0001558370-22-018487 | 10-Q | XBRL Viewer

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Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Oct. 29, 2022	Dec. 02, 2022
Document And Entity Information [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Oct. 29, 2022
Entity File Number	001-35720
Entity Registrant Name	RH
Entity Tax Identification Number	45-3052669
Entity Incorporation, State or Country Code	DE
Entity Address, Address Line One	15 Koch Road
Entity Address, City or Town	Corte Madera
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	94925
City Area Code	415
Local Phone Number	924-1005
Title of 12(b) Security	Common Stock
Trading Symbol	RH
Security Exchange Name	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		23,612,501
Entity Central Index Key	0001528849
Current Fiscal Year End Date	--01-28
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Oct. 29, 2022	Jan. 29, 2022
Current assets:
Cash and cash equivalents	$ 2,150,466	$ 2,177,889
Restricted cash (Note 5)	3,882
Accounts receivable-net	58,563	57,914
Merchandise inventories	819,299	734,289
Prepaid expense and other current assets	234,247	121,350
Total current assets	3,266,457	3,091,442
Property and equipment-net	1,577,900	1,227,920
Operating lease right-of-use assets	536,452	551,045
Goodwill	141,021	141,100
Tradenames, trademarks and other intangible assets	74,269	73,161
Deferred tax assets	63,105	56,843
Equity method investments	97,005	100,810
Other non-current assets	127,506	298,149
Total assets	5,883,715	5,540,470
Current liabilities:
Accounts payable and accrued expenses	389,965	442,379
Deferred revenue and customer deposits	361,113	387,933
Operating lease liabilities	77,858	73,834
Other current liabilities	104,538	146,623
Total current liabilities	935,176	1,063,758
Real estate loans (Note 5)	17,912
Non-current operating lease liabilities	521,093	540,513
Non-current finance lease liabilities	656,643	560,550
Other non-current obligations	7,151	8,706
Total liabilities	4,589,768	4,370,193
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 29, 2022 and January 29, 2022
Common stock-$0.0001 par value per share, 180,000,000 shares authorized, 23,609,536 shares issued and outstanding as of October 29, 2022; 21,506,967 shares issued and outstanding as of January 29, 2022	2	2
Additional paid-in capital	313,887	620,577
Accumulated other comprehensive loss	(12,685)	(1,410)
Retained earnings	992,743	551,108
Total stockholders' equity	1,293,947	1,170,277
Total liabilities and stockholders' equity	5,883,715	5,540,470
Term loan B
Current liabilities:
Term loan-net	1,940,701	1,953,203
Term loan B-2
Current liabilities:
Term loan-net	469,396
2023 Notes
Current liabilities:
Convertible senior notes due-net current	1,702	9,389
Convertible senior notes due-noncurrent		59,002
2024 Notes
Current liabilities:
Convertible senior notes due-net current		3,600
Convertible senior notes due-noncurrent	$ 41,696	$ 184,461

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Oct. 29, 2022	Jan. 29, 2022
CONDENSED CONSOLIDATED BALANCE SHEETS
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	180,000,000	180,000,000
Common stock, shares issued	23,609,536	21,506,967
Common stock, shares outstanding	23,609,536	21,506,967

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Oct. 29, 2022	Oct. 30, 2021	Oct. 29, 2022	Oct. 30, 2021
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net revenues	$ 869,066	$ 1,006,428	$ 2,817,978	$ 2,856,079
Cost of goods sold	448,288	501,174	1,375,399	1,456,172
Gross profit	420,778	505,254	1,442,579	1,399,907
Selling, general and administrative expenses	250,528	232,715	832,627	690,492
Income from operations	170,250	272,539	609,952	709,415
Other expenses
Interest expense-net	31,417	13,223	78,536	40,112
Loss on extinguishment of debt		18,513	169,578	21,784
Other expense-net	1,989		4,841
Total other expenses	33,406	31,736	252,955	61,896
Income before income taxes	136,844	240,803	356,997	647,519
Income tax expense (benefit)	36,162	54,391	(70,867)	99,124
Income before equity method investments	100,682	186,412	427,864	548,395
Share of equity method investments losses	(1,922)	(2,313)	(6,118)	(6,894)
Net income	$ 98,760	$ 184,099	$ 421,746	$ 541,501
Weighted-average shares used in computing basic net income per share	23,681,482	21,430,557	23,588,464	21,200,146
Basic net income per share (Note 13)	$ 4.17	$ 8.59	$ 25.07	$ 25.54
Weighted-average shares used in computing diluted net income per share	26,098,265	31,291,079	27,255,911	31,493,396
Diluted net income per share (Note 13)	$ 3.78	$ 5.88	$ 21.70	$ 17.19

