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Table of Contents

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 May 2, 2020

or

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

For the transition period from             to

Commission file number: 001-35720

Graphic

(Exact name of registrant as specified in its charter)

Delaware

    

45-3052669

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

15 Koch Road
Corte Madera, CA

 

94925

(Address of principal executive offices)

 

(Zip Code)

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

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

 

Common Stock, $0.0001 par value

RH

New York Stock Exchange, Inc.

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

As of May 29, 2020, 19,290,966 shares of the registrant’s common stock were outstanding.

Table of Contents

RH

INDEX TO FORM 10-Q

    

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited) as of May 2, 2020 and February 1, 2020

3

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended May 2, 2020 and May 4, 2019

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended May 2, 2020 and May 4, 2019

5

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three months ended May 2, 2020 and May 4, 2019

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended May 2, 2020 and May 4, 2019

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

50

Item 4.

Controls and Procedures

52

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

53

Item 1A.

Risk Factors

53

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

Signatures

58

2

Table of Contents

PART I

Item 1. Financial Statements

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

    

May 2,

    

February 1,

2020

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

17,208

$

47,658

Accounts receivable—net

 

49,099

 

48,979

Merchandise inventories

 

494,260

 

438,696

Prepaid expense and other current assets

 

65,154

 

61,619

Total current assets

 

625,721

 

596,952

Property and equipment—net

 

953,738

 

967,599

Operating lease right-of-use assets

392,934

410,904

Goodwill

 

124,290

 

124,367

Tradenames, trademarks and domain names

 

65,563

 

86,022

Deferred tax assets

 

38,875

 

45,005

Other non-current assets

 

228,772

 

214,845

Total assets

$

2,429,893

$

2,445,694

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

284,980

$

330,309

Deferred revenue and customer deposits

 

189,048

 

162,433

Convertible senior notes due 2020—net

295,574

290,532

Operating lease liabilities

61,997

58,924

Other current liabilities

 

137,336

 

140,714

Total current liabilities

 

968,935

 

982,912

Asset based credit facility

 

10,000

 

Equipment promissory notes—net

 

28,475

 

31,053

Convertible senior notes due 2023—net

 

271,211

 

266,658

Convertible senior notes due 2024—net

269,012

264,982

Non-current operating lease liabilities

 

395,641

 

409,930

Non-current finance lease liabilities

439,470

442,988

Other non-current obligations

 

28,017

 

28,520

Total liabilities

 

2,410,761

 

2,427,043

Commitments and contingencies (Note 15)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of May 2, 2020 and February 1, 2020

 

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 19,264,727 shares issued and 19,264,127 shares outstanding as of May 2, 2020; 19,236,681 shares issued and outstanding as of February 1, 2020

 

2

 

2

Additional paid-in capital

 

436,799

 

430,662

Accumulated other comprehensive loss

 

(5,132)

 

(2,760)

Accumulated deficit

 

(412,465)

 

(409,253)

Treasury stock—at cost, 600 shares as of May 2, 2020 and no shares as of February 1, 2020

(72)

Total stockholders’ equity

 

19,132

 

18,651

Total liabilities and stockholders’ equity

$

2,429,893

$

2,445,694

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

3

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

May 2,

May 4,

    

2020

    

2019

Net revenues

$

482,895

$

598,421

Cost of goods sold

 

283,241

 

365,607

Gross profit

 

199,654

 

232,814

Selling, general and administrative expenses

164,201

 

164,181

Income from operations

 

35,453

 

68,633

Other expenses

 

Interest expense—net

19,629

 

21,118

Tradename impairment

20,459

Total other expenses

 

40,088

 

21,118

Income (loss) before income taxes

 

(4,635)

 

47,515

Income tax expense (benefit)

 

(1,423)

 

11,793

Net income (loss)

$

(3,212)

$

35,722

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

 

19,242,641

 

19,976,858

Basic net income (loss) per share

$

(0.17)

$

1.79

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

 

19,242,641

 

24,933,987

Diluted net income (loss) per share

$

(0.17)

$

1.43

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

4

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

Three Months Ended

May 2,

May 4,

    

2020

    

2019

Net income (loss)

$

(3,212)

$

35,722

Net losses from foreign currency translation

 

