10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on June 2, 2017
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, 2017
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
(Exact name of registrant as specified in its charter)
Delaware |
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45-3052669 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
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15 Koch Road, Suite K Corte Madera, CA |
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94925 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (415) 924-1005
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):
Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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☐ |
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Emerging growth company |
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☐ |
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 31, 2017, 33,147,755 shares of registrant’s common stock were outstanding.
INDEX TO FORM 10-Q
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Page |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets (Unaudited) as of April 29, 2017, and January 28, 2017 |
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3 |
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4 |
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5 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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7 |
Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 |
Item 3. |
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39 |
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Item 4. |
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41 |
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Item 1. |
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42 |
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Item 1A. |
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42 |
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Item 2. |
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42 |
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Item 3. |
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43 |
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Item 4. |
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43 |
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Item 5. |
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43 |
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Item 6. |
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44 |
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45 |
2
RH
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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April 29, |
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January 28, |
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2017 |
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2017 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
80,150 |
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$ |
87,023 |
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Short-term investments |
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— |
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142,677 |
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Accounts receivable—net |
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34,116 |
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34,191 |
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Merchandise inventories |
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683,984 |
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752,304 |
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Asset held for sale |
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8,179 |
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4,900 |
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Prepaid expense and other current assets |
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108,241 |
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117,162 |
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Total current assets |
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914,670 |
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1,138,257 |
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Long-term investments |
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— |
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33,212 |
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Property and equipment—net |
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702,741 |
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682,056 |
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Goodwill |
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174,158 |
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173,603 |
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Trademarks and other intangible assets |
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100,734 |
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100,757 |
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Non-current deferred tax assets |
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28,815 |
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28,466 |
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Other non-current assets |
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27,268 |
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36,169 |
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Total assets |
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$ |
1,948,386 |
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$ |
2,192,520 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
233,395 |
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$ |
226,980 |
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Deferred revenue and customer deposits |
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168,177 |
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145,918 |
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Other current liabilities |
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42,349 |
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43,271 |
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Total current liabilities |
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443,921 |
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416,169 |
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Convertible senior notes due 2019—net |
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316,153 |
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312,379 |
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Convertible senior notes due 2020—net |
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240,120 |
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235,965 |
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Financing obligations under build-to-suit lease transactions |
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220,019 |
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203,015 |
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Deferred rent and lease incentives |
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61,094 |
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60,439 |
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Other non-current obligations |
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44,301 |
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44,684 |
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Total liabilities |
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1,325,608 |
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1,272,651 |
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Commitments and contingencies (Note 17) |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of April 29, 2017 and January 28, 2017 |
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— |
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— |
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Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 40,924,929 shares issued and 33,075,569 shares outstanding as of April 29, 2017; 41,123,521 shares issued and 40,828,633 shares outstanding as of January 28, 2017 |
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3 |
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4 |
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Additional paid-in capital |
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798,467 |
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790,866 |
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Accumulated other comprehensive loss |
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(2,873 |
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(1,692 |
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Retained earnings |
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146,844 |
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150,214 |
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Treasury stock—at cost, 7,849,360 shares as of April 29, 2017 and 294,888 shares as of January 28, 2017 |
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(319,663 |
) |
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(19,523 |
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Total stockholders’ equity |
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622,778 |
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919,869 |
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Total liabilities and stockholders’ equity |
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$ |
1,948,386 |
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$ |
2,192,520 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended |
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April 29, |
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April 30, |
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2017 |
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2016 |
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Net revenues |
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$ |
562,080 |
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$ |
455,456 |
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Cost of goods sold |
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391,824 |
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327,981 |
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Gross profit |
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170,256 |
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127,475 |
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Selling, general and administrative expenses |
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163,360 |
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138,950 |
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Income (loss) from operations |
