RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon, everybody, and thanks for being with us on the Q&A conference call covering the fourth quarter along with fiscal year 2019. With me right now are Gary Friedman, our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to getting started, I want to bring our legal disclaimer to your attention: certain statements we make today will be forward-looking under the federal securities laws, which includes statements regarding the outlook for our business and other matters referenced in the press release we issued today. A number of risks and uncertainties are involved in these forward-looking statements, and actual results could differ materially. For a more detailed description of the risk factors that may affect our results, please refer to our SEC filings as well as the press release issued today. Please note as well that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events; also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. Additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures can be found in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q&A session. Operator, we're ready for questions.

Good evening, and thank you for taking my question. There are two parts to it. When you consider that decline in the run rate of the low to mid 40% range that has occurred since your stores were shut, do you believe there is a realistic run rate past this one that can be used to model the business for however long those locations remain closed? Considering those circumstances, how should we view the profitability of the business should this run rate persist? Thank you.

Sure, Michael. To start, I'd simply say it's far too soon for us to say anything about realistic run rates. I believe we've had — how long have our stores been closed, 11 days at this point?

That's correct. Yes.

Indeed, 11 days. I wouldn't want to lock myself into any particular position. We find ourselves in a period marked by so much flux and unpredictability. During this stretch, circumstances are shifting — not on a weekly basis, not on a daily basis, but on an hourly basis. Take a moment to step back and consider this: the President of the United States on Friday, as I recall, stated that the nation would reopen on the 12th. Then on Sunday, the President of the United States said the nation is now going to stay closed through the end of April. So many developments are unfolding at this very moment. What matters most is staying alert to what is shifting. What matters most, in my view, at this moment is to silence the noise. This isn't the moment to hurry; it isn't about how many decisions you make. What counts is how good those decisions are; in our view, this is a moment to do less and think more so we can do more, and simply try to power up and view the entire board, so to speak, the way you would in chess, and try to take the freshest data and information that's out there and try to identify patterns and try to anticipate what's coming. Consider this: a little over two weeks ago, no one anticipated that every store across the nation would shut down. Leading a business, leading a company, during this period is beyond anything we could have imagined. We won't hurry to try to work everything out. I don't believe that's possible. I believe you have to examine the big picture and make the correct big decisions at this moment. Everything we included in our press release, everything we wrote in the letter, reflects what we can see and what we know as of today. Going further than that, commenting beyond what we've already stated would simply be unwise.

All right. You did reference in your letter that you intend to settle the $300 million this summer. Could you help us understand how the cash burn rate for the business is shaping up, so we can get a clearer picture of its liquidity, particularly given that these stores are shut and it's under some strain. Thanks so much.

Yes. As I said, we won't go beyond what was stated in the letter. Based on what we know right now and what we're seeing, we feel confident. We're doing the right things, postponing capital and cutting expenses; we're in a spot where we can confidently state that the $300 million of convertible notes can be paid down in cash, exactly as we intended previously. No change there.

All right. Thanks a lot, and best of luck.

Uh-huh. Appreciate it.

Good afternoon.

Hey, Steven.

Hey. So, considering the current circumstances, right? I guess I was hoping to zero in on what the design team has been doing, in a broad sense, now that our stores aren't open. Gary, could you maybe elaborate on the way they're engaging with your customer base at present? What wins are you seeing as a result of that work, and do you feel like those efforts have helped take some of the pressure off the business in recent days?

