RH0001528849false00015288492020-03-302020-03-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): March 30, 2020

Graphic

(Exact name of registrant as specified in its charter)

Delaware

 

001-35720

 

45-3052669

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

15 Koch Road, Corte Madera, California 94925

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (415924-1005

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value

RH

New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company 

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

Item 2.02. Results of Operations and Financial Condition.

On March 30, 2020, RH released its financial results for the fourth quarter and fiscal year ended February 1, 2020 by issuing its fourth quarter and fiscal year 2019 shareholder letter as part of a press release and posting such release on its website. A copy of the shareholder letter is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The information provided in this Item 2.02, including Exhibit 99.1, is intended to be “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.

RH is also disclosing that it may use the rh.com, restorationhardware.com, and ir.rh.com websites as means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

Item 9.01. Financial Statements and Exhibits.

(d)

Exhibits.

Exhibit
No.

  

Description

99.1

  

Shareholder letter dated March 30, 2020 – RH Reports Record Fiscal 2019 Results.

104

Cover Page Interactive Data File––the cover page XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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Dated: March 30, 2020

By: 

/s/ Jack Preston

 

Jack Preston

 

Chief Financial Officer

Exhibit 99.1

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RH Reports Record Fiscal 2019 Results

Corte Madera, CA - March 30, 2020 - RH (NYSE: RH) today announced fourth quarter and fiscal year 2019 results. Chairman & Chief Executive Officer Gary Friedman provided an update on the Company’s continued evolution and outlook in the attached letter to Our People, Partners, and Shareholders.

RH Leadership will host a Q&A conference call at 2pm PDT (5pm ET) today.

FISCAL 2019 HIGHLIGHTS:

FY GAAP NET REVENUES INCREASED +5.7% TO $2.647B

FY ADJUSTED NET REVENUES INCREASED +5.4% TO $2.647B

FY GAAP OPERATING MARGIN INCREASED 330 BASIS POINTS TO 13.7% VS. 10.4% LY

FY ADJUSTED OPERATING MARGIN INCREASED 290 BASIS POINTS TO 14.3% VS. 11.4% LY

FY GAAP DILUTED EPS INCREASED +77% TO $9.07 VS. $5.12 LY

FY ADJUSTED DILUTED EPS INCREASED +49% TO $11.66 VS. $7.80 LY

FOURTH QUARTER 2019 HIGHLIGHTS:

Q4 GAAP NET REVENUES DECREASED -0.9% TO $665.0M

Q4 ADJUSTED NET REVENUES DECREASED -1.0% TO $665.0M

Q4 GAAP OPERATING MARGIN INCREASED 190 BASIS POINTS TO 15.2% VS. 13.3% LY

Q4 ADJUSTED OPERATING MARGIN INCREASED 230 BASIS POINTS TO 17.4% VS. 15.1% LY

Q4 GAAP DILUTED EPS INCREASED +151% TO $2.66 VS. $1.06 LY

Q4 ADJUSTED DILUTED EPS INCREASED +27% TO $3.72 VS. $2.92 LY

As of February 3, 2019, the Company adopted Accounting Standards Update 2016-02, Accounting Standards Update 2018-10 and Accounting Standards Update 2018-11 (together, “ASC 842”), which pertain to accounting for leases. The Company’s previous and current guidance conforms to the new policy. Under the Company’s adoption method, the Company’s financial results for prior comparative periods are presented with adjustments to reflect the impact of ASC 842. The Company has provided reconciliation tables that update historical results to reflect these changes in lease accounting standards.

Please see the tables below for reconciliations of all GAAP to non-GAAP measures referenced in this press release.

To Our People, Partners, and Shareholders,

Fiscal 2019 was an outstanding year for Team RH. We achieved record results across every key metric of our business while continuing to elevate the brand and create strategic separation in our industry. Adjusted revenues of $2.647 billion increased 5.4% over last year, adjusted operating margins reached an industry best 14.3%, and adjusted diluted earnings per share increased 49% to $11.66. We also generated $330 million of free cash flow in 2019, and achieved industry leading ROIC of 35.3%.

While fourth quarter revenues of $665.0 million were lower than forecast, fourth quarter adjusted earnings per share of $3.72 exceeded expectations for the 13th consecutive quarter as we continue to manage the business with a bias for earnings versus revenue growth. Adjusted operating margins reached a record 17.4% in the fourth quarter, up 230 basis points versus 15.1% last year. The record results

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were driven by higher product margins, plus lower occupancy and shipping costs due to the elimination of our Holiday assortment and the continued efficiencies of our new operating platform.

We believe the revenue shortfall in the quarter was a result of two temporal issues. One, the elimination of our Holiday assortment created unforeseen collateral damage to our core business due to the lower customer traffic in both our stores and online during the peak weeks, and two, we experienced higher than expected backorders due to inventories being down 18% year over year. While it’s hard to be precise forecasting business transitions such as the elimination of Holiday short term, long term it has proven to be the right decision, elevating the RH brand while significantly improving profitability and cash flow.

While proud of the outstanding results our team achieved in 2019, clearly everything has changed as a result of the rapid spread of COVID-19 around the world. Our hearts go out to all of those whose lives are being impacted by the virus, and we are eternally grateful for all the brave souls who are on the front lines putting their health at risk to protect ours.

Due to the significant disruption to financial markets and retail business operations, we are withdrawing all prior guidance and outlook statements that relate to the performance of our business with respect to fiscal year 2020. We anticipate providing additional information about our outlook and financial expectations at some point in the future when our business becomes more predictable. Additionally, in light of the current crisis and the concurrent financial hardships being experienced by so many at this time, the executive leadership team, including myself and our nine president level leaders have chosen to forgo our salaries until business conditions stabilize.

