RH (RH) Earnings Call Transcript & Summary

Thanks. Good afternoon, everyone. I appreciate you being here for the conference call on our earnings for the second 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 beginning, please allow me to point out our legal disclaimer: we will be making certain forward-looking statements today within the meaning of the federal securities laws, including statements regarding our business outlook and other matters referenced in the press release we issued today; these forward-looking statements carry a number of risks and uncertainties that might cause actual results to differ materially. For a more detailed description of the risk factors that may affect our results, please refer to our SEC filings as well as the press release we issued today. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we assume no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. Additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures can be found in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com; with that, I'll hand the call over to Gary.

Thanks. I'll start by discussing the letter we sent to our team, our partners, and our investors. Second-quarter results came in above the guidance we had provided, with revenue reaching $800 million and an adjusted operating margin of 20.2%, helped by a $25 million revenue gain from deliveries that arrived sooner than anticipated, along with roughly $40 million in advertising expenses moving out of Q2 and into Q3 because the RH Interiors Sourcebook was mailed later. As a result, we are lifting the bottom end of our full-year revenue forecast and now anticipate revenue between $3.04 billion and $3.1 billion, compared with our earlier range of $3 billion to $3.1 billion, while keeping our adjusted operating margin outlook at 14.5% to 15.5%. Our expectation remains that both the high-end housing sector and the wider economy will stay difficult through fiscal 2023 and on into the following year, given that mortgage rates keep hovering near 20-year peaks and the present forecast calls for rates to hold steady through the second quarter of 2024. During the second quarter, the company bought back 3.7 million shares at an average price of $325.65, which works out to about 17% of the shares outstanding when the quarter began. Turning to product elevation: we just mailed our new RH Interiors Sourcebook, which runs 604 pages, and although it's too soon to gauge the response since only 40% of the mailing has landed in homes this week, the first signs do appear encouraging. We still anticipate that our business trends will turn upward in the back half of this year, helped by the late-October mailing of our RH Contemporary Sourcebook and the early-January mailing of our RH Modern Sourcebook, plus the refreshing of our galleries over the coming quarters. We think the inflection point will reach its peak in the first half of 2024, once our new collections are fully ramped and we kick off another round of Sourcebook mailings, wholly transforming and updating the assortment across the whole brand within a 12-month span. In our view, the new collections represent a degree of design and quality that is accessible in today's market, along with a value proposition that should prove disruptive across many markets, putting RH in position to capture market share through fiscal 2024. Although a product transformation of this size will dilute margins near term as we cycle out of fading collections, we expect it to turn margin accretive again once selling rates settle and permit efficiencies in our supply chain and sourcing. Now for platform expansion: our strategy to grow the RH brand worldwide, serve new markets locally, and rework our North American galleries amounts to a multibillion-dollar opportunity. This summer we brought RH to the United Kingdom in striking and memorable style by opening RH England, The Gallery at the Historic Aynho Park — a 17th century, 73-acre estate that honors history, design, food, and wine. Attendance at our opening event in early June was outstanding, and the press coverage the brand earned, both nationally and globally, was several times larger than for any gallery we have ever launched. Because RH England sits in the countryside, we anticipate that interior design and trade businesses will generate most of our revenues there, since those operations rely on cultivating repeat business with high-value clients such as hospitality projects and interior design firms. Our quote books are growing, and we'll soon send out our first Sourcebook in the United Kingdom. Although the early response has pleased us, we still have a great deal to discover regarding how the business ebbs and flows seasonally in the English countryside, particularly during winter. Once we begin mailing Sourcebooks and go through a couple of seasons, we'll have a clearer picture. Openings in Dusseldorf and Munich later this year form part of our global expansion as well, with Paris, Brussels and Madrid set for 2024, and London, Milan and Sydney on the calendar for 2025. Turning to our North American transformation. Our plans still call for opening RH Indianapolis and RH Cleveland during the second half of this year, while RH Palo Alto and RH Montecito are now slated to open in early '24. On top of that, 12 North American galleries sit in our development pipeline, with openings scheduled across the next several years. We likewise see a chance to reach new markets at the local level by launching design studios in neighborhoods, towns and small cities where wealthy and affluent people live, visit and vacation. Several locations we already operate have proven out this strategy — East Hampton, Yountville, Los Gatos, Pasadena and our former San Francisco Gallery in the Design District — where annual revenues have reached $5 million to $20 million within 2,000 to 5,000 square feet; we have just secured our first new Design Studio location in Palm Desert, which should open in the first half of 2024. We have pinpointed more than 40 locations that go beyond what we previously planned in North America, and we believe these Design Studios' results will yield data that might support opening larger galleries in those markets. Outlook. As I mentioned, we are lifting the low end of our revenue guidance for the year to a range of $3.04 billion to $3.1 billion and keeping our outlook for adjusted operating margin in the range of 14.5% to 15.5%; we estimate the 53rd week will produce revenues of approximately $60 million; for the third quarter of fiscal 2023, our forecast calls for revenues of $740 million to $760 million and adjusted operating margin in the range of 8% to 10%; we expect advertising costs to rise by approximately $50 million versus Q2 2023, reflecting the shifting of the RH Interiors Sourcebook from Q2 to Q3, the mailing of RH Contemporary Sourcebook and the mailing of our first Sourcebook into the United Kingdom; for the fourth quarter of fiscal 2023, our forecast calls for revenues of $760 million to $800 million, and adjusted operating margin in the range of 14.4% to 16.6% with incremental advertising costs of $5 million versus the fourth quarter of last year. When we look at the RH business vision and its ecosystem, taking the long view, our belief is that some players have taste but lack scale, while others have scale but lack taste — and the notion of scaling taste is something big and far-reaching. Positioning RH as the arbiter of taste for the home has turned out to be disruptive as well as lucrative, and we keep pursuing our quest to make this the most admired brand worldwide. Leading designers, artisans and manufacturers are drawn to our brand, and across our integrated platform we scale their work and make it more valuable, which lets RH curate the most compelling luxury home products collection anywhere on the planet. Elevating and expanding what we offer will go on through launches of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier, along with other new collections slated to arrive across the next decade. Opening immersive Design Galleries in each major market, as we plan to do, will unlock the value of our vast assortment, producing $5 billion to $6 billion of revenue in North America and $20 billion to $25 billion globally. Moving the brand past curating and selling product toward conceptualizing and selling spaces is what our strategy calls for.

