10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 10, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
(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.
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).
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.
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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Emerging growth company |
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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
As of December 9, 2020,
RH
INDEX TO FORM 10-Q
2
PART I
Item 1. Financial Statements
RH
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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October 31, |
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February 1, |
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2020 |
2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable—net |
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Merchandise inventories |
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Prepaid expense and other current assets |
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Total current assets |
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Property and equipment—net |
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Operating lease right-of-use assets |
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Goodwill |
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Tradenames, trademarks and domain names |
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Deferred tax assets |
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Other non-current assets |
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Total assets |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
$ |
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$ |
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Deferred revenue and customer deposits |
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Convertible senior notes due 2020—net |
— |
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Operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Asset based credit facility |
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— |
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— |
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Equipment promissory notes—net |
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Convertible senior notes due 2023—net |
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Convertible senior notes due 2024—net |
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Non-current operating lease liabilities |
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Non-current finance lease liabilities |
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Other non-current obligations |
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Total liabilities |
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Commitments and contingencies (Note 16) |
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Stockholders’ equity: |
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Preferred stock—$ |
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Common stock—$ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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( |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
RH
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended |
Nine Months Ended |
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October 31, |
November 2, |
October 31, |
November 2, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net revenues |
$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Income from operations |
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Other expenses |
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Interest expense—net |
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Tradename impairment |
— |
— |
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— |
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(Gain) loss on extinguishment of debt—net |
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— |
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( |
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Total other expenses |
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Income before income taxes |
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Income tax expense |
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Net income |
$ |
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$ |
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$ |
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$ |
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Weighted-average shares used in computing |
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Basic net income per share |
$ |
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$ |
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$ |
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$ |
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Weighted-average shares used in computing |
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Diluted net income per share |
$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
RH
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended |
Nine Months Ended |
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October 31, |
November 2, |
October 31, |
November 2, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net income |
$ |
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$ |
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$ |
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$ |
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Net gains (losses) from foreign currency translation |
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( |
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( |
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Total comprehensive income |
$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
RH
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)
Three Months Ended |
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Accumulated |
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Retained |
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Total |
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Additional |
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Other |
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Earnings |
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Stockholders’ |
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Common Stock |
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Paid-In |
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Comprehensive |
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(Accumulated |
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Treasury Stock |
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Equity |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit) |
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Shares |
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Amount |
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(Deficit) |
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Balances—August 1, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Stock-based compensation |
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— |
— |
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— |
— |
— |
— |
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Vested and delivered restricted stock units |
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— |
( |
— |
— |
— |
— |
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( |
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Exercise of stock options |
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— |
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— |
— |
— |
— |
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Retirement of treasury stock |
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— |
— |
( |
— |
— |
( |
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— |
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Shares issued in connection with warrant agreements |
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— |
— |
— |
— |
— |
— |
— |
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Net income |
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— |
— |
— |
— |
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— |
— |
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Net gains from foreign currency translation |
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— |
— |
— |
( |
— |
— |
— |
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( |
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Balances—October 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
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$ |
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Balances—August 3, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
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$ |
( |
Stock-based compensation |
|
— |
— |
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— |
— |
— |
— |
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Vested and delivered restricted stock |
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— |
( |
— |
— |
— |
— |
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( |
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Exercise of stock options |
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— |
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— |
— |
— |
— |
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Shares issued in connection with warrant agreements |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Equity component value of convertible note issuance—net |
— |
— |
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— |
— |
— |
— |
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Issuance of warrants |
— |
— |
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— |
— |
— |
— |
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Purchase of convertible note hedge |
— |
— |
( |
— |
— |
— |
— |
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( |
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Net income |
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— |
— |
— |
— |
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— |
— |
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Net gains from foreign currency translation |
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— |
— |
— |
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— |
— |
— |
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Balances—November 2, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
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$ |
( |
Nine Months Ended |
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Accumulated |
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Retained |
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Total |
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Additional |
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Other |
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Earnings |
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Stockholders’ |
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Common Stock |
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Paid-In |
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Comprehensive |
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(Accumulated |
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Treasury Stock |
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Equity |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit) |
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Shares |
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Amount |
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(Deficit) |
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Balances—February 1, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
