Good afternoon. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the RH Fourth Quarter and Fiscal 2015 Q&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. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Ms. McLaughlin, you may begin your conference.
Thank you. Good afternoon, everyone. Thank you for joining us for RH's Fourth Quarter and Fiscal 2015 Q&A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Karen Boone, Chief Financial and Administrative Officer. Prior to this call, we posted a video presentation to our investor relations website, ir.restorationhardware.com, highlighting the company's continued evolution and recent performance. 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 and video presentation 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 any revision to 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.restorationhardware.com.
With that, I will turn it over to the operator to take our first question.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile a Q&A roster. Your first question comes from the line of Matthew Fassler from Goldman Sachs. Your line is open.
Thanks so much. Good afternoon. My primary question today relates to the cadence of revenues embedded in the guidance. It seems like you're anticipating that your growth for the year will be a bit slower than the revenue growth you expect for the first quarter. If you could please explain the puts and takes behind that color.
Great. Hi, Matt. This is Gary. Let me take a pass at that, and then Karen can follow up if there's more color. The way I'd think about it, if you stand back and think, we had high demand in Q4, so you'd expect some revenue coming into the first half from Q4. If you stand back and think about it, besides the higher cancel rates and investments we made to retain and delight our customers, which are an offset to revenues, the upside you might have expected is being mitigated by moving our annual source book mailing from Q2 to Q3. Additionally, the shift in revenues from moving the book into the second half is offset by lower promotional activity, specifically in Q4.
Our decision to discontinue certain non-core legacy holiday products that are not aligned with our strategy to become the world's leading interior design platform. Specifically, if you think about products like stocking stuffers, novelty toys and games, et cetera. As we continue to build our team of interior designers, their time is significantly de-leveraged when helping a customer find a Slinky or some item like that when they're working with clients designing a room or home. There's kind of a double shift here if you think about the transition of the business. I believe we're being rightly conservative as we think about the transitional nature of consumer behavior from a highly promotional business with a cadence of multiple monthly promotions to smoothing out our business as we transition onto the Grey Card program.
That's really helpful. I know there's so much else to ask. I'll try to keep it to top line and just my follow-up will focus on sort of the cadence of the business as you saw it play out through the quarter and perhaps into Q1, and then also what the pace of the fulfillment of that strong Q4 demand is. Is a lot of that getting handled in Q1 or some of those out of stocks pushing that into later in the year?
Yeah. I think about it's mostly going to be handled in the Q2 period. We'll see a little bit flow into Q1, but mostly those orders will be fulfilled in Q2 with a little bit that runs into Q3. That's where you think about the shift out of Q2 of the annual source books into Q3 that kind of offsets that upside, so to speak. If you think about Modern from where are we today and where do we anticipate we'll be as we see the months and quarters roll out here. We're currently in the 70% range as far as our in-stocks today, and we expect that to build to the mid-80s by the end of the quarter, which is more at a normalized level. We would generally run in the mid-80s, low 90s from an in-stock point of view.
We will be substantially caught up by the end of Q2. There's a few items or two here that we'll still be chasing that get pushed into Q3, but we'll be meaningfully operating at normalized levels by the end of Q2.
Okay. Thank you so much.
Your next question comes from the line of Michael Lasser from UBS. Your line is open.
Good afternoon. Thanks a lot for taking my question. Place where I want to start, Gary, is on the overall environment. It sounds like you experienced significant volatility in June, which you attributed in part to some of the gyrations in the capital markets. Trends have stabilized, at least what we see in the capital markets. Does that mean that you've seen some stabilization in the business, or is it being overridden by other factors at this point?
Sure. I think it's a good question. I think you said June. I think you meant January.
January. Sorry, yeah.
Yeah.
Yeah.
