Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

May 26, 2023

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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 April 29, 2023

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 May 19, 2023, 22,052,211 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 April 29, 2023 and January 28, 2023

3

Condensed Consolidated Statements of Income (Unaudited)
for the three months ended April 29, 2023 and April 30, 2022

4

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the three months ended April 29, 2023 and April 30, 2022

5

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
for the three months ended April 29, 2023 and April 30, 2022

6

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended April 29, 2023 and April 30, 2022

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

48

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

TABLE OF CONENTS

2023 FIRST QUARTER FORM 10-Q | 2

PART I

ITEM 1.     FINANCIAL STATEMENTS

RH

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

    

APRIL 29,

    

JANUARY 28,

2023

2023

(in thousands)

ASSETS

 

  

 

  

Cash and cash equivalents

$

1,516,689

$

1,508,101

Restricted cash

3,538

3,662

Accounts receivable—net

 

60,233

 

59,763

Merchandise inventories

 

766,301

 

801,841

Prepaid expense and other current assets

 

129,083

 

139,297

Total current assets

 

2,475,844

 

2,512,664

Property and equipment—net

 

1,640,596

 

1,635,984

Operating lease right-of-use assets

528,010

527,246

Goodwill

 

141,026

 

141,048

Tradenames, trademarks and other intangible assets

 

75,144

 

74,633

Deferred tax assets

 

150,539

 

167,039

Equity method investments

132,997

101,468

Other non-current assets

 

175,674

 

149,207

Total assets

$

5,319,830

$

5,309,289

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Accounts payable and accrued expenses

$

321,743

$

374,949

Deferred revenue and customer deposits

344,944

 

325,754

Convertible senior notes due 2023

1,694

1,696

Operating lease liabilities

81,262

80,384

Other current liabilities

 

101,860

 

103,190

Total current liabilities

 

851,503

 

885,973

Asset based credit facility

 

 

Term loan B—net

 

1,932,356

 

1,936,529

Term loan B-2—net

 

469,091

 

469,245

Real estate loans

17,905

17,909

Convertible senior notes due 2024—net

41,751

41,724

Non-current operating lease liabilities

 

504,479

 

505,809

Non-current finance lease liabilities

648,792

653,050

Deferred tax liabilities

6,402

6,315

Other non-current obligations

 

8,165

 

8,074

Total liabilities

 

4,480,444

 

4,524,628

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 29, 2023 and January 28, 2023

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 22,051,251 shares issued and outstanding as of April 29, 2023; 22,045,385 shares issued and outstanding as of January 28, 2023

 

2

 

2

Additional paid-in capital

 

257,616

 

247,076

Accumulated other comprehensive loss

 

(108)

 

(2,403)

Retained earnings

 

581,876

 

539,986

Total stockholders’ equity

839,386

784,661

Total liabilities and stockholders’ equity

$

5,319,830

$

5,309,289

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

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 3

RH

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

THREE MONTHS ENDED

APRIL 29,

APRIL 30,

    

2023

    

2022 

(in thousands, except share and per share amounts)

Net revenues

$

739,162

$

957,292

Cost of goods sold

 

391,617

 

458,709

Gross profit

 

347,545

 

498,583

Selling, general and administrative expenses

 

248,305

 

293,295

Income from operations

 

99,240

 

205,288

Other expenses

Interest expense—net

39,816

20,855

Loss on extinguishment of debt

 

146,116

Other income—net

(653)

(343)

Total other expenses

 

39,163

 

166,628

Income before income taxes and equity method investments

60,077

38,660

Income tax expense (benefit)

16,585

(163,426)

Income before equity method investments

43,492

202,086

Share of equity method investments loss

1,602

1,375

Net income

$

41,890

$

200,711

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

22,047,029

22,608,537

Basic net income per share

$

1.90

$

8.88

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

23,758,788

27,808,082

Diluted net income per share

$

1.76

$

7.22

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

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 4

RH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

THREE MONTHS ENDED

APRIL 29,

APRIL 30,

2023

    

2022 

(in thousands)

Net income

$

41,890

$

200,711

Net gains (losses) from foreign currency translation

2,295

(4,145)

Comprehensive income

$

44,185

$

196,566

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

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 5

RH

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

THREE MONTHS ENDED

COMMON STOCK

TREASURY STOCK

 

ACCUMULATED

 

 

ADDITIONAL

 

OTHER

 

TOTAL

 

PAID-IN

 

COMPREHENSIVE

 

RETAINED

 

 

STOCKHOLDERS'

  

SHARES

  

AMOUNT

  

CAPITAL

  

LOSS

  

EARNINGS

  

SHARES

  

AMOUNT

  

EQUITY

(in thousands, except share amounts)

Balances—January 28, 2023

22,045,385

 

$

2

 

$

247,076

 

$

(2,403)

 

