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):

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~~June 8, 2018, 21,634,290 shares of registrant’s common stock were outstanding.

	July 29,			January 28,			May 5,			February 3,
	2017			2017			2018			2018
ASSETS
Current assets:
Cash and cash equivalents	$	21,637		$	87,023		$	20,796		$	17,907
Short-term investments		—			142,677
Accounts receivable—net		34,752			34,191			38,614			31,412
Merchandise inventories		608,048			752,304			530,657			527,026
Asset held for sale		—			4,900
Prepaid expense and other current assets		77,679			117,162			60,064			68,585
Total current assets		742,116			1,138,257			650,131			644,930
Long-term investments		—			33,212
Property and equipment—net		744,460			682,056			811,369			800,698
Goodwill		175,592			173,603			141,849			141,893
Trademarks and other intangible assets		100,750			100,757			100,678			100,702
Deferred tax assets		29,394			28,466			30,014			23,311
Other non-current assets		27,097			36,169			14,920			21,332
Total assets	$	1,819,409		$	2,192,520		$	1,748,961		$	1,732,866
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	271,837		$	226,980		$	264,173		$	318,765
Deferred revenue and customer deposits		176,310			145,918			172,379			149,404
Other current liabilities		47,602			43,271			59,944			51,166
Total current liabilities		495,749			416,169			496,496			519,335
Asset based credit facility		283,000			—			219,000			199,970
Term loans—net		176,363			—
Term loan—net								79,528			79,499
Convertible senior notes due 2019—net		319,969			312,379			331,678			327,731
Convertible senior notes due 2020—net		244,342			235,965			257,425			252,994
Financing obligations under build-to-suit lease transactions		226,231			203,015			227,979			229,323
Deferred rent and lease incentives		63,887			60,439			54,965			54,983
Other non-current obligations		56,652			44,684			73,248			76,367
Total liabilities		1,866,193			1,272,651			1,740,319			1,740,202
Commitments and contingencies (Note 17)		—			—
Commitments and contingencies (Note 14)								—			—
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
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of May 5, 2018 and February 3, 2018								—			—
Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 41,835,129 shares issued and 21,612,197 shares outstanding as of May 5, 2018; 41,737,470 shares issued and 21,517,338 shares outstanding as of February 3, 2018								2			2
Additional paid-in capital		834,885			790,866			870,751			860,288
Accumulated other comprehensive loss		(804	)		(1,692	)		(1,436	)		(171	)
Retained earnings		138,982			150,214			159,417			152,394
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	)
Treasury stock—at cost, 20,222,932 shares as of May 5, 2018 and 20,220,132 shares as of February 3, 2018								(1,020,092	)		(1,019,849	)
Total stockholders’ equity (deficit)		(46,784	)		919,869			8,642			(7,336	)
Total liabilities and stockholders’ equity (deficit)	$	1,819,409		$	2,192,520		$	1,748,961		$	1,732,866

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

	Three Months Ended					Six Months Ended						Three Months Ended
	July 29,			July 30,		July 29,			July 30,			May 5,		April 29,
	2017			2016		2017			2016			2018		2017
Net revenues	$	615,326		$	543,381	$	1,177,406		$	998,837		$	557,406	$	562,080
Cost of goods sold		409,513			363,542		801,337			691,523			345,371		391,824
Gross profit		205,813			179,839		376,069			307,314			212,035		170,256
Selling, general and administrative expenses		193,690			157,824		357,050			296,774			158,434		163,360
Income from operations		12,123			22,015		19,019			10,540			53,601		6,896
Interest expense—net		14,402			10,909		26,581			21,437			17,035		12,179
Income (loss) before income taxes		(2,279	)		11,106		(7,562	)		(10,897	)		36,566		(5,283	)
Income tax expense (benefit)		5,583			4,188		3,670			(4,345	)		8,507		(1,913	)
Net income (loss)	$	(7,862	)	$	6,918	$	(11,232	)	$	(6,552	)	$	28,059	$	(3,370	)
Weighted-average shares used in computing basic net income (loss) per share		28,398,307			40,646,124		35,667,217			40,617,102			21,545,025		37,609,516
Basic net income (loss) per share	$	(0.28	)	$	0.17	$	(0.31	)	$	(0.16	)	$	1.30	$	(0.09	)
Weighted-average shares used in computing diluted net income (loss) per share		28,398,307			40,820,495		35,667,217			40,617,102			25,230,228		37,609,516
Diluted net income (loss) per share	$	(0.28	)	$	0.17	$	(0.31	)	$	(0.16	)	$	1.11	$	(0.09	)

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

	Three Months Ended						Six Months Ended						Three Months Ended
	July 29,			July 30,			July 29,			July 30,			May 5,			April 29,
	2017			2016			2017			2016			2018			2017
Net income (loss)	$	(7,862	)	$	6,918		$	(11,232	)	$	(6,552	)	$	28,059		$	(3,370	)
Net gains (losses) from foreign currency translation		2,069			(1,269	)		877			1,400
Net losses from foreign currency translation														(1,265	)		(1,192	)
Net unrealized holding gains on available-for-sale investments		—			51			11			143			—			11
Total comprehensive income (loss)	$	(5,793	)	$	5,700		$	(10,344	)	$	(5,009	)	$	26,794		$	(4,551	)

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

	Six Months Ended
	July 29,			July 30,			Three Months Ended
	2017			2016			May 5,			April 29,
				As Revised			2018			2017
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:
Net income (loss)							$	28,059		$	(3,370	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		32,546			26,212			17,047			16,020
Net non-cash charges resulting from inventory step-up		1,860			3,401
Lease impairment adjustment								(1,157	)		—
Non-cash charges resulting from inventory step-up								190			1,380
Amortization of debt discount		15,018			14,213			7,881			7,458
Excess tax shortfall from exercise of stock options		—			1,769
Stock-based compensation expense		36,166			14,303			7,997			5,289
Other non-cash interest expense		2,314			2,222			938			884
Change in assets and liabilities—net of acquisition:
Change in assets and liabilities:
Accounts receivable		(617	)		(422	)		(7,243	)		8
Merchandise inventories		140,331			(52,119	)		(4,032	)		66,067
Prepaid expense and other assets		37,329			(16,403	)		(26,181	)		7,547
Accounts payable and accrued expenses		29,874			(63,483	)		(57,215	)		1,219
Deferred revenue and customer deposits		30,349			15,312			28,159			22,232
Other current liabilities		2,269			(23,310	)		13,838			(1,086	)
Deferred rent and lease incentives		1,166			2,257			44			726
Other non-current obligations		(975	)		8,951			(569	)		(426	)
Net cash provided by (used in) operating activities		316,398			(73,649	)
Net cash provided by operating activities								7,756			123,948
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(39,362	)		(70,999	)		(27,121	)		(21,173	)
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			—			—			4,900
Purchase of investments		(16,109	)		(136,799	)		—			(16,109	)
Maturities of investments		46,890			77,313			—			46,890
Sales of investments		145,020			31,896			—			145,020
Acquisition of business—net of cash acquired		—			(116,100	)
Net cash provided by (used in) investing activities		146,238			(218,514	)		(27,121	)		159,528
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under asset based credit facility		323,000			—			334,000			—
Repayments under asset based credit facility		(40,000	)		—			(314,970	)		—
Borrowings under term loans		180,000			—
Borrowing under promissory note		14,000			—
Repayments under promissory note		(117	)		—
Debt issuance costs		(7,939	)
Repayments under promissory and equipment security notes								(1,491	)		—
Repurchases of common stock—including commissions		(1,000,326	)		—			—			(300,140	)
Payments on build-to-suit lease transactions		(4,601	)		—			(3,207	)		(1,289	)
Proceeds from exercise of stock options		11,170			288			2,923			2,567
Excess tax shortfall from exercise of stock options		—			(1,769	)
Tax withholdings related to issuance of stock-based awards		(3,106	)		(946	)		(351	)		(149	)
Payments on capital leases		(158	)		(166	)		(112	)		(76	)
Net cash used in financing activities		(528,077	)		(2,593	)
Net cash provided by (used in) financing activities								16,792			(299,087	)
Effects of foreign currency exchange rate translation		55			452			(62	)		(86	)
Net decrease in cash and cash equivalents		(65,386	)		(294,304	)
Net decrease in cash and cash equivalents and restricted cash equivalents								(2,635	)		(15,697	)
Cash and cash equivalents
Beginning of period		87,023			331,467
End of period	$	21,637		$	37,163
Beginning of period—cash and cash equivalents								17,907			87,023
Beginning of period—restricted cash equivalents (construction related deposits)								7,407			28,044
Beginning of period—cash and cash equivalents and restricted cash equivalents								25,314			115,067

End of period—cash and cash equivalents								20,796			80,150
End of period—restricted cash equivalents (construction related deposits)								1,883			19,220
End of period—cash and cash equivalents and restricted cash equivalents							$	22,679		$	99,370

Non-cash transactions:
Property and equipment additions in accounts payable and accrued expenses at period-end							$	18,560		$	14,498
Property and equipment additions from unpaid construction related deposits							$	2,650		$	4,913
Property and equipment additions due to build-to-suit lease transactions	$	27,340		$	9,676		$	1,887		$	18,283
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		$	—
Issuance of non-current notes payable related to share repurchases from former employees							$	243		$	—

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

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,~~May 5, 2018, the Company operated a total of 8584 retail Galleries and 2832 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.

