RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon, everybody. We appreciate you being here for the earnings conference call covering our first quarter of 2022. With me on the line today are Gary Friedman, our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to getting underway, please let me draw your attention to our legal disclaimer: certain remarks we make today will be forward-looking, as that term is defined under the federal securities laws, including remarks concerning the outlook for our business and other topics addressed in the press release we issued today. A number of risks and uncertainties are tied to these forward-looking statements, and those could lead to actual results differing materially. For a fuller account of the risk factors that might impact our results, please see our SEC filings and the press release we issued today. Kindly also keep in mind that these forward-looking statements represent our views only as of today's call date, and we expect to have no obligation to revise them or to publicly release the results of any revision in response to new information or future events; additionally, non-GAAP financial measures may come up during this call, and those adjust our GAAP results so that the impact of certain items is removed. Additional details about these non-GAAP financial measures, along with the reconciliation of the non-GAAP to GAAP measures, can be found in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. Having said that, I'll hand the call over to Gary.

Alright. Thanks, Allison, and good afternoon to all of you. We appreciate you being here. Following our usual format, we'll begin with the shareholder letter. To our team members, partners, and stockholders, we're happy to share that we've delivered yet another record quarter, with revenue climbing 11% to $957 million, compared to $861 million during the same period last year, and rising 98% against 2020 — one of the strongest two-year growth rates seen in our sector. Gross margin grew 480 basis points in Q1, fueled by a 390 basis point gain in product margins and our decision to hold back on promotions as demand began to soften. Even though discounting has come back broadly across the industry — you can see it in the flood of sale emails in our inboxes — and although there could be near-term danger of losing market share by refraining from promotions, we see a real long-term hazard of brand deterioration and model disruption once you head down that road. That kind of discipline and long-term perspective is what has allowed us to establish new benchmarks for financial results in the home furnishings space, and our numbers today resemble those of a top luxury brand, with first quarter adjusted operating margin hitting 24.7% against 22.6% the prior year. These results include investments tied to launching RH San Francisco and the RH Guesthouse, building out RH International, and expanding RH In Your Home, which accounted for roughly 200 of the 270 basis points of SG&A deleverage this quarter; we now expect SG&A as a percentage of revenue to reach its high point during Q2 and Q3 as we resume mailing source books following a 2-year pause. Come the fourth quarter, we anticipate SG&A as a percentage of revenue will match last year's level; we produced $107 million of free cash flow in Q1, closing the quarter with net debt of $166 million, $2.24 billion in cash on our balance sheet, and trailing twelve-month adjusted EBITDA of $1.13 billion. We used $481 million in cash to buy back $180 million of our outstanding convertible notes, eliminate all $3.4 million of outstanding warrants, and unwind the remaining bond hedges. After these moves, $101 million of convertible notes remain outstanding. Fiscal 2022 outlook. Even with our record financial results in the first quarter, we've seen demand trends weaken, starting when Russia invaded Ukraine and slowing further amid market disruption over the past several months. Given where our trends stand now and the uncertain macroeconomic backdrop, here is our revised outlook for the second quarter of fiscal 2022. Second quarter net revenue ranging from -1% to -3%, compared to up 39% last year, with adjusted operating margin between 23% and 23.5%, versus 26.6% a year ago. Fiscal 2022 net revenue growth ranging from 0% to 2%, versus up 32% last year, with adjusted operating margin between 23% and 24%, versus 25.6% a year ago. We do anticipate that over the coming few quarters we'll face a near-term hurdle, since we're up against the remarkable expansion created by the pandemic-era shift in where people spent, while we give up some lower-value share of the market as we keep lifting our quality, and steer through a number of macroeconomic obstacles — yet we're confident that the investments we're making for the long haul will let us keep delivering results that lead the industry. 2022, the year of the new. As we have said, although the virus pushed back a lot of our plans, it never threw them off course. We see 2022 as the start of the following phase of growth and innovation for the RH brand. 2022, the year of the new, brings the May debut of RH San Francisco, the gallery at the historic Bethlehem Steel Building, the most remarkable new bespoke gallery we have ever created. The arrival of RH Contemporary, the most riveting and potentially market-shaking product launch in our company's history. The upgrading of RH Interiors and RH Modern brings fresh collections along with better quality, arriving this fall. The revealing of our very first RH Guesthouse in New York, a groundbreaking new hospitality idea aimed at travelers who want privacy and luxury within the $200 billion North American hotel market. The addition of a refined new live fire restaurant at RH San Francisco, with intentions to launch in RH England and the New York Guesthouse. The first appearance of a champagne and caviar concept, opening in the New York Guesthouse, with intentions to grow into our upcoming galleries in Paris, London, Milan, and Aspen. The premiere of the World of RH, which went live today, in case you haven't visited our website yet. It's a stunning visual journey that carries you into the products, places, and spaces of our brand. The takeoff of RH One and RH Two, our custom G650 and G550 that will be offered for charter later this year. The christening of RH Three, our luxury yacht that will be offered for charter across the Mediterranean and Caribbean, where the wealthy and affluent travel and vacation. The introduction of RH In Your Home, a distinctive and unforgettable experience in which brand ambassadors oversee every aspect of the delivery and carry the selling experience into the home. The worldwide growth of the RH brand, starting with the opening of RH England, the gallery at the historic Aynho Park, a magical seventeenth century 73-acre estate in the English countryside that will bring RH to the UK in dramatic and unforgettable style. The opening of RH Palo Alto, the gallery at Stanford Shopping Center, which will stand for the next stage in the evolution of our highly productive prototype galleries. RH's business vision and ecosystem, the long view. We think there are people who have taste but lack scale, and people who have scale but lack taste, and the notion of scaling taste is vast and far-reaching. Our aim is to establish RH as the arbiter of taste for the home, which has shown itself to be both disruptive and lucrative as we pursue our mission to build the most admired brand in the world. The top designers, artisans, and manufacturers are drawn to our brand, and through our integrated platform their work gets scaled up and made more valuable, which lets RH put together the most compelling assortment of luxury home products anywhere in the world. Introducing RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, plus other new collections slated to debut across the coming decade, will carry forward our push to elevate and grow what we offer. Revenues of $5 billion-$6 billion in North America and $20 billion-$25 billion globally will be unlocked by our intent to launch immersive design galleries in each major market, which unlocks the worth of our enormous assortment. Rather than stopping at curating and selling products, our strategy takes the brand toward conceptualizing and selling spaces, creating an ecosystem made up of products, places, services, and spaces that cements RH as a worldwide thought leader, a mark of taste, and a placemaker. Architecturally inspiring galleries make our products elevated and more valuable, and our interior design services along with a seamlessly integrated hospitality experience elevate and add further value to those galleries.