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6,896 |
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(11,475 |
) |
Interest expense—net |
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12,179 |
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10,528 |
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Loss before income taxes |
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(5,283 |
) |
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(22,003 |
) |
Income tax benefit |
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(1,913 |
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(8,533 |
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Net loss |
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$ |
(3,370 |
) |
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$ |
(13,470 |
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Weighted-average shares used in computing basic net loss per share |
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37,609,516 |
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40,588,081 |
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Basic net loss per share |
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$ |
(0.09 |
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$ |
(0.33 |
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Weighted-average shares used in computing diluted net loss per share |
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37,609,516 |
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40,588,081 |
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Diluted net loss per share |
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$ |
(0.09 |
) |
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$ |
(0.33 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
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Three Months Ended |
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April 29, |
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April 30, |
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2017 |
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2016 |
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Net loss |
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$ |
(3,370 |
) |
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$ |
(13,470 |
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Net gains (losses) from foreign currency translation |
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(1,192 |
) |
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2,669 |
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Net unrealized holding gains on available-for-sale investments |
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11 |
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92 |
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Total comprehensive loss |
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$ |
(4,551 |
) |
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$ |
(10,709 |
) |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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April 29, |
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April 30, |
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2017 |
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2016 |
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As Revised |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
(3,370 |
) |
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$ |
(13,470 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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16,020 |
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12,554 |
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Net non-cash charges resulting from inventory step-up |
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1,380 |
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— |
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Amortization of debt discount |
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7,458 |
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7,057 |
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Excess tax shortfall from exercise of stock options |
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— |
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76 |
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Stock-based compensation expense |
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5,289 |
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3,998 |
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Other non-cash interest expense |
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884 |
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1,126 |
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Change in assets and liabilities—net of acquisition: |
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Accounts receivable |
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8 |
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(3,504 |
) |
Merchandise inventories |
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66,067 |
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(37,228 |
) |
Prepaid expense and other assets |
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8,654 |
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(33,098 |
) |
Accounts payable and accrued expenses |
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1,219 |
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(14,604 |
) |
Deferred revenue and customer deposits |
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22,232 |
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10,972 |
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Other current liabilities |
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(1,086 |
) |
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(25,143 |
) |
Deferred rent and lease incentives |
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726 |
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|
894 |
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Other non-current obligations |
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(426 |
) |
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20 |
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Net cash provided by (used in) operating activities |
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125,055 |
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(90,350 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(13,456 |
) |
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(45,276 |
) |
Construction related deposits |
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— |
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(3,551 |
) |
Purchase of trademarks and domain names |
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— |
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(164 |
) |
Proceeds from sale of asset held for sale—net |
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4,900 |
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— |
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Purchase of investments |
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(16,109 |
) |
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(44,604 |
) |
Maturities of investments |
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46,890 |
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54,368 |
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Sales of investments |
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145,020 |
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31,896 |
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Net cash provided by (used in) investing activities |
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167,245 |
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(7,331 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
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Repurchases of common stock |
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(300,140 |
) |
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— |
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Payments on build-to-suit lease transactions |
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(1,289 |
) |
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— |
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Proceeds from exercise of stock options |
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2,567 |
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|
296 |
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Excess tax shortfall from exercise of stock options |
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— |
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(76 |
) |
Tax withholdings related to issuance of stock-based awards |
|
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(149 |
) |
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(141 |
) |
Payments on capital leases |
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(76 |
) |
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(85 |
) |
Net cash used in financing activities |
|
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(299,087 |
) |
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(6 |
) |
Effects of foreign currency exchange rate translation |
|
|
(86 |
) |
|
|
888 |
|
Net decrease in cash and cash equivalents |
|
|
(6,873 |
) |
|
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(96,799 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
87,023 |
|
|
|
331,467 |
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End of period |
|
$ |
80,150 |
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$ |
234,668 |
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Non-cash transactions: |
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|
|
|
|
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Property and equipment additions due to build-to-suit lease transactions |
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$ |
18,283 |
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$ |
7,775 |
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Property and equipment additions in accounts payable and accrued expenses at period-end |
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$ |
14,498 |
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$ |
10,721 |
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Property and equipment additions from use of construction related deposits |
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$ |
8,824 |
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$ |
1,740 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—THE COMPANY
Nature of Business
RH, a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.
On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. Refer to Note 3—Business Combination.