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Oct. 29, 2022	Oct. 30, 2021	Oct. 29, 2022	Oct. 30, 2021
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 98,760	$ 184,099	$ 421,746	$ 541,501
Net losses from foreign currency translation	(4,890)	(2,097)	(11,275)	(1,397)
Comprehensive income	$ 93,870	$ 182,002	$ 410,471	$ 540,104

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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+ Details

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Mezzanine Equity	Common Stock	Additional Paid-In Capital Impact of adoption, adjustment	Additional Paid-In Capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings (Accumulated Deficit) Impact of adoption, adjustment	Retained Earnings (Accumulated Deficit)	Treasury Stock	Impact of adoption, adjustment	Total
Balances at Jan. 30, 2021		$ 2		$ 581,897	$ 2,565		$ (137,438)			$ 447,026
Balances, shares at Jan. 30, 2021		20,995,387
Stock-based compensation				37,284						37,284
Issuance of restricted stock, Shares		1,260
Vested and delivered restricted stock units				(19,354)						(19,354)
Vested and delivered restricted stock units, Shares		39,679
Exercise of stock options				30,080						30,080
Exercise of stock options, Shares		428,788
Settlement of convertible senior notes				(674,549)				$ 660,784		(13,765)
Settlement of convertible senior notes, Shares		983,694						(983,675)
Exercise of call option under bond hedge upon settlement of convertible senior notes				660,784				$ (660,784)
Exercise of call option under bond hedge upon settlement of convertible senior notes (in shares)		(983,675)						983,675
Termination of convertible note hedge				(13,571)						(13,571)
Net income							541,501			541,501
Net losses from foreign currency translation					(1,397)					(1,397)
Balances at Oct. 30, 2021		$ 2		602,571	1,168		404,063			1,007,804
Balances, shares at Oct. 30, 2021		21,465,133
Increase (Decrease) in Temporary Equity [Roll Forward]
Reclassification of equity component to mezzanine equity related to early converted senior notes outstandingnet	$ 13,571
Balances at Oct. 30, 2021	13,571
Balances at Jul. 31, 2021		$ 2		583,112	3,265		219,964			806,343
Balances, shares at Jul. 31, 2021		21,407,717
Stock-based compensation				11,995						11,995
Vested and delivered restricted stock units				(706)						(706)
Vested and delivered restricted stock units, Shares		1,981
Exercise of stock options				4,101						4,101
Exercise of stock options, Shares		55,419
Settlement of convertible senior notes				(592,414)				$ 579,539		(12,875)
Settlement of convertible senior notes, Shares		864,090						(864,074)
Exercise of call option under bond hedge upon settlement of convertible senior notes				579,539				$ (579,539)
Exercise of call option under bond hedge upon settlement of convertible senior notes (in shares)		(864,074)						864,074
Reclassification of equity component to mezzanine equity related to early converted senior notes outstanding	(16,944)			16,944						16,944
Net income							184,099			184,099
Net losses from foreign currency translation					(2,097)					(2,097)
Balances at Oct. 30, 2021		$ 2		602,571	1,168		404,063			1,007,804
Balances, shares at Oct. 30, 2021		21,465,133
Balances at Jul. 31, 2021	30,515
Balances at Oct. 30, 2021	$ 13,571
Balances at Jan. 29, 2022		$ 2	$ (56,390)	620,577	(1,410)	$ 19,889	551,108		$ (36,501)	1,170,277
Balances, shares at Jan. 29, 2022		21,506,967
Stock-based compensation				33,725						33,725
Issuance of restricted stock, Shares		3,577
Vested and delivered restricted stock units				(494)						(494)
Vested and delivered restricted stock units, Shares		2,985
Exercise of stock options				153,568						153,568
Exercise of stock options, Shares		3,223,552
Repurchases of common stock								$ (286,441)		$ (286,441)
Repurchases of common stock, Shares		(1,127,557)						1,127,557		(1,127,557)
Retirement of treasury stock				(286,441)				$ 286,441
Retirement of treasury stock, Shares								(1,127,557)		(1,127,557)
Settlement of convertible senior notes				(14,705)				$ 14,705
Settlement of convertible senior notes, Shares		36,980						(36,968)
Exercise of call option under bond hedge upon settlement of convertible senior notes				14,705				$ (14,705)
Exercise of call option under bond hedge upon settlement of convertible senior notes (in shares)		(36,968)						36,968
Termination of common stock warrants				(386,708)						$ (386,708)
Termination of convertible note hedge				236,050						236,050
Net income							421,746			421,746
Net losses from foreign currency translation					(11,275)					(11,275)
Balances at Oct. 29, 2022		$ 2		313,887	(12,685)		992,743			1,293,947
Balances, shares at Oct. 29, 2022		23,609,536
Balances at Jul. 30, 2022		$ 2		334,054	(7,795)		893,983			1,220,244
Balances, shares at Jul. 30, 2022		23,715,191
Stock-based compensation				10,187						10,187
Vested and delivered restricted stock units				(171)						(171)
Vested and delivered restricted stock units, Shares		1,119
Exercise of stock options				1,527						1,527
Exercise of stock options, Shares		20,777
Repurchases of common stock								$ (31,710)		(31,710)
Repurchases of common stock, Shares		(127,557)						127,557
Retirement of treasury stock				(31,710)				$ 31,710
Retirement of treasury stock, Shares								(127,557)
Settlement of convertible senior notes, Shares		6
Net income							98,760			98,760
Net losses from foreign currency translation					(4,890)					(4,890)
Balances at Oct. 29, 2022		$ 2		$ 313,887	$ (12,685)		$ 992,743			$ 1,293,947
Balances, shares at Oct. 29, 2022		23,609,536