Sure. What I'd tell you is that the level of creativity coming from our associates throughout every corner of this organization has been remarkable during these last 2 weeks. We hold conference calls every day, weekends included. Jack, I'm not sure, wasn't it an 8 or 9-hour call we had with leaders from across the nation yesterday and Saturday. This moment matters so much for listening, learning, and then leading. There's a saying we have here that the brightest individuals are the ones nearest to the customer, and those of us who drift further from the customer tend to get more and more foolish, which makes me the most foolish person here. To guide people through any period, you must first hear them, then absorb, then guide. I'm simply amazed by how much creativity is taking place throughout our nation; we're reinventing RH live as it happens. Especially when it comes to a gallery, without a physical space and attempting to figure out, how do you collaborate with people, and how do you keep going Not merely keep going, how do you completely rethink the way you engage with customers, the way you do interior design, and all of that. How should we reach our customers? What ought we to be promoting right now? Everyone is overwhelmed with messaging. Begin right there, the sheer volume of news people are taking in these days, the sheer volume of information just to remain current and simply remain safe, is practically crushing. Doing things the usual way is, in our view, pointless. We're attempting to rethink the way we communicate, the way we engage with consumers. If you visit our site, you can get a feel for what we're up to. The entire homepage begins with a note from me speaking to the present circumstances, informing everyone our galleries are shut, and letting everyone know that while our doors may be shut, our hearts and minds remain open. Our design team is available to assist however we can; we've arranged virtual appointments through FaceTime, Hangouts, Skype, Zoom or call. It's as if we're live innovating, improvising, adapting and overcoming and the demand our teams are producing right now is, in my view, remarkable. We're gaining knowledge by the hour and by the day. When you reflect on the truly major, pivotal decisions this company and this brand have taken throughout their history—the most crucial ones, the largest transformative leaps—those came during periods of the greatest uncertainty. As I explain in the letter, my belief is that this situation will follow the same pattern. Winston Churchill once remarked, "Never let a good crisis go to waste." For the culture we have, this is likely the moment when we perform at our peak. What you'll witness is an ongoing, shifting set of efforts and a rising momentum in the way we simply operate our company—and that won't only shape the near term during this stretch. There will be new approaches to guiding and operating our company permanently. Much like this virus will permanently alter this nation and the globe, I think it's the same for us. This moment will permanently transform our company, the way we conduct business, and in many respects lift our culture higher. One of our significant advantages, I believe, is that we genuinely hold the title of the biggest interior design firm in North America right now—the largest residential interior design firm. Possessing that is a genuine strategic point of differentiation and a strength; we also maintain a substantial B2B operation through our contract and trade side, and both share comparable traits in that they can function in a B2B, one-on-one, direct manner with the customer. At this very moment we're drawing on every asset and all our expertise, and we learn something new each day. That's what I keep telling the teams observing the current situation: just the headline is that things will deteriorate before they improve. Make no mistake, improvement will come. As for how much deterioration occurs, each of us is developing our own assumptions and modeling every possible scenario and downside. In my view, the biggest danger facing our industry is if governments choose to essentially redefine—if they alter the classifications of essential business regarding warehousing, transportation, and the service elements tied to supply chain and logistics. As long as we're able to operate the direct portion of our business, our confidence is high. For everyone across our industry, if that gets redefined—if the way governments categorize business functions currently deemed essential changes, and every warehouse along with transportation and delivery is affected—if all of it halts, then you're dealing with a completely different situation. Naturally, if you're prudent, you must model every bit of that and grasp what it would look like. That carries consequences for the whole U.S. system as well, correct? Each port would need to close. Container movement would need to cease. Every distribution center across the globe would become backed up. Every port would be rendered unusable. The worldwide shipping sector would come to a stop, right? For everyone of us in this sector, that's the biggest danger we confront, since I believe nearly all companies nowadays run certain type of internet operation and possess certain method of connecting with buyers. Our situation is different: we once had a direct operation accounting for 50% of what we did, and that share has decreased somewhat, just as we anticipated, while we launched those larger galleries; we run a highly skilled direct-to-customer operation, via our site plus our contract and trade operation, our hospitality operation, and many others besides. By hospitality, I'm referring to the hospitality contract side, not the food and beverage hospitality side. Right now — though naturally, circumstances may shift at any moment — I've never held a leadership role. I've spent a very long stretch doing what I do. I'm no longer a young man. Never have I witnessed a period when everything transforms so quickly, from one day to the next, one instant to the next. What matters most, I believe, for all of us: pray for peace, plan for war, attempt to view the entire board. Stay patient. Hold off until you can see it. In my view, rushing toward choices and settling on poor ones for the near term — choices that could prove ruinous strategically — carries greater danger in conditions like these; matters will deteriorate, yet they will improve. What's essential is the manner in which you steer yourself across this stretch. We possess data, correct? We've observed the curves in China. How reliable China's data is, we can't quite determine. Understand, China operates very differently. You watch footage of individuals stepping off buses and planes, then being sprayed down like livestock, correct? In our nation, that likely won't occur. The curves could differ to some degree, yet even in places such as Italy and Spain, where outbreaks have been genuinely severe, you can observe the curves beginning to level off. You can observe circumstances beginning to shift. This is temporary. The real question: is it 1 month? Is it 2 months? Is it 3 months? Could it extend beyond 3 months? Might it continue past midsummer? Eventually, this shifts. The real question is the way you fine-tune your operation across this stretch and the way you ready yourself. The way you steer yourself to endure across this stretch and the way you ready yourself to flourish once this is behind us? That's what occupies our thinking.