As of April 29, 2017, the Company operated a total of 85 retail Galleries and 28 outlet stores in 32 states, the District of Columbia and Canada, and includes 15 Waterworks showrooms in the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of April 29, 2017, and the results of operations for the three months ended April 29, 2017 and April 30, 2016. The Company’s current fiscal year ends on February 3, 2018 (“fiscal 2017”).
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.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (the “2016 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. Refer to “Revision” below.
The results of operations for the three months ended April 29, 2017 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
Revision
During the fourth quarter of fiscal 2016, management determined that the Company had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC 210—Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement of the cash provided by operating activities on the condensed consolidated statements of cash flows. There was no impact on the condensed consolidated statements of income or stockholders’ equity related to these misstatements.
The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99—Materiality, codified in Accounting Standards Codification (“ASC”) 250—Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the condensed consolidated statements of cash flows.
7
The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections (in thousands):
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Three Months Ended |
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April 30, |
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2016 |
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As Reported |
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Adjustment |
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As Revised |
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Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
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|
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Change in accounts payable and accrued expenses |
|
$ |
(30,546 |
) |
|
$ |
15,942 |
|
|
$ |
(14,604 |
) |
Net cash used in operating activities |
|
$ |
(106,292 |
) |
|
$ |
15,942 |
|
|
$ |
(90,350 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
$ |
349,897 |
|
|
$ |
(18,430 |
) |
|
$ |
331,467 |
|
End of period |
|
$ |
237,156 |
|
|
$ |
(2,488 |
) |
|
$ |
234,668 |
|
NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-Based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting. The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of operations, rather than within additional paid-in capital on the balance sheet. The new guidance was effective for the Company beginning on January 29, 2017. As a result of the adoption of this new guidance, the Company recognized an excess tax shortfall of $0.1 million in the provision for income taxes as a discrete item during the three months ended April 29, 2017. This amount may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the condensed consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.
Revenue from Contracts with Customers
In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under GAAP for one year from the original effective date. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts.
The Company continues to assess all potential impacts of the standard, and currently believes one of the most significant impacts relates to accounting for gift card breakage. Under the new standard the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and will be recognized proportional to actual gift card redemptions. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially adopting it recognized at the date of initial application. The Company has not yet selected the transition method.
Accounting for Leases
In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects
8
that the adoption of ASU 2016-02 will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.
Financial Instruments
In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Cash Flow Classification
In August 2016, the FASB issued Accounting Standard Update No. 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers
In October 2016, the FASB issued Accounting Standard Update No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Goodwill and Intangibles
In January 2017, the FASB issued Accounting Standard Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350). The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
NOTE 3—BUSINESS COMBINATION
On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. The purchase price of the acquisition was approximately $119.9 million consisting of $118.4 million funded with available cash and $1.5 million representing the fair value of rollover units, which amount is subject to adjustment for changes in working capital and other items. The rollover units are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 15—Stock-Based Compensation). After the transaction, and giving effect to equity interests acquired by management in the business, the Company owns in excess of 90% of the total equity interest in Waterworks.
During the three months ended April 30, 2016, the Company incurred $2.1 million of acquisition-related costs associated with the transaction. These costs and expenses include fees associated with financial, legal and accounting advisors, and employment related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of operations.
9
During the three months ended April 29, 2017, the Company recorded purchase price allocation adjustments of $0.6 million due to changes in certain working capital and other items. The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities, prior to and after the purchase price allocation adjustments recorded during the three months ended April 29, 2017 (in thousands):
|
|
|
|
|
|
Purchase Price |
|
|
|
|
|
|
|
|
January 28, |
|
|
Allocation |
|
|
April 29, |
|
|||
|
|
2017 |
|
|
Adjustments |
|
|
2017 |
|
|||
Tangible assets acquired and liabilities assumed |
|
$ |
18,615 |
|
|
$ |
(601 |
) |
|
$ |
18,014 |
|
Trademarks |
|
|
52,100 |
|
|
|
— |
|
|
|
52,100 |
|
Goodwill |
|
|
49,229 |
|
|
|
601 |
|
|
|
49,830 |
|
Total |
|
$ |
119,944 |
|
|
$ |
— |
|
|
$ |
119,944 |
|
Under purchase accounting rules, the Company valued the acquired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the Company’s selling effort. This valuation resulted in an increase in inventory carrying value of approximately $10.5 million for marketable inventory.
