Earnings Call: Q4 2019

Mar 28, 2019

afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter and Fiscal 2018 Earnings Q and A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Ms. Cameron McLaughlin, RH Investor Relations, you may begin your conference. Thank you. Good afternoon, everyone. Thank you for joining us for RH's Q4 and fiscal 2018 Q and A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer Raynaud Blignot, President, Chief Financial and Administrative Officer and Jack Preston, our incoming 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 for 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 opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of these forward looking statements in light of new information or future events. Also during our call today, 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 for some brief opening remarks and then we'll begin our Q and A session. Great. Thank you, Cameron. Thank you for joining us today. Before we start, I'd like to congratulate Jack for his appointment to CFO and welcome him to his first earnings call. Based on how the stock is trading in after hours, Jack has little baptism by fire, but he's up for the task. As you know, Jack has been in senior positions with RH for 6 years, most recently as our Senior Vice President of Finance and our Chief Strategy Officer. In reality, Jack and I have been working together for almost 9 years now. That's right. As he was a key advisor to the company for I think 3 years prior in preparation for IPO. So it seems like it's almost 10 years, but in the 6 years that Jack has been with RH, she's had a seat at the table, participating at the most senior levels, the entire time, including many of our board meetings. And I believe I speak for the entire team that, Jack, we're so proud of you and so excited to have you in this position. You have earned it. So, welcome. Thank you, Craig. I'd also like to thank Ryno for the past 8 months and especially for the past several weeks as he's worked to ensure a seamless transition with Jack. Rayno and I were dating for a long, long time and probably longer than we got to work together. And so while I feel it's been fortunate, I know it's really best for Raynaud and his family and I want to thank Raynaud and wish you and your family nothing but the best from all of us on team RH. Great. Well, thank you, Gary. Thank you for the opportunity you gave me. Clearly, this was a very hard and unfortunate decision. But as you just said, it is the right one for me and for RH. You and the team deserve somebody who can give 150%. Unfortunately, I can't do that at the moment, but we're very fortunate to have somebody as experienced as Jack who can do that and be able to step in for a smooth transition. So with that, I think we'll hand it over to operator for questions. And your first question comes from Steve Forbes with Guggenheim Securities. Good afternoon. So I mean maybe Gary, I wanted to start with the change in the revenue growth outlook for 2019. Obviously, a lot has transpired over the past 3 months, but it is a short 3 months. So maybe just help us understand your confidence in the renewed outlook. What could go wrong from here as you kind of think about end demand for your consumer? And sort of like how have you got everything now, right? Because it appears to me that the implied comp would be very modest, if you think about everything that's sort of building from the real estate transformation effort and potentially some outlook for it? Yes. Well, one, we're as confident as we can be with our outlook. Look, we gave our outlook on December 3 and aftermarket closed and on December 4, as many of you know, we launched a convert. Our stock was, I think, trading after hours in the 160s and closed that day at 140 something. And we started a conference call with the convertible debts. I think we had 40 people on the call. I gave a 20 minute presentation and asked for questions and it was crickets. And the bankers asked for questions and it was crickets. And we found out in the 20 minutes we were talking, the market dropped 400 points on its way to down 800 points and on its way to down 4,000 points in the month of December. And look, our business is tied to the high end consumer. It's really the top there's some we've got some echo on the background. So someone, yes. I mean, can you find Steve maybe? Yes, someone's got to mute. But we deal with a high end consumer. They're tied to the stock market. It shouldn't be any new news to anybody that like severe volatility in the stock market is going to sway a business like ours, especially a high ticket business like ours that can be pretty discretionary. So for what we can control, we're super confident. Look, we I mean, yes, let's step back for a minute and start with the fact that we guided 2018 for 9% to 10% operating margins and many people thought we couldn't make it and thought we were too aggressive guiding 9% to 10%. We raised guidance 4 times during the year from an earnings point of view and we beat guidance all four times after including the Q4. And we told everybody we're going to manage the business with a bias for earnings versus revenue growth as we try to optimize this model and build the most differentiated