Like others, we will take the expected steps of deferring new business introductions and capital spending, while reducing costs to navigate through the short term challenges of this crisis. Unlike others, and due to our exceptional financial model, we believe we are well positioned to take advantage of the many opportunities that present themselves during times of dislocation. At RH, we live by Albert Einstein’s three rules of work. “Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty lies opportunity.”

It was during the depths of the Great Recession, when the word “value” drove an entire industry to lower quality and reduce prices, that we chose to move in the opposite direction, raising the quality of our offering, and positioned RH as a disruptive force in the lucrative luxury home furnishings market. Out of the clutter of the current crisis, from the discord and related drama, and in the middle of what seems like the most difficult of times, we are once again destroying our current reality to reimagine RH in a manner that will, in the words of Steve Jobs, “Change everything, again.”

Our Galleries, Restaurants, and Outlets, which were originally planned to be closed from March 17th through March 27th, will remain closed until further notice as multiple counties and states have imposed shelter in place, or stay at home orders through mid to late April. We initially communicated that we would pay our associates who were not able to work due to the closings through March 27th, and have also extended that date through April 3rd, 2020.

Since the closing of our Galleries, Restaurants, and Outlets, our core RH business demand is running down approximately 40% to last year, while total Company demand, inclusive of both Restaurants and Outlets, which do not have an online component, is running down approximately 43%. Prior to the dislocation of our business in March, demand in our RH core business was up 8% in February. Additionally, our Outlet business was down 50% in February as a result of cycling the accelerated liquidation of inventory due to the closure of a Distribution Center in Q4 2018. Prior to the impact of the COVID-19 crisis on our business, we were expecting the reduction of revenue year over year in the Outlet division to create a 4 point drag on the Company’s revenues in 2020, and we were expecting the higher Outlet merchandise margins to increase total Company operating margin approximately 100 basis points for the full fiscal year.

We are confident that our current capital structure, considering the actions we are taking to defer capital expenditures and reduce costs, will enable us to pay down the $300 million convertible notes due July 15th, 2020 in cash. We are also in discussions with several different sources of additional debt financing in order to explore opportunities to further strengthen our balance sheet positioning the Company to take advantage of the many opportunities that will exist in this dislocated market.

While over the short term we believe it is prudent to delay current Gallery openings in this uncertain environment, we do expect that over an extended timeframe we will return to our previously communicated long term targets of revenue growth of 8% to 12%, adjusted operating margins in the high teens to low twenties, adjusted net income growth of 15% to 20% annually, and ROIC in excess of 50%.

Looking beyond the current crisis, we continue to see a clear a path to over $5 billion in North America revenues. We also believe there is an opportunity to build a $20 billion global brand as we expand internationally, and further develop the RH ecosystem moving the brand beyond creating and selling products to conceptualizing and selling spaces.

I would like to thank all of our people and partners whose passion and persistence bring our vision and values to life each and every day as we pursue our quest to become one of the most admired brands in the world.

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Carpe Diem,

Gary

Note: Return on invested capital (ROIC): We define ROIC as adjusted operating income after-tax for the most recent twelve-month period, divided by the average of beginning and ending debt and equity less cash and equivalents as well as short and long-term investments for the most recent twelve- month period. ROIC is not a measure of financial performance under GAAP, and should be considered in addition to, and not as a substitute for other financial measures prepared in accordance with GAAP. Our method of determining ROIC may differ from other companies’ methods and therefore may not be comparable.

Q&A CONFERENCE CALL INFORMATION

RH leadership will host a live question and answer conference call and audio webcast at 2:00 pm Pacific Time (5:00 pm Eastern Time) on March 30, 2020. The live question and answer conference call may be accessed by dialing (866) 394-6658 or (706) 679-9188. The call and replay can also be accessed via audio webcast at ir.rh.com.

ABOUT RH

RH (NYSE: RH) is a curator of design, taste and style in the luxury lifestyle market. The Company offers its collections through its retail galleries across North America, the Company’s multiple Source Books, and online at RH.com, RHModern.com, RHBabyandChild.com, RHTeen.com and Waterworks.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated financial statements, which are prepared and presented in accordance with Generally Accepted Accounting Principles (“GAAP”), the Company uses the following non-GAAP financial measures: adjusted net revenue, adjusted operating income, adjusted net income or adjusted net earnings, adjusted net income margin, adjusted diluted earnings per share, normalized adjusted net income, normalized adjusted diluted net income per share, ROIC or return on invested capital, free cash flow, adjusted operating margin, adjusted gross margin, adjusted SG&A, EBITDA and adjusted EBITDA (collectively, “non-GAAP financial measures”). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The Company uses these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. The non- GAAP financial measures used by the Company in this press release may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the Reconciliation of GAAP to non-GAAP Financial Measures tables in this press release. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

FORWARD-LOOKING STATEMENTS

 

This release contains forward-looking statements within the meaning of the federal securities laws, including without limitation, statements regarding the elevation of our brand and creation of strategic separation in our industry; our industry best adjusted operating margins, industry leading ROIC and record results; our management of the business with a bias for earnings versus revenue growth; continued efficiencies of our new operating platform; our beliefs regarding the reasons for the revenue shortfall in the quarter including the elimination of the Holiday assortment and higher than expected backorders; the elevation of the RH brand and improvement in profitability and cash flow as a result of the elimination of Holiday; the impact to our business of the rapid development of the coronavirus (COVID-19) pandemic; our anticipation that we will be providing additional information about our outlook and expectations at some point in the future when business conditions begin to normalize; the positioning of RH as a disruptive force in the lucrative luxury home furnishings market; our expected steps of deferring new business introductions and capital spending while reducing costs to navigate through short term challenges; our belief that we are well-positioned to take advantage of the opportunities presented; the timing for the opening of our Galleries, Restaurants and Outlets; our compensation of our associates during store closings; statements relating to demand sales for our core business and Outlet business in February 2020; statements regarding our expectations regarding revenue and merchandise margins for the Outlet business for fiscal year 2020 and Company operating margin for fiscal year 2020; statements regarding core RH business demand running down approximately 40% to last year, while total Company demand running down approximately 43%, since the closing of our Galleries, Restaurants, and Outlets on March 18, 2020; our plans to pay the $300 million convertible notes due July 15, 2020 in cash, and our confidence that our current capital structure, considering the actions we are