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,~~May 5, 2018, and the results of operations for the three ~~and six~~ months ended ~~July~~May 5, 2018 and April 29, ~~2017 and July 30, 2016.~~2017. The Company’s current fiscal year, which consists of 5352 weeks, ends on February ~~3, 2018~~2, 2019 (“fiscal ~~2017”~~2018”).

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~~February 3, 2018 (the ~~“2016~~“2017 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. ~~Refer to “Revision” below.~~This reclassification had no effect on the previously reported consolidated financial position or consolidated results of operations, and did not have a material effect on the previously reported consolidated cash flows.

The results of operations for the three ~~and six~~ months ended ~~July 29, 2017~~May 5, 2018 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

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)~~:

~~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.~~

In May 2014, the FASB and International Accounting Standards Board issued their converged accounting ~~standard~~standards update on revenue recognition, Accounting Standards Update ~~2014-09~~—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,

The Company ~~continues~~adopted Topic 606 on February 4, 2018 using the modified retrospective transition method and recorded a decrease to ~~assess all potential impacts~~opening retained earnings of $21.0 million, inclusive of the ~~standard,~~tax impact. Results reported within the Company’s condensed consolidated financial statements for reporting periods beginning February 4, 2018 are presented under Topic 606 while prior periods are not adjusted and ~~currently believes one~~continue to be reported in accordance with the Company’s historic accounting under ASC 605—Revenue Recognition (Topic 605).

Under Topic 606, changes were made to the recognition timing or classification of revenues and expenses for the following:

Advertising expenses—The adoption of Topic 606 materially impacts the timing of recognizing advertising expense related to direct response advertising, including costs associated with the Company’s Source Books. Under Topic 606, the Company will recognize expense associated with the Source Books upon the delivery of the ~~most significant impacts relates~~Source Books to ~~accounting for~~the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier. Prior to adoption of Topic 606, costs associated with Source Books were capitalized and amortized over their expected period of future benefit. Such amortization was based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual Source Book basis. Each Source Book was generally fully amortized within a twelve-month period after they were mailed and the majority of the amortization occurred within the first five to nine months, with the exception of the Holiday Source Books, which were generally fully amortized within a three-month period after they were mailed. Upon adoption of Topic 606, capitalized costs associated with Source Books of $37.8 million that had been delivered to the carrier prior to or on February 3, 2018 were reclassified to retained earnings on the consolidated balance sheets, resulting in a decrease to the opening retained earnings balance.

Gift card breakage—Under Topic 606, the Company recognizes gift card ~~breakage. Under~~breakage proportional to actual gift card redemptions and such breakage is recorded within net revenues on the ~~new standard the Company expects to recognize~~condensed consolidated statements of operations. Gift card breakage ~~which is currently~~was previously recorded as a reduction to selling, general and administrative expenses when the likelihood of redemption was remote. Upon adoption of Topic 606, gift card liabilities of $6.0 million were reclassified to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

Membership revenue—Under Topic 606, the annual fee for new memberships in the RH Members Program is recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. Prior to the adoption of Topic 606, new memberships were recorded as deferred revenue when collected from customers and recognized as revenue on a straight-line basis over the twelve month membership period. This will result in a majority of revenue being recognized during the first six months of the membership period. The adoption of Topic 606 will not have an impact on membership renewal fees, which will continue to be recognized as revenue on a straight-line basis over the twelve month membership period, until the Company has more information regarding membership renewal purchasing trends. Upon adoption of Topic 606, deferred membership revenue of $3.8 million was reclassified to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

Revenue recognition—Under Topic 606, the Company will continue to recognize revenue for merchandise delivered via the home-delivery channel upon delivery. Under Topic 606, revenue for merchandise delivered via all other delivery channels will be recognized ~~proportional~~upon shipment, whereas previously such revenue was recognized upon delivery. Upon adoption of Topic 606, deferred revenue (net of cost of goods sold) of $1.3 million was reclassified to ~~actual~~retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

The Company adopted the practical expedient related to shipping and handling activities. Under this option, in instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities will be accrued for in the same period. Costs of shipping and handling continue to be included in cost of goods sold.

Allowance for sales returns—In connection with adoption of Topic 606, the Company is required to recognize its allowance for sales returns on a gross basis rather than as a net liability. Upon adoption, this resulted in an increase to prepaid and other current assets (“right of return asset for merchandise”), with a corresponding increase to other current liabilities on the consolidated balance sheets, and did not impact the consolidated statements of operations. As of May 5, 2018, the right of return asset for merchandise was $5.3 million.

Sales tax collection from customers—Under Topic 606, the Company has not changed its policy regarding sales tax collected from customers. Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.

In connection with adoption of Topic 606, the Company recorded a $6.6 million tax adjustment associated with the charges listed above to retained earnings on the consolidated balance sheets, resulting in an increase to the opening retained earnings balance.

The Company defers revenue associated with merchandise delivered via the home-delivery channel. As the Company recognizes revenue when the merchandise is delivered to our customers, it is included as deferred revenue on the consolidated balance sheets while in-transit. Customer deposits represent payments made by customers on custom orders. At the time of order placement the Company collects deposits for all custom orders equivalent to 50% of the purchase price. Custom order deposits are recognized as revenue when a customer obtains control of the merchandise. In addition, the Company collects annual membership fees related to the RH Members Program. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year. The Company expects that substantially all of the deferred revenue, customer deposits and deferred membership fees as of May 5, 2018 will be recognized within the next six months as the performance obligations are satisfied.

In addition, the Company defers revenue when cash payments are received in advance of performance for unsatisfied obligations related to its gift cards and merchandise credits. Customer liabilities related to gift cards and merchandise credits was $17.7 million and $24.1 million as of May 5, 2018 and February 3, 2018, respectively. As discussed above, $6.0 million of the decrease was due to the reclassification of gift card ~~redemptions.~~liabilities to retained earnings upon adoption of Topic 606. During the three months ended May 5, 2018, the Company recognized $4.9 million of revenue related to previous deferrals related to its gift cards and merchandise credits and recorded gift card breakage of $0.4 million. The Company expects that approximately 70% of the remaining gift card and merchandise credit liabilities will be recognized when the gift cards are redeemed by customers.

The Company recognizes revenue from its stores and direct sales channels. Stores net revenues represent sales originating in retail stores, including Waterworks showrooms, and outlet stores. Direct net revenues include sales through the Company’s Source Books, websites, and phone orders, including its Contract business and a portion of its Trade business. During the three months ended May 5, 2018, net revenues recognized from the stores and direct sales channels were $314.5 million and $242.9 million, respectively.

The following table summarizes the impact of adopting Topic 606 on the Company’s condensed consolidated statements of operations (in thousands):

The following table summarizes the impact of adopting Topic 606 on certain line items of the Company’s condensed consolidated balance sheets (in thousands):

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 adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have an impact on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards 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 existing diversity in practice regarding the manner 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 adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18—Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statement 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. Adoption of the standard will be applied using a retrospective transition method to each period presented. The Company adopted this new accounting standard in the first quarter of fiscal 2018 which resulted in a change to the presentation of the construction related deposits within the statement of cash flows. The Company considers the construction related deposits to be “restricted cash equivalents” and therefore, under the new accounting guidance, is required to include such deposits in beginning and ending “cash and cash equivalents and restricted cash

equivalents” on the statement of cash flows. Previously, funding of the construction related deposit accounts was included within the “investing” section of the statement of cash flows and usage of the deposits was presented as a non-cash transaction. Under the new accounting guidance, funding of the construction related deposit accounts will not be presented within the statement of cash flows and the usage of the deposits will be presented within the “capital expenditures” line item under the “investing” section. Adoption of this new accounting standard resulted in an increase of the beginning and ending “cash and cash equivalents and restricted cash equivalents” amounts for the three months ended April 29, 2017 of $28.0 million and $19.2 million, respectively, as well as resulted in an increase in capital expenditures for the three months ended April 29, 2017 of $7.7 million.

In October 2016, the FASB issued Accounting Standards 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 adopted this new accounting standard in the first quarter of fiscal 2018 and such adoption did not have an impact on its consolidated financial statements.

In May 2017, the FASB issued Accounting Standards 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 for annual reporting periods beginning after December 15, 2016.~~permitted. The standard will be applied prospectively. The Company ~~will adopt Topic 606 at~~adopted this new accounting standard in the ~~commencement~~first quarter 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 has2018 and such adoption did not ~~yet selected the transition method~~have an impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update ~~2016-02~~—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 that the Company has a significant number of leases.

~~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.

~~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.

~~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.

~~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.~~

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~~):

~~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.

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.

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.