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Oct. 29, 2022	Oct. 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 421,746	$ 541,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	79,760	71,375
Non-cash operating lease cost	55,912	54,084
Asset impairments	19,080	7,354
Gain on sale of building and land	(775)
Amortization of debt discount		24,236
Stock-based compensation expense	33,725	37,426
Non-cash finance lease interest expense	23,526	19,468
Product recalls	560	840
Deferred income taxes	5,627	(122)
Loss on extinguishment of debt	169,578	21,784
Gain on derivative instruments-net	(1,724)
Share of equity method investments losses	6,118	6,894
Other non-cash items	5,542	(6,030)
Cash paid attributable to accretion of debt discount upon settlement of debt		(39,078)
Change in assets and liabilities:
Accounts receivable	(675)	(1,131)
Merchandise inventories	(96,598)	(89,225)
Prepaid expense and other assets	(152,892)	(39,168)
Landlord assets under construction-net of tenant allowances	(43,380)	(50,351)
Accounts payable and accrued expenses	(44,999)	(17,980)
Deferred revenue and customer deposits	(26,604)	104,419
Other current liabilities	(36,596)	(28,106)
Current and non-current operating lease liabilities	(56,936)	(59,194)
Other non-current obligations	(23,974)	(25,314)
Net cash provided by operating activities	336,021	533,682
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(109,675)	(153,774)
Proceeds from sale of assets	5,287
Equity method investments	(2,313)	(4,816)
Net cash used in investing activities	(106,701)	(158,590)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term loan	500,000	2,000,000
Repayments under term loans	(15,000)
Borrowings under real estate loans	16,000
Repayments under real estate loans	(4)
Repayments under promissory and equipment security notes	(13,157)	(17,164)
Repayments of convertible senior notes	(13,053)	(235,126)
Repayment under convertible senior notes repurchase obligation	(395,372)
Debt extinguishment costs	(8,059)
Debt issuance costs	(27,733)	(26,411)
Principal payments under finance leases	(6,798)	(10,511)
Proceeds from termination of convertible senior note hedges	231,796
Payments for termination of common stock warrants	(390,934)
Repurchases of common stock	(286,441)
Proceeds from exercise of stock options	153,568	30,080
Tax withholdings related to issuance of stock-based awards	(494)	(19,354)
Net cash provided by (used in) financing activities	(255,681)	1,721,514
Effects of foreign currency exchange rate translation	(1,155)	34
Net increase (decrease) in cash and cash equivalents , restricted cash and restricted cash equivalents	(27,516)	2,096,640
Cash and cash equivalents, restricted cash and restricted cash equivalents
Beginning of period-cash and cash equivalents	2,177,889	100,446
Beginning of period-restricted cash equivalents (acquisition related escrow deposits)	3,975	6,625
Beginning of period-cash and cash equivalents, restricted cash and restricted cash equivalents	2,181,864	107,071
End of period-cash and cash equivalents	2,150,466	2,198,961
End of period-restricted cash	3,882
End of period-restricted cash equivalents (acquisition related escrow deposits)		4,750
End of period-cash and cash equivalents , restricted cash and restricted cash equivalents	2,154,348	2,203,711
Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end	18,915	12,313
Property and equipment additions acquired under real estate loans	(2,000)
Landlord asset additions in accounts payable and accrued expenses at period-end	6,924	28,666
Reclassification of assets from landlord assets under construction to finance lease right-of-use assets	221,886	32,405
Conversion of loan receivables into equity of variable interest entities (Note 5)	300
Extinguishment of convertible senior notes related to repurchase obligation (Note 9)	(261,988)
Financing liability and embedded derivative arising from convertible senior notes repurchase (Note 9)	405,577
Shares issued on settlement of convertible senior notes	(14,705)	(674,549)
Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes	$ 14,705	$ 660,784

