Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and fiscal year 2021 RH Earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today. Allison Malkin, you may begin.
Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2021 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.
Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake 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. Also, during this call, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures 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 turn the call over to Gary.
Great. Thank you, Allison, and thank you for joining us today. I'm gonna take a few minutes and walk you through our shareholder letter, and then Jack and I and the rest of our leadership team who's in the room will open the call to questions. To our people, partners, and shareholders, we are pleased to report another year of record results with net revenues increasing 32% to $3.759 billion, versus $2.84 billion a year ago, and up 42% versus 2019. If you exclude money-losing online businesses, it represents one of the highest two-year growth rates in our industry.
Demand versus 2019 grew 49%, which resulted in an incremental backlog at the end of the year of approximately $200 million of net revenues that we expect to fulfill over the course of 2022. RH continues to set a new standard for non-GAAP financial performance in the home furnishings industry, and our results now reflect those of the luxury sector as adjusted operating margin reached 25.6% in 2021, up 1,130 basis points versus 2019, reflecting the strongest two-year growth in our industry. Our performance demonstrates the desirability of our elevated and exclusive product range, the connected power of our evolving ecosystem, the profitability of our fully integrated business model, and the significant strategic separation created by our inspiring physical spaces.
For the quarter, net revenues increased 11% within our guidance range despite the various, the virus variant that magnified supply chain issues in the second half of Q4. We once again exceeded our adjusted operating margin outlook in the fourth quarter, reaching 25.2% versus 23.7% last year, and up 780 basis points on a two-year basis. We generated $97 million of free cash flow in the quarter and $477 million for the year, inclusive of a $191 million increase in inventory, of which approximately $60 million is due to increased transit times and the balance targeted to alleviate our in-stock demand backlog. We ended the year with $90 million of net debt and nearly $2.2 billion of cash on our balance sheet while generating ROIC of 73% in 2021.
2022, the year of the new. As we've mentioned, many of our plans were delayed by the virus. While many of our plans were delayed by the virus, they were not disrupted by it. We used these past two years to reimagine and reinvent ourselves once again and believe 2022 will mark the beginning of the next chapter of growth and innovation for the RH brand. 2022, the year of the new, will include the opening of RH San Francisco at the Historic Bethlehem Steel Building, our most extraordinary new Bespoke Gallery to date. The launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history. The elevation and expansion of RH Interiors and RH Modern, inclusive of new collections and enhanced quality.
The unveiling of our first RH Guesthouse in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market. The introduction of two new culinary concepts, an elevated Live Fire restaurant opening in San Francisco, Aspen, and the New York Guesthouse, plus a Champagne & Caviar Bar also opening in the New York Guesthouse this year, with plans to expand both concepts to our future galleries in Paris, London, Milan and Aspen. With average restaurant volumes approaching $10 million annually and a very profitable four-wall model, we are making significant investments to build a world-class hospitality organization and see endless opportunities to elevate and activate our places and spaces, creating integrated and inspiring experiences for our members and customers that cannot be replicated online.
The debut of The World of RH, the first phase of our new digital portal, highlighting the connective power of our evolving ecosystem of products, places, services and spaces, all designed to inspire customers to dream, dine, travel and live in a world thoughtfully curated by RH, will create an emotional connection with our customers unlike any other brand in the world. The lift-off of RH ONE and RH TWO are customized Gulfstream G650 and G550 that will be available for charter later this year. The former has already generated press and praise as featured in the pages of Architectural Digest, The Wall Street Journal, and the 20 titles of Modern Luxury. The christening of RH THREE, our luxury yacht that will be available for charter in the Mediterranean and Caribbean.
RH THREE will be featured in the Robb Report, Sea Magazine and BOAT International over the coming months. The continued rollout of RH In Your Home, a unique and memorable delivery experience with brand ambassadors guiding every detail of the delivery and extending the selling experience into the home. The expansion of the RH brand globally, beginning with the opening of RH England, the Gallery at the Historic Aynhoe Park , a magical 17th century 73-acre estate in the English countryside that will introduce RH to the U.K. in a dramatic and unforgettable fashion. Additionally, we have secured locations for galleries in London, Paris, Munich and Düsseldorf and are in lease or purchase negotiations for galleries in Milan, Madrid, Brussels and France. The opening of RH Palo Alto, the Gallery at Stanford Shopping Center, which will represent the next evolution of our highly productive prototype galleries.
Now let me move to our business outlook. While we enter 2022 with confidence that our efforts will continue to elevate and expand the RH brand for years to come, we also recognize there are several external factors such as record inflation, rising interest rates and global unrest that create uncertainty. Although we lack the ability to predict economic outcomes on a macro scale, we do have the business model, strategy and balance sheet to take advantage of opportunities that may present themselves, whether it be times of economic expansion, contraction or dislocation. While first quarter sales and margins trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed.
We believe it is prudent to remain conservative until demand trends return to normal, and we are providing the following outlook for the first quarter of 2022. First quarter net revenue growth in the range of 7%-8% versus 78% last year, with adjusted operating margin in the range of 23%-23.5% versus 22.6% a year ago. Fiscal 2022 net revenue growth in the range of 5%-7% versus 32% last year, with adjusted operating margin in the range of 25%-26% versus 25.6% in 2021. Our outlook is inclusive of opening RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid to late summer, and RH Palo Alto in the fourth quarter.
Now let me turn to our RH business vision and ecosystem, the long view. We believe there are those with taste and no scale, and those with scale and no taste, and the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.
Our efforts to elevate and expand our collection will continue with the introductions of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion-$6 billion in North America and $20 billion-$25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establishes RH, the RH brand as a global thought leader, taste and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.
Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses , where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating Bespoke experiences like RH Yountville, an integration of food, wine, art, and design into Napa Valley. RH ONE and RH TWO are private jets, and RH THREE are a luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture.
This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business while adding new revenue streams, while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers. The entirety of our strategy will come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.
Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion-$10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion-$100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating 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 create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Aston Martin to Aman, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We understand that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect.
We also appreciate that this climb is not for the faint of heart. As we continue our ascent, the air gets thin, and the odds become slim. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can't be learned in a classroom or by managing a business.
They must be learned, earned by building one or by reaching the top of the mountain. Onward, Team RH. Carpe diem. Now, operator, we'll open the call to questions.
Thank you. Ladies and gentlemen, as a reminder to ask the question, you need to press star then one on your telephone. We ask that you limit yourself to one question and one follow-up. Again, that's star one to ask the question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steven Zaccone with Citi. Your line is open.
Great. Thanks very much. Good afternoon, everyone. First question, can you just elaborate a little bit more on the full year revenue expectations? The full year guidance incorporate the $200 million of backlog demand being fulfilled despite all the newness in the business. Maybe just help us understand what you're seeing in terms of the softening that started in February and how that factors into your outlook for the balance of the year versus first quarter. Thank you.