No worries. Just want to make sure we're talking about the same month. We definitely saw a disruption in our business in January, that was related to the significant disruption in the capital markets. Post that period, I'd say that aspect has seemed to have stabilized, although I'd say it's stabilized at a somewhat lower level. I think that we still feel that there's a general softening at the higher end of the market. I think more specifically, as I outlined in the video, the continued pressure from the markets relating to energy and currency continue to be a down drag. I think that's what we're most concerned about. If you think about last year, when we've been tracking this very specifically, we saw a two-point drag to total company revenues coming out of those markets.
That two-point drag in the first half accelerated to a four-point drag in the second half. Now has accelerated to a five-point drag in Q1, and that's on top of the two-point drag of Q1 last year. Even more specifically, it's accelerated to a six-point drag in March at the end of the quarter. We're highly focused on that. We think that's concerning, and we're somewhat concerned could there be collateral damage here in some of these markets? There's a meaningful slowdown in the Miami and Florida markets, and that's driven by South America. South America's tied to oil, and it's also being hurt by the currency, the exchange rates with America. We're meaningfully down in all these markets. The collateral damage, which could end up being real estate in Miami and other things could trigger other issues.
I think it's a time for caution, and it's a time to just be really thoughtful about how we're investing, the pace of those investments, and how we're thinking about our business.
Are you seeing a discernible difference between what's happening in Miami because of some of those issues in South America and Texas or Canada? Is it all very similar?
Yeah. It's all within a certain number of points. We're relatively similar. We did some things to try to stimulate the Canadian business that we mentioned. We reduced some of the shipping charges to offset some of the duty rates and things like that. It had a minor impact. My sense is that even though that oil prices have come up a bit, right? That you've got a lagging effect in all of these markets based on the fall of oil. I think our business is more of a leading indicator than a lagging indicator. Someone asked me recently about, gosh, The Home Depot's business looks strong. Lowe's business looks strong. Why are you feeling it, the headwinds differently than others? I'd say, if you think about our business in the context of businesses like those.
Home improvement businesses are tied more to hard physical construction of homes. Our business is more discretionary based. If you're in the middle of a building, a project, remodeling a home, or building a home, and there's a headwind in a market, or disruption in a market, you're not going to stop building your home. You're not going to not put the roof on. You're not going to not complete your bathroom or build out of your kitchen and so on and so forth. You've got to put in your hardwood floors. You've got to finish the house, right? Or your asset is going to be significantly undervalued. But you can finish that home and or if you have moved into new homes, say, "Geez, maybe we ought to use the furniture we have. Maybe we don't need to buy that new couch just yet.
I think that's why you see our business somewhat more volatile than maybe other data points and things that people might compare to us. I think the real estate market is going to be a lagging indicator to the oil issues and those markets. No different than we're a leading indicator versus a lagging indicator like a The Home Depot or Lowe's or other kind of building material kind of businesses.
Just lastly, I know in the video you mentioned 40 months of new store contributions. Could you give a little bit more detail just to provide some assurance that the real estate transformation's on track, and you give a little more detail on how you're thinking about the contribution to your guidance from the new stores versus the same store contribution this year?
We are very early into the transformation of our real estate. I would say, at a high level, it is working exceptionally well. I would start there. Every one of our new next generation design galleries are performing over plan and that is despite the headwinds, by the way. When you think about this, the opportunity to take this company to $4 billion-$5 billion in North America with a mid-teens operating margin, that part of our strategy is fundamental, and it is working exceptionally well. What we are learning, however, is due to the significant development nature of these projects, we have less control of the timing aspects of the approvals and construction schedules than we may have previously had experience with.
For example, if you think about it in Austin, the surrounding lifestyle center and the development and The Domain that is around our gallery is not complete. We completed our store in the fourth quarter last year, early fourth quarter, and we are ready to open and everything around us is a construction site. There are no sidewalks. There are cranes. There is not a building that is completed next to us. Opening would just be foolish. We are sitting there with a built-out store, waiting for the development to catch up. In another case that is different but somewhat similar, in Toronto, an old Sears department store was torn down at the Yorkdale Shopping Center, and we are now the new anchor of a new wing of really Canada's number 1 shopping center. The development of that wing of the shopping center is behind schedule and behind what we thought schedule was.
