RH (RH) Earnings Call Transcript & Summary

Thanks, Riana. Hi everybody, and good afternoon. We appreciate you being here for the earnings conference call covering our first quarter of fiscal 2023. With me on the line today are Gary Friedman, who serves as Chairman and Chief Executive Officer, and Jack Preston, our Chief Financial Officer. Prior to getting underway, please let me point out our legal disclaimer: certain remarks we make today will be forward-looking as defined under the federal securities laws, and that includes statements regarding the outlook for our business along with other matters covered in the press release we issued today. A variety of risks and uncertainties attach to these forward-looking statements, and those could lead to actual results differing materially. For a fuller description of the risk factors that might affect our results, kindly consult our SEC filings and the press release we issued today. Be aware as well that such forward-looking statements represent our opinion solely as of the date of this call, and we assume no duty to revise them or to publicly disclose the results of any revision in response to new information or future events. In addition, we might talk about non-GAAP financial measures during this call, which are adjustments to our GAAP results that remove the effect of particular items. Additional details on those non-GAAP financial measures, plus a reconciliation between the non-GAAP and GAAP measures, appear in today's financial results press release. A live broadcast of this call can likewise be accessed through the Investor Relations section of our website at ir.rh.com. Having said that, I'll hand things over to Gary.

Okay, thanks everybody for being here. I'll start by going through what we've prepared in the shareholder letter, and after that we'll take your questions. To our team members, our partners, and our shareholders: first quarter revenue came in at $739 million, and adjusted operating margin was 14.9%, both above our financial outlook, even as the broader macro environment kept weakening, particularly for businesses tied to the home; given that 30-year mortgage rates are hovering near 20-year highs, the chance that further economic tightening will be needed to bring inflation under control, and the uncertainty created by the recent regional banking crisis, we anticipate that both the luxury housing market and the wider economy will stay difficult through fiscal 2023 and into next year. Taking all of that together with where demand currently stands, we now project higher markdowns to work through discontinued inventory, which is necessary to support the product transformation we're undertaking across the coming several quarters. We're lifting our fiscal 2023 revenue outlook to somewhere between $3 billion and $3.1 billion, while bringing our adjusted operating margin outlook down to a range of 14.5% to 15.5%, and that figure includes roughly a 150 basis-point drag from the ramp up of our global expansion. As we've said before, it's in moments like these that companies tend to follow the crowd, chasing widely adopted short-term strategies that produce largely the same results; it's also in moments like these that opportunities appear to follow long-term strategies capable of creating strategic separation and meaningful value creation for those teams willing to take the road less traveled and pursue their own unique path. For RH, that path is our climb up the luxury mountain, along with our long-term strategies of Product Elevation, Platform Expansion and Cash Generation. Product Elevation: our work to elevate the design and quality of what we make sits at the heart of our strategy to position RH as the first fully integrated luxury home brand in the world. It's also the hardest portion of our climb, since it demands that we attract higher value, more discerning customers by offering higher quality, more desirable designs. While that climb gets harder as we reach new heights, we've also been navigating it successfully for the past 22 years. This year, we'll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections spanning RH Interiors, Contemporary, Modern, Outdoor, Baby & Child and Teen. These new collections reflect a level of design and quality that's inaccessible in our current market, and a value proposition that will be disruptive across multiple markets; we also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year. The upcoming collections are going to appear in a redesigned Source Book, and the aim there is to build a unified set of titles that strengthens how we lead in design and quality, with our trademarked phrase printed on the front: “There are pieces that furnish a home, and those that define it.” Turning to Platform Expansion: our intention to take the RH brand worldwide, serve new markets on a local basis, and remake our North American Galleries amounts to an opportunity worth multiple billions of dollars. This summer, we're bringing RH to the UK in a striking, memorable way by launching RH England, The Gallery at the Historic Aynho Park — a 73 acre estate dating to the 17th century that will serve as a Celebration of History, Design, Food & Wine. Within RH England are three full-service restaurants — The Orangery, The Conservatory and The Loggia — along with three additional hospitality offerings: The Wine Lounge, The Tea Salon and The Juicery. From the 46 windows along the south-facing main building, visitors can take in Europe's biggest herd of white deer as they graze across the sprawling, picturesque grounds, and they can sip a glass of wine or take afternoon tea while gathered at monolithic stone fire-pits on the Grand Viewing Terrace. Among the most distinctive draws at RH England is The Aynho Architecture & Design Library, which holds rare books by the foundational masters of architecture: Palladio, Scamozzi and Alberti. At the heart of that collection sits one of the earliest printings of De architectura, The Ten Books on Architecture, written by Vitruvius, whose 1st century BC work later moved Leonardo da Vinci to draw the Vitruvian Man 1,500 years after Vitruvius first sketched it. The RH Design Ethos likewise draws on the core principles of Vitruvius's philosophy, and those principles show up throughout our Galleries, Interiors and Gardens. The Gallery will further feature The Sir John Soane Exhibition, a tribute to one of England's finest architects, done in partnership with Sir John Soane's Museum in London. That exhibit will explore his personal story and lay out several of his best-known projects, Aynho Park among them; in our view, RH England, The Gallery at the Historic Aynho Park, stands as RH's finest achievement too, and it will serve as an emblem of what we value and believe as we begin expanding throughout Europe; we'll reveal RH England during an exclusive private event on Saturday, June 3rd, then welcome the public starting Friday, June 9th. Our growth around the world also covers launches in Brussels, Dusseldorf, Munich and Madrid, together with an Interior Design Studio in London, across the coming 18 months, with Paris, London, Milan and Sydney to follow in 2024 and 2025. As for remaking our North American presence, we'll roll out a new Gallery concept in Palo Alto and Cleveland, and we'll open RH Indianapolis, a 178 acre estate situated on a private lake, before this year ends. RH Montecito, The Gallery at the Historic Firehouse, is now set to open in 2024. On top of that, 12 North American Galleries sit in our development pipeline, with openings planned across the next several years. We also see a chance to reach new markets on a local level by putting Design Studios in neighborhoods, towns and smaller cities where affluent and wealthy people live, visit and take vacations. Several current sites prove out this approach — East Hampton, Yountville, Los Gatos, Pasadena and our former San Francisco Gallery in the Design District — where yearly revenues have come in between $5 million and $20 million across 2,000 to 5,000 square feet; we've pinpointed more than 40 locations that add to what we previously planned in North America, and we think what these Design Studios produce will give us data that might support opening bigger Galleries in those markets. Cash Generation: We've shown that "Those with capital in difficult markets are the ones who capitalize." That's the reason we took on $2.5 billion in long-term debt ahead of the markets tightening, and we're now positioned to seize whatever opportunities arise during periods of uncertainty and dislocation. As I said, our focus will be converting inventory to cash and steadily optimizing costs across the whole organization, which makes our balance sheet stronger and preserves the most optionality. Outlook: For fiscal 2023 we're lifting our revenue outlook to a range of $3.0 billion to $3.1 billion while bringing our adjusted operating margin outlook down to a range of 14.5% to 15.5%, and that figure includes roughly a 150 basis-point drag from ramping up our global expansion. We project the 53rd week will bring in revenues of about $60 million.