Well, the softness is, and the newness is all implied in our guidance. As we've said, we, you know, we believe it's prudent to take a conservative view at this time, based on kind of the disruption. We saw our business, you know, soften since the beginning of the conflict and the market volatility that followed. I think you've gotta kinda also consider the fact you've got. It's clear now to everyone that inflation isn't going back to 2%, even though Janet Yellen, you know, not too many weeks ago, when it was 4% or 5%, said it was going to 2%, and two weeks later it went to 7.5%, and now it's at 7.9%.
We've got, you know, Jerome Powell saying that they waited too long, and now we're gonna have, you know, two years of interest rate increases, rising interest rates. So you've got a lot of news and a lot of noise out there, compounded by, you know, a war and invasion. I think the invasion of Ukraine by Russia, you know, just became a kind of a reckoning point, if you will, where people had to stop and pay attention to everything. We saw our business slow about 10%-12%. It's been relatively, you know, consistent during that period. When it returns to normal, not sure. How aggressive is the Fed gonna be? Not sure.
There are things we know, and I don't mean to be a pessimist, but, you know, history would tell us four out of five times the Fed raises interest rates over a sustained period, we have a recession. I don't need to tell you guys that math, that's just a fact. You know, so look, we tend to, as I like to say, pray for peace and plan for war. You know, we believe we've got a great hand going into this year. We believe we have the most exciting, you know, lineup of initiatives, product, you know, experiences in the history of our company. We've got the best strategy, the best business model, you know, one of the best balance sheets in our industry, the highest ROIC in our industry.
Kind of game on, you know, whatever happens, you know, and we're just putting ourselves in a position to win.
Yeah, that's very helpful detail. Thank you for that. I had a question on just the margins for international. So I think you said in the past that Europe can be the same or higher than the margin profile for the U.S. How should we think about the profitability curve as you do some of these initial openings the next few years? I guess said another way, should we assume there's a little bit of dilution in the operating margin guidance you've given for this year just from U.K. opening and then Europe next year?
Yeah, that would be the right assumption. I'd say we're all gonna learn together, right? It's the first time we've done it. You know, there's not a ton of history of a business like ours expanding globally and taking control of the brand versus, you know, licensing the brand to others, which is an easier way, and we believe a long-term, less profitable and value-creating way for shareholders. History, you know, has demonstrated that many of the great brands that license their brand or franchise their brand, you know, spent years and a lot of money buying their brands back. We believe it will be accretive to earnings long term. That's what the math would say as you kinda study others' models.
Exactly what the curve's gonna look like, you know, look, It's the first time we've done this, so, I don't think we have a better view than anybody on this phone. You know, we'll kind of communicate what's, you know, as it evolves and. I think we, you know, we become more confident every month, every week, as we get closer. We realize we've got greater brand awareness and greater brand affinity, you know, as we meet people, talk to people. You know, there's a lot of excitement for RH opening in Europe, and there's a relatively high awareness of our brand, with the target consumer. We feel very confident in it.
Long term, you know, we believe it's gonna be accretive to our operating margins. I'd say if you just kinda think about where we are today and, you know, we are still not a business of complete scale in the United States, right? We're not a retailer that is closing stores, you know, that is kinda shrinking to kind of optimize their business. We're, you know, still growing. We have lots of new galleries to transform, and, you know, have, you know, several billion dollars more we're gonna do, you know, just in the U.S. With that scale, and as our product continues to evolve, transform, and go to a higher level, you know, we can kinda see operating margins, you know, approaching 30%.
When you think about international possibly being accretive on top of that, should be accretive on top of that, you know, we could have a model here long term that looks like, you know, some of the best luxury models in the world. You know, if you kind of segment LVMH or Kering or look at the individual brands, right? Because a lot of times great brands and great businesses get lost in kind of multi-branded business models and, you know. Hermès has, you know, operating margins in the mid-30s. Chanel has operating margins in the mid-30s. Louis Vuitton, if you segment it out, has operating margins in the mid-30s. And Gucci, you know, has operating margins in the low to mid-30s. You know, we...
By the way, if you just stand back and think about those luxury brands, they have a lot of competition of scale. You know, there's actually a lot of choice for a wealthy consumer to access quite a few brands from an apparel point of view. There's also a lot of brands to access from, you know, if you think about the jewelry sector or the watch sector, if you think about luxury cars. If you stand back and think about luxury home furnishings and luxury design, if you think about, okay, who is the fully integrated brand, yeah, at the top of the luxury mountain in the world, it's a big void. It's a really big void.
You've got a very fragmented kind of portfolio of kind of niche category brands that are relatively small, that don't have scale, that don't have control of their brand. They're franchised out. They you know, they control very little of their distribution. I mean, if you just take B&B Italia, for example, in North America, I think B&B. How many, you know, points of distribution they have? You know, call it 40, 50 points of distribution. They control 4 of those points of distribution. You know, so their brand is, like, thrown around in a bunch of places. They're probably the best global brand, you know, in the upholstery category, but they don't cover all the categories, you know. Then you've got, I think it's Design Holding, something like that, some group that's.
The other ones have B&B Italia, Flos lighting, some other things. You know, people are trying to kinda throw stuff together and figure out what to do. I look at it and I kind of say, like, we have like a 20-year lead in our sector. It takes a long time to build something like we're building, and we're just getting to a place where people are gonna start to understand what this brand's capable of. You know, people are just gonna start to see in a consistent way, the kind of physical environments and experiences that we're building for customers, the exciting hospitality concepts that, you know, are gonna bring people to those physical experiences and connect with people and, you know, create greater brand awareness, greater brand affinity.
You know, when people see what we're gonna do internationally. You know, in North America, we've had to unwind a really kind of tchotchke crappy business, you know, in little stores, and spend a great part of our journey unwinding a kind of a shitty business, turning it into an okay business. You know, spending many years of this journey just not going bankrupt. You know, trying to exit lots of categories, lots of businesses. Trying to move from a promotional model to a membership model, and then reposition not only the product but all the real estate. You know, it's like Frank Sinatra says, "Not in a shy way," right?
I mean, we haven't taken our galleries, you know, which are not necessarily small when you look at, you know, other players or competitors in our market. I mean, we have 10,000-12,000 sq ft. You know, our legacy galleries with, you know, 7,000-8,000 sq ft of selling space. It's not small. But we're not taking them and just remodeling them. We're not taking them and making them 20% bigger or 50% bigger. We're making them like 500% bigger. And, you know, they're really the most exciting and interactive and experiential and dominant, you know, physical experiences of their kind in our industry today across any category, I'd argue. You know, so, I...
You know, I think when you think about taking the very best of who we are and going to Europe with that and not being kind of plagued with our old identity, not being positioned like other people kinda have been, you know. You know, you walk the mall where we've got a legacy store in a mall today. You know, there's us and there's three or four other people, depending, you know, who do you wanna pick, you know, and you know the names. Those people aren't international in any meaningful way, nor are they really positioned to compete against us today, even in the U.S. Internationally, it's so fragmented. There's nobody of scale. Most of them don't control their distribution, and most of them are...
