RH (RH) Earnings Call Transcript & Summary

Thank you. Hello everyone, and we appreciate your joining this call about the results for our second quarter of 2022. Joining me are Gary Friedman, who serves as our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Before we begin, please note our standard disclaimer: some of what we say today will be forward-looking, as that term is defined under federal securities laws. This includes comments about how our business may perform and other items covered in the press release issued today. Such forward-looking statements carry various risks and uncertainties, and actual outcomes may end up differing materially. To learn more about the risk factors that could impact our results, please see our SEC filings and the press release we issued today. Also keep in mind that these forward-looking statements represent our views only as of today's call, and we are not obligated to update them or publicly disclose any revisions if new information or future events arise. In addition, on this call we might talk about non-GAAP financial measures, which modify our GAAP results by removing the effect of specific items. More details about these non-GAAP financial measures, along with a reconciliation between the non-GAAP and GAAP measures, can be found in today's financial results press release. You can also listen to this call as it happens through the Investor Relations area of our site, ir.rh.com. Gary, over to you.

Okay, thanks. Hey everyone. We're coming to you live from RH New York, the RH Guesthouse here in New York. If any of you are in town, I'd love for you to swing by over the next few days and say hi; I'll be — I'm going to be here through next week, and this is a place you should come see for yourself; also, we've got the best breakfast in New York City, by the way. So for anyone looking for a great spot for breakfast, lunch or dinner; though especially, a good breakfast is normally impossible to find in this city. At least that's how I see it. I'll start with our letter, the way I always do. Addressing our team members, collaborators, and investors: we're pleased to report that performance exceeded what we had projected, as revenue rose to $992 million, up from $989 million during the same period last year — representing a 40% gain over a two-year span, starting from $709 million in revenues. These figures surpassed our updated forecast because backlog cleared more rapidly, even amid deteriorating macroeconomic conditions. In the second quarter, gross margin expanded by 350 basis points, mainly attributable to stronger product margins, since we continue to hold back from discounting the business while demand patterns further decelerate. As we've mentioned before, markdowns are still pervasive across our entire sector. While opting against promotional activity could mean we give up some market share in the near term, we believe that going down that path brings specific long-term hazards, including damage to the brand and the unraveling of our model. It is this kind of discipline and a view that extends well beyond the current quarter that has enabled us to set fresh benchmarks for financial results within the home furnishings sector, and our numbers continue to track those of the leading luxury names, since we reported a 24.7% adjusted operating margin for the second quarter, which also came in above our guidance. The quarter's results reflect spending on several initiatives: getting RH Contemporary off the ground, launching RH San Francisco and RH Guesthouse, building out RH International, and rolling out RH In-Your-Home. Together, those efforts drove about 400 of the 530 basis points of SG&A deleverage we saw in the quarter. On the cash side, Q2 generated $23 million in free cash flow, and we closed the period with $2.1 billion of cash on the balance sheet, $446 million in total net debt, and trailing 12-month adjusted EBITDA of $1.1 billion. We also repurchased 1 million shares of common stock during Q2, paying an average of roughly $255 per share. We additionally spent $82 million of cash buying back $18 million and $39 million worth of our outstanding convertible notes from 2023 and 2024, doing so via privately-negotiated deals. Following those transactions, $44 million in convertible notes were still outstanding as of July 30, 2022. I'll now move on to what we expect for fiscal 2022. When we gave revised guidance on June 29, 2022, our statement was that business trends should continue getting softer for the remainder of fiscal 2022. Underlying that outlook is continued softness in housing across the next few quarters — and possibly longer — connected to the rate increases anticipated from the Federal Reserve, along with the reality that we are now up against the record 2021 sales figures that COVID fueled. Beyond that, because of hold-ups in both building and getting approvals, the debut of RH England is being pushed back to spring 2023. Missing out on the busiest summer and fall stretch in that part of the English countryside is a letdown, yet we believe waiting so the brand can be presented in its fullest form is the right decision for the long haul. Also, RH Palo Alto had been scheduled to launch during 2022's fourth quarter, and that is now shifting into 2023's first quarter. With the way our trends look at present, the murky macroeconomic environment, and RH England's move to spring 2023, below is what we expect for the third quarter as well as for fiscal 2022. Looking at Q3, we're projecting net revenue to fall somewhere between 15% and 18%, and adjusted operating margin should land in the 18.5% to 19% range. Then for fiscal 2022 overall, net revenue growth is expected to be somewhere between negative 3.5% and negative 5.5%, while adjusted operating margin comes in between 21% and 21.5%. We do anticipate that the next few quarters will bring near-term difficulties, because we're now up against the unusually large growth that came from the pandemic shifting where people spend, and we're also letting go of less valuable market share as we continue improving quality and deal with a range of macro headwinds. Despite all that, we're confident our long-term investments will enable us to continue achieving industry-leading results over the long run. 2022, the year of the new. Like we mentioned before, while the pandemic set a lot of our plans back, it didn't throw them off course. Our view hasn't changed: the big investments and launches we have lined up for 2022 will mark the beginning of a new era of sustained growth and innovation for the RH brand. We're calling 2022 the year of the new, and it brings: the debut in May of RH San Francisco, The Gallery at the Historic Bethlehem Steel Building, which stands as our most remarkable new bespoke gallery to date. Then there's the arrival of RH Contemporary, the most exciting and potentially game-changing product launch we've ever done. RH Contemporary was recently brought into RH New York, and the first results there appear encouraging. As inventory levels get better in the first half of 2023, we plan to bring RH Contemporary into more galleries. We're also elevating RH Interiors and RH Modern, with fresh collections and better quality. In September, we'll unveil our first RH Guesthouse in New York — a groundbreaking new hospitality idea for travelers who want privacy and luxury within the $200 billion North American hotel market. We believe — yesterday we began accepting reservations for a stay at RH — at the RH Guesthouse, which is when our website, rhguesthouse.com, went live, and The Dining Room at RH Guesthouse New York, our new live-fire restaurant, is now serving breakfast, lunch and dinner. In the coming week, we intend to introduce The Champagne & Caviar Bar at the RH Guesthouse New York. We're also bringing an upscale new live-fire dining venue to RH San Francisco as well as to the RH Guesthouse in New York. Ever since we launched this new live-fire format, RH San Francisco has been delivering results well above those of our earlier Gallery restaurants, so we now intend to bring that format into our new Bespoke Galleries across North America and Europe. Following the September launch of our inaugural Champagne and Caviar concept at the RH Guesthouse New York, our current plan is to roll this offering out to upcoming galleries in Paris, London, Milan and Aspen. By next quarter, we'll be able to share further details about this thrilling new concept. We've launched The World of RH, our new digital portal, which showcases how our evolving ecosystem connects everything together. We think this will start to genuinely shape and position the brand in the minds of those who visit our website, particularly as we take the brand global. We also have the lift-off of RH1 and RH2 — our customized Gulfstream G650 and 550 jets — which will be offered for charter later this year. Then there's the christening of RH3, our luxury yacht, which can be chartered in the Mediterranean and Caribbean, the places where the wealthy and affluent travel and vacation. And finally, the rollout of RH In-Your-Home, a distinctive and memorable experience in which Brand Ambassadors oversee every detail of the delivery and carry the selling experience into the home.

