RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon to all of you, and we appreciate your participation in this call covering our results for the fourth quarter along with fiscal year 2021. With me on the line are Gary Friedman, our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to beginning, let me point out our legal disclaimer: certain remarks we make today will be forward-looking as defined under the federal securities laws, covering things like the outlook for our business and other topics addressed in the press release we issued today. Such forward-looking statements carry a number of risks and uncertainties that might lead actual results to differ materially. For a more detailed account of the risk factors that could impact our results, please consult our SEC filings and the press release issued today. Kindly note as well that these forward-looking statements represent our opinion only as of today's call date, and we assume no duty to update or publicly disclose the results of any revision to them should new information or future events arise. Additionally, on this call we might address non-GAAP financial measures, which modify our GAAP results to remove the effect of certain items. Additional details on these non-GAAP financial measures, along with a reconciliation of them to GAAP measures, appear in today's financial results press release. A live webcast of this call can also be accessed through the Investor Relations portion of our website at ir.rh.com. With that said, I'll hand things over to Gary.

Alright, thanks, Allison, and I appreciate everyone being here today. Over the next few minutes, I'll take you through the shareholder letter, and after that, Jack, myself, and the other members of our leadership team here in the room will open things up for your questions. To our people, our partners, and our shareholders: we're happy to share that we've delivered yet another record-breaking year. Net revenues rose 32%, hitting $3.759 billion compared with $2.84 billion the prior year, and that's a 42% gain over 2019. When you set aside the online businesses that are losing money, this stands as one of the highest 2-year growth rates our industry has seen. We saw a 49% increase in demand versus 2019, which left us carrying an incremental backlog of about $200 million in net revenues at year-end; we expect to work through that during 2022. In home furnishings, RH continues to set a higher standard for financial results, and at this point our figures resemble what you'd see from the luxury segment — adjusted operating margin reached 25.6% in 2021, which is 1,130 basis points above 2019, marking the biggest two-year gain in our sector. Taken together, our results demonstrate how much customers want our elevated, exclusive assortment, how powerfully our growing ecosystem connects with them, how much profit our fully integrated business model can generate, and how much strategic differentiation comes from our inspiring physical spaces. Looking at the quarter now — net revenues rose 11%, which put us inside our guidance range despite all the different virus variant issues that intensified supply chain difficulties during the latter part of Q4. And once again, our adjusted operating margin for Q4 came in ahead of what we had projected, hitting 25.2%, compared with 23.7% in the same period last year, which represents a 780 basis point gain measured over two years. On free cash flow, we generated $97 million during the quarter and $477 million across the full year, and that figure includes a $191 million buildup in inventory — roughly $60 million of it tied to longer transit times, while the rest was intended to help work down the backlog of demand we haven't yet shipped. We finished the year with $90 million in net debt and roughly $2.2 billion of cash sitting on the balance sheet, and at the same time we posted a 73% ROIC for 2021. Then comes 2022, which is all about the new. As we've mentioned before, although the virus pushed many of our plans back, it never threw them off course; over these last 2 years we've been reimagining and reinventing ourselves once more, and we think 2022 will mark the beginning of the next phase of growth and innovation for the RH brand. Looking at 2022 — a year characterized by what's new — we're going to open RH San Francisco inside the historic Bethlehem Steel Building, which is our most extraordinary bespoke gallery to date. Additionally, we're rolling out RH Contemporary—arguably the most exciting and potentially game-changing launch we've ever introduced. Both RH Interiors and RH Modern are getting upgrades and broader assortments, featuring new lines and improved craftsmanship. In New York, we'll debut our inaugural RH Guesthouse, an innovative hospitality concept designed for guests seeking seclusion and high-end comfort, tapping into the $200 billion hotel sector across North America. We've got two fresh dining ideas in the works. First, there's a high-end open-flame restaurant launching in San Francisco, England, and at the New York Guesthouse. Second, a champagne and caviar bar is also set to open at the New York Guesthouse before this year is out. We plan to roll both of these concepts out to upcoming galleries in Paris, London, Milan, and Aspen. With typical restaurant revenues approaching $10 million per year and the 4-wall model generating strong profits, we're putting significant money into creating a top-tier hospitality operation. We believe there's no limit to what we can do to enhance and bring life to our locations and venues, offering our members and customers cohesive, motivating experiences that can't be duplicated through digital means. Our new digital portal's initial stage, called The World of RH, is about to launch. It showcases how our growing ecosystem of products, places, services and spaces connects together — every one of them designed so customers feel moved to dream, dine, travel and live within a world RH has thoughtfully curated. This will create an emotional tie with our customers that no other brand anywhere on earth could possibly match. As for RH1 and RH2 — our bespoke Gulfstream G650 and G550 — they'll take flight, and charter availability for both arrives later this year. The first of the two has already gotten attention from the press along with praise, showing up in Architectural Digest, the Wall Street Journal, and all 20 Modern Luxury titles. Our luxury yacht, RH3, is going to be christened, and it will be offered for charter across the Mediterranean and the Caribbean. In the months ahead, you'll see RH3 in Robb Report, C Magazine and Boat International. RH In-Your-Home will continue its expansion — a delivery experience that's distinctive and memorable, where brand ambassadors oversee each detail of the delivery and bring the selling experience into the home. RH will grow around the world, beginning with RH England, The Gallery at the historic Aynhoe Park, a magical 17th century, 73-acre estate in the English countryside, which will introduce RH to the U.K. in a dramatic and unforgettable way. On top of that, we've locked down sites for galleries in London, Paris, Munich, and Düsseldorf, and right now we're in talks over leases or buys for galleries in Milan, Madrid, Brussels, and France. RH Palo Alto — The Gallery at Stanford Shopping Center — is set to open, and it will stand for the next step forward in our highly productive prototype galleries. Let me turn now to our business outlook. Heading into 2022, we have every confidence that our efforts will continue to elevate and expand the RH brand for many years to come, but at the same time we recognize that a range of internal — external pressures, among them historic inflation, rising interest rates, and global instability, are creating uncertainty. Even though we can't forecast how the economy will play out on a macro level, we possess the business model, strategy and balance sheet needed to seize chances that come our way, whether during periods of economic growth, downturn or disruption. First-quarter revenue and margin patterns remain solid, helped by our backlog continuing to unwind. Even so, we saw softer demand in Q1, and the timing matched up with Russia's late-February invasion of Ukraine plus the volatility that followed in the market. Given that, we believe a cautious stance makes sense until demand trends settle down. So here's the guidance we're providing for Q1 2022: net revenue growth for the first quarter of 7% to 8%, compared with 78% a year earlier, and adjusted operating margin of 23% to 23.5%, compared with 22.6% in the prior-year period. For fiscal 2022, net revenue growth of 5% to 7%, compared with 32% last year, and adjusted operating margin of 25% to 26%, compared with 25.6% in 2021. Looking ahead, we plan to launch RH San Francisco toward the end of spring, followed by the RH Guesthouse when summer begins, then RH England sometime in the middle to later part of summer, and finally RH Palo Alto during Q4. Now I'd like to turn to the broader picture of RH's business vision and ecosystem — taking the long view. We hold the view that certain individuals possess taste without scale, whereas others have scale without taste, and the idea of bringing taste to scale is something vast and all-encompassing.

