RH (RH)

Earnings Call: Q3 2021

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Dec 9, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the RH Third Quarter 2020 Q and A Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Mr. Allison Malkin of ICR. Alison, are you on mute? Sorry, I think we're ready to go right into Q and A. No, it's okay. I'll start. Thank you. Good afternoon, everyone. Thank you for joining us for our Q3 fiscal 2020 Q and A conference call. Joining me today are Gary Friedman, Chairman and CEO and Jeff Preston, CFO. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about the outlook for our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. Also, during this call, we may discuss non GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non GAAP financial measures and a reconciliation of these non GAAP to GAAP measures in today's financial results release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q and A session. Operator, we're ready for questions. Thank you. Our first question comes from agent Yee of Barclays. Your line is open. Great. Thank you very much. And I just have to say, wow, I mean, this is a really remarkable performance. So congratulations to everybody at our age. Gary, I guess my first question for you is, in the past, you've mentioned 2 macro drivers that benefit the company, one being kind of high end housing growth and the second being robust stock market returns. So we're in a market that we have both. And based on the historical perspective, how long has the what's been the lag in terms of the effect? Obviously, we're seeing it sort of immediate today, but what's been the duration of the positive impacts to your business from that? And then my second question is, the sales galleries in Europe, what size will they be? And how should we think about, I guess, the annual sales contribution of each of those? Thank you very much and congratulations. Thank you. Thank you. It's hard to be specific on duration. I think it depends on severity of correction in any of the markets. Particularly, we've seen, as you know, with sharp stock market moves, it sometimes will pause consumers at the high end. So hard for us to kind of give you a number of range there. But I'd say there's nothing different than how you might assume the consumers would behave depending on the severity of the changes in a marketplace. I would say, we see a very healthy home market, right. And I've been asked recently about, Keith, how do you feel about the cities you have galleries in that are consumers are moving out of some of the key dense cities based on the pandemic and there's a boom in the suburban housing market and the 2nd home housing market. We're generally I would just say, we're generally indifferent because people moving and buying homes is just a good thing, right? And we have galleries in every major market. So that will that will all kind of balance itself out. And our key market galleries like New York tend to draw from the broader suburbs and everywhere, because it's where our best assortment is. But this the uptick in the housing market and how long that will last, we don't have a crystal ball. There's usually a longer tail there because as anybody on the phone knows, if you bought a new house or moved into new house and it triggers a lot of spending on the home and it's not an easy job. It takes a long time. So we think that the tail from just the housing market move looks pretty good. It's hard to say today what's going to happen with the stock market and how the market is going to read what happens next in the pandemic. It's hard for us to understand how the market will cycle through the stay at home stocks, as they call them, versus others. And we just we try not to get too focused on those things we can't control. But as you think about the galleries in Europe and how you should think about the sales contribution, We think it's very different, obviously, from the perspective of where if you think about the U. S, when we open a new gallery, almost all of them are replacing an existing gallery. So there's something very good about that and there's from the perspective that there's little risk and we have a lot of history, right? We know we have a gallery that's doing $18,000,000 and we open a new gallery that has hospitality generally in the 1st 12 to 36 months, it will double to 36 $1,000,000 And we have a point of reference in each of those markets. But when you think about opening internationally, we're not replacing any stores. So you have a bit of an unknown on that end. End. And that can be a negative because there's more guesswork and there's less data to use. We're relatively very accurate on understanding what's going to happen with our expansion in the U. S. And even when we have kind of new markets that we open in the U. S, we're relatively accurate in predicting the performance. So we have less data internationally. We don't know exactly what the reaction will be. But and so that's a negative. I'd say on the positive, the way to think about it is you're not opening a market, you're opening a country, right? And so I think about it from the perspective of the UK, just if you start there, California today, call it directionally $500,000,000 market for the business without all the gallery conversions, longer term, probably at $700,000,000 plus market for RH, probably as we continue to expand the assortments and become a more disruptive dominant brand, call California long term, maybe it's close to $1,000,000,000 $800,000,000 But if it's easy to see $700,000,000 as you think about transforming California, we'll take the UK as 68,000,000 people, right, versus California 39,000,000 people. You've got similar demographics, similar wealth populations and so on and so forth, little change in the density. So you open a gallery in England, London or whatnot, and we've got a kind of a unique strategy there. We're opening a really terrific gallery of image and impact and kind of conversation point of view, RH England, which is this magnificent estate on 73 Acres in Oxfordshire. It's 5 minutes from the Soho Farm House. It's been called the coolest house in Great Britain. And but it's kind of out from the population. It will create a lot of awareness of the brand. And just because of the footprint and the uniqueness of the gallery and it's got a great size. So it's about, I think, we're 50 something 1,000 square feet there in the 3 buildings. And then you have a very different one in Central London in Mayfair, right, where we're right in the heart of it and we're framed by Seville Row and Burlington Gardens and we're block off New Bond Street and the flagship Ralph Lauren and the big project that LVMH is doing. And no one's going to and all the wealthy people, no one will miss us there. I think everybody will hear about us in Oxfordshire. How many people will go? Not sure. But the way to think about it is not just as the galleries, you're opening up the entire direct market, right? And we've always been a brand. We used to refer to ourselves as a direct centric brand. If you think about and it's funny because I just wrote about physical first, right? And it's not that it's not like people think, oh, he doesn't believe in the Internet because he's building these big stores, these big galleries. But the way we got to even be where we are today is we did that through the direct business, right. When we started here, we had these little stores and we had a little assortment and there's no way you could show our assortment in the 6 1,000 square feet of selling or 7,000 square feet of selling we had in the average galleries. And we had a strategy that we used to talk about in our kind of first leg as a public company and didn't talk about it so much when we reentered the public market, but we still talk about direct center growth. And what we meant by that is we said we were going to size the assortments to the potential of the market, not limit them to the size of the store and use the store space and the website to reach a much broader market. And by doing that, we were able to grow the company, a company that was on the edge of bankruptcy in a very capital efficient way. And that is going to kind of play through when you think about moving into new countries, right? Here, we started with 106 stores and we kind of rightsized it down to, we think, I don't know, 60, 70, whatever it will end up being as we optimize the footprint. I don't know if we have to have as many galleries in Europe, right, with because the Internet continues to be a better and better tool to shop or to convert, right. And so if you're well positioned, you may not need as many physical stores. It's just that today, we know what the physical stores do. We know we can double the business in every market from a retail point of view. So when you open up a gallery or 2 in England, again, in Greater the UK, when we open up a gallery in Paris, right, you're going to open up all of France and greater parts of Europe. You're going to open up your business to all the travelers. And so we're not sure exactly how to think about that until we have a couple. But I'd say the asymmetrical risk to the upside from how we think about our business because we have been a company that had before we were transforming our galleries, when our galleries were undersized, 50% of our business was direct to customer, omnichannel, digital first, whatever you want to call it. We just call it online or on our website is where it's transacted. And so we believe opening up markets is opening up countries is a big deal, a really big deal. And downside of outside of maybe not having as much specific data, right? Like it'd be like that's being the brand new today with kind of the awareness we have today and opening up California with a magnificent store in LA, right, and an incredible gallery, I don't know, call it in the Napa Valley or somewhere that people visit and vacation and go to for weekends. So what does that do? We think it's some kind of a really good outcome would be our best use today. That's very helpful. Thank you very much. Yes. Thank you. Our next question comes from Max Wilhelmski of Cowen and Company. Your line is open. Hey, guys. Thanks a lot for taking my question and congrats on the nice quarter. So it's really good to see that your cancel rates are below last year. Do you think that that could remain the case over