Earnings Call: Q1 2021

Jun 4, 2020

Ladies and gentlemen, thank you for standing by, and welcome to Restoration Hardware's First Quarter 2020 Q and A Call. Now I would like to turn the call over to your speaker today, Allison Malkin with ICR. Please go ahead. Thank you. Good afternoon, everyone. Thank you for joining us for our Q1 2020 Q and A conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer and Jeff 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 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 press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q and A session. Operator, we're ready for questions. And your first question comes from Michael Lasser with UBS. Please go ahead. Good evening. Thanks a lot for taking my question. Gary, what are the building blocks for this year to get you to positive operating margin expansion? And as part of that, can you describe what assumption is being made about your sales outlook, particularly in light of all the uncertainties in the world? Maybe a way to frame it is what under what sales environment would generating positive operating margin expansion just not be possible? Well, I think I'd point you to, if you look at our record when we reported this kind of 2019 results, I think we that was before COVID when we laid out kind of a bridge to expanding operating margins, nothing's really changed about the bridge. Just there's modifications based on a lower rate of sales than we had anticipated. And then we've made some modifications organizationally as you would expect and as we articulated to our expense structure and our spending structure. And we've really tried to reimagine the business again. If you look at our history, our DNA is really kind of built for difficult times, right? We've had a kind of from the very beginning dig ourselves out of a hole of a business that was restoration hardware that was selling completely different product that was basically on the edge of bankruptcy and when everybody else was kind of yelling back and when everybody else was kind of yelling value, value, value and taking quality down and so they could take prices down, we went the other way and business completely and pointed higher and moved faster. And this is kind of another time, right? So but at the base, if you just think about the foundation of where we started coming into this, we said we had at least 200 basis points of operating margin expansion. So the key word there is at least. So if you start there and you think about, I don't know, take Q1, we reported 10% against what 11.8% last year, right? So we hit a pretty tough Q1. Half of our stores were all of our stores were closed for the entire time. We've got outlet stores and restaurants and things like that, that did 0 revenues, have no online component. And we were able to kind of lead our teams and our teams were able to lead their teams through I've never seen a time like this, right. The most volatile difficult time for retail business, restaurant business, whoever, all the businesses that have everything shut down. You can imagine and we were we only lost 180 basis points of operating margin. And you can if you read in our press release, we say the business has accelerated, right? So you can kind of take the numbers there and imagine what would be like. And so if you just go back to that prior release, look at the bridge, it's got all the pieces, the outlet business, the moving from a single sourced rug vendor to a direct source model, other things we're doing within the core business, elevating the brand, so on and so forth. We see a very clear path to now I believe 20% plus operating margins, right. It's we are as we continue to elevate the brand and we you can see us emerging as a true luxury brand that generates luxury margins. And if you try to just stand back and think about that, you say like what other luxury kind of design furniture brands are there in the world? Just ask yourself that question, vertically integrated covering all the categories, presenting a business like us that generates the kind of productivity that we do. There's a lot of luxury apparel brands. There's a lot of luxury jewelry brands, there's a lot of luxury car brands, there's a lot of luxury brands in every category. And in our category, I'd argue that you really can't point to 1. You can point to somebody who might be a luxury sofa brand, upholstery brand, somebody who might be a luxury lighting brand, somebody who might have luxury pieces of businesses. But there's really not a business like us on any level anywhere in the world. And so but look, it's a long like I say, it's a long hike up the luxury mountain, right? And we have to earn our way there. We have to do such extraordinary work that we create a forced reconsideration of this brand. I mean, it's really interesting. I kind of made a face at our team at the table here because the conference call operator introduced us and said, welcome to the Restoration Hardware conference call. It's not the name of our company anymore. We're RH. But it's hard to shed old perceptions, right? No different than every analyst on this call, most of you, I'd say not everyone, most of you still think of it as a furniture store and you kind of comp us against Ethan Allen and other kind of people. And it's not even the same business. It's not even close, right? And so I think it's just going to take time for everybody to kind of, I think, see us in a way where we're going. And I think, look, we have to prove ourselves. And I remember all the reports that came out when we had 11.4 percent operating margins a couple of years ago, actually a little over a year ago. And there was a couple of reports that, oh, they've hit 11.4 and Williams Sonoma at their peak was at 10.5 and now they've eroded to 8.5 and there's no way RH can maintain 11.4 short the stock, right? And I had so many people that's like, oh, you can't maintain these operating margins. And then we went from 11.4 to 14.3. Percent. And now people are actually saying the same kind of thing, can they maintain those operating margins. I mean, we're used to this, right? We're used to kind of having a lot of skeptics and people don't generally believe something until they see it unless they're part of the team that's creating it, right? Makes sense. This is our vision, not anybody else's, right? So we as our vision unveils itself, as our work becomes real, then people will see it and believe it. But I could probably tell you every detail right now and you're not really going to understand how we're going to do it. I'm just kidding. You have the insight. You know what I mean? Like so but it's laid out, right? It's in that Q3, Michael. Q3 Q3 2019 letter that we released in December, there's $4,000,000,000 of upside there. And as Gary said, we at that point, we're talking about 200 basis points of upside. At least, yes. And Gary has alluded to, obviously, when we say that there's in our We're not going to say at least if we had 200 basis points, right? Sure. Understood. Let me ask a quick follow-up. Is the results that you've seen in May and quarter to date in June have been very notable. Has that been driven by the reopening? So your sales have grown by just more design galleries reopening? Or are you seeing increasing and accelerating growth in some of the design galleries that have been open for the long period of time? Yes. I mean, it's a combination of both. We've even as all stores were closed and galleries were closed, our business was building week over week as we started opening galleries incrementally, a few this week, a few that week. I don't know what our biggest week was, maybe 10 or something in a week. Clearly, our business is way better with a gallery, with a retail store. I mean, the people that think retail stores are going to go away because of pandemic, like are brain dead. I mean, it's not as everybody is pointing to like, well, look, nobody needs the store anymore. So the retailers that use this opportunity to actually shrink their store base are going to shrink their company. It's an impossible move. So it's I mean, to me, it's a very interesting time to just sit back and watch because people are asking I've had people ask me, so are you going to still open galleries? Are you going to still open your stores? Are you going to stop? Look what's happening with Amazon or Instacart or this or that, like I got it, yes, essential goods, ordering toilet paper, things like that. I think retailing that takes taste and style and presentation and imagination and so on and so forth. Humans don't I don't know about anybody in this call, did anybody like being home the last 3 months every day? It certainly has been interesting. Yes. Is anybody dying to get out of your house and go somewhere, see something, see some people? Is anybody like waiting to not have to wear a mask? Like everybody is. Like you see it on the TV, the reports, it's like they barely open certain places and beaches are flooded, bars are flooded with people and so on and so forth. So we're really optimistic about our business, our model. We've got a huge direct business. We're we think we're very capable direct retailers, digital retailers, whatever you want to call it, web retailers, everybody's got a different name for it. It's just another channel. And we're going to get better and better with that channel. We've got some exciting announcements that are coming as far as how we're going to reimagine our entire web platform. And part of it was in my annual shareholder, which parts of that I repeated here because you got to kind of keep saying the same thing a lot of times for people to get it. But you're going to hear soon about the world of RH, which is a portal that will take you into the products, places, services and spaces of RH. And we're just going to keep getting better at what we do. And so we think that there is the galleries are going to continue to be strong. I'd say the biggest question we have and I think probably every retailer has is as you reopen, I mean, 2 things. 