Segment Reporting

3 Months Ended

Apr. 29, 2023

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 (“CODM”), which we have determined is our Chief Executive Officer. We have three operating segments: RH Segment, Waterworks and Real Estate. 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, including hospitality, websites, Source Books, and the Trade and Contract channels. The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 5—Variable Interest Entities).

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 to 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 loss. Segment operating income excludes (i) severance costs associated with a reorganization, (ii) non-cash compensation amortization related to an option grant made to Mr. Friedman in October 2020, (iii) employer payroll tax expense related to an option exercise by Mr. Friedman, (iv) professional fee related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes), (v) asset impairments, and (vi) product recalls. 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 and equity method investments:

	THREE MONTHS ENDED
	APRIL 29,		APRIL 30,
	2023		2022
	(in thousands)
Operating income:
RH Segment	$	103,721	$	228,545
Waterworks		6,671		7,985
Total segment operating income		110,392		236,530
Reorganization related costs		(7,621)		—
Non-cash compensation		(3,531)		(5,858)
Employer payroll taxes on option exercise		—		(11,717)
Professional fee		—		(7,184)
Asset impairments		—		(5,923)
Recall accrual		—		(560)
Income from operations		99,240		205,288
Interest expense—net		39,816		20,855
Loss on extinguishment of debt		—		146,116
Other income—net		(653)		(343)
Income before income taxes and equity method investments	$	60,077	$	38,660

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 29,						APRIL 30,
	2023						2022
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	690,516	$	48,646	$	739,162	$	908,948	$	48,344	$	957,292
Gross profit		321,584		25,961		347,545		472,822		25,761		498,583
Depreciation and amortization		26,425		1,345		27,770		23,524		1,234		24,758

In the three months ended April 29, 2023 and April 30, 2022, the Real Estate segment share of equity method investments loss were $1.6 million and $1.4 million, respectively. Our share of income from equity method investments for the Waterworks segment were immaterial for both fiscal periods presented.

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

	APRIL 29,								JANUARY 28,
	2023								2023
	RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL		RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL
	(in thousands)
Goodwill(1)	$	141,026	$	—	$	—	$	141,026	$	141,048	$	—	$	—	$	141,048
Tradenames, trademarks and other intangible assets(2)		58,144		17,000		—		75,144		57,633		17,000		—		74,633
Equity method investments		—		715		132,282		132,997		—		623		100,845		101,468
Total assets		4,924,726		225,551		169,553		5,319,830		4,953,610		217,228		138,451		5,309,289

(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 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, as well as our hospitality operations. Net revenues in each category were as follows:

	THREE MONTHS ENDED
	APRIL 29,		APRIL 30,
	2023		2022
	(in thousands)
Furniture	$	496,391	$	662,520
Non-furniture		242,771		294,772
Total net revenues	$	739,162	$	957,292

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of April 29, 2023, 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.

No single customer accounted for 10% or more of our consolidated net revenues in the three months ended April 29, 2023 or April 30, 2022.