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What changed in RH's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of RH's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+499 added−536 removedSource: 10-K (2023-03-29) vs 10-K (2022-03-30)

Top changes in RH's 2023 10-K

499 paragraphs added · 536 removed · 352 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

57 edited+18 added−11 removed49 unchanged
Biggest changeWe plan to expand our product sales to additional international markets and have signed leases for Design Galleries in several locations outside of North America, including the United Kingdom, France and Germany. ​ ​ ​ 4 | FORM 10-K PART I ​ Table of Contents The following tables present our retail location metrics: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 ​ ​ TOTAL LEASED ​ TOTAL LEASED ​ ​ ​ ​ SELLING SQUARE ​ ​ ​ SELLING SQUARE ​ ​ COUNT ​ FOOTAGE (1) ​ COUNT ​ FOOTAGE (1) ​ ​ ​ ​ (in thousands) ​ ​ ​ (in thousands) Beginning of period 82 ​ 1,162 83 ​ 1,111 RH Design Galleries: ​ ​ Dallas Design Gallery ​ 1 ​ ​ 38.0 ​ — ​ ​ — Oak Brook Design Gallery 1 ​ ​ 37.7 ​ — ​ ​ — Jacksonville Design Gallery ​ 1 ​ ​ 37.7 ​ — ​ ​ — Marin Design Gallery — ​ ​ — ​ 1 ​ ​ 32.9 Charlotte Design Gallery — ​ ​ — ​ 1 ​ ​ 32.4 RH Modern Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dallas RH Modern Gallery ​ (1) ​ ​ (3.9) ​ — ​ ​ — RH Baby & Child and TEEN Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Santa Monica Baby & Child and TEEN Gallery ​ (1) ​ ​ (7.3) ​ — ​ ​ — RH Legacy Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tysons legacy Gallery (relocation) ​ — ​ ​ 8.5 ​ — ​ ​ — Dallas legacy Gallery ​ (1) ​ ​ (8.4) ​ — ​ ​ — Oak Brook legacy Gallery ​ (1) ​ ​ (10.0) ​ — ​ ​ — Raleigh legacy Gallery ​ — ​ ​ — ​ 1 ​ ​ 4.4 Charlotte legacy Gallery ​ — ​ ​ — ​ (1) ​ ​ (7.0) Corte Madera legacy Gallery ​ — ​ ​ — ​ (1) ​ ​ (7.0) Westport legacy Gallery ​ — ​ ​ — ​ (1) ​ ​ (6.5) St.
Biggest changeWe plan to expand our product sales to additional international markets and have signed agreements for Design Galleries in several locations outside of North America, including the U.K., France, Germany, Spain, Italy and Belgium. ​ ​ ​ 4 | FORM 10-K PART I ​ Table of Contents The following tables present our retail location metrics: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ TOTAL LEASED ​ TOTAL LEASED ​ ​ ​ ​ SELLING SQUARE ​ ​ ​ SELLING SQUARE ​ ​ COUNT ​ FOOTAGE (1) ​ COUNT ​ FOOTAGE (1) ​ ​ (square footage in thousands) Beginning of period 81 ​ 1,254 82 ​ 1,162 RH Design Galleries: ​ ​ San Francisco Design Gallery ​ 1 ​ ​ 42.1 ​ — ​ ​ — Dallas Design Gallery ​ — ​ ​ — ​ 1 ​ ​ 38.0 Oak Brook Design Gallery ​ — ​ ​ — ​ 1 ​ ​ 37.7 Jacksonville Design Gallery ​ — ​ ​ — ​ 1 ​ ​ 37.7 RH Modern Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dallas RH Modern Gallery ​ — ​ ​ — ​ (1) ​ ​ (3.9) RH Baby & Child and TEEN Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Santa Monica Baby & Child and TEEN Gallery ​ — ​ ​ — ​ (1) ​ ​ (7.3) RH Legacy Galleries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ San Francisco legacy Gallery ​ (1) ​ ​ (4.8) ​ — ​ ​ — Troy legacy Gallery (relocation) ​ — ​ ​ (5.3) ​ — ​ ​ — Dallas legacy Gallery ​ — ​ ​ — ​ (1) ​ ​ (8.4) Oak Brook legacy Gallery ​ — ​ ​ — ​ (1) ​ ​ (10.0) Tysons legacy Gallery (relocation) ​ — ​ ​ — ​ — ​ ​ 8.5 End of period 81 ​ 1,286 81 ​ 1,254 Total leased square footage at end of period (2) ​ ​ ​ ​ 1,729 ​ ​ ​ ​ 1,672 Weighted-average leased square footage (3) ​ ​ 1,719 ​ ​ 1,602 Weighted-average leased selling square footage (3) ​ ​ ​ ​ 1,281 ​ ​ ​ ​ 1,197 (1) Leased selling square footage is retail space at our retail locations used to sell our products, as well as space for our Restaurants.
The highly differentiated design aesthetic and environment of our Galleries drives customer traffic not only to our physical spaces but also to our websites. Our Source Books and targeted emails further reinforce the RH brand image and drive sales across all of our sales channels. We also participate in a wide range of other marketing, promotional and public relations activities.
The highly differentiated design aesthetic and environment of our Galleries drives customer traffic not only to our physical spaces but also to our websites. Our Source Books and targeted emails further reinforce the RH brand image and drive sales across all of our channels. We also participate in a wide range of other marketing, promotional and public relations activities.
These domain names are perpetually renewable. We own design patents or pending design patent applications to protect the ornamental appearance of several of our products. These design patents are valid for 15 years from their date of issuance. We own copyrights, including copyright registrations or pending applications, for our website and for several of our Source Books.
These domain names are perpetually renewable. We own design patents or pending design patent applications to protect the ornamental appearance of several of our products. These design patents are valid for 15 years from their date of issuance. We own copyrights, including copyright registrations or pending applications, for our website and our Source Books.
For example, we have historically experienced some seasonality in our business trends as our sales are typically higher in the second fiscal quarter, which correlates to a peak selling season for outdoor items including outdoor furniture. As a result of these factors, our working capital requirements and demands may fluctuate during the year.
For example, we have historically experienced some seasonality in our business trends as our sales are typically higher in the second fiscal quarter, which correlates to a peak selling season for outdoor items and outdoor furniture. As a result of these factors, our working capital requirements and demands may fluctuate during the year.
These include targeted Source Book circulation, email communications, promotional mailings, print advertisements, and public relations activities and events. We use our customer database to tailor our programs and increase the efficiency of our marketing and promotion initiatives. We leverage our marketing and advertising expenses across all our channels as we seek to optimize the efficiency of our investment.
These include targeted Source Book circulation, email communications, promotional mailings, print advertisements, and public relations activities and events. We use our customer database to tailor our programs and increase the efficiency of our marketing and promotional initiatives. We leverage our marketing and advertising expenses across all our channels as we seek to optimize the efficiency of our investment.
We develop close relationships with our vendors in order to achieve significant cost savings and improve our product development process by eliminating the use of most third-party purchasing agents in favor of a model in which we directly manage our vendors. Distribution and Delivery We manage the distribution and delivery of our products through our distribution centers.
We develop relationships with our vendors in order to achieve significant cost savings and improve our product development process by eliminating the use of most third-party purchasing agents in favor of a model in which we directly manage our vendors. Distribution and Delivery We manage the distribution and delivery of our products through our distribution centers.
Each of our trademark registrations is perpetually renewable provided that we use or continue to use the trademarks in commerce in the particular geographic market and for the goods or services covered by the registration. In addition, we own many domain names, including “rh.com,” “restorationhardware.com,” “rhmodern.com,” “rhbabyandchild.com,” “rhteen.com,” “rhbeachouse.rh.com,” “rhskihouse.rh.com,” “waterworks.com” and others that include our trademarks.
Each of our trademark registrations is perpetually renewable provided that we use or continue to use the trademarks in commerce in the particular geographic market and for the goods or services covered by the registration. In addition, we own many domain names, including “rh.com,” “restorationhardware.com,” “rhmodern.com,” “rhbabyandchild.com,” “rhteen.com,” “rhbeachouse.com,” “rhskihouse.com,” “rhguesthouse.com,” “waterworks.com” and others that include our trademarks.
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.
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 sized to the potential of each market and the size of our assortment.
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 13 of our Design Gallery locations, which includes Restaurants and Wine Bars.
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, respectively. 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.
Source Books We produce a series of catalogs, which we refer to as Source Books, to showcase our merchandise assortment. Our Source Books include RH Interiors, RH Modern, RH Outdoor, RH Baby & Child and TEEN, RH Beach House, RH Ski House and RH Rugs. Additionally, we plan to launch the RH Contemporary Source Book in fiscal 2022.
Source Books We produce a series of catalogs, which we refer to as Source Books, to showcase our merchandise assortment. Our Source Books include RH Interiors, RH Modern, RH Outdoor, RH Baby & Child and TEEN, RH Beach House, RH Ski House and RH Rugs. Additionally, we launched the RH Contemporary Source Book in fiscal 2022.
The RH Members Program allows our customers to shop for what they want, when they want, and receive the greatest value, which has resulted in orders and sales being more evenly distributed throughout the year. During fiscal 2021, our members drove approximately 97% of sales in our core RH business, and we had approximately 459,000 members at year end.
The RH Members Program allows our customers to shop for what they want, when they want, and receive the greatest value, which has resulted in orders and sales being more evenly distributed throughout the year. During fiscal 2022, our members drove approximately 97% of sales in our core RH business, and we had approximately 351,000 members at year end.
We believe that our trademarks, design patents, and copyrights have significant value and we vigorously protect them against infringement.
We believe that our trademarks, domain names, design patents, and copyrights have significant value and we vigorously protect them against infringement.
We have identified key learnings from our real estate transformation that have supported the development of a multi-tier market approach described below that we believe will optimize both market share and return on invested capital. ​ ​ ​ PART I FORM 10-K | 3 ​ Table of Contents First, we have developed prototype Design Galleries that are innovative and flexible blueprints that enable us to more quickly place our disruptive product assortment and immersive retail experience into the market.
We have identified key learnings from our real estate transformation that have supported the development of a multi-tier market approach described below that we believe will optimize both market share and return on invested capital. ​ ​ ​ PART I FORM 10-K | 3 ​ Table of Contents First, we have architected Design Galleries to be innovative and flexible formats that will enable us to more quickly place our disruptive product assortment and immersive retail experience into the market.
Websites Our primary RH websites, www.rh.com , www.rhmodern.com, www.rhbabyandchild.com and www.rhteen.com , provide our customers with the ability to chat with a designer and purchase our merchandise online. We sell Waterworks products online through www.waterworks.com.
Websites Our primary RH websites, www.rh.com , www.rhmodern.com, www.rhbabyandchild.com and www.rhteen.com , provide our customers with the ability to purchase our merchandise online. We sell Waterworks products online through www.waterworks.com .
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. Products and Product Development We have positioned RH as a lifestyle brand and design authority by offering expansive merchandise assortments.
We have secured a number of locations in various markets in the U.K. and continental Europe for future Design Galleries and are currently in lease or purchase negotiations for additional locations. Products and Product Development We have positioned RH as a lifestyle brand and design authority by offering expansive merchandise assortments.
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 our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion.
We believe situating our Galleries in desirable locations, such as iconic buildings and luxury retail malls, is critical to the success of our business.
We believe situating our Galleries in desirable locations, such as iconic buildings and luxury retail shopping centers, is critical to the success of our business.
For an annual fee, the RH Members Program provides a set discount every day across all RH brands, excluding RH Hospitality and Waterworks, in addition to other benefits including complimentary interior design services through the RH Interior Design program and eligibility for preferred financing plans on the RH Credit Cards.
For an annual fee, the RH Members Program provides a set discount every day across the RH brand, excluding RH Hospitality and Waterworks, in addition to other benefits, including complimentary design services through the RH Interior Design program and eligibility for preferred financing plans on the RH Credit Card.
These campaigns include media coverage in design, lifestyle, culture/society and specialty publications, as well as in-Gallery events related to new Gallery openings and product launches. In addition, we engage in print advertising in brand-relevant publications such as Architectural Digest, Elle Décor, Luxe Interiors + Designs, T: The New York Times Style Magazine, WSJ. Magazine, Business of Home and others.
These campaigns include media coverage in design, lifestyle, culture/society and specialty publications, as well as in-Gallery events related to new Gallery openings and product launches. In addition, we engage in print advertising in brand-relevant publications such as Architectural Digest, Elle Décor, T: The New York Times Style Magazine, WSJ.
As of January 29, 2022, we operated 38 outlet stores. Marketing and Advertising Our Galleries, websites and Source Books are the primary branding and advertising vehicles for the RH brands. In addition, we employ a variety of marketing and advertising techniques to drive customer traffic across all our channels, strengthen and reinforce our brand image and acquire new customers.
As of January 28, 2023, we operated 37 outlet stores. Marketing and Advertising Our Galleries, websites and Source Books are the primary branding and advertising vehicles for the RH brand. In addition, we employ a variety of marketing and advertising techniques to drive customer traffic across all our channels, strengthen and reinforce our brand image and acquire new customers.
As such, we are actively pursuing the expansion of the RH brand globally with the objective of launching international locations in Europe, beginning in 2022 with the opening of RH England, The Gallery at the Historic Aynhoe Park.
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 Gallery at the Historic Aynho Park, this summer.
Retail Locations As of January 29, 2022, our retail locations comprise RH Galleries and Waterworks Showrooms: ​ ​ ​ ​ ​ ​ ​ ​ ​ AVERAGE LEASED SELLING ​ COUNT SQUARE FOOTAGE (1) RH ​ ​ ​ ​ Design Galleries (2) ​ 27 ​ 33,500 Legacy Galleries ​ 36 ​ 7,500 Modern Galleries ​ 1 ​ 12,800 Baby & Child and TEEN Galleries ​ 3 ​ 2,800 Total Galleries ​ 67 ​ ​ Waterworks Showrooms ​ 14 ​ 4,100 Total retail locations ​ 81 ​ ​ (1) Average leased selling square footage is calculated based on total leased selling square footage divided by total locations.
Retail Locations As of January 28, 2023, our retail locations comprise RH Galleries and Waterworks Showrooms: ​ ​ ​ ​ ​ ​ ​ ​ ​ AVERAGE LEASED SELLING ​ COUNT SQUARE FOOTAGE (1) RH ​ ​ ​ ​ Design Galleries (2) ​ 28 ​ 33,800 Legacy Galleries ​ 35 ​ 7,400 Modern Galleries ​ 1 ​ 12,800 Baby & Child and TEEN Galleries ​ 3 ​ 2,800 Total Galleries ​ 67 ​ ​ Waterworks Showrooms ​ 14 ​ 4,100 Total retail locations ​ 81 ​ ​ (1) Average leased selling square footage is calculated based on total leased selling square footage divided by total locations.
We offer dominant merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, 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 offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child and teen furnishings. Our retail business is fully integrated across our multiple channels of distribution.
We believe our supply chain and fulfillment operations allow us to manage customer orders and distribute merchandise to our customers in an efficient and cost-effective manner. Competition The home furnishings sector is highly competitive.
We believe our supply chain and fulfillment operations allow us to manage customer orders and distribute merchandise to our customers in an efficient and cost-effective manner, and we continue to identify opportunities to improve the delivery of our products. Competition The home furnishings sector is highly competitive.
(2) Thirteen of our Design Galleries include an integrated RH Hospitality experience. ​ Our Galleries reinforce our luxury brand aesthetic and are highly differentiated from other home furnishings retailers. We have revolutionized the customer experience by showcasing products in a sophisticated lifestyle setting, consistent with the imagery and product presentation featured on our websites and in our Source Books.
We also have RH Hospitality in our one RH Guesthouse. ​ Our Galleries reinforce our luxury brand aesthetic and are highly differentiated from other home furnishings retailers. We have revolutionized the customer experience by showcasing products in a sophisticated lifestyle setting, consistent with the imagery and product presentation featured on our websites and in our Source Books.
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.
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 opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues.
(3) Weighted-average leased square footage and leased selling square footage are calculated based on the number of days a retail location was opened during the period divided by the total number of days in the period. ​ ​ ​ PART I FORM 10-K | 5 ​ Table of Contents The following list shows the number of retail locations in each U.S. state, each Canadian province and in the U.K. where we operate as of January 29, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ LOCATION COUNT LOCATION COUNT LOCATION COUNT Alabama 1 Massachusetts 2 Tennessee 1 Arizona 2 Michigan 1 Texas 7 California 19 Minnesota 1 Utah 1 Colorado 2 Missouri 1 Virginia 2 Connecticut 3 Nevada 1 Washington 1 Florida 6 New Jersey 2 District of Columbia 1 Georgia 2 New York 4 Alberta 2 Illinois 3 North Carolina 2 British Columbia 1 Indiana 1 Ohio 3 Ontario 1 Kansas 1 Oklahoma 1 London (1) 1 Louisiana 1 Oregon 1 Maryland 1 Pennsylvania 2 Total 81 (1) The London retail location is a Waterworks Showroom.
