RH (RH) Earnings Call Transcript & Summary

Thanks, and good afternoon to all of you. We appreciate your participation in the earnings conference call for our second quarter of fiscal 2024. With me on the line today are Gary Friedman, who serves as Chairman and Chief Executive Officer, along with Jack Preston, our Chief Financial Officer. Prior to getting underway, I want to bring our legal disclaimer to your attention — namely that certain remarks we make today will be forward-looking, as that term is defined under the Federal Securities Laws, and will include statements regarding the outlook for our business and other topics covered in the press release we issued today. A variety of risks and uncertainties are tied to these forward-looking statements, and those factors could lead to actual results differing materially. For a fuller account of the risk factors that might impact our results, we encourage you to review our SEC filings along with the press release we issued today. We also want to point out that these forward-looking statements represent our view solely as of today's call date, and we assume no duty to update or publicly disclose any revisions to them should new information or future events arise. In addition, we may address non-GAAP financial measures during this call, which are adjustments to our GAAP results that strip out the effect of particular items. Details about those non-GAAP financial measures, including a reconciliation between the non-GAAP and GAAP figures, can be found in today's press release covering our financial results. A live webcast of this call is accessible as well through the Investor Relations portion of our site, ir.rh.com. Having said that, I'll hand things over to Gary.

Okay. Thanks, Allison. Good afternoon, everybody. I appreciate you all being on this call. I'll begin with the remarks we've prepared and the shareholder letter, and after that we'll take questions. To our team members, our partners, and our shareholders: we're happy to share that in Q2, demand rose 7% and keeps turning positive, picking up steam every month, with July closing at plus 10%. Momentum built further as we entered Q3, with August at plus 12%, and product margins turned positive even as we operate in housing's toughest climate in 30 years. The biggest product overhaul and platform buildout we've ever undertaken is now driving RH to capture meaningful share in North America, and it's laying the groundwork for worldwide growth over the coming 10 years throughout Europe, Australia, and the Middle East. Although this turn arrived 2 quarters behind schedule, what matters, in our view, isn't when it happened but how big the vector is that we're building relative to the rest of the sector. A vector has both magnitude and direction, and it can shift — or become ineffective when it comes to projecting strategic separation and future share gains. At this point it's evident our vector is growing along both dimensions, since we're beating the industry by 15 to 25 points. We anticipate carrying this momentum through the back half of 2024, powered by our years-long push to lift our product and our decades-long push to elevate and grow our platform. We're also glad that Q2's results matched the guidance we gave, with revenue of $830 million, a rise of 3.6% from the prior year. Adjusted operating margin came in at 11.7% and adjusted EBITDA margin at 17.2%, and although investing hard through a downturn has weighed on near-term results, it has also put RH in position to seize the long-term chances that emerge during periods of disruption and dislocation; in our view, our demand results prove we're the strongest-positioned brand in the sector to gain from the housing rebound we expect once interest rates come down and home prices adjust lower, narrowing the affordability gap that has weighed on the market for several years now. Every act of creation is first an act of destruction, Pablo Picasso. We've labored to tear down the old version of ourselves and are now working to unleash what we see as an exponentially more inspiring and disruptive RH brand, one built around the biggest product overhaul and platform buildout in our industry's history. Our plan for transforming product in the back half of 2024 includes the second mailing of our RH Interiors Source Book, which landed in Homes from mid-July through mid-August and is driving our industry-leading demand; with fresh collections and better in-stocks, our demand ought to keep climbing through the back half of 2024. After reviewing our circulation information, we chose to fold RH Contemporary Source Book Collections into the RH Interiors and RH Modern Books so that overall mailing, depth, and efficiency could be optimized. Sending out fewer but more meaningful books lets our brand cut through the growing clutter found across the consumer industry, and it fits with our Gallery approach of delivering fewer, more immersive physical experiences that define the brand. The second mailing of the new RH Modern Source Book is set for November, with added new collections and a broader assortment, which includes the contemporary book consolidation. Once again, we expect that our broader assortment and better inch stock position will give our business an extra lift in the fourth quarter. The third mailing of the new RH Interiors Source Book is slated to reach homes from early January through February, taking advantage of what is typically one of the biggest selling seasons for furniture after consumers and designers come back from holiday travel. This mailing ought to help drive a strong finish to 2024 and carry the momentum into next year. As you know, we bought Waterworks in 2016, arguably the most coveted brand in the luxury bath and kitchen category. Over the past 8 years, the Waterworks team has performed exceptionally well, further elevating the brand and creating a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, brings in the vast majority of its revenues from the trade market, selling to architects, designers, developers and builders. Although RH has a meaningful trade business, the vast majority of our revenue comes from consumers; we see a significant opportunity to amplify the Waterworks business on the RH platform by bringing the brand to a much larger audience, much as we have grown other trade-focused businesses and brands over the years. We intend to launch with a 3,000 square foot Waterworks Showroom in our largest new design gallery in Newport Beach, California, which opens in the fourth quarter of 2024. We will also be creating a Waterworks Source Book, with test mailing plans for 2025. Waterworks today is just shy of a $200 million business with mid- to high teens EBITDA margin that we believe could become a billion-dollar global brand on our platform. Let me turn your attention to the elevation of our — and expansion of our platform; we keep opening the most inspiring and immersive physical experiences in our industry and some would say the world. Spaces that reflect human design, a study of balanced symmetry and perfect proportions, spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces with garden courtyards, rooftop restaurants, wine and barista bars, places that awaken all of the senses, and spaces that cannot be replicated online. Our plan to expand the RH brand globally, address new markets locally and transform our North American Galleries, represents a multibillion-dollar opportunity. Looking ahead to the back half of 2024, our plans for growing the platform include RH Newport Beach, which opens in November. Spanning more than 90,000 square feet of indoor and outdoor space across 4 floors, with Pacific ocean views, it will rank among our most dramatic immersive and brand-defining physical locations so far, and it will take the place of — substitute 3 legacy galleries throughout the region; featuring a 260 seat indoor/outdoor rooftop restaurant, with uninterrupted views of the California coastline, 2 wine and barista bars, an Interior Design Atelier, our first Waterworks Showroom and the most expansive luxury outdoor furniture assortment in our industry, RH Newport Beach is set to be an inspiring destination in the Southern California market, and it has the potential to become our second $100 million plus gallery. RH Raleigh, which also opens in November, offers 50,000 square feet of indoor and outdoor space, across 3 levels with a rooftop restaurant, garden courtyard, a wine and barista Bar and an Interior Design Atelier. RH Montecito, opening in early December, is a reimagination of the historic firehouse in the Charming Enclave purchased above Santa Barbara, California, and it features an indoor/outdoor courtyard restaurant with fireplaces and fountains, a wine and barista bar and an Interior Design Atelier. This November also marks the opening of our first RH Interior Design Office in Palm Desert, California.

