RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon to all of you, and we appreciate you being here for the Q&A session on our earnings for the third quarter of fiscal 2021. With me on the call today are Gary Friedman, our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to beginning, I want to point out our legal disclaimer: certain remarks we make today will be forward-looking as defined under the federal securities laws, covering statements regarding the outlook for our business and other topics mentioned in the press release we issued today; such forward-looking statements carry numerous risks and uncertainties that might lead actual results to differ materially. For a fuller explanation of the risk factors that could impact our results, please consult our SEC filings and the press release we issued today. Be aware as well that these forward-looking statements express our views solely as of today's date, and we assume no duty to update or publicly disclose the results of any revision to them based on new information or future events. In addition, we might discuss non-GAAP financial measures on this call, which modify our GAAP results to remove the effect of specific items. Further details on these non-GAAP financial measures, along with a reconciliation of the non-GAAP to GAAP measures, can be found in today's financial results press release. A live webcast of this call is also accessible through the Investor Relations portion of our website at ir.rh.com; having said that, I'll hand things over to Gary.

Alright, thanks so much. Wishing everyone a wonderful holiday season, and bon jour from Paris. Jack, Eri, and the entire leadership group are with me right now. We're actually away on a real estate scouting trip and have visited a few thrilling new international galleries. So — though it is rather late over here. If it seems like we're calling from another time zone, that's because we are. Sleep has been scarce this week. Still, we're eager to walk you through our results. Let me begin with the key points from the letter we released on the wire. To our team, our partners, and our shareholders, we're delighted to share that we've delivered yet another quarter of record-breaking results, with net revenues climbing 19% to $1.6 billion compared to $844 million during the same period last year, and rising 49% against 2019, which marks the strongest 2-year growth seen in our sector. What we achieved shows both how much demand exists for our exclusive products and our capacity to navigate the mounting supply chain obstacles that forced us to push back the launch of RH Contemporary, the debut of our first RH Guesthouse in several galleries, and the mailing of our fall source books to spring of 2022. RH keeps establishing a fresh benchmark for financial performance within the home furnishings industry, and our numbers now place us in the luxury sector as adjusted operating margin hit 27.7% compared to 26.7% a year earlier. We produced $279 million of adjusted operating income this quarter, a 24% increase over $225 million the prior year. Adjusted net income rose 25% to $209 million, and adjusted diluted earnings per share came in at $7.03 against $6.20 in last year's third quarter. Adjusted EBITDA for the quarter totaled $311 million, along with $145 million of free cash flow. When the third quarter closed, total net debt stood at $178 million, with trailing 12 months adjusted EBITDA of $1.054 billion. Now, raising our fiscal 2021 outlook — while we feel a cautious approach to fourth quarter revenues is wise given the uncertainty created by the new virus variant, the delayed opening of our new San Francisco gallery until the spring, and ongoing shipping and port delays — the strength of our operating model gives us the confidence to lift our fiscal 2021 outlook for the third time this year; we now anticipate fiscal 2021 revenue growth of 32% to 33% compared to our previous outlook of 31% to 33%, and adjusted operating margin between 25.3% and 25.5% versus our earlier outlook of 24.9% to 25.5%. 2022, the year of the new. Although our plans for fiscal 2020 and 2021 got delayed by the virus, understand this clearly, they were not derailed by it. In fact, we declined to shelter and shrink, refusing to let our culture be molded by stay-at-home mandates or allow collaboration to be swapped for isolated Zoom calls. No leaders of team RH turned their summer home into their permanent home. No one argued about whether we'd go back to the office—just about the timing. We didn't sit around feeling sorry for ourselves because of the way things were; instead we aimed to see ahead, tearing down what exists now so we could build what comes next. We spent that time imagining and rebuilding ourselves all over again. Our attitude was: let this go down as the moment RH delivered the most extraordinary wave of innovation this industry has ever witnessed. That's the reason we called 2022 the year of the new, and here's what it involves: rolling out RH Contemporary, the biggest new product introduction in our company's history, which takes in a source book running over 500 pages, a standalone RH Contemporary gallery, its own website, and a nationwide ad campaign. We're also elevating and growing RH Interiors and RH Modern, which takes in several new collections, better quality, and fresh, exciting presentation and photography throughout our physical and digital channels. Then there's the start of our worldwide push, beginning with RH England opening—the gallery at Aynhoe Park, that historic and enchanting 73-acre property laid out in 1615 by Sir John Soane, the famed English architect—which will bring RH to the UK in a way that's dramatic and impossible to forget. On top of that, we've locked in sites for galleries in London, Paris, Munich and Dusseldorf, and we're negotiating leases or purchases for galleries in Milan, Madrid, Brussels and France. We're also opening 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, plus unveiling the world of RH, a fresh digital portal that showcases 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. And there's the liftoff of RH1 and RH2, our custom Gulfstream G650 ER and G550, which will be offered for charter; the first of those is already drawing press and praise, appearing in Architectural Digest, the Wall Street Journal magazine and the 20 titles of modern luxury, among them Los Angeles Confidential, Manhattan Magazine, San Francisco Magazine, Boston Common, Dallas, Palm Beach and Aspen Magazine, just to name some, and that also includes the hundreds of thousands of social media posts and reprints of all these articles. Then comes the christening of RH3, our luxury yacht, which will be offered for charter in the Mediterranean and Caribbean, the spots where the wealthy and affluent go to visit and vacation. We're expanding RH In Your Home too, a distinctive and memorable delivery experience featuring furniture ambassadors who guide every detail of your delivery and carry the selling experience into the home. We went into 2022 feeling optimistic and confident that our work will keep lifting and amplifying the RH brand, building major separation emotionally, strategically and financially. That's the RH business vision and ecosystem, the long view; our belief is that some people have taste but no scale, while others have scale but no taste. The notion of extending taste across a broader canvas is significant and has wide implications. Positioning RH as an authority on taste for the home has shown itself to be both disruptive and profitable as we keep pursuing our aim of creating one of the world's most respected brands. Leading designers, artisans and manufacturers are drawn to our brand, and we scale and make their work more valuable across our integrated platform, which lets RH curate the most compelling assortment of luxury home products anywhere on earth. We'll keep elevating and growing our collection through the launches of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and additional new collections planned to arrive across the coming decade. Opening immersive design galleries in each major market is our plan, and it will unlock the worth of our enormous assortment, producing revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Moving the brand past curating and selling product toward conceptualizing the selling spaces is our strategy — constructing an ecosystem of products, places, services and spaces that cements the RH brand as a global thought leader, taste and place maker.