When we push past the walls of our galleries and move into RH Guesthouse, that hospitality play keeps lifting the RH name higher, and what we're after is a brand-new market altogether — one built for travelers chasing seclusion and high-end comfort, inside North America's hotel sector, which is worth $200 billion. On top of that, we're crafting unique concepts such as RH Yountville, where food, wine, art, and design come together in the Napa Valley. Our private planes go by RH One and RH Two, and RH Three is our luxury yacht, which can be chartered around the Caribbean and the Mediterranean — the very places well-off, affluent people head for their getaways. Through these immersive environments, shoppers — first-timers or loyalists alike — get to see the fearless, constantly evolving leadership we deliver in architecture, interiors, and landscape architecture. That brings us to our long-term pursuit: building inside our galleries the world's first platform anywhere that serves customers across those three disciplines, raising the RH name and strengthening our core business with new revenue streams, all the while disrupting and rewriting the playbook across multiple industries. We've entered a new chapter in which we conceive of and sell complete spaces, rather than merely furniture. Through RH Residences, we move past the $170 billion home furnishings segment and into the $1.7 trillion North American housing market. RH Residences delivers fully furnished luxury homes, condominiums, and apartments, together with integrated services that hand discerning, time-poor buyers both taste and time value. Once we launch the World of RH, the entire strategy goes digital — an online destination where customers can discover our brand and be inspired by its depth and dimension. When RH Media arrives, it will further cement our reputation as an arbiter of good taste — this content platform will shine a light on the boldest, most influential figures shaping architecture and design right now. By extending the RH ecosystem across the globe, we unlock a market opportunity valued at $7-$10 trillion, one of the largest and most valuable that any brand addresses anywhere on earth. Should we capture merely 1% of that worldwide market, that comes to a $70-$100 billion opportunity. Through our ecosystem — products, places, services, and spaces — customers feel moved to dream, design, dine, travel, and live within a world RH has thoughtfully curated, forging an emotional connection no rival brand on earth can equal. Taste resists definition, and as we see it, RH is better positioned than anyone to create an ecosystem in which taste turns inclusive — and by doing so, elevate and raise the value of how we live. We're climbing the luxury mountain and building a brand that stands alone. Every great luxury house — Chanel, Cartier, Aston Martin, Audemars Piguet, Louis Vuitton, Loro Piana, Harry Winston, Hermès — began at that mountain's summit. No brand has ever attempted that ascent, and the incumbents would prefer nobody does. The area where they live is not the same as ours, and invitations to their gatherings don't come our way. We recognize that anything we release into the world must be so remarkable that it compels others to rethink who we are and what we're capable of, and it moves those sitting at the very top to grant us their esteem. We likewise know that a path such as this is not meant for those easily discouraged. As we climb higher, oxygen grows thinner and fewer openings appear. Two decades back, we launched this undertaking driven by one goal: to remake a company that stood at the edge of failure, worth merely $20 million in market cap, with a box of Oxydol laundry detergent on the catalog's front, into the top luxury home brand worldwide — a business now measured against a $7 trillion market and $70 billion in opportunity, where even a $12 million misstep or a $7 million win teaches something. The knowledge we've gained, the passion and resolve, the courage required, and the wounds collected from being knocked down 10 times yet getting up 11 create the mental and moral resilience that builds character in individuals and shapes cultures inside companies. Such lessons cannot be taught in any classroom or delivered by any business management program; they must be earned by building something or by standing at the summit. Onward, Team RH. Seize the day. At this point, operator, let's open the line for questions.

Hello, everybody. Simeon Gutman here. Gary, my initial question concerns the promotional landscape and the restraint you mentioned. I suppose I'm new to this. Could you help me understand what level of market share loss you're willing to tolerate? Is that position firm, or would you adjust to conditions if necessary, should things keep moving toward a more promotional direction? That was my first question.

How you answer probably hinges on what "if you have to" means to you. We're in a genuinely strong spot, with the industry's best operating model by a wide margin, a very solid balance sheet, and plenty of optionality to generate value and seize opportunities across virtually any set of conditions. When you're attempting to establish a brand such as ours and, as we put it, climb the luxury mountain, the worst thing you can do is abandon discipline around brand perception and desirability — you simply cannot slip into a discounting period. That said, if something cataclysmic happened, the world were ending, and staying liquid became essential, would we act to clear inventory and convert it to cash? Absolutely. Letting the company go bankrupt is not an option. The course we're taking is a lengthy one. This is a very long journey, not a brief one. It isn't measured year to year or quarter to quarter. It spans decade to decade, and it's about creating a brand without equal and building something genuinely sustainable in this world. Few brands have managed that. Under 1% of retail businesses that are ever launched accomplish it. I sometimes joke that a retail mall resembles a graveyard for fleeting concepts, since the majority of retail brands don't survive even the length of their lease. Look back 10 years and stroll through a mall — you'd be amazed at how much has vanished. Typically 65%-70% of a retail shopping center turns over, while only a small number of businesses persist. That's the kind of thing we're working to build. We're ready to make choices with the long term in mind. It has treated us well so far, and I'm confident it will continue to do so going forward.

Appreciate it. On the second question, about repurchasing stock — historically you've been quite precise, even stringent, regarding when you act. Can you tell us anything about how we ought to frame the idea of deploying that cash to our benefit?