In addition to the retail locations, in fiscal 2022 we opened our RH Guesthouse with approximately 13,800 leased selling square footage. ​ ​ ​ PART I FORM 10-K | 5 ​ Table of Contents The following list shows the number of retail locations in each U.S. state, each Canadian province and in the U.K. where we operate as of January 28, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ LOCATION COUNT LOCATION COUNT LOCATION COUNT Alabama 1 Massachusetts 2 Tennessee 1 Arizona 2 Michigan 1 Texas 7 California 19 Minnesota 1 Utah 1 Colorado 2 Missouri 1 Virginia 2 Connecticut 3 Nevada 1 Washington 1 Florida 6 New Jersey 2 District of Columbia 1 Georgia 2 New York 4 Alberta 2 Illinois 3 North Carolina 2 British Columbia 1 Indiana 1 Ohio 3 Ontario 1 Kansas 1 Oklahoma 1 London (1) 1 Louisiana 1 Oregon 1 Maryland 1 Pennsylvania 2 Total 81 (1) The London retail location is a Waterworks Showroom.
Externally our strategy is designed to come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
In fiscal 2021, we sourced approximately 75% of our purchase dollar volume from approximately 29 vendors. In fiscal 2021, one vendor accounted for 11% of our purchase dollar volume.
In fiscal 2022, we sourced approximately 75% of our purchase dollar volume from approximately 25 vendors. In fiscal 2022, one vendor accounted for 13% of our purchase dollar volume.
Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose, as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops.
Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops. Leased selling square footage includes approximately 4,800 square feet as of fiscal 2021 related to one owned retail location.
We believe that these efforts drive increased brand awareness, leading to higher sales over time. RH Members Program The RH Members Program reimagines and simplifies the shopping experience.
Magazine, Business of Home, Luxe Interiors + Designs, C Magazine and others. We believe that these efforts drive increased brand awareness, leading to higher sales over time. RH Members Program The RH Members Program reimagines and simplifies the shopping experience.
Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose, as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops.
Leased selling square footage excludes backrooms at retail locations used for storage, office space, food preparation, kitchen space or similar purpose, as well as exterior sales space located outside a retail location, such as courtyards, gardens and rooftops. (2) We have an integrated RH Hospitality experience in fourteen of our Design Galleries.
We have a limited number of long-term merchandise supply contracts, but we believe that we generally have strong relationships with our product vendors. Although we transact business primarily on an order-by-order basis, we typically work with most of our vendors over extended periods of time, and many vendors continue to make long-term capacity investments to serve our increasing demands.
Although we transact business primarily on an order-by-order basis, we typically work with many of our vendors over extended periods of time, and many vendors continue to make long-term capacity investments to serve our increasing demands.
The prototype model is a standard we will continue to utilize and innovate based on key learnings from more recent Design Gallery openings.
We will continue to utilize these designs and innovate based on key learnings from more recent Design Gallery openings.
However, many smaller specialty retailers may lack the financial resources, infrastructure, scale and national brand identity necessary to compete effectively with us.
Certain of our competitors are larger and have greater financial, marketing and other resources than us. However, many smaller specialty retailers may lack the financial resources, infrastructure, scale and national brand identity necessary to compete effectively with us .
The prototype has approximately 40,000 leased selling square feet, inclusive of our integrated hospitality experience, presents our assortments across our businesses and contains interior design offices and presentation rooms where design professionals can work with clients on their projects. The prototype model is capital efficient and accelerates the development process.
Our most common Design Galleries have approximately 30,000 to 40,000 leased selling square feet, inclusive of our integrated hospitality experience, and present our product assortments across our businesses and contain interior design offices and presentation rooms where design professionals work with clients on their projects. These designs are capital efficient and accelerate the development process.
On December 15, 2016, Restoration Hardware Holdings, Inc. filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change its name to “RH,” effective January 1, 2017. ​ ​ ​ PART I FORM 10-K | 9 ​ Table of Contents Regulation and Legislation We are subject to numerous regulations, including labor and employment laws, customs, laws governing truth-in-advertising, consumer protection, privacy, safety, real estate, environmental and zoning and occupancy laws, and other laws and regulations that regulate retailers and govern the promotion and sale of merchandise and the operation of our retail and hospitality locations, outlets and warehouse facilities, in the United States and other international locations in which we operate presently or plan to in the future, as well as in jurisdictions from which we source our products.
Regulation and Legislation We are subject to numerous regulations, including labor and employment laws, customs, laws governing truth-in-advertising, consumer protection, privacy, safety, real estate, environmental and zoning and occupancy laws, and other laws and regulations that regulate retailers and govern the promotion and sale of merchandise and the operation of our retail and hospitality locations, outlets and warehouse facilities, in the United States and other international locations in which we operate presently or plan to in the future, as well as in jurisdictions from which we source our products.
We also compete with national and regional home furnishing retailers and department stores, in addition to mail order catalogs and online retailers focused on home furnishings, by offering what we believe is superior quality, highly distinctive design styles and a sophisticated lifestyle presentation in our product offering.
In addition, we compete with mail order catalogs and online retailers focused on home furnishings. ​ ​ ​ 8 | FORM 10-K PART I ​ Table of Contents We compete b y offering what we believe is superior quality, highly distinctive design styles and a sophisticated lifestyle presentation in our product offering.
These Galleries are tailored to reflect the local culture and are sized to the potential of each market. Examples of current indigenous Bespoke Galleries include our location in Yountville, California, as well as our Gallery under development in Aspen, Colorado. The cadence of our Gallery openings depends upon a number of factors.
Third, we will continue to open Bespoke Galleries in the best second-home markets where Galleries are tailored to reflect the local culture and are sized to the potential of each market. Examples of current Bespoke Galleries include our location in Yountville, California, as well as our Gallery under development in Aspen, Colorado.
ITEM 1. BUSINESS Overview RH (collectively, “we,” “us,” or the “Company”) is 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.
ITEM 1. BUSINESS Overview RH (collectively, “we,” “us,” 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 also believe that our success depends in substantial part on our ability to originate and define product trends, as well as to timely anticipate, gauge and react to changing consumer demands. Certain of our competitors are larger and have greater financial, marketing and other resources than us.
We also believe that our success depends in substantial part on our ability to originate and define product trends, as well as to timely anticipate, gauge and react to changing consumer demands. Many of our competitors seek to compete with us by offering products that are similar to our merchandise at lower price points.
Second, we will continue to develop and open larger Bespoke Design Galleries in the top metropolitan markets, similar to those we opened in New York and Chicago. These iconic locations are highly profitable statements for our brand, and we believe they create a long-term competitive advantage that will be difficult to duplicate.
These iconic locations are highly profitable statements for our brand, and we believe they create a long-term competitive advantage that will be difficult to duplicate.
Our strategy to elevate the design and quality of our product will continue as we introduce RH Contemporary in 2022. We also have plans to introduce RH Couture Upholstery, RH Bespoke Furniture and RH Color over the next several years. ​ Gallery Transformation . Our product is elevated and rendered more valuable by our architecturally inspiring Galleries.
Over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color. ​ Gallery Transformation . Our product is elevated and rendered more valuable by our architecturally inspiring Galleries.
We strongly believe our performance is enhanced by a workforce comprising individuals with diverse backgrounds, skills and experience that align with the needs of our business. We are committed to operating our environments with the highest safety standards to ensure the health and well-being of our guests and team members.
We strongly believe our performance is enhanced by a workforce composed of individuals with diverse backgrounds, skills and experience that align with the needs of our business, culture and Values.
The World of RH will include 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 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. ​ Global Expansion .
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. ​ Global Expansion.
We offer a white glove home delivery service for our larger merchandise and furniture categories, where third-party personnel deliver fully assembled items to the location of our customers’ choice. We believe there is an opportunity to improve the customer experience by taking greater control of the home delivery experience over time.
We operate portions of our home delivery services in 21 key markets to leverage operating costs and improve our customers’ delivery experience, while reducing returns and damage to our products. We offer a white glove home delivery service for our larger merchandise and furniture categories, where third-party personnel deliver fully assembled items to the location of our customers’ choice.
We compete with the interior design trade and specialty stores, as well as antique dealers and other merchants that provide unique items and custom-designed product offerings at higher price points, by providing a broader product assortment at an exceptional value based both upon the price and quality of our products.
We compete with the interior design trade and specialty stores, as well as antique dealers and other merchants that provide unique items and custom-designed products at higher price points. We also compete with a number of other home furnishing retailers, including national and regional businesses as well as new market participants.
We do not discriminate against any applicant or associate and have a policy outlining these principles. This policy governs all aspects of employment, including recruitment, hiring, training, promotion, compensation, discipline, job assignments, benefits, transfer and discharge. We maintain a diverse workforce. RH is an equal opportunity employer, and we believe in meritocratic hiring.
We have a policy that prohibits us from discriminating against any applicant or associate and this policy governs all aspects of employment, including recruitment, hiring, training, promotion, compensation, discipline, job assignments, benefits, transfer and discharge. We believe that our commitment to diversity is demonstrated by the composition of our workforce.
We believe that many third-party furniture delivery providers are designed to support mass and mid-market companies and that significant opportunity exists for developing improved solutions for the luxury market. We believe we have dramatically enhanced the customer experience while reducing return rates, damages and deliveries per order by enhancing the quality of our delivery providers through metric-based accountability standards.
We believe there is an opportunity to improve the customer experience by taking greater control of the home delivery experience over time. We believe that many third-party furniture delivery providers are designed to support mass and mid-market companies and that significant opportunity exists for developing improved solutions for the luxury market.
Based on total dollar volume of purchases for fiscal 2021, 69% of our products were sourced from Asia, with 34% sourced from China, 15% from the United States and the remainder from other countries and regions. In addition, we perform limited manufacturing activities in the United States.
Based on total dollar volume of purchases for fiscal 2022, 71% of our products were sourced from Asia, with 29% sourced from China, 12% from the United States and the remainder from other countries and regions. We have a limited number of long-term merchandise supply contracts, but we believe that we generally have strong relationships with our product vendors.
Leased selling square footage includes approximately 4,800 square feet as of both fiscal 2021 and fiscal 2020 related to an owned retail location. (2) Total leased square footage includes approximately 5,400 square feet as of both fiscal 2021 and fiscal 2020 related to an owned retail location.
(2) Total leased square footage includes approximately 5,400 square feet as of fiscal 2021 related to one owned retail location. (3) Weighted-average leased square footage and leased selling square footage are calculated based on the number of days a retail location was opened during the period divided by the total number of days in the period.
Our culture is driven by our Chairman and Chief Executive Officer and the senior leadership team, who instill a company-wide commitment to our values of People, Quality, Service and Innovation. We believe our distinct corporate culture allows us to attract highly talented individuals who are passionate, driven and who share our vision.
Our People We are a vision-led organization with a strong culture, led by our Chairman and Chief Executive Officer, Gary Friedman, in partnership with our senior leadership team. Together, they instill a company-wide commitment to our Vision, Values and Beliefs. Our Values – People, Quality, Service, and Innovation – are brought to life by our associates across the organization.
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 Beach House, RH Ski House, RH Outdoor, RH Baby & Child, RH TEEN and Waterworks.
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.
We will be opening our Bespoke Design Gallery, RH San Francisco, The Gallery at the Historic Bethlehem Steel Building, in spring 2022 and expect to open additional Bespoke locations in the coming years. Third, we will continue to open indigenous Bespoke Galleries in the best second-home markets where the wealthy and affluent visit and vacation.
We opened our Bespoke Design Gallery, RH San Francisco, The Gallery at the Historic Bethlehem Steel Building, in May 2022 and expect to open additional Bespoke locations in the coming years, including RH England, The Gallery at the Historic Aynho Park, RH New Jersey, The Gallery at the Historic Alnwick Hall and other locations in the U.S. and Europe.
We require our vendors to adhere to our Vendor Code of Conduct, which can be found on the Investor Relations section of our website, located at ir.rh.com under “Governance / Environmental, Social & Governance.” Intellectual Property The “RH,” “Restoration Hardware,” “RH Interiors,” “RH Modern,” “RH Outdoor,” “RH Baby & Child,” “RH TEEN,” “RH Beach House,” “RH Ski House,” “RH Rugs” and “Waterworks,” and “Waterworks Studio” trademarks, among others, are registered or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the trademark registries of several foreign countries.
Environmental, Social and Governance Our environmental , social and certain other governance efforts are implemented through our environmental, social and governance (“ESG”) programs, which are designed to align our approach to ESG issues with the interests of our people, customers and shareholders and their respective ESG concerns. ​ ​ ​ PART I FORM 10-K | 9 ​ Table of Contents Intellectual Property The “RH,” “Restoration Hardware,” “RH Interiors,” “RH Contemporary,” “RH Modern,” “RH Outdoor,” “RH Baby & Child,” “RH TEEN,” “RH Beach House,” “RH Ski House,” “RH Guesthouse,” “RH Rugs,” “The World of RH” and “Waterworks,” trademarks, among others, are registered or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the trademark registries of several foreign countries.
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 have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world.
For more information, refer to Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview. Key Value-Driving Strategies In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives: Product Elevation .
In addition, we continue to develop our supply chain in the U.K. and Europe in connection with our global expansion and plan to use third-party providers to serve our customers. We operate portions of our home delivery services in 22 key markets to leverage operating costs and improve our customers’ delivery experience, while reducing returns and damage to our products.
We believe we have dramatically enhanced the customer experience while reducing return rates, damages and deliveries per order by enhancing the quality of our delivery providers through metric-based accountability standards. In addition, we have one third-party distribution center in Europe and continue to develop our supply chain strategy in connection with our global expansion.
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We have experienced a significant improvement in our business during fiscal 2021 despite the ongoing challenges presented by the COVID-19 pandemic and the disruption it has caused in our business operations beginning in the first quarter of fiscal 2020 and throughout fiscal 2021.
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In addition, we opened our first RH Guesthouse in New York in September 2022, a first-of-its-kind hospitality experience for travelers seeking privacy and luxury. The property features six guest rooms, three guest suites and a private residence, as well as The Dining Room & Terrace.
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Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges, including port delays, which impacted our ability to convert business demand into revenues at normal historical rates.
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Macroeconomic Factors There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, rising interest and mortgage rates, and uncertainties in the global financial markets related to the foregoing as well as, among other things, the war in Ukraine and recent failures of several financial institutions, including Silicon Valley Bank and others.
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We have continued to navigate changes in operational restrictions based upon changes in local conditions and regulations, and as pandemic-related restrictions continue to be lifted in fiscal 2022 we may see consumer spending patterns shift away from spending on the home and home-related categories, such as home furnishings, and consumers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.
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These and other macroeconomic factors may have a number of adverse effects on economic conditions and markets in which we operate, including the housing market, with the potential for an economic recession and a sustained downturn in the housing market.
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For more information, refer to Item 1A—Risk Factors—The COVID-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.
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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.
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Our most recently opened Design Galleries in Dallas, Texas, Oak Brook, Illinois and Jacksonville, Florida are prototype Design Galleries, and an upcoming prototype location includes Palo Alto, California, which is expected to open in the second half of fiscal 2022. We anticipate the prototype Design Galleries will represent the format of most of our upcoming Design Galleries in North America.
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We believe that these macroeconomic factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters. ​ 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 macroeconomic factors.
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Louis legacy Gallery (relocation) ​ — ​ ​ — ​ — ​ ​ 2.9 Waterworks Showrooms: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ New York 59th Street Showroom ​ — ​ ​ — ​ (1) ​ ​ (1.4) End of period 81 ​ 1,254 82 ​ 1,162 Total leased square footage at end of period (2) ​ ​ ​ ​ 1,672 ​ ​ ​ ​ 1,559 Weighted-average leased square footage (3) ​ ​ 1,602 ​ ​ 1,536 Weighted-average leased selling square footage (3) ​ ​ ​ ​ 1,197 ​ ​ ​ ​ 1,141 (1) Leased selling square footage is retail space at our retail locations used to sell our products, as well as space for our restaurants.
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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.