The galleries we build with such architectural inspiration lift up our products and make them worth more. Then our interior design offerings and hospitality that's woven in seamlessly lift those galleries even higher and add further value. As we push past the walls of our galleries into RH Guesthouses, our hospitality work will keep raising the RH brand, and there we aim to open up a brand-new market for people who travel in search of privacy and luxury within the $200 billion North American hotel industry. Beyond that, we're building distinctive experiences — RH Yountville, for instance, which unites dining, wine, art and design over in the Napa Valley; RH1 and RH2, the private aircraft that we own; plus RH3, our luxury yacht, which is available for charter throughout the Caribbean and Mediterranean, the destinations where wealthy and affluent people go to visit and vacation. Thanks to these immersive experiences, customers both existing and new come to see our expanding authority in architecture, interior design and landscape architecture. So that leads us into the long-term plan: creating the first platform aimed at consumers for architecture, interior design, and landscape architecture services, all housed inside our galleries. This elevates the RH brand and expands our core business by bringing in additional revenue streams, while at the same time shaking up and redefining a number of industries. The strategy comes full circle once we begin conceptualizing within self spaces, moving beyond the $170 billion home furnishings market and into the $1.7 trillion North American housing market with the launch of RH Residences — completely furnished luxury homes, condominiums, and apartments paired with integrated services that provide taste and time value to discerning, time-starved consumers. Through our ecosystem—spanning goods, venues, offerings and environments—we encourage people to envision, create, eat, journey and reside within a realm that RH has thoughtfully assembled, creating a heartfelt bond that no rival brand anywhere can match. Everything we're pursuing is designed to manifest online once The World of RH goes live—a digital destination where shoppers may discover and draw inspiration from how rich and multifaceted our brand truly is. And once RH Media arrives—a hub for content highlighting the boldest and most impactful figures defining architecture and design today—our standing as a tastemaker will grow even stronger. When we take the RH ecosystem worldwide, the addressable market grows by a multiple, landing somewhere between $7 trillion and $10 trillion — among the biggest and most valuable that any brand on earth currently targets. If we captured just 1% of that worldwide market, it would amount to somewhere in the range of $70 billion to $100 billion. Taste isn't always easy to pin down, and in our view, nobody is positioned better than RH to build an ecosystem that brings inclusiveness to taste, and in doing so, lifts up our way of life and makes it worth more. Right now is the moment to let our vision define us, rather than a virus. Now that we're putting the pandemic's toughest period behind us, this should be our moment to climb again — to grow and stand out, to rethink and remake who we are, and a moment when team RH delivers the most remarkable wave of innovation this industry has ever witnessed. Who we become ought to be shaped by our vision at this very point, not by a virus. Take hold of this opportunity. With that said, operator, please start bringing us questions from those on the call.

