June 3, 2022 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Form: 10-Q

Documents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 30, 2022

☐	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 May 27, 2022, 24,681,191 shares of the registrant’s common stock were outstanding.

Table of Contents

INDEX TO FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of April 30, 2022 and January 29, 2022	3
	Condensed Consolidated Statements of Income (Unaudited) for the three months ended April 30, 2022 and May 1, 2021	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended April 30, 2022 and May 1, 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended April 30, 2022 and May 1, 2021	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 30, 2022 and May 1, 2021	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	49

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53


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PART I

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

c
	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
ASSETS
Cash and cash equivalents	$	2,243,255	$	2,177,889
Accounts receivable—net		65,602		57,914
Merchandise inventories		817,327		734,289
Prepaid expense and other current assets		272,877		121,350
Total current assets		3,399,061		3,091,442
Property and equipment—net		1,357,064		1,227,920
Operating lease right-of-use assets		544,797		551,045
Goodwill		141,092		141,100
Tradenames, trademarks and other intangible assets		73,488		73,161
Deferred tax assets		63,256		56,843
Equity method investments		100,550		100,810
Other non-current assets		208,629		298,149
Total assets	$	5,887,937	$	5,540,470
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	428,949	$	442,379
Deferred revenue and customer deposits		436,765		387,933
Convertible senior notes due 2023		—		9,389
Convertible senior notes due 2024		—		3,600
Convertible senior notes repurchase obligation (Note 9)		313,706		—
Operating lease liabilities		74,309		73,834
Other current liabilities		107,801		146,623
Total current liabilities		1,361,530		1,063,758
Asset based credit facility		—		—
Term loan—net		1,949,038		1,953,203
Convertible senior notes due 2023—net		19,658		59,002
Convertible senior notes due 2024—net		80,388		184,461
Non-current operating lease liabilities		533,074		540,513
Non-current finance lease liabilities		594,728		560,550
Other non-current obligations		7,731		8,706
Total liabilities		4,546,147		4,370,193
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 April 30, 2022 and January 29, 2022		—		—
Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 24,661,781 shares issued and outstanding as of April 30, 2022; 21,506,967 shares issued and outstanding as of January 29, 2022		2		2
Additional paid-in capital		575,635		620,577
Accumulated other comprehensive income (loss)		(5,555)		(1,410)
Retained earnings		771,708		551,108
Total stockholders’ equity		1,341,790		1,170,277
Total liabilities and stockholders’ equity	$	5,887,937	$	5,540,470

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


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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021

	(in thousands, except share and per share amounts)
Net revenues	$	957,292	$	860,792
Cost of goods sold		458,709		453,815
Gross profit		498,583		406,977
Selling, general and administrative expenses		293,295		219,089
Income from operations		205,288		187,888
Other expenses
Interest expense—net		20,855		13,308
Loss on extinguishment of debt		146,116		105
Other income—net		(343)		—
Total other expenses		166,628		13,413
Income before income taxes		38,660		174,475
Income tax expense (benefit)		(163,426)		41,724
Income before equity method investments		202,086		132,751
Share of equity method investments losses		(1,375)		(2,095)
Net income	$	200,711	$	130,656
Weighted-average shares used in computing basic net income per share		22,608,537		21,003,244
Basic net income per share (Note 13)	$	15.34	$	6.22
Weighted-average shares used in computing diluted net income per share		28,527,246		31,210,011
Diluted net income per share (Note 13)	$	12.16	$	4.19

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


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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021

	(in thousands)
Net income	$	200,711	$	130,656
Net gains (losses) from foreign currency translation		(4,145)		1,348
Total comprehensive income	$	196,566	$	132,004

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


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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(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