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We believe we are positioned to gain market share from both of these segments and drive growth. ​ ​ ​ 8 | FORM 10-K PART I ​ Table of Contents Our People At RH, we believe deeply that the “right” people are our greatest asset.
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We entered this industry with the opening of our RH Guesthouse in New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen.
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As of January 29, 2022, we had approximately 6,500 associates, of which approximately 800 were part-time associates. As of that date, approximately 2,300 of our associates were based in our retail locations and outlets. None of our employees are represented by a union, and we have had no labor-related work stoppages. We believe that relations with our associates are good.
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Launched in the spring of 2022, 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.
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The success of our business depends upon our ability to retain continued service of certain key personnel, particularly our Chairman and Chief Executive Officer, Gary Friedman, and to attract, retain and motivate qualified leaders throughout our Company, as well as qualified associates across all parts of our organization, including Galleries, Restaurants, distribution centers, home delivery centers and customer care centers, both in the United States and internationally.
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Examples of these upcoming Galleries include Palo Alto, California and Cleveland, Ohio. Second, we will continue to develop and open larger Bespoke Design Galleries in the top metropolitan markets, similar to those we opened in New York and Chicago.
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Our goal is to have the most qualified person in every position throughout our organization. As we are headquartered in the San Francisco Bay Area, a highly dynamic and competitive market for talent, we seek to provide competitive compensation for our people in order to attract and retain the best available talent.
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Fourth, we have developed alternative Design Gallery formats with varying sizes that are suited to many smaller and mid-sized North American markets, and we are testing this approach as we open new Galleries in different new locations.
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We expect our values to be maintained throughout our business, including our supply chain.
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Finally, we believe there is an opportunity to address new markets locally by opening new Design Studios in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation.
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We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena and our former San Francisco Gallery in the Design District, where we have approximately 2,000 to 5,000 square feet and are able to generate substantial annual revenues. The cadence of our Gallery openings depends upon a number of factors.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur ability to re-negotiate favorable terms on an expiring lease, to arrange for the sale of an owned property or to negotiate favorable terms for a suitable alternate location could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords and other factors that are not within our control.
Biggest changeWith respect to a number of our Gallery development projects, we are broadly undertaking increased development risk with respect to our real estate investments and these risks could increase our financial exposure to development cost overruns, construction delays and other negative factors which exposes us to increased downside risks if we encounter difficulties in implementing these strategies such as operational and financial challenges related to later than expected openings of new Gallery projects as well as substantial increases in our costs. ​ ​ ​ 18 | FORM 10-K PART I ​ Table of Contents Our ability to renegotiate favorable terms on an expiring lease, to arrange for the sale of an owned property or to negotiate favorable terms for a suitable alternate location could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords and other factors that are not within our control.
Failure to supply our customers with high-quality merchandise in a timely and effective manner, additional product recalls, or any perception that we are not maintaining adequate sourcing and quality control processes could damage our reputation and brand image and lead to an increase in product returns or exchanges or in customer litigation (including class-action lawsuits), increasing routine and non-routine litigation costs.
Failure to supply our customers with high-quality merchandise in a timely and effective manner, additional product recalls, or any perception that we are not maintaining adequate sourcing and quality control processes could damage our reputation and brand image and lead to an increase in product returns, exchanges or customer litigation (including class-action lawsuits), increasing routine and non-routine litigation costs.
Such competitors may also purchase products in significantly greater volume that we do, which may enable them to sell the products at reduced cost or flood the market with similar products. Any difficulties that we experience in our ability to obtain products in sufficient quality and quantity from our vendors could have a material adverse effect on our business.
Such competitors may also purchase products in significantly greater volume than we do, which may enable them to sell the products at reduced cost or flood the market with similar products. Any difficulties that we experience in our ability to obtain products in sufficient quality and quantity from our vendors could have a material adverse effect on our business.
If the regulations applicable to our business operations were to change or were violated by us or our vendors or buying agents, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products and harm our business and results of operations.
If the regulations applicable to our business operations were to change or were violated by us or our vendors or buying agents, the costs of certain goods could increase, or we could experience delays in shipments of our goods, detentions, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products and harm our business and results of operations.
We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection, e-commerce, privacy, health and safety, real estate, environmental and zoning and occupancy laws, intellectual property laws and other laws and regulations that regulate retailers, food and beverage providers or otherwise govern our business.
We are subject to numerous regulations, including labor and employment, customs, sanctions, truth-in-advertising, consumer protection, e-commerce, privacy, health and safety, real estate, environmental and zoning and occupancy laws, intellectual property laws and other laws and regulations that regulate retailers, food and beverage providers or otherwise govern our business.
Changes in our business operations and financial results, regulatory and other legal developments including potential changes in tax laws could also impact our share repurchase program and other capital activities. ​ Expectations of our company relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
Changes in our business operations and financial results, regulatory and other legal developments, including potential changes in tax laws could also impact our share repurchase program and other capital allocation activities. ​ Expectations of our company relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
Our utilization of third-party delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, as well as strikes, work stoppages and inclement weather, which may impact shipping companies’ abilities to provide delivery services that adequately meet our shipping needs.
Our utilization of third-party delivery services for shipments is subject to risks, including increases in rates and fuel prices, which would increase our shipping costs, as well as strikes, work stoppages and inclement weather, which may impact shipping companies’ abilities to provide delivery services that adequately meet our shipping needs.
Due to these factors, our results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year. Our results of operations may also vary relative to corresponding periods in prior years.
Due to these kinds of factors, our results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year. Our results of operations may also vary relative to corresponding periods in prior years.
While we are adopting various measures to improve the efficiency and effectiveness of our real estate development efforts with respect to opening new Galleries, the strategies may not be effective and may not have the effects that we anticipate.
While we are adopting various measures to improve the efficiency and effectiveness of our real estate development efforts with respect to opening new Galleries, the strategies may not be effective or have the effects that we anticipate.
Our strategies include (1) our “capital light” leasing deals, where a substantial portion of the capital requirement would be funded by the landlord; (2) our real estate development model where we expect either to do a sale-leaseback transaction or to pre-sell the property and structure the transaction such that the capital to build the project is advanced by the buyer during construction; and (3) various joint venture approaches, where we share the upside of the development with third parties including the developer/landlord.
Our strategies include (1) our “capital light” leasing deals, where a substantial portion of the capital requirement would be funded by the landlord; (2) our real estate development model where we expect either to do a sale-leaseback transaction or to pre-sell the property and structure the transaction such that the capital to build the project is advanced by the buyer during construction; and (3) various joint venture approaches, where we share the upside of the development with third parties such as the developer/landlord.
In addition, the San Francisco Bay Area, where our headquarters are located, is a high cost of living location in which there is vigorous competition for qualified personnel. The process of identifying personnel with the combination of skills and attributes required to carry out our goals is often lengthy and the cost of securing the right talent can be substantial.
In addition, in the San Francisco Bay Area, where our headquarters are located, there is a high cost of living and vigorous competition for qualified personnel. The process of identifying personnel with the combination of skills and attributes required to carry out our goals is often lengthy and the cost of securing the right talent can be substantial.
We expect the amount of products that we source from China will be lower in fiscal 2022 compared to fiscal 2021, but the exact product mix in terms of vendor factory locations is subject to a range of different factors and is inherently difficult to predict with accuracy.
We expect the amount of products that we source from China will be lower in fiscal 2023 compared to fiscal 2022, but the exact product mix in terms of vendor factory locations is subject to a range of different factors and is inherently difficult to predict with accuracy.
Despite our ongoing efforts to improve customer satisfaction, we may fail to maintain the level of quality for some of our products that is necessary to satisfy our customers. For example, our vendors may not adhere to our quality control standards, and we may not identify a quality deficiency before merchandise ships to our stores or customers.
Despite our ongoing efforts to improve customer satisfaction, we may fail to maintain the level of quality for some of our products that is necessary to satisfy our customers. For example, our vendors may not adhere to our quality control standards, and we may not identify a quality deficiency before merchandise ships to our customers.
Therefore, we may be dependent on particular vendors that produce popular items, and any vendor could discontinue selling to us at any time. In addition, the expansion of our business into new U.S. or international markets or new product categories could put pressure on our ability to source sufficient quantities of our products from such vendors.
Therefore, we may be dependent on particular vendors that produce popular items, and any vendor could discontinue selling to us at any time. In addition, the expansion of our business into new markets or new product categories could put pressure on our ability to source sufficient quantities of our products from such vendors.
In addition, the market price of our common stock may fluctuate significantly in response to a number of other factors, including those described elsewhere in this “Risk Factors” section, as well as the following: macroeconomic conditions including inflation and factors affecting the housing market; quarterly variations in our results of operations compared to market expectations; changes in preferences of our customers; announcements of new products or significant price reductions by us or our competitors; size of our public float and the price per share of our common stock; stock price performance of our competitors; fluctuations in stock market prices and volumes; default on our indebtedness; actions by competitors or other shopping center tenants; changes in senior leadership or key personnel; changes in financial estimates by securities analysts or failure to meet their expectations; actual or anticipated negative earnings or other announcements by us or other retail companies; downgrades in our credit ratings or the credit ratings of our competitors; natural or man-made disasters or other similar events including health issues such as COVID-19; ​ ​ ​ PART I FORM 10-K | 31 ​ Table of Contents issuances or expected issuances of capital stock; and global economic, legal and regulatory changes unrelated to our performance.
In addition, the market price of our common stock may fluctuate significantly in response to a number of other factors, including those described elsewhere in this “Risk Factors” section, as well as the following: macroeconomic conditions, including inflation, rising interest rates and factors affecting the housing market; quarterly variations in our results of operations compared to market expectations; changes in preferences of our customers; announcements of new products or significant price reductions by us or our competitors; ​ ​ ​ PART I FORM 10-K | 27 ​ Table of Contents size of our public float and the price per share of our common stock; stock price performance of our competitors; fluctuations in stock market prices and volumes; default on our indebtedness; actions by competitors or other shopping center tenants; changes in senior leadership or key personnel; changes in financial estimates by securities analysts or failure to meet their expectations; actual or anticipated negative earnings or other announcements by us or other retail companies; downgrades in our credit ratings or the credit ratings of our competitors; natural or man-made disasters or other similar events, including global health emergencies; issuances or expected issuances of capital stock; and global economic, legal and regulatory changes unrelated to our performance.
If we are unable to accurately predict and track demand, we may be required to mark down the price of certain products in order to sell excess inventory or we may be required to sell such inventory through our outlet stores or warehouse sales.
If we are unable to accurately predict and track demand for our products, we may be required to mark down the price of certain products in order to sell excess inventory or we may be required to sell such inventory through our outlet stores.
For example, the EU General Data Protection Regulation (“GDPR”), which took effect in May 2018, and the California Consumer Privacy Act, which took effect in January 2020, impose stringent requirements on how we and third parties with whom we contract collect and process personal information, and provide for significant penalties for noncompliance.
For example, the EU General Data Protection Regulation (“GDPR”), which took effect in May 2018, and the California Consumer Privacy Act, which took effect in January 2020, and the California Privacy Rights Act, which took effect starting January 1, 2023, impose stringent requirements on how we and third parties with whom we contract collect and process personal information, and provide for significant penalties for noncompliance.
Although we have previously been successful in reducing such indebtedness due in part to the strong cash flow of our business, we may in the future elect to incur further debt in addition to the $2.0 billion of debt that we raised in October 2021 in connection with our Term Loan Credit Agreement.
Although we have previously been successful in reducing such indebtedness due in part to the strong cash flow of our business, we may in the future elect to incur further debt in addition to the $2.50 billion of Term Debt that we raised in October 2021 and May 2022 in connection with our Term Loan Credit Agreement.
Depending on the nature of changes in these different factors that affect our business, we may experience an adverse impact on our business for different reasons including increased costs of operation or lower demand for our products.
Depending on the nature of changes in these different factors that affect our business, we may experience an adverse impact on our business for different reasons such as increased costs of operation or lower demand for our products.
Given the large number of organizational initiatives we are pursuing, as well as the complexity and untested nature of many of these efforts, there can be no certainty that we will be successful in executing on these initiatives.
Given the large number of organizational initiatives we are pursuing, as well as the complexity and untested nature of many of these efforts, there can be no certainty that we will succeed in executing these initiatives.
The amount, timing and execution of our share repurchase program from time to time may fluctuate based on our priorities for the use of cash for other purposes such as operational spending, capital spending, acquisitions or repayment of debt.
The amount, timing and execution of our share repurchase program and other repurchases of equity linked instruments from time to time may fluctuate based on our priorities for the use of cash for other purposes such as operational spending, capital spending, acquisitions or repayment of debt.
In the past we have faced certain securities litigation matters, including securities class action cases that were consolidated by the court (the “Class Action Case”) and certain related legal proceedings (collectively, the “Derivative Case”)and various governmental investigations including with respect to trading in our securities.
In the past we have faced certain securities litigation matters, including securities class action cases that were consolidated by the court and certain related legal proceedings and various governmental investigations, including with respect to trading in our securities.
Furthermore, there can be no assurance that in the future we will be able to find suitable businesses to purchase if we choose to acquire additional businesses, that we will be able to acquire such businesses on acceptable terms, that we will be successful in realizing the benefits of any acquisition we pursue or that any of the businesses which we acquire will meet our objectives.
If we choose to acquire businesses in the future, there can be no assurance that we will be able to find suitable businesses to purchase, acquire such businesses on acceptable terms, or realize the benefits of any acquisition we pursue or that any of the businesses which we acquire will meet our objectives.
We have elected to raise substantial amounts of capital through debt which exposes our business to risks related to obligations of indebtedness including the terms and conditions of debt financing and the need to manage our financial resources in order to repay such debt in accordance with its terms .
We have elected to raise substantial amounts of capital through debt which exposes our business to risks related to obligations of indebtedness, including the variable interest rate of such indebtedness as well as the other terms and conditions of our debt financing and the need to manage our financial resources in order to repay such debt in accordance with its terms .
We have from time to time encountered other retailers selling products substantially similar to our products or misrepresenting that the products such retailers were selling were our products.
We have from time to time encountered third parties selling products substantially similar to our products or misrepresenting that the products such retailers were selling were our products.
These features of the Notes and the Bond Hedge and Warrants, including the financial implications of any renegotiation of the above-mentioned provisions, could delay or prevent a change of control, whether or not it is desired by, or beneficial to, our stockholders, and may result in the acquisition of us being on terms less favorable to our stockholders than it would otherwise be, or could require us to pay a portion of the consideration available in such a transaction to holders of the Notes or Warrants or the counterparties to the Bond Hedge.
These features of our outstanding indebtedness, including the financial implications of any renegotiation of the above-mentioned provisions, could delay or prevent a change of control, whether or not it is desired by, or beneficial to, our stockholders, and may result in the acquisition of us being on terms less favorable to our stockholders than it would otherwise be, and are likely to require us to pay a portion of the consideration available in such a transaction to holders of our outstanding indebtedness.
Changes in prices for raw materials, energy and transportation and fluctuations in exchange rates are dependent on a number of factors beyond our control, including macroeconomic factors that may affect commodity prices (including prices for oil, lumber and cotton); changes in supply and demand; general economic conditions; inflation; significant political events; labor costs; duties and tariffs and other similar factors.
Changes in prices for raw materials, energy and transportation and fluctuations in exchange rates are dependent on a number of factors beyond our control, including macroeconomic factors that may affect commodity prices (including prices for oil, lumber and cotton); changes in supply and demand; general economic conditions; rising interest rates; inflation; significant political events; labor costs; natural disasters, including as a result of climate change; duties and tariffs and other similar factors.
In fiscal 2020, we entered into equity method investments in connection with real estate development initiatives in Aspen, Colorado. The investments include properties that will be developed into retail locations, hospitality concepts, residential developments and workforce housing projects.
In fiscal 2020, we entered into equity method investments in connection with real estate development initiatives in Aspen, Colorado with a third party real estate development partner (the “Aspen Development Partner”). The investments include properties that will be developed into retail locations, hospitality concepts, residential developments and workforce housing projects.
Government has imposed import restrictions under the Withhold Release Orders for goods such as cotton products from the Xinjiang Uyghur Autonomous Region (“XUAR”) and under the Uyghur Forced Labor Prevention Act which may induce greater supply chain compliance costs and delays to us and to our vendors.
Government has imposed import restrictions under the Withhold Release Orders and under the Uyghur Forced Labor Prevention Act for goods such as cotton, aluminum, polysilicon, and other targeted input products originating from the Xinjiang Uyghur Autonomous Region which may induce greater supply chain compliance costs and delays to us and to our vendors.
