Segment Reporting

6 Months Ended

Jul. 31, 2021

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 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 5—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, tradename impairment, (gain) loss on extinguishment of debt, income tax expense and our share of equity method investments 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):

	THREE MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	947,618	$	41,241	$	988,859	$	681,387	$	27,895	$	709,282
Gross profit		467,067		20,609		487,676		320,481		11,938		332,419
Depreciation and amortization		21,484		1,186		22,670		24,234		1,108		25,342

	SIX MONTHS ENDED
	JULY 31,						AUGUST 1,
	2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	1,767,441	$	82,210	$	1,849,651	$	1,136,344	$	55,833	$	1,192,177
Gross profit		853,620		41,033		894,653		508,243		23,830		532,073
Depreciation and amortization		44,164		2,392		46,556		47,951		2,261		50,212

The Real Estate Development segment share of equity method investments losses were $2.5 million and $4.6 million during the three and six months ended July 31, 2021, respectively.

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

	JULY 31,								JANUARY 30,
	2021								2021
					REAL ESTATE								REAL ESTATE
	RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL		RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL
Goodwill (1)	$	141,132	$	—	$	—	$	141,132	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets (2)		55,584		17,000		—		72,584		54,663		17,000		—		71,663
Equity method investments		—		—		97,412		97,412		—		—		100,603		100,603
Total assets		3,215,534		154,206		97,412		3,467,152		2,659,944		137,766		100,603		2,898,313

(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, with $20.5 million and $14.6 million recorded in fiscal 2020 and fiscal 2018, respectively.

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 lease losses, (iii) product recall accruals, (iv) severance costs associated with reorganizations and (v) loss on sale leaseback transaction. 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 review.

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

	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Operating income:
RH Segment	$	257,242	$	153,350	$	445,252	$	202,867
Waterworks		5,413		1,573		11,655		123
Non-cash compensation		(5,864)		—		(11,728)		—
Asset impairments and lease losses		(7,354)		(1,339)		(7,354)		(9,810)
Recall accrual		—		(4,780)		(500)		(4,780)
Reorganization related costs		(449)		(2,884)		(449)		(7,027)
Loss on sale leaseback transaction		—		(9,352)		—		(9,352)
Income from operations		248,988		136,568		436,876		172,021
Interest expense—net		13,581		19,418		26,889		39,047
(Gain) loss on extinguishment of debt		3,166		(152)		3,271		(152)
Tradename impairment		—		—		—		20,459
Income before income taxes	$	232,241	$	117,302	$	406,716	$	112,667

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):

	THREE MONTHS ENDED				SIX MONTHS ENDED
	JULY 31,		AUGUST 1,		JULY 31,		AUGUST 1,
	2021		2020		2021		2020
Furniture	$	699,729	$	483,205	$	1,279,740	$	795,728
Non-furniture		289,130		226,077		569,911		396,449
Total net revenues	$	988,859	$	709,282	$	1,849,651	$	1,192,177

During the third fiscal quarter of 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 and outlet locations in the United States. As of July 31, 2021, we operated 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Geographical 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 the three or six months ended July 31, 2021 and August 1, 2020.