Investor Day 2018

Sep 6, 2018

Slides

I usually do. Are we good yet? Yes. How about now, back row, can you hear me? Yes. Yes. Good. Okay. All right. We'll just start. I want to say thank you very much for joining us, especially I know a lot of you had a long day and but hopefully, your time together will be worth the time and the experience. We couldn't be prouder of now I'm echoing guys. Hey, David. Are you all right? We fixed it? Yes. I'm echoing back to myself. Yes, just want to give me a mic or something? Yes, making weird noises. I can hear it all. So just take this thing off. Oh, we'll get this right. We've been working on this gallery for, gosh, it's probably 7 years in the making, just trying to figure out how to get do a deal here. And I think we finally signed the lease 5 years ago or got close to signing the lease 5 years ago and then developing the building and conceptualizing what was going to be here. And I thought we were going to open a year ago, but the city decided to start to rip up the streets in the meat packing district. That's why we built a park out in front. So last night, when we had our party, nobody had to see all the construction. And they just, Dave, what, finished laying the bricks in front of our gallery days ago. And it wouldn't be somewhat of a mess when everybody came. So but we couldn't by the way, I'd say we used the time really well. We continue to evolve the concept. But this is an interesting story, just a second on this gallery. When we did this deal, we had not launched Modern yet. We had not launched Teen yet. We had not opened a restaurant yet and we had no hospitality. And so the I think the nature and the DNA of our organization is continue to test and learn, improvise, adapt and continue to innovate all the way through our experiences. And I think this is a really great manifestation of our DNA as a company to be able to put an experience together like this in a city like this. I'd like to say I believe and I we as part of our business and how I spend a lot of my time is looking for the best expressions of retail, hospitality, any kind of experience anywhere in the world. And we study everyone. And so we know today, I think we can confidently say, I think that this is the most innovative retail experience in the world in the most important city in the world. And the only time I can remember that ever happening was when I was 29 years old. I just joined Williams Sonoma. I went to my first investor conference with Howard Lester. I went to the Goldman Sachs investor conference. And I get to hear Bernie Marcus and Arthur Blank talk about Home Depot. And I thought, man, those are 2 excited really excited guys. They were very small. I think they had just went public a year before. And there's a tremendous presentation. And then later that afternoon, Howard and I went up and saw the Rhinelander mansion and saw Ralph Lauren's new store. And I at first I looked at it from the outside and I guess this can't be a retail store. I mean it's too beautiful, too incredible. And then walking in, it's walking into a mansion and just unbelievable expression of a brand. I mean, nothing in the world even closed. And that store at the time created and for many, many years, I think probably for 10 years, just created a global conversation and elevated their brand in such an extraordinary way. Rumor has it, they never made a dollar in that store, right? And so, I'd say to our team that I think we've now probably become this only the second people, who the second organization who has opened something like that, right? I could have never imagined it back then and just in awe of it. But today, I'm personally and we're personally in awe of what we've created here. And when we think that and we have created the most innovative and retail experience in the most important city in the world. And the biggest difference, I think, is this will be highly profitable in its 1st year. And Dave will talk a bit about it because I think people see things like this in our industry and they say, Oh, that'll never make money. Oh, but it'll be good for the brand. And they try to balance it out. Dave will show you some slides later. He'll show you this gallery will have a payback on our invested capital, which is just under 2 years or right around 2 years. And I think that I don't think anybody else could even imagine that. But I think that it's because they underestimate us. People look at what we do and they think it's art and they think it's magic. And I don't paint and I don't spend a lot of time doing anything, but math on everything. And this is a combination of if you want to call it magic and math, and I think that's what differentiates us, from a lot of organizations that try to do really innovative things. And so we're excited to have you here, excited to have you see it. After we're done taking your questions, we make a quick presentation. Love you to be able to go upstairs and just see the rooftop at night and what this restaurant looks like at night and what the outside looks at night all lit up and the view of Freedom Tower with what do they call it, the light to heaven shooting from the roof. It's really kind of spectacular, takes your breath away. But Dave and I are here to talk to you about revolutionizing physical retailing and how we think about it in a very structured systematic way and how all the logic and math connect and integrate. And nothing that we do is really in isolation and whether it means kind of creating a brand, creating statements that market the business. Everything we do has to integrate, right? The math on the productivity, the development, everything has to work. Nothing that we do is in isolation. So I think you'll get a better idea because we're going to go relatively deep on these galleries. So I'm going to start and then hand it over to Dave, see if I can work this remote. So just start at a high level. We believe that the physical manifestation of a brand will prove to be more rather than less important. I said this at Goldman, especially for brands not selling commodities. Very different if you're selling commodities in this world. Their price and online shopping, I don't really go to a store to buy toilet paper or paper towels anymore or toothpaste or the stuff I wash my face with that somebody introduced me to 20 years ago, then I can't wake up in the morning without it. It all gets automatically delivered to my home and I've got subscriptions for it. But the business we're in and brands that are not selling commodities that don't have a physical expression of their brand, I think, will never really be able to actualize the potential of the business. If the math would tell you and even though some retailers and I would argue that they're stating the financials incorrectly. If they're stating financials that say that the web is more profitable than retail. It's only because they're a retail business that built an infrastructure that the cost is being supported by the retail business. And then they've looked at the web business as kind of a freebie ride along, right? And it's not a freebie ride along. If you really allocated all the product development, merchandising, every cost in an appropriate way, there's absolutely no way it's more profitable. And we think that that will be proven true, even and it's probably one of the most misunderstood points. And I think it's led to what I call the lost generation of retailing, where the capital allocation, over the last 10 years in our industry, I think, has been woefully misplaced. That businesses and brands that had really great retail models, because of kind of the perception and the press about Amazon and other things. And if you grow online, it's more profitable. They invested in an ornament amount of capital to build an online business and created a shift. And they actually shifted business out of their retail stores and didn't necessarily get incremental business. And they shifted business to another channel that is actually more expensive to transact, right? And they created a whole another cost structure. And that's why you've seen businesses and I'm not going to say who, but if you just do the math, say, who used to have 15% operating margins in our in the home furnishings, houseware sector that has 4% operating margins today, right? Like it's hard to do. I mean it's but it happens if you create an unnatural shift online and it also happens, if you just don't do the math. And so we think we've been really, really smart and think deeply about how we allocate capital in this company. And we don't follow any trends. We try to understand what's right and what's the right returns. And I think we'll prove that over time here and I think the industry is already starting to prove it because you read the press today and now all of a sudden people who never had retail stores are opening retail stores. And I thought that was the bell, I thought I was already out of time. So this is a real key point for us and real key to our long term strategy. The headline of the transformation of our real estate strategy has the potential to double our retail sales and more than double our earnings in every market. I don't think that's ever been done. I don't think a mature retailer, right, who has really high