3


taking to defer capital expenditures and reduce costs, will enable us to pay down the $300 million convertible notes due July 15, 2020; our discussions with sources of additional debt financing to explore opportunities to further strengthen our balance sheet; the delay in current Gallery openings; our long term growth targets of revenue growth of 8% to 12%, adjusted operating margins in the high teens to low twenties, adjusted net income growth of 15% to 20% annually, and ROIC in excess of 50%; our path to over $5 billion in North American revenues; the opportunity to build a $20 billion global brand as we expand internationally and further develop the RH ecosystem; our quest to become one of the most admired brands in the world; and any statements or assumptions underlying any of the foregoing.

 

You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future events. We cannot assure you that future developments affecting us will be those that we have anticipated. Important risks and uncertainties that could cause actual results to differ materially from our expectations include the global outbreak of the coronavirus (COVID-19) virus, which poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate our business. We have already experienced significant disruption to our business as a result of the rapid development of the COVID-19 pandemic. The Company has temporarily closed its retail locations for an indeterminate period of time, and we believe changes in consumer behavior and health concerns have impacted customer demand. A large number of states and municipalities in the U.S. where we operate have implemented temporary closure requirements with respect to non-essential business operations and the duration of these requirements are unknown, and a number of mall operators as well as other retailers have elected to temporarily cease operations. The COVID-19 outbreak also may have a material adverse impact on our supply chain including the manufacture, supply, distribution, transportation and delivery of our products. The magnitude and duration of the negative impact to our business from the COVID-19 pandemic cannot be predicted with certainty, but the Company believes COVID-19 is likely to result in an adverse impact on our business, results of operations and financial condition, particularly if ongoing mitigation actions occur for a significant amount of time. Other important risks and uncertainties that could cause actual results to differ materially from our expectations include, among others, risks related to our dependence on key personnel and any changes in our ability to retain key personnel; successful implementation of our growth strategy; risks related to the number of new business initiatives we are undertaking; successful implementation of our growth strategy including our real estate transformation and the number of new Gallery locations that we seek to open and the timing of openings; uncertainties in the current performance of our business including a range of risks related to our operations as well as external economic factors; general economic conditions and the housing market as well as the impact of economic conditions on consumer confidence and spending; changes in customer demand for our products; our ability to anticipate consumer preferences and buying trends, and maintaining our brand promise to customers; decisions concerning the allocation of capital; factors affecting our outstanding convertible senior notes or other forms of our indebtedness; our ability to anticipate consumer preferences and buying trends, and maintain our brand promise to customers; changes in consumer spending based on weather and other conditions beyond our control; strikes and work stoppages affecting port workers and other industries involved in the transportation of our products; our ability to obtain our products in a timely fashion or in the quantities required; our ability to employ reasonable and appropriate security measures to protect personal information that we collect; our ability to support our growth with appropriate information technology systems; risks related to our sourcing and supply chain including our dependence on imported products produced by foreign manufacturers and risks related to importation of such products including risks related to tariffs and other similar issues, as well as those risks and uncertainties disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in RH’s most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, and similar disclosures in subsequent reports filed with the SEC, which are available on our investor relations website at ir.rh.com and on the SEC website at www.sec.gov. Any forward-looking statement made by us in this press release speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

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Graphic

RETAIL GALLERY METRICS

(Unaudited)

We operated the following number of Galleries, outlets and showrooms:

February 1,

February 2,

2020

2019

RH

Design Galleries [a]

    

22

20

Legacy Galleries

40

43

Modern Galleries

2

2

Baby & Child and Teen Galleries

4

6

Total Galleries

68

71

Outlets [b]

38

39

Waterworks Showrooms

15

15


[a]As of February 1, 2020 and February 2, 2019, eight and six of our Design Galleries included an integrated RH Hospitality experience, respectively.
[b]Net revenues for outlet stores, which include warehouse sales, were $51.2 million and $50.7 million for the three months ended February 1, 2020 and February 2, 2019, respectively. Net revenues for outlet stores, which include warehouse sales, were $221.4 million and $179.0 million for the year ended February 1, 2020 and February 2, 2019, respectively.

The following tables present RH Gallery and Waterworks showroom metrics and excludes outlets:

Three Months Ended

 

February 1,

February 2,

 

2020

2019

 

    

    

Total Leased Selling

    

    

Total Leased Selling

 

Count

Square Footage

Count

Square Footage

 

(in thousands)

(in thousands)

 

Beginning of period

 

85

 

1,095

 

86

 

1,089

Design Galleries:

 

  

 

  

 

  

 

  

Columbus Design Gallery

1

33.0

Baby & Child Galleries:

Portland RH Baby & Child Gallery

(1)

(4.7)

 

Legacy Galleries:

Columbus legacy Gallery

(1)

(6.2)

 

Durham legacy Gallery

(1)

(5.7)

 

End of period

 

83

 

1,111

 

86

 

1,089

 

  

 

  

 

  

 

  

Weighted-average leased selling square footage

 

  

 

1,109

 

  

 

1,089

% growth vs. prior year

 

  

 

2

%  

  

 

12

%

5


Year Ended

 

February 1,

February 2,

 

2020

2019

 

    

Total Leased Selling

    

    

Total Leased Selling

 

Count

Square Footage

Count

Square Footage

 

(in thousands)

(in thousands)

 

Beginning of period

86

1,089

83

981

 

Design Galleries:

  

  

  

  

 

Minneapolis Design Gallery

1

32.9

 

Columbus Design Gallery

1

33.0

 