When we create an ecosystem spanning products, locations, services, and spaces, the RH brand becomes recognized around the world as a leader in thought, taste, and place-making. The architecturally inspiring galleries we build make our products feel more elevated and more valuable, and those galleries in turn gain greater value from our interior design offerings and our hospitality experience that is seamlessly integrated. As we move past the 4 walls of our galleries and into RH Guesthouses, our hospitality work will keep lifting the RH brand, and we aim there to open up a brand-new market for travelers in search of luxury and privacy within the $200 billion North American hotel industry. On top of that, we are crafting bespoke experiences such as RH Yountville — food, wine, art, and design brought together in the Napa Valley — along with RH1 and RH2, our private jets, and RH3, our luxury yacht available for charter across the Caribbean and Mediterranean, the places the wealthy and affluent go to 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: constructing the world's first consumer-facing platform for architecture, interior design, and landscape architecture services within our galleries, which lifts the brand and magnifies our core business while adding new revenue streams and simultaneously disrupting and redefining multiple industries. Our strategy completes its circle as we start to conceptualize within self spaces, moving past the $170 billion furnishings market and 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 consumers who are starved for time. Digitally, the whole strategy is brought to life with the world of RH, an online portal where customers can explore our brand's depth and dimension and draw inspiration from it. Once 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 further. Our plan to grow the RH ecosystem around the globe multiplies the market opportunity to $7 trillion to $10 trillion — among the largest and most valuable addressed by any brand in the world today — and a 1% share of the global market represents 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 in a world thoughtfully curated by RH, forging an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to build an ecosystem that makes taste inclusive and, in doing so, elevates and renders our way of life more valuable. The end of COVID confusion, the beginning of the next evolution; we spent far too much time over the past 4 years debating if this was going to be the decade of home or the death of retail. Suppose inflation turned out to be temporary, or fiscal restraint was unavoidable — then home sales and prices rocket upward and are now plummeting back down like a stone. Never before in my working life had retailers been measuring their growth against whichever of the previous 4 years, in whatever month, of whatever year. The truth is, we sit directionally right where we sat 4 years back, fretting over the financial recession mentioned in the poll that suggests a presidential regression could be coming. If ever there was a moment when the world required Encompass, this could be that moment. Everyone on team RH embodies our vision, values, beliefs and culture — the very things that propel us and bind us together, the things we seek out, would battle for and plunge for. Having spent several years separated throughout COVID, we at last came back to The Palace of Fine Arts Theater in San Francisco — what had been our yearly leadership conference — and we discussed those things; for the first time in 4 years, everything snapped into clarity, clear took the place of fear, and connections became personal rather than virtual; it felt different because it was different. Accountability reaches another level when a person stands before you, gazing right into your eyes, offering a suggestion or making a request, as opposed to staring blankly at a screen, unsure whether the folks on the other side have muted you or simply lack much interest. The moment has come to shed the bad habits of COVID. The moment has come to step away from the screens, leave the home office behind and reconnect in our team office, or as we did at the Palace; it simply felt different because it was different. And I'm confident it will produce a different result. Still, it also felt like something known — like discovering the road back home, back among our people, where no one of us outthinks all of us, bringing every brain into the game and every ego out of the room, hearing and absorbing, talking through and debating, lifting up and aligning; it felt like the start of our next evolution, and it felt like we were beginners once more. Never undervalue what a handful of good people can do when they don't know what's impossible — especially these people. Onward team RH, Carpe Diem. At this point, we'll take questions on the call.