the coming months? Or could there be some risk as supply will trail demand for a bit longer than you previously anticipated? And then just separately, how are you guys thinking about cash allocation priorities at this point? Your free cash flow is starting to ramp and with fewer major capital heavy projects as well as debt maturities, Do you think we could see accelerated share repurchase, special dividends, M and A? Just want to get your thoughts on that. Thank you. Yes. The cancel rates have been down for several quarters now. So the trend would indicate that there's not a risk, right? And I think there's not a risk because, one, because I don't think we have a lot of direct competition at our where we are in the market. We are one of the few people that stock higher end luxury home furnishings. In most places, it's a much longer wait time, custom, etcetera, etcetera. And I think that the consumer needs the product and I just don't think anybody else is in stock, right? I mean, we're running the highest back orders in the history of the company since I've been here 20 years now. So I've never seen this kind of phenomenon, right? I've never seen back orders at all times highs and cancel rates at almost all time lows, right? So one is that tells you the consumer probably doesn't have a lot of other choices, What choices they perceive they have also don't have product to ship right away, and they really need the product. So they're many cases forced to wait, right? So you kind of go, if I don't order it now, how long might I wait, right? How many more weeks might the delay be? So the numbers would tell you over the last few quarters that there doesn't look like a risk. That doesn't mean things won't change. I just don't see any reason for them to change. So our degree of confidence of converting the orders to revenues is very, very high, right? We have a lot of data now and it's very, very consistent. Backorders have trended lower, not higher. Backorders have been below a year ago and they were low and that's by backorders, you mean cancel rates below a year ago and they're below a year ago last year. And as backorders have increased every quarter, right, because you can't when all centers, our business started trending up, we weren't buying for up, right, we canceled orders. So they started trending up 20% and we were buying for 20%, all of a sudden they went up 30%, and then you start buying for 30%, then they go 40%. You're like, God, do I even buy for 40% let me ask, wait a few more weeks and you go, okay, it looks like a trend and you buy for 40%. So we on a compounded basis, then they went up to 47%, right? So we kind of got behind, right? So as we thought we would start catching up, we also we actually fell behind because the demand continued to accelerate. And you would have thought that cancel rates would be impacted. But for the reasons I stated, I believe that there haven't been impacted. And now I kind of have a more firm view that I don't believe they will be. It doesn't mean we won't be wrong about that, but that's our view today. And as we think about cash allocation priorities, Look, we're in a world where things are changing daily, right? Again, we're we just went into in the State of California shelter in place orders, right? Retail is operating at 20% capacity. The malls and the shopping centers have less traffic than they've had in the last few months. We just saw the most severe drop off of the Black Friday to Cyber Monday selling season that we've ever seen. And in discussing with other retailers and leaders in the business, people saw a massive fall off during that period. Like we're sitting here going, uh-oh, like can we adjust orders is the tailwind over? And it just seemed that based on the fact that the virus was spiking, people decided not to go out and shop. And all of a sudden, once we got past Cyber Monday, our business started to ramp back up. So when you're in a kind of a business situation with so many unknowns that we're in, whether you have a headwind or tailwind doesn't for me, doesn't really matter. I mean, we have more optionality with the tailwind. Am I do I feel better being on this side of the table than maybe apparel people or other people who had their business or restaurants and people who had their business devastated? Yes, of course, you choose the side we're on. But it doesn't mean you should adjust anything long term. It means you should just kind of do your best day to day, week to week, month to month as new data comes in to make really good decisions for what you know and don't lose sight of your long term vision and strategies that will create that you believe will create significant shareholder value long term. And I think we've proven based on big decisions we've made and from moving from a promotional model to a membership model. Again, when I talked about having to march through hell for a heavenly cause and staying true to that and transforming our whole way of doing business, that was a long term view and we didn't let short term noise distract us. We redesigned and re architected the entire operating platform of the company. And a lot of short term noise as we are doing that and we stayed focused on where how we could create long term value. And that hasn't changed. And that's why if I wrote one of my longer shareholder letters here, tried to give you as much detail as we could, it's how being as transparent as we can, how we're seeing the business, but things are changing all the time. So to kind of have a strong view about what you're going to do from a capital allocation point of view with buybacks or M and A or other things, like we're always going to be opportunistic. But it's just hard to kind of commit to too many things today. I mean, we were were pretty certain we were going to open RH England. And I'll send travel shifts down in the UK and we can't go unless we quarantine for 2 weeks. And you can't send your leadership team and other people to go quarantine in a hotel for 2 weeks to work 2 days and come back. And so we just decided like, yes, not a good time. We had to make a decision to commit to distribution infrastructure and other investments and people and so on and so forth. And we've said like, yes, look, it's important that we take a long term view here. The long term view is like it's everybody will still be there if we wait to 2022. We'll be more prepared. We'll do a better job. We'll have more visibility. We'll understand what this looks like on the other side of the pandemic. So, yes, right now, I'd just say, too many moving parts to be committed to kind of any kind of specific activity. If the right thing comes along, that has asymmetrical risk to the upside that there's real opportunity, we'll do those things. We've made some small acquisitions. I think you'll read about in our filings. They're not really material, but we're taking opportunities to do things that will elevate the brand and invest in the brand. And we'll continue to do things like that. Where we're going to make significant share buybacks with all the uncertainty? I don't think so. Not right now. I think let's let things pass and it's no different than look, I think we are very smart at not raising debt right away. We when all of a sudden this pandemic hit and our business went down, our business moved 50 points, right? And everybody's like, you have enough cash is what this look like. And we researched it, we created a lot of optionality, we had a lot of choices to raise capital. The interest rates would have been really high, would have been very expensive money. And it might have bought us some optionality, but you just don't need to take risks without having real clear visibility. I mean, some people thought we took a big risk buying back almost 60% of the company, again, we spent $1,200,000,000 We didn't see it as risky, right, because we understood what was going to happen. We understood we are going to re architect the supply chain and take $400,000,000 to $500,000,000 out of inventory. We knew what would happen. We had really good assumptions. I'd say we knew. We had really good assumptions. We knew our business really well. And we made some moves that to other people looked risky to us had more asymmetrical risk to the upside. And so right now, I think it's just we're in a really uncertain time. We gave you as much forward looking information as we could. Tried to I kind of look at this as look at this over a 2 year period, right? It's that fiscal 2021 is a excuse me, fiscal 2020 is a down first half, up second half, fiscal 2021 is just the opposite. I'd look at the 2 years together and say, what kind of company do you think you have when you balance it all out? We think this is a company on its way to being one of the great companies. And that's what we're focused on. So that's how I characterize our frame of mind today. Got it. Thanks a lot, Gary, and happy holidays to everyone. Thank you. Happy holidays to you. Thank you. Our next question comes from Stephen Forbes with Guggenheim Securities. Your line is open. Good afternoon. Hey, Gary. Maybe to start, on the last call, you talked a lot about the reallocation of human financial capital, right? And I wonder if you can provide more context around the potential benefits here, right, as you digest those moves? And is the launch of RH Contemporary, right, in RH Color like a result of these efforts? Or how do you sort of speak to the potential benefits, right, of that strategic change and not dropping the source book in the fall? Sure. Well, not dropping the source book in the fall was a decision based on the fact that inventory was chasing demand massively and we were only going to create a greater pressure and possibly not satisfied, just have customers frustrated with us and so on and so forth. So did we give up top line in by not mailing books? Sure, we did. If we were to mail the books, would there have been incremental top line? There would have. Would there have been higher back orders? There would have. Would there have been more frustrated customers and wait times? There would have. And so we thought the right long term move was not to try to chase this kind of optimize the business in this time of the pandemic, but how to shift our human capital and focus on the longer term. And so we reallocated our time and energy towards other things, contemporary being one of them. We held back