Portland Design Gallery

1

26.0

 

Nashville Design Gallery

1

45.6

 

New York Design Gallery

1

50.5

 

Yountville Design Gallery

1

6.7

 

Modern Galleries:

 

Dallas RH Modern Gallery (relocation)

(4.5)

 

Dallas RH Modern Gallery

1

8.2

 

Baby & Child Galleries:

 

Dallas RH Baby & Child Gallery

(1)

(3.7)

1

3.7

 

Portland RH Baby & Child Gallery

(1)

(4.7)

1

4.7

 

Legacy Galleries:

 

San Diego legacy Gallery (relocation)

0.5

 

Minneapolis legacy Gallery

(1)

(13.3)

 

Columbus legacy Gallery

(1)

(6.2)

 

Durham legacy Gallery

(1)

(5.7)

 

Dallas legacy Gallery (relocation)

(2.6)

 

San Antonio legacy Gallery (relocation)

(3.8)

 

Portland legacy Gallery

(1)

(4.7)

 

Nashville legacy Gallery

(1)

(7.1)

 

Washington DC legacy Gallery

(1)

(5.6)

 

New York legacy Gallery

(1)

(21.4)

 

Waterworks Showrooms:

 

Waterworks Scottsdale Showroom (relocation)

1.1

 

End of period

83

1,111

86

1,089

 

% growth vs. prior year

2

%

 

11

%

Weighted-average leased selling square footage

 

1,088

 

1,047

% growth vs. prior year

 

4

%

 

13

%

See the Company’s most recent Form 10-K and Form 10-Q filings for square footage definitions.

Total leased square footage as of February 1, 2020 and February 2, 2019 was approximately 1,497,000 and 1,467,000, respectively.

Weighted-average leased square footage for the three months ended February 1, 2020 and February 2, 2019 was approximately 1,497,000 and 1,467,000, respectively.

Weighted-average leased square footage for the year ended February 1, 2020 and February 2, 2019 was approximately 1,468,000 and 1,409,000, respectively.

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Graphic

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

Three Months Ended

Year Ended

 

    

    

February 1,

    

% of Net

    

February 2,

    

% of Net

    

February 1,

% of Net

February 2,

% of Net

 

2020

Revenues

2019

Revenues

2020

Revenues

2019

Revenues

 

Net revenues

$

664,976

 

100.0

%  

$

670,891

 

100.0

%  

$

2,647,437

100.0

%  

$

2,505,653

 

100.0

%

Cost of goods sold

 

381,903

 

57.4

%  

 

413,012

 

61.6

%  

 

1,552,426

 

58.6

%  

 

1,520,076

 

60.7

%

Gross profit

 

283,073

 

42.6

%  

 

257,879

 

38.4

%  

 

1,095,011

 

41.4

%  

 

985,577

 

39.3

%

Selling, general and administrative expenses

 

182,093

 

27.4

%  

 

168,341

 

25.1

%  

 

732,180

 

27.7

%  

 

723,841

 

28.9

%

Income from operations

 

100,980

 

15.2

%  

 

89,538

 

13.3

%  

 

362,831

 

13.7

%  

 

261,736

 

10.4

%

Other expenses

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest expense—net

 

19,982

 

3.0

%  

 

19,509

 

2.8

%  

 

87,177

 

3.3

%  

 

67,769

 

2.7

%

Goodwill and tradename impairment

 

 

%

 

32,086

 

4.8

%

 

 

%  

 

32,086

 

1.3

%

Loss on extinguishment of debt—net

 

569

 

0.1

%  

 

 

%  

 

6,472

 

0.2

%  

 

917

 

%

Total other expenses

 

20,551

 

3.1

%  

 

51,595

 

7.6

%  

 

93,649

 

3.5

%  

 

100,772

 

4.0

%

Income before income taxes

 

80,429

 

12.1

%  

 

37,943

 

5.7

%  

 

269,182

 

10.2

%  

 

160,964

 

6.4

%

Income tax expense

 

11,996

 

1.8

%  

 

10,693

 

1.6

%  

 

48,807

 

1.9

%  

 

25,233

 

1.0

%

Net income

$

68,433

 

10.3

%  

$

27,250

 

4.1

%  

$

220,375

 

8.3

%  

$

135,731

 

5.4

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

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

 

19,120,709

 

  

 

20,901,841

 

  

 

19,082,303

 

  

 

21,613,678

 

  

Basic net income per share

$

3.58

 

  

$

1.30

 

  

$

11.55

 

  

$

6.28

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

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

 

25,767,864

 

  

 

25,702,791

 

  

 

24,299,034

 

  

 

26,533,225

 

  

Diluted net income per share

$

2.66

 

  

$

1.06

 

  

$

9.07

 

  

$

5.12

 

  

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Graphic

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

    

February 1,

    

February 2,

2020

2019

ASSETS

 

  

 

Cash and cash equivalents

$

47,658

$

5,803

Merchandise inventories

 

438,696

 

531,947

Other current assets

 

110,598

 

166,217

Total current assets

 

596,952

 

703,967

Property and equipment—net

 

967,599

 

952,957

Operating lease right-of-use assets

410,904

440,504

Goodwill and intangible assets

 

210,389

 

210,401

Other non-current assets

 

259,850

 

115,189

Total assets

$

2,445,694

$

2,423,018

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

  

 

  

Liabilities

 

  

 

  

Accounts payable and accrued expenses

$

330,309

$

320,497

Convertible senior notes due 2019—net

 

 

343,789

Convertible senior notes due 2020—net

290,532

Operating lease liabilities

58,924

66,249

Deferred revenue, customer deposits and other current liabilities

 

303,147

 

262,051

Total current liabilities

 

982,912

 

992,586

Asset based credit facility

 

 

57,500

Equipment promissory notes—net

 

31,053

 

Convertible senior notes due 2020—net

 

 

271,157

Convertible senior notes due 2023—net

 