profitability has ever been able to conceptualize kind of a next level store that will double their business at the retail level in every market and more than double their earnings. And I think it's hard for people to wrap their head around because they think these are flagship stores. And I have to remind people, flagship stores is when somebody with a 5,000 square foot assortment opens a 25,000 square foot store on Fifth Avenue. Yes, good luck with that. If you don't have a 25,000 square foot assortment, like you'll never be profitable. And people say, oh, that's for the image and that's for the brand. This just never, never works. We have like a probably a 200,000 square foot assortment and we're sizing the retail stores to the size of our assortment. We spent the last decade and a half, expanding our assortment beyond the four walls of the legacy stores, because we've said we wanted to size the assortments to the potential of the market, not limit them to the size of the stores. The stores we had were inherited. They were for a different company, a different concept. So we used the web and we used catalogs to expand the brand beyond the four walls of the store. And now that we've proven how productive we can be in these categories, Now we're going back as all the leases are expiring and we're sizing the stores to the potential of the market and the assortment. And so I think it's a very different strategy. Again, probably one that hasn't been done, so it's not quite understood yet. We developed both a multi tiered gallery strategy and real estate strategy that will significantly increase our unit level profitability and return on invested capital. Remember, we're not that far into this. It wasn't too long ago that we opened kind of a store we called a design gallery in Los Angeles that was like 15000, 17000 square feet, right, on Beverly Boulevard. And then it wasn't too long after that. In 2011, we opened Houston. And Houston was, I think it's 17,000 square feet of interior space and we had about 6,000 square feet of rooftop park, right? And that was November 11, 2011. We opened the store on 11, 11, 11. We're a little superstitious. 711 are unlucky numbers. That's why this store is opening on September 7 at 11 a. M. So, but that wasn't that long ago. And it wasn't too long ago when the next gallery we did was Boston, right? And we made a mistake in Boston. And our mistake in Boston was, oh, we didn't get the outdoor lift. Oh, it doesn't have a garden courtyard or a rooftop park, right? And we're like, uh-oh, never do another big gallery where we don't have a garden courtyard or a rooftop park because we need that outdoor lift or if we do one, don't plan an outdoor lift, right? Because part of our initial success was outdoor garden courtyards like at Beverly Boulevard where we expressed our outdoor business year round in a lot of collections and doing a rooftop park where we express the outdoor business year round with a massively expanded assortment in outdoor, which is one of our most profitable businesses, by the way. The good thing about the outdoor business that I love, it always fits in the room when we deliver it to a home. It's like all the other businesses have high risk of they don't fit in the room. We also never scratch any walls or paint or dent anything when we deliver something and put it in a backyard. So we like the outdoor business, lowest return rates, highest margins, etcetera, etcetera. That's right. We're webcasting this. So actually, I'm just trying to throw the competition off. Outdoor really sucks. But what we've done now is and then it wasn't too long after Boston that we evolved into Denver and Tampa and then kept learning as we went. And then the next big breakthrough was Chicago, right? And the integration of hospitality and that again changed everything and the addition of modern just before that. So based on all the learnings now, we've been able to kind of really tailor our strategy in a really intelligent logical way around the presentation of the product and the physical expression of the product as well as now we have proof points that allow us to negotiate and do a different kind of real estate deal when we didn't have any proof of concept and people did not want to necessarily invest in us. So let's talk about the multi tier gallery strategy. We have 4 types of galleries. Put my glasses on to see. We have bespoke design galleries in the top metropolitan markets, bespoke indigenous galleries in the top second home markets. We have a new RH prototype gallery that will be in the majority of the markets. This is an integration of all our best thinking and secondary market galleries tailored to smaller markets that we think will open up another tier and another opportunity. Let's talk about the bespoke design galleries. They're iconic locations in the top metropolitan markets that are highly profitable, statements of our brand and create a long term competitive moat, right? They really, I believe, will differentiate us. I'm just going to be hard for someone to replicate this. The math and logic, the science and art that goes into something like this, it takes a lot and it takes a lot of courage to open something like this from a capital point of view. Examples of these locations would be New York, Los Angeles. Los Angeles is a little different. I call it a bespoke a multi gallery bespoke market because we opened on Melrose and then we came up with Modern and we couldn't integrate Modern into the gallery. So we opened a freestanding Modern and we have baby and child teen in a freestanding store. So we really look at those three stores and the expressions each have is kind of a bespoke expression of the brand. But also Chicago, Miami will become 1, Dallas will become 1, Orange County will become 1, San Francisco will become 1, Boston, London, Paris, Madrid and Sydney, etcetera. And depending on how Dave and I's real estate strategy goes when we leave here Friday night and we go to London, Paris and Madrid and we'll see if things get started here. So you might hear more soon. RH New York and this is an actual photograph of it at, I think, dusk or early in the morning. But it's highly profitable iconic location that serves as a global calling card and bridge to our European expansion. We think this is a key communicator of who we are and starts to set the brand up for an international move. The bespoke design galleries, am I on your part? No. This has the profitability. I thought you were doing this. I thought I'd give you You gave this one to me? Yes, right here. So I look like I know something about the math, not just talk about it. So how you think about this financially, we think we're going to do about $100,000,000 here. We may start a little slower because the streets are all still under construction around here and people are staying away from the meat packing. But I think once the streets clean up by next spring or so at least around here in front of us, It should do about $100,000,000 have contribution about 28%. It could be a little higher. Someone on the other floor has asked me this versus flat iron and this must be so much more expensive. It's actually not. And it's not because we kind of looked ahead and made a bet on the future before this district was really happening and before the Whitney moved in. And our bet was if we took this corner location and we created and the Whitney Museum was coming at the base of the High Line and Gansevoort that we could kind of be almost 2 anchors for Gansevoort Street, which was totally underdeveloped, nothing really on it, right? And then we thought if we put the guest house right there, right in between, that would be amazing traffic and maybe we tilt this and attract luxury to the meat packing, which doesn't really exist today, luxury shopping. And we don't really want to be profits, but like I can't believe it really happens, like pinch me, I think I'm dreaming. Hermes signed the corner location, the brick building on the other corner, the yellow brick. They're building a 2 level kind of next generation cool hip Hermes, whatever that might look like. But Hermes is probably one of the best luxury brands globally. And then on the other corner, right across from Mermez, Laura Piana just signed, right? And then right across from our guest house, on Ganzalore, Pastis, which used to be here in the corner, is reopening. And so it looks like Ganzalore Street is going to be what we had wished for and will be kind of the best luxury kind of destination anchored by our gallery here and the Whitney Museum. So really excited about it. But we think we'll do so I was going to say my point is about flat iron. So our kind of rent occupancy and flat iron is about $8,000,000 a year. Here, our rent starts at $8,500,000 a year. So we've got a $500,000 step up and we've got an unbelievable step up from a brand presence and presentation, right? Like not even remotely comparable. So we think we'll have contribution margin about 28% and some of that will depend on how we dial in hospitality, right? We think this will be a highly productive hospitality experience. We think where we have hospitality, we drive 3 to 5 times more traffic into a gallery than a gallery without hospitality. And I don't give the dollar lift that we