Segment Reporting

6 Months Ended

Jul. 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 July 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 team 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 Waterworks below represents nine weeks of results for both the three and six months ended July 30, 2016, whereas the RH Segment results represent thirteen and twenty-six weeks for the three and six months ended July 30, 2016, respectively.

Segment Information

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

	Three Months Ended						Three Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	583,793	$	31,533	$	615,326	$	522,618	$	20,763	$	543,381
Gross profit	$	192,996	$	12,817	$	205,813	$	173,803	$	6,036	$	179,839
Depreciation and amortization	$	15,386	$	1,140	$	16,526	$	12,964	$	694	$	13,658

	Six Months Ended						Six Months Ended
	July 29,						July 30,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,117,321	$	60,085	$	1,177,406	$	978,074	$	20,763	$	998,837
Gross profit	$	352,623	$	23,446	$	376,069	$	301,278	$	6,036	$	307,314
Depreciation and amortization	$	30,287	$	2,259	$	32,546	$	25,518	$	694	$	26,212

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

	July 29,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,448	$	51,144	$	175,592	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624
Total assets	$	1,665,328	$	154,081	$	1,819,409	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $1.9 million during the six months ended July 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. Segment operating income excludes (i) non-cash compensation charges related to a fully vested option grant made to Mr. Friedman and the fully vested option grants made in connection with the acquisition of Waterworks, (ii) reduction of net revenues and incremental costs associated with product recalls, (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) costs incurred in connection with the acquisition of Waterworks including professional fees and (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim. 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 (loss) before tax (in thousands):

	Three Months Ended						Six Months Ended
	July 29,			July 30,			July 29,			July 30,
	2017			2016			2017			2016
Operating income (loss):
RH Segment	$	39,550		$	32,317		$	49,608		$	33,027
Waterworks		358			858			(1,424	)		858
Non-cash compensation		(23,872	)		(3,672	)		(23,872	)		(3,672	)
Recall accrual		(4,733	)		—			(4,733	)		—
Impact of inventory step-up		(480	)		(3,401	)		(1,860	)		(3,401	)
Gain on sale of building and land		1,300			—			1,300			—
Reorganization related costs		—			(3,309	)		—			(4,724	)
Acquisition related costs		—			(778	)		—			(2,847	)
Legal claim		—			—			—			(8,701	)
Operating income		12,123			22,015			19,019			10,540
Interest expense—net		14,402			10,909			26,581			21,437
Income (loss) before tax	$	(2,279	)	$	11,106		$	(7,562	)	$	(10,897	)

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				Six Months Ended
	July 29,		July 30,		July 29,		July 30,
	2017		2016		2017		2016
Furniture	$	388,983	$	351,267	$	741,939	$	641,693
Non-furniture		226,343		192,114		435,467		357,144
Total net revenues	$	615,326	$	543,381	$	1,177,406	$	998,837

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