RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon, everyone, and we appreciate you joining us for the third quarter earnings call. Joining me today are Gary Friedman, our Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Before we begin, I'd like to mention our legal disclaimer: today we will be making certain forward-looking statements within the meaning of the federal securities laws, including statements regarding the outlook of our business and other matters referenced in the press release we issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. To learn more about the risk factors that could influence our results, we encourage you to review our SEC filings and the press release we put out 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 make any revised versions public if new information or future events come to light. In addition, on this call we might talk about non-GAAP financial measures, which are adjusted from our GAAP results to remove the effect of certain items. You can find further details on these non-GAAP financial measures, along with a reconciliation between the non-GAAP and GAAP figures, in the financial results press release issued today. You can also catch this call as it happens by going to the investor relations part of our site, ir.rh.com. Gary, over to you now.

Okay. Thanks, Allison, and thanks to all of you for being here today. I'll begin with the prepared comments from our shareholder letter addressed to our people, our partners, and our shareholders. We're happy to share results for the third quarter that came in ahead of expectations, with net revenues of $869 million compared to $1.006 billion in the same period last year, and an increase of 28% against third quarter 2019 net revenues of $678 million. Gross margin shrank 50 basis points during the third quarter, driven mainly by fixed occupancy deleverage, partly offset by higher product margin as we keep resisting the urge to promote the business. As we've said before, deep discounting remains widespread throughout our industry, and even though it's been close to two years since we sent out a promotional email, we're getting two sale emails daily from numerous home furnishings retailers. While that sharp divergence in approach could create a near-term risk of losing market share, we see certain longer-term dangers of brand erosion and model destruction for anyone taking the promotional route. It's precisely that discipline and long-term perspective that has allowed us to establish new benchmarks for financial performance within the home furnishings industry. Our results today resemble those of luxury brands, with 20.8% adjusted operating margin delivered in the third quarter, which also beat our outlook despite the dramatic housing market slowdown. Those results include investments tied to the launch of RH Contemporary, the opening of our first RH Guesthouse, the development of RH International, and the rollout of RH In-Your-Home, which accounted for roughly 200 of the 640 basis points of adjusted SG&A deleverage this quarter. On top of that, we saw adjusted SG&A deleverage from revenues being lower than a year ago. Our business produced $102 million of adjusted free cash flow in Q3, finishing the quarter with $12.5 billion in cash on our balance sheet — $2.15 billion in cash on our balance sheet, total net debt of $375 million, and trailing 12 months adjusted EBITDA of $1 billion. Fiscal 2022 outlook. As we noted in our earlier shareholder letter, we anticipate business trends will keep worsening because of accelerating housing market weakness over the coming several quarters and potentially beyond, given the Federal Reserve's expected monetary policy and the cycling of record COVID-driven sales and backlog reductions. Given our present trends, we now anticipate fiscal 2022 revenue growth of -3.5% to -4.5% compared to our earlier outlook of -3.5% to -5.5%, and adjusted operating margin between 21.5%-22% versus our earlier outlook of 21%-21.5%. While we expect the upcoming several quarters to present a near-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift and shed less valuable market share, we believe our long-term investments will let us keep delivering industry-leading results. RH business vision and ecosystem, the long view. We believe some have taste but no scale, while others have scale but no taste. The concept of scaling taste is large and far-reaching. We set out to make RH the authority on taste for the home, and that mission has shown itself to be both disruptive and highly profitable as we keep pursuing our aim of becoming the most admired brand worldwide. The leading designers, artisans, and manufacturers are drawn to our brand, and across our integrated platform their work is scaled and made more valuable, which lets RH assemble the most compelling selection of luxury home products anywhere. We will keep elevating and growing our assortment with the launches of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, plus additional new collections planned to arrive across the coming decade. Opening immersive design galleries in each major market is our plan, and it will unlock the worth of our enormous assortment, producing $5 billion-$6 billion in North American revenue and $20 billion-$25 billion worldwide. Moving the brand past curating and selling product toward conceptualizing and selling spaces is our strategy, achieved by constructing an ecosystem of products, places, services, and spaces that cements the RH brand as a global thought leader, taste, and placemaker. Architecturally inspiring galleries make our products more elevated and valuable, and our interior design services along with a seamlessly integrated hospitality experience elevate and add value to them further still. As we push past the four walls of our galleries into RH Guesthouses, our hospitality work will keep lifting the RH brand, with the aim of creating a new market for travelers who want privacy and luxury within the $200 billion North American hotel industry. On top of that, we are crafting bespoke experiences such as RH Yountville, which blends food, wine, art, and design in the Napa Valley. RH ONE and RH TWO are private jets, while RH THREE is our luxury yacht, charterable in the Caribbean and Mediterranean for wealthy and affluent people to visit and vacation. Through these immersive experiences, new and existing customers encounter 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 architecture, interior design, and landscape architecture services platform, which elevates the RH brand and amplifies our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy completes its circle as we start to conceptualize and sell spaces, expanding past the $170 billion home furnishings market into the $1.7 trillion North American housing market through 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 consumers. Digitally, the whole strategy comes alive with the World of RH, an online portal where customers can explore the depth and dimension of our brand and be inspired by it. When we introduce RH Media, a content platform celebrating the most innovative and influential leaders shaping the world of architecture and design, our authority as an arbiter of taste will be amplified even more. When we take the RH ecosystem worldwide, the addressable market grows to somewhere between $7 trillion and $10 trillion, which ranks among the biggest and most valuable opportunities any brand is pursuing anywhere right now. If we capture just 1% of that global market, that's a $70 billion to $100 billion opportunity. Through our ecosystem — products, places, services, and spaces — we get customers dreaming, designing, dining, traveling, and living inside a world RH has thoughtfully curated, forging a feeling of connection that no other brand can match. Taste is hard to pin down, and in our view nobody is positioned better than RH to build an ecosystem that democratizes taste, and in the process lifts our lifestyle and makes it worth more. We're scaling the luxury mountain, creating a brand that stands alone. Each luxury house — Chanel, Cartier, Louis Vuitton, Loro Piana, Harry Winston, Hermès — first saw the light at the summit of that mountain. No brand has ever tried to make this ascent before, and the others certainly don't want you to. Their neighborhood isn't ours, and we don't get invited to their parties.

