RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon to all of you, and I appreciate your presence on this call covering our fiscal 2021 second quarter results. With me right now are Gary Friedman, who serves as Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to proceeding, I want to bring up the legal disclaimer: certain remarks we make today will be forward-looking as defined under the federal securities laws, which includes things regarding how our business is expected to perform and other subjects mentioned in the press release we put out today. A variety of risks and uncertainties are tied to these forward-looking statements, and those could lead to actual outcomes differing materially. For a fuller explanation of the risk factors that might impact 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 views solely as of today's call date, and we have no duty to update or publicly disclose any revised forward-looking statements based on new information or events that occur later; in addition, non-GAAP financial measures could come up during this call, which modify our GAAP results by removing the effect of particular items. Details about those non-GAAP financial measures, along with a reconciliation between the non-GAAP and GAAP measures, can be found in today's financial results press release. You can also access a live webcast of this call through the Investor Relations area of our site, ir.rh.com; having said that, I'll hand things over to Gary.

Okay, thanks, Allison, and thanks to all of you for being here today. I'll begin by going over our shareholder letter, and after that we'll take questions on the call. To our team members, partners, and shareholders, we're happy to share that we've delivered yet another quarter of record results, with adjusted net revenues rising 39% to $989 million, compared with $710 million during the same period last year, which represents a 40% gain over the second quarter of 2019. RH keeps establishing a fresh benchmark for financial performance within the home furnishings industry, and our numbers now mirror those of the luxury sector, as adjusted operating margin rose to 26.6%, compared with 21.8% a year earlier. We produced $263 million in adjusted operating income for the quarter, a 70% jump from $155 million the prior year. Adjusted net income climbed 105% to $252 million, while adjusted diluted earnings per share came in at $8.48, versus $4.90 in last year's second quarter; this year's adjusted net income got a boost from an unusually low tax rate of 1.3%, compared with 16.1% a year ago, driven by more stock options being exercised during the quarter and our average stock price rising nearly 3x. Had our tax rate for the second quarter matched last year's, adjusted diluted earnings per share would have come in at $7.21, which is a 47% increase over the $4.90 posted in the second quarter of 2020. During the quarter we generated $290 million in adjusted EBITDA along with $95 million in free cash flow. The second quarter closed out with total net debt of $296 million and trailing 12 months adjusted EBITDA of $1 billion, marking a new milestone for RH. Although inventory on the balance sheet grew 32% to $646 million, inventory on hand stood at $400 million, up 12% versus last year, as in-transit inventory of $163 million rose 85% from a year ago — compared with a year ago. Turning to our raised fiscal 2021 outlook, given the ongoing strength of our business and the power of our operating model, we are lifting our forecast for fiscal 2021 once again. We now anticipate revenue growth of 31% to 33%, up from our earlier outlook of 25% to 30%, and adjusted operating margin between 24.9% and 25.5%, versus our previous outlook of 23.5% to 24.3%; we're also increasing our ROIC outlook for the year to 70%, compared with our earlier outlook of 60%. Our demand growth has picked up pace during the third quarter on a 2-year basis and has kept building momentum even as we cycle the toughest comparisons from a year ago and face ongoing supply chain challenges that the spread of the Delta variant has intensified. We think the data and current trends back up the case for a more long-term sustainable step change in consumer spending on the home. One key point to keep in mind when examining the strong demand in the housing market is the migration of consumers toward larger suburban and second homes. What we're seeing from this trend is meaningful growth in square footage, and that's fueling greater need for furniture and furnishings. On top of that, interest rates sit at historic lows, the stock market has hit record levels, big portions of the economy are reopening, and spending on the home is elevated — all of which could carry a long tail. As we look ahead, a number of things make us think fiscal 2022 is on track to become the most thrilling year ever for the RH brand. We're putting together the biggest new product cycle we've ever had, led by RH Contemporary arriving in spring 2022, along with our newest RH Interiors and Modern Source Books, which haven't gone out in the mail since spring 2020. We'll also open RH England, The Gallery at the historic Aynhoe Park — a magical 73-acre estate laid out in 1615 by the legendary English architect Sir John Soane — where we'll bring RH to the UK in a dramatic and unforgettable fashion. Then there's the debut of our first RH Guesthouse in New York, a groundbreaking new hospitality idea for travelers who want privacy and luxury within the $200 billion North American hotel market. We'll also introduce the World of RH, a digital portal showcasing our integrated ecosystem of products, places, services and spaces, all built to lift the RH brand and convey our authority as a thought leader, taste and place maker. Turning to the supply chain difficulties that continue, Vietnam's government recently mandated a shutdown of manufacturing facilities because the Delta variant spread so quickly. It started with partial shutdowns in early July and grew into full factory closures by late July. Right now we expect manufacturing in Vietnam to restart in October, with production climbing to full capacity by the end of the year. Beyond that, suppliers around the world keep facing a range of challenges, among them sourcing raw materials, and prices are rising across most of our product categories. Shipping remains a headwind too, with longer transit times and higher transportation costs. Given our accelerating demand trends and compounding supply chain challenges, we are delaying the launch of RH Contemporary until spring of 2022. We're also pushing back the mailing of our fall source books so manufacturing partners can focus on reducing the backlog of core products while ramping and refining production on new collections to meet our elevated quality standards. Based on similar supply chain challenges and uncertainty about how the Delta variant will affect the hospitality industry this winter, we've decided to delay the opening of our first New York guesthouse — our first guesthouse in New York City — until spring of 2022. Our plans to open new design galleries with integrated hospitality in Chicago, Jacksonville and San Francisco this fall remain intact. Taking the long-term perspective, our vision for the RH business and its ecosystem — we hold the belief that some possess taste without scale, while others have scale without taste; and the notion of scaling taste is vast and far reaching. Positioning RH as the home's arbiter of taste has been our aim, and it has demonstrated itself to be both disruptive and lucrative as we pursue our quest to create one of the most admired brands globally. The leading designers, artisans and manufacturers are drawn to our brand, scaling and rendering their work more valuable across our integrated platform, which allows RH to curate the most compelling collection of luxury home products on the planet. Introducing RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade will continue our efforts to elevate and expand our collection. Opening immersive design galleries in every major market is our plan, and it will unlock the value of our VAS assortment generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Moving the brand beyond curating and selling product to conceptualizing and selling spaces is our strategy, accomplished by building an ecosystem of products, places, services and spaces that established the RH brand as a global thought leader, taste and place maker.