Sure. The reason we brought in that capital was to give ourselves optionality. During periods of uncertainty, quite a few paths are open to us, and plenty of chances will arise to view assets differently; they'll appear far more valuable than they did previously. That could take the form of giving money back to stockholders via buybacks in order to generate value, or it could mean seizing the right moment for property transactions and taking advantage of what I believe is bound to be a tough real estate climate across the coming 12 to 24 months, or it could mean purchases of other businesses or alternative kinds of value-adding moves that build long-term worth for our stockholders. As Warren Buffett puts it, be fearful while others are greedy, and be greedy while others are fearful. Our aim is to be ready with the optionality to take actions that position this company to gain over the long haul.

Good afternoon, Gary and Jack. Gary, I was wondering whether you might offer a bit of detail on what you expect RH Contemporary and RH England to contribute over the rest of the year, plus any fresh thinking on what RH England might do in sales during year one, now that the opening is getting close.

Sure. That's a fair question. Here's how we look at Contemporary: it's without doubt the finest work we've ever produced, and I'd say it represents the most dramatic step forward for our brand in the direction we're headed — whether you're talking about sofas made entirely in Italy, or fabrics of the highest quality anywhere in the world, with Holland & Sherry now part of the mix, or the travertine collection you've already seen. Everything here is bespoke — bespoke collections, bespoke furniture — and the designers inside our company who got an early look, especially those who traveled to RH San Francisco to help set up the gallery, have never been more enthusiastic, and they're convinced our customers are simply going to love it. We're also going to unlock a completely new market. That's genuinely what we've heard as well from other very high-end interior designers, people we've brought through RH San Francisco, given a tour, and shown even the wider collection. Our excitement about Contemporary couldn't be greater. Keep in mind that our business — that is, getting the most out of our business — really hinges on the goods being seen at retail. There's a limit to how much you can accomplish in an online business. It's funny, over roughly the last 8 or 10 years — I'm not sure of the exact figure — everyone figured we were the crazy ones for opening retail stores while others were shrinking stores and shutting stores, and meanwhile we've been building the biggest specialty stores, likely the biggest in our industry's history, certainly in the history of the world across all retail industries. That's turned out to be extremely beneficial and extremely accretive to our growth and to our operating model. As people are discovering, it's likely the cheapest way there is to acquire a customer, in any form you can take. That's why there's a rush toward opening retail stores. Getting Contemporary into retail will be essential if we want to grasp what Contemporary can become. We'll get early reads. Obviously we have all the math, and we can extrapolate how something performs when it's presented online and in our source books, then translate that into what it'll be worth. We actually prefer launching goods in our source book and online, because that lets us do a much better job projecting inventory and placing bets. This is one we'll move on pretty quickly. We've already kind of got inventory on order. And obviously, that has been tough during the past several months. We have inventory on order so we can get product in. At the moment it sits in RH San Francisco, but we need to move product into New York, into Chicago, West Palm — a few of our largest and most vital galleries and markets — since often our clients travel within their region, correct? They might be working with a designer located in Greenwich, Connecticut, or New Jersey, or some other place where we may still have a legacy store, and they'll arrange day trips and bring customers to view the product in person. Having product available regionally matters enormously, yet placing product in every gallery, I believe, will be transformational. First you must step back and ask, what does the larger picture look like? Particularly regarding how our demand compares with others, how we are doing, and so forth — what is happening in the external market? Keep in mind that we made certain crucial decisions when COVID began, and our belief was that COVID would be temporary. People were telling me, "Oh, this is the decade of home. It's going to be, well, it's going to remain this way forever." I replied, "Look, I've spent a long time in this business. Nothing stays the same forever. Everything is constantly shifting." Our perspective was that the COVID boost would likely endure roughly a year, and it stretched an additional year because of all the variants; we kept going in and out of offices. Stores opened and shut. Restaurants were closed, then at 25%, then at 50% occupancy. We've experienced a highly chaotic couple of years. What we did was quite different, I believe, from what many others did. We chose not to attempt to optimize the COVID period. We chose not to pursue revenues and pursue demand during that stretch. We said, "Look, demand already exceeds what we could actually fulfill. Why not use this period far more strategically and concentrate on shifting some truly big rocks that will establish the next decade of growth at RH?" That is what we did. We put all our energy into elevating contemporary to a new level; we actually didn't mail a Sourcebook during the past two years and had no newness during the past two years. Now consider that. Essentially no marketing and no newness, yet we beat everyone in our sector. Correct? We achieved 42% two-year growth through COVID. Apart from Wayfair, which isn't exactly a comparable business model, right? Wayfair sold every kind of item tied to the pandemic. All sorts of categories that gained enormously. Just like an Etsy or similar players. So look, when you're selling masks or a whole bunch of other stuff folks suddenly required once a pandemic hit, chances are you're going to do better than most. But take a look at the retailers dealing in home furnishings — any of those names, really — and we beat every single one of them, all while having nothing new and no Sourcebooks at all. So what does that tell you? It tells you we likely let demand slip away, because had we come out with newness back then, that demand would've been incremental; revenues wouldn't have gone up incrementally, but the backlog might have grown larger. That's my assumption, anyway. What we actually did, though, was push contemporary somewhere beyond anything we could have dreamed up. We re-architected how product gets done on the inside; we re-architected portions of our center of innovation so teams would work and collaborate differently, weaving product together in a fresh way. I believe we built something. RH Contemporary, I'd say, is practically a brand-new company sitting inside the company. Just look at the assortment — head online, flip through the source book, and then tell me: think about every home brand that may have come along over the past 5 or 10 years. All of them, right?