The Company

9 Months Ended

Oct. 29, 2022

The Company

The Company

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” “our” or the “Company”), is a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child and teen furnishings.

As of October 29, 2022, we operated a total of 67 RH Galleries and 39 RH Outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong. In September 2022, we opened our first RH Guesthouse in New York.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of October 29, 2022, and the results of operations for the three and nine months ended October 29, 2022 and October 30, 2021. Our current fiscal year, which consists of 52 weeks, ends on January 28, 2023 (“fiscal 2022”).

The condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process. Noncontrolling interests represent third-party interests in the net assets under VIEs determined by applying the hypothetical liquidation at book value methodology. Noncontrolling interests in VIEs are immaterial as of October 29, 2022. Refer to Note 5—Variable Interest Entities.

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

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

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19” or “the pandemic”) using information that is reasonably available to us at this time. The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, and intangible and other long-lived assets. Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and nine months ended October 29, 2022.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the “2021 Form 10-K”).

The results of operations for the three and nine months ended October 29, 2022 and October 30, 2021 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 pandemic and other factors as discussed in Macro-Economic Factors and COVID-19 Pandemic below.

Macro-Economic Factors and COVID-19 Pandemic

There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and rising interest rates. These factors may have a number of adverse effects on macro-economic conditions and markets in which we operate, with the potential for an economic recession and a sustained downturn in the housing market. Factors such as a slowdown in the housing market or negative trends in stock market prices could have a negative impact on demand for our products. We believe that these macro-economic factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.

The COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates. While our performance during the pandemic demonstrates the desirability of our exclusive products, consumer spending have shifted away from spending on the home and home-related categories toward travel and leisure and other areas.

Our decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business including further developments with respect to macro-economic factors and the pandemic. Refer to the section entitled “Risk Factors” in our 2021 Form 10-K.

Recently Issued Accounting Standards

9 Months Ended

Oct. 29, 2022

Recently Issued Accounting Standards

Recently Issued Accounting Standards

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

New Accounting Standards or Updates Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, ASU 2020-06 removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting ASU 2020-06’s guidance, we no longer separately present in equity an embedded conversion feature of such debt. Instead, we account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity.

