10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 29, 2017

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number: 001-35720

(Exact name of registrant as specified in its charter)

Delaware	45-3052669
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
15 Koch Road, Suite K Corte Madera, CA	94925
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 924-1005

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of September 1, 2017, 21,152,191 shares of registrant’s common stock were outstanding.

RH

INDEX TO FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of July 29, 2017, and January 28, 2017	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended July 29, 2017, and July 30, 2016	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended July 29, 2017, and July 30, 2016	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 29, 2017 and July 30, 2016	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	49
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
Signatures		54

2

PART I

Item 1. Financial Statements

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	July 29,			January 28,
	2017			2017
ASSETS
Current assets:
Cash and cash equivalents	$	21,637		$	87,023
Short-term investments		—			142,677
Accounts receivable—net		34,752			34,191
Merchandise inventories		608,048			752,304
Asset held for sale		—			4,900
Prepaid expense and other current assets		77,679			117,162
Total current assets		742,116			1,138,257
Long-term investments		—			33,212
Property and equipment—net		744,460			682,056
Goodwill		175,592			173,603
Trademarks and other intangible assets		100,750			100,757
Deferred tax assets		29,394			28,466
Other non-current assets		27,097			36,169
Total assets	$	1,819,409		$	2,192,520
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	271,837		$	226,980
Deferred revenue and customer deposits		176,310			145,918
Other current liabilities		47,602			43,271
Total current liabilities		495,749			416,169
Asset based credit facility		283,000			—
Term loans—net		176,363			—
Convertible senior notes due 2019—net		319,969			312,379
Convertible senior notes due 2020—net		244,342			235,965
Financing obligations under build-to-suit lease transactions		226,231			203,015
Deferred rent and lease incentives		63,887			60,439
Other non-current obligations		56,652			44,684
Total liabilities		1,866,193			1,272,651
Commitments and contingencies (Note 17)		—			—
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares    issued or outstanding as of July 29, 2017 and January 28, 2017		—			—
Common stock, $0.0001 par value per share, 180,000,000 shares authorized,    41,372,123 shares issued and 21,151,991 shares outstanding as of July 29, 2017;    41,123,521 shares issued and 40,828,633 shares outstanding as of January 28, 2017		2			4
Additional paid-in capital		834,885			790,866
Accumulated other comprehensive loss		(804	)		(1,692	)
Retained earnings		138,982			150,214
Treasury stock—at cost, 20,220,132 shares as of July 29, 2017 and 294,888 shares as    of January 28, 2017		(1,019,849	)		(19,523	)
Total stockholders’ equity (deficit)		(46,784	)		919,869
Total liabilities and stockholders’ equity (deficit)	$	1,819,409		$	2,192,520

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

3

RH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended					Six Months Ended
	July 29,			July 30,		July 29,			July 30,
	2017			2016		2017			2016
Net revenues	$	615,326		$	543,381	$	1,177,406		$	998,837
Cost of goods sold		409,513			363,542		801,337			691,523
Gross profit		205,813			179,839		376,069			307,314
Selling, general and administrative expenses		193,690			157,824		357,050			296,774
Income from operations		12,123			22,015		19,019			10,540
Interest expense—net		14,402			10,909		26,581			21,437
Income (loss) before income taxes		(2,279	)		11,106		(7,562	)		(10,897	)
Income tax expense (benefit)		5,583			4,188		3,670			(4,345	)
Net income (loss)	$	(7,862	)	$	6,918	$	(11,232	)	$	(6,552	)
Weighted-average shares used in computing basic    net income (loss) per share		28,398,307			40,646,124		35,667,217			40,617,102
Basic net income (loss) per share	$	(0.28	)	$	0.17	$	(0.31	)	$	(0.16	)
Weighted-average shares used in computing diluted    net income (loss) per share		28,398,307			40,820,495		35,667,217			40,617,102
Diluted net income (loss) per share	$	(0.28	)	$	0.17	$	(0.31	)	$	(0.16	)

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

4

RH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Net income (loss)	$	(7,862	)	$	6,918		$	(11,232	)	$	(6,552	)
Net gains (losses) from foreign currency translation		2,069			(1,269	)		877			1,400
Net unrealized holding gains on available-for-sale investments		—			51			11			143
Total comprehensive income (loss)	$	(5,793	)	$	5,700		$	(10,344	)	$	(5,009	)

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

5

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	July 29,			July 30,
	2017			2016
				As Revised
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(11,232	)	$	(6,552	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		32,546			26,212
Net non-cash charges resulting from inventory step-up		1,860			3,401
Amortization of debt discount		15,018			14,213
Excess tax shortfall from exercise of stock options		—			1,769
Stock-based compensation expense		36,166			14,303
Other non-cash interest expense		2,314			2,222
Change in assets and liabilities—net of acquisition:
Accounts receivable		(617	)		(422	)
Merchandise inventories		140,331			(52,119	)
Prepaid expense and other assets		37,329			(16,403	)
Accounts payable and accrued expenses		29,874			(63,483	)
Deferred revenue and customer deposits		30,349			15,312
Other current liabilities		2,269			(23,310	)
Deferred rent and lease incentives		1,166			2,257
Other non-current obligations		(975	)		8,951
Net cash provided by (used in) operating activities		316,398			(73,649	)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(39,362	)		(70,999	)
Construction related deposits		(5,285	)		(3,661	)
Purchase of trademarks and domain names		(39	)		(164	)
Proceeds from sale of assets held for sale—net		15,123			—
Purchase of investments		(16,109	)		(136,799	)
Maturities of investments		46,890			77,313
Sales of investments		145,020			31,896
Acquisition of business—net of cash acquired		—			(116,100	)
Net cash provided by (used in) investing activities		146,238			(218,514	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under asset based credit facility		323,000			—
Repayments under asset based credit facility		(40,000	)		—
Borrowings under term loans		180,000			—
Borrowing under promissory note		14,000			—
Repayments under promissory note		(117	)		—
Debt issuance costs		(7,939	)
Repurchases of common stock—including commissions		(1,000,326	)		—
Payments on build-to-suit lease transactions		(4,601	)		—
Proceeds from exercise of stock options		11,170			288
Excess tax shortfall from exercise of stock options		—			(1,769	)
Tax withholdings related to issuance of stock-based awards		(3,106	)		(946	)
Payments on capital leases		(158	)		(166	)
Net cash used in financing activities		(528,077	)		(2,593	)
Effects of foreign currency exchange rate translation		55			452
Net decrease in cash and cash equivalents		(65,386	)		(294,304	)
Cash and cash equivalents
Beginning of period		87,023			331,467
End of period	$	21,637		$	37,163
Non-cash transactions:
Property and equipment additions due to build-to-suit lease transactions	$	27,340		$	9,676
Property and equipment additions in accounts payable and accrued expenses at period-end	$	23,860		$	22,903
Property and equipment additions from use of construction related deposits	$	19,338		$	2,659
Property and equipment acquired under capital lease	$	753		$	—

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

6

RH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.

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”. Refer to Note 3—Business Combination.

As of July 29, 2017, the Company operated a total of 85 retail Galleries and 28 outlet stores in 32 states, the District of Columbia and Canada, and includes 15 Waterworks showrooms in the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of July 29, 2017, and the results of operations for the three and six months ended July 29, 2017 and July 30, 2016. The Company’s current fiscal year, which consists of 53 weeks, ends on February 3, 2018 (“fiscal 2017”).

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

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (the “2016 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. Refer to “Revision” below.

The results of operations for the three and six months ended July 29, 2017 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Revision

During the fourth quarter of fiscal 2016, management determined that the Company had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC 210—Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement of the cash provided by operating activities on the condensed consolidated statements of cash flows. There was no impact on the condensed consolidated statements of income or stockholders’ equity related to these misstatements.

The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99—Materiality, codified in Accounting Standards Codification (“ASC”) 250—Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the condensed consolidated statements of cash flows.

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The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections (in thousands):

	Six Months Ended
	July 30,
	2016
	As Reported			Adjustment			As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(81,399	)	$	17,916		$	(63,483	)
Net cash used in operating activities	$	(91,565	)	$	17,916		$	(73,649	)
Cash and cash equivalents:
Beginning of period	$	349,897		$	(18,430	)	$	331,467
End of period	$	37,677		$	(514	)	$	37,163

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

Stock-Based Compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of operations, rather than within additional paid-in capital on the balance sheet. The new guidance was effective for the Company beginning on January 29, 2017. As a result of the adoption of this new guidance, the Company recognized an excess tax benefit of $2.5 million and $2.4 million in the provision for income taxes as a discrete item during the three and six months ended July 29, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the condensed consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.

In May 2017, the FASB issued Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The standard will be applied prospectively. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under GAAP for one year from the original effective date. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts.

The Company continues to assess all potential impacts of the standard, and currently believes one of the most significant impacts relates to accounting for gift card breakage. Under the new standard the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and will be recognized proportional to actual gift card redemptions. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company will adopt Topic 606 at the commencement of fiscal 2018. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially adopting it recognized at the date of initial application. The Company has not yet selected the transition method.

8

Accounting for Leases

In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.

Financial Instruments

In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Cash Flow Classification

In August 2016, the FASB issued Accounting Standard Update No. 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers

In October 2016, the FASB issued Accounting Standard Update No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Goodwill and Intangibles

In January 2017, the FASB issued Accounting Standard Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350). The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

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, which are classified as a liability, are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 15—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.

During the three and six months ended July 30, 2016, the Company incurred $0.7 million and $2.8 million, respectively, of acquisition-related costs associated with the transaction. These costs and expenses include fees associated with financial, legal and

9

accounting advisors, and employment related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of operations.

During the six months ended July 29, 2017, the Company recorded a purchase price allocation adjustment of $1.9 million. The adjustment primarily related to a subset of inventory acquired for which the Company completed a fair value analysis based on the facts and circumstances that existed as of the acquisition date. Subsequent to the acquisition date, only a small portion of such inventory had been sold and therefore the impact on the Company’s results of operations for historical periods since the acquisition was insignificant. The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities, prior to and after the purchase price allocation adjustments recorded during the six months ended July 29, 2017 (in thousands):

			Purchase Price
	January 28,		Allocation			July 29,
	2017		Adjustments			2017
Tangible assets acquired and liabilities assumed	$	18,615	$	(1,916	)	$	16,699
Trademarks		52,100		—			52,100
Goodwill		49,229		1,916			51,145
Total	$	119,944	$	—		$	119,944

Any future changes to the purchase price will be recorded directly to the consolidated statements of operations and will not impact the goodwill recorded as a result of this acquisition.

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 $9.7 million for marketable inventory.

Trademarks 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. A portion of the trademarks and goodwill are not 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 condensed consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.

NOTE 4—ASSET HELD FOR SALE

Building and Land

During the first quarter of fiscal 2017, the Company committed to a plan to sell the building and land at one of its owned retail Galleries, resulting in a reclassification of building and land of $8.2 million from property and equipment to asset held for sale on the condensed consolidated balance sheets as of April 29, 2017. In May 2017, the Company completed the sale of the building and land for approximately $10.2 million and entered into a short-term five month lease agreement to lease the property. As a result, the gain of $2.0 million associated with the sale of this property is amortized over a five month period. During the three and six months ended July 29, 2017, the Company recorded a gain of $1.3 million which is included as a reduction of selling, general and administrative expenses on the condensed consolidated statements of operations. The remaining gain of $0.7 million is included in deferred rent and lease incentives on the condensed consolidated balance sheets as of July 29, 2017 and will be recognized on the condensed consolidated statements of operations during the three months ended October 28, 2017.

Aircraft

During the fourth quarter of fiscal 2016, the Company committed to a plan to sell an aircraft, which resulted in a reclassification of such aircraft from property and equipment to asset held for sale on the condensed consolidated balance sheets as of January 28, 2017. The asset held for sale had a carrying value of $4.9 million as of January 28, 2017. In April 2017, the sale of the aircraft was completed for a purchase price of $5.2 million and the Company incurred costs of $0.3 million to dispose of the asset.

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NOTE 5—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Capitalized catalog costs	$	42,595	$	61,258
Federal and state tax receivable		11,053		13,124
Vendor deposits		8,951		13,276
Prepaid expense and other current assets		15,080		29,504
Total prepaid expense and other current assets	$	77,679	$	117,162

Other non-current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Construction related deposits	$	13,991	$	28,044
Other deposits		4,944		4,706
Deferred financing fees		4,683		1,530
Other non-current assets		3,479		1,889
Total other non-current assets	$	27,097	$	36,169

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

The following sets forth the goodwill and intangible assets as of July 29, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,838	)	$	—		$	87
Fair market write-down (2)		(1,467	)		1,379			—			(88	)
Total intangible assets subject to amortization	$	458		$	(459	)	$	—		$	(1	)
Intangible assets not subject to amortization
Goodwill (3)(4)	$	175,605		$	—		$	(13	)	$	175,592
Trademarks and domain names (4)	$	100,663		$	—		$	—		$	100,663

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

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The following sets forth the goodwill and intangible assets as of January 28, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,792	)	$	—		$	133
Fair market write-down (2)		(1,467	)		1,350			—			(117	)
Total intangible assets subject to amortization	$	458		$	(442	)	$	—		$	16
Intangible assets not subject to amortization
Goodwill (3)(4)	$	173,690		$	—		$	(87	)	$	173,603
Trademarks and domain names (3)(4)	$	100,624		$	—		$	—		$	100,624

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) The Company recorded goodwill and trademarks of $49.2 million and $52.1 million, respectively, in fiscal 2016 related to its acquisition of Waterworks. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

NOTE 7—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Accounts payable	$	160,452	$	134,720
Accrued compensation		34,322		26,886
Accrued freight and duty		20,834		27,955
Accrued sales taxes		15,681		14,908
Accrued occupancy		11,053		8,137
Accrued professional fees		8,414		2,082
Accrued catalog costs		7,597		3,874
Other accrued expenses		13,484		8,418
Total accounts payable and accrued expenses	$	271,837	$	226,980

Other current liabilities consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Unredeemed gift card and merchandise credit liability	$	23,916	$	24,524
Allowance for sales returns		11,790		10,077
Product recall reserves		6,590		4,324
Other current liabilities		5,306		4,346
Total other current liabilities	$	47,602	$	43,271

During the three and six months ended July 29, 2017, the Company recorded a $5.0 million charge related to the recall of certain products, resulting in a reduction of net revenues by $4.0 million, increased cost of goods sold by $0.8 million and increased selling, general and administrative expenses by $0.2 million. In addition, during the three and six months ended July 29, 2017, the Company revised its estimate related to a product recall that was initiated during the fourth quarter of fiscal 2016, which resulted in an increase of net revenues of $0.2 million and a decrease of selling, general and administrative expenses by $0.1 million.

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NOTE 8—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Notes payable for share repurchases	$	19,390	$	19,390
Promissory note (1)		12,323		—
Capital lease obligations—non-current		7,675		7,242
Deferred contract incentive (2)		6,548		7,739
Unrecognized tax benefits		2,570		2,508
Rollover units and profit interests (3)		1,998		1,784
Other non-current obligations		6,148		6,021
Total other non-current obligations	$	56,652	$	44,684

(1) Represents the non-current portion of a promissory note secured by the Company’s aircraft.

(2) Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement.

(3) Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.

NOTE 9—CONVERTIBLE SENIOR NOTES

0.00% Convertible Senior Notes due 2020

In June 2015, the Company issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by the Company or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by the Company’s primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.

The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of July 29, 2017. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.

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The Company may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2020 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded $0.3 million related to the amortization of debt issuance costs. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded $0.5 million related to the amortization of debt issuance costs.

The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	300,000		$	300,000
Less: Debt discount		(52,258	)		(60,124	)
Net carrying amount	$	247,742		$	239,876
Equity component (1)	$	84,003		$	84,003

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded interest expense of $4.0 million and $3.7 million for the amortization of the debt discount related to the 2020 Notes during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded interest expense of $7.9 million and $7.4 million for the amortization of the debt discount related to the 2020 Notes during the six months ended July 29, 2017 and July 30, 2016, respectively.

2020 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 2.5 million shares of its common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.5 million shares of the Company’s common stock at a price of $189.00 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 5.1 million shares of common stock (which cap may also be subject to adjustment). The Company received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 Notes until the Company’s common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.

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The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

0.00% Convertible Senior Notes due 2019

In June 2014, the Company issued $350 million principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of July 29, 2017. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount of $1,000.

The Company may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2019 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2019 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

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Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded $0.2 million related to the amortization of debt issuance costs. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded $0.4 million related to the amortization of debt issuance costs.

The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	350,000		$	350,000
Less: Debt discount		(28,304	)		(35,457	)
Net carrying amount	$	321,696		$	314,543
Equity component (1)	$	70,482		$	70,482

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded interest expense of $3.6 million and $3.4 million for the amortization of the debt discount related to the 2019 Notes during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded interest expense of $7.2 million and $6.8 million for the amortization of the debt discount related to the 2019 Notes during the six months ended July 29, 2017 and July 30, 2016, respectively.

2019 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s common stock at a price of $171.98 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 6.0 million shares of common stock (which cap may also be subject to adjustment). The Company received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax assets are included in deferred tax assets on the condensed consolidated balance sheets.

NOTE 10—CREDIT FACILITIES

The following credit facilities were outstanding as of July 29, 2017 (in thousands):

	Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount
Asset based credit facility	$	283,000	$	—		$	283,000
LILO term loan		80,000		(547	)		79,453
Second lien term loan		100,000		(3,090	)		96,910
Total credit facilities	$	463,000	$	(3,637	)	$	459,363

There were no amounts outstanding under any credit facilities as of January 28, 2017.

Asset Based Credit Facility & LILO Term Loan

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In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders.

On June 28, 2017, Restoration Hardware, Inc. entered into an eleventh amended and restated credit agreement among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., various subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (the “credit agreement”). The credit agreement has a revolving line of credit with availability of up to $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, the credit agreement establishes an up to $80.0 million LILO term loan facility.

The Company incurred $3.6 million of deferred financing fees related to the credit agreement, which are included in other non-current assets on the condensed consolidated balance sheets, and will be amortized over the life of the revolving line of credit, which has a maturity date of June 28, 2022. As a result of the credit agreement, unamortized deferred financing fees of $0.1 million related to the previous facility were expensed during the three and six months ended July 29, 2017 and $1.1 million related to the previous facility will be amortized over the life of the new revolving line of credit.

The Company incurred $0.6 million of debt issuance costs related to the LILO term loan facility, which are presented net against the term loans balance on the condensed consolidated balance sheets, and will be amortized over the life of the revolving line of credit.

Borrowings under the revolving line of credit and LILO term loan facility are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or, in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The credit agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

As of July 29, 2017, the Company had $283.0 million in outstanding borrowings and $181.1 million of availability under the revolving line of credit, net of $13.1 million in outstanding letters of credit. As of July 29, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated fixed-charge coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit is approximately $129.4 million as of July 29, 2017.

Second Lien Credit Agreement

On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agent with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”).

The Company incurred $3.6 million of debt issuance costs related to the second lien credit agreement, which are presented net against the term loans balance on the condensed consolidated balance sheets.

The second lien term loan bears interest at an annual rate generally based on LIBOR plus 8.25%. This rate is a floating rate that resets periodically based upon changes in LIBOR rates during the life of the second lien term loan. At the date of borrowing, the rate was set at one month LIBOR plus 8.25%.

All obligations under the second lien term loan are secured by a second lien security interest in assets of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest is granted with respect to substantially the same collateral that secures the credit agreement. The second lien ranks junior in priority and is subordinated to the first lien in favor of the lenders with respect to the credit agreement.

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The borrowings under the second lien credit agreement may be prepaid in whole or in part at any time, subject to certain minimum payment requirements and a prepayment premium.

The second lien credit agreement contains various restrictive and affirmative covenants generally in line with the covenants and restrictions contained in the credit agreement including required financial reporting, limitations on the ability to incur liens, make loans or other investments, incur additional debt, make certain restricted payments, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The second lien credit agreement also contains a financial ratio covenant not found in the credit agreement based upon a senior secured leverage ratio of consolidated secured debt to consolidated EBITDA.

The second lien credit agreement also contains a consolidated fixed charge coverage ratio generally based on the same formulation set forth in the credit agreement such that the borrower may not make certain “restricted payments” in the event that certain ratios are not met and contains certain events of default and other customary terms and conditions for a second lien credit agreement.

As of July 29, 2017, Restoration Hardware, Inc. had $100.0 million in outstanding borrowings. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the second lien credit agreement.

Intercreditor Agreement

On July 7, 2017, in connection with the second lien credit agreement, Restoration Hardware, Inc. entered into an intercreditor agreement (the “intercreditor agreement”) with the administrative agent and collateral agent under the credit agreement and the administrative agent and collateral agent under the second lien credit agreement. The intercreditor agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the credit agreement and the second lien credit agreement without the consent of the other party.

NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Assets and Liabilities

Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The Company’s financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

• Level 1—Quoted prices are available in active markets for identical investments as of the reporting date.

• Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

• Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant management judgment or estimation.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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Fair Value Measurements

All of the Company’s investments are classified as available-for-sale and are carried at fair value. The Company did not hold any short-term or long-term investments as of July 29, 2017. Assets measured at fair value were as follows as of January 28, 2017 (in thousands):

	Level 1		Level 2		Total
Cash equivalents
Money market funds	$	2,510	$	—	$	2,510
Commercial paper		—		5,493		5,493
Total cash equivalents		2,510		5,493		8,003
Short-term investments
Commercial paper		—		34,534		34,534
Government agency obligations		2,553		105,590		108,143
Total short-term investments		2,553		140,124		142,677
Long-term investments
Government agency obligations		—		33,212		33,212
Total long-term investments		—		33,212		33,212
Total	$	5,063	$	178,829	$	183,892

The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within the Company’s investment portfolio as of January 28, 2017 based on stated maturities, which are recorded within cash and cash equivalents, short-term investments and long-term investments on the condensed consolidated balance sheets (in thousands):

	Cost		Fair Value
Range of maturity
Due within 1 year	$	148,155	$	148,170
Due in 1 to 2 years	$	33,238	$	33,212

The Company invests excess cash primarily in investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper, government agency obligations and guaranteed obligations of the U.S. government, all of which are subject to minimal credit and market risks. The Company estimates the fair value of its commercial paper and U.S. government agency bonds by taking into consideration valuations obtained from third party pricing services. The pricing services utilize industry standard valuation models, including both income and market based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trade dates of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities, prepayment/default projections based on historical data; and other observable inputs.

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the three and six months ended July 29, 2017 or July 30, 2016. There were no transfers into or out of level 1 and level 2 during the three and six months ended July 29, 2017 or July 30, 2016.

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value, due to the short-term nature of activity within these accounts. The estimated fair value and carrying value of the 2019 Notes and 2020 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity) were as follows (in thousands):

	July 29,				January 28,
	2017				2017
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible senior notes due 2019	$	308,012	$	321,696	$	295,381	$	314,543
Convertible senior notes due 2020	$	244,178	$	247,742	$	232,463	$	239,876

The fair value of each of the 2019 Notes and 2020 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of the Company’s convertible

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notes, when available, the Company’s stock price and interest rates based on similar debt issued by parties with credit ratings similar to the Company (level 2).

The estimated fair value of the asset based credit facility was $283.0 million, which approximates cost, as of July 29, 2017. Fair value approximates cost as there were no significant movements in interest rates between the borrowing date and July 29, 2017.

The estimated fair value of the second lien term loan and LILO term loan are $100.0 million and $80.0 million, respectively, which approximates the cost of each facility as of July 29, 2017. Fair values approximate cost as there were no significant movements in interest rates between the issuance date and July 29, 2017 for both the second lien term loan and LILO term loan.

NOTE 12—INCOME TAXES

The Company recorded income tax expense of $5.6 million and $4.2 million in the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded income tax expense of $3.7 million and an income tax benefit of $4.3 million in the six months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate was -245.0% and 37.7% for the three months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate was -48.5% and 39.9% for the six months ended July 29, 2017 and July 30, 2017, respectively. The effective tax rate was significantly impacted by (i) non-deductible stock-based compensation, (ii) our reporting a net loss before income taxes and (iii) net excess tax benefits from stock-based compensation resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.

As of both July 29, 2017 and January 28, 2017, $1.4 million of the exposures related to unrecognized tax benefits would affect the effective tax rate if realized and are included in other non-current obligations on the condensed consolidated balance sheets. As of July 29, 2017, the Company does not have any exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

NOTE 13—NET INCOME (LOSS) PER SHARE

The weighted-average shares used for net income (loss) per share is presented in the table below. As the Company was in a net loss position for the three and six months ended July 29, 2017 and for the six months ended July 30, 2016, the weighted-average shares outstanding for basic and diluted are the same.

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Weighted-average shares—basic		28,398,307		40,646,124		35,667,217		40,617,102
Effect of dilutive stock-based awards		—		174,371		—		—
Weighted-average shares—diluted		28,398,307		40,820,495		35,667,217		40,617,102

The following number of options and restricted stock units were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Options		8,997,210		7,498,345		8,997,210		8,782,871
Restricted stock units		838,377		1,011,902		838,377		1,182,588
Total anti-dilutive stock-based awards		9,835,587		8,510,247		9,835,587		9,965,459

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NOTE 14—SHARE REPURCHASES

$700 Million Share Repurchase Program

On May 2, 2017, the Company’s Board of Directors authorized a stock repurchase program of up to $700 million (the “$700 Million Repurchase Program”). Under the $700 Million Repurchase Program, the Company repurchased approximately 12.4 million shares of its common stock at an average price of $56.60 per share, for an aggregate repurchase amount of approximately $700 million, during the three months ended July 29, 2017. As the $700 Million Repurchase Program was completed during the three months ended July 29, 2017, no additional shares will be repurchased in future periods under this program.