Hello, or I suppose good evening to everyone. In the letter, Gary, you pointed out a number of exciting launches set for 2022, but I was wondering whether you could say something about the real estate pipeline right here in the states. At present, how many leases have been signed, and ought we to anticipate that the count of openings during 2022 will speed back up to that level of 5 or more?

Correct. Right now, Steve, we aren't saying anything about that, simply because so much change and chaos is going on in the construction and development world at so many levels that we're going to hold off until we have somewhat more clarity once we get through the fourth quarter before discussing what we believe will occur in 2022; therefore, you'll hear additional details on that in the — with our fourth quarter release.

Great. Then, a brief follow-up — it's wonderful to learn that RH Contemporary remains on track to debut in the coming year, though I'd really like to know what you currently think about how much of an effect fresh offerings might have on demand in that period, perhaps at a broad level, particularly when you consider putting together the source book and where things stand for you folks. I'd truly enjoy hearing just how thrilled you are about this. Could you share any remarks regarding how significant you believe it might be for brand awareness and for growth in overall demand?

Yes. To my mind, this represents a total transformation. In my view, it's the finest work we've ever produced. I believe it surpasses what we accomplished with RH Modern, which was enormous, even though Modern had a rough beginning when it came to manufacturing. Modern essentially reshaped things for RH. With this, everything shifts. Once people witness the level of taste, the feel for style, the caliber and refinement of Contemporary, I believe an entirely new market will open up. I believe it will draw certain top-tier interior designers toward our brand. I believe the clientele of those top-tier interior designers will be guided by them to our brand. I believe this is among those irrefutable endeavors we're undertaking that simply cannot be overlooked. Within our sector, it's going to matter a great deal.

Thank you. Best of luck.

Thank you.

Many thanks, Gary, Jack, and everyone on the team — excellent work steering us through such a challenging stretch. Gary, I was hoping you might offer some context and color on the quarter when it comes to the supply chain, freight, inventory, and the overall environment — what exposure you faced during the current quarter and what visibility you have on those items heading into the first quarter? Then Jack — or perhaps Gary — could you address the timing for RH England? And when you mention that secured locations have been identified for London, Paris, Munich, and Dusseldorf, should we anticipate those opening in the latter half of 2022? Thanks so much.

Sure. Absolutely. Let's start by talking about the supply chain and everything tied to it. The situation is chaotic, plain and simple. We've never faced anything this bad. So this is a time when you have to get creative, adjust, and push through. It's a time to work alongside your partners more closely than ever before — whether that means the people making the products, the ones moving freight, what's being done to the components, what we're handling with straightforward line haul, all of it. Problems with execution are showing up across the board. Rising costs are showing up across the board too. You also need to act with real intelligence and care. Sure, plenty of folks across our sector are operating in a reactive mode, but if you adopt the mindset of someone steering the ship, you ask yourself: what path gets us the strongest possible result? We're fond of the idea that the company's vision guides whoever is in charge. It sparks motivation and creates momentum from the inside, and anyone leading has to accept that putting other people ill at ease is part of the job — since you're leading them toward a place you've never visited, toward activities you've never attempted, and this situation is exactly that kind of case. Getting through what we're dealing with right now isn't easy. It demands genuine leadership and genuine reflection. We need to respond quickly when required, yet we also need to invest serious time in deep thinking — pushing ourselves until it's uncomfortable — so that we can perceive things nobody else perceives, and therefore accomplish things nobody else can. The way our team has handled everything up to this point fills me with pride. To every one of our partners across the globe, I feel thankful and full of appreciation, particularly those based in Vietnam. From a health standpoint, they've endured an absolutely brutal stretch — that nation has been hit harder than any other country we've collaborated with. Before, India was the one dealing with a really tough situation. That said, I believe both our results and our guidance show that, operationally, we can steer through periods like this, and they also show how strong our brand is when it comes to bringing in revenue and widening margins. So even with all of that, our margins are growing compared with the best margins we had a year ago, and we took on a great deal of cost and a great deal of disruption. So I think that's a good sign as you think ahead to, hopefully, better conditions. The — I don't know whether it's Omicron — I can't say it properly, but yes, Omicron. No one can predict which variant will show up next, or how many we'll ultimately have. Based on initial reports, this variant is less serious than Delta and might spread faster, though it seems to pose a reduced danger to health. So hopefully, everyone can navigate their way through this situation and come out on the other end. As for the timing of RH England's debut, we anticipate kicking things off near the start of summer or the tail end of spring, and launching prematurely in the UK isn't something we want. Our location isn't in the rural English areas where precipitation happens every day. And incidentally, showers occur almost weekly; without a doubt, you'll see rain monthly in England. Therefore, we'd rather begin operations when conditions outside are agreeable. You only get one chance to make a first impression, and that's what we're thinking about here. As far as I know, we're still set to launch around late May or the beginning of June, and truthfully, whether we go or not could hinge on what the weather does. We look at the forecast, check your phone, and every day it seems like rain is showing up. If that's what we're seeing, we'll likely hold off a bit longer. But the moment a few days of sunshine appear, we'll be set to go, and our goal is to launch on a day filled with smiles and happy people, our own team members included. That said, we will be up and running before summer gets going, unless there's no clear day to be found. That's the one thing that could delay us. We feel good about that. Are there going to be any additional launches outside the U.S. during this year? The answer is no. If there were, we would already be discussing them. Keep in mind how complex, how big, and how large in scope the projects are that we're bringing online. They are not simple. They require years of work. What we're engaged in is not some fast expansion. And as we like to put it, doing something extraordinary demands additional time, additional personnel, and additional expense. More time, more money, more people operating in a more intricate way — yet the payoff justifies it. So I believe the lesson from our experience so far is this: whenever you produce work that is extraordinary and remarkable, there is always a way to turn it into revenue. Making money off something plain and forgettable is genuinely tough. But when you're dealing with something exceptional and standout, the timeline stretches out. You spend more, you need a bigger team handling additional tasks in a more intricate way, which makes it genuinely difficult to project or anticipate exactly when these things will launch. That said, my expectation is that the projects on our list will see some launches during '23. Some will come online in '24. Others will debut across '25 and '26, and I'm optimistic about what's in the pipeline. Incidentally, here's my perspective: this is not comparable to what happened in America. Our efforts aren't about unlocking markets — we're unlocking entire countries. I truly can't stress that enough, and not only to our shareholders or the analysts listening in on this call, but also to our own team and our partners across the globe. None of these can be viewed as just a single gallery. RH England throws open England; it throws open the United Kingdom, correct? If we launch in Paris, that throws open France. Launching in Milan throws open Italy. Launching in Munich or Dusseldorf throws open Germany. These are sizable economies, then. And country by country, we intend to throw them open. Given how much business keeps shifting online — and if you consider that a long-term financial upside of this virus is that it left people far more at ease buying online and buying online for practically everything — we're happy with our timing when viewed that way. We'll figure out just how many galleries these markets require and how we properly penetrate each of them.