What makes our offerings premium and boosts their worth is the stunning architecture of our galleries, and those in turn gain extra prestige and value from the interior design work we provide along with a hospitality offering that blends in effortlessly. As we take the RH brand past the physical boundaries of our galleries and into RH Guesthouses, our hospitality push will keep lifting it higher — our aim there being to open up an entirely new market among travelers who want seclusion and high-end comfort within North America's $200 billion hotel sector. On top of that, we're crafting unique offerings such as RH Yountville, which brings together cuisine, wine, art and design in the Napa Valley; RH1 and RH2, the private jets we operate; and RH3, our luxury yacht, charterable across the Caribbean and Mediterranean, the places where wealthy and affluent people go to visit and vacation; through these immersive encounters, both new and existing customers get exposed to our growing authority in architecture, interior design and landscape architecture; this feeds into our long-range plan to build, inside our galleries, the first-ever consumer-facing platform for architecture, interior design and landscape architecture services globally, which lifts the RH brand and magnifies our core business through added revenue streams, all while upending and reshaping numerous industries. Things come full circle with our strategy as we start to envision and market spaces, stepping past the $170 billion home furnishings sector and into North America's $1.7 trillion housing market via the debut of RH Residences — completely furnished luxury homes, condominiums and apartments, paired with integrated services meant to deliver taste in time value to discerning consumers who lack time. Through our ecosystem of products, places, services and spaces, customers are inspired to dream, design, dine, travel and live within a world carefully curated by RH, forging an emotional bond unlike anything from any other brand globally. All of this strategy is meant to take shape digitally when we roll out The World of RH, an online portal where customers can discover and draw inspiration from the breadth and depth of our brand. Once we bring in RH Media, a content platform honoring the most creative and influential figures shaping architecture and design worldwide, our standing as an operative taste will grow even stronger. Taking the RH ecosystem worldwide multiplies our addressable market to between $7 trillion and $10 trillion — among the biggest and most precious opportunities tackled by any brand anywhere today. Capturing 1% of that worldwide market equals a $70 billion to $100 billion opportunity. Taste can be hard to pin down, and we feel nobody is positioned better than RH to build an ecosystem that renders taste inclusive. Doing so lifts and makes our way of life more valuable. The right people are our greatest asset. Here at RH, we hold a deep belief that the right people are our greatest asset. We appreciate individuals who bring a lot of energy and can also inspire it in others — folks who are intelligent, inventive, and hold their own perspective. We want those who spot a solution inside every challenge instead of finding a challenge inside every solution. We want those who are motivated, resolute, and refuse to accept rejection. We appreciate teammates who care more about doing the correct thing than about being the correct one. DeMonty Price, who serves as our Chief Operating, Service and Values Officer, frequently states that the greatest asset we have is the right people, while the greatest liability is the wrong ones. He further points out that the right people embody each of the 11 tenets of our people value listed above. I'd like to express gratitude to the right people who make our vision and values real every single day. The 11 out of the 11s, as DP refers to them. Thank you for your energy, your perspective, for refusing to accept rejection, and for caring more about doing the correct thing than about being the correct one, as we keep pursuing our goal of becoming one of the most admired brands across the globe. Carpe Diem. With that, I'll now take questions from the call. Operator?

Good afternoon, Gary, Jack, and Allison. Gary, with supply chain issues and cost increases combining — which I think are pushing retail higher — I'm curious whether you could speak at a high level about any shifts you're noticing in how customers engage, in conversion trends, and in cancellation rates. The point is really to get some comfort around what's fueling your confidence to lift guidance once more this year as we head toward the back half, absent, right, this new product launch that could potentially spark additional demand?

Yes. Well, Steve, I'd begin with the fact that we have visibility into the quarter. We're fairly far along in Q3 at this point, and demand within the quarter is already accelerating on a month-over-month basis. So — and we can see — just step back and consider that newness will contribute to a very large business we have here. It won't take the place of the very large business we have. So, the underlying business is very healthy; we went through a stretch of the worst out of stocks and the worst back orders we've ever had. Our inventory levels are beginning to improve. And although we're pushing back the launch of Contemporary, we're pushing back again all the newness that would go into RH Interiors, RH Modern, RH Rugs, RH, everything else, beach house, ski house, everything else we would normally mail. The guidance is our best view of what we see. And I think if you just, I don't know, look at the last 4 or 5 years of history since we kind of reconceptualized the supply chain and moved to membership in 2016, I don't think we have missed a quarter in 5 years. So, I don't know how much more conviction or pattern recognition you would need.

No, that helps. Just one quick thing to follow up on — thinking back to that Q1 letter, there was some discussion of the international pipeline overall. My recollection is 5 leases signed, 5 in final negotiations. Could you give us any update on where that pipeline stands now? Whatever you can share would be useful. Thanks.

