RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon, everybody. We appreciate your participation in the Q&A conference call for our first quarter of 2020. Here with me are Gary Friedman, who serves as Chairman and Chief Executive Officer, along with Jack Preston, our Chief Financial Officer. Prior to getting started, I want to point out our legal disclaimer, which is that certain remarks we make today will be forward-looking under the federal securities laws, covering statements regarding the outlook for our business and other topics mentioned in the press release we issued today. A number of risks and uncertainties are tied to these forward-looking statements, and those could lead to actual results differing materially. For a more detailed account of the risk factors that might affect our results, please look at our SEC filings and the press release we issued today. Also, keep in mind that these forward-looking statements represent our opinions only as of today's call date, and we take on no obligation to revise them or publicly release the results of any revision in response to new information or future events; additionally, we might discuss non-GAAP financial measures on this call, which adjust our GAAP results to remove the impact of certain items. Additional details about these non-GAAP financial measures, plus a reconciliation of the non-GAAP to GAAP measures, can be found in today's financial results press release. A live broadcast of this call is available as well on the Investor Relations section of our website at ir.rh.com; having said that, I'll hand the call to the operator so our Q&A session can begin. Operator, we're ready for questions.

Evening. I appreciate you taking my question. Gary, what are the components for this year that will deliver positive operating margin expansion? And within that, could you explain the assumption regarding your sales outlook, especially given all the uncertainty around the globe? Perhaps a helpful way to put it is this — what sort of sales environment would make positive operating margin expansion simply unachievable?

Well, I'd direct you to our track record — when we shared the 2019 results, I believe that was prior to COVID, when we presented a bridge toward expanding operating margins, and nothing about that bridge has truly changed. There are just adjustments tied to a sales rate lower than what we had expected. And then we've made certain organizational adjustments, as you'd anticipate and as we communicated regarding our expense structure and our spending structure. And we've genuinely attempted to reimagine the business once more. Looking at our history, our DNA is essentially designed for tough times, correct? From the very start, we had to pull ourselves out of a hole of a business called Restoration Hardware that sold entirely different products, that was essentially near bankruptcy, and raised money three times during the first year just to remain alive; we had to reimagine ourselves once more in 2008 and 2009. And while everyone else was essentially shouting value, value, value and lowering quality so they could lower prices, we took the opposite path and reimagined the business entirely, aiming higher and moving quicker. This is essentially another such moment, correct? So — but at the base, if you simply consider the foundation of where we began entering this, we stated we had no less than 200 basis points of operating margin expansion. So the crucial word there is, "at least." So if you begin there and you consider — I'm not sure. Consider Q1, we reported 10% versus, what, 11.8% a year ago, correct? So we faced a fairly difficult Q1. Half of our stores were — every one of our stores was shut for the whole period; we have outlet stores and restaurants and similar things, which generated zero revenue, with no online component. And we managed to kind of guide our teams, and our teams managed to guide their teams through — I've never witnessed a period like this, correct? The most volatile, challenging time for retail business, restaurant business, whoever, all the businesses that have everything shut down, as you can picture. And we were — we only gave up 180 basis points of operating margin; and you can — if you read our press release, we state the business has accelerated, correct? You can sort of look at those figures and picture what it might look like in — and if you simply return to that earlier release, check out the bridge, it contains every element: the outlet business, the shift away from a single-source rug supplier toward a direct sourcing model, the other initiatives we're pursuing in the core business, raising the brand's stature, and so on. I believe we now have a very obvious route to operating margins above 20%, correct? It's — we are — as we keep lifting the brand higher and we — you can watch us become a genuine luxury brand producing luxury-level margins; and if you step back and consider that, you'd ask yourself, what other luxury design furniture brands exist globally, just pose that question to yourself, vertically integrated across every category, running an operation like ours that delivers the productivity we achieve. Luxury apparel labels are plentiful. Luxury jewelry labels are plentiful. Luxury car marques are plentiful. Luxury brands are plentiful in every category. And in our category, I'd contend you genuinely cannot name one. You could name someone who may be a luxury sofa label, an upholstery label, someone who may be a luxury lighting label, someone who may own luxury business pieces; but there truly isn't an operation like ours at any level anywhere on earth; and so — but look, it's a long — as I enjoy saying, it's a long climb up the luxury mountain, correct? And we must earn our way there. We must perform such remarkable work that we force a reconsideration of this brand. I mean it's genuinely fascinating. I sort of grimaced at our team around the table here because the conference call operator introduced us and said, "Welcome to the Restoration Hardware conference call." That isn't our company's name any longer. We're RH. But old perceptions are hard to discard, correct? Same as every analyst on this call. Most of you, I'd say not all of you, most of you still view us as a furniture store. And you sort of benchmark us against Ethan Allen and other sorts of companies. And it isn't even the same business. Like it isn't even close, correct? And so I think everybody will simply need time to sort of, I think, see us the way we're heading; and I think, look, we have to prove ourselves. And I recall all those reports that were published. When our operating margins were 11.4% a couple of years back — actually, a little more than a year back. And a couple of reports said, "Oh, they've reached 11.4%. And Williams-Sonoma at its peak reached 10.5%, and now they've slid to 8.5%. Plus, RH simply can't keep 11.4% going. Bet against it." Correct? And plenty of folks told me things like, "Those operating margins of yours aren't sustainable." Then we moved from 11.4% up to 14.3%. And today you hear the exact same refrain: "Are they able to hold those operating margins?" I mean, this is nothing new for us, correct? Skeptics are something we're accustomed to. Generally speaking, until someone witnesses a thing, they won't accept it — unless they happen to be on the squad building it, correct? The vision belongs to us, nobody else, correct? So we — once that vision reveals itself, once the work turns tangible, that's when everyone will witness it and accept it. Still, I could lay out each and every detail for you at this moment, and you still wouldn't truly grasp the method behind it. You need to join from within.