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

	July 29,		January 28,		May 5,		February 3,
	2017		2017		2018		2018
Vendor deposits					$	20,896	$	9,701
Capitalized catalog costs	$	42,595	$	61,258		15,965		44,122
Federal and state tax receivable		11,053		13,124
Vendor deposits		8,951		13,276
Right of return asset for merchandise						5,296		—
Prepaid expense and other current assets		15,080		29,504		17,907		14,762
Total prepaid expense and other current assets	$	77,679	$	117,162	$	60,064	$	68,585

	July 29,		January 28,		May 5,		February 3,
	2017		2017		2018		2018
Deferred financing fees					$	4,194	$	4,446
Construction related deposits	$	13,991	$	28,044		1,883		7,407
Other deposits		4,944		4,706		5,006		4,997
Deferred financing fees		4,683		1,530
Other non-current assets		3,479		1,889		3,837		4,482
Total other non-current assets	$	27,097	$	36,169	$	14,920	$	21,332

The following sets forth the goodwill and ~~intangible assets as of July 29, 2017~~trademarks and domain names activity for the RH Segment and Waterworks for the three months ended May 5, 2018 (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

			Foreign
	February 3,		Currency			May 5,
	2018		Translation			2018
RH Segment
Goodwill	$	124,448	$	(44	)	$	124,404
Trademarks and domain names		48,563		—			48,563

Waterworks
Goodwill ⁽¹⁾		17,445		—			17,445
Trademarks		52,100		—			52,100

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

	July 29,		January 28,		May 5,		February 3,
	2017		2017		2018		2018
Accounts payable	$	160,452	$	134,720	$	166,044	$	195,313
Accrued compensation		34,322		26,886		31,250		47,534
Accrued freight and duty		20,834		27,955		18,219		23,757
Accrued sales taxes		15,681		14,908		17,674		19,525
Accrued occupancy		11,053		8,137		9,909		8,612
Accrued catalog costs						7,037		9,000
Accrued professional fees		8,414		2,082		2,960		3,555
Accrued catalog costs		7,597		3,874
Other accrued expenses		13,484		8,418		11,080		11,469
Total accounts payable and accrued expenses	$	271,837	$	226,980	$	264,173	$	318,765

	July 29,		January 28,		May 5,		February 3,
	2017		2017		2018		2018
Allowance for sales returns					$	17,887	$	10,565
Unredeemed gift card and merchandise credit liability	$	23,916	$	24,524		17,673		24,138
Allowance for sales returns		11,790		10,077
Federal and state tax payable						13,478		5,391
Current portion of non-current debt						6,080		6,033
Product recall reserves		6,590		4,324		1,029		1,201
Other current liabilities		5,306		4,346		3,797		3,838
Total other current liabilities	$	47,602	$	43,271	$	59,944	$	51,166

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.

	July 29,		January 28,		May 5,		February 3,
	2017		2017		2018		2018
Notes payable for share repurchases	$	19,390	$	19,390	$	19,633	$	19,390
Promissory note ⁽¹⁾		12,323		—
Equipment security notes ⁽¹⁾						12,676		13,864
Promissory note ⁽²⁾						11,285		11,627
Lease loss liabilities						8,344		9,684
Capital lease obligations—non-current		7,675		7,242		7,389		7,509
Deferred contract incentive ⁽²⁾		6,548		7,739
Deferred contract incentive ⁽³⁾						4,762		5,358
Unrecognized tax benefits		2,570		2,508		3,764		3,728
Rollover units and profit interests ⁽³⁾		1,998		1,784
Rollover units and profit interests ⁽⁴⁾						2,317		2,211
Other non-current obligations		6,148		6,021		3,078		2,996
Total other non-current obligations	$	56,652	$	44,684	$	73,248	$	76,367

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,~~May 5, 2018, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of ~~July 29, 2017.~~May 5, 2018. 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~~May 5, 2018 and April 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,			May 5,			February 3,
	2017			2017			2018			2018
Liability component
Principal	$	300,000		$	300,000		$	300,000		$	300,000
Less: Debt discount		(52,258	)		(60,124	)		(39,974	)		(44,135	)
Net carrying amount	$	247,742		$	239,876		$	260,026		$	255,865
Equity component ⁽¹⁾	$	84,003		$	84,003		$	84,003		$	84,003

The Company recorded interest expense of ~~$4.0~~$4.2 million and ~~$3.7~~$3.9 million for the amortization of the debt discount related to the 2020 Notes during the three months ended ~~July~~May 5, 2018 and April 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.

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.

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,~~May 5, 2018, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of ~~July 29, 2017.~~May 5, 2018. 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 per note to be received upon conversion 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~~May 5, 2018 and April 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,			May 5,			February 3,
	2017			2017			2018			2018
Liability component
Principal	$	350,000		$	350,000		$	350,000		$	350,000
Less: Debt discount		(28,304	)		(35,457	)		(17,268	)		(20,988	)
Net carrying amount	$	321,696		$	314,543		$	332,732		$	329,012
Equity component ⁽¹⁾	$	70,482		$	70,482		$	70,482		$	70,482

The Company recorded interest expense of ~~$3.6~~$3.7 million and ~~$3.4~~$3.6 million for the amortization of the debt discount related to the 2019 Notes during the three months ended ~~July~~May 5, 2018 and April 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.

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.

The ~~following~~Company’s outstanding credit facilities were ~~outstanding~~ as ~~of July 29, 2017~~follows (in thousands):

								May 5,							February 3,
								2018							2018
	Outstanding		Unamortized Debt			Net Carrying		Outstanding		Unamortized Debt			Net Carrying		Outstanding		Unamortized Debt			Net Carrying
	Amount		Issuance Costs			Amount		Amount		Issuance Costs			Amount		Amount		Issuance Costs			Amount
Asset based credit facility	$	283,000	$	—		$	283,000	$	219,000	$	—		$	219,000	$	199,970	$	—		$	199,970
LILO term loan		80,000		(547	)		79,453		80,000		(472	)		79,528		80,000		(501	)		79,499
Second lien term loan		100,000		(3,090	)		96,910
Total credit facilities	$	463,000	$	(3,637	)	$	459,363	$	299,000	$	(472	)	$	298,528	$	279,970	$	(501	)	$	279,469

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

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

On June 12, 2018, Restoration Hardware, Inc. entered into a ~~result~~First Amendment (the “Amendment”) to credit agreement. The Amendment (i) changes the credit agreement’s definition of “Eligible In-Transit Inventory” to clarify the requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and (ii) clarifies that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory. Eligible In-Transit Inventory consists of inventory being shipped from vendor locations outside of the United States. Qualifying in-transit inventory is included within the Company’s borrowing base for eligible collateral for purposes of determining the amount of borrowing available to borrowers under 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.agreement.

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,~~May 5, 2018, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

As of ~~July 29, 2017,~~May 5, 2018, the Company had ~~$283.0~~$219.0 million in outstanding borrowings and ~~$181.1~~$138.8 million of availability under the revolving line of credit, net of ~~$13.1~~$27.8 million in outstanding letters of credit. As of ~~July 29, 2017,~~May 5, 2018, 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”~~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 iswas approximately ~~$129.4~~$92.2 million as of ~~July 29, 2017.~~May 5, 2018.

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.~~

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.

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:~~

~~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.~~

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~~):

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~~):

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.

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,				May 5,				February 3,
	2017				2017				2018				2018
	Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value ⁽¹⁾		Fair Value		Carrying Value ⁽¹⁾
Convertible senior notes due 2019	$	308,012	$	321,696	$	295,381	$	314,543	$	327,352	$	332,732	$	324,866	$	329,012
Convertible senior notes due 2020	$	244,178	$	247,742	$	232,463	$	239,876	$	261,653	$	260,026	$	261,047	$	255,865

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~~(Level 2).

The estimated fair ~~value~~values of the asset based credit facility ~~was $283.0~~and LILO term loan were $219.0 million and $80.0 million, respectively, each of which approximates cost, as of ~~July 29, 2017.~~May 5, 2018. Fair value approximates cost ~~as there were no significant movements in interest rates between~~for both the ~~borrowing date and July 29, 2017.~~

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

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~~$8.5 million and an income tax benefit of ~~$4.3~~$1.9 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~~May 5, 2018 and April 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~~23.3% and ~~(iii) net excess tax benefits from stock-based compensation resulting from~~36.2% for the ~~Company’s adoption of ASU 2016-09~~three months ended May 5, 2018 and April 29, 2017, respectively. The decrease in the ~~first quarter~~effective tax rate is primarily due to the reduction in the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018 due to the passage of the Tax Cuts and Jobs Act (the “Tax Act”).

On December 22, 2017, the Tax Act was enacted in the United States. The Company recognized the income tax effects of the Tax Act in its fiscal ~~2017.~~2017 financial statements in accordance with Staff Accounting Bulletin 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As noted in its fiscal 2017 consolidated financial statements, the Company was able to reasonably estimate certain effects and, therefore, recorded provisional amounts associated with the one-time transition tax on indefinitely reinvested foreign earnings and the adjustment to our deferred tax assets and liabilities for the reduction in the corporate income tax rate.

The Company has not made any additional measurement period adjustments related to these items during the three months ended May 5, 2018. As the Company continues its analysis of the Tax Act and interprets any additional guidance, it may make adjustments to the provisional amounts that have been recorded that may materially impact the Company's provision for income taxes.

As of ~~both July 29, 2017~~May 5, 2018 and ~~January 28, 2017, $1.4~~February 3, 2018, the Company had $8.2 million of ~~the exposures related to~~ unrecognized tax benefits, of which $6.5 million would ~~affect~~reduce income tax expense and the effective tax rate, if ~~realized and are included in~~recognized. The remaining unrecognized tax benefits would offset other ~~non-current obligations on the condensed consolidated balance sheets.~~deferred tax assets, if recognized. As of ~~July 29, 2017,~~May 5, 2018, the Company ~~does not have any~~had $0.4 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

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~~April 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				Three Months Ended
	July 29,		July 30,		July 29,		July 30,		May 5,		April 29,
	2017		2016		2017		2016		2018		2017
Weighted-average shares—basic		28,398,307		40,646,124		35,667,217		40,617,102		21,545,025		37,609,516
Effect of dilutive stock-based awards		—		174,371		—		—		3,685,203		—
Effect of dilutive convertible senior notes⁽¹⁾										—		—
Weighted-average shares—diluted		28,398,307		40,820,495		35,667,217		40,617,102		25,230,228		37,609,516

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				Three Months Ended
	July 29,		July 30,		July 29,		July 30,		May 5,		April 29,
	2017		2016		2017		2016		2018		2017
Options		8,997,210		7,498,345		8,997,210		8,782,871		486,516		8,221,249
Restricted stock units		838,377		1,011,902		838,377		1,182,588		10,500		1,029,740
Total anti-dilutive stock-based awards		9,835,587		8,510,247		9,835,587		9,965,459		497,016		9,250,989

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.