Positioning RH as the arbiter of taste for the home has turned out to be both disruptive and lucrative, and we keep pursuing our aim of building the most admired brand worldwide. Designers, artisans and manufacturers who lead in their fields are drawn to our brand, and across our integrated platform their work gets scaled and made more valuable, which lets RH curate the most compelling luxury home product collection anywhere on the planet. Introducing RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and additional new collections slated to arrive across the coming decade will carry forward our push to elevate and grow our assortment. Opening immersive Design Galleries in each major market, per our plan, will unlock the worth of our enormous assortment, producing $5 billion to $6 billion in revenue in North America and $20 billion to $25 billion around the globe. Rather than only curating and selling product, our strategy takes the brand toward conceptualizing and selling spaces, through an ecosystem of products, places, services and spaces that makes RH — the RH brand a worldwide thought leader, taste and place maker. Architecturally inspiring galleries make our products elevated and more valuable, and our interior design services plus a seamlessly integrated hospitality experience elevate them further and add more value still. Extending past the 4 walls of our galleries into RH Guesthouses will keep lifting the RH brand through our hospitality efforts, and there we aim to create a new market for travelers in search of privacy and luxury within the $200 billion North American hotel industry. On top of that, we are crafting bespoke experiences such as RH Yountville, which brings together food, wine, art and design in the Napa Valley; RH1 and RH2, our private jets; plus RH3, our luxury yacht available for charter in the Caribbean and Mediterranean, destinations the wealthy and affluent visit and vacation in. Through these immersive experiences, new and existing customers get exposed to our evolving authority in architecture, interior design and landscape architecture. That brings us to our long-term strategy: building, inside our galleries, the world's first consumer-facing architecture, interior design and landscape architecture services platform, which elevates the RH brand and amplifies our core business while adding new revenue streams and disrupting and redefining multiple industries. As we start to conceptualize and sell spaces, our strategy comes full circle, moving past the $170 billion home furnishings market into the $1.7 trillion North American housing market with RH Residences — fully furnished luxury homes, condominiums and apartments with integrated services delivering taste and time value to discerning, time-starved consumers. All of this strategy will come to life digitally when we launch The World of RH, an online portal where customers can explore the depth and dimension of our brand and be inspired by it. When we launch RH Media, it's going to strengthen even more our standing as a tastemaker — this will be a content platform honoring the boldest and most impactful figures who are defining architecture and design today. As we take the RH ecosystem worldwide, the addressable market grows to somewhere between $7 trillion and $10 trillion, which ranks among the biggest and most valuable opportunities any brand pursues anywhere right now. If we capture just 1% of that worldwide market, that's a $70 billion to $100 billion opening. Through our products, places, services and spaces, the ecosystem we've built moves customers to dream, design, dine, travel and live inside a world RH has carefully curated, forging a heartfelt bond unlike anything another brand delivers. Taste is hard to pin down, and in our view, nobody is positioned better than RH to build an ecosystem that democratizes taste, and in doing so lifts up our way of life and makes it worth more. We're scaling the luxury mountain, creating a brand without equal. Each luxury house — Chanel to Cartier, Aston Martin to Aman, Louis Vuitton to Loro Piana, Harry Winston to Hermès — came into being at the summit of that luxury mountain. No brand has ever tried this ascent, and the others certainly don't want you attempting it. Their neighborhood isn't ours, and we don't get invited to their parties. We recognize our work must be so exceptional that it compels people to rethink who we are and what we're able to achieve, until those at the summit must tip their hat to us out of respect. We're also well aware this climb isn't meant for the timid. As we keep ascending, the air thins out and the odds shrink. This journey started 20 years ago, when we set out to turn around a business that was nearly bankrupt — carrying a $20 million market cap and a box of Oxydol laundry detergent pictured on the catalog's cover — and make it into the top luxury home brand worldwide. All the lessons and learnings, the passion and persistence, the bravery needed and the scar tissue built up from being knocked down 10 times and rising 11 create the mental and moral fortitude that forges character in people and shapes cultures and organizations — lessons no classroom can teach and no business management can impart; the only way to learn them is to earn them, by building one or by summiting the mountain. Keep going, team RH. Seize the day. Operator, let's now take questions from the call.

