December 5, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Form: 10-Q

Documents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 2, 2019

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

For the transition period from to

Commission file number: 001-35720

(Exact name of registrant as specified in its charter)


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

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

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

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.

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 November 29, 2019, 18,997,010 shares of registrant’s common stock were outstanding.

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INDEX TO FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of November 2, 2019 and February 2, 2019	3
	Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended November 2, 2019 and November 3, 2018	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended November 2, 2019 and November 3, 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three and nine months ended November 2, 2019 and November 3, 2018	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended November 2, 2019 and November 3, 2018	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71
Item 4.	Controls and Procedures	73

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	80
Signatures		81

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PART I

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)


	November 2,		February 2,
	2019		2019

ASSETS
Current assets:
Cash and cash equivalents	$	38,253	$	5,803
Accounts receivable—net		45,312		40,224
Merchandise inventories		429,189		531,947
Assets held for sale		—		21,795
Prepaid expense and other current assets		46,725		104,198
Total current assets		559,479		703,967
Property and equipment—net		969,090		952,957
Operating lease right-of-use assets		415,912		440,504
Goodwill		124,376		124,379
Tradenames, trademarks and domain names		86,022		86,022
Deferred tax assets		36,506		35,603
Other non-current assets		170,628		79,586
Total assets	$	2,362,013	$	2,423,018
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	288,937	$	320,497
Deferred revenue and customer deposits		167,014		152,595
Convertible senior notes due 2019—net		—		343,789
Convertible senior notes due 2020—net		285,570		—
Operating lease liabilities		55,753		66,249
Other current liabilities		106,432		109,456
Total current liabilities		903,706		992,586
Asset based credit facility		—		57,500
FILO term loan—net		89,408		—
Equipment promissory notes—net		36,613		—
Convertible senior notes due 2020—net		—		271,157
Convertible senior notes due 2023—net		262,177		249,151
Convertible senior notes due 2024—net		261,010		—
Non-current operating lease liabilities		412,247		437,557
Non-current finance lease liabilities		431,379		421,245
Other non-current obligations		28,693		32,512
Total liabilities		2,425,233		2,461,708
Commitments and contingencies (Note 15)		—		—
Stockholders’ deficit:
Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of November 2, 2019 and February 2, 2019		—		—
Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 18,928,309 shares issued and outstanding as of November 2, 2019; 20,480,613 shares issued and 20,477,813 shares outstanding as of February 2, 2019		2		2
Additional paid-in capital		416,946		356,422
Accumulated other comprehensive loss		(2,481)		(2,334)
Accumulated deficit		(477,687)		(392,537)
Treasury stock—at cost, no shares as of November 2, 2019 and 2,800 shares as of February 2, 2019		—		(243)
Total stockholders’ deficit		(63,220)		(38,690)
Total liabilities and stockholders’ deficit	$	2,362,013	$	2,423,018

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

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018

Net revenues	$	677,526	$	636,558	$	1,982,461	$	1,834,762
Cost of goods sold		393,360		386,537		1,170,523		1,107,064
Gross profit		284,166		250,021		811,938		727,698
Selling, general and administrative expenses		194,929		207,793		550,087		555,500
Income from operations		89,237		42,228		261,851		172,198
Other expenses
Interest expense—net		21,564		17,695		67,195		48,260
Loss on extinguishment of debt—net		6,857		—		5,903		917
Total other expenses		28,421		17,695		73,098		49,177
Income before income taxes		60,816		24,533		188,753		123,021
Income tax expense		8,353		4,419		36,811		14,540
Net income	$	52,463	$	20,114	$	151,942	$	108,481
Weighted-average shares used in computing basic net income per share		18,765,769		22,082,141		19,069,501		21,850,955
Basic net income per share	$	2.80	$	0.91	$	7.97	$	4.96
Weighted-average shares used in computing diluted net income per share		24,170,172		27,703,319		23,809,425		26,810,035
Diluted net income per share	$	2.17	$	0.73	$	6.38	$	4.05

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

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended
	November 2,		November 3,		November 2,		November 3,
	2019		2018		2019		2018

Net income	$	52,463	$	20,114	$	151,942	$	108,481
Net gains (losses) from foreign currency translation		299		(383)		(148)		(2,129)
Total comprehensive income	$	52,762	$	19,731	$	151,794	$	106,352

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

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)