Trademarks have been assigned an indefinite life and therefore are not subject to amortization. The goodwill is representative of the benefits and expected synergies from the integration of Waterworks products and Waterworks’ management and employees, which do not qualify for separate recognition as an intangible asset. A portion of the trademarks and goodwill are not deductible for tax purposes.
Results of operations of Waterworks have been included in the Company’s condensed consolidated statements of operations since the May 27, 2016 acquisition date. Net revenues attributable to Waterworks represented $28.6 million of the Company’s net revenues in the three months ended April 29, 2017. Pro forma results of the acquired business have not been presented as the results were not considered material to the Company’s condensed consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.
NOTE 4—ASSET HELD FOR SALE
During the fourth quarter of fiscal 2016, the Company committed to a plan to sell an aircraft, which resulted in a reclassification of such aircraft from property and equipment to asset held for sale on the condensed consolidated balance sheets as of January 28, 2017. The asset held for sale had a carrying value of $4.9 million as of January 28, 2017. In April 2017, the sale of the aircraft was completed for a purchase price of $5.2 million and the Company incurred costs of $0.3 million to dispose of the asset.
During the first quarter of fiscal 2017, the Company committed to a plan to sell the building and land at one of its owned retail Galleries, resulting in a reclassification of building and land from property and equipment to asset held for sale on the condensed consolidated balance sheets as of April 29, 2017. The Company performed an assessment and determined that based on management’s best estimate, the selling price of the building and land will be greater than the current net book value of the asset, which was $8.2 million as of April 29, 2017. As a result, no impairment charge was recorded during the three months ended April 29, 2017 due to this reclassification. In May 2017, the Company completed the sale of the building and land for approximately $10.2 million.
NOTE 5—PREPAID EXPENSE AND OTHER ASSETS
Prepaid expense and other current assets consist of the following (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Capitalized catalog costs |
|
$ |
56,044 |
|
|
$ |
61,258 |
|
Federal tax receivable |
|
|
14,714 |
|
|
|
13,124 |
|
Vendor deposits |
|
|
11,660 |
|
|
|
13,276 |
|
Prepaid expense and other current assets |
|
|
25,823 |
|
|
|
29,504 |
|
Total prepaid expense and other current assets |
|
$ |
108,241 |
|
|
$ |
117,162 |
|
10
Other non-current assets consist of the following (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Construction related deposits |
|
$ |
19,220 |
|
|
$ |
28,044 |
|
Other deposits |
|
|
4,927 |
|
|
|
4,706 |
|
Deferred financing fees |
|
|
1,353 |
|
|
|
1,530 |
|
Other non-current assets |
|
|
1,768 |
|
|
|
1,889 |
|
Total other non-current assets |
|
$ |
27,268 |
|
|
$ |
36,169 |
|
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The following sets forth the goodwill and intangible assets as of April 29, 2017 (in thousands):
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net Book Value |
|
||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of leases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market write-up |
|
$ |
1,925 |
|
|
$ |
(1,815 |
) |
|
$ |
— |
|
|
$ |
110 |
|
Fair market write-down (2) |
|
|
(1,467 |
) |
|
|
1,365 |
|
|
|
— |
|
|
|
(102 |
) |
Total intangible assets subject to amortization |
|
$ |
458 |
|
|
$ |
(450 |
) |
|
$ |
— |
|
|
$ |
8 |
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (3)(4) |
|
$ |
174,291 |
|
|
$ |
— |
|
|
$ |
(133 |
) |
|
$ |
174,158 |
|
Trademarks and domain names (4) |
|
$ |
100,624 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
100,624 |
|
(1) |
The fair value of each lease is amortized over the life of the respective lease. |
(2) |
The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets. |
(3) |