Now I'd like to turn to the broader vision and ecosystem for our RH business — the way we see things over the long term. Our view is that the world holds two kinds of players: people who possess taste but lack scale, and people who possess scale but lack taste. So the notion of bringing taste to scale is a big one, with ramifications that reach far. We set out to make RH the authority on taste for the home, and that aim has shown itself to be both a disrupter and a moneymaker as we pursue our ambition of becoming the most admired brand anywhere on earth. Top designers, artisans and manufacturers are drawn to our brand, and by scaling their work and making it more valuable across our integrated platform, we let RH assemble the most compelling assortment of luxury home products found anywhere in the world. We'll keep lifting and growing that assortment, starting with the rollouts of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and additional new collections we have slated to debut across the coming decade. With immersive Design Galleries planned for each major market, the worth of our enormous assortment will be unlocked, producing revenue between $5 billion and $6 billion in North America and between $20 billion and $25 billion worldwide. Rather than stopping at curating and selling product, we intend to push the brand toward conceiving and selling spaces, constructing an ecosystem spanning products, places, services and spaces that cements RH as a global leader in thought, taste and place-making. Our architecturally inspiring Galleries lift our products and make them more valuable, and our interior design services together with a seamlessly integrated hospitality offering lift those Galleries further still and add more value. We'll keep using hospitality to raise the RH brand as we push past the 4 walls of our Galleries and into RH Guesthouses, aiming there to open a new market for travelers in search of privacy and luxury within the $200 billion North American hotel industry. On top of that, we're crafting bespoke experiences — RH Yountville, which brings together food, wine, art and design in the Napa Valley; RH1 and RH2, our private jets; and RH3, our luxury yacht available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. Through these immersive experiences, new and existing customers get exposed to our growing 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 platform for architecture, interior design and landscape architecture services — raising the RH brand and amplifying our core business while adding new revenue streams and disrupting and redefining multiple industries. Our strategy comes full circle as we start to conceptualize and sell spaces, moving past the $170 billion home furnishings market and into the $1.7 trillion North American housing market with the launch of RH Residences — fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning time-starved customers. Everything we're doing takes shape in digital form through The World of RH, a web destination where shoppers can discover our brand's breadth and depth and draw inspiration from it. Once we launch RH Media — a content platform honoring the most creative and influential figures shaping architecture and design worldwide — our standing as a tastemaker will grow even stronger. Taking the RH ecosystem worldwide expands the addressable market to $7 trillion to $10 trillion, among the biggest and most valuable opportunities any brand pursues anywhere today. Capturing 1% of that global market equals a $70 billion to $100 billion prize. Through our ecosystem of Products, Places, Services and Spaces, customers are moved to dream, design, dine, travel and live inside a world RH has carefully assembled, forging an emotional bond that no other brand can match. Taste is hard to pin down, and we think nobody is positioned better than RH to build an ecosystem that democratizes taste, thereby lifting our way of life and making it worth more. Scaling the luxury mountain and creating a brand without equal. Each luxury house — Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermes — came into being at the summit of the luxury mountain. No brand has ever tried to make that ascent, and the established players would prefer you never do. We don't hail from their neighborhood, and we aren't on their guest lists. We grasp fully that our efforts must be so exceptional that they force a reckoning over who we are and what we can achieve, compelling those at the summit to acknowledge us with respect; we likewise recognize this ascent isn't meant for the timid. And as we keep climbing, oxygen thins and the chances narrow. We think the caliber of work unveiled this year — including RH Contemporary, RH San Francisco, RH1, 2 and 3, along with the debut of the RH Guesthouse New York — starts to reveal the imagination, resolve, inventiveness and bravery of this team and our tireless chase of our dream. Two decades ago, we set out on this path envisioning the transformation of a business close to bankruptcy, carrying a $20 million market cap and a box of Oxydol laundry detergent pictured on the catalog's front, into the top luxury home brand worldwide. The lessons and learnings, the fervor and perseverance, the bravery demanded and the scars earned from being knocked down 10x and rising 11 times forge the mental and moral fiber that shapes character in people and builds cultures within organizations — lessons no classroom can teach, no managing of a business can teach, lessons that come only from building one or from standing at the mountain's peak. Onward, Team RH. Carpe Diem. At this point, we're going to take questions from those on the line.

Gary, I'd like to begin by getting your big-picture perspective on what you believe the real estate pipeline is worth, especially in light of the delays announced today. Could you walk us through the expected opening schedule for 2023 and 2024? Also, might you go into greater depth on any specific projects? And do you have any sense of a timeline for when openings might return to a more typical pace?

