Earnings Call: Q1 2020

Jun 12, 2019

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter 2019 Earnings Q and A Conference Call. Thank you. Ms. Allison Malkin, you may begin your conference. Thank you. Good afternoon, everyone. Thank you for joining us for RH's Q1 fiscal 2019 Q and A 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 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 the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events. Also during our call today, we may discuss non GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non GAAP financial measures and a reconciliation of these non GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to the operator to begin our Q and A session. Our first question is from the line of Chuck Grom with Gordon Haskett. Hey, thanks a lot. Good afternoon. Congrats on a good quarter here. Just a question on the revenue change in the guidance. It looks like it was about $40,000,000 but I think you only beat the Q1 high end by about $10,000,000 So just wondering if you can unpack for us the change in the revenue assumption. How much is stronger a stronger core top line assumption versus higher prices from tariffs starting to flow through? And then, in addition to that, just wondering if you could also speak to cadence of sales in the quarter. It sounds like in the release that it accelerated, but curious if you could speak to that and also anything quarter to date? Thank you. So let me start with the revenue guidance. So it was at the midpoint, it was a $14,000,000 beat. So at the midpoint to the year, we're taking the beat up the guidance up $43,000,000 And so again, at the high end, you mentioned $11,000,000 the high end of the guidance is being taken up by $28,000,000 As it relates to higher prices due to tariffs, our guidance reflects fully reflects the tariffs and there's no assumption that higher prices roll through incremental revenue. So that is a reflection of the trends we're seeing and trends that we're seeing in the business. Yes. This is Gary. Let me echo that. We're basically we've got a chance now to see our post I think the market volatility and the stock market kind of stabilizing. We saw our business come back in the second half of the Q1. And we've also got early indications on RH Beach House as the book starts to roll in. We also have confidence in many of the underlying trends in the business as we look forward. So that's what gives us the confidence to look forward with the guidance that we have. Okay, thanks a lot. And then just my follow-up would be just any deviation in trend in some of the markets that have been impacted by the SALT changes over the past, say 60 to 75 days? Hey, it's Jack here. As we mentioned, this one we were watching just because of all the noise around it, heard anecdotes, but I got to tell you the data shows that there was no meaningful impact. So nothing that we saw. Yes, nothing yet. Okay, great. Thanks and good luck. And our next question is from the line of Michael Lasser with UBS. So you initially offered guidance for this year with the 4th quarter, then you took it down sorry, with the 3rd quarter, then you took it down with the 4th quarter and now you're raising it with the Q1. Does this just reflect some volatility in the underlying business? And where are you getting the Does this just reflect some volatility in the underlying business? And where are you getting the confidence that the volatility is going to be reduced in the back half? I'm sorry, can you kind of just give me that question again? So guidance was initial guidance established and it was brought down and now it's being brought up. So it would suggest that there's a lot of volatility in the business. What gives you confidence that volatility is not going to persist through the second half of the year? Look, we can't control macro or market issues. Nobody can, whoever's running their business. So we always pray for peace and plan for war. I think it's important for us not to get distracted by the short term noise and stay focused on the long term narrative that it's created a truly unique brand with the best operating model in our industry. So we can tell you what we're seeing today and what trends are today. If the market falls or we go into a recession or something different happens, something different happens. So I don't think it's our business that's the only business that's volatile, that the market's volatile. I mean, we're we happen to be the only business of our kind that has increasing meaningfully increasing revenues, meaningfully increasing operating margins and profitability. So that's one thing that's been consistent, right. We haven't really lowered meaningfully any earnings. So we beat earnings every quarter and we've had some movement in our top line because of the market volatility and editing parts of our business and trying to create a better model. But I think if you look back at the last 3 years, and just look at our numbers, I don't think you'd see volatility. I think you'd see a really consistently improving business model. I mean, we have the highest operating margins in our industry today. We believe that it's 400 basis points to 600 basis points more. So, but we can't do anything about what happens to the macro environment. So we keep an eye on that stuff and like I say, we have plans for if the market is expanding, if the business is expanding, we'll do certain things. If the marketplace is contracting, we have plans for that. So we just try to capitalize for our shareholders no matter what happens. That's helpful. My follow-up question is, as you look over the course of the rest of the year, it sounds like you raised your guidance for the next few quarters about $20,000,000 to $30,000,000 Is that coming from the contribution from new stores? Is it coming from more optimism around the launch of RH Beach House? Or