newness, right, that would have been generating demand today. I feel really good that demand in the core businesses bounce back to what it was up 39, right? Up 39 with no book, right, with no newness. So we're up against last year's book, we're up against last year's newness and we're still up 39. And so could we have been up 48% or 52%, maybe. But our business would have been messier. And it's never good to kind of create a messy business. I mean, I've run those before. This company has run-in a messy way before in a chaotic way. It's just no different than it's pretty clear if you just look at the emails you receive in your inboxes that there is a period where very few people were promoting. Now it looks like a period of a lot of promotions. And so my sense is there's a lot of people in the retail business that are trying to fuel the fire with increased promotions. I think that's not a good long term view, because then you're up against all that next year when you've got to cycle these difficult comparisons, I look at next I look ahead in next year and I go, I feel really good. We've got a cycle demand of 40, maybe the Q4 will be less than that because we didn't mail the books, so we don't have the newness. But next year, we're going to have a lot of newness and we're going to have really thoughtful, constructed and architected assortments and we'll even be more strategic and we've been able to make investments in other elements of our business that will elevate the brand. And so we feel very good in next year about next year unless something big happens, unless we have a stock market crash and the bottom falls out of the home business. But for the most part, I like how next year is shaping up because of the decisions we've made. I think we're very excited. I think it's tremendous new product in the pipeline, almost too much. You've got to make sure we're being disciplined about our investments from an inventory point of view and our risk on newness, but it's a lot of great newness. And I think RH Contemporary is going to open up an entirely another new layer of the market, right, that for us. It's going to bridge the gap between kind of the kind of class updated classics of interiors and the more harder edged modern and fill in with some aesthetics that we just hadn't pursued before in a very RH way, right, through our own unique point of view. And I think it's going to be really exciting to the consumer. And we've got some tremendous new talent from a design and artisan point of view coming onto the platform. I don't know if anybody's picked up the new Architectural Digest, but you'll read a 2 page article about Alison Berger coming under our platform with some incredible new lighting designs. And Allison is a I mean, he's known as one of the great lighting designers and glass designers in the world today. I mean, sold exclusively on Holly Hunt's platform, which Holly Hunt's been known as the best high end interior design showroom in the United States. And to have someone like Allison come over to our platform, kind of tips things again, right. And but it's about the product and the people joining the platform, the people joining the cause. There's just a lot of momentum in our brand today from a human capital point of view, both inside and outside RH that are going to contribute to RH from design, manufacturing, business intellect, merchandising capability and so on and so forth. So I guess the way to think about it is there's going to be a balancing, right, of kind of not mailing the books and not having any newness and then cycling around next year and not just mailing the books, but mailing more books, right? And with more news because you're going to have contemporary and you're going to have this kind of upward momentum. Now, what will happen to the markets? Do we think some air is going to come out of the demand? Do we think these you can't it'd be foolish to think like this thing will last for a real long time, not at this level. Like we think it's you're going to cycle it, it's going to normalize. There's going to still be momentum in the home business from our point of view because of long tail in that happens when people buy homes and move. But long term, if you just think about the moves we're making strategically, those are not temporal. The pandemic is temporal, right? The moves we're making are systemic and strategic, and they're going to last a long time. So that's what we're focused on. What are the moves we're making, the investments we're making that are going to elevate the RH brand and render our brand more valuable in the marketplace, more desirable, more unique, more authentic and that are going to have a lasting value. Because it's look, our stock went up, what, dollars 120 or $30 in the last 30 days or something like that. Like the stock is going to move around. You're going to have like the short term stuff is you get too focused on that and you start kind of managing your business, right, and managers generally arrange and organize the status quo and try to protect the present. We're builders here. We don't have anybody with the title of manager in this company. We only have leaders. And leaders are taking people somewhere that they've never been doing things they've never done, right. And they're building things and they're building value. And that's the culture of our company. If you walked in our center of innovation, you'd walk through a portal that says RH, the home of the extraordinary, the remarkable and the amazing, right, because that's how we think, right. What are we focused on that's extraordinary, remarkable and amazing? That's the kind of work that's kind of focus you have to have to build one of the most admired brands in the world. And that's our DNA. That's our focus. So all the other stuff is kind of noise and distractions. The important things are the big moves and the big investments that are going to continue to change everything for a very long time. And then maybe just a quick follow-up for Jack. I don't know if you can sort of speak to what's the right level of expenses as we look out to 2021? Or if you just want to sort of based on the Q3 here and maybe help us conceptualize what some of the transitory factors were, right, like the removal of the silver spokes or so forth as we think about our 2021 models? Steve, you know we don't give guidance. We gave you our outlook and I think it reflects our confidence in the business and the sort of operating structure and look, some of the things I look to, continued strength in gross margin and product margin, like that is a strong part of the story. And when we look out and our confidence to reach a 25% margin in our outlook, our longer term outlook. I mean, those are the strong elements of the story. As far as like specific elements in 2021, we're not in a position to provide this at this time. I'll look to Gary if there's anything else. No, I mean, look, we believe we're going to have double digit revenue growth and expanding operating margins. We'll know more each week, each month as the pandemic kind of plays out here and the world returns to some kind of a more normalized environment for people, how people are going to behave and what's going to happen. But we're not going to get out over our skis from a cost point of view, right. And we've had you can't, we're in a kind of a temporal environment and you've got to be smart about that. So that's why we feel confident that the margins will continue to expand because we've got a good handle on expenses and we have a good line of sight into the product pipeline and what we believe can be the margin structure from a product point of view, which is the key lever and expenses, we're pretty disciplined around here from an investment point of view. It's we tend to have a culture that doesn't spend money. We have a culture that invests money based on what we think a return what that investment will kind of what kind of return will that generate. So as long as we keep that discipline and we don't become complacent or arrogant based on business trends that are happening today, We keep our edge. We continue to be unsatisfied, curious, critical, always unfinished, always on the move. And we'll continue to do great work. So I don't think there's any other people that are giving you much more data than we're giving you today. So I think our the shareholder letter has a lot in it. Thank you both. Happy holidays. Happy holidays. Thank you. Our next question comes from Chuck Grom of Gordon Haskett. Your line is open. Hey, thanks. Good evening. Can you guys put into some context how big of an opportunity the outdoor furniture market could be for you guys? And then for Jack, just trying to understand the connection between deferred revenue and customer deposits in your balance sheet there, I believe over 60% year over year and then your demand comp, which is lower than that. Just wondering if you could connect those 2 dots for us? Yes, I think that is look, outdoor, I'd say outdoor business is a lot like the general RH business. I think when you build a brand like ours, you in many ways are creating a market and you're inspiring people to purchase and invest versus other purchases and investments they may have made based on what they see. And no different than Apple created a new market. They didn't look at the cell phone market and say how big I mean, Apple created an entirely new market around smartphones. The iPhone, nobody thought it would sell in China, became the best selling phone in China. When you create a really good product and not just a single product, I'm talking about a full integrated branded proposition. You have an opportunity to create a new market, right, to disproportionately expand the market because you're putting something out there that wasn't there before, right? And I think that's happening in many places, right. You can look at a lot of brands that are creating new markets. So in Outdoor, it's much of the same. If you just stood back and said, where do you go buy outdoor furniture? There's not a lot of consumer facing outdoor furniture stores, right? They're kind of out off the beaten trail, kind of in weird places, you can come up with the names, you've driven by them before. But if you said it's high end outdoor furniture, where do you go? Where do you even see it? Where do you even get inspired to buy it? It's no one really presents it because it