Segment Reporting

9 Months Ended

Oct. 29, 2022

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 (the “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, Source Books, and the Trade and Contract channel. The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 5—Variable Interest Entities).

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, loss on extinguishment of debt, other expense—net, income tax expense (benefit) and our share of equity method investments losses. Segment operating income excludes (i) asset impairments, (ii) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr. Friedman in October 2020, (iii) employer payroll tax expense related to the option exercise by Mr. Friedman, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9—Convertible Senior Notes), (v) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vi) product recalls, (vii) favorable legal settlement, (viii) gain on sale of building and land, and (ix) severance costs associated with reorganizations. 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 reviews.

The following table presents segment operating income and income before income taxes:


	THREE MONTHS ENDED				NINE MONTHS ENDED
	OCTOBER 29,		OCTOBER 30,		OCTOBER 29,		OCTOBER 30,
	2022		2021		2022		2021

	(in thousands)
Operating income:
RH Segment	$	173,162	$	276,091	$	639,219	$	721,343
Waterworks		7,187		2,619		22,394		14,274
Asset impairments		(10,926)		—		(19,080)		(7,354)
Non-cash compensation		(4,136)		(5,831)		(14,315)		(17,559)
Employer payroll taxes on option exercise		—		—		(11,717)		—
Professional fees		—		—		(7,469)		—
Compensation settlements		—		—		(3,483)		—
Recall accrual		—		(340)		(560)		(840)
Legal settlement		4,188		—		4,188		—
Gain on sale of building and land		775		—		775		—
Reorganization related costs		—		—		—		(449)
Income from operations		170,250		272,539		609,952		709,415
Interest expense—net		31,417		13,223		78,536		40,112
Loss on extinguishment of debt		—		18,513		169,578		21,784
Other expense—net		1,989		—		4,841		—
Income before income taxes	$	136,844	$	240,803	$	356,997	$	647,519

The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280—Segment Reporting:


	THREE MONTHS ENDED
	OCTOBER 29,						OCTOBER 30,
	2022						2021

	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL

	(in thousands)
Net revenues	$	821,260	$	47,806	$	869,066	$	964,859	$	41,569	$	1,006,428
Gross profit		394,947		25,831		420,778		484,363		20,891		505,254
Depreciation and amortization		26,785		1,247		28,032		23,878		941		24,819


	NINE MONTHS ENDED
	OCTOBER 29,						OCTOBER 30,
	2022						2021

	RH SEGMENT		WATERWORKS		TOTAL		RH SEGMENT		WATERWORKS		TOTAL

	(in thousands)
Net revenues	$	2,670,390	$	147,588	$	2,817,978	$	2,732,300	$	123,779	$	2,856,079
Gross profit		1,362,843		79,736		1,442,579		1,337,983		61,924		1,399,907
Depreciation and amortization		75,980		3,780		79,760		68,042		3,333		71,375

The statements of income metrics for the Real Estate segment were immaterial in the three and nine months ended October 29, 2022 and, therefore, such results are presented within the RH Segment for the respective periods. In the three months ended October 29, 2022 and October 30, 2021, the Real Estate segment share of equity method investments losses were $1.9 million and $2.3 million, respectively, and were $6.1 million and $6.9 million in the nine months ended October 29, 2022 and October 30, 2021, respectively. For both the three and nine months ended October 29, 2022, our share of equity method investments for the Waterworks segment was immaterial.

The following table presents the balance sheet metrics as required under ASC 280—Segment Reporting:


	OCTOBER 29,								JANUARY 29,
	2022								2022

	RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL		RH SEGMENT		WATERWORKS		REAL ESTATE		TOTAL

	(in thousands)
Goodwill⁽¹⁾	$	141,021	$	—	$	—	$	141,021	$	141,100	$	—	$	—	$	141,100
Tradenames, trademarks and other intangible assets⁽²⁾		57,269		17,000		—		74,269		56,161		17,000		—		73,161
Equity method investments		—		539		96,466		97,005		—		—		100,810		100,810
Total assets		5,573,649		207,153		102,913		5,883,715		5,259,719		179,941		100,810		5,540,470

(1)	The Waterworks reporting unit goodwill of $51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2)	Presented net of an impairment charge of $35 million recognized in prior fiscal years.

We classify our 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, as well as our hospitality operations. Net revenues in each category were as follows:


	THREE MONTHS ENDED				NINE MONTHS ENDED
	OCTOBER 29,		OCTOBER 30,		OCTOBER 29,		OCTOBER 30,
	2022		2021		2022		2021

	(in thousands)
Furniture	$	597,520	$	706,750	$	1,959,760	$	1,986,490
Non-furniture		271,546		299,678		858,218		869,589
Total net revenues	$	869,066	$	1,006,428	$	2,817,978	$	2,856,079

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of October 29, 2022, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K. Geographic revenues in Canada and the U.K. are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented. Long-lived assets held internationally were not material in any fiscal period presented.

No single customer accounted for 10% or more of our consolidated net revenues in any fiscal period presented.

- Definition

The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
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-Section 50
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+ Details