give we get, but it's highly incremental. So we're very excited about it. I mean, we do believe that this could be a $10,000,000 to $15,000,000 restaurant on the roof. I mean, Brendan's latest estimate, I think, was $12,000,000 And just to give you a sense for how conservative Brendan forecasts, he told me Chicago was going to be about 1,000,000 dollars right? And it was $5,000,000 in its 1st year and it's going to do $6,000,000 it's comped up every year, did $5,400,000 in its 2nd year, it's on trend to do $6,000,000 this year. So now I don't think if he's saying it's $12,000,000 I'm not saying that this is going to be 60,000,000 in hospitality on the roof, but because of the seat count, because of the beautiful outdoor park, I mean, it could be one of the real destinations for hospitality in New York City and the views. And we kind of refer to it as kind of the modern day tavern on the green, right? So the capital investment here is around $50,000,000 to kind of build this out and develop this. So the payback is approximately 20 months on that model, right? And I think that's an outstanding payback for an iconic location like this. The bespoke indigenous galleries, those are folks in the best second home markets where the wealthy and affluent visit and vacation tailored to reflect the local culture. Examples include the Hamptons, which we're looking for next generation indigenous bespoke. We do very well in Hamptons, but we have a postage stamp store. We'll probably develop an estate in the Hamptons. It'll be like going to a beautiful home behind the 12 foot hedges with a beautiful estate and a restaurant and possibly guest cottages and so on and so forth, but a really unique experience long term in the Hamptons. Palm Beach, a lot of people think Palm Beach maybe as one of the regular bespoke stores. It's just we call it indigenous bespoke because it is I think one of the top 2 or 3 aggregations of 2nd home markets in the world with the biggest wealth population in a per square mile that in Monaco, right? And so, Palm Beach, we designed like to be like one of those giant estates. So our big bet there, we're not in Palm Beach, we're in West Palm Beach, we're right across the bridge. And we said it's like the people in Palm Beach don't go across the bridge. And so what we had to do in Palm Beach, we said, look, they come to Palm Beach and they go to their compound, right? They're behind their walls or they're behind their hedges and they don't leave their compound and they don't go across the bridge. And we said, well, if we create a compound that feels luxurious and every bit as private as the compound that they're in, then it's just like, hey, we're going to go from our compound to your compound. And they pull in in front of if you've been there, they pull in, they pull in through the gates, through the walls and the gates and they get their car parked, valet parked in front of a 12 foot wall of falling water, right? And they never see the parking lot. And we take their car and they walk in and they're inside these walled gardens and it's very private. And that's and so we've designed it to be like a kind of a Palm Beach compound or mansion or like a small resort. What we're doing in the Napa Valley, very similar. It's an integration of food, wine, art and design in that order. So it's actually about food and wine first, right? And it'll be the first time we do that, but that's what Napa Valley is about. People go there to eat and drink wine. We're just catty corner to the French Laundry, which is the highest grossing volume restaurant in the Napa Valley. And we think this little compound of 5 buildings that we built, you see this beautiful streetscape restaurant and you'll have incredible wine, indoor outdoor wine experience. And then the secondary is 2 little buildings that are support like a small design gallery. And the key is like how do you hook the customers on what they came for and then how do you expose them to the brand and the beauty of the brand and then get them to either go back to where they live and connect with 1 of our local galleries or work with them on design there and work with the locals on all the second homes there. But you've got then you got Aspen, Carmel, Palm Springs, Charleston, Martha's Vineyards, Saint Tropez, Monaco, Mallorca and Ibiza and very many other places, right? But where the wealthy and affluent visit and vacation, and how do we and where do they have second homes and how do we capitalize on that? Our prototype galleries will enable us to quickly place our disruptive products assortment and immersive retail experience in the majority of our markets. So we think it's probably about 2 thirds, 60%, 70%. And again, this is ranging in size from 29,000 feet of selling square feet to 33,000 square feet of selling square feet with hospitality. And the prototype galleries will be more capital efficient, but yield similar productivity. So we're not losing any productivity here. We just got a lot smarter about how much how many square feet do you allocate to baby and child teen? How many square feet do we allocate to outdoor? How many square feet do we allocate to modern, etcetera? So we're really excited about how capital efficient these galleries will be. And examples include opening in 2019 in Edina, Corte Madera in Columbus. And Dave will take you through numbers on many of these. And then secondary market galleries, this is kind of a new idea we've communicated and that we've been thinking about and kind of trying to model and conceptualize. These are tailored to smaller markets and targeted at 10000 to 18000 square feet. Might be a few markets we're in today, but not many. It's really markets we're kind of not in today. And these expression of our brand will enable us to gain share in markets currently only served by local or regional competitors, where we can be very, very disruptive. Examples include Jacksonville, Fort Worth, Hartford, Buffalo, Albany, Tucson, Albuquerque, Milwaukee, markets like that, that there are wealthy people, maybe not big density, but in a smaller gallery. In those markets, we can be very disruptive. And I'm going to turn it over to Dave on the multi tier real estate strategy. Thank you, Gary. Thanks, everyone. I know it's getting late. And everyone hear me okay? Yes. You got to hold it close enough to your mouth. I'm glad I'm not using your microphone. So I'm just celebrating my 3rd anniversary here at RH. So I'm really getting to know the concept better, know the team better, being inspired by what we're doing. And what I'm my contribution is to really think about how to structure the real estate deals with the end game being to minimize our capital investment and keep this as a lighter capital strategy and one that increases our return on invested capital. So we have 3 primary deal constructs that I'm beginning to see the 3 buckets of types of deals: the development model, which I've taken some of you through in the past a joint venture model that has been developed and is also a capital light model. And at the end of the day, it's about math and it's about returns for ourselves and returns for the investors and returns for the real estate developers, kind of understanding all those angles of it. So the multi tier real estate strategy, we would significantly increase unit level profitability and return on invested capital. It results in rightsizing the galleries and the investment to the potential of each of the markets and really understanding that. One of the beauties of this model that's unlike other models I've looked at is that operating in the legacy galleries and knowing our direct business into the market allows us to very accurately project sales. This is not one where we're just studying demographics and creating an algorithm that would predict sales. We're looking at actual results from our legacy galleries. That's a very powerful tool, and we use it, to our advantage, and it allows us to cut a sharper deal. All or substantial portion of the Galleria investment is returned through either this development, joint venture or capital light models, kind of key. If we can own these with 0 capital involved or close to it, very efficient model. Our development model is one where we it's very capital efficient because we're getting all or substantial portion of our investment returned through a sale leaseback. So I think it's really important to understand that this is not about owning real estate. This is about being able to use our credit, our balance sheet, our results and a sale leaseback model to get all of our money out of the galleries. Say in the past, a typical lease model would say you return your investment through cash flow from the gallery. This is a strategy that allows us to really leverage the strength of our balance sheet, our operations and now the ability to sell. Examples that we have under construction. Gary mentioned Yountville and Edina. Edina was a project that a piece of property we bought from the Cyber Property Group and we'll be opening that fall of next year. Additional projects currently in the pipeline, including Detroit, and this is not downtown Detroit, this is in the suburbs, Morristown, New Jersey, which many of you, I'm sure, are familiar with, as well as Naples, Florida. So the key