Earnings Call: Q2 2022

Sep 8, 2021

Good day, and thank you for standing by. Welcome to the RH Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first Speaker today, Ms. Allison Morgan. Ma'am, please go ahead. Thank you. Good afternoon, everyone. Thank you for joining us for our Q2 fiscal 2021 Earnings Conference Call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our 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 adjusts our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non GAAP financial measures and a reconciliation of these non GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website atir.rh.com. With that, I'll turn the call over to Gary. Great. Thank you, Alison, And thank you everyone for joining us today. I'm going to start with our shareholder letter and then we'll open the call to questions. To our people, partners and shareholders, we are pleased to report another quarter of record results with adjusted net revenues increasing 39% to $989,000,000 versus $710,000,000 a year ago, up 40% compared to the Q2 of 2019. RH continues to set a new standard for financial performance in the home furnishings industry, and our results now reflect those of the luxury sector As adjusted operating margin increased to 26.6% versus 21.8% last year, We generated $263,000,000 of adjusted operating income in the quarter, up 70% compared to $155,000,000 a year ago. Adjusted net income increased 105 percent to $252,000,000 and adjusted diluted earnings per share reached 8.48 versus 4.90 in the Q2 of last year. This year's adjusted net income benefited from an unusually low tax rate of 1.3% versus 16.1% a year ago Due to an increase of stock options exercised in the quarter and the nearly 3x increase in our average stock price. If our tax rate in the 2nd quarter was comparable to last year, adjusted diluted earnings per share would have been 7.21 an increase of 47% versus 4.90% in the Q2 of 2020. We generated $290,000,000 of adjusted EBITDA in the quarter and $95,000,000 of free cash flow. The 2nd quarter ended with total net debt of $296,000,000 And trailing 12 months adjusted EBITDA of $1,000,000,000 a new milestone for RH. While inventory on the balance sheet increased 32% to $646,000,000 Inventory on hand was $400,000,000 up 12% to last year as in transit inventory of 100 and $3,000,000 increased 85 percent to a year ago compared to a year ago, raising fiscal 2021 outlook. Based on the continued strength of our business and the power of our operating model, we are once again raising our outlook for fiscal 2021. We now expect revenue growth of 31% to 33% versus our prior outlook of 25% to 30% And adjusted operating margin in the range of 24.9 percent to 25.5 percent versus our prior outlook of 23.5 to 24.3%. We're also raising our ROIC outlook for the year to 70% versus our prior outlook of 60%. Our demand growth has accelerated during our demand growth has accelerated during the Q3 on a 2 year basis and has continued to build momentum Despite cycling the most difficult comparisons from a year ago and the continued supply chain challenges that have been amplified by the spread of the Delta variant, We believe the data and current trends support the argument of a more long term sustainable step change in consumer spending on the home. An important point to consider when analyzing the strong demand in the housing market is the migration of consumers to larger suburban and second homes. This trend is resulting in substantial square footage growth that is driving increased furniture and furnishings demand. Add to that historically low interest rates, A record stock market and the reopening of several large parts of the economy and elevated spending on the home could very well have a long tail. Looking forward, several factors lead us to believe fiscal 2022 is shaping up to be the most exciting year on record for the RH brand as we are planning the largest new product cycle in our history, highlighted by the launch of RH Contemporary in the spring of 2022, Plus our latest RH Interiors and Modern Source books, which have not been mailed since the spring of 2020. The opening of RH England, the gallery at the historic Iron Hope Park, a magical 73 Acre Estate designed in 16/15 by the legendary English architect, Sir John Soane, that we will introduce RH to the UK in a dramatic and unforgettable fashion. The unveiling of our 1st RH Guest House in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury In the 200,000,000,000 North American hotel market, the launch is the world of RH, a digital portal presenting our integrated ecosystem of places, services and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader, taste and place maker. As it relates to the ongoing supply chain challenges, the Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the Delta variant. This began with partial shutdowns in early July and expanded to full factory closures by late July. We are currently expecting manufacturing to restart in Vietnam in with production ramping to full capacity by the end of the year. Additionally, suppliers globally We continue to experience a number of challenges, including sourcing raw materials, and we are seeing price increases in the majority of our product categories. Shipping also continues to be a headwind with longer transit times and higher transportation costs. As a result of our accelerating demand trends And compounding supply chain challenges, we are delaying the launch of RH Contemporary until spring of 2022. Additionally, we are pushing out the mailing of our false source books to enable manufacturing partners to focus on reducing the backlog of core products while ramping and refining production on new collections to meet our elevated quality standards. Based on similar supply chain challenges How the Delta variant will impact the hospitality industry this winter, we've made the decision to delay the opening of our first New York guest house our first guest house in New York City until spring of 2022. Our plans to open new design galleries with integrated hospitality in Chicago, Jacksonville and San Francisco This fall remain intact. The long view, the RH Business Vision and Ecosystem. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, Enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue With the introductions of RH Contemporary, RH Bespoke, RH Color, RH Antiques and Artifacts, Arch Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast generating revenues of $5,000,000,000 to $6,000,000,000 in North America and $20,000,000,000 to $25,000,000,000 globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that established CRH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we expand beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200,000,000,000 North American hotel industry. Additionally, we are creating bespoke experiences like RH Johnfield, an integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3 are luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture. This leads to our long term strategy of building the world's 1st consumer facing architecture, interior design and landscape architecture Services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue Our strategy comes full circle as we begin to conceptualize and sell spaces, Moving beyond the $170,000,000,000 home furnishings market into the $1,700,000,000,000 North American housing market with the launch of RH Residences Fully furnished luxury homes, condominiums and apartments with integrated services deliver taste and time value to discerning time starved consumers. Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel And live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. The entirety of our strategy is designed to come to life digitally as we launch the World of RH, an online portal where customers can Lauren be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to 7 trillion to 10,000,000,000,000, One of the largest and most valuable address by any brand in the world today. A 1% share of the global market represents a $70,000,000,000 to $100,000,000,000 opportunity. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, And by doing so, elevating and rendering our way of life more valuable. The right people are our greatest asset. At RH, we believe deeply that the right people are our greatest asset. We value people with high energy, who have the ability to energize others, People who are smart, creative and have a point of view. People who see the answer in every problem versus those who see the problem in every answer. People who are driven, determined and won't take no for an answer. We value team players, people who are more concerned with what's right rather than who's right. Damani Price, our Chief Operating Service and Values Officer, often says, the right people are our greatest asset and the wrong people are our greatest liability. He also reminds us that the right people are a reflection of all 11 tenants of our people value above. I want to thank the right people who bring our vision and values Each and every day, the 11 out of 11s as DP would call them. Thank you for your energy, your point of view, for not taking no for an answer And for being more concerned with what's right rather than who's right, as we continue our quest to become one of the most admired brands in the world, Carpe Diem. At this point, I'll open the call to questions. Operator? Thank you. Your first question comes from the line of Stephen Fores from Guggenheim. Your line is open. Good afternoon, Gary, Jack, Allison. Gary, given the combination of supply chain challenges, right, rising cost pressures, which I believe is driving rising retail, Rising Retail. Curious if you could just discuss at a high level whether you're seeing any changes in customer engagement or customer conversion trends As well as cancellation rates. And the idea is just trying to gain a level of comfort here on what's driving your conviction To raise guidance yet again this year as we look towards the back half without having this new product launch Potentially stimulating more demand. Yes. Well, Steve, I'll start with the fact that We have insights into the quarter. We're relatively well into the Q3 today. And we have accelerating demand in the quarter, Kind of month over month already. So, and we can see just Yes. Stand back and think about newness is going to add to a very large business we have here. It's not going to replace It's a very large business that we have. So, the underlying business is very healthy. We went