tends to be more seasonal in nature as far as the peaks of the business. Yes, I used to joke around and I used to tell people is what you might remember that business called Smith and Hawken, right. And they opened like 50 stores and then almost went bankrupt and they had took another go at it and I'd say, why didn't Smith and Hawken's make any money? And so, geez, we don't know. I said, well, for the most part, they had to pay rent, right? And they paid ground floor rent for a very seasonal business. And if you look at our strategy and what we've done with rooftops and terraces and things like that, we've in our new galleries, we present somewhere between 2030 outdoor collections depending on the outdoor garden space and the rooftop space. Nobody faces the customer like that in the outdoor furniture business. And because we're facing the customer like that and in this Byron environment, we're creating a new market. And we're creating a new market in outdoor furniture at a very high return on invested capital. So we really like that business. And you say, well, why can't other people do that? Well, other people don't build galleries as big as we do. So their rooftops can never be as big or they don't control the real estate like we do and they don't it's very hard to emulate what we're doing, right. And that's and why the physical nature of our business is so important, right? Like I always say, that a website is an invisible store, right? You don't see it, pass it, you have to be prompted to go to it. And physical stores, people drive by, they see if you're in the right locations, you're in the you're going to be constantly visible and you can present products and categories in ways that you can't online, where the online an online business is very democratic, right? Everybody has the same size screen. Holly's home store can look as big as RH online. I don't want to say Holly's home store, it's nobody named Holly. It's it just refers to a higher end local furniture specialty store that someone's running. And but those kind of businesses can't do what we do. And that's why we're so disruptive. So when you're disruptive like that, you're taking share, but even most more importantly than taking share, you're creating a new market. And that's how we think about it. And then Jack, I guess you can comment on if you can understand the deposits and revenue. Yes. I mean, obviously, with the strength of the business and the high demand and the supply chain constraints we talked about, those are the 2 items, 2 key items that you're going to see that grow with customer deposits and the sort of the deferred the special order business that we have that grows those customer deposits. And then as the business grows, naturally you're going to have a growth in the deferred revenue balance. You're looking year over year, I would have you look sequentially sort of where Q2 to Q3 grew as well. That's a that was like an 18% sequential build. So I think you're going to look at both, don't get me wrong, but I think as far as impact from walking down from demand down to revenue growth, you kind of want to look at that sequential build. So like I said, that was an 18% growth growth, most and very much expected relative to the trajectory of the business. That's a good color. We're looking at sequentially then. And then just my follow-up would be, just wondering if you guys describe a little bit more art than science, but just any sense for how much of your revenue growth is coming from consumers who are actually buying second homes and or people who are shifting out of cities into larger suburban homes? We've looked at the data, Chuck. Look, the data is what exactly we'd expect that suburban homes are high growth rates, 2nd home markets have the highest growth rates. And then you have, as Gary talked about, an exodus out of cities, which so But again, we're in all these markets and our customers, whether they have a primary home in an urban market and happen to be moving out there, it's all at the end of the day good for our business. We haven't gone into much more detail, but I think the trends, like I said, that hierarchy of second home having strongest growth, suburban, very strong growth and urban being the weakest of the 3. Again, it's kind of a firm grasp of the obvious as we say sometimes. But I'm not sure, Gary, you've got anything else to add? No, no. I mean, look, our business has always been our biggest part of our business is the suburban market business, right. If it's just where more large homes are, where all those large homes have more bedrooms, more living space, outdoor furniture space, so on and so forth. And no surprise, it's the largest part of our business. And so the suburban market, which is significantly the largest part of our business has tailwind and there's people moving to it, that's good for us. But it's again, it's we know all the data, we've got it. We look at it. I don't know if any of it tells us to do anything differently or to expect anything differently. There's not like markets we go, oh my god, they're buying homes there and they don't know about us or let's rush to open a gallery or stuff like that. I mean, some place you go, okay, we've been looking in Palm Desert in Southern California for years and it's on fire. And Steph, who is our Chief Gallery Officer, went to see his grandparents over Thanksgiving. And he said, we really, really need a gallery there. And he goes, yes, it's on the list. If you feel that strongly about it, go find a location and we'll get it done quickly. I mean, it's not like, oh my God, it's going to change so much. It's probably a little more, but we're really well positioned in North America to capitalize based on any way it shifts within the market. We just like that the market is up, right. We're well positioned to capitalize no matter where they're moving. In North America, I think the only place like we were not represented in Montreal and we're not represented in Hawaii. I'm trying to think. Yes, so there's a couple of places like that. Naples. But not yet. Yes, yes. We're not in Naples. We plan to be in Naples, but we do great business in Naples even though we're not there. Got it. Thanks very much. Thank you. Our next question comes from Michael Lasser of UBS. Your line is open. Good evening. Thanks a lot for taking my question. Gary, can you give us a flavor of the customer behavior that you're experiencing to drive this strong demand growth? How much is coming from new customers versus repeat customers? And how much is coming from larger baskets? Are you seeing a trend of customers who are more often buying furniture for more than one room in their house and that's where you're seeing the strong demand growth? Well, our interior design business keeps growing and has been growing. And so you'd think in a big move like this, it's kind of everything's lifted here. Some things have shifted. We had outdoor was off the charts in the beginning because a lot of people, I think, realize they're not going to travel for the summer and they spend a lot more time at home. But the consumer behavior is it hasn't it's no different than what you'd expect with demand like this. It's new customers to higher spends from existing customers and so on and so forth. The metrics don't make us think about doing anything meaningfully differently than what we're doing. So yes, so our business has been growing. If you think about size of basket and so on and so forth, it's because we've moved the business from just conceptualizing selling product to kind of creating product, conceptualizing and selling spaces and the efforts behind building an entire interior design platform in a national scale. If you go into our new galleries and you see the dedicated office space for our interior designers and the design ateliers and the meeting rooms and the space we've designed it, we'll tell you that, that obviously is something we're investing into. So and that we think that's going to be a yes, create strategic separation for a long time to come. All these investments will continue to create strategic separation and render our brand more valuable long term. And so that's what we feel best about. Look at all these pieces and say, what will this look like in over the next decade, which I tried to give people a view at and told you what's sitting behind me. I'm looking yes, no one's changed the whiteboard, so same whiteboard. That's how we think about the business. And like I've always said, people ask in the past, should I buy your stock? And I always say ask the same question. I say, are you an investor or are you a trader? If you're a trader and you're focused on short term episodic swings in the stock market or quarter to quarter kind of things like don't buy our stock. It's going to be a volatile stock because we're building something people haven't seen before. It's going to be misunderstood. It's going to get overvalued and undervalued, and you're going to not sleep a lot at nights. And yes, but if you're an investor and you take a long term view, I think it's one of the best places to put capital. I said that 10 years ago and I said that 5 years ago and if you look at our performance, we were you'd say, hey, boy, I wish I just hung on to RH stock. If I look at you look at our biggest shareholder today is Fidelity. And the team at Fidelity who's been there the whole time has held our stock. They've held 15% of our stock. At one point, it went up to almost 30% because we bought back out the company and they had a restriction that we couldn't hold that much, but they would have liked to. But that team has not sold their stock at all since the IPO. And I think they feel pretty good that they invested in stock in that when we went public at 24 and continue to invest in that looks like a good investment, even though it went crazily up and down, right? I'm one of the biggest shareholders in the company. And like people ask me on days when the stock does really well or stock does really bad, I feel like, look, I don't think about that. If you think about this is a long term investment, this is a great place to invest. And I think the character in the makeup of our shareholder base would tell you the same thing. So yes. My final question is these periods of disruption are is an opportune time to learn how to operate differently. And given the experience on the cost side in the Q3 and recognizing