$

539,986

 

 

$

 

$

784,661

Stock-based compensation

10,180

10,180

Vested and delivered restricted stock units

847

(96)

(96)

Exercise of stock options

5,017

456

456

Settlement of convertible senior notes

2

Net income

41,890

41,890

Net gains from foreign currency translation

2,295

2,295

Balances—April 29, 2023

22,051,251

 

$

2

 

$

257,616

 

$

(108)

 

$

581,876

 

 

$

 

$

839,386

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

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

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 6

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

THREE MONTHS ENDED

APRIL 29,

APRIL 30,

2023

    

2022

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

41,890

$

200,711

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

 

 

Depreciation and amortization

 

27,770

24,758

Non-cash operating lease cost

19,865

18,391

Asset impairments

2,475

5,923

Stock-based compensation expense

 

10,180

12,802

Non-cash finance lease interest expense

8,486

7,071

Product recalls

560

Deferred income taxes

16,527

5,493

Loss on extinguishment of debt

146,116

Gain on derivative instruments—net

(3,177)

Share of equity method investments loss

1,602

1,375

Other non-cash items

 

2,215

1,269

Change in assets and liabilities:

 

Accounts receivable

 

(462)

(7,715)

Merchandise inventories

 

35,915

(83,115)

Prepaid expense and other assets

 

(4,311)

(160,116)

Landlord assets under construction—net of tenant allowances

 

(9,583)

(12,148)

Accounts payable and accrued expenses

 

(54,354)

(14,778)

Deferred revenue and customer deposits

 

19,160

48,909

Other current liabilities

 

(556)

(30,057)

Current and non-current operating lease liabilities

 

(21,543)

(19,379)

Other non-current obligations

 

(8,538)

(6,944)

Net cash provided by operating activities

 

86,738

 

135,949

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

Capital expenditures

 

(34,190)

(29,364)

Equity method investments

 

(33,131)

(1,115)

Net cash used in investing activities

 

(67,321)

 

(30,479)

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 7

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

THREE MONTHS ENDED

APRIL 29,

APRIL 30,

2023

    

2022

(in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Repayments under term loans

(6,250)

(5,000)

Repayments under real estate loans

(6)

Repayments under promissory and equipment security notes

 

(1,160)

(10,910)

Repayments of convertible senior notes

(2)

(13,048)

Principal payments under finance lease agreements—net of tenant allowances

(3,877)

(3,559)

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

 

456

149,570

Tax withholdings related to issuance of stock-based awards

(96)

(266)

Net cash used in financing activities

 

(10,935)

 

(42,351)

Effects of foreign currency exchange rate translation

 

(18)

(278)

Net increase in cash and cash equivalents, restricted cash and restricted cash equivalents

 

8,464

 

62,841

Cash and cash equivalents, restricted cash and restricted cash equivalents

 

 

  

Beginning of period—cash and cash equivalents

 

1,508,101

 

2,177,889

Beginning of period—restricted cash

 

3,662

 

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

 

3,975

Beginning of period—cash and cash equivalents, restricted cash and restricted cash equivalents

$

1,511,763

$

2,181,864

End of period—cash and cash equivalents

 

1,516,689

 

2,243,255

End of period—restricted cash

 

3,538

 

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

 

 

1,450

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

$

1,520,227

$

2,244,705

Non-cash transactions:

 

 

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

$

20,441

$

12,248

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

2,564

16,823

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

(180,322)

Financing liability and embedded derivative arising from convertible senior notes repurchase

325,363

Shares issued on settlement of convertible senior notes

(14,705)

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

14,705

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

PART I. FINANCIAL INFORMATION

2023 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 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 baby, child and teen furnishings.

As of April 29, 2023, 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. In September 2022, we opened our first RH Guesthouse in New York.

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 29, 2023, and the results of operations for the three months ended April 29, 2023 and April 30, 2022. Our current fiscal year, which consists of 53 weeks, ends on February 3, 2024 (“fiscal 2023”).

The condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.

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, 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, and 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 29, 2023. As additional information becomes available to us, our future assessment of these estimates, as well as other factors, could change and the results of any such change 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 28, 2023 (the “2022 Form 10-K”).

The results of operations for the three months ended April 29, 2023, 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 factors as discussed in Business Conditions below.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 9

Business Conditions

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, rising interest and mortgage rates, and unpredictability in the global financial markets related to the foregoing as well as, among other things, the war in Ukraine and recent failures of several financial institutions. We experienced increased demand for our products during the pandemic and there have been significant shifts in consumer consumption patterns with the easing of the pandemic including increases in travel and services rather than spending on home furnishings. These and other macroeconomic factors may have a number of adverse effects on macroeconomic conditions and markets in which we operate, including the housing market, with the potential for an economic recession and a sustained downturn in the housing market. Factors such as a slowdown in the housing market or negative trends in stock market prices could have an adverse impact on demand for our products. We believe that these macroeconomic and other factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.