Gary, could you perhaps elaborate a bit more on what gives you confidence that we'll see an inflection in the business in the back half? And what are the early signals from the RH carrier book, and I suppose RH England too, telling me about how a potential reacceleration in demand might shape up as we look toward '24 and past that?

Sure. There are a couple of dynamics at play, I'd say. In my view, what we're seeing is a two-part correction: one coming off the back end of COVID, and another tied to the rapid rise in rates plus the decline from the highs of a housing market that I'd describe as fueled by the pandemic and a zero federal funds rate. So from where we sit, that adjustment wraps up as this year ends. Then the real issue is whether the housing cycle will experience a more prolonged slump. As I see it, the open items that remain unresolved come down to this: what would you say is ailing housing right now? The interest rate situation is genuinely different for people who bought homes in recent years when rates were extremely low. They're holding mortgages in the 2.7% range, or let's say up to 3.4%, and about 90% of the market has fixed-rate loans. So the vast majority of homeowners have these very low rates locked in. Meanwhile, today's 30-year mortgages are sitting around 7%, roughly 6.8% to 7.4% depending on your credit score. That leaves a massive gap. And what makes that gap even more painful is that housing prices still haven't fallen enough to make up for it. When mortgage rates came down—during the two-year stretch after COVID arrived, housing values climbed 42%, fueled by that pandemic surge. After the virus took hold, with folks confined to their residences and eager to leave urban areas, we witnessed an unprecedented shift from cities out to the suburbs, along with an unmatched wave of purchases of vacation properties. Consequently, an enormous number of individuals relocated at a speed never seen before. A large number of individuals are stuck with extremely low rates. At the same time, rates have climbed quite high, and there's nothing available on the market—no supply exists because, after selling, folks can't manage the cost of a replacement property. The reason is that they'd be swapping an interest rate of 2.7% to 3.4% for something around 7.2%, roughly the middle point. That's why things are frozen in place. This will start to move in cycles eventually. So, provided the Fed sees CPI and inflation staying controlled, and we don't—it doesn't need to keep being, in a sense, restrictive. So the real question becomes: at what point do home prices fall far enough that buyers are willing to absorb a higher rate, or alternatively, when do rates decline enough to shrink that spread? The way I see it, you need either housing values to drop or borrowing costs to drop — otherwise that gap just stays there, correct? That means you could be scraping along the bottom, or things could slide further if the broader economy runs into trouble, or if something goes wrong in commercial real estate, since offices are a weak market. Our take isn't nearly that gloomy, though. Some of that bad news has already come out into the open. From where we sit, we're basically past the toughest stretch. Will there be a rebound? Well, if you look at what the market is pricing in, it's telling us to expect rate reductions beginning in Q2, Q3, and Q4 of next year — perhaps 100 basis points. A cut of 100 basis points doesn't do a whole lot for housing; it might nudge it slightly. But my sense is something larger is needed — that spread has to be eliminated, and it's a spread the likes of which I've never witnessed. I doubt anyone listening on this call has witnessed it either. It has produced a real puzzle in the housing sector. And then consider this: the headlines say, oh, new homes are up 20%. But new homes represent just 10% of the market, while existing home sales make up 90%. So unless existing home sales and that segment steady themselves — no further decline — that's the key thing. We're expecting things to level off, in our view, during next year. We don't foresee acceleration occurring before rate cuts arrive or prices decline. Home values would need to fall to help narrow that spread. Let's set that topic aside for now. That's 1 matter. Then there's what we've been doing — a total overhaul and reinvention, or revitalization, of the brand, which we've been at for a number of years now. The full picture will emerge across the next few quarters. And keep in mind, by the end of this week, 40% of the books will be in homes — the early indicators we're seeing in those numbers look pretty robust. But these signals are extremely preliminary. You've got to be careful about extrapolating from them, since your projections need to account for things like: how will this look after every book has arrived at a home? How will this look after in-stocks reach their maximum — the levels you'd ideally want? How will this look after you start refreshing the galleries in stores with these? All kinds of lift factors come into play there. So as we examine this and project forward, we believe a genuine inflection point lies ahead. How large will that inflection point be? From where we sit, this appears to be a significant turning point. Part of why we chose to move the mailing into Q3 was so we could consider, over a longer horizon, what our approach to reaching customers ought to be, given that we're now in the middle of refreshing, reimagining, and repositioning the brand. Looking back across our history, we've moved through cycles in which we reach the customer two times per year with each book, and also stretches — years — when we reach the customer just once annually, with 1 large mailing cycle. Our thinking is that we need to get the consumer reacquainted with the RH brand — the freshness, the thrill surrounding it, and all that we're doing. We believe the right move is to establish a 2 contact strategy. As for when those contacts land — the context — our belief is that it ought to be a full contact, essentially all contact, in the spring contact. That's how I'd put it.

