RH (NYSE:RH) Q2 2024 Earnings Call Transcript

RH (NYSE:RH) Q2 2024 Earnings Call Transcript September 12, 2024

RH misses on earnings expectations. Reported EPS is $1.45 EPS, expectations were $1.53.

Operator: Good day everyone and welcome to today’s RH Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, today’s call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2024 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filing 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 opinion 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 Gary.

Gary Friedman: Great. Thank you, Allison. Good afternoon, everyone. Thank you for joining our call. I will start with our prepared comments in shareholder letter and then open the call to questions. To our people, partners, and shareholders, we are pleased to report that demand was up 7% in the second quarter and has continued to inflect positive, gaining momentum each month with July finishing up 10%. Demand accelerated into the third quarter with August up 12% and product margins inflecting positive despite operating in the most challenging housing market in three decades. Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia and the Middle East over the next decade.

While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry. Vectors are measured in magnitude and direction, and can be effective in forecasting strategic separation and future market share gains. It is now clear that our vector is increasing by both measures as we are outperforming the industry by 15 to 25 points. We expect our performance will continue to gain momentum in the second half of 2024, fueled by our multi-year effort to elevate our product, and a multi-decade effort to elevate and expand our platform. We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and adjusted EBITDA margin of 17.2%.

While aggressively investing into a downturn has put pressure on short-term results, it has also positioned RH to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. We believe our demand performance demonstrates we are the best positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower, closing the affordability gap that has suppressed the market for the past several years. Every act of creation is first an act of destruction, Pablo Picasso. We have worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry.

Our product transformation plan for the second half of 2024 includes, the second mailing of our new RH Interiors Sourcebook, which arrived in homes mid-July through mid-August, and is fueling our industry leading demand. With new collections and improved in-stocks, our demand should continue to build throughout the second half of 2024. Post analysis of our circulation data, we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern books to optimize overall mailing depth and efficiency. Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry, and is aligned with our Gallery strategy of fewer, more immersive and brand defining physical experiences.

The second mailing of the new RH Modern Sourcebook is scheduled for November with additional new collections and an expanded assortment, including the Contemporary book consolidation. Again, we believe our expanded assortment and improved in-stock position will provide an additional lift to our business in the fourth quarter. The third mailing of the new RH Interiors Sourcebook is planned to be in homes early January through February, capitalizing on what is traditionally one of the largest selling seasons for furniture post consumers and designers returning from holiday travel. This mailing should help generate a strong finish to 2024 and continue the momentum as we enter next year. As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category.

The Waterworks team has done an outstanding job over the past eight years further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of its revenues from the trade market, selling to architects, designers, developers and builders. While RH has a meaningful trade business, the vast majority of our revenue is generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we have expanded other trade focused businesses and brands over the years. Our plan is to launch with a 3,000 square foot Waterworks Showroom in our largest new Design Gallery in Newport Beach, California, opening in the fourth quarter of 2024.

We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid-to-high teens EBITDA margin that we believe has the potential to become a billion-dollar global brand on our platform. Let me shift your attention to the elevation and expansion of our platform. We continue to open the most inspiring and immersive physical experiences in our industry and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry and perfect proportions. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces with garden courtyards, rooftop restaurants, wine and barista bars. Spaces that activate all of the senses, and spaces that cannot be replicated online.

Our plan to expand the RH brand globally, address new markets locally, and transform our North American Galleries represents a multi-billion-dollar opportunity. Our platform expansion plan for the second half of 2024 includes, RH Newport Beach, opening in November with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean, will be one of our most dramatic, immersive and brand defining physical locations to date, and will replace three legacy galleries in the region. With a 260-seat Indoor-Outdoor Rooftop Restaurant with uninterrupted views of the California coastline, two Wine & Barista Bars, an Interior Design Atelier, our first Waterworks Showroom, and the most expansive Luxury Outdoor Furniture assortment in our industry, RH Newport Beach will be an inspiring destination in the Southern California market and has the potential to become our second $100 million plus Gallery.

RH Raleigh, also opening in November, features 50,000 square feet of indoor and outdoor space over three levels, with a Rooftop Restaurant, Garden Courtyards, a Wine & Barista Bar, and an Interior Design Atelier. RH Montecito, opening in early December, is a reimagination of the Historic Fire House in the charming enclave perched above Santa Barbara, California, featuring an indoor-outdoor Courtyard Restaurant with fireplaces and fountains, a Wine & Barista Bar and an Interior Design Atelier. The opening of our first RH Interior Design Office in Palm Desert, California this November. We believe there is an opportunity to address new markets locally by opening Design Offices in neighborhoods, towns and small cities where the wealthy and affluent live, visit and vacation.

The Palm Desert location is a unique test of a consumer facing professional interior design office, separate from a Gallery. Our goal is to establish the RH brand as the leader in the world of professional interior design, and enable us to attract the highest caliber of interior designers in the industry. As we look forward, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris and London in 2025, and Milan in 2026. It is then we will begin to have the scale to support the advertising investments necessary to build our business across Europe. We are looking forward to discussing our global expansion in further detail once we open those important markets. We are also making meaningful investments to elevate and differentiate our online experience and will be making meaningful upgrades to our website throughout the second half of 2024.

Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market. We plan to file for design patents on several of the user interface and presentation designs and will begin to discuss the new website strategy in more detail as we roll out the new functionality. Now, let me turn your attention to our outlook. Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout fiscal 2024 and into 2025. Due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately 4 to 8 points until we read and react to the new collections, reduce backorders and shorten special order lead times.

Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business. We believe it is also important to note that we are now forecasting to end the year with an increased backlog of approximately $80 million to $100 million due to revenue lagging demand throughout 2024, which will negatively impact adjusted operating and EBITDA margins by approximately 100 basis points for the year. Additionally, investments and startup costs to support our international expansion are now estimated to be approximately 230 basis point drag for 2024. Due to our inflection ramping later than expected, we are adjusting our full year forecast for fiscal 2024 as follows on a 52 versus 52-week basis.

Demand in the range of 8% to 10%. Revenue growth in the range of 5% to 7%. Adjusted operating margin in the range of 11% to 12% and adjusted EBITDA margin in the range of 17% to 18%. For the third quarter of fiscal 2024, we are forecasting demand growth in the range of 12% to 14%, revenue growth in the range of 7% to 9%, adjusted operating margin in the range of 15% to 16% and adjusted EBITDA margin in the range of 21% to 22%. Leaders have to be comfortable making others uncomfortable. Leadership is about pursuing a vision, something you’ve never seen, that’s somewhere you’ve never been. As creatures of habit, change is uncomfortable for humans, but for the people and partners of Team RH, a culture of leadership and innovation is at the core of who we are, and reflected in everything we do.

We’ve grown comfortable making ourselves and others uncomfortable for over two decades, and plan to continue doing so for the foreseeable future. It’s what leaders do, and how we know we’re on the right path. Whether it’s launching the most prolific product transformation in the history of our industry while others are hunkering down during the worst housing market in three decades, or opening the largest and most immersive physical retail experiences around the world while others are shrinking or closing their stores and moving online. By refusing to follow the herd into the anything-but-social world of social media, you won’t find us on Instagram, or by paying a bunch of strangers, called influencers by some, to say they love your brand on TikTok, one thing you can be sure of is that the place you will likely find us, is on the road less traveled, one guided by our vision and values that will continue to ignite our spirit and inspire our customers.

Over 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of Oxydol laundry detergent on the cover of its catalog into the leading luxury home brand in the world. The lessons and learnings, insights and intricacies, the sacrifices made and scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and form cultures in organizations. Lessons that can’t be learned in a classroom, or by managing a business, lessons that must be earned by building one. In a world that rewards duplication and penalizes the inherent bumpy road of innovation, especially for companies in the public domain, we the people and partners of Team RH will continue to drive ourselves to destroy today’s reality so we can create tomorrow’s future, while remaining completely comfortable making ourselves and others uncomfortable.

Never underestimate the power of a few good people who don’t know what can’t be done, especially these people. Onward Team RH. Carpe Diem. Operator, we will now open the call to questions.

Operator: [Operator Instructions] We’ll pick our first question from Curt Nagle with Bank of America. Your line is open.

Q&A Session

Curt Nagle: Great. Thanks so much for taking the question. Yeah, so I just know with the inflection demand trends driven by all these new product launches coming through, I’m feeling pretty good about the product margins. I think you called that out in the press release, stable, hopefully up for the rest of the year, putting you, I guess, above the phrase or market that feels a little more promotional. What are your thoughts on that?

Gary Friedman: I’m sorry. You were kind of — we couldn’t quite hear you.