and profitable business in our space. And so, look, if we were playing the old game in the Q4, our business would have dropped 10 points, we would have pulled a bunch of promotional levers and we would have done a lot of things like everybody else does. And you would have seen a zillion emails that are at the end of the day downward spiral and it's detrimental to a brand and to your long term positioning and we're just not playing that game anymore. So we took the hit on the top line. We think the business remained tough all the way through January and into February. And we've seen our business now picking up. We feel confident about the outlook, but I can't control and none of us can. I mean, anybody on this call, do they forecast what was going to happen in December? I mean, I sure couldn't on December 3. So look, we just had the best year in the company's history. We had $2,500,000,000 company making 12.1 percent operating margins. Name another home furnishings company that's expanding operating margins like we are, that's building a model like we are. We feel great about where we are. I mean, it's the stock goes down, we'll buy more stock, I'll buy more stock. It's okay. We'll take advantage of this on both sides. So this is a great day for team Resto. We're indifferent than the stocks bouncing around. I don't know what is it down 20 points. We're the best earnings in our sector by far. And so that's what we feel proud about. And do I feel bad that we took earnings guidance up on December 3? Not at all. Not at all. The next week our business dropped 10 points and we had no control over that. Maybe I Yes. So I'd say one other thing that the other thing is, we could have been around the table here and say, oh, do we still edit the unprofitable categories and the holiday, which is not strategically important, in fact it renders the brand less valuable and all the promotions and stuff we've decided to do and the three points we're taking out of the business. Those are the right long term decisions for the business. And so people who want to hold the stock, hold the stock, people want to buy the stock, buy the stock, people that don't, don't buy the stock. We're going to build the best company in our space and that's what we're doing. And we couldn't be more excited about it, Steve. Maybe a good follow-up to that sort of as I think about sort of your transformation here, right. If you take a step back and think about everything you just said, how does it impact your willingness, right, to proactively invest in the business given today's environment, right? Whether it be in the brand extensions, whether it be in the real estate transformation initiative, does this impact your sort of future investment plans, whether it be near term or long term? Look, I mean, you guys like see the reports. I mean, if you look at the Redfin report and look at the top 5% of housing, homes over $2,000,000 the chart doesn't look good right now. I mean, that should be no surprise to anybody. It's, it completely matches up with 2015, 2016, when the high end housing went negative. And a lot of times you don't see it in the broad numbers, right, because the housing, the government numbers come out and they count units. You have to sell a lot of units for one of our customers' homes that we go do an installation on. So a lot of people probably maybe don't track that, but it's slower, but our business is still going to be strong. I mean, we're taking operating margins up, name another company in our space that is, by almost 100 basis points at the midpoint. And again, if you just think about how many quarters in a row we'd beaten earnings, I'd say, I mean, you could look at the trends. We're going to continue to manage the business and the bias for earnings versus revenue growth. We're going to pivot the company back to growth this year. We've got, I think, an exciting beach house book that's going to launch. Ski house, I think, is going to be terrific. And then we're going to start continuing to take the brand up and you're going to see certain bespoke collections coming in that are at another level of quality that will further differentiate RH in the marketplace. No different than the galleries. Our products are going to continue to evolve and our services can continue to evolve and we're going to continue to evolve and we're going to run a smarter and better business. So I mean, I don't know, like I've never had a year like this. Someone has said, hey, you're going to RH is going to hit $2,500,000,000 you're going to make 12.1 percent operating margins. You're going to raise earnings every quarter and beat earnings every quarter and some market volatility and you took down a preliminary outlook and your stock goes down $22 I don't even know how to deal with And I'm not going to let it distract our organization for one second or me. Thank you, Gary. Yes. And your next question comes from Oliver Chen with Cowen. Hi, thank you very much. Our question was just about balancing merchandise margin against traffic in the quarter that we just had and also thinking about merchandise margin versus comp in the year ahead. Another question we had just in your cash flow guidance, what are your thoughts or assumptions behind networking capital