They're kinda like where we were 20 years ago. You know, I just think the opportunity globally for this brand is maybe like no other brand in the world. You know, if you really stop and think about it, you know, you just like, you take any other category and say, "Who owns it at the high level? How many brands are there? Who are the leading brands that have control of their brand, you know, control of their product, you know, on all levels? You know, have the platform we have. Have the, you know, the business model that we have." Like, we're not going over there with negative EBITDA trying to grow in Europe. We're not going over there with like 5% EBITDA and trying to grow in Europe. We're going over there with like close to 30% EBITDA.
We are in such a great position, and I don't think anybody but us really gets it just because we've been studying it for so long and thinking about it so long. You know, and then what we're doing next from a physical point of view in Europe is better than anything we've ever done. When you guys see what's coming, you know, I wouldn't wanna be in Europe competing with us, I'll tell you that. You know. I thought I didn't wanna be competing with us here in, you know, North America in our category. You really don't wanna be competing with us in Europe. I don't mean to say that arrogantly, it's just true. I mean, you just gotta take a close look. There you have it.
Yeah, that was great. Appreciate all the details. Best of luck this year.
Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Your line is open. Check to see if your line is on mute.
Can you hear me?
Yes. Yep, we can hear you, Steve.
Sorry about that. I wanted to focus on the new product launches. Gary, if you can you update us on the specific timing of the launches, Contemporary, and the elevated collections in Modern and Interiors ? Anything else of color on the breadth of the new collections as we try to conceptualize the impact? Whether the current supply chain environment has or is anticipated to impact these launches in any way.
What do you think? Of course, it's impacting the launches. I mean, everything is somewhat late, you know, and a little fragmented as it's coming together. Look, we would have liked to be out there with Contemporary in March, before, you know, the variant in the fourth quarter kinda ripped through. Again, it really impacted the U.S. a lot, you know, not that greatly. You know, it just kinda went through the U.S. very quickly. You know, when you think about countries like China, Vietnam, or some of the places that we have big sourcing out of, yeah, it just all got kinda goofed up.
I think we're about a couple of months behind. You know, and also we wanna be smart, you know, and as we think about just the economic landscape we're going into. You know, if the economic landscape is volatile, you know, you wanna be careful, especially if you've got a Sourcebook catalog business like ours. You don't wanna mail into a big headwind. You know, we're reevaluating our plans. I mean, we thought we might launch with, you know, 450-500 pages in Contemporary. I think it's gonna be probably more like 300-350 pages. Just stuff is late.
You know, my sense is it might even be later. I mean, the supply chain, you know, I think many of us thought we would have been caught up by now. I mean, we'll be lucky to be caught up by the end of the year. You know, because it's just hitting everybody from all angles, all the raw materials, all the transportation issues. You know, not just the transportation getting it to us, you know, our vendors, you know, having to get all of their components from all over the world, you know, shipped to them. You know, so you just have this compounding supply chain, kinda puzzle happening.
I think the key thing is, you know, just don't rush it right now 'cause you can probably make mistakes that you'll wish you didn't. I think just like we said, we're being a little conservative. You know, how aggressive do we go with circulation? We'll see. You know, we kind of pushed Modern, Interiors to the second half, let Contemporary kind of take the stage in the first half. It'll be coming in, yeah, May. We don't want the book to get out there, you know, before we have some goods in stock. It's all running late. That's probably also contributed to our conservative view for the year.
You know, even on the galleries, you know, on the projects, you know. We're in a world that I've never seen it so chaotic, honestly, from an execution point of view. Whether it's construction, you know, sourcing, manufacturing, you know, shipping, the supply chains, you know, freight. You know, everything's a little out of sync in the world right now. You know, but everybody's dealing with it. I think it's just how do you do it in the most intelligent way. You know, it's like I like to say, you know, it's like quality. You kind of gotta wait for quality and. You know, we're not gonna get any bonus points for rushing right now.
I just don't think we are. I think there's more risk of winding up in the ditch, you know. We're kinda slowing things down a bit. You know, we're trying to be more thoughtful. We're trying to make fewer, bigger, more important moves. You know, and that's, you know, that's just our view. You know, I know everybody else is approaching things, but that's our view. We tend to, you know, spend a lot of time here thinking very deeply about a few big moves. This is a year where we got a lot of big moves because they all kinda got backed up. You know, we don't wanna create more chaos in our world and our customers' world.
Yeah, what you see in front of you right now is, in the letter, the best news I have. It's different news than my last letter. You know, if I wrote the last letter, I didn't know. I don't even know how to say it. Omicron?
Omicron.
Yeah, you know, all of a sudden, boom, that hits. Then all of a sudden, boom, we've got a war. Russia invades Ukraine. Boom. Yellen says inflation's going from 4% to 2%, and then it goes to 7.5%, and Powell says, you know, we're behind. I mean, there's a lot. Yeah. Everybody thinks supply chains are getting better. I don't think they've gotten better at all. You know, I mean, it is what it is. I mean, like, product is on the water for a long time. Getting ships into port, it's taking a long time. We've got, you know, generally about five extra weeks in our supply chain right now.
You know, that's a lot of time, it's a lot of money, and that's the average. So that means some stuff's coming on time and some stuff's, you know, 10-12 weeks behind. When you run a kind of an integrated business like ours, where you need all the pieces of the puzzle to kind of paint the picture, that just makes it more complex and more difficult. But at the same time, right now, everything on that list, in the year of the new, I'd be shocked if it doesn't all happen. If you ask me what's the biggest risk, Palo Alto goes into first quarter of next year, but that's not gonna make a difference to the, you know, to the year anyway.
Gary, super helpful, right? 'Cause I think as we try to contextualize the prudence of the guide, it almost appears like you're not incorporating a contribution from a lot of these year-of-the-new factors, right? I mean, any comment on how you sort of built the guide from a bottom-up standpoint or how you would define the prudence behind it? I mean, you have a great track record here. Any thoughts on just the guide in a holistic context on just the prudence behind it?
Yeah. Well, look, I mean, it's probably one of the most difficult guides, you know, since 2008 and 2009 because we, you know, we're, you know, right in the middle of this disruption, you know, from Ukraine and Russia, which I think I don't think it's all Ukraine and Russia. I think it's triggered a greater awareness. Like, it's like someone I think this was rang the bell, everybody pay attention, and then all of a sudden everybody started talking. Yeah. All of a sudden the Fed's, you know, off to the races and, you know, that creates concern. You know, you got housing prices at all-time highs. I mean, you know, is it sustainable? I don't know for how long.
The math, you know, doesn't make sense on kinda what's happening in the housing sector and other places. You've got inflation like I've never seen. You know, as I was telling people, you know, when Yellen said we're going back to 2%, we were just signing our new freight contracts, ocean freight contracts. I just wonder if anybody at the Fed has picked up the phone and called a business person and said, "Hey, what do you think is happening with inflation? How's ocean rates? How's this? How's that?" I mean, you know, I think I don't think anybody really understands what's coming from an inflation point of view, 'cause either businesses are gonna make a lot less money or they're gonna raise their prices.