There's an opportunity we've identified to reach customers in new areas locally — we'd open design studios in communities, villages, and smaller cities where well-off and prosperous individuals reside, spend time, and take holidays. The spot in Palm Desert functions as a unique pilot for a consumer-oriented professional interior design studio that's separate from a gallery. What we're trying to do is establish RH as the top name in professional interior design, which would let us attract the very best interior designers working in the field. Going forward, we anticipate a turning point for our business in Europe, since we'll begin launching in Paris and London — the crucial brand-building markets — during 2025, and in Milan during 2026. Once we reach that point, the size of our operation will let us cover the ad spending required to grow that business across Europe. We're eager to provide further specifics about our worldwide growth after we launch in those important markets. In addition, we're putting substantial money into making our online experience stand out and feel more premium, and during the back half of 2024 we'll roll out major improvements to our site. A portion of the features we're planning to release is genuinely groundbreaking and has no equivalent currently available; for a number of the user interface and presentation designs, we plan to pursue design patents, and as we bring the new functionality to market, we'll begin sharing more specifics about the new website strategy; at this point, please turn your focus to our outlook. Although we anticipate that industry conditions will remain difficult until interest rates come down and the housing market begins to recover, we anticipate that our demand trends will pick up speed across 2024 and continuing into 2025. Since we've made such sweeping changes to what we carry, we anticipate that sales won't keep pace with demand this year — the gap should run about 4 to 8 points — and that will hold until we've had a chance to study how the new collections perform, work down our backlog, and cut the wait times on special orders. Alright, let's get started. Throughout fiscal 2024, we're going to provide guidance each quarter covering both demand and revenue growth, which will allow shareholders and investors to get a clear picture of how the business is performing. Another point we think matters: our current projection is that we'll close out the year carrying a larger backlog — somewhere in the range of about $80 million to $100 million — because demand will stay ahead of revenue all through 2024, and that's going to take roughly 100 basis points off adjusted operating and EBITDA margins for the year. On top of that, the start-up costs we're putting into international expansion are now expected to act as a drag of about 230 basis points in 2024. Since the upturn is arriving more slowly than we'd anticipated, here's how our outlook for the whole of fiscal 2024 changes: comparing 52 weeks against 52 weeks, we see demand landing somewhere between 8% and 10%, revenue expansion of 5% to 7%, an adjusted operating margin falling in the 11% to 12% span, and an adjusted EBITDA margin in the 17% to 18% span. Turning to what we expect in the third quarter of fiscal 2024, the figures we're projecting are demand growth of 12% to 14%, revenue growth of 7% to 9%, an adjusted operating margin somewhere from 15% to 16%, and an adjusted EBITDA margin somewhere from 21% to 22%. Genuine leaders stay comfortable even while they're making everyone else uncomfortable. Leadership means chasing a vision — something you have never witnessed, in some place you have never visited. Humans are creatures of habit, so change makes us uncomfortable, yet for RH's people and partners, a culture built on leadership and innovation sits at the very center of who we are and shows up in all that we do. For more than 2 decades, we have grown comfortable making ourselves and others uncomfortable, and we intend to keep doing that for the foreseeable future; that is what leaders do, and it is how we know we are on the right path. That could look like rolling out the biggest wave of product changes this industry has ever witnessed, even as everybody else pulls back during the toughest housing downturn in 30 years. Or it could mean building the biggest, most all-encompassing in-person shopping destinations around the world, while competitors cut locations, shut doors, and shift to the internet. We also won't chase the crowd into that supposedly social universe of social media — you won't spot us on Instagram, and we aren't handing cash to a group of unknown people labeled influencers so they'll claim on TikTok that they're fans of what we make. Here's what you can count on: the spot where we'll probably turn up is that path fewer people take. Our vision and values are what steer us — they keep our spirit burning and win our customers over. This all began over two decades back, when we set out to turn around a company that was basically insolvent, carrying a market value of just $20 million, with a box of Oxydol detergent pictured on its catalog's front — and make it into the number one luxury home brand worldwide. Everything we picked up along the way — the teachings, the subtle details, the things we gave up, and the scars that formed from being floored 10 times yet rising 11 — those experiences forge the mental and moral fiber that defines character in people and cultures within companies. You can't pick up these kinds of lessons sitting in a classroom, or by running a business. They have to be earned through the act of building. The world tends to reward copying and to punish the naturally uneven path that innovation takes — particularly for publicly traded companies. All of us, the employees and partners of team RH, will keep pushing ourselves to tear down what exists today so that we can build what comes next, and we'll stay entirely at ease with the fact that we make ourselves and those around us uneasy. Never underestimate what a handful of capable people can accomplish when they have no idea what's impossible — and I mean these particular people. Onward team RH, Carpe Diem. Operator, let's take questions now.