$300 Million Share Repurchase Program

On February 21, 2017, the Company’s Board of Directors authorized a stock repurchase program of up to $300 million (the “$300 Million Repurchase Program”). Under the $300 Million Repurchase Program, the Company repurchased approximately 7.8 million shares of its common stock at an average price of $38.24 per share, for an aggregate repurchase amount of approximately $300 million, during the three months ended April 29, 2017. No shares were purchased under the $300 Million Repurchase Program during the three months ended July 29, 2017. As the $300 Million Repurchase Program was completed during the three months ended April 29, 2017, no additional shares will be repurchased in future periods under this program.

Share Repurchases Under Equity Plans

Certain options and awards granted under the Company’s equity plans contain a repurchase right, which may be exercised at the Company’s discretion in the event of the termination of an employee’s employment with the Company. No shares were repurchased under equity plans during either the three and six months ended July 29, 2017 or July 30, 2016. As of both July 29, 2017 and January 28, 2017, the aggregate unpaid principal amount of the notes payable for share repurchases was $19.4 million, which is included in other non-current obligations on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded interest expense on the outstanding notes of $0.3 million. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded interest expense on the outstanding notes of $0.5 million.

Of the $19.4 million notes payable for share repurchases outstanding as of both July 29, 2017 and January 28, 2017, $15.5 million was due to a current board member of the Company.

NOTE 15—STOCK-BASED COMPENSATION

The Company estimates the value of equity grants based upon an option-pricing model and recognizes this estimated value as compensation expense over the vesting periods. The Company recognizes expense associated with performance-based awards when it becomes probable that the performance condition will be met. Once it becomes probable that an award will vest, the Company recognizes compensation expense equal to the number of shares which are probable to vest multiplied by the fair value of the related shares measured at the grant date.

Stock-based compensation expense is included in selling, general and administrative expenses on the condensed consolidated statements of operations. The Company recorded stock-based compensation expense of $30.9 million and $10.3 million during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded stock-based compensation expense of $36.2 million and $14.3 million during the six months ended July 29, 2017 and July 30, 2016, respectively. No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

2012 Stock Incentive Plan and 2012 Stock Option Plan

As of July 29, 2017, 8,997,210 options were outstanding with a weighted-average exercise price of $49.81 per share and 6,461,464 options were vested with a weighted-average exercise price of $51.31 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 29, 2017 was $196.4 million, $168.9 million, and $113.0 million, respectively. Stock options exercisable as of July 29, 2017 had a weighted-average remaining contractual life of 6.62 years. As of July 29, 2017, the total unrecognized compensation expense related to unvested options was $28.0 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.53 years.

As of July 29, 2017, the Company had 838,377 restricted stock units outstanding with a weighted-average grant date fair value of $52.84 per share. During the three months ended July 29, 2017, 232,534 restricted stock units vested with a weighted-average grant date and vest date fair value of $57.38 per share and $53.71 per share, respectively. During the six months ended July 29, 2017, 246,253 restricted stock units vested with a weighted-average grant date and vest date fair value of $57.98 per share and $53.32 per

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share, respectively. As of July 29, 2017, there was $23.9 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of 3.45 years.

Chairman and Chief Executive Officer Option Grant

On May 2, 2017, the Company’s Board of Directors granted Mr. Friedman an option to purchase 1,000,000 shares of the Company’s common stock with an exercise price equal to $50 per share.

The option contains dual-condition restrictions consisting of both time-based service restrictions over four years and performance-based restrictions linked to achieving the Company’s common stock price objectives of $100, $125 and $150 per share. The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option resulted in a one-time non-cash stock compensation charge of $23.9 million in the three and six months ended July 29, 2017.

Time-Based Restrictions

The time-based restrictions are measured over an initial four year service period from the date of the award and these restrictions will lapse at the end of each of these first four years at a rate of 250,000 shares per year if (i) Mr. Friedman remains employed at the end of such year, and (ii) the stock price goals have been achieved in such year as described further below.

Performance-Based Restrictions

The stock price objectives are measured each year and are set at prices for the Company’s common stock of $100, $125 and $150 per share. If all three stock price objectives are met in the first performance year, restrictions will lapse as to 250,000 shares in aggregate at the end of such year, with 83,333 shares tied to a $100 price per share, 83,333 shares tied to a $125 price per share and 83,334 shares tied to a $150 price per share.

The same price performance tests are applied in the second year of performance such that restrictions will lapse for an additional 250,000 shares at the end of the second year and then again as to an additional 250,000 shares at the end of each of the third and fourth years so long as Mr. Friedman remains employed at the end of each year.

To the extent that any of the price performance objectives is not reached within one of these first four performance years, the stock price objective can be achieved in any subsequent year until the 8th anniversary of the date of grant.

2012 Stock Incentive Plan Grant to Waterworks Associates

On May 27, 2016, on the date of our acquisition of Waterworks, the Company granted stock options to certain Waterworks associates under the 2012 Stock Incentive Plan to purchase 322,784 shares of its common stock, with an exercise price of $33.54 per share, which is equal to the closing price of the Company’s common stock on the date of grant. These options are fully vested as of the date of grant but any shares issued upon exercise of such options will be subject to selling restrictions which are scheduled to lapse in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date. The fully vested options resulted in a one-time non-cash stock-based compensation charge of $3.7 million in the three and six months ended July 30, 2016.

Rollover Units

In connection with the acquisition of Waterworks, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Appreciation Rights is determined based on an option pricing method (“OPM”). The Company did not record any expense related to the Appreciation Rights during the three and six months ended July 29, 2017 or July 30, 2016. As of both July 29, 2017 and January 28, 2017, the liability associated with the Rollover Units and related Appreciation Rights was $1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

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Profit Interests

In connection with the acquisition of Waterworks, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates. The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years. The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Profit Interests is determined based on an OPM. For the three and six months ended July 29, 2017 the Company recorded $0.1 million and $0.2 million, respectively, related to the Profit Interests, which is included in selling, general and administrative expenses on the condensed consolidated statements of operations. For both the three and six months ended July 30, 2016 the Company recorded $0.1 million, related to the Profit Interests. As of July 29, 2017 and January 28, 2017, the liability associated with the Profit Interests was $0.5 million and $0.3 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

NOTE 16—RELATED PARTY TRANSACTIONS

Aircraft Time Sharing Agreement

On March 29, 2016, Restoration Hardware, Inc., a wholly-owned subsidiary of the Company entered into an Amended and Restated Aircraft Time Sharing Agreement (the “Time Sharing Agreement”) with Gary Friedman, its Chairman and Chief Executive Officer. The Time Sharing Agreement governs use of any of the Company’s aircraft (“Corporate Aircraft”) by Mr. Friedman for personal trips and provides that Mr. Friedman will lease such Corporate Aircraft and pay Restoration Hardware, Inc. an amount equal to the aggregate actual expenses of each personal use flight based on the variable costs of the flight, with the amount of such lease payments not to exceed the maximum payment level established under the Federal Aviation Administration rules. Mr. Friedman maintains a deposit with the Company, to be used towards payment of amounts due under the Time Sharing Agreement. The amount of the deposit is immaterial to the condensed consolidated financial statements.

NOTE 17—COMMITMENTS AND CONTINGENCIES

Commitments

The Company had no material off balance sheet commitments as of July 29, 2017.

Contingencies

The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business. These disputes are increasing in number as the business expands and the Company grows larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which the Company is involved could result in unexpected expenses and liability that could adversely affect the Company’s operations. In addition, any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

The Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that the Company does establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what the Company accrues from time to time. The Company believes that the ultimate resolution of its current matters will not have a material adverse effect on its condensed consolidated financial statements.

RH Modern Securities Class Action

On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaint in the United States District Court, Northern District of California, against the Company, Gary Friedman, and Karen Boone. On March 16, 2017, Peter J. Errichiello, Jr. filed a similar class action complaint in the same forum and against the same parties. On April 26, 2017, the court consolidated the two actions. The consolidated action is captioned In re RH, Inc. Securities Litigation. The complaints allege, among other things, fraud in connection with alleged misstatements under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Both complaints purport to make claims on behalf of a class of purchasers of Company common stock from March 26, 2015 to June 8, 2016. The alleged misstatements relate to forward looking statements regarding the roll out of the RH Modern product line. The claims are currently at an early stage and it is not possible to estimate the amount or range of any potential loss at this time. An amended consolidated complaint was filed in June 2017 and the Company and its officers have moved

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to dismiss the complaint. While the outcome of litigation is inherently uncertain, the Company and its officers intend to vigorously defend the claims and believe the complaints lack merit.

NOTE 18—SEGMENT REPORTING

The Company defines reportable and operating segments on the same basis that it uses to evaluate performance internally by the Chief Operating Decision Maker (the “CODM”). The Company has determined that the Chief Executive Officer is its CODM. As of July 29, 2017, the Company had two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by the Company’s customers, including sales through catalogs, sales through the Company’s websites, sales through stores, and sales through the commercial channel.

The Company’s two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared management team and customer base, the Company has determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

The Company uses operating income to evaluate segment profitability. Operating income is defined as net income before interest expense—net and income taxes.

Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition of Waterworks was completed on May 27, 2016, reportable segment financial information for Waterworks below represents nine weeks of results for both the three and six months ended July 30, 2016, whereas the RH Segment results represent thirteen and twenty-six weeks for the three and six months ended July 30, 2016, respectively.

Segment Information

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally (in thousands):

	Three Months Ended						Three Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	583,793	$	31,533	$	615,326	$	522,618	$	20,763	$	543,381
Gross profit	$	192,996	$	12,817	$	205,813	$	173,803	$	6,036	$	179,839
Depreciation and amortization	$	15,386	$	1,140	$	16,526	$	12,964	$	694	$	13,658

	Six Months Ended						Six Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,117,321	$	60,085	$	1,177,406	$	978,074	$	20,763	$	998,837
Gross profit	$	352,623	$	23,446	$	376,069	$	301,278	$	6,036	$	307,314
Depreciation and amortization	$	30,287	$	2,259	$	32,546	$	25,518	$	694	$	26,212

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The following table presents the balance sheet metrics reviewed by the CODM to evaluate performance internally (in thousands):

	July 29,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,448	$	51,144	$	175,592	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624
Total assets	$	1,665,328	$	154,081	$	1,819,409	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

The Company uses segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) non-cash compensation charges related to a fully vested option grant made to Mr. Friedman and the fully vested option grants made in connection with the acquisition of Waterworks, (ii) reduction of net revenues and incremental costs associated with product recalls, (iii) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, (iv) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, (v) costs incurred in connection with the acquisition of Waterworks including professional fees and (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that management reviews.

The following table shows segment operating income and income (loss) before tax (in thousands):

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Operating income (loss):
RH Segment	$	39,550		$	32,317		$	49,608		$	33,027
Waterworks		358			858			(1,424	)		858
Non-cash compensation		(23,872	)		(3,672	)		(23,872	)		(3,672	)
Recall accrual		(4,733	)		—			(4,733	)		—
Impact of inventory step-up		(480	)		(3,401	)		(1,860	)		(3,401	)
Gain on sale of building and land		1,300			—			1,300			—
Reorganization related costs		—			(3,309	)		—			(4,724	)
Acquisition related costs		—			(778	)		—			(2,847	)
Legal claim		—			—			—			(8,701	)
Operating income		12,123			22,015			19,019			10,540
Interest expense—net		14,402			10,909			26,581			21,437
Income (loss) before tax	$	(2,279	)	$	11,106		$	(7,562	)	$	(10,897	)

The Company classifies its sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor. Net revenues in each category were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Furniture	$	388,983	$	351,267	$	741,939	$	641,693
Non-furniture		226,343		192,114		435,467		357,144
Total net revenues	$	615,326	$	543,381	$	1,177,406	$	998,837

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of July 29, 2017, the Company operates 5 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian and U.K. operations, and the long-lived assets in Canada and the U.K., are not material to the Company. Geographic revenues are determined based upon where service is rendered.

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No single customer accounted for more than 10% of the Company’s revenues in the three and six months ended July 29, 2017 or July 30, 2016.

NOTE 19—SUBSEQUENT EVENT

In the third quarter of 2017, the Company committed to a plan to close one of its furniture distribution centers in fiscal 2017, prior to the end of the lease term. The Company has not yet determined the financial impact related to this closure.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2016 Form 10-K.

FORWARD-LOOKING STATEMENTS AND MARKET DATA

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

Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results and matters that we identify as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include those factors disclosed under the sections entitled Risk Factors in Part II of this quarterly report, in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (“2016 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report and in our 2016 Form 10-K. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. You should evaluate all forward-looking statements made in this quarterly report in the context of these risks and uncertainties.

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

Overview

We are a leading luxury retailer in the home furnishings marketplace. Our curated and fully-integrated assortments are presented consistently across our sales channels in sophisticated and unique lifestyle settings that we believe are on par with world-class interior designers. We offer dominant merchandise assortments across a growing number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. We position our Galleries as showrooms for our brand, while our Source Books and websites act as virtual extensions of our stores.

Our business is fully integrated across our multiple channels of distribution, consisting of our stores, Source Books and websites. As of July 29, 2017, we operated a total of 85 retail Galleries, consisting of 50 legacy Galleries, 6 larger format Design Galleries, 8 next generation Design Galleries, 1 RH Modern Gallery and 5 RH Baby & Child Galleries throughout the United States and Canada, and 15 Waterworks showrooms in the United States and in the U.K. In addition, as of July 29, 2017, we operated 28 outlet stores throughout the United States and Canada.

In fiscal 2016, we experienced a slowdown in sales and substantially lower level of profits than in prior periods. We have undertaken initiatives to specifically address the temporal factors affecting our results in fiscal 2016, in addition to the other numerous initiatives we are undertaking to improve our business and financial performance in fiscal 2017 and beyond. If these initiatives are successful, we may return to rates of growth in revenues and improvements in margins and profitability that are more in line with our historical growth patterns prior to the downturn that we experienced in fiscal 2016. However, there can be no assurance that these efforts will be successful or that we will not encounter other operational difficulties during fiscal 2017 and future time periods that may have a negative impact on growth and profitability. For further information on the temporal factors affecting our results and our initiatives, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Key Value Driving Strategies in this Quarterly Report on Form 10-Q and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations in our 2016 Form 10-K.

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The second fiscal quarter of 2017 is just past the one year anniversary of our launch of both the RH Members program and the initial stage of our efforts to redesign our supply chain network. We believe that the transition to a membership model is having a favorable impact on our business and financial performance including through a reduction in our return rate, exchange rate and cancel rate resulting in higher conversion of demand into revenues. In addition, as a result of our work to redesign our distribution network and optimize inventory, we were able to forego building a fifth furniture distribution center planned to open in 2017 and we expect to consolidate our current furniture distribution center network from four to three locations by the fourth quarter of 2017. We anticipate that managing our business in fewer facilities will reduce inventory risk, increase turns, improve merchandise margins and eliminate the occupancy and overhead of approximately 900,000 square feet of distribution space.

We continue to pursue and test numerous initiatives to improve many aspects of our business including through efforts to optimize inventory, elevate the home delivery experience and simplify our distribution network, as well as to expand our product offering and transform our real estate. There can be no assurance as to the timing and extent of the operational benefits and financial contributions of these strategic efforts. In addition, our pursuit of multiple initiatives with respect to our business in any given period may result in period-to-period changes in, and increased fluctuation in, our results of operations. For example, our efforts to optimize our distribution network could cause us to incur costs and expenses in the short term with respect to changes in the way in which we operate our business such as charges related to closure of a distribution center.

Acquisition of Waterworks

On May 27, 2016, we acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks,” for consideration consisting of 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. After the transaction, and giving effect to equity interests acquired by management in the business, we own in excess of 90% of the total equity interests in Waterworks.

Waterworks has long been the definition of the well-appointed bath, and is the only complete bath and kitchen business offering fittings, fixtures, furniture, furnishings, accessories, lighting, hardware and surfaces under one brand in the market. Waterworks is composed of the Waterworks, Waterworks Kitchen and Waterworks Studio brands, all built on a foundation of impeccable style, design integrity, quality and craftsmanship. Waterworks prides itself on its deep relationships in the design community and the technical expertise and tenure of its people.

Waterworks products are sold through its 15 showrooms in the United States and in the U.K., as well as through its boutique retail partners, hospitality division and online.

Key Value Driving Strategies

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

• Transform Our Real Estate Platform. We believe we have an opportunity to significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of next generation Design Galleries that are sized to the potential of each market and the size of our assortment. New next generation Design Gallery sites are identified based on a variety of factors, including timing of legacy Gallery lease expiration, availability of suitable new site locations, the negotiation of favorable economic terms to the Company for the new location, as well as satisfactory and timely completion of real estate development including procurement of permits and completion of construction. The number of next generation Design Galleries we open in any fiscal year is highly dependent upon these variables and individual new Design Galleries may be subject to delay or postponement depending on the circumstances of specific projects. In fiscal 2017, we expect to open three next generation Design Galleries, all with integrated food and beverage offerings, as well as three to five Design Galleries in fiscal 2018.

• Expand Our Offering and Increase Our Market Share. We believe we have a significant opportunity to increase our market share by:

• growing our merchandise assortment;

• introducing new products and categories, including our introduction of RH Modern, RH TEEN and the addition of the Waterworks business;

• expanding our service offerings, including the introduction of the RH Interior Design program and cafes, wine vaults and coffee bars at our next generation Design Galleries;

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• exploring and testing new business opportunities complementary to our core business; and

• increasing our brand awareness and customer loyalty through our Source Book circulation strategy, our digital marketing initiatives and our advertising and public relations activities and events.

• Elevate the Customer Experience. We are focused on improving the end-to-end customer experience. As we have elevated our brand, especially at retail, we are also working to enhance the brand experience in other aspects of our business. We are making changes in many aspects of our business processes that affect our customers, including improvements in product quality and enhancements in sourcing, product availability, in-home delivery and all aspects of customer care and service. We plan to invest significant time in fiscal 2017 architecting a new fully integrated back-end operating platform, inclusive of the supply chain network, the home delivery experience as well as a new metric driven quality system and company-wide decision data. We also believe that the introduction of experiential brand-enhancing products and services, such as expanded design ateliers, the RH Interior Design program and the planned launch of an integrated food and beverage experience in a number of our new Galleries, will further enhance our customers’ in-store experience, in addition to allowing us to further disrupt the highly fragmented home furnishings landscape and achieve market share gains.

• Increase Operating Margins. We have the opportunity to continue to improve our operating margins by leveraging our fixed occupancy, advertising and corporate general and administrative costs, as well as leveraging our scalable infrastructure. Key areas in which we believe we will increase operating margins include:

• Occupancy leverage;

• Advertising cost leverage;

• Improved product margin and shipping efficiencies; and

• Other selling, general and administrative expenses.

• Optimize the Allocation of Capital in the Business. We believe that our operations and current initiatives present a significant opportunity to optimize the allocation of capital in our business, including generating free cash flow and optimizing cash on our balance sheet as well as deploying capital to repurchase shares of our common stock which we believe creates a long term benefit to our shareholders. We have also incurred additional debt to fund a portion of our share repurchase programs and we believe that was a good capital allocation given favorable interest rates on debt and the ability of our business to generate cash in light of current business initiatives in order to paydown and service such debt. During fiscal 2017, one of our initiatives has been to generate additional cash flow through the optimization of inventory and other efforts to make our business more efficient in its use of capital to support operations. Our current efforts to generate more cash flow in our business include rationalizing our SKU count and reducing overall levels of inventory, which involves selling slower moving, discontinued and other inventory through markdowns and through our outlet channel. We have also undertaken initiatives to optimize our distribution network and make significant improvements in the way that we handle merchandise in the distribution and delivery part of our business. We expect that these improvements will result in operational efficiencies in the handling and transportation of merchandise and will enable us to achieve greater efficiency and lower requirements for carrying inventory to meet customer demand. We plan to lower our new Gallery opening cadence to three to five Galleries per year, which we believe will result in improved deal economics, lower build out costs and higher returns and will lower our capital requirements and execution risk over the course of our real estate transformation. We also believe the slower opening cadence will put less pressure on our infrastructure, enabling greater capital discipline throughout the organization. In addition, we have a number of assets that can be sold to third parties in order to generate cash. We may enter into sale and leaseback transactions with respect to certain real estate that we own, for example, and may enter into capital or operating leases in lieu of purchasing or holding certain assets that are used in our business. We intend to continue to seek out and evaluate opportunities for effectively managing and deploying capital in ways that support and enhance our business initiatives and strategies.

• Pursue International Expansion. We plan to strategically expand our business into select countries outside of the United States, Canada and the U.K. in the future. We believe that our luxury brand positioning and unique aesthetic will have strong international appeal.

In fiscal 2016, we made several strategic investments and changes to our business model in order to strengthen our brand and position the business for growth in the future. Our fiscal 2016 results also reflected the effect of temporal issues that we faced, including the costs related to the launch of RH Modern; the timing of recognizing Membership revenues related to the transition from a promotional to a membership model; efforts to reduce inventories and rationalize our SKU count; and the decision to move our 2016 Source Book mailing from the spring to the fall.

In fiscal 2017, we will continue our efforts to optimize inventory and rationalize our SKU count. In the first half of 2017, net revenues increased 18%, of which 4 points of growth was related to higher outlet and warehouse sales stemming from our accelerated

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inventory optimization efforts. While our higher outlet revenues and inventory optimization efforts had a positive impact on revenues and working capital in the first half of the year, they had a negative impact on margins and earnings.

In the second half of fiscal 2017, we expect to continue to benefit from the anniversarying of the costs related to the launch of RH Modern and the broadening of the merchandise assortment and enlargement of its retail footprint. We also expect to recognize increased Membership revenue and further benefit from new members and renewals. In addition, we expect to build revenues due to further developments in our Source Book strategy, including the distribution of our Fall 2017 RH Interiors Source Book, with a greater emphasis on the updated classic design that RH has been famous for, while still evolving the brand towards a cleaner, more contemporary style.

We also expect incremental revenues from the four new Design Galleries opened in 2016, and the new Design Galleries expected to open in the second half of 2017. The majority of our new Design Galleries under development include a dedicated floor for RH Modern as well as an RH Hospitality offering including restaurants, wine vaults, and pantries, similar to our successful hospitality offering at RH Chicago, The Gallery at the Three Arts Club.

Basis of Presentation and Results of Operations

The following table sets forth our condensed consolidated statements of operations and other financial and operating data.

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
	(dollars in thousands)
Condensed Consolidated Statements of Operations:
Net revenues	$	615,326		$	543,381		$	1,177,406		$	998,837
Cost of goods sold		409,513			363,542			801,337			691,523
Gross profit		205,813			179,839			376,069			307,314
Selling, general and administrative expenses		193,690			157,824			357,050			296,774
Income from operations		12,123			22,015			19,019			10,540
Interest expense—net		14,402			10,909			26,581			21,437
Income (loss) before income taxes		(2,279	)		11,106			(7,562	)		(10,897	)
Income tax expense (benefit)		5,583			4,188			3,670			(4,345	)
Net income (loss)	$	(7,862	)	$	6,918		$	(11,232	)	$	(6,552	)
Other Financial and Operating Data:
Net revenues:
Stores (1)	$	350,174		$	309,786		$	666,898		$	565,862
Direct	$	265,152		$	233,595		$	510,508		$	432,975
Direct as a percentage of net revenues (2)		43	%		43	%		43	%		43	%
Growth in net revenues:
Stores (1)		13	%		15	%		18	%		17	%
Direct		14	%		-2	%		18	%		-3	%
Total		13	%		7	%		18	%		7	%
Comparable brand revenue growth (3)		7	%		-3	%		8	%	-%
Capital expenditures	$	25,906		$	25,723		$	39,362		$	70,999
Construction related deposits (4)	$	5,285		$	110		$	5,285		$	3,661
Adjusted net income (5)	$	19,701		$	17,908		$	21,495		$	15,842

(1) Stores data represents retail stores, including Waterworks showrooms, plus outlet stores. Net revenues for outlet stores, which include warehouse sales, were $51.1 million and $35.1 million, for the three months ended July 29, 2017 and July 30, 2016, respectively, and were $107.2 million and $63.1 million for the six months ended July 29, 2017 and July 30, 2016, respectively.

(2) Direct revenues include sales through our Source Books, websites, and phone orders, including our Contract business and a portion of our Trade business.

(3) Comparable brand revenue growth includes direct net revenues and retail comparable store sales, including RH Baby & Child and RH Modern Galleries. Comparable brand revenue growth excludes retail non-comparable store sales, closed store sales and outlet net revenues. Comparable store sales have been calculated based upon retail stores, excluding outlet stores, that were open at least fourteen full months as of the end of the reporting period and did not change square footage by more than 20% between periods. If a store is closed for seven days during a month, that month will be excluded from comparable store sales. Membership revenue is included in comparable brand revenue growth beginning April 2017, which is the first full month

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following the one-year anniversary of the program launch. Waterworks revenue is included in comparable brand revenue growth beginning June 2017, which is the first full month following the one-year anniversary of the acquisition.

(4) Construction related deposits relate to payments to escrow accounts for future construction of next generation Design Galleries.

(5) Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as net income (loss), adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. Adjusted net income is included in this filing because management believes that adjusted net income provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of actual results on a comparable basis with historical results. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to adjusted net income for the periods indicated below.

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
	(in thousands)
Net income (loss)	$	(7,862	)	$	6,918		$	(11,232	)	$	(6,552	)
Adjustments pre-tax:
Executive non-cash compensation (a)		23,872			—			23,872			—
Amortization of debt discount (b)		6,790			6,479			13,505			12,921
Recall accrual (c)		4,733			—			4,733			—
Gain on sale of building and land (d)		(1,300	)		—			(1,300	)		—
Legal claim (e)		—			—			—			8,701
Reorganization related costs (f)		—			3,309			—			4,724
Waterworks acquisition related:
Non-cash compensation (g)		—			3,672			—			3,672
Impact of inventory step-up (h)		480			3,401			1,860			3,401
Acquisition related costs (i)		—			778			—			2,847
Subtotal adjusted items		34,575			17,639			42,670			36,266
Impact of income tax items (j)		(7,012	)		(6,649	)		(9,943	)		(13,872	)
Adjusted net income	$	19,701		$	17,908		$	21,495		$	15,842

(a) Represents a non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in May 2017.