I don't think anybody really understands how high prices are gonna go everywhere, in restaurants, in you know cars, and everything. I you know think it's gonna outrun the consumer, and I think you know we're gonna be in some tricky space. You know so it's all you know everything's kinda happening at once, and I think you know you gotta prepare for war. I mean, if you're going into a very difficult you know unpredictable time, you just gotta be super flexible. You've gotta be able to improvise, adapt, overcome, and kinda be ready for anything. I don't mean that by playing defense. I mean it by playing offense. I wouldn't call it happy days right now. I'd call it pensive days. Be ready.
When we play like that, you know, we usually have our best outcome. When we get overly optimistic, you know, we have a higher likelihood to wind up in the ditch, you know, and get ahead of ourselves. Look, if everything, if the war in Ukraine ends and, you know, inflation slows down in some miraculous way, I don't know, everybody can sign new freight contracts because, I mean, most of the world has all signed new freight contracts. Two years ago, price of a container, you know, for us went from $2,400 to $4,800.
Okay.
Yeah. Yeah. It doubled. I'm not gonna tell you what it just went to, but just let's say that looked like a nice increase. It's not just us, it's everybody, you know. You know, either people are gonna do stupid things like take quality down to, you know, make their goods like look like it's better value, or they're gonna have to take prices up, or they won't take prices up and they'll hurt their margin profile. It's gonna change. It's not just us, it's everybody I know in every industry. I, you know, just don't think.
It's like, again, I don't want to scare everybody, but, you know, you talk about the team like there's, it's the scene in The Big Short where, you know, everybody's in that ballroom, and the guy, I think it's the guy from Bear Stearns or someone's up there, one of the things, and he's saying how they're gonna buy back, you know, $1 billion of their stock, this and that. Then, you know, one guy's on his BlackBerry, he goes, "Can I ask a question, sir? In the 20 minutes that you've been talking, your stock's down like, you know, like 55%," and everybody ran out of the room.
You know, I just think, you know, look, we tend to just try to be transparent and honest and, you know, look, maybe our stock is gonna take a big hit because of this and people are gonna think Gary Friedman wasn't excited. I you know told my team, I've never been, in my 22 years here, I've never been more excited. I've also never been more uncertain. Right? I think you have to take a real balanced view right now.
Super helpful. Thank you, Gary. Jack, best of luck.
Thank you.
Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open.
Hey, Gary. Hey, Jack. Thanks so much for the somewhat brutal honesty, but I think we have to hear it. I guess my question is, you know, Gary, you talked about in the past two events that tend to impact your business, market volatility, high net worth, ultra-high net worth individuals. That sounds like you have baked that into the guide. Then the second would be, you know, deceleration in high-end housing, which we haven't necessarily seen yet. How much of that is potentially in the guidance? Then Jack, on the $2 billion term loan that was taken out, what are the plans there? Thank you very much.
Yeah.
By the way, our San Francisco looks awesome.
Oh, thank you. Thank you. Yeah, look, I had more to tell you. You know, what's baked in, all our best thinking. Like I said, you know, there's just a lot changing. There's a lot evolving. I mean, you know, like, you have to ask yourself, I mean, where's inflation going the next time they report it? You know, what's really happening today? I mean, yeah, we're just trying to, you know, build a plan and a view that puts us in a position to win. You know, we thought about everything we can. I don't know. We, you know, can't impact nor can we forecast, you know, big macro trends, like, until you see them. I mean, the Fed can't do it. Janet Yellen can't do it.
Like, I don't think anybody in this call can really do it. No one ever really gets these things right, you know. You know, you can capitalize on any environment if you're prepared. That's all we're trying to do. You know, we're just trying to be in a position to win, to take advantage of any opportunities that present themselves. We're gonna be patient. We may look a little slow to some people. You know, we like to say, "Don't move until you see it." Right?
Mm-hmm.
We're gonna wait until we see it, and then we'll move. When we move, we generally move aggressively. Right now, a little hard to see it. You know, when all of a sudden your business kind of drops 10%-12% overnight and, you know, there's just more news and unrest in the world, you know, you just gotta change what you're doing. You know, if you don't change things won't change. We're changing things. We're, you know, adjusting and improvising as we go. We're excited as hell. But, you know, like, this is similar conversation I had with our board. You know, I said, you know, my opening was, "Hey, you know, in my 22 years, never been more excited in my entire career.
Here's why. All the things I read you, all happening, by the way. You know, almost everything there is happening in the next 12 weeks, you know, most of it. You know, it's like a few things happening in fall and Palo Alto and stuff. But also because of all the things that, you know, rising interest rates, runaway inflation, you know, unrest, you know, so on and so forth. You know, you say what's happening in the housing market is a really good thing. When things get too hot, they usually get cool. Again, I don't want to scare people. I'm just trying to tell you, I mean, you know, you can see the numbers that we see.
You know, the last time houses had multiple bids like this, the last time, prices went up like this, there wasn't a great other side to it. Again, but things are different. We, you know, we're in a different economy. There's, you know, there's new kinds of businesses. There's, you know, new kinds of wealth creation. There's new kinds of productivity, things driving the economy. I don't know. You know, is there enough good things, whether in our business or other parts of the economy that, you know, motor us through, and we don't have a recession, we don't have a slowdown? You know, does Ukraine get, you know, settled sooner? I don't know. You know, I mean, maybe we should be the one asking you guys the questions today.
You know, you know, we spent a lot of time, I wrote everything that we know. Like, you know, if you guys know stuff and have points of view, we'd love to hear what you think.
Adrienne, I think that also answers the plans of the term loan question. Look, we raised the capital to provide optionality, allow us to be opportunistic, and I think, you know, I think Gary summarized well sort of how we're thinking about, you know, not moving until we see it. When we move, you'll know.
Any plans to retire the converts early?
Yeah, we have all kinds of things. Yeah. You also look, you've windows that you can do things in our company. You've got, you know, I've got expiring options that's putting me in a position to have to, you know, sell roughly 1 million shares of stock. You know, all those things. You can't have too many things happen at one time, you know, and have conflicts happening. You know, it's probably not appropriate to be buying back the stock when the CEO is selling the stock, right?
Sure.
You know, yeah, there's just a lot of things you got to think about, right?
Yeah.
You know, we don't have complete flexibility on all those decisions. Look, I believe we'll make great decisions for our shareholders. Like if I didn't have to sell the stock, I wouldn't be selling the stock. I actually thought maybe there's some way we can extend the options, and I found out, nope, that's an IRS thing. The IRS doesn't let you go past 10 years, and then the options expire. My option's expiring in November of this year, and I think it's better to try to get it out of the way so we can have more operating flexibility. You know, my situation actually constricts us a bit.
Got it. Thank you very much for all the information.
Mm-hmm.
It's very helpful.
Sure.
Thank you. Our next question comes from the line of Curtis Nagle with Bank of America. Your line is open.