Yeah, so I'm just aware — given how demand patterns have been inflated by all these new product introductions rolling out. We feel fairly confident regarding the margins on our products. I believe you pointed that out in the press release, steady, ideally through the remainder of the year, placing you, I suppose, in a stronger position than others in a marketplace that seems somewhat more promotional. How do you see it?

My apologies, you're sort of — we weren't able to hear you clearly.

Yeah. So regarding that inflection, and the new products — those come with solid margins, correct? How do we feel about product margin for the remainder of the year? That's really what I'm asking.

Well, like I said during the third quarter, those have turned positive. And right now we feel quite good about the business. The inflection came a few quarters later than expected. When you're undertaking major moves and major innovations such as this, as I've said, timing matters less than the vector — and the growing scale and direction of that vector, plus what it lets you kind of perceive further out. Looking at all the product introductions we've rolled out over the past few seasons, we've built up enough information by now; from here on, it's a matter of fine-tuning, smoothing things out, and keeping on with learning, delivering, and adjusting. There's also plenty more coming down the road. So as I see it, the mix should begin changing starting today, though we're pleased with our current position; we're pleased with the demand trajectory that's emerging. We're pleased that margins have gone positive. We're pleased that we have several galleries, with new ones set to open ahead of us — one of them. I mean, it might be — just one of them by itself is worth around 3 or 4 Galleries. Think about the value RH Newport Beach will bring. My view is that it will become a powerful, disruptive presence throughout Southern California, and we are genuinely thrilled for what comes next. So yes, we will continue along the same path; we will keep acquiring knowledge, expanding, innovating on the fly, adjusting, honing, and raising our game — pushing our strategy ever higher. I could not be more pleased with our current position. Naturally, I would have liked this to arrive a few quarters earlier, though that detail isn't what matters, right? I mentioned to someone, how many occasions — how frequently has it actually landed on schedule? Whenever you're making big moves, hitting the timeline is genuinely hard. When you're doing real innovation, hitting deadlines is a genuine challenge. If all you're doing is making small tweaks, staying on schedule is simple — but the results are never particularly significant, and neither is the strategic view over the long haul. Think about our starting point: a brand valued at $20 million in market cap, nearly bankrupt, with a box of Oxydol laundry detergent, and 52% of our business coming from selling nostalgic discovery knick-knacks. Somehow we climbed out of that and created the brand we have now. I mention this every so often so folks can consider: if we were able to travel from that starting point to where we stand now, imagine what we might achieve going forward. We feel tremendous excitement, and yet our focus has never been keener; right now we are locked in completely. And our focus will only deepen; we'll continue honing, sharpening our understanding, and improving how we allocate both our time and our capital; so in many ways, we're just beginning this journey, ever since that turning point came. So we couldn't be happier.

Understood. Then, a brief additional question. You mentioned combining the modern catalog—I completely get the efficiency rationale. Does that perhaps suggest the extent of the opportunity is somewhat less than what was expected? Or could it simply be more of a timing matter—offering a really expensive collection of goods in a market that remains rather unstable?