Yeah, there isn't much that's new, because if there were, we'd have covered it in the letter. Traveling and negotiating an international business is somewhat hard at the moment, and so is coordinating the meetings and the conversations. That said, nothing has shifted. I believe we still have roughly 5 deals we're pushing ahead on. We have several deals — 5. We're evaluating additional ones. Where opportunities we're considering are concerned, that pipeline will keep growing. As you're aware, our galleries are extremely distinctive, and they aren't the sort of place where you can simply walk down a street and locate the building we require. Even so, we're confident we'll be able to scale the brand. In Europe, we're among the very few with any sort of specialty business capable of selling across multiple levels and multiple floors, one that can make use of gardens and rooftops, and so on. That said, launching the brand is the company's number one priority at present, along with expanding our product. On product our hands are somewhat tied, and less so on international expansion, but barring some drastic new development in the world or new strains of the virus, we feel very confident we'll deliver everything we just laid out in this letter. So this reflects our best thinking today, and we're genuinely confident about it. Should something new emerge — when we last spoke, I don't think there was much of a Delta variant or anything of that sort happening yet. So I went on vacation in July and — well, masks are off. And though it wasn't all that interesting, I threw all my masks away, came back to work, and then had to buy new masks. So things around the world are shifting fast, and I think all of us have to learn to improvise, adapt and overcome at an entirely new level, but you develop new muscles. And I'm incredibly proud of the team for how we've executed so far. If you'd asked me a year ago, when we were running 47 comp in August — I think that was our peak month, guys, right, in the core business — whether we'd come around and comfortably comp 47, I wouldn't have told you I was confident about that. Given that August has passed and the initial two weeks of September appeared quite strong, plus our in-stocks are beginning to improve somewhat. And we have goods flowing in, but we direct that flow toward our core business, toward our top sellers and the items that propel our business, which is exactly what we ought to do. A customer won't come in and say, oh, where's that item? I expected you to carry it. They've never laid eyes on it. Nothing new has ever been seen by them. No expectation exists, correct; and ours is a business that, when you think about it, isn't truly an impulse business. I mean, you're outfitting a home; it isn't a major impulse business. You're planning it, you're browsing, you're collaborating with designers, our interaction with the consumer spans weeks and months to complete an order. So, even when newness arrives, there's a ramp period lasting multiple months. But I'll simply say — I would step back and say what would — if we were selling inexpensive goods, it would be much simpler to sort of bring in inexpensive goods in the market at present, right; we sell the highest quality goods at scale across the globe in the home business. So — and we're attempting to elevate the quality of the goods. So, the upcoming round of goods represents an entirely different level of quality and design. Quality isn't rushed. You wait for it. And guess what, people pay for it. And so like if someone believes they want to gauge us during a pandemic where many people are sick and dying in Vietnam right now. And I feel awful about what's happening there. You have people that — their lives depended on it to feed their families and they can't work. So we'll be okay here. Our business is ripping. So, we have like — I mean perhaps somebody else has 40% 2-year growth, not many. I don't think anybody will have the 2-year growth that we're going to report in the third and fourth quarters because our business is accelerating. So — but I'd just focus on the big picture and what's really important; and what's really important is our demand is building; we've had some of the best business in the industry. We're taking market share. We're expanding operating margins and there are people sick and dying out in the world today. And you've got to make the right decisions, help them prioritize their lives, do what's right for the long-term, not — it's like I've told the team from the very beginning of this pandemic. We're not going to chase every sale here; we're lucky. We've had a tailwind. Nearly everywhere on the planet has faced a difficult obstacle. For close to 2 years now, individuals have been falling ill and losing their lives across this world. Things are going very well for our company, and we consider ourselves fortunate.

Thanks.

Good evening, and thanks for taking my question, Gary. Over the coming few years, are you planning for your sales and margin trajectory to be linear? You've got all these initiatives going, and some are slipping from this year into next year, which means certain costs will move from this year to next year. So should our models assume that sales and margin keep building year after year over the next few years?

Yes. Michael, we aren't providing detailed guidance for the next couple of years. Here's how I'd put it — someone might ask me, gosh, you're saving money, so your earnings are up because you're not mailing your catalog. Well, we don't mail our catalog and get to zero, and we don't mail our catalog to lose money. So we're not mailing our catalog, so we're not getting revenues. Yes. So we put money into things that drive revenues and drive profit. Where we've got new business investments, where we've got to make some infrastructure investments as we launch Europe and things like that, of course, you're going to have some initial period to ramp. What does that look like when we open in a new country, let me see, let me look at past data. Oh, I'm sorry, I don't have any. I don't mean to make a joke about that. But I just like — there are some things — if you can waste a lot of time thinking about, I think what we've got to do is open great consumer experiences in Europe, we've got to launch with a great website. We've got to launch with real intelligent marketing; we've got to be prepared to execute whether the first year is $50 million or $250 million. You tell me like, hey, let's stand back and think about this for a second. There are 39 million people in California. If I had new exciting design galleries in California, California would be, I don't know, an $800 million business for us, maybe a little bit more. There are 68 million people in the UK. There's a relatively similar demographic, slightly wealthier in California, but more people. So I would say, California, when we continue to expand the brand looks like a $1 billion business. Let's call the UK a $1 billion business. Let's call the UK today, $800 million. What happens when you have a brand that's really well-known in a very small market like ours, right, like we are at the top kind of — they are very top of the pyramid. There's not a lot of people there. They have a lot of money; they have a lot of homes and they spend exponentially on the home. Their directional — what I mean is, a portion of the information we've reviewed, plus a few studies we've looked at from several of our major investors who've conducted fairly thorough analysis, performed their own analysis, and hold studies — interior designers located in the UK and in France. And the share of interior designers who are familiar with us, like 80%, 90%, so nearly 100% in certain instances — so they're aware of us; they represent a crucial customer for our company. Affluent shoppers, I believe, largely recognize us and hold us in high regard. So, what occurs once you launch an amazing 73-acre estate that will likely rank among the most thrilling, groundbreaking retail concepts anywhere in the world. Admittedly, it sits somewhat outside London, yet our company is a destination, and what occurs once you've gone live with the site featuring — you've got 40,000 SKUs alongside the most commanding product selection in the nation; and you possess comparatively strong recognition. I'm not sure, I have to think it will outperform others who chase a large, broad audience while lacking strong awareness, since those players must invest considerable effort becoming known; so I don't — I truly can't say whether first year sales in the UK will hit $50 million or $250 million; that's the span we're looking at. I understand directionally what we need to invest, but I'm simply attempting to be candid with everyone here, regardless of whether it's $50 million or $250 million, it's going to be quite substantial across the coming couple of years. So we'll pick up a great deal once we're underway; and I think I mention that partly to wander into a lengthy digression on a question. And I say that so I won't receive the identical question four times phrased differently, correct.