Okay, so picture this as a contact that lands somewhere between the middle and latter part of August, and then it's in the home by the time September wraps up. Now, our books — particularly the interior one — that interior book runs 604 pages. Nobody else out there is putting out a 604-page book, just us. And once you factor in printing, binding, and pushing it through the whole system, it simply takes more time than our other 2 books, which land closer to the 300-page mark. So we have this initial contact arriving in homes around, let's say, the close of September into the first week of October. After that, the contemporary book shows up somewhere between the middle and the end of October. Then we follow with the January book — contemporary comes during that October window, and the modern book arrives in early January, right when folks come back from the holidays and everything starts up again. From there we loop back around and reach everybody with the following contact, which, if you're looking across a 12-month span, falls around March, April, May, June. So those 3 books get another solid wave of newness. Once that contact finishes, we'll essentially be completely transitioned. That's not to say there won't be fresh product in the contact after that, thinking ahead to next fall. But the share of newness drops to somewhere in the 15% to 20% zone, whereas what we're doing now amounts to an 80% refresh of the brand — it's enormous. This is the largest product move I've ever undertaken across my entire career, and I've launched some fairly sizable product groups. So you have to consider how you space things out, how much the consumer can absorb at once, how you'll read it accurately, and how you keep the contacts from overwhelming them and the new news from overwhelming them. So when we stepped back and took a broader look rather than just 1 angle, thinking more about how to approach it strategically — maybe across, say, the next 3 years — we believe this is the correct contract strategy, and by the peak of the inflection, I think it'll be genuinely meaningful. I think we'll pick up significant market share, significant market share compared to anyone else in our category. And the other piece worth putting into context is how we approach disruptive pricing from a circular standpoint. In our push to elevate the brand, I think we weren't being critical enough when it came to price. I said on the last conference call that, looking back, we were probably a bit arrogant; these days I think we're laser-focused and laser sharp. So we're going to be very aggressive. We plan to take advantage of how big and strong our platform is, along with the leverage that provides, so we can shake things up when it comes to pricing; and so — and I believe that will have a significant effect. I think when you check out the new book, when you check out the messaging, when you check out the key items, when you check out the key collections, when you check out how good the product is, the design, the quality of the design and how well the product is made. And when you check out the value, the price — the value of that product, I think it will disrupt a lot of people; and so I think our confidence is higher than it has ever been. I think that's the timing. And then what we can't know is what happens with the housing market? Does it stay flat? Do we see another 5% or 10% decline, or do we get a bounce? No matter what occurs with the housing market, we will have a meaningful inflection point for the business and the brand. And that is the reason we deployed the capital. That is the reason we repurchased 17% of the shares, 3.7 million shares. And — so we are pleased with what we see so far with the books here. We are pleased with our strategy. I think we are laser focused on this. And I think we will come out looking really good. So that is how we see it.

Jack, here's what I want to ask — it may have 2 parts. You brought up product transformation along with margin dilution. Is every bit of that staying inside '23? Or will a portion of it carry over into '24? Then, Gary, picking up on what you said: suppose this market drifts sideways for a while and we get yet another downdraft. Since you now carry leverage — or rather the business does — a bit above what it typically handles, would you run things any differently if the macro simply needs more time to emerge, and perhaps the curve gets steeper in later years while staying flatter over the medium term?