(2,372)

 

(937)

Total comprehensive income (loss)

$

(5,584)

$

34,785

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

5

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

 

Accumulated

 

Retained

 

Total

 

Additional

 

Other

 

Earnings

 

Stockholders’

 

Common Stock

 

Paid-In

 

Comprehensive

 

(Accumulated

 

Treasury Stock

 

Equity

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit)

    

Shares

    

Amount

    

(Deficit)

Balances—February 2, 2019

 

20,477,813

 

$

2

 

$

356,422

 

$

(2,333)

 

$

(392,538)

 

2,800

 

$

(243)

 

$

(38,690)

Stock-based compensation

 

 

 

5,588

 

 

 

 

 

5,588

Vested and delivered restricted stock
units

 

21,241

 

 

(250)

 

 

 

 

 

(250)

Exercise of stock options

 

26,158

 

 

1,226

 

 

 

 

 

1,226

Repurchases of common stock

 

(2,167,396)

 

 

 

 

 

2,167,396

 

(250,032)

 

(250,032)

Net income

 

 

 

 

 

35,722

 

 

 

35,722

Net losses from foreign currency
translation

 

 

 

 

(937)

 

 

 

 

(937)

Balances—May 4, 2019

 

18,357,816

 

$

2

 

$

362,986

 

$

(3,270)

 

$

(356,816)

 

2,170,196

 

$

(250,275)

 

$

(247,373)

Balances—February 1, 2020

 

19,236,681

 

$

2

 

$

430,662

 

$

(2,760)

 

$

(409,253)

 

 

$

 

$

18,651

Stock-based compensation

 

 

 

5,721

 

 

 

 

 

5,721

Vested and delivered restricted stock units

 

10,286

 

 

(381)

 

 

 

 

 

(381)

Exercise of stock options

 

17,760

 

 

797

 

 

 

 

 

797

Repurchases of common stock

 

(600)

 

 

 

 

 

600

 

(72)

 

(72)

Net loss

 

 

 

 

 

(3,212)

 

 

 

(3,212)

Net losses from foreign currency translation

 

 

 

 

(2,372)

 

 

 

 

(2,372)

Balances—May 2, 2020

 

19,264,127

 

$

2

 

$

436,799

 

$

(5,132)

 

$

(412,465)

 

600

 

$

(72)

 

$

19,132

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

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RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended

May 2,

May 4,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

(3,212)

$

35,722

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

Depreciation and amortization

 

24,870

 

27,189

Non-cash operating lease cost

15,907

16,279

Tradename impairment

20,459

Asset impairments

4,783

Amortization of debt discount

 

12,916

 

12,377

Stock-based compensation expense

 

5,828

 

5,695

Non-cash finance lease interest expense

5,781

5,514

Product recalls

(1,786)

Other non-cash interest expense

 

1,145

 

1,089

Change in assets and liabilities:

 

 

Accounts receivable

 

1,554

 

(7,218)

Merchandise inventories

 

(55,837)

 

1,653

Prepaid expense and other assets

 

(8,324)

 

(17,846)

Landlord assets under construction—net of tenant allowances

 

(7,600)

 

(4,542)

Accounts payable and accrued expenses

 

(52,989)

 

(38,595)

Deferred revenue and customer deposits

 

26,679

 

21,641

Other current liabilities

 

4,696

 

15,231

Current and non-current operating lease liabilities

 

(7,065)

 

(27,131)

Other non-current obligations

 

(6,459)

 

(6,448)

Net cash provided by (used in) operating activities

 

(16,868)

 

38,824

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Capital expenditures

 

(16,632)

 

(7,916)

Net cash used in investing activities

 

(16,632)

 

(7,916)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Borrowings under asset based credit facility

 

71,100

 

94,000

Repayments under asset based credit facility

 

(61,100)

 

(151,500)

Borrowings under term loans

 

 

320,000

Borrowings under promissory and equipment security notes

 

 

60,000

Repayments under promissory and equipment security notes

 

(5,166)

 

(983)

Debt issuance costs

 

 

(4,499)

Principal payments under finance leases

(2,068)

(2,129)

Repurchases of common stock—including commissions

 

 

(250,032)

Proceeds from exercise of stock options

 

797

 