Curt Nagle: Yeah, just with the inflection, new products right, good margins, how we’re feeling about the product margins for the rest of the year? That’s the core of the question.

Gary Friedman: Well, I think as I mentioned in the third quarter, they’ve inflected positive. And we feel very good about the business right now. The inflection happened a couple quarters later. When you’re making big moves and big innovations like this, as I said, it’s not as much about the timing as it is the vector and the increasing magnitude and direction of that vector and what that helps you kind of see down the road and we’ve now got enough data through the product introductions we’ve made over the last several seasons and now it’s about refining and polishing and continuing to kind of learn and improvise and adapt. And we’ve got a lot more in the pipeline. So I sit here and I think about, look, the mix will begin to shift today, but, we like where we are.

We like the demand vector that’s unveiling itself. We like that margins have been collected positive. We like that we’ve got multiple galleries, new galleries opening in front of us. One of them, I mean, could be, one of them is worth like 3 or 4 galleries in and of itself. When you think about the kind of value RH Newport Beach is going to be, I think it’s going to be a dominant and disruptive force throughout Southern California. And we’re really excited about what’s ahead of us. So, yeah, we’re going to continue to do what we’re doing. We’re going to continue to learn, grow, improvise, adapt, and refine and elevate, continue to elevate our strategy. So I can’t be more happy about where we are. Would have liked it to happen a couple of quarters earlier, but that’s not really the point, right?

I said to somebody, how many times is, I must spend on time. When you’re making big moves, it’s really hard to be on time. If you’re really innovating, it’s really hard to be on time. If you’re just iterating, it’s easy to do that and be on time. It’s just that the size of the outcome is never that meaningful in a long-term strategic perspective. So, if you think about where we started, the $20 million market cap brand that was on the edge of bankruptcy with a box of Oxydol laundry detergent and selling nostalgic discovery knickknacks with 52% of our business. And to think that we made it out of that and built the brand that we built today. I bring that up from time to time to help people think about if we could come from there and get to where we are today, what’s the potential of where we can go next?

And so, we couldn’t be more excited, but we also couldn’t be more focused. We’re very focused right now. And we’re going to get more focused and we’re going to continue to edit and get more clear and allocate our time better, allocate our capital better. So in many ways, yes, we’re just kind of warming up with this thing, since the beginning of the inflection. So, couldn’t be happier.

Curt Nagle: And then just a quick follow-up. So, you noted that consolidation of the contemporary catalog, totally understand the efficiencies. Do you think that maybe points to maybe the scope of the question being a little bit smaller than anticipated or is it maybe just more of a timing thing or it’s selling a very high priced set of products and market is still pretty choppy?

Gary Friedman: No. The point about, I pointed it last year, and I talked about contemporary at some point and said that we — we’re kind of arrogant in pricing, on the product that was, that’s just a partial issue. It’s more about as trends develop and evolve in any industry, right? There’s an opportunity to kind of segment and focus on different looks, aesthetics, perspectives. And we have been successful to this point at thinking about kind of taking assortments, focusing them and getting them to break through the clutter. Yet all kind of still integrated as one brand with a singular point of view, but delivered to the consumer with more clarity than shopping. I mean, I don’t know, like some online thing like Perigold or Wayfair, right?

Where you just got to look at a lot of stuff and you can’t really find things. So the ability to just focus our business and deliver the business with — in a really clear and compelling way is what will continue to do. Just in this case, there is a big trend movement and no different than the big movement that was made that led us to isolate versus integrate RH Modern. That was a big discussion here years back. As we developed that assortment, do we integrate it into our RH materials book and evolve that book or do we isolate it and create a more focused message to the consumer? And so you’ve got to think about what are the size of the trends, how do the trends develop, how long the trends are, and you’re constantly thinking about how to present in a clear and compelling way that’s going to break through.

So, we’ve done a lot of things, a lot of different books, RH Beach House, Ski House, things like that, which you’ll see come back, right, and continue to communicate the breadth and depth of the RH brand. And, we’ve done big smiles, small faces, all these kind of things. And you don’t have to kind of keep doing them with regularity. You’ve got to kind of keep painting a picture and breaking through and having people see you. We’re in a world — we have six senses. And out of our six senses, our dominant senses are sight and our sight drives 80% of our behavior. Right? And so if you can’t break through visually, the odds are you’re just not going to be seen and if you’re not going to be seen, how can you inspire anybody? How can you create any kind of a destination or reaction?

So we’re always doing that. You’ll always see us continue to think about how to be seen, how to break through, how to communicate visually in this world. I mean, if people don’t see what you’re selling, nobody cares. If they don’t care about the quality, if they don’t like the design or the overall presentation doesn’t break through the market and they just don’t see you. So, our business is all about kind of design quality and value in that order. Everything has to be in the right hierarchy and you’ve got to break through. So contemporary, it’s kind of like Modern. If you went back in history, people ask me all the time, where do the trends come from? And I always tell them the debt. And it sounds — catches people off guard. What do you mean?

I said, well, look, generations pass away. Their belongings go into the stage fails. These stage fails feed the high-end antique markets. The high-end antique markets feed the high-end interior design market and the high-end reproduction market, and then it trickles down from there. And it trickles through always in a unique and of the moment way, but whether it’s mid-century modern or that came through, or that little trend, or the contemporary trend that followed that, the next trend that is kind of going to start building. If you just lump them on a website, which nobody can see, by the way, it’s an invisible store, it’s a great platform if your position is kind of priced and things like that. But if you’re kind of leading an aesthetic business, if design is really critical to kind of your positioning, launching online is very limited.

Nobody walks by you, nobody sees you. You have to spend a whole bunch of money buying words and names and you’re buying other brands names. Like what a weird thing that is, right? Like, let me buy their brand name so I hope that somebody stumbles into my brand and maybe they’ll see me or let me buy a bunch of words or things like, hey, there’s so many kind of weird ways that people are trying to break through. We just go at it differently and uniquely, and we’re very good at that. But we’re not perfect at it. So contemporary, we never thought it was going to be with a big trend, but what it did is it became bigger than we thought and it kind of blurred lines. And so the lines between the interior book, the modern book, and the contemporary book were becoming too blurred.

There wasn’t the need to have all three. It would be better to consolidate, make the other two more dominant, mail a more dominant book into the marketplace at greater depth and get a better financial result. That’s the key here. It’s not like contemporary didn’t work. The goods are out there. We have some stuff that was too expensive and when we first did Italian upholstery and things like that, and we put $70 a yard, $80 a yard fabric on it, not a $20 a yard fabric on it, and all of a sudden we had price points that were too high. Yeah, but that’s okay. Mistakes are part of innovation. People who are afraid of mistakes never innovate, never take the risk. Mistakes for us are just another lesson, another learning. It’s just kind of what we do.

So I don’t think contemporary is a mistake. I think we priced some of that book incorrectly. That was a mistake. But we learned a lot. And our view based on the data and the numbers is consolidated. And it’s just going to break through, the lines would be blurred. Well, you’ll see us come out with other things in the future that may or may not continue to kind of, the goods may blend in another way, but you’ve got to kind of continually break through, right? Not doing the same thing over and over again, kind of expecting different results doesn’t work. Not in a world that’s constantly evolving, right? But being consistent, right, and having consistent values and beliefs and a consistent approach and point of view is really important, right?

So, everything we do goes through our filters and whether it’s modern, it’s an RH point of view on modern, whether it’s interiors, whether it’s classic, traditional, big style small spaces, beach house, ski house, all the things we do, I think are recognized out there and people go, that’s RH. I mean, some people still call us restoration hardware. So I just try not to do that. Because we’re trying to hone the brand, make it simpler, give it a breakthrough. So anyway, that’s, yep.

Curt Nagle: Really appreciate that. Understood. Thanks, Gary.

Gary Friedman: Thank you. Thanks, Curtis.

Operator: We’ll move next to Steven Zaccone with Citi. Your line is open.

Steven Zaccone: Great. Good afternoon. Thanks for taking my questions. I wanted to talk about the product assortment, because there’s been a lot of newness. I think last year you gave this point that 80% to 85% of the assortment would be new. So I’m curious, are we at that point now or do you need more newness in the second half of the year? And just with more product newness coming into the business, do you feel like you’re at the right cadence now? Or as we get into ‘25, you’ll have incremental newness to present to the consumer? Thank you.

Gary Friedman: Sure. Thanks, Steven. Good question. So we have a lot of newness coming in the second half and a lot of newness coming throughout next year. I’d say, mid to late next year, we will start to be on a more predictable cadence. So we will hit the 85% in the first half of next year. It’s when, there’s a lot coming in the second half and there’s a lot coming in the first half of next year. I’d say by the second half of next year, we’ll be on a new regular cadence, right? The business will be very different. And — but we’ll also, there’ll also be other things, right? Other categories we might address, like Waterworks. We’ve got a really small bath business. I mean we’re taking the best bath — arguably the best bath brand on the planet, most desired and coveted bath brand on the planet.

