Segment Reporting

12 Months Ended

Jan. 29, 2022

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, 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, tradename impairment, (gain) loss on extinguishment of debt, other expenses—net, 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):

	YEAR ENDED
	JANUARY 29,						JANUARY 30,						FEBRUARY 1,
	2022						2021						2020
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
Net revenues	$	3,593,842	$	164,978	$	3,758,820	$	2,729,422	$	119,204	$	2,848,626	$	2,514,296	$	133,141	$	2,647,437
Gross profit		1,772,668		82,743		1,855,411		1,274,148		51,383		1,325,531		1,038,722		56,289		1,095,011
Depreciation and amortization		91,252		4,770		96,022		95,071		4,969		100,040		96,148		4,591		100,739

In fiscal 2021 and fiscal 2020, the Real Estate Development segment share of equity method investments losses were $8.2 million and $0.9 million, respectively.

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

	JANUARY 29,								JANUARY 30,
	2022								2021
					REAL ESTATE								REAL ESTATE
	RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL		RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL
Goodwill (1)	$	141,100	$	—	$	—	$	141,100	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets (2)		56,161		17,000		—		73,161		54,663		17,000		—		71,663
Equity method investments		—		—		100,810		100,810		—		—		100,603		100,603
Total assets		5,259,719		179,941		100,810		5,540,470		2,659,944		137,766		100,603		2,898,313

(1) The Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $35 million, with $20 million recorded in fiscal 2020.

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) product recall accruals and adjustments—net, (iv) severance costs associated with reorganizations, (v) gain (loss) on sale leaseback transactions, (vi) legal settlements, net of legal expenses and (vii) asset held for sale gain. 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 and income before income taxes (in thousands):

	YEAR ENDED
	JANUARY 29,		JANUARY 30,		FEBRUARY 1,
	2022		2021		2020
Operating income:
RH Segment	$	944,881	$	616,523	$	375,315
Waterworks		17,747		4,019		3,780
Non-cash compensation		(23,428)		(117,084)		—
Asset impairments and change in useful lives		(9,630)		(12,851)		(21,899)
Recall accrual		(1,940)		(7,370)		3,988
Reorganization related costs		(449)		(7,027)		(1,075)
(Gain) loss on sale leaseback transaction		—		(9,352)		1,196
Legal settlements		—		—		1,193
Asset held for sale gain		—		—		333
Income from operations		927,181		466,858		362,831
Interest expense—net		64,947		69,250		87,177
(Gain) loss on extinguishment of debt		29,138		(152)		6,472
Other expense—net		2,778		—		—
Tradename impairment		—		20,459		—
Income before income taxes	$	830,318	$	377,301	$	269,182

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 29,		JANUARY 30,		FEBRUARY 1,
	2022		2021		2020
Furniture	$	2,599,540	$	1,940,658	$	1,762,034
Non-furniture		1,159,280		907,968		885,403
Total net revenues	$	3,758,820	$	2,848,626	$	2,647,437

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of January 29, 2022 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 2021, fiscal 2020 or fiscal 2019.