Looking at the second quarter of 2023, our guidance calls for revenue between $765 million and $775 million, with adjusted operating margin landing somewhere in the 14% to 14.5% range. When we look at Q2 of fiscal 2023, there's roughly $18 million in added advertising spend compared to a year ago tied to the new RH Interiors and RH Contemporary Source Books along with the debut of RH England — that works out to about 230 basis points of operating margin deleverage for the quarter. RH Business Vision & Ecosystem — The Long View: Our belief is that "There are those with taste and no scale, and those with scale and no taste," and the concept of scaling taste carries enormous reach and significance. Positioning RH as the arbiter of taste for the home has shown itself to be simultaneously disruptive and profitable, and we remain on our quest to make this the most admired brand anywhere in the world. The leading designers, artisans and manufacturers are drawn to our brand, and by scaling their work and making it more valuable across our integrated platform, RH is able to curate the most compelling luxury home product assortment on the planet. We'll keep elevating and expanding what we offer through the launches of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and additional new collections planned to roll out across the next decade. Opening immersive Design Galleries in every major market is our plan, and it will unlock the worth of our enormous assortment, producing $5 billion to $6 billion in North American revenues and $20 billion to $25 billion on a global basis. Moving the brand past curating and selling product into conceptualizing and selling spaces is our strategy — accomplished by constructing an ecosystem of Products, Places, Services and Spaces that cements RH as a worldwide thought leader, taste and place maker. Our architecturally inspiring Galleries elevate our products and make them more valuable, and our interior design services plus seamlessly integrated hospitality experience elevate and add value yet further. As we push past the four walls of our Galleries into RH Guesthouses, our hospitality endeavors will keep lifting the RH brand, with the aim of creating 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 such as RH Yountville — an integration of Food, Wine, Art & Design in the Napa Valley — RH1 and RH2, our private jets, and RH3, our luxury yacht available for charter in the Caribbean and Mediterranean, destinations the wealthy and affluent visit and vacation. Through these immersive experiences, new and existing customers get exposed to our evolving authority in architecture, interior design and landscape architecture; that brings us to our long-term strategy of building the world's first consumer-facing architecture, interior design and landscape architecture services platform inside our Galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. As we start to envision and market spaces, our strategy completes its arc—expanding past the $170 billion home furnishings sector and stepping into the $1.7 trillion North American housing market through the debut of RH Residences: completely furnished luxury homes, condominiums and apartments, paired with integrated services that provide taste and time value to discerning, time-starved consumers. Everything in our approach is brought to life digitally via The World of RH, an online destination where customers can discover and draw inspiration from the breadth and depth of our brand. Once we launch RH Media, a content platform honoring the most inventive and influential figures shaping architecture and design worldwide, our standing as an authority on taste will grow even stronger. By taking the RH ecosystem global, we amplify the addressable market to $7 trillion to $10 trillion—among the biggest and most valuable opportunities pursued by any brand anywhere today. Capturing 1% of that worldwide market equals a $70 billion to $100 billion opportunity. Through our ecosystem of Products, Places, Services and Spaces, customers are inspired to dream, design, dine, travel and live within a world thoughtfully curated by RH, forging an emotional bond unlike anything from any other brand globally. Taste can be hard to pin down, and we think nobody is positioned better than RH to build an ecosystem that makes taste inclusive—and in doing so, elevates our way of life and makes it more valuable. Scaling the Luxury Mountain and Creating a Brand Without Equal: Each luxury brand, whether Chanel or Cartier, Louis Vuitton or Loro Piana, Harry Winston or Hermès, came into being at the summit of the luxury mountain. No brand has ever tried to make that ascent to the top, and the others certainly don't want you to either. We understand deeply that our work must be so remarkable that it compels a rethink of who we are and what we can achieve, forcing those at the mountain's peak to tip their hat in respect. We also recognize this climb isn't for the timid, and as we keep ascending, the air thins out and the odds grow slim. We think the caliber of work we intend to unveil this year—including our new Collections, new Source Book design, new Gallery design, and bringing RH to the UK in an immersive, unforgettable way—will keep proving the imagination, determination, creativity and courage of this team, along with the unrelenting chase of our dream. More than 20 years ago, we set out with a vision to transform a nearly bankrupt company with a $20 million market cap and a box of Oxydol laundry detergent on the catalog cover into the world's top luxury home brand. What we take away from those experiences, the enthusiasm and refusal to quit, the bravery it takes, and the hardened resilience that comes from being knocked down 10 times yet rising 11 — all of that produces the mental and moral fortitude that shapes character in people and creates cultures within organizations. These are things no classroom can teach, nor can running a business, things you can only earn through constructing one, or, through standing at the summit. Onward Team RH. Seize the day, Gary. Right now, operator, we're going to take questions from the call.