and inventory management as you think about making sure that you're happy with your breadth and depth and simplification of your assortment and supply chain? Thank you. Okay. What is your question about MMU versus traffic? What is the question? Merchandise margin in terms of like how merchandise margins trended this quarter and also your outlook for merchandise margins next year, whether that be the cost of goods sold in terms of AUPs versus markdowns? Well, our gross margins continue to expand and we feel very confident about where our margins are going. We're guiding gross margin up, right. And so, I mean, that should tell you what you need to know. We wouldn't be guiding margins up if we didn't think we we didn't have good trends in the key drivers of gross margin. So how do we think about it versus traffic? You mean like should we promote the business to get more traffic? Is that your question? Balancing the 2 aspects. And are you seeing price margin expansion on the basis of a lower inventory management? Yes. We don't think about it this way. We don't think about it that way. I think if you want to think maybe get closer to how we think about the business, study LVMH, study Hermes, study the people that we study and the brands that we aspire to be like. They don't junk up their business because traffic's off or there's some slowing macro environments. They look for other opportunities to strengthen their business and strategies to drive long term value and to elevate the brand, not kind of deteriorate the brand. So, yes, we're just playing a different game. Maybe that's what most retailers are playing today that are bombarding you with sale emails. That's just not the game we're playing anymore. Thanks, Jack. Yes. Let me just make a quick commentary on the free cash flow guidance. Obviously, we're not providing direct color as to the drivers of free cash flow, but the sort of business and the operating platform speaks for itself. The other thing I'll say that speaks for itself is how our inventory turns have trended over time. So again, just from the face of the financials that we reported and from historical financials from 2.5 in 2017 to 2.8 this year. Again, that speaks to the power of the operating platform and the changes we've made, and it's only natural to assume that we will continue to improve inventory turns as we take advantage of the platform. Okay. And just lastly related to those questions is SKUs and breadth versus depth of the assortment, particularly as you think about new and compelling and interesting opportunities. What do you think about the range and the customer choice and preserving innovation yet also simplifying to amplify in the right manner? Yes, it's all about editing to amplify, right. And elevating while expanding. And so it's that's things we obsess about and we talk about and we you're going to see a lot of newness. We think we're more discerning than ever with the newness that we've got coming in. And we really like what's on the horizon. I think Beach House is going to be really exciting brand extension and I think open up a market if you will and have customers see our brand in a new light and ski house I think is going to do the same. And when we push color out just because we thought it was logical that kind of follow ski house excuse me, beach house and ski house in the same year and have kind of that second home cadence. And also color is probably more complex and a bit riskier from an inventory point of view with all the fabrics and colors and dimensions. We thought let's make sure we understand where the economy is going before we launch a business that's that complex. So there's multiple reasons why we kind of shifted course and changed our sequencing there. But look, we're I've spent the last 3 years kind of trying to rebuild the platform of the business. So we would have the best platform to go forward with. And I would say, starting with me, I'm really excited to be shifting back onto the product side of the business. And I mean, all of us have worked so collaboratively to try to build an operating platform that doesn't exist. And we think we've got the key parts of it right, the foundation is in place, the framing is in place, the plumbing is in place and there's some other pieces to kind of finish here and we've got another couple of years of work, but the architecture is there and the logic is there. And we feel like we've made a leapfrog move with our operating platform. And that's why, look, we've got a business that's half the size of my former company and we've got an operating margin that's 50% higher. So and it's not done going up. So we think the investment that we've made and maybe it cost us a couple of points on the top line. That's okay. It's like we're going to probably wind up with operating margins long term that are double what they would have been if we would have pursued just chasing sales. I mean, look, do I wish I had Wayfair's multiple? Sure, I do. Do I wish I had Wayfair's operating platform? Not at all. Try like we're 20 points ahead of them. Like it's not easy trying to make all that up. And I just think that it'll all shake out correctly at the end here. It always does at the end of the day. So, yes, I think what you're going