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10-Q: RH

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and the results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (the "2021 Form 10-K").

Management's discussion and analysis of financial condition and results of operations ("MD&A") contains forward-looking statements that are subject to risks and uncertainties. Refer to "Forward-Looking Statements and Market Data" below and Item 1A-Risk Factors in our 2021 Form 10-K for a discussion of the risks, uncertainties and assumptions associated with these statements. MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in our 2021 Form 10-K.

The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for the three and six months ended July 30, 2022 and a comparison to the three and six months ended July 31, 2021. The discussion related to cash flows for the six months ended July 31, 2021 has been omitted from this Quarterly Report on Form 10-Q, but is included in Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-Q for the quarter ended July 31, 2021, filed with the Securities and Exchange Commission ("SEC") on September 9, 2021.

MD&A is a supplement to our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A is organized as follows:

Overview. This section provides a general description of our business and describes our key value-driving strategies.

Basis of Presentation and Results of Operations. These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current periods as compared to the prior year's comparative period, as well as non-GAAP measures we use for financial and operational decision making and as a means to evaluate period-to-period comparisons.

Liquidity and Capital Resources. This section provides an overview of our sources and uses of cash and our financing arrangements, including our credit facilities and debt arrangements, in addition to the cash requirements for our business, such as our capital expenditures.

Critical Accounting Policies and Estimates. This section discusses the accounting policies and estimates that involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, including the significant estimates and judgments used in the preparation of our consolidated financial statements.

Recently Issued Accounting Pronouncements. This section provides a summary of recent authoritative accounting pronouncements that have been adopted in fiscal 2022 and that will be adopted in future periods.

FORWARD-LOOKING STATEMENTS AND MARKET DATA

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "short-term," "non-recurring," "one-time," "unusual," "should," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

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Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results, and matters that we identify as "short term," "non-recurring," "unusual," "one-time," or other words and terms of similar meaning may, in fact, recur in one or more future financial reporting periods. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the section entitled Risk Factors in our 2021 Form 10-K, and Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report, in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2022 (the "First Quarter Form 10-Q") and in our 2021 Form 10-K. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this quarterly report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

Overview

We are a curator of design, taste and style in the luxury lifestyle market. Our curated and fully integrated assortments are presented consistently across our sales channels in sophisticated and unique lifestyle settings. We offer dominant merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, and child and teen furnishings. Our retail business is fully integrated across our multiple channels of distribution, consisting of our retail locations, websites and Source Books. We position our Galleries as showrooms for our brand, while our websites and Source Books act as virtual and print extensions of our physical spaces. We operate our retail locations throughout the United States, Canada, and the U.K., and have an integrated RH Hospitality experience in 14 of our Design Gallery locations, which includes Restaurants and Wine Bars.

As of July 30, 2022, we operated the following number of Galleries, Outlets and Showrooms:







                                         COUNT
        RH
        Design Galleries                    28
        Legacy Galleries                    35
        Modern Galleries                     1
        Baby & Child and TEEN Galleries      3
        Total Galleries                     67
        Outlets                             39
        Waterworks Showrooms                14
        


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.

PART I. FINANCIAL INFORMATION 2022 SECOND QUARTER FORM 10-Q | 33

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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, we may see consumer spending patterns shift 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. For more information, refer to the section entitled "Risk Factors" in our 2021 Form 10-K.

Key Value-Driving Strategies

In order to drive growth across our business, we are focused on the following long-term key strategies and business initiatives:

Product Elevation. We believe we have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve industry-leading revenues and margins. Our customers know our brand concepts as RH Interiors, RH Modern, RH Contemporary, RH Outdoor, RH Beach House, RH Ski House, RH Baby & Child, RH TEEN and Waterworks. Our strategy is to continue to elevate the design and quality of our product. Over the next few years, we plan to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color.