I'd like to begin with why you feel a need for larger markdowns. Gary, I'm just wondering whether you might explain what you observed in the business during the last couple of months that led this to be reflected in guidance at this point, rather than having been included in your initial outlook when you talked with us at the close of March.

Of course. What I believe we have encountered is a demand-side headwind that keeps growing, along with a deceleration in how quickly we're working through inventory we've discontinued, since we've raised markdown levels to start clearing this merchandise so we're ready to push older goods out and pull newer goods in, and beyond that simply estimating the potential expense of getting through the repositioning of every one of our galleries. Keep in mind, we have merchandise sitting in each of our galleries that we essentially must sell — floor models sold off and shifted via our outlet operation. Our current view is that clearing that inventory under present conditions will require a greater markdown cost than before.

All right, that's reasonable. My next question concerns the opportunity in the UK market. A few quarters back, I believe, you mentioned that the UK opportunity could be as big as California. Now that England is about to open, what's your take on that opportunity today? And perhaps your view of the competitive landscape, and how you intend to merchandise this initial gallery? Any thoughts would be useful. Thanks.

Certainly. Nothing we're seeing differs from the way we've always looked at this opportunity. The timing is — the macro backdrop is a bit different, so as you'd imagine our early expectations are somewhat quieter; and on the competitive side, nothing has really shifted. We're simply growing more linked to the market, with our team having spent more time there, working, training, and so forth, building early ties and relationships with interior designers, the trade sector, and so forth. We think this will be an enormous opportunity for us. Yet a new country brings plenty of unknowns as well. So we feel we're being cautiously optimistic as we put a toe in the water and get started; and let me remind everybody that RH England is really — it's a distinctive kind of step in the market, a distinctive play in the market, where the aim is to spark the right conversation. And not — I wouldn't describe RH England as our play to maximize commerce at the outset. That will come as we keep opening RH London and elsewhere across the UK; but how do you introduce a brand to the United Kingdom and the wider Europe in a manner that sets the brand up correctly over the long term; and if you step back and consider the world and consider the realm of luxury brands, well, essentially every luxury brand on earth originates from Europe and the UK, mostly France and Italy; and if you examine which are the genuine luxury brands in the U.S., you can debate who truly qualifies. I'd contend that the brand most clearly recognized as a luxury brand out of the United States is Tiffany, correct, since they haven't driven their brand down or into broader markets the way others may have; and the French acquired Tiffany just a few years back, right? So I wouldn't say we're especially viewed as — the U.S. is viewed as the place makers of the world. And since we've typically looked toward Europe for inspiration, and U.S. brands, I'd describe them as more followers than leaders. To create a genuine luxury brand, I believe you must be viewed and respected as a leader, a thought leader, a place maker, tastemaker, whatever way you wish to describe it. So the way we're doing our launch is completely distinctive — there's never been anything quite like it. We're putting a store in a place where nobody has ever put one, and we're bringing a brand to market in a fashion nobody has ever used for this brand. Redefining a brand carries a certain amount of risk. Going from the spot you're in to the spot you want to reach takes a certain amount of courage. In our situation, the way we describe it is scaling the luxury mountain. So what everybody is going to witness in a handful of weeks, I believe, is the single most distinctive and motivating shopping experience found anywhere on the planet — or it won't be. And my view is it could become the retail store people talk about more than any other, and the shopping experience people admire more than any other that has ever existed. Putting first the building of the correct conversation rather than squeezing the most commercial activity out of the market at the start — that, in our view, is the proper order of things for building the brand; so it really is distinctive. From an online standpoint, it does unlock the whole market. But we sit 1 hour and 45 minutes away from London, correct? Plenty of people would tell you this is nonsense on all sorts of grounds. Yet saying that would mean only gazing backward and asking, well, nobody has ever tried anything of that kind, so why should it succeed? Why would — everybody else's objectives have differed from ours. Once again, this journey we're on is unlike any other. The ascent we're trying to make has never been tried by anyone; and the starting point we have is a place that has only had — you could make the case that in the biggest economy on earth, we have just 1 genuine luxury brand, and the French own it now. So the route is different; and my expectation isn't that it gets understood right away. My belief is that respect will come, and eventually it will motivate people.