We adopted ASU 2020-06 in the first quarter of fiscal 2022 using a modified retrospective transition method. Accordingly, the cumulative effect of the adoption on our opening fiscal 2022 condensed consolidated balance sheets was as follows:


			ASU 2020-06
	JANUARY 29,		ADOPTION		JANUARY 29,
	2022		ADJUSTMENTS		2022

	(in thousands)
Assets
Property and equipment—net	$	1,227,920	$	(12,385)	$	1,215,535
Deferred tax assets		56,843		11,909		68,752
Liabilities
Convertible senior notes due 2023—net		59,002		5,684		64,686
Convertible senior notes due 2024—net		184,461		30,341		214,802
Equity
Additional paid-in capital		620,577		(56,390)		564,187
Retained earnings		551,108		19,889		570,997

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848): Scope, (“ASU 2021-01” and, together with ASU 2020-04, the “ASUs”). The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. The primary contracts for which we currently use LIBOR include our asset based credit facility and certain term loan debt arrangements. The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022. All new arrangements are using alternative reference rates and we are evaluating the impact of adoption on our existing contracts, including with respect to our asset based credit facility and Term Loan B (as defined in Note 10—Credit Facilities), which we anticipate amending in the fourth quarter of fiscal 2022 to reference SOFR.

New Accounting Standards or Updates Not Yet Adopted

Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued ASU 2022-04—Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). ASU 2022-04 requires entities to disclose the program’s nature, activity during the period, changes from period to period and potential magnitude. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. With the exception of the disclosure of rollforward information, the guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied retrospectively to all periods for which a balance sheet is presented. The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and is required to be applied prospectively. We are evaluating the impact that ASU 2022-04 will have on our consolidated financial statements and related disclosures, but do not believe the adoption will impact our financial condition, results of operations or cash flows.

- Definition

The entire disclosure for change in accounting principle. Includes, but is not limited to, nature, reason, and method of adopting amendment to accounting standards or other change in accounting principle.

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+ Details

Prepaid Expense and Other Assets

9 Months Ended

Oct. 29, 2022

Prepaid Expense and Other Assets

Prepaid Expense and Other Assets

NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following:


	OCTOBER 29,		JANUARY 29,
	2022		2022

	(in thousands)
Federal and state tax receivable⁽¹⁾	$	82,310	$	—
Promissory notes receivable, including interest⁽²⁾		35,463		8,401
Other current assets		28,094		9,355
Capitalized catalog costs		23,337		22,194
Vendor deposits		23,227		19,610
Prepaid expenses		19,309		31,502
Tenant allowance receivable		8,686		15,355
Value added tax (VAT) receivable		7,831		4,529
Right of return asset for merchandise		5,990		6,429
Acquisition related escrow deposits		—		3,975
Total prepaid expense and other current assets	$	234,247	$	121,350

(1)	Refer to Note 12—Income Taxes.

(2)	Represents promissory notes, including principal and accrued interest, due from a related party. Refer to Note 5—Variable Interest Entities.

Other non-current assets consist of the following:


	OCTOBER 29,		JANUARY 29,
	2022		2022

	(in thousands)
Initial direct costs prior to lease commencement	$	41,849	$	57,087
Landlord assets under construction—net of tenant allowances		37,892		204,013
Capitalized cloud computing costs—net⁽¹⁾		20,927		14,910
Other deposits		6,889		6,877
Deferred financing fees		3,436		4,123
Other non-current assets		16,513		11,139
Total other non-current assets	$	127,506	$	298,149

(1)	Presented net of accumulated amortization of $8.8 million and $4.0 million as of October 29, 2022 and January 29, 2022, respectively.

Goodwill, Tradenames, Trademarks and Other Intangible Assets

9 Months Ended

Oct. 29, 2022

Goodwill, Tradenames, Trademarks and Other Intangible Assets

Goodwill, Tradenames, Trademarks and Other Intangible Assets

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (refer to Note 17—Segment Reporting) for the nine months ended October 29, 2022:


					FOREIGN
	JANUARY 29,				CURRENCY		OCTOBER 29,
	2022		ADDITIONS		TRANSLATION		2022

	(in thousands)
RH Segment
Goodwill	$	141,100	$	—	$	(79)	$	141,021
Tradenames, trademarks and other intangible assets		56,161		1,108		—		57,269
Waterworks⁽¹⁾
Tradename⁽²⁾		17,000		—		—		17,000

(1)	Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2)	Presented net of an impairment charge of $35 million recognized in prior fiscal years.