through a period of our highest out of stocks And highest back orders that we ever experienced. Our inventory levels are starting to get better. And Even though we're delaying the launch of Contemporary, we're delaying once again all the newness that would go into RH Interiors, RH Modern, RH Drugs, everything else, beach house, ski house, everything else we would normally mail. The guidance is our best view of What we see, I think if you just, I don't know, look at the last 4 or 5 years of history, since we We had to reconceptualize the supply chain and move to membership in 2016. I don't think we've missed a quarter In 5 years. So, I don't know how much more conviction or pattern recognition you'd need. That's helpful. And then just a quick follow-up. As I think back to the Q1 letter, There was commentary about the broader international pipeline. I think it was 5 leases were signed, 5 in final negotiations. Any update on how that pipeline has come together? Any update you can provide would be helpful. Thank you. Yes. Nothing really new or we would have talked about it in the letter. It's a little difficult to kind of travel Negotiated an international business right now, so and coordinate the kind of meetings and conversations. But, Nothing's changed. I think, we still we have kind of 5 deals That we're moving forward with, we have multiple deals, 5 we're looking at The pipeline as far as opportunities that we're looking at is going to continue to grow. As you know, our Galleries are very, very unique and not so where you can just walk through the street and find a building But, we're confident that we're going to be able to scale the brand. We're one of the only people In Europe, with any kind of a specialty business that can sell off multiple levels and multiple floors, they can use gardens and rooftops and so on and so forth. But, our focus to launch the brand is It's the number one priority in the Company right now, that and the expansion of our products. And our hands are a bit tied on the product and Less tied on the international expansion, but unless something else drastically changes In the world or with new strains of the virus, we feel very confident that we're going Deliver everything that we've just put out in this letter. So, this is our best thinking today, and we're really confident about this. If Something new changes. I don't think when we talked last, there was much of a delta variant or anything that was I went on vacation in July and Yes. But, like masks are off and wow, wasn't that interesting. Threw all my masks away and came back to work and Needed to buy new masks. So, the world is changing quickly here. And I think we've all got to learn to Improvise, adapt and overcome at a whole new level, but you build new muscles. And I'm extremely proud of the team for our execution thus far. If you would have asked me a year ago When we are running 47 comp in August, I think that was our peak month guys, right, in the core business. Yes. Were we going to come around and comfortably comp 47? I wouldn't have said I'd be confident about that. Based on the fact that August is in the rearview mirror. And the 1st couple of weeks of September Looked really good. And our in stocks are starting to get better a bit. And we have flow of goods coming, but we focus the flow on our core business, On our best sellers and the things that drive our business, and as we should, by the way, the customer that is not going to walk in and go, Where is that? I thought you were going to have that. They've never seen that. They've never seen any of the news. There's no expectation. Our business is 1, if you think about it, it's not really an impulse business. I mean, you're furnishing a home, it's not a big impulse business. You're planning it, you're shopping, you're working with designers. Our Time with the consumer is weeks months to do an order. So, Yes. Even if the newness comes in, there's a multiple month kind of ramp period. But, I would just say I'd just stand back and say, what would if we were selling cheap goods, A lot easier to kind of bring in cheap goods in the market right now, right? We're selling the highest quality goods at scale in the world in the home business. So and we're trying to elevate the quality of the goods. So, the next round of goods Is a whole another level of quality and design. You don't rush quality, you wait for it. And guess what, people pay for it. And so, like if someone thinks they want to measure us in a pandemic where There's a lot of people that are sick and dying in Vietnam right now. And I feel terrible for what's going on there. People that Their lives depended on it to feed their families, and they can't work. So, we're going to be okay here. Our business is ripping. We have, like I said, I mean, maybe somebody else has 40% 2 year growth, not many. I don't think anybody is going to have the 2 year growth that we're going to report in the 3rd and 4th quarters, because our business is accelerating. But, I just focus on the big picture and what's really important. And what's really important is Our demand is building. We've had some of the best business in the industry. We're taking market share. We're expanding operating margins. And there's people sick and dying out in the world today. And you've got to make the right decisions, Help them prioritize their lives, do what's right for the long term. Yes. It's like I told the team from the very beginning of this pandemic, we're not going to chase every sale here. We're lucky. We've had a tailwind. Most of the world has had a headwind. People are sick and dying for almost 2 years now in this world. Yes. Our business is doing great. We feel blessed. Thank you. Thank you. Your next question comes from the line of Michael Lasser from UBS, your line is open. Are you planning For your path over the next few years from a sales and a margin perspective to be linear. You have all these initiatives in place. Some of them are being delayed from this year to next year. That's going to mean some cost Shift from this year to next year. So should we be modeling your business that sales and margin over the next few years Michael, we're not giving kind of detailed guidance over the next couple of years. I would say, It's like someone who asked me, well, gosh, you're Saving money, so your earnings are up because you're not mailing your catalog. Well, we don't mail our catalog and get 0, We don't mail our catalogs to lose money. So, we're not mailing our catalogs, so we're not getting revenues. So, we invest in things that drive revenues and drive Profit. Where we've got new business investments, where we've got to make some infrastructure investments As we launch Europe and things like that, of course, you're going to have some initial period to ramp. What does that look like when we open in a new country? Let me see. Let me look at past data. Oh, I'm sorry. I don't have any. I don't mean to make a joke about that. But I just like There are some things you can waste a lot of time thinking about. I think what we've got to do is Open great consumer experiences in Europe. We've got to launch with a great website. We've got to launch with real intelligent marketing. We've got to be prepared to execute whether the 1st year is $50,000,000 or 250,000,000 You tell me. Okay, so let's stand back and think about this for a second. There's 39,000,000 people in California. If I had new exciting design galleries in California, California would be, I don't know, an $800,000,000 business for us, Maybe a little bit more. There's 68,000,000 people in the UK. There's relatively similar demographics, slightly wealthier in California, but more people. So, I would say California, when we continue to expand the brand, looks like a $1,000,000,000 business, Let's call the U. K. A $1,000,000,000 business. Let's call the U. K. Today $800,000,000 What happens when you have a Brand that's really well known in a very small market like ours, right? Like, we're at the top Kind of the very top of the pyramid. There's not a lot of people there. They have a lot of money. They have a lot of homes and they spend exponentially on the home. They directionally I mean, some of the data we've seen and some of the research we've seen from some of our large investors They've done pretty deep research, done their own research and have researched interior designers in the UK and in France. And What percent of interior designers know us? Like 80%, 90%. It's almost 100% in some cases. So they know us. They're a key customer for our business. High end consumers, I think pretty much know us and admire us. So, what happens when you open An incredible 73 Acre Estate, probably will be one of the most exciting Innovative retail experiences in the world, granted it's a bit outside London, But our business is a destination and what happens when you've launched with the website with Yes, 40,000 SKUs and the most dominant assortment in the country And you have relatively high awareness. I don't know. I got to believe it's going to be better than other people That target a big wide audience and don't have high recognition because they've got to spend a lot of time getting known. So, Yes. I really don't know if 1st year sales in the UK will be $50,000,000 or $250,000,000 That's our range. I know, directionally, we have to spend, but I'm just trying to be honest with everybody here. Yes. No matter if it's $50,000,000 or $250,000,000 it's going to be really big over the next couple of years. So, we're going to learn a lot when we get going. And I think I say that I don't mean to And to go into a long ramble on questions, I would say that so I don't get the same question 4 times in a different way. All right. I understand. Yes. That's helpful. My follow-up question is, you're articulating a lot of enthusiasm and Confidence for the back half of the year in part because of the quarter to date trends, the demand comp, The 2 year accelerating based on what you experienced in the Q2. Can you give us what the 2nd quarter demand comp was, So, we can have a calibration for our models on how that metric unfolded? Yes. It's just too crazy right now. Look, I don't want to make it a habit. We gave demand comps during the most kind of Crazy time of the pandemic in the 1st year. And I don't want to give demand comps for the rest of our lives. It's I think, Again, I would just like I answered Steve's question, I think we have a pretty good track record of Doing what we say we're going to do. I don't think we have a track