Restoration Hardware 2012 Annual Report Download - page 111

We define adjusted EBITDA as consolidated net income (loss) before depreciation and amortization,
interest expense and provision for income taxes, adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our ongoing operating performance. Because adjusted EBITDA omits
non-cash items, we feel that it is less susceptible to variances in actual performance resulting from depreciation,
amortization and other non-cash charges and is more reflective of other factors that affect our operating
performance.
We define adjusted net income as consolidated net income (loss), adjusted for the impact of certain non-
recurring and other items that we do not consider representative of our ongoing operating performance.
Purchase Accounting
All of the outstanding capital stock of Restoration Hardware, Inc. was acquired on June 16, 2008, by Home
Holdings, which we refer to as the “Acquisition,” through a transaction that was accounted for under Statement
of Financial Accounting Standards 141, “Business Combinations.” The purchase price was allocated to state our
assets and liabilities at fair value, which took into account work performed by an independent third-party
valuation firm. The allocation of the purchase price had the net effect of reducing the carrying amount of
inventory by $47.9 million, increasing property and equipment by $17.6 million and increasing amortizable
intangible assets by $55.7 million. The $47.9 million decrease in inventory value was due to the prevailing
adverse economic situation at the date of the Acquisition and the application of a market participant approach to
the valuation of inventory on hand. Such decrease was amortized to cost of goods sold over approximately nine
months and resulted in increased gross profit during fiscal 2009. We are depreciating the $17.6 million increase
in property and equipment over the useful life of each asset, which has had the effect of reducing gross profit and
increasing selling, general and administrative expenses subsequent to the Acquisition. The $55.7 million increase
in amortizable intangible assets is being amortized over the remaining life of each asset and has had the effect of
reducing gross profit and increasing selling, general and administrative expenses subsequent to the Acquisition.
We also recorded intangible assets with an indefinite life, which consisted of goodwill and trademarks, at their
fair values of $122.3 million and $47.1 million, respectively.
The following table summarizes the financial impact of purchase accounting adjustments on gross profit and
selling, general and administrative expenses in dollars, and as a percentage of net revenues, in fiscal 2012, fiscal
2011 and fiscal 2010:
Year Ended
February 2,
2013
January 28,
2012
January 29,
2011
(dollars in thousands)
Net revenues $1,193,046 100% $958,084 100% $ 772,752 100%
Gross profit increase (decrease)
Depreciation related to step up of property and
equipment $ (1,253) (0.1)% $ (1,783) (0.2)% $ (3,076) (0.4)%
Amortization of intangible related to net fair value
of leases (879) (0.1)% (1,507) (0.1)% (1,975) (0.3)%
$ (2,132) (0.2)% $ (3,290) (0.3)% $ (5,051) (0.7)%
Selling general and administrative increase
(decrease)
Amortization of intangible related to core
technologies $ 1,316 0.1% $ 1,316 0.1% $ 1,316 0.2%
Depreciation related to step up of property and
equipment — — % — — % 150 — %
Amortization of intangible related to net fair value
of leases (9) — % (21) — % 140 — %
$ 1,307 0.1% $ 1,295 0.1% $ 1,606 0.2%
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Form 10-K