No. Regarding the point—the remark I offered a year ago, at one stage I addressed contemporary and noted that our pricing approach on that product carried a degree of arrogance. That represented only one part of the problem; it has more to do with how trends shift and develop across any sector, correct? There exists a chance to divide things up and concentrate on varying appearances, aesthetics, and viewpoints, and up to now we have succeeded in considering how to take assortments, sharpen their focus, and get them to stand out amid the noise. Still everything remains joined together as a single brand possessing one unified perspective, yet presented to the customer with greater clarity than the shopping experience—I mean, I'm not sure, something online such as Perigold or Wayfair, correct, where all you can do is scan through tons of merchandise and you truly can't locate anything. So the capacity to concentrate our operation and present it in a truly clear and powerful manner is what we will keep doing. In this instance specifically, a major trend shift exists, no different from the significant shift that was undertaken involving less of the isolates compared with integrated RH Modern. I mean, that prompted considerable debate in this room years ago. When we build out that assortment, do we fold it into our RH Interior Source Book and advance that book? Or do we keep it separate and craft a sharper message for the customer? Thus you must consider how large the trends are, how they progress, how long they last, and you are continually weighing how to show things in a clear and powerful manner that will stand out. So we've carried out many initiatives, many distinct books—RH Beachhouse, Skihouse, items along those lines—which you will observe returning, correct, and which keep conveying the range and richness of the RH brand. And we've done a big smile, small spaces, all those sorts of efforts; and you cannot simply keep repeating them on a set schedule. You must keep painting a picture, breaking through, and ensuring people notice you. We inhabit a world—we possess 6 senses and face 6 senses; sight ranks as our dominant sense, and sight governs 80% of what we do. Correct? Therefore if you cannot break through by visual means, chances are you simply will not be noticed. And if you will not be noticed, how could you possibly inspire anyone? What methods exist for building a destination or sparking some kind of response? That's something we're constantly engaged in. You will keep seeing us explore ways to gain visibility, to cut through, to convey things visually in today's landscape. Honestly, if the product you offer isn't visible, no one will give a damn. Quality means nothing to them if the design turns them off or the whole presentation fails to penetrate the market and they simply never notice you. So our entire operation revolves around 10x design, quality and value, in that sequence. Each element must sit in the proper hierarchy, and you absolutely must break through; so contemporary would sort of mean modern. There was — if you looked back through time, folks ask me constantly, where do trends originate? My answer is always depth, and it sounds — it takes people by surprise. What are you talking about, they say. "Well, consider this: generations die off. Their possessions end up in estate sales. Those estate sales supply the high and antique markets, the high end antique markets, which supply the high-end design market plus the high-end reproduction market, and after that it filters downward from there. And it filters through — always in a distinctive and current manner. But whether it's mid-century modern or that shift through — that entire trend or the contemporary trend that came after it, the following trend that is sort of beginning to take shape. If you simply dump them onto a website, which by the way nobody can see, it's a store that's invisible. It's like it's a fantastic platform, if your positioning is sort of about price and that sort of thing. But if you're sort of heading up an aesthetics business, if design is truly essential to sort of your positioning, going live online is quite restricted. Nobody passes by you. Nobody notices you. You need to spend a whole bunch of money purchasing words and names and you're purchasing other brands names, like what sort of bizarre thing is that, right? Oh, let me purchase their brand name. So I hope if somebody wanders into my brand? And perhaps they'll notice me or when you purchase a bunch of words or things like let me — hey, like, is this so many sort of strange methods that people are attempting to break through. I think there's — yes, I mean, we simply approach it differently and uniquely and we're extremely skilled at that; so we're not flawless at it, right? So Contemporary, we never believed it would be a big trend. But what happened is it grew larger than we expected and it sort of blurred lines. And so the lines between the interiors book, the modern book and the contemporary book, were becoming too blurred. There wasn't the need to have all 3. Consolidating would serve us better — push the remaining two to carry more weight in mail, put a stronger book into the market with more depth, and land a stronger financial outcome; that's what matters most here; it isn't as though contemporary flopped. The product exists, and some of it simply carried too steep a tag. Back when we launched Italian upholstery and similar items, we applied $70 a yard, $80 a yard fabric to it rather than a $20 yard fabric, and everyone told us our price points sat too high, true. Still, that's fine. Innovation inevitably involves mistakes. Those who fear mistakes never innovate, never take the chance; and for us a mistake is merely one more lesson, one more bit of learning, basically how we operate. So contemporary, in my view, isn't a mistake. I believe we mispriced portions of that book. That was the mistake. Yet we gained plenty of insight; and what the data and numbers tell us points toward consolidating. And if it's simply going to break through — the lines had grown too blurred. Well, you'll watch us bring out other things down the road that may or may not keep going in a way where the goods may lend themselves differently. But you have to keep breaking through continually, correct? Repeating the identical action endlessly while anticipating a different outcome doesn't work, not in a world that keeps evolving, right? Yet staying consistent — holding consistent values and beliefs, a consistent approach and point of view — truly matters, right? So whatever we make passes through our filters, and be it modern, it's an RH point of view on modern, be it interiors, be it classic, traditional big-small spaces, beachhouse, ski house, everything we do, I believe, gets recognized out there and people say, that's RH. I mean, a few people still call us restoration hardware. So I just attempt not to do that. we're attempting to refine the brand, simplify it, achieve a breakthrough; so anyway, that's yes.

I'd like to discuss the assortment, since so much new product has arrived. My recollection is that you mentioned last year that 80% to 85% of the mix would be new. So I'm wondering, have we reached that level yet? Or is additional newness required during the back half of the year? And given that more new product keeps entering the business, do you believe the current pace is right, or will there be extra newness for the consumer as we move into '25?

