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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 1, 2020

or

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

For the transition period from             to

Commission file number: 001-35720

Graphic

(Exact name of registrant as specified in its charter)

Delaware

    

45-3052669

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

15 Koch Road
Corte Madera, CA

 

94925

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (415924-1005

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.0001 par value

RH

New York Stock Exchange, Inc.

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

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

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

As of September 4, 2020, 19,514,206 shares of the registrant’s common stock were outstanding.

Table of Contents

RH

INDEX TO FORM 10-Q

    

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited) as of August 1, 2020 and February 1, 2020

3

Condensed Consolidated Statements of Income (Unaudited) for the three and six months ended August 1, 2020 and August 3, 2019

4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended August 1, 2020 and August 3, 2019

5

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) for the three and six months ended August 1, 2020 and August 3, 2019

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended August 1, 2020 and August 3, 2019

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

Item 4.

Controls and Procedures

59

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

61

Item 1A.

Risk Factors

61

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

65

Signatures

66

2

Table of Contents

PART I

Item 1. Financial Statements

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

    

August 1,

    

February 1,

2020

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

17,387

$

47,658

Accounts receivable—net

 

55,916

 

48,979

Merchandise inventories

 

487,639

 

438,696

Prepaid expense and other current assets

 

60,497

 

61,619

Total current assets

 

621,439

 

596,952

Property and equipment—net

 

1,053,435

 

967,599

Operating lease right-of-use assets

404,508

410,904

Goodwill

 

124,350

 

124,367

Tradenames, trademarks and domain names

 

66,863

 

86,022

Deferred tax assets

 

39,013

 

45,005

Other non-current assets

 

196,801

 

214,845

Total assets

$

2,506,409

$

2,445,694

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

340,266

$

330,309

Deferred revenue and customer deposits

230,089

 

162,433

Convertible senior notes due 2020—net

290,532

Operating lease liabilities

63,866

58,924

Other current liabilities

 

150,759

 

140,714

Total current liabilities

 

784,980

 

982,912

Asset based credit facility

 

91,600

 

Equipment promissory notes—net

 

26,047

 

31,053

Convertible senior notes due 2023—net

 

275,837

 

266,658

Convertible senior notes due 2024—net

273,100

264,982

Non-current operating lease liabilities

 

406,012

 

409,930

Non-current finance lease liabilities

492,136

442,988

Other non-current obligations

 

28,206

 

28,520

Total liabilities

 

2,377,918

 

2,427,043

Commitments and contingencies (Note 16)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock—$0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of August 1, 2020 and February 1, 2020

 

 

Common stock—$0.0001 par value per share, 180,000,000 shares authorized, 19,485,843 shares issued and 19,485,826 shares outstanding as of August 1, 2020; 19,236,681 shares issued and outstanding as of February 1, 2020

 

2

 

2

Additional paid-in capital

 

444,378

 

430,662

Accumulated other comprehensive loss

 

(1,842)

 

(2,760)

Accumulated deficit

 

(314,042)

 

(409,253)

Treasury stock—at cost, 17 shares as of August 1, 2020 and no shares as of February 1, 2020

(5)

Total stockholders’ equity

 

128,491

 

18,651

Total liabilities and stockholders’ equity

$

2,506,409

$

2,445,694

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

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RH

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

August 1,

August 3,

August 1,

August 3,

    

2020

    

2019

    

2020

    

2019

Net revenues

$

709,282

$

706,514

$

1,192,177

$

1,304,935

Cost of goods sold

 

376,863

 

411,556

 

660,104

 

777,163

Gross profit

 

332,419

 

294,958

 

532,073

 

527,772

Selling, general and administrative expenses

 

195,851

 

190,977

360,052

 

355,158

Income from operations

 

136,568

 

103,981

 

172,021

 

172,614

Other expenses

 

Interest expense—net

19,418

24,513

39,047

 

45,631

Tradename impairment

20,459

Gain on extinguishment of debt

 

(152)

 

(954)

 

(152)

 

(954)

Total other expenses

 

19,266

 

23,559

 

59,354

 

44,677

Income before income taxes

 

117,302

 

80,422

 

112,667

 

127,937

Income tax expense

 

18,879

 

16,665

 

17,456

 

28,458

Net income

$

98,423

$

63,757

$

95,211

$

99,479

Weighted-average shares used in computing
basic net income per share

 

19,386,115

 

18,465,876

 

19,314,479

 

19,221,367

Basic net income per share

$

5.08

$

3.45

$

4.93

$

5.18

Weighted-average shares used in computing
diluted net income per share

 

26,564,705

 

22,324,112

 

25,383,730

 