Sure. Given the types of projects and experiences we create, I can't say what exactly normal would look like. I realize you'd prefer something more normal, but building normal isn't what we do, correct? What we're doing isn't putting up a 10,000 or 20,000 square foot shop inside a mall. Windowless spots with maybe a glass front in a shopping center—the kind you can copy over and over—aren't what we're opening either. Every single project we take on is its own development effort. Execution is complex and tough; getting approval is a struggle, and each one demands additional time, additional people, additional money, additional imagination, and additional grit. That is exactly the reason these are worth so much more than whatever somebody else might put up, even though those somebody elses might pull off better consistency. Still, it's rare for us to construct a bunch of stores that are genuinely the same. Funny thing—over the last few years, we've sometimes thrown around the word prototype in this setting. Eventually I said, let's remove that from our vocabulary, because frankly, every retailer I'm aware of that creates a prototype and begins rolling it out finds itself about 5 years later stuck with a collection of outdated stores. In the current environment, where change happens at a much quicker pace, information moves so much faster, and the world has become far more visual thanks to social media platforms and the instantaneous spread of images and photography globally, I believe sticking to a prototype and striving for greater predictability is a risky approach, since innovation will only accelerate in the world we inhabit. Duplication, in my view, is something that will endanger brands. So I'm not certain that's truly our objective, Steve. Our objective is to produce truly extraordinary and remarkable work. What we've discovered—it reached the heart of innovation and stepped through the portal. We've added a new sign above it reading, "RH, the home of the extraordinary." These are remarkable and amazing. Through our journey, we've learned that whenever we create extraordinary and remarkable work, we've consistently found ways to monetize it. And we've struggled to monetize what is ordinary and unremarkable. I think you need only examine our numbers, and the math would confirm that. When you compare how much we generate per square foot to anyone else in this industry, or how much output we get from each store relative to everyone else in our industry — that reflects the effort, the work, the imagination, determination, creativity, and courage required to do what no one has ever seen done. Achieving results nobody has ever reached means doing things nobody has ever done. So I appreciate the comment, but here's what I'll say: we sat here and asked ourselves, "Could we hurry and get England opened?" Sure, we could. And by anyone else's benchmarks, it would probably be remarkable. They can't even envision the work we're doing. Yet it wouldn't measure up to the vision inside our heads. My message to the folks working here is straightforward: you can't force quality, and you can't force greatness. Honestly, I'm not sure — somebody tell me, how often has Elon Musk actually shipped a launch when he said he would? I'm thinking, wow, wasn't it roughly five or six years back that I handed over $250,000 for the Roadster? That's right. Still, this is my conviction about the goal in front of us — the goal is to grow into the most admired brand worldwide; in the past we'd frame it as one of the most. As of today, we think claiming the title of most admired brand in the world is within reach. Our belief is that we're capable of creating output of such exceptional quality that people in every field would be genuinely moved by it. And that just takes additional hours. It takes additional labor. So putting a clock on invention and innovation doesn't really make sense to me. It reminds me of something Thomas Edison once said. A journalist posed a question to him: "Mr. Edison, you've attempted and failed 10,000 ways making a light bulb. How do you feel?" His answer was, "You're exactly wrong. I've learned 10,000 ways how not to make a light bulb." That's — the path of invention and innovation isn't one of duplication. The outcomes from our work in invention and innovation have been remarkable, and they're producing the type of performance that I believe we're now starting to demonstrate. There's also a huge strategic gap separating RH from everyone else. Even when folks ask me about particular competitors—how do you think they're taking share from you?—we began from a much smaller base. From '19 to '22, if you compare anyone against us, using their estimates and ours, sure, their percentage gain might be larger. But when it came to capturing more dollars than us? They didn't. Are their operating margins growing beyond ours? No. Could their revenue have appeared healthier merely because they're picking up the business we discard when we exit less profitable segments? Yes. Yes. And certain companies will grab whatever we walk away from; for a period they'll feel wonderful, until the moment comes when they realize they're left with a mediocre operation and a mediocre label. That's not what we're after. What we truly want is to create the most admired brand and business anywhere on earth; and it's — and sometimes — like we're going to open — allow me to give you some specifics regarding England. At RH England, there will be six hospitality offerings — six in total. That includes three complete restaurants, right? Plus three additional, more casual hospitality concepts. Among them is our live-fire restaurant. Then there's the conservatory, which is more of a relaxed American bistro-style spot. We also have a loggia — we're calling it the terrace, though technically it's a loggia. We keep flip-flopping on the name; it's a stunning outdoor area, partially covered, with incredible views, serving live-fire pizzas along with wonderful charcuterie and other dishes — and wine. Honestly, these are restaurants unlike anything else anyone in retail has. And every single one of them overlooks beautiful scenery.

On the property, we also have Europe's biggest white deer herd. Beyond that, we offer secondary hospitality experiences, such as the wine room and the tea room. High tea service will be presented in a modern manner that nobody has witnessed before. The wine room would reflect the sort of wine influence and experience we began building in San Francisco — simply the selection and curation of wine. If you visit RH New York for dinner, you will encounter an entirely different wine list. And should you come next week, when the Champagne and Caviar Bar opens, I believe you will find the most extraordinary champagne and caviar bar anywhere in the world — not merely in New York, but globally. Our New York restaurant, I think, ranks among the finest restaurants worldwide. I truly believe that. The food is that excellent, and the dining room at the RH Guesthouse New York may be the most gorgeous dining room on earth. We likely have the most stunning exterior terrace ever constructed in New York. It is the first elevated outdoor sidewalk terrace the city has ever approved, and such projects require more time. You must secure knockdown 10x. You reach 11. You must repeatedly return, becoming kinder and cleverer each time, practicing the craft of exhausting their resistance to accomplish truly remarkable work. So consider what is coming — when you witness the next iteration of our Design Galleries, starting with the first one — where will that be? I'm not certain. It will be in Houston. It will be in Naples. It will be — the following version, we've already demolished. If you've visited RH Marin, you've seen — that's precisely why it isn't even a prototype. It's already obsolete. We're constructing another one. Unfortunately, Palo Alto had progressed too far in construction. We didn't alter it. When you see the next-generation Design Gallery, it resembles a sculpture. It may be among the most beautiful buildings you've ever laid eyes on. Once more, it will convey what this brand can achieve and where we're headed. I believe it will motivate others and spark a movement surrounding this brand, and that's what you must do to attempt the ascent we're pursuing. So yes, as we say, leaders must make — leaders must be at ease making others uneasy. Sometimes we'll make you uncomfortable, because it simply won't align well with the spreadsheet. But what great invention or innovation ever did align with a spreadsheet? Who has ever managed to predict the greatest developments in this world? Yes. Okay, so apologies for that, but I'm feeling pretty inspired. You need to come check out this Guesthouse, because we — I had concerns that — I've been a longtime admirer of Aman Resorts, and I grew up — well, not grew up. I was really young then. But over the past 25 years, I've visited quite a few of them. That's where I picked up a lot about architecture, examined numerous Aman Resorts, particularly those that rank among the world's great architectural works. And I was genuinely worried that, oh man, what luck, Aman is launching in New York around when we are. I'd say I believe we've created something far superior. We stayed there a few weeks back. Ours is considerably better; and incidentally, that's the reason we set our opening room rates above what Aman charges in New York. And by the way, we already have, what, 50 inquiries — 76 inquiries to stay here, right? And with — I mean, it's selecting the room, selecting their dates, understanding the cost, with guestrooms beginning at $3,500 a night and guest suites beginning at $7,500 a night. Aman begins at $3,400. What's that? By the way, that's correct. Eri is pointing out, and we don't even have room photos on our website. We're the only ones who didn't include photos since this is all about privacy and security. Yes, private entries, a high security entrance. Nobody will get in here except the people staying in here; and since we don't permit photos and we don't permit you to post on social media, I mean, we didn't publish room photos. That's the reason The Wall Street Journal Magazine is running this article. And when I informed our team they can't photograph the room, they respond, like, that's — well, we can't publish the story. I said that's fine. It's about privacy; they truly wanted a photo with me somewhere in the Guesthouse, and I said, "Alright, I'll give them a photo." So I sat in the bathtub. You probably saw the picture. But I didn't reveal the entire room to them. I gave them a small peek at just how magnificent the bathrooms are. And if you zoom in on the photo, not only do you see these all vein-matched Italian travertine slabs, which you'll never find anywhere. You might find them in a handful of the finest homes in the world. But tell me whether you've ever seen a home or a commercial environment, if you zoom into the ceiling, that not only features a full travertine slab ceiling but has the crown moldings carved out of travertine in Italy. Where we're headed is simply not comparable. Look, it's going to be — I'll tell you it will become normalized. Great. Extraordinary and remarkable work will be the norm here.

