Segment Reporting

6 Months Ended

Jul. 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 expense—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) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr. Friedman in October 2020, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes), (v) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vi) product recalls and (vii) severance costs associated with reorganizations. 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				SIX MONTHS ENDED
	JULY 30,		JULY 31,		JULY 30,		JULY 31,
	2022		2021		2022		2021
	(in thousands)
Operating income:
RH Segment	$	237,512	$	257,242	$	466,057	$	445,252
Waterworks		7,222		5,413		15,207		11,655
Employer payroll taxes on option exercise		—		—		(11,717)		—
Non-cash compensation		(4,321)		(5,864)		(10,179)		(11,728)
Asset impairments		(2,231)		(7,354)		(8,154)		(7,354)
Professional fees		(285)		—		(7,469)		—
Compensation settlements		(3,483)		—		(3,483)		—
Recall accrual		—		—		(560)		(500)
Reorganization related costs		—		(449)		—		(449)
Income from operations		234,414		248,988		439,702		436,876
Interest expense—net		26,264		13,581		47,119		26,889
Loss on extinguishment of debt		23,462		3,166		169,578		3,271
Other expense—net		3,195		—		2,852		—
Income before income taxes	$	181,493	$	232,241	$	220,153	$	406,716

The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting:

	THREE MONTHS ENDED
	JULY 30,						JULY 31,
	2022						2021
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	940,182	$	51,438	$	991,620	$	947,618	$	41,241	$	988,859
Gross profit		495,074		28,144		523,218		467,067		20,609		487,676
Depreciation and amortization		25,671		1,299		26,970		21,484		1,186		22,670

	SIX MONTHS ENDED
	JULY 30,						JULY 31,
	2022						2021
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	1,849,130	$	99,782	$	1,948,912	$	1,767,441	$	82,210	$	1,849,651
Gross profit		967,896		53,905		1,021,801		853,620		41,033		894,653
Depreciation and amortization		49,195		2,533		51,728		44,164		2,392		46,556

In the three months ended July 30, 2022 and July 31, 2021, the Real Estate Development segment share of equity method investments losses were $2.8 million and $2.5 million, respectively, and were $4.2 million and $4.6 million in the six months ended July 30, 2022 and July 31, 2021, respectively. For both the three and six months ended July 30, 2022, our share of equity method investments for the Waterworks segment was immaterial.

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

	JULY 30,								JANUARY 29,
	2022								2022
					REAL ESTATE								REAL ESTATE
	RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL		RH SEGMENT		WATERWORKS		DEVELOPMENT		TOTAL
	(in thousands)
Goodwill(1)	$	141,098	$	—	$	—	$	141,098	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets(2)		56,810		17,000		—		73,810		56,161		17,000		—		73,161
Equity method investments		—		535		97,600		98,135		—		—		100,810		100,810
Total assets		5,531,152		202,695		97,600		5,831,447		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				SIX MONTHS ENDED
	JULY 30,		JULY 31,		JULY 30,		JULY 31,
	2022		2021		2022		2021
	(in thousands)
Furniture	$	699,720	$	699,729	$	1,362,240	$	1,279,740
Non-furniture		291,900		289,130		586,672		569,911
Total net revenues	$	991,620	$	988,859	$	1,948,912	$	1,849,651

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of July 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 any fiscal period presented.