Gary, one fast question that builds on that, okay? Looking ahead, I suppose. Do you see any possible upcoming trouble in the supply chain, okay, because of how far the virus has spread worldwide? Or what steps are you taking to stay in front of either growing back orders or simply interruptions across the global supply chain?

Of course. The largest portion of the interruption already occurred on the side we operate, and that mainly involved China and Asia, the wider operation we obtain goods from in Asia. That has essentially returned to its usual state.

For all practical purposes, it's basically fully back.

Yes, fully back. Looking at this from a wider angle, we operate a sizable business that originates in Italy. When it comes to Italian bedding, we bring in more of it than anyone else globally. Some furniture and upholstery also comes to us from Italy. Disruption is going to hit there. That represents a small share of what we do. On the bedding front, our back stock positions are fairly solid, so we don't anticipate anything hugely significant, provided the curve flattens over in Italy and things recover within the coming several months. The real question is, what happens here in the U.S.? A fairly healthy chunk of what we do, particularly anything tied to upholstery and special order business, still takes place in the U.S., with some coming from Mexico. In my view, the toughest obstacle, the Asia one, is now behind us. Vietnam has kept the virus fairly well contained. Every factory we have in Asia is running at 100% again. The thing that matters now is, when you consider our manufacturing platform, does it genuinely give our company a strategic edge? I've long maintained that furniture of this caliber had never before been produced at these volumes; we assembled that manufacturing platform alongside every one of our key partners. What matters is preventing the virus from inflicting lasting harm. Once again, I believe it comes down to working as partners; it's the same as what happens with real estate, correct? Certain folks are mailing out letters declaring they won't pay any rent. Well, would you want to be the landlord receiving that letter? When such a letter lands in the public press and you simply announce you're not paying rent, that's hardly a partnership, is it? Merely walking away and canceling orders isn't the way partnerships get built. That's not the way problems get solved. Great partnerships are the foundation of great companies, and this business was constructed in a deeply integrated fashion. From the supply chain angle, what matters for us is admitting we have a problem. There's dislocation in the business. Demand has fallen. It could remain lower for the whole year. Right now, that's what we think is most likely. Will it remain down at 40%? No. Will stores reopen within the next month, two months, three months? Yes. Is it one month or is it three months? Nobody knows. Do they come back in staggered order? Probably. What those scenarios look like; is it down 40%-45% for a while, is it down 25% for a few months, then is it down 20%, then is it down 15%, and you get back to down 10% by the end of the year? I think part of that hinges on how promotional people decide to get and so on and so forth. What matters now is, going back to the supply chain and our partnerships, there's product being manufactured today. We've got inventory that was produced across the past several weeks and is wrapping up completion today. We've also got goods currently out on the water. So what's our approach to that inventory when working alongside our partners? In what way do we split the burden together? How do we avoid turning someone into a new adversary? An unseen foe already exists — the virus. There's no need for us to make additional foes right now. What we need is to forge stronger partnerships and deeper relationships, since that's exactly where the chance will lie once we get past this, when conditions do go back to the way they were; whether we're talking about the supply chain, whether we're talking about the real estate partnerships that we hold, whether it's the manufacturing partnerships that we hold, the design partnerships that we hold, the partnerships that exist within and beyond the company right now — none of that distinction matters. This is a moment for folks to unite and collaborate on fixing issues and envisioning fresh approaches to conducting business, and not just for this brief period. The real chance lies in reimagining new and improved methods of operating our businesses side by side permanently. Frankly, it's somewhat discouraging when I witness certain behaviors taking place. A number of individuals are declaring that they won't pay rent or that they're scrapping every order. Wonderful, that's fine for you; those aren't a strategic means of steering a business through a period such as this. Nothing but partnerships will get us past these challenges.

