Economic Value Added (EVA)
EVA is registered trademark of Stern Stewart.
Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.
Economic Profit
RH, economic profit calculation
US$ in thousands
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 NOPAT. See details »
2 Cost of capital. See details »
3 Invested capital. See details »
4 2023 Calculation
Economic profit = NOPAT – Cost of capital × Invested capital
= 544,162 – 20.29% × 4,379,253 = -344,329
An analysis of the economic performance from February 2018 to January 2023 reveals a consistent inability to generate positive economic profit. Despite significant growth in operating profitability during the mid-period, the cost of the capital employed has consistently exceeded the net operating profit after taxes (NOPAT), resulting in a persistent destruction of economic value.
- Net Operating Profit After Taxes (NOPAT) Trends
- A strong upward trajectory in NOPAT is observed between 2018 and 2022, increasing from 78,790 thousand US$ to a peak of 752,355 thousand US$. This growth indicates an improvement in operational efficiency and scale. However, a reversal occurred in the final period ending January 28, 2023, where NOPAT declined to 544,162 thousand US$, suggesting a contraction in operating profitability.
- Invested Capital and Cost of Capital Dynamics
- The invested capital base expanded steadily from 1,226,304 thousand US$ in 2018 to a substantial 4,553,261 thousand US$ in 2022, representing a significant increase in the resources deployed. This expansion coincided with a volatile cost of capital, which fluctuated between a low of 18.99% in 2020 and a peak of 27.83% in 2021. The consistently high cost of capital established a high hurdle rate that the operational returns failed to meet.
- Economic Profit Performance
- Economic profit remained negative throughout the entire six-year period. While there was a period of relative stabilization between 2019 and 2020, where losses narrowed to approximately -42 million US$, the economic deficit widened sharply thereafter. The loss expanded to -257,719 thousand US$ in 2022 and reached its maximum deficit of -344,329 thousand US$ in 2023.
- Correlation of Metrics
- The widening economic loss in the final year is attributed to the simultaneous occurrence of declining NOPAT and a high level of invested capital. Although the cost of capital decreased slightly to 20.29% in 2023, the reduction was insufficient to offset the drop in operating profit relative to the large capital base, thereby accelerating the destruction of economic value.
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Net Operating Profit after Taxes (NOPAT)
RH, NOPAT calculation
US$ in thousands
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 Elimination of deferred tax expense. See details »
2 Addition of increase (decrease) in allowance for expected credit losses.
3 Addition of increase (decrease) in equity equivalents to net income.
4 2023 Calculation
Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 586,193 × 4.08% = 23,917
5 2023 Calculation
Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 175,647 × 21.00% = 36,886
6 Addition of after taxes interest expense to net income.
7 2023 Calculation
Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 38,520 × 21.00% = 8,089
8 Elimination of after taxes investment income.
Operational and bottom-line profitability exhibited a strong growth trajectory from 2018 through early 2022, followed by a contraction in the final reported period. The synchronization of peaks in both Net Operating Profit After Taxes (NOPAT) and Net Income suggests a period of high operational efficiency that translated effectively into shareholder earnings before a downturn in 2023.
- Net Operating Profit After Taxes (NOPAT) Analysis
- NOPAT demonstrated consistent growth over five consecutive years, increasing from 78,790 thousand US$ in February 2018 to a peak of 752,355 thousand US$ in January 2022. This trajectory indicates a substantial expansion in core operating profitability. However, a contraction was observed in January 2023, where NOPAT fell to 544,162 thousand US$, signaling a reduction in operational earnings power.
- Net Income Trends
- Net income experienced a sharp increase between 2018 and 2019, rising from 2,180 thousand US$ to 150,639 thousand US$. This growth trend continued until January 2022, reaching a maximum of 688,546 thousand US$. In January 2023, net income decreased to 528,642 thousand US$, mirroring the downward trend observed in operating profits.
- Comparative Analysis of NOPAT and Net Income
- NOPAT remained consistently higher than net income across all reported periods. The variance between these two metrics indicates the influence of non-operating items, such as interest expenses and non-operating taxes. The convergence of these figures toward their respective peaks in 2022 suggests that operating performance became the primary driver of the company's total profitability during that fiscal window.