In that case, once again, we do not have as much control around the certainty of timing. I would say the certainty of projects is no different. There is going to be some certainty and flexibility, we realize now that we are learning we are going to have to have around these development projects. The third one, I think a lot of you that are from N.Y. are more familiar with. In N.Y. City, where we have a partnership and a development on the corner of the Meatpacking, I think many of you know, the developer of the project experienced a tragic accident, and the project that is resulted in the job being shut down for several months. We are now under construction again, but we lost more than a half a year on that project. Again, not our fault.
We are not the developer, and it was not our construction crews or anything to do with us. We are waiting for a building to be built, and then once we take possession of that building, we will do our interior build-out or fit-out. In many of these cases, what we are learning, this is not like a typical retail store rollout, right? We are not taking airspace in a mall and building a 30-50-foot storefront, and putting some glass in and a logo on the front and doing a simple build-out in the interior. These are significant development projects or significant adaptive reuse projects in historical buildings. The certainty of timing based on having less control just means it is going to be somewhat lumpier and somewhat more unpredictable. It is definitely predictable that they will all happen.
I think that our sense is probably to be less ambitious with how fast we go. I think especially with how we're seeing and what we're seeing, again, with some of the signals in the energy markets and the currency issues and what we think might relate to some real estate issues down the road. We're also just, I think, being cautious right now and pursuing deals at maybe a less aggressive pace, only because we think that if there's dislocation in the markets, and certainly in the markets, we think asset values will come down. There's going to be more and more of an opportunity for us to capitalize on that and get better deals. I think you can combine that with the fact that now we have a proven concept.
Remember before, we were doing deals and when we had no proof of concept, we had not built one of these 45-60,000 square foot developments. Today we have multiple ones and they're all working. The most exciting one we've done in Chicago now has proven that we can not only have a successful retail concept, but we can have a successful hospitality and restaurant concept, which gives us a double advantage because developers want traffic. I think I mentioned on one of the last calls, we're feeding 500 people-1,200 people a day in our cafe with limited hours in Chicago with no alcohol, just wine and beer. We think we're becoming more desirable. We think there's going to be even better opportunities for us to do better deals.
We think it's because of the environment and because of what we've learned early here, we just have to be thoughtful and we're going to take our time and focus on executing well.
I would just add.
Yes. Thank you. Sorry, go on.
I would just add on your question about the new store months, the 40 is as much the wrap of last year's openings as it is the ones that are opening this year. When we think about the contribution, that's why we moved to that new store month calculation, is it does take into account the wrap of last year's galleries, knowing that some of the four that are coming on this year are coming in the back half.
Okay. Thank you so much.
Your next question comes from the line of Budd Bugatch from Raymond James. Your line is open.
Good afternoon. This is Bobby filling in for Budd. Thank you for taking my questions. I just wanted to touch real quickly again on the new full-line design galleries. I was hoping now with the Atlanta concept being open for more than a year, you could just give us some color on how the presence of that full-line design gallery has impacted the demand in that market.
I think we've indicated that our plan for each of these galleries is to increase retail sales in the range of 2x-3x, or 2x-4x, excuse me, in each of these markets. Then we would have a corresponding lift of I think in the range of 20% or so on the direct side of the business. We're very pleased with Atlanta. As I said, Atlanta's performing over plan. We just, I think last week, yeah, last week installed RH Modern on a full floor in Atlanta and also added RH Teen, which was that store is built for those two businesses to be received. Atlanta now has all the pieces of the puzzle, and we expect it only continue to grow and take more market share.
Okay. Thank you. I appreciate that. Karen, I was hoping that maybe you could touch a little bit on what is the outlook for the core merchandise margins in fiscal year 2016, excluding the moving parts around the RH Modern impact?