	(in thousands, except share amounts)
Balances—January 29, 2022	21,506,967	$	2	$	620,577	$	(1,410)	$	551,108	—	$	—	$	1,170,277
Stock-based compensation	—		—		12,802		—		—	—		—		12,802
Vested and delivered restricted stock units	1,409		—		(266)		—		—	—		—		(266)
Exercise of stock options	3,153,400		—		149,570		—		—	—		—		149,570
Exercise of call option under bond hedge upon settlement of convertible senior notes	(36,968)		—		14,705		—		—	36,968		(14,705)		—
Settlement of convertible senior notes	36,973		—		(14,705)		—		—	(36,968)		14,705		—
Termination of common stock warrants	—		—		(386,708)		—		—	—		—		(386,708)
Termination of convertible note hedge	—		—		236,050		—		—	—		—		236,050
Impact of ASU 2020-06 adoption	—		—		(56,390)		—		19,889	—		—		(36,501)
Net income	—		—		—		—		200,711	—		—		200,711
Net losses from foreign currency translation	—		—		—		(4,145)		—	—		—		(4,145)
Balances—April 30, 2022	24,661,781	$	2	$	575,635	$	(5,555)	$	771,708	—	$	—	$	1,341,790

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
Exercise of call option under bond hedge upon settlement of convertible senior notes	(7,305)		—		3,280		—		—	7,305		(3,280)		—
Settlement of convertible senior notes	7,307		—		(3,514)		—		—	(7,305)		3,280		(234)
Net income	—		—		—		—		130,656	—		—		130,656
Net losses from foreign currency translation	—		—		—		1,348		—	—		—		1,348
Balances—May 1, 2021	21,020,538	$	2	$	597,329	$	3,913	$	(6,782)	—	$	—	$	594,462

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


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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	200,711	$	130,656
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,758		23,886
Non-cash operating lease cost		18,391		16,603
Asset impairments		5,923		—
Amortization of debt discount		—		8,670
Stock-based compensation expense		12,802		15,307
Non-cash finance lease interest expense		7,071		6,150
Product recalls		560		500
Deferred income taxes		5,493		—
Loss on extinguishment of debt		146,116		105
Gain on derivative instruments—net		(3,177)		—
Share of equity method investments losses		1,375		2,095
Other non-cash items		1,269		(1,944)
Cash paid attributable to accretion of debt discount upon settlement of debt		—		(319)
Change in assets and liabilities:
Accounts receivable		(7,715)		(722)
Merchandise inventories		(83,115)		(49,540)
Prepaid expense and other assets		(160,116)		(12,575)
Landlord assets under construction—net of tenant allowances		(12,148)		(13,578)
Accounts payable and accrued expenses		(14,778)		(32,250)
Deferred revenue and customer deposits		48,909		82,744
Other current liabilities		(30,057)		41,981
Current and non-current operating lease liabilities		(19,379)		(19,379)
Other non-current obligations		(6,944)		(7,515)
Net cash provided by operating activities		135,949		190,875


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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)


	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021
	(in thousands)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(29,364)		(50,251)
Equity method investments		(1,115)		(1,172)
Net cash used in investing activities		(30,479)		(51,423)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under term loans		(5,000)		—
Repayments under promissory and equipment security notes		(10,910)		(5,792)
Repayments of convertible senior notes		(13,048)		(2,035)
Principal payments under finance leases		(3,559)		(3,671)
Proceeds from termination of convertible senior note hedges		231,796		—
Payments for termination of common stock warrants		(390,934)		—
Proceeds from exercise of stock options		149,570		1,393
Tax withholdings related to issuance of stock-based awards		(266)		(927)
Net cash used in financing activities		(42,351)		(11,032)
Effects of foreign currency exchange rate translation		(278)		36
Net increase in cash and cash equivalents and restricted cash equivalents		62,841		128,456
Cash and cash equivalents and restricted cash equivalents
Beginning of period—cash and cash equivalents		2,177,889		100,446
Beginning of period—restricted cash equivalents (acquisition related escrow deposits)		3,975		6,625
Beginning of period—cash and cash equivalents	$	2,181,864	$	107,071
End of period—cash and cash equivalents		2,243,255		229,527
End of period—restricted cash equivalents (acquisition related escrow deposits)		1,450		6,000
End of period—cash and cash equivalents and restricted cash equivalents	$	2,244,705	$	235,527
Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end	$	12,248	$	14,463
Landlord asset additions in accounts payable and accrued expenses at period-end		16,823		33,568
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets		109,677		—
Extinguishment of convertible senior notes related to repurchase obligation (Note 9)		(180,322)		—
Financing liability and embedded derivative arising from convertible senior notes repurchase (Note 9)		325,363		—
Shares issued on settlement of convertible senior notes		(14,705)		(3,280)
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes		14,705		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 retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings.