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 macroeconomic factors.

For more information, refer to the section entitled “Risk Factors” in our 2022 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

New Accounting Standards or Updates Adopted

Disclosure of Supplier Finance Program Obligations

In September 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-04Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). ASU 2022-04 requires entities to disclose a program’s nature, activity during the period, changes from period to period and potential magnitude. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. With the exception of the disclosure of rollforward information, the guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied retrospectively to all periods for which a balance sheet is presented. The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and is required to be applied prospectively. We adopted ASU 2022-04 in the first quarter of fiscal 2023.

Supplier Finance Program

We facilitate a voluntary supply chain financing program (the “Financing Program”) with a third-party financial institution (the “Bank”) to provide participating suppliers with the opportunity to receive early payment on invoices, net of a discount charged to the supplier by the Bank. We are not a party to the supplier agreements with the Bank, and the terms of our payment obligations to suppliers are not impacted by a supplier’s participation in the Financing Program. Our responsibility is limited to making payments to the Bank on the terms originally negotiated with our suppliers, which are typically either 30 days or 60 days. There are no assets pledged as security or other forms of guarantees provided under the Financing Program.

The Financing Program is not indicative of a borrowing arrangement and the liabilities under the Financing Program are included in accounts payable and accrued expenses on the condensed consolidated balance sheets and associated payments are included within operating activities on the condensed consolidated statements of cash flows. As of April 29, 2023 and January 28, 2023, supplier invoices that have been confirmed as valid under the Financing Program included in accounts payable and accrued expenses were $24 million and $26 million, respectively.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 10

NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following:

    

APRIL 29,

    

JANUARY 28,

2023

2023 

(in thousands)

Prepaid expenses

$

27,893

$

24,352

Capitalized catalog costs

23,124

26,522

Vendor deposits

19,700

21,201

Federal and state tax receivable

13,203

12,322

Value added tax (VAT) receivable

6,264

7,465

Tenant allowance receivable

4,765

8,336

Right of return asset for merchandise

 

4,674

 

4,983

Promissory notes receivable, including interest(1)

 

4,533

 

2,991

Interest income receivable

2,737

4,878

Other current assets

22,190

26,247

Total prepaid expense and other current assets

$

129,083

$

139,297

(1) Represents promissory notes, including principal and accrued interest, due from an affiliate of the managing member of the Aspen LLCs (refer to Note 5—Variable Interest Entities).

Other non-current assets consist of the following:

    

APRIL 29,

    

JANUARY 28,

2023

2023 

(in thousands)

Landlord assets under construction—net of tenant allowances

$

61,069

$

45,511

Initial direct costs prior to lease commencement

59,202

51,249

Capitalized cloud computing costs—net(1)

22,365

21,529

Vendor deposits—non-current

12,038

10,593

Other deposits

 

7,659

 

7,143

Deferred financing fees

 

3,276

 

3,528

Other non-current assets

 

10,065

 

9,654

Total other non-current assets

$

175,674

$

149,207

(1) Presented net of accumulated amortization of $12 million and $11 million as of April 29, 2023 and January 28, 2023, respectively.

PART I. FINANCIAL INFORMATION

2023 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 (refer to Note 17—Segment Reporting):

    

RH SEGMENT

    

WATERWORKS

TRADENAMES,

TRADENAMES,

TRADEMARKS AND

TRADEMARKS AND

OTHER INTANGIBLE

OTHER INTANGIBLE

GOODWILL

ASSETS

GOODWILL(1)

ASSETS(2)

(in thousands)

January 28, 2023

$

141,048

$

57,633

$

$

17,000

Additions

 

 

511

 

 

Foreign currency translation

(22)

April 29, 2023

$

141,026

$

58,144

$

$

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.

There are no goodwill, tradenames, trademarks and other intangible assets for the Real Estate segment.

NOTE 5—VARIABLE INTEREST ENTITIES

Consolidated Variable Interest Entities and Noncontrolling Interests

In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for real estate development activities related to our Gallery transformation and global expansion strategies. We hold a 50 percent membership interest in seven of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by a third-party real estate development partner affiliated with the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below). In one Member LLC we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held in the same way by a real estate development partner affiliated with the managing member of the Aspen LLCs.

The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support. Upon the formation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs. In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and determined that we are most closely associated with each Member LLC. Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements.