And yeah, if you think about the industry, the general trade industry is generally 80% of their business work a little more. But directionally, think about it, 80% of the business is to architects, designers, builders, so on and so forth, right? It is a business to business kind of platform. And while we have a big trade business, 80% of our business is to the consumer. A lot of trade showrooms and high-end things, they’re not even open on weekends. They close at 5 or 6 o’clock, they’re not open at night, they’re not in places where consumers, there’s high traffic or so on and so forth. Yeah, it’s a completely different model. So what we’ve learned over our journey here is we took trade brands and businesses years ago. I mean, one example is Perennials, one of the great brands in the high-end to the trade, high-end outdoor fabric business and evolved into indoor fabrics and other textiles, et cetera, and convinced David to give us a world.

We were, I think, it was a long courtship asking, but yeah, we decided to partner and test and it really worked out well for both of us. And their trade business is bigger today and their business with us and other consumer businesses is very big. I don’t know their numbers, but it’s worked out well for both of us. It’s no different than why we made the acquisition of Waterworks, why we acquired Dmitriy & Co, Couture Upholstery, Joseph Jeup, kind of the spoke furniture to the trade businesses, and great design and quality of product, even more importantly, just remarkable people and talents. Think about it, we bought Waterworks eight years ago. It takes time to kind of refine, polish, think about integration, do things really in an incredible way.

And I think if anybody on this call comes to the opening of Newport Beach, which I would say is a not to be missed RH experience, if you want to see how we can really disrupt the market, that’s going to be a great example. And we’re going to launch our first integrated Waterworks showroom. And the brand will be seen by so many more people. As I said, time to start dominant sense, right? And so, what do we have today? 14 Waterwork showrooms? Yeah, yeah, there’s 14 Waterworks showrooms in the world, right? And I think the biggest one is like 10,000 feet, something like that, some are 3,000 feet. But they’re not in the most highest traffic areas, it’s just most trade brands aren’t. But when you put the best brand in the world in front of multiple times more people who have the financial ability to buy that, buy the best product in the market, why wouldn’t they?

Why wouldn’t they do that? You take the design and quality of Dmitriy & Co, you put it in front of a massively bigger market or Joseph Jeup and put it in front of a massively better market at a greater value because, you work at building the platform to scale that level of quality, I mean, I used to say way back when we were first kind of breaking through and building our model, that furniture of this quality wasn’t sold in quantity. And we had to build kind of a, like a new railroad, like a supply platform for this level of quality. I mean, people we worked with in the beginning, the businesses were $1 million a year, $3 million a year, $7 million a year companies. And those companies are all like $150 million to $200 million today, selling that level of quality.

It just wasn’t available. I mean, you kind of stopped at Pottery Barn, stopped at Crate & Barrel, and maybe throw Ethan Allen in that, but different kind of aesthetic and I don’t know if I’m saying negative, but just it wasn’t what was kind of evolving in the market and so we did that. We made a lot of investment. We invested in the company. We lent people money. We did whatever we could to help them help us, right? And create that’s why I say in every letter I write to our people, our partners and our shareholders in that order. That is the hierarchy. That is the order of success. And yeah, we try to build incredible partnerships. And we try to make, take one plus one equal more than two. And sometimes it can equal 10. But it doesn’t happen like that.

So, we kind of created, I think, a new market. And yeah, whenever you’re a market leader, there’s going to be followers and there’s followers and people are having and you’ve got to keep innovating and you’ve got to keep innovating and reinventing and evolving faster than others. And competition is good. It makes you better. So our market ahead of us, I mean, we’re the biggest of our kind in the world. The opportunity is massive ahead of us. But that takes a long time to see too. Steve Jobs never saw Apple like what it was. He was trying not to go bankrupt. Then he got fired, then he came back and he saved the company from bankruptcy. And then you keep looking around corners, you keep learning and growing, listening and learning, testing and trying, improvising and adapting, adapting and you grow.

And that’s what it’s all about. But you can’t become a manager of a business. You’ll never create or build a market defining brand. I think that’s what makes people uncomfortable now and then, and makes us a little less predictable. But that’s what we do. If you look at our history, the last 24 years, since we’ve been on this journey, from where we were with no resources, no capabilities, edge of bankruptcy, trying to — never want to go try to not feel bankrupt while you’re trying to evolve the business. If we’re able to get from where we were to where we are, you can only imagine where we can go next. And but along the way, we’re going to test and try things. We’re going to, at times, try to do too many things and get a little unfocused as that happens.

Try to continue to just be maniacally focused. And I think the last few years, I think about 5 or 7 years, I think we tried to do too much. And it’s not fun when you kind of only great at a few things and maybe you’re, the outcome, you got to be great at all things. If you want to be the real market leader, you’ve got to have the best product, the best presentation with the best brand, and you have to have the best financial results and the best shareholder returns and all those things. So as we go forward, think about cadence and newness and stuff like that, you’re going to see us continue to edit and focus. Going with what we just went through, none of us here had ever done that. Like, I’d never led a team through a period like we’re going through right now.

And all the things you’ve got to kind of design, develop, integrate, present, it’s a lot. But really, the best thing is how much we learned and how much better we are. Not just the brand that that leapfrogs, it’s the leaders that leapfrog. So you don’t build a business, right? You build a team and the team builds the business. So the people here that have built this business, that’s what you want to focus on. If you didn’t die trying along the way over the last 18, 24 months here, you are way better. You are way smarter. You have a capability now to go to a whole new level. So yes, that’s, you asked me what I’m really most excited about. All the people that, if I like to say at times marks through hell for a heavenly cause that got us here, that now have the ability to take us to a whole new level because what we’ve all learned together, how we’ve grown together, that’s what’s most important and that’s what’s most exciting.

Steven Zaccone: Great, thanks for all that detail. I’ll cede the floor and I look forward to the invite to the Newport opening.

Gary Friedman: Look forward to seeing you.

Operator: We’ll move next to Steven Forbes with Guggenheim Securities. Your line is open.

Steven Forbes: Good afternoon, Gary, Jack, Allison. Gary, last call we briefly discussed the idea of top, middle, bottom tiers of the assortment, the new collections. So, would love to hear you sort of talk through how you think the collections are mixing into those tiers today as we all try to sit here and conceptualize what the potential aggregate demand lift could be from the actions thus far into ‘25 and beyond?

Gary Friedman: Yeah, well, it’s how many of the new collections made it in the top third, those will really move the business. If they made it into the top middle third, they’ll move the business up. If they made it into the middle, they’re not going to make that big of a difference, except when you get enough in the top third, it pulls the whole thing up and the middle gets tight. So there’s a new middle. When you think about this analogy and how I describe it, and your bottom third is a bigger, it’s a much more productive bottom third, but you’ve got to keep getting things into the top third. That’s the key, because the top third pulls everything up. It’s like great people. It’s like great leaders. They pull everybody up. They set a whole new expectation and a whole new bar.

And all the people that are capable and have the desire and the capability reach a whole new level and everything moves up. So, the real key here today is like, and I would like if I just look at it and I go, okay, where are we versus the industry? Where are we? Where is our demand versus others? What does the vector look like? What are we learning from the new top third? Because you wouldn’t have the inflection we have unless you redefine the top third. Right? And you redefine the top third, it’s forever redefined. And then the middle third is forever redefined. And the bottom third is forever redefined. Right? And it’s no different. As you think about the product is to think about people, right? Somebody goes out, take the Olympics as a point of reference and breaks a record in the hundred meters or in some swimming race, it’s a whole new standard.

Everybody swims faster, everybody runs faster. It’s a whole new game. You just keep redefining. So that’s the way to think about it. It’s like it’s not — it’s the whole three thirds are moving up or moving down, right? If you throw too many things in the middle, you’re probably going to fall behind because everybody’s moving forward, right? The world’s evolving. If you’re out there and you throw things into the bottom third, you’re more weighted that way, you’re going down. But you have to start with, generally in every market, somebody’s doing a good job and moving a market forward. And they’re going to create a higher standard and other people will follow. Other people will learn from them whether they’re there or not. If they’re smart, they’ll study the market leaders.