I appreciate the specifics. Wishing you success with the launch.

Thanks.

Hi Gary, hi Jack. How's it going? I might combine this into a single two-part question. First, just to be clear, it appears the domestic operation is either meeting what you projected or reaching its low point, assuming we don't get some kind of consumer recession. That would mean the revision to guidance, apart from the markdowns, is essentially the addition of Europe. Then for my second part, thinking more theoretically about the EBIT margin, given the Europe mix, the U.S. picking back up, and hospitality plus luxury entering the picture, getting back to, say, 20 plus — is that going to take a far longer period? Or what's the right way to frame that? Thanks.

I believe the macro is what it hinges on. Should we reach a stable state and whatever headwinds exist come to a halt and settle, then you'll have a fresh baseline. It also hinges on how effectively we've carried out this coming big product transformation. What I mean is, we've been through a transformation of this kind. Typically it happens for us every 7 or 8 years, as we keep elevating the brand, expanding, and shifting the assortment upward. So right now, I'd call this the finest work we've ever produced; we're introducing it into perhaps the toughest home environment at the high end that I've witnessed in my entire career. Never have I seen luxury housing decline to the levels shown in recent reports, and we're facing 20-year high interest rates. So there's a certain amount of caution. The macro isn't something I can — something we can control. Still, I'd say I lean more optimistic than pessimistic regarding our model over the long term. There's no reason I can see that we couldn't get back to 20% plus mid-20s operating margins over the long term. We need to demonstrate the European strategy and expansion work. We need to be smart, I think, about capital allocation, about how we construct that infrastructure, and about keeping things simple. Our strategy, I believe, is distinctive. We aren't replicating corporate roles over in Europe; we aren't treating Europe as its own separate business with its own separate infrastructure, aside from our supply chain distribution component — and even that is basically an extension of what we already do in the U.S. So our way of viewing the world differs, I think, from how most people ahead of us and historically have approached a global expansion. What I mean is, we sort of think of countries in Europe the way you'd think of states in the United States, suppose, except that the borders aren't the same. There's some uniqueness there. But we've operated our business extremely well across North America. And as we see it, we're assembling truly a global leadership team and sort of a global organization that will lead and oversee the business identically to how we do it in North America, except that there are some unique differences among the countries. So we try to keep it simple. And assuming we see any sort of sensible demand and business, we ought to be in a position to start leveraging those early supply chain investments and so forth, which initially produce some deleverage. I believe we truly have a fresh whiteboard for figuring out how to physically launch the brand in the U.S. Therefore, we don't need to reverse engineer it. We don't — when I arrived here, there were 106 legacy stores that hadn't been built for the vision of the business we had; therefore, we've needed to reverse engineer the situation and move from a — essentially nothing about the infrastructure suited the brand, whereas here we have a clean slate to build the proper infrastructure for the brand. They deliver furniture in Europe; that isn't something unique to North America. Every day furniture gets delivered. All sorts of things happen; therefore, what we aren't fully certain about is simply that the consumer generally knows our brand at the high end. But human — we are creatures of habit. Thus we have habits of shopping at various places and visiting various places when we consider our needs and wants. Consequently, we must sort of change those habits and identify RH as a more inspiring and attractive place to allocate capital from a consumer's perspective. And we believe our assortment, particularly as you watch us move through this transformation across the next several months, is, we believe, unmatched in the world; we believe our design leadership, our quality and then the value equation for that design and that quality, we believe our value equation is as disruptive as ever; and if I look back and I'd say, where did we perhaps sort of fail to optimize our business across the last couple of years with the tariff hits from the cost level, the supply chain, costs that rose all through COVID, the price changes that we're taking. And then, when you have the easy business, I think our value equation suffered. And I think our value equation will be swung in a direction where it will be unmatched in the marketplace. And that's really important, regardless of what country you're in, right? People first look at the design of a product. If the design of the product isn't good, you simply don't walk up to it or you turn the page. So, you have to have great design. People have to see and be attracted to the product or nothing else matters. The next thing you have to win on is you have to win in quality. And so, consumers will look at the design, if they love the design, they will get closer. They will look closer. They will walk up to it, touch it, interact with it, and they'll form a perception about quality. After that, if they’re intrigued, the following step is checking the price. And when they consider that design and that level of quality, they ask whether the item feels like a good value, an excellent value, or not a value at all. That judgment then drives whether they buy or don’t buy, correct? That’s exactly why design, quality, and value shape everything we do. Looking back and assessing critically what took place across roughly the past 3 or 4 years—with all the friction involving China, the tariffs, every supply chain disruption, plus rising freight, rising raw materials, rising product costs, and so forth, alongside an easy demand backdrop—I believe the world pushed prices upward, and everyone is aware of that since inflation reached 40-year highs, right? That is bound to have an impact. I suspect we were perhaps a bit too arrogant about how much pricing power we had while demand was easy. Now that the easy demand backdrop has faded, it has forced us to genuinely question whether our value equation will generate the demand level we consider appropriate for the business. So that’s why I believe people will truly embrace this new product transformation. I think it’s the finest design we’ve ever created. The quality is truly exceptional, along with the amount of detail and the effort we’ve put in, and since we’ve gained some experience with Italy, with Italian upholstery, Italian sofa, and so forth. Elsewhere, people recognize that we genuinely can scale and can generate efficiencies at the higher end of the market, meaning our value equation will be considerably stronger, at very high margins. So I wouldn’t claim the value equation will lead to a lower margin structure than what we’ve operated; it might, once we’ve worked through the discontinued product we must clear to shift into this next sort of ascent and step up the luxury mountain for our brand. I think it will be the strongest value proposition we’ve ever offered, because we’ve truly focused on it. And we’ve really just—with intensely critical thinking and genuinely challenging and genuinely examining the competitive landscape and today’s environment from a wide perspective, like throughout the food chain—to ensure we are disruptive not only at the high end, we’re disruptive—I’m not suggesting all the way down to the low end, but in certain instances, I mean we’re disruptive everywhere; and I think when you achieve that, it’s—that’s when you can capture a truly outsized share of the market.