is it coming from some of the legacy stores that have been around for more than a year? Yes, you got to be careful. You get lost in the details here. Look, our business trends reversed. The market fell 800 points in one day, the day after we gave guidance, right, in the 4th quarter. So when the it's a high for a high end customer, if the market gets rocked like that, it definitely impacts our business. We saw the trends change. We revised our guidance. Since then, the market's been consistently the Dow has been consistently over 25,000, right. So with the Dow stabilizing, people act differently. Look, I was going to in the Q4, I was going to buy a piece of property and build a new house. The market got rocked and I as a customer, as a database of 1, decided not to purchase the property and not to buy the house. Now the market stabilized, I'm looking at buying the property and building a house again. So it's those kind of things that are more affected than if you try to break down, our galleries are performing well, our product categories are performing well, they're performing better than what we guided, but they're performing more like what we would have expected them to guide in the market previously. And so we're halfway through the Q2, right. So we have pretty good visibility on the Q2. We've got good visibility on the second half of the first quarter. Those trends are pretty clear. And there's nothing surprising in the numbers. We're just happy that it looks like with the stability of the stock market that our customer is responding in a more normal fashion and that's not much more to it than that. Thank you very much. Okay. Our next question is from Steve Forbes with Guggenheim Securities. Good afternoon. I wanted to start with the home delivery experience. Gary, if you can, maybe just update us on the progress of the various tests and comment on some of the key learnings thus far as we work our way through the year here. Yes, we're very happy as we've indicated in the early numbers. We now see about $15,000,000 to $20,000,000 of annual savings that we think will roll in about 1 third this year, 2 thirds next year, just based on our early tests and what our learnings are. And we're just getting started here. We think there's going to be a lot more opportunities as it relates to reducing returns, reducing exchanges, taking more costs out of the system. We think as we improve the service level, which we're doing and there's been a big impact there that will if you think about returning excuse me, lowering returns and that directly is a positive to revenue, right. So if we can get the goods to stick, if we can have better delivery experiences, we have happier customers, happier customers are going to be repeat customers and buy more and so on and so forth. It's all good things for the brand. And I think it's probably for the most part in our industry, it's kind of the underappreciated strategy, right, because the uglier part of the business, we like to say this business is not for the faint of heart, right. It's an ugly baby, but it's ours. Back in my days in apparel, you had men's and women's tops and bottoms and accessories and it all came folded at the same size, it all traveled in the same size box and nothing broke in transit. Our business is exactly the opposite. Nothing comes from the same size box and everything can break in transit and get damaged. And plus, we have to take it into the customer's home and set it up and so on and so forth. So I think for us, we just really see based and it's probably based on our positioning in the market, right, because of our luxury positioning, it costs us more to make mistakes. I mean, it's all exponential. There's exponential savings and there's exponential costs if you're on the other side of it and the customers have higher expectations. So we're just investing more into that experience. We're leading it with much more focus and passion. We're into the details. It's not like a kind of a part of the business. It's sitting outside the business. Most of it, what percent are we in source now? 67%. 67% and we're going to 83%. Yes, we'll soon be at 83% with our own in sourced hubs. We're testing, taking total control of the in home delivery process. And we like what we're learning. We like what we see. We've made some significant leadership upgrades. We'll talk more about that probably the next quarter. So just because there's some confidential things happening there. But we think it's one of the big frontiers for a massive leapfrog in customer delight and engagement and also just operating earnings and leverage in our model. So really excited about it. And then as a follow-up, Gary, on the hospitality front, I know we talked about this in the past, but maybe you could expand on just menu optimization, right? You think about the success at New York and sort of thinking about the menu offering, right, throughout the dayparts at the various other locations. Do you think there's opportunity, right, to drive whether it's productivity or profitability at the different locations? I mean, what are you sort of thinking about as it relates to the hospitality offering broadly? Yes, I think you want to think about hospitality, right, as an amplifier for our core business. It's not our core business, right. So it really amplifies the experience for the customer and you have to really think about it, right. We don't we're not just focused on saying how do we make hospitality the most profitable. We think about it as an integrated model and how does hospitality drive how do we optimize the total model of the business with hospitality. So we're working on all kinds of things, right. Still really new at this. I mean, we have a real hospitality company. We've got 6 restaurants, a lot more on their way and guest house coming in spring next year. And so I don't want to under sell it because