Got it; that helps. For my follow-up, you're expressing a great deal of excitement and certainty about the second half of the year, partly due to quarter-to-date trends — the two-year demand comp speeding up relative to what you saw in Q2. Could you share what that Q2 demand comp actually was, so we can calibrate our models for how that metric played out?

Sure; things are simply too wild at the moment. Listen, I don't want this to become routine. We provided demand comps during that first year, the craziest stretch of the pandemic. And I'm not going to hand out demand comps for the remainder of my life, correct. It's — I believe — once more, I would — as I said when answering Steve's question, I think our record of delivering on what we promise is quite solid. Guiding aggressively is not something we've done. So the figures might strike you as aggressive. I'm certain Q1 struck everybody as really aggressive, right; we raised the numbers substantially when we announced Q1 earnings and our stock climbed $100 in a single day. And yeah, plenty of people asked me things like how did you truly raise those numbers? Do you believe you'll hit them? Yes, yes. So I don't know — so, it's not as though somebody passes me a sheet and says, Gary, here's the suggested guidance. I'm sitting here alongside 20 people for hours upon hours upon hours, reviewing categories and trends and each and every detail of our business. We examined everything thoroughly. We achieve alignment and clarity. We achieve clarity, and then we achieve alignment regarding where we think those numbers will land. And we've done this long enough that we've become rather skilled at it, even in a period such as this; so, I believe we were among the earliest to begin providing an outlook. Now, plenty of companies offered no directional guidance whatsoever for < >, and we did. So — and we did it because we're certain we understand our business. Should something enormous shift in the world, understood, all bets are off, but given what we know as of today, given the data in front of you and in front of us, yes, this is our guidance; it's typically not overly aggressive.

Michael Lasser here — thanks a lot, and best of luck.

Gary Friedman responding — yep, yep. That's great.

Thanks a lot. I've got a few broader questions I want to raise. To start with, Gary: how would you describe your current position in the luxury segment's market share? In a letter you put out not long ago, you noted that rivals of yours are either closing locations or shrinking them. Since RH continues turning its galleries into something new, how far do you think your slice of the market could grow over the longer haul?

