Restoration Hardware 2015 Annual Report Download - page 78

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Stock-Based Compensation
The Company recognizes the fair value of stock-based compensation in the consolidated financial statements as compensation
expense over the requisite service period. In addition, excess tax benefits related to stock-based compensation awards are reflected as
financing cash flows. For service-only awards, compensation expense is recognized on a straight-line basis, net of forfeitures, over the
requisite service period for the fair value of awards that actually vest. Fair value for restricted stock units is valued using the closing
price of the Company’s stock on the date of grant. The fair value of each option award granted under the Company’s award plan is
estimated on the date of grant using a Black-Scholes Merton option pricing model with the following assumptions:
• Expected volatility—Based on the lack of historical data for its own shares, the Company bases its expected volatility on a
representative peer group that takes into account industry, market capitalization, stage of life cycle and capital structure.
• Expected term—Represents the period of time that options granted are expected to be outstanding. The Company elected
to calculate the expected term of the option awards using the “simplified method.” This election was made based on the
lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Under the
“simplified” calculation method, the expected term is calculated as an average of the vesting period and the contractual
life of the options.
• Risk-free interest rate—Based on the U.S. Treasury zero-coupon bond rate with a remaining term approximate of the
expected term of the option.
• Dividend yield—As the Company has not paid dividends, nor does it currently plan to pay dividends in the future, the
assumed dividend yield is zero.
Prior to the Reorganization, Home Holdings had granted performance-based units that vested and became deliverable upon
achievement or satisfaction of performance conditions specified in the performance agreement or upon the return on investment
attained by certain of the equity investors in Home Holdings at defined liquidity events, including an initial public offering or certain
sale or merger transactions. The Company estimated the fair value of performance-based units awarded to employees at the grant date
based on the fair value of the Company on such date. The Company also considered the probability of achieving the established
performance targets in determining its stock-based compensation with respect to these awards. The Company recognizes
compensation cost over the performance period. When the performance is related to a specific event occurring in the future, the
Company recognizes the full expense at the time of the event. At the time of the Reorganization, these performance-based units were
replaced with shares of the Company’s common stock with substantially similar restrictions, terms and conditions. Refer to Note 15—
Stock-Based Compensation.
Cost of Goods Sold
Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory shrinkage, inventory
reserves and write-downs, inbound freight, all freight costs to get merchandise to the Company’s stores, design and buying costs,
occupancy costs related to store operations and supply chain, such as rent, property tax and common area maintenance, depreciation
and amortization, and all logistics costs associated with shipping product to customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses
include payroll and payroll related expenses, store expenses other than occupancy and expenses related to many of the Company’s
operations at its corporate headquarters, including utilities, depreciation and amortization, credit card fees and marketing expense,
which primarily includes catalog production, mailing and print advertising costs. All store pre-opening costs are included in selling,
general and administrative expenses and are expensed as incurred.
Selling, general and administrative expenses for fiscal 2014 included an approximately $8 million charge incurred 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. Refer to Note 18—Commitments and Contingencies.
Selling, general and administrative expenses for fiscal 2013 include a $33.7 million non-cash compensation charged related to
the one-time, fully vested option granted to Gary Friedman upon his reappointment as Chairman and Co-Chief Executive Officer in
July 2013, a $29.5 million non-cash compensation charge related to the performance-based vesting of certain shares granted to Mr.
Friedman, a $4.9 million charge incurred in connection with the legal claim mentioned above and $2.9 million of costs incurred in
connection with the Company’s follow-on offerings in May 2013 and July 2013.