So, look, there are all sorts of these that got their start on the web. They've got a catalog, maybe a store or two. You look at that assortment, and you stack it up against Contemporary, which, by the way, represents just 70% of the collection, because the vendors just — you know, we didn't want to put items in the book and online that weren't going to ship for six months, since the supply chain is still somewhat jammed up. We see Contemporary as almost a new company inside the company. Our belief is it's going to be larger than Modern. Modern right now is about a billion-dollar business, right? Think about that. Modern came onto the scene around late 2015, and if you properly attribute every appropriate sale to it — including chunks of what we do in textiles, in rugs, and so on, not just furniture and lighting (and honestly only part of lighting counts too) — then modern really transformed our business in a huge way. It changed the game for RH and opened up the market to us on a much broader scale. Customers started seeing us in an entirely new light. In my opinion, contemporary is going to have an even bigger effect on this company than modern did. Yeah, I mean, absolutely — it matters for how it's designed, and it matters for how well it's built. Over the years, people have criticized us, saying that goods manufactured in China can't match the quality of those made in America — that's simply not accurate. Take the iPhone: it's assembled in China, and it's the most impressive technology anywhere in the world. There are countless excellent products coming out of China. The people there are incredibly diligent and hardworking; sure, if you wanted to, you could turn out tons of low-quality stuff over there — excuse the phrasing — but that's simply not our approach. Alternatively, folks are going to see the label stating it comes from Vietnam. A number of the top furniture makers and craftspeople globally, based in the UK and Europe, relocated to Vietnam ages ago in order to build extremely premium furniture. Does low-cost furniture get produced in Vietnam? Without a doubt, that's true. Incidentally, inexpensive furniture is also produced within the United States. Inexpensive goods are manufactured in every location. What matters most is understanding which places to visit and, well, where to create items of superior quality. However, if you abruptly decide that a whole product area—like the one we handle in upholstery—will be produced entirely within Italy, well, Italians possess an eye for design and craftsmanship that likely surpasses anyone else globally. After all, that nation gave us Da Vinci, Michelangelo, and numerous others responsible for some of history’s most remarkable architecture, art, and design, among other things. To me, this communicates something entirely fresh. I think it's probably around page four of the source book, where you'll see "Made in Italy." There you have a couple of families—two businesses, Italian families—who've spent generations making the best goods you can find, sitting on our couch next to an article written about them. I think that says something entirely different. Then as you keep going and get to the spread, the story on Holland & Sherry, it mentions the noble fibers of Savile Row. You know, once you spot that fabric on a suit form, it's being crafted, you know, in the place where the finest suits in the world are made. This is possibly the greatest fabric house on earth. It is the, you know, preferred fabric house and fabric among the top tier of interior design. You know, the absolute best designers. I think many people's eyes are going to open wide when they flip through either online or, you know, or in our source book and discover that we're offering Holland & Sherry fabrics. No different from what was likely 10 years ago now when we began offering Perennials, correct? We changed. Here's the interesting part about what happened with Perennials: a lot of folks figured we'd wipe out that brand's trade business. Instead it grew, and we ended up capturing a big share of it. My guess is Holland & Sherry will follow the same path, though RH Contemporary sets a completely different standard. As for how it translates into demand — there's a limit to how much we can stir up through the website and our source books. Even so, I'd tell you I've never seen our designers, teams, and galleries champion something of ours this strongly. Okay, so, we have an amazing — as a company, we don't actually have a marketing department. What we have is a truth group. So we've got this fantastic set of truth advocates who will be talking about the work we do, right, and the things we're doing. My sense is the reaction will be pretty positive, but the goods also need to keep coming in steadily. There's still — you know, getting everything in stock is going to take a month or two. Typically our business builds up over the course of several months. Around the third month, you start to genuinely get a handle on what's happening, since people are engaged in projects rather than simply buying items. Eri, come autumn, when do we expect we'll be ready to begin the rollout? Is September the right month to have in mind?

Yeah.

Most likely September. What we're going to do is not just bring contemporary into the company — it'll likely turn into, I'd say, the opening third of each gallery. If it's a legacy gallery that happens to be, you know, 6,000 sq ft, then the first 2,000 sq ft or more is going to be contemporary. You know, in the case of a new design gallery, the whole first floor, I'd say, will be converted to contemporary. That's the level of confidence we have in this product line. Once Q3 arrives, you're genuinely going to grasp the demand. Another move we're making is — if you recall, I want to say 2010, 2011, when every store got remodeled, we've been through that several times. Do you remember when all our galleries turned gray, right? Every old white fixture on the walls came out. We, you know, did away with the silver sage and white paint; the floors got stained, and we made the whole thing look new again. Well, what you're going to witness is us evolving in a really dramatic manner even in our legacy galleries. I mean, it's going to come across as a completely new company in Q3. Even a few of our newest galleries are going to transform quite, yeah, quite dramatically. Even New York at this moment, with floor one, has been repainted and.

Are we talking about the public side? Yeah.

That's right — and on top of that, $10 million.

We're gonna have RH Contemporary there by end of June.