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~~there will be ~~repurchased~~no repurchases in future periods under this ~~program.~~repurchase authorization.

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~~May 5, 2018 and ~~January 28, 2017,~~February 3, 2018, the aggregate unpaid principal amount of the notes payable for share repurchases was $19.6 million and $19.4 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets. During both the three months ended ~~July~~May 5, 2018 and April 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~~$0.2 million.

Of the $19.6 million and $19.4 million notes payable for share repurchases outstanding as of ~~both July 29, 2017~~May 5, 2018 and ~~January 28, 2017,~~February 3, 2018, respectively, $15.5 million was due to a current board member of the Company.

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~~$8.0 million and ~~$10.3~~$5.3 million during the three months ended ~~July~~May 5, 2018 and April 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.

As of ~~July 29, 2017, 8,997,210~~May 5, 2018, 8,564,739 options were outstanding with a weighted-average exercise price of ~~$49.81~~$50.66 per share and ~~6,461,464~~6,295,895 options were vested with a weighted-average exercise price of ~~$51.31~~$51.95 per share. The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of ~~July 29, 2017~~May 5, 2018 was ~~$196.4~~$429.8 million, ~~$168.9~~$388.2 million, and ~~$113.0~~$307.0 million, respectively. Stock options exercisable as of ~~July 29, 2017~~May 5, 2018 had a weighted-average remaining contractual life of ~~6.62~~5.90 years. As of ~~July 29, 2017,~~May 5, 2018, the total unrecognized compensation expense related to unvested options was ~~$28.0~~$23.4 million, which is expected to be recognized on a straight-line basis over a weighted-average period of ~~3.53~~2.86 years.

As of ~~July 29, 2017,~~May 5, 2018, the Company had ~~838,377~~768,463 restricted stock units outstanding with a weighted-average grant date fair value of ~~$52.84~~$52.81 per share. During the three months ended ~~July 29, 2017, 232,534~~May 5, 2018, 30,615 restricted stock units vested with a weighted-average grant date and vest date fair value of ~~$57.38~~$52.36 per share and ~~$53.71~~$97.09 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,~~May 5, 2018, there was ~~$23.9~~$18.9 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~~2.81 years.

~~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.

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.

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.

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.

In connection with the acquisition of Waterworks in May 2016, $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~~May 5, 2018 or April 29, ~~2017 or July 30, 2016.~~2017. As of both ~~July 29, 2017~~

May 5, 2018 and ~~January 28, 2017,~~February 3, 2018, 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.

In connection with the acquisition of Waterworks in May 2016, 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 both the three ~~and six~~ months ended ~~July~~May 5, 2018 and April 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~~May 5, 2018 and ~~January 28, 2017,~~February 3, 2018, the liability associated with the Profit Interests was ~~$0.5~~$0.8 million and ~~$0.3~~$0.7 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

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.

The Company had no material off balance sheet commitments as of ~~July 29, 2017.~~May 5, 2018.

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.

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~~An amended consolidated complaint was filed in ~~connection with alleged misstatements~~June 2017 asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as ~~amended. Both complaints purport to make~~amended (the “Exchange Act”). The complaint asserts claims purportedly 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~~line and the ~~Company~~Company’s inventory levels. The complaint seeks class certification, monetary damages, and ~~its officers have moved~~

other appropriate relief, including an award of costs and attorneys’ fees. On February 26, 2018, the Court filed an order denying the Company’s motion 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~~complaint lacks merit.

On April 24, 2018, purported Company shareholder David Magnani filed a purported shareholder derivative suit in the United States District Court, Northern District of California, captioned Magnani v. Friedman et al. (No. 18-cv-02452). The suit names the Company as nominal defendant and certain current and former directors and officers as individual defendants. The allegations in the complaint substantially track those in the securities class action described above. The plaintiff brings claims against all individual

defendants under Section 14(a) of the Exchange Act, as well as claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets. The complaint also includes insider trading and misappropriation of information claims against two of the individual defendants. The complaint seeks monetary damages, corporate governance changes, restitution, and an award of costs and attorneys’ fees. The Company believes that the plaintiff lacks standing to bring this derivative action.

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,~~May 5, 2018, 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 (loss) 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.

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—~~(in~~Segment Reporting (in thousands):

	Six Months Ended						Six Months Ended						Three Months Ended
	July 29,						July 30,						May 5,						April 29,
	2017						2016						2018						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,117,321	$	60,085	$	1,177,406	$	978,074	$	20,763	$	998,837	$	526,007	$	31,399	$	557,406	$	533,528	$	28,552	$	562,080
Gross profit	$	352,623	$	23,446	$	376,069	$	301,278	$	6,036	$	307,314		199,035		13,000		212,035		159,627		10,629		170,256
Depreciation and amortization	$	30,287	$	2,259	$	32,546	$	25,518	$	694	$	26,212		15,935		1,112		17,047		14,901		1,119		16,020

The following table presents the balance sheet metrics ~~reviewed by the CODM to evaluate performance internally~~ as required under ASC 280—~~(in~~Segment Reporting (in thousands):

	July 29,						January 28,						May 5,						February 3,
	2017						2017						2018						2018
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill ⁽¹⁾	$	124,448	$	51,144	$	175,592	$	124,374	$	49,229	$	173,603	$	124,404	$	17,445	$	141,849	$	124,448	$	17,445	$	141,893
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624		48,563		52,100		100,663		48,563		52,100		100,663
Total assets	$	1,665,328	$	154,081	$	1,819,409	$	2,040,346	$	152,174	$	2,192,520		1,621,817		127,144		1,748,961		1,608,290		124,576		1,732,866

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~~ legal expenses incurred in connection with the ~~acquisition~~final purchase price 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~~(iii) the lease loss liability adjustment associated with ~~a reorganization, which include severance costs~~the Dallas distribution center closure 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.(iv) product recall adjustments. 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~~presents segment operating income (loss) and income (loss) before tax (in thousands):

	Three Months Ended						Six Months Ended						Three Months Ended
	July 29,			July 30,			July 29,			July 30,			May 5,			April 29,
	2017			2016			2017			2016			2018			2017
Operating income (loss):
RH Segment	$	39,550		$	32,317		$	49,608		$	33,027		$	53,896		$	10,058
Waterworks		358			858			(1,424	)		858			(516	)		(1,782	)
Non-cash compensation		(23,872	)		(3,672	)		(23,872	)		(3,672	)
Distribution center closures														2,072			—
Recall accrual		(4,733	)		—			(4,733	)		—			254			—
Post-acquisition related legal costs														(1,915	)		—
Impact of inventory step-up		(480	)		(3,401	)		(1,860	)		(3,401	)		(190	)		(1,380	)
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			53,601			6,896
Interest expense—net		14,402			10,909			26,581			21,437			17,035			12,179
Income (loss) before tax	$	(2,279	)	$	11,106		$	(7,562	)	$	(10,897	)	$	36,566		$	(5,283	)

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				Three Months Ended
	July 29,		July 30,		July 29,		July 30,		May 5,		April 29,
	2017		2016		2017		2016		2018		2017
Furniture	$	388,983	$	351,267	$	741,939	$	641,693	$	352,646	$	352,956
Non-furniture		226,343		192,114		435,467		357,144		204,760		209,124
Total net revenues	$	615,326	$	543,381	$	1,177,406	$	998,837	$	557,406	$	562,080

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,~~May 5, 2018, the Company operates 54 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~~Canada and U.K. geographic revenues are ~~determined~~ based upon ~~where service is rendered.~~revenues recognized at the retail store locations in the respective country.

No single customer accounted for more than 10% of the Company’s revenues in the three ~~and six~~ months ended ~~July~~May 5, 2018 or April 29, ~~2017 or July 30, 2016.~~

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.2017.

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~~2017 Form 10-K.

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,~~ February 3, 2018 (“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~~2017 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.

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,~~May 5, 2018, we operated a total of 8584 retail Galleries, consisting of 5017 Design Galleries, 46 legacy Galleries, ~~6 larger format Design Galleries, 8 next generation Design Galleries, 1~~2 RH Modern ~~Gallery~~Galleries and 54 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,~~May 5, 2018, we operated 2832 outlet stores throughout the United States and Canada.

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

InNew Design Gallery sites are identified based on a variety of factors, including timing of legacy Gallery lease expiration, availability of suitable new site locations based on several store specific aspects including geographic location, demographics, and proximity to affluent consumers, and 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. Based on our analysis, we believe we have the opportunity to operate Design Galleries in 60 to 70 locations in the United States and Canada. The increased cadence should support an increase in the

rate of our long-term revenue growth as new Design Gallery openings are one of the key drivers of our long-term revenue growth. The number of Design Galleries we open in any fiscal ~~2016, we experienced a slowdown~~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.