Thank you, Gary.

Hey, Curtis. Are you there?

Hey, guys. Hey, Gary.

Hey.

Yeah. My apologies for that. Yeah. I'm in a tiny flat with the mute on.

It's fine; every one of us has dealt with that.

Let me try to shut out the background noise. I appreciate you taking my question. To start, a quick one for Jack: how much is currently available on the revolver? My understanding is it's roughly $600, though I could be wrong about that. Gary, for you, and I might be jumping ahead of myself here, but I'm thinking about the point when everything settles down, conditions return to normal, and hopefully the macro picture improves. From a competitive standpoint, you folks are sitting in a fairly solid capital position. How would you describe where your closest rivals stand when it comes to liquidity, capital structure, and those sorts of things? Once things improve, do you see a chance for possibly picking up more market share? Or is that perhaps just not the right thing to be focused on at this moment?

Sure. I'll handle that one, and then I'll hand it back to Jack, pass it to Jack so he can address the credit facility and availability question. Look, I've lived through some major downturns. We made it through the Great Recession, and my recollection is that our operating margin heading into the Great Recession was 7% or thereabouts, 5%- 7%. I understand how hard it was to come out of that alive; we just announced operating margins of 14.3%; on the previous call, in the prior press release, we had discussed having at least 200 basis points of opportunity for operating margin expansion in 2020, right before this virus hit. If you simply run the numbers, if we just posted 14.3%, and we stated we had no fewer than 200 basis points of margin expansion, that gets you to 16.3% at the minimum. Suppose someone responds, "Come on, it was bigger than that." Then you might take a more optimistic stance and argue, "Look, before all this occurred, this company probably was running an operating margin up in the high teens," meaning somewhere above 16.3%. There's no way we would have guided you to at least roughly 200 basis points unless the real figure was larger. My perspective is this: I'm about to enter a difficult stretch like the one ahead. This team has navigated genuinely hard circumstances when operating margins were seven. So how does it look when those margins are 17%? It looks vastly better. The effect is that it plainly expands the range of possible opportunities. What matters most, once again, is figuring out how to navigate the near term while still setting up the correct strategic perspective and the strategic actions that become possible. How do you get yourself into a spot where you can recognize the chances that tend to show up during periods like this one? Down the road, the share we pick up will be enormous. If you look at the fact that, generally speaking, a big chunk of our main manufacturing partners—I'm not sure of the exact figure—but something like half to 80% of what they do is with us, while the remaining portion, anywhere from 20% to 50%, is likely made up largely of individual shops, mom-and-pop operations, and smaller regional competitors who lack our business approach, our distribution infrastructure, our financial setup, and every resource that a company of this kind has at its disposal. That opens up chances for us to expand, to matter more to them, and to be far more closely tied into each of our major partners across the board. The very same dynamic applies when you think about it from a real estate standpoint—the possibilities look identical. Looking back around three to five years ago, when we first began constructing these large galleries, the prevailing view was, "Those will never make money." If you go through 80% of the analyst reports written back then, the question was always how on earth they could possibly turn a profit. People said Friedman's just building mansions for his ego. All sorts of wild things got written. At this point, though, I believe people understand we weren't attempting to build mansions. It had nothing to do with magic. Gut instincts played no part at all. Math drove everything, and logic drove everything. Today we have what is arguably one of the most exciting retail experiences, and one of the most productive and profitable physical environments, in our entire industry. During this period of upheaval, the number of competitors is going to shrink significantly. A large number of companies will find themselves financially impaired, essentially limping along. I believe RH will actually have an even bigger chance to matter more to its most important partners. There will be additional openings to put itself forward amid this disruption. What the longer-term effect on the economy looks like is uncertain to us. Will a recession hit with a 10 decline, or a 20 decline? Could it be even worse than that? All sorts of opportunities are going to emerge. The main thing is basically to hold off on doing anything at this moment. As we've said, look, the main thing is to avoid taking any action within our company that would worsen the situation. We shouldn't hurry and inadvertently mess something up or cause damage at this point; this is a moment for thinking deeply. It's a moment for genuine objectivity. It's a moment to listen, to learn, and to perceive the larger plays, correct? To perceive what other people cannot perceive, so that we can accomplish what other people cannot accomplish. That's why, honestly, at this moment we have not implemented any markdowns whatsoever. We are not running any promotions at all. Back in 2008 and 2009, when operating margins were 7%, we needed to pull levers right away. Today, we aren't pulling any levers. We feel our position in the market is one of a kind. Our brand, as we see it, stands alone in this industry in many respects. That's not said with any arrogance. Take a moment to look at how we run things, the approach we take, what we offer customers, and the manner in which we present it—we're convinced no other company is truly comparable. In our view, we have incredible physical locations that, when people—and by the way, what kind of slingshot effect might be possible here? When folks who've been stuck at home, I don't know what your own experience has been like. At this moment I'm in our office together with Jack and Dave. Everyone else on our call is joining remotely, and Jack, Dave, and myself are sitting about fifteen feet from one another; we've stayed so close together that we haven't even sprayed each other with Lysol yet, and people are going to want to head outdoors. There's going to be a real hunger among folks to leave their homes. The spring season is approaching. Conditions outside will get nicer. If we're fortunate, the virus will diminish, and people are going to want to head outdoors. When that desire to leave the house hits, which kind of physical environment do you think comes out ahead? My answer is one that offers gorgeous architecture, rooftop parks, and hospitality built right in — something that stirs people through its interior look and design. What I believe has just taken place is that all of us have been forced to remain at home for a great deal of time. When you're at home as often as I've been during these past two weeks, you start looking around and telling yourself, "Wow, there are so many aspects of my house I'd like to change."

