Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

June 10, 2021

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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 May 1, 2021

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 June 4, 2021, 21,030,374 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 May 1, 2021 and January 30, 2021

3

Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended May 1, 2021 and May 2, 2020

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
for the three months ended May 1, 2021 and May 2, 2020

5

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
for the three months ended May 1, 2021 and May 2, 2020

6

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended May 1, 2021 and May 2, 2020

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

48

Item 4.

Controls and Procedures

50

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

TABLE OF CONENTS

2020 QUARTERLY REPORT | 2

PART I

ITEM 1.     FINANCIAL STATEMENTS

RH

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts) (Unaudited)

    

MAY 1,

    

JANUARY 30,

2021

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

229,527

$

100,446

Accounts receivable—net

 

60,212

 

59,474

Merchandise inventories

 

593,946

 

544,227

Prepaid expense and other current assets

 

105,723

 

97,337

Total current assets

 

989,408

 

801,484

Property and equipment—net

 

1,103,668

 

1,077,198

Operating lease right-of-use assets

541,841

456,164

Goodwill

 

141,152

 

141,100

Tradenames, trademarks and other intangible assets

 

72,237

 

71,663

Deferred tax assets

 

49,869

 

49,924

Equity method investments

99,131

100,603

Other non-current assets

 

240,011

 

200,177

Total assets

$

3,237,317

$

2,898,313

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

389,411

$

424,422

Deferred revenue and customer deposits

363,404

 

280,641

Operating lease liabilities

72,442

71,524

Federal and state tax payable

89,311

49,539

Other current liabilities

 

101,604

 

95,506

Total current liabilities

 

1,016,172

 

921,632

Asset based credit facility

 

 

Equipment promissory notes—net

 

3,739

 

14,614

Convertible senior notes due 2023—net

 

288,136

 

282,956

Convertible senior notes due 2024—net

285,721

281,454

Non-current operating lease liabilities

 

532,142

 

448,169

Non-current finance lease liabilities

501,118

485,481

Other non-current obligations

 

15,827

 

16,981

Total liabilities

 

2,642,855

 

2,451,287

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 May 1, 2021 and January 30, 2021

 

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 21,020,538 shares issued and outstanding as of May 1, 2021; 20,995,387 shares issued and outstanding as of January 30, 2021

 

2

 

2

Additional paid-in capital

 

597,329

 

581,897

Accumulated other comprehensive income

 

3,913

 

2,565

Accumulated deficit

 

(6,782)

 

(137,438)

Total stockholders’ equity

 

594,462

 

447,026

Total liabilities and stockholders’ equity

$

3,237,317

$

2,898,313

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

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 3

RH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts) (Unaudited)

THREE MONTHS ENDED

MAY 1,

MAY 2, 

    

2021

    

2020 

Net revenues

$

860,792

$

482,895

Cost of goods sold

 

453,815

 

283,241

Gross profit

 

406,977

 

199,654

Selling, general and administrative expenses

219,089

 

164,201

Income from operations

 

187,888

 

35,453

Other expenses

 

Interest expense—net

13,308

 

19,629

Tradename impairment

20,459

Loss on extinguishment of debt

 

105

 

Total other expenses

 

13,413

 

40,088

Income (loss) before income taxes

 

174,475

 

(4,635)

Income tax expense (benefit)

 

41,724

 

(1,423)

Income (loss) before equity method investments

132,751

(3,212)

Share of equity method investments losses

(2,095)

Net income (loss)

$

130,656

$

(3,212)

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

 

21,003,244

 

19,242,641

Basic net income (loss) per share

$

6.22

$

(0.17)

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

 

31,210,011

 

19,242,641

Diluted net income (loss) per share

$

4.19

$

(0.17)

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

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 4

RH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

THREE MONTHS ENDED

MAY 1,

MAY 2, 

2021

    

2020 

Net income (loss)

$

130,656

$

(3,212)

Net gains (losses) from foreign currency translation

 

1,348

 

(2,372)

Total comprehensive income (loss)

$

132,004

$

(5,584)

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

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 5

RH

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

THREE MONTHS ENDED

COMMON STOCK

TREASURY STOCK

 

ACCUMULATED

 

RETAINED

 

 

ADDITIONAL

 

OTHER

 

EARNINGS

 

TOTAL

 

PAID-IN

 

COMPREHENSIVE

 

(ACCUMULATED

 

 

STOCKHOLDERS'

SHARES

  

AMOUNT

  