Yes. By the first half of next year, in my view, the inflection will matter far more than the macro does; therefore nothing about our approach changes.

Regarding the margin dilution, Simeon, let me address that. I'm also considering it in relation to where the margin — or the discounting and inventory clearance — will stand in Q1 of '24 compared with Q1 of '23. So yes, some of that will still be present during the early portion of the year.

However, I believe there are two factors at play here, correct? As we shift our assortment, you'll see some margin dilution from a product margin standpoint—yet you'll also gain leverage and margin accretion across the entire model, based on our expectations for what will occur with our top line. So yes, I simply—I believe '24 will be an excellent year, unless some sort of wild crisis emerges that we don't think is coming. I think—I think past experience would show us that if conditions truly deteriorated, the Fed would loosen. When I reflect on the past 20 years, the Fed has acted quite consistently. We've experienced a very extended stretch of extremely low interest rates, with only a handful of minor spikes that are elevated. And I think the Fed will respond in a manner that boosts the economy once more. So—and then housing will—eventually, housing will surge, correct? There's substantial pent-up demand. The issue is that demand can be so deeply pent up that if the gap remains unchanged, right? If either prices don't decline or the interest rate gap stays the same, rates must decrease. One of those two scenarios occurs. If both occur—prices fall and the Fed acts—you can get—I think we can achieve a really favorable outcome in the housing market. But that's simply beyond our control. We hold a perspective on it, to offer our perspective. We examine numerous factors, and we possess plenty of data that we analyze. What matters most to us is how we consider the balance sheet, which we do—I mean, we invested a great deal of capital; we hold strong confidence in the model. We're amid a transformation; it's not—this is not, in any way, the first instance we've undertaken it. It's the largest endeavor we've ever pursued. Yet our expertise in executing such moves exceeds that of anyone in this sector. And we're intensely focused on it; and we grasp our balance sheet extremely well, along with what our cash flow will look like and the schedule of capital, outflows, and anticipated inflows, and we're familiar with all sorts of downside scenarios and know how to function in any type of environment, any type of challenging environment. To put it plainly, leverage doesn't scare us. This company has carried far heavier debt loads before, and folks have watched us steer through those periods fairly smoothly — the only exception being how truly bad things got around 2008 and '09, roughly. So our confidence is high. Still, the main takeaway I'd point to is this: I would be genuinely stunned if we failed to beat whatever the macro throws at us during the first half of next year — unless it turns into something so extreme that it paralyzes the whole economy. And my honest view is that won't occur. My expectation is the Fed will act the way the Fed typically acts. Should we see any sort of settling or improvement in the market, we'd be looking at an unbelievable year. So I believe our positioning now is stronger than at any point in this company's history. My sense is we're headed for the largest inflection point this business has ever experienced — coming by Q2 of next year. Sure, some inflection will show up sooner than that, but when I review every line and consider output, in-stocks, floor sets, and all the transitional work ahead of us, I believe the peak arrives during the second cycle of the books, and from there we're going to go on an unbelievable run.

I'd like to turn now to the launch of RH England. From what I can tell, that opening event went well and was a success, though reaching full maturity is going to require some time. Should we expect your other launches abroad to follow a similar maturity path? Or does this one take the longest, given that it's essentially your first? Also, in the same vein, the letter verified 9 openings outside the U.S. by 2025. Could you elaborate on how quickly you'll open internationally each year going forward? Is 3 roughly the correct figure?