benefits, it gives us the opportunity to buy and develop unique retail locations, ability to structure these sale leasebacks with significantly lower rents. The key is we're cutting out the middleman. We don't need the capital of the developer. And frankly, they don't add a lot of value when we're a key driver of great customer high income customer traffic and we have this beautifully integrated experience like this. Going to having a developer in the middle of it really adds no value. Their capital is more expensive than ours is. They're generating their own profits and we're able to cut that out. We can eliminate percentage rent. We in expensive triple nets and pass throughs, and we're also minimizing depreciation and amortization. Of course, if we have money left in development, we have to depreciate and amortize that. So that's an earnings drag. So model comparison, I'll give you Edina as a quick model comparison where we're able to generate really substantial incremental cash flows under the sale leaseback model versus the typical lease model. So what I've done here in 2 different columns is to say, okay, if we were to do it as a development model and I'm going to give it equal sales of $30,000,000 the occupancy under our development model is about $1,700,000 versus a lease model, which is about $2,200,000 What are some of the key differences? The $500,000 differences could be percentage rent, would be a key difference. In a sale leaseback, we will not pay percentage rent to the investor in the property. So our cash contributions are higher and therefore our net capital in this instance is actually a positive $3,000,000 I believe we'll generate about a $33,000,000 sale price for the project and we have about $30,000,000 in it, which is substantially it's a great benefit versus a lease model. We would have been out $15,000,000 in developing the project. Typically, in those lease models, we've been putting about 50% of the capital in ourselves and the developer was putting in 15%. In the new model, we while we put up all the money, we get all the money back. Make sense? Yes. So the joint venture model, and that'll be available. We can ask you can ask some questions once we get through the end of it. The joint venture model, this is interesting. This is really kind of a hybrid. This is a situation where we're able to value to really leverage the value of an RH lease to create a joint venture or profits opportunity with minimal capital investment by RH. I'll go through a quick example, but this is typically where we can't buy it. Someone owns it. They want to do a lease with us. We come to them and say, We're not going to do a lease, but if you want to participate in some of the upside and we participate as well, we'll structure a joint venture. This is one where, we contribute the value of our lease in exchange for the joint venture profits interest in the project and our profits interest is paid upon a sale or refinancing of the project within 5 years or less typically. Example is Aspen. So in Aspen, we're able to secure really a prime corner in Aspen. Many of you that are familiar with it, we're literally catty corner to the Ralph Lauren and across the street from the Casa Tua restaurant. Beautiful views of Aspen Mountain, really irreplaceable real estate that's owned and controlled by a developer in Aspen. We'll execute a lease. We'll have 40 years of control in the anchor position of the project. We already signed the 1st, do you? Yes, the 1st time. Oh, yes. We did execute, sorry about that. It's now executed. Developer contributes the property and capital to provide a build to suit for us with an integrated hospitality experience. Our hospitality experience is actually on the roof that has like this one a beautifully will have a glass roof on it as well as being able to open the entire restaurant to the elements of the mountains which is beautiful including the view. The our development pro form a projects sales of about $20,000,000 resulting in return on investment within 0 to 18 months depending on the timing of the sale or refinancing. What the reason I've done that is it's very possible this project could be presold. Aspen is a very attractive real estate investment venue and it's we've generated substantial interest already in the project. We expect to generate $8,000,000 to $10,000,000 from the sale. That's our cut of the profits interest, which would give us a $3,000,000 to $5,000,000 of positive capital in the transaction. So I'll move on to our capital light model. And this capital light model is really a twist on the previous deals we were doing that were at least where we were putting about 50% of the capital in and the landlord was. So based on our proof of concept and our improved profitability as well as the addition of hospitality, we're now in a much more desirable and lower risk investment for our landlord. Being able a landlord being able to see a rooftop cafe like we have, not giving up their prime first floor real estate for a restaurant And in our proven model, it's a very nice investment for them to make. We expect that the landlord will contribute 65% to 100% of the required capital versus the previous deals where we're getting maybe 35% to 50% of the capital from the landlords. We currently have about 12 of these capital light deals in the development pipeline for 2019 and beyond. You might ask the question, why would we do capital light deals versus just buying a property and developing it ourselves and doing sale leasebacks? In some of these projects, they will be part of an integrated project. It could be office, residential, retail, etcetera. They'll have covenants and restrictions on the properties. And frankly, those aren't as attractive to try to sell. These situations, we're in a much better position of taking the landlord's capital and being able to get most of our capital out, if not all. Example of some capital light models. This is one I'm not going to disclose which one this is, but it's a public company we dealt with and we'd be better off not stating it at this point. But our net investment is about $8,000,000 in this particular deal. The landlord in this instance recaptured a department store in a very key location in the center and they are looking to redevelop it as a full expression of RH including our gallery and rooftop hospitality experience. Again, in this situation, we have not executed this lease yet. We'll provide 40 years of control. And it the landlord will contribute $20,000,000 in tenant allowance towards a total of about a $28,000,000 investment. And we project that we'll have about $8,000,000 in, of course. Interestingly here, the land value is not included in this calculation. The previous one, Edina, we actually bought the property, so that's part of our capital investment. Our development pro form a projects that we'd return our capital within 8 to 10 months. So very attractive deal where the landlords providing $20,000,000 of the $28,000,000 to develop the property. It's one of the best centers in all of California. It's a phenomenal center. Maybe the point about that is, is that capital light not we're not forcing the model. We are always going towards these iconic, irreplicable locations. That's what we're after. Whether we do a development deal, a joint venture or a capital light, it's all about super high quality real estate where our high income customers feel very comfortable coming and spending time with us. In this one, our net investment would be about $4,000,000 The landlord has acquired a former anchor tenant position and they plan on developing again an RH gallery for us along with the hospitality experience. Again, we'll execute a lease of about with 40 years of control and the landlord will contribute $15,000,000 towards the development of a $19,000,000 gallery. So we'll have a net $4,000,000 invested. Our development pro form a projects return of capital within 4 to 6 months. Again, a really attractive deal. You might say, what's the difference between the $8,000,000 and the $4,000,000 It's really the cost of the real estate. And in some of the larger markets, the real estate will be more expensive or the cost of development will be more expensive, much more expensive than developing California, for instance, Southern California or Northern California than, say, Dallas or Columbus or some of the lesser costing markets. So in summary, our multi tier real estate strategy will significantly increase our unit level profitability. It will because we're able to negotiate these lower rents, lower capital requirements and will increase our return on invested capital. So thank you. Open it up to questions. Robin? This is like the quintessential destination experience go to. What in the world triggered this vision in your mind? It's just really connecting the dots along the way. It's we like to say we're always unfinished, always on the move. We're always testing, learning and shaping our future as we go. So it's just an integration of a lot of ideas and experiences that we went through, right? I mean, did we predict we'd open a restaurant in the middle of the Chicago store that would do $6,000,000 have a line around the block every single Saturday and Sunday, even in the snow. And we'd have what are we up to now? Anybody here from Chicago have any wedding proposals? 