We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC. As of April 29, 2023 and January 28, 2023, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions. Accordingly, we did not recognize any noncontrolling interests as of April 29, 2023 and January 28, 2023.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 12

The carrying amounts and classification of the VIEs’ assets and liabilities included in the condensed consolidated balance sheets were as follows:

    

APRIL 29,

    

JANUARY 28,

2023

2023 

(in thousands)

ASSETS

 

  

 

  

Cash and cash equivalents

$

6,657

$

6,653

Restricted cash(1)

3,538

3,662

Prepaid expense and other current assets

 

3,927

 

3,670

Total current assets

 

14,122

 

13,985

Property and equipment—net(2)

 

206,172

 

187,093

Other non-current assets

214

 

122

Total assets

$

220,508

$

201,200

LIABILITIES

 

  

 

  

Accounts payable and accrued expenses

$

9,795

$

6,685

Real estate loans(3)

17,905

17,909

Other non-current obligations

952

 

929

Total liabilities

$

28,652

$

25,523

(1) Restricted cash deposits are held in escrow for one Member LLC and represent a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for tenant allowances specified in a lease agreement between us and the Member LLC.
(2) Includes $140 million and $125 million of construction in progress as of April 29, 2023 and January 28, 2023, respectively.
(3) Real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $2.0 million with a maturity date of August 1, 2032. The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00%.

On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $16 million with a maturity date of September 9, 2032. The Promissory Note bears interest at a fixed rate per annum equal to 5.37% until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00%, subject to a total interest rate 3.00% floor.

Equity Method Investments

Equity method investments represent our 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”) that were formed for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent membership interest in the third Aspen LLC. The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Accordingly, we account for these investments using the equity method of accounting.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 13

We have previously made contractually required contributions to the Aspen LLCs in an aggregate amount of $105 million in prior periods. In February 2023, we elected to make equity contributions to two of the Aspen LLCs totaling $31 million whereby such funding was used to repay a portion of third-party debt secured by certain real estate assets held by the Aspen LLCs. In April 2023, we made an additional equity contribution to one Aspen LLC of $1.8 million whereby such funding was used in connection with the acquisition of additional real estate assets. Inclusive of the equity contributions made during the three months ended April 29, 2023, we have made in excess of $135 million in capital contributions to the Aspen LLCs. Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of April 29, 2023.

During the three months ended April 29, 2023 and 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 29,

    

JANUARY 28,

2023

2023 

(in thousands)

Accounts payable

$

156,531

$

166,082

Accrued compensation

 

50,489

 

76,650

Accrued sales and use tax(1)

 

24,874

 

21,950

Accrued occupancy

 

24,290

 

28,830

Accrued freight and duty

 

13,881

 

17,497

Accrued legal reserves

8,430

8,921

Accrued professional fees

 

7,777

 

7,447

Accrued catalog costs(1)

 

1,595

 

1,546

Accrued interest

954

14,456

Other accrued expenses

 

32,922

 

31,570

Total accounts payable and accrued expenses

$

321,743

$

374,949

(1) Prior year amounts have been adjusted to conform to the current period presentation.

Reorganization

As reported in the 2022 Form 10-K, we implemented a restructuring on March 24, 2023 that includes workforce and expense reductions in order to improve and simplify our organizational structure, streamline certain aspects of our business operations and better position us for further growth. The workforce reduction associated with the initiative included the elimination of numerous leadership and other positions throughout the organization, which affected approximately 440 roles. The reorganization was completed during the first quarter of fiscal 2023. During the three months ended April 29, 2023, we incurred total charges relating to the reorganization of $7.6 million consisting primarily of severance costs and related taxes. As of April 29, 2023, we had accruals of $5.8 million included in accounts payable and accrued expenses related to the reorganization.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 14

Other current liabilities consist of the following:

    

APRIL 29,

    

JANUARY 28,

2023

2023 

(in thousands)

Unredeemed gift card and merchandise credit liability

$

28,180

$

26,733

Current portion of term loans

25,000

25,000

Allowance for sales returns

19,323

20,747

Finance lease liabilities

17,349

17,007

Foreign tax payable

4,425

4,365

Other current liabilities

 

7,583

 

9,338

Total other current liabilities

$

101,860

$

103,190

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 29, 2023 will be recognized within the next six months as the performance obligations are satisfied. 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 29, 2023 and April 30, 2022, we recognized $6.1 million and $4.7 million, respectively, of revenue related to previous deferrals related to our gift cards. We expect that approximately 70% 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 29,

    

JANUARY 28,

2023

2023 

(in thousands)

Unrecognized tax benefits

$

2,992

$

2,962

Other non-current obligations

 

5,173

 

5,112

Total other non-current obligations

$

8,165

$

8,074

.

PART I. FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 15

NOTE 8—LEASES

Lease costs—net consist of the following:

THREE MONTHS ENDED

APRIL 29,

    

APRIL 30,

    

    

2023

    

2022

(in thousands)

Operating lease cost(1)

$

26,300

$

25,133

Finance lease costs

Amortization of leased assets(1)

13,704

11,498

Interest on lease liabilities(2)

8,486

7,071

Variable lease costs(3)

6,168

9,087

Sublease income(4)