we have a real hospitality company inside of RH today. But as we think about menu optimization and other tweaks to the model, there are tweaks that we think will be helpful that will the key is got to optimize the integrated model, not just optimize hospitality, can't look at these in silos. You have to look at it as an integrated business model. We're looking at things like events and other things. We have so many people that want to use our rooftops, they want to use New York for their wedding or their vamits or their investment bank wants to take over for their event. And it would be easy to kind of say, oh my God, we could we can get $150,000 a day versus maybe the $30,000 or $40,000 we're doing out of the restaurant, right, if we do some events, but are those events really accretive to the business? Do they create the right customer experience that we're trying to curate and so you have to think hard about all those things and you can't sit in a silo. If I look if I was just running it it might have a negative effect on the bigger business. So you really have to kind of look at it as an integrated model. That's how we do it. And we'll update you as we make meaningful changes. But I'd say right now, we're just really happy that we've opened 6 restaurants, all in different locations across the United States in a very short amount of time and we're executing at a really high level. I mean, we don't get any complaints in our restaurants. We get I think we have an average of 4.5 stars Yelp rating. I mean, check that out against other really high end restaurants in any city. I mean, we our team is executing really, really well and to bring up a real business like this integrated into a much bigger business and do it seamlessly and execute at this level, I think has just been outstanding. And so we're just super excited about the opportunities going forward. But yes, we don't want to do a couple of things also and take a New York restaurant that's I don't know where it's tracking to about $11,000,000 maybe $12,000,000 Once we probably can serve outside New York, that restaurant price is $15,000,000 to $17,000,000 but you can sit there and easily create one of the highest volume restaurants in New York on the rooftop and it could be overwhelming to the shopping experience, right, and to the environment we want to create for our customers for the 90% of the business, right. So you got to be careful thinking about it. It's not where there's going to be huge leverage. Like that's a little rock. The big rock is hospitality integrated seamlessly and amplifying the customer experience at RH and optimizing the business model. Thank you. Our next question is from Tami Zakaria with JPMorgan Chase. Hi, congrats on a solid quarter and thanks for taking my question. So when you spoke last time, obviously, you sounded cautious and you attributed sales weakness to the stock market and high end housing. Since then, the high end housing market hasn't really improved all that much, but your performance has definitely been better than expected. So do you feel like you've sort of decoupled yourself or reduced dependence on some of these macro factors driven by the strength of your improved real estate and operating model? Yes, we think look, we think we've got a leapfrog model and we think we've created in many cases, a brand with no peer and an operating model that's significantly advantaged versus the rest of the marketplace and it's massively disruptive at the high end of the marketplace, right. So you really got to look at our brand and our business model in the correct context, right. A lot of people, I think, compare us kind of to more of a people who are really targeting different customers. The biggest disruption we're creating is at the very high end of the market is we continue to elevate the brand, right, not just expand the brand, but really elevate the brand, where we think the biggest share of market is where we're most disruptive. So, I tell people if you just had a point of reference in Marin County, where we sit today, we have a shopping center that's 3 blocks from us that we have a legacy gallery in. And in that legacy gallery, we do close to 18,000,000, somewhere around 18,000,000 without Baby and Child. With Baby and Child, we do 20,000,000 dollars in a small store in that center, it's a little over $20,000,000 If you think about that from Sausalito to Santa Rosa, which is Sausalito is the first city kind of get to across the Golden Gate Bridge and Santa Rosa is kind of call it the wine country up near Sonoma and Napa. There's really about 32 high end home boutique stores in that part of the market. And their average size is about 3000 to 15000 square feet. Today, we have a 7,000 square foot gallery that fits, kind of in the almost in the middle of that marketplace. And today, we don't look any differently than anybody else, even though our assortment is massively different, right. Someone would have to click on our website 10000 times to know the difference between RH and many of those other people who are somewhat competing for us for a high end customer. And so when we transform our gallery in this marketplace, which is under construction and opens this fall, My guess is the 32 competitors over the next 3 years goes to 16, because all of a sudden you're going to see a 50,000 square foot indoor and outdoor experiential immersion into our brand with hospitality and so on and so forth. And that makes us massively disruptive, right, to independent. It also makes us massively disruptive to the high end design trade, where you've got showrooms in high end centers where the customers don't have real access to without an interior designer or someone with a resale license. And so, yes, when you stand back, our strategy is not entirely dependent. Our growth and our expanding profit model is not entirely dependent on the