We genuinely recognize that the quality of our output must be so remarkable that it compels people to rethink who we are and what we can achieve, to the point where those sitting at the summit must doff their caps in acknowledgment. We likewise recognize that this journey isn't meant for the timid. As we keep climbing, oxygen thins out and the chances grow ever slimmer. We feel that the caliber of work we've brought forward this year — including RH Contemporary, the World of RH, RH San Francisco, RH ONE, TWO, and THREE, plus the debut of our inaugural RH Guesthouse in New York — starts to showcase the vision, resolve, ingenuity, and bravery of this team, and mirrors our tireless chase of our aspiration. I noted when this year began that across more than 20 years at the helm of RH, my enthusiasm for what lies ahead has never been greater, while my certainty about the current moment has never been lower. Even though my near-term doubt has widened because the luxury housing market has entirely caved, my zeal for our long-range potential has swelled enormously, since I hold that the capital we're deploying to lift and broaden both our offerings and our infrastructure will prove revolutionary once more. Looking ahead to 2023, we'll roll out the biggest assortment of fresh merchandise in our company's history spanning RH Interiors, RH Modern, RH Contemporary, RH Outdoor, RH Beach and Ski House, Baby & Child, and Teen. To magnify this landmark debut, we'll once more reveal a groundbreaking new gallery concept, and we'll also redesign and renovate every one of our existing galleries. This spring and summer, we'll bring RH to the U.K. and the remainder of Europe in the most thrilling and memorable manner, launching RH England, The Gallery at the historic Aynho Park — a 16th century, 73 acre estate that will include three restaurants: The Orangery, The Conservatory, and The Terrace. Along with that come the Aynho Architecture & Design Library and the Deer Park, home to Europe's biggest herd of white deer, viewable from the grand lawn. Construction is additionally underway on RH Paris. That gallery on the Champs-Élysées is slated to open in 2024, and RH London, the gallery in Mayfair, is slated to open in 2024, 2025. We've furthermore locked in sites in Milan, Madrid, Munich, Düsseldorf, and Brussels, several of which will likewise open in 2024 and 2025. RH further disclosed today these acquisitions and hires aimed at speeding the brand's transformation and its ascent of the luxury mountain. The purchase of Dmitriy & Co, a to-the-trade custom upholstery atelier, together with bringing on Dmitriy's founders Donna and David Feldman to establish RH Couture Upholstery. The purchase of the business of Jeup, Inc., a to-the-trade custom bespoke furniture workroom, together with bringing on Joseph Jeup to establish RH Bespoke Furniture. Bringing on Margaret Russell—the former editor-in-chief of Architectural Digest and Elle Decor—to build RH Media, an editorial content platform meant to honor the most inventive and influential individuals and concepts currently molding architecture and design. With today's news, along with what we acquired earlier in Waterworks, four RH flags are now planted solidly atop the luxury mountain, and our aim to make RH a recognized arbiter of taste and design is made plain. Once these brands and businesses are thoughtfully brought together and magnified on what we expect will become the globe's most inventive and vibrant design platform, they will start to reshape the luxury home furnishings sector and the to-the-trade design business in fundamental ways. With the holidays and the new year drawing near, we want to thank each of our people and partners worldwide for what you give and how you commit to our cause, and for making our vision and values real. Becoming the most inspiring brand on earth is no simple task, and it certainly isn't meant for the timid. Leading instead of following demands courage. Building a brand able to cut through this world's noise demands collaboration. Reaching the summit of a mountain nobody else has tried to climb demands teamwork. Our journey started 20 years ago, driven by a vision to turn a business that was nearly bankrupt—carrying a $20 million market cap and a box of Oxydol laundry detergent pictured on its catalog cover—into the top luxury home brand worldwide. The lessons and learnings, the passion and persistence, the courage needed, and the scar tissue earned from being knocked down 10 times and rising 11 produce the mental and moral strength that shapes character in people and forms cultures within organizations. Lessons no classroom can teach, nor can running a business. Lessons that come only from building one, or from standing at the mountain's peak. Happy holidays, team, Team RH. Carpe diem.