to see from us from a product point of view, from a marketing point of view and innovation and kind of inspiration, I think we've got a team that's the best in the business at all of that. So, but we have been focused on reconceptual and it take reconceptualizing an operating platform from every dimension. And so we needed all the brains in the game to do that. We needed all the creativity focused on that, right, as opposed to bringing a consultant in, paying them several $1,000,000 having them give us a book and then having a supply chain and operating platform that looks like everybody else's built by people who really don't run businesses, but kind of just opine on them. So we run this business, we know this business and the investment we made to dig in and rebuild this operating platform is going to we're going to be miles ahead of everybody for a long, long time. So but Thank you, Gary. Okay. Great job on New York as well. I really appreciate the comments. And your next question is from Michael Lasser with UBS. Good evening. Thanks a lot for taking my question. Given the volatility that you saw in December January as a result of the market stock market volatility and the high end housing market, does it give you pause on the size of the addressable market for high end home furnishings, particularly at a time where you're accelerating the rollout of new concepts and new store openings? Not at all. The exponential spending at the home at the top of the market is unbelievable. If you look at the numbers, I mean, the tip of the iceberg is where all the money is. I mean, people spend exponentially more on their home. So I mean, you go down market, most people can't afford to furnish the house they buy. Yes. I'd love the market we're going after. So it's like there's going to be volatility, there's going to be cycles in the market. Again, those things we can't control and we just have to be prepared to capitalize when housing markets are big tailwinds and when there are headwinds, know how to capitalize them. And my follow-up question is, as we model the course of the year, should we model your top line sales pretty consistently in the full year range or should we expect more weakness at the beginning and more improvement at the end? I think it's we've got when you think about the impact from some of the editing we're doing with the unprofitable businesses and fringe promotions and transitioning the rug business, I think it's like just a one point hit in Q1, 2 point hit in Q2, 1 point in Q3, 2 points in Q4. It's 2.4, 2.4 actually. Or 2.4, yes. Can you clarify that? So it's 2.1 hit So as we were talking about in the letter, there's a 3 point drag from the editing of the business and the way we think about that as far as impact versus last year is 2 point drag in Q1, 4 point drag in Q2, 2 point drag in Q3 and 4 point drag in Q4. And that again reflects just the timing of some of the pieces and when they're coming out. Holiday, for example, has a bigger impact in Q4. Yes, the revenue transition is the bigger impact in Q2. And as a result of that, we should be modeling negative comps, right? Yes, we're not going to guide comp anymore. We don't really look at comps here. So we decided we're not going to report comps going forward. And it's the only time we were preparing to know our comps was like the 2 days before the earnings call, because you guys focus on it. We don't So you won't be reporting that anymore? Yes, we don't use it as a metric to run the business. We run the business as a total channel neutral business. We look at our business more from a market point of view. And what we're investing into a market from real estate, store investment, catalog investment, marketing investment. And so we could care less which side or where they shop or where they transact. We just look at total our total revenues and our margins. Thank you very much. Your next question is from Tami Zakaria with JPMorgan. Hi, thanks for taking my question. So with all that noise around tax refunds and your company's exposure to states like California that's facing the SALT deduction impact, have you seen any performance variability by geography in the past couple of months or has performance been weak across the board? Yes, nothing that we can that's been consistent that we can determine. I mean, LA has been a little soft in parts, but then Orange County is looking okay. And so we can't find any consistent threads. Look, our business is really strong in New York. Obviously, we opened a store that we thought was going to take a couple of years to get to $100,000,000 and it's already at a run rate in excess of $100,000,000 So yes, right now it's hard to determine everything got hit when the market got hit. But our businesses can be a little lumpy, right? We have a lot of big transactions and big design jobs that hit at different times. So I'm sure as we get farther into the year and we'll have more clarity on are we is our business consistently different. But right now, it's too early to tell. And Tammy, it's Jack. I would just add that it's something we're watching closely. I mean, we've heard anecdotes of people being surprised with the tax bills as they prepare their tax returns. But as Gary mentioned, we're just seeing some