Gallery Transformation. Our product is elevated and rendered more valuable by our architecturally inspiring Galleries. We believe our strategy to open new Design Galleries in every major market will unlock the value of our vast assortment, generating a revenue opportunity for our business of $5 to $6 billion in North America. We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries that is sized to the potential of each market and the size of our assortment. In addition, we plan to incorporate hospitality into most of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable. We believe hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of hospitality drives incremental sales of home furnishings in these Galleries.

Brand Elevation. We are evolving the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of Products, Places, Services and Spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, taste and place maker. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. In September 2022, we opened our first RH Guesthouse in New York. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley, RH1 & RH2, our private jets, and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.

Digital Reimagination. Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally, our multi-year effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation. Externally, our strategy comes to life digitally with The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Launched this spring, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable. We expect to continue to elevate the customer experience on The World of RH with further enhancements to content, navigation and search functionality. We believe an opportunity exists to create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a website can and should be.

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Global Expansion. We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that pursuit of global expansion will provide RH a substantial long-term market opportunity to build a $20 to $25 billion global brand over time. Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, and brand of RH. As such, we are actively pursuing the expansion of the RH brand globally with the objective of launching international locations in Europe beginning with the opening of RH England, The Country House at the Historic Aynho Park, in the spring of 2023. We have secured a number of locations in various markets in the United Kingdom and continental Europe for future Design Galleries and are in lease or purchase negotiations for additional locations.







        Basis of Presentation and Results of Operations
        The following table sets forth our condensed consolidated statements of income:
                                            THREE MONTHS ENDED                           SIX MONTHS ENDED
                                  JULY 30,  % OF NET  JULY 31,  % OF NET     JULY 30,   % OF NET   JULY 31,   % OF NET
                                    2022    REVENUES    2021    REVENUES       2022     REVENUES     2021     REVENUES
                                                                 (dollars in thousands)
        Net revenues              $ 991,620  100.0 %  $ 988,859  100.0 %    $ 1,948,912  100.0 %  $ 1,849,651  100.0 %
        Cost of goods sold          468,402   47.2      501,183   50.7          927,111   47.6        954,998   51.6
        Gross profit                523,218   52.8      487,676   49.3        1,021,801   52.4        894,653   48.4
        Selling, general and        288,804   29.2      238,688   24.1          582,099   29.8        457,777   24.8
        administrative expenses
        Income from operations      234,414   23.6      248,988   25.2          439,702   22.6        436,876   23.6
        Other expenses
        Interest expense-net         26,264    2.6       13,581    1.4           47,119    2.5         26,889    1.4
        Loss on extinguishment       23,462    2.4        3,166    0.3          169,578    8.7          3,271    0.2
        of debt
        Other expense-net             3,195    0.3            -      -            2,852    0.1              -      -
        Total other expenses         52,921    5.3       16,747    1.7          219,549   11.3         30,160    1.6
        Income before income        181,493   18.3      232,241   23.5          220,153   11.3        406,716   22.0
        taxes
        Income tax expense           56,397    5.7        3,009    0.3        (107,029)  (5.5)         44,733    2.4
        (benefit)
        Income before equity        125,096   12.6      229,232   23.2          327,182   16.8        361,983   19.6
        method investments
        Share of equity method      (2,821)  (0.3)      (2,486)  (0.3)          (4,196)  (0.2)        (4,581)  (0.3)
        investments losses
        Net income                $ 122,275   12.3 %  $ 226,746   22.9 %    $   322,986   16.6 %  $   357,402   19.3 %
        


PART I. FINANCIAL INFORMATION 2022 SECOND QUARTER FORM 10-Q | 35

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Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures (collectively, our "non-GAAP financial measures"). We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision making. The non-GAAP financial measures used by us in this Quarterly Report on Form 10-Q may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Adjusted Operating Income. Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.

Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating







        Income
                                                    THREE MONTHS ENDED            SIX MONTHS ENDED
                                                 JULY 30,       JULY 31,      JULY 30,        JULY 31,
                                                   2022           2021          2022            2021
                                                                     (in thousands)
        Net income                               $ 122,275      $ 226,746    $   322,986      $ 357,402
        Interest expense-net(1)                     26,264         13,581         47,119         26,889
        Loss on extinguishment of debt(1)           23,462          3,166        169,578          3,271
        Other expense-net(1)                         3,195              -          2,852              -
        Income tax expense (benefit)(1)             56,397          3,009      (107,029)         44,733
        Share of equity method investments           2,821          2,486          4,196          4,581
        losses(1)
        Operating income                           234,414        248,988        439,702        436,876
        Employer payroll taxes on option                 -              -         11,717              -
        exercise(2)
        Non-cash compensation(3)                     4,321          5,864         10,179         11,728
        Asset impairments(4)                         2,231          7,354          8,154          7,354
        Professional fees(5)                           285              -          7,469              -
        Compensation settlements(6)                  3,483              -          3,483              -
        Recall accrual(7)                                -              -            560            500
        Reorganizational related costs(8)                -            449              -            449
        Adjusted operating income                $ 244,734      $ 262,655    $   481,264      $ 456,907
        


Refer to discussion "Three Months Ended July 30, 2022 Compared to Three Months Ended July 31, 2021" and "Six Months Ended July 30, 2022 Compared to

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(2) Represents employer payroll tax expense related to the option exercise by Mr. Friedman in the first quarter of fiscal 2022.

(3) Represents the amortization of the non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in October 2020.

Represents asset impairment related to property and equipment of Galleries

Represents professional fees contingent upon the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge

(6) Represents compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary.

(7) Represents accruals associated with product recalls.

(8) Represents severance costs and related payroll taxes associated with reorganizations.

Adjusted Net Income. Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance.







        Reconciliation of GAAP Net Income to Adjusted Net Income
                                                 THREE MONTHS ENDED            SIX MONTHS ENDED
                                               JULY 30,      JULY 31,       JULY 30,        JULY 31,
                                                 2022          2021           2022            2021
                                                                  (in thousands)
        Net income                            $  122,275    $  226,746    $     322,986    $  357,402
        Adjustments pre-tax:
        Loss on extinguishment of                 23,462         3,166          169,578         3,271
        debt(1)
        Employer payroll taxes on option               -             -           11,717             -
        exercise(1)
        Non-cash compensation(1)                   4,321         5,864           10,179        11,728
        Asset impairments(1)                       2,231         7,354            8,154         7,354
        Professional fees(1)                         285             -            7,469             -
        Compensation settlements(1)                3,483             -            3,483             -
        Recall accrual(1)                              -             -              560           500
        (Gain) loss on derivative                  1,453             -          (1,724)             -
        instruments-net(2)
        Amortization of debt discount(3)               -         5,865                -        11,846
        Reorganization related costs(1)                -           449                -           449
        Subtotal adjusted items                   35,235        22,698          209,416        35,148
        Impact of income tax items(4)             56,397         (305)        (107,029)       (3,256)
        Share of equity method                     2,821         2,486            4,196         4,581
        investments losses(1)
        Adjusted net income                   $  216,728    $  251,625    $     429,569    $  393,875
        


Refer to table titled "Reconciliation of GAAP Net Income to Operating Income

Represents net (gain) loss on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge

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Prior to the adoption of Accounting Standards Update ("ASU") 2020-06-Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (which was adopted as of the first quarter of fiscal 2022) ("ASU 2020-06"), certain convertible debt instruments that may be settled in cash on conversion were required to be separately accounted for as liability and equity components of the instrument in a manner that reflected the issuer's non-convertible debt borrowing rate. Accordingly, in accounting for GAAP purposes through fiscal 2021 for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the "2023 Notes") and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the "2024 Notes"), we separated the 2023

The adjustment for both the three and six months ended July 30, 2022 is based on an adjusted tax rate of 0.0%, which represents our expected cash tax liability associated with anticipated fiscal 2022 results as we do not expect

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. . .

Sep 08, 2022

COMTEX_414029312/2041/2022-09-08T17:03:35

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