Ready for questions.

Good afternoon, everyone. I'd like to ask about written orders during the third quarter. I'm not sure whether you'll address this, but if that run rate is taken as a proxy for the business, does it deteriorate? My question is this: given that you beat in the third quarter, we now face a somewhat steeper slope heading into the fourth quarter. Is that a matter of less backlog? Is it more macro risk? What is shifting as we move from third to fourth?

Perhaps I'll begin with the second part, Simeon. Look, regarding the Q3 beat, I'd say most of it, in my view, really comes down to sales timing — moving from Q4 into Q3. Not really. Part of that is clearly us clearing the backlog more quickly than we'd anticipated, though we always planned to work through it and keep doing so over the course of the year. When you look at the full year, we're still looking at $3.6 billion in sales. As far as that outlook goes, I don't see our figures shifting in any meaningful way. A bit sharper, yes, but honestly, in a certain sense this amounts to a rounding error, if you'll pardon the expression. Honestly, this lines up pretty well with our earlier discussion. The main point is that in Q3, a portion of sales got shifted ahead from Q4, and the backlog grew at a somewhat quicker pace.

All right. For a follow-up, this might be aimed more at Gary. Given that you'll keep putting money into the future while also being somewhat prudent in the short run, the question is whether you're considering a different order of priorities. Is anything going to be given up? I'd really like to hear your thinking on this, particularly as the year continues to unfold with the Fed still tightening.

Yeah. What's your definition of responsible?

Right. I'm not certain whether.

I mean it. I'm only attempting to cut in on your question.

Uh.

Right. Right. I'm merely attempting to break in on what you asked. That's what I figure.