variability across. So it's not a clear trend just yet. I think given where we are with certainly some affluent people tend to go a little later on their tax returns too. So again, it's another thing that we're watching closely as the results come in here. Got it. And so my follow-up question would be, with lower than expected cash flow in the Q4, could you remind us what the plan is with the convertible notes that mature this year and whether you think there's room to take on additional debt in the near term? Tami, it's Jack again. Look, as you know, we launched and pulled a convert in December. So one thing that we've said and that's clear is we're always opportunistically looking at our capital structure. Having said that, we are comfortable with settling the 2019 convert in cash and borrowings on our credit facility as we mentioned in the letter. Got it. Thank you. Your next question is from Brad Thomas with KeyBanc Capital Markets. Hey, thank you for taking my question. I wanted to just ask about the 2019 guidance, just make sure I'm understanding bridging the new guidance and the old guidance, just to make sure we're clear on this. So it looks like there's a $0.36 adjustment from the lease accounting changes and then a lower run rate for sales based on what you're seeing some associated maybe deleverage from that or less margin expansion due to that. Am I interpreting this right? And are there any other changes to note in the outlook? Yes. So again, if we look at the tables in our 8 ks, the midpoint of our revenue guidance range, as we've talked about, went from 10% to 4%. So we've spoken to the drivers of that. So the walk through on providing sort of a new level of guidance just based on the flow through of that and our latest trends on the business. So if you look again Page 28 of the tables, that left side shows you can compare that with our prior guidance. And then the lease accounting is just that impact that we also note there. And so clearly, we're reporting results under the old accounting today. When fast forward to June, we're going to report results under new accounting. And so we didn't want to create any confusion by jumping into the new accounting just yet, but we're giving you all the pieces that you're going to need for you to build your models. And so come June, when we report our results, we'll be referring to the new guidance. So we want to make sure you had both pieces. And I think we've described you're getting it right. And it's just again impacts across the P and L. So you're seeing an 80 basis point impact in 2019 to gross margin and to operating income sorry, 70 basis point impact to gross margin and operating income from the lease accounting. Great. And as a follow-up on some of the adjustments that you've made in your sourcing as tariffs were a concern 6 to 9 months ago in particular. I guess, Gary, could you speak to your level of confidence in any changes that you've made with partners that you're working with over in Asia? Well, I think the outlook has changed quite a bit, right, from the early threats to the recent outlook is I think optimistic that we're going to find a happy settlement right on both sides. So I've said from the beginning, I think that there's more risk trying to run out of China and resource and bring new factories up with big quantities. So where it makes sense, we've done that. But we you have to balance you really have to balance the risk, right, of taking programs out of factories and trying to resource them at the quality level we play out. It's probably a lot easier for lower level product and smaller products that can be manufactured in a lot of places. But we have kind of directional understanding with all of our vendors that if the what if happens, if the 25% tariff comes, how we would handle that. We're comfortable with where our understandings are. We're comfortable we can navigate through this without a real meaningful hit if the worst happens. And if the worst happens, everybody's got to deal with it. I mean, even the people that are rushing out of China, good luck, you're going to have disruption. There's no way you move big quantities of products into new factories and it goes smooth. So we like how we've how our strategy looks and what our sourcing profile looks like today and what our plans are if the worst case happens. Thank you. Your next question is from Seth Basham with Wedbush Securities. Thanks a lot and good afternoon. My first question is just around the gross margin outlook. If you could provide a little more color, Gary, on the walk from 2017 to 2018 relative to 2018 to 2019 in terms of the key drivers and which things are going to be bigger contributors to gross margin expansion? That would be really helpful. Yes. I'll hand it over to Jack. He's got the walk in front of him. Well, as you know, we don't comment in detail around the parts of gross margin, but I think we've talked about that the 2017 to 2018 pickup was largely related to the product margin improving due to anniversarying your street rationalization and outlet sales. And then going forward with the guidance we provided, it's probably in that sort of 2 thirds zip code of being related to product margins and then of that pickup. And then the rest being some