For the first question, could you expand a bit further regarding what you expect for revenue across the entire year? The guidance for the whole year includes $200 million in backlog demand that will be fulfilled, even with all the newness in the business. Perhaps you could help us grasp what you are observing concerning the softening that began in February and how that plays into your outlook for the rest of the year as opposed to the first quarter.

Well, the softness — and the newness — is entirely baked into our guidance. And like we've stated, we think it's wise to adopt a cautious stance right now given the kind of disruption. The conflict's start marked a turning point where things got tougher for us, with market swings following close behind. Plus, you've got to factor in something everyone now accepts: getting inflation back down to 2% isn't happening. Janet Yellen, only weeks ago, when the rate was sitting at 4% or 5%, insisted it would land at 2%. Two weeks after that, it reached 7.5%. Today it's at 7.9%. Jerome Powell is now telling us they moved too slowly. So we're looking at two years of rate hikes — borrowing costs climbing. That's a lot of headlines and a lot of static, and the war, the invasion, only makes it worse. I'd say the conflict in Ukraine became something of a turning point, in a manner of speaking — a moment when everyone had to stop and take stock of things. Our business decelerated by about 10 to 12 points, and it's stayed more or less at that level the whole time since. When will things get back to normal? I'm not certain. How hard will the Fed push? I'm not certain either. Some things we do know, and I don't mean to come across as a pessimist, but based on what history shows us, whenever the Fed hikes rates 4 to 5 times across a prolonged stretch, a recession follows. I don't think I need to spell out the arithmetic for you folks. That's just how it is. Here's how I'd put it: we usually hope for calm times but prepare for the tough ones. Going into this year, our position looks strong. The set of initiatives, products, and experiences we're bringing forward is, I believe, the most thrilling in our company's history. Our strategy and business model are the strongest around, our balance sheet ranks among the best in the industry, and nobody in the industry beats our ROIC. So in a sense, it's game on—whatever comes, comes. We're simply setting ourselves up to come out ahead.