Not just to emulate them, maybe short-term to emulate them, but if they want to be the new market leader, they have to conceptualize and conceive a vision that can leapfrog that market leader. It’s really hard to take a market leader up. Takes sometimes decades. How long was IBM at the top? How long was Microsoft at the top? Microsoft at one point was 800 times more valuable than Apple. 800 times. And then Apple leapfrogged them. But Microsoft’s coming back. They’re new CEOs, and he’s leading a crusade. If someone would have said, Microsoft would bounce back like that. I’d say, no way, they’re dead. Once that vector starts, you leave people in the dust. And, I mean, there’s probably a lot of people here. I mean, so was it BlackBerry — was the name of the movie or was BlackBerry movie, right?

Great movie. If you want to think about vectors and market disruption and changing of the guard, watch the BlackBerry movie. They were so far ahead. They had so many things right. And they stopped inventing, they got complacent. And the Apple iPhone comes and that scene when they’re, it’s like the guy’s — he’s walking, the leader there, walking down, he’s pissed and he thinks he’s going to get it back and he sees the people and Steve Jobs is presenting the iPhone, going through, it’s a phone, it’s a music player, it’s an internet device. It’s a phone. It’s a music platform. It’s an Internet device. And he goes, do you get it? It’s one thing. It’s the iPhone. And all these people are like, oh shit, we’re dead. But then you saw in the later part of the movie, the partner I think is pitching some of its partners for the platform and they’re going, well, here’s the lines, here’s the market, here’s how Apple is inflecting and it was too late.

Apple ran away, but the new CEO of Microsoft, that’s the guy to me. That’s like, wow, one of the great comebacks in American business history. You don’t see that. You didn’t see IBM come back. You didn’t see Xerox come back. You didn’t see all kinds, you name a lot of them. It’s like, where’s Ford? Where’s Chevy? Where’s this? Where’s that? They usually — if somebody starts to make a move and that inflection happens, it’s hard to come back. But it’s all about leadership. It’s all about innovation and invention and leading and not managing and being a newsmaker, not a newscaster. But if you’re going to do that, they’re not all great days, because you’re going to break some glass along the way while you’re building something nobody’s seen before.

So, it’s all top third, middle third, bottom third, right? You’ve got to take big risks. You got to place big bets. You got to do things. Like, it’s not that contemporary didn’t work. Contemporary is just a stepping stone. You’re going to see new things when you try new things. But I like where we are. But I’ll tell you this, we’re more focused than we’ve ever been. We are smarter than we’ve ever been, and we’ve got a big edge. So we’re going to make some really smart moves over the next several quarters and several years. And I think we’re going to be a lot more focused. I mean, that’s the thing. Steve Jobs said, about saying no to a thousand things, we have to say no to more things. It’s like you always think it’s in fact, you think is you’ve done some great things, you think, I can do so much more, I can do so much more.

You generally didn’t get there by doing a lot. I mean, I took over RH, I eliminated 100% of the SKUs. Like, we don’t have one thing. I eliminated 50% of the SKUs in my first season, and had to try to figure out how to navigate that. So you’re — you got to make big moves and you’re not going to get them all right. Okay. I had to sell [indiscernible] for 10 years. Did I like selling [indiscernible]? Hell no. Did [indiscernible] was that a stepping stone to get to Italian bedding and Belgian linen and Waterworks and all the things we’re doing today. Yeah, of course. So anyway, not to [indiscernible] you guys when you have questions. I’ve got hundreds if not thousands of our team members on this call. So speaking to the three constituencies that are on that letter.

Steven Forbes: It’s great to hear about the focus. So I’ll also pass it on. Thanks, Gary.

Gary Friedman: All right. Thank you.

Operator: We’ll move next to Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman: Hey, everyone. It’s Simeon. Hi, Gary, Jack, and Allison. I wanted to ask a twist on maybe what Steve was just asking, the confidence that this initial demand that you have here has durability. And I know, Gary, you mentioned the vectors and the market share spread. And I think you have a lot of newness. You have catalogs or source books. So you have reason to be stronger than them at this point. And you had this coming. So how do you look out several quarters? And then related to Steve’s question when you talked about the different tiers or tranches, do you have enough product out to see how some of the initial product is trending? How many of those top third categories might you already be sitting on? Thank you.

Gary Friedman: Yeah, we’ve learned a ton. Yeah, we’ve got a lot of data. And so, we’re very confident in our outlook and what’s ahead of us, despite whether we get interest rate tests or not interest rate tests. It’s not as all of you know, we came into this year, everybody expected, I think the markets were betting for five to six interest rate cuts. And so far we haven’t had one. And now they’re saying, it’s time to do an interest rate cut. Well, those are the same people that said, when inflation went from 2% to 4%, it was going back to 2% over the next few quarters, and then it went to 9%. So, that’s not a dig at those people, by the way. Leading and trying to look into the future is really hard, right? You guys do models on everybody, you have forecasts on everybody.

My sense is almost every plan you have, every forecast you have is some degree of wrong, right? And so the key is, are you more right than wrong? And are you learning, are you gathering more data? Are you sharpening your sword? And can you see around the next corner? So we have a lot of confidence, we have a lot of data, we put a lot of product in the market, we’ve learned a lot. And we have a lot of news coming in and we’re rebuilding everything here. Every model, every part of our organization, everything is kind of under inspection, under attack. We’re going to reinvent every way we do things and then as we do, the things we did best, we’ll optimize those and we’ll focus those and those will be our next round of habits but — and behaviors.

But you got to be careful you can’t stick with those things too long because other people will learn from you. So you got to keep moving forward. So we have a lot of reasons that we will be stronger than the competition for a long time right now. A lot of reasons. And a lot of reasons why we’ll take a lot of market share. I mean, it’s not an accident, right? I mean we’ve been talking about this a long time. The question was, well, when will it happen? I mean, some guy that I know that used to work here is an analyst, put out a report last week, never talked to me I don’t know probably 15 years and he said, they’re product transformation is a complete dud. I don’t know how he feels today. But he’s going to feel worse in the coming quarters. You don’t learn anything by being a sideline critic.

You want to learn something, come here and ask us some questions and you learn something, but you want to be a sideline credit, you’re not going to learn a lot. And you’re going to be wrong a lot more than you’re right. So, yeah, we look out over the next several quarters, over the next several years, if you think about the real estate pipeline we’ve built, incredible real estate pipeline coming. Incredible. You feel — we’re just, instance in Europe, we’re just, barely, we’re learning. What do we do? We kind of opened some galleries in an order we didn’t want to, but we couldn’t have got the other galleries without taking those and a real estate deal and stuff. We’ve launched, but not really in the way you’d launch if you want to build great market awareness.

So when we open Paris and London and Milan, there’s going to be a significantly different awareness of RH. So, it’s not that we don’t love the ones we did, but it’s not necessarily an order we would have picked as we were thinking about positioning and building the brand. But sometimes, you’ve got to take the opportunities as they come. And you’ve got to — it’s not perfect when you’re — we’re not rolling out like formula mall stores or 5,000 or 10000 square foot things or even 15,000 square foot things and going to the mall or going to somebody else’s box and building a storefront and then like floating a couple of walls or something with a run on sentence [indiscernible] on the floor. It’s like not what we do. We build things that are going to last generations.

Like other people talk about their great showrooms. I mean put one next to ours and tell me what’s going to stand the test of time. What we’re doing, I think, long-term is going to be incomparable and massively durable. I mean, we came from nothing. We came from a bankrupt business selling shoes. And we built, the market leader. And we went through a massive, we’re still in the middle of it, a massive transformation. I’ve never done this before, no one’s ever done it. The industry’s never seen it. But now you’re going to start to witness the potential of the RH brand and the team behind that brand, more importantly. So we just couldn’t be more excited. And do we have enough product to see how the product tiers are trending? Yeah. And we like what’s in the pipeline.

Because, we’ve seen a lot. And we’re going to keep building it. And we’ve got too many ideas to execute right now. The key for us is focus and hierarchy. And what is the right hierarchy? What comes first, what comes second, what comes third? How do we allocate the human and financial capital in very best way? And how do we be smart? How do we say no to a thousand things? That can be the hardest part right now. What are we going to say no to? What are we not going to do? It’s going to be as important it’s not more important than what we do right now. But we might decide to work on what is actually number one, but we also worked on number three and four and five at the same time. And we never gave number one the focus it needed to change everything.

So that’s how we’re thinking right now. We’ve got a lot of edge, we’ve got a lot of focus, we’ve got a lot of energy. We’re very enlightened and very excited, but also we have a lot of edge. So we’re not taking anything for granted. I couldn’t be more excited about where we are and what’s ahead of us.

Simeon Gutman: Okay, thank you. Good luck.

Operator: We’ll move next to Max Rakhlenko with TD Cowen. Your line is open.

Max Rakhlenko: Great, thanks a lot. Gary, so you earlier walked through the importance of galleries. Can you provide an update on where you stand in resetting the in-store assortment? I think on the last call you discussed being around 50%. So just curious, where’s that now? And when do you think it’ll get closer to or fully reset, just given the potential lift that it could have to the business?