So at this point, we're just going to speak to Q1 because there's still a lot of moving pieces in our plan as it relates to the RH Grey Card membership and the introduction of that throughout the year and some of the other levers we have with the Source Books and things. For now, we're just going to provide color on Q1. As you can see or imply from our guidance, the earnings have been significantly impacted by some of the investments we are making in the customer from the Modern and other customer experience items. That is going to have, overall including that, our margins are going to be down in the almost 300 basis point range. The biggest single piece of that is those investments.
We also have product that was significantly discounted in Q4 that's shipping in Q1, and then we have some deleverage still wrapping from our new DC in Patterson in Northern California that's going to continue to be a drag in Q1 and Q2 until we lap that in the back half.
How much more discounting product ex Q1 will be left to ship? Maybe lastly for me, could you help us think about what the impact was from the new distribution center in California versus the 30% year-over-year inventory growth?
Yeah. On the margin, just going into the quarters, the impacts will taper when you go from Q1, it'll get a little bit better in Q2, and then it will moderate in the back half. We don't expect that to be a drag all year. That is a bigger impact than the promotional cadence leftover from Q4 shipping into Q1. The inventory growth of 30%, that is a result of we underperformed in Q4 versus our expectations. That 30% growth will continue into Q1, but some of the places where we have too much inventory that's really related to the new DC, it's a different market.
Yeah, I think the shift in with the new business dynamics of Modern where we overperformed in Modern and slightly underperformed in Core also added to the dynamic of higher than anticipated inventories.
That's a big focus for us this year, is making sure our inventories are right-sized and we're getting rid of underperforming SKUs. Overall in the year, we do expect to grow inventory in line with sales at that pretty low mid-single digit range. We don't expect that 30% growth that we have in Q1 or in Q4, it's going to stay pretty high into Q1, but by the middle of the year and then by the end of the year, it'll go down significantly.
Thank you. I appreciate the detail and best of luck moving forward.
Great. Thanks, Bobby.
Your next question comes from the line of Peter Benedict from Robert W. Baird. Your line is open.
Hey, guys. Thanks for taking the question here. Two questions. First, Karen, saw the free cash flow positive view on 2016. Can you maybe talk to the drivers of your operating cash flow, how you're thinking about D&A this year, and maybe the working capital contribution?
Yeah, as I mentioned with inventory, we do expect working capital to improve significantly with some of the inventory initiatives we have in place. Depreciation isn't going to grow too much, maybe in the $10 million range from last year, not too significant. Our capital is what it is. It's the $175-$200 range. A better contribution this year from working capital, both inventory and accounts payable.
Okay, thank you. We noticed on the balance sheet, I guess, the PP&E line declined $41 million versus the third quarter. Can you give us a sense of what drove that?
Yes. Our build-to-suit leases, as we've tried to put a lot of transparency and color in our SEC filings, and we've done a lot of almost 8-Ks on these. Build-to-suit leases have a significant portion of the landlord assets on our books. It's a gross up. It's in assets and liabilities. Our Northern California DC was a build-to-suit lease. We affected a sale-leaseback on that DC and leased at the end of the fourth quarter or in January, and $75 million of the landlord assets were removed from our balance sheet, both the property balance and the corresponding liability. $75 million from property and $75 million from, you'll see that build-to-suit liability. Both the asset and liability were removed once we affected that sale-leaseback.
That's perfect. Thank you. Last question. Just curious, I know it's early, but how the RH Grey Card transactions thus far have compared to maybe your historical average transaction in terms of size and maybe gross margin rate. Thank you.
Yeah, we're not disclosing that just yet. I think maybe what I can do, though, is to just add a little bit more color around the RH Grey Card. I think in the video, we try to keep it short and focused, but let me just maybe motor up and give you a little bit more perspective why the RH Grey Card, why we think it'll work, and maybe even how to think about it if you say, "What if it doesn't?" As I mentioned in the video, much of how we have behaved promotionally was left over from the Great Recession and did not reflect the brand we're building, nor the way our customers shop with us. One, first, we've moved from a product-based business to a project-based business.