Wow, I honestly can't fathom that it's time to replace my couches, or that these cushions need swapping out, or gosh, the treatments on my windows. A refresh is likely overdue." Incidentally, my feeling is that the home, given everything that's gone on, given this virus, will wind up mattering even more. The manner in which folks reside in their houses and having a place that inspires you to live there. Whether it's a situation like this one occurring or simply the reality that I also consider matters such as how many trips are getting called off at this moment. How many individuals will truly make the journey to Europe or Hawaii or anyplace else they had planned to visit, South America, Africa. How many individuals will be taking trips during this summer? My guess is a portion of the count of individuals who took trips last summer. Speaking just for myself, every one of our plans is shifting. How many individuals will feel moved to sort of reinvent their residence and build a lasting sort of getaway, and a reinvented residence that comes across more like a setting you'd visit while on holiday. Incidentally, that's precisely how I believe our galleries come across. Our galleries come across like a holiday from everyday existence. So many chances and elements that I believe create a chance for us to consider RH reimagined. What is the full range of things we could undertake? What is the full range of benefits we possess at present? In what way would we push the pendulum so far toward the opposite side as to witness not gradual evolution, but genuine leapfrog strides? We're positioned to accomplish that. We're positioned to put money in. We're positioned to join forces in manners nobody else could. We're fervent about producing excellent work. I believe moments such as these cause folks to sort of concentrate harder and reflect on what truly matters. I believe you can't get away from the fact that your residence truly matters, that the bonds you share with your loved ones truly matter. Your friendships truly matter. Where you will devote your hours across the coming 1 to 2 years, while this virus is probably still somewhat present in this world. You will probably devote a heck of a lot additional hours at your main dwelling, vacation property, someone else's dwelling. I believe that every bit of it generates a possible tailwind for us. Near-term, we must get past the present moment; we must ensure we, just as everyone else does, we must survive to fight one more day. We must make numerous difficult near-term choices, and make those choices within the frame of a strategic perspective on what lies ahead, and not mess anything up here by acting hurriedly and letting fear drive us. We say the facts remove the fear. What do we know? What are the facts? What's the data? How do we think about it? What’s the way to identify the correct patterns? What’s the way to plan out the coming 20 moves? If chess is something you enjoy, and if the film “Searching for Bobby Fischer” has ever crossed your path—and if it hasn’t, given that all of us are stuck at home under lockdown at the moment, I’d urge everyone to give that movie a look. It centers on a young chess-playing boy whose name is Josh, and two people coach him: a street player and a Russian master. It reaches a point. In our company, we treat it as a sort of leadership training film. As for the last match, you can simply Google it and bring up the YouTube clip of that final game from “Searching for Bobby Fischer.” The whole message is don’t move until you see it. Correct? See the entire board. Don’t make a move until you see it, and see the big moves. Should we spot those and execute those moves properly, my belief is that we will redefine ourselves in a manner that is exponentially greater than what we achieved in 2008 and 2009. That’s exponentially greater than when we redefined ourselves across 2016 and 2017, when we chose to pull the car into the pits following what was a somewhat rocky beginning with RH Modern, and we chose to shift away from a promotional model toward a membership model, which let us re-architect the whole operating platform of the business, and lift the brand up. The global opportunities that are going to come our way in an environment such as this strike me as incredible. I realize that’s a lot, but at this moment we don’t truly have a strong script in front of us. In the same way that everything is sort of evolving, what we’re handing you are our live, evolving thoughts. Over to Jack.