We opened our Portland Design Gallery in ~~sales~~March 2018. We expect to open two more Design Galleries in Nashville and ~~substantially lower level of profits than~~New York in ~~prior periods.~~ fiscal 2018, as well as one smaller Gallery in Yountville, California in the Napa Valley, all with integrated cafés, wine vaults and barista bars.

We have ~~undertaken initiatives~~identified key learnings from our real estate transformation that have supported the development of our new prototype Design Gallery that will enable us to ~~specifically address the temporal factors affecting~~accelerate our ~~results~~new store opening cadence beginning in fiscal ~~2016,~~2019. The new prototype will range in ~~addition~~size from 33,000 square feet inclusive of our integrated hospitality experience to 29,000 square feet without the integrated hospitality experience, and will represent our assortments from RH Interiors, RH Modern, RH Baby & Child, RH TEEN and RH Outdoor. Due to the reduced square footage and efficient design, we believe these new Galleries will be more capital efficient and should have lower risk in the real estate development process both with respect to costs and time required for completion, but yield similar productivity. We anticipate these Galleries will represent approximately two thirds of our target markets and enable us to ramp up from three to five new Galleries per year to a pace of five to seven new Galleries per year beginning in fiscal 2019.

We will continue to develop and open larger Bespoke Design Galleries in the top metropolitan markets, and indigenous Bespoke Galleries in the best second home markets where the wealthy and affluent visit and vacation. Examples include the Hamptons, Aspen, Palm Beach and the Napa Valley, among others.

We also believe there is an opportunity to transition our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries then recoup the investments through a sale leaseback arrangement resulting in lower capital investment and lower rent. We currently have two projects, RH Yountville, California, and Edina, Minnesota, under construction using this new model and have an additional five projects in the development process.

During fiscal 2017 and fiscal 2018 we have deferred the introduction of major new product category expansions other ~~numerous initiatives~~than the ongoing development of RH Hospitality in conjunction with new Design Galleries. We plan a return to our product and business expansion strategy in fiscal 2019, which has been on hold as we ~~are undertaking~~focus on the architecture of a new operating platform and our move to ~~improve~~a membership model.

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.~~

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 capitalbusiness. The above factors and other ~~items. After the transaction,~~current and ~~giving effect to equity interests acquired by management in the business, we own in excess of 90%~~future operational initiatives 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.~~

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

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

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.near term.

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

	Three Months Ended						Six Months Ended						Three Months Ended
	July 29,			July 30,			July 29,			July 30,			May 5,			April 29,
	2017			2016			2017			2016			2018			2017
	(dollars in thousands)												(dollars in thousands)
Condensed Consolidated Statements of Operations:
Net revenues	$	615,326		$	543,381		$	1,177,406		$	998,837		$	557,406		$	562,080
Cost of goods sold		409,513			363,542			801,337			691,523			345,371			391,824
Gross profit		205,813			179,839			376,069			307,314			212,035			170,256
Selling, general and administrative expenses		193,690			157,824			357,050			296,774			158,434			163,360
Income from operations		12,123			22,015			19,019			10,540			53,601			6,896
Interest expense—net		14,402			10,909			26,581			21,437			17,035			12,179
Income (loss) before income taxes		(2,279	)		11,106			(7,562	)		(10,897	)		36,566			(5,283	)
Income tax expense (benefit)		5,583			4,188			3,670			(4,345	)		8,507			(1,913	)
Net income (loss)	$	(7,862	)	$	6,918		$	(11,232	)	$	(6,552	)	$	28,059		$	(3,370	)
Other Financial and Operating Data:
Net revenues:
Stores⁽¹⁾	$	350,174		$	309,786		$	666,898		$	565,862		$	314,517		$	316,724
Direct	$	265,152		$	233,595		$	510,508		$	432,975		$	242,889		$	245,356
Direct as a percentage of net revenues ⁽²⁾		43	%		43	%		43	%		43	%		44	%		44	%
Growth in net revenues:
Stores ⁽¹⁾		13	%		15	%		18	%		17	%		(1	)%		24	%
Direct		14	%		-2	%		18	%		-3	%		(1	)%		23	%
Total		13	%		7	%		18	%		7	%		(1	)%		23	%
Comparable brand revenue growth⁽³⁾		7	%		-3	%		8	%	-%				1	%		9	%
Adjusted net income ⁽⁴⁾													$	33,454		$	1,794
Adjusted EBITDA ⁽⁵⁾													$	78,424		$	29,585
Capital expenditures	$	25,906		$	25,723		$	39,362		$	70,999		$	27,121		$	21,173
Construction related deposits ⁽⁴⁾	$	5,285		$	110		$	5,285		$	3,661
Adjusted net income ⁽⁵⁾	$	19,701		$	17,908		$	21,495		$	15,842

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

	Three Months Ended
	May 5,			April 29,
	2018			2017
	(in thousands)
Net income (loss)	$	28,059		$	(3,370	)
Adjustments pre-tax:
Amortization of debt discount^(a)		7,272			6,715
Post-acquisition related legal costs ^(b)		1,915			—
Impact of inventory step-up^(c)		190			1,380
Distribution center closures^(d)		(2,072	)		—
Recall accrual ^(e)		(254	)		—
Subtotal adjusted items		7,051			8,095
Impact of income tax items ^(f)		(1,656	)		(2,931	)
Adjusted net income	$	33,454		$	1,794

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										Three Months Ended
	July 29,						July 30,				May 5,						April 29,
	2017						2016				2018						2017
	Store Count			Total Leased Selling Square Footage⁽¹⁾			Store Count		Total Leased Selling Square Footage⁽¹⁾		Store Count			Total Leased Selling Square Footage⁽¹⁾			Store Count		Total Leased Selling Square Footage⁽¹⁾
				(in thousands)					(in thousands)					(in thousands)					(in thousands)
Beginning of period		85			912			69		725		83			981			85		912
Waterworks Showrooms acquired	—			—				15		51.0
Retail Galleries opened:
Waterworks Boston Showroom		1			5.0		—		—
Portland Design Gallery												1			26.0		—		—
RH Modern Dallas												1			8.2		—		—
Waterworks Scottsdale Showroom												1			2.2		—		—
Retail Galleries closed:
Waterworks Boston Showroom		(1	)		(2.1	)	—		—
Portland legacy Gallery												(1	)		(4.7	)	—		—
Waterworks Scottsdale Showroom												(1	)		(1.1	)	—		—
End of period		85			915			84		776		84			1,012			85		912

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

	Three Months Ended						Six Months Ended						Three Months Ended
	July 29,			July 30,			July 29,			July 30,			May 5,			April 29,
	2017			2016			2017			2016			2018			2017
Condensed Consolidated Statements of Operations:
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		66.6			66.9			68.1			69.2			62.0			69.7
Gross profit		33.4			33.1			31.9			30.8			38.0			30.3
Selling, general and administrative expenses		31.4			29.0			30.3			29.7			28.4			29.1
Income from operations		2.0			4.1			1.6			1.1			9.6			1.2
Interest expense—net		2.4			2.1			2.2			2.2			3.1			2.1
Income (loss) before income taxes		(0.4	)		2.0			(0.6	)		(1.1	)		6.5			(0.9	)
Income tax expense (benefit)		0.9			0.7			0.4			(0.4	)		1.5			(0.3	)
Net income (loss)		(1.3	%)		1.3	%		(1.0	%)		(0.7	%)		5.0	%		(0.6	)%

Three Months Ended ~~July 29, 2017~~May 5, 2018 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 JulyApril 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							Three Months Ended
	July 29,							July 30,							May 5,							April 29,
	2017							2016							2018							2017
	RH Segment		Waterworks⁽¹⁾			Total		RH Segment		Waterworks⁽¹⁾			Total		RH Segment		Waterworks⁽¹⁾			Total		RH Segment		Waterworks⁽¹⁾			Total
	(in thousands)														(in thousands)
Net revenues	$	583,793	$	31,533		$	615,326	$	522,618	$	20,763		$	543,381	$	526,007	$	31,399		$	557,406	$	533,528	$	28,552		$	562,080
Cost of goods sold		390,797		18,716			409,513		348,815		14,727			363,542		326,972		18,399			345,371		373,901		17,923			391,824
Gross profit		192,996		12,817			205,813		173,803		6,036			179,839		199,035		13,000			212,035		159,627		10,629			170,256
Selling, general and administrative expenses		180,751		12,939			193,690		145,573		12,251			157,824		144,728		13,706			158,434		149,569		13,791			163,360
Income (loss) from operations	$	12,245	$	(122	)	$	12,123	$	28,230	$	(6,215	)	$	22,015	$	54,307	$	(706	)	$	53,601	$	10,058	$	(3,162	)	$	6,896

Consolidated net revenues ~~increased $71.9~~decreased $4.7 million, or ~~13.2%~~0.8%, to ~~$615.3~~$557.4 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$543.4~~$562.1 million in the three months ended ~~July 30, 2016.~~April 29, 2017. Stores net revenues ~~increased $40.4~~decreased $2.2 million, or ~~13.0%~~0.7%, to ~~$350.2~~$314.5 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$309.8~~$316.7 million in the three months ended ~~July 30, 2016.~~April 29, 2017. Direct net revenues ~~increased $31.6~~decreased $2.5 million, or ~~13.5%~~1.0%, to ~~$265.2~~$242.9 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$233.6~~$245.4 million in the three months ended ~~July 30, 2016.~~April 29, 2017. Comparable brand revenue was 7%1% for the three months ended ~~July 29, 2017.~~May 5, 2018.