However, when it comes to our high-end consumer, we're not an unfamiliar name. I believe I brought up on a different earnings call that an analyst report had come out stating RH has quite poor brand recognition among European consumers. They placed companies like Target, Walmart, IKEA, and plenty of others far above us. But honestly, that was just stating what everyone already knows, right? Because the people who buy from us aren't shopping at those retailers, and certainly their shoppers aren't coming to RH — we wouldn't even show up on their radar. That said, one of our very sharp investors — who is likely tuned in to this call right now, and you know who you are — conducted some research on interior designers based in the UK. They looked into how much — what the level of brand awareness for RH was in the UK, and I believe it came out to 90%, nearly 90%. Then they checked what share of those people intended to purchase once we launch in the UK, and I think that figure was approximately 80%. So those figures are extraordinary, right? They're simply extraordinary. This whole approach of entering new countries when you possess the type of brand we've built and when you're so distinctive within a market, and you debut the way we plan to debut — we're not launching the way this company originally began in the United States, with small inherited stores offering 6,000 square feet or 7,000 square feet of selling space. We're launching with our finest work. So we get a running head start, since we already enjoy solid brand recognition with the right customer. We're unveiling remarkable galleries that rank among the most thrilling projects we've ever undertaken — in fact, I'd say nearly every single one of them is among the most exciting galleries we've ever introduced — stunning historic properties that we're reimagining. So when I consider the business, and when our team considers the business looking out over the next 5 years, well, I believe it positions us to grow faster than anyone else in our sector.

Gary, that is unbelievably useful. Congratulations on how well you’ve carried this out, and clearly there’s a great deal of opportunity ahead. Appreciate it.

Thanks.

Hey, thanks. Strong numbers. I want to ask about deferred revenue and customer deposits — both rose from the prior quarter. So I'm wondering whether you've begun making any headway in reducing those backlog levels. I think at some point earlier this year, they were sitting at roughly $150 million. So have you started lowering them, or how many quarters do you figure it will take before you work off some of that benefit?

Hey, Chuck, Jack here. So we provided that $150 million figure back at the start of the year. We haven't refreshed it, and we'll do so at the right time. But one thing you need to keep in mind is that as we cleared some of that backlog, fresh backlog gets generated. So what you're seeing is somewhat sequential — if you look at our revenue on a sequential basis and really the amount of revenue. And this is the biggest revenue quarter we've ever had, clearly larger than the last quarter and larger than the one before it. So you'll see a sequential increase in those. And again, I believe as we get — as the supply chain and all the rest gets sorted out over time, we'll work through it; but at the moment, it kind of mirrors the scale of the business. And as Gary talked about regarding the supply chain, we're working, we're improvising, we're adapting, and I think it will all come together.

