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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 October 31, 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 December 9, 2020, 20,401,431 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 October 31, 2020 and February 1, 2020

3

Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

5

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three and nine months ended October 31, 2020 and November 2, 2019

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 31, 2020 and November 2, 2019

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

60

Item 4.

Controls and Procedures

62

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

63

Item 1A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3.

Defaults Upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

66

Item 6.

Exhibits

67

Signatures

68

2

Table of Contents

PART I

Item 1. Financial Statements

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

    

October 31,

    

February 1,

2020

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

89,884

$

47,658

Accounts receivable—net

 

59,065

 

48,979

Merchandise inventories

 

497,076

 

438,696

Prepaid expense and other current assets

 

88,875

 

61,619

Total current assets

 

734,900

 

596,952

Property and equipment—net

 

1,051,825

 

967,599

Operating lease right-of-use assets

405,776

410,904

Goodwill

 

135,306

 

124,367

Tradenames, trademarks and domain names

 

71,663

 

86,022

Deferred tax assets

 

38,839

 

45,005

Other non-current assets

 

240,941

 

214,845

Total assets

$

2,679,250

$

2,445,694

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

368,552

$

330,309

Deferred revenue and customer deposits

274,958

 

162,433

Convertible senior notes due 2020—net

290,532

Operating lease liabilities

64,879

58,924

Other current liabilities

 

174,196

 

140,714

Total current liabilities

 

882,585

 

982,912

Asset based credit facility

 

 

Equipment promissory notes—net

 

20,363

 

31,053

Convertible senior notes due 2023—net

 

280,536

 

266,658

Convertible senior notes due 2024—net

277,247

264,982

Non-current operating lease liabilities

 

405,432

 

409,930

Non-current finance lease liabilities

488,660

442,988

Other non-current obligations

 

27,558

 

28,520

Total liabilities

 

2,382,381

 

2,427,043

Commitments and contingencies (Note 16)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of October 31, 2020 and February 1, 2020

 

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 19,844,455 shares issued and outstanding as of October 31, 2020; 19,236,681 shares issued and outstanding as of February 1, 2020

 

2

 

2

Additional paid-in capital

 

566,436

 

430,662

Accumulated other comprehensive loss

 

(1,938)

 

(2,760)

Accumulated deficit

 

(267,631)

 

(409,253)

Total stockholders’ equity

 

296,869

 

18,651

Total liabilities and stockholders’ equity

$

2,679,250

$

2,445,694

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

3

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RH

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

October 31,

November 2,

October 31,

November 2,

    

2020

    

2019

    

2020

    

2019

Net revenues

$

844,013

$

677,526

$

2,036,190

$

1,982,461

Cost of goods sold

 

435,683

 

393,360

 

1,095,787

 

1,170,523

Gross profit

 

408,330

 

284,166

 

940,403

 

811,938

Selling, general and administrative expenses

 

297,109

 

194,929

657,161

 

550,087

Income from operations

 

111,221

 

89,237

 

283,242

 

261,851

Other expenses

 

Interest expense—net

15,656

21,564

54,703

 

67,195

Tradename impairment

20,459

(Gain) loss on extinguishment of debt—net

 

 

6,857

 

(152)

 

5,903

Total other expenses

 

15,656

 

28,421

 

75,010

 

73,098

Income before income taxes

 

95,565

 

60,816

 

208,232

 

188,753

Income tax expense

 

49,154

 

8,353

 

66,610

 

36,811

Net income

$

46,411

$

52,463

$

141,622

$

151,942

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

 

19,552,836

 

18,765,769

 

19,393,931

 

19,069,501

Basic net income per share

$

2.37

$

2.80

$

7.30

$

7.97

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

 

28,286,124

 

24,170,172

 

26,351,194

 

23,809,425

Diluted net income per share

$

1.64

$

2.17

$

5.37

$

6.38

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

(In thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

October 31,

November 2,

October 31,

November 2,

2020

    

2019

    

2020

    