Great. Thanks very much for taking the question. So yeah, just Gary, I guess thinking about, you know, a lot of noise going on, obviously, and we've kind of gone through in a lot of detail here on the call, volatility, supply chain malaise, all sorts of stuff. I guess kind of thinking about the state of the industry and thinking about, you know, the premium and luxury end of things, at least in the U.S., it's still pretty fragmented. I guess, maybe sort of cynically thinking here, do you think you guys might have a bigger opportunity to take share? Like, you know, how do you think that plays out? How has that changed, you know, over the past, I don't know, couple of years?
You know, thinking about the next, I don't know, 2-3.
I think we feel great about the next 2-3 years.
Okay.
I think we'll take share in any environment, Curtis, in any environment. You know, again, it's these are all kind of temporal issues, you know, whether it's the war, the inflation and stuff like that. None of this is permanent. You know, it's just there's a lot of things going on at once and you know the supply chain, everything else. You just have to navigate in the best possible way, or you can kind of screw up your business model and make some strategic mistakes. It's one thing, we're all gonna make a lot of mistakes.
I tell everybody in the company, you know, the only difference between their mistakes and my mistakes is my mistakes are gonna cost the company a lot more money than their mistakes. You know, but collectively, as a leadership team, you know, we have thousands of people in this company, you know, that their livelihood is determined on our decisions. You know, we wanna make great long-term decisions. We're not here for, you know, a short period of time. You know, I've been here 22 years. You know, I'm looking over at, you know, Steph has been here, who, you know, is our Chief Gallery Officer, Stefan Duban, who's been here 22 years. A little longer than me, I think, right? You know, Eri has been here 15-
16.
16 years. Jack has really been here 10 or 11. You know, but I mean, not technically. If he was with Bank of America taking-
nine at RH plus three with-
Yeah.
That would-
Yeah. Sandy and Helen. Sandy, 14 years our Chief People Officer. You know, I mean, I go around. There's more people in the room, but a lot more people in the room than. You know, we've been here a long time. You know, we tend to be. We're gonna be here a long time. You know, so we're playing for the long-term, and we're trying to make really good, big decisions that kinda change kinda the vector of, you know, the direction that we're going. I think we've made some really good ones. I think that's why we've got an operating model that's, you know, not a little better than the next best person. It's a lot better than the next best person.
We have really big moves we're making right now that can increase that vector and you know accelerate our performance significantly more. You know, we don't sit here and say, "Oh, we made 25% operating margin. We think this is the best we've ever done, so it's not gonna get any better." We think it's gonna get a lot better. We maybe see another 5-10 points of operating margin, quite frankly. It's just that right now, I'm giving you guidance right now. We're talking about right now. Right now is a bit confusing. Anybody who's saying it's not, you know, like, you know, good luck. It's just I think at the time you've gotta, you know, really keep your eyes open, your antennas up, and you've gotta prepare for anything that might happen.
I mean, again, you know, look, this, the work could end, things could get better, our business could bounce back, but there's a lot of things that are sitting out there. You know, rising interest rates is never a great thing. Now, it might be three years away before rising interest rates really take a big hit out of the economy. I don't know. You know, you know, the. You know, there's always patterns and, you know, we've looked at all the patterns. We've got all the graphs. We've laid over, you know, all the graphs of, you know, all the interest rates. Like, with the last 20 years in the U.S., the average interest rate was 2%. You go push it out 30 years, it's 3%, federal funds rate. When's the last time it's looked like that?
The 1950s to the 1970s, okay? That's the last time. How old was everybody in this call in 1980 when the federal funds rate was 20%? I'm not trying to scare anybody, but almost everybody on this call, like, in 1980, like I was, you know, I was a kid. You know, I didn't know what I was doing. I didn't have wisdom then. I just don't think there's a lot of people in business today, except for Warren Buffett and Charlie Munger and, I don't know, George Soros. I mean, it is a handful. You know, if you had wisdom in 1980, you know, you kinda get into your years of wisdom in your 50s and, you know, you start to get wise.
You know, I look back, I go, my 30s, I really didn't do anything. I just, like, worked really hard. My 40s, I just got better, I could get shit done and kinda see a bigger picture. In my 50s, I started seeing a much bigger picture. In my late 50s and 60s, I think I've kind of gained a lot of wisdom, and I can see a much bigger, much bigger playing field than I could. If somebody, you know, was, you know, 50 years old in 1980, they're 90 years old today. You know, I just think a lot of people haven't seen this. When's the last time anybody here has seen interest rates go up two years in a row, you know, and, you know, six or seven times this year and four or five times next year? Nobody's seen that.
Nobody's seen a lot of things that are happening today. I'm just saying. Look, I'm just trying to be completely honest. Again, I you know I you know I couldn't be more excited, but I can be more uncertain, and that's just the story. You know, other people might be banging a brighter, happier drum than me. You know, do they have better numbers than we do? I don't think so. We'll play the game the way we play the game. We have a lot of exciting things coming and if, look, if we're too conservative, that's okay. We just make more money.
For sure, and certainly appreciate the long-term view. Just one quick follow-up, just in terms of, I guess, pricing that you may be including in the guidance, right? Probably some residual from price taken last year. As you mentioned, lots of new costs coming in or continued cost increases. You know, are another round of price increases included in the 2022 guide or no?
Yeah. We've got everything included in the guidance. Again, our business has been evolving for multiple years, right? We are selling higher price points to fewer customers, bigger orders, you know, like in general. You know, we're still evolving this model and into a luxury branded model. You know, ours is a little different. I mean, contemporary is the highest quality goods we've ever had. It's the highest price points we've ever had. When we get those right, they tend to be the best-selling products we've ever had. Our most expensive sofa is our best-selling sofa. You know, we're probably better positioned to take prices up than others because we've been taking prices up for years.
In our industry, you know, it's kind of event buying, right? It's like buying a car. You're not looking at the price of the car until you need the car. You're not looking at the price of the furniture all the time until you need the furniture. I think we're a little better positioned than other industries and other categories as it relates to price increases. You know, we're pretty disciplined about taking price increases and so on and so forth. These are gonna be bigger. I mean, you know, what's gonna be the real impact when you have this kind of impact from freight and raw materials and price increases from suppliers and so on and so forth.
I mean, you can say, "Oh, we're big. We're, you know, we can absorb it." That's kind of BS when what's happening in the world today. You know, like, prices are going up everywhere, and if they're not, earnings are gonna go down. The question people have to ask is, do I want a bigger, lower margin business, and do I wanna chase sales? Or do I want, maybe for a while, a smaller, higher margin business and then come out of this really positioned for the long term? That's the view we've taken, not just recently, you know, but, you know, for almost 20 years and really accelerated, you know, six, seven years ago.
You know, seven years ago, and we, you know, began to move to membership six years ago and, you know, launched Modern and so on and so forth. You know, Modern was. The prices of Modern were 50% higher on average. Yeah. When we launched, something like that, almost two times in some cases. So, yeah, but it's all, I mean, I know you guys are trying to figure out the model and the guidance and exactly what that's gonna be. You know, I don't know. I think we can all get lost in the details right now. You know, it's kind of the big moves and the big picture that's important and, you know, making really smart, big moves. I think all our big moves are the right big moves.