Waterworks goodwill increased $0.6 million during the three months ended April 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination. |
(4) |
Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment. |
The following sets forth the goodwill and intangible assets as of January 28, 2017 (in thousands):
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net Book Value |
|
||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of leases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market write-up |
|
$ |
1,925 |
|
|
$ |
(1,792 |
) |
|
$ |
— |
|
|
$ |
133 |
|
Fair market write-down (2) |
|
|
(1,467 |
) |
|
|
1,350 |
|
|
|
— |
|
|
|
(117 |
) |
Total intangible assets subject to amortization |
|
$ |
458 |
|
|
$ |
(442 |
) |
|
$ |
— |
|
|
$ |
16 |
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (3)(4) |
|
$ |
173,690 |
|
|
$ |
— |
|
|
$ |
(87 |
) |
|
$ |
173,603 |
|
Trademarks and domain names (3)(4) |
|
$ |
100,624 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
100,624 |
|
(1) |
The fair value of each lease is amortized over the life of the respective lease. |
(2) |
The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets. |
(3) |
The Company recorded goodwill and trademarks of $49.2 million and $52.1 million, respectively, in fiscal 2016 related to its acquisition of Waterworks. Refer to Note 3—Business Combination. |
(4) |
Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment. |
11
NOTE 7—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Accounts payable |
|
$ |
124,646 |
|
|
$ |
134,720 |
|
Accrued compensation |
|
|
32,285 |
|
|
|
26,886 |
|
Accrued freight and duty |
|
|
28,770 |
|
|
|
27,955 |
|
Accrued sales taxes |
|
|
16,711 |
|
|
|
14,908 |
|
Accrued occupancy |
|
|
8,843 |
|
|
|
8,137 |
|
Accrued catalog costs |
|
|
7,183 |
|
|
|
3,874 |
|
Accrued professional fees |
|
|
4,394 |
|
|
|
2,082 |
|
Other accrued expenses |
|
|
10,563 |
|
|
|
8,418 |
|
Total accounts payable and accrued expenses |
|
$ |
233,395 |
|
|
$ |
226,980 |
|
Other current liabilities consist of the following (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Unredeemed gift card and merchandise credit liability |
|
$ |
24,991 |
|
|
$ |
24,524 |
|
Allowance for sales returns |
|
|
10,698 |
|
|
|
10,077 |
|
Product recall reserves |
|
|
2,625 |
|
|
|
4,324 |
|
Other current liabilities |
|
|
4,035 |
|
|
|
4,346 |
|
Total other current liabilities |
|
$ |
42,349 |
|
|
$ |
43,271 |
|
NOTE 8—OTHER NON-CURRENT OBLIGATIONS
Other non-current obligations consist of the following (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Notes payable for share repurchases |
|
$ |
19,390 |
|
|
$ |
19,390 |
|
Capital lease obligations—non-current |
|
|
7,192 |
|
|
|
7,242 |
|
Deferred contract incentive (1) |
|
|
7,144 |
|
|
|
7,739 |
|
Unrecognized tax benefits |
|
|
2,538 |
|
|
|
2,508 |
|
Rollover units and profit interests (2) |
|
|
1,891 |
|
|
|
1,784 |
|
Other non-current obligations |
|
|
6,146 |
|
|
|
6,021 |
|
Total other non-current obligations |
|
$ |
44,301 |
|
|
$ |
44,684 |
|
(1) |
Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement. |
(2) |
Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation. |
NOTE 9—CONVERTIBLE SENIOR NOTES
0.00% Convertible Senior Notes due 2020
In June 2015, the Company issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by the Company or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The
12
2020 Notes are guaranteed by the Company’s primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.
The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.
Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of April 29, 2017, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of April 29, 2017. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.
The Company may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs related to the issuance of the 2020 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets. During the three months ended April 29, 2017 and April 30, 2016, the Company recorded $0.3 million and $0.2 million, related to the amortization of debt issuance costs, respectively.
