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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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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

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

For the transition period from to

Commission file number: 001-35720

(Exact name of registrant as specified in its charter)


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

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

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

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


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

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

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

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

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

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

As of June 4, 2021, 21,030,374 shares of the registrant’s common stock were outstanding.

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INDEX TO FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of 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

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

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

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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

Table of Contents

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

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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.


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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)


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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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “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.


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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.


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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.


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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.


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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.


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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 15—Stock-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.


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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.


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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%


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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
Operating cash flows from operating leases	$	(25,456)	$	(10,786)
Operating cash flows from finance leases		(6,253)		(2,437)
Financing cash flows from finance leases		(3,671)		(2,068)
Total cash outflows from leases	$	(35,380)	$	(15,291)
Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash)
Operating leases	$	103,088	$	1,198
Finance leases		19,611		58

Long-lived Asset Impairment

During the three months ended May 2, 2020, we recognized long-lived asset impairment charges of $3.5 million related to one RH Baby & Child and TEEN Gallery and one Waterworks showroom, comprised of lease right-of-use asset impairment of $2.0 million and property and equipment impairment of $