52 wedding proposals in the middle of a furniture store? You can't make that shit up, right? Like it just happens. And so, you go, well, I don't know, is this a one off? And what we did is we quickly said, let's test that. Like what can we how can we quickly test that? Even if we have to spend some initial incremental capital to test it. And we went through every gallery that we had in development and said, okay, can we put a restaurant here? No. Can we put a restaurant out? No, that won't work. And then like how we can't cut a hole in the middle of the building and create a courtyard. And then we looked at a couple like Palm Beach, right? And we said Palm Beach was the steel was all up. And were we willing to delay construction by 6 months and probably build the most expensive restaurant we're ever going to build by having to reinforce the entire building with new steel because it wasn't built for the load and open a restaurant on the roof, right, in Palm Beach. And then we were scared, by the way, because it's going to be an expensive restaurant. We're going to delay opening by 6 months. We're going to have 6 months of dead bread. We're going to build a very expensive rooftop restaurant, reinforce this building. And will anybody know we have a restaurant on the roof? And honestly, I was like went back and forth, had sleepless nights, whether I wanted to go back to the Board with this kind of wild idea that we're going to delay the store and build a I know we probably wanted to we built probably an $8,000,000 to $10,000,000 restaurant and when you look at the incremental capital. But we looked at it as a long term investment. We needed to know would it work. And honestly, thank God, we did Palm Beach because we opened Palm Beach massively successful in its 1st year. It's going to do as much as Chicago in its 3rd year. And what we learned from that investment, which we never could have seen, right? We never could have predicted this. A lot of this work people think it's vision. It's not necessarily vision. It's just continually learning, right? And being curious and testing and trying and connecting the dots and see where it leads you, right? And just make really intentional and intelligent investments. And if we didn't do that rooftop restaurant, we wouldn't have this prototype. We wouldn't have the prototype. But to actually know that the restaurant on the roof works, the cost of building the restaurant on the roof and putting the kitchen on the roof and all the equipment on the roof together is significantly less expensive than building the courtyard like we did in Nashville. I mean, for example, okay, Nashville has all of the businesses kind of spatially allocated, etcetera, as a new prototype. Some of it's not as efficient when you wrap it around a courtyard. When you wrap it around a courtyard, you have now an interior facade you have to build. You have all extra windows you have to build, right? You have to plaster all that, seal all that. You have to go up another level to get all the businesses because you lose the interior footprint. You cut a hole in the middle of the day. So now, that's not shoppable space. And so, we land, Dave, on Nashville total capital price, dollars 35,000,000? Yes. Okay. So, Nashville cost us $35,000,000 Doing the restaurant on the roof, making that investment in Palm Beach when we did, even though that was an expensive decision to make, now we can put a restaurant on the roof. We can build the gallery on 2 floors instead of 3 or 4 floors. We don't have the extra storefront and we can build these new galleries at $18,000,000 to $28,000,000 The only reason one it's going to be $28,000,000 is that Dave gave an example is because it's in California, it's a more expensive spot, and we've got a little bit more engineering and things to do on that gallery. These galleries, I think, will cost us, Dave, what, dollars 18 to $22 on average, maybe some will hit 24. I don't think many will hit 28. And we're in the early stages. We'll just be opening our first three next year, and we'll gain learning as we do it. But each of the markets, it's really dependent on construction and construction availability of labor, which has been tight. And we take a smaller footprint than we do, right? So it's easier to find footprints on the prototype because the restaurant's on the roof. I mean, all kinds of good things came from that investment. So the vision really is and how we got here is really a series of dots connecting that leads to an outcome like this. And I think that you can continue us to expect us to continue to connect dots. I don't think our model is going to change as radically in the next 10 years as it did in the last 5 years. I mean, we're in almost kind of every kind of key category. We've added restaurants, baby and child, teen, modern, so on and so forth. I don't think we need a lot more square footage. And actually, we got bigger, and now we're making that more efficient. And we now have proof of concept to the developers on the retail RH business. So before they give it to Billy Taubman and the Taubman Company that bet on us, right? We cut 3 deals with the Taubman. I said he came to our opening in he came to Houston and he went to Scottsdale and saw the first kind of built from the ground up galleries that were they were like 18000 to 20000 square feet and with the rooftop of the glass box, it's about another 2,000 square feet. And he was all excited and he came to me with the Denver idea. And he had Saks Fifth Avenue and he said, Look, I got this idea. SOTTOM, I'm going to give you a third of the Saks going this way. You'll face the valet parking and you can build like you're Houston. And I go, Billy, I'm not building Houston anymore. And he goes, I just saw Houston. I just saw it. Scott, what do you mean you're not building that anymore now? No, no, we're building something way bigger. It's like almost 3 times bigger, Billy. How could it be? You just opened this thing 4, 6 months ago. And he said, well, we've got these new businesses coming and that we can allocate more to outdoors, so on and so forth. I need the whole front of the Saks building. Because he was going to put 2 other big retailers, the big Nike flagship. And I think at the time, he was going to do a Perch deal or something, and he's going to get through space. I said, no, no, no. Give us the whole front, and then you can take the back half of Stacks and you can bring it to us, make us an anchor and fill it in with Louis Vuitton and Tiffany and everybody else, which now he's done. Yes, so it's really good. So you got to monetize the back half, give us a breakdown on the front half. But give it to kind of Billy Taubman, we had no proof of concept. And so he made a big bet back then, giving us $15,000,000 of capital for Denver, giving us, I think, dollars 12,000,000 of capital for Palm Beach and similar, I think, in Nashville, right? We did those 3 deals. Now we have and by the way, we had no restaurants. And now I'm trying to negotiate with Billy to say, don't you want a restaurant on the top of Denver and don't you want a restaurant on the he's probably listening to this webcast. He was here last night. He was here last night. And I said, don't you want a restaurant on the top of Tampa? And if you do, it would be really good for you to give us like $3,000,000 or $5,000,000 to build that. And this is why it's good for you, right? Because we'll generate all this traffic, we'll bring people to the mall. And I think we're executing the best F and B experience in any shopping center in America. I think we're opening the best experience today, and the developers believe that. I mean, David Simon believes that. Billy Taubman And he was here last night as well. Yes. David Simon, so David Simon, everybody knows, if you know David, David is a really good capital allocator. You've really got to have proof of concept with David. And David is a big believer now. And we've got a part of the development deal pipeline is with David. And I think he gets the math works for them and works for us. So not a big vision, but like just we're always curious, we're always critical, we always want to learn, right? That's how we've kind of gotten here. Steve, did you have a question? Could you please bring the microphone? Yes. I want to speak to the interior design offices and the showrooms that you have in the store and maybe just touch on what you think it means for the brand and what you kind of envision, right, whether it's from a talent acquisition or sales productivity standpoint, what drove you to the decision to allocate the space you did in the box? So what's your first reaction to it? I saw it last night. I actually had one of the designers give me a tour and I loved it. I think it's a great space to bring the guests, right, into a creative space outside of wherever they may be and then and bring ideas together. Yes. Well, that's I mean, that's what we hope with the reaction we get, right? It's one thing to say you have interior design, and it's another thing to all of a sudden put an interior design firm visibly in the gallery, right, which then has the entire gallery reflect the fact that we are an interior design firm and platform, right? If you