~programs in an aggregate amount of $1 billion. A $300 million share repurchase was completed during the first quarter of fiscal 2017 and ~~completed our second~~a $700 million share repurchase ~~program in an amount of $700 million~~was completed during the second quarter of fiscal 2017 (refer to “Share Repurchase Programs” below). We intend to evaluate our capital allocation from time to time and may engage in future share repurchases in circumstances where buying shares of our common stock represents a good value and provides a favorable return for our shareholders.

We have ~~$650~~$985 million in aggregate principal amount of convertible notes outstanding, of which $350 million mature in June 2019, ~~and~~ $300 million mature in June 2020 and $335 million mature in June 2023. While we anticipate using free cash flow to repay the convertible notes in cash to minimize dilution, 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 availability of capital to fund such repayments, or that if capital is available through additional debt issuances or refinancing of the convertible notes, that such capital will be available on terms that are favorable to us. Based on anticipated strong cash flow generation in 2018 and beyond, we expect to repay the outstanding principal of our $985 million convertible notes at maturity in June 2019, June 2020 and June 2023 in cash to minimize dilution. We believe the strength of our business and the reduction in leverage we have achieved during the past year puts us in a strong position to take advantage of the positive conditions in the capital markets. We believe we have multiple financing alternatives available to us on favorable terms that could provide us with additional financial flexibility with respect to capital allocation.

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

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

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

Our business has relied on cash flows from operations, net cash proceeds from the issuance of the convertible senior notes, as well as borrowings under our credit facilities as our primary sources of liquidity. We have pursued in the past, and may pursue in the future, additional strategies to generate liquidity for our operations, including through the strategic sale of assets, utilization of our credit facilities, and entry into new debt financing arrangements that present attractive terms.

As of August 4, 2018, we had approximately $852.8 million of net debt, excluding financing obligations under build-to-suit lease transactions, compared to approximately $1,052.2 million of net debt, excluding financing obligations under build-to-suit lease transactions, as of July 29, 2017. Over the last year, we have substantially reduced our net debt to trailing twelve months Adjusted EBITDA from 5.1x at the end the second quarter fiscal 2017 to 2.4x at the end of the second quarter fiscal 2018. A reconciliation of our net income to EBITDA and Adjusted EBITDA is as follows:

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 to dispose of the aircraft, which was classified as an 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 an asset held for sale. We may in the future pursue additional strategies, through the use of existing assets and debt facilities, or through the pursuit of new external sources of liquidity and debt financings, to fund our strategies to enhance stockholder value. There

can be no assurance that additional capital, whether raised through the sale of assets, utilization of our existing debt financing sources, or pursuit of additional debt financing sources, will be available to us on a timely manner, on favorable terms or at all. To the extent we pursue additional debt as a source of liquidity, our capitalization profile may change and may include significant leverage, and as a result we may 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 Design Galleries, and these capital expenditures have increased in the past and may continue to increase in future periods as we open additional ~~next generation~~ Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. During 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~~$125 million to ~~$130~~$135 million ~~for~~in fiscal ~~2017. Our~~2018, primarily related to our efforts to continue our growth and expansion, including construction of new Design Galleries and infrastructure investments. We anticipate that our fiscal ~~2017~~2018 capital expenditures will be partially offset by ~~cash flows~~proceeds from ~~operating activities. Our efforts to optimize inventory and reduce capital spending generated substantial free cash flow in~~sales of assets of approximately $50 million. During the ~~nine~~six months ended ~~October 28, 2017, and we expect to generate additional free cash flow for the remainder of the year.~~August 4, 2018, our investments in capital expenditures totaled $61.2 million.

The majority of the current lease arrangements for our new Design Galleries require the landlord to fund a portion of the construction related costs directly to third parties, rather than through traditional construction allowances and accordingly, 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.~~2018. As we develop new Galleries, as well as ~~potentially~~ other potential strategic initiatives in the future like our integrated hospitality ~~experience;~~experience, we may explore other models for our real estate, which could include longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings. These approaches might require greater capital investment on our part than a traditional store lease with a landlord. We also believe there is an opportunity to transition our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries then recoup the investments through a sale leaseback arrangement resulting in lower capital investment and lower rent. 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 arrange financing on favorable terms to the extent necessary to fund all of our initiatives, or that sufficient incremental debt will be available to us in order to fund our cash payments in respect of the repayment of our outstanding convertible senior notes in an aggregate principal amount of ~~$650~~$985 million at maturity of such senior convertible ~~notes or our terms loan at the maturity dates of such term loan.~~notes. In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments including the repayment of the principal amount of our convertible senior notes in cash upon maturity of such senior notes. To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations including triggering cross defaults or other consequences with respect to other indebtedness. Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations. Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks.

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

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

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

For the ~~nine~~six months ended ~~October 28,~~August 4, 2018, net cash provided by operating activities was $70.2 million and consisted of net income of $92.1 million and non-cash items of $69.6 million, partially offset by a decrease in cash used for working capital and other activities of $91.5 million. Working capital and other activities consisted primarily of increases in prepaid expenses and other current assets of $43.2 million related to vendor deposits, federal and state tax receivables due to prepayments, capitalized catalog costs and right of return asset for merchandise, decreases in accounts payable and accrued expense of $42.7 million related to timing of payments, as well as increases in inventory of $25.0 million and accounts receivable of $9.4 million. These decreases to working capital were partially offset by increases in deferred revenue and customer deposits of $20.8 million and increases in other current liabilities of $9.9 million.

For the six months ended July 29, 2017, net cash provided by operating activities was ~~$386.8~~$314.4 million and consisted of ~~net income~~a decrease in uses of ~~$1.9 million, and an increase in cash provided by~~ working capital and other activities of ~~$259.3~~$237.7 million and non-cash items of ~~$125.6~~$87.9 million, offset by net loss of $11.2 million. Working capital and other activities consisted primarily of decreases in inventory of ~~$190.6~~$140.3 million due to our SKU rationalization initiative, outlet inventory optimization efforts and revised DC network strategy. We also had decreases in prepaid expense and other current assets of ~~$38.4~~$35.3 million primarily due to amortization of our capitalized catalog costs ~~reduction of federal and state tax receivables,~~ and a reduction in prepaid rent. In addition, we had increases in deferred revenue and customer deposits of ~~$20.6~~$30.3 million and increases in accounts payable and accrued liabilities of ~~$10.5~~$29.9 million due to the timing of payments.