Go ahead and give it a shot.

Sure. Though you get my point, don't you? So, um, but everything's been set out, correct? It's there in that

This appears in the Q3 letter, Michael — the one for Q3 2019 that came out in December. A potential gain of $4 billion sits right there. And like Gary mentioned, back then what we discussed was an improvement of 200 basis points.

At minimum.

At minimum. And as Gary has hinted, clearly, when we put it that way, there's — within our…

We're not going to say at least if we had 200 basis points, right?

Yes.

Right, got it. Let me squeeze in one more quick question. What you posted for May and for June so far has really stood out. Is the reopening what's behind that? In other words, is the lift coming purely from additional design galleries coming back online? Or within the design galleries that never shut down for very long, are you actually seeing growth that keeps getting faster and bigger?

Yes. What I'd say is it's the two of those together. The — even during the stretch when every store and every gallery was shut, once we began bringing galleries back a handful at a time, a couple one week, a couple the next, our business kept climbing week after week. I couldn't tell you which week was our peak. Possibly 10 or so in a single week. It's obvious that having a gallery, having a retail store, makes our business far stronger. Anyone who believes the pandemic means retail stores are finished is, frankly, brain dead; so, as plenty of folks keep saying, well, look, a store isn't needed by anybody these days. Well, any retailer that grabs this moment to actually cut down its store footprint is going to end up cutting down the company. There's no way that works; so, to me, it's a really fascinating moment to just sit back and observe, since people keep asking — folks have come up to me and said, "So will you keep opening galleries? Will you keep opening your stores? Or will you halt? Just look at what Amazon or Instacart or this or that is doing." I understand it. Sure, essential goods, buying toilet paper, that kind of thing. Sure, but retail that demands taste, and style and presentation and imagination and all the rest, humans — I can't speak for anyone else on this call. Did anyone actually enjoy being at home every single day for the last three months?

It certainly has been an interesting one.