	Three Months Ended
						Accumulated		Retained					Total
				Additional		Other		Earnings					Stockholders’
	Common Stock			Paid-In		Comprehensive		(Accumulated		Treasury Stock			Equity
	Shares	Amount		Capital		Income (Loss)		Deficit)		Shares	Amount		(Deficit)
Balances—August 4, 2018	22,229,439	$	2	$	925,087	$	(1,917)	$	218,906	20,222,932	$	(1,000,569)	$	141,509
Stock-based compensation	—		—		3,578		—		—	—		—		3,578
Vested and delivered restricted stock units	11,831		—		(1,084)		—		—	—		—		(1,084)
Exercise of stock options	129,549		—		6,618		—		—	—		—		6,618
Repurchases of common stock	(1,160,879)		—		—		—		—	1,160,879		(145,182)		(145,182)
Net income	—		—		—		—		20,114	—		—		20,114
Net gains (losses) from foreign currency translation	—		—		—		(383)		—	—		—		(383)
Balances—November 3, 2018	21,209,940	$	2	$	934,199	$	(2,300)	$	239,020	21,383,811	$	(1,145,751)	$	25,170

Balances—August 3, 2019	18,591,763	$	2	$	355,010	$	(2,780)	$	(530,150)	—	$	—	$	(177,918)
Stock-based compensation	—		—		5,009		—		—	—		—		5,009
Vested and delivered restricted stock units	2,967		—		(304)		—		—	—		—		(304)
Exercise of stock options	279,570		—		11,286		—		—	—		—		11,286
Shares issued in connection with warrant agreements	54,009		—		—		—		—	—		—		—
Net income	—		—		—		—		52,463	—		—		52,463
Net gains (losses) from foreign currency translation	—		—		—		299		—	—		—		299
Equity component of the convertible notes issuance—net	—		—		87,070		—		—	—		—		87,070
Issuance of warrants	—		—		50,225		—		—	—		—		50,225
Purchase of convertible note hedges	—		—		(91,350)		—		—	—		—		(91,350)
Balances—November 2, 2019	18,928,309	$	2	$	416,946	$	(2,481)	$	(477,687)	—	$	—	$	(63,220)

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)


	Nine Months Ended
						Accumulated		Retained					Total
				Additional		Other		Earnings					Stockholders’
	Common Stock			Paid-In		Comprehensive		(Accumulated		Treasury Stock			Equity
	Shares	Amount		Capital		Income (Loss)		Deficit)		Shares	Amount		(Deficit)
Balances—February 3, 2018	21,517,338	$	2	$	840,765	$	(171)	$	151,575	20,220,132	$	(1,000,326)	$	(8,155)
Stock-based compensation	—		—		17,457		—		—	—		—		17,457
Issuance of restricted stock	6,405		—		—		—		—	—		—		—
Vested and delivered restricted stock units	114,847		—		(8,947)		—		—	—		—		(8,947)
Exercise of stock options	735,029		—		35,827		—		—	—		—		35,827
Repurchases of common stock	(1,163,679)		—		—		—		—	1,163,679		(145,425)		(145,425)
Equity component value of convertible note issuance—net	—		—		89,933		—		—	—		—		89,933
Sale of common stock warrant	—		—		51,021		—		—	—		—		51,021
Purchase of convertible note hedge	—		—		(91,857)		—		—	—		—		(91,857)
Impact of Topic 606 adoption	—		—		—		—		(21,036)	—		—		(21,036)
Net income	—		—		—		—		108,481	—		—		108,481
Net gains (losses) from foreign currency translation	—		—		—		(2,129)		—	—		—		(2,129)
Balances—November 3, 2018	21,209,940	$	2	$	934,199	$	(2,300)	$	239,020	21,383,811	$	(1,145,751)	$	25,170