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$ |
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Stock-based compensation |
|
— |
— |
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— |
— |
— |
— |
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Issuance of restricted stock |
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— |
— |
— |
— |
— |
— |
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— |
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Vested and delivered restricted stock units |
|
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— |
( |
— |
— |
— |
— |
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( |
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Exercise of stock options |
|
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— |
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— |
— |
— |
— |
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Repurchases of common stock |
|
( |
— |
— |
— |
— |
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( |
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( |
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Retirement of treasury stock |
|
— |
— |
( |
— |
— |
( |
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— |
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Shares issued in connection with warrant agreements |
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— |
— |
— |
— |
— |
— |
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— |
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Settlement of convertible senior notes |
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— |
( |
— |
— |
( |
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— |
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Exercise of call option under bond hedge upon settlement of convertible senior notes |
( |
— |
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— |
— |
|
( |
— |
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Net income |
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— |
— |
— |
— |
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— |
— |
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Net gains from foreign currency translation |
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— |
— |
— |
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— |
— |
— |
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Balances—October 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
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$ |
|
Balances—February 2, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
|
$ |
( |
Stock-based compensation |
|
— |
— |
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— |
— |
— |
— |
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||||||||||||
Issuance of restricted stock |
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— |
— |
— |
— |
— |
— |
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— |
||||||||||||
Vested and delivered restricted stock units |
|
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— |
( |
— |
— |
— |
— |
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( |
||||||||||||
Exercise of stock options |
|
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— |
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— |
— |
— |
— |
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||||||||||||
Repurchases of common stock |
|
( |
— |
— |
— |
— |
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( |
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( |
||||||||||||
Retirement of treasury stock |
|
— |
— |
( |
— |
( |
( |
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— |
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Shares issued in connection with warrant agreements |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Equity component of the convertible notes issuance—net |
— |
— |
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— |
— |
— |
— |
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||||||||||||||
Issuance of warrants |
— |
— |
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— |
— |
— |
— |
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||||||||||||||
Purchase of convertible note hedges |
— |
— |
( |
— |
— |
— |
— |
( |
||||||||||||||
Conversion of convertible senior notes |
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— |
— |
— |
— |
( |
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Net income |
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— |
— |
— |
— |
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— |
— |
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Net losses from foreign currency translation |
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— |
— |
— |
( |
— |
— |
— |
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( |
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Balances—November 2, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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— |
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$ |
— |
|
$ |
( |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
RH
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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October 31, |
November 2, |
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2020 |
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2019 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Non-cash operating lease cost |
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Tradename impairment |
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— |
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Asset impairments |
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(Gain) loss on sale leaseback transaction |
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( |
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Amortization of debt discount |
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Accretion of debt discount upon settlement of debt |
( |
( |
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Stock-based compensation expense |
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Non-cash finance lease interest expense |
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Product recalls |
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( |
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Deferred income taxes |
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(Gain) loss on extinguishment of debt—net |
( |
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Other non-cash items |
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Change in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Merchandise inventories |
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( |
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Prepaid expense and other assets |
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( |
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Landlord assets under construction—net of tenant allowances |
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( |
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( |
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Accounts payable and accrued expenses |
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( |
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Deferred revenue and customer deposits |
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Other current liabilities |
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( |
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Current and non-current operating lease liabilities |
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( |
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( |
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Other non-current obligations |
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( |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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( |
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( |
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Acquisition of business |
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( |
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— |
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Investments in joint ventures |
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( |
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— |
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Proceeds from sale of assets |
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Deposit on asset under construction |
— |
( |
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Net cash used in investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Borrowings under asset based credit facility |
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Repayments under asset based credit facility |
|
( |
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( |
||
Borrowings under term loans |
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— |
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Repayments under term loans |
— |
( |
||||
Borrowings under promissory and equipment security notes |
|
— |
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Repayments under promissory and equipment security notes |
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( |
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( |
||
Debt issuance costs |
|
— |
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( |
||
Proceeds from issuance of convertible senior notes |
|
— |
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Proceeds from issuance of warrants |
|
— |
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Purchase of convertible note hedges |
|
— |
|
( |
||
Debt issuance costs related to convertible senior notes |
|
— |
|
( |
||
Repayments of convertible senior notes |
( |
( |
||||
Principal payments under finance leases |
( |
( |
||||
Repurchases of common stock—including commissions |
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— |
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( |
||
Proceeds from exercise of stock options |
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||
Tax withholdings related to issuance of stock-based awards |
( |
|
( |
|||
Payments under promissory notes related to share repurchases |
— |
|
( |
|||
Net cash used in financing activities |
|
( |
|
( |
||
Effects of foreign currency exchange rate translation |
|
( |
|
( |
||
Net increase in cash and cash equivalents and restricted cash equivalents |
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|
||
Cash and cash equivalents and restricted cash equivalents |
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|
|||
Beginning of period—cash and cash equivalents |
$ |
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$ |
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End of period—cash and cash equivalents |
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End of period—restricted cash equivalents (acquisition related escrow deposits) |
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— |
||
End of period—cash and cash equivalents and restricted cash equivalents |
$ |
|
$ |
|
||
Non-cash transactions: |
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|
|
|||
Property and equipment additions in accounts payable and accrued expenses at period-end |
$ |
|
$ |
|
||
Landlord asset additions in accounts payable and accrued expenses at period-end |
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|
||||
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets |
|
— |
||||
Shares issued on settlement of convertible senior notes |
( |
— |
||||
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes |
|
— |
||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
7
RH
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—THE COMPANY
Nature of Business
RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or 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 our stores, catalogs and websites.
