Business Combination

9 Months Ended

Oct. 29, 2016

Business Combinations [Abstract]

Business Combination

NOTE 3—BUSINESS COMBINATION

On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. The purchase price of the acquisition was approximately $119.9 million consisting of $118.4 million funded with available cash and $1.5 million representing the fair value of rollover units, which amount is subject to adjustment for changes in working capital and other items. The rollover units are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 14—Stock-Based Compensation). After the transaction, and giving effect to equity interests acquired by management in the business, the Company owns in excess of 90% of the total equity interest in Waterworks.

The addition of Waterworks to the RH platform further positions the Company as an authority in two of the most important and high value rooms of the home—the bath and kitchen—and creates one of the first fully integrated luxury home brands in the world. Furthermore, the Company believes that the Waterworks brand renders the RH brand more valuable and opens RH up to additional high net worth clients, designers and contractors at a much earlier stage in the home project lifecycle. In addition, Waterworks’ long focus and service of the luxury customer is valuable to RH as it continues to elevate the RH brand and customer experience.

For the nine months ended October 29, 2016, the Company incurred$2.8 million of acquisition-related costs associated with the transaction. For the three months ended October 29, 2016, the Company did not incur any acquisition-related costs. These costs and expenses include fees associated with financial, legal and accounting advisors, and employment related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of operations.

The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):

Tangible assets acquired and liabilities assumed	$	16,249
Intangible assets		52,100
Goodwill		51,595
Total	$	119,944

Under purchase accounting rules, the Company valued the acquired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the Company’s selling effort. This valuation resulted in an increase in inventory carrying value of approximately $10.8 million for marketable inventory.

Intangible assets represent trade names which have been assigned an indefinite life and therefore are not subject to amortization. The goodwill is representative of the benefits and expected synergies from the integration of Waterworks products and Waterworks’ management and employees, which do not qualify for separate recognition as an intangible asset. The trade names and goodwill are not expected to be deductible for tax purposes.

Results of operations of Waterworks have been included in the Company’s condensed consolidated statements of operations since the May 27, 2016 acquisition date. Pro forma results of the acquired business have not been presented as the results were not considered material to the Company’s consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.