Variable Interest Entities

9 Months Ended

Oct. 29, 2022

Variable Interest Entities [Abstract]

Variable Interest Entities

NOTE 5—VARIABLE INTEREST ENTITIES

Equity Method Investments

Equity method investments represent our membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that were formed during fiscal 2020 for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent interest in the third Aspen LLC. These investments meet the criteria of VIEs, however, we are not the primary beneficiary of these arrangements. As we have the ability to exercise significant influence over the Aspen LLCs, but do not have a controlling financial interest in the Aspen LLCs, we account for these investments using the equity method of accounting.

As of October 29, 2022 and January 29, 2022, $8.8 million and $8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets. Promissory notes related specifically to the Aspen LLCs are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs. We have made in excess of $100 million in capital contributions to the Aspen LLCs as contractually required. Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity capital contributed as of October 29, 2022.

During the three months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $1.9 million and $2.3 million, respectively, which is included on the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets. During the nine months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $6.1 million and $6.9 million, respectively. During the three and nine months ended October 29, 2022 and October 30, 2021, we did not receive any distributions or have any undistributed earnings of equity method investments.

Consolidated Variable Interest Entities and Noncontrolling Interests

In the third quarter of fiscal 2022, we formed two real estate development limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for the purpose of acquiring, developing, operating and selling certain real estate projects, one of which is intended to be a future RH Design Gallery. We hold a 50 percent membership interest in each Member LLC, and the remaining 50 percent is held by an affiliate of the managing member of the Aspen LLCs.

We have determined that each Member LLC is a VIE and that the power to direct the most significant activities of each Member LLC is shared amongst related parties. We have determined that we are most closely associated with each Member LLC, and, accordingly, consolidate the results of operations, financial condition and cash flows of the Member LLCs in our condensed consolidated financial statements. Noncontrolling interests in the consolidated variable interest entities are measured using the hypothetical liquidation at book value methodology. Noncontrolling interests in consolidated variable interest entities are immaterial as of October 29, 2022.

As of October 29, 2022, $27 million of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member of the Member LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets. The promissory notes outstanding as of October 29, 2022 are related to other real estate joint ventures with entities affiliated with the managing member and such promissory notes are expected to be converted into equity in future privately-held limited liability companies for real estate development activities related to our Gallery transformation and global expansion strategies.

Restricted Cash

As of October 29, 2022, $3.9 million of restricted cash deposits are held in escrow for one Member LLC, which escrow balances are included in restricted cash on the condensed consolidated balance sheets. The escrow represents a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for expenditures that qualify as tenant improvements under an allowance specified in a lease agreement between us and the Member LLC.

Real Estate Loans

On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $2.0 million with a maturity date of August 1, 2032. The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00%. In addition, we entered into an immaterial loan with the Member LLC that is eliminated upon consolidation.

On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $16 million with a maturity date of September 9, 2032. The Promissory Note bears interest at a fixed rate per annum equal to 5.37% until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00%, subject to a total interest rate 3.00% floor.

These real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

Accounts Payable, Accrued Expenses and Other Current Liabilities

9 Months Ended

Oct. 29, 2022

Accounts Payable, Accrued Expenses and Other Current Liabilities

Accounts Payable, Accrued Expenses and Other Current Liabilities

NOTE 6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following:


	OCTOBER 29,		JANUARY 29,
	2022		2022

	(in thousands)
Accounts payable	$	180,484	$	242,035
Accrued compensation		71,825		96,859
Accrued occupancy		33,888		28,088
Accrued freight and duty		22,577		21,888
Accrued sales taxes		21,746		24,811
Accrued interest		11,814		5,185
Accrued professional fees		8,990		5,892
Accrued catalog costs		4,277		4,127
Other accrued expenses		34,364		13,494
Total accounts payable and accrued expenses	$	389,965	$	442,379

Other current liabilities consist of the following:


	OCTOBER 29,		JANUARY 29,
	2022		2022

	(in thousands)
Unredeemed gift card and merchandise credit liability	$	28,304	$	22,712
Current portion of term loans		25,000		20,000
Allowance for sales returns		24,399		25,256
Finance lease liabilities		16,557		15,511
Current portion of equipment promissory notes		1,691		13,625
Federal and state tax payable⁽¹⁾		—		31,364
Other current liabilities		8,587		18,155
Total other current liabilities	$	104,538	$	146,623

(1)	Refer to Note 12—Income Taxes.