RH Segment net revenues ~~increased $61.2~~decreased $7.5 million, or ~~11.7%~~1.4%, to ~~$583.8~~$526.0 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$522.6~~$533.5 million in the three months ended ~~July 30, 2016.~~April 29, 2017. The below discussion highlights several significant factors that resulted in decreased RH Segment net revenues, which are listed in order of magnitude.

~~A number of factors contributed~~RH Segment core net revenues decreased due to additional discounts offered on discontinued merchandise related to the ~~increase in RH Segment net revenues~~optimization of our inventory and SKU rationalization 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 secondfirst quarter of fiscal 2017 ~~whereas~~that did not repeat in the ~~second~~first quarter of fiscal ~~2016 did not benefit from a similarly timed mailing.~~2018. The overall decrease in RH Segment core net revenues was partially offset by an increase in retail weighted-average leased selling square footage related to new store openings in West Palm Beach, Toronto and Portland.

Outlet sales, which include sales via warehouse locations, ~~increased $16.0 million~~decreased in the three months ended ~~July 29, 2017~~May 5, 2018 compared to the three months ended ~~July 30, 2016, representing 2.9% of growth in RH Segment net revenues. Increased outlet sales occurred~~April 29, 2017 primarily as a result of our inventory optimization efforts during the first quarter of fiscal 2017 as we increased our outlet promotional activity and ~~had~~offered higher

discounts. Similar promotions and discounts ~~including through warehouse sales,~~were not offered in the first quarter of fiscal 2018. We increased the number of outlet locations, adding four new locations from the prior period and ~~we increased~~increasing outlet selling square footage by approximately ~~43%~~28% compared to the prior period. ~~Additionally,~~

We had increases in net revenues during the ~~increase in our retail weighted-average leased selling square footage contributed~~first quarter of fiscal 2018 as compared 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~~first quarter of fiscal 2017 associated with our Contract business, Membership revenue 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.Hospitality operations.

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~~$2.8 million, or ~~51.9%~~10.0%, to ~~$31.5~~$31.4 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$20.8~~$28.6 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~~April 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.~~2017.

Consolidated gross profit increased ~~$26.0~~$41.8 million, or ~~14.4%~~24.5%, to ~~$205.8~~$212.0 million in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~$179.8~~$170.3 million in the three months ended ~~July 30, 2016.~~April 29, 2017. As a percentage of net revenues, consolidated gross margin increased ~~0.3%~~7.7% to ~~33.4%~~38.0% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~33.1%~~30.3% of net revenues in the three months ended ~~July 30, 2016.~~April 29, 2017.

RH Segment gross profit for the three months ended ~~July 29, 2017~~May 5, 2018 was ~~negatively~~positively impacted by ~~$4.6~~$0.3 million related to ~~the reduction of revenue and incremental costs~~an adjustment associated with product ~~recalls, as described above.~~recalls. Waterworks gross profit for the three months ended ~~July~~May 5, 2018 and April 29, 2017 ~~and July 30, 2016~~ was negatively impacted by $~~0.5~~0.2 million and ~~$3.4~~$1.4 million, respectively, of amortization related to the inventory fair value adjustment recorded in connection with the acquisition.

Excluding the product ~~recalls~~recall adjustment and the impact of the amortization related to the inventory fair value adjustment mentioned above, consolidated gross margin would have increased ~~0.4%~~7.5% to ~~34.1%~~38.0% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~33.7%~~30.5% of net revenues in the three months ended ~~July 30, 2016.~~April 29, 2017.

RH Segment gross profit increased ~~$19.2~~$39.4 million, or ~~11.0%~~24.7%, to ~~$193.0~~$199.0 million in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~$173.8~~$159.6 million in the three months ended ~~July 30, 2016.~~April 29, 2017. As a percentage of net revenues, RH Segment gross margin ~~decreased 0.2%~~increased 7.9% to ~~33.1%~~37.8% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~33.3%~~29.9% of net revenues in the three months ended ~~July 30, 2016.~~April 29, 2017.

Excluding the product ~~recalls~~recall adjustment mentioned above, RH Segment gross margin would have increased ~~0.3%~~7.9% to ~~33.6%~~37.8% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~33.3%~~29.9% of net revenues in the three months ended ~~July 30, 2016.~~April 29, 2017. 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~~higher product margins ~~was~~ due to higher outlet and warehouse sales driven by increased promotions and higher ~~discounts. This decrease was partially offset by~~discounts during the first quarter of fiscal 2017 versus fiscal 2018, improvements in our core merchandise margins as our SKU rationalization efforts had a reduced impact on our margins this year compared to last year, as well as leverage in our occupancy costs related to distribution center network redesign. In addition, we realized leverage in total shipping expense due to the initiatives implemented in fiscal 2017 to redesign our Outlet and ~~an increase~~reverse logistics business, which were partially offset by higher expenses related to cost increases in ~~Membership revenue recognized.~~the transportation industry.

Waterworks gross profit increased ~~$6.8~~$2.4 million, or ~~112.3%~~22.3%, to ~~$12.8~~$13.0 million in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~$6.0~~$10.6 million in the three months ended ~~July 30, 2016. The increase in Waterworks gross profit is primarily due to the three months ended July~~April 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.~~

2017. As a percentage of net revenues, Waterworks gross margin increased ~~11.5%~~4.2% to ~~40.6%~~41.4% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~29.1%~~37.2% of net revenues in the three months ended ~~July 30, 2016.~~April 29, 2017.

Excluding the impact of the amortization related to the inventory fair value adjustment mentioned above, Waterworks gross margin would have decreased ~~3.3%~~0.1% to ~~42.2%~~42.0% of net revenues in the three months ended ~~July 29, 2017~~May 5, 2018 from ~~45.5%~~42.1% 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.~~April 29, 2017.

Consolidated selling, general and administrative expenses ~~increased $35.9~~decreased $4.9 million, or ~~22.7%~~3.0%, to ~~$193.7~~$158.4 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$157.8~~$163.4 million in the three months ended ~~July 30, 2016.~~April 29, 2017.

RH Segment selling, general and administrative expenses ~~increased $35.2~~decreased $4.8 million, or ~~24.2%~~3.2%, to ~~$180.8~~$144.7 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared ~~$145.6~~$149.6 million in the three months ended ~~July 30, 2016.~~April 29, 2017.

RH Segment selling, general and administrative expenses for the three months ended ~~July 29,~~May 5, 2018 included a $2.0 million lease loss liability reversal associated with the Dallas distribution center closure completed in fiscal 2017 ~~included $23.9~~and $1.9 million ~~related to a fully vested option grant made to Mr. Friedman in May 2017, $0.2 million incremental~~of 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 andlegal expenses incurred ~~as a result~~in connection with the final purchase price of ~~the Waterworks transaction~~.Waterworks.

Advertising and marketing costs ~~increased $8.2~~decreased $12.5 million during the three months ended ~~July 29, 2017~~May 5, 2018 as compared to ~~July 30, 2016, primarily~~April 29, 2017, due to the adoption of Topic 606 in the first quarter of fiscal 2018 as well as the timing of our ~~Source Book mailings. In the second quarter of fiscal 2017 we amortized~~spring website launch. The decrease in advertising and marketing costs was partially offset by increases in employment and employment 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%~~27.5% and ~~27.1%~~28.0% of net revenues for the three months ended ~~July~~May 5, 2018 and April 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~~adjustments related to the ~~sale of building and land, the reorganization costs,~~distribution center closure lease loss liability and the ~~charges and~~legal expenses incurred ~~as a result~~in connection with the final purchase price 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~~a decrease in advertising and marketing costs primarily due to the adoption of Topic 606, partially offset by deleverage 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 ~~increased $0.7~~decreased $0.1 million, or ~~5.6%~~0.6%, to ~~$12.9~~$13.7 million in the three months ended ~~July 29, 2017~~May 5, 2018 compared ~~$12.3~~to $13.8 million in the three months ended ~~July 30, 2016.~~

~~The increase in~~April 29, 2017. Waterworks selling, general and administrative expenses ~~is primarily due to~~were 43.7% and 48.3% of net revenues for the three months ended ~~July~~May 5, 2018 and April 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.respectively.

E~~xcluding 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.~~

Interest expense increased ~~$3.5~~$4.8 million to ~~$14.4~~$17.0 million for the three months ended ~~July 29, 2017~~May 5, 2018 compared to ~~$10.9~~$12.2 million for the three months ended ~~July 30, 2016.~~April 29, 2017. Interest expense consisted of the following:

	Three Months Ended						Three Months Ended
	July 29,			July 30,			May 5,			April 29,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Amortization of convertible senior notes debt discount	$	7,561		$	7,155		$	7,881		$	7,457
Build-to-suit lease transactions		4,074			3,263			4,668			4,153
Amortization of debt issuance costs and deferred financing fees		1,290			628
Asset based credit facility		996			444			2,811			431
Term loans		824			—			1,004			—
Amortization of debt issuance costs and deferred financing fees								787			647
Other interest expense		591			821			946			547
Capitalized interest for capital projects		(839	)		(677	)		(900	)		(742	)
Interest income		(95	)		(725	)		(162	)		(314	)
Total interest expense—net	$	14,402		$	10,909		$	17,035		$	12,179

Income tax expense was ~~$5.6~~$8.5 million in the three months May 5, 2018 and ~~$4.2~~a benefit of $1.9 million in the three months ended ~~July~~April 29, ~~2017 and July 30, 2016, respectively.~~2017. Our effective tax rate was ~~-245.0%~~23.3% and ~~37.7%~~36.2% for the three months ended ~~July~~May 5, 2018 and April 29, 2017, ~~and July 30, 2016,~~ respectively. The decrease in 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.