that some of the SG and A decline was from not mailing the source book, is RH now able to operate its model less cost intensively with a lower amount of labor, so we shouldn't necessarily expect the same amount of labor expense moving forward? And how would you think about reinvesting some of that back in the business? Well, look, the model is going to continue to evolve, right? When look, if you just take a simple move in our model and say, hey, we went from a legacy gallery to a design gallery. And that design gallery will essentially double the business over in 1 to 3 years. We're not going to mail any more source books into that market. We generally don't. We maybe do a little splash because we're opening a new gallery, so people are aware of it. But our ad cost at that level, right, leverages massively. And I think people sometimes miss that in a model like ours, right, because they see this big gallery and they go, oh, it must cost a lot of money, it must be more expensive and they don't think about the dynamics of what happens, okay, because no one's ever taken a really productive kind of legacy store like we have and then been able to just change the footprint and basically double their business. I've never seen it before. Consistently across the entire country, we can do that. And so when you think about ad costs like that gives you big leverage. When you have a temporal situation like this with the pandemic and you make a decision to not mail a book, are there things we can learn there? Yes, but it's really it's a little tricky. It's like as we go to reinvest and mail the books, do we mail as much as last year? Do we mail more? Do we mail less? Do we what do we test? I mean, we're going to look at a lot of data. We're going to run the models. We're always looking for opportunities to be more efficient to optimize. You also don't want to under invest in the business at certain times. So but our model, again, all the way through, you think about doubling your revenue at retail, which is the biggest part of our business in a market and what that does to the cost structure at corporate, what that does to the cost structure against all the other operating areas, our distribution centers and so on and so forth, you're going to have leverage. When you think about kind of climbing the luxury mountain as we are and taking quality up and desirability up and prices up, that's going to give you leverage, right? And then you think about just kind of being consistently unsatisfied with whatever today's performance is, which is our culture, you're always looking at how to do things better. And so throughout the cost structure and we've got all kinds of initiatives going, all kinds of investments we're making that we think will have really good returns that will make the model more efficient, more profitable. So yes, whether it's labor savings, it's not so much labor savings, it's leverage on and strategies we're pursuing that are making the business just more profitable, right? So and we have a lot of things happening that we believe will do that. And our history, right, over the last several years, I mean, I remember when we said we were going to kind of be 10% operating margin, there was like, oh, you can't be 10% operating margin. And then we hit 11.4%, right? And what I remember reading reports on the company, 11.4%, no one's like it's higher than whoever and it's unsustainable, right? They only have half the revenues of this other company that their high was 10% or whatnot. And this 11.4% is sustainable. Then we hit 14.1% operating margin. It's like everybody's like it's unsustainable. Now we're going to be at 21%. And 21% on, call it, 7% revenue growth, like really the way to stand back and think about the pandemic is like mush the year altogether. We're only going to have revenues up 7% and operating margins are going to be 21%. Does it really matter how those revenues came over the course of the year? Or does it matter that on 7% revenue growth, they hit 21%. So I don't know if we didn't have a pandemic, would we have hit 20% or would we hit 22%. It's not like the pandemic from a revenue point of view has enabled our operating margin this year. It really hasn't. If anything, it's deleveraged our operating margin this year, made us less efficient when you look at how things are happening. I think about this, we're generating like roughly $80,000,000 to $100,000,000 of future revenue. We spent all the money like engaging all the customers, helping all the customers, doing all the design work, and we're getting no revenues this year, that $80,000,000 to $100,000,000 Put that $80,000,000 to $100,000,000 in your model this year, and what would the operating margin for our HV? Because there wouldn't really be much more cost, right? Like most of the cost is already behind us. We would had shipping and stuff like that. But you look at the flow through on that, you go operating margins would be higher than 21, right? Like that's what I focus on, wait a minute, on 7% operating margin, they hit 21. They were we thought they were high at 14%. And we thought they were really high at 11%. And then it starts to help you think about like, oh, where are they going next? Like we when we said we had a clear line of sight at 20, it just came sooner than you expected, right? We say we have a clear line of sight at 25. We have a clear line of sight. We think it's over the next several years, all depends what's going to happen. If look, we don't go into a recession. If we go into a recession and stuff, right, there's it'll be a reset. It'll take a little longer. But if we don't and if the economy continues to just perform, like if we just grow it 8% to 12% a year, we're going to do pretty good. If we accelerate, like we think next year is going to be double digits, right? So that's 10 or over. And so we wouldn't tell you double digits if we didn't really think it looked pretty certain. Even like not expecting the trends in the second half of next year, we think when we anniversary those numbers, it's not going to look like this. But we can look ahead and say, here's all the things we're doing that will create upside. Here's what's going to cycle forward. Here's the pluses and minuses. Mean, if you just take the lost revenues in our New York restaurant and add those back, It's not a little, that was a very high volume restaurant. And once the vaccines get out there, people are going to start going back to restaurants. By the way, if you think about all the traffic we lost in restaurants, you think we run the restaurants just for the restaurant business? Of course not. All that traffic drives business in our galleries to our brand. And so when you go, oh, the restaurant business today, I don't know, it was the last few months, we're down like 70%, right, to our plan. When that comes back, there's going to be a whole lot of people in RH Galleries, whole lot of people discovering a lot of new product, a whole lot of people hopefully being inspired by our environments. And there's going to be kind of tailwinds here. But the real point is, like don't get lost in the pandemic, right? Like it's a crazy year, right? Down in the Q1, stores closed, stores closed part of the second quarter, things all of a sudden swing back. I kind of wash it all away and go, revenue is up 7%, looks like, okay, we're a little behind our 8% to 12% growth, but operating margins are going to be 21%. I really like this model. This is a really good model. Like, I wouldn't bet against this team. We've done what we said we were going to do very consistently and we've exceeded people's expectations massively over the last few years since we transformed the entire company on so many levels. And now we've got a kind of a brand with no peer. And we have a DNA that's just massively unsatisfied. If we get super excited for like a few minutes and then we're really intense around here about like what's next and making things great. So I just I like the path we're on. And as a big shareholder here, I really like the next 10 years. And I wouldn't have told you that if it really wasn't on the whiteboard behind me. My team is all nodding and smiling, right? Like we look at this. We are big thinkers. We look at a long term view. And so I know you have a lot of customers that are real short term focused, okay, like, tell them don't buy our stock. Like, if they want to own one stock with a long term view, it's a good place. Thank you. Our next question comes from Curtis Nagle of Bank of America. Your line is open. Good evening. Thanks very much. So, yes, I want to turn, I guess, to the Arch Contemporary line. Maybe just give a little bit more detail in terms of the vision and strategy. Gary, I think you described it as bridging between the interior and modern lines in the letter. I'm guessing there's I guess what I'd say is an extremely strong chance you wouldn't roll it out if you thought it cannibalize the existing business. So just kind of curious what gives the confidence you think that this is going to be a good incremental business? How it's out of the other lines? How should we think about it? I think about it if we're excited about it, then you ought to be excited about it. Because we're not excited about things that we don't want to buy and that we I mean, we might be too excited about it, right? If anything last night laid us telling area like, okay, let's make sure we're looking at the whole board here because it is really exciting. I mean, there's a lot of really new product. And so yes, we just think it's going to open the aperture of the brand. And yes, we're really excited about color too. We just can't do everything at once and we keep kicking the can down the road on color. We've got I think we are starting to 0 in on RH color. It's a tough one, right? We're a neutral based brand. We're kind of famous for our look and point of view. In fact, we're so famous for it that people that like color kind of hate our brand almost like it offends them that there's not a lot of color in our age, but that's okay. We tell people that look, there's not a lot of color in humans, right. We're all some form of a neutral color from light to dark, right. And that's why neutrals is the biggest part of the market, because most great design is a reflection of human design. That's why it's familiar and you're comfortable with it. And that's why you go, because it's a reflection