The percentage of business we do with external interior designers, internal interior designers, and projects has significantly shifted over the last five to eight years. Presenting various promotions during different time intervals is not aligned with the vast majority of our business, which are customers working on furnishing an entire room or a home. The RH Grey Card, it also supports our strategy of moving from what we think of as a traditional retail business with a primary focus of creating and selling products to an interior design platform that is conceptualizing and selling spaces. Second, the previous promotional approach was built on a vocabulary of discounting and price, not taste, design, quality, or style. It's virtually impossible to differentiate our brand from anyone else. Sending repetitive promotional emails is in conflict with the very essence of the brand we are trying to build.
Additionally, we don't believe anyone wants their inbox flooded with redundant promotional emails. If we just think about how many Presidents' Day sales we hear about, private sales, spring sales, fall sales, holiday sales, winter sales, Mother's Day, Father's Day, one day only sales, friends and family sales, so on and so forth. How many can a customer process before you lose all credibility and they become numb to your brand? We believe that the RH Grey Card also brings the pricing transparency to all of our brands. Previously, our source books and website displayed mostly full price items. Unless you received a promotional email or entered a promo code on the website, the promotional selling price was not obvious. I don't think most people realize that.
Now, member pricing will be prominently displayed in all of our source books, websites, and galleries, which we believe will more firmly establish the disruptive value proposition of the RH brand. Third, which I think is an important point, we believe this is the right model for our business. The promotion activities we ran historically skewed consumer behavior and created peaks and troughs of volume from being on and off events. By smoothing out our business, we can operate in a more efficient and cost-effective manner in our galleries, call centers, DCs, delivery hubs, throughout our supply chain and organization. I think another important point to note is the vast majority of our revenues are driven by customers who spend more than $500 with RH, and we believe the $100 cost of the program is set to maximize conversion.
Our goal here is not to create a traditional membership program as you might be familiar with. To establish the best relationship with our customer and align our behavior with our brand ethos and optimize our business model. That's what we're trying to do. We don't think that's possible with the old promotional cadence. It's been greatly marginalized. We addressed a lot of questions about, how do you think about this? Who do you point to? I'd say, well, there's not another retail program to point to like this in the market. It is akin to the high-end, to the trade showrooms who offer a set discount to interior designers and to the trade.
We believe the Grey Card program brings the best elements of this experience directly to the customer, allowing our customers to shop when they want, for what they want, enabling us to communicate our brand ethos and brand authority, simplifying our business model, and reducing costs throughout the organization. Providing price and transparency and highlighting the disruptive value proposition that has allowed us to really gain market share so rapidly over the last seven years in this marketplace. I think the other thing I'd comment on, because a lot of people have asked questions, both externally and internally, questions we ask ourselves, what if it doesn't work, right? I'd say that we've developed multiple downside risk scenarios. We believe it'll take two to three quarters to allow for the new buying behavior to be analyzed correctly.
We believe that the customer that's been working on a project, whether it's a room or a home, and we've forced them to buy in these kind of episodic moments, based on all these multiple promotions, buying their lighting when the lighting event's going on, buying their bedding when a bedding event's going on, so on and so forth, that we will see a delay in some of those transactions, and then there'll be fewer, bigger transactions, fewer, bigger orders, based on a change in the buying behavior. We won't see the big peaks, and we'll see that smooth out. There's going to be a natural delay and a natural shift in the business. Our view, it's going to take us two to three quarters to analyze that, and to study that.
We've got our thesis of how we believe it'll happen, we'll be watching that closely. If for some reason, our assumptions are incorrect, and by the way, any plan, in my entire career I've ever been associated with or developed is some degree wrong. We expect to be some degree wrong, and that's why we have a lot of what if scenarios and kind of backup plans in place. If for some reason our assumptions are incorrect, we can always insert some level of promotional activity back into the business that will still maintain the integrity of the program. There's lots of ways we can massage this program to make it work. We do believe it will fundamentally enhance the overall customer experience, and the business model of the company. We believe it's the right thing to do long term.