That's genuinely helpful. I wanted to ask about international margins in particular. My understanding is that you've said Europe has the potential to equal or even beat the margin profile of the U.S. As you begin some of these first openings over the coming years, how should we think about the profitability curve? To frame it another way, should we expect some dilution to the operating margin guidance you gave for this year, purely from the U.K. opening, and then from Europe the following year?

Yeah, that assumption is right, though I'd put it this way — we're all going to learn together, aren't we? This is our first time doing it. Not many companies similar to ours have attempted worldwide growth while retaining ownership of their brand instead of handing it off through licensing. Licensing is the simpler route, but in our view it delivers weaker profits over time and builds less value for shareholders. Past experience bears this out: numerous well-known brands that chose licensing or franchising eventually shelled out significant sums across many years just to regain control of their names. Because of that, we're confident this approach will boost earnings over the long run. When you examine how others have structured their models, the numbers support that conclusion. Still, predicting the precise shape of that trajectory is difficult — after all, this is our first attempt at it. Honestly, our visibility into this isn't any sharper than anyone else's on the call. As things develop, we'll share what we can. That said, with each passing week and month, and as the date gets nearer, our confidence keeps building. What we're finding is that brand recognition and brand attachment are stronger than we'd realized, now that we're actually out meeting folks and having conversations. Sure, there's plenty of buzz around RH launching in Europe, and among the consumers we're targeting, our name carries fairly strong recognition. We're quite sure of ourselves here, and over time we see this adding to our operating margins. If you look at our current situation, we still haven't reached full scale in the U.S., correct? We aren't a retailer shutting locations and contracting in order to fine-tune operations; we remain in growth mode. We have many new galleries still to convert, plus multiple billions of dollars in additional work ahead of us in the U.S. alone. As we reach that size and keep improving, developing, and elevating what we offer, operating margins in the vicinity of 30% start to look achievable; and if you factor in the possibility that our international business adds to that rather than diluting it — it really ought to add to it — then over the long haul we might arrive at a model resembling those of the finest luxury businesses anywhere. If you take LVMH or Kering apart, or look at each brand individually — and that's important, because great labels and great companies often get lost within these portfolios of many brands — you'll find that Hermès operates with margins in the middle of the 30s. CHANEL does the same. Pull Louis Vuitton out on its own, and its operating margins land in the mid-30s too. Gucci's operating margins sit in the low to mid-30s. Therefore, we — and incidentally, step back for a moment and consider those luxury names: they face plenty of competition at scale. A wealthy buyer genuinely has many options when it comes to apparel, with quite a few brands available. Plenty of brands exist to choose from as well in jewelry, or in watches, or in luxury automobiles. Step back and consider luxury home furnishings and luxury design, and consider who is the fully integrated brand sitting at the summit of the global luxury mountain — there's a large gap there. A genuinely large gap. What you find is a highly fragmented collection of niche category labels, comparatively tiny, lacking scale, lacking command over their own brand. They've franchised themselves out. They govern almost none of their distribution. Consider B&B Italia, for instance, in North America — B&B, as I recall, how many distribution points do they have, roughly 40, 50 distribution points, and they run just 4 of them. Their brand therefore gets tossed around across a bunch of locations, and they're arguably the top global name in upholstery, yet they don't span every category. Then there's, I believe it's Industrial Design < >, or something similar, some group that's — the other one I mentioned, B&B Italia, Flos lighting, other things too, where people attempt to toss things together and work out what to do. So when I look at this, I sort of say we hold something like a 20-year lead within our sector. Building what we're building requires a long time. And we're only now arriving at a point where people will begin to grasp what this brand can do. People will begin to consistently witness the sorts of physical environments and experiences we're creating for customers, the thrilling hospitality concepts set to draw people into those physical experiences and forge connections with people while generating stronger brand awareness and stronger brand affinity. If you look at what we intend to accomplish abroad, plus what we've done in North America, you'd see we first had to get rid of a truly junky, knickknack-style operation along with these tiny locations, and a big chunk of this trip has gone into dismantling that lousy operation, converting it into something merely acceptable, devoting a lot of years here simply to staying solvent, working to get out of numerous segments and numerous lines of business, working to shift away from a discount-driven approach toward one built on memberships, and then to reposition the merchandise as well as every piece of real estate and not — as Frank Sinatra put it, without being timid about it, correct? What I mean is, we haven't taken our showrooms, which aren't exactly tiny when you compare them against other companies or rivals in our sector — I mean, ours run 10,000 to 12,000 square feet, our older showrooms, with 7,000 to 8,000 feet devoted to selling. That isn't tiny, yet we aren't simply taking those spaces and renovating them. We aren't expanding them by 20% or by 50%. We're enlarging them by something like 500%. And in our field right now, across every category, I'd contend they stand as the most thrilling, interactive, experiential, and commanding in-person experiences of this type.