In connection with such changes to our senior leadership structure, we also implement changes in personnel and reductions in force as a result of which we may incur severance costs and other reorganization charges and expenses. Changes in our organizational structure may also have an impact on retention of personnel.
In connection with such changes to our senior leadership structure, we also implement changes in personnel and reductions in force as a result of which we may incur severance costs and other reorganization charges and expenses.
From time to time, we and/or members of our senior leadership team are involved in legal and regulatory proceedings including litigation, claims, investigations and regulatory and other proceedings related to a range of matters in connection with the conduct of our business, including (i) privacy and data security, (ii) our labor and employment practices, including laws related to discrimination, wages and benefits, ERISA and disability claims, (iii) intellectual property issues with respect to copyright, trademarks, patents and trade dress, (iv) trade and business practices including unfair competition and unfair business practices, (v) consumer class action claims relating to our consumer practices including the collection of zip code or other information from customers, (vi) product safety and compliance including products liability, product recalls personal injury, (vii) advertising and promotion of products and services, including class actions and regulatory actions related to advertising, (viii) compliance with securities laws including class actions related to allegations of securities fraud, (ix) taxation, (x) contractual disputes, and (xi) health and safety regulations. ​ ​ ​ 26 | FORM 10-K PART I ​ Table of Contents Claims and legal proceedings may involve arbitration, mediation, private litigation, class action matters, derivative claims, internal and governmental investigations and enforcement matters.
From time to time, we and/or members of our senior leadership team are involved in legal and regulatory proceedings, including litigation, claims, investigations and regulatory and other proceedings related to a range of matters in connection with the conduct of our business, including (i) privacy and data security, (ii) our labor and employment practices, including laws related to discrimination, wages and benefits, ERISA and disability claims, (iii) intellectual property issues with respect to copyright, trademarks, patents and trade dress, (iv) international and domestic trade and business practices, including import laws, unfair competition and unfair business practices, (v) consumer class action claims relating to our consumer practices, including the collection of zip code or other information from customers, (vi) product safety and compliance, including products liability, product recalls personal injury, (vii) advertising and promotion of products and services, including class actions and regulatory actions related to advertising, (viii) compliance with securities laws, including class actions related to allegations of securities fraud, (ix) taxation, (x) contractual disputes, and (xi) health and safety regulations.
Our existing indebtedness and any other indebtedness we may incur in the future could have significant consequences on our future operations and financial results, including: making it more difficult for us to meet our payments and other obligations; reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions or strategic investments and other general corporate requirements, and limiting our ability to obtain additional financing for these or other purposes; subjecting us to increased interest expense related to any indebtedness we may incur with variable interest rates; limiting our flexibility in planning for, or reacting to (and increasing our vulnerability to), changes in our business, the industry in which we operate and the general economy; and placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
Our existing indebtedness, including the Term Debt and any other indebtedness we may incur in the future, could have significant consequences on our future operations and financial results, including: making it more difficult for us to meet our obligations; reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions or strategic investments and other general corporate requirements, and limiting our ability to obtain additional financing for these or other purposes; subjecting us to increased interest expense related to the variable interest rate terms of our ABL Credit Agreement and Term Debt as well as the terms of any other indebtedness we may incur with variable interest rates in the event that we do not hedge the associated interest rate risk of such variable interest rate indebtedness and we experience increased interest rates; limiting our flexibility in planning for, or reacting to (and increasing our vulnerability to), changes in our business, the industry in which we operate and the general economy; and placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. We do not expect to pay any cash dividends for the foreseeable future.
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. ​ ​ ​ 28 | FORM 10-K PART I ​ Table of Contents We do not expect to pay any cash dividends for the foreseeable future.
For example, we have consolidated our distribution center network and we are in the process of opening new outlet and home delivery center locations and reconfiguring our furniture home delivery centers and outlets in order to streamline our operations.
For example, we have consolidated our distribution center network and we are in the process of reconfiguring our furniture home delivery centers in order to streamline our operations.
If we are unable to pass such cost increases on to our customers or the higher cost of the products results in decreased demand for our products, our results of operations could be harmed. We are subject to risks associated with occupying substantial amounts of space, including future increases in occupancy costs.
If we are unable to pass such cost increases on to our customers or the higher cost of the products results in decreased demand for our products, our results of operations could be harmed. ​ ​ ​ PART I FORM 10-K | 17 ​ Table of Contents We are subject to risks associated with occupying substantial amounts of space, including future increases in occupancy costs.
The exact scope of our capital plans in future fiscal years, including fiscal 2022, will depend on a variety of factors including the level of gross capital expenditures that we undertake in our business, the amount of any proceeds from the sale of assets, including sales of real estate, and the way that our business performs.
We expect our capital expenditures to increase in fiscal 2023, but the exact scope of our capital plans in future fiscal years, including fiscal 2023, will depend on a variety of factors such as the level of gross capital expenditures that we undertake in our business, the amount of any proceeds from the sale of assets, including sales of real estate, and the way that our business performs.
We have experienced significant fluctuations in the growth rate of our business and high levels of growth may not be achieved in future periods. We have experienced significant fluctuations in the growth rate of our business. We may continue to experience wide fluctuations in our quarterly performance.
We have experienced significant fluctuations in the growth of our business and high levels of growth may not be achieved in future periods. We have experienced significant fluctuations in the growth of our business since the occurrence of the COVID-19 pandemic. We may continue to experience wide fluctuations in our quarterly performance.
Our business depends upon the successful operation of our distribution centers, furniture home delivery centers and other aspects of our supply chain and customer delivery network, as well as upon our order management and fulfillment services and the re-stocking of certain inventories within our stores.
Our business depends upon the successful operation of our distribution centers, furniture home delivery centers and other aspects of our supply chain and customer delivery network, as well as upon our order management and fulfillment services.
A number of our vendors, particularly our artisan vendors, may have limited financial or other resources and operating histories and may receive various forms of credit from us, including with respect to payment terms or other arrangements.
A number of our vendors, particularly our artisan vendors, may have limited financial or other resources and operating histories and may receive various forms of credit from us, including with respect to payment terms or other arrangements such as unsecured advance payments from us for orders.
As a result, we may not be able to cover the financial loss we may incur in losing the services of any of our key personnel. ​ ​ ​ PART I FORM 10-K | 23 ​ Table of Contents Competition for qualified employees and personnel is intense, particularly in the retail and hospitality industry.
As a result, we may not be able to cover the financial loss we may incur in losing the services of any of our key personnel. Competition for qualified employees and personnel is intense, particularly in the retail and hospitality industry.
We purchase substantially all of our merchandise from a number of third party vendors. Many such vendors are the sole sources for particular products, and we generally transact business with such vendors on an order-by-order basis without any long-term or other contractual assurances of continued supply, pricing or access to new products with our vendors.
Many such vendors are the sole sources for particular products, and we generally transact business with such vendors on an order-by-order basis without any long-term or other contractual assurances of continued supply, pricing or access to new products with our vendors.
Furthermore, we may be unable to remedy such issues quickly as opening additional distribution and home delivery facilities can face operational difficulties, such as disruptions in transitioning fulfillment orders to the new distribution facilities, competition for distribution facility space and problems associated with operating new facilities or reducing the size and changing functions of existing facilities.
We also may be unable to remedy such issues quickly due to operational difficulties, such as disruptions in transitioning fulfillment orders to the new distribution facilities, competition for distribution facility space and problems associated with operating new facilities or reducing the size and changing functions of existing facilities.
We believe that our trademarks, copyrights (including in photographs, Source Books and our website), and other proprietary rights have significant value and are important to identifying and differentiating our brand and certain of our products from those of our competitors and creating and sustaining demand for certain of our products.
We believe that our trademarks, copyrights (including in photographs, Source Books and our website), and other proprietary rights are important to identifying and differentiating our brand and certain of our products from those of our competitors.
As part of exploring growth opportunities, we may from time to time seek to acquire value-creating, add-on businesses that we believe will broaden our existing position and market reach and have completed several different acquisitions in recent years. For example, in fiscal 2016, we acquired a controlling interest in Waterworks.
As part of exploring growth opportunities, we may from time to time seek to acquire value-creating, add-on businesses that we believe will broaden our existing position and market reach and have completed several different acquisitions in recent years.
An introduction of new duties, tariffs, quotas or other similar trade restrictions, or increases in existing duties or tariff rates, on products imported into the U.S. and Canada, whether actual, pending or threatened, may have a negative impact on our results of operations.
In addition, substantial regulatory uncertainty exists regarding international trade relations and trade policy. An introduction of new duties, tariffs, quotas or other similar trade restrictions, or increases in existing duties or tariff rates, on products imported into the U.S., Canada and Europe, whether actual, pending or threatened, may have a negative impact on our results of operations.
Some of our merchandise has failed to meet our expectations and objectives concerning quality. Our emphasis on merchandise quality is increasing as we strive to elevate our brand. In recent periods we have recalled products due to quality or other issues and may recall others in the future.
Our emphasis on merchandise quality is increasing as we strive to elevate our brand. In recent periods we have recalled products due to quality or other issues and may recall others in the future.
Although we believe that such allocation of capital has been very beneficial to our investors, there can be no assurance that future decisions to allocate capital to the repurchase of our shares of common stock or other equity linked instruments will be a beneficial long-term decision for investors in our common stock.
Although we believe that our previous decisions regarding the allocation of capital to repurchase common stock has been very beneficial to our investors, there can be no assurance that any decisions to allocate capital to the repurchase of our shares of common stock or other equity linked instruments will be a beneficial long-term decision for investors in our common stock or that we will receive the benefits from these repurchases that we anticipate.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
If we are unable to remediate the deficiencies in our internal control over financial reporting and disclosure controls and procedures and maintain effective controls in the future, the accuracy and timeliness of our financial reporting and disclosures may be adversely affected.
We may not experience the operational or financial benefits we expect these improvements to generate and we may face unanticipated costs related to pursuing these initiatives such as personnel turnover, senior leadership distraction, or compliance and quality control risks, any of which could have a material adverse effect on our financial condition or results of operations.
We may not experience the operational or financial benefits we expect these improvements to generate and we may face unanticipated costs related to pursuing these initiatives, any of which could have a material adverse effect on our financial condition or results of operations.
We are subject to regulatory oversight and legal enforcement by a range of government and self-regulatory organizations including federal, state and local governmental bodies both within the U.S. and in other jurisdictions where we operate such as, among others, the Equal Employment Opportunity Commission, the CPSC, the Federal Trade Commission, the Department of Labor, the SEC, FINRA, the NYSE, the Department of Justice and numerous state and local governmental authorities including state attorney generals and state agencies.
We are subject to regulatory oversight and legal enforcement by a range of government and self-regulatory organizations, including federal, state and local governmental bodies both within the U.S. and in other jurisdictions where we operate such as, among others, the Equal Employment Opportunity Commission, the CPSC, the Federal Trade Commission, U.S. Customs and Border Protection, the U.S.
At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.
The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.
Our sales may fall in response to any price increases and our vendors may not be able to support the level of pricing concessions that we seek. ​ ​ ​ 16 | FORM 10-K PART I ​ Table of Contents Our dependence on foreign imports makes us vulnerable to other risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our U.S. distribution centers, product quality control charges on or assessment of additional import duties, tariffs, anti-dumping duties and quotas, loss of “most favored nation” trading status by our foreign trading partners with the U.S., work stoppages, including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments, including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the U.S., freight cost increases, political unrest, economic uncertainties, including inflation, foreign government regulations, trade restrictions, increased labor costs and other similar factors that might affect the operations of our vendors in specific countries such as China or related to Russia.
Our dependence on foreign imports makes us vulnerable to other risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our U.S. distribution centers, product quality control charges on or assessment of additional import duties, tariffs, anti-dumping duties and quotas, loss of “most favored nation” trading status by our foreign trading partners with the U.S., work stoppages, including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments, including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the U.S., freight cost increases, political unrest, economic uncertainties, including inflation, foreign government regulations, trade restrictions, increased labor costs and other similar factors that might affect the operations of our vendors in or transacting with specific countries such as China, Russia and the ongoing conflict in Ukraine, Venezuela, other various trade sanctions and other restrictions resulting from geopolitical tensions.
We have focused on rationalizing our SKU count and optimizing inventory, which includes selling slower moving, discontinued and other inventory through markdowns and our outlet channel, as well as enhancing and optimizing our product sourcing capabilities and adding new management information systems.
We have focused on introducing new products and optimizing our merchandise assortment including through selling slower moving, discontinued and other inventory through markdowns and our outlet channel, as well as enhancing and optimizing our product sourcing capabilities and adding new management information systems.
We often have in the past, and may in the future, incur significant costs for any new initiative before we realize any corresponding revenue with respect to such initiative.
We often have incurred, and may in the future incur, substantial upfront costs for new business initiatives before we realize any corresponding revenue with respect to such initiatives.
We have also incurred indebtedness to finance other strategic initiatives, including our share repurchase programs, and we may continue to incur indebtedness to support such initiatives in future time periods.
We have also incurred indebtedness to finance other strategic initiatives, including our share repurchase programs, and we may continue to incur indebtedness to support such initiatives in future time periods. We completed four convertible debt financings from fiscal 2014 through fiscal 2019.
In addition, our information systems can face risks to the extent we acquire new businesses but are not able to quickly or comprehensively integrate such acquired businesses into our policies and procedures for addressing cybersecurity risks or identify and address weaknesses in such acquired entity’s information systems, which risks may be compounded to the extent the information systems of an acquired entity are integrated with ours, thus providing access to a broader set of sensitive customer information through a compromised network at the acquired entity level. ​ ​ ​ 24 | FORM 10-K PART I ​ Table of Contents In addition, for our business to function successfully, we and other market participants must be able to handle and transmit confidential and personal information securely, including in customer orders placed through our website.
In addition, our information systems can face risks to the extent we acquire new businesses but are not able to quickly or comprehensively integrate such acquired businesses into our policies and procedures for addressing cybersecurity risks or identify and address weaknesses in such acquired entity’s information systems, which risks may be compounded to the extent the information systems of an acquired entity are integrated with ours, thus providing access to a broader set of sensitive customer information through a compromised network at the acquired entity level.
We are subject to income taxes in the U.S. and certain foreign jurisdictions. We record income tax expense based on our estimates of future payments, which include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards.
We record income tax expense based on our estimates of future payments, which include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards. At any one time, many tax years are subject to audit by various taxing jurisdictions.
It is difficult to predict the impact of future changes to accounting principles or current accounting practice and the exact impact of such changes may not be what we anticipate.
New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. It is difficult to predict the impact of future changes to accounting principles or current accounting practice and the exact impact of such changes may not be what we anticipate.
We have substantial capital requirements related to investments in our business, our real estate strategy, our international expansion, the development of new businesses and our significant number of concurrent initiatives.
We will have significant capital requirements for the operation of our business in the near term if we are to continue to pursue all of our current business initiatives. We have substantial capital requirements related to investments in our business, our real estate strategy, our international expansion, the development of new businesses and our significant number of concurrent initiatives.
We pursue a range of different real estate development models for these projects. In a number of these projects, we perform a significant role in various aspects of the design and construction of the Gallery location.
In addition, one of our key value-driving strategies involves the development and introduction of new Gallery locations. We pursue a range of different real estate development models for these projects. In a number of these projects, we perform a significant role in various aspects of the design and construction of the Gallery location.
However, there can be no assurance that such insurance coverage will be available in the future on commercially reasonable terms or at commercially reasonable rates.
However, there can be no assurance that such insurance coverage will be available in the future on commercially reasonable terms or at commercially reasonable rates. In addition, insurance coverage may be insufficient or may not cover certain cybersecurity losses and liability.
Excessive employee turnover will result in higher employee costs associated with finding, hiring and training new store employees.
Turnover in the retail industry and food and beverage industry is generally high. Excessive employee turnover will result in higher employee costs associated with finding, hiring and training new store employees.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our operations and consumer spending may be affected by natural or man-made disasters or other similar events, including floods, hurricanes, earthquakes, widespread illness, fires, loss of power, interruption of other utilities, industrial accidents, social unrest and riots.
Our operations and consumer spending may be affected by natural or man-made disasters or other similar events, including as a result of climate change, including floods, hurricanes, earthquakes, widespread illness, fires, loss of power, interruption of other utilities, industrial accidents, social unrest and riots.
Pursuing multiple different paths for addressing our real estate needs may create various other risks including increased complexity and challenges related to the time and costs of real estate development and construction as well as the need for additional capital and risks related to resale of real estate projects.