Is there truly anyone who prefers being stuck indoors, going nowhere, seeing nothing, and having no contact with other folks? Who among us isn't eager for the day when masks become unnecessary? That's how everybody feels. You see it on TV, in the news coverage; it seems as though some places have barely reopened, yet the beaches are completely full. Bars are jammed with patrons, and so on and so forth. So we're genuinely upbeat about our business, about our model. We have an enormous direct business. We believe we're extremely skilled direct retailers, digital retailers, or whatever term you prefer, web retailers. People refer to it by all sorts of labels. To us, it's just another avenue. And we intend to continually make that avenue better. We've got exciting news coming soon about a complete rethink of our entire web platform; a bit of that showed up in my yearly letter to shareholders, and you'll see some of it echoed here since you often need to repeat yourself a great deal before the message lands. Soon, though, you'll be hearing about the world of RH, a gateway that will bring you into the products, places, services and spaces of RH. We'll just keep improving at our craft, so we expect the galleries to trend in a strong direction. The main thing we're wondering about — and I'd guess every retailer is too — is what happens when you reopen, and that breaks into two parts. First, once you reopen, how much of that pent-up demand comes rushing back? How much actually returns? How long does it stick around? What does it end up looking like? Then the second part is which shifts in spending are seismic? Obviously, Wayfair moves from up 18< > to up 19< >, correct? There are plenty of factors behind that. Every one of their rivals — At Home, Bed Bath & Beyond, tons of names in that space — basically every business built around physical stores went under, which pushed everybody over to Wayfair. Wayfair carries an enormous selection in the kitchen and home furnishings categories. Pop over to their site and you'll find something like twenty pages of toasters — roughly 600 different models, if I remember right. On top of that, nobody was going out to restaurants. Dining out just wasn't happening. You would not believe the amount of money my partner dropped at Williams-Sonoma, which happens to be my alma mater. So the real question is: fine, we've got these huge shifts and these boosts that I believe are helping us — obviously, folks are remaining at home. They glance around their living space and think, wow, we're stuck here for the foreseeable future. Let's improve how it looks. There's no travel, no vacations. We're not doing all sorts of other things. So a dramatic change in where money goes is taking place. And can that last? Will there be some kind of payback? What would the schedule look like? We don't have any knowledge about any of it. We can't make any claims. There's just no genuine method to pin down those numbers. Yet we do know that over the long term, folks will continue living in houses; at present, they'll keep purchasing furniture, furnishings, lighting, and things of that nature. And should we offer the finest assortment within the categories we compete in, whether or not a pandemic is happening, shown in the best manner with top value and top service, we'll come out just fine. So — and our attention is on the long term. So I — and I'm not — folks ask me things like, will there be — what about pent-up demand? What about that? Was it like — sure, I have no idea. I truly don't know. I don't know whether we'd act differently if we did. The only thing we know is that, over the long term, we believe we'll create one of the most admired brands anywhere in the world. And that's where our focus lies.

Thank you very.

Thank you.

Evening — actually, good afternoon. I appreciate you fielding this. Gary, I'd like to briefly touch on — well, perhaps not so briefly — the RH Residence side of things, and maybe dig a bit deeper into why this makes sense at this moment and how many years the concept has been in development. How do the unit economics work? Are you working alongside homebuilders on this, or something else? I'd really enjoy hearing more about the vision behind what appears to be quite a significant opportunity.