Of course. Thanks, Steven. That's a good question. So plenty of newness is arriving in the second half, and plenty is arriving across next year. Yes, I'd agree with that. At some point in the middle to later portion of next year, we'll start running on a more predictable rhythm — is that right? So that 85% mark gets hit in the first half of next year. Here's what happens: a lot lands in the second half, and a lot lands in the first half of next year. My feeling is that once we get to the back half of next year, we'll be running on a new steady cadence, right, and the business is going to look quite different. And — but we'll also — there will be other items as well, correct? One more category we might take on, like Waterworks. Look, the size of our bath division is honestly pretty modest. What we have here, I'd argue, is the finest bath brand anywhere in the world — the one people want most and envy most. And that's true. Now, when you look at how this industry works, the general trade typically routes about 80% of its volume, maybe a touch above that, through its channels. Speaking in broad directional terms, think of it this way: that 80% flows toward architects, designers, builders, and similar players — right? It functions as a B2B-style model. Our trade operation is substantial, yet 80% of what we do reaches the consumer directly. Here's the thing, though — plenty of trade showrooms don't even keep their doors open on weekends. By 5 or 6:00 they've shut down. Once evening comes, they're closed. Those locations don't have shoppers in them—no heavy footfall, nothing like that. The whole approach is unlike anything else. So here's what our experience has taught us: several years back, we acquired trade-oriented labels and companies. Take Perennial as an illustration—a standout name in premium outdoor textiles sold through the trade, which then expanded into interior fabrics, additional textile categories, and so forth—and we persuaded David and Ann to hand us a world; I believe that took considerable effort to arrange, yet we chose to join forces and run a trial, and ultimately it proved highly beneficial for each side. Their trade operation has grown larger at present, plus the volume they do with us alongside other consumer-facing companies is substantial. Their specific figures aren't something I have, yet it's turned out favorably for both sides. That same logic explains why we acquired Waterworks, and why we added Dmitriy & Co, Couture Upholstery, and Joseph Jeup — businesses making bespoke furniture for the trade, with outstanding design and product quality, and what matters even more, truly remarkable people and skills. Think about it: Waterworks joined us 8 years ago, and it takes time to refine, polish, work through integration, and execute in a genuinely impressive way. So yes, I believe if anyone listening joins us for the Newport Beach opening — something I'd describe as an RH experience you shouldn't skip — you'll see a terrific illustration of how we can genuinely shake up the market, and there we'll debut our very first integrated Waterwork Showroom. Far more people will then encounter the brand. Like I mentioned, a dominant sense, correct? So what do we currently have — 14 Waterwork showrooms? That's right. Around the globe there are 14 Waterwork showrooms, correct? I believe the largest runs roughly 10,000 feet, something along those lines, while others are 3,000 feet; however, they aren't located in the highest traffic locations. That's simply the case for most trade brands; yet when you place the finest brand on earth before many times more individuals possessing the financial means to purchase the best product available, why would they refuse, correct? Why wouldn't they go for it? Take Dmitriy & Co's design and quality, present it to a vastly larger market, or take Joseph Jeup and present it to a superior market at greater value, since you're focused on constructing the platform to scale that standard of quality. You know, I remember saying way back, during that early period when we were first gaining traction and figuring out our approach, that you just couldn't move high-end furniture like this in large quantities. We had to create what amounted to a brand-new rail system — an infrastructure for supplying goods at that level of craftsmanship. The partners we teamed up with when we launched these ventures were doing $1 million annually, $3 million annually, $7 million annually; and now those very same businesses sit somewhere in the range of $150 million to $200 million, moving product at that same tier of quality. Back then, it just wasn't available, you know? To put it another way, your consideration basically ended with Pottery Barn and Creighton Barrel, and maybe you could throw Ethan Allen into that group as well, even if its aesthetic is a different one—and I don't want to say anything bad about it, but that simply wasn't the direction the market was heading in. So that's what we did. We committed a great deal of capital. We injected funds into the business, we compensated employees, and we exhausted every avenue available to assist them in helping us in return, right, and to build something. That is the reason I say in each letter I send to our people, our partners and our shareholders, in exactly that order, that this is the hierarchy. That is how success is arranged. We aim to form amazing partnerships, and we aim to make — have 1 plus 1 amount to more than 2; and at times it can amount to 10; but that isn’t how it unfolds. As we sort of built, I believe, a fresh market; and look, any time you lead a market, there will be imitators and there are imitators and folks are entering and you have to keep innovating and reinventing and evolving quicker than the rest. And competition is beneficial. It pushes you to improve. The market in front of us, I mean, we’re sort of the largest of our type on the planet. The opportunity in front of us is massive, but seeing it fully play out takes a long time. Think about Steve Jobs — he never got to watch Apple struggle to avoid going broke. He got pushed out, came back later, and pulled the company out of bankruptcy. From there you just keep looking ahead, keep picking things up, keep expanding, listening, absorbing, experimenting, attempting, adjusting, evolving — that's what it's all about. The one thing you can't do is become a caretaker of an existing operation. If you do that, you'll never make anything new. You'll never create or build a brand that defines a market.

So I think that's the piece that makes folks uneasy at times, and it makes us somewhat less predictable. But that's just how we operate. If you examine our track record across the last 24 years, ever since we started this journey from a place with zero resources, zero capabilities, yes, bankruptcy, attempting — everybody would attempt not to end up bankrupt while you're attempting to grow the business. If we could move from that starting point to where we stand today, you can just picture where we might head next. And — yet along the way, we will test and experiment with things. Sometimes we'll attempt to take on too many things, and become somewhat scattered when that occurs, and try to stay just maniacally focused. And I think over the recent years, I think about the last 5 or 7, I think we attempted too much. And it isn't enjoyable when you're kind of only excellent at a handful of things and perhaps your — the result, you must be excellent at everything. If you wish to be the actual market leader. You must have the finest product, the finest presentation with the finest brand, and you must have the finest financial results and the finest shareholder returns and all of those things. And so as we move ahead, think about cadence and newness and stuff like that, you're going to see us keep editing and focusing. Building what we just came through, nobody here had ever accomplished that, like I've never guided a team through a stretch like we're going through at this moment. And all the things you must kind of design, develop, integrate, present. It's a lot. But really the finest thing, how much we learned and how much stronger we are. Not just the brand that leapfrogs, it's the leaders that leapfrog. So you don't build the business, correct, you build the team and the team builds the business. So the people here that have built this business, that's what you want to concentrate on. Like if you didn't perish Trian along the way over the last 18, 24 months here, you were far better. You are far smarter — and you possess a capability now to go toward an entirely new level. So that's — at what I'm really most excited about. All the people that — as I like to say a time marks through hell for a heavenly cause, that got us here that now possess the ability to take us to an entirely new level because what we've all learned together, how we've grown together. That's what's most important, and that's what's most exciting.

