Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

December 10, 2020

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on December 10, 2020


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, 2020

or

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

For the transition period from             to

Commission file number: 001-35720

Graphic

(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
Corte Madera, CA

 

94925

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (415924-1005

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.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

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

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

As of December 9, 2020, 20,401,431 shares of the registrant’s common stock were outstanding.

RH

INDEX TO FORM 10-Q

    

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2020 and February 1, 2020

3

Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

5

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 31, 2020 and November 2, 2019

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

60

Item 4.

Controls and Procedures

62

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

63

Item 1A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3.

Defaults Upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

66

Item 6.

Exhibits

67

Signatures

68

2

PART I

Item 1. Financial Statements

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

    

October 31,

    

February 1,

2020

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

89,884

$

47,658

Accounts receivable—net

 

59,065

 

48,979

Merchandise inventories

 

497,076

 

438,696

Prepaid expense and other current assets

 

88,875

 

61,619

Total current assets

 

734,900

 

596,952

Property and equipment—net

 

1,051,825

 

967,599

Operating lease right-of-use assets

405,776

410,904

Goodwill

 

135,306

 

124,367

Tradenames, trademarks and domain names

 

71,663

 

86,022

Deferred tax assets

 

38,839

 

45,005

Other non-current assets

 

240,941

 

214,845

Total assets

$

2,679,250

$

2,445,694

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

368,552

$

330,309

Deferred revenue and customer deposits

274,958

 

162,433

Convertible senior notes due 2020—net

290,532

Operating lease liabilities

64,879

58,924

Other current liabilities

 

174,196

 

140,714

Total current liabilities

 

882,585

 

982,912

Asset based credit facility

 

 

Equipment promissory notes—net

 

20,363

 

31,053

Convertible senior notes due 2023—net

 

280,536

 

266,658

Convertible senior notes due 2024—net

277,247

264,982

Non-current operating lease liabilities

 

405,432

 

409,930

Non-current finance lease liabilities

488,660

442,988

Other non-current obligations

 

27,558

 

28,520

Total liabilities

 

2,382,381

 

2,427,043

Commitments and contingencies (Note 16)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of October 31, 2020 and February 1, 2020

 

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 19,844,455 shares issued and outstanding as of October 31, 2020; 19,236,681 shares issued and outstanding as of February 1, 2020

 

2

 

2

Additional paid-in capital

 

566,436

 

430,662

Accumulated other comprehensive loss

 

(1,938)

 

(2,760)

Accumulated deficit

 

(267,631)

 

(409,253)

Total stockholders’ equity

 

296,869

 

18,651

Total liabilities and stockholders’ equity

$

2,679,250

$

2,445,694

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)

Three Months Ended

Nine Months Ended

October 31,

November 2,

October 31,

November 2,

    

2020

    

2019

    

2020

    

2019

Net revenues

$

844,013

$

677,526

$

2,036,190

$

1,982,461

Cost of goods sold

 

435,683

 

393,360

 

1,095,787

 

1,170,523

Gross profit

 

408,330

 

284,166

 

940,403

 

811,938

Selling, general and administrative expenses

 

297,109

 

194,929

657,161

 

550,087

Income from operations

 

111,221

 

89,237

 

283,242

 

261,851

Other expenses

 

Interest expense—net

15,656

21,564

54,703

 

67,195

Tradename impairment

20,459

(Gain) loss on extinguishment of debt—net

 

 

6,857

 

(152)

 

5,903

Total other expenses

 

15,656

 

28,421

 

75,010

 

73,098

Income before income taxes

 

95,565

 

60,816

 

208,232

 

188,753

Income tax expense

 

49,154

 

8,353

 

66,610

 

36,811

Net income

$

46,411

$

52,463

$

141,622

$

151,942

Weighted-average shares used in computing
basic net income per share

 

19,552,836

 

18,765,769

 

19,393,931

 