(b) Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. 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”) and for the $300 million aggregate principal amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), we separated the 2019 Notes and 2020 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 and 2020 Notes over their expected lives. The equity components represent the difference between the proceeds from the issuance of the 2019 Notes and 2020 Notes and the fair value of the liability components of the 2019 Notes and 2020 Notes, respectively. Amounts are presented net of interest capitalized for capital projects of $0.8 million and $0.7 million during the three months ended July 29, 2017 and July 30, 2016, respectively. Amounts are presented net of interest capitalized for capital projects of $1.5 million and $1.3 million during the six months ended July 29, 2017 and July 30, 2016, respectively.

(c) In the second quarter of fiscal 2017, we initiated a product recall of certain of our products. Additionally, in the second quarter of fiscal 2017, we adjusted the recall accrual related to certain product recalls initiated in the fourth quarter of fiscal 2016. The recall and recall adjustment, which affected our results for the three and six months ended July 29, 2017, had the following effect on our income before taxes:

	Three and Six Months Ended
	July 29, 2017
Reduction of net revenues	$	3,813
Incremental cost of goods sold		763
Impact on gross profit		4,576
Incremental selling, general and administrative expenses		157
Impact on income (loss) before income taxes	$	4,733

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(d) Represents the gain on the sale of building and land. As we entered into a short-term lease agreement to lease the property subsequent to the sale, the total gain of $2.0 million associated with the sale of this property will be amortized over a five month period.

(e) Represents the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards.

(f) Represents costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards.

(g) Represents a non-cash compensation charge related to the fully vested option grants made in connection with our acquisition of Waterworks.

(h) Represents the non-cash amortization of the inventory fair value adjustment recorded in connection with our acquisition of Waterworks.

(i) Represents costs incurred in connection with our acquisition of Waterworks including professional fees.

(j) The three and six months ended July 29, 2017 assume a normalized tax rate of approximately 39%. The adjustment for the three months ended July 30, 2016 represents the tax effect of the adjusted items based on our effective tax rate of 37.7%. The adjustment for the six months ended July 30, 2016 represents the tax effect of the adjusted items based on an adjusted effective tax rate of 37.6%.

The following tables present retail Gallery metrics, which have been calculated based upon retail stores, which includes our RH Baby & Child, RH Modern Galleries and Waterworks Showrooms, and excludes outlet stores.

	Six Months Ended
	July 29,						July 30,
	2017						2016
	Store Count			Total Leased Selling Square Footage (1)			Store Count		Total Leased Selling Square Footage (1)
				(in thousands)					(in thousands)
Beginning of period		85			912			69		725
Waterworks Showrooms acquired	—			—				15		51.0
Retail Galleries opened:
Waterworks Boston Showroom		1			5.0		—		—
Retail Galleries closed:
Waterworks Boston Showroom		(1	)		(2.1	)	—		—
End of period		85			915			84		776

(1) Leased selling square footage is retail space at our stores used to sell our products. Leased selling square footage excludes backrooms at retail stores used for storage, office space or similar purpose, as well as exterior sales space located outside a store, such as courtyards, gardens and rooftops. Leased selling square footage for the three and six months ended July 29, 2017 includes approximately 4,800 square feet related to one owned store location. Leased selling square footage for the three and six months ended July 30, 2016 includes approximately 13,000 square feet related to two owned store locations.

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
	(in thousands)
Total leased square footage at end of period (1)		1,248		1,084		1,248		1,084
Weighted-average leased square footage (2)		1,243		1,062		1,243		1,036
Weighted-average leased selling square footage (2)		913		761		912		743
Retail sales per leased selling square foot (in dollars) (3)	$	327	$	360	$	612	$	674

(1) Total leased square footage as of July 29, 2017 includes approximately 5,400 square feet related to one owned store location. Total leased square footage as of July 30, 2016 includes approximately 24,000 square feet related to two owned store locations

(2) Weighted-average leased square footage and leased selling square footage is calculated based on the number of days a Gallery location was opened during the period divided by the total number of days in the period.

(3) Retail sales per leased selling square foot is calculated by dividing total net revenues for all retail stores, comparable and non-comparable, by the weighted-average leased selling square footage for the period.

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The following table sets forth our condensed consolidated statements of operations as a percentage of total net revenues.

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Condensed Consolidated Statements of Operations:
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		66.6			66.9			68.1			69.2
Gross profit		33.4			33.1			31.9			30.8
Selling, general and administrative expenses		31.4			29.0			30.3			29.7
Income from operations		2.0			4.1			1.6			1.1
Interest expense—net		2.4			2.1			2.2			2.2
Income (loss) before income taxes		(0.4	)		2.0			(0.6	)		(1.1	)
Income tax expense (benefit)		0.9			0.7			0.4			(0.4	)
Net income (loss)		(1.3	%)		1.3	%		(1.0	%)		(0.7	%)

Three Months Ended July 29, 2017 Compared to Three Months Ended July 30, 2016

Prior to the Waterworks acquisition on May 27, 2016, we had one reportable segment. As we acquired the Waterworks business on May 27, 2016, reportable segment information presented below for Waterworks includes results for nine weeks during the three months ended July 30, 2016 and includes results for thirteen weeks during the three months ended July 29, 2017. The RH Segment includes results for thirteen weeks during both the three months ended July 29, 2017 and July 30, 2016.

	Three Months Ended							Three Months Ended
	July 29,							July 30,
	2017							2016
	RH Segment		Waterworks (1)			Total		RH Segment		Waterworks (1)			Total
	(in thousands)
Net revenues	$	583,793	$	31,533		$	615,326	$	522,618	$	20,763		$	543,381
Cost of goods sold		390,797		18,716			409,513		348,815		14,727			363,542
Gross profit		192,996		12,817			205,813		173,803		6,036			179,839
Selling, general and administrative    expenses		180,751		12,939			193,690		145,573		12,251			157,824
Income (loss) from operations	$	12,245	$	(122	)	$	12,123	$	28,230	$	(6,215	)	$	22,015

(1) Waterworks results include non-cash amortization of $0.5 million and $3.4 million related to the inventory fair value adjustment recorded in connection with our acquisition of Waterworks during the three months ended July 29, 2017 and July 30, 2016, respectively.

Net revenues

Consolidated net revenues increased $71.9 million, or 13.2%, to $615.3 million in the three months ended July 29, 2017 compared to $543.4 million in the three months ended July 30, 2016. Stores net revenues increased $40.4 million, or 13.0%, to $350.2 million in the three months ended July 29, 2017 compared to $309.8 million in the three months ended July 30, 2016. Direct net revenues increased $31.6 million, or 13.5%, to $265.2 million in the three months ended July 29, 2017 compared to $233.6 million in the three months ended July 30, 2016. Comparable brand revenue was 7% for the three months ended July 29, 2017.

RH Segment net revenues

RH Segment net revenues increased $61.2 million, or 11.7%, to $583.8 million in the three months ended July 29, 2017 compared to $522.6 million in the three months ended July 30, 2016.

A number of factors contributed to the increase in RH Segment net revenues during the three months ended July 29, 2017, including our decision to move the mailing of our 2016 Interiors Source Book to the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore was a contributor to net revenues in the second quarter of fiscal 2017, whereas the second quarter of fiscal 2016 did not benefit from a similarly timed mailing.

Outlet sales, which include sales via warehouse locations, increased $16.0 million in the three months ended July 29, 2017 compared to the three months ended July 30, 2016, representing 2.9% of growth in RH Segment net revenues. Increased outlet sales occurred primarily as a result of our inventory optimization efforts as we increased our outlet promotional activity and had higher

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discounts, including through warehouse sales, and we increased outlet selling square footage by approximately 43% compared to the prior period. Additionally, the increase in our retail weighted-average leased selling square footage contributed to the increase in RH Segment net revenues. We also had an increase in Membership revenue recognized.

RH Segment net revenues for the three months ended July 29, 2017 were negatively impacted by a $3.8 million related to the reduction of revenue associated with product recalls. In the second quarter of fiscal 2017 and in the fourth quarter of fiscal 2016, we initiated product recalls of certain of our products. In the second quarter of fiscal 2017, we adjusted the recall accrual related to certain product recalls previously initiated, and we may adjust recall accruals in the future. Product recalls and the establishment or adjustment of any related recall accruals can affect our results and cause quarterly fluctuations affecting the period-to-period comparisons of our results. No assurance can be provided that any accruals will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time, which could further affect results.

Waterworks net revenues

On May 27, 2016, we acquired a controlling interest in Waterworks. As a result of this acquisition, we acquired 15 Waterworks showrooms and included such additional retail stores in our weighted-average leased selling square footage for both the three months ended July 29, 2017 and July 30, 2016. Waterworks net revenues increased $10.8 million, or 51.9%, to $31.5 million in the three months ended July 29, 2017 compared to $20.8 million in the three months ended July 30, 2016. Waterworks net revenues represented 5.1% and 3.8% of our net revenues for the three months ended July 29, 2017 and July 30, 2016, respectively. The increase in Waterworks net revenues is primarily due to the three months ended July 29, 2017 representing thirteen weeks of results, whereas the three months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016.

The above factors and other current and future operational initiatives of the Company may create additional uncertainty with respect to our consolidated net revenues and profit in the near term.

Gross profit

Consolidated gross profit increased $26.0 million, or 14.4%, to $205.8 million in the three months ended July 29, 2017 from $179.8 million in the three months ended July 30, 2016. As a percentage of net revenues, consolidated gross margin increased 0.3% to 33.4% of net revenues in the three months ended July 29, 2017 from 33.1% of net revenues in the three months ended July 30, 2016.

RH Segment gross profit for the three months ended July 29, 2017 was negatively impacted by $4.6 million related to the reduction of revenue and incremental costs associated with product recalls, as described above. Waterworks gross profit for the three months ended July 29, 2017 and July 30, 2016 was negatively impacted by $0.5 million and $3.4 million, respectively, of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.

Excluding the product recalls and the impact of the amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased 0.4% to 34.1% of net revenues in the three months ended July 29, 2017 from 33.7% of net revenues in the three months ended July 30, 2016.

RH Segment gross profit

RH Segment gross profit increased $19.2 million, or 11.0%, to $193.0 million in the three months ended July 29, 2017 from $173.8 million in the three months ended July 30, 2016. As a percentage of net revenues, RH Segment gross margin decreased 0.2% to 33.1% of net revenues in the three months ended July 29, 2017 from 33.3% of net revenues in the three months ended July 30, 2016.

Excluding the product recalls mentioned above, RH Segment gross margin would have increased 0.3% to 33.6% of net revenues in the three months ended July 29, 2017 from 33.3% of net revenues in the three months ended July 30, 2016. The increase in gross margin was due to improvement in shipping costs as a percentage of net revenues, as well as leverage in our distribution network occupancy costs, partially offset by deleverage in our outlet occupancy costs.

We experienced deleverage in our gross margins related to our continued efforts to optimize inventory during the three months ended July 29, 2017. This decrease in product margins was due to higher outlet and warehouse sales driven by increased promotions and higher discounts. This decrease was partially offset by improvements in our core merchandise margins and an increase in Membership revenue recognized.

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Waterworks gross profit

Waterworks gross profit increased $6.8 million, or 112.3%, to $12.8 million in the three months ended July 29, 2017 from $6.0 million in the three months ended July 30, 2016. The increase in Waterworks gross profit is primarily due to the three months ended July 29, 2017 representing thirteen weeks of results, whereas the three months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016.

As a percentage of net revenues, Waterworks gross margin increased 11.5% to 40.6% of net revenues in the three months ended July 29, 2017 from 29.1% of net revenues in the three months ended July 30, 2016.

Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 3.3% to 42.2% of net revenues in the three months ended July 29, 2017 from 45.5% of net revenues in the three months ended July 30, 2016. The decrease in gross margin is primarily due to deleverage in occupancy costs, as well as changes in product mix.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $35.9 million, or 22.7%, to $193.7 million in the three months ended July 29, 2017 compared to $157.8 million in the three months ended July 30, 2016.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $35.2 million, or 24.2%, to $180.8 million in the three months ended July 29, 2017 compared $145.6 million in the three months ended July 30, 2016.

RH Segment selling, general and administrative expenses for the three months ended July 29, 2017 included $23.9 million related to a fully vested option grant made to Mr. Friedman in May 2017, $0.2 million incremental costs associated with product recalls and a gain of $1.3 million related to the sale of building and land. RH Segment selling, general and administrative expenses for the three months ended July 30, 2016 included $3.3 million associated with a reorganization, including severance and related taxes and $0.7 million related to charges and expenses incurred as a result of the Waterworks transaction.

Advertising and marketing costs increased $8.2 million during the three months ended July 29, 2017 as compared to July 30, 2016, primarily due to the timing of our Source Book mailings. In the second quarter of fiscal 2017 we amortized costs related to our 2016 Interiors Source Book which was circulated in the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in the second quarter of fiscal 2017, whereas the second quarter of fiscal 2016 did not incur similarly timed expenses.

RH Segment selling, general and administrative expenses were 26.9% and 27.1% of net revenues for the three months ended July 29, 2017 and July 30, 2016, respectively, excluding the fully vested option grant made to Mr. Friedman in May 2017, the product recall costs, the gain related to the sale of building and land, the reorganization costs, and the charges and expenses incurred as a result of the Waterworks transaction mentioned above. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in employment and employment related costs and leverage in our corporate occupancy costs, partially offset by an increase in advertising and marketing costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $0.7 million, or 5.6%, to $12.9 million in the three months ended July 29, 2017 compared $12.3 million in the three months ended July 30, 2016.

The increase in Waterworks selling, general and administrative expenses is primarily due to the three months ended July 29, 2017 representing thirteen weeks of results, whereas the three months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016. This increase is partially offset by stock-based compensation of $3.7 million related to the fully vested option grants made in connection with our acquisition of Waterworks during the three months ended July 30, 2016.

Excluding the fully vested option grants made in connection with our acquisition of Waterworks, Waterworks selling, general and administrative expenses would have been 41.0% and 41.3% of net revenues in the three months ended July 29, 2017 and July 30, 2016, respectively.

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Interest expense—net

Interest expense increased $3.5 million to $14.4 million for the three months ended July 29, 2017 compared to $10.9 million for the three months ended July 30, 2016. Interest expense consisted of the following:

	Three Months Ended
	July 29,			July 30,
	2017			2016
	(in thousands)
Amortization of convertible senior notes debt discount	$	7,561		$	7,155
Build-to-suit lease transactions		4,074			3,263
Amortization of debt issuance costs and deferred financing fees		1,290			628
Asset based credit facility		996			444
Term loans		824			—
Other interest expense		591			821
Capitalized interest for capital projects		(839	)		(677	)
Interest income		(95	)		(725	)
Total interest expense—net	$	14,402		$	10,909

Income tax expense

Income tax expense was $5.6 million and $4.2 million in the three months ended July 29, 2017 and July 30, 2016, respectively. Our effective tax rate was -245.0% and 37.7% for the three months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate in the three months ended July 29, 2017 was significantly impacted by (i) non-deductible stock-based compensation, (ii) our reporting a net loss before income taxes and (iii) net excess tax benefits from stock-based compensation resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.

Six Months Ended July 29, 2017 Compared to Six Months Ended July 30, 2016

Prior to the Waterworks acquisition on May 27, 2016, we had one reportable segment. As we acquired the Waterworks business on May 27, 2016, reportable segment information presented below for Waterworks includes results for nine weeks during the six months ended July 30, 2016 and includes results for twenty-six weeks during the six months ended July 29, 2017. The RH Segment includes results for twenty-six weeks during both the six months ended July 29, 2017 and July 30, 2016.

	Six Months Ended							Six Months Ended
	July 29,							July 30,
	2017							2016
	RH Segment		Waterworks (1)			Total		RH Segment		Waterworks (1)			Total
	(in thousands)
Net revenues	$	1,117,321	$	60,085		$	1,177,406	$	978,074	$	20,763		$	998,837
Cost of goods sold		764,698		36,639			801,337		676,796		14,727			691,523
Gross profit		352,623		23,446			376,069		301,278		6,036			307,314
Selling, general and administrative    expenses		330,320		26,730			357,050		284,523		12,251			296,774
Income (loss) from operations	$	22,303	$	(3,284	)	$	19,019	$	16,755	$	(6,215	)	$	10,540

(1) Waterworks results include non-cash amortization of $1.9 million and $3.4 million related to the inventory fair value adjustment recorded in connection with our acquisition of Waterworks during the six months ended July 29, 2017 and July 30, 2016, respectively.

Net revenues

Consolidated net revenues increased $178.6 million, or 17.9%, to $1,177.4 million in the six months ended July 29, 2017 compared to $998.8 million in the six months ended July 30, 2016. Stores net revenues increased $101.0 million, or 17.9%, to $666.9 million in the six months ended July 29, 2017 compared to $565.9 million in the six months ended July 30, 2016. Direct net revenues increased $77.6 million, or 17.9%, to $510.5 million in the six months ended July 29, 2017 compared to $432.9 million in the six months ended July 30, 2016. Comparable brand revenue was 8% for the six months ended July 29, 2017.

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RH Segment net revenues

RH Segment net revenues increased $139.2 million, or 14.2%, to $1,117.3 million in the six months ended July 29, 2017 compared to $978.1 million in the six months ended July 30, 2016.

A number of factors contributed to the increase in RH Segment net revenues during the six months ended July 29, 2017, including our decision to move the mailing of our 2016 Interiors Source Book to the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore was a contributor to net revenues in the first half of fiscal 2017, whereas the first half of fiscal 2016 did not benefit from a similarly timed mailing.

Outlet sales, which include sales via warehouse locations, increased $44.1 million in the six months ended July 29, 2017 compared to the six months ended July 30, 2016, representing 4.5% of growth in RH Segment net revenues. Increased outlet sales occurred primarily as a result of our inventory optimization efforts as we increased our outlet promotional activity, including through warehouse sales, and we increased outlet selling square footage by approximately 43% compared to the prior period. Additionally, the increase in our retail weighted-average leased selling square footage contributed to the increase in RH Segment net revenues. Net revenues also increased related to deeper markdowns on discontinued merchandise based on our continued efforts to rationalize our SKU count. We also had an increase in Membership revenue recognized.

RH Segment net revenues for the six months ended July 29, 2017 were negatively impacted by a $3.8 million related to the reduction of revenue associated with product recalls. During the six months ended July 30, 2016, RH Segment net revenues were reduced by an estimated $16 million due to customer accommodation and related expenses as a result of our initiative to elevate the customer experience, including in response to production delays related to RH Modern. We did not experience similar production delays during the six months ended July 29, 2017.

Waterworks net revenues

On May 27, 2016, we acquired a controlling interest in Waterworks. As a result of this acquisition, we acquired 15 Waterworks showrooms and included such additional retail stores in our weighted-average leased selling square footage for both the six months ended July 29, 2017 and July 30, 2016. Waterworks net revenues increased $39.3 million, or 189.4%, to $60.1 million in the six months ended July 29, 2017 compared to $20.8 million in the six months ended July 30, 2016. Waterworks net revenues represented 5.1% and 2.1% of our net revenues for the six months ended July 29, 2017 and July 30, 2016, respectively. The increase in Waterworks net revenues is primarily due to the six months ended July 29, 2017 representing twenty-six weeks of results, whereas the six months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016.

The above factors and other current and future operational initiatives of the Company may create additional uncertainty with respect to our consolidated net revenues and profit in the near term.

Gross profit

Consolidated gross profit increased $68.8 million, or 22.4%, to $376.1 million in the six months ended July 29, 2017 from $307.3 million in the six months ended July 30, 2016. As a percentage of net revenues, consolidated gross margin increased 1.1% to 31.9% of net revenues in the six months ended July 29, 2017 from 30.8% of net revenues in the six months ended July 30, 2016.

RH Segment gross profit for the six months ended July 29, 2017 was negatively impacted by $4.6 million related to the reduction of revenue and incremental costs associated with product recalls. RH Segment gross profit for the six months ended July 30, 2016 was negatively impacted by $7.7 million related to the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards. The coupons expired in March 2016.

Waterworks gross profit for the six months ended July 29, 2017 and July 30, 2016 was negatively impacted by $1.9 million and $3.4 million, respectively, of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.

Excluding the product recalls, impact of the coupons redeemed in connection with the legal claim and amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased 0.5% to 32.4% of net revenues in the six months ended July 29, 2017 from 31.9% of net revenues in the six months ended July 30, 2016.

RH Segment gross profit

RH Segment gross profit increased $51.3 million, or 17.0%, to $352.6 million in the six months ended July 29, 2017 from $301.3 million in the six months ended July 30, 2016. As a percentage of net revenues, RH Segment gross margin increased 0.8% to

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31.6% of net revenues in the six months ended July 29, 2017 from 30.8% of net revenues in the six months ended July 30, 2016. Excluding the product recalls and impact of the coupons redeemed in connection with the legal claim mentioned above, RH Segment gross margin would have increased 0.3% to 31.9% of net revenues in the six months ended July 29, 2017 from 31.6% of net revenues in the six months ended July 30, 2016.

The increase in gross margin was due to incremental shipping charges incurred during the six months ended July 30, 2016 related to RH Modern production delays, whereas in the first half of fiscal 2017 we did not experience similar delays. In addition, during the six months ended July 29, 2017 we experienced occupancy leverage in our fixed retail and distribution occupancy costs, partially offset by increased outlet occupancy costs.

We experienced deleverage in our gross margins related to our continued efforts to optimize inventory and rationalize our SKU count during the six months ended July 29, 2017. This decrease in product margins was due to higher outlet and warehouse sales driven by increased promotions and higher discounts, as well as higher outlet square footage, lower selling margins on discontinued products and the impact of markdowns on inventory related reserves. These decreases were partially offset by lower customer accommodations and an increase in Membership revenue recognized.

Waterworks gross profit

Waterworks gross profit increased $17.4 million, or 288.4%, to $23.4 million in the six months ended July 29, 2017 from $6.0 million in the six months ended July 30, 2016. The increase in Waterworks gross profit is primarily due to the six months ended July 29, 2017 representing twenty-six weeks of results, whereas the six months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016. As a percentage of net revenues, Waterworks gross margin increased 9.9% to 39.0% of net revenues in the six months ended July 29, 2017 from 29.1% of net revenues in the six months ended July 30, 2016. Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased 3.4% to 42.1% of net revenues in the six months ended July 29, 2017 from 45.5% of net revenues in the six months ended July 30, 2016. The decrease in gross margin is primarily due to deleverage in occupancy costs, as well as changes in product mix.

Selling, general and administrative expenses

Consolidated selling, general and administrative expenses increased $60.3 million, or 20.3%, to $357.1 million in the six months ended July 29, 2017 compared to $296.8 million in the six months ended July 30, 2016.

RH Segment selling, general and administrative expenses

RH Segment selling, general and administrative expenses increased $45.8 million, or 16.1%, to $330.3 million in the six months ended July 29, 2017 compared $284.5 million in the six months ended July 30, 2016.

RH Segment selling, general and administrative expenses for the six months ended July 29, 2017 included $23.9 million related to a fully vested option grant made to Mr. Friedman in May 2017, $0.1 million incremental costs associated with product recalls and a gain of $1.3 million related to the sale of building and land.

RH Segment selling, general and administrative expenses for the six months ended July 30, 2016 included $4.7 million associated with a reorganization, including severance and related taxes, $2.8 million related to charges and expenses incurred as a result of the Waterworks transaction, and $1.0 million related to the estimated cumulative impact of coupons redeemed in connection with a legal claim alleging that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording ZIP codes from customers paying with credit cards.

Advertising and marketing costs increased $17.1 million during the six months ended July 29, 2017 as compared to July 30, 2016, primarily due to the timing of our Source Book mailings. In the second quarter of fiscal 2017 we amortized costs related to our 2016 Interiors Source Book which was circulated in the fall of 2016. The 2016 Interiors Source Book mailing was complete in mid-December and therefore resulted in amortized costs in the first half of fiscal 2017, whereas the first half of fiscal 2016 did not incur similarly timed expenses. In addition, we had an increase in credit card fees, employment and employment related costs, and depreciation associated with upgrades in our technology infrastructure.

RH Segment selling, general and administrative expenses were 27.4% and 28.2% of net revenues for the six months ended July 29, 2017 and July 30, 2016, respectively, excluding the fully vested option grant made to Mr. Friedman in May 2017, the product recall costs, the gain related to the sale of building and land, the reorganization costs, the charges and expenses incurred as a result of the Waterworks transaction, and the impact of coupons redeemed in connection with the legal claim mentioned above. The decrease in selling, general and administrative expenses as a percentage of net revenues was primarily driven by leverage in our employment and

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employment related costs and leverage in our corporate occupancy costs, partially offset by an increase in advertising and marketing costs.

Waterworks selling, general and administrative expenses

Waterworks selling, general and administrative expenses increased $14.5 million, or 118.2%, to $26.7 million in the six months ended July 29, 2017 compared $12.3 million in the six months ended July 30, 2016.

The increase in Waterworks selling, general and administrative expenses is primarily due to the six months ended July 29, 2017 representing twenty-six weeks of results, whereas the six months ended July 30, 2016 only includes nine weeks of results as Waterworks was acquired on May 27, 2016. This increase is partially offset by stock-based compensation of $3.7 million related to the fully vested option grants made in connection with our acquisition of Waterworks during the six months ended July 30, 2016.

Excluding the fully vested option grants made in connection with our acquisition of Waterworks, Waterworks selling, general and administrative expenses would have been 44.5% and 41.3% of net revenues in the six months ended July 29, 2017 and July 30, 2016, respectively.

Interest expense—net

Interest expense increased $5.1 million to $26.6 million for the six months ended July 29, 2017 compared to $21.4 million for the six months ended July 30, 2016. Interest expense consisted of the following:

	Six Months Ended
	July 29,			July 30,
	2017			2016
	(in thousands)
Amortization of convertible senior notes debt discount	$	15,018		$	14,212
Build-to-suit lease transactions		8,227			6,336
Amortization of debt issuance costs and deferred financing fees		1,937			1,250
Asset based credit facility		1,427			881
Term loans		824			—
Other interest expense		1,138			1,682
Capitalized interest for capital projects		(1,581	)		(1,292	)
Interest income		(409	)		(1,632	)
Total interest expense—net	$	26,581		$	21,437

Income tax expense (benefit)

Income tax expense was $3.7 million in the six months ended July 29, 2017 compared to a benefit of $4.3 million in the six months ended July 30, 2016. Our effective tax rate was -48.5% and 39.9% for the six months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate in the six months ended July 29, 2017 was significantly impacted by (i) non-deductible stock-based compensation, (ii) our reporting a net loss before income taxes and (iii) net excess tax benefits from stock-based compensation resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.