Pursuing multiple different paths for addressing our real estate needs may create various other risks including (i) conflicting financial incentives and objectives of third parties involved in our real estate development projects, including our joint venture partner, (ii) increased complexity of concurrently pursuing multiple different models for Gallery development, and (iii) challenges related to the time and costs of real estate development and construction as well as the need for additional capital and risks related to resale of real estate projects.
We target consumers of high-end home furnishings as customers for our products. As a result, we believe that our sales are sensitive to a number of factors that influence consumer spending generally, but are particularly affected by the financial health of and demand levels from the higher-end customer demographic.
As a result, we believe that our sales are sensitive to a number of factors that influence consumer spending generally, such as general economic conditions and the health and volatility of the stock market, but that our sales are particularly affected by the financial health of and demand levels from higher-end consumers.
The higher-end of the housing market may be disproportionately influenced by other factors including the number of foreign buyers in higher-end real estate markets in the U.S., activity in luxury and second home markets, the number of second and third homes being built and sold, stock market valuation and overall equity market conditions, global economic uncertainty, inflation, decreased availability of income tax deductions for mortgage interest and state income and property taxes, and the perceived prospect for capital appreciation in higher-end real estate.
While the overall market for home furnishings may be influenced by factors such as employment levels, interest rates, new household formation and the affordability of homes for first-time home buyers, the higher-end of the housing market may be disproportionately influenced by other factors, including the number of foreign buyers in higher-end U.S. real estate markets, foreign currency volatility, the number of second and third homes being bought and sold, stock market prices, global economic uncertainty, inflation, decreased availability of income tax deductions for mortgage interest and state income and property taxes, and perceived capital appreciation prospects in higher-end real estate.
We have experienced delays in opening some new stores and may experience further delays in the future. We also have incurred higher levels of capital and other expenditures associated with the opening of some of our new Gallery locations. In addition, construction costs and the price of building materials related to construction have experienced substantial price increases in recent years.
We also have incurred higher levels of capital and other expenditures associated with the opening of some of our new Gallery locations. In addition, construction costs and the price of construction materials have increased substantially in recent years.
Furthermore, in the past, during periods of significant customer growth and demand, we have found that our distribution centers often run at capacity. If we fail to accurately anticipate the future capacity requirements of our distribution centers, we may experience delays and difficulties in fulfilling orders and delivering merchandise to customers in a timely manner.
If we fail to accurately anticipate the future capacity requirements of our distribution centers, we may experience delays and difficulties in fulfilling orders and delivering merchandise to customers in a timely manner.
We completed convertible debt financings in fiscal 2014 ($350 million), fiscal 2015 ($300 million), fiscal 2018 ($335 million) and fiscal 2019 ($350 million) for an aggregate principal amount of $1,335 million. We have completed repayment of the first two of these convertible notes financings in connection with their final maturity in an aggregate principal amount of $650 million.
We have completed repayment of the first two of these convertible notes financings in connection with their final maturity in an aggregate principal amount of $650 million.
If we are unsuccessful in any such acquisition efforts, then our ability to continue to grow at rates we anticipate could be adversely affected.
If we are unsuccessful in any such acquisition efforts, then our ability to continue to grow at rates we anticipate could be adversely affected. The success of any completed acquisition will depend on our ability to effectively manage the business after the acquisition.
Accordingly, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.
Accordingly, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Any failure by our vendors outside the U.S. to adhere to applicable legal requirements or our global compliance standards, such as fair labor standards and prohibitions on forced labor and child labor, could give rise to a range of adverse consequences, including supply chain disruption, potential liability, harm to our reputation and brand, and boycotts by consumers or special interest groups, any of which could negatively affect our business and results of operations.
Any failure by our vendors outside the U.S. to adhere to applicable legal requirements or our global compliance standards, such as fair labor standards and prohibitions on forced labor and child labor, could give rise to a range of adverse consequences, including supply chain disruption, potential liability, harm to our reputation and brand, and boycotts by consumers or special interest groups, any of which could negatively affect our business and results of operations. ​ ​ ​ 16 | FORM 10-K PART I ​ Table of Contents Our growth strategy and performance depend on our ability to purchase quality merchandise in sufficient quantities at competitive prices, including products that are produced by artisans and specialty vendors.
In addition, insurance coverage may be insufficient or may not cover certain cybersecurity losses and liability. ​ ​ ​ PART I FORM 10-K | 25 ​ Table of Contents We face product liability risks and certain of our products may be subject to recalls or other actions by regulatory authorities, and any such recalls or similar actions could have a material adverse effect on our business and reputation.
We face product liability risks and certain of our products may be subject to recalls or other actions by regulatory authorities, and any such recalls or similar actions could have a material adverse effect on our business and reputation.
We currently rely on a combination of copyright, trademark, patent, trade dress and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights.
Our defense of any claim, regardless of its merit, could be expensive and time consuming and could divert senior leadership resources. We currently rely on a combination of copyright, trademark, patent, trade dress and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights.
Legislators and regulators in the U.S., Canada and the U.K., where our products are sold, continue to adopt new product laws and regulations. These new laws and regulations have increased or likely will increase the regulatory requirements governing the manufacture and sale of certain of our products as well as the potential penalties for noncompliance.
These new laws and regulations have increased or likely will increase the regulatory requirements governing the manufacture and sale of certain of our products as well as the potential penalties for noncompliance.
We are continuing to pursue a substantial expansion of the RH Hospitality offering which includes integrated Restaurants and wine bars in a number of our Galleries and will also incorporate standalone restaurants and guesthouses as well as other innovations such as our private jets RH1 and RH2, and our luxury yacht RH3.
We have introduced a number of new product categories such as RH Modern and RH Contemporary, expanded the RH Hospitality offering which includes integrated Restaurants and Wine Bars in a number of our Galleries, standalone restaurants and guesthouses, as well as introduced other innovations such as our private jets RH1 and RH2, and our luxury yacht RH3.
Our failure to effectively address challenges such as those listed above could adversely affect our ability to successfully open new stores or change our store footprint in a timely and cost-effective manner and could have a material adverse effect on our business, results of operations and financial condition. ​ ​ ​ 20 | FORM 10-K PART I ​ Table of Contents Reductions in the volume of mall and other in-store traffic or the closing of shopping malls as a result of changing demographic patterns could adversely affect our sales.
Our failure to effectively address challenges such as those listed above could adversely affect our ability to successfully open new stores or change our store footprint in a timely and cost-effective manner and could have a material adverse effect on our business, results of operations and financial condition.
We can provide no assurances that we will be successful in expanding our operations into any new businesses and product lines.
We can provide no assurances that customers will respond favorably to or that we will successfully execute on such business initiatives or that we will be successful in expanding our operations into any new businesses and product lines.
Similarly, the limited capitalization and liquidity of certain of our vendors and their lack of insurance coverage for product recall claims may result in such vendors being unable to refund our purchase price or pay applicable penalties or damages associated with any such defects or resulting product recalls.
Similarly, the limited capitalization and liquidity of certain of our vendors and their lack of insurance coverage for product recall claims may result in such vendors being unable to refund our purchase price or pay applicable penalties or damages associated with any such defects or resulting product recalls. ​ ​ ​ 14 | FORM 10-K PART I ​ Table of Contents Our business depends on the strength of our brand and continuing investments in our brand will be an important requirement for our future success.
On October 20, 2021, RHI entered into a Term Loan Credit Agreement with respect to an initial term loan in an aggregate principal amount equal to $2.0 billion with a maturity date of October 20, 2028.
On May 13, 2022, RHI entered into an Amended Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with respect to incremental term loans in an aggregate principal amount equal to $ 500 million with a maturity date of October 20, 2028 (collectively, with the initial $2.0 billion raised pursuant to the Term Loan Credit Agreement, the “Term Debt”).

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe following table summarizes the location and size of our leased fulfillment centers, home delivery center locations and corporate facilities occupied as of January 29, 2022: ​ ​ ​ ​ LEASED SQUARE FOOTAGE LOCATION ​ (Approximate) RH Furniture Fulfillment Centers Patterson, California 1,501,000 Baltimore (North East), Maryland 1,195,000 Ontario, California ​ 1,001,000 RH Small-Parcel Fulfillment Center West Jefferson, Ohio (1) 1,224,000 Home Delivery Center Locations (2) 1,304,000 Waterworks Fulfillment Center Brookfield, Connecticut 160,000 Corporate Facilities Corte Madera, California (1) (3) 263,000 Pinole, California (4) 200,000 Danbury, Connecticut (5) 26,000 Other 240,000 (1) Customer service center and home delivery operations are also performed at this location.
Biggest changeRefer to “Retail Locations” within Item 1 — Business . ​ ​ ​ PART I FORM 10-K | 31 ​ Table of Contents The following table summarizes the location and size of our leased fulfillment centers, home delivery center locations and corporate facilities occupied as of January 28, 2023: ​ ​ ​ ​ LEASED SQUARE FOOTAGE LOCATION ​ (approximate, in thousands) RH Furniture Fulfillment Centers Patterson, California 1,501 Baltimore (North East), Maryland 1,195 Ontario, California ​ 1,001 RH Small-Parcel Fulfillment Center West Jefferson, Ohio (1) 1,224 Home Delivery Center Locations (2) 1,252 Waterworks Fulfillment Center Brookfield, Connecticut 160 Corporate Facilities Corte Madera, California (1)(3) 263 Pinole, California (4) 200 Danbury, Connecticut (5) 26 Other 240 (1) Customer service center and home delivery operations are also performed at this location.
(2) Includes total approximate leased square footage for 21 separate home delivery center locations. (3) Location of RH Headquarters. Includes approximately 10,000 square feet of warehouse space. (4) Represents warehouse space. (5) Location of Waterworks Headquarters.
(2) Includes total approximate leased square footage for 20 separate home delivery center locations. (3) Location of RH Headquarters. Includes approximately 10,000 square feet of warehouse space. (4) Represents warehouse space. (5) Location of Waterworks Headquarters.
For additional information regarding leases, refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases in our consolidated financial statements within Part II of this Annual Report on Form 10-K.
For additional information regarding leases, refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases in our consolidated financial statements within Part II of this Annual Report on Form 10-K. In addition to the above, we also have a third-party service agreement for a shared distribution center facility in Belgium.
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ITEM 2. PROPERTIES Leased Properties As of January 29, 2022, we have approximately 1,981,000 leased gross square feet for 27 Design Galleries, 36 legacy Galleries, 1 RH Modern Gallery, 3 RH Baby & Child Galleries and 14 Waterworks Showrooms. We have approximately 1,190,000 leased gross square feet for 38 outlet stores as of January 29, 2022.
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PROPERTIES Leased Properties The following table summarizes the total leased gross square footage of our leased properties as of January 28, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ LEASED GROSS SQUARE FOOTAGE ​ COUNT (approximate, in thousands) Retail locations (1) ​ 81 ​ 2,034 Outlets ​ 37 ​ 1,171 Guesthouse ​ 1 ​ 27 (1) Retail locations include the Design Galleries, legacy Galleries, Modern Gallery, Baby & Child and TEEN Galleries and Waterworks Showrooms.
Removed
Owned Property We own four properties for current and future retail locations, including an approximate 5,400 square foot building that is the location of our Gallery in San Francisco’s Design District, an approximate 54,100 square foot building in England for a future Design Gallery, an approximate 22,100 square foot building in Morris Township, New Jersey for a future Design Gallery, and an approximate 12,500 square foot building in Birmingham, Michigan for a future Design Gallery.
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Owned Property As of January 28, 2023, we own nine properties, eight of which are owned through our consolidated variable interest entities. Seven locations represent current and future RH locations, and are part of the RH Segment.
Removed
The owned properties are part of our RH Segment. ​ ​ ​ 36 | FORM 10-K PART I ​ Table of Contents
Added
Two locations represent properties for the purpose of use by RH or others related to developing, operating and selling such real estate, and are part of the Real Estate segment.
Added
Refer to Note 8— Variable Interest Entities in our consolidated financial statements within Part II of this Annual Report on Form 10-K. ​ ​ ​ 32 | FORM 10-K PART I ​ Table of Contents

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeSuch legal proceedings may include claims related to our employment practices, wage and hour claims, claims of intellectual property infringement, including with respect to trademarks and trade dress, claims asserting unfair competition and unfair business practices, claims with respect to our collection and sale of reproduction products, and consumer class action claims relating to our consumer practices including the collection of zip code or other information from customers.
Biggest changeSuch legal proceedings may include claims related to our employment practices, wage and hour claims, claims of intellectual property infringement, including with respect to trademarks and trade dress, claims asserting unfair competition and unfair business practices, claims with respect to our collection and sale of reproduction products, and consumer class action claims relating to our consumer practices.
ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ​ ​ ​ ​ ​ ​ PART I FORM 10-K | 37 ​ Table of Contents PART II
ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ​ ​ ​ ​ ​ ​ PART I FORM 10-K | 33 ​ Table of Contents PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. ​ Mine Safety Disclosures ​ 37 ​ ​ ​ ​ ​ ​ ​ PART II. ​ ​ Item 5. ​ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ​ 38 Item 6. ​ Reserved ​ 40 Item 7. ​ Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ 41 Item 7A. ​ Quantitative and Qualitative Disclosures About Market Risk ​ 62 Item 8. ​ Financial Statements and Supplementary Data ​ 65
Biggest changeItem 4. ​ Mine Safety Disclosures ​ 33 ​ ​ ​ ​ ​ ​ ​ PART II. ​ ​ Item 5. ​ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ​ 34 Item 6. ​ [ Reserved ] ​ 36 Item 7. ​ Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ 37 Item 7A. ​ Quantitative and Qualitative Disclosures About Market Risk ​ 60 Item 8. ​ Financial Statements and Supplementary Data ​ 63

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons in the graph and table are required by the SEC and are not intended to be indicative of possible future performance of our common stock. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 27, 2017 FEBRUARY 2, 2018 FEBRUARY 1, 2019 JANUARY 31, 2020 JANUARY 29, 2021 JANUARY 28, 2022 RH 100.00 352.78 512.23 800.11 ​ 1,822.00 ​ 1,502.18 NYSE Composite Index 100.00 115.97 109.27 120.66 ​ 127.60 ​ 145.33 S&P Retailing Select Index 100.00 106.53 102.62 100.57 ​ 205.81 ​ 186.18 ​ ​ ​ ​ PART II FORM 10-K | 39 ​ Table of Contents Repurchases of Common Stock During the three months ended January 29, 2022, we repurchased the following shares of our common stock: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ APPROXIMATE DOLLAR ​ ​ ​ ​ AVERAGE ​ VALUE OF SHARES THAT ​ ​ ​ ​ PURCHASE ​ MAY YET BE ​ ​ NUMBER OF ​ PRICE PER ​ PURCHASED UNDER THE ​ ​ SHARES (1) ​ SHARE ​ PLANS OR PROGRAMS (2) ​ ​ ​ ​ ​ ​ ​ (in millions) October 31, 2021 to November 27, 2021 — ​ $ — ​ $ 450 November 28, 2021 to January 1, 2022 1,961 ​ $ 568.03 ​ $ 450 January 2, 2022 to January 29, 2022 378 ​ $ 535.94 ​ $ 450 Total 2,339 ​ ​ ​ ​ (1) Reflects shares withheld from delivery to satisfy exercise price and tax withholding obligations of employee recipients that occur upon the vesting of restricted stock units granted under our 2012 Stock Incentive Plan.
Biggest changeThe comparisons in the graph and table are required by the SEC and are not intended to be indicative of possible future performance of our common stock. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ FEBRUARY 2, 2018 FEBRUARY 1, 2019 JANUARY 31, 2020 JANUARY 29, 2021 JANUARY 28, 2022 JANUARY 27, 2023 RH 100.00 145.20 226.80 516.47 ​ 425.81 ​ 337.52 NYSE Composite Index 100.00 94.23 104.04 110.03 ​ 125.31 ​ 121.99 S&P Retailing Select Index 100.00 96.33 94.40 193.19 ​ 174.77 ​ 153.90 ​ ​ ​ ​ PART II FORM 10-K | 35 ​ Table of Contents Repurchases of Common Stock During the three months ended January 28, 2023, we repurchased the following shares of our common stock: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TOTAL NUMBER OF ​ APPROXIMATE DOLLAR ​ ​ ​ ​ AVERAGE ​ SHARES REPURCHASED ​ VALUE OF SHARES THAT ​ ​ ​ ​ PURCHASE ​ AS PART OF PUBLICLY ​ MAY YET BE ​ ​ NUMBER OF ​ PRICE PER ​ ANNOUNCED PLANS ​ PURCHASED UNDER THE ​ ​ SHARES (1) ​ SHARE ​ OR PROGRAMS (2) ​ PLANS OR PROGRAMS (2) ​ ​ ​ ​ ​ ​ ​ ​ ​ (in millions) October 30, 2022 to November 26, 2022 — ​ $ — ​ — ​ $ 2,164 November 27, 2022 to December 31, 2022 1,330,327 ​ $ 258.43 ​ 1,329,559 ​ $ 1,820 January 1, 2023 to January 28, 2023 (3) 1,262,837 ​ $ 293.08 ​ 1,262,434 ​ $ 1,450 Total 2,593,164 ​ ​ ​ ​ 2,591,993 ​ ​ (1) Includes shares withheld from delivery to satisfy exercise price and tax withholding obligations of employee recipients that occur upon the vesting of restricted stock units granted under our 2012 Stock Incentive Plan.