If we change our mind in any of them and we decide not to do something, pull back on something, you know, we'll make the right decisions based on how things evolve. You know, our, you know, the business just did change weeks ago. You know, we're probably the, you know, I don't know, like, when did other people report? Yeah, I mean, we reported a little later, right? People probably hadn't seen the real trends yet. You know, unless we're just the only ones getting hit right now. I mean, I'd be surprised if that was happening. You know, what I've heard is there's been a broader slowdown in our industry, and it's gotta be probably in other places too.
Fair enough. Much appreciated, Gary. Thank you.
Thank you. Our next question comes from the line of Michael Lasser with UBS. Your line is open.
Good evening. Thanks a lot for taking my question. Gary, when you say that you've seen a 10-12 point slowdown, presumably that's on demand comps. Where are your demand comps trending over the last few weeks? Are they actually down year-over-year? The counterargument would be that while there is a lot of uncertainty in the environment, your core customer came into this year in a very strong financial position, and the high-end housing market is in a pretty good spot. Is it your view that these purchases are merely being deferred, or is there a possibility that prices have been raised so significantly that the customer is now responding to that?
What do you think? I don't know. I mean, it could be a little bit of everything. It could be the distraction of the war. It could be so many things, Michael, so. We're not really giving. You know, our demand got hit by 10-12 points. You know, we're not actually guiding demand. We just wanted to give you color that there's been a change. You know, there's also one of the biggest dislocations between demand and revenues. I think it's gonna be that way for everybody.
We just wanted to try to be transparent and say, "Hey, look, you know, just because we might, you know, up eight in 10, it doesn't mean that that's where demand is." We're trying to be transparent with shareholders and let people know what's really happening. Don't wanna come back next quarter and say, "Oh, yeah, well, you know, our demand's been down for a whole, you know, for the last several months, and you know, we didn't tell you when we could have.
Yeah.
You know, again, I mean, it probably hit our stock today. I got it. You know, whatever. I mean, you know, we're playing for the long run. I know, you know, everybody's got clients, and there's in and out of stocks, and, you know, these aren't easy times for all shareholders. I, you know, we're just gonna tell you the truth, and we're gonna be transparent. We didn't have to say this. I think we're the first ones talking about demand.
Yeah.
Other people have-
But-
They're talking about sales, and they're saying.
Totally.
Sales continue strong. Well, our sales are gonna continue relatively strong in Q1 comparatively to what we're up against, but our demand. It's just the truth, right?
Yeah.
You know, what the consumer's got, do they have more money? Do they have this like. They do, they're not acting like it right now. That's what you gotta know.
Totally.
Will it change in three months?
That's super helpful. Are you seeing this consistently across the board, the slowdown in across categories as well? Or is there any patterns that you can see? You're not the only one. I mean, Traeger, the grill company, reported last week, also said that the last three weeks they've seen a pretty big slowdown. This is probably a broader trend, and it's right for you to point it out as well. I guess any flavor you can provide on what you're seeing by category, geography. The obvious question is to what degree did you flex your OpEx, your SG&A, your P&L?
If this is prolonged and gets worse, is there downside risk to the 25%-26% operating margin target for this year, understanding that you will have an opportunity to grow that from that base over the long run?
Look, if it stays down like this the entire year, I think everybody in the industry will be adjusting our numbers down. You know, this looks temporary. You know, when things like this happen, they usually don't stick. It all depends on if there are any other shoes to drop. You know, we've got things that are gonna counter this. You know, we've got new goods and initiatives that are gonna come into play. You know, I mean, this is all we have for you right now. I think next quarter we'll have a much better view. I don't know, Jack, you wanna-
Yeah, well, I mean
Jump in and-
On the categories and geography, obviously, Michael, we don't disclose those kind of items. I think generally no major headlines there. And then obviously if there's risks, if the macro stays down for an extended period of time, there's a risk to the margin. Well, that's just drama. We'll update you to the extent that happens.
Understood. Good luck. Thank you so much.
Okay. Thank you, Michael.
Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.
Hey, thanks a lot. Just to continue on this theme, unfortunately. I was wondering, Gary, if you could compare and contrast some of the consumer behavior that you've seen in recent weeks to December of 2019 when your business was off a bit and you know, potentially in the context of that 10%-12% decline that you just cited.
Well, you know, a 10%-12% decline looks like a 10%-12% decline. There's different, very different factors at that that contributed to that. You know, how those will play out is the unknown. But again, you know, like we're all kinda like major focused on kinda right now. I think that, you know, our focus is really on a much longer horizon and the big moves we're making. You know, no matter what happens short term, we're gonna win, we're gonna take market share, we're gonna be disruptive. You know, we've got the best model, we've got a great balance sheet, we've got an incredible strategy. We've got a global expansion that we're teeing up that's, you know, the best work we've ever done.
So if you're doing some of those things into a headwind, whatever. We've seen headwinds. You know, this is not the first goat rodeo we've seen. You know, you just navigate through them and you win through them. You know, but I'm not gonna sit here and just try to act like nothing's happening right now. It would be the wrong thing to do. And so, but and you know, how it compares to 2018, I you know. They were both down. Different circumstances, different time. We're a different company. I don't know, what was our operating margin in 2018? Like
Eleven.
Eleven? Yeah. Yeah. In 2018, we had an operating margin of 11.4%. We had a different cash flow profile. A lot of things were different. We have an operating margin up to 26% today. You know, we've got a better real estate strategy than we've had. We've got a, you know, higher return on invested capital than we've ever had. We've got more exciting things in the pipeline than in 2018. You know, we're all smarter and better than we were in 2018. You know, we're tremendously excited. Again, we're working our butts off here. And, yeah, we're super pumped. We may not. You know, I may not sound like the most excited right now, I am.
You know, you guys keep asking me the same questions to a degree about, you know, like I'm giving you the best answers. You know, if you wanna talk to me more about Europe or more about other things, you'll probably get a little bit of different tone. You know, I don't know, Chuck. I mean, we don't see anything, you know, specifically different in the numbers. I see something different in the environment. I mean, in 2018, did we have the Fed say they're gonna raise interest rates 6 or 7 times? No. Did we have inflation at the levels we have today? No. Did we have, you know, the chair of the Fed say, "Hey, we're way behind"? No.
You know, there's just a lot of things very different, you know. You know, I've seen, you know, enough cycles to know that, you know, caution is advised right now. Yeah, that's what I'd say.
Got it. I think we all appreciate your honesty. Just 'cause maybe bigger picture on a brighter spot. You know, you called out the $200 million or $200 billion TAM for RH Guesthouse. Just quickly, you know, can you talk on the ramp, on how quickly you can build that out over the next, say, 3-5 years?