Quick one to follow up on. Eighteen months have passed since that JV investment. So I'm just wondering whether you might share a few big-picture reflections on how things are going with the partnership; and whether it has changed at all — is it on track, or how exactly is it supporting the process, you know, across the entire real estate process.

Yes. It has truly been purely additive, and once more, an entirely different tier of innovation, since I believe our partner is unbelievably creative, smart, and resourceful. And the capacity to find properties we in all likelihood never would have located has been enormously incremental; we recently acquired one of the final, say, palaces in Madrid; that will be — and once you witness what we're up to in Indianapolis, I mean, it's crazy; we hold a 178-acre estate in Indianapolis beside Butler University featuring this amazing home on a lake behind a wall. You find yourself wondering what sits back there behind that wall. And it stretches for miles, correct? You drive one; and it's — I mean I think we're simply encountering far more imaginative possibilities. We just completed — I suppose we haven't even made that public yet now. I suppose I could discuss it, right? Yes. Yes, we own it. We own it. We completed the purchase of 856 acres in the Napa Valley, likely the most gorgeous parcel of land in the whole of Napa; it was where the historic Soda Springs Resort stood back in the 1800s, the ruins remain, and there we'll put up a guesthouse plus residences and a winery. We possess some of the finest organic farms anywhere in the Napa Valley. We're creating an experience the world has never witnessed. Yes, we're near completing — are we — I don't know whether we're allowed to discuss it. I'm hoping. I can't discuss that one yet. No. Okay. There's this unbelievable property somewhere in Europe that you'll learn about, and I can't discuss that one yet; but many of these endeavors we're pursuing with the JV, we're simply encountering things we'd never encountered before, I mean, various guest house possibilities. And at this point I'd simply say that being here in this guesthouse, there's no chance this time. It's simply unbelievable. I mean nothing matches it anywhere in the world. And I believe the world requires this; they're just — every great hotel brand has merely marginalized itself because all of them have this — nobody has control. A developer controls the development. You get a hotel flag attempting to design it. You get conflicts regarding what they'll design, how much building it will cost, and so on and so forth; and so nobody is truly producing extraordinary work. And I think — I genuinely think that this thing is — I mean it might define a completely new market that doesn't exist. Right, so there's simply a great deal going on. What I mean is, we now have far more optionality and far more opportunity available to us. On top of that, we keep making our in-house group stronger when it comes to what I would describe as more standard transactions. That said, the joint venture structure will keep letting us accomplish remarkable things while using limited capital, and it gives us the ability to stop being tied to our desks and instead capture value for what we've built for the developer — all in a way that requires little capital. As a result, we'll hold real estate value that we can monetize from time to time. There may be occasions when we refinance assets and take capital out. And my sense is that since what we're creating is so distinctive — we aren't putting up things like strip center retail; these are genuinely bespoke assets — and because our brand keeps performing well, at the level of results we deliver, that makes the real estate worth even more. So it's simply a wealth of optionality that will be ours over the long term, plus plenty of flexibility. Yet the single most crucial element is really the ingenuity we bring to finding deals. I genuinely believe this organization is unbelievably creative and resourceful. Beyond that, they're a pleasure to collaborate with, since they're so highly creative as well. So, plenty of excellent things.

To start, could you give us a bit more detail about how Contemporary is doing in New York and San Francisco? Any initial observations or points worth highlighting? Then, now that supply chain constraints are loosening, might there be a chance to move it into additional galleries more quickly? It seems the timeline has slipped somewhat versus what you mentioned three months ago; and with all that in mind, are 1Q '23 or perhaps 2Q of '23 the first quarters when Contemporary will deliver a significant contribution to your top line?