Reduce all of it, right.

Right, we're letting people know what our actions are. In our view, every step we take is the right thing. Honestly, I'm not really sure what response fits that.

Okay, so perhaps that relates to the latter portion — specifically, is anything being given up? In other words, are certain longer-term investments being halted, or is that not the case? Maybe that's simply the correct manner in which to view it.

No longer-term investments are being halted by us. What I mean is, our focus is on the long game. We aren't engaging in reckless actions that others are taking, such as pushing their business and offloading, you know, dispatching, I'm not sure, 30 emails per week to a single customer featuring, you know, sale signage; in my view, that could be reckless. You know, but I suppose it hinges on your approach. If your approach happens to be, you know, to represent price, then perhaps that's a fine approach. Representing design alongside quality alongside innovation is what our approach entails. The company has been positioned around product, rather than around price. I believe we've remained truly consistent regarding our approach. When considering priorities, we constantly reorder them around here. You know, we enjoy saying, you know, you've sort of got to start moving. You must determine, are we right strategically? Are we right directionally? We hold the belief that we are right strategically and right directionally. We hold the belief that provided we make the correct long-term investments, you know, and construct this business with the long term in mind, we'll turn into, you know, one of the handful of brands globally that endures across an extended span of time. That's rare within our sector. You know, the majority of people create a concept, after which they roll out 300 or 500 stores. you know, once 10 years have passed, it's a dated concept. We, we prefer not to become dated, and we prefer to keep reinventing the business and, you know, regardless of what the cycles happen to be. Should you examine, should you examine it from our perspective, should you review history, you know, from when I came aboard in 2001, you know, a recession existed at that moment and, you know, we raised the product up and sort of remade the brand. The identical action was taken by us during 2008 and 2009, you know, amid the financial crisis; we cycled through yet another period in 2015, 2016, 2017, when the shift toward membership was made by us and the back end was rearchitected. Modern was also brought in by us and, you know, kept evolving and kept the brand pertinent and ensured we lead the sector. We believe the effort that, you know, started with RH Contemporary's introduction, which will grow threefold next year from an assortment standpoint. You know, the launches we're set to make throughout the whole portfolio, along with the fresh gallery design we're set to reveal, and we'll proceed to remodel and redesign every one of our existing galleries and update each of them, in addition to the platform we're constructing, you know, on a global scale for the brand, is going to yet again, you know, remake RH. Friend, place us in a situation where tremendous strategic separation gets created by us. We, you know, are sort of at ease with being the outsiders and heading in the opposite direction. You know, plenty of folks at the moment are battening down the hatches, you know, and pulling back. We, you know, are sort of accelerating. You know, we're feeling more enthusiasm, less dread. I think we anticipated this; this isn't a game we're encountering for the first time. It's simply not the same. You know, our actions across the last 22 years have stayed really steady. You know, I think we're quite disciplined about what we do. Those things are out of the ordinary. You know, back when we were launching 50,000 to 60,000 sq ft stores, the remainder of the industry was shutting locations and reducing footprints and, you know, attempting to shift all their business to the internet. These days everyone's launching stores. I don't know, perhaps we're just slightly ahead of the rest.

All right, thanks a lot. Wishing you happy holidays.

Thanks. Same to you — enjoy the holidays.

Thanks. Good afternoon, and I appreciate you taking my question. I'd like to zero in on RH Guesthouse. During your previous appearance on this call, you mentioned some of the initial interest. How has it done over its first 3 months of being open? What early lessons has the hotel taught you, and do you foresee a chance to launch additional locations of this kind down the road?