Balances—February 2, 2019	20,477,813	$	2	$	356,422	$	(2,333)	$	(392,538)	2,800	$	(243)	$	(38,690)
Stock-based compensation	—		—		15,788		—		—	—		—		15,788
Issuance of restricted stock	7,014		—		—		—		—	—		—		—
Vested and delivered restricted stock units	104,608		—		(6,538)		—		—	—		—		(6,538)
Exercise of stock options	452,219		—		18,509		—		—	—		—		18,509
Repurchases of common stock	(2,167,396)		—		—		—		—	2,167,396		(250,032)		(250,032)
Retirement of treasury stock	—		—		(13,180)		—		(237,091)	(2,170,154)		250,271		—
Shares issued in connection with warrant agreements	54,009		—		—		—		—	—		—		—
Net income	—		—		—		—		151,942	—		—		151,942
Net gains (losses) from foreign currency translation	—		—		—		(148)		—	—		—		(148)
Equity component of the convertible notes issuance—net	—		—		87,070		—		—	—		—		87,070
Issuance of warrants	—		—		50,225		—		—	—		—		50,225
Purchase of convertible note hedges	—		—		(91,350)		—		—	—		—		(91,350)
Conversion of convertible senior notes	42		—		—		—		—	(42)		4		4
Balances—November 2, 2019	18,928,309	$	2	$	416,946	$	(2,481)	$	(477,687)	—	$	—	$	(63,220)

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	November 2,		November 3,
	2019		2018

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	151,942	$	108,481
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		75,945		64,934
Non-cash operating lease cost		48,855		51,095
Asset impairments		1,660		5,337
Asset held for sale gain		(1,529)		—
Amortization of debt discount		33,528		29,669
Accretion of debt discount upon settlement of debt		(70,482)		—
Stock-based compensation expense		16,109		17,777
Non-cash finance lease interest expense		16,864		11,254
Product recalls		(3,516)		—
Net non-cash charges resulting from inventory step-up		—		380
Deferred income taxes		667		(670)
Loss on extinguishment of debt—net		5,903		917
Other non-cash interest expense		3,306		2,648
Change in assets and liabilities:
Accounts receivable		(2,809)		(11,098)
Merchandise inventories		102,788		(39,815)
Prepaid expense and other assets		42,178		(51,614)
Landlord assets under construction—net of tenant allowances		(49,387)		(39,605)
Accounts payable and accrued expenses		(41,474)		(11,529)
Deferred revenue and customer deposits		14,406		20,893
Other current liabilities		(53,016)		9,238
Current and non-current operating lease liability		(61,887)		(57,806)
Other non-current obligations		(19,054)		(13,770)
Net cash provided by operating activities		210,997		96,716
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(64,614)		(73,278)
Deposit on asset under construction		(30,000)		—
Proceeds from sale of assets		24,078		—
Net cash used in investing activities		(70,536)		(73,278)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under asset based credit facility		322,500		656,000
Repayments under asset based credit facility		(380,000)		(748,470)
Borrowings under term loans		320,000		—
Repayments under term loans		(234,000)		(80,000)
Borrowings under promissory and equipment security notes		99,000		—
Repayments under promissory and equipment security notes		(10,280)		(31,974)
Debt issuance costs		(4,636)		—
Proceeds from issuance of convertible senior notes		350,000		335,000
Proceeds from issuance of warrants		50,225		51,021
Purchase of convertible note hedges		(91,350)		(91,857)
Debt issuance costs related to convertible senior notes		(4,818)		(6,349)
Repayments of convertible senior notes		(278,560)		—
Principal payments under finance leases		(7,136)		(4,937)
Repurchases of common stock—including commissions		(250,032)		(145,182)
Proceeds from exercise of stock options		18,509		35,827
Tax withholdings related to issuance of stock-based awards		(6,538)		(8,947)
Payments under promissory notes related to share repurchases		(892)		—
Net cash used in financing activities		(108,008)		(39,868)
Effects of foreign currency exchange rate translation		(3)		(136)
Net increase (decrease) in cash and cash equivalents and restricted cash equivalents		32,450		(16,566)
Cash and cash equivalents and restricted cash equivalents
Beginning of period—cash and cash equivalents		5,803		17,907
Beginning of period—restricted cash equivalents (construction related deposits)		—		7,407
Beginning of period—cash and cash equivalents and restricted cash equivalents	$	5,803	$	25,314

End of period—cash and cash equivalents		38,253		7,755
End of period—restricted cash equivalents (construction related deposits)		—		993
End of period—cash and cash equivalents and restricted cash equivalents	$	38,253	$	8,748
Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end	$	11,859	$	11,591
Landlord asset additions in accounts payable and accrued expenses at period-end		20,475		16,120
Landlord asset additions from unpaid construction related deposits		195		809
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets		—		73,275
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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

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, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.

As of November 2, 2019, the Company operated a total of 70 RH Galleries and 39 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 15 Waterworks showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, and revisions due to the adoption of the new lease accounting standard described in Note 2—Recently Issued Accounting Standards, necessary to fairly state the Company’s financial position as of November 2, 2019, and the results of operations for the three and nine months ended November 2, 2019 and November 3, 2018. The Company’s current fiscal year, which consists of 52 weeks, ends on February 1, 2020 (“fiscal 2019”).