Yes. Absolutely. Well, for one, we're extremely pleased with Contemporary's results, in both San Francisco and New York. And it's — in San Francisco, we've been truly delighted; in New York, it has genuinely altered the trajectory of the business. That one was somewhat simpler to gauge, correct, since San Francisco went from a very small location to a large one featuring a restaurant. In New York, you have something closer to a like-for-like comparison. And New York isn't fully finished, fully set up — it would be complete, right, in roughly another month, a few weeks. Every floor in New York is being redone. And incidentally, likely around year-end in January, we may refresh the restaurant simply to update it and connect it to the entire new look and color scheme so that restaurant stays truly relevant and exciting. And regarding supply chain acceleration, since these are all new products, you simply cannot speed up too quickly. But the key takeaway, as you're aware, is that when our merchandise is in our — when our product sits in our retail stores, it sells far better than when it's available only online or through a Source Book; so that's the major opportunity. The wonderful part is that right now, we're gathering some initial insights: which items are top sellers, which things are — which categories, which aesthetics and finishes and similar details our clients are gravitating toward. What are our design teams enthusiastic about? What do they anticipate? What are outside interior designers enthusiastic about and anticipating? And then how are we modifying orders to showcase those items in our galleries and grow and add dimension to those concepts across the collection? So plenty of exciting developments. If you've visited RH New York, we sort of brought it in here a few weeks back. The team has been here this past week, really refining it and making it look excellent. I was there just a couple of days ago; and I believe it — the gallery appears substantially different. We repainted the walls on — to a buff white similar to RH San Francisco. This new collection is simply a superior canvas when you compare it to that gray paint. Therefore, every floor is getting redone; that process will likely require a span of roughly 2 months, shutting down areas, applying new paint, resetting merchandise; after that, we intend to map out a full overhaul spanning every gallery. The wonderful part about refusing to hurry is that once we roll out those changes throughout every gallery, those choices will be genuinely smart ones grounded in actual data; thus, when a launch of this magnitude with this much fresh product arrives simultaneously, look, any plan we've built will be flawed to some extent, correct? What matters is whether our direction and strategy are sound; they are. At this point it's merely refinement, gathering information, tweaking production along with the on orders, giving shape to the major concepts and paths, then maximizing the chance at some point, perhaps the first half of next year, based on how ambitious we choose to be regarding the gallery overhaul. We're only painting the interiors. Is there anything beyond that? We'll update you as things develop, though our excitement is enormous. Honestly, yes, my excitement has never been higher. It's amusing in a way since we're — I'm not sure, folks continue asking whether a recession is coming. A recession is already here. Anyone believing otherwise is delusional. A recession has hit the housing market, and it has only begun. Consequently, our industry likely faces a tough 12 to 18 months. Yet these moments are precisely when you can seize real advantage. What I cherish is that every major step we've taken is right in direction and right in strategy, be it Contemporary, be it what sits in our pipeline that we're developing, be it the money poured into RH In-Your-Home, be it the — our efforts across Europe, which I believe, once more, will prove remarkable. We had just finished the Guesthouse. All of these function as major vector-shifting items that genuinely place us on a distinct long-term path. Additional chances will arise throughout the coming, I'd say, 12 to 18 months while we endure what will be — my sense is a harder period rather than an easier one. That contrasts with my view a quarter or 2 back. I believe circumstances globally and simply — I believe the Fed at last truly grasps what must be done. And it won't be attractive once rates climb the way they're climbing. Once more, history is available for all of us to examine. What matters is whether you're ready for moments such as these. Are you ready to take advantage of moments such as these? My sense is we've positioned ourselves, attacking while potentially everyone else retreats. And here's the amusing part — back during COVID, from a small-rock standpoint, we never truly went on offense. Our rivals, I think, were rushing everywhere attempting to gather every tiny rock, or what I refer to as apple captures, correct? Picture apples dropping off the tree, and they're grabbing them off the ground. While everyone's racing around attempting to grab those apples off the ground, we discovered how to create an apple-harvesting business, so to speak. So yeah, it's simply an alternative game that we're engaged in. And yeah, so I believe we're feeling genuinely great at this moment. What I mean is we're feeling truly clear, truly passionate, yet there's a sort of serenity underneath. It's like we've weathered storms previously. We've weathered downturns previously; we've weathered the Great Recession previously. Yeah. We understand what steps to take. We understand how to compete in this game. And we believe there's — plenty of others will trip and tumble. They won't understand what steps to take. There are numerous recently listed businesses that are — they'll face pressure, sense that Wall Street pressure to expand. And they'll do it precisely at the incorrect moment with the incorrect balance sheet. And I'm pleased with our position. What I mean is, if you examine what occurred, what I mean is what occurred to Wayfair this morning, correct? Like executing a convertible notes offering at $40 a share. Like their stock stood at $300 a share for nearly 12 months, yet they're competing in a tiny game. So they couldn't even focus. Like if there's any moment you'd execute a convertible note raise, it's when you might have executed it at $300 and hedged it up 100% to $600 and paid 0 coupon. There are no 0 coupons currently. And executing convertible notes at $40-something a share, what I mean is, if they survive the upcoming major — this challenging period, what I mean is, the sheer scale of enormous dilution if the business performs well, this will be astounding from that. So there's — I simply examine the — how individuals are competing in the game, what individuals are doing, what's like — I simply say I'm pleased with our position. I'm pleased with the path we're on. I'm pleased with the strategy we're pursuing; and yeah, I believe we'll have plenty of enjoyment. And look, it's — as Powell stated, we'll experience some pain. It only harms you when you aren't ready.

Understood, that's quite useful. Then, if we could briefly revisit the second quarter, what portion of that revenue figure came from clearing out the backlog? And where do things stand at present? Also, what's your estimate for how long it'll take before we're back at a more typical level?

Max, this is Jack. Naturally, whenever we work down a backlog, we're typically adding to it as well. That said, if you look at merely the amount by which revenue exceeded our forecast, as Gary mentioned, that came from backlog reduction. I'd estimate that during the first six months of the year, we'll move roughly $50 million to $75 million of it. So compared with the $200 million we initially mentioned back at the start of the year, there's still that remaining work in front of us; and although supply chain pressures and other issues are letting up, they haven't returned to — assuming there's such a thing as a normal level, assuming we all agree 2019 before the pandemic represents normal, they haven't reached that point yet, and a variety of factors are still causing that backlog to linger. So we'll find out. I believe there's an opportunity to clear it before the year ends. If that doesn't happen, though, we'll simply keep working away at it. Eventually, it will return to normal, particularly given the macroeconomic conditions and their current state.

Gary, I'd like to remain on the subject of how the brand is evolving; it appears that the essence of the brand is in fact — a portion of it is evolving. I'm simply curious whether that's the correct manner of viewing it. Is the business still grounded and established, with the foundation being home furnishings? It appears that upcoming CapEx are hotels and real estate property and the physical assets; and although, yes, you're still opening the stores, they're more experiential. So I'm simply curious how you view, sort of, the fundamental DNA of the business. Okay, Jack, one quick thing before we move on — when we look at SG&A dollar growth for the first half of '23, since a few of the Palo Alto and England locations are set to open during that period, how should we be thinking about that dollar growth?

Absolutely. Let me take the first part of that, Adrienne. What I'd tell you is this: if you've got our shareholder letter with you, and you go to the section on the RH business vision and ecosystem, the long view, and you go through it closely, the message you'll take away is that every single thing we're doing is meant to lift up and make the core business more valuable — all of it, right? Every single thing we're doing. If you just go through it very thoroughly, every point will come through. Architecturally striking galleries lift our offerings and add to their worth, and those spaces gain even more value from our interior design work and the hospitality experience woven right in, correct? Through RH Guesthouses, our hospitality push will keep lifting the RH brand as we move past the four walls of our Galleries. A fresh market is where we're headed. Every piece of this is meant to raise up and increase the value of the core business. Now look at architecture, interior design, and landscape architecture—each one built to lift the RH brand and make it worth more, right? We furnish our homes completely, and every design choice exists to lift up and increase the value of the main brand. So that's just another path for getting the brand across and growing it, unlike the way anyone else has gone about it. And that's fine. Take Elon Musk — his method is entirely his own. Twitter is his channel. He never runs an ad. Right, we just have faith that what we're building will put our brand where it belongs, raise it up and make it worth more, and that's the whole thing — it's the reason we use the word ecosystem. Right. So nothing about this waters down the brand, correct? This is just another method of reaching out, distinct from offering free delivery, a Labor Day promotion, a financing event, or options like paying immediately versus buy now pay later — every one of those various approaches companies use to connect with their shoppers. Our approach to that connection is just different.