marketplace. But what's happening in the marketplace, whether it's a slowdown in housing at the high end, whether it's an impact from tariffs or so on and so forth or stock market volatility, all of those things are inconvenient, but they're not disruptive to our long term strategy or business model, right. They're just inconvenient. And so when you think about making depending if you're an investor or a trader, right, if we you're an owner or trader, right, And today, traders can kind of control the marketplace around RH. If you look at our volatility without any news within the quarter, our stocks traded from like $120,000,000 to $85,000,000 on no news. And so we can't control that. There's many things we can't we just can't do anything about. But what we can do is we can kind of put the inconvenient aspects of what's happening in a marketplace to the side and we can and things that are not disruptive to our long term strategy and business model and stay focused on doing what we're doing. And over time, right, investors will be greatly rewarded and people who think like owners like we do will be greatly rewarded. And so that's how we think about it. We prepare for everything. The market happens, things go down, tariffs happen, they go from 10% to 25%, all inconvenient things, all things that are somewhat distracting, all things we have to stop and pay attention to and react to, but not things that we want to that we want to kind of not let those things control the narrative. They are not the narrative. That is not the strategic aspects of what we're doing. Those are kind of tactical things and distractions we have to react to. But I think you see in a lot of businesses, people just they let the distractions become kind of the focus of the company. And that's why sometimes you hear an impatience in my voice, right, by some of the questions, right. It's the same in patients my team hears from me when we talk about the little rocks and not the big rocks, because you don't create big value moving the little rocks around on the table. You just kind of the landscape stays the same. You trade value by focusing on identifying the big rocks and focusing on them. And by the way, the big rocks can sometimes look overwhelming. Most people don't want to deal with them. They don't they can't focus on them. They take enormous focus, enormous effort by an organization. But if you move 1 of the big rocks, you can tilt the whole table and all the little rocks will come, right? And I think that's why you see in the face of a lot of volatility and other changes that our operating margins keep expanding, our earnings keep getting better. The things that we have more control over than less control over are improving and not by a little. We're not sitting here trying to have operating margin stability. I mean, we're our operating margins are expanding by several 100 basis points in a market where everybody else is mostly going backwards or trying to hang on by the edge. And that's because we're focused on the big rocks. And so that's why sometimes I get a little impatient with the low level questions that are the distractions and the noise, so that we can stay focused on what's really important here. Because I'm sensitive to you guys distracting my team honestly. And we're not and we want to lead this organization to greatness, not get lost in the noise like most people do. Got it, Gary. That's really helpful as always. And so my follow-up question is about tariffs. What's the risk if the transport tariff that is being contemplated goes through? Does your guidance embed that as well? And can you remind us about your current exposure to China in terms of percentage of products sold? Hey, Tammy, it's Jack. So most of the round our product sourced from China is mostly in round 3. So a modest amount would be included in round 4, and we would react in the same way we have done with round 3 tariffs and address it as we've talked about. And then so the guidance, there's it's not specifically assumed that that's going to be included, but I'm not sure it would materially change just given the small amount that's left. And did you was there a second question that I missed? Yes. Could you remind us about your current exposure to China in terms of products sold? Right. It's about 40%. That's in terms of receipts that the purchases of our goods last year was about 40% from China. Our next question is from Mike Baker with Deutsche Bank. Hi, thank you. So a couple of follow ups and hopefully these aren't Little Rock questions. But on the tariff, I think you had said that you're planning on prices going up, but no impact to revenues, which correct me if I'm wrong, but I guess that would assume that you're thinking units would come down? And then also what are you thinking about the margin implication? Are you sort of passing through to keep the profit dollars flat or are you aiming at the margins, in other words passing through the cost increase plus a little bit? Yes, I mean, we wish we knew exactly how it would play out, right. But I'll give you our logic. Our logic is to try to stabilize or to kind of keep margins intact on a gross margin level with the product. So if you think about that, we renegotiated the price and get a lower price, right, but not the entire tariff. I don't know of anybody who's getting the 25% discount. But let's just take you take a piece of tariff take half or you get 2 thirds and then you balance that with a price increase of 3% to 5% and that balances your merchandise margin on the product. And then at that level, we're not changing sales. So that would imply that we're going to sell less units, right. And so we don't think that there won't be any market impact. There's a bit of a model impact, but it's not bad to have the same dollars and slightly less unit sales because you take a ton of cost out of the business, right? We