Oh, I don't know. You know, we have our first one opening. Like, I just knocked on wood. You know, I think it's extraordinary. I think, you know. One of the things we've learned is when we do extraordinary, remarkable work, we've always figured out how to monetize it. And this is some of the best work we've ever done. You know, we have our second one in Aspen that's coming, you know, a year behind it. And that's got, you know. You know, that's very similar in a lot of ways. They're both, you know, kind of a micro hotel. We've got, you know, 10 rooms in New York and nine in Aspen. But they're incredible rooms. They're rooms that no one's ever seen. It's architected for privacy. I don't think anybody's architected a hospitality experience for privacy.
We believe privacy is gonna be a big market. You know, privacy is the one thing everybody's given away on social media, and it's one thing the Internet's taken away because you can Google anything about everyone. We believe privacy is gonna be an important market and a market you can monetize. We're creating a you know, concept, I think, that's unlike anything else in the world. We're doing things that have never been done in hospitality. It's a place we would all love to stay. You know, it's at a different price point now, and if we get what we think we're gonna get for the rooms, it's. We think it can really work. We don't know. We haven't sold a room yet. We haven't opened the restaurant yet.
You know, we have the first kinda restaurant like that that we've put in our Bespoke Gallery in San Francisco. It's our new Live Fire restaurant concept that's tremendously exciting. I think, you know, it's got a really wide net. I think it's delicious food. You know, we're doing it internally from scratch ourselves. You know, we've been in there eating almost every night and fine-tuning every detail. We think on a lot of levels, the Guesthouse is gonna be an incredibly exciting concept for us and will elevate the RH brand in, you know, in the world of design and taste and style and, you know, placemaking and stuff like that. I think it's gonna have a huge impact on our brand and how we're perceived in the world.
If it works the way, you know, we are kinda modeling it now that we're closer to it and we can see it and we can think about how to price it, yeah, it could be a real business. That's not what we're planning for right now. We're not sitting there, you know, kinda saying, "Yeah, we're gonna go build a billion-dollar hospitality business." Then again, you know, I only thought RH could be a billion dollars not too long ago. It's, you know. I mean, this is it. In a lot of ways, it's the best work we've ever done. You know, of any kind of work we've ever done, this is the best work we've ever done. We'll see what the consumer thinks.
They'll kinda tell us, you know, how excited to get about it.
Got it. Thanks a lot.
Thank you.
Thank you. Our last question comes from the line of Brad Thomas with KeyBanc Capital. Your line is open.
Hey, good afternoon. Thanks for taking the question. Gary, I was hoping to follow up on RH England and see if there was any more color you could provide on how things are shaping up from a supply chain and logistics standpoint, knowing you're going to new continent here. What should the customers over there expect initially that might be different in terms of anything like delivery time or relative price points versus what we see here in the United States?
Fernando just got back. I'm looking at him across the table. I mean, he's updated us that things look good.
Yeah, absolutely.
Yes. I think we're ready to go from a supply chain side on our end. The part of the supply chain we don't control, we'll see how that evolves. I think so far it looks like we'll have inventory. We'll be ready, we'll be able to deliver, and execute the construction. Like any construction today in the world of COVID is taking longer and costing a bit more. I kinda think about RH England as a kind of living store. It's a big 73-acre estate, and not everything has to open at once. We're gonna have how many hospitality? I'm trying to think about that.
It's like we've got three restaurants opening on the property. Altogether, I think there's five or six hospitality experiences, but we have the Orangery restaurant, we've got the Conservatory, we've got the Loggia, we've got the Wine Room , the Tea Room , we've got the Juicery. What else? There's the team. Scott's kinda talked. Yeah, we got weekend picnics on the lawn, you know, that are gonna be happening. I mean, it's gonna be a fun place. Like, I don't think the Conservatory restaurant will make it for this summer. I mean, we may just, you know, that may come next time. We'll, you know, like, next season. But I think this is gonna be something that's gonna be a really fun, interactive experience.
I think if we do it well, a lot of people are gonna come. It's gonna be a great environment to see our product in, you know, this beautiful state. It gets incredible light. It has incredible views. We have the biggest herd of white deer in all of Europe. You know, we have a deer park, you know, that deer graze on it. You know, you sit there, have a picnic, and look at the deer or sit in the Orangery, look at the views or the Conservatory or the Loggia. They all have views and, yeah, it's gonna be spectacular. We kinda call it the most unusual store in the world, you know, internally. That's not what we're gonna say externally. You know, I think it's gonna get us off to a great start.
You know, we're running a bit behind. You know, like, you always have all kinds of... This is a Grade I listed building, just to put it in perspective. That's... The-- like, Buckingham Palace is a Grade I listed building. When you have a Grade I listed building, you know, it's-- I don't wanna say anything that all of a sudden I get anybody on the English side upset, but, you know, it's just not the easiest to get approvals to make any changes and so on and so forth. Look, the people we're working with in Historic England-- they've been tremendous, you know, and they've been excited about our project. Yeah, it's just a slower process, and COVID slowed us down a bit. You know, we're kinda rushing to kinda hit midsummer.
It could be late summer. Whenever we get open, it'll be spectacular, and that's really the key. You know, you don't get a second chance to make a first impression on something like this. You know, whether it opens, I thought we're gonna get June. I don't know, you know, it's probably a long shot to get June now, but you know, could be July, could be August. Whenever it opens, you know, I think everybody in our organization is gonna be proud of it. I think our shareholders are gonna be proud of it, and I think customers are gonna be really excited about it. You know, it'll be our best work. We just did our new best work. You know, if any of you who...
You know, a few of you came to the opening of RH San Francisco, which wasn't the opening of RH San Francisco. It was once they, you know, once they announced in the Bay Area in Northern California that masks, we didn't have to wear masks, we said, "Okay, we haven't had a party in two years. We've, you know, opened a bunch of galleries, no parties. We're having a party in our hometown." We set the date, we mailed the invites, and we had a party even though everything wasn't exactly done. Those of you that were there, you know, it looks spectacular. It is. You know, it's the most extraordinary Gallery we've ever built. It's got an entirely new restaurant that, you know, that's called the Palm Court that's incredible.
You know, this new wine experience there, these new wine bars and, you know, incredible rooftop with views of downtown San Francisco. You know, but England goes to another place, right? You know, when everybody sees what's coming in Paris, it's just extraordinary. What we're doing in Mayfair, in central London, incredible. We're stringing together four buildings to create this incredible experience. You know, in Paris, we're gonna have a Champagne & Caviar Bar , on the top floor on the roof with views of the Eiffel Tower. I mean, you can't make that up, right? In Paris, the RH Paris is gonna have a Champagne & Caviar Bar with views of the Eiffel Tower. You know, we used to...
I think Chicago, the 3 Arts Club still has the record for the most engagements in a you know in one of our restaurants, but Paris might take that crown you know after a few years. When you see you know we're very close to I guess I shouldn't say you know 'cause we're in negotiations but something even wildly more spectacular in the French countryside. You know if we do this one I mean it's just a incredible brand enhancer. Like the stuff we have coming is you know. You're just gonna have to keep changing your perspective on what's possible and how to see our brand. I think all the people who came to our party last week designers were blown away.