266,658

 

249,151

Convertible senior notes due 2024—net

264,982

 

Non-current operating lease liabilities

 

409,930

 

437,557

Non-current finance lease liabilities

442,988

421,245

Other non-current obligations

 

28,520

 

32,512

Total liabilities

 

2,427,043

 

2,461,708

Stockholders’ equity (deficit)

 

18,651

 

(38,690)

Total liabilities and stockholders’ equity (deficit)

$

2,445,694

$

2,423,018

8


Graphic

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Year Ended

    

February 1,

    

February 2,

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

220,375

$

135,731

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

 

  

 

  

Depreciation and amortization

 

100,739

 

91,372

Accretion of debt discount upon settlement of debt

(70,482)

 

Other non-cash items

 

169,099

 

205,156

Change in assets and liabilities:

 

  

 

  

Prepaid expense and other assets

 

28,404

 

(88,434)

Accounts payable and accrued expenses

7,445

10,148

Current and non-current operating lease liability

(77,004)

(70,875)

Other changes in assets and liabilities

 

(39,388)

 

(33,495)

Net cash provided by operating activities

 

339,188

 

249,603

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Capital expenditures

 

(93,623)

 

(79,992)

Deposits on asset under construction

(53,000)

Proceeds from sale of assets

24,078

Net cash used in investing activities

 

(122,545)

 

(79,992)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net repayments under asset based credit facility

 

(57,500)

 

(142,470)

Net repayments under term loans

 

(4,000)

 

(80,000)

Net borrowings (repayments) under promissory and equipment security notes

 

105,480

 

(31,974)

Debt issuance costs

 

(4,636)

 

Repayments of convertible senior notes

(278,560)

Repurchases of common stock—including commissions

 

(250,032)

 

(250,000)

Proceeds from issuance of convertible senior notes

350,000

335,000

Proceeds from issuance of warrants

50,225

51,021

Purchase of convertible notes hedges

(91,350)

(91,857)

Debt issuance costs related to convertible senior notes

(4,818)

(6,349)

Other financing activities

 

10,387

 

27,637

Net cash used in financing activities

 

(174,804)

 

(188,992)

Effects of foreign currency exchange rate translation

 

16

 

(130)

Net increase (decrease) in cash and cash equivalents and restricted cash equivalents

 

41,855

 

(19,511)

Cash and cash equivalents and restricted cash equivalents

 

  

 

  

Beginning of period—cash and cash equivalents

 

5,803

 

17,907

Beginning of period—restricted cash equivalents (construction related deposits)

 

 

7,407

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

$

5,803

$

25,314

End of period—cash and cash equivalents

$

47,658

$

5,803

9


Graphic

CALCULATION OF FREE CASH FLOW

(In thousands)

(Unaudited)

Three Months Ended

Year Ended

    

February 1,

    

February 2,

    

February 1,

    

February 2,

2020

2019

2020

2019

Net cash provided by operating activities

$

128,191

$

152,887

$

339,188

$

249,603

Accretion of debt discount upon settlement of debt

70,482

Proceeds from sale of assets

 

 

 

24,078

 

Capital expenditures

(29,009)

(6,714)

(93,623)

(79,992)

Principal payments under finance leases

 

(2,546)

 

(1,948)

 

(9,682)

 

(6,885)

Free cash flow [a]

$

96,636

$

144,225

$

330,443

$

162,726


[a]Free cash flow is calculated as net cash provided by operating activities, the non-cash accretion of debt discount upon settlement of debt and proceeds from sale of assets, less capital expenditures and principal payments under finance leases. Free cash flow excludes all non-cash items. Free cash flow is included in this press release because management believes that free cash flow provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

10


Graphic

RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME

(In thousands)

(Unaudited)

Three Months Ended

Year Ended

    

February 1,

    

February 2,

    

February 1,

    

February 2,

2020

2019

2020

2019

GAAP net income

$

68,433

$

27,250

$

220,375

$

135,731

Adjustments (pre-tax):

 

  

 

  

 

  

 

  

Net revenues:

 

  

 

  

 

  

 

  

Recall accrual [a]

 

 

932

 

(391)

 

4,733

Cost of goods sold:

 

  

 

  

 

  

 

  

Asset impairments [b]

 

 

3,807

 

4,909

 

3,807

Recall accrual [a]

 

 

(2,361)

 

(3,372)

 

(4,139)

Distribution center closures [c]

1,478

Impact of inventory step-up [d]

 

 

 

 

380

Selling, general and administrative expenses:

 

  

 

  

 

  

 

  

Asset impairments and lease losses [b]

14,847

16,990

3,411

Reorganization related costs [e]

 

692

 

1,075

9,977

Legal settlements [f]

(1,193)

(5,289)

Asset held for sale loss (gain) [g]

 

 

8,497

 

(1,529)

 

8,497

Recall accrual [a]

 

 

380

 

(225)

 

1,025

Distribution center closures [c]

 

 

 

 

1,568

Other expenses:

 

  

 

  

 

  

 

  

Amortization of debt discount [h]

 

11,300

 

11,661

 

42,545

 

39,216

Loss on extinguishment of debt—net [i]

569

6,472

917

Goodwill and tradename impairment [j]

 

32,086

 

32,086

Subtotal adjusted items

 

26,716

 

55,694

 

65,281

 

97,667

Impact of income tax items [k]

 

(3,969)

 

(8,971)

 

(9,359)

 

(29,080)

Adjusted net income [l]