So, following a similar thread to what Simeon asked, Gary, I would really like to get an update regarding the contemporary line, completely understanding it's been an unusual year, obviously; but simply regarding the number of galleries it has been introduced into and how it has been received in those locations where it has been available for, I suppose, a suitable period of time that would allow a judgment about the reception of the…

Yes. I would say, we are pleased with how contemporary has performed, given the circumstances. It has only been introduced into four galleries. And the reason we chose not to expand it further is that we have far more newness and far more options to consider bringing into the business; so, we have withheld a portion of it because I believe contemporary, I would say, represents our poorest level of execution relative to what I would call the disruptive value equation, correct? I think that is where I would be harshest on ourselves. Certain price points simply reached levels that, again, perhaps during a tailwind and COVID, everyone purchases everything and everyone wants everything immediately, and you have the greatest migration from cities into suburbs and second-home markets in any history we have witnessed. I think we were simply too aggressive with the pricing, too arrogant perhaps to some extent. And so, we reexamined that; we examined the sourcing. We challenged everything; and I think as you observe how — what is coming, whether you are considering interiors or contemporary or modern, you are simply going to see a genuinely meaningful value equation tied to design and quality leadership that will alter the trajectory of everything, contemporary included; so contemporary, look, if you considered it within the context compared to modern, things of that nature, off to a really good start. But if you consider it compared to the work we are about to unveil, you go, oh, it is simply the next level of transformation from a product standpoint. I think it is sort of — it is like holding a trump card; and again, it is simply going to win, we believe. So yes, I view contemporary not merely in isolation, but integrated with the broader thing, I think everything, every interiors and modern are going to look entirely new and different. Contemporary is going to also look pretty new and unique. There is a lot of new collections contemporary. Collections — contemporary really only — what do we have, 5, full collections? Four full furniture collections. And that will — I think it more than doubles, correct? Yes. Yes. So contemporary, you are really seeing this next phase of a much more robust assortment.

Okay. That's good to hear, and it helps a lot. Just one more quick follow-up. Gary, I'd love a bit more detail on what Cleveland and Palo Alto will look like. Palo Alto, as I understand it, is somewhat smaller — 25,000 square feet — but is there anything else, maybe regarding out with sorted, layup at the field? I'm just curious, yes, to learn more about that format you brought up.

Yes. In many respects, it's an aesthetic shift and a refresh, and you'll watch us start moving away from gray and truly build the foundation for where the merchandise is headed. We've sort of surfed that gray wave for roughly the past 14 years, I'd say. Product goes through big cycles. Folks often ask me, "Hey, what comes next? And how can you tell what comes next? And where do trends originate?" And my answer is that trends in our industry originate from the dead — generations die and their belongings go to an estate sale, estate sale after estate sale, whether at the high end, at the antique markets, and the antique markets are truly what propel the high-end interior design market, and from there it moves into the high-end reproduction market, and then it begins to trickle down from that point; and if you examine the major trends, whether it's what I refer to as the Belgian European look that we sort of exploded at a commercial level across the United States in 2009, 2010, 2011, 2012, 2013, the — we made arguably our biggest move in modern. If you consider the mid-century movement that began rolling through, you can sort of time things backward. If you consider when consumers are typically in their peak buying years for furniture, it used to be 40 to 50s since lifespans were shorter. Lifespans have become longer. If you consider the high end of the demographic with the greatest access to healthcare and the most focus on longevity and fitness and eating well. I believe it's now up to 87 years old, correct? And so, what that does is it pushes upward as people grow older and wealthier, there's greater focus on the home until they can't really use their home. They reach an age where they're simply not really mobile and they can't enjoy as much. But if you consider and say — if you looked back in the 1950s, you'd say 40 to 50 really the peak buying years for furniture, for real furniture. People reach an age where they're in the second or third home in their life stage and they've done well financially, and they can afford to furnish a home. And then, if you consider the average life span and how old people are today, well, now those people are really old, correct? So that cycle has now moved through. Mid-century modern is fading out. What came next in the cycle was actually known as contemporary. That's the reason we introduced contemporary. The contemporary style truly took hold during the '70s and '80s, and afterward, in the late '80s, it shifted toward a kind of eclecticism — blending more contemporary pieces with antiques, and so forth. So when you examine those cycles, they have a tendency to recur. What you should consider, then, is which platform suits those sorts of trends or influences; and it's not that we have a brand that qualifies as trendy, since everything gets filtered through an RH perspective — how we read the trends and how we put them forward. But you — I'd say — looking at retail across my whole career, something I've faulted others for is watching them build a retail concept and then expand to 300 stores, and 7 to 10 years down the road, every one of them is dated and worn out, and the concept is dead. Whether the platform holding your product makes that product more valuable or less valuable matters. So as we consider our product transformation — truly the biggest product transformation in our brands' history — is our platform ready to make that product more valuable? The good news now is that, architecturally speaking, these are beautifully architected, timeless buildings, perfectly balanced and symmetrical. They've got fresh air and natural light. Their proportions are correct, everything. You wouldn't alter anything about the building; many of the buildings we've built could arguably rival great historical architecture — the same principles apply; yet how we skin them, what the surfaces, finishes, colors, and background are, and how everything is presented — what that canvas, that background, looks like — matters enormously. So often, it's an aesthetic resurfacing, a kind of feeling that will, I believe, be a more relevant and exciting canvas and backdrop to amplify the product; but the logic behind our galleries and their layout is highly scientific and architecturally timeless and relevant. So — yet to a consumer it will appear very fresh and new. Just like what we did around 2009, 2010, — 2009, 2010, we moved all our galleries off silver sage paint and white trend and blond maple floors, and they became all gray with gray wash floors. That was 14, 15 years ago; so I always think of cycles as generational, correct? And if you — generations are defined as 15 to 20 years, right? So roughly every 15 years, there's — I believe there's typically a major move to be made. Also, roughly each 7 or 8 years, you get these interim refresh cycles as well. So from a product standpoint, this marks the upcoming big step, and it's about ensuring all of it shows up on the proper platform and the proper canvas, which makes the product come across as more valuable; so you'll watch these new locations begin to open, and then over the coming several years you'll watch us work through the platform and bring up to date, I'd say, each gallery aesthetically — just colors, walls, paint, finishes, maybe replastering gallery exteriors, shifting them from gray into a lovely buff shade that we believe serves as the correct canvas for the coming 10 to 15 years.