Gary, on this final call, we touched on the concept of top, middle, and bottom tiers within the assortment — the new collections. I'd really like to hear you walk through how you see these collections fitting into those tiers right now, as all of us attempt to envision what the possible total demand increase might be from what's been done so far in '25 and after?

Yes. Well, it comes down to how many of those new collections landed in the top — those are the ones that will genuinely shift the business. If they landed in that upper middle third, they'll lift the business. If they landed in the middle, they won't make much of a difference, except once you get enough into the top 30, it raises the entire thing, the middle rises too, and a new middle emerges, correct? Consider this comparison and the way I tend to explain it. And your bottom third is larger — it's a far more productive bottom third, yet you have to keep pushing items into the top third, correct? That's what matters, since the top third elevates everything, much like exceptional people; much like exceptional leaders, correct? They lift everyone. They establish an entirely new expectation and an entirely new bar, and everyone who is capable and possesses the drive and the ability attains an entirely new level, and the whole thing rises. So what's truly essential right now is, if I simply examine it and ask, alright, where do we stand relative to the industry? Where do we stand? How does our demand compare with others? What does the trajectory look like? What are we gaining from the new top third? Because you wouldn't see the inflection we're experiencing unless you redefined the top third, correct? And you redesign the top third, it gets permanently redefined; afterward the middle third gets permanently redefined. And the bottom third gets permanently redefined, correct? And it's identical whether you consider the product or consider people, correct? Someone goes out, take the Olympics as an example, and sets a record in the 100 meters or in some swimming event. It becomes an entirely new standard. Everyone swims quicker. Everyone runs quicker; it's an entirely new game. You simply keep redefining; so that's how to approach it. It's not — all 3/3 are rising or falling, correct? If you place too many items in the middle, you'll likely fall behind since everyone else is advancing, correct? The world keeps evolving. If you're out there putting things in the bottom third, and you're weighted more heavily that way, you're declining. But you must begin with the fact that generally in every market, someone is doing a solid job of pushing the market forward; and they will establish a higher standard, and others will follow. Whether or not those individuals are present, others are going to pick up things from them. Should they possess intelligence, they will examine the companies setting the pace—not merely to copy them, perhaps copying them for a brief period, yet should their ambition be to become the next pacesetter, they must imagine and devise a strategy capable of overtaking that pacesetter. Lifting a pacesetter out of position is genuinely difficult, occasionally requiring many decades. For what length of time did IBM occupy the top spot? For what length of time did Microsoft occupy the top spot? At a certain moment Microsoft was worth 800 times what Apple was worth. 800 times, and afterward Apple overtook them. Yet Microsoft is making a resurgence. A new CEO has arrived, and he is spearheading a campaign. Had somebody predicted Microsoft would rebound in that manner, I would respond that there is no chance; they are finished. Once that vector gets going, you abandon many people far behind. And I likely mean quite a few individuals in this room. I mean it was — BlackBerry was made into a film, or was — the Blackberry film, correct? Excellent film. Should you wish to contemplate vectors along with market upheaval and the swapping of who holds power, what does the BlackBerry film show? They were ahead by such a margin. They had gotten so many elements correct. Then they ceased creating. They became self-satisfied; and along comes the Apple iPhone, and that moment is visible when they are — it resembles the men strolling, with the boss present there, strolling through his pits and believing he will reclaim it, then he observes his staff and Steve Jobs presenting the iPhone and moving through its features; it is a phone, it is a music player. It is an Internet device. It is the phone. It is a music platform; it is an Internet device. Then he asks, do you understand? It is a single object. It is the iPhone, and it transforms everything, with all those people reacting, "oh, sh**, we're finished." Yet afterward, in the film's later section, the partner, I believe, is promoting the platform to some of its partners, and they respond, well, here are the figures, here is the market. Here is how Apple is bending the curve, and by then it was too late. Apple sprinted away; yet Microsoft's new CEO, to my mind that is the man. I mean that is like, wow, among the finest revivals in American commercial history, you do not witness that. IBM's revival can be observed, Xerox's revival will be observed. You will observe every era — you can list plenty of them. It is like we are Ford, we are Chevy, we are this, we are that. Typically, when somebody begins making a push and that bending point occurs, returning is difficult. Yet indeed, leadership is everything. Innovation and invention and leading rather than managing are everything. And being someone who generates news, rather than someone who reads it. However, should you proceed with that, not every day will be wonderful, since you will shatter some glass as you go, as you construct something that nobody has previously witnessed. So — and it is entirely top-third, middle third, bottom third, correct? You have to take significant chances, and you have to make sizable wagers. You need to do things where it's not as if this is current get work, temporary is merely a stepping stuff. When you attempt new things, you're going to witness new things; but I'm happy with where we stand, though let me say this, our focus has never been greater. Our intelligence has never been higher, and we possess a major advantage. So over the coming several quarters and several years, we're going to execute some truly clever plays. And my belief is we're simply going to be far more concentrated. That is, after all, what Steve Jobs said, yes, regarding turning down 1,000 things; we've got the same refusal for additional things. It's like you always believe, you think once you've accomplished some wonderful things, it's like, "Oh, I can accomplish so much more. I can accomplish so much more." Usually you didn't arrive there by doing a great deal. I mean, when I assumed control of RH, I removed 100% that was skewed, like we don't possess a single item. During my first season I removed 50% of use and then had to attempt to work out how to steer through that. So you're — you have to make enormous plays and you won't get every one of them correct. Alright. For 10 years I had to sell < >. Did I enjoy selling < > selling out? < > with that a stepping stone to reach Italian betting and Belgian linen and Waterworks and everything we're doing today. Yes, obviously. So in any case, I'm not talking to you folks when you have questions, probably I've got hundreds, if not thousands of our team members on this call. So talking to the three constituencies that are on that letter.

