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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
Net Operating Profit after Taxes (NOPAT)
Cash Operating Taxes
Invested Capital
Cost of Capital
Economic Spread Ratio
Economic Profit Margin

RH, economic profit calculation

US$ in thousands

12 months ended:	Jan 28, 2023	Jan 29, 2022	Jan 30, 2021	Feb 1, 2020	Feb 2, 2019	Feb 3, 2018
Net operating profit after taxes (NOPAT)¹	544,162)	752,355)	339,002)	295,307)	242,188)	78,790)
Cost of capital²	20.35%	22.26%	27.93%	19.05%	22.89%	22.29%
Invested capital³	4,379,253)	4,553,261)	2,021,807)	1,774,870)	1,246,825)	1,226,304)

Economic profit⁴	(347,203)	(261,150)	(225,734)	(42,881)	(43,152)	(194,525)

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 – 20.35% × 4,379,253 = -347,203

An analysis of economic profit from 2018 to 2023 reveals a consistent failure to generate value above the required cost of capital. Despite significant growth in operating profits during the middle of the period, the economic profit remained negative throughout the entire six-year window, indicating that the returns generated were insufficient to cover the cost of the capital employed.

Net Operating Profit After Taxes (NOPAT): A strong upward trajectory was observed from 2018 to 2022, with NOPAT increasing from US$ 78.79 million to a peak of US$ 752.36 million. However, a contraction occurred in 2023, with NOPAT declining to US$ 544.16 million, suggesting a reduction in operational efficiency or a downturn in market demand.
Invested Capital: The capital base remained relatively stable between 2018 and 2019, followed by a steady increase through 2021. A substantial expansion occurred in 2022, where invested capital jumped to US$ 4.55 billion, more than doubling the previous year's figure. This aggressive expansion of the asset base slightly corrected in 2023 to US$ 4.38 billion.
Cost of Capital: The cost of capital exhibited significant volatility, fluctuating between a low of 19.05% in 2020 and a high of 27.93% in 2021. The consistently high cost of capital, averaging above 20% for most of the period, established a high threshold for achieving positive economic value added.
Economic Profit Trends: Economic profit remained negative for all reported years. While there was a period of relative stabilization and improvement between 2019 and 2020, the losses widened significantly starting in 2021. The deterioration accelerated in 2022 and 2023, reaching a peak deficit of US$ 347.20 million. The divergence between the growth in NOPAT and the widening economic loss is primarily attributable to the massive increase in invested capital, which increased the total capital charge beyond the growth in operational earnings.

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RH, NOPAT calculation

US$ in thousands

12 months ended:	Jan 28, 2023	Jan 29, 2022	Jan 30, 2021	Feb 1, 2020	Feb 2, 2019	Feb 3, 2018
Net income	528,642)	688,546)	271,815)	220,375)	150,639)	2,180)
Deferred income tax expense (benefit)¹	(92,610)	(6,921)	(4,920)	(8,387)	(1,043)	5,684)
Increase (decrease) in allowance for expected credit losses²	(200)	300)	1,100)	300)	100)	(600)
Increase (decrease) in equity equivalents³	(92,810)	(6,621)	(3,820)	(8,087)	(943)	5,084)
Interest expense	151,730)	66,883)	70,648)	88,509)	75,908)	63,084)
Interest expense, operating lease liability⁴	23,917)	24,205)	20,632)	17,910)	42,004)	45,312)
Adjusted interest expense	175,647)	91,088)	91,280)	106,419)	117,912)	108,396)
Tax benefit of interest expense⁵	(36,886)	(19,129)	(19,169)	(22,348)	(24,762)	(36,529)
Adjusted interest expense, after taxes⁶	138,761)	71,960)	72,111)	84,071)	93,151)	71,867)
Interest income	(38,520)	(1,936)	(1,398)	(1,332)	(834)	(514)
Investment income, before taxes	(38,520)	(1,936)	(1,398)	(1,332)	(834)	(514)
Tax expense (benefit) of investment income⁷	8,089)	407)	294)	280)	175)	173)
Investment income, after taxes⁸	(30,431)	(1,529)	(1,104)	(1,052)	(659)	(341)
Net operating profit after taxes (NOPAT)	544,162)	752,355)	339,002)	295,307)	242,188)	78,790)

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.