1, as you reopen, how much pent up demand is snapping back and how much comes back? And how long does that last and what does that look like? And then the second one is, what are the seismic shifts in spending? I mean clearly Wayfair goes from up 18 to up 90, right? A lot of reasons driving that, all their competitors at home Bed Bath and Beyond, a lot of people like that, like all the store centric businesses shut down, like it's driven to Wayfair. Wayfair has got a huge kind of kitchen kind of furnishings business. So if you go on Wayfair, I think they have, I don't know, like 20 pages of toasters, right, 600 toasters or something like that. And so that's like nobody was going to restaurants, nobody was eating out, right? Like I can't tell you how much my significant other she spent at my alma mater, Williams Sonoma. And so but the question is, okay, these seismic shifts and these lifts, which I think we're benefiting, clearly people are staying home, they're looking around at their house going like, God, we're going to be here for a while, why don't we make it look better? We're not traveling, we're not going to vacation, we're not doing all kinds of things. So there's a seismic shift to spending happening. And is that sustainable? Does that is there a give back? What does the timing look like? We don't know any of that. We can't tell any of that. There's no way to kind of really figure out that data. But we know long term, people are going to still live in homes. For now, they're going to still buy furniture and furnishings and lighting and so on and so forth. And if we have the best assortment in the categories that we're in, pandemic or no pandemic, presented the best way with the best value, with the best service, we're going to do just fine. And so and we're focused on the long term. So I and I'm not people ask me like, is it going to split pent up demand? What about this? What about like, yes, I don't know. Like, I don't know exactly. I don't know if we do anything different if we did. All we know is like long term, we think we're going to build one of the most admired brands in the world. And that's what we're focused on. Thank you very much and good luck. Thank you. Your next question comes from Curtis Nagle with Bank of America. Please go ahead. Good evening or just good afternoon. Thanks very much for taking the question. Gary, maybe I just want to touch quickly on or maybe not quickly on the Orange Residence business and just maybe go into a little bit more detail in terms of kind of why now, how long you've been developing the concept, what are the economics, are you partnering, I don't know, I guess with homebuilders to do it. I would just love to hear a little bit more about the, I guess, the vision for, I guess, what you think looks to be a pretty big opportunity. Yes. It's really what we try to do is put out there our kind of big long term vision for the business, right, one that will outlive me. So I think we have a vision for this brand and this company that is going to be multi generational, right? When you sit here and think about the if you sit and think about what we wrote, it's probably throws a lot of people back. But if you think about it, it's all kind of connected in a very simple way. And if you start with the idea that there's those with taste and no scale and those with scale and no taste, The idea of scaling taste, we believe, is very large and far reaching. And everything that we're going to do here is not in a silo, right? So it's all it all amplifies and elevates and renders the core brand more valuable. So residences is just that it's just a space, right? If you think about spaces, we already do spaces. We build some of the most inspiring spaces in the world. If you think about what those spaces look like, we're obsessed with great architecture. We either find historical great architecture and redact it or we build great architecture. And that great architecture amplifies the product. And we do great architecture. We have great interior design. We if you look at our rooftops or our gardens, we have great landscape architecture. If you think about those categories, because let me step into it for a second. If you think about those businesses, there are none of them are consumer facing businesses. Where do you find an architect? Do they have an office that's reflective of great architecture? Not really. You don't even know where to go. It's like trying to find a dentist, right? You ask a friend. Where do you find a landscape architect? Where do you find an interior designer? Now someone will say, oh, you can find those things on Houzz and yes, you can, but there's no physical manifestation of the business. And we have a physical manifestation of great interior design, great landscape architecture. So embedding a services business inside a business that stands for those things seems pretty logical. We've had very we've had great success with our interior design business and believe we can take that to a much higher level. We practice great architecture today. We build great architecture and design it and develop it. We design great sets and great rooms. We do great interior design. We do great landscape architecture. So that we're really good at those things. So it's logical to have a services business and expanded services business that provides those services in multiple businesses that are not consumer facing. It's why we've been able to build RH because high end luxury furniture for the most part is not consumer facing, at least it hasn't been, right? The design districts, the design buildings, I used to say, yes, behind the iron curtain of right to the trade design showrooms. You need to be an interior designer and have a resale license to get into those places. So same kind of things with other businesses. You think about homes today, I would ask everybody in this call, if you get a second tonight, go on Zillow, go on Redfin, go on pick your website for real estate, go look at 100 homes tonight in a price range that you think we might play at And tell me how many have great architecture, tell me how many have great interior design and how many have great landscape architecture. If it's 1% if it's more than 1%, like you must live in a really great area. But even in the great areas, it's so low. How many friends houses do you go to that you say, wow, this is beautiful architecture, this is great interior design, this is great landscape architecture. Almost never, almost never. It's like a completed complete uncharted world. When you really look at the big homebuilders, they're kind of stamping out some it's not a McMansion anymore, call it whatever you want, but it's a stamp out, right? And it's a nice organized development, but there's no one providing completely turnkey homes. Like Gary says to me a lot, like they don't sell you a car without an interior. You don't go buy a beautiful Mercedes or whatever brand you like and it comes without an interior and you've got to figure it out yourself. I don't know how many people on this phone have tried to do their own interior design or furnish a house. It's a nightmare. It's a nightmare for me and I do it for a living. I have a house in the Napa Valley that I finished remodeling like 3.5 years ago. It's not furnished yet. It's because it's that hard and it's a pain in the ass. And so it's we know how hard it is. We know we're good at it. And we believe that if you I used to work when I worked for Howard Lester at Williams Sonoma, he used to say, you sell the hole, not the drill, right? Don't sell them the drill, sell them the hole because that's what the drill does, right? And in Williams Sonoma, what they've been fantastic at, right, is selling you the idea of pizza, not the pizza pan, selling the idea of pasta or how to bake an apple pie, that's selling the hole, not the drill. And I sit here and I go, well, why can't we we're really good at architecture, really good at interior design, really good at landscape architecture. I know we can design and build things and furnish them that people will like. And I think there's if you think about people with money, okay, and you think about just what's the most valuable asset? Time, right? By far, the most valuable asset. Everybody on this phone can figure out if you lose your money, you can figure out how to make more money. If you lose your time, you just can't get it back, right? So we think a lot about businesses that deliver time value will become more valuable. And I just bought a house in Beverly Hills. Why did I buy it? I walked in, it was fully furnished. It was designed by an architect and furnished by I'm good. This is going to save me 2 years of my life. And it could immediately move in and use the house. And we did a test house. I don't know if everybody knows, but if you can still go online, I think the video is still online. If you look up, what it was, 8 Palms, the RH residents, the video is still out there. We did a test house in the Napa Valley. We took it you can watch the video and look what we did the before and after. We did a took a house that was kind of needed some love. We completely redid it and furnished it and sold it. So we have more of those coming. It's like anything we do. We'll test it. We'll try it. We'll work it. You got to perfect it. So it's not like we're going to stamp these things out. I mean, again, the vision for the ecosystem is a big giant vision. I think we're