Come the end of June, on the ground level in New York, you're going to see contemporary. You know, my sense is we've already gotten that first floor in New York painted. We sort of have this small internal approach to sort of removing the gray, though not removing all of it. In contemporary, you don't really notice much gray, correct? To me this feels like 2009, 2010, 2011, those years when we truly remade the whole company and the whole business. It's one of those, you know, hugely transformative periods. What you're going to witness isn't the brand merely evolving, you know, but rather a sort of evolution. There's going to be a huge shift, a real revolution, arriving in the second half of the year. My take is that during Q3, you'll truly get a feel for what the demand looks like. Then in Q4, contemporary starts having an impact on our revenues — though because we're still ramping up and shipping during that period, the effect will be on the smaller side as well. So it kicks in during Q4, and by the time next year arrives, contemporary becomes a force in our industry — and not just at RH, but across the whole industry — a force that transforms things. Now turning to RH England: I'm not going to devote as much time to England, but it does represent our first. You can likely sense that I have a fair amount of excitement about contemporary. As for RH England, the way I see it, it's much more than just a gallery, correct? This is genuinely about launching a store that represents not just a country but, in a lot of ways, an entire continent. The way we're doing this, I think, has a kind of inspiring, magical quality to it. Consider this: no one has ever put a retail store on a 73-acre estate in the English countryside dating back to the seventeenth century. Some folks will ask, "How can you be sure it will work?" Honestly, I can't be certain, but our history with ventures that had never been attempted before is pretty strong. If you happen to be on the West Coast, visit RH San Francisco — plenty of people thought that project was a mistake too, located in a section of San Francisco that no one had ever really explored. In my view, we've kicked off a complete reimagining of that entire waterfront area. That lease got signed at a point when nobody had any idea construction was coming. The way we saw it, we felt confident about reshaping that section of San Francisco and pulling off something remarkable, and we believed folks would show up. These days I'd call RH San Francisco the single most remarkable gallery in our entire company, the one that sparks the most inspiration, and it includes a fantastic new dining offering — that live fire restaurant we just launched. We're really happy with it. Okay, so, um, as far as feedback goes up to this point, I believe, well, we're seeing ratings of 4.5 and 4.8 on Yelp, along with some other platforms. That represents an entirely different standard for this brand when it comes to hospitality. There are also new wine bars and similar venues. England is unlike anything that has ever existed globally. It's an experience with many dimensions. At the location, we have 3 full hospitality concepts, and in addition, 2 smaller hospitality options. Out of those 3 primary concepts, 2 will open simultaneously with us. The last restaurant will require additional time. With this property, since it dates back to 1615, it’s a significant structure. In England, it’s classified as a grade one heritage building. For comparison, Buckingham Palace is also a grade one listed building. If you want to make any changes to a Grade I listed property, you basically need the Queen’s approval. It’s been moving more slowly than usual. That’s also due to COVID, when no one was working, or everyone preferred to handle things over Zoom. Honestly, any companies that plan to operate via Zoom going forward, best of luck with that. Thank goodness Elon Musk put out that message, right—like, you’re just going to mail it in. If you think things were better over the last two years, you're probably someone who avoids hard work. You're the kind of employee a company keeps around simply because they're on the payroll. Sure, we're happy to see the world getting back to how it was, since that makes it easier for us to complete our remaining tasks. The moment RH England opens its doors, my guess is it will set off a huge conversation. As for what the immediate demand will look like, I genuinely have no idea. This has us really excited, and the stuff that gets us excited tends to get other people excited too; we're aware that a lot of folks in England, and in London specifically, are already talking about it. I think we've now gotten clearance on the last few things we were waiting on. At this point, we're looking at wrapping up sometime near the end of August, and then we'll probably need about two to three weeks — call it three — to get a gallery of that type up and running. It could take a little longer given the two hospitality concepts involved. There will be a full restaurant in the mix. The Orangery will be opening its doors. The Loggia, which has a more casual feel, will also open, and a third restaurant is set to open as well. My guess is it arrives next spring. There's a chance it comes online during the winter, though opening out there then probably isn't ideal. It’ll be unlike anything else anywhere in the world, and I think we’ll generate a lot of enthusiasm. We’ll see some demand. It’s difficult to promise anything at this stage. It could cover a wide range, so it’s tough to predict what year one sales for RH England will be. I wish we could—I wish we were better at estimating things like that. That one is simply difficult for us. So yeah, we’ll see how it turns out. Within our organization, there's a saying we use: each of our plans is incorrect to some extent. What matters is whether we're right on strategy and right in terms of direction. When we are correct on both those fronts, we sort of start moving, and we move quite fast, after which we receive input. That is, we obtain genuine input along with genuine data, and at that point we sort of make do, adapt, conquer—adjust, in other words—and attempt to make things, well, remarkable. Still, we're thrilled about it. My belief is it will be the most incredible store ever to launch anywhere; saying that feels strange right after you've just opened RH San Francisco. Gary, thank you.

Excellent. I'm grateful you took my question, and I appreciate the acknowledgment of my Italian heritage on this call. I'd like to inquire about the revision to this year's guidance. Might you elaborate a bit further on the possible weakening in demand that's been observed recently? You provided such excellent detail when you last reported. What exactly are you witnessing in the business that leads 2Q revenue to be roughly flat, followed by a decline across the second half of the year? I suppose what I'm wondering is how much stems from a drop in demand as opposed to a possible postponement of certain new initiatives?