23,629,050

Diluted net income per share

$

3.71

$

2.86

$

3.75

$

4.21

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

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RH

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months Ended

Six Months Ended

August 1,

August 3,

August 1,

August 3,

2020

    

2019

    

2020

    

2019

Net income

$

98,423

$

63,757

$

95,211

$

99,479

Net gains (losses) from foreign currency translation

 

3,290

490

 

918

 

(447)

Total comprehensive income

$

101,713

$

64,247

$

96,129

$

99,032

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

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RH

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

Three Months Ended

 

Accumulated

 

Retained

 

Total

 

Additional

 

Other

 

Earnings

 

Stockholders’

 

Common Stock

 

Paid-In

 

Comprehensive

 

(Accumulated

 

Treasury Stock

 

Equity

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit)

    

Shares

    

Amount

    

(Deficit)

Balances—May 2, 2020

 

19,264,127

 

$

2

 

$

436,799

 

$

(5,132)

 

$

(412,465)

 

600

 

$

(72)

 

$

19,132

Stock-based compensation

 

6,755

 

6,755

Issuance of restricted stock

 

3,192

 

Vested and delivered restricted stock units

 

60,006

(6,437)

 

(6,437)

Exercise of stock options

 

158,518

7,328

 

7,328

Retirement of treasury stock

 

(72)

(600)

72

 

Settlement of convertible senior notes

1,131,645

(315,708)

(1,131,645)

315,708

Exercise of call option under bond hedge upon settlement of convertible senior notes

(1,131,662)

315,713

1,131,662

(315,713)

Net income

 

98,423

 

98,423

Net gains from foreign currency translation

 

3,290

 

3,290

Balances—August 1, 2020

 

19,485,826

 

$

2

 

$

444,378

 

$

(1,842)

 

$

(314,042)

 

17

 

$

(5)

 

$

128,491

Balances—May 4, 2019

 

18,357,816

 

$

2

 

$

362,986

 

$

(3,270)

 

$

(356,816)

 

2,170,196

 

$

(250,275)

 

$

(247,373)

Stock-based compensation

 

5,191

 

5,191

Issuance of restricted stock

 

7,014

 

Vested and delivered restricted stock
units

 

80,400

(5,984)

 

(5,984)

Exercise of stock options

 

146,491

5,997

 

5,997

Retirement of treasury stock

 

(13,180)

(237,091)

(2,170,154)

250,271

 

Conversion of convertible senior notes

 

42

(42)

4

 

4

Net income

 

63,757

 

63,757

Net gains from foreign currency translation

 

490

 

490

Balances—August 3, 2019

 

18,591,763

 

$

2

 

$

355,010

 

$

(2,780)

 

$

(530,150)

 

 

$

 

$

(177,918)

Six Months Ended

 

Accumulated

 

Retained

 

Total

 

Additional

 

Other

 

Earnings

 

Stockholders’

 

Common Stock

 

Paid-In

 

Comprehensive

 

(Accumulated

 

Treasury Stock

 

Equity

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit)

    

Shares

    

Amount

    

(Deficit)

Balances—February 1, 2020

 

19,236,681

 

$

2

 

$

430,662

 

$

(2,760)

 

$

(409,253)

 

 

$

 

$

18,651

Stock-based compensation

 

12,476

 

12,476

Issuance of restricted stock

 

3,192

 

Vested and delivered restricted stock units

 

70,292

(6,818)

 

(6,818)

Exercise of stock options

 

176,278

8,125

 

8,125

Repurchases of common stock

 

(600)

600

(72)

 

(72)

Retirement of treasury stock

 

(72)

(600)

72

 

Settlement of convertible senior notes

1,131,645

(315,708)

(1,131,645)

315,708

Exercise of call option under bond hedge upon settlement of convertible senior notes

(1,131,662)

315,713

1,131,662

(315,713)

Net income

 

95,211

 

95,211

Net gains from foreign currency translation

 

918

 

918

Balances—August 1, 2020

 

19,485,826

 

$

2

 

$

444,378

 

$

(1,842)

 

$

(314,042)

 

17

 

$

(5)

 

$

128,491

Balances—February 2, 2019

 

20,477,813

 

$

2

 

$

356,422

 

$

(2,333)

 

$

(392,538)

 

2,800

 

$

(243)

 

$

(38,690)

Stock-based compensation

 

10,779

 

10,779

Issuance of restricted stock

 

7,014

 

Vested and delivered restricted stock units

 

101,641

(6,234)

 

(6,234)

Exercise of stock options

 

172,649

7,223

 

7,223

Repurchases of common stock

 

(2,167,396)

2,167,396

(250,032)

 

(250,032)

Retirement of treasury stock

 