of self. But we do think that there's a market for color. It's not the biggest part of the market, but that will open up the aperture of the brand. So just no difference in beach house and ski house opened up the opportunity of the brand. And people talk like relatively small introductions, right, in small books, but a big conversation. I can't tell you how many people have said, oh, I've gotten your ski house book, I can't wait, we're doing a boat, I got your beach house book and so on and so forth. So a lot of these things too, we say internally, if you want to be part of the conversation, you have to create the conversation, right? And contemporary is going to create another conversation. Color is going to create another conversation. And you just have to do these things really, really well. But you should be really excited about it because we're really excited about it. And it's what exactly does it look like? I mean, I just can't say that. That was their remarks. Yes, it's going to look very new and fresh. But again, we like to say the things that really do well are fresh yet familiar, right? So you can't do things that are too far out there. Those are interesting, but generally not relevant to your business and don't sell well. But we think it looks very fresh. There's a familiarity to it. And there's kind of really great historic design references that make it familiar. So when we get things that are fresh and familiar, they're usually really good. Got it. Well, excited to see it when you release it. Just as a quick follow-up, going back to Europe, I don't know, in theory, do you think that the I know there are a lot of moving pieces here and it's super early, but do you think that perhaps the profit contribution could be higher than the U. S. At some point in time and you get a little bit of scale given the comments you made about perhaps having a less dense gallery strategy and the additional international exposure you guys are probably going to see from being in these major capital cities? Yes. All our research and due diligence would say the potential is for higher margins than the U. S. And then a lot of brands, as you know, have higher margins and higher profitability outside the U. S. Than they do inside the U. S. And that's because you're getting a lot of leverage off your cost structure, right, if you set it up well, if you're not overly redundant. And for us, right, we don't have to set up any kind of redundant buying organizations or inventory organizations or things like that. I mean, think about it, We don't have any cash and carry, but what is our cash and carry business all the days? Less than a percent. 0. Yes, you're right. It's almost a year, it's a year almost, right? Like we don't really sell anything. It used to be like 1% or 2%, and now it's almost 0%. We just got yes, we've gotten rid of the holiday stuff. We've gotten rid of the ornaments and everything. So every once in a while, someone buys some towels or something and walks out with them. For the most part, we don't really inventory anything in our stores. So our model has is very simplistic versus other models. Like someone is saying to me like, oh, well, Home Depot or Target or other people didn't do so well over in Europe or other yes, well, one, those are kind of stores not brands, right? They're stores selling other people's brands. Most high end luxury brands work really well globally, right? And if you're the best in your kind of category, and we believe we are, then those brands do they usually do exponentially better than others. And so and then it's just being very strategic. I actually like that we gave ourselves a little bit more time on Europe because we had more time to think about things like this, Curtis, the margin structure, how we think about it, the pricing, all the different nuances and really, really think deeply about these moves that we're going to make and positioning the business correctly because everything we've looked at and read and looked at points of references, which say we should have higher profit margins in Europe. Now there's going to be some short term, some expense, minor expense deleverage as you ramp up the infrastructure. But that might take care of itself relatively quickly because of the broad based market you're going to address by opening and just by opening it just in the UK and in London and England and Paris and a couple of these galleries, even looking at Munich and Dusseldorf or Madrid and Brussels and once like just with that little footprint, you're going to get a massive audience, right, because of the Internet and because of the online component of the business. And by positioning ourselves in these kind of extraordinary locations and stores and environments that we're looking at, it's going to be a great new learning. I mean, I really as much I really didn't want to delay it. It was just the right business decision to do it because we're so anxious to learn. But I think what you're saying is directionally right. I think it should be based on other points of reference more profitable or at least as profitable as our U. S. Business, but it should create leverage, right? So the net net effect should be overall RH margins going up. Got it. Thanks very much for the thoughts and happy holidays. Thank you. Happy holidays to you. Operator? Valerie? Operator? Is that our last question or is the operator? No, there's 2 You lost our operator? Pardon me, Mr. Thomas. Your line is open. Hi, Gary, Jack, can you hear me? Can you hear you? Hey, Brad. Great. Hey, it's Brad Thomas with KeyBanc. Thanks for making time for my question here. Just hopefully a quick one just on how to think about 4Q. I know there's not specific guidance. But if you go back the last 4 years, the 4th quarter has been your highest order for operating margin in any quarter. And so just trying to understand some of the seasonal dynamics. Gary, I think you also referenced that if sales for the full year come in growing about 7% that, that might get you to 21% operating margin, which maybe pushes that 4Q operating margin closer to 20%. Just trying to understand if there's any puts or takes that we should be aware of that make this 4Q different than what we've seen in the last few years seasonally? Yes. Well, I mean, Jassy can give you some highlights, but one of the big ones is, the Q3 is helped by not mailing a book, hard to say exactly how much because we would have got more revenue. We expect revenues to slow a bit based on the fact we don't have the books. And so you don't have the ramp of the books and we're at record kind of out of stocks and things like that. So we're taking a conservative view on, I think, in the Q4 as we should. But I think the landscaping is a little hard to look at historically because there's been so much change, change in demand trends, change in margins, you have things cycling through like when the outlet business how the outlet business cycles in and out, how the rug business cycles quarter to quarter, puts and takes that may have distorted past quarters and past times. So and then we have things like we generally have a much bigger bonus accrual in Q4 and other things like that, where we're having really good years and that can distort things. So I know Jack, you want to add? Yes. One thing I will add, as you think about the 21% in 2020, as we talked about that as sort of a floor number, that's 7% growth rate. So that it does imply about 20% growth for revenue. As Gary mentioned, that is slight deceleration from the 25 points in Q3. And then margin wise, to get the year at 'twenty to 'twenty one, obviously that implies just shy of 'twenty one for Q4. And I think Gary spoke to the you can't look at the same sequential trends because Q3 has the advertising benefit. And so I was going to make similar comments on the cycling, right. So like the rug business, we had talked about as a sort of when you think about when we started clearing that out and putting the new product on, the biggest benefits are going to be through this quarter. We'll still get some benefit in Q4. And then once you look into next year, that will be fully cycled. I know outlet will have a different dynamic, but directionally, I think those are some of the pieces. That's really helpful color. Thank you. If I could squeeze in one more housekeeping just around the merchandising newness for next year. Any more color on maybe the magnitude, what percentage of products you may refresh or maybe new in 2021 and how that compares to what you normally change out or would like to normally change out? I would just say year over year, it will be a meaningful increase year over year. Thank you. Our next question comes from Tamy Suttara from JPMorgan. Your line is open. Hi. Thank you so much for taking my question. I just have one longer term question. I think in your press release, you spoke of 10% to 15% annual sales growth potential in the future with mid-20s operating margins. So what's really driving that optimism of 10% to 15% versus 8% to 12% that you've been speaking out prior to this trend. Do you need all the new businesses to come to life, like the yacht and the RH residences business to come to life to get there? Or can you get to that 10% to 15% with the existing home furnishings business alone? Yes. First, let me kind of characterize that what I gave you kind of our internal view of what's possible, right, not necessarily our guidance. And we're obviously going to always have a view internally of what can happen. I'd start with, if you just kind of thought about if you take the belief that, hey, RH is building 1 of the dominant one of the kind of premier luxury brands in its space in the world. And if it performs like other luxury brands and you think about the just the market at a global level, it would imply that 25% of our business should be kind of in the U. S./North America, and 75% of our business should be outside of the U. S, And we believe we can be $5,000,000,000 to $6,000,000,000 long term in North America. That would imply that we'd be a $20,000,000,000 to $24,000,000,000 global brand as architected today. The yacht is a brand elevating conversation, right? There's some people that are spending money like everybody else on digital marketing, doing things that nobody talks about. We mentioned a yacht and a lot of people are talking about it, right. And when you see it on our website in the world of