don't have to buy that unit. We don't have to ship that unit. We don't have to receive that unit. We don't have to deliver that unit. We don't have to have returns on that unit and so on and so forth. So yes, of course, that would be one way the model could play out or the model could play out that the units stay flat and revenues go up. But it's no different whether it's a tariff or just a normal price increase in anybody's business. Starbucks goes through the same math, right? They raise a cup of coffee or macchiato by $0.25 and they go through the same math. Okay, thanks. That makes sense. If I could follow-up one more. I think we appreciate how your business can be impacted by short term movements in the market. But it sounds like your business stayed pretty strong in May, which frankly wasn't a great month for the stock market, probably because of some of the trade issues. But didn't seem to impact you as much as it did at the end of last year. Is it just a function of magnitude? I mean, the stock market was not great in May, but it wasn't certainly down 800 points in one day. So I suppose there's some level of stability before you start to see weakness in your sales trends. Is that a fair way to look at it? Correct, Mike. I think that's the right way to look at it. I mean, I think the Dow was down, what, 18% in December, right? It was the worst December, I think the worst December in history. And so you think about that, everybody is home for the holidays, with their families or on vacation and the market is down 18% in December. That's a big deal. I don't want to small volatility of the market moving from 26,000 in the Dow to 25,000 or bouncing between 24,000 26,000, that's probably not going to have a huge impact, might have little impact here or there, you might get a little spooked, but depending on how severe the moves are. But if it's based on our history, you really have to have kind of a meaningful move. And when a market drops 10% to 20%, 10% is a meaningful move, 20%, almost 20%, that's a big move, right? And so all of a sudden, most people have most of their net worth, high net worth people, most of the net worth is tied up in the markets. And so whether it's the financial markets or the real estate markets. And so whether you're investing in a REIT or not, that might be a public entity. So if you get the public markets moving 18% down, yes, I mean, I would expect our business to get impacted. That was no surprise to me. The fact that we just guided up the day before of the 800 point drop, bad timing, got that like wish I was Karnak, and I could hold the letter up to my head, knew what was going to happen the next day, but we don't. So it's inconvenient. We react to it. We adjust our numbers. Stock gets volatile, got it. But we're playing a much longer game, right. So it's we don't get sucked into those things. We stay focused on the big value driving strategies that are going to create leapfrog moves in the company and that's why we have a clear line of sight to another 400 to 600 basis points of operating margin and feel very confident we're going to get it. Could it get delayed by a recession somewhere over the next 5 years? It could. Is that fundamental to the strategy or model? It's not. It's inconvenient, okay. It's inconvenient. We stay on our course and we'll come out the other side. It's just no different than if we were sailing a ship out in the seas. A storm comes, it's not fundamental to the fact of where you're traveling, it's inconvenient. You've got to sail around the storm or you're going to sail through the storm, but it's not a constant, right? The storm is not a constant. A market correction is not a constant. A recession is not a constant. We've bounced back from every recession in the history of the United States, every single one of them. We've bounced back from every market correction in the stock market, every single one of them. So like we don't if there was data that said, oh, the markets there's history of the markets going down by 25% and never coming back, different. Yes, that's different. But then you kind of change your lens. So these things that are short term episodic and inconvenient, yes, there are things that just happened. You just got to be prepared for all those things and not let them distract you. Stay focused, right? Don't focus on the noise, focus on the narrative. Understood. I appreciate the color. Thank you. Our next question is from Elizabeth Suzuki with Bank of America. Great. Thank you. Can you just talk about what went into the capital allocation decisions this quarter, specifically taking out some debt and utilizing liquidity from the revolver to buy back shares? Yes, we didn't use the revolver really to buy back shares. We took out some incremental debt to buy back shares because the stock thought the stock was undervalued. So no different than we have over the last 3 years. So we try to capitalize on market volatility or the market, we believe the market undervalue our shares. And again, it's just math. If you do the math on what we're borrowing the money for and how long we think we'll hold the debt and what the cost of the debt will be and what the price of the stock is and how much we're buying stock back for and what we think the stock is going to be worth in 3 years 5 years. It's just math, it's just investing. So that's just capital allocation. Okay. No, that makes sense. And just one other quick one, which is how much of the RH Beach Health line is all new product? As we kind of look through catalog, it looks like some of it, if not all, was product from the core line. Is that the case? And is this more of a marketing tool than a platform to launch all new product? Or is there a significant portion of that? It's like 70% new product. So it's like 70% new Our next question is from Christina Fernandez with Telsey Advisory Group. Hi, good afternoon. I