We do not currently anticipate that we will pay any cash dividends on our common stock in the foreseeable future. ​ ​ ​ ​ 38 | FORM 10-K PART II ​ Table of Contents Stock Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of RH under the Securities Act of 1933, as amended, or the Exchange Act.
We do not currently anticipate that we will pay any cash dividends on our common stock in the foreseeable future. ​ ​ ​ ​ 34 | FORM 10-K PART II ​ Table of Contents Stock Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of RH under the Securities Act of 1933, as amended, or the Exchange Act.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Dividend Policy Our common stock trades under the symbol “RH” on the NYSE. The number of stockholders of record of our common stock as of January 29, 2022 was 15.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Dividend Policy Our common stock trades under the symbol “RH” on the NYSE. The number of stockholders of record of our common stock as of January 28, 2023 was 15.
The following graph and table compare the cumulative total stockholder return for our common stock during the five-year period ended January 29, 2022 in comparison to the NYSE Composite Index and the S&P Retailing Select Index, our peer group index.
The following graph and table compare the cumulative total stockholder return for our common stock during the five-year period ended January 28, 2023 in comparison to the NYSE Composite Index and the S&P Retailing Select Index, our peer group index.
The graph and the table below assume that $100 was invested at the market close on January 27, 2017 in the common stock of RH, the NYSE Composite Index and the S&P Retailing Select Index. Data for the NYSE Composite Index and the S&P Retailing Select Index assumes reinvestments of dividends.
The graph and the table below assume that $100 was invested at the market close on February 2, 2018 in the common stock of RH, the NYSE Composite Index and the S&P Retailing Select Index. Data for the NYSE Composite Index and the S&P Retailing Select Index assumes reinvestments of dividends.
(2) Reflects the dollar value of shares that may yet be repurchased under the $950 Million Repurchase Program authorized by the Board of Directors on October 10, 2018 and replenished on March 25, 2019. There were no shares repurchased under this plan during the three months ended January 29, 2022. ​
(2) Reflects the dollar value of shares that may yet be repurchased under the Share Repurchase Program (as defined below) authorized by the Board of Directors on October 10, 2018, and replenished on March 25, 2019 and June 2, 2022.
Added
(3) Starting on January 1, 2023, share repurchases under our Share Repurchase Program are subject to a 1% excise tax imposed under the Inflation Reduction Act (“IRA”). ​

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

136 edited+63 added−57 removed88 unchanged
Biggest changeWe 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ ​ 2022 2021 2020 ​ ​ (in thousands) ​ Net income ​ $ 688,546 ​ $ 271,815 ​ $ 220,375 ​ Adjustments pre-tax: ​ ​ ​ ​ ​ ​ ​ (Gain) loss on extinguishment of debt (1) ​ 29,138 ​ (152) ​ 6,472 ​ Non-cash compensation (1) ​ 23,428 ​ 117,084 ​ — ​ Amortization of debt discount (2) ​ 18,477 ​ 37,055 ​ 42,545 ​ Asset impairments and change in useful lives (1) ​ ​ 9,630 ​ ​ 12,851 ​ ​ 21,899 ​ Recall accrual (1) ​ 1,940 ​ 7,370 ​ (3,988) ​ Reorganization related costs (1) ​ 449 ​ 7,027 ​ 1,075 ​ Tradename impairment (1) ​ ​ — ​ ​ 20,459 ​ ​ — ​ (Gain) loss on sale leaseback transaction (1) ​ — ​ 9,352 ​ (1,196) ​ Legal settlements (1) ​ ​ — ​ ​ — ​ ​ (1,193) ​ Gain on sale of building and land (1) ​ ​ — ​ ​ — ​ ​ (333) ​ Subtotal adjusted items ​ 83,062 ​ 211,046 ​ 65,281 ​ Impact of income tax items (3) ​ (13,317) ​ (20,845) ​ (9,359) ​ Share of equity method investments losses (1) ​ 8,214 ​ 888 ​ — ​ Adjusted net income ​ $ 766,505 ​ $ 462,904 ​ $ 276,297 ​ (1) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information.
Biggest changeWe 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) ​ Net income ​ $ 528,642 ​ $ 688,546 ​ $ 271,815 ​ Adjustments pre-tax: ​ ​ ​ ​ ​ ​ ​ (Gain) loss on extinguishment of debt (1) ​ 169,578 ​ 29,138 ​ (152) ​ Asset impairments (1) ​ ​ 24,186 ​ ​ 9,630 ​ ​ 12,851 ​ Non-cash compensation (1) ​ 18,072 ​ 23,428 ​ 117,084 ​ Employer payroll taxes on option exercises (1) ​ 14,392 ​ — ​ — ​ Professional fees (1) ​ 7,469 ​ — ​ — ​ Non-cash compensation related to consolidated VIEs (1) ​ ​ 4,470 ​ — ​ — ​ Compensation settlements (1) ​ ​ 3,483 ​ ​ — ​ ​ — ​ Recall accrual (1) ​ 560 ​ 1,940 ​ 7,370 ​ Legal settlements (1) ​ ​ (4,188) ​ ​ — ​ ​ — ​ Gain on derivative instruments—net (2) ​ ​ (1,724) ​ ​ — ​ ​ — ​ Gain on sale of building and land (1) ​ ​ (775) ​ ​ — ​ ​ — ​ Amortization of debt discount (3) ​ — ​ 18,477 ​ 37,055 ​ Tradename impairment (1) ​ ​ — ​ ​ — ​ ​ 20,459 ​ Loss on sale leaseback transaction (1) ​ ​ — ​ ​ — ​ ​ 9,352 ​ Reorganization related costs (1) ​ — ​ 449 ​ 7,027 ​ Subtotal adjusted items ​ 235,523 ​ 83,062 ​ 211,046 ​ Impact of income tax items (4) ​ (237,683) ​ (13,317) ​ (20,845) ​ Share of equity method investments losses (1) ​ 2,055 ​ 8,214 ​ 888 ​ Adjusted net income ​ $ 528,537 ​ $ 766,505 ​ $ 462,904 ​ (1) Refer to table titled “Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income” and the related footnotes for additional information. ​ ​ ​ PART II FORM 10-K | 45 ​ Table of Contents (2) Represents net gain on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchases (refer to Note 12— Convertible Senior Notes in our consolidated financial statements).
All pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new retail locations and outlets, develop new product categories and otherwise pursue our current business initiatives.
All retail pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new retail locations and outlets, develop new product categories and otherwise pursue our current business initiatives.
In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments including the repayment of the principal amount of our convertible senior notes in cash, whether upon stated maturity, early conversion or otherwise of such senior notes.
In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments, including the repayment of the principal amount of our convertible senior notes in cash, whether upon stated maturity, early conversion or otherwise of such convertible senior notes.
In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement. The issuance of the Term Loan was assigned a Ba2 rating from Moody’s Investors Service and BB rating from S&P Global.
In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan B in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement. The issuance of the Term Loan B was assigned a Ba2 rating from Moody’s Investors Service and BB rating from S&P Global.
Fluctuation in Quarterly Results . Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Source Book releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.
Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Source Book releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense.
EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit).
For example, a number of our vendors have experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.
For example, a number of our vendors experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This 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.
We would be the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
We are the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
We continuously evaluate our capital allocation strategy and may engage in future investments in connection with existing or new share repurchase programs (refer to “Share Repurchase Programs” below), which may include investments in derivatives or other equity linked instruments.
We continuously evaluate our capital allocation strategy and may engage in future investments in connection with existing or new share repurchase programs (refer to “Share Repurchase Program” below), which may include investments in derivatives or other equity linked instruments.
To determine if the value of inventory should be marked down below original cost, we use estimates to determine the lower of cost or net realizable value, which considers current and anticipated demand, customer preference and the merchandise age.
To determine if the value of inventory should be marked down below original cost, we use estimates to determine the lower of cost or net realizable value, which considers current and anticipated demand and the merchandise age.
The discussion for fiscal 2020 and fiscal 2019 has been omitted from this Annual Report on Form 10-K, but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 30, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021.
The discussion for fiscal 2021 and fiscal 2020 has been omitted from this Annual Report on Form 10-K, but is included in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 29, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2022.
(Gain) loss on extinguishment of debt—net During fiscal 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $29 million.
During fiscal 2021 we recognized a loss on extinguishment of debt for a portion of the 2023 Notes and 2024 Notes that were early converted at the option of the noteholders of $29 million.
The adjustments in fiscal 2020 include asset impairments of $6.6 million, acceleration of depreciation expense of $3.9 million due to a change in the estimated useful lives of certain assets and asset impairment of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.
The adjustment in fiscal 2021 represents asset impairments of $9.6 million. The adjustments in fiscal 2020 include asset impairments of $6.6 million, acceleration of depreciation expense of $3.9 million due to a change in the estimated useful lives of certain assets and impairment of $2.4 million related to Outlet inventory resulting from retail closures in response to the COVID-19 pandemic.
Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases. Convertible Senior Notes Refer to Note 12— Convertible Senior Notes in our consolidated financial statements for further information on our 0.00% Convertible Senior Notes due 2024 and 0.00% Convertible Senior Notes due 2023.
Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases. Convertible Senior Notes Refer to Note 12— Convertible Senior Notes in our consolidated financial statements for further information on the 2023 Notes and 2024 Notes.
Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage, inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves; inbound freight; all freight costs to get merchandise to our Galleries; design, buying and allocation costs; occupancy costs related to Gallery operations and our supply chain, such as rent and common area maintenance for our leases; depreciation and amortization of leasehold improvements, equipment and other assets in our Galleries and distribution centers.
Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage, inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost or net realizable value reserves; inbound freight; all freight costs to get merchandise to our retail locations and outlets; design, buying and allocation costs; occupancy costs related to retail and outlet operations and our supply chain, such as rent and common area maintenance for our leases; depreciation and amortization of leasehold improvements, equipment and other assets in our retail locations, outlets and distribution centers.
The table presenting the maturities of our lease liabilities included in Note 11— Leases includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.
The table presenting the maturities of our lease liabilities included in Note 11— Leases in our consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.
These expenses include payroll and payroll-related expenses, retail expenses other than occupancy and expenses related to many of our operations at our corporate headquarters, including utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.
These expenses include payroll and payroll-related expenses, retail related expenses other than occupancy, and expenses related to the operations at our corporate headquarters, including rent, utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Source Book production, mailing and print advertising costs.
In fiscal 2020, the recall adjustments decreased net revenues by $1.4 million, increased cost of goods sold by $4.6 million and increased selling, general and administrative expenses by $1.4 million. In fiscal 2019, the recall adjustments increased net revenues by $0.4 million, decreased cost of goods sold by $3.4 million and decreased selling, general and administrative expenses by $0.2 million.
In fiscal 2021, the recall adjustments increased net revenues by $1.2 million and increased selling, general and administrative expenses by $3.1 million. In fiscal 2020, the recall adjustments decreased net revenues by $1.4 million, increased cost of goods sold by $4.6 million and increased selling, general and administrative expenses by $1.4 million.
We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Capital raised from debt financings has enabled us to pursue various investments.
We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Capital raised from debt financings has enabled us to pursue various investments, including our investments in joint ventures.
The adjustment in fiscal 2020 is based on an adjusted tax rate of 21.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.
T he adjustment for fiscal 2020 is based on an adjusted tax rate of 21.3%, which excludes the tax impact associated with the non-cash compensation charge related to an option grant made to Mr.
Information on the year ended February 1, 2020 (fiscal 2019) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 30, 2021, filed with the SEC on March 30, 2021.
Information on the year ended January 30, 2021 (fiscal 2020) is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 29, 2022, filed with the SEC on March 30, 2022.
(3) The adjustment for fiscal 2021 is based on an adjusted tax rate of 16.1%, which excludes the tax impact associated with our share of equity method investments losses.
The adjustment for fiscal 2022 is based on an adjusted tax rate of 21.7%. The adjustment for fiscal 2021 is based on an adjusted tax rate of 16.1%, which excludes the tax impact associated with our share of equity method investments losses.
(2) As of January 29, 2022 and January 30, 2021, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $20 million and $15 million in outstanding letters of credit, respectively. ​ ​ ​ 54 | FORM 10-K PART II ​ Table of Contents General The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, rent for our retail and outlet locations, capital expenditures associated with opening new locations and updating existing locations, as well as the development of our infrastructure and information technology.
(3) The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $27 million and $20 million in outstanding letters of credit as of January 28, 2023 and January 29, 2022, respectively. ​ ​ ​ PART II FORM 10-K | 51 ​ Table of Contents General The primary cash needs of our business have historically been for merchandise inventories, payroll, rent for our retail and outlet locations, capital expenditures associated with opening new locations, updating existing locations, as well as the development of our infrastructure and information technology, and Source Books.
Delays in the rate of opening new Galleries and in pursuit of our international expansion as a result of COVID-19 have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.
Delays in the rate of opening new Galleries and pursuit of our international expansion have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced.
Equity method investments losses Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $8.2 million loss in fiscal 2021 compared to a $0.9 million loss in fiscal 2020. ​ Liquidity and Capital Resources Overview Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement.
Equity method investments losses Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $2.1 million and $8.2 million loss in fiscal 2022 and fiscal 2021, respectively. ​ Liquidity and Capital Resources Overview Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement.
The discussion of our financial condition and changes in our results of operations, liquidity and capital resources is presented in this section for fiscal 2021 and a comparison to fiscal 2020.
The discussion of our financial condition and changes in our results of operations, liquidity and capital resources are presented in this section for fiscal 2022 and a comparison to fiscal 2021.
As such, we are actively pursuing the expansion of the RH brand globally with the objective of launching international locations in Europe, beginning in 2022 with the opening of RH England, The Gallery at the Historic Aynhoe Park.
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 Gallery at the Historic Aynho Park, this summer.
The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors including the purpose of the VIE, contractual rights and obligations of the variable interest holders, and mechanisms for the resolution of disputes among the variable interest holders.
The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors, including the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders.
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 .
We have secured a number of locations in various markets in the U.K. and continental Europe for future Design Galleries and are currently in lease or purchase negotiations for additional locations .
We may undertake other repurchase programs in the future with respect to our securities. $950 Million Share Repurchase Program In 2018, our Board of Directors authorized the 950 Million Repurchase Program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases including through privately-negotiated arrangements in which a portion of the 950 Million Repurchase Program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives.
Share Repurchase Program In 2018, our Board of Directors authorized a share repurchase program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases, including through privately negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives.
This section provides a general description of our business, including the impacts of the COVID-19 pandemic, and describes our key value-driving strategies. Factors Affecting Our Results of Operations .
This section provides a general description of our business, including the impacts of macroeconomic factors, and describes our key value-driving strategies and business initiatives. Factors Affecting Our Results of Operations .
Changes in the mix of our products may also impact our gross profit and gross margin. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and our outlets to efficiently sell these products. The timing and extent of markdowns are driven primarily by customer acceptance of our merchandise.
We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and our outlets to efficiently sell these products. The timing and extent of markdowns are driven primarily by customer acceptance of our merchandise.
If we misjudge the market for our products or the product lines that we acquire, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net revenues and gross profit. ​ ​ ​ 44 | FORM 10-K PART II ​ Table of Contents Overall Economic Trends .
If we misjudge the market for our products or the product lines that we acquire, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net revenues and gross profit. Overall Economic Trends .
MD&A is a supplement to our consolidated financial statements within Part II of this Annual Report on Form 10-K and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A is organized as follows: Overview .
MD&A is a supplement to our consolidated financial statements within Part II of this Annual Report on Form 10-K and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A includes these primary sections: Overview .
Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of convertible senior notes that were issued in June 2014 (the “2019 Notes”), the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), 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 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes over their expected lives.
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 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we amortized as debt discount an amount equal to the fair value of the equity components as interest expense on the 2023 Notes and 2024 Notes over their expected lives.