Yeah, that helps.

Then, Adrienne, regarding the dollar increase in SG&A — well, variable pieces exist within it; 6 components are in there. Perhaps what you're really after is the fixed portion of investment we're putting in, since obviously the variable side will move around, as it has while our business expanded. That said, investments are being made internationally. We've been discussing that. A portion of those sits in this year's base. Preopening of something we flagged — San Francisco and Guesthouse — happened this year. Those will come around again. Clearly, other preopening items will show up next year. Each year differs, be it a new level, higher or lower. So we don't — guidance hasn't really been provided, though we've handed you a bit of perspective on some shifting pieces there. And once more, some pieces will be variable, others fixed. Still, when it comes to the investment cycle, you roughly know what we're up to. And the elements being invested in this year — Gary pointed them out in his letter. And a number of those, once more, sit in the base, so we'll cycle them. Should additional investments be made, we'll discuss that.

So I suppose the first thing I'd like to address is returning to Contemporary. It's wonderful to hear following a very encouraging beginning. That said, when considering where this brand is headed longer term, Gary, I believe you described it as possibly the next billion-dollar brand — I assume that's still the case. How long do you figure it takes to build momentum, and what effect does that have on the other brands? Does it add or take away? And at what point would you say it reaches maturity? Would that require 2 or 3 years? So how should we think about this brand's growth curve?

Yes. Roughly 3 years is what it'll take to scale up, I'd say. We'll continue growing it and adding dimensions to that side of the business; and anything you undertake carries some cannibalistic effect. It's difficult to say this early what it'll look like, because certain customers will simply trade up. Still, on balance, my expectation is that it's incremental more than it isn't. And it'll create a broader new market, particularly at the upper end — at the upper end, where customers own larger residences, additional residences, and put more money into their homes. It'll bring the market to high-end interior designers, and even more so RH Bespoke Furniture and RH Couture Upholstery will do that. So yes, I think — I mean, we — look, the manner in which we package concepts lets those concepts cut through the market, you know, and take hold and become recognized for something. In many respects, it's simply the brand expanding and evolving. It's just that we opt to do things our own way and tend to — and allow us to — rather than having things slowly trickle out and either gain lots of traction or attract attention, we typically hold back, construct a concept, construct a large concept, and afterward attempt to cut through the noise. Then it can genuinely create meaningful change, the way RH Modern did. The largest internal argument at our company during 2014, '15 was whether to fold in RH Modern. Do we simply fold it into the RH brand, the main book? Or do we keep it separate and attempt to cut through? And we went back and forth, back and forth, back and forth. At the final moment, we decided to keep it separate, since we simply aren't recognized for Modern, and it would stand a greater chance of cutting through the noise. And so that's — so that's what we do at times and just how we go about it. It isn't really — I'm not sure it's correct to call it a brand. It's a collection. This is a business transformation, one that we're confident will be genuinely additive, will elevate us, and will create new market opportunities for us at the premium tier. That means we'll draw in higher-value clientele; however, there's also a certain self-cannibalizing aspect to it. And simultaneously, we're cutting away business at the lower end, correct? For instance, we're releasing things that drag the brand down, things that perhaps once mattered to the brand but now actually make the brand worth less. So within our company, we're continually debating this. Is it contributing? Or is it taking away? Is it beneficial? Is it damaging? Does it boost our value? Does it reduce our value? And when you're attempting to shape a brand and a business model the way we are, every one of these conversations truly matters, and every one of these choices truly matters and — indeed. So it's not as if we say, oh, contemporary, let's simply pursue that and begin tossing products into the market. We aim to reflect very carefully on these concepts, and we state that we must think to the point of pain, until we perceive what others cannot perceive so that we can accomplish what others cannot accomplish. And our concepts typically — our major concepts typically are strategically and directionally sound; after that we start moving, we obtain actual information, and then we can develop from that point; and therefore...

I think that's Adrienne — Curtis, I'm sorry, that's...

Anyway, yes, that answers your question, hopefully.

It certainly does take everything into account, and that all sounds completely logical. And I just need to ask something about the buyback. I believe this was the first occasion you've entered the market, I think, in something like 12 quarters, correct? Kind of why now? You've had cash on the books — a lot of cash sitting there for a while; so yes, I suppose what set that off? I mean what are you seeing in the business? Is it the valuation and the certainty in the long-term growth? Should we expect it to stay in the market? Yes, just very curious about that.

Yes, yes. Well, first, we only get very small windows when we're able to be in the market, right? And I think sometimes not everyone knows that. We have generally how many weeks in the market?

Right now we're in the second week of the quarter's last month. So when we do make the announcement, it'll be 5 or 6 weeks from now.

Right. Typically, after we make an announcement, there's a window of 5 or 6 weeks when it's open. That means for the bulk of the quarter, purchasing our own shares isn't possible, correct? So I believe plenty of folks read various reports and assume we're actively out there buying. The truth is, we can't; yet broadly speaking, we're evaluating several factors. We're examining valuation. We're examining how the environment appears, where we believe things will head. It's not — for instance, we currently hold substantial capital on our balance sheet that we've raised; and we possess considerable optionality. In a market similar to the one we're entering, there could be companies we'd like to purchase. There's property we might purchase. There are other moves we might make. Our own shares, we might purchase. I'm not sure, perhaps we'd purchase shares of a company we aim to acquire, similar to what Bernard Arnault does. So numerous actions are available when you're situated as we are and you have optionality and you have a truly strong business model that you can capitalize on in any market, particularly if we're heading toward a recession. So we're continuously reviewing every option and asking, okay, given what we currently know, what's the optimal deployment of capital. At times it's simply — yes, we need additional data. So we don't just buy without thought. Consider what occurred at Bed, Bath & Beyond, for heaven's sake, they spent $12 billion repurchasing their own shares. And see where they stand now. I'm certain some individuals here believed it was a favorable moment. Likely we had $12 billion. But...