No one's ever done it before and that there's some level of uncertainty. We believe we've spent a lot of time, we spent several years on this. We've been studying this and thinking about this for, gosh, five years. It's going to take a while to transition, it is absolutely aligned with how our consumers shop from us, what our brand strategy and brand ethos is, and it is in alignment with our strategy to optimize the business model at RH.
Okay, great. Thanks for those thoughts, Gary.
Your next question comes from the line of Steven Forbes from Guggenheim Securities. Your line is open.
Hey, guys. I want to focus on talent acquisition and maybe the in-store labor model. Can you briefly discuss the company's experience thus far as it relates to acquiring and retaining the necessary talent, especially at the store level, right? Essentially, do you feel you have the right labor model in place to service the customer the way that you need for the brand? I know we've talked about this in the past, but how does the commission sales force fall into that? Are you guys still testing that, or is that something you're looking at?
What I'd say, I think we have one of the best retail organizations in the industry, and I think I would put our people and culture up against anybody. With that said, I would say, we're always evolving. As I said in the video, we are in a constant state of innovating and evolving, a constant state of destroying our current reality to create tomorrow's future. As we think about the long-term vision and positioning and the strategy for this brand and business, we're making significant investments to massively transform and upgrade the physical shopping experience. We're making meaningful investments to upgrade the brand, whether it's online or through printed mediums like source books and advertising.
We're making significant investments to elevate the customer experience, whether it's at the initial touch points or it relates to their interactions with us throughout an order process or all the way to in-home delivery. Everything will constantly improve. We expect to make investments and to elevate the workforce as it relates to attracting and keeping the right people. I think we're at the top of the list today of some of the most desired places in retail to work. I think the environment we create, the culture we have is second to none. At the same time, we're making investments to build an interior design platform. That means that we're recruiting and bringing more interior design professionals onto our platform.
We're developing an educational kind of university, if you will, around interior design and our point of view and the kind of authority in that area. You'll see us continue to evolve. As I said earlier, the kind of the transition from a kind of a typical retail model that traditional retail business with a primary focus of creating and selling products to an interior design platform that is conceptualizing and selling spaces is going to require us to continually upgrade the talent and capability. We're kind of always unfinished and always on the move here. As it relates to commission selling and other things, we're looking at all of those things, and we'll continue to test new ways and methods to incentivize our people to do the right thing. More to come.
Very good. Thanks, guys.
Your next question comes from the line of Daniel Hoskins from William Blair & Company. Your line is open.
Good afternoon. Just wanted to follow up a little bit on the, let's say, the cancellation rates so far with Modern and whether this latest kind of view, which is pretty similar to what you indicated in the pre-release, whether you feel like you're on the, let's say, the conservative side of the likely outcome. In other words, are you seeing cancellation rates stabilizing? By that I mean cancellation rates due to delays that are greater than customers maybe expected or thought they would be. You think you're going to be largely up to date by sometime in the early third quarter, as you say. How has that changed in the last month or two? That's my first question.
Yeah, I would say we're on the backside of the mountain, if you will. The most painful part we have experienced with our customers and I'm sure everybody somehow read the excerpts of the letter that created a firestorm in the media about our focus on empowering our associates to do whatever it takes to delight our customers. There's a finite number of customers at the high end of the market. They're very important to our business and to our model. It's unfortunate that we've disappointed so many of them. We're making the investments to try to maintain and enhance that relationship and save that relationship. We have a whole initiative in our company around Customer Delight. Not appeasement, but what do we have to do to delight the customers?
We're making the investments that we believe are necessary to delight our customers and create advocacy for our brand, even in light of initially disappointing them. That's expensive. Probably, I think this will turn out when we look back in kind of our history and I believe we will look back at this and say, "This was one of the most important and correct decisions we've ever made." Painful from a cost point of view. I think we can actually take a negative and in some ways turn it into a positive about how to respond when you let customers down. I think we are on the backside of this now. I think we're past the peak. The in-stocks of Modern are going up. We're not out of the woods yet. We still have order delays.