13
The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Liability component |
|
|
|
|
|
|
|
|
Principal |
|
$ |
300,000 |
|
|
$ |
300,000 |
|
Less: Debt discount |
|
|
(56,223 |
) |
|
|
(60,124 |
) |
Net carrying amount |
|
$ |
243,777 |
|
|
$ |
239,876 |
|
Equity component (1) |
|
$ |
84,003 |
|
|
$ |
84,003 |
|
(1) |
Included in additional paid-in capital on the condensed consolidated balance sheets. |
The Company recorded interest expense of $3.9 million and $3.7 million for the amortization of the debt discount related to the 2020 Notes during the three months ended April 29, 2017 and April 30, 2016, respectively.
2020 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 5.1 million shares of its common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 5.1 million shares of the Company’s common stock at a price of $189.00 per share. The Company received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 Notes until the Company’s common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
The Company recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in non-current deferred tax assets on the condensed consolidated balance sheets.
0.00% Convertible Senior Notes due 2019
In June 2014, the Company issued $350 million principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.
The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.
Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last
14
reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of April 29, 2017, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of April 29, 2017. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount of $1,000.
The Company may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2019 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs related to the issuance of the 2019 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets. During both the three months ended April 29, 2017 and April 30, 2016, the Company recorded $0.2 million related to the amortization of debt issuance costs.
The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, are as follows (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||
|
|
2017 |
|
|
2017 |
|
||
Liability component |
|
|
|
|
|
|
|
|
Principal |
|
$ |
350,000 |
|
|
$ |
350,000 |
|
Less: Debt discount |
|
|
(31,900 |
) |
|
|
(35,457 |
) |
Net carrying amount |
|
$ |
318,100 |
|
|
$ |
314,543 |
|
Equity component (1) |
|
$ |
70,482 |
|
|
$ |
70,482 |
|
(1) |
Included in additional paid-in capital on the condensed consolidated balance sheets. |
The Company recorded interest expense of $3.6 million and $3.4 million for the amortization of the debt discount related to the 2019 Notes during the three months ended April 29, 2017 and April 30, 2016, respectively.
2019 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s common stock at a price of $171.98 per share. The Company received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the
15
conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
The Company recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax assets are included in non-current deferred tax assets on the condensed consolidated balance sheets.
NOTE 10—LINE OF CREDIT
In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders. On November 24, 2014, the Company amended its existing revolving line of credit by entering into an amended and restated credit agreement with the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent. The amended and restated credit agreement increased the existing revolving line of credit by $182.5 million, while eliminating the $15.0 million term loan facility under the existing revolving line of credit. Under the amended and restated credit agreement, which has a maturity date of November 24, 2019, the Company has the option to increase the amount of the revolving line of credit by up to an additional $200.0 million, subject to satisfaction of certain customary conditions at the time of such increase.
On August 12, 2015, Restoration Hardware, Inc. and Restoration Hardware Canada, Inc. entered into a First Amendment (the “Amendment”) to the amended and restated credit agreement. The Amendment changes the amended and restated credit agreement definition of “Change of Control” (the occurrence of which triggers a default under the amended and restated credit agreement) so that changes in the composition of the Company’s Board of Directors due to actual or threatened proxy solicitations are treated in the same way as other changes in the composition of the Company’s Board of Directors.
As of April 29, 2017, the Company had no outstanding borrowings and $478.0 million of availability under the revolving line of credit, net of $14.4 million in outstanding letters of credit. As a result of the consolidated fixed-charge coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit would be approximately $430 million.
Borrowings under the revolving line of credit are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the amended and restated credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.
The amended and restated credit agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size. As of April 29, 2017, the Company was in compliance with all covenants of the amended and restated credit agreement. As of April 29, 2017, the Company would not be in compliance with the consolidated FCCR in the event that availability under the amended and restated credit agreement was less than 10% of the domestic borrowing base.
NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Assets and Liabilities
Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.
The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of
16
pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.