That leads right into what I was going to ask next. You all have been so careful and so disciplined, correct? This is the first occasion in some time, so I felt it deserved a mention, since you've been — holding back, staying disciplined, right, with that balance sheet — so how exactly did you arrive at that decision point.

Yeah. I mean, particularly at this moment, I can't say precisely how this will unfold. Just like every investor you deal with, right, in what ways are they putting capital to work, who are they acquiring depending on what data exists in the market and when is the correct moment to purchase what. And listen, this is sort of like the optionality capital during times such as these. That isn't — it isn't the top priority for us, right? What matters most is truly all the major undertakings here to create one — to create the brand people admire most anywhere in the world. That's where the bulk of our time goes. After that we devote some time to thinking about — we're examining data. Assuming we've got capital, does the data suggest now is a good moment to purchase our stock and where do we believe things are headed? Or would it be wiser to wait and be — gain clearer sight of what the market will become and how our — what our business will become within that market? And are there additional opportunities? Are there companies resembling what we'd strategically like to accomplish that perhaps we could buy for a tiny portion of the price and possibly gain a 5-year head start on something that — if we attempted it ourselves, might move quicker. I mean nothing — let me just put it this way. I'd like to discuss matters of that kind. Certain press outlets will report, "Oh, Gary Friedman mentioned like acquiring businesses," and suddenly that turns into our grand strategy; that isn't our grand strategy. But there are items we're developing and executing and then items we've stated we intend to do that other folks are already doing, and if you've done it across a long time, perhaps they simply lack the scale we possess or the platform we possess or the infrastructure we possess, and their business is too small to work as a solid public business or even a solid private business. And sure, perhaps take companies of that sort, place it within our platform, and it might perform far better. I mean — over the long haul, it turns into a significant opportunity for us. So it's simply — yeah, we're constantly reviewing a great many things, and people bring us plenty of options and we examine things. And there are items we've been reviewing for quite a while. For the entire 22 years I've worked here, we've known we wanted Waterworks in the portfolio. When we finally acquired Waterworks, the timing was right, and honestly the early days were somewhat rough, but these days Waterworks is doing extremely well. Record EBITDA, a truly strong model. There's a larger chance ahead to create synergies between what Waterworks does and RH on our platform. My sense is our brand is beginning to catch up with theirs, and once the brands come into harmony, that will be the moment for a much bigger play. So you go — considering all of that, you're genuinely adopting a long-term perspective; it's not — I mean there could be a short — a really good moment to buy. But mistakes tend to happen more often when you simply purchase things based on price, correct? That's the reason I kind of mention the situation with Bed, Bath & Beyond or something. A few of these folks didn't think deeply enough or understand the business deeply enough, because I'm certain looking back, they review it and say that was the worst allocation of $12 billion, perhaps one of the worst in retail history, for companies that size. Yet somebody believed that was a good idea. My take is they probably simply didn't think deeply enough; they didn't consider the risk; they didn't consider other opportunities and know their business well enough. And so we've devoted a lot of time thinking here, a lot of time debating; we try to get all the brains in the game and the egos out of the room, and we say none of us are smarter than all of us, and that typically leads us to better decisions than most people are making. But yes, so we're in no rush. I mean I don't know, like — I mean if we enter a really bad recession, where will they price our stock? You tell me. Probably lower than it is today.

A quick near-term item, so forgive me for these. To start, the reduction in guidance happened in June, and from what it sounds like, that may have marked the bottom for quite a few retailers. I understand that you serve a different clientele and customers in a different end market, but I'm curious whether anything improved; and then the larger question, I suppose, is how much market share are you prepared to give up? That down 15 to 18, I'm not sure whether that's a typical run rate going forward; but I guess when do you come in with price? And is that a '23 call or might it be an end of '22 call?

Yeah, like I said earlier, there really isn't a fallback option for that. My feeling is we won't need to go there. That said, it's not as if we aren't — inventory turnover is something we'll always be doing, right? From where I sit, there's going to be some amount of stock moving through at all times. If conditions in the market get genuinely rough, we may move the cheaper end of our stock more quickly. That means we could give up around two hundred basis points in margin to hold onto our market share, but discounting storewide isn't something we'll do. To me, that doesn't look like something we'll have to resort to. I don't think other companies are going to capture that share of the market, since they don't have our product, our positioning, our experience, or our brand, correct? A lot of folks will tell me, "Oh, that's a competitor of yours. This one over here is a competitor too." My response is, seriously? Walk into one of their stores. Do you honestly believe they compete with us? Consider that per square foot, we generate three times what they do. They're not truly competing with us. And compared to some of the other top-tier operators out there, we're also hitting three times per square foot. I really don't want to come across as arrogant or as brushing anyone off, but honestly, things would have to completely fall apart for us to change course in any way. Could that still occur? Possibly. Honestly, I don't see anything on the horizon where I'd say, wow, something just occurred that will make our model go off the rails. I genuinely don't. Seasonal merchandise isn't part of what we offer. Christmas items aren't something we carry either. Our inventory has no seasonal component. There's nothing we stock for summer. We don't carry winter products. None of that exists for us. That makes us quite unusual compared to the rest of the industry. Think about it — which retailers do you know that skipped a Labor Day promotion? The luxury names are the only ones. Did an e-mail about a Labor Day sale from us ever hit your inbox? If we had sent out an e-mail promoting a Labor Day sale, do you believe our sales would have been higher? Of course they would. As someone mentioned to me recently, a person said, "Our House was featured on that call, and they claimed they're gaining market share from RH." When did anyone last take a look at Our House's site? Everything in that operation is discounted. The entire operation is marked down 25% to 35%, each product listed on the site. Would you consider that maintainable? Check back with me regarding Our House in 2 to 3 years. Right. My reaction was, fine, Our House has revenue up 50%, yet its operating margin isn't rising. That's not a game I wish to play. If we pressed the promotional button right here, our sales would climb to 50x without difficulty. It's simply not the game we're playing. So — I don't go ask Hermes or go ask Chanel or go ask Ferrari or go ask all the others, go ask those luxury brands what their plan is. Whatever they plan to do is what we'll do. Right, that's — it's simply the path we're on.

Okay, one more quick question about the international piece — I can't remember, did the sales guidance include any contribution from it? And if so, how much ends up getting pushed out?