record of guiding aggressively. So the numbers may look aggressive to you. I'm sure Q1 looked really aggressive to everyone, Right. We took the numbers up pretty big when we reported Q1 earnings and our stock went up $100 in one day. And yes, I got a lot of questions like, dad, you really picked the numbers up. Do you think you're going to make them? Yes. So, I don't know. Yes, we it's not like someone hands me a sheet and says, here's the recommended guidance, Gary. I sit here with 20 people for hours and hours and hours Going through categories and trends and every detail in our business, we turn over every rock, We gain alignment and clarity. We gain clarity and then we gain alignment on Where we believe the numbers are going to be, and we've been doing it long enough that we've gotten pretty good with it, even In a time like this. So, I think we were one of the first ones to start giving an outlook. Now, a lot of people didn't even give any kind of We did. And we did because we're confident That we know our business. If something massively changes in the world, got it, all bets are off. But based on what we know today, Based on the data, you're looking at and we're looking at, this is our guidance. It's generally not too aggressive. Thank you. Your next question comes from the line of Max Ratlancou from Cowen and Company. Your line is open. Great. Thanks a lot. So a couple of bigger picture questions here. So the first one is, Gary, what do you think is your share of the luxury segment Of the market today, you had a comment in one of your recent letters that your competitors are closing or downsizing their stores and with RH continuing Transition to galleries. Longer term, where do you think your market share could go over time? Yes. I think we have a clear line of sight to $5,000,000,000 to $6,000,000,000 in North America. And that may be bigger depending on the product innovation and elevation and all the Concepts that I've articulated, which are really not all of them are even in that Number, right. So, I'd say, to not hit the 5,000,000,000 to 6,000,000,000 Something would have to go really wrong here. If we just continue to transform Existing galleries to design galleries and launch contemporary and it does directionally what we think it's going to do, Continue to expand and upgrade our product assortments in interiors and modern, expand our rug business, Build and dimensionalize our textiles business, continue to build and expand our lighting business And add the new categories. And if we're directionally right, does that number get bigger than $6,000,000 more likely than not. But today, we're very confident about $5,000,000,000 to $6,000,000,000 in North America. So, I think to do that, We have to take market share, right? Like take Marin County here. We had a gallery that's doing about $18,000,000 And we have a new gallery that we opened. I mean, I might even be able to throw a football and hit our old gallery from our new gallery, standing on the roof maybe. But it's not very far, like a 20 yard pass. And I don't know how many people have done this before, but we're we opened a new gallery and it's trending, What guys, is it about $50,000,000 somewhere in that range? And I think it's a combination Creating a new market because people are seeing products that they've never Seen before, presented in a way they've never seen before, in an environment that's inspiring and interactive and full of light and fresh air and Theatrical presentation, we call them galleries because we say it's an Artful abstraction of home furnishings in a gallery setting, right? So, we don't really just merchandise our stores. We create kind of Artistic installations of home furnishings. So, people haven't seen anything like this before. So, I think To some degree, it creates a new market. But, some of the math I give people examples say, look, If you take our Marins R. H. Marin, we're talking about that one right now. 5 years ago 4, 5 years ago, There were 32, what I'd call, higher end home stores from Sausalito to Santa Rosa, including the Napa Valley. And not going to name them because who knows, people are sitting on the phone listening to our call. Yes. But there's small boutiques, mom and pops, some regional players, and their stores Are about 3,500 to 15,000 square feet. Our gallery was about 6,500 square feet. So, it's kind of in the middle. In our gallery here in Marin, I think we had 5 sofa collections, 6 sofa collections, Right. Five dining collections and 5 or 6 bedroom collections in the gallery. So, the other galleries, if we were right in about the middle, we had we looked like everybody else, We weren't really differentiated. And by the way, in that gallery, when we closed it, It had less than 2% of our assortment, right? It's like 2%, call it maybe 1.5% Of our assortment. So, you couldn't really see our assortment in that gallery. That's why we mailed really big books, Right. Because if you saw our big book, hit your doorstep and other people's spin books, you'd go, hey, those guys have a lot more than everybody else. If you just went into the physical world, we don't look like we have any more than anybody else where we have our traditional galleries. Now, Our galleries in and of themselves, our legacy galleries probably outperformed competitors 3 to 4 to 1 in the same Square footage. But when we open a big gallery, I always tell people that the 32 It's going to 32 kind of what you call maybe could be competitors, higher end home boutiques and Generally more expensive than us, long wait times, don't have the infrastructure. But, I'd say half of them go away pretty quickly. And we'll do another survey and do the count of Did it go after year 1, did it go from 32 to 25, did it go to 32 to 18, did it go to 32 to 10? But, yes, we're not it's just not completely a new market we're creating. But, it's I compare it. Don't take this wrong. They'll probably write this on some letter, Jerry Friedman, now compares us to Apple. I can't remember who had last time he said something that we Those claiming that compared us to some to Hermes, that's right. It's talking about the financial model. But Apple With kind of the last people into the cell phone game, but they created a new game. They created a new market. It was more than a phone. So, it created a new market and it also Took massive market share. I think directionally, we're it's kind of similar to that. We're creating a new market And we're taking market share pretty aggressively on both sides of scale. And I think when we look at Europe, Just to kind of talk about that for a second. The competitive landscape in Europe is significantly weaker than it is in the U. S. So, I think we'll be even more disruptive and differentiated in Europe. And that's why we're very confident about it. Great. That's very helpful. And can you discuss your cash deployment priorities? You're now sitting with almost $300,000,000 of cash on the balance sheet. And with free cash flow set to accelerate over the coming years, you'll have a lot of opportunities. So, how are you thinking about reinvesting back in the business versus M and A or ramping up share repurchases? Thank you. Thinking about all of the above, Jack. I don't know what I was going to say the same thing. And even more things. Every quarter and I think we answered it twice. We have a cash chessboard sitting here. So, we there's all kinds of moves and Just waiting for the right time to make the right moves. But we're looking at a lot of things, whether it's Investments into the business and innovation in the business, whether it's investments into M and A and acquisitions that will Strengthen our positioning or elevate our business and brand. We're thinking about share repurchases and Everything you think that we're probably thinking about, we're thinking about. So, but we tend to Yes, be opportunistic and patient. So, at the right time, I think we'll make a good move on our chessboard. Right now, all the pieces are still there. We haven't moved anything yet. So we've contemplated a lot. Thank you. Your next question comes from the line of Adrian Yee from Barclays. Your line is open. Can you hear me? Yes. We can hear you. Hi, Adrienne. Hey, sorry about that. I just I don't know what happened. But congrats on the consistency of the success and the progress. Just awesome to see this. Gary, I wanted to continue to focus on the European opportunity. The $15,000,000,000 to $20,000,000,000 outside of North America, can you talk about specifically the TAM in Europe? And I guess really what I want to know is, It really feels like Art Contemporary is going to come online. It sounds like there's more investment, more design, elevating the product overall. And as you're shifting to the international market, do you feel that the target household income or the demographic is materially different Then sort of where RH has been maybe say over the past 5 to 10 years. This seems like there's a greater appetite and appreciation for luxury brands and goods when we kind of cross the bond? Thanks so much. I don't know what I could add to that. That's how we see it. No, but we have I mean, let's start with the global opportunity. Again, it's directional math Based on looking at supply in many ways, wealth, consumers, housing markets, The high net worth, ultra high net worth ratios, it's based on looking at luxury brands And penetration in volume. And So, we've looked at the math multiple ways. And I think we're directionally right. If you were here, you'd see a big giant room where about Forty people get together generally on Thursdays, big cross functional team, and we've got all of Europe. First, we have the whole world, and it's just too much to look at. So we That's like, yes, right now, just get the rest of the world in the next room, got it, that's top line. But let's really break down Europe And understand it, understand each country, go deeper, look at other people's Approaches and real estate strategies, whether it's not everybody that has an iPhone shops at RH, But most people at the high end of the market spend a lot of money at Apple, I'd say. So, we look at where are the Apple Stores, where are the iconic Apple Stores where the big suburb Apple stores, where other businesses that we're familiar with, where the luxury good players in the suburbs. The hardest thing in, I think in Europe is going to be, we don't know their suburbs like we know our suburbs. We don't know their market like we know their market. Now, we've expanded our team. I