said to yourself, how many interior designers have storefronts? How many interior designers have visibility to the public? How do you find an interior designer today? How many people here have used an interior designer? Okay, quite a few hands. Where did you find them? How did you hear about them? Word-of-mouth? Yes. We're all word-of-mouth. Everybody word-of-mouth? Yes, all word-of-mouth, right? No storefront, no nothing, right? So it's like, hey, anybody know a good interior designer? I mean that's like to me that's I talked about earlier that our I would say that our market is not only fragmented, but it has a lack of accessibility, right, because most of our business is behind the iron curtain to the trade. The interior design business is beyond the lack of accessibility. It's all about invisibility. You can't see it. You don't know where to go. Now there's some new online platforms and some of these people are trying to give interior. Houzz gives interior designers visibility on their website, right? And that starts to create an online storefront, but there's no physical expression of the interior design business anywhere that I can think of, right? So by integrating the offices, visible offices, like a design firm is here, communicates that this is about interior design. We have real interior designers. We don't have salespeople who might be good visually and have done displays and send them into your home and say they're an interior designer. They've gone through our training. They've gone through our program. They believe in our ethos, which, by the way, is on every one of those levels. If you are writing up the elevator, you can read it in the gallery, all these big quotes on the walls. And so, the ability to communicate how committed we are to interior design and actually present a design firm, the design opposite and have presentation rooms through the store. How many rooms do we have here, 4? 5. 5 interior design presentation rooms. I think it's a big leapfrog. So, it's the 1st place we've done it. And we'll start we're going to go back and retrofit some of our current galleries and especially if this test works. But the minute I saw it, right, and by the way, it came from sessions and listening to our designers say, hey, look, 1, we're losing good interior designers because they feel like they have to be sales associates on the floor, right, to work on a retail floor. And we felt, okay, that's not right. That doesn't make sense. And so, now we're changing that model and we're investing in that model. And I was telling a group on another floor when I was walking through and interacting with some of you. Hospitality was intended to be a business that can amplify the brand by bringing traffic and bringing people into our home and being hospitable. And if you feed people and you give people something to eat, they'll stay, right, in your home. And so we wanted people to stay longer, explore more, feel better, feel relaxed, not like they have to rush out and get something to eat. And doing design takes a long time if you want to do a room or a home. And it was always intended to be a business that elevated the brand, elevated the experience and drove additional traffic. And if we could have done it at a breakeven and got incremental revenue on the core business, it would have been a big win. If the integrated model, that would have been a big win. The big learning here is it's so successful that on a standalone basis, it's a profitable business. And on an integrated business, it's wildly accretive, right? That we never thought that would be. And so we invested heavily into doing it right. We took 50 basis points earning drag the past year and it will start to come down. And we start to leverage the infrastructure we invested into. Now we're thinking about interior design the same way, right? Let's make it a real business, a real design firm. And yes, we know it drives incremental top line sales. But what if we really invest in it like we did in hospitality? What if we really create a true design firm, right? And could it actually also be a standalone investable business? Could it be profitable on its own if you looked at the incremental sales that drove versus the cost structure? Today, like we're doing a lot of stuff for free. I mean, we send teams to people's house and do installations for multiple days. We steam their bedding. We hang all the pictures. We put in all this stuff and we don't even charge them. We don't charge for it. So interior design, it's probably a standalone business, is probably operating at a loss. We know of all the extra things we do for consumers. We flew teams to Aspen to do a house in Aspen and install it, multiple houses in Aspen. We fly teams to other destinations. We charge if it's international. So, we have how big is the project in Shanghai? Nicole, are you in here? $1,200,000 We have $1,000,000 install, dollars 1,000,000 job we're doing in Shanghai. What was Italy was like 800,000 dollars 900,000 dollars flying our teams to Italy, Shanghai. We have multiple international jobs that we're doing. People come and see our galleries and have our design teams travel and go all over. But all the domestic travel, we're covering right now. All the time spent with the customer, it's all a freebie. And it's and you can argue, well, should it be, shouldn't it be? My sense is people don't value things very much when they're free, right? They generally think, oh, it must not cost that much and kind of they overuse it and they just don't value it, right? And long term, I think we can charge for installation services. We can charge for design services. Maybe you're a member and you get up to 8 hours of free design services or 12 hours or whatever kind of a time frame. But if we're working on a $500,000 home, we're going to $1,000,000 project and it's we're working for a month, multiple people and we're sending 20 people to install the house for 4 days. Yes, that probably shouldn't be free. So long term, we think we're going to adjust the model, we're going to invest into this. And I think just like hospitality, I believe we're going to learn that this is actually going to be like a real investable business, if you looked at it on a standalone, and you put it inside the gallery, if that makes sense. Yes. Mark Friedman from Mill Valley. Ironically, a friend of mine at the Corribus Aerosaur was just hired away by a big Marin interior designer last month. And I'm just going to ask you, how do you prevent that from happening? And I think it's because she didn't want to be seen as a sales associate, now she feels Oh, she got recruited away. Yes. Yes. Yes. That's I think that's the issue. Yes, because we're having the designers spend time on the retail floor and they don't have an office and it doesn't feel like they're at a design firm. Yes. Okay. And so my next question is, and I have 2 homes in Mill Valley and had interior designers is so I've been to San Francisco Design Center enough times. What is the pitch or what's the advantage for that designer to come to your store to go A to Z instead of just getting the bedside table lamp and the bed and bath towels at RH, but then several things at room and board are in a lot at the design center, the San Francisco design center. Yes. Room and board is just a retailer, right? They're not really they happen to be near the design center. They're not a design showroom. So one, there's not a lot of incentive for the designer to come to us because we have total transparency on our pricing, right? We're accessible and we also have transparency. All the design showrooms have opacity. They don't have a lack of accessibility and they have opacity and lack of transparency on pricing. So and that's by design, so the designer can charge an incremental markup on the product. So today, just being completely transparent, truth be told, yes, it's not logical that a designer comes to RH because they're going to make less money, okay? And the designers know that and we know that, right? But we're a transparent platform. So I think we're massively disruptive that way. And here's the reason why most designers come to us, two reasons. 