For the nine months ended October 29, 2016, net cash used in operating activities was $19.0 million and consisted of a net loss of $4.0 million and an increase in uses of working capital and other activities of $109.8 million, offset by non-cash items of $94.8 million. Working capital and other activities consisted primarily of decreases in accounts payable and accrued liabilities of $63.4 million primarily due to the timing of payments to our vendors, and prepaid expense and 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 was partially offset by increases in deferred revenue and customer deposits of $22.7 million and an increase in other non-current obligations of $8.5 million primarily due to a deferred contract incentive.

Investing activities consist primarily of investments in capital expenditures related to new ~~Gallery openings, the acquisition of buildings and land,~~Galleries, 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~~six months ended ~~October 28,~~August 4, 2018, net cash used in investing activities was $61.2 million due to investments in new Galleries, information technology and systems infrastructure, and supply chain investments.

For the six months ended July 29, 2017, net cash provided by investing activities was ~~$101.3~~$134.2 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, information technology and systems infrastructure, and supply chain investments of ~~$76.8~~$56.7 million and 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.~~million.

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

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

Financing activities consist primarily of borrowings related to the convertible senior notes offerings, credit facilities and other financing arrangements, as well as share repurchases and other equity related transactions.

For the six months ended August 4, 2018, net cash used in financing activities was $9.3 million primarily due to net repayments of debt of $311.9 million under the asset based credit facility, LILO term loan, equipment loans and promissory note secured by our aircraft. In addition, we made $6.2 million of payments on build-to-suit transactions. The repayments of debt described above were partially funded by the $335 million convertible senior notes issued in June 2018, which provided net proceeds of $287.8 million after taking into consideration the convertible note hedge and warrant transactions, as well as discounts upon original issuance and offering costs. Finally, equity related transactions provided $21.3 million due to $29.2 million of proceeds from exercise of employee stock options, partially offset by $7.9 million of cash paid for employee taxes related to net settlement of equity awards.

For the ~~nine~~six months ended ~~October 28,~~July 29, 2017, net cash used in financing activities was ~~$553.0~~$528.1 million primarily due to $1.0 billion of share repurchases made under the $300 Million Repurchase Program and $700 Million Repurchase Program. Cash funding for the share repurchase programs was provided by available cash balances, net borrowings under the asset based credit facility of ~~$341.0~~$283.0 million, as well as ~~borrowings~~new debt issued under the second lien term ~~loans~~loan of ~~$180.0~~$100.0 million, ~~borrowings under loans secured by certain equipment~~the LILO term loan facility of ~~$20.0~~$80.0 million and ~~borrowings under~~ a promissory note secured by our aircraft of $14.0 million. Additionally, proceeds from exercise of employee stock options were $15.4 million. The cash provided by these financing activities was partially offset by repayment of the second lien term loan of $100.0 million, $8.7 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 million.

Non-cash transactions consist of non-cash additions of property and ~~equipment.~~equipment and the issuance of notes payable related to share repurchases from former employees.

The non-cash additions of property and equipment due to build-to-suit lease transactions are 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 extent to which we are involved in constructing the leased asset. If we are the “deemed owner” for accounting purposes, upon commencement of the construction project, we are required to capitalize contributions by the landlord toward construction as property and equipment on our condensed consolidated balance sheets. The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of our condensed consolidated statements of cash flows.

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

In June 2018, we issued in a private offering $300 million principal amount of 0.00% convertible senior notes due 2023 and issued an additional $35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”). The 2023 Notes are governed by the terms of an indenture between us and U.S. Bank National Association, as the Trustee. The 2023 Notes will mature on June 15, 2023, unless earlier purchased by us or converted. The 2023 Notes will not bear interest, except that the 2023 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 2023 Notes. The 2023 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2023 Notes, which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes.

The initial conversion rate applicable to the 2023 Notes is 5.1640 shares of common stock per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $193.65 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” 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 2023 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2023, the 2023 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 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 calendar 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 2023 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 August 4, 2018, none of these conditions have occurred and, as a result, the 2023 Notes are not convertible as of August 4, 2018. On and after March 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2023 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 2023 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 2023 Notes for cash at a price equal to 100% of the principal amount of the 2023 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 2023 Notes, we separated the 2023 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 2023 Notes and the fair value of the liability component of the 2023 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 6.35% over the expected life of the 2023 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 2023 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 2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

In connection with the offering of the 2023 Notes and the exercise of the overallotment option in June 2018, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.7 million shares of our common stock at a price of approximately $193.65 per share. The total cost of the convertible note hedge transactions was $91.9 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.7 million shares of our common stock at a price of $309.84 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 3.5 million shares of common stock (which cap may also be subject to adjustment). We received $51.0 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2023 Notes until our common stock is above approximately $309.84 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity (deficit), are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

We recorded a deferred tax liability of $22.3 million in connection with the debt discount associated with the 2023 Notes and recorded a deferred tax asset of $22.5 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.

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

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

Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding ~~fiscal~~calendar 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,~~August 4, 2018, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of ~~October 28, 2017.~~August 4, 2018. 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”)~~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.

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

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

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~~calendar 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,~~August 4, 2018, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of ~~October 28, 2017.~~August 4, 2018. 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.

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.

In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a 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~~established an ~~up to~~ $80.0 million LILO term loan ~~facility.~~facility which was repaid in full in June 2018. As a result of the repayment, we incurred a $0.5 million loss on extinguishment of debt, which represents the acceleration of amortization of debt issuance costs. We did not incur any prepayment penalties upon the early extinguishment of the LILO term loan.