think we've got a great leader. He knows Europe very well. But there's no one like us, right? There's not a real comp. But there's enough similarities that gives us Confidence is we dimensionalize what we believe the market opportunity is, at least today. So, and again, as I look at it, I think and I believe most of our senior team and I don't think really influenced by me because we tend to just debate everything here. And Yes. When I usually say if Eric Chia, if I say something and she goes, Gary, like it's like it usually sorry, Eric. She's sitting right here. She says that all the time, by the way. I would say, she keeps me out of the ditch. So, but, yes, but we spent a lot of time together cross functionally debating this. We've had people I do have a lot of insights on European expansion and so on and so forth. We feel good about that. I think we're going to be Directionally right. And that's all you need to be at this stage. You don't really want to boil the ocean. It doesn't I would say like, it's like the settlers that came to America. Some people said, hey, go west, young man, there's gold in them there hills. Some people just went west and they kind of hit Sierra Nevada and there is gold. Other people like were sitting in Boston trying to figure exactly where on the West Coast they wanted to be. And by the time they've gotten their course and parts, the other people were they're like getting to the Sierra Nevada. So, We don't exactly does it really matter if we're $10,000,000,000 off? Would we not do what we're doing today? Doesn't really matter, right? Like if the opportunity is only 15,000,000,000 We're $10,000,000,000 in Europe, does it matter? Would you not go? That's what I mean, that's kind of stuff I say to the team. So I'm just being transparent. You just you go, and you go to Europe first. It's the most familiar, it's the most connected. So anyway, And then I'd say the idea that the target demographic material is different than Where Rx has been over the past 5 to 10 years? Yes. Here it is and it's going to be there. And it's going to continue to evolve. We're going to continue to go up. I think we'll continue to shed consumers at the bottom And we'll grow consumers at the top of the funnel where there is exponential spending. And By doing that, I think all of a sudden, long term will pull people up because the brand will be more aspirational, People will save to buy our sofa. There's a demographic that will be younger and less affluent, But they'll have great taste and style, and they'd rather have a few good pieces than a whole bunch of crap. And That's the way I grew up. I remember when I bought my first Schwintens feed. It's like $65 technique. I mowed a lot of Yes, that's launch to get that Schwintenspy. I didn't buy a crappy Montgomery Ward spike. And I mean, so it's just that kind of stuff. I'm sorry, I don't mean to overly simplify it, but there's going to be consumers Yes, they want a part of the very best in life and they aspire to it. Like Nobody thought the Apple phone was going to be the number one phone in the world. Nobody thought the Apple phone was going to sell in China. It became the best selling phone in China. It's like people want better quality all the time. Gavin Grover, our lawyer says this to me all the time, like History has proven that people want better and better quality. And the world is generally Heads in that direction. So, yes, we think, again, we're going west. There's gold in them there, Hils. We're going in the right direction. Yes, we're going to be fine. Thank you. Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open. Hey, good afternoon. Next quarter. Gary, just curious on the long term opportunity as you see it for RH Guest House. And then in your prepared remarks, you spoke to the migration of consumers to larger homes and the demand that's driving. I was just wondering if there's a way to contextualize The size of that demand? Thanks. Yes. I don't think anybody's got the real data on it. The key is There's been an exit from cities. COVID was the has been a stimulus for that. And I'm not the one that made this up. Actually, one of our big shareholders identified this Early on. And they said, they did math their math on this. And it was going to exponentially, They thought play in our favor. And then we did some kind of smaller research You hesitated, but it's that's what's happened, right? You've had people migrating to suburbs, Migrating second home markets, places like Napa, Aspen, the Hamptons, Palm Desert, kind of second home markets like that, that are drivable for people that They're at some distance where they can work part time in the cities, but live out of the cities. Those markets have exploded. You can't buy homes in the nice suburbs. I mean, it's just multiple offers and Yes, rising prices. So, and so the simple math is this, Like take a someone lives in a 2,500 foot apartment in New York or very nice 3,000 square foot And they've moved to a house in Greenwich. What's the comparable house in Greenwich? 6,000 to 10000 square feet, It could be 2 to 3 times as far as footage. Those rooms aren't going to be empty, Not if they can afford to furnish them. So that's kind of a good thing for us. And that's why I think that Even without any newness for almost 2 years, our 2 year comp is Growing. So, what's the main thing that changed We're in a much better stock position, like back orders are down 10 points or more. It's like, what's the latest word? I mean, don't tell everybody, just hold your fingers up to me. But like the last time I looked at a couple of weeks ago, it's back down about 10 points, even more More than 10. So as back orders are going down, demand is going up, right? And that makes sense. I mean, our back orders At their peak, we're 4 times normal. Yes, 4 times normal. And so now they're down to probably 2.5 times normal. And it should get better because I think we've done a good job prioritizing production and flow. And I'm glad we didn't try to do newness because newness usually takes longer. I think it's going to be great. I think we'll have the best newness introductions we've ever had in our history. We've had more time to refine samples, to get things right, quality sure things. We're not rushing our manufacturing partners. And so we will have by the time newness launches, we'll have 2 years of newness, 4 seasons of newness. We've never launched that much newness at one time. Yes, people are going to think it's like Christmas again at RH. We don't even sell Christmas stuff, but it's going to be like what the heck just happened. I think that the aesthetic evolution and the quality evolution of the brand Will be shocking to the consumers. It looks so good. I mean, seriously, I wish everybody on the phone, Including all our people, because I know we usually have like a lot of our teams, all our galleries probably have an open line, our DCs have an open line and There's probably a couple of 1,000 people in our company listening to this call, maybe more. And like I wish, seriously, right now, we were out of COVID, we can get everybody together and take everybody through what's coming. Contemporary is shocking. It's so good. It's like I thought modern was great. Contemporary is the best work we've ever done. It's just going to open up the aperture of the brand. I think People at the highest end, the highest end interior designers are going to go, what did they just do? It looks so good. And there's maybe 20 interior designers in the world That we're not going to completely impress. It's like the really silly rich people that use them. Like everybody else, Yes, they're just going to go, uh-oh. We better join that movement there or we'll get left behind. It's really, really Great stuff in the pipeline. And we've had a lot of time to refine it and make it better. We'll probably have, We'll launch with the lowest returns, the lowest damages, all the kind of things that happen when you ramp up New goods, new factories, if you have new materials, new materials, new construction, especially with the Big aesthetic move in opening of an aperture like we're going to with contemporary. But even the product in interiors and modern, the new stuff and the quality impacts Our teams that are working on Couture and Bespoke, we have like some of the greatest experts from The highest end of the industry. So, I wish I could talk about them. I'm not allowed to announce anything. But Like, yes, a couple of them are sitting in the room right now. They look like they're going to like, they have their masks on, but you can tell they're smiling and turning red. Like the best that we have some of the best people in the industry. When the industry hears who's on our team, everybody's going to go, It's just great stuff coming. I couldn't be more excited. I just wish everybody could be here and see it. And Yes. But that's okay. We'll just make it. The good news is, like we keep making it better. So every season we delay it Like it gets so much better. So between now and next spring, it's going to continue to get better, the presentation, the execution. So we're super, super excited. And I think that the market I think there's look, I was the guy I'm the guy who thought there'd be a recession the last 5 years. I was like, I was ready for recession last 5 years. I've been really wrong. Instead, what happened to pandemic? But now I'm finally thinking, okay, I called this wrong. I never thought we'd be comping 47 comp with no new goods And back orders at 3 times historical rates, 2.5 times historical rates. And but we are. And so I think that, again, that's the home business, the home people buy a home, they don't furnish it All immediately. It's over a period of time. It takes a long time. I mean, right now, you can't get a contractor to remodel a bathroom. You can't get interior designers are all backed up. Our teams have been backed up. Like Customers complaining like, how come I have to wait so long for an interior designer? I mean, they're all busy. Professional services around the home are all busy. There's not enough homes. There's not enough people to build homes. There's not enough people Yes. Designs, new interior designs, there's backups everywhere. Now, so even if and we're at record levels everywhere. So even if The market slows down. If you go, oh, the home business is a little off or Pulte took numbers down a little bit. The question is, did Pulte take numbers down a little bit? How are those numbers compared to historical numbers? They're