Hey Curt, Jack here. I want to add something regarding what you asked about size. Palo Alto and Corte Madera are pretty much equal in size. So, I believe you said 25,000. That's not right — it's roughly 48,000, and Cleveland is approximately the same…

Alright, that was really helpful. Appreciate it. And yeah, best of luck through the remainder of the year.

Thanks.

I'd like to inquire about how things looked across different geographies in the quarter. Is there any variation you're noticing region to region, anything that adds to the positive sentiment or the worry tied to that updated revenue guidance you all gave us?

Steve, regional variation is a constant, and I'll simply repeat what was said earlier. Our practice is not to address such matters unless they become so enormous that they truly jump out, the way oil markets did in one particular year; therefore, we have nothing to offer that anyone should interpret as a signal about any patterns there.

Then perhaps a brief follow-up — with what you said regarding the holistic value equation and getting better throughout the portfolio, do you have any thoughts on how big the relief from input or supply chain costs might be that you expect coming up?

When it comes to supply chain costs, are you referring specifically to things such as ocean freight, or…?

Is there any kind of expense reduction, correct, that might perhaps assist in financing, correct, an improved value offer?

Sure, we have been receiving that. And that is — I believe Gary brought that up during the previous call or the one before it, and somebody inquired regarding select price adjustments. However, we have already been observing some expense reduction that we are channeling back into product pricing. Regarding supply chain and ocean freight, I mean, we have reached a stage, considering our turn and considering how our team goes about securing the best rates for the sailings. We are in a — it is accretive — or conversely, the ocean freight contracts, we have moved beyond the negative developments of May 2022, and we are now in a sort of increase, a modest increase in the margin resulting from that positive news.

Gary, you said earlier you may have pushed too hard on raising certain prices. Previously, you discussed shifting toward wealthier shoppers, which could shrink your addressable market. Should we read your latest comments as suggesting you might need to step back and target a wider group of buyers at possibly lower prices, since that would eventually lift revenue and, in turn, profits?

