May 26, 2023 - 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 29, 2023

☐	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 19, 2023, 22,052,211 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 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


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PART I

ITEM 1. FINANCIAL STATEMENTS

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.


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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.


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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.


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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.


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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)


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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.


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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 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.


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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 2022-04—Disclosure 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.


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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.


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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 (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.


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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.


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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.


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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


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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⁾

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