Yeah. And at this point, what we're thinking is that the backlog isn't going to be fully worked off within the next year. The odds are strong that we'll be going into the year after that still carrying the backlog.

Understood. All right, sounds good. You also brought up the new variant during your remarks. Apologies for asking about the short term here, but I'm simply wondering whether demand has shown any odd patterns during the last two weeks or so. On a broader note, you mentioned the supply chain remains an issue — I'd love to know whether consumer habits have shifted at all, whether people are still willing to hold out for items, or whether cancellations have picked up, or possibly none of that?

Sure. Plenty of folks are walking in asking to purchase masks. That was me joking. What I'd say is this — in our kind of business, you typically don't see instant spikes, you know, with things like furniture. It's still fairly early, so we'll find out how it plays out; my sense is customers have grown used to waiting, correct? And how every one of us functions in this environment comes down to expectations. Take the illustration of heading to Disneyland; suppose you're after the Star Wars ride, the Matterhorn, whichever one you choose — there's a sign showing 45 minutes from here, and you can see roughly 400 people lined up. Do I truly want to queue up with my two daughters for the Matterhorn today, even with that 45-minute wait posted? You'd figure nobody on earth would join a line reading 45 minutes from this point; yet the truth is you do join it, since you've been conditioned to join it. And because Disney performs so consistently, I'm someone who tends to check my watch and clock it. Every occasion I've entered a line at Disneyland, when it says 45 minutes, they're consistently 45 minutes; that's the spot where they place the sign. I haven't gone over the last 2 years since my daughter got a bit older, though they genuinely want to return this year; anyway — you invariably board the ride at roughly 39 to 43 minutes. So they never leave you waiting beyond 45 minutes. What we're aiming for is to be Disneyland. Don't claim 4 weeks when it'll be 5, if 5 is a possibility. If 5 is a possibility, then say 6. Sure, we might shed a bit of demand that way, but nothing is worse than letting consumers down; still, what matters more, I'd argue, is that consumers — every one of us is conditioned to wait. I mean, attempt to get anything constructed these days. Attempt to renovate your home on schedule these days. I believe I read — in fact, just read a report where 50% of people claimed they're waiting longer, and they're spending more money. I'm curious about who those contractors are — that remaining half — since I don't know a single person whose construction wraps up when promised, and I'm not aware of anyone whose remodel doesn't run somewhere between 50% and 100% over their original budget. What I mean is, costs are climbing at every single level, that's just the reality we're living in now, and all of us have gotten used to waiting; honestly, it feels like a bizarre shock whenever something arrives on schedule. So when your Postmates courier actually turns up on time with the food, or the Grubhub driver arrives, you get weirdly thrilled, because out of everyone today, those are basically the only folks who are punctual.

Hi Chuck, another point worth remembering is that whenever a buyer, for whatever reason, would rather not hold out, we genuinely have — we carry a substantial amount of available inventory; that's the subject we discussed, one of our strategic strengths being that stocked merchandise; and this extends to our site as well, where you're able to browse what's on hand. Personally, I counted myself among those design shoppers who, for some reason, needed to — I wanted pieces that were in stock right away. And I managed to obtain them, naturally, certain products I do wait on, yet we're capable of serving both situations.

Thanks a lot for the additional detail. Gary, regarding the fast pass, I believe it's working quite effectively. Best of luck for the remainder of the year. Appreciate it.

I really appreciate you taking my question. Prior to asking it, I want to go on record stating that I was not the analyst responsible for that report on your weak brand recognition in Europe. So let me just set the record straight on that. I'd also like to note that I visited your new RH Oakbrook store recently, and it was simply — I mean, truly spectacular. I mean, genuinely, absolutely stunning. But getting to my question, you discussed in the — in your letter how RH In-Your-Home is being expanded. And I'm aware white glove service matters enormously; and clearly, the gross margin dollars from each transaction allow you to cover that expense. But I was simply curious, should we be accounting for any notable cost increase as a result of growing RH In-Your-Home?

We will be making an investment. That investment is meaningful and significant. We believe that investment will generate a solid return. The numbers indicate we should proceed. I'm not sure — Fernando is present. Our Chief Supply Chain Officer and President of Home Delivery is Fernando Garcia. He has essentially been the visionary behind RH In-Your-Home. And he recently had Dana Out, who leads RH In-Your-Home, and we enjoyed an inspiring presentation. I promise you, if anyone on this call had been in that room, you would want to invest in RH In-Your-Home; so Fernando, would you like to share anything regarding RH In-Your-Home?