On June 12, 2018, Restoration Hardware, Inc. entered into a First Amendment (the “Amendment”) to the credit agreement. The Amendment (i) changes the credit agreement’s definition of “Eligible In-Transit Inventory” to clarify the requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and (ii) clarifies that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory. Eligible In-Transit Inventory consists of inventory being shipped from vendor locations outside of the United States. Qualifying in-transit inventory is included within the borrowing base for eligible collateral for purposes of determining the amount of borrowing available to borrowers under the credit agreement.

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, including the value of eligible inventory and eligible accounts receivable. As a result of the borrowing base formula, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). All obligations under the credit agreement are secured by substantially all of the assets, including accounts receivable, inventory, intangible assets, property, equipment, goods and fixtures of Restoration Hardware, Inc., Restoration Hardware Canada, Inc., RH US, LLC, Waterworks Operating Co., LLC and Waterworks IP Co., LLC.

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~~In addition, under our credit agreement, ~~does not contain any significant~~we are required to meet specified financial ratios in order to undertake certain actions, and we may be required to maintain certain levels of excess availability or meet a specified consolidated fixed-charge coverage ratio ~~covenants unless~~(“FCCR”). The trigger for the FCCR occurs if 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 .~~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”)~~an 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,~~August 4, 2018, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

The credit agreement requires a daily sweep of all cash receipts and collections 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,~~August 4, 2018, Restoration Hardware, Inc. had ~~$341.0 million in~~no outstanding borrowings and ~~$189.0~~$437.8 million of availability under the revolving line of credit, net of ~~$27.7~~$12.8 million in outstanding letters of credit. ~~As of October 28, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility.~~ As a result of the consolidated FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit would be approximately ~~$125.2 million.~~

~~On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into the second lien credit agreement, dated~~$392.8 million as of ~~July 7,~~August 4, 2018.

During fiscal 2017, ~~among Restoration Hardware, Inc.,~~we repurchased approximately 20.2 million shares of our common stock under two separate repurchase programs for an aggregate repurchase amount of approximately $1 billion, which represented 49.5% of the shares outstanding as ~~lead borrower,~~of the ~~guarantors party thereto,~~end of fiscal 2016. We generated $415 million in free cash flow in fiscal 2017 which supported our share repurchase programs. Free cash flow is calculated as net cash provided by operating activities and net proceeds from sale of assets held for sale, less capital expenditures, payments on build-to-suit lease transactions and payments on capital leases. Free cash flow excludes all non-cash items, such as the ~~lenders party thereto, each~~non-cash additions of ~~whom are funds~~property and ~~accounts managed or advised~~equipment due to build-to-suit lease transactions. Free cash flow is included in this filing because management believes that free cash flow provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. A reconciliation of our net cash provided by ~~Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association~~operating activities to free cash flow is as ~~administrative agent and collateral agent~~follows:

We believe that these share repurchase programs will continue to be an excellent allocation of capital for the long term benefit of our shareholders. We may undertake other repurchase programs in the future with respect to the second lien term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023. The second lien term loan of $100.0 million was repaid in full on October 10, 2017. As a result of the repayment, we incurred a $4.9 million loss on extinguishment of debt, ~~which includes a prepayment penalty of $3.0 million and acceleration of amortization of debt issuance costs of $1.9 million~~our securities..

On February 21, 2017, our board of directors authorized a stock repurchase program of up to $300 million (the “$300 Million Repurchase Program”) through open market purchases, privately negotiated transactions or other means, including through Rule 10b18 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 use of other techniques such as accelerated share repurchases including through privately-negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives. During the three months ended July 29, 2017, we repurchased approximately 12.4 million shares of our common stock under the $700 Million Repurchase Program at an average price of $56.60 per share, for an aggregate repurchase amount of approximately $700 million. No additional shares will be repurchased in future periods under the $700 Million Repurchase Program.

~~We enter into long-term contractual obligations and commitments, primarily debt obligations and non-cancelable operating leases, in the normal course of business.~~ As of ~~October 28, 2017,~~August 4, 2018, our future contractual cash obligations over the next several periods were as ~~follows (in thousands~~):follows:

	Payments Due by Period										Payments Due by Period
	Total		Remainder of 2017		2018-2019		2020–2021		Thereafter		Total		Remainder of 2018		2019-2020		2021–2022		Thereafter
	(in thousands)										(in thousands)
Convertible senior notes due 2019	$	350,000	$	—	$	350,000	$	—	$	—	$	350,000	$	—	$	350,000	$	—	$	—
Convertible senior notes due 2020		300,000		—		—		300,000		—		300,000		—		300,000		—		—
Convertible senior notes due 2023												335,000		—		—		—		335,000
Asset based credit facility ⁽¹⁾		341,000		—		—		—		341,000		—		—		—		—		—
Term loan ⁽²⁾		80,000		—		—		—		80,000
Operating leases ⁽³⁾⁽²⁾		683,685		23,058		163,223		122,998		374,406		637,012		44,389		147,029		112,578		333,016
Other non-current obligations ⁽⁴⁾⁽³⁾		792,723		9,335		78,971		86,513		617,904		754,503		17,785		77,560		89,004		570,154
Capital lease obligations		14,913		357		2,832		2,569		9,155		15,163		928		3,678		2,669		7,888
Equipment security notes		19,626		1,129		10,281		8,216		—
Notes payable for share repurchases		19,390		—		893		—		18,497		19,633		—		892		15,920		2,821
Promissory note		13,533		350		2,800		2,800		7,583
Letters of credit		27,718		27,718		—		—		—		12,762		12,762		—		—		—
Total	$	2,642,588	$	61,947	$	609,000	$	523,096	$	1,448,545	$	2,424,073	$	75,864	$	879,159	$	220,171	$	1,248,879

We have no material off balance sheet arrangements as of ~~October 28, 2017.~~August 4, 2018.

