NOTE E. SEGMENT REPORTING

We have two reportable segments, e-commerce and retail. The e-commerce segment has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through our e-commerce websites and direct-mail catalogs. Our e-commerce merchandise strategies are operating segments, which have been aggregated into one reportable segment, e-commerce. The retail segment, which includes our franchise operations, has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, which sell our products through our retail stores. Our retail merchandise strategies are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.

These reportable segments are strategic business units that offer similar products for the home. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes since our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third-party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, prepaid expenses, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

Income taxes are calculated at an entity level and are not allocated to our reportable segments.

Segment Information


In thousands	E-commerce		Retail		Unallocated			Total
Thirteen weeks ended July 29, 2018
Net revenues¹	$	686,942	$	588,232	$	—		$	1,275,174
Depreciation and amortization expense		7,651		22,494		15,791			45,936
Operating income (loss)²		137,236		33,922		(96,992	)		74,166
Capital expenditures		8,958		18,495		18,539			45,992
Thirteen weeks ended July 30, 2017
Net revenues¹	$	630,793	$	570,813	$	—		$	1,201,606
Depreciation and amortization expense		6,788		22,385		15,925			45,098
Operating income (loss)²		135,139		34,592		(88,147	)		81,584
Capital expenditures		8,119		23,288		19,167			50,574
Twenty-six weeks ended July 29, 2018
Net revenues¹	$	1,333,122	$	1,145,052	$	—		$	2,478,174
Depreciation and amortization expense		16,997		45,493		31,319			93,809
Operating income (loss)²		280,041		55,983		(195,308	)		140,716
Assets³		801,253		1,116,904		689,820			2,607,977
Capital expenditures		14,752		35,690		29,579			80,021
Twenty-six weeks ended July 30, 2017
Net revenues¹	$	1,211,303	$	1,101,810	$	—		$	2,313,113
Depreciation and amortization expense		13,755		44,727		31,566			90,048
Operating income (loss)²		267,143		56,306		(179,391	)		144,058
Assets³		672,522		1,129,925		677,413			2,479,860
Capital expenditures		10,989		39,785		31,953			82,727

Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $80.7 million and $80.6 million for the thirteen weeks ended July 29, 2018 and July 30, 2017, respectively, and $160.1 million and $150.0 million for the twenty-six weeks ended July 29, 2018 and July 30, 2017, respectively.

The thirteen and twenty-six weeks ended July 29, 2018 includes: $5.3 million of expense related to impairment and early lease termination charges which is primarily recorded in the retail segment, $5.0 million and $11.9 million of expense, respectively, related to our acquisition of Outward, Inc., (primarily acquisition-related compensation costs, the amortization of intangible assets acquired, and the operations of the Outward business), of which $3.6 million and $9.1 million, respectively, is recorded in the e-commerce segment and $1.4 million and $2.8 million, respectively, is recorded in the unallocated segment, as well as $1.9 million and $3.6 million, respectively, of employment-related expense in our corporate functions, which is recorded within the unallocated segment. The twenty-six weeks ended July 30, 2017 includes $5.7 million of severance-related charges in our corporate functions, which is recorded within the unallocated segment.

³	Includes long-term assets related to our international operations of approximately $52.9 million and $61.9 million as of July 29, 2018 and July 30, 2017, respectively.