Sure — I'd put it this way: a route to between $5 billion and $6 billion across North America is plainly visible to us. Depending on how products evolve, move upmarket, and take shape around the ideas I've described, the number might grow beyond that—and honestly, that estimate doesn't even capture all of those possibilities. So from where I sit, missing the $5 billion to $6 billion range would require a genuine breakdown somewhere. If we just continue turning the galleries we already have into design galleries and launch contemporary, and it does about what we're expecting directionally, and we keep widening and lifting the product assortments along with interiors and modern, expand our rug business, build out and add dimension to textiles, keep growing and expanding lighting and introduce the new categories — assuming our direction is correct, would that number ultimately land above $6 million? Probably yes. Still, as of today, we have a lot of confidence in $5 billion to $6 billion for North America. So I believe getting there means we have to take market share, correct — consider Marin County: we had a gallery doing about $18 million. We've launched a fresh gallery space. Honestly, if I were up on the roof of this new gallery, I could probably toss a football over to the old one — it's that close, roughly a 20 yard throw. I'm not sure how often this has been pulled off, but here's what happened: we debuted a new gallery, and it's performing well — the team brought in around $50 million, in that ballpark. I'd say what's happening is partly that we're opening up a brand-new market, since shoppers are encountering items they've never come across before, shown in a manner that's entirely new to them, inside a space that feels inspiring, lets them interact, and is filled with light, fresh air, and a theatrical kind of staging. We refer to these spaces as galleries, since we frame the concept as an artistic, abstracted take on home furnishings placed within a gallery environment. In other words, we aren't simply arranging product displays in our stores. What we're really doing is building something like artistic installations of home furnishing. So nothing like this has been seen by people previously. That means, at least in part, it brings a new market into being. Let me give you the arithmetic I occasionally take folks through — RH Marin, since that's the location in question — correct, five years back, four or five years back, covering everything from Sausalito up through Santa Rosa and including Napa Valley, there were 32 establishments I'd classify as upper-tier home furnishings retailers. I'll keep their identities to myself, since you never know — some people are on this call listening — but sure, little shops, family-run operations, a handful of bigger regional names. Those stores spanned about 3,500 to 15,000 square feet. Ours came in at roughly 6,500 square feet. So it kind of lands right in the center. At that Marin location, I think we carried five sofa lines — actually six — plus five dining lines, and either five or six bedroom lines. So as for the remaining galleries, if we're positioned right around the middle, then we had — yeah, we came across just like everyone else, basically lacking any real distinction. And another thing: once we shut that gallery down, it represented less than 2% of what we offer — let's just say 2%, or maybe 1.5% of our assortment. So our assortment wasn't really visible in that space. That's the reason we sent out those really large books. If our large catalog showed up at your home alongside everyone else's slimmer volumes, your reaction would be, wow, these folks possess far more than the rest — since stepping only into brick-and-mortar, we look no bigger than anyone else in our conventional showrooms; and those showrooms themselves are inherited spaces that likely beat rivals by a factor of three or four to one within equivalent floor area. Yet whenever we launch a sizable showroom, my standard remark is that the 32 will — 32, let's say possibly rival high-end domestic shops, typically pricier than we are, with lengthy delays and lacking the necessary setup. But what I'd note is that a good chunk of those disappear fairly fast. Then we'll run a fresh survey and tally things up — after year one, did it vanish? Did the figure drop from 32 down to 25? Did it fall from 32 to 18? Or did it slide from 32 all the way to 10? Right, so we aren't exactly building a brand-new market from scratch. I like to use a comparison — please don't read too much into it, because I'm sure someone will put it in a letter: Gary Friedman likening us to Apple. I still recall the last time you said something like that, when I supposedly compared us to Hermes — that was really about the financial model. But Apple came into the cell phone business pretty much last, and they reinvented the game; they opened up a new market. It was more than just a phone. Thus, a brand-new market came into existence, and it captured an enormous portion of the market as well. In terms of direction, I'd say we're somewhat comparable to that. A new market is being created by us, and on both fronts, at scale, we're seizing share quite forcefully. And I believe that, when I — when we turn our attention to Europe, just to discuss that briefly, the competitive situation there is considerably weaker compared to what exists in the U.S. So my belief is that in Europe we'll be even more disruptive and differentiated, which is exactly why our confidence about it is so strong.

Excellent. That is quite useful. Could you also talk about where your cash deployment priorities stand? At this point you have close to $300 million in cash sitting on the balance sheet, and since free cash flow is positioned to speed up across the years ahead, plenty of opportunities will be available to you; so what is your thinking on putting money back into the business as opposed to M&A or increasing share repurchases? Thanks.

Weighing each of those options, Jack, I have no idea.

Yes. I was going to say the same thing.

And even more things, yes, but I mean...

This is every quarter, and I think we answered it so...

Absolutely. There’s a chessboard of cash in front of us, so we — many possible plays exist, and we’re simply biding our time until the moment is right to execute the correct ones. That said, we’re evaluating numerous options: could be putting money into the company and driving innovation internally, could be putting money into M&A and acquisitions that sharpen our competitive standing or lift both our business and our brand. Share buybacks are on our minds too, and whatever else you imagine we might be considering, we are considering it as well. So — yet our style leans toward acting when opportunity strikes. And also — staying patient. Therefore we will — when the timing is right, I believe we will execute a strong play on that chessboard of ours. At this moment, every piece remains in place; nothing has been shifted so far, though we’ve given a great deal plenty of thought.

Understood. Best regards.

Thank you. Thanks, Matt.

Hey there, Adrienne. I think your mute button might still be on.

Hi there. Is my audio coming through?

Yep, we've got you loud and clear. Hey, Adrienne.

Hello, my apologies for that. I'm not sure how it occurred. Congratulations on how consistent the success has been and on the progress. It's simply wonderful to witness. Gary, I hoped we could keep concentrating on what's possible in Europe. Regarding that $15 billion to $20 billion beyond North America, could you discuss in detail what the TAM looks like in Europe? And really, what I'm after is this: it genuinely appears that RH Contemporary will be launching; from what I can tell, there's additional investment, more design work, and an overall lift for the product. And once you move into the international marketplace, do you sense that the target household income or the demographic differs substantially from where RH has typically been — perhaps across the last 5 to 10 years? It just appears there's a bigger appetite and greater appreciation for luxury brands and goods once we cross the pond. Many thanks.