Net Income: The net income has shown a significant upward trend from 2018 to 2022, starting at 2,180 thousand US dollars in 2018 and reaching a peak of 688,546 thousand US dollars in 2022. However, in 2023, there is a notable decline to 528,642 thousand US dollars, indicating a decrease from the previous year's peak.
Net Operating Profit After Taxes (NOPAT): NOPAT has also demonstrated a consistent increase over the years, rising from 78,790 thousand US dollars in 2018 to 752,355 thousand US dollars in 2022. Similar to net income, NOPAT decreases in 2023 to 544,162 thousand US dollars, showing a reduction compared to the prior year.
Overall Trends and Insights: Both net income and NOPAT exhibit strong growth from 2018 through 2022, reflecting improved profitability and operational efficiency. The concurrent decline in both metrics in 2023 suggests potential challenges or one-time events that affected the company's earnings and operating profit. Despite the decrease in 2023, the company maintains substantially higher profitability levels compared to the earlier years.

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RH, cash operating taxes calculation

US$ in thousands

12 months ended:	Jan 28, 2023	Jan 29, 2022	Jan 30, 2021	Feb 1, 2020	Feb 2, 2019	Feb 3, 2018
Income tax expense (benefit)	(91,358)	133,558)	104,598)	48,807)	30,514)	27,971)
Less: Deferred income tax expense (benefit)	(92,610)	(6,921)	(4,920)	(8,387)	(1,043)	5,684)
Add: Tax savings from interest expense	36,886)	19,129)	19,169)	22,348)	24,762)	36,529)
Less: Tax imposed on investment income	8,089)	407)	294)	280)	175)	173)
Cash operating taxes	30,049)	159,201)	128,393)	79,262)	56,143)	58,643)

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).

Income Tax Expense (Benefit): The income tax expense shows a general upward trend from 2018 through 2022, increasing from 27,971 thousand US dollars in 2018 to a peak of 133,558 thousand US dollars in 2022. This indicates a substantial rise in reported tax expense over this period. However, in 2023, there is a significant reversal, with the figure turning negative to -91,358 thousand US dollars, suggesting a tax benefit or refund in that year rather than an expense.
Cash Operating Taxes: Cash operating taxes exhibit a consistent increase from 58,643 thousand US dollars in 2018 to a high of 159,201 thousand US dollars in 2022. This steady growth indicates rising cash outflows for taxes related to operations. In 2023, however, the cash operating taxes decline sharply to 30,049 thousand US dollars, which is less than one-fifth of the prior year’s amount, pointing to a significant reduction in tax payments made in cash during this period.
Overall Tax Trends: Both income tax expense and cash operating taxes generally trend upwards through most of the timeframe, reflecting increasing tax obligations. The notable shifts in 2023, with income tax expense turning into a benefit and cash operating taxes dropping markedly, suggest exceptional tax events or adjustments that could be related to changes in profitability, tax regulation, or tax planning strategies implemented during or prior to that fiscal year. The divergence between tax expense and cash taxes in the final year indicates that the recorded tax expense does not correspond to actual cash outflows, highlighting potential timing differences or non-cash tax items influencing the reported figures.

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RH, invested capital calculation (financing approach)

