Segment Reporting

3 Months Ended

Apr. 29, 2017

Segment Reporting [Abstract]

Segment Reporting

NOTE 18—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 April 29, 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 a 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 for the statements of operations presented below is only for the three months ended April 29, 2017.

Segment Information

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally (in thousands):

	Three Months Ended
	April 29,
	2017
	RH Segment		Waterworks		Total
Net revenues	$	533,528	$	28,552	$	562,080
Gross profit	$	159,627	$	10,629	$	170,256
Depreciation and amortization	$	14,901	$	1,119	$	16,020

The following table presents the balance sheet metrics reviewed by the CODM to evaluate performance internally (in thousands):

	April 29,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,328	$	49,830	$	174,158	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,524	$	52,100	$	100,624	$	48,524	$	52,100	$	100,624
Total assets	$	1,794,542	$	153,844	$	1,948,386	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $0.6 million during the three months ended April 29, 2017 due to purchase price accounting adjustments. Refer to Note 3—Business Combination.

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 non-cash amortization of the inventory fair value adjustment recorded in connection with the acquisition of Waterworks and a reduction of net revenues and costs associated with 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 management reviews.

The following table shows segment operating income and income before tax (in thousands):

	Three Months Ended
	April 29,
	2017
Operating income (loss):
RH Segment	$	10,058
Waterworks		(1,782	)
Impact of inventory step-up		(1,380	)
Operating income		6,896
Interest expense—net		12,179
Loss before tax	$	(5,283	)

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):

	Three Months Ended
	April 29,		April 30,
	2017		2016
Furniture	$	352,956	$	290,426
Non-furniture		209,124		165,030
Total net revenues	$	562,080	$	455,456

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of April 29, 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 the three months ended April 29, 2017 or April 30, 2016.