2019

Net income

$

46,411

$

52,463

$

141,622

$

151,942

Net gains (losses) from foreign currency translation

 

(96)

299

 

822

 

(148)

Total comprehensive income

$

46,315

$

52,762

$

142,444

$

151,794

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)

Three Months Ended

 

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—August 1, 2020

 

19,485,826

 

$

2

 

$

444,378

 

$

(1,842)

 

$

(314,042)

 

17

 

$

(5)

 

$

128,491

Stock-based compensation

 

118,677

 

118,677

Vested and delivered restricted stock units

 

2,814

(610)

 

(610)

Exercise of stock options

 

64,848

3,996

 

3,996

Retirement of treasury stock

 

(5)

(17)

5

 

Shares issued in connection with warrant agreements

290,967

Net income

 

46,411

 

46,411

Net gains from foreign currency translation

 

(96)

 

(96)

Balances—October 31, 2020

 

19,844,455

 

$

2

 

$

566,436

 

$

(1,938)

 

$

(267,631)

 

 

$

 

$

296,869

Balances—August 3, 2019

 

18,591,763

 

$

2

 

$

355,010

 

$

(2,780)

 

$

(530,150)

 

 

$

 

$

(177,918)

Stock-based compensation

 

5,009

 

5,009

Vested and delivered restricted stock
units

 

2,967

(304)

 

(304)

Exercise of stock options

 

279,570

11,286

 

11,286

Shares issued in connection with warrant agreements

 

54,009

 

 

 

 

 

 

 

Equity component value of convertible note issuance—net

87,070

 

87,070

Issuance of warrants

50,225

 

50,225

Purchase of convertible note hedge

(91,350)

 

(91,350)

Net income

 

52,463

 

52,463

Net gains from foreign currency translation

 

299

 

299

Balances—November 2, 2019

 

18,928,309

 

$

2

 

$

416,946

 

$

(2,481)

 

$

(477,687)

 

 

$

 

$

(63,220)

Nine Months Ended

 

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 1, 2020

 

19,236,681

 

$

2

 

$

430,662

 

$

(2,760)

 

$

(409,253)

 

 

$

 

$

18,651

Stock-based compensation

 

131,153

 

131,153

Issuance of restricted stock

 

3,192

 

Vested and delivered restricted stock units

 

73,106

(7,428)

 

(7,428)

Exercise of stock options

 

241,126

12,121

 

12,121

Repurchases of common stock

 

(600)

600

(72)

 

(72)

Retirement of treasury stock

 

(77)

(617)

77

 

Shares issued in connection with warrant agreements

 

290,967

 

Settlement of convertible senior notes

1,131,645

(315,708)

(1,131,645)

315,708

Exercise of call option under bond hedge upon settlement of convertible senior notes

(1,131,662)

315,713

1,131,662

(315,713)

Net income

 

141,622

 

141,622

Net gains from foreign currency translation

 

822

 

822

Balances—October 31, 2020

 

19,844,455

 

$

2

 

$

566,436

 

$

(1,938)

 

$

(267,631)

 

 

$

 

$

296,869

Balances—February 2, 2019

 

20,477,813

 

$

2

 

$

356,422

 

$

(2,333)

 

$

(392,538)

 

2,800

 

$

(243)

 

$

(38,690)

Stock-based compensation

 

15,788

 

15,788

Issuance of restricted stock

 

7,014

 

Vested and delivered restricted stock units

 

104,608

(6,538)

 

(6,538)

Exercise of stock options

 

452,219

18,509

 

18,509

Repurchases of common stock

 

(2,167,396)

2,167,396

(250,032)

 

(250,032)

Retirement of treasury stock

 

(13,180)

(237,091)

(2,170,154)

250,271

 

Shares issued in connection with warrant agreements

 

54,009

 

 

 

 

 

 

 

Equity component of the convertible notes issuance—net

87,070

87,070

Issuance of warrants

50,225

50,225

Purchase of convertible note hedges

(91,350)

(91,350)

Conversion of convertible senior notes

 