US$ in thousands

	Jan 28, 2023	Jan 29, 2022	Jan 30, 2021	Feb 1, 2020	Feb 2, 2019	Feb 3, 2018
Convertible senior notes due 2024, net	—)	3,600)	—)	—)	—)	—)
Convertible senior notes due 2023, net	1,696)	9,389)	2,354)	—)	—)	—)
Convertible senior notes due 2020, net	—)	—)	—)	290,532)	—)	—)
Convertible senior notes due 2019, net	—)	—)	—)	—)	343,789)	—)
Current portion of term loans	25,000)	20,000)	—)	—)	—)	—)
Current finance lease liabilities	17,007)	15,511)	14,671)	9,188)	1,074)	471)
Current portion of equipment promissory notes	1,160)	13,625)	22,747)	22,009)	892)	6,033)
Asset based credit facility	—)	—)	—)	—)	57,500)	199,970)
Term loan B, net	1,936,529)	1,953,203)	—)	—)	—)	—)
Term loan B-2, net	469,245)	—)	—)	—)	—)	—)
Term loan, net	—)	—)	—)	—)	—)	79,499)
Real estate loans	17,909)	—)	—)	—)	—)	—)
Convertible senior notes due 2024, net	41,724)	184,461)	281,454)	264,982)	—)	—)
Convertible senior notes due 2023, net	—)	59,002)	282,956)	266,658)	249,151)	—)
Convertible senior notes due 2020, net	—)	—)	—)	—)	271,157)	252,994)
Convertible senior notes due 2019, net	—)	—)	—)	—)	—)	327,731)
Non-current finance lease liabilities	653,050)	560,550)	485,481)	442,988)	7,720)	7,509)
Non-current portion of equipment promissory notes, net	—)	1,129)	14,614)	31,053)	—)	—)
Operating lease liability¹	586,193)	614,347)	519,693)	468,854)	364,304)	380,773)
Total reported debt & leases	3,749,513)	3,434,817)	1,623,970)	1,796,264)	1,295,587)	1,254,980)
Stockholders’ equity (deficit)	784,661)	1,170,277)	447,026)	18,651)	(22,962)	(7,336)
Net deferred tax (assets) liabilities²	(160,724)	(56,843)	(49,924)	(45,005)	(30,033)	(23,311)
Allowance for expected credit losses³	3,400)	3,600)	3,300)	2,200)	1,900)	1,800)
Equity equivalents⁴	(157,324)	(53,243)	(46,624)	(42,805)	(28,133)	(21,511)
Accumulated other comprehensive (income) loss, net of tax⁵	2,403)	1,410)	(2,565)	2,760)	2,333)	171)
Adjusted stockholders’ equity (deficit)	629,740)	1,118,444)	397,837)	(21,394)	(48,762)	(28,676)
Invested capital	4,379,253)	4,553,261)	2,021,807)	1,774,870)	1,246,825)	1,226,304)

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.

Total reported debt & leases: The total reported debt and leases show a generally increasing trend over the analyzed periods. Starting at approximately 1.25 billion US dollars in early 2018, the amount rises modestly to about 1.3 billion in early 2019. A significant increase is observed in 2020, reaching around 1.8 billion, followed by a slight decline in 2021 to about 1.62 billion. However, from 2021 to 2023, the debt nearly doubles, peaking at approximately 3.75 billion US dollars by early 2023. This indicates a substantial increase in leverage towards the latter years.
Stockholders’ equity (deficit): Stockholders’ equity exhibits notable volatility. It begins with a deficit of roughly -7.3 million in early 2018, worsening to -22.9 million in 2019. A positive turnaround occurs in 2020, with equity improving to about 18.7 million. This positive trajectory continues strongly, reaching approximately 447 million in 2021 and peaking at around 1.17 billion in 2022. However, equity declines significantly in 2023 to roughly 784 million, though it remains positive. The initial deficits suggest prior financial struggles, followed by a recovery period and some recent weakening.
Invested capital: Invested capital follows a pattern similar to total debt and equity combined, displaying growth over the period examined. Starting near 1.23 billion in 2018, it remains relatively flat through 2019 before a marked increase to about 1.77 billion in 2020. Steady growth continues into 2021, reaching just over 2 billion. A substantial surge occurs in 2022, with invested capital approximately doubling to 4.55 billion, before slightly decreasing to 4.38 billion in 2023. The significant increase in invested capital aligns with the rise in debt and equity previously noted, indicating increased capitalization.

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RH, cost of capital calculations

Jan 28, 2023

	Capital (fair value)¹	Weights					Cost of capital
Equity²	5,416,784)	5,416,784)	÷	9,192,347)	=	0.59	0.59	×	31.09%	=	18.32%
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					20.35%

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 »

Jan 29, 2022

	Capital (fair value)¹	Weights					Cost of capital
Equity²	7,256,808)	7,256,808)	÷	10,725,914)	=	0.68	0.68	×	31.09%	=	21.04%
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					22.26%

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 »

Jan 30, 2021

	Capital (fair value)¹	Weights					Cost of capital
Equity²	12,598,090)	12,598,090)	÷	14,243,251)	=	0.88	0.88	×	31.09%	=	27.50%
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					27.93%

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 »

Feb 1, 2020

	Capital (fair value)¹	Weights					Cost of capital
Equity²	2,270,164)	2,270,164)	÷	4,068,301)	=	0.56	0.56	×	31.09%	=	17.35%
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					19.05%

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 »

Feb 2, 2019

	Capital (fair value)¹	Weights					Cost of capital
Equity²	2,108,232)	2,108,232)	÷	3,364,528)	=	0.63	0.63	×	31.09%	=	19.48%
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					22.89%

