SEGMENT REPORTING

3 Months Ended

May 04, 2024

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 certain of our equity method investments and consolidated variable interest entities that are non-wholly-owned subsidiaries and have operations that are not directly related to RH’s operations.

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 (loss) before interest expense—net, other income—net, income tax expense (benefit) and our share of equity method investments loss—net. Segment operating income excludes (i) favorable legal settlements, (ii) non-cash compensation amortization related to an option grant made to Mr. Friedman in October 2020 and (iii) severance costs associated with a reorganization. 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 a reconciliation to income from operations and income (loss) before income taxes and equity method investments:

	THREE MONTHS ENDED
	MAY 4,		APRIL 29,
	2024		2023
	(in thousands)
Operating income:
RH Segment	$	41,431	$	103,721
Waterworks		5,804		6,671
Total segment operating income		47,235		110,392
Legal settlements—net		9,375		—
Non-cash compensation		(1,947)		(3,531)
Reorganization related costs		—		(7,621)
Income from operations		54,663		99,240
Interest expense—net		56,772		39,816
Other (income) expense—net		1,165		(653)
Income (loss) before income taxes and equity method investments	$	(3,274)	$	60,077

The following table presents selected statements of income (loss) metrics for our segments, including disaggregated net revenues:

	THREE MONTHS ENDED
	MAY 4,						APRIL 29,
	2024						2023
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	677,066	$	49,894	$	726,960	$	690,516	$	48,646	$	739,162
Gross profit		289,808		26,230		316,038		321,584		25,961		347,545
Depreciation and amortization		29,383		1,444		30,827		26,425		1,345		27,770

In the three months ended May 4, 2024 and April 29, 2023, the Real Estate segment share of equity method investments loss were $2.8 million and $1.6 million, respectively. Our share of income from equity method investments for the Waterworks segment were immaterial in both fiscal periods presented.

The following table presents selected balance sheet metrics for our segments:

	MAY 4,								FEBRUARY 3,
	2024								2024
	RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL		RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL
	(in thousands)
Goodwill(1)	$	141,013	$	—	$	—	$	141,013	$	141,033	$	—	$	—	$	141,033
Tradenames, trademarks and other intangible assets(2)		59,053		17,000		—		76,053		58,927		17,000		—		75,927
Equity method investments(3)		—		4,008		124,900		128,908		—		3,609		125,059		128,668
Total assets		3,836,347		188,213		161,979		4,186,539		3,798,572		183,804		161,521		4,143,897

(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.

(3) The Waterworks segment balance represents membership interests in two European entities, whereby we hold a 50 percent membership interest in one entity and an approximately 25 percent membership interest in the other, and we are not the primary beneficiary of these VIEs.

We sell furniture and non-furniture products. 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
	MAY 4,		APRIL 29,
	2024		2023
	(in thousands)
Furniture	$	505,271	$	496,391
Non-furniture		221,689		242,771
Total net revenues	$	726,960	$	739,162

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of May 4, 2024, we operated four retail locations and one outlet in Canada, two retail locations and one outlet in the United Kingdom, two retail locations in Germany and one retail location in Belgium. Geographic revenues in Canada, the United Kingdom, Germany and Belgium are based upon revenues recognized at the retail locations in the respective country and were not material in either fiscal period presented.