1,226

Tax withholdings related to issuance of stock-based awards

(381)

 

(250)

Net cash provided by financing activities

 

3,182

 

65,833

Effects of foreign currency exchange rate translation

 

(132)

 

6

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

 

(30,450)

 

96,747

Cash, cash equivalents and restricted cash

 

  

 

  

Beginning of period—cash and cash equivalents

$

47,658

$

5,803

 

  

 

  

End of period—cash and cash equivalents

 

17,208

 

37,550

End of period—restricted cash

 

 

65,000

End of period—cash, cash equivalents and restricted cash

$

17,208

$

102,550

Non-cash transactions:

 

 

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

$

2,935

$

8,529

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

23,489

19,481

Landlord asset additions from unpaid construction related deposits

 

195

 

2,056

Issuance of non-current notes payable related to share repurchases from former employees

 

72

 

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

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RH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” “our” or the “Company”), is a luxury home furnishings retailer that offers a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings. These products are sold through our stores, catalogs and websites.

As of May 2, 2020, we operated a total of 69 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 15 Waterworks showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of May 2, 2020, and the results of operations for the three months ended May 2, 2020 and May 4, 2019. Our current fiscal year, which consists of 52 weeks, ends on January 30, 2021 (“fiscal 2020”).

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets. Our current assessment of these estimates are included in our condensed consolidated financial statements as of and for the three months ended May 2, 2020. As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “2019 Form 10-K”).

The results of operations for the three months ended May 2, 2020 presented herein are not necessarily indicative of the results to be expected for the full fiscal year. Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the novel coronavirus disease as discussed in Recent Developments—COVID-19 below.

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Recent Developments—COVID-19

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus disease (“COVID-19”) as a pandemic. The initial wave of the COVID-19 outbreak caused disruption to our business operations, as we temporarily closed all of our retail locations on March 17, 2020 in response to the public health crisis. While our retail locations were substantially closed at the end of the first fiscal quarter on May 2, 2020, since that date we have been able to reopen a large number of our stores based on local market circumstances including the gradual lifting of restrictions on business operations, including shelter-in-place rules. During the time that our Gallery locations were closed, we continued to serve our customers in those market areas virtually through our Gallery representatives and designers, as well as our online capabilities.

As of June 3, 2020, we had reopened 74% of our Gallery locations, 68% of our Outlets and 50% of our Restaurants, and are moving toward the expected complete reopening of our retail locations in the U.S. and Canada based on local conditions and requirements. While we have continued to serve our customers and operate our business through the initial phase of the COVID-19 health crisis and retail closures in the U.S. and Canada, there can be no assurance that future events including additional waves of COVID-19 outbreaks, evolving federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, or other similar issues will not adversely affect our business, results of operations or financial condition in the future, or that the pace of economic activity in the wake of the first wave of COVID-19 outbreaks will not have a negative impact on our business, results of operations or financial condition. The extent and duration of the crisis remains uncertain, and the results of the fiscal year ending January 30, 2021 could be further impacted in future periods, through reduced revenues, increased receivable and merchandise inventory reserves, asset impairments, valuation allowances and potential declines in liquidity.

We have historically relied on cash flows from operations, net cash proceeds from the issuance of convertible senior notes, as well as borrowings under credit facilities as primary sources of liquidity. When our retail locations were closed as a result of the COVID-19 outbreak, we took immediate action to assure that our liquidity needs would not be materially affected, including our ability to fund our business operations, as well as to make debt repayments when due, such as the $300 million convertible senior notes maturing in July 2020 (the “2020 Notes”) and payments under equipment promissory notes. In response to the initial impact of COVID-19, we implemented a number of measures to minimize cash outlays, including managing workforce costs, delaying planned capital expenditures, deferring new business introductions, adjusting the timing and circulation of Source Books and minimizing discretionary expenses. Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may further adjust our investments in various business initiatives including our capital expenditures over the course of fiscal 2020. We will continue to closely manage our expenses and investments while considering both the overall economic environment as well as the needs of our business operations. In addition, our near term decisions regarding the sources and uses of capital in our business will continue to reflect and adapt to changes in market conditions and our business related to COVID-19.