wanted to ask on the gross margin guidance for the Q2. It looks like it's down a bit year over year even with some of the adjustments for the lease accounting. Is there anything that we should know about the second quarter and the puts and takes as it looks like you're expecting gross margin to recover a fair amount in the back half? Hi, Christina. Thanks for the question. So there's 2 dynamics that are occurring in the Q2. You may recall, we talked about the drags to our business in the Q2. One of those is the transition in our rug business model. So we were going from a single vendor to a direct source model. As that We're updating all that in. So as we sell down through the inventory and that inventory is sold down throughout a lower margin, you're going to see pressure on the margin there and that's some of that's reflected in there. And then you may recall, so at the end of Q3 last year, we exited a DC facility on the East Coast. That facility had basically become had reverse logistics sort of outlet inventory that was stored there and we've there's just some that we've accelerated the sell through of and that has the biggest impact. That's what you see an acceleration of those sales in Q1, Q2 with the biggest impact in Q2 is what's expected. So those two dynamics are what's weighing on not seeing a gross margin bump in Q2. Thank you. And as a follow-up, you're seeing 2 stores delayed a bit to next year, but still think you can open 5 to 7 stores 2020 and 7 2021. Given the complexity of your stores, I guess what gives you confidence that you can achieve that higher level of store openings? Well, we're moving in many markets to our new prototype and our new prototype now is engineered much more simple. We've now have how many under construction, Dave? We've prototyped. 4. We have 4 under construction today. We know what the timing looks like on those prototypes. We've learned from them and we have a lot of confidence in schedule, but that's just one aspect of it. The other aspect of it is just the pipeline because if you think about our real estate model and kind of where we are, we are much more desirable today because we have a proven model from a kind of a home and interior design point of view. And so we now shown to the development community, we're consistent performer. We can do the kind of volumes out of these bigger stores that we're building out of the galleries. And that is creating much more certainty for them, right, deal certainty for them and is much more attractive, right. We look like a modern day anchor tenant. And then secondarily, we now have a proven hospitality strategy and we are very accretive to a developer because a developer all developers, no matter if you're doing a street or you're doing a lifestyle center or even a traditional shopping center, everybody needs hospitality for traffic, right. And so what developers normally have to do is they have to put up big T tenant allowance money and give relatively prime real estate to hospitality concepts. They're generally ground floor concepts. And now we have we give the mall or the shopping center or the street, a hospitality concept that's on a roof. And they don't have to give away the real estate. There's no incremental real estate on our side. We're getting better deals and more capital to build the stores. And because of these new dynamics, we just have a much bigger robust pipeline of deals. So that's why we said, I think we said at least 7 in 2021, right. So if we said at least 7, we have a lot more than 7 today on the map. In fact, today we have 11 stores that could open in 2021. And so and we have 7 stores that could open in 2020. So we sit there and say, okay, if 2 fall out of 2020, we know we've got at least 5, right. And if there's some delays at all and there shouldn't be as many delays, but these are big development projects. So something can go wrong. It could all of a sudden force an environmental study on us on parking and other things and impact and because we're building buildings. But if 2 fall out of 2020, all of a sudden 2021 has goes from 11 to 13. Are the odds that 5 fall out of 2021? That ain't going to happen, right? So today, we feel really good about 5 will open in 2020 and at least 7 in 2021. But it could be 7 open in 2020 and 11 open in 2021. I mean, I don't we're not going to put that out as guidance, but that's what gives us the confidence. We have a lot in the pipeline and of those, let me just count those, of those 1, 2, how many we have there 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14. Yes. So of the 18, I just said, 14 are prototypes. So that's never happened. That's also changed, right. Our next question is from Brad Thomas with KeyBanc Capital Markets. Good afternoon. Thanks for taking my question. Gary, I was hoping you could give us an update on some of your research about international markets and latest thoughts on when you might have your first gallery opening overseas? Timing is really good. We're super excited. We are leaving right after the Warriors win Game 6 at Oracle. And we are we have how many of us? 10 of us are on the plane. Yes, 10 of us on a trip to 10 cities in Europe to finalize real estate deals for global expansion. So and we've got lots of tentative locations. I'd say 2 in Europe look like they're almost done in 2 great cities. Oh, don't say, I'm getting don't say anything, I'm sorry. Yes, yes, okay. Like I'm getting waived off. Don't say it's like, yes, they know I can get excited. I'll become an over share. But let's just say we're seeing 10 locations in Europe, a couple we feel very strong about and we've been working on for quite a long time. We're looking at locations in South America, locations in Australia. We're very active. We have people that want to partner us with us in China and the Middle East. We're just trying to go through to how much control do