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.

~~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.

~~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.

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.~~

~~Consolidated gross profit increased $68.8 million, or 22.4%,~~U.S. corporate income tax rate from 35% 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 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

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 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 primarily21% effective January 1, 2018 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 impactpassage 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.Tax Cuts and Jobs Act. The ~~decrease in gross margin is primarily due to deleverage in occupancy costs, as well as changes in product mix.~~

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 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

~~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 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.

E~~xcluding 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 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:

~~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~~also favorably impacted by ~~(i) non-deductible stock-based compensation, (ii) our reporting a net loss before income taxes and (iii)~~$1.0 million of discrete tax benefits related to net excess tax ~~benefits~~windfalls from stock-based ~~compensation resulting from the Company’s adoption of ASU 2016-09 in the first quarter of fiscal 2017.~~compensation.

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. WeIn fiscal 2017, we completed ~~our first~~two share repurchase ~~program~~programs in an aggregate amount of $1 billion. A $300 million share repurchase was completed during the first ~~fiscal~~ quarter of fiscal 2017 and ~~completed our second~~a $700 million share repurchase ~~program in an amount of $700 million~~was completed during the second ~~fiscal~~ quarter of fiscal 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 where 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 outstanding, of which $350 million mature in June 2019 and $300 million mature in June ~~2020, and~~2020. While we anticipate using free cash flow to repay the convertible notes in cash to minimize dilution, 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

available through additional debt issuances or refinancing of the convertible notes, that such capital will be available on terms that are favorable to us. Based on anticipated strong cash flow generation in 2018 and beyond, we expect to repay the outstanding principal of our $650 million convertible notes at maturity in June 2019 and June 2020 in cash to minimize dilution. We believe the strength of our business and the reduction in leverage we have achieved during the past three quarters puts us in a strong position to take advantage of the positive conditions in the capital markets. We believe we have multiple financing alternatives available to us on favorable terms that could provide us with additional financial flexibility with respect to capital allocation.

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~~loan 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.

At May 5, 2018, we had approximately $928.7 million of net debt, excluding financing obligations under build-to-suit lease transactions, compared to approximately $1,052.2 million of net debt, excluding financing obligations under build-to-suit lease transactions, as of July 29, 2017. Over the last three quarters, we have substantially reduced our net debt to trailing twelve months Adjusted EBITDA from 5x at the end the second quarter fiscal 2017 to 3x at the end of the first quarter fiscal 2018. A reconciliation of our net income to EBITDA and Adjusted EBITDA is as follows:

	Trailing Twelve Months
	May 5,			July 29,
	2018			2017
	(in thousands)
Net income	$	33,609		$	721
Depreciation and amortization		71,162			63,606
Interest expense—net		67,426			49,626
Goodwill impairment^(a)		33,700			—
Loss on extinguishment of debt^(b)		4,880			—
Income tax expense		38,391			11,168
EBITDA^(m)		249,168			125,121
Non-cash compensation^(c)		53,417			51,296
Recall accrual ^(d)		7,453			9,348
Asset impairment and lease losses ^(e)		4,417			12,743
Distribution center closures^(f)		3,723			—
Post-acquisition related legal costs ^(g)		1,915			—
Impact of inventory step-up^(h)		1,337			5,294
Anti-dumping exposure⁽ⁱ⁾		(2,202	)		—
Gain on sale of building and land^(j)		(2,119	)		(1,300	)
Aircraft impairment ^(k)		—			4,767
Reorganization related costs ^(l)		—			974
Adjusted EBITDA ^(m)	$	317,109		$	208,243

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 an 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 iswas located, which was classified as an 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 Design 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~~$125 million to ~~$140~~$135 million ~~for~~in fiscal ~~2017. Our~~2018, primarily related to our efforts to continue our growth and expansion, including construction of new Design Galleries and infrastructure investments. We anticipate that our fiscal ~~2017~~2018 capital expenditures will be partially offset by ~~cash flows~~proceeds from ~~operating activities. Our efforts to optimize inventory and reduce~~sales of assets of approximately $50 million. During the three months ended May 5, 2018, our investments in 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.~~expenditures totaled $27.1 million.

The majority of the current lease arrangements for our new Design 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.~~2018. As we develop new Galleries, as well as ~~potentially~~ other potential strategic initiatives in the future like our integrated hospitality ~~experience;~~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. We also believe there is an opportunity to transition our real estate strategy from a leasing model to a development model, where we potentially buy and develop our Design Galleries then recoup the investments through a sale leaseback arrangement resulting in lower capital investment and lower rent. 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~~term loan at the maturity ~~dates~~date of such term ~~loans.~~loan. In addition, agreements

governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments including the repayment of the principal amount of our convertible senior notes in cash 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.

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

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 three months ended May 5, 2018, net cash provided by operating activities was $7.8 million and consisted of non-cash items of $32.9 million and net income of $28.1 million, partially offset by a decrease in cash used for working capital and other activities of $53.2 million. Working capital and other activities consisted primarily of decreases in accounts payable and accrued expense of $57.2 million related to timing of payments, increases in prepaid expenses and other current assets of $26.2 million primarily due to vendor deposits and capitalized catalog costs, as well as increases in accounts receivable of $7.2 million. These decreases to working capital were partially offset by increases in deferred revenue and customer deposits of $28.2 million and increases in other current liabilities of $13.8 million.

For the ~~six~~three months ended ~~July~~April 29, 2017, net cash provided by operating activities was ~~$316.4~~$123.9 million and consisted of a decrease in uses of working capital and other activities of ~~$239.7~~$96.3 million and non-cash items of ~~$87.9~~$31.0 million, offset by net loss of ~~$11.2~~$3.4 million. Working capital and other activities consisted primarily of decreases in inventory of ~~$140.3~~$66.1 million due to lower inventory receipts and higher sales, including through our outlet and warehouse sales channels, in part as a result of our SKU rationalization initiative and our outlet inventory optimization efforts, increases in deferred revenue and ~~revised DC network strategy. We also had~~customer deposits of $22.2 million and 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$7.5 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.

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.

For the ~~six~~three months ended ~~July~~May 5, 2018, net cash used in investing activities was $27.1 million due to investments in new Galleries, information technology and systems infrastructure, and supply chain investments.

For the three months ended April 29, 2017, net cash provided by investing activities was ~~$146.2~~$159.5 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.~~million. 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.$21.2 million.

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

For the ~~six~~three months ended ~~July~~May 5, 2018, net cash provided by financing activities was $16.8 million primarily due to net borrowings under the asset based credit facility of $19.0 million and proceeds from exercise of employee stock options of $2.9 million. The cash provided by these financing activities was partially offset by $3.2 million of payments on build-to-suit lease transactions.

For the three months ended April 29, 2017, net cash used in financing activities was ~~$528.1~~$299.1 million primarily due to ~~$1.0 billion~~$300 million 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 consist of non-cash additions of property and ~~equipment.~~equipment and the issuance of notes payable related to share repurchases from former employees.

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.

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

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,~~May 5, 2018, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of ~~July 29, 2017.~~May 5, 2018. 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.

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

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 (deficit), 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.

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,~~May 5, 2018, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of ~~July 29, 2017.~~May 5, 2018. 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.

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.

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.

On June 12, 2018, Restoration Hardware, Inc. entered into a First Amendment (the “Amendment”) to the credit agreement. The Amendment (i) changes the credit agreement’s definition of “Eligible In-Transit Inventory” to clarify the requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and (ii) clarifies that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory. Eligible In-Transit Inventory consists of inventory being

shipped from vendor locations outside of the United States. Qualifying in-transit inventory is included within the borrowing base for eligible collateral for purposes of determining the amount of borrowing available to borrowers under the credit agreement.

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.

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~~In addition, under our credit agreement, ~~does not contain any significant~~we are required to meet specified financial ratios in order to undertake certain actions, and we may be required to maintain certain levels of excess availability or meet a specified consolidated fixed-charge coverage ratio ~~covenants unless~~(“FCCR”). The trigger for the FCCR occurs if 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)

the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing ~~base .~~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”)~~an 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,~~May 5, 2018, Restoration Hardware, Inc. was in compliance with all applicable covenants of the credit agreement.

The credit agreement requires a daily sweep of all cash receipts and collections 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,~~May 5, 2018, Restoration Hardware, Inc. had ~~$283.0~~$219.0 million in outstanding borrowings and ~~$181.1~~$138.8 million of availability under the revolving line of credit, net of ~~$13.1~~$27.8 million in outstanding letters of credit. As of ~~July 29, 2017,~~May 5, 2018, 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.~~

~~On July 7, 2017, Restoration Hardware, Inc., a wholly-owned subsidiary of RH, entered into a credit agreement (the “second lien credit agreement”), dated~~$92.2 million as of ~~July 7,~~May 5, 2018.

During fiscal 2017, ~~among Restoration Hardware, Inc.,~~we repurchased approximately 20.2 million shares of our common stock under two separate repurchase programs for an aggregate repurchase amount of approximately $1 billion, which represented 49.5% of the shares outstanding as ~~lead borrower,~~of the ~~guarantors party thereto,~~end of fiscal 2016. We generated $412 million in free cash flow in fiscal 2017 which supported our share repurchase programs. We believe that these share repurchase programs will continue to be an excellent allocation of capital for the ~~lenders party thereto, each~~long term benefit 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 agentour shareholders. We may undertake other repurchase programs in the future 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”).~~our securities.