Yes. I mean, we've only just opened. We believe it's remarkable. What our guests are telling us is amazing. What we're hearing from the restaurant is amazing as well. You know, we're only in the early stages of learning. You know, we aren't... You know, I mean, this is our first attempt at anything like it. Thus far, we're genuinely thrilled. You know, we will be launching our Champagne & Caviar Bar before long. We've gotten ourselves established, you know, with our new live fire restaurant. You know, we're as excited as we could possibly be about it. You know, I mean, what we hear from our guests is, you know, plenty of them asking, "Gosh, how will I ever manage to get in over the long haul?" You know, since there simply aren't that many rooms; we're thrilled. We're, you know, there are lessons ahead that are going to help us improve and make Aspen better and, you know, that sort of thing; this is only a very early major experiment. You know, it's sort of a modest item within a really large company that, should it grow into a major item over time, wonderful. At this point, you know, it's genuinely set up to be something that assists in redefining the brand and gets people to view us in a new way. You know, I believe it shows, you know, the sort of imagination and dedication and meticulousness needed to create something remarkable. You know, folks from the hospitality sector have visited and taken tours of it. You know, luxury CEOs who've visited and taken tours of it, you know, have told us they've never encountered anything comparable anywhere on earth; we're simply letting it develop on its own here.

All right, that's really useful. My next question concerns gross margin. This marks the first quarter in which the business has posted a decline, clearly driven by occupancy deleverage. Looking ahead, is it likely that gross margin falls once more in the fourth quarter? How should we frame the path from here?

Yeah, so here's how I'd put it — consider the sequential movement in our absolute sales. Revenue went from $992 million in Q2, with gross margin at 52.8%, down to $869 million in Q3, at 49.7%, and as Gary said, occupancy deleverage accounts for a large share of that. Turning to Q4, there's another sequential step down, correct? For us, Q4 is the smaller quarter. At the midpoint of the guide, we sit at $789 million. We aren't guiding gross margin, but if you run roughly the same kind of calculation and carry the numbers across from Q3 to Q4 the way you did from Q2 to Q3, then naturally you'd see a gross margin decline baked into that, since absolute sales again come in below Q3. It's simply arithmetic. Directionally, likely around 100 basis points or so — though once more, gross margin isn't something we're officially guiding. That figure is only directional.

So, what I'd say is this — take a look at the housing sector, and if you follow it, and if you follow how home furnishings retailers have performed through previous housing slumps, that should tell you that things are going to worsen before they improve around here. The housing sector, you know, is falling off a cliff. For example, the National Association of Realtors just put out a report showing housing demand dropped 37% in October. In my lifetime, at least, I have never witnessed interest rates climb this fast. I doubt anyone listening on this call has seen it either. The effect on the housing market, particularly when you compare it with a market that COVID had pumped up and overinflated, is that you're going to see some extreme volatility here. And it's hitting the luxury segment first. If you examine the figures and if you follow the past — yeah, 9 months, or what Redfin has been reporting, I believe the luxury housing market began declining in Q4 of last year. The luxury housing market climbed more swiftly and to greater heights, and it's going to fall more swiftly and to lower depths. That's simply how it plays out, you know. The real question is this — some people rode that wave upward, and they'll attempt to keep things elevated, and they'll push their business, and my view is they'll end up wrecking their business models. Before you know it, you've got to fire off 1,000 emails again next year, and you're caught in what I'd call that downward spiral. We are, you know, stuck in the ditch. From the very start, we sort of anticipated that this COVID boost wasn't something we had created ourselves. Usually when that occurs, these sorts of things rise, and afterward they fall. And you do your best to keep your eyes on the long term. We aren't going to wreck our model in an attempt to, you know, push the business during a stretch like this. I mean, there are folks in our sector right now posting some fairly strong sales. Their entire website is 30%-40% off. If I marked our entire website down 30%-40%, our sales trend would shift by 50 points. The trouble is you'd simply end up with a far less productive business, since moving more volume at thinner margins — and all that volume — also generates, you know, inefficiencies in costs throughout a model. I've previously operated companies that way. Yeah, our model is different. Somebody asked me recently, "Hey, what happens if you're mistaken about your long-term outlook? What if the market isn't $25 billion?" I said, "Fine — what if it isn't? What if it's only half of that?" Suppose the figure were $12.5 billion? We've got a 30% EBITDA margin. I'm not certain. Broadly speaking, that puts us in a similar spot to companies such as Hermès and others in that group. Their EBITDA, mind you, runs above that level. We would land in a valuation territory where this business would command serious money. Whether the number ends up at $12 billion or $25 billion isn't truly the key question. The key question is whether we get there. Do we truly become the world's first integrated luxury home brand? That path will look unlike anything anyone else has followed, since nobody has ever pulled it off. There will be good stretches and bad stretches, but the housing market is collapsing rapidly. Things will deteriorate further before they improve. So far, our calls have been correct more often than incorrect, because we don't attempt to steer this business on wishful thinking. We do our best to operate it using facts, math, logic, and patterns. Right now, near term, I probably don't come across as very optimistic. I'm not. Over the long term, I'm extremely optimistic. If your goal is a short-term trade, ours isn't the stock for you. If your goal is long-term investing, this is a solid spot to place your capital.