Yes, I don't, well, I'm not sure I possess additional detail to offer. What I mean is, demand decelerated when the war started. It grew even softer, as you know, over the following couple of months. Most of the story, I believe, has already been shared. I think our guidance reflects what we see at present. How do we, well, how will all of this play out? Nobody truly has that answer at this moment, in my view. This marks the first occasion anyone has witnessed inflation of this kind, you know, in 42 years, correct? I wonder, like, how many individuals, you know, on this call were adults 42 years ago? Not many, correct? Not adults possessing much wisdom, you know? At least that's my favorite thing to say. The folks who genuinely possessed wisdom 42 years ago, you know, are 80, 90, or 100 years old. There simply aren't many of those individuals who remain highly active in decision-making positions. I suppose, like, we have a president who's, you know, at minimum he may have been old enough to sort of understand what's happening, but it doesn't appear they know what to do. Janet Yellen at last did come forward and state, "I was wrong." I mean, everyone is granting her all this praise for the mea culpa. Like, why did it take so long? Like, how obvious did it need to be to sort of acknowledge you were wrong, correct? Like, how long ago did inflation move from, you know, 2% to 4%, 4% to 7.4%, and then 8.5%. Yeah, one must wonder, like, where does inflation truly stand today? I've had an opportunity to engage, you know, at a dinner down in Woodside with a few, you know, genuinely fascinating people in a small group, you know, from, you know, primarily North America, plus somebody who leads one of the biggest companies in the world out of China; and you know, one of the biggest venture capitalists, you know, cryptocurrency experts, you know, and so forth. And you know, each of us got to pose several questions. As we were finishing up late that evening, I said, "Alright, nobody leaves this room until they share their take on the current situation. What's your read? What's happening with the economy?" My view is — and it matches what I experienced when I was fortunate enough to be at the WndrCo Conference that Jeffrey Katzenberg hosted not long ago, which brought together 150 attendees from across the globe — I believe many folks aren't quite sure where things stand. If you examine the current landscape, take inflation: it's really elevated. Will it decline? Has it peaked? If you want my read on what the majority of those I speak with — business leaders, those managing large business portfolios, venture capitalists included — they'll tell you inflation is actually higher than the official figures suggest, and we'd agree with that assessment. We recognize the Fed must increase rates; we recognize that when rates go up, a recession typically follows. It's certainly not favorable for housing. Anyone who believes higher rates help the housing market simply hasn't lived long enough. So you've got rates climbing. Meanwhile the government has been engaged in quantitative easing, and then planned to tighten — that's bad for the debt market. The price of money will simply skyrocket across the board, correct? There are many questions around whether we've experienced multiple contractions and whether we're in something like an earnings recession relative to the peaks, and where things head next. Nobody has the answer. Nobody possesses a crystal ball. All we can do is examine the finest data available and attempt to generate the strongest projections and forecasts possible. This is a moment to stay extremely, in my view, extremely nimble; as we often say within the company, hope for peace, yet prepare for war. How do you get yourself ready for virtually anything and everything that might unfold in a market such as this? A piece of our approach involved raising capital. Be ready, keep our balance sheet ready. We want to safeguard the business model. We want to seize opportunities in an environment that could turn volatile. Sure, if unexpectedly, by some miracle, they discover how to resolve inflation without pushing rates up too far, and some magic solutions in the economy shift the picture, then we incurred a modest amount of interest expense. Alright, every bit of our term loan debt can be paid back. So, the cash isn’t being used. As of now, we haven’t used any of it. That money is in hand. At this point, we’re essentially paying to keep our options open. Our guidance reflects what we see as the best forecast for what’s ahead as of today, though today’s outlook is highly unpredictable. Extremely unpredictable. I’d call it twice as unpredictable for anyone involved in the home sector, since we’ve moved past COVID. Like everyone, we’re comparing against huge prior figures. Interest rates are climbing. We’re coming out of an incredibly intense stretch—a couple of years—for both home values and sales. Even if inventory is tight, that’s irrelevant when demand is weak. Many individuals relocated during the past several years. I doubt there will be anywhere close to the same level of relocating in America as before; we experienced an unprecedented wave of moves, particularly the shift from urban areas to suburban ones, which, as you know, greatly benefited both our company and our sector, correct? Picture folks possibly going from a 1,500 sq ft apartment to a 3,000 sq ft house, a 4,000 sq ft house. That calls for far more furniture. Are they heading back?

Sure, maybe they will. Will they head out and swap out every single item of furniture yet again? I can't say. What I figure is that not a lot of people are necessarily going to move back. I don't think there's some massive wave of individuals who are relocating. You know, I realize some have, you know, referenced studies, you know, that appeared on Google and the like. That study is from LendingTree, and, you know, by the way its date was January 11th; that is barely current. You know, if you're going to put your, you know, your faith in a January 11th item that LendingTree posted on Google, you know, good luck to you. You know, my hunch is there won't be a lot of moving back, and I don't think there will be anywhere near that level of activity. So what does a market like that demand? You have to be truly new and different, and that's exactly what we are. I mean, we'll be the most exciting story in what might be the least predictable market we've seen in 10 or 15 years, you know? I'm pleased with where we stand no matter how things play out. You know, so I'm, you know, I hate to say I'm indifferent, but I, you know, looking at the big picture, I am indifferent. You know, our long-term plan is remarkable. You know, what we're going to pull off over the next several years, the world has never seen anything like it. We're doing it with the best model in our industry by, you know, roughly 50%. You know, for those who think long term, there's no better place to invest your money. For those who get nervous about the short term, like, I don't know, don't put money into our sector. It's going to be pretty uncertain, I think, for at least all of this year, and at least until the government figures out what to do about inflation and how high interest rates have to rise. You know, if you go back to the seventies and eighties, you know, my team will crack up. I'm actually going to say this. I remember buying a water bed, you know, back when I was in college, and I was making payments. I bought a water bed for $125, and I was paying 26% interest, right? Credit cards carried, like, 28% or 32% interest. I believe by the time I finished paying off that water bed, it came to around $1,000, right? Years afterward. You know, are interest rates, you know, is the federal funds rate going to return to 20%? I doubt it. Is it going to remain under 4 or 5? I doubt that too. You know, I think we've got a long ways to go in raising interest rates to fight inflation. I think right now you simply have to be ready for anything. And by the way, all of this is coming from a guy who once paid $145 for a beanbag chair.

Excellent, I appreciate the thoroughness.

Hello there, many thanks. I've got one for Jack regarding the guidance. So, you provided us with certain key building block sales figures broken out by segment unit color on a quarterly basis, and that's quite useful. It appears you aren't expecting a great deal of gross margin erosion across the year. Clearly, 1Q is excellent. I'm curious about what provides that sense of reassurance, considering how demand has shifted recently and where inventory levels currently stand.

Yes, all of what I just mentioned. We've got phenomenal new products arriving that I believe will, you know, reshape our market. I think we'll be the most thrilling thing happening out there. It's genuinely a great moment to operate a membership model like ours. Our model lets customers obtain tremendous value and receive a discount when they sign up as an RH member. I'd say that's a competitive edge at present. There's plenty of RFC. Jack, would you like to—

Alright Chuck, I’m not certain whether this is a follow-up from you. On the promotional front, as you’re aware, we’ve already addressed that. Anyone participating in promotional activity clearly faces a risk factor there. Gary, I think, has covered that topic thoroughly. Beyond that, the question turns to which additional elements could influence margin — shipping expenses, occupancy costs, or any of those other pieces, for instance. Looking at the guidance specifically, might there be a slight amount of occupancy deleverage? That’s possible. The real point is that you have the steps we’ve implemented regarding product margin, and we’re able to observe those persisting and accumulating. That, in my view, simply mirrors the $8 million model we’ve built.

All right, excellent. Yeah, I simply hoped to get some clarity. And then, reflecting on Q1, you came in well ahead of what you'd targeted, with an 11% increase. As I recall, the target stood at 7%-8%. What I'd like to know is what portion of that came from working through backlogs as opposed to, you know, the demand patterns we're seeing right now across the quarter. How should we view backlog positions at present and looking ahead a couple of quarters? Thanks.