CAPITAL

  

INCOME (LOSS)

  

DEFICIT)

  

SHARES

  

AMOUNT

  

EQUITY

Balances—January 30, 2021

 

20,995,387

 

$

2

 

$

581,897

 

$

2,565

 

$

(137,438)

 

 

$

 

$

447,026

Stock-based compensation

 

15,200

 

15,200

Vested and delivered restricted stock units

 

2,807

(927)

 

(927)

Exercise of stock options

 

22,342

1,393

 

1,393

Settlement of convertible senior notes

7,307

(3,514)

(7,305)

3,280

(234)

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

(7,305)

3,280

7,305

(3,280)

Net income

 

130,656

 

130,656

Net gains from foreign currency translation

 

1,348

 

1,348

Balances—May 1, 2021

 

21,020,538

 

$

2

 

$

597,329

 

$

3,913

 

$

(6,782)

 

 

$

 

$

594,462

Balances—February 1, 2020

 

19,236,681

 

$

2

 

$

430,662

 

$

(2,760)

 

$

(409,253)

 

 

$

 

$

18,651

Stock-based compensation

 

5,721

 

5,721

Vested and delivered restricted stock units

 

10,286

(381)

 

(381)

Exercise of stock options

 

17,760

797

 

797

Repurchases of common stock

 

(600)

600

(72)

 

(72)

Net loss

 

(3,212)

 

(3,212)

Net losses from foreign currency translation

 

(2,372)

 

(2,372)

Balances—May 2, 2020

 

19,264,127

 

$

2

 

$

436,799

 

$

(5,132)

 

$

(412,465)

 

600

 

$

(72)

 

$

19,132

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

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 6

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

THREE MONTHS ENDED

MAY 1,

MAY 2,

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

130,656

$

(3,212)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

Depreciation and amortization

 

23,886

 

24,870

Non-cash operating lease cost

16,603

15,907

Tradename impairment

20,459

Asset impairments

4,783

Amortization of debt discount

 

8,670

 

12,916

Accretion of debt discount upon settlement of debt

(319)

Stock-based compensation expense

 

15,307

 

5,828

Non-cash finance lease interest expense

6,150

5,781

Product recalls

500

Loss on extinguishment of debt

105

Share of equity method investments losses

2,095

Other non-cash items

 

(1,944)

 

1,145

Change in assets and liabilities:

 

 

Accounts receivable

 

(722)

 

1,554

Merchandise inventories

 

(49,540)

 

(55,837)

Prepaid expense and other assets

 

(12,575)

 

(8,324)

Landlord assets under construction—net of tenant allowances

 

(13,578)

 

(7,600)

Accounts payable and accrued expenses

 

(32,250)

 

(52,989)

Deferred revenue and customer deposits

 

82,744

 

26,679

Other current liabilities

 

41,981

 

4,696

Current and non-current operating lease liabilities

 

(19,379)

 

(7,065)

Other non-current obligations

 

(7,515)

 

(6,459)

Net cash provided by (used in) operating activities

 

190,875

 

(16,868)

PART I. FINANCIAL INFORMATION

2020 FIRST QUARTER FORM 10-Q | 7

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands) (Unaudited)

THREE MONTHS ENDED

MAY 1,

MAY 2,

2021

    

2020

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Capital expenditures

 

(50,251)

 

(16,632)

Equity method investments

 

(1,172)

 

Net cash used in investing activities

 

(51,423)

 

(16,632)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Borrowings under asset based credit facility

 

 

71,100

Repayments under asset based credit facility

 

 

(61,100)

Repayments under promissory and equipment security notes

 

(5,792)

 

(5,166)

Repayments of convertible senior notes

(2,035)

Principal payments under finance leases

(3,671)

(2,068)

Proceeds from exercise of stock options

 

1,393

 

797

Tax withholdings related to issuance of stock-based awards

(927)

 

(381)

Net cash provided by (used in) financing activities

 

(11,032)

 

3,182

Effects of foreign currency exchange rate translation

 

36

 

(132)

Net increase (decrease) in cash and cash equivalents and restricted cash equivalents

 

128,456

 

(30,450)

Cash and cash equivalents and restricted cash equivalents

 

 

  

Beginning of period—cash and cash equivalents

 

100,446

 

47,658

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

 

6,625

 

Beginning of period—cash and cash equivalents

$

107,071

$

47,658

End of period—cash and cash equivalents

 

229,527

 

17,208

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

 

6,000

 

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

$

235,527

$

17,208

Non-cash transactions:

 

 

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

$

14,463

$

2,935

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

33,568

23,489

Shares issued on settlement of convertible senior notes

(3,280)

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

3,280

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

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 8

RH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” “our” or the “Company”), is a leading luxury retailer in the home furnishings market that offers merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings. These products are sold through our retail locations, websites and Source Books.

