Segment Reporting

12 Months Ended

Jan. 28, 2017

Segment Reporting [Abstract]

Segment Reporting

NOTE 20—SEGMENT REPORTING

The Company defines reportable and operating segments on the same basis that it uses to evaluate performance internally by the Chief Operating Decision Maker (the “CODM”). The Company has determined that the Chief Executive Officer is its CODM. As of January 28, 2017, the Company had two operating segments: RH Segment and Waterworks. The two operating segments include all sales channels accessed by the Company’s customers, including sales through catalogs, sales through the Company’s websites, sales through stores, and sales through the commercial channel.

The Company’s two operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have shared management and customer base, the Company has determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

The Company uses operating income to evaluate segment profitability. Operating income is defined as net income before interest expense—net and income taxes.

Prior to the Waterworks acquisition, the Company had one reportable segment. As the Company’s acquisition of Waterworks was completed on May 27, 2016, reportable segment financial information presented below is only for fiscal 2016 and reflects a partial year of performance for Waterworks acquisition.

Segment Information

The following table presents the metrics reviewed by the CODM to evaluate performance internally as of and for the year ended January 28, 2017 (in thousands):

	RH Segment		Waterworks		Total
Net revenues	$	2,060,044	$	74,827	$	2,134,871
Gross profit		656,191		23,596		679,787
Depreciation and amortization		54,480		2,515		56,995
Goodwill		124,374		49,229		173,603
Trademarks and domain names		48,524		52,100		100,624
Total assets		2,040,346		152,174		2,192,520

The Company uses segment operating income to evaluate segment performance and allocate resources. The Company believes it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes (i) product line impairments, (ii) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim, (iii) non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks, (iv) costs associated with a reorganization, which include severance costs and related taxes, partially offset by a reversal of stock-based compensation expense related to unvested equity awards, (v) impairment recorded due to the Company committing to a plan to sell its aircraft, (vi) reduction of net revenues and costs associated with product recalls, (vii) a non-cash compensation charge related to one-time, fully vested option grants made in connection with the acquisition of Waterworks and (viii) costs incurred in connection with the acquisition of Waterworks including professional fees. 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 management reviews.

The following table shows segment operating income and income before tax for the year ended January 28, 2017 (in thousands):

Operating income:
RH Segment	$	105,274
Waterworks		(2,360	)
Product line impairments		(12,743	)
Legal claim		(8,701	)
Impact of inventory step-up		(6,835	)
Reorganization related costs		(5,698	)
Aircraft impairment		(4,767	)
Recall accrual		(4,615	)
Non-cash compensation		(3,672	)
Acquisition related costs		(2,847	)
Operating income		53,036
Interest expense—net		44,482
Income before tax	$	8,554

The Company classifies its 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 (in thousands):

	Year Ended
	January 28,		January 30,		January 31,
	2017		2016		2015
Furniture	$	1,334,526	$	1,295,486	$	1,116,351
Non-furniture		800,345		813,520		751,071
Total net revenues	$	2,134,871	$	2,109,006	$	1,867,422

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of January 28, 2017, the Company operates 5 retail and 2 outlet stores in Canada and 1 retail store in the U.K. Revenues from Canadian and U.K. operations, and the long-lived assets in Canada and the U.K., are not material to the Company. Geographic revenues are determined based upon where service is rendered.

No single customer accounted for more than 10% of the Company’s revenues in fiscal 2016, fiscal 2015, or fiscal 2014.