We have utilized, and expect to continue to utilize, our asset based credit facility, and we may pursue other sources of capital that may include other forms of external financing, in order to increase our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from COVID-19. Refer to Note 8—Convertible Senior Notes and Note 9—Credit Facilities for further information on the terms and conditions of our outstanding debt agreements. We had no outstanding borrowings under our asset based credit facility as of May 29, 2020 and the amount under the revolving line of credit borrowing base that could be available pursuant to the asset based credit facility was $170.4 million, net of reserves for the repayment of the 2020 Notes and outstanding letters of credit. We believe our operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements and fulfill other capital needs for more than the next 12 months.

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NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

Cloud Computing

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amends Accounting Standards Update 2015-05—Customers Accounting for Fees in a Cloud Computing Agreement. The amendments in this ASU more closely align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

We adopted the ASU as of February 2, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include three-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within other non-current assets on our condensed consolidated balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in either cost of goods sold or selling, general and administrative expenses, consistent with the costs of the hosting arrangement, on the condensed consolidated statements of operations on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the ASU did not have a material effect on our condensed consolidated financial statements. Refer to Note 3—Prepaid Expense and Other Assets.

Current Expected Credit Losses

In June 2016, the FASB issued Accounting Standards Update 2016-13—Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs amend the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology to result in more timely recognition of losses. The guidance in the ASUs applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions.

Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our contract business and other miscellaneous receivables. Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts was $3.2 million and $2.2 million as of May 2, 2020 and February 1, 2020, respectively.

We adopted the ASUs as of February 2, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not recognize a cumulative-effect adjustment upon adoption as the adoption of the ASUs did not have a material effect on our condensed consolidated financial statements.

Income Taxes

In December 2019, the FASB issued Accounting Standards Update 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We will adopt this standard in the first fiscal quarter of 2021 and are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial statements.

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NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following (in thousands):

    

May 2,

    

February 1,

2020

2020

Prepaid expense and other current assets

$

34,118

$

30,875

Capitalized catalog costs

 

14,616

 

13,740

Vendor deposits

11,187

11,258

Right of return asset for merchandise

 

5,233

 

5,746

Total prepaid expense and other current assets

$

65,154

$

61,619

Other non-current assets consist of the following (in thousands):

    

May 2,

    

February 1,

2020

2020

Landlord assets under construction

$

148,487

$

138,315

Deposits on asset under construction

 

60,000

 

60,000

Promissory note receivable, including interest

 

5,417

 

5,354

Other deposits

 

5,258

 

5,157

Deferred financing fees

 

2,332

 

2,602

Other non-current assets

 

7,278

 

3,417

Total other non-current assets

$

228,772

$

214,845

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND DOMAIN NAMES

The following sets forth the goodwill, tradenames, trademarks and domain names activity for the RH Segment and Waterworks (See Note 16—Segment Reporting), for the three months ended May 2, 2020 (in thousands):

    

    

    

Foreign

    

February 1,

Currency

May 2,

2020

Impairment (1)

Translation

2020

RH Segment

 

  

 

  

 

  

 

  

Goodwill

$

124,367

$

$

(77)

$

124,290

Tradenames, trademarks and domain names

 

48,563

 

 

 

48,563

 

  

 

  

 

  

 

Waterworks (1)

 

  

 

  

 

  

 

Tradename (2)

 

37,459

 

(20,459)

 

 

17,000

(1)Waterworks reporting unit goodwill of $51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $17.4 million and $33.7 million of impairment recorded in fiscal 2018 and fiscal 2017, respectively.
(2)Presented net of an impairment charge of $35.1 million, with $20.5 million recorded in the three months ended May 2, 2020 and $14.6 million recorded in fiscal 2018. Refer to “Waterworks Tradename Impairment” below for further discussion regarding the fiscal 2020 impairment.

Waterworks Tradename Impairment

During the first fiscal quarter of 2020, as a result of the COVID-19 health crisis and related Showroom closures and slowdown in construction activity, management updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability. We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount. We determined fair value utilizing a discounted cash flow methodology under the relief-from-royalty method. Significant assumptions under this method include forecasted net revenues and the estimated royalty rate, expressed as a percentage of revenues, in addition to the

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discount rate based on the weighted-average cost of capital. Based on the impairment test performed, we concluded that the Waterworks reporting unit tradename was impaired as of May 2, 2020.