Yes, let me begin with the first part. Well, for one thing, RH England resembles nothing else we've ever launched, and not only from an international standpoint; it really comes down to the sort of location, plus our vision for how we wished to bring the brand forward and when we wished to bring the brand forward. First, we wanted to bring the brand forward in a manner that was highly distinctive and impossible to forget. Simply because the U.S. isn't genuinely regarded from a European standpoint when it comes to design, taste and style, the luxury market, and so on and so forth; that's not truly the game we play particularly well. I believe I've said this previously. The sole genuine luxury brand we've had, I think, in the United States, is Tiffany, and the French own it now, correct? And every luxury brand originates from Europe; so how do we enter that world and present ourselves. We felt that mattered a great deal. And so — and we likewise felt the timing mattered, like how do we get the name recognized and establish ourselves in a distinctive manner. And we could have held off and launched Paris first, or we could have held off and launched London first. We would have needed to wait longer, and we stumbled upon this chance at this property, and we felt this could be something extraordinary. It could serve as a truly excellent introduction for the brand; and I've consistently said that our choice on RH England came down to its location, it's an hour and 45 minutes outside of London. It's in the Cotswolds. It's near wealthy and affluent people, yet it isn't near density. You don't have anyone strolling past this gallery. Like it's not — it is a genuine destination. And you sort of have to go out of your way. But you're heading to something spectacular that you've never laid eyes on before. So the impression it creates is unlike anything else. And I don't wish to draw the incorrect comparison here, but if you simply consider the sorts of things that went into the, what I call the middle and nowhere and transformed everything. Think about Disneyland. Disneyland launched in the middle of nowhere. If you went back to when they opened it in the middle of an orange orchard, and nobody was nearby. Nobody — there was no population density anywhere close to it. And it transformed everything. Take Las Vegas—it wasn’t there before; it got built. And I’m not saying that comparison lines up perfectly. What I mean is, we’re attempting to establish a brand at a tier of the market that nobody has established before. Our thinking was that this choice was aimed more at sparking discussion than at generating sales. We never expected this to be a gallery with big volume. Still, we didn’t expect zero volume either. My sense is it will be okay. I believe it would take far—if you placed something similar in London, it would perform many times over—right away many times quicker; it’s somewhat of a hassle, yet it’s remarkable. Plenty of truly remarkable things around the globe began as hassles, correct? Getting an iPhone was a hassle, getting a Tesla was a hassle. How long did folks wait for a Tesla? How long did folks wait—how long did they wait for the new roaster or the cyber truck? So it’s—you need to consider what the long-term objectives are that you’re pursuing. We’re attempting to mold the brand in a manner no brand has ever been molded. Bringing the brand into Europe, where the luxury brands are, I believe, generates the right discussion with the right individuals and generates the right buzz, the right halo for this entire endeavor so that—when you bring it into other markets, there’s enthusiasm surrounding it. They’ve caught wind of it. It’s on its way; they’ve watched it shared. They’ve watched it covered. The media attention we’ve received on it is simply unbelievable. It’s many times greater than any gallery we’ve ever launched since it’s something nobody has laid eyes on before. And it’s handed the world a topic to discuss; plus we have genuinely fascinating, prominent individuals turning up there, booking appointments there, and seeking collaborations with us; some of the most upscale car brands on earth want to hold car shows at our property and similar things. So—my feeling is it will unlock every sort of fresh opportunity, fresh discussion, fresh perception, and fresh possibility for the RH brand. Yet it isn’t the gallery I’d point to and say, Oh, let me project what occurs here. We lack anything comparable in America. Correct. We lack any sort of location resembling this. Nothing here is remotely like it; so—and that’s why I believe it’s prompting so much discussion; yet it isn’t the handiest spot to shop. We understood that from the start. So the real purpose here is to introduce the brand, spark the right discussion, allow it to grow, let’s go through a winner. Let’s go through a cycle. Let’s find out what steps we need to take. Also, keep in mind, the book hasn't gone out yet over in the U.K. So advertising has been minimal; we've got all the coverage that everyone has put out there, and beyond that we ran a handful of ads along with some magazines and that kind of thing. So my sense is that in every one of the other places we're launching, they're extremely visible in the big markets, with plenty of foot traffic around them — closer to what I'd describe as standard when you look at it from a site standpoint, though not standard when you look at it from a competitive or market standpoint. These are going to be remarkable galleries; a few are even more remarkable than the rest. Certain markets carry more weight. In a few spots, we picked up some of the Abercrombie sites we otherwise might have passed on, just so we could land London and Paris, since those sites are so unbelievable. So there are a few smaller ones where we aren't putting in much capital, but we'll open them anyway and we'll learn from them. That said, I'd tell you this can't serve as a proxy. It isn't one. Whether we'll ever construct anything like this again, I'm not sure. We might; but it isn't what anyone would normally do. Still, that's exactly why everyone is so curious about it, and why they keep writing about it, and why they keep discussing it, and why the caliber of folks heading there is the kind of people who likely wouldn't have shown up — you probably wouldn't have drawn them if you opened something run-of-the-mill, but they're showing up because it's one of a kind. And sure, but it's merely a single small component of a far larger, far larger composition and puzzle that we're assembling, all to turn RH into a genuinely dominant, successful luxury design brand. The cadence of international openings. Yes, I'd say this marks a beginning for that opening cadence. I'm happy with how we've started. Yes, I'd say I was reasonably aggressive about it. So here's where we are — we're putting a lot of flags down in key places, on truly dominant, fantastic real estate, and we couldn't be more thrilled; so — but — and my sense is we'll pick up a great deal over the coming 3 years.