Yeah. I'd say a portion of the backlog relief definitely did happen in Q1, that

You’re pointing to backlogs as the reason for the beat.

That was a benefit for us.

Yes.

So, if you consider that backlog of $200 million, part of it — roughly $20 million to $30 million — was handled during Q1, and a substantial portion still remains. Without a doubt, as Gary just pointed out, a chunk of the beat — in fact, the largest chunk — stems from that backlog. There's still more ahead on that front.

Yeah. It wasn't demand, you know, demand going up didn't do us any favors.

Exactly.

Yeah. It was things shipped faster.

Thanks a lot for fielding that. So, I suppose to whatever extent you can break it down, just considering the slowdown you've observed — and look, we don't have to dig into specific figures or anything — but I'm just kind of wondering how widespread it's been throughout your customer base, right, whether by demographic groups, by income brackets, or anything around regional variation. Just sort of curious how that shakes out, or simply how broad the scope is, regarding the shifts in demand you've been seeing.

Yeah, well. I mean, there are a few minor regional variations. You know, you've got.

There always are.

There always are, yeah.

Yeah.

And so-

Curtis, this isn't a kind of business where, you know, we're selling winter coats and, you know, the weather's great. Once again, it's those regional variations that are happening all the time, and it isn't in some way, you know. Again, there could be differences, but that doesn't push you to necessarily, you know, run or steer your company in another manner.

Yeah. But, you know, folks down in Texas and in spots similar to that are going to be really pleased at the moment. Oil prices are looking pretty solid.

Yeah.

So, there are certain tailwinds out there, and they're providing a boost to particular businesses. Take Florida — clearly that's due to all the migration — and Texas, where plenty of folks continue to put down roots. Those markets, I believe, are going to perform better, and they're tied to oil. Oil has a major impact on South America. South America has a massive effect on what we do in Florida, and it also gives our Texas operations a lift. Canada stands to gain when oil prices climb. Demographically speaking, there's always going to be some shifting around. At the high end, people will sometimes come to us and say, "Hey, luxury is performing really well. Aren't you a luxury brand? Don't lump the apparel sector in with the home sector. Those two are nothing alike. Think about it — how many folks picked up new clothing across the past 24 months when nobody was going anywhere? Did anyone attend a wedding over the past couple of years? Did anyone go to any events over the past couple of years? What about dinner parties? Nope. We had to skip a lot of store opening events; eventually we did hold an event in San Francisco. Off came the masks. Mask mandates ended. Apparel sales ought to have exploded. Stores had their doors shut. Nope. Everyone's at home. People were picking up Lululemon and similar brands. That was essentially the national uniform at the high end. Now, sure, luxury brands are going to perform well. Absolutely, they may face challenges and shutdowns in China and that sort of thing, but travel is going to explode. Luxury hotels are going to perform really well. Luxury apparel is going to perform really well. Luxury home is an entirely separate industry. So you have to examine it in a very particular manner to grasp it. It astonishes me how many folks think, like, gee, Hermès and Louis Vuitton and Cartier are posting strong numbers at the moment. Why are you soft? I don't. Sometimes I just want to hang up the phone. That's such a terrible question. Things are what they are. The data sitting in the market is crystal clear. Right now, it isn't really good for our industry. Perhaps our demand is going to appear softer than others across some stretch of time? Yes. Again, we rolled out zero new products for 2 years. During the first quarter, that turned into 3 years without any new product up until the Contemporary launch we have now. Yeah, perhaps we're surrendering some share since we've had nothing new. I realize we're losing some share since we aren't running promotions, and, you know, that's clear. People keep saying, "Hey, we're never going back to those site-wide promotions." All right, fine, got it. But you still sent me 34 sale emails last month — sometimes multiple in a single day. So here's my take: you can figure out who's going to run promotions and who isn't just by watching the gross margin line. I've never seen a long-term strategy work out well when the plan is to push your business through promotions and then maybe cover the extra expense with the added volume. That approach can't last forever. Usually it becomes a downward spiral. The only ones who've promoted their way to greatness are discounters. When your goal is creating enduring premium labels—and even more so a true luxury house—you face choices that others simply don't. As I've said, we're traveling a road nobody has ever tried to travel. This is a mountain nobody has climbed. What we do will look nothing like what anyone else does. The calls we make will be unlike the calls anyone else makes. It truly doesn't bother me if our first quarter looks weaker than our competitors', or even a chunk of the second quarter. That's fine by me. For three straight years I had nothing fresh to offer. Typically, new products contribute roughly five percentage points to our business each year—possibly a bit more. One could make the case, wow, look at what happened in Q1. When you add it all up, that works out to between 15 and 20 points. For three years, nothing new has come along. Starting at this moment, that's different.

Got it. I appreciate the extra detail there. Let me ask something very fast. I only want to confirm my timeline is accurate. Regarding when Aynho Park will open, it sounds like that's going to be in the fall. I wasn't totally certain what date you have in mind. Is that right?

According to our construction crew — given that we only received our final approvals last week — well, honestly, getting even basic approvals has been incredible. This is a 16th-century grade one heritage property located in the English countryside. Plenty of folks don't even want to do a site visit, much less come take a look at anything. I sympathize with our team. I feel badly, since I've pushed them quite hard, and I say, "All right, I understand." I get what they're up against. It appears the project will be finished in late August, and roughly three weeks will be required to assemble everything. I would say early to mid-September, we'll probably — Stefan is sitting here, and he's nodding. I'm not sure I trust that, either. No, I believe we will absolutely be open during September — sometime in September, I think.

What a lovely moment to be over in England. With any luck, the weather cooperates. Typically, September offers wonderful conditions there, you know, in England. Let's hope that works out for you.

Yeah.

Best of luck, and thanks for taking my question.

Right. Whether it rains or not, we're going ahead with the opening. It's been far too long. Thank you.