The preparation of financial statements in accordance with ~~GAAP~~accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following 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:

In the first quarter of fiscal 2018, we adopted Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). The adoption of Topic 606 resulted in a material change to the “Revenue Recognition” and “Advertising Expenses” critical accounting policies in fiscal 2018. Please refer below for our updated “Revenue Recognition” and “Advertising Expenses” critical accounting policies. There have been no material changes to the other critical accounting policies and estimates listed above from the disclosures included in the 2017 Form 10-K. For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in the ~~2016~~2017 Form 10-K. ~~There have been no material changes~~

We recognize revenues and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise. Revenue recognized for merchandise delivered via the home-delivery channel is recognized upon delivery. Revenue recognized for merchandise delivered via all other delivery channels will be recognized upon shipment. Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store. Discounts or other accommodations provided to customers are accounted for as a reduction of sales.

We account for shipping and handling as activities to fulfill the promise to transfer the merchandise to our customers. We apply this policy consistently across all of our distribution channels. In instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities will be accrued for in the same period. Costs of shipping and handling are included in cost of goods sold.

We defer revenue associated with merchandise delivered via the home-delivery channel. As we recognize revenue when the merchandise is delivered to our customers, it is included as deferred revenue on the consolidated balance sheets while in-transit.

We collect annual membership fees related to the ~~critical accounting policies~~RH Members Program. New membership fees are recorded as deferred revenue when collected from customers and ~~estimates listed~~recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year.

Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the ~~2016 Form 10-K.~~consolidated balance sheets as it is ultimately remitted to governmental authorities.

We reserve for projected merchandise returns. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

Our customers may return purchased items for a refund. We provide an allowance for sales returns based on historical return rates, which is presented on a gross basis. We present the allowance for sales returns within other current liabilities and the estimated value of the right of return asset for merchandise within prepaid expense and other assets on the consolidated balance sheets.

Advertising expenses primarily represent the costs associated with our catalog mailings, as well as print and website marketing.

Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and distribute Source Books. Such costs are capitalized and recognized as expense upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier.

Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the initial advertisement.

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

We currently do not engage 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 which bears interest at variable rates and we may incur additional indebtedness that bears interest at variable rates. ~~At October 28, 2017, $341.0 million was~~As of August 4, 2018, we had no outstanding borrowings under the revolving line of credit. As of ~~October 28, 2017,~~August 4, 2018, the undrawn borrowing availability under the revolving line of credit was ~~$189.0~~$437.8 million, net of ~~$27.7~~$12.8 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~~was approximately ~~$125.2 million.~~$392.8 million as of August 4, 2018. Based on the average interest rate on the revolving line of credit during the three months ended ~~October 28, 2017,~~August 4, 2018, and to the extent that borrowings were outstanding on such line of credit, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition. To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.

We are subject to interest rate risk in connection with borrowings under our LILO term loan, which bears interest at variable rates. At October 28, 2017, $80.0 million was outstanding under the LILO term loan. Based on the average interest rates on the LILO term loan during the three months ended October 28, 2017, 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.

As of ~~October 28, 2017,~~August 4, 2018, 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,~~August 4, 2018, 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.

As of August 4, 2018, we had $335 million principal amount of 0.00% convertible senior notes due 2023 outstanding (the “2023 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.

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—7—Convertible Senior Notes in our condensed consolidated financial statements.

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

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—7—Convertible Senior Notes in our condensed consolidated financial statements.

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

We also entered into separate warrant transactions with the same group of counterparties initially relating to the number of shares of our common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially $309.84 per share. Refer to Note 7—Convertible Senior Notes in our condensed consolidated financial statements.

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.

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

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

From time to time, we and/or our management are involved in litigation, claims and other proceedings relating to the conduct of our business, including purported class action litigation, as well as securities class action litigation. Such legal proceedings may include claims related to our employment practices, wage and hour claims, claims of intellectual property infringement, including with respect to trademarks and trade dress, claims asserting unfair competition and unfair business practices, claims with respect to our collection and sale of reproduction products, and consumer class action claims relating to our consumer practices including the collection of zip code or other information from customers. In addition, from time to time, we are subject to product liability and personal injury claims for the products that we sell and the stores we operate. Subject to certain exceptions, our purchase orders generally require the vendor to indemnify us against any product liability claims; however, if the vendor does not have insurance or becomes insolvent, we may not be indemnified. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims. Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management 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 certain pending securities litigation, refer to Note ~~17—~~14—Commitments and Contingencies in our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.

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 on Form 10-K for the fiscal year ended ~~January 28,~~ February 3, 2018 (“2017 ~~(“2016~~ Form 10-K”)~~. There have been no material changes to the risk factors disclosed~~ and in our ~~2016~~Quarterly Report on Form ~~10-K.~~10-Q for the quarterly period ended May 5, 2018 (the “First Quarter Form 10-Q”).

The risks described herein and those described in our ~~2016~~2017 Form 10-K and First Quarter Form 10-Q are not the only risks we face. We describe in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and First Quarter 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. We have identified additional material changes to our risk factors set forth below.

We are subject to risks associated with our dependence on foreign manufacturing and imports for our merchandise.

Based on total dollar volume of purchases, in fiscal 2017 we sourced approximately 86% of our merchandise from outside the United States, including 77% from Asia and approximately 40% of our merchandise from China. In addition, some of the merchandise we purchase from vendors in the United States also depends, in whole or in part, on vendors located outside the United States. As a result, our business highly depends on global trade, as well as any trade and or other factors that impact the specific countries where our vendors’ production facilities are located. Our future success will depend in large part upon our ability to maintain our existing foreign vendor relationships and to develop new ones based on the requirements of our business and any changes in trade dynamics that might dictate changes in the locations for sourcing of products. In addition, we face risks related to the ability of our vendors to scale their operations whether in connection with new products we introduce or new production locations that may be introduced, which in some cases would require substantial ongoing investments to support additional capacity. In addition, we have previously encountered difficulties in the ability of our vendors to scale production commensurate with demand from our customers. While we rely on long-term relationships with many of our vendors, we have no long-term contracts with them and generally transact business with them on an order-by-order basis.