$

91,180

$

73,973

$

276,297

$

204,318


[a]Represents adjustments to net revenues, cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments, and vendor and insurance claims.
[b]The adjustments to cost of goods sold for the three months ended February 2, 2019 and for both the years ended February 1, 2020 and February 2, 2019 represent acceleration of depreciation expense due to a change in the estimated useful lives of certain assets. The adjustment to selling, general and administrative expenses for the three months ended February 1, 2020 includes (i) asset impairments of $8.9 million, (ii) an RH Contemporary Art lease impairment of $4.6 million, resulting from an update to both the timing and the amount of future estimated lease related cash inflows, and (iii) acceleration of depreciation expense of $1.3 million due to a change in the estimated useful lives of certain assets. The adjustment to selling, general and administrative expenses for the year ended February 1, 2020 includes (i) asset impairments of $9.1 million, (ii) an RH Contemporary Art lease impairment of $4.6 million, (iii) other lease impairments of $1.5 million due to early exit of leased facilities, (iv) acceleration of depreciation expense of $1.3 million due to a change in the estimated useful lives of certain assets and (v) a $0.5 million charge related to the termination of a service agreement. The adjustment to selling, general and administrative expenses for the year ended February 2, 2019 represents an RH Contemporary Art lease impairment.
[c]Represents disposals of inventory and property and equipment, lease related charges, inventory transfer costs and other costs associated with distribution center closures.
[d]Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks.
[e]Represents severance costs and related taxes associated with reorganizations.
[f]Represents legal settlements, net of related legal expenses.
[g]The adjustment in the year ended February 1, 2020 represents a gain on real estate related to asset previously classified as held for sale and other land sales. The adjustments for the three months and year ended February 2, 2019 represent the impairment recorded upon reclassification of an owned Design Gallery as held for sale.
[h]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 GAAP purposes for the $350 million aggregate principal amount of convertible

11


senior notes that were issued in June 2014 (the “2019 Notes”), for the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the “2023 Notes”), and for the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the “2024 Notes”), we separated the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes over their expected lives. The equity components represent the difference between the proceeds from the issuance of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes and the fair value of the liability components of the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes, respectively. Amounts are presented net of interest capitalized for capital projects of $1.4 million and $0.6 million during the three months ended February 1, 2020 and February 2, 2019, respectively. Amounts are presented net of interest capitalized for capital projects of $3.7 million and $2.7 million during the year ended February 1, 2020 and February 2, 2019, respectively. The 2019 Notes matured on June 15, 2019 and did not impact amortization of debt discount post-maturity.
[i]The adjustment in the three months ended February 1, 2020 represents the loss on extinguishment of debt related to the acceleration of debt issuance costs related to early repayment of the FILO term loan. The adjustment in the year ended February 1, 2020 represents the loss on extinguishment of debt related to a second lien term loan which was repaid in full in September 2019 and the acceleration of debt issuance costs related to early repayment of the FILO term loan, partially offset by the gain on extinguishment of debt upon the maturity and settlement of the 2019 Notes in June 2019. The adjustment in the year ended February 2, 2019 represents the loss on extinguishment of debt related to the LILO term loan, the promissory note secured by our aircraft and the equipment security notes, all of which were repaid in full in June 2018.
[j]Represents goodwill and tradename impairment related to the Waterworks reporting unit.
[k]The adjustment in the three months ended February 1, 2020 represents the tax effect of the adjusted items based on our effective tax rate of 14.9%. The adjustment in the year ended February 1, 2020 is based on an adjusted tax rate of 17.4%, which is calculated using a 21% normalized tax rate for the first and second quarters of the year ended February 1, 2020 and the effective tax rates of 13.7% and 14.9% for the third and fourth quarters of the year ended February 1, 2020, respectively. The three months and year ended February 2, 2019 assume a normalized tax rate of 21%.
[l]Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net income is included in this press release because management believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

12


Graphic

RECONCILIATION OF DILUTED NET INCOME PER SHARE TO

ADJUSTED DILUTED NET INCOME PER SHARE

(Unaudited)

Three Months Ended

Year Ended

    

February 1,

    

February 2,

    

February 1,

    

February 2,

2020

2019

2020

2019

Diluted net income per share

$

2.66

$

1.06

$

9.07

$

5.12

Pro forma diluted net income per share [a]

$

2.79

$

1.07

$

9.30

$

5.18

Per share impact of adjustments (pre-tax) [b]:

 

  

 

  

 

  

 

  

Amortization of debt discount

 

0.46

 

0.46

 

1.80

 

1.50

Asset impairments and lease losses

 

0.61

 

0.14

 

0.92

 

0.27

Loss on extinguishment of debt—net

0.02

0.27

0.04

Reorganization related costs

0.03

0.05

0.38

Recall accrual

(0.04)

(0.17)

0.06

Asset held for sale loss (gain)

 

 

0.34

 

(0.07)

 

0.32

Legal settlements

 

 

 

(0.05)

 

(0.20)

Goodwill and tradename impairment

1.27

1.23

Distribution center closures

 

 

 

 

0.12

Impact of inventory step-up

 

 

 

 

0.01

Subtotal adjusted items

 

1.09

 

2.20

 

2.75

 

3.73

Impact of income tax items [b]

 

(0.16)

 

(0.35)

 

(0.39)

 

(1.11)

Adjusted diluted net income per share [c]

$

3.72

$

2.92

$

11.66

$

7.80


[a]For GAAP purposes, we incur dilution above the lower strike prices of our 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes of $116.09, $118.13, $193.65 and $211.40, respectively. However, we exclude from our adjusted diluted shares outstanding calculation the dilutive impact of the convertible notes between $116.09 and $171.98 for our 2019 Notes, between $118.13 and $189.00 for our 2020 Notes, between $193.65 and $309.84 for our 2023 Notes, and between $211.40 and $338.24 for our 2024 Notes, based on the bond hedge contracts in place that will deliver shares to offset dilution in these ranges. At stock prices in excess of $171.98, $189.00, $309.84 and $338.24, we incur dilution related to the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes, respectively, and we would have an obligation to deliver additional shares in excess of the dilution protection provided by the bond hedges. Pro forma diluted net income per share for the three months ended February 1, 2020 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 24,538,122, which excludes dilution related to the 2020 Notes of 1,229,742 shares. Pro forma diluted net income per share for the three months ended February 2, 2019 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 25,360,886, which excludes dilution related to the 2019 Notes and 2020 Notes of 341,905 shares. Pro forma diluted net income per share for the year ended February 1, 2020 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 23,697,440, which excludes dilution related to the 2019 Notes and 2020 Notes of 601,594 shares. Pro forma diluted net income per share for the year ended February 2, 2019 is calculated based on GAAP net income and pro forma diluted weighted-average shares of 26,180,981, which excludes dilution related to the 2019 Notes and 2020 Notes of 352,244 shares.
[b]Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.
[c]Adjusted diluted net income per share is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted diluted net income per share as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance divided by the Company’s pro forma share count. Adjusted diluted net income per share is included in this press release because management believes that adjusted diluted net income per share provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.