As of April 30, 2022, we operated a total of 67 RH Galleries and 39 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 senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of April 30, 2022, and the results of operations for the three months ended April 30, 2022, and May 1, 2021. Our current fiscal year, which consists of 52 weeks, ends on January 28, 2023 (“fiscal 2022”).

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 April 30, 2022. 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 29, 2022 (the “2021 Form 10-K”).

The results of operations for the three months ended April 30, 2022, 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 pandemic and other factors as discussed in COVID-19 Pandemic and Macro-Economic Factors below.


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COVID-19 Pandemic and Macro-Economic Factors

The COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates. While our performance during the pandemic demonstrates the desirability of our exclusive products, we may see consumer spending patterns shift away from spending on the home and home-related categories as customers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business including increased inflation and rising interest rates. These factors may have a number of adverse effects on overall economic conditions and markets in which we operate. A slowdown in the housing market or continued negative trends in stock market prices could have a negative impact on our customers and demand for our products.

Our decisions regarding the sources and uses of capital 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 2021 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

New Accounting Standards or Updates Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 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, ASU 2020-06 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 ASU 2020-06’s guidance, we no longer 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, ASU 2020-06 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.

We adopted ASU 2020-06 in the first quarter of fiscal 2022 using a modified retrospective transition method. Accordingly, the cumulative effect of the adoption on our opening fiscal 2022 condensed consolidated balance sheets was as follows:


			ASU 2020-06
	JANUARY 29,		ADOPTION		JANUARY 29,
	2022		ADJUSTMENTS		2022

	(in thousands)
Assets
Property and equipment—net	$	1,227,920	$	(12,385)	$	1,215,535
Deferred tax assets		56,843		11,909		68,752
Liabilities
Convertible senior notes due 2023—net		59,002		5,684		64,686
Convertible senior notes due 2024—net		184,461		30,341		214,802
Equity
Additional paid-in capital		620,577		(56,390)		564,187
Retained earnings		551,108		19,889		570,997


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Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848): Scope, (“ASU 2021-01” and, together with ASU 2020-04, the “ASUs”). The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. The primary contracts for which we currently use LIBOR include our asset based credit facility and certain term loan debt arrangements. The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022. All new arrangements are using alternative reference rates and we are evaluating the impact of adoption on our existing contracts.

NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following:


	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
Federal and state tax receivable⁽¹⁾	$	139,080	$	—
Prepaid expense and other current assets		52,713		45,386
Vendor deposits		24,343		19,610
Capitalized catalog costs		21,859		22,194
Tenant allowance receivable		17,761		15,355
Promissory notes receivable, including interest⁽²⁾		9,601		8,401
Right of return asset for merchandise		6,070		6,429
Acquisition related escrow deposits		1,450		3,975
Total prepaid expense and other current assets	$	272,877	$	121,350

(1)	Refer to Note 12—Income Taxes.

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


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Other non-current assets consist of the following:


	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
Landlord assets under construction—net of tenant allowances	$	115,977	$	204,013
Initial direct costs prior to lease commencement		50,361		57,087
Capitalized cloud computing costs—net⁽¹⁾		17,991		14,910
Other deposits		6,872		6,877
Deferred financing fees		5,192		4,123
Other non-current assets		12,236		11,139
Total other non-current assets	$	208,629	$	298,149

(1)	Presented net of accumulated amortization of $5.4 million and $4.0 million as of April 30, 2022 and January 29, 2022, respectively.

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 (Refer to Note 17—Segment Reporting), for the three months ended April 30, 2022:


					FOREIGN
	JANUARY 29,				CURRENCY		APRIL 30,
	2022		ADDITIONS		TRANSLATION		2022

	(in thousands)
RH Segment
Goodwill	$	141,100	$	—	$	(8)	$	141,092
Tradenames, trademarks and other intangible assets		56,161		327		—		56,488
Waterworks⁽¹⁾
Tradename⁽²⁾		17,000		—		—		17,000

(1)	Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2)	Presented net of an impairment charge of $35 million recognized in previous fiscal years.