Many of our imported products are subject to existing duties, tariffs, anti-dumping duties and quotas that may limit the quantity or affect the price of some types of goods that we import into the United States. In addition, substantial regulatory uncertainty exists regarding international trade and trade policy, both in the United States and abroad. For example, recently President Trump has introduced a number of different tariffs on various goods imported from China. The Trump administration has also raised a number of other trade related initiatives that may affect importation of goods including renegotiation of trade agreements with Mexico and Canada as well as other countries and the possible introduction of further import duties or tariffs. On July 10, 2018, the Office of U.S.

Trade Representative announced a proposed 10 percent ad valorem duty on a subset of products imported from China, inclusive of various furniture and lighting product categories. We have evaluated the supplemental list issued by the U.S. Trade Representative on July 10, 2018 and believe that a significant subset of our furniture and lighting sourced from China would be affected by the proposed tariffs. While we are continuing to assess these proposed tariffs on Chinese imports, and believe that we can adjust our supply chain appropriately in the event that such tariffs become effective on a permanent basis, there can be no assurance that we will not experience disruption in our business related to these or other changes in trade practices and applicable rules.

Any changes to tariffs or other rules related to cross border trade, including the possible implementation of additional tariffs, could materially increase our cost of goods sold with respect to merchandise that we purchase from vendors who manufacture products in China or other countries outside the United States, which could in turn require us to increase our prices and, in the event consumer demand declines as a result, negatively impact our financial performance. Certain of our competitors may be better positioned than us to withstand or react to these kinds of changes including border taxes, tariffs or other restrictions on global trade and as a result we may lose market share to such competitors. In addition, to the extent that our competitors, our vendors or companies in other industries that manufacture products in China respond to the tariffs imposed to date or the possibility of future tariffs by shifting production to other countries in Asia or to other regions, the costs of production in such countries may increase, which may increase our costs or otherwise have an adverse impact on our product supply chain. Similarly, to the extent that we or our vendors respond to the tariffs imposed to date or the possibility of future tariffs by shifting merchandise purchases or production to other countries in Asia or to other regions, we may face delays or costs associated with developing new vendor relationships and our vendors may face delays or costs associated with bringing online new manufacturing facilities, which may increase the cost of our products or cause delays in the shipment of our merchandise that result in the cancellation of orders by our customers. An interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured. Due to broad uncertainty regarding the timing, content and extent of any regulatory changes in the U.S. or abroad, we cannot predict the impact, if any, that these changes could have to our business, financial condition and results of operations.

Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the United States, charges on or assessment of additional import duties, tariffs, anti-dumping duties and quotas, loss of “most favored nation” trading status by the United States in relation to a particular foreign country, work stoppages, including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments, including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the United States, freight cost increases, political unrest, economic uncertainties, including inflation, foreign government regulations, trade restrictions, increased labor costs and other similar factors that might affect the operations of our vendors in specific countries such as China.

In addition, there is a risk of compliance violations by our vendors, which could lead to adverse consequences related to the failure of our vendors to adhere to applicable manufacturing requirements or other applicable rules. Any such noncompliance could have an adverse impact on our business and may result in product recalls, regulatory action, product liabilities, investigation by governmental agencies and other similar adverse consequences. Any failure by our vendors outside the United States to adhere to applicable legal requirements or our global compliance standards such as fair labor standards, prohibitions on child labor and other product safety or manufacturing safety standards could give rise to a range of adverse consequences including the disruption of our supply chain as well as potential liability to us and harm our reputation and brand and could subject us to other adverse consequences including boycotts by our consumer or special interest groups including activists, any of which actions could negatively affect our business and results of operations.

Our operations have significant liquidity and capital requirements and depend on the availability of adequate financing on reasonable terms. If we fail to use our financial resources effectively, or if we are unable to borrow sufficient capital when needed, it could have a significant negative effect on our ability to grow our business.

We have historically relied on the availability of some amount of debt financing to fund our operations. We have also incurred indebtedness to finance other strategic initiatives, such as the aggregate $1 billion in stock repurchase programs authorized by our Board of Directors, which program was fully completed during fiscal 2017. We completed debt financings in fiscal 2014, fiscal 2015 and fiscal 2018 through the issuance of three series of convertible senior notes for an aggregate principal amount of $985 million. As of August 4, 2018, we had no amounts outstanding borrowings and $437.8 million of availability under our revolving line of credit, net of $12.8 million in outstanding letters of credit. As a result of the consolidated fixed charge coverage ratio restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to us and the other affiliated parties under the revolving line of credit was approximately $392.8 million as of August 4, 2018.

While we believe that we currently have sufficient capital for the operation of our business in the near term, we may expend some significant portion of our capital on investments in our business, the purchase of our equity securities, the acquisition of new businesses and our significant number of concurrent initiatives. 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 Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. During fiscal 2017, we spent $146.2 million for capital expenditures which was offset by proceeds from sales of assets of approximately $15.1 million. We anticipate our gross capital expenditures to be approximately $125 million to $135 million in fiscal 2018, primarily related to our efforts to continue our growth and expansion, including construction of new Design Galleries and infrastructure investments. Our fiscal 2018 capital expenditures will be partially offset by proceeds from anticipated sales of assets of $50 million. We plan to continue opening Design Galleries in select major metropolitan markets, pursuing category extensions of our brand, and exploring new business areas. We own the building and land for our Gallery in San Francisco, as well as the location of our wine tasting room in Yountville, California, which is expected to be the location of a Design Gallery in the future, but to date we have principally relied upon leases with landlords for our other locations. 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 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.