As of May 1, 2021, we operated a total of 68 RH Galleries and 38 RH outlet stores in 30 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 the Company’s records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of May 1, 2021, and the results of operations for the three months ended May 1, 2021, and May 2, 2020. Our current fiscal year, which consists of 52 weeks, ends on January 29, 2022 (“fiscal 2021”).

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires our senior leadership team to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19” or “the pandemic”) 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 is included in our condensed consolidated financial statements as of and for the three months ended May 1, 2021. 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 January 30, 2021 (the “2020 Form 10-K”).

The results of operations for the three months ended May 1, 2021, presented herein are not necessarily indicative of the results to be expected for the full fiscal year. Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the novel coronavirus disease as discussed in Recent Developments—COVID-19 below.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 9

Recent Developments—COVID-19

The COVID-19 outbreak in the first quarter of fiscal 2020 caused disruption to our business operations. In our initial response to the health crisis, we undertook immediate adjustments to our business operations including temporarily closing all of our 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 through fourth fiscal quarters of fiscal 2020 as a result of both the reopening of most of our retail locations and also strong consumer demand for our products. Operational restrictions related to the COVID-19 pandemic affecting our Galleries and hospitality locations continued to fluctuate in the first quarter of 2021 based upon changes in local conditions and regulations. As of June 4, 2021, substantially all of our Galleries, Outlets, and Restaurants were open, although many of our Restaurants and Galleries continue to conduct business with occupancy limitations and other operational restrictions.

Our overall customer demand in specific markets has generally correlated favorably with our customers’ ability to access our Galleries and Outlets. Although our business has strengthened during the period from the second quarter of fiscal 2020 and continuing into fiscal 2021, consumer spending patterns may shift away from spending on the home and home-related categories, such as home furnishings, as pandemic restrictions are lifted and consumers return to pre-COVID consumption trends, such as spending on travel and leisure and other activities. In addition, various constraints in our merchandise supply chain have resulted in some delays in our ability to convert business demand into revenues at normal historical rates. We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during fiscal 2021. It may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand and as a result the exact timing cannot be accurately predicted due to ongoing uncertainty of the continuing impact of the pandemic on our global supply chain. In particular, business circumstances and operational conditions in numerous international locations where our vendors operate are subject to ongoing risks, and regions in which our vendors have production facilities, such as India, have experienced various spikes in cases related to the pandemic. As a result, the pandemic may continue to adversely affect business operations in these jurisdictions, which could, in turn, have a negative impact on our vendors and therefore on our business as well, as including our ability to source products.

We will continue to closely manage our 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 including further developments with respect to the pandemic. For more information, refer to the section entitled “Risk Factors” in our 2020 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

New Accounting Standards or Updates Adopted

Income Taxes

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this standard in the first quarter of fiscal 2021 and the adoption did not have an impact on our condensed consolidated financial statements.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 10

New Accounting Standards or Updates Not Yet Adopted

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 will adopt the ASU in the first quarter of fiscal 2022, and we are evaluating the effects that the adoption of this ASU will have on our condensed consolidated financial statements, including the adoption approach.

NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

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

    

MAY 1,

    

JANUARY 30, 

2021

2021 

Prepaid expense and other current assets

$

52,819

$

42,079

Capitalized catalog costs

 

13,826

 

19,067

Promissory notes receivable, including interest (1)

 

13,816

 

13,569

Vendor deposits

12,689

12,519

Right of return asset for merchandise

 

8,173

 

7,453

Acquisition related escrow deposits

4,400

2,650

Total prepaid expense and other current assets

$

105,723

$

97,337

(1) Represents promissory notes, including principal and accrued interest, due from a related party. Refer to Note 5—Equity Method Investments.