Hi Curtis. On the topic of what we can draw under the revolver, that $600 million figure represents the entire facility size. Keep in mind, though, that this is an asset-based loan, so the amount we can access hinges on our inventory levels and other collateral. When you look at the 10-K, which is about to be filed, you'll find that we closed out the year with $322 million of availability. And as of right now, availability stands at $308 million.

Understood. Okay. Many thanks, everyone. I appreciate that.

Thank you. Hello, everyone, and good afternoon. You've clearly done excellent work making your cost structure more efficient, and I imagine that's something you feel quite good about right now. I was hoping you could provide a bit more detail on what makes up your costs, specifically cost of goods sold and SG&A. Perhaps some insight into what portion of those expenses is fixed and what portion is variable, and what you believe could be reduced. If stores remain closed past the April 30th deadline, would you keep paying your staff? Any additional information on that would be useful.

Beyond what we've shared in our financial filings, there isn't much more to add. Consider the situation where we're shut down — even with our stores closed, a fairly large share of our workforce is actively engaged and productive, thanks to our interior design operation and the direct character of many of our transactions. We're in touch, we're connecting, we're functioning. If circumstances stay the same as they are now, or if things remain closed, will we need to essentially restructure how our costs are organized? Naturally, we will. Is that as drastic as what other sectors and other companies face? I don't think so. I just came across the news regarding Macy's today — companies that depend far more on foot traffic than we do. Keep in mind, many of our galleries are truly unique locations. Take Chicago, for example; it sits six blocks away from any other retail store; it's located in a residential area. It's in the Gold Coast. We had to ask the city to rezone the whole neighborhood for a single day, grant us approval, and then zone it back, all so no other retailer could open there, because as we put it, we don't build retail stores; we build inspiring spaces. Our operation is far more of a destination. I think that works to our advantage. That's not to say walk-in traffic doesn't matter. Naturally, it does. Customers want to engage with the merchandise. They want to experience the setting and draw inspiration from the space. Some folks are simply visiting, stopping by for something to eat and walking into our restaurant, and suddenly they find themselves in this inspiring environment that gets them rethinking their home and creates a connection with them. Look, people have asked me, "So, is this a chance to essentially transform into a true direct business, launch digital advertising, and operate like Amazon?" I told them, "No, absolutely not." Want to genuinely overhaul the cost structure of the business? Begin burning large sums on digital advertising. Having that as the foundation of your cost structure offers no benefit. In the near term, there will be disruption, but we'll also have plenty of people working across many areas of our company. This won't resemble Macy's or those other retailers where most employees end up on furlough. Intelligent choices are what we'll need to make. Incidentally, that's the reason we held off. It's yet another case of that principle: don't act until you can see it. Keeping our associates on payroll longer and maintaining their full benefits — that helps them. It gives them a chance to grasp what a furlough might actually involve, should some occur. Toward our team right now, we're being extremely candid and transparent; that helps us too. We're becoming more organized and sharper. We're gathering details on every bit of stimulus assistance available to companies and individuals through this period. Our aim is simply to reason it all through and collect additional data. We expect to ride out this storm quite successfully; obviously, things will look quite unlike before. Dramatically unlike in the near term, somewhat unlike in the medium term, and closer to usual over the long term. What emerges will be a reimagined RH and, in my view, a dramatically transformed and much stronger brand and business — just like every other occasion we've confronted something similar.