42

(42)

4

 

4

Net income

 

151,942

 

151,942

Net losses from foreign currency translation

 

(148)

 

(148)

Balances—November 2, 2019

 

18,928,309

 

$

2

 

$

416,946

 

$

(2,481)

 

$

(477,687)

 

 

$

 

$

(63,220)

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

6

Table of Contents

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended

October 31,

November 2,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

141,622

$

151,942

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

 

 

Depreciation and amortization

 

76,688

 

75,945

Non-cash operating lease cost

47,069

48,855

Tradename impairment

20,459

Asset impairments

4,783

1,660

(Gain) loss on sale leaseback transaction

9,352

(1,196)

Amortization of debt discount

 

33,810

 

33,528

Accretion of debt discount upon settlement of debt

(84,003)

(70,482)

Stock-based compensation expense

 

131,472

 

16,109

Non-cash finance lease interest expense

17,887

16,864

Product recalls

5,561

(3,516)

Deferred income taxes

 

117

 

667

(Gain) loss on extinguishment of debt—net

(152)

5,903

Other non-cash items

 

3,274

 

2,973

Change in assets and liabilities:

 

 

Accounts receivable

 

(6,070)

 

(2,809)

Merchandise inventories

 

(57,781)

 

102,788

Prepaid expense and other assets

 

(47,288)

 

42,178

Landlord assets under construction—net of tenant allowances

 

(44,921)

 

(49,387)

Accounts payable and accrued expenses

 

10,844

 

(41,474)

Deferred revenue and customer deposits

 

111,436

 

14,406

Other current liabilities

 

29,153

 

(53,016)

Current and non-current operating lease liabilities

 

(36,810)

 

(61,887)

Other non-current obligations

 

(19,239)

 

(19,054)

Net cash provided by operating activities

 

347,263

 

210,997

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Capital expenditures

 

(71,755)

 

(64,614)

Acquisition of business

 

(13,052)

 

Investments in joint ventures

 

(7,500)

 

Proceeds from sale of assets

 

25,006

 

24,078

Deposit on asset under construction

(30,000)

Net cash used in investing activities

 

(67,301)

 

(70,536)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Borrowings under asset based credit facility

 

359,400

 

322,500

Repayments under asset based credit facility

 

(359,400)

 

(380,000)

Borrowings under term loans

 

 

320,000

Repayments under term loans

(234,000)

Borrowings under promissory and equipment security notes

 

 

99,000

Repayments under promissory and equipment security notes

 

(10,872)

 

(10,280)

Debt issuance costs

 

 

(4,636)

Proceeds from issuance of convertible senior notes

 

 

350,000

Proceeds from issuance of warrants

 

 

50,225

Purchase of convertible note hedges

 

 

(91,350)

Debt issuance costs related to convertible senior notes

 

 

(4,818)

Repayments of convertible senior notes

(215,846)

(278,560)

Principal payments under finance leases

(8,801)

(7,136)

Repurchases of common stock—including commissions

 

 

(250,032)

Proceeds from exercise of stock options

 

12,121

 

18,509

Tax withholdings related to issuance of stock-based awards

(7,428)

 

(6,538)

Payments under promissory notes related to share repurchases

 

(892)

Net cash used in financing activities

 

(230,826)

 

(108,008)

Effects of foreign currency exchange rate translation

 

(10)

 

(3)

Net increase in cash and cash equivalents and restricted cash equivalents

 

49,126

 

32,450

Cash and cash equivalents and restricted cash equivalents

 

 

  

Beginning of period—cash and cash equivalents

$

47,658

$

5,803

 

  

 

  

End of period—cash and cash equivalents

 

89,884

 

38,253

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

 

6,900

 

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

$

96,784

$

38,253

Non-cash transactions:

 

 

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

$

23,277

$

11,859

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

20,296

20,475

Reclassification of assets from landlord assets under construction to finance lease right-of-use assets

68,459

Shares issued on settlement of convertible senior notes

(315,708)

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

315,713