They thought if you get out on the West Coast, you know, even if it's not open yet, I think we'll open kinda mid-April. We got a few more things we gotta get done there. If you're anywhere near here and you wanna see it, let us know. We'll give you a tour because on the main floor, we set up RH Contemporary, and it's shocking. It's so good. It's that good when you see it. I mean, I think people. It's just gonna motivate people to change their house, redo their house, no matter how long ago they bought furniture. It's a whole new thing. It's very cool and just beautiful, and the quality is outstanding. You know, a lot of excitement coming. We're really pumped about England.
If there's no COVID and we can have a party, do not miss that one.
All really exciting stuff. If I could squeeze in a follow-up, perhaps a bit more dry. You know, you all have had kinda different capital structures over the years and depending on if times are good or bad. Just to circle back on that question of the term loan. You know, I mean, in this environment with inflation where it is and the trends you've been seeing, I guess, how do you think about what the capital structure should look like right now?
I think we've consistently answered that. I mean, I'm not sure that we have a target cap structure. We, you know, we think very opportunistically about our capital, our capital deployment, our cap structure. That hasn't changed. I think we've been quite consistent, you know, probably for the last nine years about that. You know, we raised the capital, you know, to provide optionality and give us, you know, give us some flexibility here going forward. Exactly, you know, we accomplished that at a very attractive rate, so.
You certainly did. Great. Thank you so much.
Thank you, Brad.
Thank you. We had another question that comes in the queue. It's from Seth Basham with Wedbush. Your line is open.
Thanks a lot, and good afternoon. Not to belabor the point that's been brought up by some prior questions, but just in regards to thinking about the margin outlook for 2022, with the more muted sales outlook, I'm surprised to see operating margins expanding in your guidance. I'm wondering if you are changing anything in your cost structure materially relative to when you last talked to us in December. For example, you're cutting back on some of the source book distribution that you're planning or anything else along those lines. Thank you.
No. Well, like, I think if you just looked at us, you know, since what, 2017, you know, on relatively modest revenue growth, we've had pretty significant operating margin expansion. You know, I would hope you'd get used to it, you know, 'cause we don't expect to not, you know, to anytime soon stop expanding margins unless we make, you know, some kind of short term, big investments that maybe put weight on it. Even with opening Europe, even with a lot of pre-opening expense and investments and, you know, opening Europe means, you know, we've got people over there now. We're flying teams over there, people over there, living there, staying there in hotels. We'll have big teams going there. We've had big teams in San Francisco, you know, to get that open.
We've got big pre-opening costs for the Guesthouse . You know, we're absorbing a lot of investments, and it's clear to us, you know, how important kind of the connective tissue of hospitality is in our business today and will be. You know, our vision for hospitality now, I think, is just magnified, what we can see and what we have confidence in doing. Like, look, not too many years ago, we didn't know anything about restaurants. You know, it was the end of 2015, really beginning of 2016, we had our first restaurant to be open. We didn't even have a host, you know, because we thought no one was gonna show up, you know?
There was part of it like, okay, who wants to go eat in the middle of a furniture store? You know, the original. If you want, look at the Chicago video. I think Brendan, who we partnered with on the first few restaurants, he said, you know, like, "There's gonna be no host, no this, no that." We opened the first day, and all of a sudden we had a line out the door, and we had nobody seating anybody. We had customers hovering over tables waiting for the next person to leave. You know, we've went from, you know, just one restaurant that wasn't really in our backyard. It was all the way in Chicago, and it was with, you know, with somebody, you know, that was not inside our company, right?
Now it's you know six years later and we've got 13 restaurants that we totally control. You know the entire hospitality team is you know it's internal. It's not farmed out at all. We're developing it. We design the restaurants we design the menus. We're architecting you know what this platform looks like. We've done the Guesthouse from scratch. Nobody helped us with that. We even did all the architecture internally and all these things. You know we're really gonna become a hospitality company too. Well some people might think well gosh it's just like another business. Not the way we're thinking about it. Everything we do we think from an integrated perspective. It's not like we're running a hospitality business.
This is really an integrated hospitality business that's amplifying the core business and amplifying the brand. It's a new way of talking to people. It's a new way to market a brand. It's a new way to connect. We just see so many more opportunities. You're gonna see us do new things like the new Live Fire restaurant. You're gonna see us do this Champagne & Caviar Bar in New York, and you know, it will be the first one. You're gonna see the first RH Bathhouse & Spa in Aspen. You'll see other things. I think this brand is gonna evolve and become something that the world's never seen.
In many ways, you know, depending where you are and what you're looking at, it's already become something the world's never seen. Especially from a financial outcome perspective, right? No one's had a model like this. You know, we're investing heavily in hospitality this year, you know, and because we think there's such a big opportunity to enhance the brand. You know, we're absorbing a lot of costs this year. You know, with like we had almost no travel during COVID, so we're back to traveling. You know, that's why you saw some deleverage in SG&A in Q4. You know, one of the things was travel. We're traveling again. We're working again. You know, we came back to work a lot earlier than everybody else. We don't have a whole
You know, we don't have a vote here on, you know, are we coming back to work or not, you know? It's like, you know. I mean, a lot of crazy things happening, you know, in the world that I think is gonna be bad for productivity. Like, not going to work, I think is one of them. Anyway, you can see in our model that, you know, we're, you know, relatively conservative sales. We're expanding operating margins, even though we have a lot of investments, and we're expanding internationally. You know, so it just tells you about our model, right? What's the model gonna continue to look like over the next, you know, two, three, four, five years? Or what it's gonna look like over the next decade.
I really think it's gonna look like, you know, the handful of very best luxury brands in the world, if we do it right. I mean, but you've gotta build desirability and scarcity and, prestige and exclusivity and a lot of things, you know, into really being a luxury brand. You know, like that to give people, you know, to really desire that brand, you know, you've gotta execute at such an incredible level. We're getting there. You know, we're getting better all the time. You know, we've got a ways to go, and so that's what we're optimistic about. We go like, "Look how we're doing. Like, shoot, look how we're doing, and this is. They haven't seen anything yet." Like we can see what's coming over the pipeline over the next two, three, four, five years, right?
We know what's in that pipeline. Some of that pipeline's under construction or, you know, we're finalizing a lease or, you know, we're you know, doing the renderings and finishing the architectural designs on projects that. You know, I wish I could talk about them all right now, but you guys would probably get scared, you know? Like I've already probably scared you enough for one day. You know, just trying to be honest about what we see.
Thank you so much.
By the way, we're not scared, just to be clear. We're excited. We're just cautious.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Gary for closing remarks.
Okay. Well, thank you everyone for your time. We look forward to speaking with you next quarter. Do let us know if you're on the west coast and wanna see RH San Francisco or come by and see the Center of Innovation. Okay. You might need a pickup after this call. Thank you. Take care everyone.
Ladies and gentlemen. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.