still really good numbers. And so, if you're in our position and you're kind of a brand without a lot peers and building a market of 1 and you're the place to go and especially where we have these new galleries that are having outsized growth, right. There's like we're in a really good place today. So I just think that I've gotten more optimistic. And it's my fault that we have the highest back orders too. I Cut the inventories too aggressively. And then when the trends went to 20, I said buy When the trends went to 40%, I said they'll never stay there by 'twenty. They're only going to be there for 2 weeks and then they didn't stop. So, like, the fish thinks that they had, right? Like, I kind of screwed a lot of the stuff up too, because I didn't make, Some of those calls were just kind of risky. You don't want to all of a sudden buy a 40% increase and then you're kind of pregnant with all the inventory And the sales dropped from 40 to 8, up 8 and you're like, uh-oh. So we've been chasing this the whole time, probably a lot I'm I'm not the only person that was too conservative buying inventory. So I think that pent up demand and some of the commentary in the home business about pent up demand, I think it's all kind of bright. And even I think about why I got the economy wrong over the last 5 years. I think there's a new economy. When you think about the dynamics of the current global economy, the stock markets and what's driving everything, There's new businesses, there's new kind of companies, there's new industries that are being formed, there's faster and faster Innovation and technology is changing the world in an exponential way. So look at the last recession, Which was now, like I can't believe, like 'eight, 'nine. It's like going on 14 years, 'eight, right? Like we're going to be in 'twenty two pretty soon. I think the longest economic expansion in the history of the United States before that was 11 years, right? So we've never seen this, Right. And even through a pandemic, which was like a kind of, I guess, a recession, but not normal, right? So I think there's this underlying structure of a new economy That is making businesses more productive. I think about how much more productive we are because of technology and the things we're doing inside the company At all levels, how other companies must be more productive and all the new innovative kind of companies that are Changing the world and yes, I mean, in 'eight, 'nine, I think there was 2 companies that were $500,000,000,000 like GE and Exxon, right, or something like that. Like maybe Apple, I think, was getting close. Now there's multiple $1,000,000,000,000 companies And many more $500,000,000,000 companies and they're growing. So I think that there's a lot of things that are different that probably Harder to see because of the pandemic. But when I try to listen to Yes, the people that are way smarter than I am about this, there's a lot more optimism And the smartest people I know who have generally been more critical and pessimistic. And yes, you try to listen to them and connect the dots as it relates to our business. But I think things are very different. I think the pattern of recognition of before, there's probably just going to be all new patterns that we have to be prepared Thanks, Gary. That's helpful. My follow-up is just you talked about Pulte, And I'm just a little bit curious on RH residents, how that's going to be implemented? I guess, what's the timeline on that? Just any more color on that would be interesting to hear. Yes, it's really long term. We're going to test some things in Aspen. That's where we'll have a controlled launch of an ecosystem. And a lot of this is going to benefit the brand is just far as awareness and Kind of place making and becoming a tastemaker and a Placemaker and a spacemaker and so on and so forth. So, we've learned from these things. I think that's the other thing that people underestimate. When You do new things. It's not just about the new thing. It's about building new muscles and getting smarter and solving new kinds of problems And as human beings growing exponentially, right, and having individuals and an organization in an upward spiral Learning and growing, that's what's invigorating for humans, and that's what makes great companies Invigorating. So, when you stop inventing and you stop learning and educating, and it's even like, It's so funny, I used to think, we grew up with the Gap, we had all these formalized training programs and all this stuff and Like, it's a training program for everything. It's like, you couldn't it's big manual. And I used to think, I go, Patch, you got to have all stuff in it. I realized like many of those years early in the gap before Mickey Drexel got there, it's all about management, right? And it wasn't very exciting growing up there back then until Mickey Drexler got there and then things changed. And I think When you're inventing and innovating, it's just really stimulating for smart driven people, Because they're learning by doing. They're learning by being evolved. They're not learning by studying an operational manual. They're not in some theoretical training class talking about theoretically how you might do this and being taught by someone who's never done it. And so we kind of like do shit here. Like we get into it And we get really involved and we all get really deep and it's just super exciting. Someone would have said, I'd Be more excited than any point in time in my life at my age? It's impossible. I'd say, no way. I'm so excited I can't sleep, which is not good for my health, but it's seriously that I'm so excited I can't sleep. Yes. It's kind of a beautiful thing for people that really Want to create and invent and evolve and grow and do new things. And that's why Yes. One of your questions about what exactly do you think Europe is going to be? I don't know. Yes. How much volume did I think the big galleries are going to be, that I think they were going to be as big as they were? It's been exactly in November, it will be exactly 10 years since we opened RH Houston. We opened that, people said it was the best retail home store in the world, maybe one of the most beautiful retail stores in the world. The 10 year lease is up, we're going to tear it down and we're going to build a store 4 times bigger, Like how many Houston's did we build? Kind of 2. We built 1 there and we built 1 in Scottsdale and then The next thing we did was 2 times bigger and 3 times bigger. And then, like I remember with some People on the board at the time that really want us like Houston was so great. They said, just roll these out, just do Houston. I don't think anybody that's sitting at this table that I'm looking at right here, right now or any of the people in our leadership team meetings, I don't think anybody would be here if we were just rolling out Houston. I think we have a completely different, Uninspiring management team. And I don't know if everybody knows this, but we don't even use the word manager in this company. Mike, we're allergic to that word. Management is about kind of arranging and organizing the status quo. Everybody here It's titled leader, right, because leadership is about taking people somewhere they've never been, doing something they've never done. When we say leaders have to be comfortable making others uncomfortable, because you're in uncharted waters all the time. And when you get comfortable with that, it's exhilarating. But I think we'd have a completely different team. If we were just like shooting at the same target the same way, just kind of organizing and arranging The status quo, it's not what we do. We just say here, like, is it directionally right? Is it strategically right? Is it more right than wrong? Is it asymmetrical risk to the upside? We do tons of math. We think really hard, really deeply about it. But then we get going because that's where you learn. That's where you grow. And you hit going and then, it's going to learn exponentially faster than everybody else. Yes. And that's so residences and stuff like that, like, they're going to come and ask them, might test and try other things. Jack and I met with incredible guys. You're probably on this call. I'd say your name, but I Can't do that, but incredible, like super inspiring, grew up in the business, He sought us out and wants to help put a debt in the universe with us and Create a whole different kind of home business. And it's like so much more than we know about building homes. And it's exactly like a lot of times in our organization, What gets these ideas going is the right people, right? Someone comes along and Has knows more than you do, has greater vision about the idea than you do, is ready to go And excited to get going. And then you go, that's when it's time to go. We know it's directionally right. It all makes sense, but you need someone To kind of really lead us all there. And so if you're on the call, you know who I'm talking about. You got my email the other day, ping me back. We were traveling for oil, so we lost touch. And if he joins the team, you'll probably hear about ARIES Residences sooner than later. Thank you. Your next question comes from the line of Curtis Nagle from Bank of America. Your line is open. Good evening. Thanks very much. Just I guess a very product question on All right. And Cheaps, at least to me, that's a new one. Would you be able to give just, I don't know, maybe a sneak peek in terms of what you envision for this collection and You might integrate it with the entire offering? Sure. Yes. I'd say, go into one of our new galleries And go just walk through and count how many antiques and artifacts are in our galleries. A lot. People want to buy them, and we have to say no all the time. Every once in a while, they make Such a silly offer, we say yes and then we replace them. But we just say no to some silly offers because we have some really cool stuff in our galleries and it all renders Yes, our product more valuable. And it's so different than people's homes where they want to be really unique and they want some things in their homes that makes it theirs. So, while our ATN TEEKs and artifacts will be limited to a degree because you can't Joe, manufacture them. What makes them unique and special is there's not that many. And so And I think we're good curators of it. I mean, we have warehouses of antiques and artifacts. We're probably as a buyer of Antiques and artifacts, we might see the biggest buyer in the world. If I told you what we