RH, where 30 odd 1000000 people will see it every year, it's going to be a pretty cool thing and a pretty big conversation for a pretty minor investment, right? And so it's not about how many people are going to be on the yacht, it's about how many people are going to appreciate the design, the creativity, the taste and style of the yacht and how many people are going to be aware of it and talk about the yacht, right. And so, yes, the yacht is not a big growth story. The yacht's conversation, right. If you want to be part of the conversation, you got to create the conversation. You want to climb the luxury mountain and you want people at the highest end of at the high at the top of the mountain to talk about you, do things that they're interested in, do be places where they spend their time. If you're going to do something in hospitality, whether it's a yacht or a guest house, do something that forces the very highest people at taste level wealth influence, force them to tip their hat that you did such great work that you earned their respect that they you create a forced reconsideration of your brand, right? So but the growth, like if you just said, hey, we're going to get to what's the numbers that's like 7.4 to 11.5. Yes, 7.4 to 11.5 is like maybe halfway to our global potential. So it's for us to have a goal of saying, hey, can we grow this thing at 10% to 15%? We could. We could maybe grow faster, depends on how much risk, depends on how quickly you can go without putting risk into the work, right? I mean, we're furniture of this quality has never been made in these quantities. So we have to build the supply chain and the platform to be able to do this, right? But I mean, the thing that gives me confidence about that is that from where we've been to where we are, we have learned that supply chases demand. If you create demand, people will figure out how to supply that demand because there's opportunities for people to benefit economically, right? And so we believe we will create a market at the higher end. We believe that market has a potential for probably $20,000,000,000 to $25,000,000,000 globally and 10% to 15% annual sales growth could be possible. I wouldn't plug it into your model, but if you wanted to look at an upside model of what might potentially could be if we start opening countries and opening countries is exponentially more valuable than opening stores in North America that could accelerate our growth rate, right. We have people knocking down the door here trying to partner with us with our brand, wanted to partner with us in China, partner with us in the Middle East, partner with us in Europe, partner with us in South America, partner with us in Mexico, like there is not I don't think there's a country that's unrepresented as far as people like knocking on our door, wanting to take our brand globally. We could go faster, it might mean less control. And we believe brands with more control will become more valuable. If you look at history and you look at all the great brands, they're all buying back their business from partners, because they believe they can run the business better and there's greater returns. So we're going to learn from that history. We're going to probably go slower and with more control. And we're going to try to retain as much control of our brand as we possibly can. I mean, today, we have 100% control of our brand. Nobody presents our products but us, nobody sells our products but us, nobody uses our brand or our marks but us. And we think that's going to be more and more important in a world of marketplaces and kind of what I call messes, right? Like just I think any of these brands, I mean, you look to the right model, look at what Hermes is doing, look at what Chanel is doing, look at what the LVMH brands are doing, look at the people that didn't put their brands out in market places that were very discerning about what they've done, that the investments that they've made, they've taken you look at the great brand, they've taken more and more control of their distribution. You look at the brands that didn't make those investments and what happened to them And again, I don't have to name them, but you know who they are. I mean, the value has been significantly diminished, because there's brands that had too much of their distribution was controlled by department stores. Department stores is a decaying platform. Imagine if you were you built a great brand and your distribution platform with predominantly department stores and you don't have control of your distribution channel. I mean, I think what Arnaud and the Turing Group and the Chanel teams and other people who have invested over the past 10 to 15 years to take control of their distribution, that's why they're the brands they are today. Good news is, we're not in any department stores. We're not in any nobody's got any control of this brand but us. And so we love that positioning and we think it may mean we go slower with higher quality and that's okay. That's okay. We the world is only going to get smaller. It's not going to get bigger, right? The Internet and communications and technology is bringing the world together. English is going to become the language. It's and it's so much different. Every decade, it's exponentially easier to operate internationally. So and that just is going to grow faster. So I just think that could you if you're I would say 10% to 15%, is there probably people on the long side of this business that have that model? Probably. Should it be a secret that, geez, the RH team thinks that they might be able to grow this at 10% to 15%. We think we can probably do that. Is that what we're going to guide you? No. Not until we're more confident. There may be a time we're sitting here and that becomes the guidance. There may be a point that we're sitting here in a few years after we've got more data and proof of concept globally that the number could be 15 to 20. I don't know. It's not unreasonable if you think that the size of the market for just the core business. Everything else is gravy. Do I think the yacht business is going to be meaningful from a taste and style and image and conversation point of view, yes. For revenue point of view, no. We will do revenues. So I think we've got like we have multiple charters lined up. It's like we unfortunately had to cancel 7 charters on the boat this past summer because of pandemic. But there's a lot of demand for our boat. But that's irrelevant from a revenue point of view. Do I think things like guest houses could be meaningful long term? They might be. I think the work is that good. I think what it's evolved into is something extraordinary beyond what my initial vision or expectations for it were. And I think it's become that because we control everything, not some third party, it's not Marriott using our brand, and you have a bunch of bureaucrats with no taste kind of screwing up your brand, it's not some other little hotel company that's just doing a revenue share thing with you. We have total control of this thing. Do I think RH Residences could be a big idea? I really do. I'm fascinated with it. I'm fascinated with selling spaces because when I go on Zillow and I go on Redfin and I look at the level of taste, the design, I see crappy architecture, I see non existent interior design. And I'm like, man, people with a lot of money don't have the ability or access to make their home look amazing. Like why doesn't everybody have an incredible inspiring home, especially if you can afford it? Why? Because it is really hard to do and there's nowhere to do it. And by the way, why wouldn't you buy homes that are fully furnished, that are perfect, that you just like, yes, you buy and give you the key and you move in. And you don't have to spend a year or 2 or 3 or 4 or 5 or never get your home done. Most people just never finish it. Like so like, Aerie said to me a long time ago, like, hey, they don't sell you a car without an interior. Sit there and try to figure out the interior of your car, yes, you get to pick the color. You want tan, you want black, you want so I just think that I'm fascinated with the fact that there's so little great architecture, such little great design. I mean start in any market you want, like want to go to Marin right now. I think the most expensive house is $43,000,000 Just click down and tell me what you think of the architecture, the landscape architecture, the interior design, the furnishings, the taste, the style. It could be massive. If you said like, hey, is there an acquisition we make someday? I don't know. Know. Maybe we buy 1 of the big homebuilders and we infuse them with great taste. Now I'm not saying we're going to do that. But if you want to think big, I mean, there's like I think we can create an entirely new market for residences, whether they're condominiums or homes or single homes and communities and things like that. And you'll hear more about this. We are pursuing opportunities in the spaces and places part of our strategy. And you'll hear about our first test of RH residences and but whether it's home condominiums, whether it's luxury rentals, huge opportunity. The market is full of crap out there. It's massive opportunity. Got it. Got it. That's very helpful as always. Thanks guys. Thank you. Happy holidays. You too. Thank you. Our final question comes from Seth Basham of Wedbush Securities. Your line is open. Hey, good evening. It's up Tasham here. Thanks for taking my question. The first question is just around understanding product margin in the quarter. Now product margin expansion certainly drove the majority of the gross margin expansion, but could you help us understand how much of the revenue mix shift away from hospitality and outlet helped increase gross margins in the Q3? From a product margin point of view, our hospitality margins like quite good. You obviously have a higher mix of employment, but we're also operating the restaurants at very low levels of productivity and we're keeping people employed, right. So we've actually got a pretty big drag from the customer overall to the business. A slight lift in the margin to but very slight. Very slight. There's not enough sales. Yes, it's not enough sales to make a big impact. Yes. So Yes. But Yes. And then the outlet, yes, we've kind of given you directionally that's year over year, that's been a big driver because we redesigned and