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Cash Operating Taxes
RH, cash operating taxes calculation
US$ in thousands
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
The analysis of cash operating taxes reveals a period of sustained growth in cash outflows followed by a sharp contraction in the final fiscal year. Between 2018 and 2022, cash tax payments exhibited a strong upward trajectory, generally mirroring the increase in reported income tax expenses, although cash outflows consistently exceeded accrual-based expenses during this period.
- Cash Operating Tax Growth Trend
- From February 2019 to January 2022, cash operating taxes rose from $56.1 million to a peak of $159.2 million. This indicates a substantial increase in the liquidity required to meet tax obligations, with the most aggressive escalation occurring between 2020 and 2022.
- Accrual versus Cash Divergence
- A consistent variance is observed between the income tax expense and actual cash operating taxes from 2018 through 2022. The cash outflows for taxes were higher than the reported tax expense in each of these years, suggesting the influence of permanent differences or the settlement of prior-year liabilities.
- Fiscal Year 2023 Volatility
- A significant reversal occurred in the period ending January 28, 2023. While the company recorded an income tax benefit of $91.4 million, cash operating taxes remained a positive outflow of $30.0 million. This divergence highlights a scenario where accounting records reflect a tax recovery or credit, yet the operational cash flow still required a payment to tax authorities, despite the payment being the lowest since 2019.
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Invested Capital
RH, invested capital calculation (financing approach)
US$ in thousands
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 Addition of capitalized operating leases.
2 Elimination of deferred taxes from assets and liabilities. See details »
3 Addition of allowance for doubtful accounts receivable.
4 Addition of equity equivalents to stockholders’ equity (deficit).
5 Removal of accumulated other comprehensive income.
The analysis of invested capital over the period from 2018 to 2023 reveals a substantial expansion of the capital base, characterized by a transition from a heavily leveraged position with negative equity to a significantly larger and more complex financing structure. Invested capital increased from 1.23 billion USD in 2018 to a peak of 4.55 billion USD in 2022, before experiencing a slight contraction to 4.38 billion USD in 2023.
- Invested Capital Trends
- A moderate growth pattern is observed between 2018 and 2021, followed by a sharp acceleration in 2022, where invested capital more than doubled from the previous year. This suggests a period of aggressive capital deployment or significant asset expansion during the 2022 fiscal period.
- Debt and Lease Obligations
- Total reported debt and leases show a consistent upward trend, mirroring the growth in invested capital. A significant increase occurred between 2021 and 2022, with obligations rising from 1.62 billion USD to 3.43 billion USD, and further increasing to 3.75 billion USD by 2023. Debt remains the primary component of the company's invested capital.
- Stockholders' Equity Volatility
- The equity position shifted from a deficit in 2018 and 2019 to a positive balance starting in 2020. Equity grew rapidly, peaking at 1.17 billion USD in 2022, before declining to 784.66 million USD in 2023. This decline in equity in the final year is the primary driver behind the slight decrease in total invested capital despite the continued rise in debt.
- Capital Structure Dynamics
- In the initial years of the analysis, the capital base was funded almost exclusively by debt due to the equity deficits. By 2022, the funding mix became more diversified as equity contributions peaked. However, the 2023 data indicates a return to higher relative leverage, as the growth in debt obligations offset the reduction in stockholders' equity.
