Segment Reporting

9 Months Ended

Oct. 28, 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 October 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 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 (loss) 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 twenty-two weeks of results for the nine months ended October 29, 2016, whereas the RH Segment results represent thirty-nine weeks for the nine months ended October 29, 2016. The results for both the three months ended October 28, 2017 and October 29, 2016 include thirteen weeks for both the RH Segment and Waterworks.

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
	October 28,						October 29,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	563,174	$	29,299	$	592,473	$	521,027	$	28,301	$	549,328
Gross profit	$	203,221	$	11,104	$	214,325	$	166,124	$	9,695	$	175,819
Depreciation and amortization	$	17,474	$	1,072	$	18,546	$	13,966	$	1,070	$	15,036

	Nine Months Ended						Nine Months Ended
	October 28,						October 29,
	2017						2016
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Net revenues	$	1,680,495	$	89,384	$	1,769,879	$	1,499,101	$	49,064	$	1,548,165
Gross profit	$	555,844	$	34,550	$	590,394	$	467,402	$	15,731	$	483,133
Depreciation and amortization	$	47,761	$	3,331	$	51,092	$	39,484	$	1,764	$	41,248

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

	October 28,						January 28,
	2017						2017
	RH Segment		Waterworks		Total		RH Segment		Waterworks		Total
Goodwill (1)	$	124,409	$	51,144	$	175,553	$	124,374	$	49,229	$	173,603
Trademarks and domain names	$	48,563	$	52,100	$	100,663	$	48,524	$	52,100	$	100,624
Total assets	$	1,649,057	$	152,509	$	1,801,566	$	2,040,346	$	152,174	$	2,192,520

(1) Waterworks goodwill increased $1.9 million during the nine months ended October 28, 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, incremental costs and inventory charges 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 anticipated distribution center closures, (v) gain on sale of building and land, (vi) charges incurred for the estimated cumulative impact of coupons redeemed in connection with a legal claim, (vii) 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, 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 (loss) and income (loss) before tax (in thousands):

	Three Months Ended						Nine Months Ended
	October 28,			October 29,			October 28,			October 29,
	2017			2016			2017			2016
Operating income (loss):
RH Segment	$	48,724		$	18,660		$	98,332		$	51,687
Waterworks		(719	)		(514	)		(2,143	)		344
Non-cash compensation		—			—			(23,872	)		(3,672	)
Recall accrual		(3,552	)		—			(8,285	)		—
Impact of inventory step-up		(248	)		(1,786	)		(2,108	)		(5,187	)
Distribution center closures		(1,862	)		—			(1,862	)		—
Gain on sale of building and land		819			—			2,119			—
Legal claim		—			—			—			(8,701	)
Reorganization related costs		—			(974	)		—			(5,698	)
Acquisition related costs		—			—			—			(2,847	)
Operating income		43,162			15,386			62,181			25,926
Interest expense—net		18,915			11,091			45,496			32,528
Loss on extinguishment of debt		4,880			—			4,880			—
Income (loss) before tax	$	19,367		$	4,295		$	11,805		$	(6,602	)

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				Nine Months Ended
	October 28,		October 29,		October 28,		October 29,
	2017		2016		2017		2016
Furniture	$	383,281	$	343,946	$	1,125,220	$	985,639
Non-furniture		209,192		205,382		644,659		562,526
Total net revenues	$	592,473	$	549,328	$	1,769,879	$	1,548,165

The Company is domiciled in the United States and primarily operates its retail and outlet stores in the United States. As of October 28, 2017, the Company operates 4 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 or nine months ended October 28, 2017 or October 29, 2016.