Sure. What we aim to do is share the broad, long-range vision we hold for the company, correct? One that will endure beyond my lifetime. We hold a vision for this brand and this company intended to span multiple generations, right? When you pause and consider — if you pause and consider what we put in writing, sure, it likely startles quite a few people. Yet when you reflect on it, everything is tied together in a quite straightforward manner. Begin with the notion that some possess taste but lack scale, while others have scale but lack taste — and the combination of scale with taste, in our view, is enormous and extends widely. Nothing we do here operates in isolation, right? So everything — it all magnifies and lifts and makes the core brand more valuable. Residences fits exactly that — merely a category of space, right? Consider spaces — we already create spaces. We construct some of the most inspiring spaces anywhere in the world. Consider how those spaces appear — we are fixated on exceptional architecture. Either we locate architecture of historical caliber and adapt it anew, or we construct exceptional architecture. That exceptional architecture magnifies the product; and we do exceptional architecture; we have exceptional interior design. We — whether you look at our rooftops or our gardens, we have exceptional landscape architecture. Think about those categories since — allow me to go into this briefly. Think about those businesses — not one of them is a consumer-facing business. Where can someone locate an architect? Do they keep an office that reflects exceptional architecture? Not really. You don't even know where to look; it resembles searching for a dentist, right? You ask a friend. Where can someone locate a landscape architect? Where can someone locate a full — interior designer? Someone might respond, "Oh, those can be found on house." Sure, that's true, but the business has no physical manifestation. And we do have a physical manifestation of exceptional architecture, exceptional interior design, exceptional landscape architecture. So placing a services business within a business that represents those things strikes me as quite logical. Our interior design operation has performed extremely well, and we think there's room to elevate it substantially. Great architecture is what we practice now — we construct it, we design it, we develop it. We create wonderful sets and wonderful rooms. Our interior design work is excellent; our landscape architecture work is excellent, so those are areas where we genuinely excel. It follows, then, that a services arm makes sense — a broader services operation delivering those capabilities across several companies that don't sell directly to consumers; that's exactly how we managed to build RH, since premium luxury furniture largely isn't sold directly to consumers. Or at minimum, it wasn't, correct? The design districts, the design buildings — I often described it as sitting behind the iron curtain, so to speak, of trade-only design showrooms. To enter those spaces, you must be an interior designer holding a resell license. The same dynamic applies in these other sectors. Consider housing as it stands now. My request to everyone listening tonight: if you have a moment, open Zillow, open Redfin, open whichever real estate site you prefer. Browse 100 houses this evening within a price bracket you imagine we'd compete in. Then report back how many feature excellent architecture, how many feature excellent interior design, and how many feature excellent landscape architecture. Should it reach 1% — should it exceed 1%, you probably reside in a truly exceptional region. Yet even within exceptional regions, the figure is remarkably small. How often do you visit a friend's home and think, "Wow, what beautiful architecture. What great interior design. What great landscape architecture"? Practically never. Practically never. It resembles an entirely uncharted territory. Looking closely at the major homebuilders, they're essentially churning out something — it's no longer a McMansion. Label it however you wish. But it's a churned-out product, correct? And it's a pleasant, well-organized development, yet nobody delivers fully turnkey residences. As Eri frequently tells me, nobody sells you a vehicle lacking an interior. You don't purchase a gorgeous Mercedes, or whatever marque you favor, and receive it with no interior, leaving you to sort it out on your own. I'm unsure how many people on this call have attempted their own interior design or furnished a home themselves. It's a nightmare. It's a nightmare even for me, and this is my profession. I own a house in the Napa Valley whose remodel I completed roughly 3.5 years back. It still lacks furniture. That's how difficult it is. It's a pain in the ass. So we understand the difficulty; we understand we're skilled at it; and we believe that if you — regarding work — back when I worked for Howard Lester at Williams-Sonoma, he would say, "You sell the hole, not the drill," correct? Don't sell them the drill. Give them the hole, since that’s what a drill is for, correct? And at Williams-Sonoma, the thing they’ve done incredibly well, right, is sell the concept of pizza rather than the pizza pan. They sell you the notion of pasta, or of baking an apple pie. That means selling the hole, not the drill. So I’m sitting here thinking, well, why couldn’t we — we’re genuinely strong in architecture, genuinely strong in interior design, genuinely strong in landscape architecture. I’m confident we can design and build items and furnishings that people will enjoy. And I believe there’s — when you consider people who have money, okay, and you consider what the single most valuable asset is, time, right? Without question, the most valuable asset. Anyone on this call can work out — if you misplace your money, you can work out how to earn additional money. If you misplace your time, you simply cannot recover it, right? So we spend a lot of thought on businesses that provide time value, because those will grow more valuable. And I recently purchased a house in Beverly Hills. Why did I purchase it? I walked inside, and it was completely furnished.