we want to have versus how much speed and other people's capital do we want to use. So more to come, but we're anticipating this is going to be a very productive trip for us. And Gary, you've talked about the opportunity being very big. How should we think about the potential returns and cost to open a store overseas? Yes. Good questions. Based on the work we are doing now, we don't see it as materially different than our current model, except for I don't think it's going to be as prototype as rich. They'll probably be more historic buildings. They'll probably be more kind of unique development just because we probably won't be as America is much more shopping center based, more traditional. So but as we think about it from a capital point of view, we think it's going to be relatively neutral. We think we're going to be able to do development deals in some of the cases. But when you think about the size of the opportunity, I mean, we say in there, we think with Global could be a $7,000,000,000 to $10,000,000,000 brand, right. So I mean, that's super conservative. If you really step back and you look at sometimes I call us the dumb Americans, right. Because we grew up here, we think America is the whole world and we cannot really see the world very clearly if we are kind of American based company, we tend to we'll see a famous Anais Nin, We don't see things as they are. We see things as we are. We see things through our own head and our own perspective. But if you stand back and you really think globally and you just say, what does the landscape of global businesses look like in the high end luxury market for people that don't have a U. S. Centric view that really have a global view. When you look at companies like LVMH or Kirin or Chanel or Hermes or like real global brands, only 25% of their business is in the U. S, 75% of their business is outside the U. S. We're building today, we believe will become the most premier and dominant global home brand. That will be massively differentiated and should kind of live in that world of those other brands that I've mentioned. That's where we're heading. That's why we talk about it's not about expansion, it's about elevation of this brand. That's where the biggest opportunity is. So if you looked at that as a model, which I and what I believe is I believe long term, if we believe we can be $5,000,000,000 in North America, then we should be able to be $20,000,000,000 if our model looks like other models. And there's no reason it shouldn't because the high end demographic spends exponentially more on the home, like even more on the home than they do on apparel. So they might buy even more Chanel and Laura Piana, whatever brands you want to use, Louis Vuitton and so on and so forth. But walk into those people's homes and you'll see how they spend exponentially on the homes and they have multiple homes. And the average second home has twice as many bedrooms as their primary residence. And when you get into the ultra high net worth individuals, you get to yes, they have 34 homes. So I look at it long term and I go, survey says, this should look like these companies. And I don't think there's any reason it shouldn't. It's just it's going to take us longer. We don't have a lot of experience. We're going to have to learn. But the good news is we weren't trying to do it 10 or 20 years ago. I mean 20 years ago is a lot different. Today, we're in a completely different world. Everybody speaks English, everybody communicates the same way, everybody's on the same communications platforms. So it's much, much different. And the world is about global brands. That's the world we live in. And that's why we think it is the single biggest long term value creating strategy is the global expansion of RH because we're miles ahead in the U. S. And we're even farther ahead internationally. The development of high end home internationally is almost not there. It's like invisible. So we think we'll be even more disruptive internationally than we are domestically. That's great. Thank you, Gary. And our next question is from Seth Basham with Wedbush Securities. Hi, good afternoon. It's Seth Basham. My question is around interior design. You mentioned investments in interior design in your letter. I was hoping you could provide an update on what changes you made here recently and if you think you still might charge for these services one day? Yes, that's a really good question. But we're really focused on it. And we think there's some leapfrog moves here and probably in the not too near future, we'll have something really meaningful to announce. But we're we're continuing to make investments that not only in our galleries where we're the new galleries will have, if you've seen RH New York, you can see it's the first time we embedded kind of it's like embedding a design firm inside a retail gallery where we actually built out offices. The consumer can look in, see the offices, see interior designers in there. We have presentation rooms in the building designed where we can have private meetings and presentations. And you will see that in all of our new galleries. You will see embedded interior design firms and offices. So that's a big investment for us. And we think we can even make it a bigger presence. Now that we see what's happening in New York, you'll see it becoming an even bigger presence. We think interior design and the expansion of interior design and really being taking a business, most of these service businesses like interior design, architecture, landscape architecture, they're not consumer facing businesses, right. They're like these businesses that you can't see. You have to ask somebody who's your interior designer. You have to go online and kind of research and but you don't walk by interior design offices, you don't walk by architecture offices, landscape architecture, things like that. So we think long term, this we're starting with interior design. I mean, you could we could become a whole services platform because none of these businesses are consumer facing. They're all actually relatively good margin businesses if you can get any kind of scale as we've done more and more research, but there's hardly any scale. I mean, what are the numbers? 