almost I shouldn't say we Dave is not on the phone right now. Like I don't know if we've signed the deal yet. Like I don't want to I was like, I'll send the yes, I can't say anything. But let's just say we have a place where we'll announce our first ecosystem where we'll have an RH Gallery, an RH Guest House and RH Residences in a really very cool place. And it'll be a great test. We've been working on the deal and the vision for a long time. And people really love these first handful of houses that we do. I think we're going to have 5, 6 residences. Yes. The residences will be serviced by the guest house. So you want housekeeping, you want someone to set up and cater a meal at your residence and so on and so forth. This is not connected. It's not a vertical. We have visions for vertical ones and so on and so forth. But we'll see. We'll see how our guest houses do. We think our guest houses are going to create a new market for privacy and luxury. If you think about the idea of privacy, we think privacy is going to become a very big market. Just stand back and think about privacy is the one thing everybody has given away on social media and it's the one thing that the Internet has taken away. You could Google anybody, you can find out anything, May not be true, but you can read a lot about almost anybody today. But I think we're in a world where it's so exploited, privacy is going to become very valuable. And if you see what we're doing with guest houses, when you see it, we open in New York, I mean, the can keeps getting kicked down the road because something else happens. Then we have pandemic. And we thought like, yes, even though we probably hope we could open it in the fall, like it just feels like bad luck to open a hospitality experience on the heels of a pandemic. So I think we're we don't open all set up, closed, we're shelter in place for another month. But we're going to create something, I think, extraordinary in hospitality, not ordinary at all, extraordinary. There's ideas in our guesthouse that have never been seen in the hospitality world and we have to do things like that because we have to force the best and the legends of hospitality to tip their hat and respect us because it's another rung up the luxury mountain. And I think where we've got it, I think it's entirely new market. I mean, no one's addressing it like we're addressing it. And so you think long term, you think about, hey, if I can have guest houses that work, if that works, that model looks really good. If I put 10 residences on top of the guest house and I can have a total ecosystem where our F and B and our restaurant services the room services the restaurant. You could in our 2nd guest house, as we talked about our 2nd guest house, where it is? Yes, we have it hit the news, right? Yes, it's in Aspen. Our 2nd guest house is in Aspen. And in Aspen, we'll have our 1st RH bathhouse and spa in the basement. And you start thinking of these elements coming together and creating residential ecosystems could that all kind of amplify, elevate and render each other more valuable in so many ways. And you come back to time and you think about businesses that deliver time value will become more valuable and we believe that deeply. We think that's why our business is very successful today because you don't have to go to 10 showrooms. You don't have to coordinate deliveries from everybody. You don't have to take the time and have the hassle. We're much simpler. We're much less friction, much less time. So all these elements of the ecosystem, we think we can do. There are things we already do in some way, shape or form. And the ideas we have for them are going to be very good. And I thought, look, this is a real crazy time right now. We're in a pandemic, we've got civil unrest, we've got global trade wars, all kinds of crazy stuff going on. Like for us, there wasn't a better time to unveil our long term vision. Even if it's just for ourselves, even if it's just for our the world needs hope, needs inspiration, needs a positive thrust, it needs more light and less darkness. So whether anybody believes in it right now, I don't really care. We believe in it. And the things we believe in, we usually bring to life and we usually do them pretty well. So we're not going to give you a model in the resonance right now. We've got models. They're all some degree of wrong. The question is, are they more right than wrong? Because once you get going and you do something, that's when you really start learning and that's where the learning curve accelerates and that's when you begin to really improvise and adapt and shape it into the right direction, into the right thing. But I think our vision is a lot more right than wrong, going to be some degree wrong. Think we're going to as we do everything else, we generally the things we do, We take a real swing at it. We do them relatively well. They don't all work. But if we're half right on this vision, it's a massive idea. If we're quarter right on this vision, it's the company is going to be 10 times bigger than it is today. I sit back and I go, look, Elon Musk is doing electric car, solar power, space travel, tunnels. I think humans, we don't tend to push ourselves to find out what's really possible. And so in our lifetimes here, we're going to try to do extraordinary work. It's what we live to do. It's what we're built to do and it's what we believe in. And so I think we'll be more right than wrong. And as we prove it, it'll play out. So That's a lot to chew on. I appreciate, yes, a lot to think about it. I'll pass it on to someone else. But yes, thanks for, I guess, extrapolating on the visionary. Sure. Your next question comes from Adrienne Yih with Barclays. Gary, I'm going to keep on this theme because I think it truly is revolutionary. Revolutionary. It reminds me of Bucarat Hotel, right, taking that luxury brand and then turning it into a new business. I guess my question is, did you not have a test of this back in 2016, in Crystal Cove, it was in Newport Beach. How is that different? Were you only doing the interiors? And what did you learn from that? And then secondly, like what's the sort of timing of the launch of services? So not necessarily this piece of the business, which seems far longer term, but the services that you talked about earlier? Thank you very much. Sure, sure. Yes, the Newport Beach Crystal Cove project was a project that our contract division, contract and hospitality division partnered with a builder. We were really hired to kind of do the interiors and so there was a partnership kind of there wasn't really we didn't control the architecture, the design of the homes and so on and so forth. So it was really more of an interior job. And they wanted to use the brand and we I'm always a little careful about that. We kind of let them use the brand a bit. And it's like I usually and I hope the guys crystal coke aren't on, but like there's not too much stuff that other people do in this kind of niche of architecture, interior design, landscape architecture that we believe people can do better than us. And that's why we think it will work. When you think about the timing of the launch of services, that'll be unveiled. Right now, we're highly focused on elevating the interior design business and investing heavily in interior design. You saw in our press release where we swung the investment pendulum back the other way. And we're going to continue to invest aggressively into our future. And interior design, we think we can take it to another level of professionalism and capability. We will probably test sooner than later in a market, maybe it's here in the Bay Area, somewhere where we test architecture and landscape architecture. Thinking about like right now in San Francisco, we've got a big new gallery opening. We've got a gallery opening here in Marin. They're right here. Do we test it in those two galleries? Do we take our old San Francisco gallery? I don't know if anybody has seen it. It's one of the most beautiful little buildings in the middle of the design district. It was built by Ed Hardy, who is one of the famous collectors and sellers of antiques, one of the key people at Sotheby's for years. And he built this beautiful Palladium building, beautiful garden courtyards. It's what inspired us years back to do gardens and rooftop gardens. And so we're thinking, do we geez, do we just hang on to that building, we own it, it's a very small investment. And do we put our services business into its own offices in this beautiful building that represents everything? And because we can't fit it all into the galleries, right? You'll have a consumer facing part. Like if you've been to one of our new galleries, in kind of the middle and the back in one of our prototypes, we've got RH interior design, very visible offices that you see through a glass wall. And so eventually that will become RH Architecture Interior Design and Landscape Architecture. So the vision is to have a kind of forward facing integrated services business, right, that kind of catches people, but you can't really you don't really want to operate a whole offices business out of I don't think out of the gallery and out of that space. I think it won't fit exactly right, right. It's good for a kind of a consumer facing part to kind of interface, meet people, make the connection and then have an office, a true office for the services that then are so you really have the space for people to work and the right equipment and tools and so on and so forth. So you'll see us testing that. You'll see us testing look, we have the residences, it will be coming very quickly, the first test in the market over the next couple of years. We'll be building out the ecosystem. You'll hear more about that in the OneTest market. It will be our first one. You'll hear you'll start to hear about the services business. We'll be testing that. That's why we wanted to get the vision out here because you're going to hear more about them. You're going to see we'll start to be able to communicate more. And then we look, the biggest thing we've got coming in the short term, the biggest thing is RH International. And we've got are the deals signed? How many are signed? We got 1 signed or 2? 