Correct. So RH In-Your-Home, the way Gary describes it, is something distinctive that people remember, and it takes money to make it happen. Still, what comes back from putting that money in is substantial for the brand — not just through the demand Gary talked about, but also through how customers feel and the longing for the brand that this spending will generate. And we — across the past 2 years, we've managed to strike excellent deals with our partners, which has made it possible for us to think about putting financial resources into RH In-Your-Home.

Understood; that is quite useful. Many thanks, and continue the excellent work, everyone.

All right, thanks, Anthony.

Evening, and I appreciate you fielding this. I'll keep it brief — it's regarding new product rollouts. My impression was that a Modern and an incremental release were on tap for the coming year. I went back and checked on the prior year afterward, and I couldn't find it. So I suppose my question is, how incremental is it really — clearly this matters a great deal to the brand. It doesn't strike me as larger than what I'd call the core business. Still, what do you anticipate for Modern? And also, how would you describe the way the brand — the sub-brand, I mean — is developing as the product itself develops?

Certainly. Yes, Modern represents a significant portion of what we do at present. When we look at how the company is structured right now, there are three segments: RH Interiors, RH Modern, and RH Contemporary. RH Modern has been folded into the core offering. That's our framing — it still needs to feel aesthetically driven, yet it's no longer a fresh launch. Even so, both Interiors and Modern are set to receive a greater volume of new product than they've seen in quite some time, simply because we've gone two years without sending out the book. We've launched a fresh line after a two-year gap. That means roughly two years of development work has been sitting in the queue. Our view is that the timing is right now — Curtis, the supply chain has recovered sufficiently that you won't leave customers unhappy or cause them to wait longer. Fingers crossed, we hope nothing shifts with regard to variants and how things play out. Even so, Contemporary is going to come across as dramatically refreshed, with a great deal of added product that ought to make HR — sorry, Contemporary will consist entirely of added product. Actually, not entirely. To put it another way, my expectation is that 50% to 60% of Contemporary will be added product, given how novel and distinct it is. We've added fresh lines to both the Modern and Interiors segments. Interiors represents the largest portion of our offerings, while Modern comes in second and accounts for the largest share of revenue. As for Contemporary, we've all come to see it as having the potential to surpass Modern and eventually match Interiors, elevating the entire brand in the process. That's why we view it as an exciting new opportunity. Looking at it, the pandemic actually worked in our favor in certain respects—it handed us additional opportunity to examine the concept, to add dimension to it, to challenge it, to refine it, and to give the idea more depth. And honestly, every week the team here grows more enthusiastic, since we've kept finding ways to innovate, broaden, and build out that idea. So it's going to represent a substantial chunk of new business. On top of that, a certain share of both Interiors and Modern will come in as incremental. Eri is right here with us. Eri, is there anything you'd like to throw in that I've left out?

Yeah, I'd have to agree with that. From where I sit, the Contemporary angle feels completely new and thrilling, and it really speaks to this moment. And as you were saying, once we launch it, I believe it'll go head-to-head with Modern, and down the road it might even overtake that idea. It's genuinely exciting. We've built out the concepts and the collections to be far, far larger, and at every step we've lifted the design and the quality.

That's really thrilling. Perhaps a fast question about modeling for Jack. I realize you folks haven't provided context or specifics regarding price hikes or similar matters. I'm not requesting that. But merely considering the coming year, the backlogs, and the timeframe needed for inventory to move through. I suppose, would it be reasonable to state that at minimum during perhaps the initial quarter or two of next year, you still kind of observe some boost from price hikes you've already implemented, or ought we to view it otherwise?

That's simply another method of requesting our '22 guidance including that element. Listen, I believe depending on — you may check our source books on the web or you can — if you track them, we haven't hidden the fact that we've implemented certain price hikes this year to tackle the supply chain. Will there be a few revenues early in the year? Certainly. Once more, we aren't discussing details, but I think that's a solid approach to consider it.

Right, I can't say for certain that we've seen the last of price adjustments; so yeah, inflation in prices is still with us. That means we'll keep acting in a way that's fair and right, though we're not looking to do anything that would sort of chip away at our margin structure. But it's taking place everywhere. Eateries are seeing wild price hikes along with many of the costs of inputs, and we're simply doing what we think is correct and just. When our prices rise, we pass those along. And I believe that due to stimulus in the marketplace and the government's efforts to sort of hold everything up and keep it all in motion, it's sort of evening everything out, correct? And in a somewhat positive manner, since this pandemic isn't confined to a single nation and is a worldwide matter, it lets every nation on the planet print money without hugely devaluing its currency. So this has never occurred before. None of us have witnessed this; we all sit around asking, what will come of it? And sure, who knows how long everyone will keep printing money, how long prices will keep climbing. What will happen with inflation. With any luck, you hold a dovish stance regarding interest rates at the Fed. I believe most people are quite content. Powell has been reelected. And thus, up to now, things are fine. I'd have expected many things to have gone poorly by this point. Yet once more, this is something we've never witnessed. The world has never witnessed it. So my guess is that price increases will likely stick around for some time.