Liquidity and Capital Resources

General

The primary cash needs of our business have historically been for merchandise inventories, payroll, Source Books, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as the development of our infrastructure and information technology. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. We completed our first share repurchase program in an amount of $300 million during the first fiscal quarter of 2017 and completed our second repurchase program in an amount of $700 million during the second fiscal quarter of 2017 (refer to “Share Repurchase Programs” below). We intend to evaluate our capital allocation from time to time and may engage in future share repurchases in circumstances buying shares of our common stock represents a good value and provides a favorable return for our shareholders.

We have $650 million in aggregate principal amount of convertible notes, of which $350 million mature in June 2019 and $300 million mature in June 2020, and we may need to pursue additional sources of liquidity to repay such convertible notes in cash at their respective maturity dates. There can be no assurance as to the availability of capital to fund such repayments, or that if capital is

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available through additional debt issuances or refinancing of the convertible notes, that such capital will be available on terms that are favorable to us.

We extended and amended our revolving line of credit in June 2017 which has a total availability of $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, we have an $80.0 million last out, delayed draw term loan (“LILO term loan”) facility. The revolving line of credit and LILO term loan facility have a maturity date of June 28, 2022.

We entered into a second lien credit agreement in July 2017 with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”), the proceeds of which were used to support our share repurchase program. We anticipate repayment of this debt during the second half of fiscal 2017.

We believe that cash expected to be generated from operations, net cash proceeds from the issuance of the convertible senior notes, borrowing availability under the revolving line of credit, borrowings under our term loans and other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and other capital needs for the next 12 months.

Our business has relied on cash flows from operations, net cash proceeds from the issuance of the convertible senior notes, as well as borrowings under our credit facilities as our primary sources of liquidity. We have pursued in the past, and may pursue in the future, additional strategies to generate liquidity for our operations, including through the strategic sale of assets, utilization of our credit facilities, and entry into new debt financing arrangements that present attractive terms.

During the first quarter of fiscal 2017, we received cash of $4.9 million for the sale of an aircraft, net of $0.3 million of costs to dispose of the aircraft, which was classified as asset held for sale, and during the second quarter of fiscal 2017 we received cash of $10.2 million for the sale of a real estate parcel that we owned on which one of our retail Galleries is located, which was classified as asset held for sale. We may in the future pursue additional strategies, through the use of existing assets and debt facilities, or through the pursuit of new external sources of liquidity and debt financings, to fund our strategies to enhance stockholder value. There can be no assurance that additional capital, whether raised through the sale of assets, utilization of our existing debt financing sources, or pursuit of additional debt financing sources, will be available to us on a timely manner, on favorable terms or at all. To the extent we pursue additional debt as a source of liquidity, our capitalization profile may change and may include significant leverage, and as a result we may be required to use future liquidity to repay such indebtedness and may be subject to additional terms and restrictions which affect our operations and future uses of capital.

In addition, our capital needs may change in the future due to changes in our business or new opportunities that we choose to pursue. We have invested significant capital expenditures in remodeling and opening new Galleries, and these capital expenditures have increased in the past and may continue to increase in future periods as we open additional next generation Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. During fiscal 2016, we spent $157.6 million for capital expenditures. Additionally, we made payments of $23.4 million in fiscal 2016 to escrow accounts for future construction of next generation Design Galleries.

We anticipate our gross capital expenditures to be approximately $120 million to $140 million for fiscal 2017. Our fiscal 2017 capital expenditures will be offset by cash flows from operating activities. Our efforts to optimize inventory and reduce capital spending generated substantial free cash flow in the first half of fiscal 2017, and we expect to generate additional free cash flow for the remainder of the year.

The majority of the current lease arrangements for our new Galleries require the landlord to fund a portion of the construction related costs directly to third parties, rather than through traditional construction allowances and accordingly, we do not expect to receive significant contributions directly from our landlords related to the building of our larger format and next generation Design Galleries in fiscal 2017. As we develop new Galleries, as well as potentially other strategic initiatives in the future like our integrated hospitality experience; we may explore other models for our real estate, which could include longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings. These approaches might require greater capital investment on our part than a traditional store lease with a landlord. In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurances that we will be successful in securing additional funding on attractive terms or at all.

There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing on favorable terms to the extent necessary to fund all of our initiatives, or that sufficient incremental debt will be available to us in order to fund our cash payments in respect of the repayment of our outstanding convertible senior notes in an aggregate principal amount of $650 million at maturity of such senior convertible notes or our terms loans at the maturity dates of such term loans. In addition, agreements

40

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 upon maturity of such senior notes. To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations including triggering cross defaults or other consequences with respect to other indebtedness. Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest t rate increases and fluctuations. Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks.

Any weakening of, or other adverse developments in, the U.S. or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt. We cannot assure you that we will be able to raise necessary funds on favorable terms, if at all, or that future financing requirements would not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock. If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.

Cash Flow Analysis

A summary of operating, investing, and financing activities is set forth in the following table:

	Six Months Ended
	July 29,			July 30,
	2017			2016
				As Revised
	(in thousands)
Provided by (used in) operating activities	$	316,398		$	(73,649	)
Provided by (used in) investing activities	$	146,238		$	(218,514	)
Used in financing activities	$	(528,077	)	$	(2,593	)
Decrease in cash and cash equivalents	$	(65,386	)	$	(294,304	)
Cash and cash equivalents at end of period	$	21,637		$	37,163

Net Cash Provided By (Used In) Operating Activities

Operating activities consist primarily of net income (loss) adjusted for non-cash items including depreciation and amortization, stock-based compensation, amortization of debt discount and the effect of changes in working capital and other activities.

For the six months ended July 29, 2017, net cash provided by operating activities was $316.4 million and consisted of a decrease in uses of working capital and other activities of $239.7 million and non-cash items of $87.9 million, offset by net loss of $11.2 million. Working capital and other activities consisted primarily of decreases in inventory of $140.3 million due to our SKU rationalization initiative, outlet inventory optimization efforts and revised DC network strategy. We also had decreases in prepaid expense and other current assets of $37.3 million primarily due to amortization of our capitalized catalog costs and a reduction in prepaid rent. In addition, we had increases in deferred revenue and customer deposits of $30.3 million and increases in accounts payable and accrued liabilities of $29.9 million due to the timing of payments.

For the six months ended July 30, 2016, net cash used in operating activities was $73.6 million and consisted of a net loss of $6.6 million and an increase in uses of working capital and other activities of $129.1 million, offset by non-cash items of $62.1 million. Working capital and other activities consisted primarily of decreases in accounts payable and accrued liabilities of $63.5 million primarily due to the timing of payments to our vendors, and increases in inventory of $52.1 million related to the increase in both existing and new products. In addition, other current liabilities decreased $23.3 million primarily due to federal and state tax payments, and prepaid expense and other current assets increased $16.4 million due to an increase in prepaid expenses and federal and state tax benefits recorded for the six months ended July 30, 2016. This was partially offset by increases in deferred revenue and customer deposits of $15.3 million and an increase in other non-current obligations of $9.0 million primarily due to a deferred contract incentive.

Net Cash Provided By (Used In) Investing Activities

Investing activities consist primarily of investments in capital expenditures related to new Gallery openings, the acquisition of buildings and land, investments in supply chain and systems infrastructure, construction related deposits, acquisition of businesses, as well as activities associated with investing in available-for-sale securities.

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For the six months ended July 29, 2017, net cash provided by investing activities was $146.2 million primarily as a result of sales and maturities of investments in available-for-sale securities of $145.0 million and $46.9 million, respectively, the proceeds of which were used to fund the share repurchases made under the $300 Million Repurchase Program. In addition, we had net proceeds from the sale of building and land and the sale of an aircraft of $10.2 million and $4.9 million, respectively. These increases to cash were partially offset by investments in new Galleries, information technology and systems infrastructure, and supply chain investments of $39.4 million, purchases of investments in available-for-sale securities of $16.1 million and payments of $5.3 million to escrow accounts for future construction of next generation Design Galleries.

For the six months ended July 30, 2016, net cash used in investing activities was $218.5 million primarily as a result of our acquisition of Waterworks, net of cash acquired, of $116.1 million. In addition, we made $71.0 million of investments in new Galleries, information technology and systems infrastructure, supply chain and other corporate assets, as well as payments of $3.7 million to escrow accounts for future construction of next generation Design Galleries. In addition, we made investments in available-for-sale securities of $136.8 million, partially offset by maturities and sales of such investments of $77.3 million and $31.9 million, respectively.

Net Cash Used In Financing Activities

Financing activities consist primarily of borrowings related to the convertible senior notes offerings, credit facilities, as well as share repurchases and other equity related transactions.

For the six months ended July 29, 2017, net cash used in financing activities was $528.1 million primarily due to $1.0 billion of share repurchases made under the $300 Million Repurchase Program and $700 Million Repurchase Program. Cash funding for the share repurchase programs was provided by available cash balances, net borrowings under the asset based credit facility of $283.0 million, as well as new debt issued under the second lien term loan of $100.0 million, the LILO term loan facility of $80.0 million and a promissory note secured by our aircraft of $14.0 million.

For the six months ended July 30, 2016, net cash used in financing activities was $2.6 million primarily due to tax shortfalls from the exercise of stock options of $1.8 million and cash paid for employee taxes related to net settlement of equity awards of $0.9 million.

Non-Cash Transactions

Non-cash transactions consist of non-cash additions of property and equipment.

Build-to-Suit Lease Transactions

The non-cash additions of property and equipment due to build-to-suit lease transactions are the result of the accounting requirements of Accounting Standards Codification (“ASC”) 840—Leases (“ASC 840”) for those construction projects for which we are the “deemed owner” of the construction project given the extent to which we are involved in constructing the leased asset. If we are the “deemed owner” for accounting purposes, upon commencement of the construction project, we are required to capitalize contributions by the landlord toward construction as property and equipment on our condensed consolidated balance sheets. The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of our condensed consolidated statements of cash flows.

Over the lease term, these non-cash additions to property and equipment due to build-to-suit lease transactions do not impact our cash outflows, nor do they impact net income within our condensed consolidated statements of operations.

Convertible Senior Notes

0.00% Convertible Senior Notes due 2020

In June 2015, we issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, we issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of our June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between us and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by us or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events

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are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.

The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of July 29, 2017. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

We may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, we separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2020 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets.

2020 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 2.5 million shares of our common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.5 million shares of our common stock at a price of $189.00 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 5.1 million shares of common stock (which cap may also be subject to adjustment). We received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual

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earnings dilution from the conversion of the 2020 Notes until our common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

We recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

0.00% Convertible Senior Notes due 2019

In June 2014, we issued $350 million aggregate principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between us and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by us or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of July 29, 2017. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

We may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2019 Notes, we separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The debt discount will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2019 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

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Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets.

2019 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2019 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 3.0 million shares of our common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of our common stock at a price of $171.98 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 6.0 million shares of common stock (which cap may also be subject to adjustment). We received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

We recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

Asset Based Credit Facility

In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders. On June 28, 2017, Restoration Hardware, Inc. entered into an eleventh amended and restated credit agreement among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., various subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (the “credit agreement”). The credit agreement has a revolving line of credit with availability of up to $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, the credit agreement establishes an up to $80.0 million LILO term loan facility.

The availability of credit at any given time under the credit agreement is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable. As a result of the borrowing base formula, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). All obligations under the credit agreement are secured by substantially all of the assets, including accounts receivable, inventory, intangible assets, property, equipment, goods and fixtures of Restoration Hardware, Inc., Restoration Hardware Canada, Inc., RH US, LLC, Waterworks Operating Co., LLC and Waterworks IP Co., LLC.

Borrowings under the revolving line of credit and LILO term loan facility are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or, in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The credit agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The credit agreement does not contain any significant financial or coverage ratio covenants unless the domestic availability under the revolving line of credit is less than the greater of (i) $40.0 million and (ii) 10% of the sum of (a) the lesser of (x) the aggregate revolving commitments under the credit agreement and (y) the aggregate revolving borrowing base, plus (b) the lesser of (x)

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the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing base . If the availability under the credit agreement is less than the foregoing amount, then Restoration Hardware, Inc. is required to maintain a consolidated fixed-charge coverage ratio (“FCCR”) of at least one to one. The consolidated FCCR is based upon the ratio on the last day of each month on a trailing twelve-month basis of (a) (i) consolidated EBITDA (as defined in the agreement) minus (ii) capital expenditures, minus (iii) the income taxes paid in cash to (b) the sum of (i) debt service charges plus (ii) certain dividends and distributions paid. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

The credit agreement requires a daily sweep of cash to prepay the loans under the agreement while (i) an event of default exists or (ii) the availability under the revolving line of credit for extensions of credit is less than the greater of (A) $40.0 million and (B) 10% of the sum of (a) the lesser of (x) the aggregate revolving commitments under the credit agreement and (y) the aggregate revolving borrowing base, plus (b) the lesser of (x) the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing base.

As of July 29, 2017, Restoration Hardware, Inc. had $283.0 million in outstanding borrowings and $181.1 million of availability under the revolving line of credit, net of $13.1 million in outstanding letters of credit. As of July 29, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit would be approximately $129.4 million.

Second Lien Credit Agreement

On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agent with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”).

The second lien term loan bears interest at an annual rate generally based on LIBOR plus 8.25%. This rate is a floating rate that resets periodically based upon changes in LIBOR rates during the life of the second lien term loan. At the date of borrowing, the rate was set at one month LIBOR plus 8.25%.

All obligations under the second lien term loan are secured by a second lien security interest in assets of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest is granted with respect to substantially the same collateral that secures the credit agreement. The second lien ranks junior in priority and is subordinated to the first lien in favor of the lenders with respect to the credit agreement.

The borrowings under the second lien credit agreement may be prepaid in whole or in part at any time, subject to certain minimum payment requirements and a prepayment premium.

The second lien credit agreement contains various restrictive and affirmative covenants generally in line with the covenants and restrictions contained in the credit agreement including required financial reporting, limitations on the ability to incur liens, make loans or other investments, incur additional debt, make certain restricted payments, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The second lien credit agreement also contains a financial ratio covenant not found in the credit agreement based upon a senior secured leverage ratio of consolidated secured debt to consolidated EBITDA.

The second lien credit agreement also contains a consolidated fixed charge coverage ratio generally based on the same formulation set forth in the credit agreement such that the borrower may not make certain “restricted payments” in the event that certain ratios are not met and contains certain events of default and other customary terms and conditions for a second lien credit agreement.

As of July 29, 2017, Restoration Hardware, Inc. had $100.0 million in outstanding borrowings. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the second lien credit agreement.

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Intercreditor Agreement

On July 7, 2017, in connection with the second lien credit agreement, Restoration Hardware, Inc. entered into an intercreditor agreement (the “intercreditor agreement”) with the administrative agent and collateral agent under the credit agreement and the administrative agent and collateral agent under the second lien credit agreement. The intercreditor agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the credit agreement and the second lien credit agreement without the consent of the other party

Share Repurchase Programs

On February 21, 2017, our board of directors authorized a stock repurchase program of up to $300 million (the “$300 Million Repurchase Program”) through open market purchases, privately negotiated transactions or other means, including through Rule 10b18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as accelerated share repurchases. During the three months ended April 29, 2017, we repurchased approximately 7.8 million shares of our common stock under the $300 Million Repurchase Program at an average price of $38.24 per share, for an aggregate repurchase amount of approximately $300 million. No additional shares will be repurchased in future periods under the $300 Million Repurchase Program.

Following completion of the $300 Million Repurchase Program, our board of directors authorized on May 2, 2017 an additional stock repurchase program of up to $700 million (the “$700 Million Repurchase Program”) through open market purchases, privately negotiated transactions or other means, including through Rule 10b18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as 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. During the three months ended July 29, 2017, we repurchased approximately 12.4 million shares of our common stock under the $700 Million Repurchase Program at an average price of $56.60 per share, for an aggregate repurchase amount of approximately $700 million. No additional shares will be repurchased in future periods under the $700 Million Repurchase Program.

Contractual Obligations

We enter into long-term contractual obligations and commitments, primarily debt obligations and non-cancelable operating leases, in the normal course of business. As of July 29, 2017, our contractual cash obligations were as follows (in thousands):

	Payments Due by Period
	Total		Remainder of 2017		2018-2019		2020–2021		Thereafter
	(in thousands)
Convertible senior notes due 2019	$	350,000	$	—	$	350,000	$	—	$	—
Convertible senior notes due 2020		300,000		—		—		300,000		—
Asset based credit facility (1)		283,000		—		—		—		283,000
Term loans (2)		180,000		—		—		—		180,000
Operating leases (3)		703,329		45,555		160,246		123,035		374,493
Other non-current obligations (4)		806,221		17,271		77,090		86,735		625,125
Capital lease obligations		15,264		708		2,832		2,569		9,155
Notes payable for share repurchases		19,390		—		893		—		18,497
Promissory note		13,883		700		2,800		2,800		7,583
Letters of credit		13,118		13,118		—		—		—
Total	$	2,684,205	$	77,352	$	593,861	$	515,139	$	1,497,853

(1) Under the credit agreement, the asset based credit facility has a maturity date of June 28, 2022.

(2) Under the credit agreement, the $80.0 million LILO term loan facility has a maturity date of June 28, 2022. Under the second lien credit agreement, the $100.0 million second lien term loan has a maturity date of January 7, 2023.

(3) We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The table above does not include future obligations for renewal options that have not yet been exercised. The future operating lease obligations would change if we were to exercise these options. Amounts above do not include estimated contingent rent due under operating leases. Our obligation for contingent rent as of July 29, 2017 was $3.4 million.

(4) Other non-current obligations include estimated payments for rent associated with build-to-suit lease transactions. These amounts may be reduced in the event we are able to effect a sale-leaseback on any of these locations.

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Off Balance Sheet Arrangements

We have no material off balance sheet arrangements as of July 29, 2017.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management 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. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, and are therefore discussed as critical:

• Revenue Recognition

• Merchandise Inventories

• Advertising Expenses

• Impairment of Goodwill and Long-Lived Assets

• Lease Accounting

• Stock-Based Compensation

• Income Taxes

For further discussion regarding these policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in the 2016 Form 10-K. There have been no material changes to the critical accounting policies and estimates listed in the 2016 Form 10-K.

Recent Accounting Pronouncements

Refer to Note 2—Recently Issued Accounting Standards in our condensed consolidated financial statements for a description of recently proposed accounting standards which may impact our consolidated financial statements in future reporting periods.

Item 3. 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.

We are subject to interest rate risk in connection with borrowings under our revolving line of credit which bears interest at variable rates and we may incur additional indebtedness that bears interest at variable rates. At July 29, 2017, $283.0 million was outstanding under the revolving line of credit. As of July 29, 2017, the undrawn borrowing availability under the revolving line of credit was $181.1 million, net of $13.1 million in outstanding letters of credit. As a result of the FCCR restriction that limits the last 10% of borrowing availability, actual incremental borrowing available under the revolving line of credit would be approximately $129.4 million. Based on the average interest rate on the revolving line of credit during the three months ended July 29, 2017, and to the extent that borrowings were outstanding on such line of credit, 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. To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.

We are subject to interest rate risk in connection with borrowings under our LILO term loan and second lien term loan (the “term loans”), which bear interest at variable rates. At July 29, 2017, $80.0 million and $100.0 million was outstanding under the LILO term loan and second lien term loan, respectively. Based on the average interest rates on the term loans during the three months ended July 29, 2017, we do not believe that a 10% change in the interest rates would have a material effect on our consolidated results of operations or financial condition.

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As of July 29, 2017, we had $350 million principal amount of 0.00% convertible senior notes due 2019 outstanding (the “2019 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.

As of July 29, 2017, we had $300 million principal amount of 0.00% convertible senior notes due 2020 outstanding (the “2020 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 2019

In connection with the issuance of the 2019 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, 3.0 million shares of our common stock, which represents the number of shares of our common stock underlying the 2019 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2019 Notes. These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2019 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2019 Notes.

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. 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 $171.98 per share. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.

0.00% Convertible Senior Notes due 2020

In connection with the issuance of the 2020 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. The convertible note hedge transactions relate to, collectively, 2.5 million shares of our common stock, which represents the number of shares of our common stock underlying the 2020 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2020 Notes. These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2020 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2020 Notes.

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. 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 $189.00 per share. Refer to Note 9—Convertible Senior Notes in our condensed consolidated financial statements.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

From time to time we and/or our management are involved in litigation, claims and other proceedings relating to the conduct of our business, including purported class action litigation. Such 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. In addition, from time to time, we are subject to product liability and personal injury claims for the products that we sell and the stores we operate. Subject to certain exceptions, our purchase orders generally require the vendor to indemnify us against any product liability claims; however, if the vendor does not have insurance or becomes insolvent, we may not be indemnified. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims. Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability and could also materially adversely affect our operations and our reputation.

For additional information, refer to Note 17—Commitments and Contingencies in our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. For a detailed discussion of certain risks that affect our business, refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (“2016 Form 10-K”). There have been no material changes to the risk factors disclosed in our 2016 Form 10-K.

The risks described in our 2016 Form 10-K are not the only risks we face. We describe in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this quarterly report certain known trends and uncertainties that affect our business. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business, operating results and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Common Stock during the Three Months Ended July 29, 2017

During the three months ended July 29, 2017, we repurchased the following shares of our common stock: 

	Number of Shares (1)		Average Purchase Price Per Share		Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs (2)		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
							(in millions)
April 30, 2017 to May 27, 2017		987	$	59.87		—	$	700
May 28, 2017 to July 1, 2017		8,281,386	$	52.58		8,227,873	$	268
July 2, 2017 to July 29, 2017		4,143,878	$	64.59		4,142,899	$	—
Total		12,426,251	$	56.59		12,370,772

(1) Includes shares withheld from delivery to satisfy exercise price and tax withholding obligations of employee recipients that occur upon the exercise of stock options and vesting of restricted stock units granted under the Company’s 2012 Stock Incentive Plan. There were 55,479 shares surrendered for this purpose during the three months ended July 29, 2017.

(2) Reflects shares repurchased as part of the $700 Million Repurchase Program authorized by the board of directors on May 2, 2017.

51

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

52

Item 6. Exhibits

			Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Date of First Filing	Exhibit Number	Filed Herewith
10.1*	Notice of Stock Option Award and Stock Option Award Agreement by and between RH and Gary Friedman	8-K	001-35720	May 3, 2017	10.1
10.2*	Cash Incentive Bonus Plan.	—	—	—	—	X
10.3	Eleventh Amended and Restated Credit Agreement dated as of June 28, 2017 among Restoration Hardware, Inc., as lead borrower, various other subsidiaries of RH named therein as borrowers, the guarantors party thereto, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent.	8-K	001-35720	July 3, 2017	10.1
10.4	Credit Agreement, dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, various other subsidiaries of RH named therein as borrowers, the guarantors party thereto, the lenders party thereto and Wilmington Trust, National Association as administrative agent and collateral agent.	8-K	001-35720	July 13, 2017	10.1
10.5	Intercreditor Agreement, dated as of July 7, 2017, among Restoration Hardware, Inc., Bank of America, N.A. and Wilmington Trust, National Association.	8-K	001-35720	July 13, 2017	10.2
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	—	—	—	—	X
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	—	—	—	—	X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	—	X
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	—	X
101.INS	XBRL Instance Document	—	—	—	—	X
101.SCH	XBRL Taxonomy Extension Schema Document	—	—	—	—	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	—	—	—	—	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	—	—	—	—	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	—	—	—	—	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	—	—	—	—	X

53

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	RH
Date: September 7, 2017	By:	/s/ Gary Friedman
		Gary Friedman
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
Date: September 7, 2017	By:	/s/ Karen Boone
		Karen Boone
		Co-President, Chief Financial and Administrative Officer
		(Principal Financial Officer and Principal Accounting Officer)

54

EX-10.2

Exhibit 10.2

RH

CASH INCENTIVE BONUS PLAN

Section 1. Establishment and Purpose

RH (hereinafter referred to as the “Company”) hereby establishes a cash incentive compensation plan to be known as the “RH Cash Incentive Bonus Plan” (hereinafter referred to as the “Plan”).

The purpose of the Plan is to help the Company and its Subsidiaries attract and retain highly qualified officers and to provide such officers with additional financial incentives to promote the success of the Company and its Subsidiaries.

The Plan is effective as of June 27, 2017. The Plan will remain in effect until such time as it shall be terminated by the Board, pursuant to Section 8 herein.

Section 2. Definitions

Unless the context requires otherwise, the following words, when capitalized, shall have the meanings ascribed below:

(a) “Board” means the Board of Directors of the Company.

(b) “Code” means the Internal Revenue Code of 1986, as amended.

(c) “Committee” means the committee established to administer the Plan pursuant to Section 3.

(d) “Company” means RH, and any successor thereto.

(e) “Participant” means an officer who is selected by the Committee to participate in the Plan.

(f) “Performance Period” means the fiscal year of the Company or such shorter or longer period as determined by the Committee.

(g) “Plan” means the RH Cash Incentive Bonus Plan, as may be amended from time to time.

(h) “Subsidiary” means any corporation in which the Company owns, directly or indirectly, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, without limitation, partnerships and joint ventures) in which the Company owns, directly or indirectly, at least fifty percent (50%) of the combined equity thereof.