1, because the consumer points them to us. So if they go present a piece of furniture or a sofa for $9,000 and you can get something that looks like that similar quality for $4,000 at our age, it's really hard for the designer to not buy from us, right? The value is exponentially better. But the second motivation for a designer to use us is we become an augmentation of their design firm, right? So they can use us like their design assistants, right? We can coordinate all the orders. Like the other thing that's kind of because we're a fully integrated business, if you're using an interior designer and you're doing a home with an interior designer, he or she is probably going to 20 or more showrooms to furnish your house, right? So you've got multiple orders to manage. Interior designers have all kinds of assistance to manage those orders in complex jobs. And there's multiple delivery charges, right? And so because of the integration of all the categories here, we save the customer time, we save the interior designer time, and they can use this as their design office. They just have to negotiate the right deal for their client. I think interior designers add tremendous value, right? And I think the key is because of the transparency, they're going to be more and more creative, and many are, in using us because they could probably get 5 times as many projects done and not have to have all the incremental people and headaches that they have to doing those orders in multiple places, having all the people try to support and run down the orders, all the multiple delivery charges and so on and so forth. So we're disruptive on many levels. And I believe people like look at you open this, like there's not a better showroom in New York City for product. I mean, these bamboo pieces by John Birch, right, if you're into contemporary, if you're an interior designer and you've been buying contemporary pieces, I mean, the Why is the showroom is famous at the high, high end. I mean, we never thought John Birch would design for our platform. I mean, these coffee tables, this one right here, I mean, I believe he was selling for $30,000 right? He designed the collection. What's the price of that coffee too? It's like $4,000 $3,000 yes, dollars 3,000 $4,000 right? And so and John, by the way, will make more money. He's going to sell a whole lot more coffee tables and get a royalty on that. His collection will probably be in RH for 20 years. He's going to get a check all the time. He doesn't have to run a store. And then because John Birch is designing from Wyatt is designing and has his good in our age, then the interior designers kind of also have to embrace it, right? So there's just so many reasons why I think it's like when people ask me about the China tariffs. Generally, people always operate in their best interest, right? I mean, it's in when there's leverage and a market's going, it's in China's best interest to participate with America. I mean and the longer China doesn't participate, the worse it's going to get because not only are retailers shifting production, most of the people that own the factories in China are Taiwanese owners and other owners that came from outside of China developed the factories and they're moving out of China, right? And so, like, it's going to be bad for China, right? And that's why I think Trump, whether you like his methodology or not, I mean, he proposed 10% tariffs. Got no cooperation, went to 25. There's not a good outcome for China. There's leverage and there's a new dynamic. And so people ask me, are you worried about the China tariffs? Yeah, not really. We're de risking, but more importantly, all the vendors are they're moving production. So same thing with the designers. I think they it's where people are going to have to react to what this is. It just creates transparency and it's a much better model for the consumer. So it forces the industry to change. Maybe I have a question over here. It's Michael Lasser with UBS. Gary, can you speak to the flexibility of the cost structure that you're creating? And what are the points of flexibility? Maybe you could use this store as an example. You said it's going to pro form a at $100,000,000 Rent is going to be 8 and change. It will do 40%, 45% gross margin maybe. That's $40,000,000 or so gross profit. What are the fixed costs that need to be covered to give us a sense for the sensitivity of the model? Sure, sure, sure. So, yes, think about this. Think of like if we're directionally right here and it does $100,000,000 and it throws off 28% 4 wall, right, cash on cash, right? And so it'll drive $28,000,000 The real key fixed cost structure here is the occupancy. So we're paying $8,000,000 in our last gallery and it does roughly $60,000,000 right? And as long as you've got the volume coverage, like it's all about how many times do you cover rent and what percent is kind of rent and occupancy of your model. So rent and occupancy is a percent of our model. Generally in the organization, we try to do 5% to 6%, 5% to 7%. Here, it will be in the 8%, 9% range. I mean, our high end on this Galleries, maybe it will do $120,000,000 3 years from now, 4 years from now as my meat packing starts to expand and then you drive the occupancy drives down to price 6%, 7%. And so then you've got a lot of flexibility, right? If the business goes down, you adjust your investment in payroll and other expenses. And so this is just the occupancy. And as long as you're building a model like ours where occupancy is such a low percentage of sales, most retail businesses in malls will run anywhere from 10% to 17% occupancy. So we have much lower occupancy model as a percentage of sales. Hey, Gary. Brad Thomas with KeyBanc over here. Could you just remind us, as you guys target the longer term revenue goal of 8% to 12%, how much of that is coming from these new galleries? And then as we think about leveraging all the learnings that you've had here, what efficiencies are you finding in the amount of time you have to spend on each gallery, particularly as you may open more of them in a given year than 4 this year and as you may need to travel overseas more frequently with your openings? Sure. Well, yes, let's start with my time. So I mean, the real estate transformation has been the biggest value driving strategy for the company for several years. So a massive amount of my time has been focused on conceptualizing the strategy, testing, trying, designing, developing. I mean, do I have a lot of personal hours into the Designer's Gallery? You bet I do. I mean, I might have sketched that rooftop. How many times, Dave? 50? 50 times. And so but this is New York. It's really important, right? And the design of the prototypes and all these things, all those learnings, yes, I mean, my time massively invested here trying to understand trying to design a really efficient box. Now that we've joined I mean, the exciting thing, we've spent a ton of time designing the prototype. And again, Palm Beach was the key crack. Thank God we opened that restaurant on the roof. The craziest thing, the most expensive restaurant we'll probably ever build will be the dot that makes these galleries and the return on capital like 50% to 100% more attractive. And so my time now will really be spent thinking about the international positioning of the real estate, the development of the brand as we think about that next move from a real estate point of view. And Dave and Dave's team have I'll probably I'm always going to be involved with Dave on the deals, right, because it's a long term decision. So we're partners on those deals. We go see he tees up all up and I go see them all with him. And we discussed the economics and the upside, but the design and development of the prototype is done. So I really don't have to spend time on the prototypes going forward unless it needs to be massively modified. We're working on the secondary markets with the team designing, developing that, so that footprint works logically, economically and so on and so forth. But that's not a lot of time. And so, yes, so my time is going to be a big, big chunk of my time will be reallocated very soon back to the product. So if I think about the last 2 years of my personal allocation of time, it's probably been, I don't know, what would you say, 80% on real estate and the operating platform, 20% on the goods, maybe 10%, might be 10. The littlest that I've ever spent in the history of my career has been on the product the last 2 years, right? And it's kind of like the shadow of the farmer kind of deal, right? Like the best fertilizer is the shadow of the farmer. So my shadow hasn't been on the product, even Aerie's shadow. Like when you try to build an integrated operating model like ours, you need every president, every head in the room, right, when you're redesigning the platform like we have. So the entire organization's shadow, not just mine, has not been that like on the goods, we put things on hold. We decided to expand the assortment at a much slower rate and not introduce new businesses, put them on ice. Plus, you think about membership model and how it simplified the business and how we've shifted our allocation of time. Yes. Yes. Membership creates the simplification of the business and the amount of time we used to spend, like every retailer does, like no matter how beautiful your store looks, work at a typical retailer, you're in the back in the offices trying to figure out the promotions from week to week. This was the it's like nutty. If you guys saw a typical retailer behind the scenes and like how everybody really spends their time, it's like massive chaos, massive chaos. We're like so different now. We'll do almost anything to never go back. The only thing I worry about is like, oh, God, whenever the next recession comes, we just have to hold steady and weather it and not pull the plug and try to go back to crazy promotions. And we've got contingency plans. We actually have plans to how do we modify membership, what's our membership recession model. We've developed that. So because time allocation is key. And thanks for asking that question. It's a really great question. Matt? It's Matt Vassilier from Goldman Sachs. Thanks guys so much for doing this last night and this evening. My question relates to sales growth in markets as you transform the real estate strategy. You spoke to doubling retail sales, sort