While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, demographics of new household formation and the affordability of homes for the first-time home buyer, the higher-end of the housing market may be disproportionately influenced by other factors, including stock market prices, restrictions on travel due to the COVID-19 pandemic, the number of second and third homes being bought and sold, the number of foreign buyers in higher-end real estate markets in the U.S., tax policies and interest rates, and the perceived prospect for capital appreciation in higher-end real estate.
While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, demographics of new household formation and the affordability of homes for first-time home buyers, the higher-end of the housing market may be disproportionately influenced by other factors, including stock market prices, disruption in financial markets, the number of second and third homes being bought and sold, the number of foreign buyers in higher-end real estate markets in the U.S., foreign currency volatility, inflation, tax policies and interest rates, and the perceived prospect for capital appreciation in higher-end real estate.
In addition, our near-term 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 the pandemic.
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 macroeconomic factors.
We anticipate our adjusted capital expenditures to be $200 million to $250 million in fiscal 2022, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.
We anticipate our adjusted capital expenditures to be $275 million to $325 million in fiscal 2023, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments.
Refer to Note 15— Income Taxes in our consolidated financial statements for further information on our uncertain tax positions. ​ Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires our senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires our senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that the pursuit of global expansion will provide RH a substantial long-term market opportunity to build a $20 to $25 billion global brand over time.
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 opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues.
A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2022 ​ 2021 ​ ​ ​ (in millions) Asset based credit facility ​ $ — ​ $ — Term loan (1) ​ ​ 1,995 ​ ​ — Equipment promissory notes (1) ​ ​ 15 ​ ​ 38 Convertible senior notes due 2023 (1) ​ ​ 69 ​ ​ 288 Convertible senior notes due 2024 (1) ​ ​ 189 ​ ​ 284 Notes payable for share repurchases ​ ​ 1 ​ ​ 1 Total debt ​ $ 2,269 ​ $ 611 Cash and cash equivalents ​ ​ (2,178) ​ ​ (100) Total net debt ​ $ 91 ​ $ 511 Availability under the asset based credit facility—net (2) ​ $ 347 ​ $ 272 (1) Amounts exclude discounts upon original issuance and third party offering and debt issuance costs.
A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ ​ (in millions) Asset based credit facility ​ $ — ​ $ — Term loan B (1) ​ ​ 1,975 ​ ​ 1,995 Term loan B-2 (1) ​ ​ 499 ​ ​ — Equipment promissory notes (1) ​ ​ 1 ​ ​ 15 Convertible senior notes due 2023 (1) ​ ​ 2 ​ ​ 69 Convertible senior notes due 2024 (1) ​ ​ 42 ​ ​ 189 Notes payable for share repurchases ​ ​ — ​ ​ 1 Total debt (2) ​ $ 2,519 ​ $ 2,269 Cash and cash equivalents ​ ​ (1,508) ​ ​ (2,178) Total net debt ​ $ 1,011 ​ $ 91 Availability under the asset based credit facility—net (3) ​ $ 533 ​ $ 347 (1) Amounts exclude discounts upon original issuance and third-party offering and debt issuance costs.
As of January 29, 2022, we operated the following number of Galleries, outlets and Showrooms: ​ ​ ​ ​ ​ COUNT RH ​ ​ Design Galleries ​ 27 Legacy Galleries ​ 36 Modern Galleries ​ 1 Baby & Child and TEEN Galleries ​ 3 Total Galleries ​ 67 Outlets ​ 38 Waterworks Showrooms ​ 14 For more information on our company and operations, refer to Item 1—Business .
As of January 28, 2023, we operated the following number of locations: ​ ​ ​ ​ ​ COUNT RH ​ ​ Design Galleries ​ 28 Legacy Galleries ​ 35 Modern Galleries ​ 1 Baby & Child and TEEN Galleries ​ 3 Total Galleries ​ 67 Outlets ​ 37 Guesthouse ​ 1 Waterworks Showrooms ​ 14 For more information on our company and operations, refer to Item 1—Business .
This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income and adjusted capital expenditures. Basis of Presentation and Results of Operations .
This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, operating income and operating margin, and net income and the related non-GAAP financial measures, in addition to adjusted EBITDA. Basis of Presentation and Results of Operations .
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. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense.
We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit). Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance.
Externally our strategy is designed to come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
During fiscal 2021 and 2020, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues, and our global supply chain has not fully recovered from the impact of this dislocation.
During fiscal 2020 and 2021, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues.
Excluding the adjustments mentioned above, RH Segment gross margin would have increased 230 basis points to 49.3% of net revenues in fiscal 2021 from 47.0% of net revenues in fiscal 2020.
Excluding the adjustments mentioned above, RH Segment gross margin would have increased 130 basis points to 50.6% of net revenues in fiscal 2022 from 49.3% of net revenues in fiscal 2021.
RH Segment selling, general and administrative expenses RH Segment selling, general and administrative expenses increased $53 million, or 6.6%, to $862 million in fiscal 2021 compared to $808 million in fiscal 2020. RH Segment selling, general and administrative expenses for fiscal 2021 included amortization of non-cash compensation of $24 million related to a fully vested option grant made to Mr.
RH Segment selling, general and administrative expenses for fiscal 2021 included amortization of non-cash compensation of $24 million related to a fully vested option grant made to Mr.
Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received. During fiscal 2021, adjusted capital expenditures were $254 million, net of cash received related to landlord tenant allowances of $22 million.
Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received during the construction period. During fiscal 2022, adjusted capital expenditures were $225 million in aggregate, net of cash received related to landlord tenant allowances of $13 million.
As a percentage of net revenues, RH Segment gross margin increased 260 basis points to 49.3% of net revenues in fiscal 2021 compared to 46.7% of net revenues in fiscal 2020.
As a percentage of net revenues, RH Segment gross margin increased 100 basis points to 50.3% of net revenues in fiscal 2022 compared to 49.3% of net revenues in fiscal 2021.
We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business.
We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business. We believe our capital structure provides us with substantial optionality regarding capital allocation.
We place orders with merchandise vendors primarily in United States dollars and, as a result, are not currently exposed to significant foreign currency exchange risk.
We place orders with merchandise vendors primarily in United States dollars and, as a result, are not currently exposed to significant foreign currency exchange risk. However, our exposure may increase in connection with our global expansion strategy.
In determining the yield rates, for Design Galleries we utilize market information on the lease commencement date and for leases other than new Design Galleries, we utilize market information as of the beginning of the quarter in which the lease commenced.
In determining the yield rates, for newly constructed Design Galleries or significant distribution centers we utilize market information on the lease commencement date and, for all other leases, we utilize market information as of the beginning of the quarter in which the lease commenced.
The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met. The maturity date of the asset based credit facility is July 29, 2026.
The accordion feature may be added as a first-in, last-out term loan facility. The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met.
We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.5 million as of January 29, 2022 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.
As of January 28, 2023, these merchandise inventory purchase commitments were $303 million. We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.0 million as of January 28, 2023 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time.
For fiscal 2021, net cash provided by operating activities was $662 million and consisted of net income of $689 million and an increase in non-cash items of $252 million, partially offset by a change in working capital and other activities of $279 million.
For fiscal 2022, net cash provided by operating activities was $404 million and consisted of net income of $529 million and an increase in non-cash items of $373 million, partially offset by a change in working capital and other activities of $498 million.
These sections provide our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in fiscal 2021 compared to fiscal 2020, 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 our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current period as compared to the prior year’s comparative period, as well as non-GAAP financial measures we use for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Liquidity and Capital Resources .
Refer to “Non-GAAP Financial Measures” below for further information. ​ ​ ​ 46 | FORM 10-K PART II ​ Table of Contents Basis of Presentation and Results of Operations The following table sets forth our consolidated statements of income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, 2022 % OF NET REVENUES JANUARY 30, 2021 % OF NET REVENUES FEBRUARY 1, 2020 % OF NET REVENUES ​ ​ (dollars in thousands) Net revenues ​ $ 3,758,820 100.0 % $ 2,848,626 100.0 % $ 2,647,437 100.0 % Cost of goods sold ​ 1,903,409 50.6 ​ 1,523,095 53.5 ​ 1,552,426 58.6 ​ Gross profit ​ 1,855,411 49.4 ​ 1,325,531 46.5 ​ 1,095,011 41.4 ​ Selling, general and administrative expenses ​ 928,230 24.7 ​ 858,673 30.1 ​ 732,180 27.7 ​ Income from operations ​ 927,181 24.7 ​ 466,858 16.4 ​ 362,831 13.7 ​ Other expenses ​ ​ ​ ​ ​ ​ ​ Interest expense—net ​ 64,947 1.7 ​ 69,250 2.5 ​ 87,177 3.3 ​ Tradename impairment ​ ​ — — ​ ​ 20,459 0.7 ​ ​ — — ​ (Gain) loss on extinguishment of debt ​ 29,138 0.8 ​ (152) — ​ 6,472 0.2 ​ Other expense—net ​ ​ 2,778 0.1 ​ ​ — — ​ ​ — — ​ Total other expenses ​ 96,863 2.6 ​ 89,557 3.2 ​ 93,649 3.5 ​ Income before income taxes ​ 830,318 22.1 ​ 377,301 13.2 ​ 269,182 10.2 ​ Income tax expense ​ 133,558 3.6 ​ 104,598 3.6 ​ 48,807 1.9 ​ Income before equity method investments ​ ​ 696,760 18.5 ​ ​ 272,703 9.6 ​ ​ 220,375 8.3 ​ Share of equity method investments losses ​ ​ (8,214) (0.2) ​ ​ (888) (0.1) ​ ​ — — ​ Net income ​ $ 688,546 18.3 % $ 271,815 9.5 % $ 220,375 8.3 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles (“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”).
Refer to “Non-GAAP Financial Measures” below for further information. ​ ​ ​ 42 | FORM 10-K PART II ​ Table of Contents Basis of Presentation and Results of Operations The following table sets forth our consolidated statements of income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, % OF NET JANUARY 29, % OF NET JANUARY 30, % OF NET ​ ​ ​ 2023 REVENUE 2022 REVENUES 2021 REVENUE ​ ​ ​ (dollars in thousands) Net revenues ​ $ 3,590,477 100.0 % $ 3,758,820 100.0 % $ 2,848,626 100.0 % ​ Cost of goods sold ​ 1,778,492 49.5 ​ 1,903,409 50.6 ​ 1,523,095 53.5 ​ ​ Gross profit ​ 1,811,985 50.5 ​ 1,855,411 49.4 ​ 1,325,531 46.5 ​ ​ Selling, general and administrative expenses ​ 1,089,828 30.4 ​ 928,230 24.7 ​ 858,673 30.1 ​ ​ Income from operations ​ 722,157 20.1 ​ 927,181 24.7 ​ 466,858 16.4 ​ ​ Other expenses ​ ​ ​ ​ ​ ​ ​ ​ Interest expense—net ​ 113,210 3.2 ​ 64,947 1.7 ​ 69,250 2.5 ​ ​ (Gain) loss on extinguishment of debt ​ 169,578 4.7 ​ 29,138 0.8 ​ (152) — ​ ​ Tradename impairment ​ ​ — — ​ ​ — — ​ ​ 20,459 0.7 ​ ​ Other expense—net ​ ​ 30 — ​ ​ 2,778 0.1 ​ ​ — — ​ ​ Total other expenses ​ 282,818 7.9 ​ 96,863 2.6 ​ 89,557 3.2 ​ ​ Income before income taxes and equity method investments ​ 439,339 12.2 ​ 830,318 22.1 ​ 377,301 13.2 ​ ​ Income tax expense (benefit) ​ (91,358) (2.6) ​ 133,558 3.6 ​ 104,598 3.6 ​ ​ Income before equity method investments ​ ​ 530,697 14.8 ​ ​ 696,760 18.5 ​ ​ 272,703 9.6 ​ ​ Share of equity method investments losses ​ ​ 2,055 0.1 ​ ​ 8,214 0.2 ​ ​ 888 0.1 ​ ​ Net income ​ $ 528,642 14.7 % $ 688,546 18.3 % $ 271,815 9.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures.
Tradenames, trademarks and other intangible assets are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present.
Impairment Tradenames, Trademarks and Other Intangible Assets We annually evaluate whether tradenames, trademarks and other intangible assets continue to have an indefinite life. Tradenames, trademarks and other intangible assets are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present.
We believe that share repurchase programs will continue to be an excellent allocation of capital for the long-term benefit of our shareholders.
We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our shareholders. We may undertake other repurchase programs in the future with respect to our securities.
Term Loan Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our Term Loan.
Term Loan Facilities Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our term loans facilities, including our Term Loan B and Term Loan B-2. Equipment Loan Facility Refer to Note 13— Credit Facilities in our consolidated financial statements for further information on our equipment loan facility.
RH Segment net revenues in both fiscal 2021 and fiscal 2020 were impacted by product recalls as noted above. ​ ​ ​ PART II FORM 10-K | 51 ​ Table of Contents Outlet sales increased $92 million to $279 million in fiscal 2021 compared to $187 million in fiscal 2020.
RH Segment net revenues in fiscal 2021 were impacted by product recalls as noted above. ​ ​ ​ 48 | FORM 10-K PART II ​ Table of Contents Outlet sales decreased $19 million to $260 million in fiscal 2022 compared to $279 million in fiscal 2021.
Excluding the adjustments mentioned above, consolidated gross margin would have increased 250 basis points to 49.3% of net revenues in fiscal 2021 compared to 46.8% of net revenues in fiscal 2020. RH Segment gross profit RH Segment gross profit increased $499 million, or 39.1%, to $1.8 billion in fiscal 2021 compared to $1.3 billion in fiscal 2020.
Excluding the adjustments mentioned above, consolidated gross margin would have increased 150 basis points to 50.8% of net revenues in fiscal 2022 compared to 49.3% of net revenues in fiscal 2021. RH Segment gross profit RH Segment gross profit decreased $64 million, or 3.6%, to $1,708 million in fiscal 2021 compared to $1,773 million in fiscal 2020.
We have in the past experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods. These headwinds tied to macroeconomic factors may continue in future quarters.
Shifts in consumption patterns may also have an impact on consumer spending in the high-end housing market. We have in the past experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods. These headwinds tied to macroeconomic factors may continue in future quarters.
Based on total dollar volume of purchases for fiscal 2021, 69% of our products were sourced from Asia, with 34% sourced from China, 15% from the U.S. and the remainder from other countries and regions.
Based on total dollar volume of purchases for fiscal 2022, 71% of our products were sourced from Asia, with 29% sourced from China, 12% from the U.S. and the remainder from other countries and regions . Consumer Preferences and Demand .
Non-Cash Transactions Non-cash transactions consist of non-cash additions of property and equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets, as well as promissory notes forgiven in exchange for assets and the conversion of loan receivables into equity method investments.
Non-Cash Transactions Non-cash transactions consist of non-cash additions of property and equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets, as well as conversion of loan receivables into equity of variable interest entities.
Our strategy is to offset these higher costs through price increases, as well as efficiencies in our operations. These cost increases are reasonably likely to continue to affect our business in the future given the current macroeconomic conditions. We plan to refine our strategies to continue to address these impacts as they occur. Selling, General and Administrative Expenses.
Our strategy is to offset these higher costs through price increases, as well as efficiencies in our operations. These cost increases are reasonably likely to continue to affect our business in the future given the current macroeconomic conditions.
Cash Flow Analysis A summary of operating, investing, and financing activities is set forth in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 29, ​ JANUARY 30, ​ FEBRUARY 1, ​ 2022 2021 2020 ​ ​ (in thousands) Net cash provided by operating activities ​ $ 662,114 ​ $ 500,770 ​ $ 339,188 Net cash used in investing activities ​ (194,353) ​ (197,600) ​ (122,545) Net cash provided by (used in) financing activities ​ 1,607,127 ​ (243,914) ​ (174,804) Net increase in cash and cash equivalents and restricted cash equivalents ​ 2,074,793 ​ 59,413 ​ 41,855 Cash and cash equivalents and restricted cash equivalents at end of period ​ 2,181,864 ​ 107,071 ​ 47,658 Net Cash Provided By Operating Activities Operating activities consist primarily of net income adjusted for non-cash items including depreciation and amortization, impairments, stock-based compensation, cash paid attributable to accretion of debt discount upon settlement of debt and the effect of changes in working capital and other activities.