As a result, we recognized a $20.5 million non-cash impairment charge for the Waterworks reporting unit tradename during the three months ended May 2, 2020, and the carrying value of the Waterworks indefinite-lived tradename asset after the impairment charge was $17.0 million.

NOTE 5—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following (in thousands):

    

May 2,

    

February 1,

2020

2020

Accounts payable

$

151,890

$

180,714

Accrued compensation

 

61,950

 

64,659

Accrued freight and duty

 

18,260

 

25,170

Accrued sales taxes

 

16,792

 

19,618

Accrued occupancy

 

9,266

 

12,067

Accrued catalog costs

 

6,250

 

8,267

Accrued professional fees

 

5,187

 

4,381

Other accrued expenses

 

15,385

 

15,433

Total accounts payable and accrued expenses

$

284,980

$

330,309

Other current liabilities consist of the following (in thousands):

    

May 2,

    

February 1,

2020

2020

Promissory notes on asset under construction

$

53,000

$

53,000

Unredeemed gift card and merchandise credit liability

 

21,877

 

16,625

Current portion of equipment promissory notes

19,587

 

22,009

Allowance for sales returns

17,962

19,206

Finance lease liabilities

11,752

9,188

Federal and state taxes payable

 

6,048

 

13,591

Product recall reserve

 

1,819

 

2,055

Other current liabilities

 

5,291

 

5,040

Total other current liabilities

$

137,336

$

140,714

Contract Liabilities

We defer revenue associated with merchandise delivered via the home-delivery channel. We expect that substantially all of the deferred revenue, customer deposits and deferred membership fees as of May 2, 2020 will be recognized within the next six months as the performance obligations are satisfied.

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards and merchandise credits. During the three months ended May 2, 2020 and May 4, 2019, we recorded $4.1 million and $4.7 million, respectively, of revenue for previous deferrals related to our gift cards and merchandise credits. During the three months ended May 2, 2020 and May 4, 2019, we recorded gift card breakage of $0.6 million and $0.4 million, respectively. We expect that approximately 70% of the remaining gift card and merchandise credit liabilities as of May 2, 2020 will be recognized within the next twelve months as the gift cards are redeemed by customers.

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NOTE 6—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following (in thousands):

    

May 2,

    

February 1,

2020

2020

Notes payable for share repurchases

$

18,813

$

18,741

Rollover units and profit interests (1)

 

3,170

 

3,064

Unrecognized tax benefits

 

3,063

 

3,020

Other non-current obligations

 

2,971

 

3,695

Total other non-current obligations

$

28,017

$

28,520

(1)Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 14Stock-Based Compensation.

.

NOTE 7—LEASES

Lease costs—net consist of the following (in thousands):

Three Months Ended

May 2,

    

May 4,

    

2020

    

2019

Operating lease cost (1)

 

$

20,726

$

19,117

Finance lease costs

Amortization of leased assets (1)

9,588

8,852

Interest on lease liabilities (2)

5,781

5,514

Variable lease costs (3)

3,560

5,607

Sublease income (4)

(2,575)

(3,282)

Total lease costs—net

$

37,080

$

35,808

(1)Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or selling, general and administrative expenses on the condensed consolidated statements of operations based on our accounting policy. Refer to Note 3—Significant Accounting Policies in the 2019 Form 10-K.
(2)Included in interest expense—net on the condensed consolidated statements of operations.
(3)Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $2.0 million and $3.3 million for the three months ended May 2, 2020 and May 4, 2019, respectively. Other variable costs, such as single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material for the three months ended May 2, 2020 and May 4, 2019.
(4)Included in selling, general and administrative expenses on the condensed consolidated statements of operations.