An architect designed it, and the furnishings came from — that same architect doubles as the interior designer. Once every five or seven years he completes a single house, and when it's finished, it's fully finished. I stepped inside. My reaction was, this works for me. That's going to give me back two years of my life; and right away I could move in and start using the house; and we built a test house. Maybe not everyone is aware, but the video should still be accessible online, I believe. Search for Eight Palms, RH Residence. That video is still up. In the Napa Valley we built a test house. We took — watching the video, you can see what we did before and after. We did a — the house we took on was — it sort of needed some love. We redid it entirely, furnished it, and sold it. So more of those are on the way. Just like everything we do, we'll test it; we'll try it; we'll work it. Perfecting it is essential. So stamping these things out is not the plan. I mean once again, the ecosystem's vision is a huge, enormous vision. Like we — I believe we're nearly — I shouldn't say — we — or we — Dave isn't on the phone at this moment; it's like — whether the deal is signed, I'm not sure. Like I don't want to come across as — Allison, did — right, I can't say anything. But suffice it to say there's a place where our first ecosystem will be announced, where an RH Gallery, an RH Guesthouse and RH Residences will all be in a really very cool place. And it'll make a great test; the deal and the vision have been worked on by us for a long time. And these first handful of houses we do are really loved by people. Five — six residences, I think that's what we're going to have, yes. Servicing of the residences will come from the guesthouse; so housekeeping is something you want. Having someone set up and cater a meal at your residence and so on and so forth is something you want. This isn't connected. A vertical, it is not. Visions exist for vertical ones and so on and so forth. But we'll see; how our guesthouses do, we'll see. A new market for privacy and luxury is what we think our guesthouses are going to create. Thinking about the idea of privacy, a very big market is what we think privacy is going to become. Standing back and thinking about privacy, it's the one thing everybody has given away on social media. And the one thing the Internet has taken away is that. Anybody could be Googled by you. Anything can be found out by you. True it may not be, but a lot about almost anybody today can be read by you. But a world where it's so exploited is where I think we are. Very valuable is what privacy is going to become. So when you look at what we're up to with guesthouses, once you actually see it—when the New York location opens—well, the timeline keeps getting pushed off to something else. Then the pandemic hit, and we figured, sure, we'd probably been hoping to launch that fall, but opening a hospitality concept right after a pandemic just seems like tempting fate. So my thinking is, we don't want to launch all 10 of them and then have to shut down if there's another month of shelter in place. Still, what we're going to build in hospitality, I believe, will be something remarkable. Not run-of-the-mill whatsoever. Remarkable. Some of the concepts in our guesthouse have never appeared anywhere in hospitality before. That kind of thing is necessary, because we've got to push the greatest names in hospitality to acknowledge us with respect, since this is one more step up the luxury mountain—and I believe we've nailed it. To me, it's a completely fresh market. Nobody is going after it the way we are. So you think over the long haul, and you consider, hey, if I can have guesthouses that succeed, if that pans out, that model looks really strong. With 10 residences placed above the guesthouse, I'd have a full ecosystem in which our F&B and restaurant services, the room services, the restaurant—you could—at our second guesthouse—did we discuss our second guesthouse—did we discuss our second guesthouse, and where it's located? Yes, we did; it made the news, correct? Yes, it's located in Aspen. So Aspen is where our second guesthouse will be. And down in the basement in Aspen, we'll have our first RH bathhouse and spa. Once you begin picturing these pieces fitting together and forming residential ecosystems that in many ways reinforce, lift and make one another more valuable—then you return to the idea of time, and you reflect on how companies providing time value will grow more valuable, and that's something we believe down to our core. That's exactly why our business does so well today, in our view: there's no need to visit 10 separate showrooms. There's no need to juggle deliveries from a bunch of different vendors. There's no need to spend the time or deal with the headache. We're far simpler. Far less friction, far less time. So all these pieces of the ecosystem—we think we're capable of doing them. Some of them we already handle in one way or another. And the concepts we've got for them are going to turn out really well. And I thought, look, this moment is genuinely insane, isn't it? There's a pandemic; there's civil unrest. There are global trade wars. There's every kind of every kind of wild thing happening. For us, there was no better moment to reveal what we're aiming for over the long haul, even if the only audience is ourselves, even if the only audience is our own team. The world is in need of hope, in need of inspiration, in need of — it needs some positive momentum. It needs a greater amount of light and a smaller amount of darkness. So whether anyone has faith in it at this moment, that doesn't really matter to me. We have faith in it. And the things we have faith in, we typically make real. And we typically do them quite well; so we're not handing you a model in the residence at this point. We do have the models. Every one of them is wrong to some degree. The real question is whether they're more right than wrong. Because the moment you get moving and you actually do something, that's when real learning begins. And that's where the learning curve speeds up, and that's when you start to genuinely improvise and adapt and steer it in the proper direction and do the proper thing. But I believe our vision is far more right than wrong. It's going to be wrong to some degree. I think we're going to — as we do with everything else, we — generally the things we do, we take a real swing at it. We do them relatively well. They don't all work; but if we're half right on this vision, it's a massive idea.

Suppose our vision turns out correct even just one time out of four — this business will end up 10 times its current size. When I step back and consider it, I say to myself, look at Elon Musk: he's building electric cars, solar power, space travel, tunnels. My sense is that we humans — we generally don't push ourselves hard enough to discover what's truly achievable. So during the time we have here, we're going to attempt remarkable work; that's what we exist to do; that's how we're wired. And that's what we put our faith in. So I believe we'll be right more often than wrong. And once we demonstrate it, everything will unfold accordingly. So…

That gives us plenty to digest, and I appreciate it. Yeah, quite a bit to consider. I'll hand it over to somebody else, but yeah, thank you for, I suppose, laying out the vision in more detail, Gary.

Of course.

Hi there, good afternoon. Gary, I want to stay on this topic since I believe it's genuinely groundbreaking; it brings to mind the Baccarat Hotel, doesn't it — taking a luxury brand like that and transforming it into an entirely new business. So my question would be, didn't you actually run a test of this going back to 2016 at Crystal Cove? That was located in Newport Beach. In what ways does it differ? Was the scope limited to interiors only? And what lessons came out of it? Then second, what would the timeline look like for rolling out the services — not the part of the business you described as much more long-term, but rather the services you mentioned before? Thanks so much.