Okay, great. Then I suppose my next question is this: some data points have come out suggesting softness along the coast, yet the nation's interior looks comparatively steady. I'm just wondering what you're observing throughout the U.S. And building on that, with year one for New York City now finished, could you address any lessons at a big-picture level, whether positive or negative? What do you figure could carry over to upcoming openings? Thanks.

Yeah. My sense is that business dynamics along the coast aren't dramatically different from those in the Midwest right now. That isn't what we're witnessing. We're witnessing a fairly comparable effect nationwide, since the single largest hit to the business comes from shutting our physical location. That's been a fairly even-handed call, with a steady effect across the country. Look, do we anticipate that matters will worsen in New York ahead of improving? Naturally. If you step back and examine New York from a broader perspective, what lessons emerge after year one? One lesson is that we likely have a chance to conduct more business in markets rather than less. When we consider crafting physical experiences, New York became the first store where we placed a visible interior design operation inside the physical gallery. You'll witness that in every one of our new galleries. The hospitality offering on the rooftop — which began, I believe, with our first one in Palm Beach, correct? Beginning in Palm Beach, that was the sole location where we halted construction for nine months. It's the sole location where we managed to determine where a restaurant could go. We were afraid to attempt it since it sat on the fourth floor, and we wondered, what if no one heads up there? New York once more confirmed that a rooftop hospitality offering makes economic sense. Building it that way is the more economical route. That's why you'll see — thanks to Palm Beach and New York plus a handful of others we've lately opened — you'll see restaurants situated on rooftops. We believe it's a wonderful experience for consumers. It provides them gorgeous views and gorgeous settings to dine within, inside a glass box, gazing out at a gorgeous rooftop garden. Other lessons New York has taught us: it gives us considerable confidence as we consider what we ought to do internationally in certain other highly important cities, when you weigh the potential in New York and the volume we're generating with merely one store in New York. Ought we to have a second store in New York? Ought we to have some sort of distinctive environment on the Upper East Side and some sort of reimagined brownstone or home? What ought we to do in London and Shanghai, in other major cities and metropolitans of that kind? The upcoming galleries we're launching are a reflection of our freshest information and insights, and they've advanced beyond what we've been referring to as—well, we're done using the word prototype. Calling something a prototype suggests it's frozen in place and never improves, which simply isn't how we operate. Innovation sits at the heart of everything for us, and we constantly attempt to rethink all that we do, to improve things constantly, and to acknowledge that we remain forever incomplete and in motion. So I won't discuss our prototype; instead we'll describe it as the newest version of our design galleries. These galleries bring together the finest of our thinking and everything we've absorbed from every experience, whether positive or negative, that we've created to this point. Our belief is that they'll keep improving and delivering more. When we consider various tailored concepts, they merge our strongest takeaways in fresh and superior manners, and occasionally create a chance to discover something entirely new. Once everyone witnesses our plans for New Jersey, I believe it will seem simply extraordinary. It's nearly astonishing. We made the choice not to secure an anchor spot at this Short Hills Mall. Instead, we chose to buy a property of five and a half acres located in Morristown, New Jersey, within the township of New Jersey; we've acquired a historic house that sat on that land. We're introducing essentially two structures onto the site. The most stunning outdoor gardens anyone has laid eyes on. A gateway that carries a slight resemblance to Versailles, and features unlike anything you've encountered, which we ourselves have never attempted. My feeling is that it will become the most awe-inspiring destination within New Jersey, perhaps even along the East Coast, drawing visitors from all over. Where does our confidence for undertakings like this come from? It comes from continuously gaining wisdom through our wins, and continuously gaining wisdom through our failures; we keep linking the pieces together and rethinking what can be achieved in this space. What we plan for New Jersey, which I consider among the most thrilling things anyone has witnessed in our sector. It merges everything we picked up in Chicago, about venturing off the typical route into an area with very strong demographics, one that may lack heavy foot traffic yet carries significant cachet. Blending businesses in fresh and distinctive manners. Insights from RH Yountville apply here regarding gardens and linking areas and weaving hospitality in a distinctive fashion. Insights from Palm Beach apply too, where we have remarkable gardens and encounters when you arrive and in how you leave your vehicle and in how you step into our compound. Back when we launched Palm Beach, we noted that we're technically situated in West Palm Beach, and the running joke was that plenty of residents of Palm Beach Island never set foot in West Palm Beach. We mentioned that all these individuals basically arrive by air, landing from the airport, whether aboard their own private jet or simply on a commercial flight, and afterward they head to their compound and pretty much remain inside it. Should they leave that compound, perhaps they visit a friend's compound or dine at a restaurant in Palm Beach; we stated that we must create the most inspiring compound across that entire area and region, so the customer feels at ease departing their own compound and arriving at ours. It is entirely enclosed by walls. You drive your vehicle up facing a 14-foot wall of cascading water. We handle valet parking for you. You find yourself in this incredible experience. When you look at what we are building in New Jersey, it spans five and a half acres. It resembles a gorgeous estate paired with these extraordinary gardens. What you will witness from us going forward — our finest work lies ahead, not in the past. Many folks assumed that once our operating margins reached 11%, everyone remarked, "Oh, that's the ceiling." The previously dominant company topped out with operating margins at 10.5%, and they have since declined. These folks reached 11%, so they likely pushed themselves beyond what they could sustain." Yet here we stand at 14.3%, and I just explained to you that absent a coronavirus scare at this moment, we would land well above 16.3%. This organization will keep innovating; it will keep reimagining what lies ahead and creating. We will keep growing sharper and more resilient. This is an unbelievable period. It is frightening for everybody. It is devastating to realize how many individuals are suffering because of this virus and losing their lives to it. Nothing remotely like this has ever happened in the U.S. We inhabit a nation that has never been invaded during our lifetime, correct? This amounts to an invasion. It resembles a war. Nothing like this has ever been endured by us. Lockdowns are something we have never gone through. Situations such as this are something we have never faced. This too shall end. Things will deteriorate before they improve, yet improvement will come; we will keep allowing our vision and our values to steer us, and we will harness the hearts and minds of every one of our people, and spark the human spirit within everything within our company that we can influence. I believe what lies ahead from us is going to be remarkable.