Gary Friedman: Yeah, we’re at the very early stages of that. Again, you want to think about, we reset on the early data, then we get better data, and then you’ve got new newness, and then you’ve got to, so you’re going to constantly read and react and refine. And I mean, we’re right now so excited about some stuff going really, okay how do we run to get that in the galleries? What do you do? Like, your life depended on it. How to get the goods in the galleries now because they’re going to really massively lift. I think public right are mixed right. Yeah they’re going to be — 70-30 kind of. Not really? Okay. I mean, the game is get the goods in the gallery right now. We get the right goods in the gallery, on the floor, in the right place.

That alone is a massive move, a massive move. But we’ve got to, you got to ramp up the production, you got to get it. You’ve got to dimensionalize it. You’ve got to — that’s why we’re running with a higher level of inventory right now. We’ve got so many things, you got to kind of, these transitions are really tricky. You didn’t — you’re not going to buy it right. So you’ve got to kind of invest in kind of some downside protection. You’ve got to carry heavier inventories for a while, while you’re learning and then you’ve got to kind of edit and refine and go through it. But no, that’s what you’re identifying is one of the next big moves. I would say where are we on the galleries having all the right goods? I mean, Stefan, what would you say?

Stefan Duban: We have work to do.

Gary Friedman: Yeah, would we say, 30%?

Stefan Duban: I was going to say 35-40.

Gary Friedman: Yeah, 35%, 40%. Yeah, there’s some big turns there. Big moves.

Max Rakhlenko: Got it. That’s helpful. And then maybe we can keep this one. You said it might be rudimentary, but where do you stand now in the promotion, in your promotions and sort of winding down the old discontinued product demands picking up? So, should we think that you’re probably in the latter innings or how should we think about it? And then just the key drivers of the product margin inflecting here more recently.

Gary Friedman: Yeah, I’d say, look, we’re in the middle of kind of these big moves in and out, right? So you’re learning, you’re transitioning, and you’re kind of building the bridge to the next place. So I wouldn’t really, I mean, I think everybody’s making that a bigger deal. And I read the report, no, no, they got to get rid of the clearance or whatever. You’ve got to build a bridge to the future. I don’t know why everybody’s overly focused on that. I just focus on, hey, is our demand growing and is our margin inflecting positive? That’s the game, right, Right there. And then, how do we organize, say, the brand and the business, all throughout build the platform and infrastructure, and organize the company for where we are and where we’re going next, make it really efficient.

So we’re in a very inefficient stage right now. Massively inefficient. Because we’ve been laser focused on just kind of almost one thing. And so a lot of things, we’ve got to kind of rethink this all up and put things in the right order. And, so yeah, but that’s what we do. So we’ve been doing this a long time. We love doing it. It’s what we do. We love big moves like this. We love these times. This is what we live for. Figuring it all out. Doing it better than anybody else in the world. Leaving no doubt. It’s like exactly how much we’re marking down and what that is. I mean, the question is, what does the vector look like? What does the vector look like in demand? What does it look like in margin? Where eventually will the vector be? As you think about leverage and cost, then what will the model become?

What’s the timing of the big things here, you’ve got this big thing, Europe, we’re just entering that, we had to make a lot of investments that honestly, not the greatest time, under construction, during COVID, post COVID and the most expensive times to do things or try to make, and stuff like that. But we got to get the big brand building markets and galleries open and the brand will build and then the demand will build there and we’ll get a vector going there on what is what is Europe and international look like over X number of years and what’s the leverage in the cost structure there? Like, there’s so many opportunities, I mean crazy amount of opportunities ahead of us but we got to stay focused. We’ve got to be laser focused and we got to do first things first.

We cannot get distracted right now. That’s the hardest thing. Yeah, so.

Max Rakhlenko: Got it. Thanks a lot. I appreciate all the color and good luck with all the new galleries.

Gary Friedman: All right, Max. See you soon.

Operator: We’ll move next to Andrew Carter with Stifel. Your line is open.

Andrew Carter: Hey, thanks. Good evening. I wanted to ask a little bit about the — I think you’re going to hit with your guidance here, seven design galleries this year plus the design studio. Are you in a position to hit that cadence every year? I know two international you’ve reiterated today. And I know you’re talking a little more about prioritization. Where do the white space markets kind of fit in within that and are the white space markets still in scope for all design gallery types? Thanks.

Gary Friedman: I’m just processing the multiple questions right now. So the first one is about, we’re opening — how many we doing this year?

Jack Preston: Seven galleries, one design studio.

Gary Friedman: Okay, eight total. Okay, so yeah, I think we were doing nine. Okay, so are we in a position to hit that cadence feature. I think there’ll be years we’ll hit that cadence and do more and there’ll be years that we do less because our kind of pipeline is, if you try to go force things in and if you screw up big real estate moves like we make, you can’t getting to unwinding from that is very expensive. So, can we open eight a year? Yeah. We haven’t released what we’re doing next year, but I’d say it’s kind of in that direction. Might be more, might be less. The pipeline is really big. We’ve got a lot of things in the pipeline. So I think over the next four or five years, there’s going to be a lot more galleries that we open than over the last five years.

Think about it that way. But they’re very big and complex projects. Andrew, you come see Newport Beach or something like, that’s the evident. And it knocked down a whole part of the mall, and opened up, I don’t know how many, got rid of like four retailers, something like that, five, and give us the path that we needed and the positioning that we wanted, have views of the Pacific Ocean from three of the four floors and do the most, probably the most incredible kind of rooftop restaurants in all of Southern California with the views we’re going to have. That’s why we didn’t even make it any outdoor furniture up there. The whole thing is a 260 feet beautifully designed indoor-outdoor eating experience. It’s got incredible weather, incredible views.

I don’t know how many of you tried it. How many restaurants now have the new menu? It’s like four? Four or five, yeah. And we’re rolling out and upgrading and transforming our menu in our galleries. It’s terrific new menu and yes, the menu for that gallery, it’s going to be fantastic. I think you’ll see some of our innovations happening there, that have been previously working on for a long time. So, yeah, there’s going to be a lot. And where does, like, the white space thing, what’s that question? Where does the white space fit or something?

Jack Preston: I mean it’s more of a transformation Andrew, right? There’s — there are white space opportunities for design studios of course as Gary’s talked about over the quarters.

Gary Friedman: We’ve got probably like 10 markets we can open up mid-size gallery. In a couple we can open a big one in North America. Right?

Stefan Duban: Yeah, we do.

Andrew Carter: Yeah, I mean, what we’re going to do in Naples is unbelievable. Yeah, we haven’t talked about that yet. Not yet. Coming. You got me excited. I’m debating right now, like, myself, do I talk about it? Do I not talk about it? Well, it’s going to probably be in the press soon. I mean, it’s a whole new, three dimensional RH experience of the compound, the RH compound. And, it’s a multi building, kind of integrated experience with gardens and courtyards and connecting buildings and it’s like nothing anybody’s ever seen. We partnered, came in Naples and we got the former Nordstorm’s pad that sits overlooking this beautiful pond and it’s an incredible new idea and again, it’s evolution of different ways to have more parts that you play.

It’s going to take a bigger site, how would you use the site, what would it be? Also, we think it might be massively more efficient to build than some of the galleries we’re building today. And yeah, another innovative thing. So, yeah, I think generally, again, as you grow, you see more. As your brand grows and does more dollars per location and all of a sudden different markets look, they a lot better than they looked when you were doing a lot less volume, right? And the cost of the markets looked different and everything looks different. So I remember when I was at Williams-Sonoma, when I first joined and Howard Lester and Chuck Williams telling me, we can only have at the most 75 Williams-Sonoma stores, the most in North, like maybe only 50.

And I think when I got there, there was like 35 or something. I don’t know. How many Williams Sonoma stores are there? Like 250 or something, 200. I don’t know. Some like that. But, you keep building a brand and it becomes more productive, it becomes better, and more market awareness, and you create markets. I mean, market leaders create markets. And so today, in North America, what do we think is right? Like 60 to 70? I don’t know. So we’d be sitting here in five years and that’s 80 to 100 maybe. I don’t know. Yeah. So, but as we learn, you’ll learn. So…

Andrew Carter: Great. Looking forward to Newport Beach. I’ll pass it on.

Gary Friedman: All right. Thanks, Andrew.

Operator: We’ll move next to Jonathan Matuszewski with Jefferies. Your line is open.