I'm not sure what more I could say about that. That's our view of it. No; but here's the thing — I mean, let's begin with the worldwide opportunity. Once more, this is directional math. It comes from examining the pie from numerous angles — wealth, consumers, housing markets, the high net worth, ultra high net worth ratios; it comes from examining luxury brands and penetration in volume; and in — so we've examined the math from several angles, and I believe we're directionally correct. Were you present here, you'd see a huge room where roughly 40 people assemble, typically on Thursdays, a large cross-functional team; and we've got all of Europe. At first, we had the entire world and it's simply too much to examine; so we said, yes, for now just put the rest of the world in the adjacent room. We have it at top line, but let's truly dissect Europe and comprehend it, comprehend every country. Dig deeper. Examine other people's approaches and real estate strategies, whether it's — not everyone who owns an app phone shops at RH. But most people at the high end of the market spend a lot of money at Apple, I'd say. So we examine where the Apple stores are, where the iconic Apple stores are, where the big suburb Apple stores are. Where other businesses we're familiar with are. Where the luxury — players in the suburbs are. The toughest thing in, I believe, in Europe will be — we don't know their suburbs the way we know our suburbs. We don't know their market the way we know their market. Now we've grown our team. I believe we have a great leader. He knows Europe extremely well; but there is nobody like us, correct? There isn't a real comp; but there are enough similarities that give us confidence as we dimensionalize what we believe the market opportunity is at least today. Okay, and once more, when I look at this, I figure — and I think the majority of our senior leadership too, and not — I don't believe I really have that much sway over it, since around here we pretty much hash out every single thing. And what I tend to tell people — if Eri Chaya — if I make a comment and she responds, Gary, it's like normally — pardon me, Eri, she's seated right here. But she says that constantly, incidentally. I'd put it this way: she stops me from landing in a ditch. But — so — yeah, but we invest a great deal of time together across functions arguing this through. We've got folks with plenty of knowledge about growing in Europe and such, and we feel confident there. As we — my sense is we'll get the direction somewhat right. And at this point, that's really all that's required. Boiling the ocean isn't something you actually want to do. It isn't — it's — I compare it to the settlers who arrived in America; some folks were told, hey, head West young man, gold awaits in those hills. A number of them simply headed West, and they more or less reached a Sierra Nevada, and gold was there. Others, meanwhile, like us sitting in Boston, attempt to pin down precisely which spot on the West Coast they'd prefer. And before they've even got their horses and carts ready, those other folks were — they were basically arriving at the Sierra, Nevada. So we don't precisely — does it truly matter whether we're $10 billion off? Would we stop doing what we're doing today? It truly doesn't matter, correct, like if the chance is merely $15 billion or $10 billion in Europe, does it matter? Would you choose not to go? That's — I mean, that's the sort of thing I tell the team, so let me just be transparent. You simply — you go, and you head to Europe first; it's the most familiar, it's the most connected. So in any case — and then I point out that the notion that the target demographic material differs from where RH has been across the past 5 to 10 years, yes. Here it is, and it's going to be there. And it's going to keep evolving; we're going to keep going up. My belief is we will keep shedding consumers at the bottom, and afterward we will grow consumers at the top of the funnel, where spending is exponential; and through that, I think suddenly, over the long term, will lift people up because the brand will be more aspirational, people will save in order to buy our sofa. There is a demographic that will be younger and less affluent; but they will have great taste and style and they would rather have a few good pieces, then a whole bunch of crap. And that's how I grew up. I still recall purchasing my very first < >, which ran me about $65 weekly. To earn the money for that intensity, I cut a great many lawns. A cheap Montgomery rewards bike was not what I got, so that's the sort of thing I'm talking about. And I apologize — I don't want to make it sound too simple. Still, there will be customers who desire a piece of the absolute finest that life offers, and they hold that aspiration. Nobody imagined the Apple phone would become the top-selling phone worldwide. Nobody imagined the Apple phone would be sold in China; it turned into China's best-selling phone. People constantly crave superior quality. Take Gavin Grover, our lawyer — he tells me repeatedly that history has demonstrated people's desire for ever-improving quality; and the world generally — moves in that direction; so we believe, once more, that we're headed West. Gold awaits in those hills; our direction is the correct one. Yes, things will work out for us.

Gary, I'm really enjoying this. That's wonderful. Truly impressive. Thank you for it.

Appreciate that, Adrienne.

Good afternoon. Solid quarter. Gary, I'm just wondering about how you view the long-term potential for RH Guesthouse; and also, during your prepared remarks, you mentioned consumers relocating to bigger houses and the demand that creates. I'm curious whether there's a method to put the scale of that demand into context. Thanks.

