Segment Reporting

6 Months Ended

Aug. 01, 2020

Segment Reporting

Segment Reporting

NOTE 17—SEGMENT REPORTING

We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”), which we have determined is our Chief Executive Officer. We have two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by our customers, including sales through catalogs, websites, stores, and the commercial channel.

Our two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared management team and customer base, we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

We use operating income to evaluate segment profitability. Operating income is defined as net income before interest expense—net, tradename impairment and income tax expense.

Segment Information

The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting (in thousands):

	Three Months Ended
	August 1,						August 3,
	2020						2019
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	681,387	$	27,895	$	709,282	$	672,328	$	34,186	$	706,514
Gross profit		320,481		11,938		332,419		280,469		14,489		294,958
Depreciation and amortization		24,234		1,108		25,342		24,170		1,151		25,321

	Six Months Ended
	August 1,						August 3,
	2020						2019
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,136,344	$	55,833	$	1,192,177	$	1,236,034	$	68,901	$	1,304,935
Gross profit		508,243		23,830		532,073		498,412		29,360		527,772
Depreciation and amortization		47,951		2,261		50,212		50,174		2,336		52,510

The following table presents the balance sheet metrics as required under ASC 280—Segment Reporting (in thousands):

	August 1,						February 1,
	2020						2020
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,350	$	—	$	124,350	$	124,367	$	—	$	124,367
Tradenames, trademarks and domain names (2)		49,863		17,000		66,863		48,563		37,459		86,022
Total assets		2,382,857		123,552		2,506,409		2,301,823		143,871		2,445,694

(1) The Waterworks reporting unit goodwill of $51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $17.4 million and $33.7 million impairment recorded in fiscal 2018 and fiscal 2017, respectively.

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $35.1 million, of which $20.5 million was recorded in the first quarter of fiscal 2020 and $14.6 million was recorded in fiscal 2018. Refer to “Waterworks Tradename Impairment” within Note 4—Goodwill, Trademarks, Trademarks and Domain Names.

We use segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) asset impairments and change in useful lives, (ii) loss on sale leaseback transaction, (iii) severance costs associated with reorganizations, (iv) product recall accruals and adjustments—net and (v) favorable legal settlements, net of legal expenses. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and management review.

The following table presents segment operating income and income before income taxes (in thousands):

	Three Months Ended				Six Months Ended
	August 1,		August 3,		August 1,		August 3,
	2020		2019		2020		2019
Operating income:
RH Segment	$	153,350	$	104,093	$	202,867	$	173,493
Waterworks		1,573		920		123		2,014
Asset impairments and change in useful lives		(1,339)		(2,545)		(9,810)		(6,021)
Loss on sale leaseback transaction		(9,352)		—		(9,352)		—
Reorganization related costs		(2,884)		—		(7,027)		—
Recall accrual		(4,780)		320		(4,780)		1,935
Legal settlements		—		1,193		—		1,193
Income from operations		136,568		103,981		172,021		172,614
Interest expense—net		19,418		24,513		39,047		45,631
Tradename impairment		—		—		20,459		—
Gain on extinguishment of debt		(152)		(954)		(152)		(954)
Income before income taxes	$	117,302	$	80,422	$	112,667	$	127,937

We classify our sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor, as well as hospitality. Net revenues in each category were as follows (in thousands):

	Three Months Ended				Six Months Ended
	August 1,		August 3,		August 1,		August 3,
	2020		2019		2020		2019
Furniture	$	488,303	$	485,639	$	805,082	$	882,337
Non-furniture		220,979		220,875		387,095		422,598
Total net revenues	$	709,282	$	706,514	$	1,192,177	$	1,304,935

We are domiciled in the United States and primarily operate our retail and outlet stores in the United States. As of August 1, 2020, we operated 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian and U.K. operations, and the long-lived assets in Canada and the U.K., are not material. Canada and U.K. geographic revenues are based upon revenues recognized at the retail store locations in the respective country.

No single customer accounted for more than 10% of our revenues in the three or six months ended August 1, 2020 or August 3, 2019.