While we seek to target capital toward investments that we believe will achieve favorable returns for our shareholders, these decisions involve a significant amount of judgment regarding the availability of capital and the anticipated growth of the business in both revenue and earnings in future periods. For example, the use of capital to repurchase shares may yield beneficial impact on earnings per share but may divert capital from other purposes including other investments that we might undertake with respect to the business. We can provide no assurances of the exact impact of any share repurchases on our business. Although our previous stock repurchase programs were intended to enhance long-term stockholder value by representing an attractive investment and use of capital by the Company, there can be no assurance that the stock repurchases under the program will in fact enhance stockholder value. For example, the market price of our common stock may subsequently decline below the levels at which repurchases were made. Furthermore, any strategy of this kind regarding capital allocation may have unanticipated effects on our business and financial results. We may also decide to pursue additional repurchase programs in the future. We may incur debt in connection with our business in the event that we use other cash resources to purchase shares, which may affect the financial performance of our business during future periods or our liquidity and the availability of capital for other needs of the business.

In addition, while we anticipate that we will be able to repay our debt maturities as they come due, there can be no assurance that we will have sufficient financial resources or be able to arrange financing to repay these obligations, or that we will be able to extend their maturities or otherwise refinance our obligations as needed. For example, in certain circumstances, we may be required to repay the three series of convertible senior notes that we issued in fiscal 2014, fiscal 2015 and fiscal 2018 with cash payments. See Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Convertible Senior Notes. Additionally, at the time the notes become due, the trading price of our common stock may be such that we may find it necessary to settle the notes in cash. There can be no assurance that we will be able to pay the amount of cash due if holders surrender their notes for conversion. In addition, agreements governing any debt may restrict our ability to make each of the required cash payments even if we have sufficient funds to make them. Furthermore, our ability to purchase the notes or to pay cash upon the conversion of the notes may be limited by law or regulatory authority. In addition, if we fail to purchase the notes, to pay special interest, if any, due on the notes, or to pay the amount of cash due upon conversion, we will be in default under the respective indentures governing the notes, which in turn may result in the acceleration of other indebtedness we may then have. If the repayment of the other indebtedness were to be accelerated, we may not have sufficient funds to repay that indebtedness and to purchase the notes or to pay the amount of cash due upon conversion.

The need to repay our convertible senior notes or other debt obligations could cause us to incur additional borrowings or sell additional notes to investors. We may also experience cash flow shortfalls in the future, and we may otherwise require additional external funding, or we may need to raise funds to take advantage of unanticipated opportunities, to make acquisitions of other businesses or companies or to respond to changing business conditions or unanticipated competitive pressures. Any weakening of, or other adverse developments in, the U.S. or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt. We cannot assure you that we will be able to raise necessary funds on favorable terms, if at all, or that future financing requirements would not be dilutive to holders of our capital stock. If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.

Our business is dependent on certain key personnel; if we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.

The success of our business depends upon the continued service of certain key personnel, particularly our Chairman and Chief Executive Officer, Gary Friedman. We face risks related to loss of any key personnel and we also face risks related to any changes that may occur in key senior leadership executive positions. Any disruption in the services of our key personnel could make it more difficult to successfully operate our business and achieve our business goals and could adversely affect our results of operation and financial condition. These changes could also increase the volatility of our stock price.

Many of our key personnel periodically travel together while on company business. We do not have a policy that prohibits key officers and directors from flying together, whether flying commercially or in our corporate aircraft. We face risks related to any loss of key personnel that might arise as a result of such travel arrangements. In addition, we do not maintain key man life insurance policies on any of our key personnel. As a result, we may not be able to cover the financial loss we may incur in losing the services of any of our key personnel.

We recently appointed a new President, Chief Financial and Administrative Officer connection with the retirement of the previous President, Chief Financial and Administrative Officer and we may face risks related to the transition of such position in our leadership team.

Competition for qualified employees and personnel in the retail industry is intense, particularly in the San Francisco Bay Area where our headquarters are located, and we may be unable to retain personnel that are important to our business or hire additional qualified personnel. The process of identifying personnel with the combination of skills and attributes required to carry out our goals is often lengthy. Our success depends to a significant degree upon our ability to attract, retain and motivate qualified management, marketing and sales personnel, and store managers, and upon the continued contributions of these people. In addition, our complex operations require the services of qualified and experience management personnel, with expertise in the areas including information technology and supply chain management. We cannot assure you that we will be successful in attracting and retaining qualified executives and personnel

In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of store and other employees who understand and appreciate our corporate culture and customers. Turnover in the retail industry and food and beverage industry is generally high. Excessive employee turnover will result in higher employee costs associated with finding, hiring and training new store employees. If we are unable to hire and retain store and other personnel capable of consistently providing a high level of customer service, our ability to open new stores, service the needs of our customers and expand our food and beverage business may be impaired, the performance of our existing and new stores and operations could be materially adversely affected and our brand image may be negatively impacted.

We expect that our common stock may experience increased trading volatility in connection with our Convertible Notes Financings.

In June 2015, we issued $250 million of 0.00% convertible senior notes due 2020 and, on July 2, 2015, we issued an additional $50 million pursuant to the exercise of the overallotment option granted to the initial purchasers as part of the June 2015 offering (collectively, the “2020 Notes”). In June 2014, we issued $300 million of 0.00% convertible senior notes due 2019 and, on June 24, 2014, we issued an additional $50 million pursuant to the exercise of an overallotment option granted to the initial purchasers as part of the June 2014 offering (the “2019 Notes”). In June 2018, we issued $300 million of 0.00% convertible senior notes due 2023 and, on June 26, 2018, we issued an additional $35 million pursuant to the exercise of an overallotment option granted to the initial purchasers as part of the June 2018 offering (the “2023 Notes” and, together with the 2019 Notes and the 2020 Notes, the “Notes”). In connection with each offering of the Notes, we entered into convertible note hedge transactions with certain counterparties (the “Bond Hedge”) and warrant transactions (the “Warrants” and together with the Notes and the Bond Hedge, the “Convertible Notes Financings”) with the same counterparties (the “hedge counterparties”).

We have been advised that, in connection with establishing their initial hedge positions with respect to the Bond Hedge and Warrants, the hedge counterparties and/or their affiliates would likely purchase shares of our common stock or enter into various derivative transactions with respect to our common stock concurrently with, or shortly after, the pricing of the Notes, including with certain investors in the Notes. These hedging activities could increase (or reduce the size of any decrease in) the market price of our common stock or the Notes.