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Lease right-of-use assets and lease liabilities consist of the following (in thousands):

May 2,

February 1,

2020

2020

Balance Sheet Classification

Assets

Operating leases

Operating lease right-of-use assets

$

392,934

$

410,904

Finance leases (1)(2)

Property and equipment—net

630,781

642,117

Total lease right-of-use assets

$

1,023,715

$

1,053,021

Liabilities

Current (3)

Operating leases

Operating lease liabilities

$

61,997

$

58,924

Finance leases

Other current liabilities

11,752

9,188

Total lease liabilities—current

73,749

68,112

Non-current

Operating leases

Non-current operating lease liabilities

395,641

409,930

Finance leases

Non-current finance lease liabilities

439,470

442,988

Total lease liabilities—non-current

835,111

852,918

Total lease liabilities

$

908,860

$

921,030

(1)Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement.
(2)Finance lease right-of-use assets are recorded net of accumulated amortization of $101.7 million and $92.3 million as of May 2, 2020 and February 1, 2020, respectively.
(3)Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months.

The maturities of lease liabilities are as follows as of May 2, 2020 (in thousands):

Fiscal year

Operating
Leases

Finance
Leases

Total

Remainder of fiscal 2020

$

59,698

$

25,738

$

85,436

2021

69,968

35,311

105,279

2022

60,642

35,729

96,371

2023

56,210

36,143

92,353

2024

52,407

36,630

89,037

2025

52,396

37,791

90,187

Thereafter

193,769

530,520

724,289

Total lease payments (1)(2)

545,090

737,862

1,282,952

Less—imputed interest (3)

(87,452)

(286,640)

(374,092)

Present value of lease liabilities

$

457,638

$

451,222

$

908,860

(1)Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Total lease payments exclude $381.9 million of legally binding payments under the noncancellable term for leases signed but not yet commenced as of May 2, 2020.
(2)Excludes future commitments under short-term lease agreements of $0.5 million as of May 2, 2020.
(3)Calculated using the incremental borrowing rate for each lease at lease commencement.

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Supplemental information related to leases consists of the following:

Three Months Ended

May 2,

May 4,

2020

    

2019

Weighted-average remaining lease term (years)

Operating leases

8.7

9.1

Finance leases

18.4

19.1

Weighted-average discount rate

Operating leases

3.82%

3.80%

Finance leases

5.25%

5.26%

Other information related to leases consists of the following (in thousands):

Three Months Ended

May 2,

May 4,

2020

    

2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

(10,786)

$

(31,780)

Operating cash flows from finance leases

(2,437)

(5,514)

Financing cash flows from finance leases

(2,068)

(2,129)

Total cash outflows from leases

$

(15,291)

$

(39,423)

Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash)

Operating leases

$

1,198

$

8,173

Finance leases

58

17,984

Long-lived Asset Impairment

During the three months ended May 2, 2020, we recognized long-lived asset impairment charges of $3.5 million related to one RH Baby & Child Gallery and one Waterworks showroom, comprised of lease right-of-use asset impairment of $2.0 million and property and equipment impairment of $1.5 million.

NOTE 8—CONVERTIBLE SENIOR NOTES

$350 million 0.00% Convertible Senior Notes due 2024

In September 2019, we issued in a private offering $350 million principal amount of 0.00% convertible senior notes due 2024 (the “2024 Notes”). The 2024 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2024 Notes will mature on September 15, 2024, unless earlier purchased by us or converted. The 2024 Notes will not bear interest, except that the 2024 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2024 Notes. The 2024 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 us or any of our subsidiaries. Certain events are also considered “events of default” under the 2024 Notes, which may result in the acceleration of the maturity of the 2024 Notes, as described in the indenture governing the 2024 Notes. Events of default under the indenture for the 2024 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal

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amount in excess of $20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% of the aggregate principal amount of the 2024 Notes then outstanding.

The initial conversion rate applicable to the 2024 Notes is 4.7304 shares of common stock per $1,000 principal amount of 2024 Notes, or a total of approximately 1.656 million shares for the total $350 million principal amount. This initial conversion rate is equivalent to an initial conversion price of approximately $211.40 per share, which represents a 25% premium to the $169.12 closing share price on the day the 2024 Notes were priced. 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 governing the 2024 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.

Prior to June 15, 2024, the 2024 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after December 31, 2019, 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 calendar quarter, the last reported sale price of our 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 2024 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of May 2, 2020, none of these conditions have occurred and, as a result, the 2024 Notes were not convertible as of May 2, 2020. On and after June 15, 2024, 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 2024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2024 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our 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.