1 is like they're almost all ready to sign. I mean, like working out the details. Dave, you're not is Dave on the call? He's not on the speaker line, yes. Oh, he's not on the speaker line. Okay, Dave can't talk. He's like, he asked to be? Okay. Yes, like he probably is talking right now. You guys can't hear him. We didn't give him a line to talking to. But Dave has really laid out an incredible beginning strategy in Europe for the brand. I think we're just going to it's going to be incredible. I mean, we it's mind blowing for us. So I can only imagine what it's going to be like for consumers. But the first gallery could be open in 2021, in the summer of 2021. We've got to move relatively quickly And it's the latest will be spring of 2022, but it could be 2021 that will open to RH England. That'll be followed by unless something goes wrong with the deals at the last minute, but they're just basically done, but followed by RH Paris, RH London. We've got multiple other ones that I won't go any farther. I don't want to jinx anything. I probably went too far. But those will these next two will be 22 or 2023. The complexity of the architecture on RH London is depends on how far we go with it. It's kind of 3 buildings we're integrating with a beautiful rooftop and a restaurant and all kinds of things. But it will be incredibly it will be one of the most exciting stores in all of London. The thing we're doing in England, which is kind of right outside London, mind blowing, mind blowing. Be the most exciting I mean, both of those would be the most exciting retail experiences we've ever done that it's good or better than New York in their own ways. And one is just you can't even imagine it. So at some point, one of the next decisions I know we're going to hit the timing, you will probably do an industrial Analyst Day, we'll lay the stuff out and we'll show you all the pictures, so everybody can kind of really understand it. But no one's ever introduced themselves into Europe like this ever. It'll be the most incredible first impression a brand has ever made. And so we're just extremely excited about that opportunity. And that you think about that, like 75% of our business should be outside of the United States. I mean, that's what the model should look like. That's what the wealth model is. That's what LVMH and Kieran and everybody else in Hermes' business looks like. So that's really the big as you think about those pieces and how we go. But yes, it's all going to start happening and that's why we put it out there and we thought, yes, it's a really good time to be sorry to be visionary and inspiring. And so for no one else but ourselves. No, I mean, it's very inspiring. So best of luck on that. We'll be watching. Thank you. Thank you. Your next question comes from Chuck Grom from Gordon Haskett. Please go ahead. Hey, thanks. Good afternoon. Can you guys speak to the pace of foot traffic within some of your channels, maybe the galleries, outlet stores and restaurants since they've been reopened? And then can you remind us, just you talked about just now, but your expectations for gallery openings in the balance of 2020 and also into 2021? Thank you. Sure, sure. So yes, we don't have high foot traffic retail stores if you just start there, right. We're relatively low traffic business except for when we have restaurants. Right now, the restaurants are we have 4 of them open, only half of them open and they're been open a week or 2 and they're operating in limited capacity and only I think 50% capacity. So we're not really a traffic counting company. And our business is just we like to say we don't really care about mall traffic and things like that. People that have time to walk the mall, the only thing they have to spend is the day, right? So we generally talk about creating our own destination and having fewer of the right customers inside our galleries. It's one of the reasons why you'll see some changes that we're making in New York, even from a hospitality experience, a bit guided by COVID and not having to operate with social distancing. But just the fact that in New York, our kind of our barista bar and wine bar kind of became kind of the we started to become the best free WeWorks, the free SoHo House, the free a way better Starbucks and we are serving a lot of people coffee and stuff like that. And they're sitting around in our furniture all day and making it hard to sell. So we're going to we're modifying things to actually have less traffic because it's not so much about traffic, it's really the right traffic, right, in our business. That's what we focus on. And we don't even talk about traffic, we really talk about the right customers. So we don't really we look at it through a different lens. The gallery openings for 2020 2021, we have Charlotte opening kind of the middle of June. We have RH Marin will open towards the end of June or early July. We're just got to work with the local restrictions here and things like that. We're ready to go. It's all merchandised. It looks great. The landscape looks amazing. We got to still Dave, if you're on the phone, we got to tweak the lighting around the crown moldings. But that's the only little thing that's left. I was there last night. And then we may have RH San Francisco opened in the Q4. We kind of shut down construction everywhere except for Marin and Charlotte. And so now we're rebooting up. And so we've got to see what's the complexity of booting up and getting back. And as everybody knows, construction is never smooth. But we could get San Francisco over the line and then we'll unveil next year a little later when we're more certain. And nobody knows is we're going to have another breakout of the virus in the late 3rd or Q4? Is there going to be any more kind of disruption and so on and so forth? What's that going to cause? Will there be work shutdowns? So that's some of the things we're up against, but yes, you'll see 2 or 3 happen this year. Okay. That's helpful, Gary. And then can we talk a little bit about the progression of your demand curve on the core part of your business? I think you guys said down 11 in 1Q, up 11 so far in June. Could you maybe amplify a little bit on what you're seeing by product, by region? Just any color would be helpful. Thanks. Yes, it's a general lift. I mean, there's some of the things that you're reading broadly about the outdoor business, things like that, that have bigger lifts and other things, which completely makes sense. People aren't going on vacations. They're probably buy outdoor furniture and going to be spending time outside. So we're having a strong outdoor season. And then other parts of the business, nothing that's surprising. Our best sellers are still our best sellers. And I think what will be interesting, and I kind of mentioned it in the letter, I don't know if everybody picked it up, but we are now going to mail a spring interiors book. I guess they're going to be a summer interiors book in the summer modern book. So we had initially pulled back all circulation. We killed the books. And that's how we were able to what was it, dollars 50,000,000 of ad costs we took out, right, because we killed the books in the first half. And then we saw the demand coming back. Difficult thing is our offices were closed, so we couldn't shoot all the newness that we had. So we're pushing the newness to fall, but we did kind of repuginate the books. We had couple of new things that we had gotten shot and we got into the books. But you never want to mail books. I mean, you never want to advertise into a massive headwind like we had, right? Those 1st several weeks, I guess, 3 to 4 weeks, we're you couldn't do anything to get the demand to change much. Even businesses that were running 10 or 15 points ahead of other businesses, all of a sudden everything went down. They didn't stay up. So that's why you never want to mail book into a wind. But now that the business has changed several weeks ago, we said, well, do we have enough time? Can we improvise? Can we adapt? Can we overcome? Can we get the books in the mail? Because it looks like there's they're coming back and we've got a bit of a tailwind. And so we just mailed the books. The books could make I mean, they're not going to do nothing, okay. We're mailing millions of books, our 2 highest volume books, And they're not going to do 0. So but I also don't know what the curve looks like, what the pent up demand looks like, what so we don't exactly know. So we could be, hey, maybe the business slows down and then the books pick up and we're still up 11. Maybe there's more pent up demand and as we open more galleries, the 11 is going to go to 15 or 17 and the 17 is going to go to 25 with the books. I don't know. But if you asked me, today, if I had a bet, I think it's going up, not going down. Not all of our galleries are open. Our restaurants are only half open. And our restaurants drive a lot of the right customers into our spaces. And right now, as the world's reopening up, we feel a lot more optimistic than pessimistic and a lot more excited. And we've learned a lot going through this pandemic. We're way better for it. Our people are the kind of an imagination and innovation that came out of our teams