All right, thank you so much. I appreciate you making room in your schedule, and best of luck for the remainder of the year.

Thanks, Curtis.

Good evening, and thank you very much for taking my question. Given that there's a great deal of uncertainty at present and some supply chain difficulties, your fourth — or rather your implied fourth quarter guidance indicates that demand trends are decelerating, or at minimum your revenue trends will decelerate during the fourth quarter, particularly on a stack basis; so do you believe the affluent consumer, who has perhaps been less mobile across the last 18 months, is beginning to feel fatigued from staying at home, beginning to move spending toward other categories, and that this could persist into the next year and that's an indication you're already starting to observe in the business?

Well, yes, I believe everyone simply needs to examine their own behavior. When you lack the ability to travel, yet your income remains the same. You're either putting money away or using it elsewhere, correct? And travel and leisure is 3x the size of the home furnishings market; and obviously, that segment of the economy was shut down. And that segment of the economy has reopened. If you attempt to get a flight these days or attempt to book a hotel room at many places you might want to go, it's a lot different than it was a year ago, and it's massively different than it was 2 years ago at the beginning part of pandemic; so the question is, I think, how has this affected the long-term view of the home, right? And how has this changed the perspective — it's — I think there is a short-term cycle here that, yes, spending will shift back to travel and leisure and other parts of the economy. People are going to spend money on weddings. There weren't weddings. There weren't events. There were — so many things went to zero, right? Nobody went to concerts. Nobody went to — some of you guys like I happen to be a fan of the Golden State Warriors. The last couple of years, you didn't really want to go to a Warriors game and be one of 2,000 people in a 20,000-seat arena. It just didn't have a lot of energy and wasn't a lot of fun. But now there is 20,000 people back in there, spending money on tickets, going to games, spending money in F&B. It's expensive night out no matter where you're sitting in that arena and I would imagine arenas everywhere, whether it's soccer games, whether it's other events, whether it's concerts that are happening now; so all travel, leisure, entertainment, so on and so forth, people are getting out. Yet you would have thought there'd be a much bigger shift out of the home. So what we're figuring out, I believe, is that this could have brought about a lasting change in how much the home matters, how much time folks will be spending there, the manner in which they'll use that time at home, how much entertaining they'll do there, how many residences they'd like to own if they can manage the cost, plus the danger posed not just by new variants but by yet another pandemic. Nothing like this is ever anticipated. Nothing like this has ever been witnessed. Yet after witnessing something like this, you begin asking yourself, what if it occurs once more? Hey, sweetheart, all right, understood. We got through this pandemic. Everyone is in good health. So what's our next move? What if another 1 arrives in 3 years and 5 years? How will we be prepared? What does prepared mean when it comes to another pandemic? Prepared means owning a second home. Prepared means having a wonderful backyard. Prepared means turning your home into a place where you actually want to remain. The pandemic, I believe, took everyone by surprise, correct? Each of us had to spend some amount of time at home. Each of us sat there and noticed all the things that perhaps weren't so great about our home. Each of us sort of said, hey, why not improve our home? We'll be here for a while; and I believe that if it hadn't been your home, the impact might have been shorter term. Yet for a lot of people, and particularly upper end consumers, it's the single most significant place you go. It's where you sleep nearly every night; and it's where you consume the majority of your meals; it's where you bring up your family. For most people now, if you're employed and you're an affluent consumer, you've got a home office, you've got someone working in the home. You've now developed a habit of doing more entertaining at home. Anyone who claims they haven't cooked more than they did over the last 2 years — yes, you're welcome, Williams-Sonoma, incidentally. Everyone is cooking more. That has to be beneficial for the home. These new habits have to be beneficial for the home. And I believe the — all of us are astonished by how long, like I'm not sure who first said it, one of you wrote it, wrote reports, and there's stronger for longer. And I believe it's been stronger for longer since it's the home. It isn't as though you merely purchased a new car; and you purchase a new car and you don't furnish the car. You don't do a thing to the car. Possibly you wax it and you clean it, but you sort of — you obtain everything you require when you purchase a car. When you purchase a home, you sort of furnish it for years. You keep doing things to it for years. Plus at this point it matters even more, and you're devoting additional hours to it, plus you anticipate possibly devoting additional hours to it down the road. On top of that, there could be danger of yet another pandemic. My view is the home could see a lasting change from this. How large? Will it decelerate? Absolutely. For instance, we won't witness those identical expansion rates, I mean — although once more, if you looked at our business plan for last year, that plan came in a lot below what we actually delivered since we believed a significant pullback might follow the 2020 surge. Plus we believed we'd pull back during 2021. Whether a pullback arrives in ‘22, I have no idea. So far or what was Maverick's line in Top Gun? Looking pretty good so far.