The Company’s financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
|
• |
Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. |
|
• |
Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. |
|
• |
Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant management judgment or estimation. |
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements
All of the Company’s investments are classified as available-for-sale and are carried at fair value. The Company did not hold any short-term or long-term investments as of April 29, 2017. Assets measured at fair value were as follows as of January 28, 2017 (in thousands):
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
2,510 |
|
|
$ |
— |
|
|
$ |
2,510 |
|
Commercial paper |
|
|
— |
|
|
|
5,493 |
|
|
|
5,493 |
|
Total cash equivalents |
|
|
2,510 |
|
|
|
5,493 |
|
|
|
8,003 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
— |
|
|
|
34,534 |
|
|
|
34,534 |
|
Government agency obligations |
|
|
2,553 |
|
|
|
105,590 |
|
|
|
108,143 |
|
Total short-term investments |
|
|
2,553 |
|
|
|
140,124 |
|
|
|
142,677 |
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
Government agency obligations |
|
|
— |
|
|
|
33,212 |
|
|
|
33,212 |
|
Total long-term investments |
|
|
— |
|
|
|
33,212 |
|
|
|
33,212 |
|
Total |
|
$ |
5,063 |
|
|
$ |
178,829 |
|
|
$ |
183,892 |
|
The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within the Company’s investment portfolio as of January 28, 2017 based on stated maturities, which are recorded within cash and cash equivalents, short-term investments and long-term investments on the condensed consolidated balance sheets (in thousands):
|
|
Cost |
|
|
Fair Value |
|
||
Range of maturity |
|
|
|
|
|
|
|
|
Due within 1 year |
|
$ |
148,155 |
|
|
$ |
148,170 |
|
Due in 1 to 2 years |
|
$ |
33,238 |
|
|
$ |
33,212 |
|
The Company invests excess cash primarily in investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper, government agency obligations and guaranteed obligations of the U.S. government, all of which are subject to minimal credit and market risks. The Company estimates the fair value of its commercial paper and U.S. government agency bonds by taking into consideration valuations obtained from third party pricing services. The pricing services utilize industry standard valuation models, including both income and market based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trade dates of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities, prepayment/default projections based on historical data; and other observable inputs.
There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the three months ended April 29, 2017 or April 30, 2016. There were no transfers into or out of level 1 and level 2 during the three months ended April 29, 2017 or April 30, 2016.
17
Fair Value of Financial Instruments
Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of the 2019 Notes and 2020 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity) were as follows (in thousands):
|
|
April 29, |
|
|
January 28, |
|
||||||||||
|
|
2017 |
|
|
2017 |
|
||||||||||
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
Convertible senior notes due 2019 |
|
$ |
302,145 |
|
|
$ |
318,100 |
|
|
$ |
295,381 |
|
|
$ |
314,543 |
|
Convertible senior notes due 2020 |
|
$ |
239,140 |
|
|
$ |
243,777 |
|
|
$ |
232,463 |
|
|
$ |
239,876 |
|
The fair value of each of the 2019 Notes and 2020 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of the Company’s convertible notes, when available, the Company’s stock price and interest rates based on similar debt issued by parties with credit ratings similar to the Company (level 2).
NOTE 12—INCOME TAXES
The Company recorded an income tax benefit of $1.9 million and $8.5 million in the three months ended April 29, 2017 and April 30, 2016, respectively. The effective tax rate was 36.2% and 38.8% for the three months ended April 29, 2017 and April 30, 2016, respectively. The decrease in the effective tax rate is primarily due to discrete tax expense of $0.1 million in the three months ended April 29, 2017 related to net excess tax shortfalls from stock-based payments resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.
As of both April 29, 2017 and January 28, 2017, $1.4 million of the exposures related to unrecognized tax benefits would affect the effective tax rate if realized and are included in other non-current obligations on the condensed consolidated balance sheets. As of April 29, 2017, the Company does not have any exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.
NOTE 13—NET LOSS PER SHARE
The weighted-average shares used for net loss per share is presented in the table below. As the Company was in a net loss position for both the three months ended April 29, 2017 and April 30, 2016, the weighted-average shares outstanding for basic and diluted are the same.
|
|
Three Months Ended |
|
|||||
|
|
April 29, |
|
|
April 30, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Weighted-average shares—basic |
|
|
37,609,516 |
|
|
|
40,588,081 |
|
Effect of dilutive stock-based awards |
|
|
— |