Jonathan Matuszewski: Great. Good evening. Thanks for taking my questions. Gary, first one is just on housing. I think investors are trying to understand how the eventual recovery in housing will impact furniture category spend, maybe across different income cohorts. So just wanted your perspective, how you see luxury housing reacting to the Fed rate cuts maybe relative to, you know, homes at non-luxury price points. Do you see luxury housing reacting more quickly? And if so, why?

Gary Friedman: I think a lot of it’s about, again, the affordability gap and are we getting, do people see three rate cuts of 25% or 25 basis points or 50 basis points. And how far is — how much are you going to close the affordability gap? I mean, the average US home I think is what, up 50 something percent versus pre-COVID and it’s the half, yeah, the prices of housing got too expensive. And then the price of a mortgage got too expensive. And there’s just a lot of people locked in at very low interest rates and when does that affordability gap close enough that people that are, I mean there’s a lot of pent-up demand. I mean people are waiting, waiting really want a new house really want to move that the family’s expanded, they need more room.

I mean, it’s a big build up here. But, how does that affordability gap kind of, just come together. It’s like that’s the key. So I don’t know exactly how it’s going to move or — there’s a lot of pent-up demand. So it may pop quicker or it may take time to ease. And yeah, it’s going to depend on kind of what the Fed does. And it’s going to depend on the homeowners, are they going to lower their price or are they going to hold out? I put a house on the market in Beverly Hills and I got a lot of low ball prices and I had it on the market for six months and I didn’t need to take the lower price and I took it off the market. So, and there’s a lot of that right now. There’s a lot of like homes are coming on the market and people are testing it out and then homes are coming off the market.

And yeah, but there’s more people testing today, but I do think — I mean I knew I had to lower my price, but I had a price I was going to lower it to. There’s a price I’d take, but I didn’t get that offer. And I did the math, because you do and say, okay, I get this super low mortgage rate and if I hold for a year, I’m going to have to pay this. But if interest rates, a year from now, come down where I think they might go, if we have inflation under control, look, they could do one or two 25 basis points cuts and all of a sudden we can see inflation pick up and then all of a sudden, like, whoops. It’s like I tell everybody here, we’ve got a chart that we all look at and it’s, taking the team through it. I don’t know four years now. Yeah, like look at, pull it up, the last 60 something years of federal funds rate, and go to the 1970s and look at what happened, like chin went up, they took rates up, they thought they had it, they took them down.

They thought they had it, and then up and down, up and down, up and down, up and down, up and down, and till the cut, the federal funds rate was like 21%. But they thought if they had it, if you look and just zoom in on like a eight to 10-year period, I mean, up and down, up and down, up and down, like maybe 100 or something times. Like, you’d probably be good to really zoom in and just have the patience to count it. And who says that can’t happen again? I hope not. I’d rather personally, I tell the team this all the time, I’d rather have them not cut the rates. It’s bad for our business. Do not cut the rates until you are absolutely have killed inflation. Leave no doubt because if it starts going up and down and so on and so forth, it’s anywhere like that period that, I mean, it’s like the worst 10 year economic period in American history, except for the Great Depression.

And you don’t want that to happen. I’d rather hang on and we’re going to inflect no matter what. And we’re kind of indifferent. Will it be good when the housing market inflects? Yes. Will it inflect? Yes. Will the Fed get it right? Who knows? And I’m again, not being critical with that. I was critical of the Fed when they said, inflation is going from 4 to 2, it’s transitory, and over the next few quarters, it’s going to go back to two. I’m like, do they talk to anybody in business? There are ocean freight rates that went up 120%. Price of wood was up 80%, steel, that’s like all the imports, all our prices were going up. And I’m like, they think it’s going back to 2. There’s no way, like, I think the, — what do they have? Something like 400 PhD data scientists, forecasters are saying, more than anywhere in the world in the Fed.

He called some business people. I know what’s really going on. Like, I don’t know anybody would have told them that that that inflation was going down. And again I’m not — like yeah it’s critical but what the hell has happened. I think Powell since then has done a really good job. I think he’s got to hold his ground. And for us, we’re not going to worry about that. If it comes, it come, we’ll be ready, and we’ll be in the best position of anybody. But I am totally indifferent. I am much more rooting for kill inflation, leave no doubt. Even if we go into a recession for a while, whatever, it’s just a recession, it’s not a plague.

Jonathan Matuszewski: That makes a lot of sense. And just a quick follow-up, Jack. Just on the international investment this year, it looks like the headwind ticked up a little bit. Just if you could contextualize for that, is there kind of any incremental investments that are being made in international versus what was previously planned?

Jack Preston: Yeah, good question, Jonathan. Yeah, part of it was just refining the number of sales came down a little lower. And, we had set approximately 200 and we were in that zip code. So we’re just refining, giving you a number as the year plays out, we’ll see greater visibility than sales growth. So just sales coming down overall and the impact.

Jonathan Matuszewski: Understood. Best of luck.

Jack Preston: Thank you.

Operator: We’ll move next to Brad Thomas with KeyBanc Capital Markets. Your line is open.

Brad Thomas: Great, thanks. Gary, you’ve touched on international a bit and some other comments that you’ve made and answers, but I was wondering if you could just give us an update on how you’re feeling about the trajectory of that business and how some of the data points are coming in as you lap the one year anniversary of some of these locations?

Gary Friedman: Yeah, I mean, look, they’re all going to get better. The real conversation happens. We open Paris next spring. We open London late next year. Crossed our fingers that, it’s a complex job to string together four buildings and hopefully that plays out. And then we have Milan, but it’s the fall after that? Spring after that, or spring 2026.

Jack Preston: Yeah, fall after that.

Gary Friedman: Yeah, so I think we’ve got to get open in the big markets. I mean, people go like, you’re kind of in London. No, we’re outside of London. We tried to do an inspiring, unforgettable experience because we had a chance to, like here, we were introduced years ago, selling a lot more totally different brand and people still remember that. We still fight that perception a lot. And restoration hardware, that’s where I buy my stocking stuffers. Like okay, William sold stocking stuffers in seven years. So like, no, you don’t. Don’t lie to me. But perception in brands are, it’s really key and we were able to open, and kind of as a whole new thing. And that’s why we did what we did. And, yeah, because we said, look, let’s do something unforgettable and leave an impression.

And, as I said many times, that investment was about conversation, not necessarily about commerce. I wouldn’t have opened out there to say, hey, let me show you what I can do in the UK in an hour and 50 minutes outside of London, without anybody walking by with keycards. So, we’ve learned a lot, business is inflecting, it’s all heading in the right direction, our design business is growing, our brand recognition is growing. And — but when we open in London, in Mayfair, stringing together the four buildings we’re stringing together, when you see that, the consumer sees that gallery, like, when they see that restaurant, I mean it’s unbelievable. It’s like the amount of people that will see it not only in London, from all over the world, like, they’ll walk around Mayfair and it’s a global — wealthy global audience, and so we’re right in the heart of it.

I love our position, with kind of almost like free standing in this multiple intersection place. And we’re not wedged in on one of the busy streets and people with cars are — can pass by you or walk by you. I mean, we’re like, you can’t miss us, and we’re like, that’s a really nice place. And the restaurant that our teams designed, like, I tell Kristin on our team, [indiscernible] but Bella was telling her, do you know how many people he tells that he came up with this design for this restaurant? If you gave me a hundred years to conceptualize the design of this restaurant that we have that’s in like the original Bank of England or something like that. Like, it’s like, incredible 30 foot high ceilings with these columns and everything. And like what she designed is just, I can’t help like, like show everybody the pictures.

I probably just put them on Zoom and show you guys, but I want to do it in the right way. I might bring back one of our videos. It’s like when I used to do those videos. Because it’s such a visual business. I sit here and I talk and I try to tell you how excited we are and stuff like that. But seeing is believing, right? Physical evidence is the key. And so maybe in a quarter or two, we’ll put together one of our videos with music and you’ll see the images come through. Paris, same thing, unbelievable. Milan, I mean those three galleries are so unique and different but unreal. I mean just, but again let’s think about, we’re out in England, incredible, like there’s not that many people go out there. And so, yes, in the summer, kind of picks up.

In the winter, not so many people. But when London opens, I think the business will go up in RH England, because the brand awareness is going to go up and all the people that go out there are going to know about us. When we open in Paris, Paris and London and Milan, both Milan’s the center of the universe for design, it’s the home of Salone, the biggest design show in the world and 500, 000 people go to Salone. Any — almost every great interior designer in the world and brand in the world and aspiring designers and so on and so forth. And I mean, there’s nothing in Milan like what we’re doing. Nothing close. It’s just incredible. I mean, gives me goosebumps talking about it. And I’ve got all of them. I mean Paris [indiscernible] It’s just like this jewel box, right in the heart of the world of luxury, right by whose office and everybody else that’s all around there.