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Cost of Capital
RH, cost of capital calculations
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 5,416,784) | 5,416,784) | ÷ | 9,192,347) | = | 0.59 | 0.59 | × | 30.98% | = | 18.26% | ||
| Debt3 | 3,189,370) | 3,189,370) | ÷ | 9,192,347) | = | 0.35 | 0.35 | × | 6.66% × (1 – 21.00%) | = | 1.83% | ||
| Operating lease liability4 | 586,193) | 586,193) | ÷ | 9,192,347) | = | 0.06 | 0.06 | × | 4.08% × (1 – 21.00%) | = | 0.21% | ||
| Total: | 9,192,347) | 1.00 | 20.29% | ||||||||||
Based on: 10-K (reporting date: 2023-01-28).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 7,256,808) | 7,256,808) | ÷ | 10,725,914) | = | 0.68 | 0.68 | × | 30.98% | = | 20.96% | ||
| Debt3 | 2,854,759) | 2,854,759) | ÷ | 10,725,914) | = | 0.27 | 0.27 | × | 4.96% × (1 – 21.00%) | = | 1.04% | ||
| Operating lease liability4 | 614,347) | 614,347) | ÷ | 10,725,914) | = | 0.06 | 0.06 | × | 3.94% × (1 – 21.00%) | = | 0.18% | ||
| Total: | 10,725,914) | 1.00 | 22.18% | ||||||||||
Based on: 10-K (reporting date: 2022-01-29).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 12,598,090) | 12,598,090) | ÷ | 14,243,251) | = | 0.88 | 0.88 | × | 30.98% | = | 27.40% | ||
| Debt3 | 1,125,468) | 1,125,468) | ÷ | 14,243,251) | = | 0.08 | 0.08 | × | 5.04% × (1 – 21.00%) | = | 0.31% | ||
| Operating lease liability4 | 519,693) | 519,693) | ÷ | 14,243,251) | = | 0.04 | 0.04 | × | 3.97% × (1 – 21.00%) | = | 0.11% | ||
| Total: | 14,243,251) | 1.00 | 27.83% | ||||||||||
Based on: 10-K (reporting date: 2021-01-30).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 2,270,164) | 2,270,164) | ÷ | 4,068,301) | = | 0.56 | 0.56 | × | 30.98% | = | 17.29% | ||
| Debt3 | 1,329,283) | 1,329,283) | ÷ | 4,068,301) | = | 0.33 | 0.33 | × | 5.25% × (1 – 21.00%) | = | 1.36% | ||
| Operating lease liability4 | 468,854) | 468,854) | ÷ | 4,068,301) | = | 0.12 | 0.12 | × | 3.82% × (1 – 21.00%) | = | 0.35% | ||
| Total: | 4,068,301) | 1.00 | 18.99% | ||||||||||
Based on: 10-K (reporting date: 2020-02-01).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 2,108,232) | 2,108,232) | ÷ | 3,364,528) | = | 0.63 | 0.63 | × | 30.98% | = | 19.41% | ||
| Debt3 | 891,992) | 891,992) | ÷ | 3,364,528) | = | 0.27 | 0.27 | × | 11.53% × (1 – 21.00%) | = | 2.41% | ||
| Operating lease liability4 | 364,304) | 364,304) | ÷ | 3,364,528) | = | 0.11 | 0.11 | × | 11.53% × (1 – 21.00%) | = | 0.99% | ||
| Total: | 3,364,528) | 1.00 | 22.82% | ||||||||||
Based on: 10-K (reporting date: 2019-02-02).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
| Capital (fair value)1 | Weights | Cost of capital | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity2 | 2,050,294) | 2,050,294) | ÷ | 3,304,429) | = | 0.62 | 0.62 | × | 30.98% | = | 19.22% | ||
| Debt3 | 873,362) | 873,362) | ÷ | 3,304,429) | = | 0.26 | 0.26 | × | 11.90% × (1 – 33.70%) | = | 2.09% | ||
| Operating lease liability4 | 380,773) | 380,773) | ÷ | 3,304,429) | = | 0.12 | 0.12 | × | 11.90% × (1 – 33.70%) | = | 0.91% | ||
| Total: | 3,304,429) | 1.00 | 22.22% | ||||||||||
Based on: 10-K (reporting date: 2018-02-03).
1 US$ in thousands
2 Equity. See details »
3 Debt. See details »
4 Operating lease liability. See details »
Economic Spread Ratio
RH, economic spread ratio calculation, comparison to benchmarks
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | |||||||
| Economic profit1 | (344,329) | (257,719) | (223,742) | (41,778) | (42,282) | (193,678) | |
| Invested capital2 | 4,379,253) | 4,553,261) | 2,021,807) | 1,774,870) | 1,246,825) | 1,226,304) | |
| Performance Ratio | |||||||
| Economic spread ratio3 | -7.86% | -5.66% | -11.07% | -2.35% | -3.39% | -15.79% | |
| Benchmarks | |||||||
| Economic Spread Ratio, Competitors4 | |||||||
| Amazon.com Inc. | -10.78% | -21.72% | -1.96% | — | — | — | |
| Home Depot Inc. | 16.92% | 21.37% | 12.21% | — | — | — | |
| Lowe’s Cos. Inc. | 13.66% | 21.63% | 9.18% | — | — | — | |
| TJX Cos. Inc. | 4.23% | 4.25% | -12.60% | — | — | — | |
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 Economic profit. See details »
2 Invested capital. See details »
3 2023 Calculation
Economic spread ratio = 100 × Economic profit ÷ Invested capital
= 100 × -344,329 ÷ 4,379,253 = -7.86%
4 Click competitor name to see calculations.
The analysis of economic value added over the six-year period reveals a consistent failure to generate positive economic profit, indicating that the returns on invested capital did not exceed the company's cost of capital. While there was a period of relative stabilization and improvement between 2019 and 2020, the subsequent years demonstrate a widening economic loss and a substantial increase in the capital base.