Contract Liabilities

We defer revenue associated with merchandise delivered via the home-delivery channel. We expect that substantially all of the deferred revenue and customer deposits as of October 29, 2022 will be recognized within the next six months as the performance obligations are satisfied. Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year.

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards. During the three months ended October 29, 2022 and October 30, 2021, we recognized $5.0 million and $4.4 million, respectively, of revenue related to previous deferrals related to our gift cards. During the nine months ended October 29, 2022 and October 30, 2021, we recognized $16 million and $14 million, respectively, of revenue related to previous deferrals related to our gift cards.

We recognize breakage associated with gift cards proportional to actual gift card redemptions. Breakage of $0.7 million and $0.5 million was recorded in net revenues in the three months ended October 29, 2022 and October 30, 2021, respectively. Breakage of $1.8 million and $1.4 million was recorded in net revenues in the nine months ended October 29, 2022 and October 30, 2021, respectively.

We expect that approximately 70% of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.

Other Non-Current Obligations

9 Months Ended

Oct. 29, 2022

Other Non-Current Obligations.

Other Non-Current Obligations

NOTE 7—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following:


	OCTOBER 29,		JANUARY 29,
	2022		2022

	(in thousands)
Unrecognized tax benefits	$	2,893	$	3,471
Other non-current obligations		4,258		5,235
Total other non-current obligations	$	7,151	$	8,706

Leases

9 Months Ended

Oct. 29, 2022

Leases

Leases

NOTE 8—LEASES

Lease costs—net consist of the following:


	THREE MONTHS ENDED				NINE MONTHS ENDED
	OCTOBER 29,		OCTOBER 30,		OCTOBER 29,		OCTOBER 30,
	2022		2021		2022		2021

	(in thousands)
Operating lease cost⁽¹⁾	$	25,153	$	25,637	$	75,190	$	74,794
Finance lease costs
Amortization of leased assets⁽¹⁾		13,964		10,860		38,334		32,574
Interest on lease liabilities⁽²⁾		8,564		6,711		23,526		19,468
Variable lease costs⁽³⁾		5,681		9,096		22,015		25,436
Sublease income⁽⁴⁾		(1,085)		(1,189)		(3,298)		(3,507)
Total lease costs—net	$	52,277	$	51,115	$	155,767	$	148,765

(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 income based on our accounting policy. Refer to Note 3—Significant Accounting Policies in the 2021 Form 10-K.

(2)	Included in interest expense—net on the condensed consolidated statements of income.

(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 $3.4 million and $6.9 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $15 million and $19 million for the nine months ended October 29, 2022 and October 30, 2021, respectively, as well as charges associated with common area maintenance of $2.3 million and $2.2 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $6.9 million and $6.6 million for the nine months ended October 29, 2022 and October 30, 2021, respectively. Other variable costs, which include 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 in any period presented.

(4)	Included as an offset to selling, general and administrative expenses on the condensed consolidated statements of income.

Lease right-of-use assets and lease liabilities consist of the following:


		OCTOBER 29,		JANUARY 29,
		2022		2022

		(in thousands)
	Balance Sheet Classification
Assets
Operating leases	Operating lease right-of-use assets	$	536,452	$	551,045
Finance leases⁽¹⁾⁽²⁾	Property and equipment—net		1,092,787		784,327
Total lease right-of-use assets		$	1,629,239	$	1,335,372
Liabilities
Current⁽³⁾
Operating leases	Operating lease liabilities	$	77,858	$	73,834
Finance leases	Other current liabilities		16,557		15,511
Total lease liabilities—current			94,415		89,345
Non-current
Operating leases	Non-current operating lease liabilities		521,093		540,513
Finance leases	Non-current finance lease liabilities		656,643		560,550
Total lease liabilities—non-current			1,177,736		1,101,063
Total lease liabilities		$	1,272,151	$	1,190,408

(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 on the condensed consolidated balance sheets upon lease commencement.