We may not redeem the 2024 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2024 Notes for cash at a price equal to 100% of the principal amount of the 2024 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 2024 Notes, we separated the 2024 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 2024 Notes and the fair value of the liability component of the 2024 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 5.74% over the expected life of the 2024 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Debt issuance costs related to the 2024 Notes were comprised of discounts upon original issuance of $3.5 million and third party offering costs of $1.3 million. In accounting for the debt issuance costs related to the issuance of the 2024 Notes, we 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 2024 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

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 2024 balance on the condensed consolidated balance

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sheets. During the three months ended May 2, 2020 we recorded $0.2 million related to the amortization of debt issuance costs related to the 2024 Notes.

The carrying value of the 2024 Notes, excluding the discounts upon original issuance and third party offering costs, is as follows (in thousands):

    

May 2,

    

February 1,

2020

2020

Liability component

 

  

 

  

Principal

$

350,000

$

350,000

Less: Debt discount

 

(77,764)

 

(81,634)

Net carrying amount

$

272,236

$

268,366

Equity component (1)

$

87,252

$

87,252

(1)Included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $3.9 million for the amortization of the debt discount related to the 2024 Notes during the three months ended May 2, 2020.

2024 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2024 Notes and exercise of the overallotment option in September 2019, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of approximately $211.40 per share. The total cost of the convertible note hedge transactions was approximately $91.4 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.656 million shares of our common stock at a price of $338.24 per share, which represents a 100% premium to the $169.12 closing share price on the day the 2024 Notes were priced. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of approximately 3.3 million shares of common stock (which cap may also be subject to adjustment). We received approximately $50.2 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 2024 Notes until our common stock is above approximately $338.24 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.

We recorded a deferred tax liability of $21.7 million in connection with the debt discount associated with the 2024 Notes and recorded a deferred tax asset of $22.7 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

$335 million 0.00% Convertible Senior Notes due 2023

In June 2018, we issued in a private offering $300 million principal amount of 0.00% convertible senior notes due 2023 and issued an additional $35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”). The 2023 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2023 Notes will mature on June 15, 2023, unless earlier purchased by us or converted. The 2023 Notes will not bear interest, except that the 2023 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2023 Notes. The 2023 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 us or any of our subsidiaries. Certain events are also considered “events of default” under the 2023 Notes, which may result in the acceleration of the maturity of the 2023 Notes, as described in the indenture governing the 2023 Notes. Events of default under the indenture for the 2023 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which

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there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% of the aggregate principal amount of the 2023 Notes then outstanding.

The initial conversion rate applicable to the 2023 Notes is 5.1640 shares of common stock per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $193.65 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 governing the 2023 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2023 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2023, the 2023 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018, 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 calendar quarter, the last reported sale price of our 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 2023 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of May 2, 2020, none of these conditions have occurred and, as a result, the 2023 Notes were not convertible as of May 2, 2020. On and after March 15, 2023, 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 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2023 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our 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.

We may not redeem the 2023 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2023 Notes for cash at a price equal to 100% of the principal amount of the 2023 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 2023 Notes, we separated the 2023 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 2023 Notes and the fair value of the liability component of the 2023 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 6.35% over the expected life of the 2023 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

Debt issuance costs related to the 2023 Notes were comprised of discounts upon original issuance of $1.7 million and third party offering costs of $4.6 million. In accounting for the debt issuance costs related to the issuance of the 2023 Notes, we 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 2023 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

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 2023 balance on the condensed consolidated balance

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sheets. During both the three months ended May 2, 2020 and May 4, 2019, we recorded $0.2 million related to the amortization of debt issuance costs.

The carrying values of the 2023 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):

    

May 2,

    

February 1,

2020

2020

Liability component

 

  

 

  

Principal

$

335,000

$

335,000

Less: Debt discount

 

(60,417)

 

(64,729)

Net carrying amount

$

274,583

$

270,271

Equity component (1)

$

90,990

$

90,990

(1)Included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $4.3 million and $4.1 million for the amortization of the debt discount related to the 2023 Notes during the three months ended May 2, 2020 and May 4, 2019, respectively.

2023 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2023 Notes and exercise of the overallotment option in June 2018, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 1.730 million shares of our common stock at a price of approximately $193.65 per share. The total cost of the convertible note hedge transactions was approximately $91.9 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 1.730 million shares of ou