All right, that’s quite useful. For my follow-up, I’m trying to understand why you’re not ready to give guidance for ‘22. Could you address a couple of things that will affect the model? First, the start-up cost tied to all the different initiatives you’ve got launching in the New Year? Second, you clearly just completed a major recapitalization of the balance sheet. Could you offer some sense of how that will shape the model in 2022? Thanks very much.

Yes. Well, look, the recapitalization is fairly straightforward, correct? There is — we took on $2 billion in borrowing. That money carries an interest rate; it’s a one-time increase in costs. And nothing magical exists on the opposite side that eliminates it. We view it as an investment that positions us to generate a strong return on that $2 billion. How exactly that unfolds and when it unfolds, we’ll find out. But we wouldn’t have brought in capital if we lacked plans for it. Still, we’re patient. We want to stay opportunistic; we don’t know what the future holds. So you’ll — but there’s a one-time expense related to that, as it pertains to other initiatives and the things we’re pursuing, and Jack will provide additional detail. Yes, we’ll spend additional dollars. We’ll put more capital to work, and we’ll enter new countries. We’re adding new DCs. We are looking at actions of that kind, and those carry a cost on the investment side. Still, my view is that we have performed quite reliably over a number of years. It may be that across the past five years, our approach to steering the investment community — and to where we say the numbers will come out — has been pretty close to the mark. We also tend to err on the side of caution rather than the opposite, and I expect that pattern to continue. As for 2022, we have not yet provided guidance. We'll be picking up a lot of information in the coming two months, and after demand patterns and other considerations become clearer, we already know the amounts we plan to put toward international expansion, toward RH In-Your-Home, and toward other initiatives. Our approach to putting money to work is built around the long haul. The way we deploy capital in this business is the way an owner of all 100% of it would; that long-term orientation explains why nobody else in our sector comes close to our operating margins — and the gap isn't small. Outside of RH, I'm not sure what the peak figure in our industry has been. My guess is it lands somewhere near 15% or 16%. During Q3, that figure came to 27.7%. That puts us roughly 1,100 basis points ahead of whoever's in second place. What's behind numbers like these? It comes down to making smart investments. Luck has nothing to do with it. Smart investments are the key. You have to commit that capital thinking long term. What's the single worst thing that could happen to this company at this moment? It would be us starting to play this like a quarter-by-quarter game. If we began following the advice someone gave me as a meeting wrapped up — you have to protect the brand. In every organization I've been part of, whenever I've encountered folks saying you must safeguard the brand, that's precisely when brands begin to deteriorate, because they quit playing offense, they quit putting money in with that same bravery and enthusiasm, and they quit bringing that same determination and vigor to improve things and elevate them. So the status quo makes us sick. Finding big ideas is our obsession; their origin is irrelevant to us. RH In-Your-Home has us incredibly thrilled. If anyone — we almost ought to replay that meeting for this audience, like if all of you — if every person on this call might have watched the recording, the group presenting RH In-Your-Home, I genuinely want to pull cash from my wallet and ask, may I put my own money into this? It will be phenomenal. Yet the costs of getting it off the ground. It isn't inexpensive, but in this world you receive what you shell out for; and anticipate that we will commit meaningful capital and anticipate that we won't honor the status quo whatsoever around here. Anticipate that we will never play defense and anticipate that this will never attempt to safeguard this brand. We expect to expand this brand, invest in it, and make it one of the most respected brands globally. Not merely the most respected name in home furnishings worldwide — but among the most respected brands anywhere. In the years ahead, feel free to compare us with anyone. The projects we have in development will raise this company to a completely different plane.

Michael, Jack here. Two points I'd like to make, and clearly I won't get into the particulars regarding what those start-up costs amount to; still, bear in mind that a large share of spending tied to these initiatives tracks the revenue; that gives you the matching dimension. Then the other point I'd raise is simply to consider the size of our operation. Our EBITDA exceeds $1 billion. So regardless of the figures you attach to the investments, be it launching Contemporary or expanding globally, once more, set against what we generate today, I'd say it remains fairly modest, and as Gary mentioned, it has to be material, and we must approach it with care, just as we always do.

That's really useful. Thanks a lot, and enjoy the holidays.

Operator, are you still on the line?

I will check in with it.

Michael?

You're present.

You're present. Right, Kwanda isn't showing up for me < >.