13


Graphic

RECONCILIATION OF NET REVENUES TO ADJUSTED NET REVENUES

AND GROSS PROFIT TO ADJUSTED GROSS PROFIT

(Dollars in thousands)

(Unaudited)

Three Months Ended

Year Ended

 

    

February 1,

    

February 2,

    

February 1,

    

February 2,

 

2020

2019

2020

2019

 

Net revenues

$

664,976

$

670,891

$

2,647,437

$

2,505,653

Recall accrual [a]

 

 

932

 

(391)

 

4,733

Adjusted net revenues [b]

$

664,976

$

671,823

$

2,647,046

$

2,510,386

Gross profit

$

283,073

$

257,879

$

1,095,011

$

985,577

Asset impairments and lease losses [a]

 

 

3,807

 

4,909

 

3,807

Recall accrual [a]

 

 

(1,429)

 

(3,763)

 

594

Distribution center closures [a]

1,478

Impact of inventory step-up [a]

 

 

 

 

380

Adjusted gross profit [b]

$

283,073

$

260,257

$

1,096,157

$

991,836

Gross margin [c]

 

42.6

%  

 

38.4

%  

 

41.4

%  

 

39.3

%

Adjusted gross margin [c]

 

42.6

%  

 

38.7

%  

 

41.4

%  

 

39.5

%


[a]Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.
[b]Adjusted net revenues and adjusted gross profit are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net revenues as consolidated net revenues, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define adjusted gross profit as consolidated gross profit, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net revenues and adjusted gross profit are included in this press release because management believes that adjusted net revenues and adjusted gross profit provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.
[c]Gross margin is defined as gross profit divided by net revenues. Adjusted gross margin is defined as adjusted gross profit divided by adjusted net revenues.

14


Graphic

RECONCILIATION OF NET INCOME TO OPERATING INCOME

AND ADJUSTED OPERATING INCOME

(Dollars in thousands)

(Unaudited)

Three Months Ended

Year Ended

 

    

February 1,

    

February 2,

    

February 1,

    

February 2,

 

2020

2019

2020

2019

 

Net income

$

68,433

$

27,250

$

220,375

$

135,731

Interest expense—net

 

19,982

 

19,509

 

87,177

 

67,769

Goodwill and tradename impairment

 

 

32,086

 

32,086

Loss on extinguishment of debt—net

 

569

 

 

6,472

917

Income tax expense

 

11,996

 

10,693

 

48,807

 

25,233

Operating income

 

100,980

 

89,538

 

362,831

 

261,736

Asset impairments and lease losses [a]

 

14,847

 

3,807

 

21,899

 

7,218

Reorganization related costs [a]

 

 

692

 

1,075

 

9,977

Recall accrual [a]

 

 

(1,049)

 

(3,988)

1,619

Asset held for sale loss (gain) [a]

 

 

8,497

 

(1,529)

 

8,497

Legal settlements [a]

 

 

 

(1,193)

 

(5,289)

Distribution center closures [a]

 

 

 

 

3,046

Impact of inventory step-up [a]

 

 

 

 

380

Adjusted operating income [b]

$

115,827

$

101,485

$

379,095

$

287,184

 

  

 

  

 

  

 

  

Net revenues

$

664,976

$

670,891

$

2,647,437

$

2,505,653

Adjusted net revenues [c]

$

664,976

$

671,823

$

2,647,046

$

2,510,386

 

  

 

  

 

  

 

  

Operating margin [c]

 

15.2

%  

 

13.3

%  

 

13.7

%  

 

10.4

%

Adjusted operating margin [c]

 

17.4

%  

 

15.1

%  

 

14.3

%  

 

11.4

%


[a]Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.
[b]Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted operating income is included in this press release because management believes that adjusted operating income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.
[c]Operating margin is defined as operating income divided by net revenues. Adjusted operating margin is defined as adjusted operating income divided by adjusted net revenues. Refer to table titled “Reconciliation of Net Revenues to Adjusted Net Revenues and Gross Profit to Adjusted Gross Profit” and the related footnotes for a definition and reconciliation of adjusted net revenues.

15


Graphic

RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED EBITDA

(In thousands)

(Unaudited)

Three Months Ended

Year Ended

February 1,

February 2,

February 1,

February 2,

2020

2019

2020

2019

Net income

    

$

68,433

    

$

27,250

    

$

220,375

    

$

135,731

Depreciation and amortization

 

24,794

 

26,438

 

100,739

 

91,372

Interest expense—net

 

19,982

 

19,509

 

87,177

 

67,769

Income tax expense

 

11,996

 

10,693

 

48,807

 

25,233

EBITDA [a]

 

125,205

 

83,890

 

457,098

 

320,105

Non-cash compensation [b]

 

5,723

 

6,206

 

21,832

 

24,122

Asset impairments and lease losses [c]

 

13,508

 

1,196

 

15,651

 

4,607

Loss on extinguishment of debt—net [c]

569

6,472

917

Reorganization related costs [c]

 

 

692

 

1,075

9,977

Recall accrual [c]