Regarding the repurchase program — you obviously ramped it up quite a bit during this quarter. What I want to know is how we ought to interpret that. Was it pretty much a one-off tweak? Or should we be looking for the buyback to remain aggressive as we move into upcoming quarters?

With each buyback, we share what our plans are; we still have open to buy plus the repurchases, I believe, of a few hundred million, $700 million. So yes, I'd say we acted fairly aggressively here. And it's — we believe we acquired that 17% of the business at a genuinely appealing price. I think our shareholders will gain from it; and should our outlook for the coming couple of years prove correct, it will appear to be a truly excellent investment. Just how aggressive will we get in quarters ahead? I think if you look at our history, we tend to be opportunistic. Unlike a large corporation that establishes a routine buyback each quarter and things of that nature, we don't operate that way. I mean, if doing that were so clever, Warren Buffett would do it, correct? Warren Buffett repurchases his stock in a highly opportunistic manner; and we aim to be opportunistic investors, whether that's in our own stock or in anything else we pursue. So we felt this was an excellent moment to put capital to work and repurchase a significant stake in our company; and it hinges on what the market does, hinges on what we observe and how we feel about what we'll do going forward.

I'd like to circle back to that topic. You brought up the shareholder letter regarding certain early indicators that, as we read them, look fairly encouraging around the Sourcebook launch — as you put it, still early. But I'm wondering if you could expand a bit on what you were getting at. Are more customers returning to the brand? Is our conversion rate climbing? Bigger average order values? I'd really appreciate hearing more specifics about those signals if possible.

Sure. Well, the new collections — the ones we believe matter, or that are behaving as though they'll matter — those look promising. And the markets where the books are landing appear solid. The reactions appear solid. So you simply have to observe it across a stretch of time. What drives our business — what drives our business — is mostly advance purchasing. It comes from someone purchasing a new residence, renovating a residence, or choosing to redecorate a residence, and none of those things occur frequently, correct? That makes it a business with very high transaction values. So if you track our customers across multiple years and identify their peak day, that peak day has amounted to approximately 80% to 85% of what they spend with us during roughly a 90-day window, correct? After that, looking ahead a couple of years, they spend very little. So you have to capture them while they're in buying mode. That explains why this business takes a harder hit than others during a cyclical downturn such as the current one. And look, we recognize that after we exited the holiday businesses — whether that's the Halloween business, the Christmas business, or the accessories business — we aren't nearly as dominant in those areas as we once were. During a down cycle, we wouldn't absorb as large a blow since consumers keep purchasing small items. We barely sell any small items, and we don't sell any seasonal holiday merchandise whatsoever, correct? As a result, we'll absorb larger blows than others during these down cycles, yet we'll experience larger gains during up cycles thanks to our mix and similar factors. So — but you won't witness people immediately; the books won't land and you won't witness the complete potential. You have to allow these books to settle in. Typically, we reach ramp within a book by 3 months. We achieve that ramp rate. In-stocks occur properly, and so forth, and things accumulate, and so forth. Well, but — we're pleased with everything we're seeing. I mean, genuinely. What I'd say is that the initial indications look favorable, and all we're asking for is additional time; we'd like to make a transition and equip a handful of locations with certain new items, and we'd like inventory positions to strengthen. There are numerous new products, and a few of them appear as though they could become runaway hits. So you have to ask yourself, all right, what's my approach to getting ahead of that? And what's the method for shifting manufacturing capacity around, and so forth; and you've got certain items that are — there will always be items that did better than your expectations and items that did worse than your expectations; so you gather all the positives, negatives and combine them, but afterward direct your resources toward maximizing your genuine winners. And — yet at this extremely early stage, everything appears, I would say, genuinely favorable for only 40%. So bear that in mind. I'll be able to say considerably more when the next quarter comes; and should anything prove truly significant enough, perhaps we speak with everyone or take some action before then. We'll find out. What I mean is this is — we are at a very early point. And we are quite optimistic, but we remain not so optimistic about the housing market and the broader environment; so the tone will be cautious to some extent, but we'll be far better informed in another 8 weeks. And after that, yes, we'll possess sufficient data to take steps toward contemplating investments during the first half of next year from a mailing standpoint, and how large, how extensive do we reach, how accurate are we, and how large do we go? But we're going to be correct to some extent here; this won't be a swing that turns into a miss. What I mean is, I don't wish to jinx anything, but the fact is we've been at this for many years, and we're skilled at interpreting the data; so it's simply — I believe the question is what degree of really good to great will the result be; and afterward what isn't worth treating as a reset, and then how do you build on that sort of reset?

