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Commitments and Contingencies | 12 Months Ended
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Feb. 02, 2019
Commitments And Contingencies Disclosure [Abstract] |
Commitments and Contingencies | NOTE 19—COMMITMENTS AND CONTINGENCIES Leases The Company leases certain property consisting of retail and outlet stores, corporate offices, distribution centers and equipment. A majority of the Company’s leases expire at various dates through fiscal 2035. The Company has a lease for one Gallery location that expires in fiscal 2058. The stores, distribution centers and corporate office leases generally provide that the Company assumes the maintenance and all or a portion of the property tax obligations on the leased property. Most store leases also provide for minimum annual rent payments, with provisions for additional rent based on a percentage of sales, after meeting certain sales thresholds, and for payment of certain expenses. The aggregate future minimum rent payments under leases in effect as of February 2, 2019, are as follows (in thousands):
Lease agreements accounted for as: |  | Capital Leases (1) |  |  | Operating Leases |  |  | Build-to-Suit |  |  | Total |
2019 |  | $ | 2,042 |  |  | $ | 83,426 |  |  | $ | 37,629 |  |  | $ | 123,097 |
2020 |  |  | 1,943 |  |  |  | 75,133 |  |  |  | 41,693 |  |  |  | 118,769 |
2021 |  |  | 1,444 |  |  |  | 62,889 |  |  |  | 45,267 |  |  |  | 109,600 |
2022 |  |  | 1,267 |  |  |  | 55,654 |  |  |  | 47,744 |  |  |  | 104,665 |
2023 |  |  | 1,317 |  |  |  | 52,409 |  |  |  | 48,875 |  |  |  | 102,601 |
Thereafter |  |  | 6,571 |  |  |  | 284,185 |  |  |  | 481,941 |  |  |  | 772,697 |
Minimum lease commitments |  |  | 14,584 |  |  | $ | 613,696 |  |  | $ | 703,149 |  |  | $ | 1,331,429 |
Less—amount representing interest |  |  | (5,790 | ) |  |  |  |  |  |  |  |  |  |  |  |
Present value of capital lease obligations |  |  | 8,794 |  |  |  |  |  |  |  |  |  |  |  |  |
Less—current capital lease obligations |  |  | (1,074 | ) |  |  |  |  |  |  |  |  |  |  |  |
Non-current capital lease obligations |  | $ | 7,720 |  |  |  |  |  |  |  |  |  |  |  |  |
(1) | The current and non-current capital lease obligations are included in other current liabilities and other non-current obligations, respectively, on the consolidated balance sheets.
Lease payments that depend on factors that are not measurable at the inception of the lease, such as future sales volume, represent contingent rent expense and are excluded from minimum lease payments and included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable. Future payments for insurance, real estate taxes and repair and maintenance to which the Company is obligated are excluded from minimum lease payments. Minimum rent payments and contingent rent expense under lease agreements accounted for as operating leases and as build-to-suit lease transactions are as follows (in thousands):
|  | Year Ended |
|  | February 2, |  |  | February 3, |  |  | January 28, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
Lease agreements accounted for as operating leases |  |  |  |  |  |  |  |  |  |  |  |
Minimum rent |  | $ | 84,651 |  |  | $ | 91,152 |  |  | $ | 87,520 |
Contingent rent |  |  | 7,023 |  |  |  | 8,063 |  |  |  | 7,140 |
Total operating leases |  | $ | 91,674 |  |  | $ | 99,215 |  |  | $ | 94,660 |
Lease agreements accounted for as build-to-suit lease transactions (1) |  |  |  |  |  |  |  |  |  |  |  |
Minimum rent |  | $ | 35,465 |  |  | $ | 32,256 |  |  | $ | 16,066 |
Contingent rent |  |  | 1,562 |  |  |  | 833 |  |  |  | 726 |
Total build-to-suit lease transactions |  | $ | 37,027 |  |  | $ | 33,089 |  |  | $ | 16,792 |
(1) | As described in Note 3—Significant Accounting Policies, the cash payments made under leases accounted for as build-to-suit lease transactions are allocated to land rent expense and treated as debt service payments (a portion to interest expense and a portion to financing obligation). Minimum rent payments recognized as interest expense within the consolidated statements of income were $20.3 million, $15.4 million and $12.1 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Minimum rent payments allocated to the financing obligations under build-to-suit lease transactions within the consolidated balance sheets were $7.5 million, $10.2 million and $0.4 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Minimum rent payments allocated to deferred rent amortization was $0.5 million in fiscal 2018. The remaining minimum rent payments of $7.2 million, $6.7 million and $3.6 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively, represent land rent expense and were included in cost of goods sold on the consolidated statements of income. Contingent rent under build-to-suit lease transactions is recognized as interest expense on the consolidated statements of income.