Simeon here. I'd like to pose something that's a variation on what Steve just brought up — how sure are you that the demand you're seeing at the outset will hold up? And Gary, I believe you brought up the vectors plus the spread in market share; I think there's a great deal of newness on your side, whether that's catalog or what amounts to books. That gives you grounds to be in a better spot than they are right now, and you saw this coming. So how does that look when you gaze out a number of quarters? Also, tying back to what Steve asked, when you discussed the various tiers or tranches, do you have sufficient product in the market to observe how a portion of the early product is performing? Out of those top third categories, how many could you already be sitting on?

Yeah. Listen, we've picked up an enormous amount. Yeah, we have plenty of data; and so — yeah, our confidence is high regarding our outlook and what lies in front of us, regardless of whether interest rate cuts come our way or they don't, correct? It isn't a — as every one of you is aware, look, we entered this year and everyone figured it was, I believe, the markets were wagering on 5 to 6 interest rate cuts. And to this point, we've gotten zero. And at present, they're saying, "Oh, now's the moment to make an interest rate cut." Well, those are the very same folks who said, "Oh, when inflation moved from 2% to 4%, it was heading back to 2% across the following few quarters and then it reached 9%"; so not — incidentally, that's not as large as those folks. Leading and attempting to peer into what's coming is genuinely difficult, right? All of you build models and everyone, you've got a forecast on everybody. My feeling is nearly every plan you hold, every forecast you hold is wrong to some degree, right? So the crucial thing is, are you right more often than you're wrong? And are you picking things up? Are you collecting additional data? Are you honing your store and can you perceive what's around the coming corner. So do we have a great deal of confidence? We have a great deal of data. We placed a great deal of products into the market. We've picked up a great deal, and we have a great deal of news arriving, and we're rebuilding every single thing here, every model, every segment of our organization, everything is sort of being examined, being looked at. We're going to reinvent each method by which we operate. And then as we do, the things — the things we performed best, we'll refine those and we'll concentrate on those and those will become our next set of habits and behaviors. But you must be cautious, you can't remain with those things for too long since others will pick up from you and you must continue advancing. So we have a great deal of reasons that will keep us stronger than the competition for quite a while at present, a great deal of reasons. There are plenty of reasons we're going to capture a big chunk of the market. It isn't something that happened by chance, you know? We've discussed this for quite a while. The question people kept asking was: when is this going to take place? Some fellow I'm acquainted with, who once worked here as an analyst, published a report last week — he never spoke with me, probably for something like 15 years. And his take was, "Their product transformation is a complete dud." I can't say how he feels now, but he'll feel worse over the quarters ahead. You gain nothing by predicting from the sidelines. If you actually want to learn, you come here, ask a few questions, and you pick something up — but if you'd rather be a sideline critic, you won't learn much, and you'll be wrong far more often than you're right. So we're looking ahead across the next several quarters, across the next several years. Consider the real estate pipeline — we've assembled an amazing one, and it's coming, amazing. You sense it — I mean, in Europe we're basically infants. Right. Only just, we're still learning. What did we do? We sort of opened certain galleries in a sequence we wouldn't have chosen, yet we couldn't have secured the other galleries without accepting those as part of a real estate deal and such. So we've launched, though not truly in the manner you'd launch if your goal were building strong market awareness. That means once we open Paris, London, and Milan, awareness of RH is going to be substantially different. It's not that we dislike the ones we've done, but the order wasn't necessarily what we'd have selected while thinking through positioning and brand building. Still, at times you have to seize the opportunity as it arrives, and you have to — it's imperfect when you're — we aren't rolling out some formula of mall stores, or 5,000 or 10,000 square foot spaces, or even 15,000 square foot spaces, heading into a mall, taking somebody else's box, putting up a storefront, then sort of floating a couple of walls or whatever with a run-on setting to ship on a floor. That's simply not what we do. We create things meant to last generations. Other folks talk up their great showroom. Put one beside ours and tell me which will stand the test of time. What we're doing, I believe, over the long term will be incomparable and massively durable. We started from nothing — from a bankrupt business, selling shots — and we turned it into the market leader. And we've gone through a massive — we're in the midst of it — a massive transformation. I've never done this before. Nobody ever has. The industry has never witnessed it. However, at this point you will begin to see what the RH brand—and, more crucially, the people driving it—can truly achieve, so our excitement couldn't be greater. And do we have a product where the tiers are showing positive momentum? Absolutely. Absolutely, and we're pleased with what's coming down the line. We've observed plenty, and we'll continue developing it; plus we currently have an excess of concepts to bring to life. For us, the crucial thing is prioritization and hierarchy—determining the correct hierarchy, what takes precedence, what follows, what comes after that, how we deploy our people and our money in the optimal manner, and how do we get smart, how do we turn down 1,000 opportunities? That will be the toughest challenge at this moment. What will we decline? What won't we pursue? That will matter just as much, perhaps even more, than what we choose to do right now. Yet we might have chosen to focus on whatever ranks #1, while simultaneously tackling #3 and 4 and 5; and we never granted #1 the attention required to transform everything, correct? So that's our current way of thinking. We possess a great deal of edge. We possess a great deal of focus. We possess a great deal of energy. We're extremely enlightened and extremely excited, yet at the same time, we have plenty of edge. Nothing is being assumed on our part. I couldn't be more thrilled about our present position and what lies before us.