I mean, if you consider bringing the absolute finest version of ourselves over to Europe, without being dragged down by the identity we used to have, and without being slotted in the same way others have been — you go into a shopping center where we already operate a longstanding location, and in that shopping center today, alongside us there are 3 or 4 others, whichever ones you prefer, and you're familiar with those names — those companies aren't truly global in any real sense, and they aren't genuinely in a position to go head-to-head with us right now, even here in the U.S. So on a worldwide basis, things are extremely scattered, and no one has real scale. The majority of them lack control over how their products get to market. And most of them are roughly in the place we occupied 20 years back. So my feeling is that the worldwide chance for this brand might be unmatched by any other brand anywhere. If you actually pause and reflect on it, if you simply — pick some other category and ask, who's the leader at the premium end? How many brands exist there? Which are the top brands that command their own brand, command their own product across every dimension, possess the infrastructure we possess, possess the operating model we possess — we aren't heading over there with negative EBITDA while attempting to expand in Europe. We aren't heading over there with something like 5% EBITDA while attempting to expand in Europe. We're heading over there at roughly 30% EBITDA. So we simply have — indeed, our situation is tremendously strong. And I believe nobody aside from us truly grasps it, purely because we've been examining it for such a long time and considering it for such a long time. And beyond that, whatever we do next on the physical side in Europe will surpass anything we've previously accomplished. And once all of you witness what's on the way, I certainly wouldn't want to be in Europe going up against us, I'll say that to you. My thought was, if you're up against us here in North America within our category, you definitely don't want to be up against us in Europe. And I'm not saying that with any arrogance; it's simply — I mean, you just need to examine it carefully. So that's my take.

Am I coming through okay?

Yes, Steve, you're coming through fine.

No problem. I'd like to zero in on the product introductions. Gary, could you give us an update on when exactly Contemporary and the elevated Modern and Interiors collections will arrive? Also, any details on how broad these new collections are, so we can get a sense of what the impact might look like? And finally, has the supply chain situation right now affected these launches, or do you expect it to?