As of October 31, 2020, we operated a total of
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of October 31, 2020, and the results of operations for the three and nine months ended October 31, 2020 and November 2, 2019. Our current fiscal year, which consists of 52 weeks, ends on January 30, 2021 (“fiscal 2020”).
Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.
We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19”) using information that is reasonably available to us at this time. The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets. Our current assessment of these estimates are included in our condensed consolidated financial statements as of and for the three and nine months ended October 31, 2020 and November 2, 2019. As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “2019 Form 10-K”).
The results of operations for the three and nine months ended October 31, 2020 and November 2, 2019 presented herein are not necessarily indicative of the results to be expected for the full fiscal year or future time periods. Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the novel coronavirus disease as discussed in Recent Developments—COVID-19 below.
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Recent Developments—COVID-19
The initial wave of the COVID-19 outbreak starting in March 2020 caused disruption to our business operations as we temporarily closed all of our retail locations on March 17, 2020. While our retail locations were substantially closed at the end of the first fiscal quarter on May 2, 2020, during the second fiscal quarter we had reopened substantially all of our retail locations. As of the end of the third fiscal quarter on October 31, 2020 we had reopened all of our Galleries and Outlets, and
During the time period of October through early December of 2020, there has been a spike in reported COVID-19 cases in various parts of both the U.S. and Canada. The recent surge in cases has led to the imposition of increasing levels of restriction on our physical operations with respect to Galleries, Outlets and restaurants. These limitations include restrictions on the level of occupancy that is permitted in some locations as well as full closure requirements for other locations. Although we have experienced strong demand for our products in connection with prior closure requirements earlier in this year, our overall demand in specific markets correlates favorably with our customers’ ability to access our Galleries and Outlets. Accordingly, we do anticipate some negative impact to overall demand in connection the restrictions on our physical locations and the duration and extent of these operational limits cannot be predicted with certainty.
While our business strengthened during the second and third fiscal quarters, the lag in inventory receipts together with dislocations in our supply chain has resulted in some delays in our ability to convert business demand into revenues. Our global supply chain has not fully recovered from the impact of the COVID-19 dislocation. In light of the recent increase of virus infections and shelter in place orders which continue to negatively impact our manufacturing partners, we anticipate that our supply chain may not catch up to demand until the second half of 2021. Despite the strong growth in consumer demand in our business during the second and third fiscal quarters, revenue growth has lagged the increase in customer orders. As manufacturing and inventory receipts catch up with this backlog, we expect this demand will convert into revenue in the next several quarters.
While we have continued to serve our customers and operate our business through the ongoing COVID-19 health crisis, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains uncertain. Future adverse developments in connection with the COVID-19 crisis, including additional waves or resurgences of COVID-19 outbreaks, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance for the fiscal year ending January 30, 2021 and future time periods. Although the availability of vaccines and various treatments with respect to COVID-19 can be expected to have an overall positive impact on business conditions in the aggregate over time, the exact timing of these positive developments is uncertain and in the meantime reported cases of COVID-19 have surged in the U.S. and Canada from October through December 2020 resulting in various adverse operating restrictions on our physical locations.
In our initial response to the COVID-19 health crisis we undertook immediate adjustments to our business operations including temporarily closing retail locations and restaurants, curtailing expenses and delaying investments including scaling back some inventory orders while we assessed the status of our business. Our approach to the crisis evolved quickly as our business trends substantially improved during the second and third fiscal quarters. We will continue to closely manage our expenses and investments while considering both the overall economic environment as well as the needs of our business operations. In addition, our near term decisions regarding the sources and uses of capital in our business will continue to reflect and adapt to changes in market conditions and our business related to the impact of COVID-19. During the second and third fiscal quarters of 2020 we have resumed many investments and previously deferred expenditures, but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further development with respect to COVID-19.
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NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS
Cloud Computing
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amends ASU 2015-05—Customers Accounting for Fees in a Cloud Computing Agreement. The amendments in this ASU more closely align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).
We the ASU as of February 2, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include
Current Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs amend the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology to result in more timely recognition of losses. The guidance in the ASUs applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions.
Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our contract business and other miscellaneous receivables. Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts was $
We the ASUs as of February 2, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not recognize a cumulative-effect adjustment upon adoption as the adoption of the ASUs did not have a material effect on our condensed consolidated financial statements.
Income Taxes
In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We will adopt this standard in the first quarter of fiscal 2021 and we do not expect the adoption of the new accounting standard to have a material impact on our consolidated financial statements.
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Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial statements, including the timing and adoption approach.