Gary, earlier you went over why galleries matter so much. Could you give us an update on how far along you are in reworking the merchandise in our stores? I believe on the previous call you mentioned being at roughly 50%. So I'm just wondering, where does that stand today? And when do you expect it will be nearer to complete, or completely reset, considering what it could mean for the business?

Yes. We're only just beginning on that. As in, once more, would you frame it as we reset based on initial data, after that we receive improved data, and after that you have new newness? And after that you have — so you'll continually read and react and refine. And I mean, at this moment we're so thrilled about a few steps going really, okay, how do we run to get that into the galleries? What do you do? As though your life depended on it. How do you get the merchandise into the galleries now, since they're going to really lift things enormously? I think like public, correct, our mix, correct? Yes. Everyone 70/30 sort of — no, not really. No? Okay. Okay. I mean the game is get to merchandise in the gallery right now. We get the right merchandise in the gallery on the floor in the right spot; that by itself is a huge move, a huge move. But we have to ramp up the production, you have to get it, you have to dimensionalize it, you have to — that's the reason we're operating with a higher level of inventory at present. We have so many things. You have to sort of — these transitions are really tricky. You're not going to buy it right? So you have to sort of invest in sort of some downside protection, right? And you have to carry heavier inventories for a while, while you're learning and after that you have to sort of edit and refine and go through it. But that's what you're identifying is one of the next big moves. I would say where are we on the galleries having all the right merchandise? I mean, I know Stefan, what would you say?

Yes.

Yes. Will we say 30%?

I'd put it at 35%, 40%.

Yeah, 35% to 40%. Right. You see some significant shifts in that range. Considerable swings.

Understood, that helps. Perhaps we can stay on this topic, and it may be basic, but where are you currently with the promotional activity and the process of phasing out the older, discontinued items as demand rises? Should we assume you're likely in the later stages, or how should we frame it? And also, what are the main factors behind the product margin turning upward recently?

Yes. I'd say, look, we're right in the middle of the major shifts in and out, correct? So you're learning, you're making the transition, and you're constructing that bridge toward the next destination. So I wouldn't really — I mean, I think everyone is treating that as a bigger issue. And I agree, the report, I don't know, they need to clear out the clearance or whatever, you have to create a path to what's ahead. I'm not aware that we're completely concentrated on that. I simply concentrate on, hey, is our demand increasing and is our margin turning positive, once more, right there; and then how do we structure the brand and the business across the board, build the platform and infrastructure, and arrange the company for where we are and where we're headed next, make it truly efficient; so we're at a very inefficient phase, right, hugely inefficient since we've been intensely focused on basically one thing. And so many things — we have to rethink all of this and place things in the proper sequence and — yes. So yes, but that's our job; so we've been doing this increasingly over time; we enjoy doing it; it's our job. We enjoy major moves like this; we enjoy these periods. Yes, this is what we live for, working it all out, executing better than anyone else globally, leaving no uncertainty. So — but it's precisely how much we're discounting and what that amounts to. I mean, the question is what does the vector look like? What does the vector look like for demand? What it looks like for margin, where ultimately will the vector be when you consider leverage and cost, and what will the model turn into, what's the timing of the major items here? You've got this major item, Europe, we're just starting that, we had and made numerous investments that honestly, not the best timing under construction during COVID, post COVID, the most costly periods to do things or attempt to, stuck with that. So we need to get the big brand building markets and galleries open, and the brand will develop, and then demand will develop there, and we'll get a vector going there? What is what does Europe and international look like over X number of years, and what's the leverage and the cost structure there? And look, there are so many opportunities. I mean, there's just a wild number of chances in front of us. That said, we have to keep our attention fixed. We need to be extremely focused, and we need to tackle the most important items before anything else. Getting pulled off track isn't an option at this moment; that's the toughest part. Right. So...

I'd like to dig into something a bit — my sense is that your guidance implies you'll reach 7 design galleries during this year, and the design studio too. Can you sustain that pace annually? You've restated the international piece again today, as I understand it. Also, you seem to be saying more regarding prioritization. How do white space markets sort of slot into that picture? And do white space markets remain within scope for every type of design gallery?

I'm still working through all those questions at once; so regarding the first, it concerns how many we're launching in this year, with that 7 to 9, but we're...