19,069,501

Basic net income per share

$

2.37

$

2.80

$

7.30

$

7.97

Weighted-average shares used in computing
diluted net income per share

 

28,286,124

 

24,170,172

 

26,351,194

 

23,809,425

Diluted net income per share

$

1.64

$

2.17

$

5.37

$

6.38

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)

Three Months Ended

Nine Months Ended

October 31,

November 2,

October 31,

November 2,

2020

    

2019

    

2020

    

2019

Net income

$

46,411

$

52,463

$

141,622

$

151,942

Net gains (losses) from foreign currency translation

 

(96)

299

 

822

 

(148)

Total comprehensive income

$

46,315

$

52,762

$

142,444

$

151,794

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

 

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 1, 2020

 

19,485,826

 

$

2

 

$

444,378

 

$

(1,842)

 

$

(314,042)

 

17

 

$

(5)

 

$

128,491

Stock-based compensation

 

118,677

 

118,677

Vested and delivered restricted stock units

 

2,814

(610)

 

(610)

Exercise of stock options

 

64,848

3,996

 

3,996

Retirement of treasury stock

 

(5)

(17)

5

 

Shares issued in connection with warrant agreements

290,967

Net income

 

46,411

 

46,411

Net gains from foreign currency translation

 

(96)

 

(96)

Balances—October 31, 2020

 

19,844,455

 

$

2

 

$

566,436

 

$

(1,938)

 

$

(267,631)

 

 

$

 

$

296,869

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

 

 

 

 

 

 

 

Equity component value of convertible note issuance—net

87,070

 

87,070

Issuance of warrants

50,225

 

50,225

Purchase of convertible note hedge

(91,350)

 

(91,350)

Net income

 

52,463

 

52,463

Net gains from foreign currency translation

 

299

 

299

Balances—November 2, 2019

 

18,928,309

 

$

2

 

$

416,946

 

$

(2,481)

 

$

(477,687)

 

 

$

 

$

(63,220)

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 1, 2020

 

19,236,681

 

$

2

 

$

430,662

 

$

(2,760)

 

$

(409,253)

 

 

$

 

$

18,651

Stock-based compensation

 

131,153

 

131,153

Issuance of restricted stock

 

3,192

 

Vested and delivered restricted stock units

 

73,106

(7,428)

 

(7,428)

Exercise of stock options

 

241,126

12,121

 

12,121

Repurchases of common stock

 

(600)

600

(72)

 

(72)

Retirement of treasury stock

 

(77)

(617)

77

 

Shares issued in connection with warrant agreements

 

290,967

 

Settlement of convertible senior notes

1,131,645

(315,708)

(1,131,645)

315,708

Exercise of call option under bond hedge upon settlement of convertible senior notes

(1,131,662)

315,713

1,131,662

(315,713)

Net income

 

141,622

 

141,622

Net gains from foreign currency translation

 

822

 

822

Balances—October 31, 2020

 

19,844,455

 

$

2

 

$

566,436

 

$

(1,938)

 

$

(267,631)

 

 

$

 

$

296,869

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

 

 

 

 

 

 

 

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

Net income

 

151,942

 

151,942

Net losses from foreign currency translation

 

(148)

 

(148)

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.

6

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended

October 31,

November 2,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

141,622

$

151,942

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization

 

76,688

 

75,945

Non-cash operating lease cost

47,069

48,855

Tradename impairment

20,459

Asset impairments

4,783

1,660

(Gain) loss on sale leaseback transaction

9,352

(1,196)

Amortization of debt discount

 

33,810

 

33,528

Accretion of debt discount upon settlement of debt

(84,003)

(70,482)

Stock-based compensation expense

 

131,472

 

16,109

Non-cash finance lease interest expense

17,887

16,864

Product recalls

5,561

(3,516)

Deferred income taxes

 

117

 

667

(Gain) loss on extinguishment of debt—net

(152)