and how to operate differently through this and how to collaborate. And I mean, we're way better coming out of this. We're a way better team. Like we're like at least 30% better than we were, maybe 50% just because what we had to go through. Thanks, Gary. Good luck. Thank you. Your next question comes from Brian Nagel with Oppenheimer. Please go ahead. Hi, good afternoon. Thank you for taking my question. So maybe Gary, maybe a bit of a follow-up to that to the prior question. But clearly, a really nice rebound trajectory here. It held up well from Q1, your core business, then here into the second fiscal quarter. To what extent, as you look at the trends in your stores, to what extent are you seeing within this crisis, new customers, reaching a new customer and that customer helping to drive this improvement trajectory in sales? I haven't seen if you look at our I mean, the best way to kind of look at that is through membership. And so the numbers in membership don't look that different, new member growth, renewals, etcetera, and so on and so forth. So I think it's kind of a different business when you think about our business. We're an event driven business. People either bought a new home, remodeling a home or redesigning their home. And that only happens it happens very infrequently. So you might get a new customer and they might come in and spend a lot of money and do a design job and you might not see them again for another 10 years Or they might just come in and get some bedding or some towels and stuff like that. But our business is very much an event driven business. And so it's not like a lot of people bought new homes. We know that data, right? And so I've always thought about this. As we debated it here, we got shut down. We were running up 8. Our business in the core business went down 40. So we lost 48 points of business. Do all those people now not need furniture? Do they not? People like we inspire a lot of people to buy furniture, but most of our business is a good part of our business, I'd say, is a need based business, right? So when you're in a need based business, if you have a disruption and that disruption, if you have a fine this is an interesting thing that happened to us. And we didn't just like in 2008 and 2009, we had a financial disruption that was permanent, right? When I say permanent, like for a year and a half, right? Like the whole thing melted down. It was the market went down. It was a very different kind of impact. And this how permanent is this? Like, yes, we can talk about, I mean, what's the unemployment now, dollars 40,000,000, dollars 20,000,000 I think. $1,000,000 total of that. $40,000,000 Like, look, they're coming back. I mean, we've now brought back 75% of our furloughs, almost 80%. Yes. And they're all coming back next week or the week after, we'll be 100% back. Everybody we furloughed is coming back. And in many of the businesses, you're going to have a lot of people coming back. So to me, there's how much of this is now pent up demand. And then you might have some new customers for outdoor furniture, but were they just going to buy 6 months later or next year and now you pull them forward, like how much is pulling forward, how much is sustainable? Like look, I would not like I'm not picking on Wayfair. Some people think I'd pick on Wayfair. I just think it's really interesting that they have a market cap that's like 4 times bigger than ours and we make so much more money. We have our operating margins were like 20 something points higher than theirs. Like if they catch up to us in this lifetime, it will be a miracle. But the point is, I'm glad I'm not Wayfair. If someone wants to take a bet on is Wayfair going to be able to comp next year, no way. They're going to go up against 90 comp and they're going to be down 40. They were 30 or it's going to be a big change. So that's why we like a membership model, not a promotional model, right? You have all these kind of episodic things going on and it's harder, your business is more complicated and you got to comp it and Wayfair has got to sit there and think about how do we comp 90 up 90 when we were really only running up 18? How do you do that? Unless there's another pandemic and or something else drives everybody to buy cookware and toasters and all the other things and essentials and stuff. And I know we're not going to spend as much money on all that stuff next year for our homes like we've got all new stuff now. Don't need new coffee makers, don't need new waffle makers or whatever, stuff like that because we're like we used to eat out every night and now all of a sudden we're eating home every night. So some of these things are going to be kind of interesting. Again, that's why I kind of sit there and go, yes, did we get new customers, this and that, I don't know. Like honestly, those are all really little small rocks. Like if you focus too much on the little small rocks, you're just going to move little rocks around it, it looks a little different and you think you know more, but none of it's that important. What we're trying to do is look at what are the big rocks, right? What are those big things that can create real value and how do we move the big rocks and how do we create real value, big opportunities. So if all of a sudden we had the best data tracking and we knew how many people were new customers, would we do anything different? Nothing that was going to be significant strategically, right? We just try to be better all the time at the core things we do. And if we are, more people are going to wake up in the morning and think about us when they want to design their home, think about us when they need a new chandelier or a new sofa. And hopefully long term think about us when they want a new house. So we have to just be great at those core things. And then usually the rest takes care of itself. I appreciate all the color. Thank you. Thank you. Your next question comes from Oliver Chen with Cowen and Company. Please go ahead. Hey, this is Max on for Oliver. Thanks a lot for taking the question. The question. So first, you noted product margins are significantly higher quarter to date. Can you maybe touch on what's driving that? And then secondly, more broadly, as you are thinking about future gallery real estate developments, does the current environment affect that it's full of store closures? Does that put you in a more advantageous position as you look to continue to negotiate these capital light models? Thank you. Yes, the product margins, that's kind of again all laid out in that, was it Q3 press release, Jack, all the bridge to the operating margins, a lot of it has to do with product margins, cycling the outlet business, the accelerated burn down of inventory a year ago. So outlet sales are going to be down, but margins are going to be way up, right, because we closed that DC in the Q4 of 2018 and we pushed all the outlet inventory out and sold in an accelerated way. So you've got impact there. You've got an impact from going from a single source, rug manufacturing relationship to a direct sourcing relationship that's kind of laid out in that bridge. And then you've got just various other things where the businesses were expanding, the things we've done, the price changes, price increases we've taken, the new collections. If you bring new collections in that are more differentiated and higher margin and they work well, they lift the whole thing. We think about the businesses, the top third, the middle third and the bottom third, right? And if you bring in goods that are in the top third, it lifts everything up, whether it's sales or margin. Bringing things and they kind of perform like the middle, nothing happens. Bringing things that are in the bottom third and it drags everything down, whether it's sales or margin. So we've been I think we've been just doing better work, making smarter investments from an inventory point of view and a product point of view that are lifting margins and things like that. And we're just also just we like for instance, we like everybody else, right, whether this pandemic happened and this is actually great, so tell this story. We're thinking like, okay, what are we going to do? Do we promote? Like God, if we promote, will we screw up our model that we work so hard to build the membership, but we've got convertible debt coming on. What if the business stays down 40? What if it goes down 50? All the modeling we have to do. And we didn't do anything in Memorial Day. We didn't do one promotion and our gallery leader one of our calls with our all of our teams, our gallery leader from Toronto said, look, Gary, just you told it to the team, you said, you guys don't do it. Don't take a markdown. It's going to be really hard to climb that luxury mountain with crutches, right? And when we got a visual of that, we said like, yes, we can't do it, we can't go back there, right? We're just running the business in a very disciplined way. And if you have the right goods presented the right way, you've got great design, great quality and then great value. And that value is determined by the design and the quality, the combination of the design and quality at that price. If it's a great value, people buy it. And I just think we're we just keep doing a better job. And if you do a better job, you can earn higher margins. If you do the same job, you're going to have the same margins. Don't do as good of a job, you're going to have lower margins. I mean, it's just that simple. But yes, we look at it really strategically and we think about how to strategically build the model that we want to build. It's not accidental that we will have higher operating margins than last year. I'm pretty sure we'll be the only one in