They’re all going to see, we’re going to enter at a level that might be a step or two ahead of them. Because what we’re doing is just we’re making investments into just grand statements, physical experiences that are going to be like, just monuments and like, I mean, anybody who goes to any of those towns, I guarantee you, I guarantee you any high end person that’s going to London, that’s going to Paris, that’s going to Milan and they say like, hey, what should I do here? Like, where should I eat? Where should I go? We will be on that list. Concierge, influential people, not influencers, but really influential people, at the high end, and I am just super excited andand I’m kind of glad I’m giving Kristin global accolades here because she’s like, that was just one of the greatest designs that I couldn’t have imagined.

If I had a hundred years to try to do it, I would have never came up with the idea. So yes, the trajectory is the trajectory for now. The trajectory will be completely different over the next couple of years. So, give it a little time, things take time, and then they go boom generally. It’s like there’s really no overnight successes. So, yeah, let us kind of really get going and kind of plant the foundation. And then I think everything around it, all the seeds we’ve — it’ll be planted and all the galleries, they’ll all go up. The whole thing’s going to go up. But just hang on, be patient. I’m an impatient guy, but I have to be patient about this. Like this has been a long-term investment, and we got to get those galleries built. And then Europe and the UK and the consumer, they’ll really know who we are.

You won’t be able to miss us.

Brad Thomas: I appreciate it. Thanks, Gary.

Gary Friedman: Okay, Brad, thank you.

Operator: We’ll move next to Michael Lasser with UBS. Your line is open.

Michael Lasser: Good evening. Thank you so much for taking my question. Gary, if you look at the updated guidance, how much of the reduction was due to the market just not being as strong as you expected, a slower ramp in demand in response to some of the introductions and changes that were introduced, or just everything executing a little slower than what was previously anticipated. And then as part of that, if demand is shaping up to be a little lower than you had expected, shouldn’t there be a benefit to the spread between demand and sales?

Gary Friedman: Yeah. So, Michael, all good questions. So thanks. I say to the first one, which is kind of a lot of questions in one, right, dealing with what really caused the ramp to be slower, I think a little bit of all of it. Right? So, let me say this. The first one, not relevant. The market is not as strong as we expected. I don’t think that was relevant. I think it’s more, just the time it takes to marinate with the consumer, to see it, the time it takes for the books to get in home and might get in home. Ours are big books. You got to really intentionally throw it out and get to like, boom, it’s out. But a lot of people get our book and it sits on the kitchen counter or the coffee table on their desk next to their bed.

And now, all of a sudden, they might open it, you know, And then you have a certain amount of people that, like, they’re in the home process, they’ve moved, they did buy a home. The housing market is not at zero, right? It’s just down comparatively. I mean, we’re doing a lot of volume. But yeah, it’s just trying to say what — when — the amount we’re doing, it’s like, take the amount we’re doing and say, like how long does that take to digest? How right or wrong are you, what’s the quality of our execution, and what can be the quality of the execution is such a massive move, right? So it’s hard to be critical, really, the organization when you’re doing so much, it’s hard to have the points of reference to measure and it’s hard to know what the ramp is, how fast will it ramp, what’s the consumer reaction acceptance, when does it tip and really get going?

But I’d say it’s, we’re seeing the data, right? That’s why I say the, I’m not spending a lot of time really on that question, Michael. It’s like why I wrote it in the letter. It’s not so much about the timing. It’s more about the vector. It is happening. That is indisputable. It’s happening. And we have real points of reference. We’ve reported a little later than others. So you’ve got all this points of reference and demand. That’s why I actually kind of gave you months and bills so you can have more comparability. I put some more bread crumbs out there. And so that’s indisputable. Nobody has our demand right now. Nobody’s close to our demand right now. So now it’s just — and so that’s how we think about that. It’s not when. Like, if we’re still waiting and we’re like bouncing around at negative 3, negative 3, I guess looks like a good number.

My former company came out a week or two ago and said, hey, the industry is down 10. I don’t know what industry, I don’t know if that’s the furniture industry or that’s the home furnishing industry or the tabletop industry, they’re in a much broader categories, but they characterized it as down 10. And yeah, so I’m sure that included all the businesses they have, and they were down 3, and they said, we are taking market share. So we’re doing a lot better than that. And we are more of a furniture-based business, right? And so if you anchor us around furniture people versus heavy mix of home furnishings. Like, we are not in a tabletop, we don’t have a big accessories business, we don’t celebrate any of the holidays. Right. We got no Halloween stuff, we got no Thanksgiving stuff.

We got no Valentine’s Day stuff. Yeah, we don’t have any Christmas, any Hanukkah stuff, and we sell that stuff. But just cluttered up the furniture, right? And we don’t sell any — and look, I’m not saying we’ll never sell any of that again. I don’t know. You learn, you might do a little, maybe we’d have some giftable things. I don’t know. But right now I like where we’re at. But the important thing is, who are you anchoring us against? You could look at our book and count the products on the pages and the space that things get. And you could make an estimate of what percent of our business, I’m sure you can get an estimate or do an industry analysis, right? If you looked at furniture and other categories of what percent of a home spend at the high end are all of those categories.

The important thing is anchoring us against people. Don’t anchor us against people selling a lot of accessories or a lot of holiday stuff or tabletop and all this. We’re not in that business. We’re not in any — very little of those businesses. We don’t have any dining table piled with stuff on them. You see a beautiful dining table with maybe a centerpiece or something like that. But if you really compare us to the industry, we have a massive inflection point. Massive. And so, if you really kind of look at a home and walk through a high-end home, and if you took a pad of paper and pencil and you walked room to room and you say how much, like in this dining room, how much was the table, how much was the chairs, how much was the sideboard or cabinet, do they have a rug under the table, how much was the rug, how much was the chandelier, okay, let me open the sideboard and cabinets, how much were the dishes and flatware and the placemats, napkins, you go do that in every room and you realize that the amount of business in the categories we’re dominant in is the biggest amount of business.

If not, we won’t maybe try tabletop again. It’s just not the big percentage. It doesn’t get anywhere close to the businesses we decided to be in and the business we decided to dominate. And that’s like what I was saying earlier on the call about what you have to say no to. I mean, we’ve said no, we’ve edited so many businesses. We might have, yeah, we’ve probably edited $700 million to $1 billion of that business today. But the furniture, lighting, rugs, big tech stuff, the outdoor furniture, those businesses would be a lot smaller if our stores were cluttered with all that, I mean, I call it crap, but it’s not crap. You need it. Like we — it’s like we have a little bit of it, but it’s just, what do you say no to? What are you trying to be best in the world at?

But the spreads, you got to look at the spreads right here. And when the home business comes back, when housing lifts the people that are selling Halloween stuff and Christmas stuff and all that stuff, those businesses don’t go up or down that much. I mean, do your kids not go trick or treating, when the business is tough for somebody, no, everybody goes trick or treating. Does Santa always come, everybody celebrate Hanukkah, people give Valentine’s gifts. Yeah, they do. Those businesses don’t really go way up or down. So if you’ve got a bunch of those businesses, you’re going to be less cyclical. You’re also not going to benefit as much as we do from a housing market bounce back, right? That’s why I like us better than everybody else. I like us better than everybody else because we have the inflection on demand and margin.

We have incredible pipeline coming. We have an incredible platform that’s only going to become better and more dominant. And when they really start buying furniture and chandeliers and rugs and all the big ticket stuff, measure our inflection then compared to all those people selling Halloween crap. Cause you can’t even see their dining table during Halloween. It’s covered with all kinds of goofball things. So like, but I’m not saying those businesses are horrible businesses. You have to say, what are you going to own? What are you going to be best in the world at? It’s hard to be best in the world at all those things. We’ve learned that, we’ve got scar tissue. We’ve made recent mistakes and we’re going to continue to edit and focus and get more focused.

So — that’s how I think about it.

Michael Lasser: Maybe I could reframe the second part of the question is when do you expect demand and revenue, the growth rates to converge?

Gary Friedman: I don’t know. Like, you actually made a really good point, right? If demand comes down, like, we lowered demand, that gap will come down and also the backlog, projected backlog. So we kind of modified some of those numbers. We kept the 4 to 8 because it’s a quarterly bounce. It could be bouncy, but it could gap narrower, depending on timing of things. But yeah, it’ll all converge. When I think it’ll be, I don’t know, like end of next year, like when we’ve — we’re kind of, we start to regulate more, right, as far as the case, in books and the newness and then, those gaps will not be as important, like, we won’t have many back orders and won’t have imbalances in special demand, lead times won’t be as long from our partners.