Sure. Sure. Yes, that Crystal Cove project in Newport Beach was one where our contract division — the Contract and Hospitality division — worked alongside a builder; essentially we got brought in to handle the interiors, more or less. So it operated as a partnership. In a sense there wasn't much — we had no real control over the architecture, how the homes were designed, that sort of thing; so really it amounted to an interiors-focused job. Plus they were eager to leverage the brand, and I tend to be somewhat cautious about that. We sort of allowed them to make some use of the brand. It's like — generally I feel — and I hope nobody from Crystal Cove is listening, but there isn't a great deal of work that others perform within this particular niche of architecture, interior design, landscape architecture that we think can be done at a higher standard than what we deliver. And so — that's the reason we're confident it will succeed. When you consider the timing for unveiling the services that are going to be rolled out. At this moment, our focus is squarely on lifting the interior design business and putting substantial investment into interior design. You noticed in our press release that we shifted the investment pendulum back in the opposite direction. And we intend to keep investing forcefully in what lies ahead for us. With interior design, we believe we can elevate it to a new tier of professionalism and capability. We'll likely run a test sooner rather than later in some market. Perhaps right here in the Bay Area, at a location where we try out architecture and landscape architecture. Thinking about it — like at present in San Francisco, we have a large new gallery set to open. We have an actual opening here in Marin; they're located right here. Should we test it at those two galleries? Should we repurpose our former San Francisco gallery? I'm not sure whether anyone has laid eyes on it, but it's among the most stunning little buildings in the center of the Design District; Ed Hardy built it — he ranked among the well-known collectors and dealers of antiques, and was one of the pivotal figures at Sotheby's for many years; and he put up this gorgeous palladium building, with lovely garden courtyards. That's the very thing that inspired us, many years ago, to create gardens and rooftop gardens. So we're sitting here asking ourselves, should we simply keep that property? It's ours; the amount we put in is quite modest. Should our services operation move into separate quarters within this gorgeous building that symbolizes so much and — since there's no way we can squeeze into the galleries, correct? There'd be a portion facing consumers. For instance, if you've visited any of our newer galleries, roughly in the center and rear of one of our prototypes, there's RH Interior Design, with highly noticeable offices visible via a glass partition. Eventually, that's going to turn into RH architecture, interior design and landscape architecture. The idea, then, is to have an integrated services business that faces forward, essentially, one that draws people in. Yet you can't truly — operating an entire offices operation out of — in my view, not out of the gallery and not out of that area. My sense is it — it just won't be the right fit, you know? It works well for a consumer-facing portion to interact, greet folks, establish the link, and afterward have an office, a genuine office for the services that's ent — giving you the actual room for folks to work plus the proper equipment and tools, and things like that. So you're going to witness us trying that out. You'll watch us experiment — listen, the residences are arriving quite soon, with the initial market trial happening within the coming 2 years. We're going to expand the ecosystem. You'll learn additional details about that, and our very first test market will be that one. You'll hear — you'll begin hearing regarding the services business. We're going to trial it. That's the reason we wanted the vision shared right now, since you're going to hear additional details about those. You're going to witness them. We'll gradually manage to say more; and afterward we — listen, the largest item on the horizon — near term, the largest item is RH International. Plus we have — are those deals inked? What's the count that are inked? Did we get 1 or 2? One is similar to — practically all of them are set to be inked. And we're figuring out the specifics. Dave, you're not — is Dave present on this call?

He's not on the speaker line. He asked.