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 February 2, 2019 (the “2018 Form 10-K”). Certain prior year amounts have been adjusted to conform to the current period presentation due to the adoption of the new lease accounting standard. Refer to Note 2—Recently Issued Accounting Standards.

The results of operations for the three and nine months ended November 2, 2019 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Convertible Senior Notes

In September 2019, the Company issued in a private offering $350 million principal amount of 0.00% convertible senior notes due 2024 (the “2024 Notes”). In connection with the issuance of these notes, the Company entered into convertible note hedge transactions for which it paid an aggregate amount of $91.4 million. In connection with the issuance of the 2024 Notes, the Company sold warrants to purchase shares of common stock of the Company, for which it received aggregate proceeds of approximately $50.2 million. Taken together, the Company received total cash proceeds of $304.1 million, net of discounts upon original issuance and offering costs of $4.8 million, from the issuance of the 2024 Notes and the related warrants. Refer to Note 8—Convertible Senior Notes.

Revisions

During the adoption process of the new lease accounting standard (refer to Note 2—Recently Issued Accounting Standards), the Company identified a lease agreement that was incorrectly accounted for as an impaired lease under Accounting Standards Codification (“ASC”) 420—Exit or Disposal Cost Obligations in fiscal 2017 and the first quarter of fiscal 2018. This error resulted in an overstatement of net income of $1.4 million and $0.9 million for the year ended

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February 3, 2018 and the nine months ended November 3, 2018, respectively. This error also resulted in an overstatement of retained earnings as of February 3, 2018 of $1.4 million, from $152.4 million as reported to $151.0 million as revised, and as of November 3, 2018 of $2.3 million, from $245.9 million as reported to $243.6 million as revised, prior to the impact of the modified retrospective application of the new lease accounting standard as further discussed in Note 2. In addition, as of February 2, 2019, this error resulted in an understatement of other non-current obligations of $3.3 million, an overstatement of other current liabilities of $1.0 million and understatement of accumulated deficit of $2.3 million, from $376.8 million as reported to $379.1 million as revised. Although these errors are not considered to be material to any of the previously issued financial statements, the Company has revised the accompanying unaudited interim financial statements to reflect the correction of these errors.

In addition, during the adoption process of the new lease accounting standard, the Company identified an error in its previously reported consolidated statement of cash flows for the quarterly and annual periods in fiscal 2018. This error resulted in an understatement of $9.2 million of net cash provided by operating activities and an understatement of $9.2 million of net cash used in investing activities for each reporting period in fiscal 2018. There was no impact on the condensed consolidated balance sheets, condensed consolidated statements of income or the condensed consolidated statement of stockholders’ equity (deficit) related to this error. Although these errors are not considered to be material to any of the previously issued financial statements, the Company has revised the accompanying unaudited interim financial statements to reflect the correction of these errors.

The following are selected line items from the Company’s condensed consolidated statements of cash flows illustrating the effect of the corrections, prior to the adoption of the modified retrospective application of the new lease accounting standard (in thousands):


	Nine Months Ended November 3, 2018
	As Reported		Adjustment		As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(23,601)	$	9,201	$	(14,400)
Net cash provided by operating activities		127,592		9,201		136,793
Cash flows from investing activities:
Capital expenditures		(104,403)		(9,201)		(113,604)
Net cash used in investing activities		(104,403)		(9,201)		(113,604)


	Fiscal Year Ended February 2, 2019
	As Reported		Adjustment		As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(452)	$	9,201	$	8,749
Net cash provided by operating activities		300,556		9,201		309,757
Cash flows from investing activities:
Capital expenditures		(136,736)		(9,201)		(145,937)
Net cash used in investing activities		(136,736)		(9,201)		(145,937)

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting for Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02—Leases, which requires a lessee to distinguish all leases as operating leases or finance leases and recognize all leases on the balance sheet as a right-of-use asset with a corresponding lease liability representing the present value of lease payments. The standard also requires a lessee to recognize a single lease cost for operating leases, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. The lease cost for finance leases includes both principal and interest components, and is higher than the corresponding cash payment at the beginning of the lease term and declines over the lease term as the liability is reduced. 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

Table of Contents

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company