leverage or opportunities we're seeing in transportation and leverage in our occupancy. So I'll just leave it at a high level commentary there. Got it. And just as a follow-up with that in terms of the transportation and DC consolidation and reverse logistics efforts, how are those going progress report wise? And do you think that benefit will persist beyond 2019? Yes, we're quite happy. I mean that's why you see the operating margins you see in our company and we there's more to go and there's more to do with the very early, early stage of reconceptualizing the home delivery experience. And we've got a few tests in place and we like what we see. We think there's some real leapfrog opportunities here on multiple levels over multiple years. So you'll start to hear more about that probably in the back half of the year. So as we have more data and information and some of it is really good and will remain proprietary. We won't be able to tell you. But the opportunity, we think we've got several years ahead of us, probably 3, 4 years of optimizing the entire integrated supply chain platform. Got it. Very good. And just lastly, the point of clarification in terms of the moving pieces between gross margin and revenue in 2019, what is your Chinese tariff assumption for the year? Is it status quo at 10% or is it different? Thank you very much. Yes. Right now it's status quo. I mean, we unless anybody's got news, we haven't seen anything new. Our sources and who knows exactly what's going to happen. But our sources tell us that they're going to find a compromise. It's really not good for China right now. I mean, there's I mean, factory owners and are leaving China and opening factories in Vietnam and Indonesia and other countries. And I don't think China can hang on that much longer because the businesses are going to exit the country. You don't really have to it's going to be soon, it's going to be less dependent on the retailer resourcing the goods because the manufacturer is going to resource the goods for you. They can't afford to lose the business. So they're moving quickly on the manufacturing side. And so I mean, it's going to all play out. I think if I say, if it goes up, if it doubles, it goes 25%, it's going to go to 25% for everybody. Nobody can move and resource that quickly without taking great risk unless they're making cheap product. Understood. Thanks again. Your next question is from Anthony Chukumba with Loop Capital Markets. Good afternoon and thanks for taking my question. So my question was just in terms of giving guidance. In other words, obviously, you came out with your preliminary guidance in December based on the current trends at the time. Obviously, the trends changed and so you had to reduce the guidance. I mean, could the argument be made that maybe I don't want to call it a mistake, but couldn't the argument be made in retrospect maybe just shouldn't have given guidance at that time? And then just come out with your guidance now based on what you've seen over the last few months? Thank you for that hindsight. Much appreciated. Well, of course, yes, the firm grasp to the obvious. If we could have done that, we would have done that. But we were out there also raising capital, right? So you don't want to sell your company cheap when you're trying to raise capital. So we want to give the fullest view of where we thought the company was going to perform at. And when you go out and whether you're doing a convert or doing a transaction and you're selling any part of your company, I mean, we didn't want to go sell put Resto on sale. So we felt it was important to give the full view and where the business was, where we thought it was headed. And at the time, and I mean, we can second guess all kinds of things on timing, right? Like, sure, you're right. I wish I did that. I mean, Gary, look, I mean, look, obviously, hindsight is 2020, and I'm certainly not questioning your decision in hindsight. I mean, you've done a great job running this business and creating shareholder value. There's no question about that. I'm just I guess what I'm it sounds like part of the reason that you gave the preliminary guidance is because you were doing the convert. Is that fair or I'm just trying to understand why? We gave preliminary guidance the year before too, didn't we? Yes, we've given preliminary guidance. So but it is one thing if you're going out and you're I mean, you want to give a full view to investors, right? So I mean, I but we've given preliminary guidance before. So I mean, it's we did it in the last year and probably the year before. Yes. So kind of business is usual, but I mean, I don't know where you're going with this. No, I mean Not a lot of you about it right now. Right. No, no, totally understand. I guess the point that I'm making is the only or the point that I was trying to sort of get to was that maybe if you if that wasn't the practice of giving guidance, then you stock wouldn't have reacted this way because you're doing the right thing. I mean, right, you're not promoting, you're managing the business for the long term. I think you're doing all the right things. It's just that you were somewhat tripped up a little bit because trends change so quickly. So it's not trust me, Garrett, it's