Duly noted. Thank you. Happy holidays.

Happy holidays.

Thanks so much. Given how your margins have come in during the last couple of quarters, with beats in both 2Q and 3Q, does that leave you feeling more assured about holding EBIT margins at 20% or better next year should conditions stay tough? And stepping back, what's your view on how lasting and how strong this business's margin capability is right now, considering a few of the steps you've taken lately?

Honestly, the outcome depends on us. The amount you invest, and the timing of those investments, will always be the deciding factor. Take our foundational operations—if we wanted to, we could scale everything back and stay at 20%. Whether that serves our long-term interests is something I'm not sure about. How bad conditions in this market might get is anyone's guess. What we won't do is sacrifice the business for short-term gains, chasing a result that won't matter two quarters down the line. Look, we've got a lot of choices ahead of us. For anyone working in housing right now, conditions are genuinely difficult. If you happen to operate at the premium end of the market, it gets even harder, and honestly, that reality doesn't always make sense to people at first glance. You really need to reason it out carefully. During COVID, this country saw an unprecedented shift of residents leaving urban areas for the suburbs and buying into vacation-home destinations. The folks who pulled that off had the financial means to do so. During COVID, the folks who relocated most frequently and purchased the greatest number of residences were luxury buyers, since they possessed the means to do so. That explains why that segment climbed to such heights—the luxury portion of housing saw the largest gains. Now there's another side to this. We certainly didn't squander all the additional cash we generated throughout the pandemic. And honestly, if we end up handing more of it back, that's perfectly acceptable. Just examine any home furnishings retailer: compare their operating margin figures from 2019, prior to COVID, against what those numbers looked like coming out of it in 2021. Before the pandemic hit, our operating margins led the field among home furnishings sellers, and when it ended, ours stood above everybody else's too. We captured, you know, a bigger margin gain than the rest did. Our strategic separation was wider. That strikes me as appropriate — our customer shifted more, our customer felt greater urgency. And, you know, in certain instances where competitors ran promotions, perhaps their top line came in a bit ahead of ours, but running promotions simply wasn't something we did. You know, it's like pretending, "Oh, this caught us off guard." You know, I mean, the Fed flooded the economy with so much money that inflation resulted. For a long stretch, rates were kept extremely low, which opened the door for homebuyers; today the situation has flipped. With quantitative easing behind us, borrowing costs have climbed. Inflation is here as well. Who among us has lived through this scenario? Anyone listening on this call? Only if you were active in the markets somewhere between 1975 and 1982; what we're facing now is an entirely unfamiliar situation that virtually nobody has experienced. Our approach involves studying the patterns, looking ahead, and asking ourselves, "What's the smartest way to handle this so we come out truly positioned for the next 5 to 10 years?" Rather than focusing on the next 2 to 3 quarters, or maybe even the 5 or 6 quarters after that. Over the long haul, that simply doesn't matter. What matters over the long haul is the shape of the coming 5 to 10 years, and which choices we make right now will influence that direction, correct? That nudges us a bit more upward, and across the long term it makes an enormous difference; that's where our attention sits. We aren't merely managing this business, we're leading it toward something greater and more promising. Our path will be somewhat lengthier, it will require somewhat more time. Some folks will possess patience, and some folks won't. We do possess patience. If you truly want to be exceptional in this world, patience is essential.