What's your guess? Naturally, it's having an effect on the launches. What I mean is, everything is running somewhat behind and arriving in pieces. Here's the thing — we'd hoped to have Contemporary out by March. We would have, I mean, prior to the variant sweeping through during Q4; and once more, it truly — my view is it hit the U.S. hard — not all that hard; it simply moved across the U.S. quite fast. But consider nations such as China or Vietnam, or other locations where we do a lot of sourcing — indeed, it all ended up scrambled. So we — my estimate is we're roughly two months delayed. We're — and beyond that, we want to act wisely as this — as we consider the economic conditions ahead of us. When economic conditions are unstable, you need to be cautious, particularly when you run a source book catalog operation like we do. You don't want to send mail straight into a strong headwind; so we're rethinking our strategy; we're — I mean, we're sort of — originally we figured we'd release with 450 or 500 pages for Contemporary. My guess now is it'll likely be closer to 300 to 350 pages. Things are simply behind schedule. My feeling is it could slip even further. I mean, the supply chain, I believe a lot of us assumed it would be resolved by this point. I mean, we'll be fortunate if it's resolved before the year ends. And that's because it's striking everyone from every direction — all the raw materials, all the shipping problems, not only shipping to reach us, but our vendors needing to bring in every component from around the globe to their own facilities. So you've got this escalating supply chain riddle piling up. So I believe the main point is simply not to force it at this moment, since you can likely make errors you'll regret. I think, as we've said, we're leaning a bit cautious. How far would we push circulation? We'll find out. We've more or less moved Modern and Interiors to the back half, letting Contemporary take center stage in the front half. But it's arriving, yes, in May. We don't want the book going out before we've got merchandise on hand, and everything is running behind. So — that likely played into why we're being cautious about this year too. And even when it comes to galleries, to projects, we're operating in a time that is — it's — honestly, from the standpoint of getting things done, I've never witnessed such chaos, whether that's construction, sourcing, manufacturing, supply chain shifts, freight. Right now everything across the globe is somewhat out of step; so — but everyone faces the same thing. So I figure it comes down to how you handle it in the smartest possible manner. And it's like — a phrase I'm fond of using, it's like quality. Quality is something you sort of have to wait for, and right now nobody's handing out bonus points for hurrying. I simply don't believe they are. My sense is you're more likely to end up in the ditch. So we're sort of easing off the pace a little. We're attempting to be more deliberate. We're attempting to make fewer, bigger, more significant moves. And that's simply how we see it. I realize others are handling things their own way, but that's how we see it. We tend to invest a lot of time here thinking very deeply about a few big moves; this year we've got a lot of big moves because they all sort of piled up. And so we don't want to introduce additional chaos into our world and our customers' world; so what's in front of you right now is the — in the letter is the best news I have; it's different news than my last letter. When I wrote the last letter, I didn't know, how do you say it, Omicron.

Omicron.

Right. It strikes out of nowhere. Then suddenly, boom, there's a war on our hands. Russia moves into Ukraine, boom. Yellen claims interest — inflation will drop from 4% down to 2%, and next thing it's sitting at 7.5%. Then Powell admits we're lagging. My sense is plenty of folks believe supply chains are improving. In my view, they haven't improved one bit. I mean, it is what it is. I mean, goods sit on the water for ages. Bringing vessels into port takes forever. On average, we're carrying roughly 5 additional weeks in our supply chain at this moment. That's a huge amount of time. It's a huge amount of money, and that's just the average. So certain steps arrive on schedule while others lag 10 to 12 weeks behind. And when you operate a somewhat integrated business like ours, where every piece of the puzzle is needed to paint the picture, that simply renders it more complex and more challenging; yet even so, as of now, every item on that list, the year of the new, I'd be stunned if it all doesn't come together. If you want to know my pick for the biggest risk, Palo Alto lands in first quarter of next year. But that won't change anything for the year regardless.

Gary, that's really useful, isn't it? Since we're trying to frame how cautious the guidance is, it sort of looks as though you aren't factoring in any input from many of these fresh elements tied to the year, correct? I mean, could you say anything about the way you assembled that guidance from the ground up, or how you'd characterize the caution embedded in it? Your record in this area is excellent. So do you have any perspective on the guidance taken as a whole, specifically regarding the conservatism behind it?