Section 3. Administration

Except as otherwise determined by the Board, the Plan shall be administered by the Compensation Committee of the Board. Subject to applicable laws and the provisions of the Plan (including any other powers given to the Committee hereunder), and except as otherwise provided by the Board, the Committee shall have full and final authority in its discretion to establish rules and take all actions, including, without limitation, interpreting the terms of the Plan and any related rules or regulations or other documents enacted hereunder and deciding all questions of fact arising in their application, determined by the Committee to be necessary in the administration of the Plan. Awards intended to meet the performance-based compensation exemption under Section 162(m) of the Code shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more directors eligible to serve on a committee making awards intended to meet the performance-based compensation exemption under Section 162(m) of the Code.

1

sf-3811875

All decisions, determinations and interpretations of the Committee shall be final, binding and conclusive on all persons, including the Company, its Subsidiaries, its stockholders, the Participants and their estates and beneficiaries.

Section 4. Eligibility

Eligibility under the Plan is limited to individuals who are officers with respect to the Company or any Subsidiary under Section 16 of the Securities Exchange Act of 1934, as amended, and who are designated by the Committee to participate in the Plan.

Section 5. Form of Payment

Payment of incentive awards under the Plan shall be made in cash and may be made by any Subsidiary of the Company.

Section 6. Determination of Incentive Awards

(a) Designation of Participants, Performance Period and Performance Objectives. The Committee shall select the Participants to whom incentive awards shall be granted, designate the applicable Performance Period, establish the target incentive award for each Participant, if applicable, and establish the performance objective or objectives that must be satisfied in order for a Participant to receive an incentive award for such Performance Period. Any such performance objectives will be based upon one or more of the following performance measures, or, if the incentive award is not intended to meet the performance-based compensation exemption under Section 162(m) of the Code, such other performance measures (including, without limitation, individual measures) as determined by the Committee:

(i) earnings per share,

(ii) economic value created,

(iii) market share (actual or targeted growth),

(iv) net income (before or after taxes) (actual or adjusted),

(v) operating income and/or earnings or any metric derived from earnings, including earnings before taxes, earnings before interest, taxes, depreciation and amortization (EBITDA) (actual or adjusted) and adjusted EBITDA,

(vi) sales contract growth,

(vii) return on assets (actual or targeted growth),

(viii) return on capital (actual or targeted growth),

(ix) return on equity (actual or targeted growth),

(x) return on investment (actual or targeted growth),

(xi) revenue (actual or targeted growth) or any metric derived from any element of revenue (actual or targeted growth), including comparable brand revenue, direct revenue, same store sales,

(xii) cash flow,

(xiii) operating margin,

(xiv) share price or any direct or indirect measure or metric tied to share price,

(xv) share price growth,

2

sf-3811875

(xvi) total stockholder return

(xvii) book value growth,

(xviii) strategic business criteria consisting of one or more objectives based on meeting specified market penetration goals, demands, orders, or any metric derived from any element of demands or orders, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger or other transaction-related synergies, management of employment practices and employee benefits, or supervision of litigation and information technology, and goals relating to acquisitions or divestitures of Subsidiaries and/or other affiliates or joint ventures, and

(xix) any metric derived from any of the foregoing metrics or derived from a combination of such metrics.

The targeted level or levels of performance with respect to such performance measures may be established at such levels and on such terms as the Committee may determine, in its discretion, relate to the performance of the Company, a Subsidiary and/or any individual business units or divisions of the Company or a Subsidiary, and they may be in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies.

(b) Payment of Awards. As soon as reasonably practicable after the end of each Performance Period, the Committee shall (i) determine whether the performance objectives for the Performance Period have been satisfied, (ii) determine the amount of the incentive award to be paid to each Participant for such Performance Period and (iii) to the extent the incentive award is intended to meet the performance-based compensation exemption under Section 162(m) of the Code, certify such determination in writing. Incentive award shall be paid to the Participants following such determination (or, if applicable, certification) by the Committee no later than the 15th day of the third month following the close of the Performance Period with respect to which the awards are made.

(c) Maximum Award. The maximum incentive award that may be paid under the Plan to a participant during any calendar year shall be $25,000,000.

(d) Committee Discretion. Notwithstanding the foregoing, to the extent permitted by applicable law, the Committee shall retain discretion to adjust performance goals, measures and/or targets and the amounts payable with respect to an award, including, without limitation, the discretion to reduce the amount of any incentive award that would otherwise be payable to a Participant, including a reduction in such amount to zero; provided, that the Committee will not exercise such discretion to increase the amount of any incentive award that would otherwise be payable to a Participant to the extent the incentive award is intended to meet the performance-based compensation exemption under Section 162(m) of the Code.

Section 7. Termination of Employment

Unless otherwise determined by the Committee or specified in an employment or other binding agreement with the Participant, a Participant shall have no right to an incentive award under the Plan for any Performance Period in which the Participant is not actively employed by the Company or a Subsidiary on the last day of the Performance Period to which such award relates. The Committee, in its sole and absolute discretion, may impose such additional service restrictions as it deems appropriate.

Section 8. Amendment or Termination of the Plan

The Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part.

Section 9. Taxes

Any amount payable to a Participant under this Plan shall be subject to any applicable Federal, state and/or local income and employment taxes and any other amounts that the Company is required at law to deduct and withhold from such payment.

3

sf-3811875

Section 10. General Provisions

(a) No Rights to Employment or Service. Nothing contained in the Plan shall create any rights of employment in any Participant or in any way affect the right and power of the Company or a Subsidiary to discharge any Participant or otherwise terminate the Participant’s employment or service at any time with or without cause or to change the terms of employment or service in any way.

(b) Non-Exclusive Plan. The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable.

(c) Unfunded Plan. Incentive awards under the Plan will be paid from the general assets of the Company, and the rights of Participants under the Plan will be only those of general unsecured creditors of the Company.

(d) Non-alienation of Benefits. Except as expressly provided herein, no Participant shall have the power or right to sell, transfer, assign, pledge or otherwise encumber the Participant’s interest under the Plan.

(e) Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

(f) Successors. All obligations of the Company under the Plan shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or other event, or a sale or disposition of all or substantially all of the business and/or assets of the Company and references to the “Company” herein shall be deemed to refer to such successors.

(g) Governing Law. All questions concerning the construction, validity and interpretation of this Plan shall be governed by and construed in accordance with the domestic laws of the State of Delaware applicable to contracts made and to be performed in the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction.

(h) Code Section 409A Compliance. To the extent applicable, it is intended that this Plan and any incentive awards granted hereunder comply with, or qualify for an exemption from, the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service (“Section 409A”), and the Plan and any award agreement or other document relating to an award under the Plan shall be interpreted accordingly. Any provision that would cause the Plan or any incentive award granted hereunder to fail to satisfy Section 409A shall have no force or effect until amended to comply with Section 409A, which amendment may be retroactive to the extent permitted by Section 409A. Notwithstanding the foregoing, the Company makes no representation or warranty that awards under the Plan will not be subject to (or will comply with) Section 409A of the Code, or similar state laws, and in no event shall the Board, the Company or any affiliate of the Company (or their employees, agents, officers, directors, managers, successors or assigns) be liable to any Participant for any failure to comply with Section 409A, similar state laws, or an applicable exemption thereunder.

(i) Clawback of Benefits. The Company may (1) cause the cancellation of any incentive award, (2) require reimbursement of any incentive award by a Participant, and (3) effect any other right of recoupment of compensation provided under the Plan or otherwise in accordance with any Company policies that currently exist or that may from time to time be adopted or modified in the future by the Company and/or applicable law (each, a “Clawback Policy”). In addition, a Participant may be required to repay to the Company certain previously paid compensation, provided under the Plan, in accordance with any Clawback Policy. By accepting an incentive award, a Participant is also agreeing to be bound by any existing or future Clawback Policy adopted by the Company, or any amendments that may from time to time be made to the Clawback Policy in the future by the Company in its discretion (including without limitation any Clawback Policy adopted or amended to comply with applicable laws or stock exchange requirements) and is further agreeing that any rights a Participant has under the Plan may be unilaterally amended by the Company, without the Participant’s consent, to the extent that the Company in its discretion determines to be necessary or appropriate to comply with any Clawback Policy.

4

sf-3811875

EX-31.1

Exhibit 31.1

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Gary Friedman, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of RH;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 7, 2017

/s/ Gary Friedman

Gary Friedman

Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Karen Boone, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of RH;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 7, 2017

/s/ Karen Boone

Karen Boone

Co-President, Chief Financial and Administrative Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Gary Friedman, Chairman and Chief Executive Officer of RH (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

• the Quarterly Report of the Company on Form 10-Q for the fiscal quarter ended July 29, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

Date: September 7, 2017 

By:	/s/ Gary Friedman
Name:	Gary Friedman
Title:	Chairman and Chief Executive Officer

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Karen Boone, Co-President, Chief Financial and Administrative Officer of RH (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

• the Quarterly Report of the Company on Form 10-Q for the fiscal quarter ended July 29, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

Date: September 7, 2017

By:	/s/ Karen Boone
Name:	Karen Boone
Title:	Co-President, Chief Financial and Administrative Officer

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

XML

Document and Entity Information - shares	6 Months Ended
	Jul. 29, 2017	Sep. 01, 2017
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jul. 29, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Trading Symbol	RH
Entity Registrant Name	RH
Entity Central Index Key	0001528849
Current Fiscal Year End Date	--02-03
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		21,152,191

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Current assets:
Cash and cash equivalents	$ 21,637	$ 87,023
Short-term investments		142,677
Accounts receivable—net	34,752	34,191
Merchandise inventories	608,048	752,304
Asset held for sale		4,900
Prepaid expense and other current assets	77,679	117,162
Total current assets	742,116	1,138,257
Long-term investments		33,212
Property and equipment—net	744,460	682,056
Goodwill	175,592	173,603
Trademarks and other intangible assets	100,750	100,757
Deferred tax assets	29,394	28,466
Other non-current assets	27,097	36,169
Total assets	1,819,409	2,192,520
Current liabilities:
Accounts payable and accrued expenses	271,837	226,980
Deferred revenue and customer deposits	176,310	145,918
Other current liabilities	47,602	43,271
Total current liabilities	495,749	416,169
Asset based credit facility	459,363
Term loans—net	176,363
Financing obligations under build-to-suit lease transactions	226,231	203,015
Deferred rent and lease incentives	63,887	60,439
Other non-current obligations	56,652	44,684
Total liabilities	1,866,193	1,272,651
Commitments and contingencies (Note 17)
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of July 29, 2017 and January 28, 2017
Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 41,372,123 shares issued and 21,151,991 shares outstanding as of July 29, 2017; 41,123,521 shares issued and 40,828,633 shares outstanding as of January 28, 2017	2	4
Additional paid-in capital	834,885	790,866
Accumulated other comprehensive loss	(804)	(1,692)
Retained earnings	138,982	150,214
Treasury stock—at cost, 20,220,132 shares as of July 29, 2017 and 294,888 shares as of January 28, 2017	(1,019,849)	(19,523)
Total stockholders’ equity (deficit)	(46,784)	919,869
Total liabilities and stockholders’ equity (deficit)	1,819,409	2,192,520
Asset Based Credit Facility [Member]
Current liabilities:
Asset based credit facility	283,000
Convertible Senior Notes Due 2019 [Member]
Current liabilities:
Convertible senior notes due-net	319,969	312,379
Convertible Senior Notes Due 2020 [Member]
Current liabilities:
Convertible senior notes due-net	$ 244,342	$ 235,965

XML

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Jul. 29, 2017	Jan. 28, 2017
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	180,000,000	180,000,000
Common stock, shares issued	41,372,123	41,123,521
Common stock, shares outstanding	21,151,991	40,828,633
Treasury stock, shares	20,220,132	294,888

XML

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Income Statement [Abstract]
Net revenues	$ 615,326	$ 543,381	$ 1,177,406	$ 998,837
Cost of goods sold	409,513	363,542	801,337	691,523
Gross profit	205,813	179,839	376,069	307,314
Selling, general and administrative expenses	193,690	157,824	357,050	296,774
Income from operations	12,123	22,015	19,019	10,540
Interest expense—net	14,402	10,909	26,581	21,437
Income (loss) before income taxes	(2,279)	11,106	(7,562)	(10,897)
Income tax expense (benefit)	5,583	4,188	3,670	(4,345)
Net income (loss)	$ (7,862)	$ 6,918	$ (11,232)	$ (6,552)
Weighted-average shares used in computing basic net income (loss) per share	28,398,307	40,646,124	35,667,217	40,617,102
Basic net income (loss) per share	$ (0.28)	$ 0.17	$ (0.31)	$ (0.16)
Weighted-average shares used in computing diluted net income (loss) per share	28,398,307	40,820,495	35,667,217	40,617,102
Diluted net income (loss) per share	$ (0.28)	$ 0.17	$ (0.31)	$ (0.16)

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
Net income (loss)	$ (7,862)	$ 6,918	$ (11,232)	$ (6,552)
Net gains (losses) from foreign currency translation	2,069	(1,269)	877	1,400
Net unrealized holding gains on available-for-sale investments		51	11	143
Total comprehensive income (loss)	$ (5,793)	$ 5,700	$ (10,344)	$ (5,009)

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (11,232)	$ (6,552)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	32,546	26,212
Net non-cash charges resulting from inventory step-up	1,860	3,401
Amortization of debt discount	15,018	14,213
Excess tax shortfall from exercise of stock options		1,769
Stock-based compensation expense	36,166	14,303
Other non-cash interest expense	2,314	2,222
Change in assets and liabilities—net of acquisition:
Accounts receivable	(617)	(422)
Merchandise inventories	140,331	(52,119)
Prepaid expense and other assets	37,329	(16,403)
Accounts payable and accrued expenses	29,874	(63,483)
Deferred revenue and customer deposits	30,349	15,312
Other current liabilities	2,269	(23,310)
Deferred rent and lease incentives	1,166	2,257
Other non-current obligations	(975)	8,951
Net cash provided by (used in) operating activities	316,398	(73,649)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(39,362)	(70,999)
Construction related deposits	(5,285)	(3,661)
Purchase of trademarks and domain names	(39)	(164)
Proceeds from sale of assets held for sale—net	15,123
Purchase of investments	(16,109)	(136,799)
Maturities of investments	46,890	77,313
Sales of investments	145,020	31,896
Acquisition of business—net of cash acquired		(116,100)
Net cash provided by (used in) investing activities	146,238	(218,514)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under promissory note	14,000
Repayments under promissory note	(117)
Debt issuance costs	(7,939)
Repurchases of common stock—including commissions	(1,000,326)
Payments on build-to-suit lease transactions	(4,601)
Proceeds from exercise of stock options	11,170	288
Excess tax shortfall from exercise of stock options		(1,769)
Tax withholdings related to issuance of stock-based awards	(3,106)	(946)
Payments on capital leases	(158)	(166)
Net cash used in financing activities	(528,077)	(2,593)
Effects of foreign currency exchange rate translation	55	452
Net decrease in cash and cash equivalents	(65,386)	(294,304)
Cash and cash equivalents
Beginning of period	87,023	331,467
End of period	21,637	37,163
Non-cash transactions:
Property and equipment additions due to build-to-suit lease transactions	27,340	9,676
Property and equipment additions in accounts payable and accrued expenses at period-end	23,860	22,903
Property and equipment additions from use of construction related deposits	19,338	$ 2,659
Property and equipment acquired under capital lease	753
Asset Based Credit Facility [Member]
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing	323,000
Repayments under asset based credit facility	(40,000)
Term Loan [Member]
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing	$ 180,000

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The Company

6 Months Ended

Jul. 29, 2017

Accounting Policies [Abstract]

The Company

NOTE 1—THE COMPANY

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.

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”. Refer to Note 3—Business Combination.

As of July 29, 2017, the Company operated a total of 85 retail Galleries and 28 outlet stores in 32 states, the District of Columbia and Canada, and includes 15 Waterworks showrooms in the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of July 29, 2017, and the results of operations for the three and six months ended July 29, 2017 and July 30, 2016. The Company’s current fiscal year, which consists of 53 weeks, ends on February 3, 2018 (“fiscal 2017”).

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

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (the “2016 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. Refer to “Revision” below.

The results of operations for the three and six months ended July 29, 2017 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Revision

During the fourth quarter of fiscal 2016, management determined that the Company had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC 210—Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement of the cash provided by operating activities on the condensed consolidated statements of cash flows. There was no impact on the condensed consolidated statements of income or stockholders’ equity related to these misstatements.

The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99—Materiality, codified in Accounting Standards Codification (“ASC”) 250—Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the condensed consolidated statements of cash flows.

The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections (in thousands):

	Six Months Ended
	July 30,
	2016
	As Reported			Adjustment			As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(81,399	)	$	17,916		$	(63,483	)
Net cash used in operating activities	$	(91,565	)	$	17,916		$	(73,649	)
Cash and cash equivalents:
Beginning of period	$	349,897		$	(18,430	)	$	331,467
End of period	$	37,677		$	(514	)	$	37,163

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Recently Issued Accounting Standards

6 Months Ended

Jul. 29, 2017

Accounting Changes And Error Corrections [Abstract]

Recently Issued Accounting Standards

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

Stock-Based Compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of operations, rather than within additional paid-in capital on the balance sheet. The new guidance was effective for the Company beginning on January 29, 2017. As a result of the adoption of this new guidance, the Company recognized an excess tax benefit of $2.5 million and $2.4 million in the provision for income taxes as a discrete item during the three and six months ended July 29, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the condensed consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.

In May 2017, the FASB issued Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The standard will be applied prospectively. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under GAAP for one year from the original effective date. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts.

The Company continues to assess all potential impacts of the standard, and currently believes one of the most significant impacts relates to accounting for gift card breakage. Under the new standard the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and will be recognized proportional to actual gift card redemptions. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company will adopt Topic 606 at the commencement of fiscal 2018. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially adopting it recognized at the date of initial application. The Company has not yet selected the transition method.

Accounting for Leases

In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.

Financial Instruments

In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Cash Flow Classification

In August 2016, the FASB issued Accounting Standard Update No. 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers

In October 2016, the FASB issued Accounting Standard Update No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Goodwill and Intangibles

In January 2017, the FASB issued Accounting Standard Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350). The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

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Business Combination

6 Months Ended

Jul. 29, 2017

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, which are classified as a liability, are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 15—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.

During the three and six months ended July 30, 2016, the Company incurred $0.7 million and $2.8 million, respectively, of acquisition-related costs associated with the transaction. 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.

During the six months ended July 29, 2017, the Company recorded a purchase price allocation adjustment of $1.9 million. The adjustment primarily related to a subset of inventory acquired for which the Company completed a fair value analysis based on the facts and circumstances that existed as of the acquisition date. Subsequent to the acquisition date, only a small portion of such inventory had been sold and therefore the impact on the Company’s results of operations for historical periods since the acquisition was insignificant. The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities, prior to and after the purchase price allocation adjustments recorded during the six months ended July 29, 2017 (in thousands):

			Purchase Price
	January 28,		Allocation			July 29,
	2017		Adjustments			2017
Tangible assets acquired and liabilities assumed	$	18,615	$	(1,916	)	$	16,699
Trademarks		52,100		—			52,100
Goodwill		49,229		1,916			51,145
Total	$	119,944	$	—		$	119,944

Any future changes to the purchase price will be recorded directly to the consolidated statements of operations and will not impact the goodwill recorded as a result of this acquisition.

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 $9.7 million for marketable inventory.

Trademarks 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. A portion of the trademarks and goodwill are not 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 condensed consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.

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Asset Held For Sale

6 Months Ended

Jul. 29, 2017

Property Plant And Equipment [Abstract]

Asset Held For Sale

NOTE 4—ASSET HELD FOR SALE

Building and Land

During the first quarter of fiscal 2017, the Company committed to a plan to sell the building and land at one of its owned retail Galleries, resulting in a reclassification of building and land of $8.2 million from property and equipment to asset held for sale on the condensed consolidated balance sheets as of April 29, 2017. In May 2017, the Company completed the sale of the building and land for approximately $10.2 million and entered into a short-term five month lease agreement to lease the property. As a result, the gain of $2.0 million associated with the sale of this property is amortized over a five month period. During the three and six months ended July 29, 2017, the Company recorded a gain of $1.3 million which is included as a reduction of selling, general and administrative expenses on the condensed consolidated statements of operations. The remaining gain of $0.7 million is included in deferred rent and lease incentives on the condensed consolidated balance sheets as of July 29, 2017 and will be recognized on the condensed consolidated statements of operations during the three months ended October 28, 2017.

Aircraft

During the fourth quarter of fiscal 2016, the Company committed to a plan to sell an aircraft, which resulted in a reclassification of such aircraft from property and equipment to asset held for sale on the condensed consolidated balance sheets as of January 28, 2017. The asset held for sale had a carrying value of $4.9 million as of January 28, 2017. In April 2017, the sale of the aircraft was completed for a purchase price of $5.2 million and the Company incurred costs of $0.3 million to dispose of the asset.

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Prepaid Expense and Other Assets

6 Months Ended

Jul. 29, 2017

Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]

Prepaid Expense and Other Assets

NOTE 5—PREPAID EXPENSE AND OTHER ASSETS

Prepaid expense and other current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Capitalized catalog costs	$	42,595	$	61,258
Federal and state tax receivable		11,053		13,124
Vendor deposits		8,951		13,276
Prepaid expense and other current assets		15,080		29,504
Total prepaid expense and other current assets	$	77,679	$	117,162

Other non-current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Construction related deposits	$	13,991	$	28,044
Other deposits		4,944		4,706
Deferred financing fees		4,683		1,530
Other non-current assets		3,479		1,889
Total other non-current assets	$	27,097	$	36,169

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Goodwill and Intangible Assets

6 Months Ended

Jul. 29, 2017

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

The following sets forth the goodwill and intangible assets as of July 29, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,838	)	$	—		$	87
Fair market write-down (2)		(1,467	)		1,379			—			(88	)
Total intangible assets subject to amortization	$	458		$	(459	)	$	—		$	(1	)
Intangible assets not subject to amortization
Goodwill (3)(4)	$	175,605		$	—		$	(13	)	$	175,592
Trademarks and domain names (4)	$	100,663		$	—		$	—		$	100,663

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

The following sets forth the goodwill and intangible assets as of January 28, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,792	)	$	—		$	133
Fair market write-down (2)		(1,467	)		1,350			—			(117	)
Total intangible assets subject to amortization	$	458		$	(442	)	$	—		$	16
Intangible assets not subject to amortization
Goodwill (3)(4)	$	173,690		$	—		$	(87	)	$	173,603
Trademarks and domain names (3)(4)	$	100,624		$	—		$	—		$	100,624

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) The Company recorded goodwill and trademarks of $49.2 million and $52.1 million, respectively, in fiscal 2016 related to its acquisition of Waterworks. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

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Accounts Payable, Accrued Expenses and Other Current Liabilities

6 Months Ended

Jul. 29, 2017

Payables And Accruals [Abstract]

Accounts Payable, Accrued Expenses and Other Current Liabilities

NOTE 7—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable and accrued expenses consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Accounts payable	$	160,452	$	134,720
Accrued compensation		34,322		26,886
Accrued freight and duty		20,834		27,955
Accrued sales taxes		15,681		14,908
Accrued occupancy		11,053		8,137
Accrued professional fees		8,414		2,082
Accrued catalog costs		7,597		3,874
Other accrued expenses		13,484		8,418
Total accounts payable and accrued expenses	$	271,837	$	226,980

Other current liabilities consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Unredeemed gift card and merchandise credit liability	$	23,916	$	24,524
Allowance for sales returns		11,790		10,077
Product recall reserves		6,590		4,324
Other current liabilities		5,306		4,346
Total other current liabilities	$	47,602	$	43,271

During the three and six months ended July 29, 2017, the Company recorded a $5.0 million charge related to the recall of certain products, resulting in a reduction of net revenues by $4.0 million, increased cost of goods sold by $0.8 million and increased selling, general and administrative expenses by $0.2 million. In addition, during the three and six months ended July 29, 2017, the Company revised its estimate related to a product recall that was initiated during the fourth quarter of fiscal 2016, which resulted in an increase of net revenues of $0.2 million and a decrease of selling, general and administrative expenses by $0.1 million.

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Other Non-Current Obligations

6 Months Ended

Jul. 29, 2017

Other Liabilities Disclosure [Abstract]

Other Non-Current Obligations

NOTE 8—OTHER NON-CURRENT OBLIGATIONS

Other non-current obligations consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Notes payable for share repurchases	$	19,390	$	19,390
Promissory note (1)		12,323		—
Capital lease obligations—non-current		7,675		7,242
Deferred contract incentive (2)		6,548		7,739
Unrecognized tax benefits		2,570		2,508
Rollover units and profit interests (3)		1,998		1,784
Other non-current obligations		6,148		6,021
Total other non-current obligations	$	56,652	$	44,684

(1) Represents the non-current portion of a promissory note secured by the Company’s aircraft.

(2) Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement.

(3) Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.

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Convertible Senior Notes

6 Months Ended

Jul. 29, 2017

Debt Disclosure [Abstract]

Convertible Senior Notes

NOTE 9—CONVERTIBLE SENIOR NOTES

0.00% Convertible Senior Notes due 2020

In June 2015, the Company issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by the Company or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by the Company’s primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.

The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of July 29, 2017. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.

The Company may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2020 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded $0.3 million related to the amortization of debt issuance costs. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded $0.5 million related to the amortization of debt issuance costs.

The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	300,000		$	300,000
Less: Debt discount		(52,258	)		(60,124	)
Net carrying amount	$	247,742		$	239,876
Equity component (1)	$	84,003		$	84,003

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded interest expense of $4.0 million and $3.7 million for the amortization of the debt discount related to the 2020 Notes during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded interest expense of $7.9 million and $7.4 million for the amortization of the debt discount related to the 2020 Notes during the six months ended July 29, 2017 and July 30, 2016, respectively.

2020 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 2.5 million shares of its common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 2.5 million shares of the Company’s common stock at a price of $189.00 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 5.1 million shares of common stock (which cap may also be subject to adjustment). The Company received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 Notes until the Company’s common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the condensed consolidated balance sheets.

0.00% Convertible Senior Notes due 2019

In June 2014, the Company issued $350 million principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.

Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of July 29, 2017, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of July 29, 2017. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount of $1,000.