Understood, that's really useful. Could you talk about how customers have responded to Contemporary on its own? How does that compare with what you'd anticipated? Any kind of update—

Gary Friedman here. Yes.

Max Rakhlenko speaking, regarding when the rollout will reach the remaining galleries.

Honestly, the initial reception has been something we feel great about. Sure, we'd love for additional product to reach us faster. A few things are behind that: supply chain backups played a big role, and those are pretty much resolved at this point. On top of that, almost every new item is truly novel — nothing like it has ever been manufactured at scale. This is one of those patterns that tends to repeat for us from one cycle to the next. Back in 2008 and 2009, when we reworked the business's assortment, it happened to us; then in 2015 and 2016, when we made the move to modern, it happened again; and right now, it's happening once more. So these major shifts tend to come around every seven or eight years for us, since that's roughly how the big cycles run in our industry. Sure, a trend might stretch 10 to 15 years, but generally speaking, I'd say any brand needs a significant overhaul once every seven or eight years. In our case, it just so happened that the timing lined up with economic slumps. Honestly, a lot of that is just coincidence. Looking at 2015 and 2016, there wasn't truly a downturn in the economy. We sort of manufactured one ourselves when we shifted to membership, because, as you know, that took about a year of transition to pull off. When you introduce a large volume of brand-new product that hasn't existed in the market before and that nobody has ever produced at scale — say, travertine furniture or burl wood pieces made at volume. You might spot individual items in antique shops, or a retailer here and there may carry one or two, a few pieces. But they don't offer collections spanning 130 SKUs; and nobody is manufacturing those goods at scale. Forever, going forward, we'll need to keep developing the supply chain capacity that lets us innovate. When you're creating something entirely new and trying to grow it, that inherently means nobody's done it before. It's going to require more time, and the path won't be smooth. There's a real distinction between running a company, overseeing operations, and pursuing invention and innovation, versus simply copying what already exists. So my sense is we'll experience the same pattern with Contemporary. Scaling this kind of thing is simply taking more time. So, picture this: we had just returned from visiting the quarries over in Italy, right? While there, we spent time with several of the top families and owners of those quarries, working on partnerships around stone. The goal there is being able to produce stone furniture at a large scale, which would give us improved economics along with a stronger supply chain. Honestly, I'm not even sure — about 14 days ago, we did a whole global trip; we were in 10 — well, over a span of 10 days, I believe we hit somewhere around seven different countries. The point is, standing inside the factories and having conversations with the people who own them about how to grow — not only regarding whatever they happen to be increasing output on at this moment, but also what lies ahead, which is... well, you've only gotten the first small taste of Contemporary. Once you witness what's coming next year, it's remarkable and groundbreaking. I mean, I believe it's going to be — we're simply going to dominate that whole aesthetic and look, and it'll be no different from how we handled 2008, 2009, when we adopted that European, Belgian style, went out and owned it, executed it at scale, and it turned into the RH look across the industry. We didn't just casually try out Modern. We kicked things off with a 450-page book, or something along those lines. A 545-page book. Right, a 545-page book. Also, honestly, we ran into some rough patches when it came to getting the supply chain moving for each of those. In the end, Modern grew into a business worth $1 billion. My belief is that Contemporary is going to be the most extraordinary thing we've ever pulled off. What you've seen so far is only the beginning — the first dish of the meal, so to speak. Right? Picture a meal with four courses. Two more substantial courses are coming next year, and then one more big one arrives in 2024. My expectation is that by 2024, it will be completely filled out. It's going to be. In my view, it's going to be the most extraordinary achievement in our history. We couldn't be more excited about it. Wish we had more product available right now. Wish we could get it into more galleries right now. Up to this point, every gallery where we've placed it has shown a really strong response, and we're genuinely thrilled about bringing it into more galleries.

Awesome. Thanks a lot, Gary. Jack, Allison, happy holidays, everyone. Speak soon.

Max, I hope you're enjoying the holiday season.