our category that does. And that's really it. And then the real estate development deals, yes. I joke around, it's like we're the most attractive person at the dance right now. And a lot of people want to dance with us because we're building not only the most beautiful and inspiring retail experiences that I think the world's ever seen, but they're among the most productive. I mean, behind Apple and yes, we in many places, our new galleries are the next highest volume experience. And in some places, we might be higher volume than Apple. And in most places, we're higher volume than the department stores, except for a few of the Nordstroms. But even in some cases, we're higher volume than them or higher volume Neiman Marcus in many places. So you have the most beautiful inspiring space with a hospitality component that looks like nothing else that is more productive than almost anything else in the mall. And it renders the mall more valuable, puts you in a good position to build a bridge and do a deal that's where everybody wins. So But that's why we also paid our rent. Nobody wants to do a deal with anybody who doesn't pay rent. So I wouldn't want to be in a lawsuit with any of my landlords right now. They're not going to be nice. Got it. Thanks a lot. Your next question comes from Stephen Forbes with Guggenheim Securities. Please go ahead. Good afternoon. So Gary, I wanted to touch on 2 topics. The first is Waterworks and then the second sort of being what you noted on the spread between demand and revenue growth and really just the manufacturing network. So maybe I'll start with Water Works. Can you just give us an update on the business there and less about how it performed and more about what you're thinking about the potential integration in that offering and the timeline behind that? Yes. So, look, Waterworks was an opportunistic acquisition at the time, right? It wasn't we had so many big things we are focused on, but Waterworks was marketing themselves and made themselves available. We it was always on our list as something as a brand, we'd love to partner with and integrate on the platform that we're building. And but it was an opportunistic acquisition and we did the deal when we did. And quite frankly, haven't focused a lot on it. We've tried to enable them to focus on their business and build the best business they can. And we're getting to a point where it will be the right time to kind of think about how to amplify Waterworks on this platform. And so not a real timeline yet. We've been all distracted and busy trying to get through this time. But in it sometimes probably later this year, we'll talk about what that could look like. And it's not that we've never talked about it. It's just deciding exactly how and when you do that. So it's a long term opportunity. I think look, I think the business on our platform could be multiple times the size that it is today. So and then the spread between demand and revenue really has to do with the dislocation of the supply chain. It's kind of really 3 or 4 things. So we were very aggressive to cut inventory and cancel orders when the pandemic hit. And that looked like a smart thing for the 1st 3 weeks and then by week 4, things looked a little better and then it started to get traction, right? So we it's hard when you cancel those orders and shut down. Factories pulled back, factories laid people off. And then you had factories got disrupted, right? Factories got shut down and not just in China and other parts of the world, but in North America. We have of our upholstery business, 57% of our upholstery business is in Asia, that's China and Vietnam and some other few other smaller countries. And 41% of our upholstery business, which is really what our biggest business is domestic, it's made here in United States. And so and then we have a small part of it is in Italy. And then if you think about the special order part of that business, which is a it's huge part of special order, 51% of the special order is Asia, 47 percent domestic, right? So domestic manufacturing in the United States was in shelter in place, shut down, not an essential business. Same thing, we have some of it in Mexico, right, and kind of shut Mexico got shut down and it affected our outdoor furniture business because our cushion manufacturing domestically and in Mexico shut down. So big back orders, big back orders building, time delays, so on and so forth. And so and then compound that with weak cut orders and then we have to try to catch up and in increasing demand, demand way better than we initially thought. We could have never forecasted what happened in the first 2 to 3 weeks of the pandemic. We were like everybody else, we were wartime trying to not get hit by the next missile and trying to figure out how to protect the business and protect the balance sheet. So that's a big piece of this. And then you've got this other piece where consumers have to want to take delivery. And so we have a whole bunch of consumers that for whatever reason, maybe they had a second home and now they're not going to be there and we're holding deliveries. And so we've that's a couple of points of it. And then so you've got revenue building. We're trying to catch up on receipts. So we got back orders significantly up, all compounding because the back orders are getting bigger and they're projected to get even bigger because our demand is going to grow. So and then factories coming back online, but then they've got to get back up to speed. It's not that easy. It doesn't all of a sudden they come back and they're at 100%. It might take them 3 weeks, 4 weeks to get back. So we think a lot of this will kind of I mean our initial numbers look like a lot more is coming in Q3 than Q4, but it never is exactly what you think. You can tend to be optimistic. So we think a lot more is hitting in Q3, some may hit in Q4. By the time we get all when I'm talking about all caught up, right, where we come back into kind of balance and harmony with the business. And so and then you guys ask yourself, if the back order for too long, do you have a higher cancel rate because of backorder time? So we could give a point or 2 of that back. I don't know yet. Generally, if we hit our dates, they don't get canceled. But if the factories tell you that they're going to be up in 4 weeks and instead it takes 8 weeks and then someone gets a back order notice and it's another 4 weeks, you might see some cancellations. So but there's a big dislocation there. That's why I wanted to call it out. It's the biggest one I've ever had. I've never seen one like this. So we'll continue to kind of update you and as this comes out, but I think our numbers are pretty good. I think we'll see 90%, 95% of it will all flow through. Some may get canceled, but we'll get most of it. And I think the majority today as we look at it will be Q3. And then just a quick one. If I think back to 2016 and some of the RH Modern disruption, right, there was customer combinations in order to provide people some window of time, right? I mean, are you feeling that from the customer today or are you sort of explaining the issue and you feel like there's a general understanding and appreciation out there? Yes. Right now, there's I'd say, for the most part, a general understanding and appreciation. Everybody knows the whole world stops, right? It's not like it was our fault like with modern, where we could try to blame the factory, the customer In their mind, it's our factory, right? So we just had to do everything to keep the customers. I think everybody has the same some form of the same issue. I think every retailer cut orders everywhere. And if you're in a business that runs back orders, many retailers don't have a back order business. Furniture businesses tend to. So I don't think we're the only one that's going to be in this boat. Ours is probably bigger because we've got maybe better performance in certain categories and our business because of our really strong kind of direct business, online business, we probably at least from the bigger product furniture side of the business, lighting side of the business, stuff like that, take away the kind of housewares, kitchenware, those kind of businesses that are creating really big lifts for a lot of people. If you kind of isolate more furniture based retailers And right now, right, we don't have any of those other ancillary businesses at all. We're super clean. We got rid of holiday and everything. So I think when you compare us to people in our category, furniture, we're probably going to have the best numbers in Furniture. So we'll probably have a kind of a bigger gap between demand and ship sales because of that. So but yes, we got a lot of history having gaps like this. It generally you might lose a little bit of it, depends on how we execute through it. If we can if the biggest issue you have is if you have to push the orders 1 or 2 more times, right? So that's where you start to get cancellations. Thank you, Gary. Yes. Your next question comes from John Baugh with Stifel. It's very quick. Obviously, if you're going to expand operating margins over time to 20%, I would expect your return on invested capital to go up. But I'm just curious with all the various RH residents and guest house and other things, how relative to the margin expansion? Thank you. Yes. I guess, it's a really good question. Really good question. So the answer is yes. The first guest house is no. And so but we've kind of already spent most of that capital. So that's in the rearview mirror. But to any new thing on test, you've got some investment. There's you've got to have something to sell and something to partner with people on. Our guest house model is going to be unlike some