The Company may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2019 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the debt issuance costs related to the issuance of the 2019 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.

Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded $0.2 million related to the amortization of debt issuance costs. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded $0.4 million related to the amortization of debt issuance costs.

The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	350,000		$	350,000
Less: Debt discount		(28,304	)		(35,457	)
Net carrying amount	$	321,696		$	314,543
Equity component (1)	$	70,482		$	70,482

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded interest expense of $3.6 million and $3.4 million for the amortization of the debt discount related to the 2019 Notes during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded interest expense of $7.2 million and $6.8 million for the amortization of the debt discount related to the 2019 Notes during the six months ended July 29, 2017 and July 30, 2016, respectively.

2019 Notes—Convertible Bond Hedge and Warrant Transactions

In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s common stock at a price of $171.98 per share. The warrants contain certain adjustment mechanisms whereby the total number of shares to be purchased under such warrants may be increased up to a cap of 6.0 million shares of common stock (which cap may also be subject to adjustment). The Company received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

The Company recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax assets are included in deferred tax assets on the condensed consolidated balance sheets.

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Credit Facilities

6 Months Ended

Jul. 29, 2017

Debt Disclosure [Abstract]

Credit Facilities

NOTE 10—CREDIT FACILITIES

The following credit facilities were outstanding as of July 29, 2017 (in thousands):

	Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount
Asset based credit facility	$	283,000	$	—		$	283,000
LILO term loan		80,000		(547	)		79,453
Second lien term loan		100,000		(3,090	)		96,910
Total credit facilities	$	463,000	$	(3,637	)	$	459,363

There were no amounts outstanding under any credit facilities as of January 28, 2017.

Asset Based Credit Facility & LILO Term Loan

In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders.

On June 28, 2017, Restoration Hardware, Inc. entered into an eleventh amended and restated credit agreement among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., various subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (the “credit agreement”). The credit agreement has a revolving line of credit with availability of up to $600.0 million, of which $10.0 million is available to Restoration Hardware Canada, Inc., and includes a $200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600.0 million to up to $800 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. In addition, the credit agreement establishes an up to $80.0 million LILO term loan facility.

The Company incurred $3.6 million of deferred financing fees related to the credit agreement, which are included in other non-current assets on the condensed consolidated balance sheets, and will be amortized over the life of the revolving line of credit, which has a maturity date of June 28, 2022. As a result of the credit agreement, unamortized deferred financing fees of $0.1 million related to the previous facility were expensed during the three and six months ended July 29, 2017 and $1.1 million related to the previous facility will be amortized over the life of the new revolving line of credit.

The Company incurred $0.6 million of debt issuance costs related to the LILO term loan facility, which are presented net against the term loans balance on the condensed consolidated balance sheets, and will be amortized over the life of the revolving line of credit.

Borrowings under the revolving line of credit and LILO term loan facility are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or, in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The credit agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

As of July 29, 2017, the Company had $283.0 million in outstanding borrowings and $181.1 million of availability under the revolving line of credit, net of $13.1 million in outstanding letters of credit. As of July 29, 2017, the Company had $80.0 million outstanding borrowings under the LILO term loan facility. As a result of the consolidated fixed-charge coverage ratio (“FCCR”) restriction that limits the last 10% of borrowing availability, actual incremental borrowing available to the Company and the other affiliated parties under the revolving line of credit is approximately $129.4 million as of July 29, 2017.

Second Lien Credit Agreement

On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated as of July 7, 2017, among Restoration Hardware, Inc., as lead borrower, the guarantors party thereto, the lenders party thereto, each of whom are funds and accounts managed or advised by Apollo Capital Management, L.P., and its affiliated investment managers, and Wilmington Trust, National Association as administrative agent and collateral agent with respect to an initial term loan in an aggregate principal amount equal to $100.0 million with a maturity date of January 7, 2023 (the “second lien term loan”).

The Company incurred $3.6 million of debt issuance costs related to the second lien credit agreement, which are presented net against the term loans balance on the condensed consolidated balance sheets.

The second lien term loan bears interest at an annual rate generally based on LIBOR plus 8.25%. This rate is a floating rate that resets periodically based upon changes in LIBOR rates during the life of the second lien term loan. At the date of borrowing, the rate was set at one month LIBOR plus 8.25%.

All obligations under the second lien term loan are secured by a second lien security interest in assets of the loan parties including inventory, receivables and certain types of intellectual property. The second lien security interest is granted with respect to substantially the same collateral that secures the credit agreement. The second lien ranks junior in priority and is subordinated to the first lien in favor of the lenders with respect to the credit agreement.

The borrowings under the second lien credit agreement may be prepaid in whole or in part at any time, subject to certain minimum payment requirements and a prepayment premium.

The second lien credit agreement contains various restrictive and affirmative covenants generally in line with the covenants and restrictions contained in the credit agreement including required financial reporting, limitations on the ability to incur liens, make loans or other investments, incur additional debt, make certain restricted payments, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The second lien credit agreement also contains a financial ratio covenant not found in the credit agreement based upon a senior secured leverage ratio of consolidated secured debt to consolidated EBITDA.

The second lien credit agreement also contains a consolidated fixed charge coverage ratio generally based on the same formulation set forth in the credit agreement such that the borrower may not make certain “restricted payments” in the event that certain ratios are not met and contains certain events of default and other customary terms and conditions for a second lien credit agreement.

As of July 29, 2017, Restoration Hardware, Inc. had $100.0 million in outstanding borrowings. As of July 29, 2017, Restoration Hardware, Inc. was in compliance with all applicable covenants of the second lien credit agreement.

Intercreditor Agreement

On July 7, 2017, in connection with the second lien credit agreement, Restoration Hardware, Inc. entered into an intercreditor agreement (the “intercreditor agreement”) with the administrative agent and collateral agent under the credit agreement and the administrative agent and collateral agent under the second lien credit agreement. The intercreditor agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the credit agreement and the second lien credit agreement without the consent of the other party.

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Fair Value of Financial Instruments

6 Months Ended

Jul. 29, 2017

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Assets and Liabilities

Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The Company’s financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

• Level 1—Quoted prices are available in active markets for identical investments as of the reporting date.

• Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

• Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant management judgment or estimation.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Fair Value Measurements

All of the Company’s investments are classified as available-for-sale and are carried at fair value. The Company did not hold any short-term or long-term investments as of July 29, 2017. Assets measured at fair value were as follows as of January 28, 2017 (in thousands):

	Level 1		Level 2		Total
Cash equivalents
Money market funds	$	2,510	$	—	$	2,510
Commercial paper		—		5,493		5,493
Total cash equivalents		2,510		5,493		8,003
Short-term investments
Commercial paper		—		34,534		34,534
Government agency obligations		2,553		105,590		108,143
Total short-term investments		2,553		140,124		142,677
Long-term investments
Government agency obligations		—		33,212		33,212
Total long-term investments		—		33,212		33,212
Total	$	5,063	$	178,829	$	183,892

The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within the Company’s investment portfolio as of January 28, 2017 based on stated maturities, which are recorded within cash and cash equivalents, short-term investments and long-term investments on the condensed consolidated balance sheets (in thousands):

	Cost		Fair Value
Range of maturity
Due within 1 year	$	148,155	$	148,170
Due in 1 to 2 years	$	33,238	$	33,212

The Company invests excess cash primarily in investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper, government agency obligations and guaranteed obligations of the U.S. government, all of which are subject to minimal credit and market risks. The Company estimates the fair value of its commercial paper and U.S. government agency bonds by taking into consideration valuations obtained from third party pricing services. The pricing services utilize industry standard valuation models, including both income and market based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trade dates of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities, prepayment/default projections based on historical data; and other observable inputs.

There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the three and six months ended July 29, 2017 or July 30, 2016. There were no transfers into or out of level 1 and level 2 during the three and six months ended July 29, 2017 or July 30, 2016.

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value, due to the short-term nature of activity within these accounts. The estimated fair value and carrying value of the 2019 Notes and 2020 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity) were as follows (in thousands):

	July 29,				January 28,
	2017				2017
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible senior notes due 2019	$	308,012	$	321,696	$	295,381	$	314,543
Convertible senior notes due 2020	$	244,178	$	247,742	$	232,463	$	239,876

The fair value of each of the 2019 Notes and 2020 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of the Company’s convertible notes, when available, the Company’s stock price and interest rates based on similar debt issued by parties with credit ratings similar to the Company (level 2).

The estimated fair value of the asset based credit facility was $283.0 million, which approximates cost, as of July 29, 2017. Fair value approximates cost as there were no significant movements in interest rates between the borrowing date and July 29, 2017.

The estimated fair value of the second lien term loan and LILO term loan are $100.0 million and $80.0 million, respectively, which approximates the cost of each facility as of July 29, 2017. Fair values approximate cost as there were no significant movements in interest rates between the issuance date and July 29, 2017 for both the second lien term loan and LILO term loan.

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Income Taxes

6 Months Ended

Jul. 29, 2017

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 12—INCOME TAXES

The Company recorded income tax expense of $5.6 million and $4.2 million in the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded income tax expense of $3.7 million and an income tax benefit of $4.3 million in the six months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate was -245.0% and 37.7% for the three months ended July 29, 2017 and July 30, 2016, respectively. The effective tax rate was -48.5% and 39.9% for the six months ended July 29, 2017 and July 30, 2017, respectively. The effective tax rate was significantly impacted by (i) non-deductible stock-based compensation, (ii) our reporting a net loss before income taxes and (iii) net excess tax benefits from stock-based compensation resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.

As of both July 29, 2017 and January 28, 2017, $1.4 million of the exposures related to unrecognized tax benefits would affect the effective tax rate if realized and are included in other non-current obligations on the condensed consolidated balance sheets. As of July 29, 2017, the Company does not have any exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

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Net Income (Loss) Per Share

6 Months Ended

Jul. 29, 2017

Earnings Per Share [Abstract]

Net Income (Loss) Per Share

NOTE 13—NET INCOME (LOSS) PER SHARE

The weighted-average shares used for net income (loss) per share is presented in the table below. As the Company was in a net loss position for the three and six months ended July 29, 2017 and for the six months ended July 30, 2016, the weighted-average shares outstanding for basic and diluted are the same.

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Weighted-average shares—basic		28,398,307		40,646,124		35,667,217		40,617,102
Effect of dilutive stock-based awards		—		174,371		—		—
Weighted-average shares—diluted		28,398,307		40,820,495		35,667,217		40,617,102

The following number of options and restricted stock units were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Options		8,997,210		7,498,345		8,997,210		8,782,871
Restricted stock units		838,377		1,011,902		838,377		1,182,588
Total anti-dilutive stock-based awards		9,835,587		8,510,247		9,835,587		9,965,459

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Share Repurchases

6 Months Ended

Jul. 29, 2017

Equity [Abstract]

Share Repurchases

NOTE 14—SHARE REPURCHASES

$700 Million Share Repurchase Program

On May 2, 2017, the Company’s Board of Directors authorized a stock repurchase program of up to $700 million (the “$700 Million Repurchase Program”). Under the $700 Million Repurchase Program, the Company repurchased approximately 12.4 million shares of its common stock at an average price of $56.60 per share, for an aggregate repurchase amount of approximately $700 million, during the three months ended July 29, 2017. As the $700 Million Repurchase Program was completed during the three months ended July 29, 2017, no additional shares will be repurchased in future periods under this program.

$300 Million Share Repurchase Program

On February 21, 2017, the Company’s Board of Directors authorized a stock repurchase program of up to $300 million (the “$300 Million Repurchase Program”). Under the $300 Million Repurchase Program, the Company repurchased approximately 7.8 million shares of its common stock at an average price of $38.24 per share, for an aggregate repurchase amount of approximately $300 million, during the three months ended April 29, 2017. No shares were purchased under the $300 Million Repurchase Program during the three months ended July 29, 2017. As the $300 Million Repurchase Program was completed during the three months ended April 29, 2017, no additional shares will be repurchased in future periods under this program.

Share Repurchases Under Equity Plans

Certain options and awards granted under the Company’s equity plans contain a repurchase right, which may be exercised at the Company’s discretion in the event of the termination of an employee’s employment with the Company. No shares were repurchased under equity plans during either the three and six months ended July 29, 2017 or July 30, 2016. As of both July 29, 2017 and January 28, 2017, the aggregate unpaid principal amount of the notes payable for share repurchases was $19.4 million, which is included in other non-current obligations on the condensed consolidated balance sheets. During both the three months ended July 29, 2017 and July 30, 2016, the Company recorded interest expense on the outstanding notes of $0.3 million. During both the six months ended July 29, 2017 and July 30, 2016, the Company recorded interest expense on the outstanding notes of $0.5 million.

Of the $19.4 million notes payable for share repurchases outstanding as of both July 29, 2017 and January 28, 2017, $15.5 million was due to a current board member of the Company.

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Stock-Based Compensation

6 Months Ended

Jul. 29, 2017

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Compensation

NOTE 15—STOCK-BASED COMPENSATION

The Company estimates the value of equity grants based upon an option-pricing model and recognizes this estimated value as compensation expense over the vesting periods. The Company recognizes expense associated with performance-based awards when it becomes probable that the performance condition will be met. Once it becomes probable that an award will vest, the Company recognizes compensation expense equal to the number of shares which are probable to vest multiplied by the fair value of the related shares measured at the grant date.

Stock-based compensation expense is included in selling, general and administrative expenses on the condensed consolidated statements of operations. The Company recorded stock-based compensation expense of $30.9 million and $10.3 million during the three months ended July 29, 2017 and July 30, 2016, respectively. The Company recorded stock-based compensation expense of $36.2 million and $14.3 million during the six months ended July 29, 2017 and July 30, 2016, respectively. No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

2012 Stock Incentive Plan and 2012 Stock Option Plan

As of July 29, 2017, 8,997,210 options were outstanding with a weighted-average exercise price of $49.81 per share and 6,461,464 options were vested with a weighted-average exercise price of $51.31 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 29, 2017 was $196.4 million, $168.9 million, and $113.0 million, respectively. Stock options exercisable as of July 29, 2017 had a weighted-average remaining contractual life of 6.62 years. As of July 29, 2017, the total unrecognized compensation expense related to unvested options was $28.0 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.53 years.

As of July 29, 2017, the Company had 838,377 restricted stock units outstanding with a weighted-average grant date fair value of $52.84 per share. During the three months ended July 29, 2017, 232,534 restricted stock units vested with a weighted-average grant date and vest date fair value of $57.38 per share and $53.71 per share, respectively. During the six months ended July 29, 2017, 246,253 restricted stock units vested with a weighted-average grant date and vest date fair value of $57.98 per share and $53.32 per share, respectively. As of July 29, 2017, there was $23.9 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of 3.45 years.

Chairman and Chief Executive Officer Option Grant

On May 2, 2017, the Company’s Board of Directors granted Mr. Friedman an option to purchase 1,000,000 shares of the Company’s common stock with an exercise price equal to $50 per share.

The option contains dual-condition restrictions consisting of both time-based service restrictions over four years and performance-based restrictions linked to achieving the Company’s common stock price objectives of $100, $125 and $150 per share. The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option resulted in a one-time non-cash stock compensation charge of $23.9 million in the three and six months ended July 29, 2017.

Time-Based Restrictions

The time-based restrictions are measured over an initial four year service period from the date of the award and these restrictions will lapse at the end of each of these first four years at a rate of 250,000 shares per year if (i) Mr. Friedman remains employed at the end of such year, and (ii) the stock price goals have been achieved in such year as described further below.

Performance-Based Restrictions

The stock price objectives are measured each year and are set at prices for the Company’s common stock of $100, $125 and $150 per share. If all three stock price objectives are met in the first performance year, restrictions will lapse as to 250,000 shares in aggregate at the end of such year, with 83,333 shares tied to a $100 price per share, 83,333 shares tied to a $125 price per share and 83,334 shares tied to a $150 price per share.

The same price performance tests are applied in the second year of performance such that restrictions will lapse for an additional 250,000 shares at the end of the second year and then again as to an additional 250,000 shares at the end of each of the third and fourth years so long as Mr. Friedman remains employed at the end of each year.

To the extent that any of the price performance objectives is not reached within one of these first four performance years, the stock price objective can be achieved in any subsequent year until the 8th anniversary of the date of grant.

2012 Stock Incentive Plan Grant to Waterworks Associates

On May 27, 2016, on the date of our acquisition of Waterworks, the Company granted stock options to certain Waterworks associates under the 2012 Stock Incentive Plan to purchase 322,784 shares of its common stock, with an exercise price of $33.54 per share, which is equal to the closing price of the Company’s common stock on the date of grant. These options are fully vested as of the date of grant but any shares issued upon exercise of such options will be subject to selling restrictions which are scheduled to lapse in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date. The fully vested options resulted in a one-time non-cash stock-based compensation charge of $3.7 million in the three and six months ended July 30, 2016.

Rollover Units

In connection with the acquisition of Waterworks, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Appreciation Rights is determined based on an option pricing method (“OPM”). The Company did not record any expense related to the Appreciation Rights during the three and six months ended July 29, 2017 or July 30, 2016. As of both July 29, 2017 and January 28, 2017, the liability associated with the Rollover Units and related Appreciation Rights was $1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

Profit Interests

In connection with the acquisition of Waterworks, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates. The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years. The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of operations. The fair value of the Profit Interests is determined based on an OPM. For the three and six months ended July 29, 2017 the Company recorded $0.1 million and $0.2 million, respectively, related to the Profit Interests, which is included in selling, general and administrative expenses on the condensed consolidated statements of operations. For both the three and six months ended July 30, 2016 the Company recorded $0.1 million, related to the Profit Interests. As of July 29, 2017 and January 28, 2017, the liability associated with the Profit Interests was $0.5 million and $0.3 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

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Related Party Transactions

6 Months Ended

Jul. 29, 2017

Related Party Transactions [Abstract]

Related Party Transactions

NOTE 16—RELATED PARTY TRANSACTIONS

Aircraft Time Sharing Agreement

On March 29, 2016, Restoration Hardware, Inc., a wholly-owned subsidiary of the Company entered into an Amended and Restated Aircraft Time Sharing Agreement (the “Time Sharing Agreement”) with Gary Friedman, its Chairman and Chief Executive Officer. The Time Sharing Agreement governs use of any of the Company’s aircraft (“Corporate Aircraft”) by Mr. Friedman for personal trips and provides that Mr. Friedman will lease such Corporate Aircraft and pay Restoration Hardware, Inc. an amount equal to the aggregate actual expenses of each personal use flight based on the variable costs of the flight, with the amount of such lease payments not to exceed the maximum payment level established under the Federal Aviation Administration rules. Mr. Friedman maintains a deposit with the Company, to be used towards payment of amounts due under the Time Sharing Agreement. The amount of the deposit is immaterial to the condensed consolidated financial statements.

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Commitments and Contingencies

6 Months Ended

Jul. 29, 2017

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

NOTE 17—COMMITMENTS AND CONTINGENCIES

Commitments

The Company had no material off balance sheet commitments as of July 29, 2017.

Contingencies

The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business. These disputes are increasing in number as the business expands and the Company grows larger. Litigation is inherently unpredictable. As a result, the outcome of matters in which the Company is involved could result in unexpected expenses and liability that could adversely affect the Company’s operations. In addition, any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

The Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that the Company does establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what the Company accrues from time to time. The Company believes that the ultimate resolution of its current matters will not have a material adverse effect on its condensed consolidated financial statements.

RH Modern Securities Class Action

On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaint in the United States District Court, Northern District of California, against the Company, Gary Friedman, and Karen Boone. On March 16, 2017, Peter J. Errichiello, Jr. filed a similar class action complaint in the same forum and against the same parties. On April 26, 2017, the court consolidated the two actions. The consolidated action is captioned In re RH, Inc. Securities Litigation. The complaints allege, among other things, fraud in connection with alleged misstatements under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Both complaints purport to make claims on behalf of a class of purchasers of Company common stock from March 26, 2015 to June 8, 2016. The alleged misstatements relate to forward looking statements regarding the roll out of the RH Modern product line. The claims are currently at an early stage and it is not possible to estimate the amount or range of any potential loss at this time. An amended consolidated complaint was filed in June 2017 and the Company and its officers have moved to dismiss the complaint. While the outcome of litigation is inherently uncertain, the Company and its officers intend to vigorously defend the claims and believe the complaints lack merit.

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Segment Reporting

6 Months Ended

Jul. 29, 2017

Segment Reporting [Abstract]

Segment Reporting

NOTE 18—SEGMENT REPORTING

The Company defines reportable and operating segments on the same basis that it uses to evaluate performance internally by the Chief Operating Decision Maker (the “CODM”). The Company has determined that the Chief Executive Officer is its CODM. As of July 29, 2017, the Company had two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by the Company’s customers, including sales through catalogs, sales through the Company’s websites, sales through stores, and sales through the commercial channel.

The Company’s two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared management team and customer base, the Company has determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

The Company uses operating income to evaluate segment profitability. Operating income is defined as net income before interest expense—net and income taxes.

Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition of Waterworks was completed on May 27, 2016, reportable segment financial information for Waterworks below represents nine weeks of results for both the three and six months ended July 30, 2016, whereas the RH Segment results represent thirteen and twenty-six weeks for the three and six months ended July 30, 2016, respectively.

Segment Information

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally (in thousands):

	Three Months Ended						Three Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	583,793	$	31,533	$	615,326	$	522,618	$	20,763	$	543,381
Gross profit	$	192,996	$	12,817	$	205,813	$	173,803	$	6,036	$	179,839
Depreciation and amortization	$	15,386	$	1,140	$	16,526	$	12,964	$	694	$	13,658

	Six Months Ended						Six Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,117,321	$	60,085	$	1,177,406	$	978,074	$	20,763	$	998,837
Gross profit	$	352,623	$	23,446	$	376,069	$	301,278	$	6,036	$	307,314
Depreciation and amortization	$	30,287	$	2,259	$	32,546	$	25,518	$	694	$	26,212

The following table presents the balance sheet metrics reviewed by the CODM to evaluate performance internally (in thousands):

	July 29,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,448	$	51,144	$	175,592	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624
Total assets	$	1,665,328	$	154,081	$	1,819,409	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

The Company uses segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) non-cash compensation charges related to a fully vested option grant made to Mr. Friedman and the fully vested option grants made in connection with the acquisition of Waterworks, (ii) reduction of net revenues and incremental costs associated with product recalls, (iii) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, (iv) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, (v) costs incurred in connection with the acquisition of Waterworks including professional fees and (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that management reviews.

The following table shows segment operating income and income (loss) before tax (in thousands):

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Operating income (loss):
RH Segment	$	39,550		$	32,317		$	49,608		$	33,027
Waterworks		358			858			(1,424	)		858
Non-cash compensation		(23,872	)		(3,672	)		(23,872	)		(3,672	)
Recall accrual		(4,733	)		—			(4,733	)		—
Impact of inventory step-up		(480	)		(3,401	)		(1,860	)		(3,401	)
Gain on sale of building and land		1,300			—			1,300			—
Reorganization related costs		—			(3,309	)		—			(4,724	)
Acquisition related costs		—			(778	)		—			(2,847	)
Legal claim		—			—			—			(8,701	)
Operating income		12,123			22,015			19,019			10,540
Interest expense—net		14,402			10,909			26,581			21,437
Income (loss) before tax	$	(2,279	)	$	11,106		$	(7,562	)	$	(10,897	)

The Company classifies its sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor. Net revenues in each category were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Furniture	$	388,983	$	351,267	$	741,939	$	641,693
Non-furniture		226,343		192,114		435,467		357,144
Total net revenues	$	615,326	$	543,381	$	1,177,406	$	998,837

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of July 29, 2017, the Company operates 5 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian and U.K. operations, and the long-lived assets in Canada and the U.K., are not material to the Company. Geographic revenues are determined based upon where service is rendered.

No single customer accounted for more than 10% of the Company’s revenues in the three and six months ended July 29, 2017 or July 30, 2016.

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Subsequent Event

6 Months Ended

Jul. 29, 2017

Subsequent Events [Abstract]

Subsequent Event

NOTE 19—SUBSEQUENT EVENT

In the third quarter of 2017, the Company committed to a plan to close one of its furniture distribution centers in fiscal 2017, prior to the end of the lease term. The Company has not yet determined the financial impact related to this closure.

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The Company (Policies)

6 Months Ended

Jul. 29, 2017

Accounting Policies [Abstract]

Nature of Business

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.

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”. Refer to Note 3—Business Combination.

As of July 29, 2017, the Company operated a total of 85 retail Galleries and 28 outlet stores in 32 states, the District of Columbia and Canada, and includes 15 Waterworks showrooms in the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of July 29, 2017, and the results of operations for the three and six months ended July 29, 2017 and July 30, 2016. The Company’s current fiscal year, which consists of 53 weeks, ends on February 3, 2018 (“fiscal 2017”).

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

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (the “2016 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. Refer to “Revision” below.

The results of operations for the three and six months ended July 29, 2017 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Revision

Revision

During the fourth quarter of fiscal 2016, management determined that the Company had incorrectly reported negative cash balances due to outstanding checks in the accounts payable and accrued expenses financial statement line item in its condensed consolidated balance sheets without properly applying the limited right of offset against cash and cash equivalents in accordance with ASC 210—Balance Sheet. This resulted in an overstatement of cash and cash equivalents and an overstatement of accounts payable and accrued expenses on its condensed consolidated balance sheets, as well as a misstatement of the cash provided by operating activities on the condensed consolidated statements of cash flows. There was no impact on the condensed consolidated statements of income or stockholders’ equity related to these misstatements.

The Company assessed the materiality of these misstatements on prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99—Materiality, codified in Accounting Standards Codification (“ASC”) 250—Presentation of Financial Statements, and concluded that these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the amounts have been revised in the condensed consolidated statements of cash flows.