of a 2 part question. What happens to the direct number as well? What kind of move do you see? And also, I'm curious, you were doing, I think, pretty good business in Flatiron. You talked about doing $100,000,000 here. What kind of delta does that imply for the New York market? Is this typical in that regard? Yes. So Flatiron wasn't really a legacy gallery, right? Flatiron was a modified legacy. We added 2 floors. So but just to give you a percent of square footage, Flatiron it's about 22,000 square feet is selling. And this interior and exterior square footage is selling. I think we have 70 something 1,000 square feet. Correct. Yes. And Flatiron doesn't have hospitality, right? It doesn't have all the traffic the hospitality brings. So I mean, this one, I think we'll get it double. It's going to take about I think it's going to take about 3 to 5 years to get it double. That's why I think it will start at about 100 and I think it will get to 120. Because the trap what happens with the trap, what we're learning, what happens to the traffic in hospitality is they don't buy right away. It's like you don't all of a sudden, it's like see a sofa and go, like, yes, change my sofa, right? But the traffic that's coming in, we're seeing they're seeing experience in the gallery. They're getting inspired and thinking like, gosh, next year, honey, instead of that trip to the Caribbean, let's redo our home. Like, let's make our home better. And so you have this tail of that traffic. So I think the amount of people that are going to be eating on this rooftop, the amount of people that are going to walk through this inspiring space, the tail that comes from that will, I think, will be worth an incremental $20,000,000 That's not a big comp, right, like when you think about it. So are you saying then that New York did something like $60,000,000 prior? Oh, I said it was $60,000,000 didn't I? Okay. Yes, yes. Yes. So that's like still 60% higher on the same rent basically. Yes, yes. And if I could ask a follow-up for Dave. So talk about the impact that hospitality has had as you've talked to these mall developers because it seems like you now sort of have a bankable high end restaurant that they can bring that has some grand panache, which doesn't see there aren't many of these out there, especially as you think about what mall developers are trying to do for traffic and to reallocate space. So how has that piece of it changed the conversation? Yes, I think it's really changed the game and especially putting the cafe on the rooftop. I think Brendan said it very well in the description of Palm Beach. It will be relevant 20 or 30 years from now, our cafe and the integrated experience. I think the developers see us as a very stable, well thought out integration of hospitality as opposed to the new next thing. And one of their problems is what was hot 5 years ago is no longer, yet that restaurant tenant controls it for 10, 15, 20 years. So they're really struggling with that. They have to buy out some of those restaurants. For us, they see the quality of the clientele that we bring in and they see that they don't have to give up 1st floor space and they have to finance a lot of those restaurant guys. They look at us as, wow, they're taking multi floor, which is very difficult, really sets us apart, very difficult in retail to have productive second, third, fourth floors. They now look at us and say, this is really interesting. One is parking requirements for a gallery might be 2 spaces per 1,000 square feet, right? And then you put a restaurant on top of it and you integrate it, it's not a parking drag for them, less investment for them in parking, etcetera. So the whole thing is really set up, Matt, very well for the developer to look at us as an integrated concept of restaurant and gallery. And as we said last night, the number of people that came through here, the developers, they're seeing it. They've seen Chicago, they've seen Palm Beach, and now they see this, and they believe and because it's proved out. Chicago, it's the kind of numbers we're doing. They have a difficult time finding a restaurant concept that can actually produce those kinds of food and beverage numbers. Thank you. Yes. Yes. I'll just jump in and just kind of accentuate a point. For mall developers on any shopping center, lifestyle, outdoor, For hospitality concept, it is almost always ground floor space, which is the most expensive space they have to give up. They usually don't get very high rents from hospitality providers and they have to put up basically all the capital, right? And that's why our capital is going up because we're bringing hospitality and we're getting an outside capital contribution for the hospitality because we're giving them back the space, right? They're saving the 8000 or 10000 feet they had to have for that hospitality concept. So, we're saying, look, you don't have to give any space. Give us a capital contribution. We're going to put it on top of our space, which is really unique. And I think one thing I'd also add to that, Gary, is what we bring in terms of the wine experience and the wine vault and the fact that it's only beer and wine, we do not have a bar. So you think about most of these restaurant concepts are built around liquor and bar where we're not. So it's a totally different experience that we're bringing and something that's really different than anything that they can get into their property. So I think that's another key point. We're basically closed 8 or 9 at night, 10 at night. We're done, and that's attractive as a different way to utilize the property. Christina Fernandez from Telsey Advisory Group. I wanted to ask on international, which is you've been talking more today in the last conference calls. How would you describe RH brand awareness outside the U. S? And not having operated there before and knowing it's still early days, do you think you'll have to take a different approach to marketing or merchandising as you look at to the opportunity today? Yes. We don't have any real data yet. We actually want to get some do some research. But we do the data we do have is we know how much we ship to those countries. And so the like for example, in Miami, a third of the business goes to South America, right? It goes to Argentina, Brazil, Mexico, so on and so forth. And we do know what percent of the business we're shipping to the United Kingdom, to London and so on and so forth and all the we have every country and every volume. So we do have some data about the brand awareness and the fact that people I mean, we don't even do the shipping. So the fact that they're kind of going through finding we might recommend a provider or whatnot, but there's a lot of liability for us right now. And our business is an ugly business if you get returns. So if they damaged it, their shipper damaged it, then we don't take that much liability. So but the data would say it's a growing brand awareness. And again, things like this and what we've done in Palm Beach, those are huge, right? When we get Miami done, those are huge. What we've done in L. A. Has been huge for the brand's awareness internationally. I mean, even Chicago has been really huge for the brand's awareness internationally. I guess before, right? For the most part, we were just a little store in the mall, like 6000, 7000 feet of selling. In many cases, we're what I refer to as a Dionne Warwick, a walk on by, right? Like we're 1 of 600 storefronts. So, you do something like this, the world's going to know about it. Hi, Gary. You mentioned on the call, it's more about margin. It's Oliver Witterman from Margaret Natives, I'm sorry. It's more about profitable sales instead of margins. And you reached an all time high in gross margins, and you just pulled forward the margin profitability goal by a year. Can you walk us through how you get there from a gross margin standpoint, which is an all time high? Or is it more about sales leverage? Yes. Think about it is that we believe think about like a bridge to 15%, if you will, like 15% operating margins. For the high end of our range this year, if we get into the high 11s, we'll break through and hit 12 this year. I think about it as about 300 basis points, 150 basis points of margin and 150 basis points of SG and A to get to 15. I think the thing I should probably add is that to that last question, a lot of people who questions I get or people are talking to me, I think it's a misperception that next year, when we show that 8% to 12% revenue growth and that 15% to 20% earnings growth that next year goes to 15% to 20%, it doesn't go to 15% to 20%. Next year will still be significantly higher than that. The step up, right, as the business ramps, the cost savings and margin growth is still really accelerating next year, and that's why we've pulled the numbers forward. Any other questions? Okay. Well, listen, for those of you who would like to, we invite you up to the roof. It's all lit up. It looks beautiful up there. Definitely just take a quick peek and have a glass of champagne or something and we can chat for a few more minutes casually up there and then some of you guys want to hang out later, we can feed you some more. Okay. But thank you for coming. Appreciate it. Thank you, everyone. Thank you.