of the other people that are doing branded hotels that are really doing it with a flag, doing it with another hotel company and doing a baccarat hotel with a hotel group or a Bvlgari hotel with some hotel group, we're going to control the whole thing. But it doesn't mean we won't have a development partner. But we could be doing deals in the future like if we're the developer and we think that's the right way to do a deal, we'll be the developer. For instance, in Aspen, we have kind of a JV deal, right, with a profits interest and stuff. And so we've got different kind of deals in different places. Aspen is going to be capital light, New York is the first one, capital heavy. Why were we able to get capital light in Aspen? Because we've designed something in New York, we had something that sell. And we also you think about if we can bring the value of our business to a property and it helps a developer create value for themselves, we're in a position where we can share that value. So I think it's all going to depend on how well the first few do and how excited people are about them. And I think the first few are really important that way and get a second chance to make a first impression. So but this is very different than a West Elm Hotel or what's the other one that did it, the watch? Shinola. Shinola, people like that. I don't think any of those people are running their own hotels. They're just signing a flag deal and I don't think you don't really do much there. You kind of say, you go, use my furniture, design it this way, but you get a little bit of a revenue cut on it. So you don't have a lot of risk, but you don't have a lot of upside either. You don't really control the experience. We no different than I said that brands that create time value will become more valuable. We believe that brands with more control versus less control will become more valuable. I think that one of the biggest weaknesses brands have today is when they don't control their brand, they don't control their distribution. It's one of the challenges with Ralph Lauren today. They have to unwind all that shitty distribution. Think about how much of Ralph Lauren's business is in really shitty department stores. Like everything around the brand is rendering the brand less valuable. And I love Ralph Lauren by the way, one of my favorite brands. But that's a hard thing, they're unwinding like that worked for a lot of years, but they don't do a lot of business out of their own stores, right. So they don't control their experience. And if you contrast that with what Bernard Arnault has done over the last 10 to 15, maybe 20 years, I think he saw this coming and he invested in building his own platform. And now you've got a bigger and bigger percentage of LVMH's business controlling the experience from concept to customer, right. And those brands that control the experience from concept to customer, I think will become significantly more valuable and can control the brand experience all the way through and they have no risk of having somebody else render them less valuable, right? But you don't want to be a brand in a department store today. Like I was meeting with someone who had a great new brand and they thought they had a good deal because they're Nordstrom's is going to put them in or this or that. And it's even Nordstrom's, I mean, like it's I wouldn't want to be Nordstrom's today. This is just an old model. It's not a great model. Those they're all lucky. Their farm stores are lucky they have such cheap rent, but they don't control their goods. And then the people that are putting the goods in the department stores don't control the experience, right? Like so you go like EEC, bad model, like you're sitting ducks for someone like Amazon or some version of Amazon that disrupts you, where brands that really control the brand from concept to customer, from product ideation to product presentation, I think is going to be the really valuable brands long term. And I think that's been proven in the luxury sector. And I think LVMH has been a shining example. It's like brilliant, brilliant transformation in real estate strategy. And think, Kieran has done a lot of the same and Hermes, same thing. And so they're less and less dependent. So but for us, it's all the things we want to do, everything. It doesn't matter if it's a guest house, it doesn't matter if it's a restaurant, it doesn't matter if it's a residence deal. We might have a partner from a development point of view, but we will control it. We want to own it. We want it to be ours. We want to be great at it. And it's hard to be great when you're kind of licensing out parts of your business. No one's going to care as much as you. No one's going to love it as much as you. And if you want to be the best in the world, it is not for the faint of heart. It's not you can't rent that. You can't buy that. You've got to build that. And Gary, as a follow-up on that note, and I know the deals may aren't even complete and you don't want to get into the weeds and the details, but London and Paris aren't free. Are they Would you rate those as capital light, capital moderate, capital heavy, any lead there? Yes, I'd say 2 capital light. The first three, 2 capital light. 1, don't know, capital well, one of them we're working with Foster and Partners and they're so good. Like this is really it's like maybe the best architects in the world. And they did the Apple campus. They do so many I mean they just are so good. Their offices are so inspiring. And they their first pass at kind of weaving these 4 buildings together in London and what it could be, I'm like, yes, we're going to have to do that. And so it's going to be I'd say that's going to be more like a New York investment, but you should be making a New York investment in London, right? You should be making a New York investment in London. And by the way, New York, less than 2 year payback, That's really good. So and I think London will be like that. I think we will open up an entirely new market. Think about London like it's like opening in New York and not having any store in New Jersey or Connecticut or anywhere near like we've got all these stores around they're doing. If I took all that volume and I mushed it all into New York, man, it makes a lot of money then. So you might argue, well, you won't get the whole market. Well, I don't know. Like if you build something that's incredible and you have a great direct business and a great platform and you have there's nothing like us. We have way more competition in North America than we are going to have in Europe, way more competition in North America. So we might take us a little bit longer to get the brand awareness, but I don't know. Like in the main cities, they know us. They know us. And they're shipping to us or shopping from us. They've been in our galleries in New York and Los Angeles and Chicago and so on and so forth, Palm Beach. So anyway, the headline is it'll be a mixture and it if you have 2 out of 3 that are capital light and one's kind of capital heavy, you're kind of from a capital point of view, you're in the bottom third, which actually is not that's the right third for the capital investment. But again, you want to do great work, right? It's did we spend more money than we thought we were going to spend in New York? Yes. Is the gallery greater than we thought it was? Yes. Was it the right investment? 2 year payback on a flagship store like that in New York, find another retailer that's ever done that. That's made an investment at New York. No, most people don't make money in New York, right? They build a big store and they don't think they're going to ever make money. It's like it's a billboard. We don't really have that strategy. Everywhere we invest money, we want to make money. And so but some things you've got to yes, you have the courage like you have to have the courage to do great work. And if London takes a New York kind of investment, so be it. It's arguably the 2nd, 3rd most important city in the world, in the top 3. Like, if you're not going to make an investment there, where are we going to make it? So anyway. I appreciate the details. Good luck. Thanks. Yes. Thank you. Your next question comes from Tami Zakaria JPMorgan. Please go ahead. Hi, thank you so much for taking my question. I have a really quick one. So can you talk a little bit about how much of the announced $150,000,000 of cost savings did you recognize in the Q1? And do you expect any more savings in the Q2? And also how much of this is actually permanent given you eliminated some positions back in April? It's a good question. I know Jack, if we can kind of break that out, how do we think about exactly that's good. Gary mentioned we are reinvesting some of those savings back, right, dollars 90,000,000 dollars I don't have the breakout TAMI at my fingertips. So maybe we can follow-up. Yes. You've got a chunk in the Q1 and then you've got a chunk in the second quarter. Most of it was first half. Yes. Because if you think about the compensation savings from the furloughs, obviously, you have those upfront. And as Gary mentioned, all furloughs employees will be back in the next few weeks. So those were front end. Yes. Then the ad costs we put back in just kind of a little later, right. And then we had some ad cost savings in the second half. We're putting that back in. Yes, so yes, it's a good question. Let us maybe we'll do some work around that and maybe in the next quarter, we'll lay it out a little bit, so we can disclose it in a way that everybody knows the answer. So let's figure that out. Good question. We don't have the details laid out. Yes. Got it. Thank you so much and best of luck. Thank you, Tammy. Your