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 »

Feb 3, 2018

	Capital (fair value)¹	Weights					Cost of capital
Equity²	2,050,294)	2,050,294)	÷	3,304,429)	=	0.62	0.62	×	31.09%	=	19.29%
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					22.29%

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 »

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	(347,203)	(261,150)	(225,734)	(42,881)	(43,152)	(194,525)
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	-7.93%	-5.74%	-11.16%	-2.42%	-3.46%	-15.86%
Benchmarks
Economic Spread Ratio, Competitors⁴
Amazon.com Inc.	-10.81%	-21.75%	-1.99%	—	—	—
Home Depot Inc.	16.92%	21.36%	12.21%	—	—	—
Lowe’s Cos. Inc.	13.65%	21.62%	9.17%	—	—	—
TJX Cos. Inc.	4.24%	4.26%	-12.59%	—	—	—

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 × -347,203 ÷ 4,379,253 = -7.93%

⁴ Click competitor name to see calculations.

The analysis of economic value added reveals a consistent failure to generate positive economic profit over the observed six-year period. The entity has operated continuously below its cost of capital, resulting in a persistent destruction of economic value despite significant fluctuations in the magnitude of these losses.

Economic Profit Trends: Economic profit remained negative from 2018 through 2023. A period of relative improvement was observed between 2019 and 2020, during which losses narrowed to approximately -43 million USD. However, a significant deterioration began in 2021, with economic profit falling further each year to reach -347.2 million USD by 2023, indicating an increasing inability to cover the imputed cost of invested capital.
Invested Capital Expansion: A substantial upward trend in invested capital is evident. From a base of 1.23 billion USD in 2018, the capital base grew steadily until 2021. A sharp increase occurred in 2022, where invested capital more than doubled to 4.55 billion USD. This aggressive expansion of the capital base did not correlate with a transition to positive economic profit, suggesting that the additional capital deployed did not generate returns exceeding the cost of capital.
Economic Spread Ratio Analysis: The economic spread ratio has remained negative throughout the period, confirming that the return on invested capital has consistently trailed the cost of capital. The ratio showed significant volatility, improving from -15.86% in 2018 to a peak of -2.42% in 2020. This trend reversed sharply in 2021, with the ratio dropping to -11.16%, before settling at -7.93% by 2023. The persistent negative spread indicates a systemic failure to create value for shareholders relative to the risk and cost of the capital employed.

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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	(347,203)	(261,150)	(225,734)	(42,881)	(43,152)	(194,525)
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	-9.67%	-6.95%	-7.92%	-1.62%	-1.72%	-7.97%
Benchmarks
Economic Profit Margin, Competitors³
Amazon.com Inc.	-6.09%	-11.35%	-0.85%	—	—	—
Home Depot Inc.	5.94%	6.79%	4.59%	—	—	—
Lowe’s Cos. Inc.	3.48%	5.88%	2.90%	—	—	—
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 × -347,203 ÷ 3,590,477 = -9.67%

³ Click competitor name to see calculations.

The analysis of economic value creation from 2018 to 2023 reveals a persistent inability to generate positive economic profit, with the company operating below its cost of capital throughout the entire period.

Economic Profit Trends: A period of relative stabilization occurred between 2019 and 2020, during which economic losses narrowed to approximately US$ 43 million. However, a sharp reversal began in 2021, leading to a continuous expansion of economic losses that reached a peak of US$ 347.2 million by 2023.
Revenue Growth and Value Erosion: Net revenues exhibited a general upward trajectory, increasing from US$ 2.44 billion in 2018 to a peak of US$ 3.76 billion in 2022. Despite this growth in top-line scale, economic profit deteriorated significantly over the same timeframe. This divergence indicates that revenue expansion failed to generate sufficient operating returns to cover the associated cost of capital.
Economic Profit Margin Volatility: The economic profit margin demonstrated significant volatility, initially improving from -7.97% in 2018 to -1.62% in 2020. This recovery was subsequently erased as the margin declined sharply to -7.92% in 2021 and reached its lowest point of -9.67% in 2023, signaling an increasing inefficiency in value creation relative to the scale of operations.

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RH (NYSE:RH)

Economic Value Added (EVA)

Economic Profit

Net Operating Profit after Taxes (NOPAT)

Cash Operating Taxes

Invested Capital

Cost of Capital

Economic Spread Ratio

Economic Profit Margin