We still have a lot of goods that we've got to deliver. We have to deliver on our promise, and especially in many of the situations here where we've had to make decisions to air goods in to get them here in time for people's projects. We've still got to get them to their home. We got to get them there in perfect condition and undamaged. We're not out of the woods completely. We are in a much better place than we were just a month or two ago. I'd say this really peaked on us in January, February, and we've now got, I think, our arms around it. I think what we've also learned from it is to mobilize the organization correctly. We had to tear down a lot of internal silos in our company.
Groups and parts of our organization that were acting independently, which weren't going to be able to satisfy a customer within their silo. We've torn down a lot of silos. We've flattened the organization. We've created cross-functional collaboration. We've learned a lot about ourselves through this. I think we have a vision and a strategy to build a much more customer-centric organization, that will operate at a higher level with much greater urgency and empathy for our customers. This is carried through, not just around some of the situations with Modern, but it's brought to light other opportunities, whether it relates to how we handle and move inventory, how we deliver products into our customers' homes.
How much control we have of our supply chain versus not, how much control we think we need, where we need to make investments to really operate this company at the level of the brand experience that we want to build. I think we have our arms around what we think the cost will be. We have our arms around the work that needs to be done. I think we have a much more compelling vision for what the customer experience ought to be in this company. We have an organization and an organizational structure that is evolving, that I believe is committed to delivering services that's second to none in any industry.
Okay. Thank you. Then my other just quick question is, are there any costs that you've identified in terms of when you open a new store going forward that you feel like you can take out relative to what you would have opened in the last year without hurting the brand or the customer experience?
Yeah. Absolutely. Lots of learnings in the first four or five of these.
across the board.
Yeah
everything from how we open it to the execution.
Yeah
the capital spend-
Yeah
just running.
Yeah.
Second vintage, I think everyone gets a little better and a little smoother.
Yeah. The timings, the initial investment to build, the ability to think about how to value engineer the build-outs, how we stock them, how we ship goods to them.
How we map out floor plans.
Yeah.
There's been a ton of learning and progress.
How do you organize teams to execute projects of this level, the investment, the staffing, how to be more efficient. Yeah, it's funny you ask this. We just spent several hours in the last week on this topic. Yeah. In any of these things we're doing, we have a lot of endeavors. We're a company with, at our core, we're an innovative driven organization, and we're not just a retail organization that continues to duplicate. We continue to innovate and based on innovation, there's investment and cost on the front end of new ideas and the ability to learn quickly and understand how to optimize as we scale is really critical to our model. Almost everything we do here, once we do it a second or third or fourth or fifth time, we get better and better and better.
That's why for the most part, exception for this Modern launch, we usually get better at what we do.
One point on the new stores, I'll just clarify because Gary threw out a 20% number, which is kind of a target, but in many cases that's a floor. We have seen direct lifts of 30%, 50%, upwards of 100% direct lifts when we open these stores. Just a clarifying point there.
All right. Thanks, guys.
Your next question comes from the line of Oliver Chen from Cowen and Company. Your line is open.
Hi. Thanks for the details on the transparency. Gary, as you did evaluate the Grey Card and the opportunity there, it sounds quite innovative and new, and a really creative way to approach how to do this in a brand appropriate manner. What would you say internally were some of the key controversies you faced in terms of decisions you were making around Grey Card, in your process for implementing that? Karen, what should we know over time, like how do we account for the revenues from the membership fees? Is there anything we should know about modeling that? Do you think on a longer time horizon, the Grey Card penetration rate should be really high? Is there a CRM component as you engage in a lifestyle experience in terms of engagement with your customers, as you think about the RH brand at large?
Karen, on the comp store sales, can you just help us understand our model as we look at the spread between square footage and comp, just what we should know about the spread widening or narrowing as we look at our models and get to the implied comp store sales on your full year revenue guidance. Thanks.