Cash Flow Analysis A summary of operating, investing, and financing activities is set forth in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Net cash provided by operating activities ​ $ 403,687 ​ $ 662,114 ​ $ 500,770 Net cash used in investing activities ​ (171,068) ​ (194,353) ​ (197,600) Net cash provided by (used in) financing activities ​ (902,477) ​ 1,607,127 ​ (243,914) Net increase (decrease) in cash and cash equivalents, restricted cash and restricted cash equivalents ​ (670,101) ​ 2,074,793 ​ 59,413 Cash and cash equivalents, restricted cash and restricted cash equivalents at end of period ​ 1,511,763 ​ 2,181,864 ​ 107,071 ​ ​ ​ 54 | FORM 10-K PART II ​ Table of Contents Net Cash Provided By Operating Activities Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, impairments, stock-based compensation, loss on extinguishment of debt, cash paid attributable to accretion of debt discount upon settlement of debt (prior to the adoption of ASU 2020-06 in fiscal 2022) and the effect of changes in working capital and other activities.
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 our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion.
Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 30 basis points to 39.4% of net revenues in fiscal 2021 compared to 39.7% of net revenues in fiscal 2020.
Waterworks selling, general and administrative expenses for fiscal 2021 included $1.4 million related to product recalls. Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 20 basis points to 39.2% of net revenues in fiscal 2022 compared to 39.4% of net revenues in fiscal 2021.
We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock, and (iii) a discount for illiquidity estimated using the Finnerty method. ​ ​ ​ PART II FORM 10-K | 61 ​ Table of Contents Equity Method Investments In fiscal 2020, we entered into equity method investments in connection with real estate development initiatives in Aspen, Colorado.
We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock and (iii) a discount for illiquidity estimated using the Finnerty method.
Other expense—net Other expense—net was $2.8 million in fiscal 2021 due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S. dollar as compared to Pound Sterling and Euro, in addition to a foreign exchange loss from the remeasurement of an intercompany loan with a U.K. subsidiary. ​ ​ ​ PART II FORM 10-K | 53 ​ Table of Contents Income tax expense Income tax expense was $134 million in fiscal 2021 compared to $105 million in fiscal 2020.
Other expense—net Other expense—net was $0.1 million and $2.8 million in fiscal 2022 and 2021, respectively, which included losses of $1.8 million and $2.8 million, respectively, due to unfavorable exchange rate changes affecting foreign currency denominated transactions, primarily between the U.S. dollar as compared to Pound Sterling and Euro, in addition to a foreign exchange loss from the remeasurement of intercompany loans with our U.K. and Switzerland subsidiaries in fiscal 2022 and an intercompany loan with our U.K. subsidiary in fiscal 2021, respectively.
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, décor, outdoor and garden, and child and teen furnishings.
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. Our retail business is fully integrated across our multiple channels of distribution.
We also believe there is an opportunity to transition some portion of our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries with the objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent.
We have also begun executing changes in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the ultimate objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent.
Selling, general and administrative expenses Consolidated selling, general and administrative expenses increased $70 million, or 8.1%, to $928 million in fiscal 2021 compared to $859 million in fiscal 2020.
Selling, general and administrative expenses Consolidated selling, general and administrative expenses increased $162 million, or 17.4%, to $1,090 million in fiscal 2022 compared to $928 million in fiscal 2021.
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. ​ ​ ​ ​ PART II FORM 10-K | 47 ​ Table of Contents Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 29, JANUARY 30, FEBRUARY 1, ​ ​ 2022 ​ 2021 ​ 2020 ​ ​ (in thousands) Net income ​ $ 688,546 ​ $ 271,815 ​ $ 220,375 Income tax expense (1) ​ 133,558 ​ 104,598 ​ 48,807 (Gain) loss on extinguishment of debt (1) ​ 29,138 ​ (152) ​ 6,472 Interest expense—net (1) ​ 64,947 ​ 69,250 ​ 87,177 Share of equity method investments losses (1) ​ ​ 8,214 ​ ​ 888 ​ ​ — Other expense—net (1) ​ ​ 2,778 ​ — ​ — Tradename impairment (1) ​ — ​ 20,459 ​ — Operating income ​ 927,181 ​ 466,858 ​ 362,831 Non-cash compensation (2) ​ ​ 23,428 ​ ​ 117,084 ​ ​ — Asset impairments and change in useful lives (3) ​ 9,630 ​ 12,851 ​ 21,899 Recall accrual (4) ​ 1,940 ​ 7,370 ​ (3,988) Reorganization related costs (5) ​ 449 ​ 7,027 ​ 1,075 (Gain) loss on sale leaseback transaction (6) ​ — ​ 9,352 ​ (1,196) Legal settlements (7) ​ — ​ — ​ (1,193) Gain on sale of building and land (8) ​ — ​ — ​ (333) Adjusted operating income ​ $ 962,628 ​ $ 620,542 ​ $ 379,095 (1) Refer to discussion “Fiscal 2021 Compared to Fiscal 2020” below for a discussion of our results of operations for the year ended January 29, 2022 and January 30, 2021.
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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ ​ 2023 ​ 2022 ​ 2021 ​ ​ (in thousands) Net income ​ ​ 528,642 ​ ​ 688,546 ​ ​ 271,815 Interest expense—net (1) ​ 113,210 ​ 64,947 ​ 69,250 (Gain) loss on extinguishment of debt (1) ​ 169,578 ​ 29,138 ​ (152) Tradename impairment (1) ​ ​ — ​ ​ — ​ ​ 20,459 Other expense—net (1) ​ ​ 30 ​ 2,778 ​ — Income tax expense (benefit) (1) ​ (91,358) ​ 133,558 ​ 104,598 Share of equity method investments losses (1) ​ ​ 2,055 ​ ​ 8,214 ​ ​ 888 Operating income ​ 722,157 ​ 927,181 ​ 466,858 Asset impairments (2) ​ 24,186 ​ 9,630 ​ 12,851 Non-cash compensation (3) ​ ​ 18,072 ​ ​ 23,428 ​ ​ 117,084 Employer payroll taxes on option exercises (4) ​ ​ 14,392 ​ ​ — ​ ​ — Professional fees (5) ​ 7,469 ​ — ​ — Non-cash compensation related to consolidated VIEs (6) ​ ​ 4,470 ​ ​ — ​ ​ — Compensation settlements (7) ​ ​ 3,483 ​ ​ — ​ ​ — Recall accrual (8) ​ 560 ​ 1,940 ​ 7,370 Legal settlements (9) ​ (4,188) ​ — ​ — Gain on sale of building and land (10) ​ (775) ​ — ​ — Loss on sale leaseback transaction (11) ​ ​ — ​ ​ — ​ ​ 9,352 Reorganizational related costs (12) ​ — ​ 449 ​ 7,027 Adjusted operating income ​ $ 789,826 ​ $ 962,628 ​ $ 620,542 (1) Refer to discussion “Fiscal 2022 Compared to Fiscal 2021” below for a discussion of our results of operations for the year ended January 28, 2023 and January 29, 2022.
In addition, non-cash transactions consist of shares issued and received related to convertible senior note transactions. Cash Requirements from Contractual Obligations Leases We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.
In addition, non-cash transactions consist of the extinguishment of convertible senior notes related to our repurchase obligations and associated financing liabilities and embedded derivatives arising from the convertible senior notes repurchases (refer to Note 12— Convertible Senior Notes in our consolidated financial statements), as well as shares issued and received related to convertible senior note transactions. ​ ​ ​ PART II FORM 10-K | 55 ​ Table of Contents Cash Requirements from Contractual Obligations Leases We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.
(4) Represents adjustments to net revenues, cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments, and vendor and insurance claims. In fiscal 2021, the recall adjustments increased net revenues by $1.2 million and increased selling, general and administrative expenses by $3.1 million.
(7) Represents compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary. (8) Represents adjustments to net revenues, cost of goods sold and inventory charges associated with product recalls, as well as accrual adjustments, and vendor and insurance claims. In fiscal 2022, the recall adjustments increased selling, general and administrative expenses by $0.6 million.
When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the VIE model and, if so, whether we are the primary beneficiary of the VIE.
Variable Interest Entities We make investments in privately-held limited liability companies in connection with real estate development initiatives. When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether we are the primary beneficiary of the VIE.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeIn future periods, we might be adversely affected by various aspects of inflation to the extent we are not able to overcome these issues through measures such as price increases for our products.
Biggest changeHowever, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future, including by the heightened levels of inflation experienced globally during 2022 and 2023. We may be unable to overcome these issues through measures such as price increases for our products.
Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of income, which are presented in other expenses—net on the consolidated statements of income. We minimize this exposure by managing cash balances at levels appropriate to meet forthcoming expenses in U.S. dollars and applicable foreign currencies.
Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of income, which are presented in other expense—net . We minimize this exposure by managing cash balances at levels appropriate to meet forthcoming expenses in U.S. dollars and applicable foreign currencies.
While it is difficult to accurately measure the historical impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our consolidated results of operations and financial condition have been immaterial.
Impact of Inflation Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the historical impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our consolidated results of operations and financial condition have been immaterial to date.
Any of these alternative methods may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.
However, SOFR or any other alternative rates may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.
As of January 29, 2022, we had $74 million principal amount of 0.00% convertible senior notes due 2023 outstanding (the “2023 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
As of January 28, 2023, we had $1.7 million principal amount of 0.00% convertible senior notes due 2023 outstanding (the “2023 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
As of January 29, 2022, we had $220 million principal amount of 0.00% convertible senior notes due 2024 outstanding (the “2024 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
As of January 28, 2023, we had $42 million principal amount of 0.00% convertible senior notes due 2024 outstanding (the “2024 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
Market Price Sensitive Instruments 0.00% Convertible Senior Notes due 2023 In connection with the issuance of the 2023 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties.
Market Price Sensitive Instruments Convertible Senior Notes In connection with the issuance of the 2023 Notes and 2024 Notes, we entered into privately negotiated convertible note hedge transactions with certain counterparties.
Based on the average interest rate on the revolving line of credit and the Term Loan during the year ended January 29, 2022, and to the extent that borrowings were outstanding under any facility, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition.
Based on the average interest rate on the revolving line of credit under the ABL Credit Agreement and the Term Loan B and Term Loan B-2 under the Term Loan Credit Agreement during fiscal 2022, and to the extent that borrowings were outstanding under any facility, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition.
We are subject to interest rate risk in connection with borrowings under the ABL Credit Agreement and the Term Loan Credit Agreement, in each case bearing interest at variable rates and we may incur additional indebtedness that bears interest at variable rates.
We are subject to interest rate risk in connection with borrowings under the ABL Credit Agreement and the Term Loan Credit Agreement, as amended, since such borrowings bear interest at variable rates and we may incur additional indebtedness that bears interest at variable rates.
Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the ABL Credit Agreement as of January 29, 2022 was $347 million, net of $20 million in outstanding letters of credit.
Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the ABL Credit Agreement as of January 28, 2023 was $533 million, net of $27 million in outstanding letters of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS Interest Rate Risk We currently do not engage in any interest rate hedging activity and we have no intention to do so in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS Interest Rate Risk We currently do not engage in any interest rate hedging activity.
Risks related to inflation could include increased costs for many products and services that are necessary for the operation of our business, as well as the impact of interest rate increases, which could have a negative effect on the housing market. ​ ​ ​ ​ ​ ​ 64 | FORM 10-K PART II ​ Table of Contents
Risks related to inflation could include increased costs for many products and services that are necessary for the operation of our business as well as the impact of interest rate increases, which could have, among other consequences, a negative effect on the housing market and consumer demand for our products. ​ ​ ​ PART II FORM 10-K | 61 ​ Table of Contents On August 16, 2022, the Inflation Reduction Act, H.R. 5376 (the “IR Act”) was signed into law.
As of January 29, 2022, we had no outstanding borrowings under the revolving line of credit and $1,995 million outstanding under the Term Loan Credit Agreement. The ABL Credit Agreement provides for a borrowing amount based on the value of eligible collateral and a formula linked to certain borrowing percentages based on certain categories of collateral.
The ABL Credit Agreement provides for a borrowing amount based on the value of eligible collateral and a formula linked to certain borrowing percentages based on certain categories of collateral.
Removed
To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations. ​ ​ ​ 62 | FORM 10-K PART II ​ Table of Contents A number of our current debt agreements, including the ABL Credit Agreement and the Term Loan Credit Agreement, have an interest rate tied to LIBOR, which is expected to be discontinued in accordance with reference rate reform and the phase out of LIBOR.
Added
In addition, certain of our real estate loans under our VIEs also bear interest at variable rates.
Removed
A number of alternatives to LIBOR have been proposed or are being developed, but it is not clear which, if any, will be adopted.
Added
We are also subject to interest rate risk through interest income received on our cash and cash equivalent balances, which consist of highly liquid investments with original maturities of 90 days or less held in cash on hand, bank balances, short-term deposits and money market funds.
Removed
The convertible note hedge transactions relate to, collectively, 1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the 2023 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2023 Notes.
Added
The Federal Reserve continued increasing short-term interest rates in fiscal 2022 compared to the historically low levels in fiscal 2021 and there is widespread expectation in the market for rate increases to continue into the first half of 2023.
Removed
These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2023 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2023 Notes.
Added
Such interest rate increases, if they continue, may increase the interest rate applicable to our borrowings that have rates that are subject to adjustment pursuant to floating rate indices such as LIBOR and SOFR. As of January 28, 2023, we had no outstanding borrowings under the revolving line of credit and $2,474 million outstanding under the Term Loan Credit Agreement.
Removed
The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially $309.84 per share.
Added
To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations. However, our exposure to change in our interest expense is partially offset by interest income, which is also affected by changes in market interest rates.
Removed
Refer to Note 12— Convertible Senior Notes in our consolidated financial statements within Part II of this Annual Report on Form 10-K. 0.00% Convertible Senior Notes due 2024 In connection with the issuance of the 2024 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties.
Added
Following announcements by the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, and the Intercontinental Exchange Benchmark Administration, the administrator of LIBOR, publication of 1-week and 2-month U.S. Dollar LIBOR settings and all tenors for other currencies ceased after December 31, 2021. While publication of the remaining U.S.
Removed
The convertible note hedge transactions relate to, collectively, 1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the 2024 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2024 Notes.
Added
Dollar settings (overnight and 1, 3, 6 and 12 month U.S. Dollar LIBOR) is expected to cease after June 30, 2023, U.S. banking and other global financial services regulators have directed regulated institutions to cease entering into new LIBOR-based contracts as soon as practicable and in any event by the end of 2021.
Removed
These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2024 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2024 Notes. ​ ​ ​ PART II FORM 10-K | 63 ​ Table of Contents We also entered into separate warrant transactions with the same group of counterparties initially relating to the number of shares of our common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments.
Added
SOFR, which is currently published by the Federal Reserve Bank of New York based on overnight U.S.
Removed
The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions is initially $338.24 per share.
Added
Treasury repurchase agreement transactions, has been recommended as the alternative to LIBOR by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York and is provided as an alternative rate for our current debt facilities having an interest rate tied to LIBOR. ​ ​ ​ 60 | FORM 10-K PART II ​ Table of Contents The ABL Credit Agreement was amended in December 2022 to transition from LIBOR to SOFR.
Removed
Refer to Note 12— Convertible Senior Notes in our consolidated financial statements within Part II of this Annual Report on Form 10-K. Impact of Inflation Our results of operations and financial condition are presented based on historical cost.
Added
We anticipate the Term Loan Credit Agreement will transition to reference SOFR in fiscal 2023.
Added
We intend to continue to evaluate and monitor the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR and ensuring operational processes are updated to accommodate alternative rates. Due to uncertainty surrounding alternative rates, we are unable to predict the overall impact of this change at this time.
Added
In the first and second quarter of fiscal 2022, we entered into agreements to repurchase $237 million in aggregate principal amount of convertible senior notes consisting of approximately $63 million and $174 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively.
Added
In addition to such convertible senior notes repurchases, in the first quarter of fiscal 2022 we also terminated all of the remaining bond hedges as well as all of the outstanding warrants originally issued in conjunction with the 2023 Notes and the 2024 Notes . Refer to Note 12— Convertible Senior Notes in our consolidated financial statements.
Added
The IR Act introduces a 15% corporate alternative minimum tax (“CAMT”) for corporations whose average annual adjusted financial statement income for any consecutive three-tax-year period preceding the applicable tax year exceeds $1 billion and a 1% excise tax on certain stock repurchases The CAMT and the excise tax are effective in taxable years beginning after December 31, 2022.
Added
We are evaluating the provisions of the new law and its potential impact. ​ ​ ​ ​ ​ ​ 62 | FORM 10-K PART II ​ Table of Contents

Other RH 10-K year-over-year comparisons