NOTE 5—EQUITY METHOD INVESTMENTS

Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020 for 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.

As of April 30, 2022 and January 29, 2022, $9.6 million and $8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, 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. We have made $105 million in capital contributions to the Aspen LLCs as contractually required and no further capital contributions are required other than payments made under a management services arrangement. Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of April 30, 2022.


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During the three months ended April 30, 2022 and January 29, 2022, we recorded our proportionate share of equity method investments losses of $1.4 million and $2.1 million, respectively, which is included in the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of April 30, 2022. During the three months ended April 30, 2022, we did not receive any distributions or have any undistributed earnings of equity method investments.

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

Accounts payable and accrued expenses consist of the following:


	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
Accounts payable	$	254,537	$	242,035
Accrued compensation		54,471		96,859
Accrued freight and duty		27,339		21,888
Accrued sales taxes		26,732		24,811
Accrued occupancy		26,208		28,088
Accrued professional fees		17,134		5,892
Accrued catalog costs		7,946		4,127
Other accrued expenses		14,582		18,679
Total accounts payable and accrued expenses	$	428,949	$	442,379

Other current liabilities consist of the following:


	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
Unredeemed gift card and merchandise credit liability	$	25,237	$	22,712
Allowance for sales returns		24,709		25,256
Current portion of term loan		20,000		20,000
Finance lease liabilities		15,982		15,511
Current portion of equipment promissory notes		3,875		13,625
Federal and state tax payable⁽¹⁾		—		31,364
Other current liabilities		17,998		18,155
Total other current liabilities	$	107,801	$	146,623

(1)	Refer to Note 12—Income Taxes.

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 April 30, 2022 will be recognized within the next six months as the performance obligations are satisfied. Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee. 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.


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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 April 30, 2022 and May 1, 2021, we recognized $4.7 million and $4.9 million, respectively, of revenue related to previous deferrals related to our gift cards.

We recognize breakage associated with gift cards proportional to actual gift card redemptions. Breakage of $0.7 million and $0.4 million was recorded in net revenues in the three months ended April 30, 2022 and May 1, 2021, respectively.

We expect that approximately 75% of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.

NOTE 7—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following:


	APRIL 30,		JANUARY 29,
	2022		2022

	(in thousands)
Unrecognized tax benefits	$	3,491	$	3,471
Non-current portion of equipment promissory notes—net		—		1,129
Other non-current obligations		4,240		4,106
Total other non-current obligations	$	7,731	$	8,706

NOTE 8—LEASES

Lease costs—net consist of the following:


	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021

	(in thousands)
Operating lease cost⁽¹⁾	$	25,133	$	23,567
Finance lease costs
Amortization of leased assets⁽¹⁾		11,498		10,918
Interest on lease liabilities⁽²⁾		7,071		6,150
Variable lease costs⁽³⁾		9,087		8,427
Sublease income⁽⁴⁾		(1,128)		(1,182)
Total lease costs—net	$	51,661	$	47,880

(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 income based on our accounting policy. Refer to Note 3—Significant Accounting Policies in the 2021 Form 10-K.

(2)	Included in interest expense—net on the condensed consolidated statements of income.

(3)

Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $6.7 million and $6.3 million for the three months ended April 30, 2022 and May 1, 2021, respectively, and charges associated with common area maintenance of $2.4 million and $2.1 million for the three months ended April 30, 2022 and May 1, 2021, respectively. Other variable costs, which 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 either period.

(4)	Included as an offset to selling, general and administrative expenses on the condensed consolidated statements of income.


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Lease right-of-use assets and lease liabilities consist of the following:


		APRIL 30,		JANUARY 29,
		2022		2022

		(in thousands)
	Balance Sheet Classification
Assets
Operating leases	Operating lease right-of-use assets	$	544,797	$	551,045
Finance leases⁽¹⁾⁽²⁾	Property and equipment—net		918,605		784,327
Total lease right-of-use assets		$	1,463,402	$	1,335,372
Liabilities
Current⁽³⁾
Operating leases	Operating lease liabilities	$	74,309	$	73,834
Finance leases	Other current liabilities		15,982		15,511
Total lease liabilities—current			90,291		89,345
Non-current

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