He isn't connected to the speaker line. All right. Dave is unable to speak. He's sort of — he made a request to be on it. Okay. He's like — he's likely speaking at this very moment. You folks just can't hear him. We never provided him with a line to speak into. Yet Dave has genuinely mapped out an amazing initial strategy for the brand in Europe. I believe we're simply going to — it's going to be amazing. I mean we — for us it's mind blowing. So I can only picture how consumers will experience it; but the first gallery might open during 2021, in summer 2021. We need to move fairly fast; and it's — spring of 2022 at the latest, though it might be 2021 when we open RH England; that will be followed by — unless the deal falls apart at the final moment, but they're essentially finished, but followed by RH Paris, RH London. We have several others that I won't discuss further. I don't want to jinx anything. I've probably said too much already. But those will — the following 2 will be 2022 or 2023. How complex the architecture is for RH London — it hinges on how far we take it. We're basically connecting three separate buildings, and on top of that there's a stunning roof deck, a restaurant, and plenty of other features. It's going to be incredible, and it'll stand as one of the most exciting stores in all of London. As for what we're building in England — technically just beyond London — it's astonishing. Honestly, both of these rank as the most exciting retail concepts we've ever brought to life, and in their own distinct ways they match or even surpass what we did in New York. One of them is so unique you can't even visualize it. So at some point, we'll need to make a call on one of the things still ahead of us — I'm confident the timing will come together. Most likely, we'll hold it in the format of an Investor/Analyst Day. We'll walk everyone through the material, and we'll put all the visuals on display, so that each person can genuinely, fully take it in. Even so, no one has ever entered Europe in this manner. Not once. No brand has ever delivered a more stunning debut. That prospect has us enormously thrilled. And keep in mind that roughly 75% of our business should sit beyond the United States. That's what the model is supposed to look like. That's the essence of the wealth model. It's also how LVMH, Kering, and everyone else, including Hermes, operate. So as you consider those elements and our direction, that's the big picture. But indeed, it will all begin to unfold, which is exactly why we made it public. We figured now is an excellent moment to attempt to be forward-looking and motivating—and not for anyone else's sake, only for our own.

Honestly, that's really motivating — and that first part is definitely something we'll be keeping an eye on. Thanks so much.

Appreciate it.

Thanks. Good afternoon. Could you discuss how quickly people are coming through certain channels — perhaps the galleries, outlet stores, and restaurants — since reopening? Also, could you remind us — you just mentioned this — what you expect regarding gallery openings for the rest of 2020 and going into 2021? Thank you.

Sure, sure. So yes, if you begin with retail stores, we don't see heavy foot traffic there, correct? Ours is a fairly low-traffic operation, unless restaurants are involved; and at present, regarding the restaurants — 4 are open, which is just half. They've been operating for 1 or 2 weeks. They're running at limited capacity, at roughly only 50% capacity, I believe. So yes, counting traffic isn't really what we do. And we — our business is simply — as we like to put it — mall traffic isn't something we truly worry about; it appears that those with enough time to stroll the mall have nothing else to spend but the day, correct? So generally, we discuss building our own destination and keeping fewer of the right customers within our galleries. That's among the reasons you'll notice certain changes we're implementing in New York, even regarding the hospitality experience, somewhat influenced by COVID and needing — having to function with social distancing. But the simple truth is that in New York, our barista bar and wine bar sort of turned into — we began to turn into the finest free WeWork, the finest free Soho House, the finest — a far superior Starbucks, and we're giving lots of people coffee and similar things. And they're lounging on our furniture all day, which makes selling difficult. So we're going to — we're adjusting things so there's actually less traffic, because traffic isn't really the point; what matters is the right traffic, correct, in our business; that's our focus. And traffic isn't even something we mention. The right customers are what we actually discuss. So we don't really — we view it through a different lens. But regarding gallery openings for 2020 and 2021, Charlotte is opening around the middle of June. We have — RH Marin will open near the end of June or early July. We simply have to deal with local restrictions and such. We're ready; the merchandise is all there. It looks great. The landscape looks amazing. We've got a — we're still — Dave, if you're on the phone, we need to adjust the lighting around the crown moldings. But that's the only small item remaining. I visited last night. But — and then RH San Francisco might open in the fourth quarter. We basically halted construction everywhere except Marin and Charlotte. So at this point, we’re starting things back up. With the complexity of bringing everything online and returning, we have to wait and see; as is widely understood, building work rarely goes without hiccups. Still, we managed to get San Francisco finished. After that, we’ll make an announcement next year, a bit later on, once we have greater certainty. And there’s no way to know whether the virus might flare up again during the late third or fourth quarter. Could there be further kinds of interruption, and so forth? What kind of price tag will that carry? Might there be stoppages of work? Those are among the challenges we’re facing; even so, yes, you’ll see 2 or 3 take place this year.

All right, that's useful, Gary. Could you also speak a bit about how the demand curve has been moving in the core portion of the business? I believe you mentioned it was down 11 in 1Q and up 11 thus far in June. Perhaps you could expand a little on what you're observing across products and regions? Any detail at all would be useful. Thank you.