Thanks for the color, Gary. Good luck.

Yep.

Hi, Gary. Just a quick one — the RH figure dropping 40% after the close, does that reflect shipments or orders? Could you clarify that for us?

Yes. That's demand. Right. It's demand. Shipments follow demand. I'm telling you, what is it, Jack, 11 days now that we've been shut, 12 days?

Today's day 13.

Day 13. Okay.

When we say orders, we basically mean orders that have been submitted — confirmed in writing.

Thanks. Just a quick second question from me. That remark about looking into debt — it comes across as a chance to make a bold, proactive move. Is that actually what it is, or could it instead be a way of simply strengthening our cash reserves, since the future is so uncertain?

Jack, what are you asking?

Well, I believe that letter addresses the matter. It concerns liquidity. Is it an offensive move or a defensive one? That's what I mean.

Oh, it's labeled offensive. Yeah.

Right. You look at that as a chance, perhaps, to strike a property transaction or take some action. It isn't an attempt to bolster a liquidity position.

No. We're in good shape on liquidity. As you've observed from us previously, we tend to be fairly opportunistic.

Great. Thanks for the responses. I appreciate that.

Hi, everyone. This is Max, sitting in for Oliver. We appreciate you fielding our question. To start, could you perhaps bring us up to speed on how large your direct business is right now, and how has it been trending across the last several weeks? After that, could you remind us of the locations of your distribution centers here in the United States? Then we have something else to ask.

Yes, we genuinely don't break out our channels individually. Our approach to running the business is integrated. Where the customer chooses to make a purchase isn't something that worries us much. Obviously, at present there is just a single avenue available for them to buy. Everything flows through there. If you took a step back and simply worked out the basic arithmetic, asking what we were during the prior quarter — 60/40, roughly that?

That's right.