reconceptualized the whole reverse logistics business. Yes. Seth, of the 5.30 basis points of product margin, essentially half are in our core business, with some of that still related to the rug cycling as we talked about, and then half is from outlet. Those are the big pieces of the 5.30. Yes. But inside the core business, I think every category has got positive product margins, right? Absolutely. Yes. Very helpful. And then one item that one area that we haven't really discussed much on this call is the interior design architecture and landscape architecture opportunity. Could you just give us an update on your rollout associated with that business? Well, interior design is out there, right? And it's again, I think today we must be the biggest residential interior design firm in North America, if you look at the work that we do and the projects that we do. Architecture and landscape architecture, we'll begin to test that. I gave you a bigger vision for that, how it's going to be within the world of RH. But yes, we were going to move more quickly. We pushed some of the plans out a bit because of the pandemic, but we're looking at testing our first kind of freestanding architecture, interior design and landscape architecture studio in a design district that will support many of our galleries in a market. So the way to think about it is where you see today, if you've been into one of our new galleries, one of our prototypes where the kind of the back part through if you look through the staircase, there's a big glass wall with desks and it's right next to our design atelier, where all of our interior designers have their offices. And that says right now RH Interior Design. Long term, we believe it will say long RH Architecture, Interior Design and Landscape Architecture. And I think about the galleries, because they are a manifestation of great architecture, great interior design and great landscape architecture, will have the only consumer facing business of its kind like that. Most architects don't have an office that anybody sees. And most architects' offices aren't in great architecture necessarily. Landscape architects, like where do you find 1, like interior designers, again, not a consumer facing business. So inside these big magnificent galleries that are an example of all those disciplines, it only makes sense that people would go, I can't tell you how many times people are in our galleries that ask us who the architect is. How many people ask us, so who did the landscape architecture? Who did the landscaping here? They obviously know we did the interior design. So we think there's an opportunity to continue to elevate and amplify the core business by expanding our services business, which is a very capital light business, if you think about it, right? It's not a lot of capital to make the investment to add those services and those services don't face the consumer in a very compelling way. So and there are things that we already do really well, right? We now do almost all of our architecture internally, right, very little externally. We have a great internal architecture team. We do all of our landscape architecture internally. We do all of our interior design internally. And so there are competencies of our company and it's just building out the teams kind of market by market, right. And just as we did with interior design, I'd see it no differently than interior design. It'll take us several years to kind of do it and we'll learn and we'll roll it out, but we've set up kind of the galleries, the new galleries to accept those businesses. Now we may need support offices behind the scenes. We'll interface with customer there, we'll catch them there, we'll consult with them there, we'll make the initial connection. But we probably will need some office space to support those businesses, but that office space can be anywhere, right? It's not high cost real estate. You're not paying premium retail real estate for the back of house office. We do all of our meetings in the galleries, but we might have to house more team members doing the production work on the architecture or the landscape architecture and things like that. So we think it's very logical for us to pursue the services side of the business. And we think we're really well positioned to capitalize on it. And we have the confidence, right? We it is what we do. That's helpful. Just to clarify, Gary, I know you don't charge for the interior design services now unless I'm mistaken, but do you plan to charge for those in the future and I presume that you plan to charge for the architecture and landscape architecture and design services? Yes, yes. For sure the architecture and landscape architecture design services, how we think about the interior design piece, we're still noodling with that. We believe at some point we'll probably charge for that, but we may not need to. I'm not sure, honestly. I mean, I go back and forth on that one all the time. So more to come. Our thoughts will develop there more. But I think as we test this and kind of get our arms around it, and we're going to we'll probably start it here locally. I guess I could say we're thinking of doing right. Like, yes, I mean, we could I reserve the right to change our mind to think about some sort of things. But we our plan is we're opening a beautiful new gallery in San Francisco at the historic Bethlehem Steel Building. It's really spectacular. When everybody can travel again and you come out to San Francisco, let us know. We'll get you a seat at the restaurant. It's going to be a spectacular restaurant. It will be the 1st restaurant with our we're actually testing our new guesthouse concept menu there. It will be kind of a dual restaurant. We'll have a live fire cooking kind of component to it that's really great. But we're going to have this spectacular gallery in San Francisco, rooftop park, views of the Bay and the city and so on and so forth. And we have this as you know, if you've been in San Francisco, we one of the great learnings for us was when we took this amazing little building in the heart of the design district, that was the Ed Hardy and Peak Gallery and he built this charming Palladium building. And we went into the center of the design district and said, we got to put our brand among the very best. I remember the headline in the local San Francisco paper was there goes the neighborhood, change store going into the design district, right. So, yes, we did pretty good work. We opened a beautiful gallery there. I think we exceeded people's expectations. And it became really fantastic for business. That gallery does like 20,000,000, right? Yes, something like that. In 4,500 square feet, incredibly it was one of our best real estate moves ever. We bought a little building, I think, for $3,500,000 But we have this charming building with a beautiful garden courtyard, and we've learned so much being in that building. And again, we could probably sell the building for $10,000,000 or something. And we're thinking, we're right in the center of the design district. Why don't we take that building and turn it into the first kind of freestanding RH architecture, interior design and landscape architecture studio, right. And right in the heart of the design district, face the customer there in the heart of the design district and then face the customer in our galleries and use this as our first ecosystem for the services platform right here in our backyard. We can go there, we can listen and learn, very visible, use it at the lab, and we think that will really accelerate our learnings. So that's what we'll do with it. Exactly when we start, not sure yet. We've got a lot of big rocks we're moving in different parts of the business right now. And just want to make sure we do this one well. And we have team in place that can really position this well and make a great first impression as we enter the services business. But that's what you can expect from us. I think we'll now that I've said it, what I like is that we're committed to it, right. I kind of we've been talking about it, but now we're committed. So it will happen. But if it works, I think it just opens up another aperture of business for us, right? If all of a sudden we become the architects for people's homes, you're just going to sell them a lot more furniture and lighting and accessories and brubs and bath hardware and all the things we sell. I get it. Very exciting. Thank you very much and happy holidays. Thank you. Thanks, Seth. Thank you. I'm showing no further questions. I'd like to turn the call back over to management for any closing remarks. Great. Well, thank you, everyone. I want to especially thank our people and our partners around the world who have worked so hard through these challenging times to continue to elevate our brand and bring our vision to life each and every day. And also our thoughts and prayers go out to everyone who's suffering through this pandemic, especially people who have been infected by this virus and have family members and loved ones impacted. And our thanks to all the people on the front lines that are just working to keep us safe and get us through this. And it's been just a very mixed feelings, right? Like from our company, you again, when there's so many people suffering and your business is doing well and you're getting the tailwind, it's hard to really feel that good when other people are having the opposite experience. So we just hope that we get through this very soon, that the world will continue to evolve and improve and yes, and we'll be here for the long term. But we want to thank everyone for their hard work, their leadership, their imagination, and their perspiration in bringing this to life. And all our frontline teams that is in our galleries, it's in our call centers, it's in our distribution centers and delivering our products into our customers' homes. They've had to walk a fine line, right, and being on the front lines. And especially want to thank those teams who have represented our company and our brand so well through these challenging times. So we wish everyone a wonderful holiday and a safe holiday and here's to get into the other side of this and back to bright and sunny days for everyone on this planet. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may have a great day. You may all disconnect.

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