SEGMENT REPORTING

6 Months Ended

Aug. 03, 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 before interest expense—net, other (income) expense—net, income tax expense and our share of equity method investments loss—net. Segment operating income excludes (i) 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 before income taxes and equity method investments:

	THREE MONTHS ENDED				SIX MONTHS ENDED
	AUGUST 3,		JULY 29,		AUGUST 3,		JULY 29,
	2024		2023		2024		2023
	(in thousands)
Operating income:
RH Segment	$	90,527	$	153,369	$	131,958	$	257,090
Waterworks		6,461		7,995		12,265		14,666
Total segment operating income		96,988		161,364		144,223		271,756
Legal settlements—net		—		(8,000)		9,375		(8,000)
Non-cash compensation		(861)		(2,024)		(2,808)		(5,555)
Reorganization related costs		—		—		—		(7,621)
Income from operations		96,127		151,340		150,790		250,580
Interest expense—net		59,262		44,422		116,034		84,238
Other (income) expense—net		(663)		(186)		502		(839)
Income before taxes and equity method investments	$	37,528	$	107,104	$	34,254	$	167,181

The following tables present selected statements of income metrics for our segments, including disaggregated net revenues:

	THREE MONTHS ENDED
	AUGUST 3,						JULY 29,
	2024						2023
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	780,925	$	48,730	$	829,655	$	753,550	$	46,929	$	800,479
Gross profit		348,624		26,133		374,757		354,425		25,648		380,073
Depreciation and amortization		30,618		1,639		32,257		26,828		1,308		28,136

	SIX MONTHS ENDED
	AUGUST 3,						JULY 29,
	2024						2023
	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL
	(in thousands)
Net revenues	$	1,457,991	$	98,624	$	1,556,615	$	1,444,066	$	95,575	$	1,539,641
Gross profit		638,432		52,363		690,795		676,009		51,609		727,618
Depreciation and amortization		60,001		3,083		63,084		53,253		2,653		55,906

In the three months ended August 3, 2024 and July 29, 2023, the Real Estate segment share of equity method investments loss was $3.9 million and $3.4 million, respectively. In the six months ended August 3, 2024 and July 29, 2023, the Real Estate segment share of equity method investments loss was $6.7 million and $5.0 million, respectively. Our share of income from equity method investments for the Waterworks segment was immaterial in all fiscal periods presented.

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

	AUGUST 3,								FEBRUARY 3,
	2024								2024
	RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL		RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL
	(in thousands)
Goodwill(1)	$	140,997	$	—	$	—	$	140,997	$	141,033	$	—	$	—	$	141,033
Tradenames, trademarks and other intangible assets(2)		59,243		17,000		—		76,243		58,927		17,000		—		75,927
Equity method investments(3)		—		3,011		127,779		130,790		—		3,609		125,059		128,668
Total assets		4,022,273		189,535		164,588		4,376,396		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				SIX MONTHS ENDED
	AUGUST 3,		JULY 29,		AUGUST 3,		JULY 29,
	2024		2023		2024		2023
	(in thousands)
Furniture	$	593,814	$	560,602	$	1,099,085	$	1,056,993
Non-furniture		235,841		239,877		457,530		482,648
Total net revenues	$	829,655	$	800,479	$	1,556,615	$	1,539,641

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of August 3, 2024, we operated four retail locations in Canada, two retail locations and one outlet in the United Kingdom, two retail locations in Germany, one retail location in Belgium and one retail location in Spain. Geographic revenues generated outside of the United States were not material in any fiscal period presented.