Awesome. I appreciate you making time for this. I might start with something more long-term, and then follow with a quick modeling item. Gary, first off, I'd really like to dig into those acquisitions and, you know, the degree to which they elevate your luxury trade and design operations for those of us who aren't as familiar, and, you know, what size of an opportunity this could represent from a revenue standpoint. And then just to tack on, I wanted to get some clarity on that remark you made somewhat offhandedly regarding a 20% margin in the coming year if you ease up on investments. Perhaps I heard it wrong — could you just explain what you meant by that?

Yeah, I think, when you consider, you know, the premium design and trade segment, you know, what's the revenue potential? The individuals at the absolute pinnacle, you know, possess the greatest number of residences. Beyond having the most residences, those residences carry higher price tags. Typically, a person allocates roughly 10% of what a home costs toward furnishings, decor and art, correct? When they purchase upscale residences, they purchase upscale furniture. They fill every room. They own several residences. You know, that represents the most lucrative segment of the business. It will be the most profitable segment of the business; it carries the greatest leverage. That's where you generate the most profit; so we believe it's truly critical from a strategic standpoint, and we went out and, you know, connected with those we felt, you know, possessed the finest reputation along with quality and design in upholstery and likewise in, you know, case goods and furniture. You know, they strongly believe in attempting to scale this caliber of quality and design. You know, we're genuinely thrilled about it. You know, it's going to require time. We need to, you know, get it launched and running and trial it and observe how it performs; we need to determine precisely how it gets integrated, over the long haul, you want to... Yeah, I'd simply say likely at present, right now, there are, you know, quite a few individuals within the premium trade sector who basically said, you know, "WTF?" You know, and then, and like, what now, you know, is going to occur? You know, so this is, this is a significant strategic step for us, but we have to develop capability. You know, there might be additional acquisitions, you know, to develop capability in this area. You know, consider, you know, the investments we're making to build a media platform and a content editorial platform that will, you know, establish the brand as an authority within the industry. You know, not talking about ourselves, talking about those who, you know, who are genuinely, you know, influencing the realm of architecture and design. You know, we want to turn into an authority and a voice within that space. You don't truly accomplish that by discussing yourself. You accomplish it by discussing others. We're simply going to... So, you know, we're choosing a different route, and we're going to create a different market, and we'll keep evolving and changing. Not all that different, though, you know? Take Apple, for instance, right? They came in pretty high up, with a phone at $400 or so, while we came in at — what's the newest Apple phone? Around $1,100 or so? $1,200. Yeah. They basically established a premium segment for phones. Back then, I believe the typical phone cost about $69, a Motorola Razr or similar. I think, you know, we aren't simply chasing a market and asking how large the revenue opportunity is there. We're also going to create a market, because a product at that tier of the market isn't accessible. Those showrooms aren't open to you. Prices aren't listed on the goods. You're sort of in the dark, you know. You've got to go through, you know, a middleman to get access to quality of, you know, that kind of quality and that kind of design. We believe there's going to be a huge unlock in simply beginning to make that degree of quality and design available. We believe we'll expand the market; we believe it'll be a major boost for our brand, you know, getting us into those customers' main rooms. Today, I think we mostly play in, you know, the family room, the second bedrooms. I'm not sure — we get that customer's living room, master bedroom, main house. You know, it's simply going to open up a great deal of opportunity. Lots to test, lots to learn, lots to work out; we've considered it for quite a while. We've worked on this for quite a while. And today we chose to announce to you formally that we're going ahead with it.

Great.

Prior to anyone else finding out; yes, we made the announcement. We couldn't be more thrilled regarding this. The skill set involved — I'd also describe it as an acquisition of talent as well. What I'm saying is, these individuals are simply amazing. Amazing. Amazing in terms of culture, creativity, entrepreneurial spirit, you know, just remarkable ability; all of us, you know, during this brief period we've spent alongside one another, we've picked up things, you know, from one another and, you know, they've made us worth more. I believe we've made them worth more; it's sort of a rising spiral.