The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections (in thousands):

	Six Months Ended
	July 30,
	2016
	As Reported			Adjustment			As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(81,399	)	$	17,916		$	(63,483	)
Net cash used in operating activities	$	(91,565	)	$	17,916		$	(73,649	)
Cash and cash equivalents:
Beginning of period	$	349,897		$	(18,430	)	$	331,467
End of period	$	37,677		$	(514	)	$	37,163

Recently Issued Accounting Standards

Stock-Based Compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of operations, rather than within additional paid-in capital on the balance sheet. The new guidance was effective for the Company beginning on January 29, 2017. As a result of the adoption of this new guidance, the Company recognized an excess tax benefit of $2.5 million and $2.4 million in the provision for income taxes as a discrete item during the three and six months ended July 29, 2017, respectively. These amounts may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. As permitted, the Company elected to classify excess tax benefits (shortfalls) as an operating activity in the condensed consolidated statements of cash flows instead of as a financing activity on a prospective basis and did not retrospectively adjust prior periods.

In May 2017, the FASB issued Accounting Standard Update No. 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The standard will be applied prospectively. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under GAAP for one year from the original effective date. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations, and the recognition of expected breakage amounts.

The Company continues to assess all potential impacts of the standard, and currently believes one of the most significant impacts relates to accounting for gift card breakage. Under the new standard the Company expects to recognize breakage, which is currently recorded as a reduction to selling, general and administrative expenses, as revenue and will be recognized proportional to actual gift card redemptions. Topic 606 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company will adopt Topic 606 at the commencement of fiscal 2018. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially adopting it recognized at the date of initial application. The Company has not yet selected the transition method.

Accounting for Leases

In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.

Financial Instruments

In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Cash Flow Classification

In August 2016, the FASB issued Accounting Standard Update No. 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers

In October 2016, the FASB issued Accounting Standard Update No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Goodwill and Intangibles

In January 2017, the FASB issued Accounting Standard Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350). The updated guidance simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

Commitments and Contingencies

The Company reviews the need for any loss contingency reserves and establishes reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that the Company does establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what the Company accrues from time to time. The Company believes that the ultimate resolution of its current matters will not have a material adverse effect on its condensed consolidated financial statements.

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The Company (Tables)

6 Months Ended

Jul. 29, 2017

Accounting Policies [Abstract]

Effect of Corrections in Unaudited Condensed Consolidated Statements of Cash Flows

The following are selected line items from the Company’s unaudited condensed consolidated statements of cash flows illustrating the effect of the corrections (in thousands):

	Six Months Ended
	July 30,
	2016
	As Reported			Adjustment			As Revised
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$	(81,399	)	$	17,916		$	(63,483	)
Net cash used in operating activities	$	(91,565	)	$	17,916		$	(73,649	)
Cash and cash equivalents:
Beginning of period	$	349,897		$	(18,430	)	$	331,467
End of period	$	37,677		$	(514	)	$	37,163

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Business Combination (Tables)

6 Months Ended

Jul. 29, 2017

Business Combinations [Abstract]

Summary of Purchase Price Allocation Based on Estimated Fair Value of Acquired Assets and Assumed Liabilities, Prior to and After Purchase Price Allocation Adjustments

The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities, prior to and after the purchase price allocation adjustments recorded during the six months ended July 29, 2017 (in thousands):

			Purchase Price
	January 28,		Allocation			July 29,
	2017		Adjustments			2017
Tangible assets acquired and liabilities assumed	$	18,615	$	(1,916	)	$	16,699
Trademarks		52,100		—			52,100
Goodwill		49,229		1,916			51,145
Total	$	119,944	$	—		$	119,944

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Prepaid Expense and Other Assets (Tables)

6 Months Ended

Jul. 29, 2017

Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]

Prepaid Expense and Other Current Assets

Prepaid expense and other current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Capitalized catalog costs	$	42,595	$	61,258
Federal and state tax receivable		11,053		13,124
Vendor deposits		8,951		13,276
Prepaid expense and other current assets		15,080		29,504
Total prepaid expense and other current assets	$	77,679	$	117,162

Schedule of Other Non-Current Assets

Other non-current assets consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Construction related deposits	$	13,991	$	28,044
Other deposits		4,944		4,706
Deferred financing fees		4,683		1,530
Other non-current assets		3,479		1,889
Total other non-current assets	$	27,097	$	36,169

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jul. 29, 2017

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

The following sets forth the goodwill and intangible assets as of July 29, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,838	)	$	—		$	87
Fair market write-down (2)		(1,467	)		1,379			—			(88	)
Total intangible assets subject to amortization	$	458		$	(459	)	$	—		$	(1	)
Intangible assets not subject to amortization
Goodwill (3)(4)	$	175,605		$	—		$	(13	)	$	175,592
Trademarks and domain names (4)	$	100,663		$	—		$	—		$	100,663

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

The following sets forth the goodwill and intangible assets as of January 28, 2017 (in thousands):

	Gross Carrying Amount			Accumulated Amortization			Foreign Currency Translation			Net Book Value
Intangible assets subject to amortization
Fair value of leases (1)
Fair market write-up	$	1,925		$	(1,792	)	$	—		$	133
Fair market write-down (2)		(1,467	)		1,350			—			(117	)
Total intangible assets subject to amortization	$	458		$	(442	)	$	—		$	16
Intangible assets not subject to amortization
Goodwill (3)(4)	$	173,690		$	—		$	(87	)	$	173,603
Trademarks and domain names (3)(4)	$	100,624		$	—		$	—		$	100,624

(1) The fair value of each lease is amortized over the life of the respective lease.

(2) The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets.

(3) The Company recorded goodwill and trademarks of $49.2 million and $52.1 million, respectively, in fiscal 2016 related to its acquisition of Waterworks. Refer to Note 3—Business Combination.

(4) Refer to Note 18—Segment Reporting for goodwill and trademarks and domain names by reportable segment.

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Accounts Payable, Accrued Expenses and Other Current Liabilities (Tables)

6 Months Ended

Jul. 29, 2017

Payables And Accruals [Abstract]

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Accounts payable	$	160,452	$	134,720
Accrued compensation		34,322		26,886
Accrued freight and duty		20,834		27,955
Accrued sales taxes		15,681		14,908
Accrued occupancy		11,053		8,137
Accrued professional fees		8,414		2,082
Accrued catalog costs		7,597		3,874
Other accrued expenses		13,484		8,418
Total accounts payable and accrued expenses	$	271,837	$	226,980

Schedule of Other Current Liabilities

Other current liabilities consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Unredeemed gift card and merchandise credit liability	$	23,916	$	24,524
Allowance for sales returns		11,790		10,077
Product recall reserves		6,590		4,324
Other current liabilities		5,306		4,346
Total other current liabilities	$	47,602	$	43,271

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Other Non-Current Obligations (Tables)

6 Months Ended

Jul. 29, 2017

Other Liabilities Disclosure [Abstract]

Schedule of Other Non-Current Obligations

Other non-current obligations consist of the following (in thousands):

	July 29,		January 28,
	2017		2017
Notes payable for share repurchases	$	19,390	$	19,390
Promissory note (1)		12,323		—
Capital lease obligations—non-current		7,675		7,242
Deferred contract incentive (2)		6,548		7,739
Unrecognized tax benefits		2,570		2,508
Rollover units and profit interests (3)		1,998		1,784
Other non-current obligations		6,148		6,021
Total other non-current obligations	$	56,652	$	44,684

(1) Represents the non-current portion of a promissory note secured by the Company’s aircraft.

(2) Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement.

(3) Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.

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Convertible Senior Notes (Tables)

6 Months Ended

Jul. 29, 2017

Convertible Senior Notes Due 2020 [Member]

Carrying Values of Notes Excluding the Discounts upon Original Issuance and Third Party Offering Costs

The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	300,000		$	300,000
Less: Debt discount		(52,258	)		(60,124	)
Net carrying amount	$	247,742		$	239,876
Equity component (1)	$	84,003		$	84,003

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

Convertible Senior Notes Due 2019 [Member]

Carrying Values of Notes Excluding the Discounts upon Original Issuance and Third Party Offering Costs

The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, are as follows (in thousands):

	July 29,			January 28,
	2017			2017
Liability component
Principal	$	350,000		$	350,000
Less: Debt discount		(28,304	)		(35,457	)
Net carrying amount	$	321,696		$	314,543
Equity component (1)	$	70,482		$	70,482

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

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Credit Facilities (Tables)

6 Months Ended

Jul. 29, 2017

Debt Disclosure [Abstract]

Schedule of Credit Facilities

The following credit facilities were outstanding as of July 29, 2017 (in thousands):

	Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount
Asset based credit facility	$	283,000	$	—		$	283,000
LILO term loan		80,000		(547	)		79,453
Second lien term loan		100,000		(3,090	)		96,910
Total credit facilities	$	463,000	$	(3,637	)	$	459,363

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jul. 29, 2017

Fair Value Disclosures [Abstract]

Schedule of Assets Measured at Fair Value

Assets measured at fair value were as follows as of January 28, 2017 (in thousands):

	Level 1		Level 2		Total
Cash equivalents
Money market funds	$	2,510	$	—	$	2,510
Commercial paper		—		5,493		5,493
Total cash equivalents		2,510		5,493		8,003
Short-term investments
Commercial paper		—		34,534		34,534
Government agency obligations		2,553		105,590		108,143
Total short-term investments		2,553		140,124		142,677
Long-term investments
Government agency obligations		—		33,212		33,212
Total long-term investments		—		33,212		33,212
Total	$	5,063	$	178,829	$	183,892

Schedule of Available-for-sale Securities Maturities

The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within the Company’s investment portfolio as of January 28, 2017 based on stated maturities, which are recorded within cash and cash equivalents, short-term investments and long-term investments on the condensed consolidated balance sheets (in thousands):

	Cost		Fair Value
Range of maturity
Due within 1 year	$	148,155	$	148,170
Due in 1 to 2 years	$	33,238	$	33,212

Estimated Fair Value and Carrying Value of Notes

The estimated fair value and carrying value of the 2019 Notes and 2020 Notes (carrying value excludes the equity component of the 2019 Notes and 2020 Notes classified in stockholders’ equity) were as follows (in thousands):

	July 29,				January 28,
	2017				2017
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible senior notes due 2019	$	308,012	$	321,696	$	295,381	$	314,543
Convertible senior notes due 2020	$	244,178	$	247,742	$	232,463	$	239,876

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Net Income (Loss) Per Share (Tables)

6 Months Ended

Jul. 29, 2017

Earnings Per Share [Abstract]

Schedule of Weighted Average Shares Used for Net Income (Loss) per Share

The weighted-average shares used for net income (loss) per share is presented in the table below. As the Company was in a net loss position for the three and six months ended July 29, 2017 and for the six months ended July 30, 2016, the weighted-average shares outstanding for basic and diluted are the same.

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Weighted-average shares—basic		28,398,307		40,646,124		35,667,217		40,617,102
Effect of dilutive stock-based awards		—		174,371		—		—
Weighted-average shares—diluted		28,398,307		40,820,495		35,667,217		40,617,102

Anti-Dilutive Securities Excluded from Diluted Net Income (Loss) per Share

The following number of options and restricted stock units were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Options		8,997,210		7,498,345		8,997,210		8,782,871
Restricted stock units		838,377		1,011,902		838,377		1,182,588
Total anti-dilutive stock-based awards		9,835,587		8,510,247		9,835,587		9,965,459

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Segment Reporting (Tables)

6 Months Ended

Jul. 29, 2017

Segment Reporting [Abstract]

Summary of Statements of Operations Metrics Reviewed by CODM to Evaluate Performance Internally

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally (in thousands):

	Three Months Ended						Three Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	583,793	$	31,533	$	615,326	$	522,618	$	20,763	$	543,381
Gross profit	$	192,996	$	12,817	$	205,813	$	173,803	$	6,036	$	179,839
Depreciation and amortization	$	15,386	$	1,140	$	16,526	$	12,964	$	694	$	13,658

	Six Months Ended						Six Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,117,321	$	60,085	$	1,177,406	$	978,074	$	20,763	$	998,837
Gross profit	$	352,623	$	23,446	$	376,069	$	301,278	$	6,036	$	307,314
Depreciation and amortization	$	30,287	$	2,259	$	32,546	$	25,518	$	694	$	26,212

Summary of Balance Sheet Metrics Reviewed by CODM to Evaluate Performance Internally

The following table presents the balance sheet metrics reviewed by the CODM to evaluate performance internally (in thousands):

	July 29,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,448	$	51,144	$	175,592	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624
Total assets	$	1,665,328	$	154,081	$	1,819,409	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $1.9 million during the six months ended July 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

Schedule of Segment Operating Income and Income (Loss) Before Tax

The following table shows segment operating income and income (loss) before tax (in thousands):

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Operating income (loss):
RH Segment	$	39,550		$	32,317		$	49,608		$	33,027
Waterworks		358			858			(1,424	)		858
Non-cash compensation		(23,872	)		(3,672	)		(23,872	)		(3,672	)
Recall accrual		(4,733	)		—			(4,733	)		—
Impact of inventory step-up		(480	)		(3,401	)		(1,860	)		(3,401	)
Gain on sale of building and land		1,300			—			1,300			—
Reorganization related costs		—			(3,309	)		—			(4,724	)
Acquisition related costs		—			(778	)		—			(2,847	)
Legal claim		—			—			—			(8,701	)
Operating income		12,123			22,015			19,019			10,540
Interest expense—net		14,402			10,909			26,581			21,437
Income (loss) before tax	$	(2,279	)	$	11,106		$	(7,562	)	$	(10,897	)

Net Revenues

Net revenues in each category were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Furniture	$	388,983	$	351,267	$	741,939	$	641,693
Non-furniture		226,343		192,114		435,467		357,144
Total net revenues	$	615,326	$	543,381	$	1,177,406	$	998,837

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The Company - Additional Information (Detail)	Jul. 29, 2017 Gallery Store State Showroom
Organization Consolidation And Presentation Of Financial Statements [Abstract]
Number of retail Galleries | Gallery	85
Number of outlet stores | Store	28
Number of states | State	32
Number of waterworks showrooms | Showroom	15

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The Company - Effect of Corrections in Unaudited Condensed Consolidated Statements of Cash Flows (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016
Cash flows from operating activities:
Change in accounts payable and accrued expenses	$ 29,874	$ (63,483)
Net cash used in operating activities	316,398	(73,649)
Cash and cash equivalents:
Beginning of period	87,023	331,467
End of period	$ 21,637	37,163
As Reported [Member]
Cash flows from operating activities:
Change in accounts payable and accrued expenses		(81,399)
Net cash used in operating activities		(91,565)
Cash and cash equivalents:
Beginning of period		349,897
End of period		37,677
Adjustment [Member]
Cash flows from operating activities:
Change in accounts payable and accrued expenses		17,916
Net cash used in operating activities		17,916
Cash and cash equivalents:
Beginning of period		(18,430)
End of period		$ (514)

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Recently Issued Accounting Standards - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jul. 29, 2017	Jul. 29, 2017
Accounting Standard Update 2016-09 [Member]
New Accounting Pronouncements Or Change In Accounting Principle [Line Items]
Excess tax benefit in provision for income taxes	$ 2.5	$ 2.4

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Business Combination - Additional Information (Detail) - USD ($) $ in Thousands		3 Months Ended	6 Months Ended
	May 27, 2016	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Business Acquisition [Line Items]
Acquisition-related costs		$ 778		$ 2,847
Design Investors WW Acquisition Company, LLC [Member]
Business Acquisition [Line Items]
Purchase price of acquisition	$ 119,900
Cash portion of purchase price	118,400
Fair value of shares issued to acquire business	$ 1,500
Acquisition-related costs		$ 700		$ 2,800
Purchase price allocation adjustment due to changes in certain working capital and other items			$ 1,900
Increase in carrying value of acquired finished goods inventory			$ 9,700
Design Investors WW Acquisition Company, LLC [Member] | Minimum [Member]
Business Acquisition [Line Items]
Total equity interest acquired	90.00%

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Business Combination - Summary of Purchase Price Allocation Based on Estimated Fair Value of Acquired Assets and Assumed Liabilities, Prior to and After Purchase Price Allocation Adjustments (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 29, 2017	Jan. 28, 2017
Business Acquisition [Line Items]
Goodwill	$ 175,592	$ 173,603
Design Investors WW Acquisition Company, LLC [Member]
Business Acquisition [Line Items]
Tangible assets acquired and liabilities assumed	16,699	18,615
Trademarks	52,100	52,100
Goodwill	51,145	49,229
Total	119,944	$ 119,944
Purchase Price Allocation Adjustments, Tangible assets acquired and liabilities assumed	(1,916)
Purchase Price Allocation Adjustments, Goodwill	$ 1,916

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Asset Held For Sale - Additional Information (Detail) $ in Thousands		1 Months Ended	3 Months Ended		6 Months Ended
	Jul. 29, 2017 USD ($)	May 31, 2017 USD ($)	Jul. 29, 2017 USD ($)	Apr. 29, 2017 USD ($) Gallery	Jul. 29, 2017 USD ($)	Jan. 28, 2017 USD ($)
Long Lived Assets Held For Sale [Line Items]
Number of retail galleries held for sale | Gallery				1
Asset held for sale				$ 8,200		$ 4,900
Sale of building and land		$ 10,200			$ 15,123
Short-term lease agreement, period		5 months
Gain on sale of building and land		$ 2,000
Building and land, amortization period		5 months
Sale price of aircraft				5,200
Costs incurred in disposal of asset				$ 300
Selling, General and Administrative Expenses [Member]
Long Lived Assets Held For Sale [Line Items]
Gain on sale of building and land			$ 1,300		$ 1,300
Deferred Rent and Lease Incentives [Member]
Long Lived Assets Held For Sale [Line Items]
Gain on sale of building and land	$ 700

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Prepaid Expense and Other Assets - Prepaid Expense and Other Current Assets (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Prepaid Expense And Other Assets Current [Abstract]
Capitalized catalog costs	$ 42,595	$ 61,258
Federal and state tax receivable	11,053	13,124
Vendor deposits	8,951	13,276
Prepaid expense and other current assets	15,080	29,504
Total prepaid expense and other current assets	$ 77,679	$ 117,162

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Prepaid Expense And Other Assets - Schedule of Other Non-Current Assets (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Other Assets Noncurrent [Abstract]
Construction related deposits	$ 13,991	$ 28,044
Other deposits	4,944	4,706
Deferred financing fees	4,683	1,530
Other non-current assets	3,479	1,889
Total other non-current assets	$ 27,097	$ 36,169

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Goodwill and Intangible Assets - Goodwill and Intangible Assets (Detail) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jul. 29, 2017	Jan. 28, 2017
Finite-Lived Intangible Assets [Line Items]
Finite Lived, Gross Carrying Amount	$ 458	$ 458
Finite Lived, Accumulated Amortization	(459)	(442)
Finite Lived, Net Book Value	(1)	16
Goodwill, Gross Carrying Amount	175,605	173,690
Goodwill, Foreign Currency Translation	(13)	(87)
Goodwill, Net Book Value	175,592	173,603
Indefinite Lived, Gross Carrying Amount	100,663	100,624
Indefinite Lived, Net Book Value	100,663	100,624
Fair Market Write-Down, Gross Carrying Amount	(1,467)	(1,467)
Fair Market Write-Down, Accumulated Amortization	1,379	1,350
Fair Market Write-Down, Net Book Value	(88)	(117)
Trademarks and Domain Names [Member]
Finite-Lived Intangible Assets [Line Items]
Indefinite Lived, Gross Carrying Amount	100,663	100,624
Indefinite Lived, Foreign Currency Translation		0
Indefinite Lived, Net Book Value	100,663	100,624
Fair Market Write-Up [Member]
Finite-Lived Intangible Assets [Line Items]
Finite Lived, Gross Carrying Amount	1,925	1,925
Finite Lived, Accumulated Amortization	(1,838)	(1,792)
Finite Lived, Net Book Value	$ 87	$ 133

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Goodwill and Intangible Assets - Goodwill and Intangible Assets (Parenthetical) (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jul. 29, 2017	Jan. 28, 2017
Finite-Lived Intangible Assets [Line Items]
Goodwill	$ 175,592	$ 173,603
Design Investors WW Acquisition Company, LLC [Member]
Finite-Lived Intangible Assets [Line Items]
Goodwill increased due to purchase price accounting adjustments	1,916
Goodwill	51,145	49,229
Trademarks	$ 52,100	$ 52,100

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Accounts Payable, Accrued Expenses and Other Current Liabilities - Accounts Payable and Accrued Expenses (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Payables And Accruals [Abstract]
Accounts payable	$ 160,452	$ 134,720
Accrued compensation	34,322	26,886
Accrued freight and duty	20,834	27,955
Accrued sales taxes	15,681	14,908
Accrued occupancy	11,053	8,137
Accrued professional fees	8,414	2,082
Accrued catalog costs	7,597	3,874
Other accrued expenses	13,484	8,418
Total accounts payable and accrued expenses	$ 271,837	$ 226,980

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Accounts Payable, Accrued Expenses and Other Current Liabilities - Schedule of Other Current Liabilities (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Payables And Accruals [Abstract]
Unredeemed gift card and merchandise credit liability	$ 23,916	$ 24,524
Allowance for sales returns	11,790	10,077
Product recall reserves	6,590	4,324
Other current liabilities	5,306	4,346
Total other current liabilities	$ 47,602	$ 43,271

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Accounts Payable, Accrued Expenses and Other Current Liabilities - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
	Jul. 29, 2017	Jul. 29, 2017
Payables And Accruals [Line Items]
Charge related to recall of products	$ 5.0	$ 5.0
Net Revenues [Member]
Payables And Accruals [Line Items]
Charge related to recall of products	4.0	4.0
Estimated product recall expense	0.2	0.2
Cost of Goods Sold [Member]
Payables And Accruals [Line Items]
Charge related to recall of products	0.8	0.8
Selling, General and Administrative Expenses [Member]
Payables And Accruals [Line Items]
Charge related to recall of products	0.2	0.2
Estimated product recall expense	$ 0.1	$ 0.1

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Other Non-Current Obligations - Schedule of Other Non-Current Obligations (Detail) - USD ($) $ in Thousands		Jul. 29, 2017	Jan. 28, 2017
Other Liabilities Noncurrent [Abstract]
Notes payable for share repurchases		$ 19,390	$ 19,390
Promissory note	[1]	12,323
Capital lease obligations—non-current		7,675	7,242
Deferred contract incentive	[2]	6,548	7,739
Unrecognized tax benefits		2,570	2,508
Rollover units and profit interests	[3]	1,998	1,784
Other non-current obligations		6,148	6,021
Total other non-current obligations		$ 56,652	$ 44,684

[1] Represents the non-current portion of a promissory note secured by the Company’s aircraft.

[2] Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement.

[3] Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.