(13,180)

(237,091)

(2,170,154)

250,271

 

Conversion of convertible senior notes

 

42

(42)

4

 

4

Net income

 

99,479

 

99,479

Net losses from foreign currency translation

 

(447)

 

(447)

Balances—August 3, 2019

 

18,591,763

 

$

2

 

$

355,010

 

$

(2,780)

 

$

(530,150)

 

 

$

 

$

(177,918)

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

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RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Six Months Ended

August 1,

August 3,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

95,211

$

99,479

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization

 

50,212

 

52,510

Non-cash operating lease cost

31,355

33,227

Tradename impairment

20,459

Asset impairments

4,783

Loss on sale leaseback transaction

9,352

Amortization of debt discount

 

25,378

 

22,962

Accretion of debt discount upon settlement of debt

(84,003)

(70,482)

Stock-based compensation expense

 

12,689

 

10,993

Non-cash finance lease interest expense

11,729

11,186

Product recalls

4,780

(2,106)

Other non-cash items

 

2,404

 

1,297

Change in assets and liabilities:

 

 

Accounts receivable

 

(6,431)

 

(504)

Merchandise inventories

 

(48,984)

 

51,189

Prepaid expense and other assets

 

(10,307)

 

(2,882)

Landlord assets under construction—net of tenant allowances

 

(22,934)

 

(27,555)

Accounts payable and accrued expenses

 

(13,127)

 

(40,073)

Deferred revenue and customer deposits

 

67,647

 

12,987

Other current liabilities

 

8,777

 

3,179

Current and non-current operating lease liabilities

 

(18,388)

 

(44,513)

Other non-current obligations

 

(12,327)

 

(13,761)

Net cash provided by operating activities

 

128,275

 

97,133

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

Capital expenditures

 

(47,531)

 

(25,283)

Investments in joint ventures

 

(3,050)

 

Proceeds from sale of assets

 

25,006

 

Net cash used in investing activities

 

(25,575)

 

(25,283)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Borrowings under asset based credit facility

 

283,200

 

302,000

Repayments under asset based credit facility

 

(191,600)

 

(214,500)

Borrowings under term loans

 

 

320,000

Borrowings under promissory and equipment security notes

 

 

69,000

Repayments under promissory and equipment security notes

 

(5,408)

 

(4,993)

Debt issuance costs

 

 

(4,636)

Repayments of convertible senior notes

(215,846)

(278,560)

Principal payments under finance leases

(4,641)

(4,399)

Repurchases of common stock—including commissions

 

 

(250,032)

Proceeds from exercise of stock options

 

8,125

 

7,223

Tax withholdings related to issuance of stock-based awards

(6,818)

 

(6,234)

Payments under promissory notes related to share repurchases

 

(892)

Net cash used in financing activities

 

(132,988)

 

(66,023)

Effects of foreign currency exchange rate translation

 

17

 

(75)

Net increase (decrease) in cash and cash equivalents

 

(30,271)

 

5,752

Cash and cash equivalents

 

  

 

  

Beginning of period—cash and cash equivalents

$

47,658

$

5,803

End of period—cash and cash equivalents

$

17,387

$

11,555

Non-cash transactions:

 

 

Property and equipment additions in accounts payable and accrued expenses at period-end

$

19,978

$

10,875

Landlord asset additions in accounts payable and accrued expenses at period-end

17,515

21,055

Reclassification of assets from landlord assets under construction to finance lease right-of-use assets

68,441

Shares issued on settlement of convertible senior notes

(315,708)

Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes

315,713

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

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RH

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—THE COMPANY

Nature of Business

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

As of August 1, 2020, we operated a total of 68 RH Galleries and 38 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 15 Waterworks showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of August 1, 2020, and the results of operations for the three and six months ended August 1, 2020 and August 3, 2019. Our current fiscal year, which consists of 52 weeks, ends on January 30, 2021 (“fiscal 2020”).

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.

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19”) using information that is reasonably available to us at this time. The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets. Our current assessment of these estimates are included in our condensed consolidated financial statements as of and for the three and six months ended August 1, 2020 and August 3, 2019. As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “2019 Form 10-K”).

The results of operations for the three and six months ended August 1, 2020 and August 3, 2019 presented herein are not necessarily indicative of the results to be expected for the full fiscal year. Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the novel coronavirus disease as discussed in Recent Developments—COVID-19 below.