Understood. Then perhaps one more question. On the international side, you have — new locations on the way, correct, I believe technically inside the 4 months based on what the newsletter shows. What's your take on those launches? And I suppose I'm just wondering what made those 2 cities the first choice?

Those happen to be the smaller ones. Right, smaller ones without much capital, like...

There's no hospitality component.

Correct — no hospitality, nothing like that. So these are a few spots where we felt the sites were reasonable. Without committing much capital, they'll let us — they'll give us a bit of insight into how the brand performs out there. I mean, honestly, Abercrombie never had a poor site. These simply were — we believe we'll gain — we'll pick up knowledge and data, correct? After that we'll figure out how long we might remain in these spots, since we picked up certain leases. And whether there are larger, nicer markets to enter? And what's our move? But I'd say a crucial piece is simply getting the brand out there in a positive manner. Yet the true crux is what came first for us? When folks encountered us or caught wind of us, what reached them? What are they directed toward, what runs through their minds? So at this point we sort of don't — I doubt anyone will regard Munich and Dusseldorf as unattractive galleries; they simply won't reach the standard of London and Paris and Milan and — a few others we're pursuing, indeed. So — yet there are sites we had to accept in order to secure certain truly essential sites that we genuinely wanted, and those were Central London and the Paris location. So we consider these acceptable. Alright. Let's begin. Let's gain knowledge. Let's watch how the business grows. Let's rapidly pick up how to run things in these various nations with fairly modest investment and far less strain than tackling the truly massive ones requiring enormous effort spanning several years that — and that include hospitality plus other layers of difficulty. So...

I'd like to ask about margins. What's the right way to consider profitability on those new lines where you're intending to be far more aggressive with price? Should we be modeling consolidated gross margin somewhere in the mid-40% range on a run-rate basis from here on out?

There will probably be more for us to share down the road. Our view is that over the long haul we can return to the peak levels we've seen historically. At the same time, we need to capture some market share, which means playing some offense and becoming more competitive on price; as a result, we're putting a handful of points into investment right now. That said, there are areas where we're pushing hard and still running at record-high margins. Everything depends on which categories we're going after and how we go after them; so we'll have more to share. Let's wait and see how these books perform once they arrive, what's selling, and what customers are telling us. There will likely be spots where we've cut pricing very aggressively. There are also plenty of spots where we'll be raising prices, correct? We already have 1 collection that's performing incredibly well. It appears to be the strongest collection we've ever had, so we'll likely raise prices this week, simply because demand is so strong. And we believe we can — the product will remain positioned at a disruptive value. We'd probably just pushed the pendulum a bit too far in some areas — this is — in the business we operate in, it's day-to-day, week-to-week, you learn, you gather data, you reconsider things, you're — every new product purchase you make is a guess based on historical data. So you're never — nothing we buy turns out 100% right; we've never bought something and said, that item is selling exactly as planned. That's exactly right. So you're only hypothesizing, correct, you're getting actual data, actual information. Then you learn from it, and you extrapolate that into making the next best decisions. So I wouldn't leap to any conclusions just because of what I'd describe as our more near-term approach of simply trying to shift from the current kinds of products to the next-generation products and playing offense from a disruptive value equation standpoint; that's how we got here. I just think we probably should have maintained that edge the way we used to; and — but you go through a stretch when you're in COVID and your business is running at 40% and your prices are climbing and you've got — you went — we went through multiple rounds of tariff increases and price increases and supply chain increases and COVID increases and ocean freight increases. And I think — that's the reason I made those remarks at the end of my letter. Like, I think we've finally reached the point where everything that kind of — drove everything higher. When you factor in COVID, it's sort of the downside of the cycle — everything declining and everyone, everything just flushing through. And I think if you were to take those years and ask, alright, what are the finest lessons I picked up that can now be set aside, and you have to rethink your business somewhat, but I think — yeah. I simply wouldn't build any long-term assumptions on whatever is occurring on a short-term basis at this moment in this transitional period. I think you'll see us come back to a truly strong model. If we get the inflection that we believe is going to take place in the top line, particularly where we think it will land as we move into, sort of, the first half of next year, you'll see our entire business model snap back.

Okay. However, let me make sure I have this straight, Gary. So when it comes to margin — for the new product you're bringing out across roughly the coming 6 to 9 months, the product margins will sit a few points beneath what you're currently making on items amid the pandemic; and after that, the genuine upside for gross margins might come from volume, meaning better volumes?

Not exactly.