You want me to start on the Grey Card, just the membership revenue, the fees. We'll take the $100 fee in, it will be required to be amortized over the 12-month membership period. You will see a ramp. We'll take in the money, that will have to be recognized over time. You'll see that build over time. Eventually, once we cycle this thing, that membership revenue will be more consistent. For now, you're going to take one twelfth of it in the first month that you get it, that will build over time. Gary, I don't know if you want to talk about any other-
I think the question was, what were the internal controversies? I think on any initiative here, or strategy or investment, we have a highly and deeply collaborative culture that has a lot of aggressive debate about anything we do. Everything we do goes through three filters in a sequential order. One, we look at everything based on emotional value. Is this going to connect with our customer on an emotional level? Is this something that we connect with emotionally? Are we going to be passionate about it? Because we think if you try to do work you're not passionate about, you're not going to do very good work. Emotional value. Number two is strategic value. What's the strategic value of any initiative or any strategy that we're pursuing? How does it position our brand?
How does it position us to win, and the long-term implications of that. Three, what is the financial value, which relates to the return on both our human capital and financial capital investment, and how does this relate to other things? I would say, as it relates to those filters, from just a choice to do it, there is, I'd say, 100% alignment inside the organization. In fact, the alignment was so great, especially with our field organization, that I was bound to a promise that I wouldn't waver on moving forward in this, because everybody felt it was so important to transform the business and the customer relationship, and the way we do business today. Lots of controversies internally about exactly how, exactly when. How do we think about the level of discounting? How do we think about what price we charge for this?
Back and forth on, guys, does $100 feel like it's not enough? Should we be charging more? Again, I'd say that our goal here was to really transform ourselves off the current, what I'd call chaotic promotional platform, onto an operating business model that was going to allow us to focus our time and energy in the most productive way and build the best customer experience and relationships with our customers. Was there camps that said we shouldn't have done this? I don't think there was a person that believed we shouldn't have done this. Was there a lot of debate? I think I was probably the biggest hold-up at the end of the day, just because at the end of the day, we're a very math-driven culture. We talk about facts a lot more than we talk about feelings.
How we feel about something generally relates to what are the facts that we can gather, and what is the data we can gather, and how well informed are we, and how certain are we, or does the data inform our decisions? Here, we took a lot of time gathering a lot of data, building a lot of theories and hypothesis. When we got down to it, I think the alignment and the energy behind this is really fantastic in the organization. I think that's why the acceptance rate out of the gate is so high. We have an acceptance rate on Grey Card that I think it would exceed probably what most people's expectations would be for a kickoff on a program like this. Everything here in our culture is highly debated, highly scrutinized.
It deals a lot about facts versus just feelings, and we're very scientific and methodical. We also know when you innovate, there's a degree of uncertainty and risk, and that's why it's important to have alternative plans and backup plans and what-if scenarios, and we think we've developed those. We feel very strongly this is the right thing to do strategically for the brand and business. Again, I think this is going to be another one of these things we're going to look back two, three, four, five, 10 years from now and say, "That was one of the most pivotal decisions in the history of this brand.
With respect to brand comp, I think you're talking about the total revenue growth versus the comp growth, and that was a two-point delta in Q4 and on the full year. We would expect that to continue. As we have new store months growing, you would expect that to diverge a little bit even more than the two points we saw in Q4 and last year. It's always going to be tempered based on ones that are then going into the comp base. As soon as we start to anniversary some of the new full-line design galleries, those go back into the comp base. You would never expect too big of a delta between those two numbers.
Okay. Thanks, guys. Appreciate it. Best regards.
Thank you.
Thank you.
This concludes our question and answer session. I'll now turn the call over to Mr. Friedman for closing remarks.
Great. Well, thank you everybody for your participation in our call. We are excited about the prospects of the company and the direction that we're moving towards, and we're excited to talk to you again next quarter at our next update. Thank you very much.
This concludes today's conference call. You may now disconnect.