Okay, thank you very much, everyone. As you keep making your way up that luxury peak, so to speak, what's your view on who your main customer is right now — would that be based on household income or net worth? The reason I ask is it really appears as though the people buying from you might be changing right before our eyes, particularly after you start moving into contemporary; that's the first question.

To be honest, nothing about how we see them has changed. As we continue that ascent up the luxury mountain — I say this to everyone, and I'm not certain I've ever actually mentioned it on a call — at this moment we are both giving share away and taking share, if you consider the climb we're making, right? While we're ascending that mountain, we're kind of handing share down to those below us as the brand rises. Quality keeps getting raised a notch, design keeps getting raised a notch, and we keep producing a luxury product and experience that's more desirable. And incidentally, that is precisely what has occurred for two decades. Right? We've been giving share away. Like, when I got here 22 years ago, a $999 chenille sofa was the top seller. You know? I can't recall the name. That green chenille sofa — the ugly one. Number one seller throughout the entire company. Today we don't offer a chenille sofa, or any sofa with a $999 price, right? But again, it's — we keep giving share off, leaving it behind, and what we're doing instead is picking up share upmarket. The arbitrage is what matters — a positive arbitrage, right? That's often how it works. Other times you could be slightly off. Sometimes, the portion of the market you gain can be smaller than the portion you give up. Even so, you have to stay dedicated to moving upward, correct? Think of it as attempting to summit Everest. There may come a moment when you're halted—perhaps because of harsh conditions or a mistake you made. You set off toward someplace, then lose some ground, lowering yourself along your line, and you've sort of got to climb your way back up. What we're engaged in is no simple stroll. This is not an easy stroll; it's a climb up a mountain that has never been conquered before. Nobody has taken a company similar to ours—given what we offer—and done this. When I came on board, the top-selling product in the whole company was this tiny piece of cardboard that went for two dollars, and it was named Auto Bingo. All right. A back scratcher was among the next biggest sellers. Okay? Then came a foot duvet. Do you all recall the foot duvets? We had enormous piles of those things, right? I could keep listing them forever. If a pocket hand warmer is what you're after, you'll have to look elsewhere. Those are no longer part of our lineup. I could just keep going and going. The Bite the Man dog toy, and all sorts of other things. So, the way we talk about certain products in our current lineup will stay consistent. Roughly 33% to 50% of what we offer is going to disappear within three to five years, I'd say. The bottom third of our assortment, maybe, will be replaced over the next two years—honestly, more like two to three years. That accounts for about 0.5% of the total. So when you take all of that into account, you begin to wonder, "What's actually going to take place?" Can every customer who has the means for that standard of quality and design also afford the tier above it? Obviously they can't, correct? At the premium end we're picking up share, and the buyers in that premium segment invest vastly greater sums in their residences. They have multiple homes; they spend more on filling those homes with furnishings, and that constitutes a completely distinct market. To envision our market — picture a pyramid, because that's the way the majority of people imagine a market, and sure, the one percent occupies the peak and so forth — quite simply, the number of individuals up there is smaller. In the middle, the population is larger. Yet to grasp the spending, you essentially need to invert that pyramid and place it atop the standard pyramid. So starting at the topmost tier — that one percent, and in fact the upper half of one percent — the further up you go, the amount devoted to the home rises exponentially. Which means the line is at its widest precisely at the summit. We intend to advance toward the summit, and as for how much is still untapped, we'll work that out along the way. We'll identify the optimal approach to maximize it. Luxury brands in other sectors have pulled this off. Within our sector, no one has so much as attempted it, correct? I mean, there are a few instances — one could make the case that with B&B Italia's premium sofas, for example, beyond that point they move almost nothing, just a small number of lighting items and similar things. No genuinely dominant worldwide luxury brand is doing what we're doing, and no one has started from where we started and tried to get to that point; it's rather unprecedented. Even so, we like to say that leaders must make others uneasy. That's our approach. We're going to make you people uneasy. We're going to make ourselves uneasy; regrettably, we're also going to make quite a few of our customers uneasy. Yes. But we're going to thrill a great many people, and we're going to produce a tremendous number of remarkable things, and we believe we're going to produce remarkable value. Got it; that's genuinely helpful. Gary, about what you mentioned earlier regarding converting an older gallery into one focused on design — I remember you explaining how, in roughly a year to a year and a half, sales at that location would double, with e-commerce receiving a bit of a lift as well. So I'm wondering if that's still the way we should be thinking about it. Thinking back, perhaps six months or twelve months ago, you mentioned that dining locations would perform better. So how should we think about the longer-term growth equation for new store openings? Yeah, I'd say the overall trajectory hasn't truly changed. Because the baseline keeps climbing, a twofold gain becomes more difficult, right? That's simply what happens once volume is greater. And one more thing worth keeping in mind: we're talking about a 0.5% shift at the margin, which matters when you're compounding over time. Let's go back to the beginning of all this. At that point, if my memory serves, a standard store of ours in those older galleries did roughly $2.1 million. Marin works well as an illustration. Quite a few of you have visited the Center of Innovation located here. You witnessed Marin back in its earlier phase. The Marin gallery that came to us when I arrived was doing $2.5 million. By the time we shut it down, what had it reached? Anywhere from 18 to 20. It had grown to roughly $20 million. Now recall when we began opening those larger spots — typical volumes were probably 10, or maybe somewhere between 8 and 10. Later they reached 12. Maybe 8. Today, what we'd call a standard legacy gallery likely sits at 15. With a larger base, doubling becomes harder. To be honest, I believe our normal volume in the early days was 7. Correct. Yet our average older galleries are running near 15. Whenever a new gallery opens — particularly now, with the restaurant and the extra foot traffic it generates — we observe a doubling. A gallery at $15 million generally becomes one at $30 million. One at $20 million turns into about $40 million. Marin, as I recall, stands at — where are we? Trailing twelve, approaching $50 million, roughly that. Marin went from $20 million up to $50 million. That shift reflects a gain of about 0.5% in the context we were just discussing.

About the restaurant.