In addition, we expect that many investors in, including future purchasers of, the Notes may employ, or seek to employ, a convertible arbitrage strategy with respect to the Notes. Investors would typically implement such a strategy by selling short the common stock underlying the Notes and dynamically adjusting their short position while continuing to hold the Notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock.

Further, investors in the Notes may periodically modify their arbitrage strategies with respect to the Notes or modify their hedge positions with respect to the Notes from time to time. The hedge counterparties and/or their respective affiliates also may periodically modify their hedge positions from time to time (and are likely to do so during the conversion period relating to any conversion of the Notes or following any repurchase of Notes by us on any fundamental repurchase date or otherwise). Such modifications may be implemented by entering into or unwinding various derivatives with respect to our common stock, and/or by purchasing or selling shares of our common stock or other securities of the Company in secondary market transactions and/or open market transactions. The effect, if any, of these transactions and activities on the market price of our common stock or the trading prices of the Notes (which could affect a noteholder’s ability to convert the Notes or the amount and value of the consideration received upon conversion of the Notes) will depend in part on market conditions and cannot be ascertained at this time. Any of these activities, however, could adversely affect the market price of our common stock.

It is not possible to predict the effect that these hedging or arbitrage strategies adopted by holders of the Notes or counterparties to the Bond Hedge and Warrants will have on the market price of our common stock. For example, the SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any changes in government regulations or other factors that affect the manner in which third parties can engage in hedging strategies, including entering into short sales or swaps on our common stock, could adversely affect the trading prices and the liquidity of the Notes and/or our common stock.

Taken together, the Bond Hedge and Warrants are intended, but not guaranteed, to offset any actual earnings dilution that could occur upon delivery of shares of common stock to satisfy to our conversion obligation under the Notes. For the 2020 Notes, the corresponding Bond Hedge and Warrants are intended to limit the earnings dilution that our stockholders would experience until the Company’s common stock is above approximately $189.00 per share, the strike price of the 2020 Notes warrant transactions, which represented a 100% premium over the closing price of our common stock at the time we entered into the Bond Hedge and Warrants related to the 2020 Notes. For the 2019 Notes, the corresponding Bond Hedge and Warrants are intended to limit the earnings dilution that our stockholders would experience until the Company’s common stock is above approximately $171.98 per share, the strike price of the 2019 Notes warrant transactions, which represented a 100% premium over the closing price of our common stock at the time we entered into the Bond Hedge and Warrants related to the 2019 Notes. For the 2023 Notes, the corresponding Bond Hedge and Warrants are intended to limit the earnings dilution that our stockholders would experience until the Company’s common stock is above approximately $309.84 per share, the strike price of the 2023 Notes warrant transactions, which represented a 100% premium over the closing price of our common stock at the time we entered into the Bond Hedge and Warrants related to the 2023 Notes. However, these transactions are complex, and there can be no assurance that they will operate as planned.

We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of our common stock. In addition, we do not make any representation that the counterparties to those transactions will engage in these transactions or activities or that these transactions and activities, once commenced, will not be discontinued without notice; the counterparties or their affiliates may choose to engage in, or discontinue engaging in, any of these transactions or activities with or without notice at any time, and their decisions will be in their sole discretion and not within our control.

Repurchases of Common Stock during the Three Months Ended ~~October 28, 2017~~August 4, 2018

During the three months ended ~~October 28, 2017,~~August 4, 2018, we repurchased the following shares of our common stock:

Number of
Shares ⁽¹⁾

Average
Purchase
Price Per
Share

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

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

(in millions)

July 30, 2017 to August 26, 2017

—

$
—

—

$
—

August 27, 2017 to September 30, 2017

40,414

$
72.18

—

$
—

October 1, 2017 to October 28, 2017

752

$
77.20

—

$
—

Total

41,166

$
72.28

—

	Number of Shares		Average Purchase Price Per Share		Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
							(in millions)
May 6, 2018 to June 2, 2018 ⁽¹⁾		1,297	$	101.24		—	$	—
June 3, 2018 to July 7, 2018 ⁽¹⁾		40,830	$	159.92		—	$	—
July 8, 2018 to August 4, 2018 ⁽¹⁾		1,222	$	134.50		—	$	—
Total		43,349	$	157.45		—

~~Incorporated by Reference~~

Exhibit
Number

~~Exhibit Description~~

~~Form~~

~~File~~

~~Number~~

~~Date of~~

~~First Filing~~

~~Exhibit~~

~~Number~~

~~Filed~~

~~Herewith~~

~~31.1~~

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

—

~~31.2~~

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

—

~~32.1~~

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

—

~~32.2~~

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

—

~~101.INS~~

~~XBRL Instance Document~~

—

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document~~

—

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document~~

—

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document~~

—

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~

—

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document~~

—

			Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Date of First Filing	Exhibit Number	Filed Herewith

4.1	Indenture dated June 18, 2018, between RH and U.S. Bank National Association, as Trustee, including form of 0.00% Convertible Senior Note due 2023.	8-K	001-35720	June 19, 2018	4.1

4.2	First Supplement Indenture dated September 4, 2018, between RH and U.S. Bank National Association, as Trustee, relating to the 0.00% Convertible Senior Note due 2023.	—	—	—	—	X

10.1	Form of Base Convertible Bond Hedge Confirmation, dated June 13, 2018, between RH and each of the counterparties thereto.	8-K	001-35720	June 19, 2018	10.1

10.2	Form of Base Warrant Confirmation, dated June 13, 2018, between RH and each of the counterparties thereto.	8-K	001-35720	June 19, 2018	10.2

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

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

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

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

101.INS	XBRL Instance Document	—	—	—	—	X

101.SCH	XBRL Taxonomy Extension Schema Document	—	—	—	—	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	—	—	—	—	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	—	—	—	—	X

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	—	—	—	—	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	—	—	—	—	X

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.

