Segment Reporting

3 Months Ended

Apr. 30, 2022

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 (refer to 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.

Segment Information

We use operating income to evaluate segment profitability for the retail operating segments and allocate resources. Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other income—net, income tax expense (benefit) and our share of equity method investments losses. Segment operating income excludes (i) employer payroll tax expense related to the option exercise by Mr. Friedman, (ii) asset impairments, (iii) non-cash compensation amortization related to the fully vested option grant made to Mr. Friedman in October 2020 and (iv) professional fee related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes). 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 segment operating income and income before income taxes:

	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021
	(in thousands)
Operating income:
RH Segment	$	228,545	$	188,010
Waterworks		7,985		6,242
Employer payroll taxes on option exercise		(11,717)		—
Professional fee		(7,184)		—
Asset impairments		(5,923)		—
Non-cash compensation		(5,858)		(5,864)
Recall accrual		(560)		(500)
Income from operations		205,288		187,888
Interest expense—net		20,855		13,308
Loss on extinguishment of debt		146,116		105
Other income—net		(343)		—
Income before income taxes	$	38,660	$	174,475

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:

	THREE MONTHS ENDED
	APRIL 30,						MAY 1,
	2022						2021
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	908,948	$	48,344	$	957,292	$	819,823	$	40,969	$	860,792
Gross profit		472,822		25,761		498,583		386,553		20,424		406,977
Depreciation and amortization		23,524		1,234		24,758		22,680		1,206		23,886

In the three months ended April 30, 2022 and May 1, 2021, the Real Estate Development segment share of equity method investments losses were $1.4 million and $2.1 million, respectively.

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

	APRIL 30,								JANUARY 29,
	2022								2022
					REAL ESTATE								REAL ESTATE
	RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL		RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL
	(in thousands)
Goodwill(1)	$	141,092	$	—	$	—	$	141,092	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets(2)		56,488		17,000		—		73,488		56,161		17,000		—		73,161
Equity method investments		—		520		100,030		100,550		—		—		100,810		100,810
Total assets		5,595,677		192,230		100,030		5,887,937		5,259,719		179,941		100,810		5,540,470

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

(2) Presented net of an impairment charge of $35 million recognized in previous fiscal years.

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:

	THREE MONTHS ENDED
	APRIL 30,		MAY 1,
	2022		2021
	(in thousands)
Furniture	$	662,520	$	580,011
Non-furniture		294,772		280,781
Total net revenues	$	957,292	$	860,792

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of April 30, 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 10% or more of our consolidated net revenues in the three months ended April 30, 2022 or May 1, 2021.