not a critical thing. Yes. No, no, no, I know. But let's just play this out. Let's say we didn't give guidance and we came out with guidance today, what it is. I mean, is the stock going to be valued higher? I don't know. I mean, yes, I mean, people are doing math and probably doing a multiple on how we guided. So the guidance would have been the same. And our long term outlook, Gary, is 8% to 12%. Yes. Our long term outlook is not changing at all. Like we feel really confident about growing this business over the long term at 8% to 12%. We feel really good at growing earnings 15% to 20%. Nothing's changed except look, there was a blip. We had the worst stock market reaction that we've seen and it affected our market. And there's not a good comparable for us, right? So it's not other people selling the price point we're selling, the high homes we're selling. And so I think that's what maybe surprised people. There's not another good compare. I don't know what who else you compare the selling price point that we are in home. But for cheaper goods, you still have pretty full employment, right? So you've got the business at the lower ends of the market, middle of the market, still will look better than our market right now. It's just much more tied to the stock market. And high end housing is its own little data set that gets missed a lot. Got it. That's helpful. Thanks. Yes. And our final question is from Zach Fadem with Wells Fargo. Hi. Thanks for fitting me in. Just a quick point of clarification on the 3% to 5% sales growth outlook. Helpful color on the business exits, but maybe you could talk a little bit more about just the impact from the core business, core existing stores and then separately on your expectations for new galleries and just the contribution there? And then second, could you also just give us some more color on how you expect New York to trend and how that compares versus your expectations maybe a quarter or 2 ago? I mean, I think anything more about the sales outlook. Nothing that we haven't been saying that in the letter or we gave you a little color earlier. I don't know if I've got anything else to throw in. No, I think we said it all again. The letter speaks for itself in the commentary we provided earlier. Yes, we feel great about our new galleries. We think we have the most exciting new retail concept out there with the best economics and return on invested capital. So we've got a whole new model and I think I laid that out in detail in the last letter. I didn't carry that over. But if you read the last letter, it's got the real estate model pretty well laid out. And we couldn't be more excited about the deals we're getting and the locations we're getting and the store designs and everything we've learned in over the last several years. So we think the next generation of galleries can be highly productive on kind of every metric that we measure. And then a question, how do we expect New York to trend and how does that compare to what we were expecting a quarter or 2 ago? So I think we said when we did the meeting in New York and then we said, look, we thought it was going to be $85,000,000 year 1 $100,000,000 year 2, right? Yes. Yes. So I mean we're Ahead of that. Yes, it's way ahead. Okay. That's helpful. And then just quickly on the program and how that's trended with some of the new openings like Nashville and New York? And also with design services, maybe you could comment on customer usage and any plans to tweak that offering? Yes. No, membership program is working very well. We're very happy with it. So, yes, we're constantly doing little tweaks. When you're kind of cycling SKU rationalization, you're not going to have as much membership growth because we were selling a lot more SKUs. And then you're going to have if you go on promotion, you have a you're going year over year, you're selling more SKUs, you have more customers at a lower ticket, you're going to have more memberships than when you have fewer bigger sales, you're going to have fewer memberships as far as new memberships. So that's just simple math. And if you look at how our the fact that we cycle we're cycling through that. So but nothing new to report. We're very happy with membership is like one of the best moves we've ever made. I mean, we wouldn't we've never gotten to redesign and architect the operating platform if we were still running the business the way most of the rest of retail runs their business. And as you know, we reported the membership count in the 10 ks, so you'll see we're at 418,000 members as of the end of the Q4. Great. Any more questions? We're done with questions. Any questions? No, well, thank you everyone. I want to thank our team and our people and our partners all around the world that support our cause and just congratulate everybody. I mean, it was a record year for our company. And we I don't think we in the early days ever had a vision of getting higher than 10% operating margins if we ever could get there. And so hitting 12%, we just couldn't be more proud. And as we look at the vision we have in front of us and the strategy we have in front of us, we're just super excited about the future. And this is a little blip. So all good. We're excited. Thank you for your time.