I'd respond by saying — once more, my starting point is the lens of design, quality and value, correct? And I believe our greatest success has come when design was our winning card. Nobody beats our design; that design carries a level of quality people admire and respect. Given that design and quality, the value equation disrupts the market — clearly for those above us. Look at anyone on either side, hugely disruptive, and even disruptive somewhat below, simply because ours is truly the largest platform, correct? So we can achieve genuine scale. And I think when we introduced contemporary, we'd been elevating the brand, and while demand came easily — as it did during the COVID period, the relocation that COVID caused, the attention on home since travel wasn't possible, and shifts in where big segments spent — when demand comes that easily, and you're able to charge more, you usually do. Then suddenly it shifts and forces you to rethink; so as we rethink where our pricing stood and has stood, I simply think — keep in mind, we went through a major pricing cycle hike tied to tariffs, correct? After that, we endured an enormous supply chain upheaval along with rising raw goods and raw material costs, rising labor, everything climbing, rising freight, all of which heavily affected pricing. So I'd say we, likely like anyone else in our sector, maximized whatever you could capture; and I believe you'll see others adjusting prices and seeking to optimize whichever market they pursue. Ours is somewhat more complicated since we're elevating, correct? And we're attempting to attract a wealthier shopper and capture a larger share of their spending, because their home-related outlays grow exponentially, not marginally, exponentially. I mean, customers above aren't worth merely a bit more. They could be worth 10 times more. Consider the peak of the pyramid; it resembles turning the pyramid upside down when you examine home spending at the truly wealthy tiers. So we continue pursuing those customers. Design and quality are where we have to come out on top. Our value proposition is going to be incredibly disruptive in that space, since we're the sole platform worldwide with scale in these kinds of products. When RH forms a relationship with anyone on the manufacturing side, that's significant for them, because we have the ability to transform their lives. Should they place their product on our platform, everything changes for them. Still, we always need to keep in mind that it has to be a great value. If the value isn't great, shoppers will look elsewhere. But when the value is great, and they have faith in that value equation, they don't need to give it a second thought. In the internet era, I'd say there's far more visibility, far more pricing, far more options, which makes it tougher to tell apart both design and quality when shopping online. That said, I believe it all resolves itself eventually, because if you purchase something you believed was a terrific value, and what arrives in the mail is junk — the quality is junk or the finishes are junk, and it isn't good — you're going to send it back. You'll never shop there again. So all of that will settle over time, just like all the marketplaces and everything else of that nature. My view is those will truly serve branded products that you recognize, such as consumer goods and similar items. If you're picking up some toothpaste or whatever else, you know it comes from the brand. That's what you purchase. But when there are lots of blind products — and our industry, I'd say, has more blind product than branded product — it can be a bit puzzling for a customer at times. Still, it all works out. For instance, if you visit a marketplace — name one — there's simply an endless aisle of options. First, they aren't curators. Second, not from a design standpoint, not from a quality standpoint, and not from an aesthetic standpoint. That's why our platform truly is unlike any other in the world right now. And I believe what we do next will demonstrate that. So I think you're always — every company asks how large is that market, and where do I go, and so forth. I think it's genuinely hard — hard for anyone of us in this home industry, where suddenly, boom, your demand rises 40 points, then falls 40 points, then rises 40; and suddenly you can't — you've got too much inventory, then not enough inventory, and whatever you can put out there, customers want — can you furnish my house next week, and so forth. Then, unexpectedly, once you’re past COVID, you layer inflation on top of that, and that demanded the quickest interest-rate climb ever seen, which—obviously, stating the plain truth—hurts mortgage rates and the housing sector; it forces you to rethink every single thing, as you ought to. So I believe the real question is: what do you do once you’re on that other side? For example, folks bring this up with me constantly. Oh, maybe you’re giving up more market share, this and that. Well, you need to respond: what is the caliber of that market share? Could we hit a promotional switch right now? Can I begin blasting out discount emails the way everyone else does? And does it really matter if you’re running whatever promotions you’re—let’s call them sitewide promotions, everyone’s attempting to sort of build a curtain of opacity out there, you know what they’re up to. If you’re pushing the business and firing off sale emails, then you’ll be recognized as a promotional business. And you’re also generating, I’d argue, a stratum of long-term low-quality revenues, correct? Those are never going to be high-quality revenues. You have to discount categories or whatever else to capture those revenues, right? Well, you have to discount all those products; so how many customers would have paid full price for your product at truly robust margins?

Now, regarding that incremental lift — what amount of margin were you forced to recover across every item you discount, be it across the whole site, a single category, or just bed and bath, or lighting? Right now you've got a lighting promotion running, or you're marking everything down. I mean, it's curious, not really pertinent, but what do your emails actually say? Just go through the emails and check the promotional banners on every one of them and check the stuff — Memorial Day promotions, this promotion, that promotion, another promotion, all landing in your inbox at this moment. Every one of those customers will influence their model over the long haul. I would prefer to surrender lower value market share over the long haul, low quality market share over the long haul, preserve our pricing integrity and our messaging centered more on design and quality, and simply transform the business for the coming cycle. And if we pull it off, which we have — I'm not sure, this marks my 23rd year with the company; we've done this many times. We've transformed many times; we've weathered every kind of cycle here. This isn't a new leadership team; so, we're pleased with what's ahead, but you simply have to adopt a longer-term perspective. So, when folks ask me whether they should put money into our stock, my response is always the same — I want to know if they're a trader or an investor. If you're a trader, what you're doing is chasing those short-term episodic moments, the ups and downs, trying to optimize. And for traders, my advice is: don't buy our stock, because the moves we're making are long-term ones. But if you're someone who holds for the long haul and wants to be on a winning side — well, just take a look at what we've delivered over 20 years. Take a look at what we've delivered even across the last five years, and be a happy shareholder. Look at our performance. If you purchased with us during the pandemic, or at other points, and assumed circumstances would remain unchanged indefinitely—well, fine, perhaps you're a person who'd never experienced cycles previously, perhaps the mechanics of COVID escaped you, or you encountered media coverage claiming this would be the decade of home. It turned out not to be the decade of home. That was essentially a damn pandemic. That's all it was; it's a temporary phenomenon; so—but at present we've moved past it. At present we're dealing with interest rates. Which options are people selecting, and which will prove to be long-term selections, and which will prove to be high-quality selections. Suppose my concern were the share price from one quarter or year to the next—say I were a chief executive with a short-term mindset, eager to cash out stock options at the ideal moment—then maybe I'd hit the hype switch. Yet I hold the biggest stake in this Company. Reaching this point took ages, and I have no plans to leave. What we'll pursue are the right moves, the ones that pay off for those holding shares and investing over the long run. It's just a different sort of philosophy—how we see things and how we think them through. And compared with what others will accept, we'll make tougher decisions for the distant horizon. At times we'll stand apart, on the lower side, the way we are at this moment; it's obvious we're lagging somewhat versus others since we aren't hitting the promotional lever. Yet across the long run, I believe you'll see that we end up as a major winner. And we have a great deal of confidence in that. It's only that in stretches such as this one, we appear different; and afterward, over the long run, we appear different too.

