Restoration Hardware 2015 Annual Report Download - page 49

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(b) Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately
accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible
debt borrowing rate. Accordingly, in accounting for GAAP purposes for the $350 million aggregate principal amount of
convertible senior notes that were issued in June 2014 (the “2019 Notes”) and for the $300 million aggregate principal
amount of convertible senior notes that were issued in June and July 2015 (the “2020 Notes”), we separated the 2019
Notes and 2020 Notes into liability (debt) and equity (conversion option) components and we are amortizing as debt
discount an amount equal to the fair value of the equity components as interest expense on the 2019 Notes and 2020 Notes
over their respective terms. The equity components represent the difference between the proceeds from the issuance of the
2019 Notes and 2020 Notes and the fair value of the liability components of the 2019 Notes and 2020 Notes, respectively.
Amounts are presented net of interest capitalized for capital projects of $0.9 million and $0.2 million during the third and
fourth quarters of fiscal 2014, respectively. Amounts are presented net of interest capitalized for capital projects of $0.5
million, $0.6 million, $0.4 million and $0.8 million during the first, second, third and fourth quarters of fiscal 2015,
respectively.
(c) The first, second, third and fourth quarters of fiscal 2014 include an adjustment to calculate income tax expense at a pro
forma 40% effective tax rate. The adjustments for the first, second, third and fourth quarters of fiscal 2015 represent the
tax effect of the adjusted items based on our effective tax rates of 37.1%, 38.9%, 38.9% and 40.1%, respectively.
(4) Comparable brand revenue growth includes retail comparable store sales, including RH Baby & Child and RH Modern
Galleries, and direct net revenues. Comparable brand revenue growth excludes retail non-comparable store sales, closed store
sales and outlet store net revenues. Comparable store sales have been calculated based upon retail stores, excluding outlet stores,
that were open at least fourteen full months as of the end of the reporting period and did not change square footage by more than
20% between periods. If a store is closed for seven days during a month, that month will be excluded from comparable store
sales.
Liquidity and Capital Resources
General
Our business relies on cash flows from operations, net cash proceeds from the issuance of the convertible senior notes, as well
as the revolving line of credit as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, payroll,
Source Books and other catalogs, store rent, capital expenditures associated with opening new stores and updating existing stores, as
well as infrastructure and information technology. The most significant components of our working capital are cash and cash
equivalents, merchandise inventories, accounts payable and other current liabilities. Our working capital varies as a result of increases
in our inventory levels and costs related to our Source Books. We believe that cash expected to be generated from operations, net cash
proceeds from the issuance of the convertible senior notes and borrowing availability under the revolving line of credit or other
financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures for the next 12 to
24 months.
We expect that our working capital needs may fluctuate based on the timing of new product introductions. Specifically, during
fiscal 2015 the timing of our inventory purchases was not consistent with prior fiscal years as we introduced a significant portion of
our new products in the Fall of 2015 whereas in prior years the majority of our new product introductions coincided with our Spring
Source Book mailing. The timing of our inventory purchases in fiscal 2016 may not be consistent with prior fiscal years.
Our investments in capital expenditures, including the acquisition of buildings and land, for fiscal 2015 totaled $133.5 million
and we made payments of $20.0 million in fiscal 2015 to escrow accounts for future construction of next generation Design Galleries.
As an offset to gross capital expenditures in fiscal 2015, we received $9.2 million related to profit participation arrangements for our
distribution center facilities. We expect to have gross capital expenditures of approximately $175 million to $200 million in fiscal
2016, primarily related to our efforts to continue our growth and expansion, including construction of our new galleries and
infrastructure investments. The majority of the current lease arrangements for our new galleries require the landlord to fund a portion
of the construction related costs directly to third parties, rather than through traditional construction allowances and accordingly, we
do not expect to receive significant contributions directly from our landlords related to the building of our larger format and next
generation Design Galleries in fiscal 2016.