~~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.~~

~~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.~~

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.

~~We enter into long-term~~As of May 5, 2018, there were no material changes to our contractual obligations ~~and commitments, primarily debt obligations and non-cancelable operating leases,~~described in the ~~normal course~~Management’s Discussion and Analysis of ~~business. As~~Financial Condition and Results of ~~July 29,~~Operations—Contractual Obligations in the 2017 ~~our contractual cash obligations were as follows (in thousands~~):Form 10-K.

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

We have no material off balance sheet arrangements as of ~~July 29, 2017.~~May 5, 2018.

The preparation of financial statements in accordance with ~~GAAP~~accounting principles generally accepted in the United States 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:

In the first quarter of fiscal 2018, we adopted Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). The adoption of Topic 606 resulted in a material change to the “Revenue Recognition” and “Advertising Expenses” critical accounting policies in fiscal 2018. Please refer below for our updated “Revenue Recognition” and “Advertising Expenses” critical accounting policies. There have been no material changes to the other critical accounting policies and estimates listed above from the disclosures included in the 2017 Form 10-K. 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~~2017 Form 10-K. ~~There have been no material changes~~

We recognize revenues and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise. Revenue recognized for merchandise delivered via the home-delivery channel is recognized upon delivery. Revenue recognized for merchandise delivered via all other delivery channels will be recognized upon shipment. Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store. Discounts or other accommodations provided to customers are accounted for as a reduction of sales.

We account for shipping and handling as activities to fulfill the promise to transfer the merchandise to our customers. We apply this policy consistently across all of our distribution channels. In instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities will be accrued for in the same period. Costs of shipping and handling are included in cost of goods sold.

We defer revenue associated with merchandise delivered via the home-delivery channel. As we recognize revenue when the merchandise is delivered to our customers, it is included as deferred revenue on the consolidated balance sheets while in-transit.

We collect annual membership fees related to the ~~critical accounting policies~~RH Members Program. New membership fees are recorded as deferred revenue when collected from customers and ~~estimates listed~~recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year.

Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the ~~2016 Form 10-K.~~consolidated balance sheets as it is ultimately remitted to governmental authorities.

We reserve for projected merchandise returns. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

Our customers may return purchased items for a refund. We provide an allowance for sales returns based on historical return rates, which is presented on a gross basis. We present the allowance for sales returns within other current liabilities and the estimated value of the right of return asset for merchandise within prepaid expense and other assets on the consolidated balance sheets.

Advertising expenses primarily represent the costs associated with our catalog mailings, as well as print and website marketing.

Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and distribute Source Books. Such costs are capitalized and recognized as expense upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier.

Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the initial advertisement.

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.

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~~As of May 5, 2018, $219.0 million was outstanding under the revolving line of credit. As of ~~July 29, 2017,~~May 5, 2018, the undrawn borrowing availability under the revolving line of credit was ~~$181.1~~$138.8 million, net of ~~$13.1~~$27.8 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~~was approximately ~~$129.4 million.~~$92.2 million as of May 5, 2018. Based on the average interest rate on the revolving line of credit during the three months ended ~~July 29, 2017,~~May 5, 2018, 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~~bears interest at variable rates. ~~At July 29, 2017,~~As of May 5, 2018, $80.0 ~~million and $100.0~~ million was outstanding under the LILO term ~~loan and second lien term loan, respectively.~~loan. Based on the average interest rates on the LILO term ~~loans~~loan during the three months ended ~~July 29, 2017,~~May 5, 2018, we do not believe that a 10% change in the interest ~~rates~~rate would have a material effect on our consolidated results of operations or financial condition.

As of ~~July 29, 2017,~~May 5, 2018, 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,~~May 5, 2018, 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.

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—7—Convertible Senior Notes in our condensed consolidated financial statements.

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—7—Convertible Senior Notes in our condensed consolidated financial statements.

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.

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.

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.

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, as well as securities 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 regarding certain pending securities litigation, refer to Note ~~17—~~14—Commitments and Contingencies in our condensed consolidated financial statements within Part I of this Quarterly Report on Form 10-Q.

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,~~ February 3, 2018 (“2017 ~~(“2016~~ Form 10-K”). There have been no material changes to the risk factors disclosed in our ~~2016~~2017 Form 10-K.

The risks described in our ~~2016~~2017 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.

Repurchases of Common Stock during the Three Months Ended ~~July 29, 2017~~May 5, 2018

During the three months ended ~~July 29, 2017,~~May 5, 2018, 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

	Number of Shares		Average Purchase Price Per Share		Total Number of shares Repurchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
							(in millions)
February 4, 2018 to March 3, 2018		—	$	—		—	$	—
March 4, 2018 to April 7, 2018 ⁽¹⁾		3,584	$	95.28		—	$	—
April 8, 2018 to May 5, 2018 ^{(1) (2)}		9,721	$	96.62		—	$	—
Total		13,305	$	96.26		—

~~Not applicable.~~First Amendment to the Eleventh Amended and Restated Credit Agreement

52On June 12, 2018, Restoration Hardware, Inc. entered into a First Amendment (the “Amendment”) to the 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 (the “Credit Agreement”). The Amendment (i) changes the Credit Agreement’s definition of “Eligible In-Transit Inventory” to clarify the requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and (ii) clarifies that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory. Eligible In-Transit Inventory consists of inventory being shipped from vendor locations outside of the United States. Qualifying in-transit inventory is included within the Company’s borrowing base for eligible collateral for purposes of determining the amount of borrowing available to borrowers under the Credit Agreement.

This description of the Amendment is qualified in its entirety by reference to the Amendment, which is filed with this Quarterly Report as Exhibit 10.1 and incorporated herein by reference.

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.

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)

		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~July 29, 2017,~~May 5, 2018, and ~~January 28, 2017~~February 3, 2018	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three ~~and six~~ months ended ~~July~~May 5, 2018, and April 29, 2017 ~~and July 30, 2016~~	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three ~~and six~~ months ended ~~July~~May 5, 2018, and April 29, 2017 ~~and July 30, 2016~~	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~six~~three months ended ~~July~~May 5, 2018, and April 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	2723
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4840
Item 4.	Controls and Procedures	4941

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5143
Item 1A.	Risk Factors	5143
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5144
Item 3.	Defaults Upon Senior Securities	5244
Item 4.	Mine Safety Disclosures	5244
Item 5.	Other Information	5244
Item 6.	Exhibits	5345
Signatures		5446

	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

Description	Policy under Topic 605	Policy under Topic 606
Advertising expenses	Costs associated with Source Books were capitalized and amortized over their expected period of future benefit. Expense was amortized based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual Source Book basis, generally over a twelve-month period after they were mailed.	Costs associated with Source Books are expensed upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier.
Gift card breakage	Recognized gift card breakage (amounts not expected to be redeemed) within selling, general and administrative expenses.	Recognize gift card breakage within net revenues proportional to actual gift card redemptions.
Membership revenue	Annual fees for new memberships in the RH Members Program and renewals were recorded as deferred revenue when collected from customers and recognized as revenue on a straight-line basis over the twelve month membership period.	Annual fees for new memberships in the RH Members Program are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, using historical trends of sales to members. RH Members Program renewal fees are recorded as deferred revenue when collected from customers and will continue to be recognized as revenue on a straight-line basis over the twelve month membership period.
Revenue recognition	Revenue for merchandise that is not delivered via the home-delivery channel was recognized upon delivery.	Revenue for merchandise that is not delivered via the home-delivery channel will be recognized upon shipment.
Allowance for sales returns	Recognized an allowance for sales returns as a net liability within other current liabilities.	Recognize an allowance for sales returns on a gross basis as a liability within other current liabilities and a right of return asset for merchandise within prepaid expense and other current assets.

	Three Months Ended May 5, 2018
	As Reported		Adjustments			Balances without Adoption of Topic 606
Net revenues	$	557,406	$	(7,610	)	$	549,796
Cost of goods sold		345,371		(2,988	)		342,383
Gross profit		212,035		(4,622	)		207,413
Selling, general and administrative expenses		158,434		3,803			162,237
Income from operations		53,601		(8,425	)		45,176
Interest expense—net		17,035		—			17,035
Income before income taxes		36,566		(8,425	)		28,141
Income tax expense		8,507		(1,950	)		6,557
Net income	$	28,059	$	(6,475	)	$	21,584

	As of May 5, 2018
	As Reported		Adjustments			Balances without Adoption of Topic 606
Prepaid expense and other current assets	$	60,064	$	27,652		$	87,716
Deferred tax assets		30,014		(6,561	)		23,453
Accounts payable and accrued expenses		264,173		(638	)		263,535
Deferred revenue and customer deposits		172,379		9,463			181,842
Other current liabilities		59,944		(2,295	)		57,649
Retained earnings		159,417		14,561			173,978

			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

	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

	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

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

	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

	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

	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

			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

	RH

Date: ~~September 7, 2017~~June 12, 2018	By:	/s/ Gary Friedman
		Gary Friedman
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~September 7, 2017~~June 12, 2018	By:	/s/ Karen Boone
		Karen Boone
		~~Co-President,~~President, Chief Financial and Administrative Officer
		(Principal Financial Officer and Principal Accounting Officer)

Large accelerated filer

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Non-accelerated filer

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Smaller reporting company

Emerging growth company