Sure; it's a broad-based increase. What I mean is, certain categories you're hearing about generally in the outdoor segment and similar areas are experiencing larger gains, while others behave differently, which makes complete sense. Since people aren't taking vacations, they're likely purchasing outdoor furniture. They'll be spending their time outdoors, so our outdoor season is performing strongly. As for the remaining portions of the business, there's nothing unexpected. The items that sell best for us continue to be our top sellers. And I believe what's going to be intriguing — I touched on this in the letter, not sure whether everyone caught it — is that we're now going to send out a spring interiors book. I suppose there will be a summer interiors book during the summer, a modern book; so at first we had reduced all circulation. We eliminated the books. That's how we managed to — what was the figure, $50 million in advertising expenses that we removed, correct, since we eliminated the books during the first half; and afterward we observed demand returning. The hard part is that our offices had been shut. Consequently, we couldn't photograph all the new merchandise we had. So we're moving the new merchandise to fall, but we did sort of rearrange the pages of the books. We had a few new items that we'd managed to get photographed and we placed them into the books; however, you never want to send out books, you never want to advertise into a huge headwind the way we faced, correct? During those initial several weeks, I believe, three to four weeks, we're — nothing you did could shift demand very much. Even companies that were performing 10 or 15 points better than other companies, suddenly, everything declined. Yes, they didn't remain up. That's the reason you never want to mail a book into the wind; so — but given that the business shifted several weeks back, we asked ourselves, well, do we have sufficient time? Is it possible to improvise? Is it possible to adapt? Is it possible to overcome? Is it possible to get the books into the mail? Because it appears there's — they're returning, and we've got somewhat of a tailwind. And so we simply mailed the books. Now the books might make — I mean they won't do nothing, all right? We're mailing millions of books. Our two highest volume books; and they won't do zero. So yes, but at the same time I don't know what the curve looks like, what the pent-up demand looks like, what — so we don't precisely know. Yes. So it’s possible — hey, maybe things slow down, and then books come back stronger, and we’re still sitting at an 11. Maybe there’s additional demand that’s been held back. And as additional galleries open, that 11 will move to 15 or 17, and then the 17 will move to 25 once books are included. I’m not sure. But if you want my view — as of today, if I were placing a wager, I believe it moves higher, not lower. Not every one of our galleries is open. Only half of our restaurants are open; and a lot of the right customers get brought into our spaces by our restaurants. So at this moment, with the world reopening, we’re feeling far more optimistic than pessimistic and far more excited. And we’ve gained a great deal from going through this pandemic. We’re much stronger because of it. Our people are — the level of imagination and innovation that our teams produced and how to run things differently through this and how to work together, and I mean we’re much stronger coming out of this. We’re a much stronger team. We’re at least 30% stronger than we were, maybe 50%, simply because of what we had to go through.

Thanks, Gary. Good luck.

Thank you.

Hello there, good afternoon. I appreciate you taking my question. Gary, this might build slightly on what was asked just before. Obviously, the recovery path looks quite impressive. Your main operation has maintained its strength nicely across Q1 and now into the second fiscal quarter. How much — when you examine what's happening in your locations, how much are you noticing, amid this crisis, shoppers who are new — bringing in a first-time buyer, and that buyer contributing to this better sales trend?

I have not observed — or if you check our — I mean, membership is probably the clearest window into that; and so the membership figures appear fairly similar: fresh sign-ups, re-ups, and so forth and so on. Therefore I believe it functions somewhat differently when you consider what we do. Ours is a business built around events. Someone either purchased a different house, is renovating a house or redoing their house. And that merely occurs — it occurs quite rarely. Consequently you could gain a first-time buyer, and that person may walk in and drop a significant sum and complete a design project, and then you may never encounter them again until another 10 years pass. Alternatively they may simply walk in and pick up certain bedding or certain towels and items of that nature. Yet what we do is largely a business built around events, and so it isn't the case that a great many individuals purchased different houses. That information is available to us, correct? So indeed; and so this is something I've long reflected on. While we've argued about it in this setting, we got forced to close; we were posting gains of eight. Our operation in the main operation dropped 40. Consequently we surrendered 48 points of business. Do every one of those individuals suddenly no longer require furniture? No. Do they stop being people — I mean we motivate a great many individuals to purchase furniture, don't we? However the bulk of what we do is — a substantial portion of what we do, I would say, is business driven by necessity, correct? So when you're in a business driven by necessity, should you face a disruption and that disruption — should you have a fine — we — so here's a fascinating thing that befell us. And we didn't simply — during 2008 and 2009, we endured a financial disruption that stuck around forever. By forever, I mean roughly 1.5 years, right, the entire situation collapsed. It was — the market declined. It was an entirely distinct sort of effect. And this one — exactly how lasting is it? Like sure, we can discuss — I mean what does unemployment stand at currently? 40 million? Is it 30 million, 20 million?