Yeah, I doubt anyone possesses the actual figures on that. But what matters is that people have been leaving cities in large numbers. COVID triggered it. And I didn't come up with this. In fact, a major investor of ours spotted it before most; and they mentioned doing calculations — according to their calculations, it would, in their view, exponentially benefit us. After that, we conducted some more limited research, as you pointed out, but that's exactly what took place, correct. People have been moving to suburbs, moving to second-home destinations, spots such as Napa, Aspen, the Hamptons, Palm Desert, those kinds of second-home destinations, which are within driving distance for folks who are situated far enough away that they could work part time in cities yet reside outside them. Those destinations have taken off. You can't purchase houses in desirable suburbs. I mean, there are simply bidding wars and escalating prices. So — And here's the straightforward calculation, consider a — a person resides in a 2,500 or — square foot apartment in New York or a really nice 3,000 square foot apartment and they've relocated to a house in Greenwich, what's the equivalent house in Greenwich 6,000 to 10,000 square feet, might be 2 to 3x the square footage. Those rooms won't sit empty, not if they have the means to fill them. So that's basically favorable for us; and that's the reason I believe that despite having no new products for nearly 2 years, our 2-year comp is increasing. So — and the biggest shift is that we're in a far stronger inventory situation like back orders have declined 10 points or more; it's like with the most recent update. I mean they don't inform everyone just hold your fingers up for me. But like when I last checked a couple of weeks ago, they dropped roughly 10 points, actually beyond 10 — beyond 10; so while back orders decline, demand rises, correct? And that tracks. Like I mean, our back orders at their highest point were 4x normal. Yes, 4x normal. And so at present they're probably at 2.5x normal. Yes. And they ought to improve since I believe we've done well at prioritizing production and flow. And I'm pleased we didn't attempt newness because newness typically takes longer — I believe it'll be fantastic. I believe we'll have the finest newness launches in our company's history. We have had additional opportunity to perfect samples, to nail the details, quality certain items are — we are not hurrying the folks who make our products. So by the moment the new collection debuts, we will possess 2 years of fresh goods, four seasons of fresh goods. I do not — we have never brought that volume of new product out all at once. I suspect folks will feel it is like Christmas once more at RH, we do not even offer Christmas merchandise, but it is going to be like what on earth just occurred. I believe the aesthetic development and the quality development of the brand will astonish shoppers. It appears so excellent. I mean I genuinely I wish every person on the line, including all our staff since I know we typically have like plenty of our crews, all our showrooms probably have an open line. Our distribution centers have an open line, and there are likely a few thousand individuals within our firm listening to this call, perhaps greater. And like I wish I genuinely at this moment, we were past COVID. We could gather everyone and walk everyone through what is on the way. Contemporary is astonishing. It is so excellent. It is like I believed modern was fantastic, contemporary the finest effort we have ever produced. It is simply going to widen the scope of the brand. I believe individuals at the top tier, the top tier interior decorator is going to say, what did they just accomplish? Like it appears so excellent and this perhaps 20 interior decorators on the planet that we are not going to totally win over. It is like they are truly absurdly wealthy individuals that hire them. Like everyone else, yes, they are simply going to say, we had better become part of that shift or we will fall further behind. It is truly, truly fantastic material in development; and we have had plenty of time to perfect it and enhance it. We will likely have — we will introduce with the fewest send-backs, the fewest breakages, all the sorts of things that occur when you scale up fresh merchandise, fresh plants, if you have fresh substances, fresh substances, fresh building methods, particularly with a major aesthetic shift a widening of scope like we are moving to contemporary; but even the product interiors to modern the fresh items and the quality effect that our crews that are working on couture and bespoke, we have like some of the finest specialists from the top tier of the sector. So I wish I could discuss them, but I am not permitted to declare anything. But like a couple of them are seated in this room at this moment, they appear like they are going to — like they have their masks on, but you can detect they are grinning and flushing. But like the finest; at present, we have some of the finest individuals in the sector. When the sector here sits on our crew, everyone is going to say; so it is simply fantastic material on the way. I'm extremely thrilled about this. I only wish everyone could be present to witness it. And sure, that's fine. We'll simply get it done. What's great is that we keep improving it. Each season, by pushing it back, it becomes significantly better. So from this moment until next spring, it will keep improving. The presentation, the execution — so we're incredibly, incredibly enthusiastic. And I believe the market is — I believe there's — listen, I was the person — I had the people believing a recession would hit within the last 5 years. I was saying I was prepared for a recession throughout the last 5 years. I've been completely mistaken. What actually occurred instead was the pandemic; so — but at this point I'm finally thinking, alright, I got this wrong, I never imagined we'd be comping 47 comp without any new goods. And back orders running at 3x historical rates, 2.5x historical rates, and — but that's exactly what we're doing. And so I think once again, the home business, the home — when someone purchases a home, they don't furnish the whole thing right away. It happens across a span of time. It takes quite a while. I mean, at this moment, you can't even get a contractor to remodel a bathroom.

You can't just get interior designers—they're all completely booked up. Our teams have been swamped, and customers are complaining, asking why they have to wait so long to get an interior designer. I mean, they're all busy. Every professional service related to the home is busy. There aren't enough homes. There aren't enough people to build homes. There aren't enough people to design—to do interior design. Backups exist everywhere. So, even if—and we're at record levels across the board; so even if the market slows down. If you look at the home business, it's a little soft, Pulte brought their numbers down somewhat. The real question is, did Pulte bring their numbers down somewhat. How do those figures stack up against historical figures? They're still genuinely strong figures; and so if you're sitting where we are and you're sort of a brand lacking many peers and creating a market of one, and you're the destination and particularly in the case of these new galleries that are experiencing outsized growth, right, there is—like we're in a genuinely strong position right now. So I just believe that I've become more optimistic. And look, it's my fault that we also have the highest back orders. I reduced the inventories too aggressively. And then when the trends hit 20, I said by 10. When the trends hit 40, I said, they'll never remain there by 20. They're only going to stay there for 2 weeks and then they didn't stop. So listen, the fish rots from the head, right? Like I kind of messed a lot of things up too because I didn't make some of those calls—they were just sort of risky. You don't want to—all of a sudden buy a 40% increase. And then you're sort of pregnant with all the inventory and the sales dropped from 40% to 8% to up 8% and you're like; so we've been chasing the entire time, probably a lot of—I'm probably not the only one who was too conservative on inventory. So I think the pent-up demand and some of the commentary in the home business regarding pent-up demand, I think it's all kind of correct. And even I think about why I got the economy wrong over the last 5 years. I think there is a new economy. When you think about the dynamics of the current global economy, the stock markets and what's driving everything, there are new businesses. There are new kinds of companies. There are new industries being formed; they is faster and faster innovation and technology is changing the world in an exponential way; so look at the last recession, which was now like they can't believe like go '08 or '09, it was like going on 14 years, '08, right like we are going to be in '22 pretty soon. I believe the previous record for the longest stretch of economic growth in United States history was 11 years, correct? So this situation is unprecedented for us, right? And it continued even during a pandemic, which resembled a recession in some ways, I suppose, though not a typical one, right? So I believe a new economy's fundamental framework exists that's driving greater business productivity. I consider how much more productive we've become thanks to technology and what we're implementing within the company, across every level, and how other businesses must also be achieving greater productivity through all the innovative new companies transforming the world. And I mean back in '08 and '09, I believe there were two businesses valued at $500 billion, like GE and Exxon, right, or roughly that. Perhaps Apple, I think, was approaching that mark. Today, though, we have several $1 trillion companies plus far more $500 billion companies, and they're expanding. So I think numerous factors are different and probably harder to notice because of the pandemic. But when I attempt to heed those far more knowledgeable than myself on this topic, I find significantly more optimism among the brightest individuals I know, who have typically been more skeptical and gloomy. So — and yes, they attempt to heed them and link the dots regarding our business. So — But I think circumstances are quite different. I think the prior pattern recognition will likely be replaced by entirely new patterns we must be ready for.