spend on a new store in antiques and artifacts, Aerie is shaking her head, I'm not going to tell them. You'd be shocked at the number. But go walk a gallery and you could probably take a little pad out or you're going to take your phone and do the calculator and you're probably walking and you probably get close enough, If you guess. But if you really look at it, it's like, yes, they really help us look unique. And our customers want their homes to be unique. So, we have some of our team in here that lead our galleries that are all shaking their heads yes. So, that's how to think about it. It's about all of these things in integration, not in isolation. We don't think about anything that we do in isolation. When we do, we're usually wrong looking at it incorrectly. So, everything we do Have to render everything else that we do more rather than less valuable, right? Usually, when you try to do more, you actually do less. When When you try to be additive, you're actually dilutive, because you didn't think deeply enough about it and think about how will this, How will 1 +1equal3 or more? So, we believe things like RHN peaks and artifacts Well, just like they render our galleries more valuable, they're going to render our customers' homes more valuable. And our designers would tell you They're going to close a lot more sales. They're going to sell a lot more furniture. They're going to get a lot more unique homes That they may not get today because right now we don't have that. And we've discussed internally, like, I don't know, do we open it up, do we let them go Shop, first dibs, other things, 4 antiques and artifacts, ANKISS, charge to customer. For the service and make a margin on buying it just like an interior designer does. First, by the way, which I think is great. So, I think they've done a great job aggregating the world of antiques. But, It's like you got to look through every to find the needle in the haystack, like that's, It's really hard on first dibs. I mean, it used to be a lot easier, it's much more curated. Now, it's like anybody who sells antiques can be on first dibs. So, instead of finding the needle in a haystack, make the haystack out of needles, right? That will be our HNT and artifacts. You won't like have to dig through the haystack to find the needle. The haystack is made out of needles, completely different way to think about it. Your next Question comes from the line of Pammi Zakaria from JPMorgan. Your line is open. Hi, Gary, Jack and everyone. I hope you're doing well and thanks so much for taking my questions. I have a couple of Quick ones actually. So first, I saw some of the convertible notes you have were moved to the current liabilities section of the balance sheet. So are these redeemable in the next 12 months? Well, so the convertible notes became convertible once we exceeded the certain percentage of the convertible price. So they've been convertible for a while and they're coming in. As you see on the balance sheet, we have remaining converts $652,000,000 but With redemption requests that have come in, that will be settled momentarily, we're actually left with 411,000,000 Essentially as of today. Got it. That's helpful. And then the second question, Can you talk a little bit about the design services market in Europe? And what kind of opportunity you see there for RH given this has been a great success for you in the U. S. Market. So, do you plan to have complementary design interior design service in Europe as well when you launch there? I think, our model is going to be almost identical, but it'll be just kind of On the edges, it will be modified for the market. So, in a lot of ways, some of the things we're doing, Again, you get to think like a beginner, right? Like you're going to a new market, like you're not saddled with Legacy stores, you're not saddled with old ways of doing things, you're not saddled with, well, this is the way we've always done it. Like, we get to kind of Be a beginner again. And so, you get to ask a whole lot of questions about what about this and what about that, what if we did this way or that way. And it tends to just stimulate a lot of innovation, new thinking and opportunity. Yes. So, I think for the most part, the brand will be very recognizable. But in many parts and ways, it will be better. I think some of the big When I think about RH England, RH London and RH Paris, They might be the 3 most interesting stores we've ever opened and exciting stores we've ever opened, galleries we've ever opened. I mean, they're so different. It's so unique. And when I say that in comparison to the competition, It's an even greater strategic separation. So, I go back and forth, which ones I Like the most like right now, it's tough to say, England and Paris London are just incredible and all very, very different. But, spectacular. I don't think we could have found anything Better for Paris. I mean, I really don't. I think it's perfectly placed. You have the world of luxury surrounding us. We're within 2 blocks, the top executives from many of the top luxury brands in the world, They're going to probably come to lunch at our gallery. They'll probably go up from the rooftop and have a glass of champagne and have some caviar and look at the Eiffel Tower. Yes. There's going to be some of the yes, I can't say what I was going to say. You know what I was going to say about I got it. No, no. But, it's like the people that are talking about us in Oxfordshire, they know we're coming. Like, it's exactly the people That you want to talk about. It's funny, I mean in Oxfordshire people are asking, what are they doing there? Is it a private club? How do I get on the list to be a member? It's really interesting, like the kind of questions we're getting through sources. So, Yes, we'll have design services. Initially, they'll be free unless we change our mind between now and then. I don't think that's going to happen. But, I always say, we always reserve the right to change our minds for better ideas and better thinking. So, Right now, I don't think so. But, I will say is long term, you can think about our brand as Evolving to have just like you think about Couture upholstery, bespoke furniture, Other things, who knows, maybe long term there could be RH bespoke interior design, like a whole another level That we charge for that's as we continue to kind of pull up and elevate us And elevate the brand and evolve the brand. So, the good thing in Europe is, again, We get to start with fresh eyes and we can ask ourselves like what about this, what about that. Like, we've never had a gallery with a champagne and caviar bar. I don't think we would ever even think of putting a gallery, champagne caviar garden gallery except for in Paris, It's beautiful little kind of space. The top floor kind of terraces back and beautiful like a jewel box. And we figured out a way to get up to the roof and use the roof, and we got approval to use the roof. And we're going to have This spectacular rooftop garden from the roof and from the level below where the champagne caviar bar is, you see like 2 thirds of the Eiffel Tower. I mean, it's incredible. Like how does American company come and get a building like that and all of a sudden Champagne and Caviar Bar. You can't call it champagne unless it's from champagne. Champagne is in France, right? Like, We're opening a champagne and caviar bar in Paris on a rooftop with views of the Eiffel Tower With a garden roof tile, like you can't make that stuff up. Like it's just sometimes we just think like we're in the right side of Good fortune. Yes, it's like you like I just sit there and go like, wow, it's going to be incredible. Yes. I think just think about it as you're going to see the new best version of us, right? We will evolve. We will Have new and fresh ideas. You'll see the first RH Architecture and Design Library It's RH England. We've designed one for RH Miami In a location we're still working on 10 years later, which will be like if it all comes together, it will be a mind blowing experience. So, because we're working on an integrated gallery guesthouse, Beach Club and Bathhouse, right, on the beach in Miami. If it comes together, it will I mean, it's designed We're ready to go. So, but there's again, there's always going to be new exciting things that evolve here. And I think they will all render the brand more valuable. And yes, someday we may charge for all interior designs, don't Right now, it's working pretty good. It doesn't mean we shouldn't change it. One of our beliefs, We have our values and then we have our beliefs. And our beliefs we call the RH rules, the rest of the rules. And rule number 1 is vision is everything. And we say vision leads the leader. And Yes. Those with vision, leaders and without a vision are managers arranging and organizing the status quo. And we say leaders have to be willing To destroy today's reality to create tomorrow's future, we have to be willing to tear down our very best work to do something exponentially greater and more valuable. And I think we've proven that we do that, right? That's why it's 10 years later and Houston In its moment was the best home store in the world, and we only built another one in Scottsdale, And then, we left it in the dust, right? And so, don't feel bad if the team in Houston right now are Scottsdale. Don't worry, You know in Houston, we've got a new location, it's going to be incredible. And in Scottsdale, we're working on it. Thank you. Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open. Great. Good afternoon, Gary and Jack. Thanks for taking my question. I had a question on the RH Guest House. How do you think about The opportunity there relative to the competitive landscape in the hotel industry. And maybe how do you see the TAM opportunity for guest houses over time. Yes. Good question. I think, what we're trying to do is to create a new market, Right, for travelers seeking privacy and luxury. And I tell people that we believe privacy is going to become a very important thing and it's going to become a real Market, that people are going to I think privacy is the one thing everybody's given away With social media, and it's one thing that the Internet has taken away, because you can Google anything about everybody, right? So, there's a whole level of privacy The world has lost. And I think that there's just going to be a desire To find your place, right, to be in that place that's special to you, that It gives you that level of privacy and exclusivity and level of luxury that you just can't find anywhere else because Someone's trying to do 200 or 300 rooms or even 50 or 100 rooms. Like, our first two guest houses We have 9 and 10 rooms. We're going to open in New York with 9 rooms and a residence. So, it was 6 rooms, 3 suites and a residence. And residence means it's just the top floor. And the idea is Mr. Friedman's residence and he will let people stay there when he's not there and It's not going to be cheap. But anyway, We're going to open the smallest hotel, I'd say, in the biggest city one of the biggest cities in the world. And it's going to be like nothing you've ever seen. There's Things that no one's ever done in hospitality that you're going to see in our guesthouse. Yes. And we think it all makes sense. There's just when we launch it, You'll hear about it. You'll know what it is. And I think a lot of people will go like, why hasn't anybody ever done that before? I think a lot of it really makes sense. So, we're not trying to be different to be different. We're trying to be better. We're trying to create A new product. And like at this point in time, I'm so excited about it. I think Yes. The idea of the guest house is, again, 1st and foremost, to elevate the brand and position RH as a kind of thought leader, Taste and place maker in the industry. So, it's not really what anybody thinks it's going to be. It's It's just not going to be that. People ask me, you're opening a hotel, and I say, no. I go, What are you doing? I say guesthouse. They go, what's the guesthouse? And I say, we're trying to create a new market for travelers seeking privacy and luxury. And then they go, oh, I get it, it's going to be a showroom for your furniture. And I say, no, why would we do that? We have a 90,000 square foot showroom 20 steps away. Then I say the thing that And it makes this glazed look. I'd say, in fact, it's not going to have any of our furniture. And then they say, whose furniture is it going to have? And they say, not really going to have any furniture, it's not about furniture. It's about a completely different experience. It's about a completely integrated Singular design point of view that no one's ever done before. So you're just going to see something that you've never seen And executed at the highest level of taste and quality and design. And I think it's going to break through. I know we all want to stay there. And so that usually works, right? You never want to be the worst thing is when you're in a meeting, you go like, okay, like Somebody is presenting some new products, there's 30 or 40 people in a meeting and say, okay, how many people here if it wasn't about price, we get 4, how many people would buy that And when all the hands go up or 70% of the hands go up, you kind of know I'm sorry, that's going to be a winner. When none of the hands go up or a couple of hands go up, you guys there's not anybody who's seen our guest house, Whether inside this company or outside this company, the people working on it, the trades, A lot of them said to me personally, like we know we'll never work on something like this again. This is the best thing we've ever worked on. Like, they're just so proud of it. So, we're taking it to a level the world's never seen. If you want to think about this idea of climbing the luxury mountain, when I say, We have to create a forced reconsideration of our brand. We're not from the neighborhood, we're not invited to their parties. They don't really want us to make that climb. You have to do work that is So extraordinary and so remarkable that you force the people at the top of the mountain to tip their hat. And I would say, Pick whoever you want in our industry who's at the top of the mountain. I've said his name before, so you probably know what I'm talking about. If he shows up and sees the guest house, he's going to sit at the tap. Yes. And he just built probably the best hotel in the world that opened this week. So, yes, I mean, we're doing things to kind of elevate the brand. And by doing I've always said, One thing that I've learned in my career is when you do extraordinary and remarkable work, you can usually figure out how to monetize it. And that it's really hard to monetize ordinary and unremarkable. So, I believe and I think we believe that our guesthouse It's extraordinary and remarkable and something that the world has never seen before. And We believe we're going to be able to monetize it, but it's not really in our numbers. Like, we don't we're not sitting here saying, no, we should have Yes, we're modeling 50 guest houses or something like that. I think it'll become that, but that's not the idea. The idea is to have a Guesthouse in New York, the Guesthouse in Aspen, Miami, Malibu, St. Bar's, maybe a few in Europe and maybe one in Paris and London and Yes. Maybe one in Saint Tropez or a few places like that, where the Wealthy and Affluent visited vacation, Yes, the Hamptons, things like that. Yes, it's like we will have a handful. And my sense is right now, New York and Aspen, what we've designed, I think there's a real market. I think, people will pay a price That will create a new market. I had a really smart person who's like had ton of success in the hotel industry So, you can never make money in a hotel under 100 rooms. Yes, I also had a lot of people tell me that No one is going to go to your Chicago store that's 5 blocks away from everywhere else. And I had people tell me that Nobody does volume in the meatpacking district in New York. No one makes money in flagship stores in New York. Who shops in the meat packing district? It says a third of the business of SoHo and Half the business is Flatiron. You're moving from Flatiron to the meat packing. It's the highest volume home store In all of New York, that's the mid to high end. I don't know, what we do in Chicago of 60,000,000 It makes over $20,000,000 a year. So, it replaced it $16,000,000 a year in revenue. Yes. So, like yes, we do a lot of things that haven't been done before, but we focus on doing Extraordinary and remarkable work. And when we do that, we usually figure out how to monetize it. Steve, you tell me. Like, when we open, like, we'll give you a tour before we open. Like, we We'll be ready to open. We could open it in late November, December if we wanted to. You don't get a second chance to make a first impression. I don't want to open in the winter. We've got the most incredible rooftop park with a 40 foot long Infinity swimming pool and private dining tariffs, it's mind blowing that has some of the best views in the city. And yes, I just don't I want to open everybody's got masks on. It's just weird right now. Like, so, it's easy to say, hey, like, Okay. The travertine from Italy is coming in late. We could open in November. What do you think? And I'm just like, yes, We've waited this long. We'll wait till spring. Yes, we'll open it. And it'll give us more time to practice and It's fine tuned and nailed the service and nailed the restaurant. We've got a whole new restaurant concept there, live fire restaurant the world's never seen. You've never seen anything like this restaurant. And I think we have the most beautiful room I've ever stood in from an Experience of a restaurant, like there's not a bad seat in the house, it's still perfectly proportioned. So, like we just have a little bit more time to make it better. Yes, that's what we do. So, leave no doubt. But again, I'd like to say, You can't rush rate quality. It takes time. So And people will pay more for really great quality. Thank you. Your next question comes from the line of Brad Thomas. Your line is open. Gary, I think you alluded earlier to being interested in potential acquisitions. I believe the last one you did was Water Works in 2016. And I was hoping you could just talk a little bit about what you learned from that most recent acquisition And how you think about what might fit as an incremental piece of the puzzle here for you? We've learned a lot from Waterworks. I think that one of the most difficult things Challenges, like we work in a very integrated way here. We're very visually oriented. And We made an acquisition of a business that was in Connecticut. So, that's made it a little, I think, More difficult, you have to kind of you have an idea, you can't just see somebody in the hallway or walk over to where they sit or walk into a room. You can't walk by the product all the time and see things and talk with people about ideas and talk about what they're excited about. So, I think that's made it different. I think over time, we've got to all got to know each other We said initially, rule number 1, don't screw it up. It's the best brand in the space. It wasn't exactly we weren't Really ready to buy it when we bought it, but it's like those things that come along once in a lifetime when it's For sale, if you don't buy it, you may never see it again. We always admired it. It was actually one of 2 things on our list, the only two things on our list for the first 15 years of our existence here. And the other one got screwed up, it was Dean and DeLuca, and it got screwed up and Seth, but we thought we could do something really great with Demi De Luca. And who knows, maybe we still will. It went bankrupt. Maybe we'll bring it back to life. Actually, put that on the list, guys. No. But, you guys so, Waterworks, I think, It's going to fit perfectly into where we're going because Waterworks has always been kind of The admired desired brand. And yes, so we've learned a lot watching how they run their business and how they think about their brand. And So, there's I think we've learned a lot from Peter and Ralph and the team, and I think they've learned a lot from us. I think there's a lot of respect on both sides. And I think we have really a great shared vision for the future. And Yes, a lot of pieces are coming together that I would say I mean, I think a lot is going to transpire over the next Just a year. I mean, I think we're really close to a lot of things. We could be sitting here 6 months from now, 12 months from now, and be talking about a lot of new very exciting things that help Catapult us up the mountain and how it will all integrate and come together. And the water business now, like I think people know that we struggle within the beginning financially, we had to write off Most of it is book value and now it's performing really well. I mean, it's And I think not just because of COVID, I think just because of just learning from each other. And Some things we do really well that