In addition to the above, the non-cash rent benefit recognized on the consolidated statements of income was $2.6 million and $1.0 million in fiscal 2018 and fiscal 2017, respectively, and the non-cash rent expense recognized on the consolidated statements of income was $1.2 million in fiscal 2016. Non-cash rent represents the straight-line impact and amortization of tenant allowances under operating leases and land rent expense recorded for build-to-suit lease transactions prior to cash payments occurring under the leases. Commitments The Company had no material off balance sheet commitments as of February 2, 2019. Contingencies 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 consolidated financial statements. Securities Class Action 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. An amended consolidated complaint was filed in June 2017 asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as 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 statements regarding the roll out of the RH Modern product line and the Company’s inventory levels. The complaint seeks class certification, monetary damages, and other appropriate relief, including an award of costs and attorneys’ fees. On March 21, 2019, the Company and the individual defendants in the case entered into a binding memorandum of understanding to settle the case based on an aggregate settlement amount of $50 million. The memorandum of understanding contemplates that the parties will enter into a settlement agreement, which will be subject to customary conditions including court approval following notice to the Company’s shareholders, and a hearing at which time the court will consider the fairness, reasonableness and adequacy of the settlement. If a settlement is finally approved by the court, it will resolve all of the claims that were or could have been brought in the action. The Company continues to believe that the claims in the lawsuits are without merit and, to the extent the settlement is not finalized the Company would defend against them vigorously. The Company maintains insurance for claims of this nature. As a result of signing the memorandum of understanding and the potential liability becoming probable and estimable, the Company has recorded a provision for legal settlement for $50.0 million within other current liabilities on the consolidated balance sheets as of February 2, 2019. Additionally, the Company has recorded a litigation insurance recovery receivable of $50.0 million as of February 2, 2019 within prepaid expense and other current assets on the consolidated balance sheets, which represents the estimated insurance claims proceeds from the Company’s insurance carriers. Shareholder Derivative Lawsuit 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). On June 29, 2018, Hosrof Izmirliyan filed a similar purported shareholder derivative complaint in the same forum, captioned Izmirliyan v. Friedman et al. (No. 18-cv-03930). On July 29, 2018, the court consolidated both derivative actions, and the consolidated action is captioned In re RH Shareholder Derivative Litigation. On August 24, 2018, plaintiffs filed an amended complaint that names RH as a nominal defendant and Gary Friedman, Karen Boone, Carlos Alberini, Keith Belling, Eri Chaya, Mark Demilio, Katie Mitic, Ali Rowghani and Leonard Schlesinger as defendants. The allegations substantially track those in the securities class action described above. Plaintiffs bring 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 plaintiffs also allege insider trading and misappropriation of information claims against two of the individual defendants. The amended complaint seeks monetary damages, corporate governance changes, restitution, and an award of costs and attorneys’ fees. The Company believes that plaintiffs lack standing to bring this derivative action. On September 28, 2018, the Company filed a motion to stay proceedings and a motion to dismiss the consolidated complaint. On January 23, 2019, the court granted the motion to stay the case.

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