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

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

		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~October 28, 2017,~~August 4, 2018, and ~~January 28, 2017~~February 3, 2018	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three and ~~nine~~six months ended ~~October 28,~~August 4, 2018, and July 29, 2017 ~~and October 29, 2016~~	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and ~~nine~~six months ended ~~October 28,~~August 4, 2018, and July 29, 2017 ~~and October 29, 2016~~	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~October 28,~~August 4, 2018, and July 29, 2017 ~~and October 29, 2016~~	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4953
Item 4.	Controls and Procedures	5055

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5156
Item 1A.	Risk Factors	5156
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5161
Item 3.	Defaults Upon Senior Securities	5161
Item 4.	Mine Safety Disclosures	5261
Item 5.	Other Information	5261
Item 6.	Exhibits	5362
Signatures		5463

	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

Description	Policy under Topic 605	Policy under Topic 606
Advertising expenses	Costs associated with Source Books were capitalized and amortized over their expected period of future benefit. Expense was amortized based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual Source Book basis, generally over a twelve-month period after they were mailed.	Costs associated with Source Books are expensed upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier.
Gift card breakage	Recognized gift card breakage (amounts not expected to be redeemed) within selling, general and administrative expenses.	Recognize gift card breakage within net revenues proportional to actual gift card redemptions.
Membership revenue	Annual fees for new memberships in the RH Members Program and renewals were recorded as deferred revenue when collected from customers and recognized as revenue on a straight-line basis over the twelve month membership period.	Annual fees for new memberships in the RH Members Program are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. RH Members Program renewal fees are recorded as deferred revenue when collected from customers and will continue to be recognized as revenue on a straight-line basis over the twelve month membership period.
Revenue recognition	Revenue for merchandise that is not delivered via the home-delivery channel was recognized upon delivery.	Revenue for merchandise that is not delivered via the home-delivery channel will be recognized upon shipment.
Allowance for sales returns	Recognized an allowance for sales returns as a net liability within other current liabilities.	Recognize an allowance for sales returns on a gross basis as a liability within other current liabilities and a right of return asset for merchandise within prepaid expense and other current assets.

	Three Months Ended August 4, 2018
	As Reported		Adjustments			Balances without Adoption of Topic 606
Net revenues	$	640,798	$	(1,685	)	$	639,113
Cost of goods sold		369,198		(662	)		368,536
Gross profit		271,600		(1,023	)		270,577
Selling, general and administrative expenses		186,225		(11,105	)		175,120
Income from operations		85,375		10,082			95,457
Other expenses
Interest expense—net		17,480		—			17,480
Loss on extinguishment of debt		917		—			917
Total other expenses		18,397		—			18,397
Income before income taxes		66,978		10,082			77,060
Income tax expense		2,936		455			3,391
Net income	$	64,042	$	9,627		$	73,669

	Six Months Ended August 4, 2018
	As Reported		Adjustments			Balances without Adoption of Topic 606
Net revenues	$	1,198,204	$	(9,295	)	$	1,188,909
Cost of goods sold		714,569		(3,650	)		710,919
Gross profit		483,635		(5,645	)		477,990
Selling, general and administrative expenses		344,659		(7,302	)		337,357
Income from operations		138,976		1,657			140,633
Other expenses
Interest expense—net		34,515		—			34,515
Loss on extinguishment of debt		917		—			917
Total other expenses		35,432		—			35,432
Income before income taxes		103,544		1,657			105,201
Income tax expense		11,443		(1,495	)		9,948
Net income	$	92,101	$	3,152		$	95,253

	As of August 4, 2018
	As Reported		Adjustments			Balances without Adoption of Topic 606
Prepaid expense and other current assets	$	78,254	$	36,012		$	114,266
Deferred tax assets		29,437		(6,561	)		22,876
Accounts payable and accrued expenses		284,942		(732	)		284,210
Deferred revenue and customer deposits		164,979		9,860			174,839
Other current liabilities		51,354		(3,865	)		47,489
Retained earnings		223,459		24,188			247,647

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

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

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

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

	Trailing Twelve Months
	August 4,			July 29,
	2018			2017
	(in thousands)
Net income	$	105,513		$	721
Depreciation and amortization		72,392			63,606
Interest expense—net		70,504			49,626
Goodwill impairment^(a)		33,700			—
Loss on extinguishment of debt^(b)		5,797			—
Income tax expense		35,744			11,168
EBITDA^(m)		323,650			125,121
Non-cash compensation^(c)		28,774			51,296
Asset impairment and lease losses ^(d)		4,417			12,743
Distribution center closures^(e)		3,723			—
Reorganization related costs ^(f)		1,721			974
Recall accrual ^(g)		1,656			9,348
Impact of inventory step-up^(h)		1,047			5,294
Legal settlement ⁽ⁱ⁾		(5,289	)		—
Anti-dumping exposure^(j)		(2,202	)		—
Gain on sale of building and land^(k)		(819	)		(1,300	)
Aircraft impairment ^(l)		—			4,767
Adjusted EBITDA ^(m)	$	356,678		$	208,243

	Twelve Months Ended
	February 3, 2018
	(in thousands)
Net cash provided by operating activities ⁽¹⁾	$	556,817
Capital expenditures ⁽¹⁾		(146,233	)
Payments on build-to-suit lease transactions		(10,200	)
Payments on capital leases		(377	)
Proceeds from sale of assets held for sale—net		15,123
Free cash flow	$	415,130

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

	RH

Date: ~~December 6, 2017~~September 4, 2018	By:	/s/ Gary Friedman
		Gary Friedman
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~December 6, 2017~~September 4, 2018	By:	/s/ Ryno Blignaut
		Ryno Blignaut
		President, Chief Financial and Administrative Officer
		(Principal Financial Officer)

Date: September 4, 2018	By:	/s/ Karen Boone
		Karen Boone
		~~President, Chief Financial and Administrative~~Principal Accounting Officer
		(Principal ~~Financial Officer and Principal~~ Accounting Officer)

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