(2)	Finance lease right-of-use assets are recorded net of accumulated amortization of $211 million and $174 million as of October 29, 2022 and January 29, 2022, 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 October 29, 2022:


	OPERATING		FINANCE
FISCAL YEAR	LEASES		LEASES		TOTAL

	(in thousands)
Remainder of fiscal 2022	$	25,297	$	12,226	$	37,523
2023		98,805		49,454		148,259
2024		92,305		49,824		142,129
2025		89,936		51,259		141,195
2026		86,538		52,032		138,570
2027		81,205		53,214		134,419
Thereafter		241,401		963,165		1,204,566
Total lease payments⁽¹⁾⁽²⁾		715,487		1,231,174		1,946,661
Less—imputed interest⁽³⁾		(116,536)		(557,974)		(674,510)
Present value of lease liabilities	$	598,951	$	673,200	$	1,272,151

(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 $640 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of October 29, 2022, of which $5.0 million, $25 million, $36 million, $39 million, $40 million and $38 million will be paid in the remainder of fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $457 million will be paid subsequent to fiscal 2027.

(2)	Excludes an immaterial amount of future commitments under short-term lease agreements.

(3)	Calculated using the discount rate for each lease at lease commencement.

Supplemental information related to leases consists of the following:


	NINE MONTHS ENDED
	OCTOBER 29,		OCTOBER 30,
	2022		2021
Weighted-average remaining lease term (years)
Operating leases		8.5		9.3
Finance leases		22.1		20.1
Weighted-average discount rate
Operating leases		4.04%		3.84%
Finance leases		5.32%		4.97%

Other information related to leases consists of the following:


	NINE MONTHS ENDED
	OCTOBER 29,		OCTOBER 30,
	2022		2021

	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	(75,570)	$	(76,957)
Operating cash flows from finance leases		(23,526)		(19,774)
Financing cash flows from finance leases—net⁽¹⁾		(6,798)		(10,511)
Total cash outflows from leases	$	(105,894)	$	(107,242)
Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash)
Operating leases	$	42,883	$	151,548
Finance leases		108,547		73,855

(1)	Represents the principal portion of lease payments offset by tenant allowances received subsequent to lease commencement.

Build-to-Suit Asset

During the second quarter of fiscal 2021, we opened the Dallas Design Gallery. During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property & equipment—net on the condensed consolidated balance sheets. Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we could not derecognize the build-to-suit asset. Therefore, the asset remains classified as a build-to-suit asset within property and equipment—net on the condensed consolidated balance sheets and is depreciated over the term of the useful life of the asset.

Convertible Senior Notes

9 Months Ended

Oct. 29, 2022

CREDIT FACILITIES

Convertible Senior Notes

NOTE 9—CONVERTIBLE SENIOR NOTES

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”). In September 2019, we issued in a private offering $350 million principal amount of 0.00% convertible senior notes due 2024 (the “2024 Notes” and, together with the 2023 Notes, the “Convertible Senior Notes” or the “Notes”). Refer to Note 12—Convertible Senior Notes in our consolidated financial statements in our 2021 Form 10-K for further information and terms of the Notes, including the accounting policies related to the Notes that were in effect through fiscal 2021. In connection with our adoption of ASU 2020-06 in the first quarter of fiscal 2022, we recombined the previously outstanding equity component, which resulted in an increase in the balance of convertible debt outstanding. Refer to Note 2—Recently Issued Accounting Standards for further discussion of the impact of our adoption of ASU 2020-06 in our condensed consolidated financial statements.

The outstanding balances under the 2023 Notes and 2024 Notes were as follows:

OCTOBER 29,

JANUARY 29,

2022

UNAMORTIZED

DEBT

NET

DEBT

NET

PRINCIPAL

ISSUANCE

CARRYING

PRINCIPAL

ISSUANCE

CARRYING

AMOUNT

COST⁽¹⁾

AMOUNT

COST⁽¹⁾