- Economic Profit Trends
- Economic profit remained negative throughout the entire observed period. A notable improvement occurred between February 2018 and February 2020, where losses narrowed from 193,678 thousand USD to 41,778 thousand USD. However, this trend reversed sharply starting in January 2021, with losses expanding to 223,742 thousand USD and continuing to deteriorate to 344,329 thousand USD by January 2023. This trajectory suggests an increasing inability to create value for shareholders in the latter half of the period.
- Invested Capital Expansion
- Invested capital showed a consistent upward trajectory, growing from 1,226,304 thousand USD in 2018 to 4,379,253 thousand USD in 2023. A significant surge is observed between January 2021 and January 2022, where invested capital more than doubled from 2,021,807 thousand USD to 4,553,261 thousand USD. This substantial capital injection did not translate into positive economic profit, suggesting that the expanded asset base failed to generate a sufficient return to cover its associated costs.
- Economic Spread Ratio Analysis
- The economic spread ratio remained negative across all reported years, confirming that the company operated below its cost of capital. The ratio improved from -15.79% in 2018 to a peak of -2.35% in 2020. A sharp decline followed in 2021, reaching -11.07%, before fluctuating to -5.66% in 2022 and -7.86% in 2023. The persistence of a negative spread indicates a chronic gap between the internal rate of return and the required rate of return on the capital employed.
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Economic Profit Margin
RH, economic profit margin calculation, comparison to benchmarks
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in thousands) | |||||||
| Economic profit1 | (344,329) | (257,719) | (223,742) | (41,778) | (42,282) | (193,678) | |
| Net revenues | 3,590,477) | 3,758,820) | 2,848,626) | 2,647,437) | 2,505,653) | 2,440,174) | |
| Performance Ratio | |||||||
| Economic profit margin2 | -9.59% | -6.86% | -7.85% | -1.58% | -1.69% | -7.94% | |
| Benchmarks | |||||||
| Economic Profit Margin, Competitors3 | |||||||
| Amazon.com Inc. | -6.07% | -11.34% | -0.84% | — | — | — | |
| Home Depot Inc. | 5.95% | 6.79% | 4.60% | — | — | — | |
| Lowe’s Cos. Inc. | 3.49% | 5.88% | 2.91% | — | — | — | |
| TJX Cos. Inc. | 1.73% | 1.73% | -8.77% | — | — | — | |
Based on: 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 Economic profit. See details »
2 2023 Calculation
Economic profit margin = 100 × Economic profit ÷ Net revenues
= 100 × -344,329 ÷ 3,590,477 = -9.59%
3 Click competitor name to see calculations.
An analysis of the economic value added indicates a persistent failure to generate positive economic profit over the six-year period ending January 28, 2023. Despite a general upward trajectory in net revenues, the organization has consistently failed to cover its cost of capital, resulting in a negative economic profit margin throughout the observed timeframe.
- Economic Profit Margin Trends
- The economic profit margin exhibited significant volatility. A period of relative improvement occurred between February 2019 and February 2020, where the margin narrowed to -1.69% and -1.58%, respectively. However, this trend reversed sharply by January 2021, with the margin widening to -7.85%. Although a slight recovery to -6.86% was noted in January 2022, the period concluded with the most severe margin contraction in the sequence, reaching -9.59% in January 2023.
- Net Revenue Performance
- Net revenues demonstrated a steady growth pattern from 2018 through 2022, increasing from 2.44 billion to a peak of 3.76 billion. This growth indicates an expansion of the top line; however, the divergence between revenue growth and economic profit suggests that the increase in scale did not lead to value creation above the cost of capital. A slight revenue contraction was observed in the final year, with figures declining to 3.59 billion.
- Absolute Economic Profit Analysis
- The absolute economic profit remained negative throughout the entire period. Following a reduction in losses during 2019 and 2020, the deficit widened substantially starting in 2021. The economic profit loss grew from -223.7 million in January 2021 to -344.3 million in January 2023, signifying a marked increase in the destruction of economic value despite the higher revenue base achieved in the later years.
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