For fiscal '22? Right, right. As you can see, we trimmed revenue slightly, roughly 1 point. Essentially, you can think of that as international and Palo Alto both being removed from the forecast.

Also, we pushed up the top end of our operating margin range by 50 basis points, correct.

Correct.

I appreciate all the useful details. My question concerned RH Guesthouse, and honestly, it sounds amazing. How are you thinking about what it could mean financially? Like, in what way does something like that flow through the model? I realize the primary purpose is promoting the RH brand, and that logic totally works for me, but I was curious about how we ought to factor in the financial side, especially with those room rates.

Yeah. Ask us again next quarter. We'll find out how demand looks, how the restaurant performs. The San Francisco restaurant is simply — it feels unbelievable; and this one is the same — I believe we chose to place it in San Francisco at the very end and maybe we refined it. But I think our restaurant — the Guesthouse restaurant, when you pair it with the Champagne and Caviar Bar, which has 32 seats, sort of down in a basement cellar, when you put those 2 together, I think it will clearly be, by a wide margin, the largest volume food and beverage style restaurant experience we have ever created. We expect the volume to be substantially greater; and that's a different model, correct? The majority of hotels excel at rooms, and they're terrible at F&B; so their entire approach is simply a room approach. Ours is a somewhat different approach. We're a street front F&B operation; we have 100 — I believe it's 115 feet of street frontage here for a restaurant; plus we have a highly discreet entrance, a private one, for the Guesthouse. So it's essentially a restaurant with sleeping rooms above it, right? So if you run a restaurant well and your model is solid, you're already far ahead. And then you have the rooms, which for years everyone insisted to me, a hotel can't be profitable with fewer than 100 rooms. So sure, we always respond, "Well, I'm not opening a hotel." Then they ask, "What are you doing?" It's a guesthouse. Then they ask, "What's that?" We're attempting to create a new market for privacy and luxury; and then they say, "Oh, I understand. It'll be a showroom for your furniture." And I tell them, "No. Why would we do that? We have a 90,000 square foot showroom, I think, 47 steps away." And they say the sort of thing that typically makes us tilt our head and say, well, it won't include any of our furniture. Then they get the trout look. And furniture isn't the point. The point is elevating. The point is elevating RH as a thought leader, place maker and taste maker in the world. So none of our furniture is in here. And so — but since it's such a one-of-a-kind and remarkable thing, I figure, let's just say, somebody hard to please is paying — what I mean is, places at the higher end such as the Marcus and the Carlisle and others are charging a starting room rate of roughly $1,300 to $1,600. The rooms run 350 to 450 square feet. And walking the team through it and asking, what do the rooms have? What are you seeing? We checked out photos of their rooms and said, "Well, we're seeing painted sheet rock walls, a quirky small bit of crown molding if there's any at all." And I ask, "Did you notice any down lights up in the ceiling?" Nope, not a single down light in any ceiling. Any uplight at all? Nope, nothing. Where are you supposed to sit when you'd like breakfast? Where do you sit? Let's examine that. Let's examine the vastness. Let's examine — I believe if you discover — if you simply visit the finest hotels in New York City and even the new Aman, if you walk in and request a tour of the room, they'll likely grant it since I don't believe — they opened, and it isn't the standard of quality I would have expected. And I believe we simply possess a level of design and quality unlike anything the world has ever seen. I believe it will command a price that perhaps nobody has seen in New York, along with a tremendous degree of exclusivity and scarcity that — somewhat resembling a luxury brand, somewhat resembling a Birkin bag, if you will. And so I believe within a quarter, we'll likely have a decent feel for, okay, how do the restaurant revenues look? How do the room rates look? I mean the wonderful part of this business — as most hoteliers would tell you, they earn 80% margin on the rooms. Completely 80% margin, the rooms are $400 a night. Rooms at $1,200 a night is far different. Rooms at $1,800 a night is different. If the rooms start at $3,500 a night, you can picture what the margin on the rooms could be. It could be 97% margin, 98% margin since you aren't really spending all that much more on housekeeping and other items. We are putting investments into security and safety, and we have some of the finest security and safety experts who protect the wealthiest people in the world, who have designed our systems and security here. So this will be a very safe spot for wealthy and affluent people to stay. A very private spot and a very luxurious spot; so I believe we're simply going to be able to — we have something nobody else has with the room that we believe we'll get. Plus, the hospitality concept is performing exactly as we anticipated, so this venture stands to generate substantial profits. And should that happen, we'll gain yet one more lucrative means of communicating our identity. You could label it marketing, though no marketing division exists here. What we have is a truth group. That's why the term marketing rarely comes up. Our preferred way of putting it: we aren't defined by our words, but by our actions. So when we produce excellent work such as this, and it turns a profit, it's no different from our restaurants, correct? Once more — the majority of retailers operate a restaurant. Theirs lose money by design, whereas ours earn money, bringing in close to $10 million at an average location these days; therefore this turns into yet another method of engaging our customer, an accretive vehicle for acquiring customers. And it won't simply remain static while someone says, Gary, the residence only holds 9 rooms. That's accurate, yet our restaurant will likely accommodate 5,000 to 6,000 people weekly. And regardless of whether you've lodged here, word will reach you. You'll come to grasp the aesthetic, the meticulous attention to detail, and the sheer thought leadership while dining there, or you'll be astonished by the Champagne and Caviar Bar. And certainly, the dialogue will be superb. But consider the 40 million unique visitors arriving at our site who could read about and view the Guesthouse. That figure then possibly expands to 100 million people worldwide when Europe is included, and it's no different than — the point isn't the 6 to 12 individuals chartering RH3 annually. It's the 50 million to 100 million people 3 to 4 years from now who can view it online. The same applies to RH1 and 2, the small number of people who'll contact us regarding designing their aircraft or their yacht, something we now offer. They've settled on precisely how many of those projects to accept; yet another remarkable aspect I suspect people overlook concerning a venture such as this Guesthouse is the knowledge gained from undertaking such work, how greatly we improve by resolving the challenges addressed here, how much elevated our case level becomes, how much deeper our comprehension of high-end design grows simply because we've accomplished what nobody else has. In other words, we've become far stronger in our primary business thanks to ventures like this. We've become far stronger in our primary business through the galleries we conceive, merely by engaging in the design process and positioning ourselves to genuinely grasp what it takes to prevail at the market's most exclusive tier. What I'm really saying is that this is something that puts resources into developing the leadership and the team, and that kind of opportunity may not come along in any other setting, or at any other point in your lifetime.