Thanks for sharing all of that. To help us fine-tune our models and get our forecasts right, if you all had to make a collective estimate, how much price reduction do you anticipate? Will it land in the double-digit territory — meaning roughly 10% on average throughout the assortment? Does that seem like a fair assumption?

I wouldn't characterize it as us cutting prices across the board, okay? Once again, we are moving through a significant product cycle. For instance, do you notice us bringing down the price on the Cloud Sofa? Absolutely, we would bring the price down — we have — when was the Cloud Sofa first launched? 2015, correct? That puts us in year eight, right? Consequently, items during their 8th or 10-year span, similar to that, begin to decline. And there will be additional — there is — I mean, how many imitations of the Cloud Sofa exist? Who isn't receiving a daily e-mail about yet another Cloud Sofa copycat on TikTok or on some platform, or it's a well-known sofa. So — yet it's also — it's a sofa that sustained us throughout the last 10 years. It isn't the sofa that will sustain us for the next 10 years. And I'm not saying people should stop purchasing the Cloud Sofa. It's a fantastic sofa. It will remain available for the next 10 years. However, I don't anticipate it performing in the same manner. It will simply settle into its new position, so. And we'll be more aggressive; but we also — our manufacturers will — tighten their belts and everyone will tighten their belts since they wish to retain as much market share as they can; so I wouldn't think — I wouldn't describe it as a massive rollback. I'd say — I view it truly as a spring forward given all the newness. You truly need to examine where the product is headed, not where it has been. And so, — and then additionally consider what the present competitive landscape looks like and what it takes to be — to succeed; and succeeding on a grand scale typically requires being disruptive. And once more, you must genuinely view it through the perspective of design, quality and then value derived from that design and quality; and I believe given the design and quality that we have in the pipeline, I believe we're going to be enormously disruptive, so.

This kind of builds on what was just asked, but when I think back to the prior quarter, you folks announced certain cost cuts — that $50 million in annualized savings. Given the markdown pressure you're seeing, plus what you've said about demand, and the fact that this situation might drag on even longer, which isn't an unreasonable assumption, how do you view the possibility of taking out more costs, and perhaps other levers or chances to tackle additional inefficiencies? Thank you.

Yes. That's something we're constantly examining, I'd say. But listen, demand shifted in a significant way. And any time demand moves meaningfully, in either direction — up or down — you'll either be putting money in or you'll be taking costs out, correct? You're continuously — each year we review the organization and attempt to rebuild its structure around our view of where the business stands and where it's headed. And we're always seeking efficiencies and better approaches to getting things done, so. But we'd long understood that if a significant step-down occurred externally, we'd clearly need to right-size the organization at that point. That's exactly what we did; so if demand softens once more, and on and on, we'll do what's best for the business, working to optimize and sharpen our pencils the way any strong leadership team would. And I believe much will hinge on the macro picture — does housing start to bounce back? And once more, when it comes to housing for us, you truly need to focus on the luxury segment of that market, which has absorbed roughly a 10-point bigger blow than housing overall, correct? So, those are the critical factors. But you truly need to — the crux, I'd say, comes down to the goods, correct? That's our merchandise. And if we're correct — if our product direction and trajectory are directionally correct, we'll witness some sort of inflection, with or without a headwind, correct? This product transformation — is it worth 5 points, 10 points, 20 points, I don't know, 30 points? Consider our track record when we've made these moves. In those instances, we've been right far more often than wrong; and we've managed to inflect the business, so. And then you need to frame it against this COVID cycle — the COVID downturn — and layer on top of that the climbing interest rates and the luxury housing market's collapse. And ask, once we reach the bottom, okay, what does it look like as we climb back up? I mean, cycles have a history everyone can study, correct? And so — we genuinely like where we stand. Look, of course it's a difficult stretch. We've had to take plenty of hard calls, restructure the company, and let some team members go — that's what we did. Those sorts of choices come with running a business. What really matters, though, is the picture once we get past this. Where do we stand when we come out the other side? Did we make smart moves for the long haul? We aren't forced to keep recycling the discount mailers that everyone else is doing. They're stuck rotating those deals. They're stuck rotating those bargain blasts. Not a single one of those do we have to rotate. Our base is smaller, right? It is. Might that mean a bigger climb from a smaller base? Seems logical. That could happen. We've got an enormous wave of new items on the way. It's unlike anything we've ever released. So we genuinely feel good about what's ahead. I wouldn't be saying that if I'd spent the past 6 or 12 months, or whatever stretch everyone else has been — when — things swing back toward discount mailers. Still — all of you gather emails from every player in this space, I'm certain, so just put them side by side. You haven't gotten a bargain blast from us in more than 2.5 years, nearly 3 at this point. When did you begin receiving discount mailers from all the others? When do they rotate theirs? How hard is that going to get? How many additional discount mailers will they send next? What's their next move to generate demand? Right; so I believe that — yes, the coming 12 to 24 months for RH will look completely unlike the coming 12 or 24 months for every other company in this space.