Other non-current assets consist of the following (in thousands):

    

MAY 1,

    

JANUARY 30, 

2021

2021 

Landlord assets under construction—net of tenant allowances

$

169,312

$

135,531

Initial direct costs prior to lease commencement

41,843

 

36,770

Capitalized cloud computing costs—net (1)

8,547

7,254

Other deposits

 

7,344

 

5,287

Acquisition related escrow deposits

1,600

3,975

Deferred financing fees

 

1,256

 

1,525

Other non-current assets

 

10,109

 

9,835

Total other non-current assets

$

240,011

$

200,177

(1) Presented net of accumulated amortization of $1.1 million and $0.5 million as of May 1, 2021 and January 30, 2021, respectively.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 11

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (See Note 17—Segment Reporting), for the three months ended May 1, 2021 (in thousands):

    

    

    

FOREIGN

    

JANUARY 30,

CURRENCY

MAY 1, 

2021

ADDITIONS

TRANSLATION

2021 

RH Segment

 

  

 

  

 

  

 

  

Goodwill

$

141,100

$

$

52

$

141,152

Tradenames, trademarks and other intangible assets

 

54,663

 

574

 

 

55,237

Waterworks (1)

 

 

  

 

  

 

Tradename (2)

 

17,000

 

 

 

17,000

(1) Waterworks reporting unit goodwill of $51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $17.4 million and $33.7 million of impairment recorded in fiscal 2018 and fiscal 2017, respectively.
(2) Presented net of an impairment charge of $35.1 million, with $20.5 million and $14.6 million recorded in fiscal 2020 and fiscal 2018, respectively.

Waterworks Tradename Impairment

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related Showroom closures and slowdown in construction activity, management updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability. We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount. We determined fair value utilizing a discounted cash flow methodology under the relief-from-royalty method. Significant assumptions under this method include forecasted net revenues and the estimated royalty rate, expressed as a percentage of revenues, in addition to the discount rate based on the weighted-average cost of capital. Based on the impairment test performed, we concluded that the Waterworks reporting unit tradename was impaired as of May 2, 2020. As a result, we recognized a $20.5 million non-cash impairment charge for the Waterworks reporting unit tradename during the three months ended May 2, 2020.

NOTE 5—EQUITY METHOD INVESTMENTS

Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020, and have the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. As we do not have a controlling financial interest in the Aspen LLCs but have the ability to exercise significant influence over the Aspen LLCs, we account for these investments using the equity method of accounting.

During the three months ended May 1, 2021, we recorded our proportionate share of equity method investments losses of $2.1 million, which is included in the condensed consolidated statements of operations and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of May 1, 2021.

As of May 1, 2021, $13.8 million of promissory notes receivable are outstanding with the managing member, which are included in prepaid expense and other current assets on the condensed consolidated balance sheets. These promissory notes are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

An affiliate of the managing member of the Aspen LLCs became the landlord of an additional RH Design Gallery in the first quarter of fiscal 2021.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 12

NOTE 6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following (in thousands):

    

MAY 1,

    

JANUARY 30, 

2021

2021 

Accounts payable

$

231,901

$

224,906

Accrued compensation

 

49,503

 

84,860

Accrued freight and duty

 

33,698

 

29,754

Accrued sales taxes

 

25,474

 

23,706

Accrued occupancy

 

21,252

 

17,671

Accrued catalog costs

 

6,460

 

4,354

Accrued professional fees

 

4,532

 

5,383

Deferred consideration for asset purchase

14,387

Other accrued expenses

 

16,591

 

19,401

Total accounts payable and accrued expenses

$

389,411

$

424,422

Other current liabilities consist of the following (in thousands):

    

MAY 1,

    

JANUARY 30, 

2021

2021 

Allowance for sales returns

$

28,649

$

25,559

Current portion of equipment promissory notes

28,067

 

22,747

Unredeemed gift card and merchandise credit liability

 

18,574

 

19,173

Finance lease liabilities

15,322

14,671

Product recall reserve

 

7,012

 

8,181

Other current liabilities

 

3,980

 

5,175

Total other current liabilities

$

101,604

$

95,506

Contract Liabilities

We defer revenue associated with merchandise delivered via the home-delivery channel. We expect that substantially all of the deferred revenue and customer deposits as of May 1, 2021 will be recognized within the next six months as the performance obligations are satisfied. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year.

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards. During the three months ended May 1, 2021 and May 2, 2020, we recognized $4.9 million and $4.1 million, respectively, of revenue related to previous deferrals related to our gift cards. During the three months ended May 1, 2021 and May 2, 2020, we recognized gift card breakage of $0.4 million and $0.6 million, respectively. We expect that approximately 75% of the remaining gift card liabilities as of May 1, 2021 will be recognized when the gift cards are redeemed by customers.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 13

NOTE 7—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following (in thousands):

    

MAY 1,

    

JANUARY 30, 

2021

2021 

Deferred payroll taxes

$

4,461

$

4,461

Rollover units and profit interests (1)

 

3,597

 

3,490

Unrecognized tax benefits

 

3,324

 

3,114

Other non-current obligations

 

4,445

 

5,916

Total other non-current obligations

$

15,827

$

16,981

(1) Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15Stock-Based Compensation.

