Segment Reporting

6 Months Ended

Jul. 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, Sourcebooks, 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) expense—net, income tax expense (benefit) and our share of equity method investments loss. Segment operating income excludes (i) legal settlements, (ii) severance costs associated with a reorganization, (iii) non-cash compensation amortization related to an option grant made to Mr. Friedman in October 2020, (iv) employer payroll tax expense related to an option exercise by Mr. Friedman, (v) asset impairments, (vi) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes), (vii) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, and (viii) 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				SIX MONTHS ENDED
	JULY 29,		JULY 30,		JULY 29,		JULY 30,
	2023		2022		2023		2022
	(in thousands)
Operating income:
RH Segment	$	153,369	$	237,512	$	257,090	$	466,057
Waterworks		7,995		7,222		14,666		15,207
Total segment operating income		161,364		244,734		271,756		481,264
Legal settlements		(8,000)		—		(8,000)		—
Reorganization related costs		—		—		(7,621)		—
Non-cash compensation		(2,024)		(4,321)		(5,555)		(10,179)
Employer payroll taxes on option exercise		—		—		—		(11,717)
Asset impairments		—		(2,231)		—		(8,154)
Professional fees		—		(285)		—		(7,469)
Compensation settlements		—		(3,483)		—		(3,483)
Recall accrual		—		—		—		(560)
Income from operations		151,340		234,414		250,580		439,702
Interest expense—net		44,422		26,264		84,238		47,119
Loss on extinguishment of debt		—		23,462		—		169,578
Other (income) expense—net		(186)		3,195		(839)		2,852
Income before income taxes and equity method investments	$	107,104	$	181,493	$	167,181	$	220,153

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 29,						JULY 30,
	2023						2022
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	753,550	$	46,929	$	800,479	$	940,182	$	51,438	$	991,620
Gross profit		354,425		25,648		380,073		495,074		28,144		523,218
Depreciation and amortization		26,828		1,308		28,136		25,671		1,299		26,970

	SIX MONTHS ENDED
	JULY 29,						JULY 30,
	2023						2022
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	1,444,066	$	95,575	$	1,539,641	$	1,849,130	$	99,782	$	1,948,912
Gross profit		676,009		51,609		727,618		967,896		53,905		1,021,801
Depreciation and amortization		53,253		2,653		55,906		49,195		2,533		51,728

In the three months ended July 29, 2023, and July 30, 2022, the Real Estate segment share of equity method investments loss were $3.4 million and $2.8 million, respectively, and were $5.0 million and $4.2 million in the six months ended July 29, 2023, and July 30, 2022, respectively. Our share of income from equity method investments for the Waterworks segment were immaterial for all fiscal periods presented.

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

	JULY 29,								JANUARY 28,
	2023								2023
	RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL		RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL
	(in thousands)
Goodwill(1)	$	141,053	$	—	$	—	$	141,053	$	141,048	$	—	$	—	$	141,048
Tradenames, trademarks and other intangible assets(2)		58,472		17,000		—		75,472		57,633		17,000		—		74,633
Equity method investments		—		773		129,437		130,211		—		623		100,845		101,468
Total assets		3,818,843		227,683		166,305		4,212,831		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 prior 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				SIX MONTHS ENDED
	JULY 29,		JULY 30,		JULY 29,		JULY 30,
	2023		2022		2023		2022
	(in thousands)
Furniture	$	560,602	$	699,720	$	1,056,993	$	1,362,240
Non-furniture		239,877		291,900		482,648		586,672
Total net revenues	$	800,479	$	991,620	$	1,539,641	$	1,948,912

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of July 29, 2023, we operated four retail locations and two outlets in Canada, and two retail locations 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 any fiscal period presented.