5,903

Other non-cash items

 

3,274

 

2,973

Change in assets and liabilities:

 

 

Accounts receivable

 

(6,070)

 

(2,809)

Merchandise inventories

 

(57,781)

 

102,788

Prepaid expense and other assets

 

(47,288)

 

42,178

Landlord assets under construction—net of tenant allowances

 

(44,921)

 

(49,387)

Accounts payable and accrued expenses

 

10,844

 

(41,474)

Deferred revenue and customer deposits

 

111,436

 

14,406

Other current liabilities

 

29,153

 

(53,016)

Current and non-current operating lease liabilities

 

(36,810)

 

(61,887)

Other non-current obligations

 

(19,239)

 

(19,054)

Net cash provided by operating activities

 

347,263

 

210,997

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Capital expenditures

 

(71,755)

 

(64,614)

Acquisition of business

 

(13,052)

 

Investments in joint ventures

 

(7,500)

 

Proceeds from sale of assets

 

25,006

 

24,078

Deposit on asset under construction

(30,000)

Net cash used in investing activities

 

(67,301)

 

(70,536)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Borrowings under asset based credit facility

 

359,400

 

322,500

Repayments under asset based credit facility

 

(359,400)

 

(380,000)

Borrowings under term loans

 

 

320,000

Repayments under term loans

(234,000)

Borrowings under promissory and equipment security notes

 

 

99,000

Repayments under promissory and equipment security notes

 

(10,872)

 

(10,280)

Debt issuance costs

 

 

(4,636)

Proceeds from issuance of convertible senior notes

 

 

350,000

Proceeds from issuance of warrants

 

 

50,225

Purchase of convertible note hedges

 

 

(91,350)

Debt issuance costs related to convertible senior notes

 

 

(4,818)

Repayments of convertible senior notes

(215,846)

(278,560)

Principal payments under finance leases

(8,801)

(7,136)

Repurchases of common stock—including commissions

 

 

(250,032)

Proceeds from exercise of stock options

 

12,121

 

18,509

Tax withholdings related to issuance of stock-based awards

(7,428)

 

(6,538)

Payments under promissory notes related to share repurchases

 

(892)

Net cash used in financing activities

 

(230,826)

 

(108,008)

Effects of foreign currency exchange rate translation

 

(10)

 

(3)

Net increase in cash and cash equivalents and restricted cash equivalents

 

49,126

 

32,450

Cash and cash equivalents and restricted cash equivalents

 

 

  

Beginning of period—cash and cash equivalents

$

47,658

$

5,803

 

  

 

  

End of period—cash and cash equivalents

 

89,884

 

38,253

End of period—restricted cash equivalents (acquisition related escrow deposits)

 

6,900

 

End of period—cash and cash equivalents and restricted cash equivalents

$

96,784

$

38,253

Non-cash transactions:

 

 

Property and equipment additions in accounts payable and accrued expenses at period-end

$

23,277

$

11,859

Landlord asset additions in accounts payable and accrued expenses at period-end

20,296

20,475

Reclassification of assets from landlord assets under construction to finance lease right-of-use assets

68,459

Shares issued on settlement of convertible senior notes

(315,708)

Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes

315,713

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 68 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 14 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 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.

8

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 8 out of 10 of our restaurants. Our business substantially recovered during the second and third fiscal quarters as a result of both the reopening of most of our physical locations and also due to strong consumer demand for our products.

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.

9

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 adopted the ASU as of February 2, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include three-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within other non-current assets on our condensed consolidated balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in either cost of goods sold or selling, general and administrative expenses, consistent with the costs of the hosting arrangement, on the condensed consolidated statements of income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the ASU did not have a material effect on our condensed consolidated financial statements. Refer to Note 3—Prepaid Expense and Other Assets.

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 $3.3 million and $2.2 million as of October 31, 2020 and February 1, 2020, respectively.

We adopted 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.

10

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.