Yeah. Well, listen, I'd say this is likely among the toughest sets of guidance since 2008 and '09, since we sit right amid the upheaval caused by Ukraine and Russia, which, in my view — I don't believe it's entirely about Ukraine and Russia. My sense is that it set off a broader awakening. It's as if somebody — I believe this amounted to ringing the bell, telling everyone to pay attention; and then suddenly, everyone began talking. Yeah, suddenly the Fed is off and running, and that breeds worry. You've got home prices sitting at record peaks. I mean, can that last? I have no idea how long the arithmetic holds up. Yeah, it doesn't add up given what's going on in housing and elsewhere where — you've got inflation at a level I've never witnessed. Now, back when Yellen said, "We're going back to 2%," I was telling folks that we happened to be signing our new freight contracts, the ocean freight ones. I can't help but wonder whether anyone — whether the Fed ever picked up the phone, dialed a businessperson, and asked, "Hey, what's your read on inflation right now? What are ocean rates doing? What about this? What about that?" I mean, my sense is — I don't figure anyone truly grasps what's headed our way on the inflation front, because either companies will earn far less profit or they'll push their prices higher. And I don't figure anyone truly grasps how far prices will climb across the board, at restaurants, on cars, and everything else. It's — and my sense is it will outpace what the consumer can handle. And my sense is we'll find ourselves in a rather tricky position; so everything is sort of hitting simultaneously; and my sense is you've got to get ready for war. I mean, when you're heading into a highly tough, unpredictable stretch, you simply have to stay extremely nimble. You have to be capable of improvising, adapting, overcoming, and sort of being prepared for whatever comes. And I don't mean that in the sense of playing defense. I mean it in the sense of playing offense, but it's — I wouldn't describe the present moment as happy days. I'd describe it as pensive days, so be ready; and when we operate that way, we typically achieve our strongest result. When we become too optimistic, we're more likely to end up in the ditch and get ahead of ourselves. Alright, so — but assuming everything — suppose the conflict in Ukraine comes to a halt and somehow, miraculously, inflation eases off, who knows, then everyone would be able to enter into fresh freight agreements, because, well, the majority of the globe all inked new freight deals. Two years back, the cost of a container for us jumped from $2,400 to $4,800?

About that.

Yes, indeed, it increased twofold. I'm not going to say what level it has now hit. Still, I'd say that was a pretty significant rise. And it's not just our company — this applies to everybody. So either companies will take silly steps like cutting quality so their offerings look like they give more for the money, or they'll have to charge more. Or else they keep prices where they are and suffer — their profit margins will change. But this isn't happening only to us; it's happening to every company I'm aware of, in all sectors. And honestly, I don't believe it's — once more, I don't wish to alarm anybody. I brought up that theme earlier — you know, there's a moment in The Big Short where the whole crowd's gathered in that ballroom, and this fellow, I believe he's with Bear Stearns or one of those firms, is standing up there announcing that they intend to repurchase $1 billion worth of their own shares, along with this and that. Then somebody in the audience, looking at his BlackBerry, pipes up: "May I ask something, sir? During the 20 minutes you've spent speaking, your stock has fallen roughly 55%." At that point everybody bolted from the room. My thinking is simply that we make an effort to operate with transparency and honesty. Sure, our share price might drop sharply over this, and folks may conclude that I, Gary Friedman, lacked enthusiasm. In all my 22 years with this company, I have never felt this energized — I said as much to my team. At the same time, I have never faced this much ambiguity, correct? So I believe what's needed at this moment is a genuinely even-handed perspective.

Thanks a lot for being brutally honest — it stings a bit, but it's something we need to hear. So my question is this, Gary: during the last 2 events, you mentioned two things that affect your business — market volatility and high net worth, ultra-high net worth individuals. It sounds as though that's already reflected in the guide. Then the second thing would be a slowdown in high-end housing, which so far we haven't really seen. How much of that might be sitting in the guidance? And then, Jack, regarding that $2 billion term loan you took out, what are the plans for it? Also, RH San Francisco is awesome.