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Other Non-Current Obligations - Schedule of Other Non-Current Obligations (Parenthetical) (Detail)	6 Months Ended
	Jul. 29, 2017
Other Liabilities Noncurrent [Abstract]
Incentive payment service agreement period	5 years

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Convertible Senior Notes - Additional Information (Detail)	1 Months Ended		3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($) d Derivative $ / shares $ / Derivative shares	Jun. 30, 2014 USD ($) d Derivative $ / shares $ / Derivative shares	Jul. 29, 2017 USD ($)	Jul. 30, 2016 USD ($)	Jul. 29, 2017 USD ($)	Jul. 30, 2016 USD ($)	Jan. 28, 2017 USD ($)	Jul. 31, 2015 USD ($)
Debt Instrument [Line Items]
Amortization of debt discount					$ 15,018,000	$ 14,213,000
Convertible Senior Notes Due 2020 [Member]
Debt Instrument [Line Items]
Debt instrument, principal amount			$ 300,000,000		300,000,000		$ 300,000,000
Deemed elected combination settlement amount per note to be received upon conversion	$ 1,000
Debt instrument, effective interest rate	6.47%
Discounts and commissions payable	$ 3,800,000		52,258,000		52,258,000		60,124,000
Third party offering costs	$ 2,300,000
Amortization of debt issuance costs			300,000	$ 300,000	500,000	500,000
Amortization of debt discount			4,000,000	3,700,000	$ 7,900,000	7,400,000
Warrants sold to purchase common stock | shares	2,500,000
Cash proceeds from sale of warrants	$ 30,400,000
Warrants price per share | $ / shares	$ 189.00
Convertible Senior Notes Due 2020 [Member] | Convertible Bond Hedge and Warrant Transactions [Member]
Debt Instrument [Line Items]
Conversion price per share | $ / shares	$ 189.00
Convertible note hedge, number of shares | Derivative	2,500,000
Convertible note hedge, price per share | $ / Derivative	118.13
Convertible note hedge, description					The Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 2.5 million shares of its common stock at a price of approximately $118.13 per share
Convertible note hedge, inception Date					Jun. 30, 2015
Total cost of convertible note hedge transactions	$ 68,300,000
Deferred tax liability			32,800,000		$ 32,800,000
Deferred tax asset			26,600,000		$ 26,600,000
Convertible Senior Notes Due 2020 [Member] | Convertible Bond Hedge and Warrant Transactions [Member] | Warrants Subject to Certain Adjustment Mechanisms [Member] | Maximum [Member]
Debt Instrument [Line Items]
Warrants sold to purchase common stock | shares	5,100,000
Convertible Senior Notes Due 2020 [Member] | Convertible Debt Instrument Conversion Period One [Member]
Debt Instrument [Line Items]
Debt instrument, convertible trading days | d	20
Debt instrument, convertible consecutive trading days	30 days
Debt instrument, convertible percentage of stock price	130.00%
Convertible Senior Notes Due 2020 [Member] | Convertible Debt Instrument Conversion Period Two [Member]
Debt Instrument [Line Items]
Debt instrument, convertible trading days | d	5
Debt instrument, convertible consecutive trading days	10 days
Debt instrument, convertible percentage of stock price	98.00%
Convertible Senior Notes Due 2020 [Member] | Convertible Debt Instrument Conversion Period Three [Member]
Debt Instrument [Line Items]
Debt instrument, convertible earliest date					Mar. 15, 2020
Convertible Senior Notes Due 2020 [Member] | Common Stock [Member]
Debt Instrument [Line Items]
Debt instrument, initial conversion rate	8.4656
Debt instrument, conversion principal amount	$ 1,000
Conversion price per share | $ / shares	$ 118.13
Debt instrument, conversion description					The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share.
Convertible Senior Notes Due 2019 [Member]
Debt Instrument [Line Items]
Debt instrument, principal amount			350,000,000		$ 350,000,000		350,000,000
Debt instrument, convertible earliest date					Mar. 15, 2019
Deemed elected combination settlement amount per note to be received upon conversion		$ 1,000
Debt instrument, effective interest rate		4.51%
Discounts and commissions payable		$ 4,400,000	28,304,000		$ 28,304,000		$ 35,457,000
Third party offering costs		$ 1,000,000
Amortization of debt issuance costs			200,000	200,000	400,000	400,000
Amortization of debt discount			3,600,000	$ 3,400,000	$ 7,200,000	$ 6,800,000
Warrants sold to purchase common stock | shares		3,000,000
Cash proceeds from sale of warrants		$ 40,400,000
Warrants price per share | $ / shares		$ 171.98
Convertible Senior Notes Due 2019 [Member] | Convertible Bond Hedge and Warrant Transactions [Member]
Debt Instrument [Line Items]
Convertible note hedge, number of shares | Derivative		3,000,000
Convertible note hedge, price per share | $ / Derivative		116.09
Convertible note hedge, description					the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately $116.09 per share.
Total cost of convertible note hedge transactions		$ 73,300,000
Deferred tax liability			27,500,000		$ 27,500,000
Deferred tax asset			$ 28,600,000		$ 28,600,000
Conversion price per share, two | $ / shares		$ 171.98
Convertible Senior Notes Due 2019 [Member] | Convertible Bond Hedge and Warrant Transactions [Member] | Warrants Subject to Certain Adjustment Mechanisms [Member] | Maximum [Member]
Debt Instrument [Line Items]
Warrants sold to purchase common stock | shares		6,000,000
Convertible Senior Notes Due 2019 [Member] | Convertible Debt Instrument Conversion Period One [Member]
Debt Instrument [Line Items]
Debt instrument, convertible trading days | d		20
Debt instrument, convertible consecutive trading days		30 days
Debt instrument, convertible percentage of stock price		130.00%
Convertible Senior Notes Due 2019 [Member] | Convertible Debt Instrument Conversion Period Two [Member]
Debt Instrument [Line Items]
Debt instrument, convertible trading days | d		5
Debt instrument, convertible consecutive trading days		10 days
Debt instrument, convertible percentage of stock price		98.00%
Convertible Senior Notes Due 2019 [Member] | Convertible Debt Instrument Conversion Period Three [Member]
Debt Instrument [Line Items]
Debt instrument, convertible earliest date					Mar. 15, 2019
Convertible Senior Notes Due 2019 [Member] | Common Stock [Member]
Debt Instrument [Line Items]
Debt instrument, initial conversion rate		8.6143
Debt instrument, conversion principal amount		$ 1,000
Conversion price per share | $ / shares		$ 116.09
Debt instrument, conversion description					The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share
Private Placement [Member] | Convertible Senior Notes Due 2020 [Member]
Debt Instrument [Line Items]
Debt instrument, principal amount	$ 250,000,000
Debt instrument, interest rate	0.00%
Debt instrument, maturity date					Jul. 15, 2020
Private Placement [Member] | Convertible Senior Notes Due 2019 [Member]
Debt Instrument [Line Items]
Debt instrument, principal amount		$ 350,000,000
Debt instrument, interest rate		0.00%
Debt instrument, maturity date					Jun. 15, 2019
Exercise of Over Allotment Option in Private Placement [Member] | Convertible Senior Notes Due 2020 [Member]
Debt Instrument [Line Items]
Debt instrument, principal amount								$ 50,000,000

XML

Convertible Senior Notes - Carrying Values of Notes Excluding the Discounts upon Original Issuance and Third Party Offering Costs (Detail) - Convertible Senior Notes Due 2020 [Member] - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017	Jun. 30, 2015
Liability component
Principal	$ 300,000	$ 300,000
Less: Debt discount	(52,258)	(60,124)	$ (3,800)
Net carrying amount	247,742	239,876
Equity component	$ 84,003	$ 84,003

XML

Convertible Senior Notes - Carrying Value of Notes Excluding the Discounts and Commissions Payable to the Initial Purchasers and Third Party Offering Costs (Detail) - Convertible Senior Notes Due 2019 [Member] - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017	Jun. 30, 2014
Liability component
Principal	$ 350,000	$ 350,000
Less: Debt discount	(28,304)	(35,457)	$ (4,400)
Net carrying amount	321,696	314,543
Equity component	$ 70,482	$ 70,482

XML

Credit Facilities - Schedule of Credit Facilities (Detail) $ in Thousands	Jul. 29, 2017 USD ($)
Line Of Credit Facility [Line Items]
Credit facilities, Outstanding Amount	$ 463,000
Credit facilities, Unamortized Debt Issuance Costs	(3,637)
Credit facilities, Net Carrying Amount	459,363
Asset Based Credit Facility [Member]
Line Of Credit Facility [Line Items]
Credit facilities, Outstanding Amount	283,000
Credit facilities, Net Carrying Amount	283,000
LILO Term Loan [Member]
Line Of Credit Facility [Line Items]
Credit facilities, Outstanding Amount	80,000
Credit facilities, Unamortized Debt Issuance Costs	(547)
Credit facilities, Net Carrying Amount	79,453
Second Lien Term Loan [Member]
Line Of Credit Facility [Line Items]
Credit facilities, Outstanding Amount	100,000
Credit facilities, Unamortized Debt Issuance Costs	(3,090)
Credit facilities, Net Carrying Amount	$ 96,910

XML

Credit Facilities - Additional Information (Detail) - USD ($)			3 Months Ended	6 Months Ended
	Jul. 07, 2017	Jun. 28, 2017	Jul. 29, 2017	Jul. 29, 2017	Jan. 28, 2017
Line Of Credit Facility [Line Items]
Amounts outstanding under credit facilities			$ 463,000,000	$ 463,000,000
Deferred financing fees			4,683,000	$ 4,683,000	$ 1,530,000
Revolving line of credit, interest rate description				Borrowings under the revolving line of credit and LILO term loan facility are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or, in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.
Outstanding revolving line of credit			459,363,000	$ 459,363,000
Fixed charge coverage ratio covenant, percentage of borrowing base				10.00%
Incremental borrowing available after maintaining fixed charge coverage ratio			129,400,000	$ 129,400,000
Credit Agreement [Member]
Line Of Credit Facility [Line Items]
Agreement, date				Jun. 28, 2017
Unamortized deferred financing fees written off / expensed			100,000	$ 100,000
Credit Agreement [Member] | Other Non-current Assets [Member]
Line Of Credit Facility [Line Items]
Deferred financing fees			3,600,000	3,600,000
Second Lien Credit Agreement [Member]
Line Of Credit Facility [Line Items]
Amounts outstanding under credit facilities			100,000,000	100,000,000
Credit Facilities [Member]
Line Of Credit Facility [Line Items]
Amounts outstanding under credit facilities					$ 0
Revolving Credit Facility [Member]
Line Of Credit Facility [Line Items]
Availability under the revolving line of credit			181,100,000	181,100,000
Unamortized deferred financing fees			1,100,000	1,100,000
Outstanding revolving line of credit			283,000,000	283,000,000
Outstanding letters of credit			13,100,000	$ 13,100,000
Revolving Credit Facility [Member] | Credit Agreement [Member]
Line Of Credit Facility [Line Items]
Amended and restated credit agreement maturity date				Jun. 28, 2022
Revolving Credit Facility [Member] | Credit Agreement [Member] | Maximum [Member]
Line Of Credit Facility [Line Items]
Availability under the revolving line of credit		$ 600,000,000
Revolving Credit Facility [Member] | Credit Agreement [Member] | Minimum [Member]
Line Of Credit Facility [Line Items]
Line of credit		600,000,000
Revolving Credit Facility [Member] | Credit Agreement [Member] | Scenario, Plan Subject to Satisfaction of Conditions [Member]
Line Of Credit Facility [Line Items]
Increase in revolving line of credit		200,000,000
Revolving Credit Facility [Member] | Credit Agreement [Member] | Scenario, Plan Subject to Satisfaction of Conditions [Member] | Maximum [Member]
Line Of Credit Facility [Line Items]
Line of credit		800,000,000
Revolving Credit Facility [Member] | Credit Agreement [Member] | Restoration Hardware Canada, Inc. [Member]
Line Of Credit Facility [Line Items]
Availability under the revolving line of credit		10,000,000
LILO Term Loan Facility [Member]
Line Of Credit Facility [Line Items]
Amounts outstanding under credit facilities			80,000,000	$ 80,000,000
Debt issuance costs			600,000	600,000
Outstanding revolving line of credit			79,453,000	79,453,000
LILO Term Loan Facility [Member] | Credit Agreement [Member] | Maximum [Member]
Line Of Credit Facility [Line Items]
Line of credit facility, maximum borrowing capacity		$ 80,000,000
Second Lien Term Loan [Member]
Line Of Credit Facility [Line Items]
Amounts outstanding under credit facilities			100,000,000	$ 100,000,000
Agreement, date				Jul. 07, 2017
Line of credit facility, maximum borrowing capacity	$ 100,000,000
Amended and restated credit agreement maturity date				Jan. 07, 2023
Debt issuance costs	$ 3,600,000
Outstanding revolving line of credit			$ 96,910,000	$ 96,910,000
Interest rate description				Annual rate generally based on LIBOR plus 8.25%
Variable interest rate description				one month LIBOR plus 8.25%
Debt instrument, basis spread on variable rate	8.25%

XML

Fair Value of Financial Instruments - Additional Information (Detail) - USD ($)	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016	Jan. 28, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Transfers out of Level 1 into Level 2	$ 0	$ 0	$ 0	$ 0
Transfers out of Level 2 into Level 1	0	0	0	0
Estimated Fair Value [Member] | Asset Based Credit Facility [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of term loan	283,000,000		283,000,000
Estimated Fair Value [Member] | Second Lien Term Loan [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of term loan	100,000,000		100,000,000
Estimated Fair Value [Member] | LILO Term Loan [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of term loan	80,000,000		80,000,000
Level 3 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Fair value measurement, purchases, sales, issuances, or settlements	0	$ 0	0	$ 0
Short-term investments [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total investments	0		0		$ 142,677,000
Long-term investments [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total investments	$ 0		$ 0		$ 33,212,000

XML

Fair Value of Financial Instruments - Schedule of Assets Measured at Fair Value (Detail) - USD ($)	Jul. 29, 2017	Jan. 28, 2017
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		$ 8,003,000
Total		183,892,000
Money market funds [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		2,510,000
Commercial paper [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		5,493,000
Level 1 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		2,510,000
Total		5,063,000
Level 1 [Member] | Money market funds [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		2,510,000
Level 2 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		5,493,000
Total		178,829,000
Level 2 [Member] | Commercial paper [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total cash equivalents		5,493,000
Short-term investments [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments	$ 0	142,677,000
Short-term investments [Member] | Commercial paper [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		34,534,000
Short-term investments [Member] | Government agency obligations [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		108,143,000
Short-term investments [Member] | Level 1 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		2,553,000
Short-term investments [Member] | Level 1 [Member] | Government agency obligations [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		2,553,000
Short-term investments [Member] | Level 2 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		140,124,000
Short-term investments [Member] | Level 2 [Member] | Commercial paper [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		34,534,000
Short-term investments [Member] | Level 2 [Member] | Government agency obligations [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		105,590,000
Long-term investments [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments	$ 0	33,212,000
Long-term investments [Member] | Government agency obligations [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		33,212,000
Long-term investments [Member] | Level 2 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		33,212,000
Long-term investments [Member] | Level 2 [Member] | Government agency obligations [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Total investments		$ 33,212,000

XML

Fair Value of Financial Instruments - Schedule of Available-for-sale Securities Maturities (Detail) $ in Thousands	Jan. 28, 2017 USD ($)
Cost range of maturity
Cost due within 1 year	$ 148,155
Cost due in 1 to 2 years	33,238
Fair value range of maturity
Fair value due within 1 year	148,170
Fair value due in 1 to 2 years	$ 33,212

XML

Fair Value of Financial Instruments - Estimated Fair Value and Carrying Value of 2019 and 2020 Notes (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Convertible Senior Notes Due 2019 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Convertible senior notes, Fair Value	$ 308,012	$ 295,381
Convertible senior notes, Carrying Value	321,696	314,543
Convertible Senior Notes Due 2020 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Convertible senior notes, Fair Value	244,178	232,463
Convertible senior notes, Carrying Value	$ 247,742	$ 239,876

XML

Income Taxes - Additional Information (Detail) - USD ($)	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016	Jan. 28, 2017
Income Tax Disclosure [Abstract]
Income tax expense (benefit)	$ 5,583,000	$ 4,188,000	$ 3,670,000	$ (4,345,000)
Effective income tax rate	(245.00%)	37.70%	(48.50%)	39.90%
Unrecognized tax benefits	$ 1,400,000		$ 1,400,000		$ 1,400,000
Exposures related to unrecognized tax benefits	$ 0		$ 0
Period of unrecognized tax benefits change			12 months

XML

Net Income (Loss) Per Share - Schedule of Weighted-Average Shares Used for Net Income (Loss) per Share (Detail) - shares	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Earnings Per Share [Abstract]
Weighted-average shares—basic	28,398,307	40,646,124	35,667,217	40,617,102
Effect of dilutive stock-based awards		174,371
Weighted-average shares—diluted	28,398,307	40,820,495	35,667,217	40,617,102

XML

Net Income (Loss) Per Share - Anti-Dilutive Securities Excluded from Diluted Net Income (Loss) per Share (Detail) - shares	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Options and restricted stock units were excluded from calculation of diluted net earnings share	9,835,587	8,510,247	9,835,587	9,965,459
Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Options and restricted stock units were excluded from calculation of diluted net earnings share	8,997,210	7,498,345	8,997,210	8,782,871
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Options and restricted stock units were excluded from calculation of diluted net earnings share	838,377	1,011,902	838,377	1,182,588

XML

Share Repurchases - Additional Information (Detail) - USD ($)	3 Months Ended			6 Months Ended
	Jul. 29, 2017	Apr. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016	May 02, 2017	Feb. 21, 2017	Jan. 28, 2017
Equity Class Of Treasury Stock [Line Items]
Unpaid principal amount of notes payable outstanding for share repurchases	$ 19,390,000			$ 19,390,000				$ 19,390,000
$700 Million Repurchase Program [Member]
Equity Class Of Treasury Stock [Line Items]
Shares of common stock purchased under repurchase program, shares	12,400,000
Shares of common stock purchased at an average price per share under repurchase program	$ 56.60
Shares of common stock purchased under repurchase program	$ 700,000,000
$300 Million Repurchase Program
Equity Class Of Treasury Stock [Line Items]
Shares of common stock purchased under repurchase program, shares	0	7,800,000
Shares of common stock purchased at an average price per share under repurchase program		$ 38.24
Shares of common stock purchased under repurchase program		$ 300,000,000
Share Repurchases Under Equity Plans [Member]
Equity Class Of Treasury Stock [Line Items]
Shares of common stock purchased under repurchase program, shares	0		0	0	0
Unpaid principal amount of notes payable outstanding for share repurchases	$ 19,400,000			$ 19,400,000				19,400,000
Interest expense related to notes payable for share repurchases	300,000		$ 300,000	500,000	$ 500,000
Board of Directors [Member] | Maximum [Member] | $700 Million Repurchase Program [Member]
Equity Class Of Treasury Stock [Line Items]
Stock repurchase program authorized amount						$ 700,000,000
Board of Directors [Member] | Maximum [Member] | $300 Million Repurchase Program
Equity Class Of Treasury Stock [Line Items]
Stock repurchase program authorized amount							$ 300,000,000
Director [Member] | Share Repurchases Under Equity Plans [Member]
Equity Class Of Treasury Stock [Line Items]
Unpaid principal amount of notes payable outstanding for share repurchases	$ 15,500,000			$ 15,500,000				$ 15,500,000

XML

Stock-Based Compensation - Additional Information (Detail) - USD ($)				3 Months Ended		6 Months Ended
		May 02, 2017	May 27, 2016	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016	Jan. 28, 2017
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense				$ 30,900,000	$ 10,300,000	$ 36,166,000	$ 14,303,000
Stock-based compensation cost capitalized				0	0	0	0
Rollover units and profit interests	[1]			1,998,000		1,998,000		$ 1,784,000
Selling, general and administrative expenses				193,690,000	157,824,000	$ 357,050,000	296,774,000
Design Investors WW Acquisition Company, LLC [Member] | Profit Interests [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Profit interest expected life						5 years
Selling, general and administrative expenses				100,000	100,000	$ 200,000	100,000
Design Investors WW Acquisition Company, LLC [Member] | Profit Interests [Member] | Other Non-Current Obligations [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Liability associated with the profit interests				500,000		$ 500,000		300,000
Stock Options [Member] | Chairman and Chief Executive Officer [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		1,000,000
Exercise price of option granted		$ 50
Time Based Restricted [Member] | Chairman and Chief Executive Officer [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of share lapse per year		250,000
Time Based Restricted [Member] | Chairman and Chief Executive Officer [Member] | Stock Options [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option vesting period		4 years
Performance Based Restricted [Member] | Chairman and Chief Executive Officer [Member] | Stock Options [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected vested exercise price description						performance-based restrictions linked to achieving the Company’s common stock price objectives of $100, $125 and $150 per share
Appreciation Rights [Member] | Design Investors WW Acquisition Company, LLC [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Rollover units and profit interests				1,500,000		$ 1,500,000		$ 1,500,000
Appreciation Rights [Member] | Design Investors WW Acquisition Company, LLC [Member] | Rollover Units [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense				$ 0	0	$ 0	0
2012 Stock Incentive Plan and 2012 Stock Option Plan [Member] | Stock Options [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Outstanding shares				8,997,210		8,997,210
Options outstanding, weighted-average exercise price per share				$ 49.81		$ 49.81
Numbers of options vested						6,461,464
Vested weighted-average exercise price per share						$ 51.31
Aggregate intrinsic value of options outstanding				$ 196,400,000		$ 196,400,000
Aggregate intrinsic value of options vested or expected to vest				168,900,000		168,900,000
Aggregate intrinsic value of options exercisable				113,000,000		$ 113,000,000
Weighted-average remaining contractual life of options exercisable						6 years 7 months 14 days
Unrecognized compensation expense related to unvested options				$ 28,000,000		$ 28,000,000
Unrecognized compensation expense with weighted-average period						3 years 6 months 11 days
2012 Stock Incentive Plan and 2012 Stock Option Plan [Member] | Restricted Stock And Restricted Stock Unit [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation expense with weighted-average period						3 years 5 months 12 days
Outstanding shares				838,377		838,377
Restricted stock awards outstanding with weighted-average grant date fair value per share				$ 52.84		$ 52.84
Vested restricted stock unit				232,534		246,253
Vested weighted-average grant date fair value				$ 57.38		$ 57.98
Vested weighted-average vest date fair value				$ 53.71		$ 53.32
Unrecognized compensation expense related to unvested options				$ 23,900,000		$ 23,900,000
Time-Based Restrictions and Performance-Based Restrictions [Member] | Chairman and Chief Executive Officer [Member] | Stock Options [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense				$ 23,900,000		$ 23,900,000
Performance-Based Restrictions [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock, lapse description						The stock price objectives are measured each year and are set at prices for the Company’s common stock of $100, $125 and $150 per share. If all three stock price objectives are met in the first performance year, restrictions will lapse as to 250,000 shares in aggregate at the end of such year, with 83,333 shares tied to a $100 price per share, 83,333 shares tied to a $125 price per share and 83,334 shares tied to a $150 price per share. The same price performance tests are applied in the second year of performance such that restrictions will lapse for an additional 250,000 shares at the end of the second year and then again as to an additional 250,000 shares at the end of each of the third and fourth years so long as Mr. Friedman remains employed at the end of each year.
Performance-Based Restrictions [Member] | Common Stock Achieving Price per Share of $100 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		83,333
Exercise price of option granted		$ 100
Performance-Based Restrictions [Member] | Common Stock Achieving Price per Share of $125 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		83,333
Exercise price of option granted		$ 125
Performance-Based Restrictions [Member] | Common Stock Achieving Price per Share of $150 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		83,334
Exercise price of option granted		$ 150
Performance-Based Restrictions [Member] | First Performance Year [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		250,000
Performance-Based Restrictions [Member] | Second Performance Year [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		250,000
Performance-Based Restrictions [Member] | Third Performance Year [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		250,000
Performance-Based Restrictions [Member] | Fourth Performance Year [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Option to purchase of common stock		250,000
2012 Stock Incentive Plan [Member] | Waterworks Associates [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense					$ 3,700,000		$ 3,700,000
Exercise price of option granted			$ 33.54
Common stock, lapse description						options are fully vested as of the date of grant but any shares issued upon exercise of such options will be subject to selling restrictions which are scheduled to lapse in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date.
Stock option granted			322,784

[1] Represents rollover units and profit interests associated with the acquisition of Waterworks. Refer to Note 15—Stock-Based Compensation.

XML

Commitments and Contingencies - Additional Information (Detail)	Jul. 29, 2017 USD ($)
Commitments And Contingencies Disclosure [Abstract]
Material off balance sheet commitments	$ 0

XML

Segment Reporting - Additional Information (Detail)	3 Months Ended		6 Months Ended
	Jul. 29, 2017 Store Customer	Jul. 30, 2016 Customer	Jul. 29, 2017 Store Segment Customer	Jul. 30, 2016 Customer
Segment Reporting Information [Line Items]
Number of operating segments | Segment			2
Number of reportable segment | Segment			1
Number of outlet stores	28		28
Number of customers accounted for more than 10% of Company's revenues | Customer	0	0	0	0
Sales [Member] | Customer Concentration Risk [Member]
Segment Reporting Information [Line Items]
Portion of specified customers portion in total revenues	10.00%	10.00%	10.00%	10.00%
Canada [Member]
Segment Reporting Information [Line Items]
Number of retail stores	5		5
Number of outlet stores	2		2
U.K [Member]
Segment Reporting Information [Line Items]
Number of retail stores	1		1

XML

Segment Reporting - Summary of Statements of Operations Metrics Reviewed by CODM to Evaluate Performance Internally (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Segment Reporting Information [Line Items]
Net revenues	$ 615,326	$ 543,381	$ 1,177,406	$ 998,837
Gross profit	205,813	179,839	376,069	307,314
Depreciation and amortization	16,526	13,658	32,546	26,212
RH Segment [Member]
Segment Reporting Information [Line Items]
Net revenues	583,793	522,618	1,117,321	978,074
Gross profit	192,996	173,803	352,623	301,278
Depreciation and amortization	15,386	12,964	30,287	25,518
Waterworks [Member]
Segment Reporting Information [Line Items]
Net revenues	31,533	20,763	60,085	20,763
Gross profit	12,817	6,036	23,446	6,036
Depreciation and amortization	$ 1,140	$ 694	$ 2,259	$ 694

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Segment Reporting - Summary of Balance Sheet Metrics Reviewed by CODM to Evaluate Performance Internally (Detail) - USD ($) $ in Thousands	Jul. 29, 2017	Jan. 28, 2017
Segment Reporting Information [Line Items]
Goodwill	$ 175,592	$ 173,603
Trademarks and domain names	100,663	100,624
Total assets	1,819,409	2,192,520
RH Segment [Member]
Segment Reporting Information [Line Items]
Goodwill	124,448	124,374
Trademarks and domain names	48,563	48,524
Total assets	1,665,328	2,040,346
Waterworks [Member]
Segment Reporting Information [Line Items]
Goodwill	51,144	49,229
Trademarks and domain names	52,100	52,100
Total assets	$ 154,081	$ 152,174

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Segment Reporting - Summary of Balance Sheet Metrics Reviewed by CODM to Evaluate Performance Internally (Parenthetical) (Detail) $ in Thousands	6 Months Ended
	Jul. 29, 2017 USD ($)
Design Investors WW Acquisition Company, LLC [Member]
Segment Reporting Information [Line Items]
Goodwill increased due to purchase price accounting adjustments	$ 1,916

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Segment Reporting - Summary of Segment Operating Income and Income (Loss) Before Tax (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Segment Reporting Information [Line Items]
Operating income (loss)	$ 12,123	$ 22,015	$ 19,019	$ 10,540
Recall accrual	(4,733)		(4,733)
Impact of inventory step-up	(480)	(3,401)	(1,860)	(3,401)
Gain on sale of building and land	1,300		1,300
Reorganization related costs		(3,309)		(4,724)
Acquisition related costs		(778)		(2,847)
Legal claim				(8,701)
Interest expense—net	14,402	10,909	26,581	21,437
Income (loss) before income taxes	(2,279)	11,106	(7,562)	(10,897)
Waterworks [Member]
Segment Reporting Information [Line Items]
Non-cash compensation		(3,672)		(3,672)
RH Segment [Member]
Segment Reporting Information [Line Items]
Non-cash compensation	(23,872)		(23,872)
Operating Segments [Member] | RH Segment [Member]
Segment Reporting Information [Line Items]
Operating income (loss)	39,550	32,317	49,608	33,027
Operating Segments [Member] | Waterworks [Member]
Segment Reporting Information [Line Items]
Operating income (loss)	$ 358	$ 858	$ (1,424)	$ 858

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Segment Reporting - Net Revenues (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 29, 2017	Jul. 30, 2016	Jul. 29, 2017	Jul. 30, 2016
Segment Reporting Information [Line Items]
Total net revenues	$ 615,326	$ 543,381	$ 1,177,406	$ 998,837
Furniture [Member]
Segment Reporting Information [Line Items]
Total net revenues	388,983	351,267	741,939	641,693
Non-furniture [Member]
Segment Reporting Information [Line Items]
Total net revenues	$ 226,343	$ 192,114	$ 435,467	$ 357,144

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Subsequent Event - Additional Information (Detail)	3 Months Ended
	Oct. 28, 2017 Distribution
Scenario Forecast [Member]
Subsequent Event [Line Items]
Committed to plan to close furniture distribution centers	1