next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead. Hi, good afternoon. I also have two quick ones. One, can you bridge us how to pay the convert in July the $300,000,000 relative to the $70,000,000 in cash at the end of the quarter? Is that mostly just from free cash flow coming here in the second quarter? And then a little bit bigger picture question. In retail, we've seen definitely a shift towards digital. It might be less so in your business, but you've also rolled out virtual design consultations in the quarter. So maybe just your thoughts on technology and consumer spending or consumer habit shifts, if that how that could impact your business? Thank you. So I'll start with the first question, Christina. As we've said, we're going to repay in cash, which means cash both that we've generated and cash borrowed on our asset baseline. So what you're going to see in the 10 Q that's going to be filed tomorrow is our availability on the line. And if you were to consider us repaying the debt as of today, for example, or as of, I guess, May 29 is what we had noted, we still have availability of $170,000,000 on the line. And so we will obviously, with the business trends we have, continue to generate free cash flow from there. So $170,000,000 on the line at the low point after you paid it. Assuming if we had to have repaid it by last Friday, that is so basically, it's I would think of that as a low point. That is what would have been available if we had repaid from the cash we have on hand with the remainder from the ABL. And so again, we will generate free cash flow from here and that will look a little different by July 15. Yes. Because cash flow negative in Q1 becomes our expectations becomes positive in all the next three quarters, significantly positive. Correct. And then the shift towards digital, I mean, we're going to we're making a lot of big investments this year. We just hired a new Chief kind of Digital Experience Officer, who is someone we've been trying to hire for years. I think he's one of the most creative, smartest people in the space. We consulted with us about 10 years ago, Harry. Yes. And we'll be joining us soon and we're going to make some significant investments in completely reimagining the whole website and it will move from a website to a portal. And we've got some visions for it and I'm sure it's going to change 100 times and the gentleman that's joining the team is going to have a, I'm sure, a huge impact and we're also going to bring in other talent. We're going to try to bring collection of the world's best thinkers, best designers, best technology, just with internally and external resources to kind of create a leapfrog experience, something that has never been done. That's equal to the strategic separation we have in the physical world today. So and I think that's going to be harder to do, right, because the screen size is the same size. You're more on a democratic platform. But we've got a lot of good ideas we've been thinking about for a long time and now we're going to make meaningful investment and we think we've got the right talent lined up. So the shift in habits, thoughts about technology or the shift in habits, I think that the shift to it probably got accelerated. If you think about e commerce world, I mean, you've got clearly, you've got a forced shift in habits. So I think we probably accelerated the shift to digital shift online by maybe 3 years or something, maybe more, maybe 5 years. So what was total online business last year is what, 15%, 17% something like that. So I don't know what's the projections for this year. But so maybe you get to 30%, 3 years faster, 4 years faster, something like that in total online business like on a sustainable business, sustainable way. So I don't think that's a massive change. I mean, that's I think it's a massive change for a short amount of time. I don't think this is not going to stick this level of spending. I mean, it's very different again if you're thinking about just basic essential things and putting them on a reorder with Amazon or whoever shampoo you buy or wherever you buy, whatever things you use, yes, all that stuff, there's been a forced shift and that will stick. I think a lot is going to be a lot like it was, just a little different, not a lot different for our business. It's going to be a lot different for some other businesses, right? But yes, I just think you're going to see the biggest fallout here is that or the biggest change is the best brands and the best kind of retail businesses will be much stronger coming out of this. And the people that were weak, that were on the fringe, the people that don't have a I was talking to a very smart investor, people I think is one of the smartest people I know on the planet. And he said, look, people that don't have a fully integrated multichannel business that's frictionless for the customer are going to be gone by 2022. That this is going to accelerate that. It's accelerating the weak retailers. Like Neiman Marcus was going to always go bankrupt. It's just were they going to go bankrupt 2 years from now or 3 years from now or they just went bankrupt now, right? And the weaker businesses, it just accelerates. So it's like a cleaning house. But history would tell you every time there's a cleaning house, there's like newness that comes. There's new grass that grows. There's new ideas that come to the market. There's new things that evolve. And it's different, but it's usually just a lot better. I don't see this isn't like when people were riding around in horses and carriages and all of a sudden someone came up with a car and now nobody uses horses for transportation. It's like this not going to be all of a sudden like no one's going to shop in retail anymore. It's not I think it's just an acceleration of a shift to online in certain categories and businesses and behavior that just got accelerated a bit. So I think people get like overly focused on this. They're just going to do a poor job of allocating the capital because they're going to like the trends are going to be, oh, everybody ought to be doing this. Like right now, it's a great time to be a consultant, right, like that has some digital pitch. Like look what just happened in the world, like here spend 1,000,000 with me. And it's just so it kind of happens after times like this. The consultants will come out with a new thing like omni channel, but the next thing or the post pandemic platform and they'll sell a lot of air. So yes, just to shift things were going to be different. It just happened a little faster. There are currently no further questions at this time. I'll turn the call back to Gary for any closing remarks. Great. Well, thank you, everyone. I do want to say to our team who has just done a remarkable job through this time. To our furloughed teammates, welcome back. And to the few that haven't come back, we'll all be the center of innovation and headquarters where the majority of the people that are not completely back, we're going to be able to open next week and we'll be able to welcome everyone back to the team. And 2, I just say, this time of civil unrest too, just every person of color and every black person in America, this is a very difficult time. And to the African American community and the people that work for us, they know how we feel and we've communicated that and we don't need to broadcast that to the world. We don't think that platform necessarily to grandstand for us. We're going to do our work and set our example inside our company. But let's say what we've said internally, we stand with you. You just have to have a lot of empathy for what's going on in the world. And just a lot of leftover really shitty bad habits of judgment and discrimination. And I just hope that the unrest we're going through, which I think is just needed, it's just needed. We've got to wipe it clean. And yes, is it messy? It is. Is it scary? It is. But it's also needed because sometimes you got to have fear in this world to get people to change. And you've got to fight for what you truly believe in. And there'll be people on the fringe that take advantage of it, whether it's diluting or the burning of things. That's not what this is about. That's unfortunately what's making the news. The 99% or 95% of the people that are fighting for the freedom that they deserve in this country and the respect that they deserve in this country, the words that are in the pledge of allegiance that we all grew up putting our right hands over the heart our hearts and talking about the land that has justice and liberty for all, not for some. We're still fighting that fight. But I just want to say that we're all affected by this and we're all troubled by this. And we all want to think about what's the best way to help. And sometimes it's just letting people know you truly care. So we just want everyone to know we care, especially our African American teammates who it's got to be a hard time witnessing this being a part of this and having those things resurface. Just know we care and we are here and anything we can do and if you want to talk, I know that your family is here and we're standing with you even if we can't be physically with you all the time. So anyway, but I just want to thank our teams for just an incredible job, incredible work, incredible imagination, incredible innovation going through the time we just went through, and we are just so much better. What doesn't kill you makes you stronger. So we're really looking forward to the time ahead. Whether we have another breakout of the pandemic or not, we're ready. So team Resto, team RH RH will be wet ready for anything and really excited about the future. So thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.