Segment Reporting

12 Months Ended

Jan. 30, 2021

Segment Reporting

Segment Reporting

NOTE 21—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 three operating segments: RH Segment, Waterworks and Real Estate Development. The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, websites, source books, and the commercial channel. The Real Estate Development segment represents operations associated with our equity method investments entered into in fiscal 2020, as described in Note 8—Equity Method Investments.

The retail operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared senior leadership 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 for the retail operating segments. Operating income is defined as net income before interest expense—net, goodwill and tradename impairment, (gain) loss on extinguishment of debt—net, income tax expense and our share of equity method investment losses.

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):

	YEAR ENDED
	JANUARY 30,						FEBRUARY 1,						FEBRUARY 2,
	2021						2020						2019
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	2,729,422	$	119,204	$	2,848,626	$	2,514,296	$	133,141	$	2,647,437	$	2,375,472	$	130,181	$	2,505,653
Gross profit		1,274,148		51,383		1,325,531		1,038,722		56,289		1,095,011		933,805		51,772		985,577
Depreciation and amortization		95,071		4,969		100,040		96,148		4,591		100,739		86,719		4,653		91,372

In fiscal 2020, the Real Estate Development segment share of equity method investments losses was $0.9 million.

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

	JANUARY 30,								FEBRUARY 1,
	2021								2020
					REAL ESTATE
	RH SEGMENT		WATERWORKS		INVESTMENTS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Goodwill (1)	$	141,100	$	—	$	—	$	141,100	$	124,367	$	—	$	124,367
Tradenames, trademarks and other intangible assets (2)		54,663		17,000		—		71,663		48,563		37,459		86,022
Equity method investments		—		—		100,603		100,603		—		—		—
Total assets		2,659,944		137,766		100,603		2,898,313		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 February 2, 2019, 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.

We use segment operating income to evaluate segment performance and allocate resources. Segment operating income excludes (i) a non-cash compensation charge related to a fully vested option grant made to Mr. Friedman in October 2020, (ii) asset impairments and changes in useful lives, (iii) gain (loss) on sale leaseback transactions, (iv) product recall accruals and adjustments—net, (v) severance costs associated with reorganizations, (vi) legal settlements, net of legal expenses, (vii) asset held for sale gain, (viii) disposals of inventory and property and equipment, lease related charges, inventory transfer costs and other costs and adjustments associated with distribution center closures, and (ix) non-cash amortization of the inventory fair value adjustment recorded in connection with the Waterworks acquisition. 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 our senior leadership team reviews.

The following table presents, for our retail operating segments, the segment operating income (loss) and income before income taxes (in thousands):

	YEAR ENDED
	JANUARY 30,		FEBRUARY 1,		FEBRUARY 2,
	2021		2020		2019
Operating income (loss):
RH Segment	$	616,523	$	375,315	$	288,106
Waterworks		4,019		3,780		(922)
Non-cash compensation		(117,084)		—		—
Asset impairments and change in useful lives		(12,851)		(21,899)		(7,218)
Gain (loss) on sale leaseback transaction		(9,352)		1,196		(8,497)
Recall accrual		(7,370)		3,988		(1,619)
Reorganization related costs		(7,027)		(1,075)		(9,977)
Legal settlements		—		1,193		5,289
Asset held for sale gain		—		333		—
Distribution center closures		—		—		(3,046)
Impact of inventory step-up		—		—		(380)
Income from operations		466,858		362,831		261,736
Interest expense—net		69,250		87,177		67,769
Goodwill and tradename impairment		20,459		—		32,086
(Gain) loss on extinguishment of debt—net		(152)		6,472		917
Income before income taxes	$	377,301	$	269,182	$	160,964

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. Net revenues in each category were as follows (in thousands):

	YEAR ENDED
	JANUARY 30,		FEBRUARY 1,		FEBRUARY 2,
	2021		2020		2019
Furniture	$	1,940,658	$	1,762,034	$	1,635,631
Non-furniture		907,968		885,403		870,022
Total net revenues	$	2,848,626	$	2,647,437	$	2,505,653

During fiscal 2020, we reviewed our segments and product lines and updated certain products and categories in our reporting of furniture and non-furniture product lines. While this reporting change did not impact our consolidated results, prior period segment data has been recast for consistency in reporting.

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of January 30, 2021, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K. Geographic revenues in Canada and the U.K. are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented. Long-lived assets held internationally were not material in any fiscal period presented.

No single customer accounted for more than 10% of our revenues in fiscal 2020, fiscal 2019 or fiscal 2018.