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Recent Developments—COVID-19

The initial wave of the COVID-19 outbreak starting in March 2020 caused disruption to our business operations as we temporarily closed all of our retail locations on March 17, 2020. While our retail locations were substantially closed at the end of the first fiscal quarter on May 2, 2020, during the second fiscal quarter we have reopened substantially all of our retail locations. As of the end of the second fiscal quarter on August 1, 2020 we had reopened 66 out of 68 of our Galleries, all of our Outlets, and 8 out of 10 of our restaurants. In addition, our business has substantially recovered during the second fiscal quarter as a result of both the reopening of most of our retail locations and also due to strong consumer demand for our products.

Our global supply chain has not fully recovered from the impact of the COVID-19 dislocation. Despite the strong growth in consumer demand in our business during the second fiscal quarter, revenue growth has lagged the increase in customer orders. As manufacturing and inventory receipts catch up with this backlog, we expect this demand will convert into revenue in the next several quarters as our supply chain recalibrates to the new level of our business.

While we have continued to serve our customers and operate our business through the initial phase of the COVID-19 health crisis, and have now substantially reopened our retail locations in the U.S. and Canada, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains uncertain. Future adverse developments in connection with the COVID-19 crisis, including additional waves of COVID-19 outbreaks, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance for the fiscal year ending January 30, 2021.

In our initial response to the COVID-19 health crisis we undertook immediate adjustments to our business operations including curtailing expenses and delaying investments. Our approach to the crisis evolved quickly as our business trends substantially improved during the second fiscal quarter. We will continue to make decisions regarding the sources and uses of capital in our business to reflect and adapt to changes in market conditions including any lasting effects of COVID-19. While we deferred some capital expenditures and other expenses in response to the initial circumstances of the COVID-19 health crisis, we are continuing both long term investments and shorter term initiatives necessary to support our business and the recent increase in consumer demand.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

Cloud Computing

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which amends Accounting Standards Update 2015-05—Customers Accounting for Fees in a Cloud Computing Agreement. The amendments in this ASU more closely align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

We adopted the ASU as of February 2, 2020 using a prospective method. We capitalize implementation costs related to hosted arrangements, which typically include three-year service terms with additional renewal periods generally ranging from one to three years. The related assets are recorded within other non-current assets on our condensed consolidated balance sheets, net of accumulated amortization for assets placed in service. The amortization of assets placed in service is recorded in either cost of goods sold or selling, general and administrative expenses, consistent with the costs of the hosting arrangement, on the condensed consolidated statements of income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods. The adoption of the ASU did not have a material effect on our condensed consolidated financial statements. Refer to Note 3—Prepaid Expense and Other Assets.

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Current Expected Credit Losses

In June 2016, the FASB issued Accounting Standards Update 2016-13—Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”). The ASUs amend the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology to result in more timely recognition of losses. The guidance in the ASUs applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions.

Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our contract business and other miscellaneous receivables. Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts was $3.0 million and $2.2 million as of August 1, 2020 and February 1, 2020, respectively.

We adopted the ASUs as of February 2, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings. We did not recognize a cumulative-effect adjustment upon adoption as the adoption of the ASUs did not have a material effect on our condensed consolidated financial statements.

Income Taxes

In December 2019, the FASB issued Accounting Standards Update 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We will adopt this standard in the first quarter of fiscal 2021 and are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial statements.

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial statements, including the timing and adoption approach.

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NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

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

    

August 1,

    

February 1,

2020

2020

Prepaid expense and other current assets

$

29,625

$

30,875

Capitalized catalog costs

 

13,128

 

13,740

Vendor deposits

12,518

11,258

Right of return asset for merchandise

 

5,226

 

5,746

Total prepaid expense and other current assets

$

60,497

$

61,619


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

    

August 1,

    

February 1,

2020

2020

Landlord assets under construction

$

109,549

$

138,315

Deposits on asset under construction

 

60,000

 

60,000

Promissory note receivable, including interest

 

5,479

 

5,354

Other deposits

 

5,289

 

5,157

Investments in joint ventures (Note 5)

3,050

Deferred financing fees

 

2,063

 

2,602

Other non-current assets

 

11,371

 

3,417

Total other non-current assets

$

196,801

$

214,845

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND DOMAIN NAMES

The following sets forth the goodwill, tradenames, trademarks and domain names activity for the RH Segment and Waterworks (See Note 17—Segment Reporting), for the six months ended August 1, 2020 (in thousands):

    

    

    

    

Foreign

    

February 1,

Currency

August 1,

2020

Acquisition

Impairment (1)

Translation

2020

RH Segment

 

  

 

  

 

  

 

  

 

  

Goodwill

$

124,367

$

$

$

(17)

$

124,350

Tradenames, trademarks and domain names

 

48,563

 

1,300

 

 

 

49,863

 

  

 

  

 

  

 

  

 

Waterworks (1)

 

  

 

  

 

  

 

  

R