Thanks, Gary. That's useful. Moving to my next question — you brought up Pulte. I have some interest in RH residences. How exactly is that going to be introduced? What kind of timeline should we expect? If there's anything more you can share, I'd appreciate it. Thanks.

Right, this is really something for the long term. We'll test a handful of concepts in Aspen, where we'll run a limited month-long ecosystem. A lot of this will benefit the brand. It comes down to awareness and, in a way, establishing a destination and becoming a tastemaker — also a place maker, a space maker, and so on and so forth. That's what we gain from these initiatives. When you take on something new, I think that's the part people don't give enough credit to — it's not just about the thing itself. It's about building fresh capabilities, getting smarter, and tackling different kinds of problems, and growing as a person in a way that compounds, right? And having a team and an organization that's constantly climbing, learning, and improving. That's the feeling that energizes people. And it's the same thing that energizes excellent companies. So the moment you stop creating and stop learning, stop teaching — it's actually funny, thinking back to when I was growing up with the Gap, we had all these systems, training initiatives, and everything else, and I remember it felt like there was a training program for literally everything, like some giant manual. You need every stage in place, honestly. Look at the early years at Gap, before Mickey Drexler arrived. Management is what makes or breaks it, correct? Back then, while I was growing up, it wasn't particularly thrilling until Mickey Drexler showed up, and after that, everything shifted. When you're creating and breaking new ground, that's genuinely energizing for talented, motivated individuals, since they pick things up by actually doing them. They gain knowledge through participation, not through reading some operations handbook. They aren't sitting in a hypothetical classroom discussing in theory how something could be accomplished, instructed by a person who's never actually performed it. So we do deliver here, and we dive right in. Everyone gets deeply engaged, and honestly, it's thrilling. If somebody presented me with that kind of opportunity, at my age, I'd be more enthusiastic than I've ever been at any moment in my life — it wouldn't even be possible to top it. I'd tell you there's just no way. I'm so pumped that I can't get any rest, which isn't great for my wellbeing, but truly, that's the situation — the excitement keeps me awake. Yeah. There's nothing — right, for folks who genuinely want to build, dream up, advance, expand, and tackle fresh ventures, it's a lovely sort of thing. Regarding your question about what I anticipate for Europe — I honestly can't say. You also asked what volume I figured the big galleries would do, and whether I think they'll get back to their former scale. Well, this November marks exactly a decade since RH Houston first opened. Back when it debuted, people described it as the best home retail store on the planet, maybe one of the most breathtaking retail spaces anywhere. That ten-year lease is now finished. We intend to tear it down and build something four times the size. Think about how many Houstons we built, roughly two; we have one there and another went up in Scottsdale; after that, what we did next was 2x bigger, then 3x bigger. And after that. I recall being with certain Board members back then who genuinely felt Houston was so wonderful. Their advice was, simply roll this out, simply replicate Houston. I doubt anyone seated at this table that I'm gazing at right now, or any individuals in our leadership team meetings — I doubt anyone would still be here had we merely been rolling out Houston. If we had a different sort of crew running things, I think it would be far less exciting. A lot of people probably don't know this, but you won't find the term manager anywhere in our organization. We basically can't stand it. The job of management is to keep things arranged and running the way they already are. Every person here is called a leader, right, because leading means guiding people to places they've never gone and helping them accomplish things they've never done. We also tell people that if you're a leader, you need to be at ease when those around you feel uneasy, since you're constantly navigating unfamiliar territory. After you get used to that feeling, it actually gets thrilling. And still, I think our team would look completely different. If our goal had just been hitting the identical objective in the identical manner — basically reshuffling and tidying up how things already are — well, that's not our approach. What we ask is simply this: does this point us the right way? Is it the smart play strategically? Is it more correct than incorrect? Does the risk tilt in our favor, toward gains? We crunch a huge amount of numbers. We deliberate with real intensity and depth. Then we start moving, since movement is what teaches you. That's the source of growth, and once you begin, your learning curve steepens far beyond what others experience. So with residences and similar ventures, should they materialize, Aspen may serve as a place to experiment and attempt different approaches. Jack and I sat down with a remarkable individual. That person is likely listening in right now. I won't mention your name, though I wish I could — but what an amazing individual. Truly motivating — raised within this industry. He came looking for us, and he's eager to join our mission of making a real impact on the world and launching an entirely new style of home business. He also understands far more about constructing houses than we ever will. And honestly — which is something that frequently occurs in this place — the spark behind these efforts is usually finding the right people, isn't that true? Someone turns up who — carries expertise you lack, sees a grander vision for the idea than you possess, is ready to act, and is delighted to get going. And at that point you say, now is the moment to act. We understand it's broadly the correct path. Everything lines up. Yet you require a person who can truly guide everyone toward it. So if you happen to be listening in, you understand what I mean. You received my message recently. Send a reply since we spent time on the road and drifted apart. But — and should he come aboard, you'll likely learn about RH Residences before too long. And that's the way it develops. Yes, so...

Thanks you, Gary. Perfect.

Yes.

Good evening, and thanks so much. Gary, I suppose I have a product question about RH Antiques. To me at least, that's a new one. Could you perhaps give us — I'm not sure, maybe a sneak peak at what you picture for this collection and how you'd fold it into the whole offering.