You Like, think about our partners, trying to react to what we just did. I mean, everybody, it’s a bit chaotic for everybody, But it’s a beautiful chaos. And the great thing is when you create order out of that chaos, and it’s a beautiful chaos, it becomes a really focused, powerful beam that’s just going to break through. But I don’t know. Look, your job’s really hard right now. You’re trying to build this model. I can’t build the model very good, right? Like I, we were off on the inflection stuff and, but, we’ll give you the data. Like that’s why we never guided demand before. We didn’t give anybody demand. And but we thought, hey, you know what? Right now, you’re not going to be able to analyze our business with what we’re going through, we need to give demand.

And so, we’re trying to be transparent and give you the important data and be completely honest about what’s working and what’s not working and what’s going to take more time. But it’s all — we’re strategically right, We’re directionally right. The vector is there, it’s growing in magnitude and direction and it’s — I mean, do I see the vector closing. I mean, man, I’ve never seen anything like that in my career. I’ve been doing this a long time. Once you get this right, and you get this directionally right, you’re generally off to the races. That’s how you go from a brand that had a $20 million market cap selling Oxydol laundry detergent and tchotchkes to where we are today. It’s big moves. Big, big moves and getting being directionally right and then building on that and refining that and that’s just what we do.

And we’re pretty good at it. We’re not perfect. We’re going to miss some things. We’re going to get timing wrong. We’re not generally wrong completely about the idea except for what I call side shows. Like, it got us into the contemporary art business. And I thought it was — there’s more square footage on walls than there is floors. And, then I realized like, God, you get a best seller and you can only sell one of them. This is a shitty business. What do you mean? I got a best seller, it’s only, you know, sell one? Like, oh no. It’s like, yeah, it’s like, I don’t even know how to — if I was like, this guy, this was dumb, and I mean, again, really good for someone else who’s mastered that business, like totally foreign to us, like, okay, you get the wall, but I’m going to do a different wall business.

I think what we’re doing with [Horsy-Dorothy] (ph) in general public and doing like the then stenograph like printing like 3D printed beautiful reproductions, her whole philosophy on art is just fantastic. And her and Ellen are incredible art collectors, but they want to make art more accessible. And, she says, look, what if the world — what if there was a great book and there was only one of them and you couldn’t print the book? Think about that for a second. I have the only catcher in the ride. Who’s going to pay? What are you going to pay now? $7 million, $10 million, $100 million for that book? And then someone has the only whatever, like what a silly business that is right and so she’s trying to you know bring more democracy to that and make it more accessible.

And she’s got really good artists that they negotiate in her team, and ability to reproduce at high quality level. I mean, you look at it, you think it’s the real thing, and it’s great. I’ve got it up in my house. It’s good stuff. That’s a really good business that we’re in. Building. But I thought, really cool. We’ll reinvent the contemporary art business. We’re going to swing and miss at things like that. It’s like, got it. It’s how you learn and grow. So, but all good stuff. Anyway, I don’t want to keep you guys too long. I keep talking about this forever.

Michael Lasser: Thank you very much. Much appreciated. And good luck.

Gary Friedman: Thanks so much. Come see us someday.

Michael Lasser: We will do for sure.

Operator: We’ll move next to Seth Basham with Wedbush Securities. Your line is open.

Seth Basham: Thanks a lot and good afternoon. I have one question, one follow-up. First, you mentioned in your 10-Q that your contract business is growing. I was hoping to provide a little bit more color on the size of that and the momentum there and whether that’s going to become more meaningful to the overall company at any point in the near future?

Gary Friedman: Yeah, well look, everything begins and ends with the core RH brand, right, that business. And if that business gets stronger and more powerful, then the contract business will get stronger and more powerful. All of everything will, the hospitality business is going to be better if more people are coming to our galleries and buying things and so on and so forth. And we’ve got great teams and contracts. We’ve been thinking about our outlet business. If demand is up and sales are up, you’re going to have more returns. You have more returns, you have more inventory for the outlet business, and the outlet is a joke, like all those businesses generally trail the core business, right? Like, yeah, it’s like the lead, lead sled dog or something, that’s clearing the path and creating the geese that fly in formation and stuff like that.

The core business is at the front and everything else will benefit from the core business. And so, is the core business demand stronger than all the other demands? Sure. Is that right there an opportunity as the other businesses benefit from what’s happening in the core? Yes, that’s the coming tailwind. And so we’re not breaking that all out right now. But maybe I think it’s a firm grasp of the obvious, but maybe it’s not. The core brand makes it possible to have a contract business, makes it possible to have an outlet business. It makes it possible to have any other kind of business we’re in. Our restaurant business is possible from the great galleries and spaces we build and our baby and child business. If there wasn’t an RH brand, would there be an RH baby and child?

No. But all the lessons and all the things you’ll see, you’re starting to see, I don’t know if you saw the last the book we just mailed recently for baby and child teen looks incredible, and it’s emulating kind of aesthetically what’s happening in the core, right? So there’s so many reasons we’re so excited right now because the reflection in the core, everything else, it will create, it will clear the path for everything else to follow and it’ll bring everything with it. It’s just a matter of timing. So, but the core is going to lead it all, right? So you could expect, I would say almost with certain, but I could be wrong. Something could pop here and there, but the core business demand growth will be higher than everything else, but they’ll all catch up and it’ll all kind of come back into harmony.

Seth Basham: Got you. And then my second question is on inventory, which increased more than 20 percentage points faster than sales this quarter. You talked about some of the reasons why, but can you provide any more color as to how much of this is for gallery floor models and other things that would be helpful? And related to leagues, we expect this outside inventory growth versus sales growth to persist for at least the next few quarters?

Gary Friedman: Yeah, a lot of it is a kind of insurance, right? Like, how do you make the transition from here to there? How do you not things like drop out and run out of this before you build a bridge to there and all of a sudden you lost business? You just expect we’re coming for this and you’re learning every time. In a big transition like this, never done this before. So we’re doing all our math and saying, how do we get from here to there? And then we had early learnings and like, gosh, we’re getting out of that too fast, hold on, like how do you optimize? So, we’re learning. But, yes, there’s like an insurance policy, call it inventory, to kind of get from where we are to where we’re going and exactly where we’re going.

We know directionally where we’re going. We don’t know exactly what that — the makeup or the pieces and the percentages and the — like what’s optimal now, we’re going to learn new things. And, so as we learn, you’ll learn, I like to say, so we’re, I mean, wish I had — I mean, I don’t really wish I had a really precise answer because then I’d be a manager. I’d be arranging and organizing the status quo and I’d be really accurate telling you what’s going to happen next quarter and next year, but that’s just not what we do. We would never got here if we were managers. We have a leadership culture. We don’t have a title of manager anywhere in this company, in this brand. There are no managers here. We don’t have meetings here. We have adventures, you know, pursuit of better ways and brighter days.

So, we don’t — different — yeah, it’s a different culture. We do different things with different vocabulary. And you need a different vocabulary. Otherwise, people just go to meetings, and people do a nice little PowerPoint and people will go, really good. And shake hands and kiss babies and can’t wait to get to lunch. Not usually what we do. Kind of an adventure, and you’re kind of learning a lot. And sometimes, it’s difficult. Sometimes you trip and fall and you get up and you’ve learned and yeah, like we tell the team here, like, if you want to know what’s possible, you have to go to the edge of impossible, right? And you have to look out and try to see what’s possible. And we say, just don’t fall off. Don’t die. If you don’t die, you’re going to learn and you’re going to grow.

And so that’s where we kind of go. And that’s where we play. And that’s where we that’s how we learn and that’s how we grow. So I’m sorry. I can’t give you like so buttoned up answers here and I kind of sometimes give you longer winded conceptual, directional answers, but that’s what we do here. Like we’re figuring it out and we’re learning. I can tell you right now, we just learned a lot and, and boy, we’ve got some really good data that’s helping us move faster and more accurately towards the direction we want to go. So…

Seth Basham: I appreciate that. Thank you.

Operator: And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn it back to Chairman and CEO, Gary Friedman for any closing remarks.

Gary Friedman: Great. Thank you everyone. Thanks for your time and your interest and hopefully you’ve learned just like we’ve learned and I guess as we do here, just thank our people and partners around the world. It’s just a great time to be on Team RH at all levels. I think, we’re all learning so much. We’re just getting going. We’re getting stronger every day. Our culture here is to get all the brains in the game and the egos out of the room. None of us are smarter than all of us and we’re learning together and we’re growing together and you know we’re going to build something incredible together and it takes a lot of energy and it takes a lot of effort, a lot of courage and a lot of commitment. So thank you everyone on the team internally and externally. You’ve brought this to life and it’s going to be a fun ride from here. It’s going to be a really fun ride. So, look forward to speaking with everybody soon and carpe diem.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.