 

(1,049)

 

(3,988)

 

1,619

Asset held for sale loss (gain) [c]

 

 

8,497

 

(1,529)

 

8,497

Legal settlements [c]

 

 

 

(1,193)

 

(5,289)

Goodwill and tradename impairment [c]

32,086

32,086

Distribution center closures [c]

 

 

 

 

3,046

Impact of inventory step-up [c]

 

 

 

 

380

Adjusted EBITDA [a]

$

145,005

$

131,518

$

495,418

$

400,067


[a]EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance. EBITDA and Adjusted EBITDA are included in this press release because management believes that these metrics provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of operating results on a comparable basis with historical results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions for other companies due to different methods of calculation.
[b]Represents non-cash compensation related to equity awards granted to employees.
[c]Refer to table titled “Reconciliation of GAAP Net Income to Adjusted Net Income” and the related footnotes for additional information.

16


Graphic

CALCULATION OF TOTAL DEBT, TOTAL NET DEBT AND

RATIO OF TOTAL NET DEBT TO TRAILING TWELVE MONTHS ADJUSTED EBITDA

(Dollars in thousands)

(Unaudited)

February 1,

Interest

2020

Rate [a]

Asset based credit facility

$

2.94%

Equipment promissory notes

53,372

4.56%

Convertible senior notes due 2020 [b]

291,110

0.00%

Convertible senior notes due 2023 [b]

270,271

0.00%

Convertible senior notes due 2024 [b]

268,366

0.00%

Notes payable for share repurchases

18,741

4.97%

Total debt

$

901,860

Cash and cash equivalents

(47,658)

Total net debt

$

854,202

Trailing twelve months Adjusted EBITDA [c]

$

495,418

Ratio of total net debt to trailing twelve months Adjusted EBITDA [c]

1.7


[a]The interest rates for the equipment promissory notes and notes payable for share repurchases represent the weighted-average interest rates.
[b]Amounts exclude discounts upon original issuance and third party offering costs.
[c]The ratio of total net debt to trailing twelve months Adjusted EBITDA is calculated by dividing total net debt by trailing twelve months Adjusted EBITDA. Refer to table titled “Reconciliation of Net Income to Trailing Twelve Months EBITDA and Trailing Twelve Months Adjusted EBITDA” and the related footnotes for definitions of EBITDA and Adjusted EBITDA and a reconciliation of trailing twelve months Adjusted EBITDA.

17


Graphic

ASC 842 IMPACT OF ADOPTION

(Dollars in thousands, except per share amounts)

(Unaudited)

We adopted Accounting Standards Update (“ASU”) 2016-02, ASU 2018-10 and ASU 2018-11 (together, “ASC 842”), which pertain to accounting for leases, on February 3, 2019, the first day of our first fiscal quarter of 2019, using a modified retrospective approach. Under this adoption method, the results of prior comparative periods are revised with an adjustment to opening retained earnings of fiscal 2017.

Condensed Consolidated Statements of Income

The following tables summarize the impact of adopting ASC 842 on our fiscal 2018 annual and quarterly condensed consolidated statements of income:

Year Ended February 2, 2019

    

As Reported

    

Adjustment

As Adjusted

Net revenues

$

2,505,653

$

$

2,505,653

Cost of goods sold

 

1,504,806

 

15,270

[a]

 

1,520,076

Gross profit

 

1,000,847

 

(15,270)

 

985,577

Selling, general and administrative expenses

 

711,617

 

12,224

[b][c]

 

723,841

Income from operations

 

289,230

 

(27,494)

 

261,736

Other expenses

 

  

 

 

  

Interest expense—net

 

75,074

 

(7,305)

[d]

 

67,769

Goodwill and tradename impairment

32,086

32,086

Loss on extinguishment of debt—net

 

917

 

 

917

Total other expenses

 

108,077

 

(7,305)

 

100,772

Income before income taxes

 

181,153

 

(20,189)

 

160,964

Income tax expense

 

30,514

 

(5,281)

[e]

 

25,233

Net income

$

150,639

$

(14,908)

$

135,731

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

 

21,613,678

 

 

21,613,678

Basic net income per share

$

6.97

$

(0.69)

$

6.28

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

 

26,533,225

 

 

26,533,225

Diluted net income per share

$

5.68

$

(0.56)

$

5.12

Three Months Ended May 5, 2018

    

As Reported

    

Adjustment

As Adjusted

Net revenues

$

557,406

$

$

557,406

Cost of goods sold

 

345,371

 

2,702

[a]

 

348,073

Gross profit

 

212,035

 

(2,702)

 

209,333

Selling, general and administrative expenses

 

158,434

 

2,752

[b]

 

161,186

Income from operations

 

53,601

 

(5,454)

 

48,147

Interest expense—net

 

17,035

 

(1,937)

[d]

 

15,098

Income before income taxes

 

36,566

 

(3,517)

 

33,049

Income tax expense

 

8,507

 

(919)

[e]

 

7,588

Net income

$

28,059

$

(2,598)

$

25,461

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

 

21,545,025

 

 

21,545,025

Basic net income per share

$

1.30

$

(0.12)

$

1.18

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

 

25,230,228

 

 

25,230,228

Diluted net income per share

$

1.11

$

(0.10)

$

1.01

18


Three Months Ended August 4, 2018

    

As Reported

    

Adjustment

As Adjusted

Net revenues

$

640,798

$

$

640,798

Cost of goods sold

 

369,198

 

3,256

[a]

 

372,454

Gross profit

 

271,600

 

(3,256)

 

268,344

Selling, general and administrative expenses

 

186,225

 

296

[b]

 

186,521

Income from operations

 

85,375

 

(3,552)

 

81,823

Other expenses

Interest expense—net

 

17,480

 

(2,013)

[d]

 

15,467

Loss on extinguishment of debt—net

917

917

Total other expenses

18,397