.

NOTE 8—LEASES

Lease costs—net consist of the following (in thousands):

THREE MONTHS ENDED

MAY 1,

    

MAY 2, 

2021

    

2020 

Operating lease cost (1)

 

$

23,567

$

20,726

Finance lease costs

Amortization of leased assets (1)

10,918

9,588

Interest on lease liabilities (2)

6,150

5,781

Variable lease costs (3)

8,427

3,560

Sublease income (4)

(1,182)

(2,575)

Total lease costs—net

$

47,880

$

37,080

(1) Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or selling, general and administrative expenses on the condensed consolidated statements of operations based on our accounting policy. Refer to Note 3—Significant Accounting Policies in the 2020 Form 10-K.
(2) Included in interest expense—net on the condensed consolidated statements of operations.
(3) Represents variable lease payments under operating and finance lease agreements. The amounts primarily represent contingent rent based on a percentage of retail sales over contractual levels of $6.3 million and $2.0 million for the three months ended May 1, 2021 and May 2, 2020, respectively, as well as charges associated with common area maintenance of $2.1 million and $1.6 million for the three months ended May 1, 2021 and May 2, 2020, respectively. Other variable costs include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset were not material in any period.
(4) Included in selling, general and administrative expenses on the condensed consolidated statements of operations.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 14

Lease right-of-use assets and lease liabilities consist of the following (in thousands):

MAY 1,

JANUARY 30, 

   

2021

   

2021 

Balance Sheet Classification

Assets

Operating leases

Operating lease right-of-use assets

$

541,841

$

456,164

Finance leases (1)(2)

Property and equipment—net

718,001

711,804

Total lease right-of-use assets

$

1,259,842

$

1,167,968

Liabilities

Current (3)

Operating leases

Operating lease liabilities

$

72,442

$

71,524

Finance leases

Other current liabilities

15,322

14,671

Total lease liabilities—current

87,764

86,195

Non-current

Operating leases

Non-current operating lease liabilities

532,142

448,169

Finance leases

Non-current finance lease liabilities

501,118

485,481

Total lease liabilities—non-current

1,033,260

933,650

Total lease liabilities

$

1,121,024

$

1,019,845

(1) Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement.
(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $144.0 million and $133.0 million as of May 1, 2021 and January 30, 2021, respectively.
(3) Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months.

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 15

The maturities of lease liabilities are as follows as of May 1, 2021 (in thousands):

OPERATING

FINANCE

FISCAL YEAR

   

LEASES

   

LEASES

   

TOTAL

Remainder of fiscal 2021

$

72,017

$

29,966

$

101,983

2022

88,706

40,352

129,058

2023

80,696

40,771

121,467

2024

74,575

41,169

115,744

2025

74,475

42,385

116,860

2026

71,741

43,164

114,905

Thereafter

276,516

575,649

852,165

Total lease payments (1)(2)

738,726

813,456

1,552,182

Less—imputed interest (3)

(134,142)

(297,016)

(431,158)

Present value of lease liabilities

$

604,584

$

516,440

$

1,121,024

(1) Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Total lease payments exclude $667.4 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of May 1, 2021, of which $24.1 million, $32.5 million, $37.3 million, $38.7 million, $40.0 million and $39.8 million will be paid in fiscal 2021, fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $455.0 million will be paid subsequent to fiscal 2026.
(2) Excludes future commitments under short-term lease agreements of $1.8 million as of May 1, 2021.
(3) Calculated using the discount rate for each lease at lease commencement.

Supplemental information related to leases consists of the following:

THREE MONTHS ENDED

MAY 1,

    

MAY 2,

2021

    

2020

Weighted-average remaining lease term (years)

Operating leases

9.5

8.7

Finance leases

18.2

18.4

Weighted-average discount rate

Operating leases

4.00%

3.82%

Finance leases

4.99%

5.25%

PART I. FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 16

Other information related to leases consists of the following (in thousands):

THREE MONTHS ENDED

MAY 1,

    

MAY 2,

2021

    

2020

Cash paid for amounts included in the measurement of lease liabilities