13,800 interior designers, interior design firms, with an average of $1,000,000 of volume and it sounded like 93% of the firms have 8 people or less or something like that. Yes. And so it's a massively fragmented business that people have perceptions that it costs too much and it takes too long. And so we think it's a huge opportunity because again, if think about it, it is a if we think about it as a separate business and actually build a world class interior design firm, it's also a massive amplifier to the business we're in, right. And it becomes part of what when we talk about this integrated ecosystem of businesses that all render each other more valuable, right. Interior Design renders our retail business more valuable. And long term, you could even think about architecture and you can think about a landscape architecture, you think about a whole services platform that becomes consumer facing where we have these big galleries, right, that we're building that are architectural statements. There are statements about great architecture. There are statements of great interior design and with our rooftop parks and gardens, they're statements about great landscape architecture. And so long term, we think there's a much bigger idea here and interior design becomes the first step. And the point about charging is, yes, like we look, nobody values anything that's free. And so it's just, in fact, it gives you a perception of quality is not good. So we started there. And as we professionalize, as we get significantly better here, we will move to a model where we charge for interior design. There might be a complementary period where we engage with you, so we can help you understand the services and what we might do and so on and so forth. And to get the best talent in the industry, we have to run it like a design firm. We have to charge for it. I mean, our people don't even like that we don't charge for it, because the customers don't really take it as seriously. They don't take your time as seriously and so on and so forth. But so long term, huge, huge opportunity. It's one of our big value driving strategies is interior design and long term, a whole integrated portfolio of services that become part of our ecosystem and all render and render each other more valuable and amplify the RH brand. And that's very helpful. And just as a follow-up, what percentage of your sales right now are supported by a designer? I think you've given out that stat in the past. I was just wondering what the update number is? Yes. I don't know if we have. I don't want to give it any Like if we don't print it, I don't want to give it anymore. I don't want anybody to know what we're doing here. I mean, I've already given I've already gotten too excited and gave you too much right there, right. And the only reason I just told you what we're going to do right there is I don't think anybody else has a chance of actually trying to pull off what we're going to pull off. But I don't want to start giving the metrics because it'll just be too important to other competitors. Good stuff. Understood. Thank you very much and good Our last question is from Chuck Grom with Gordon Haskett. Jack, just wondering if you guys wanted to comment on the refi for the convert that's coming due, I think, in a couple of days. And then just as a follow-up to that, inventory levels were under excellent control again. Just how should we think about inventory levels as you guys progress throughout the year? Thank you. Sure. So on the refi, as we've said, we're going to repay it from cash on hand and borrowings on the revolver. And so it's due this Saturday, which obviously business First Business Day falls on Monday. So we're you'll see on the 10 Q when it's filed tomorrow, there's excess cash on the books and that will go down to just the bare minimum level we need operating for operating purposes and then we'll draw the rest. So that's just the simple plan. And then beyond that, we haven't we don't give specific inventory guidance, but you've seen, as I've mentioned on last call, you've seen a continued improvement in our inventory turns based on the moves all the moves we've made and the enhancements to our operating platform. So you saw a slight enhanced just if you calculate inventory turns on the face of the financials, slight, very slight improvement in Q1 versus Q4. That's I would just expect that sort of to continue. So certainly some inventory improvement assumed in our free cash flow and our guidance, but we're not giving a specific direction beyond that. Understood. Thank you again. Our last question is from Mike Baker with Deutsche Bank. I figured if Chuck was going to come on to one more, I may as well also, and this should be a quick one. The free cash flow guidance didn't change even though your sales and operating profit guidance change. I presume that's just because of the increased interest expense. Is that the right way to think about it or is there something else that we'd be missing in there? No, I think that's correct. If you were just as you see our operating income guidance went up by 20 just under 20 and our interest expense, as we noted, was about 20 incremental. So it was a wash from that perspective and free cash flow guidance remains the same. Understood. Thanks. Appreciate it. Great. Well, thank you everyone for your interest in our brand and business and we look forward to talking to you next quarter. Thank you. Thank you. This does conclude today's conference call. You may now disconnect.