they learn from us and some things that they do well, we learn from them at the higher end of the market. And I think they're going to have a record year, not by a little, probably by 50% or 60% better than the best year they've ever had in their history at their peak. And I think, it's on the right trajectory strategically. Even if I COVID adjust It's the best numbers they've ever had. That's how we think about things, by the way, internally here. We know there's COVID tailwinds. Yes. I don't mean to sound like, gosh, we think this is just going to be here forever. I mean, I think that one of the great things about, If there is ever, when it I just think it's going to be a much softer landing than I thought and much longer And I think for us what I like is as it evolves, as Things might evolve from COVID. I think, we're going to go into the biggest innovation cycle in the history of the Company, and we just might outperform everybody, even if There's some slowdown or give back sometime in the future. But I think the same thing has happened with Waterworks. I think the opportunity for Waterworks looks so much bigger now We had never looked 5 years ago. So, and I think all the pieces of the puzzle, Yes. They're going to fit together beautifully. Thanks, Brad. Thank you. Your next question comes from the line of Seth Basham from Wedbush. Your line is open. Thanks a lot. Good evening. It's Seth Basham. I appreciate you taking my question. My question is a little bit more about Europe and just the roadmap In terms of the operations and infrastructure to support as much as $250,000,000 in sales in the 1st year. Could you give us a little bit more color on how that's coming along and what the building blocks are there? Yes. I mean, the key building blocks for us are start with Demand creation and how are you going to create demand? So, we believe we've got the right initial real estate building blocks And the ability to launch a website, and we're learning and Going through optionality and thinking about how to market the brand Outside of the physical, most of our marketing in the U. S. Is kind of physical Marketing and then print and tiny bit Digital, I think we're going to be doing more things. We've got some really good ideas. And especially as we are evolving the world of RH, That exercise has opened our eyes to some really, really, really good ideas where we can Shoot with the rifle and not with the shotgun. So, and those things Yes. It will be the pieces. 1st, you got to think about how do I create demand. And that's a big part of the focus. And then, We said, now how do we fill demand? And if we say, hey, if it could be between $50,000,000 $250,000,000 What risks do you have to take? How do you structure distribution platform, Home delivery platform, small package platform, how do you handle returns And damages, so you have to have a reverse logistics and outlet platform. And that's the major pieces, really. Did I forget anything? I mean, those are the pieces of the puzzle that we've got to put together. And Yes. The question is, how do you you hate to kind of say like, Boom, you launched the same and it's like people come driving in from Spain and France and the Netherlands and every truck that come train in or fly into England and shop at our gallery and they want to like, look, today, we have people And buy from us from Europe and arrange to have their own goods shipped. Well, I think they're going to do that a lot more in the UK. We may not be ready yet with the Reverse logistics and other things to handle returns and stuff like that. So, we're going to start kind of country by country, see what we learn, maybe open up a country. I don't want the first impression to be a reverse logistics outlet store. It's the first physical experience for RH. Not It's just not the right first experience. It's an important part of our business. Yes. But, you don't want to kind of go out there and launch a web business and just your only physical experience in many countries is a reverse logistics Outlet store, I think that's not how you build a great luxury brand. So, we're going to build incredible physical experiences. We'll have We'll be launching with the new World of RH, digital portal And web experience, which is all new, all simplified, all really user friendly, great navigation, all kinds of Great functionality. And we really have to execute well. Right now, here's the good news. They sell furniture in Europe and they deliver it to people's homes. So, it's not something that's not done. So, we know that's done, it's done every day. We have to be able to execute it really well. So, how are we going to do that with 3rd parties we've never worked with before, even though there are 3rd parties In Europe that we've worked with in the United States, same company, but yes, European division and whatnot. And Yes. There's going to work to get to know people, we're going to have to make sure they understand our standards and what we expect. But we've got to I think we really have an incredible leadership team in that part of business. Yes. And they're super passionate about this. I mean, they're ready to go. They want us to like Get going. So, and we've got people now transitioning base there. So, I think, I don't see any parts of the business that I think, I don't think we can execute really well with the team we have. It's just more preparing for the unknown, it's preparing for that range, Preparing for $50,000,000 to $250,000,000 maybe it'll be right in the middle, it'll be $125,000,000 the 1st year. Yes. I don't think it's going to be $400,000,000 the 1st year and I don't think it's going to be $10,000,000 the 1st year. So, I think the range is right. It's just a really big range. And so, if it's 50, is there a little bit more earnings drag? Sure, there is. But you've got to be able to take those kind of risks, right? We can't we're not going to get it fine tuned perfectly. So, when we know more, we'll share it with you. Thanks. And just a follow-up modeling question for Jack. In terms of the operating margin outlook for the balance of the year, You gave some color on how to think about gross margin versus SG and A? We're not guiding to that level. I think at the moment, we're just we'll leave it at the operating income margin. I think we've seen what we've delivered In terms of gross margin and SG and A variances versus last year versus the last 2 years we've talked about. And clearly, As you look at the SG and A difference, there's been timing differences, advertising that's been one of the biggest drivers. So, I mean, I think you made comments about that last quarter and then you noticed what our plans are with The change in the books this year. So just keep that in mind. Thank you. Your last question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open. Hey, good evening and thank you for taking my question. I wanted to ask on supply chain. On DNAM particularly, can you comment on how much of your product is sourced are from the country? And do you expect any sort of product categories to be impacted by the manufacturing delays, the shutdown going on right now? How much product is sourced from Vietnam, you said? Yes. Is that what you're asking? Correct. Yes, how much product is sourced and then total I think we disclosed in the past the amount in Asia, right? I don't know if we do it specifically by country. We've broken out China. Yes. I mean, we have a meaningful part of our business in Vietnam, and More businesses migrated to Vietnam with the tariff situation in China. Vietnam makes really high had some Small boutique, high quality factories that we got involved with in 2008, 'nine, 'ten, 'eight, 'nine, 'ten, People that we've grown with that were maybe $3,000,000 to $5,000,000 and now We're $50,000,000 to $120,000,000 of volume with them, first cost. So, we've got great relationships in Vietnam. It's a meaningful production, especially when you think about you can't really buy Wood furniture in China for bedroom, right? You pay crazy tariffs, it's exponential, right? So, They make it impossible to buy bedrooms, there's anti javings and so on and so forth. And there's no bedroom coming out of China. So, that's We've been heavier in Vietnam and Indonesia and other countries. Yes, it's meaningful. And it's caused us to Push the launch of contemporary and hold on our other books because it's a meaningful part of the newness. Understood. Is it also a meaningful part of the core business? Yes. Yes. Of course, well, anything that's meaningful is meaningful to the core towards almost the whole business here. Yes. Okay. And then my follow-up question, would you be able to kind of quantify or comment how much of the delay in RH Temporary and I assume the guesthouse in the digital are smaller, but how much of the revenues shifted out of 2021 into 2022? It's all in our guidance, right, for this year. We're not guiding 'twenty two yet. But, It was supposed to first launch in spring, then it's going to launch in fall, now it's launching Yes, next spring. So, it wasn't 0. Thank you. There are no other questions on queue. I will now turn the call over back to Gary for any closing remarks. Great. Well, thank you everyone for your interest and Thank you for our team who is kind of leading the charge and bringing our vision and values to life. We could not be more proud of the work that everybody is doing and the effort that everybody has put through. And again, we feel Yes, super blessed and fortunate to be in the position we're in and our hearts go out to not only the people that are suffering in Vietnam, but Just suffering all of the world through this COVID and the variants that are continuing to wreak havoc and Even right here in America and even on a much smaller scale, people who suffered just recently here Through the hurricanes and the devastation. So, it's been it's hard to feel Yes. You know, so good about your business when so many people are suffering. And so but we've never been more excited. And we've said, yes, this is the time to have a lot of edge and a lot of empathy. And so, Yes. I just want to just really thank everyone and also just send out our very best wishes to the people That are struggling through these times. And to our people, just thank you for Yes, making this company more exciting, more innovative, more magical than at any other time That in our history, and I think we're going to rewrite history as we go forward. So great job, everyone. Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.