Thank you. Appreciate it. Yeah. Honestly, I'd love to be able to share more with you. Everything we've come up with is reflected in what we've assumed; but as I mentioned, so much is shifting, and so much is still taking shape. I mean, you've got to wonder, when the next inflation figures come out, which direction will they point? What's actually going on right now? I mean, our goal is simply to put together a strategy and an outlook that gives us the best shot at succeeding; so we've considered every angle we can. I'm not sure. Things like major macroeconomic shifts are beyond our ability to influence or predict before they show up. I mean, the Fed can't pull that off. Janet Yellen can't pull that off. Honestly, I doubt anyone listening in on this call is capable of pulling that off. Nobody truly nails these situations. That said, if you've done the work ahead of time, you can find a way to profit no matter what conditions you're facing. That's really the whole point of what we're doing. Our goal is simply to put ourselves where we can succeed — where we're able to seize whatever chances come our way. Patience is going to be our approach. To some folks, that might come across as moving slowly. But here's how we like to put it: hold off until you spot it. So we'll hold and watch for it, and once we spot it, we act. And typically, when we act, we act with real force. At this moment, it's somewhat difficult to perceive; plus, whenever your company suddenly declines by ten to twelve points in a single night, and there's simply additional developments and turbulence across the globe, you just — you have to alter your approach. Unless you make changes, nothing will improve. Therefore, we are making changes; we're modifying and improvising in real time. We couldn't be more thrilled. However, this is — listen, this mirrors a discussion I previously had with our Board. My opening remark was, "Hey, throughout my twenty-two years, I have never felt this enthusiastic at any point in my profession. Let me explain why." Everything I've described to you, all of it is occurring, incidentally. Nearly all of it is going to occur within the coming twelve weeks — the majority of it, anyway. You should also anticipate a handful of items unfolding during autumn, plus some activity in Palo Alto and similar locations. Beyond that — and in the same vein, given all the elements at play, like rising interest rates, inflation that's running unchecked, unrest, and so on — the situation you're characterizing as unfolding in the housing market is actually a healthy thing. When things get too hot, they generally settle back down; so again, I'm not trying to frighten anybody. I'm just trying to lay it out. What I'm saying is, the numbers we're looking at are right there for you to see too. Previously, when homes received several offers in this manner, when values climbed in this fashion, not — there wasn't a pleasant reverse side to that; so it's like — yet circumstances differ now. Our economy is not the same. Fresh categories of enterprises exist. Fresh categories of wealth generation exist. Fresh categories of output efficiency exist, forces propelling the economy; so I'm unsure. Are there sufficient positive elements, be it within our company or elsewhere in the economy that push us forward and we avoid a recession, we avoid a downturn? Does Ukraine reach resolution faster? I'm unsure. I mean, perhaps I ought to be the person — perhaps we ought to be the ones posing questions to you folks today; we invested considerable time — I recorded every detail we possess. If you folks possess information and hold opinions, we would be delighted to learn your thoughts.

Adrienne, I believe that also takes care of what you asked regarding our term loan plan. What we did was bring in that capital so we'd have optionality and could act opportunistically. Gary put it nicely, I think, in terms of how we're approaching this — we simply wait until we see it before making a move. So once we do move, you'll be aware.

But is there any intention to pay off the converts ahead of schedule?

Yeah. A whole range of possibilities. But then again — see, windows exist, so within our company certain moves become possible. There are — expiring options on my end are forcing me into a spot where I have to unload about 1 million shares of stock, that whole set of issues. Too many events can't all land at once with clashes breaking out. Buying back stock while the CEO sells stock probably isn't appropriate, is it? So yeah, there are simply many factors you must weigh, correct? That means we lack total freedom across those choices. And so — but look, we'll make — my belief is we'll make terrific choices for our shareholders. Were selling the stock not required of me, sell it I would not. I even figured perhaps there's a route to extend those options. Then I learned, no, that falls under the IRS. Past 10 years the IRS won't permit you to go, and at that point the options expire. So November of this year is when my option expires, and getting it handled sooner seems wiser so that greater operating flexibility becomes available. So in fact my circumstances do constrain us somewhat.

Great; so just — Gary, I suppose, considering all the commotion that's happening, clearly, as you've walked through in great depth during this call, turbulence, supply chain struggles, all kinds of things, I suppose, thinking about where the industry stands and considering the premium and luxury segment, at least within the U.S., it remains fairly fragmented. I suppose perhaps somewhat skeptically, do you believe you folks could have a larger chance to capture share? How do you figure that will unfold? How has that shifted across the last, I don't know, couple of years, considering the upcoming, I don't know, 2 to 3?

I believe we feel fantastic regarding the upcoming 2 to 3 years. So I believe we'll capture share regardless of the environment, Curtis, regardless of the environment. Again, it's — these are all sort of temporary matters. Whether it's the war, the inflation and things of that nature, none of this lasts forever. It's just that there are many things happening simultaneously. And the supply chain, everything else, you simply must steer through as best you can or you could sort of ruin your business model and commit certain strategic errors. It's one thing — all of us are going to commit plenty of errors; and I tell everyone at the company, the sole distinction between their errors and my errors is my errors sort of cost the company far more money than their errors. So together, as a leadership team, we have thousands of people at this company whose livelihood depends on our choices. And we want to make excellent long-term choices; we're not here for a brief period of time. I've been here 22 years; and I'm glancing over at Stef, who's been here — who serves as our Chief Gallery Officer, Stefan Duban, who's been here 22 years, slightly longer than me, I believe, correct? Eri has been here 15?

16.

16 years. Jack, who has actually been around for 10 or 11, though — well, not officially. He was at BofA...