Gary Friedman: Yeah, yeah. So that’s not where I’d be focused. Like I mean you can focus there, you’ll just miss everything that’s going to unfold here, if you want to focus on that. I mean we’re investing for the next cycle. We’re investing for the long term. We’re not trying to protect the operating margin a point or two. I mean, if that’s going to get people really fired up about the long-term strategy of this company, it’s probably the wrong shareholders.
Jack Preston: And Steve, the — just one thing to comment about — again, you mentioned the lever, but just more of a point of a tailwind is that we have elevated markdown activity this year, that as we cycle through that next year that could on unveil itself as a tailwind next year. So we’ll talk more about that in March. But that’s one aspect that’s positive.
Gary Friedman: Yeah. I mean the operating margins are going to be fine. So the cash flow is going to be fine. We didn’t buy back $2.2 billion of stock because we think the model has a problem. We’re going through the biggest transformation in this entire industry. And so you want to think about what’s going to be on the other side of that, not with the operating margin in the next quarter or two. Whether that bounces around a point or two — it’s not — as the biggest shareholder in this company, that’s not what I’m worried about.
Steven Zaccone: Okay. Fair enough. A follow-up then on just the promotional aspect to the furnishings industry. How long do you think that lasts? Is that something that continues for the next couple of years? Or is it something that probably is finished by the end of ’24?
Gary Friedman: You mean just the broader industry?
Steven Zaccone: Yes.
Gary Friedman: Yeah. No, I think the broader industry is back to pre-COVID pricing and promotions, and it will be there forever now. Once you turn that on, you can’t go back. So maybe the e-mails look different or they call them different, but you go look at the websites that — I mean, go — I mean, you’re getting pelted with sale e-mails and have been for over a year. And that’s why, as I said, that’s why everybody is now cycling that. And so there’s easy business. We could have turned on promotions, over the last year on the other side of COVID and moved our business 15 to 20 points. Just would have permanently created a different model. And so look, some people are promoting and cutting ad costs. Some people are doing a lot of different things and hoping they have a massively different model.
I just — there might be people that come out of this thing with a slightly better model. Maybe there’s some things they learned, maybe they don’t have to spend as much on ad cost, maybe this or that. So — but it’s not really people that we compete with that I’m too concerned with. I’m more focused on what we are doing and what our big strategies are and how this business is going to be positioned for the next five years. And we really like what I see. I think this is the best work we’ve ever done. So what you’re going to see unfolding over the next several quarters and not just — it won’t stop there. While I say that the inflection point will peak in Q2, that’s just based on what’s in the pipeline, which coming on the next cycle likely will create higher and higher peaks, right?
Because we just — we’re creating an entirely new foundation for the business, a stronger, bigger, better foundation to the business. Where we got arrogant around pricing during COVID and we had all the price increases from the tariffs and then the supply chain and raw material goods going up, we’re just a lot stronger, and we’re going to play a very aggressive game because we can. We have the scale to buy bigger than other people. We have the scale to get better pricing. We have the platform to present it. And so where I think we’ve — we lost some market share because we were slow to kind of ramp back up the product development and marketing of the business post-COVID, we rebuilt those muscles, where we were arrogant from a pricing point of view, there’s no arrogance anymore.
There’s incredible competitive focus to win. And so as the market is going to do what the market does. I don’t know if I was — all the people that are out there that have been promoting this past year, what are they going to do stop promoting their business will go down 15 or 20 points. Yeah, I have — try not promoting to the furniture business when you’ve been promoting, like it just doesn’t work. You have to go through a whole year cycle like we went through when we moved to membership. That’s a painful thing to do. And you have to be someone who owns a lot of the company like I did. Otherwise, you’re going to be a CEO that’s under attack by activists. If you go through a transition like that. So there’s people that say, we’re going to do like an RH membership model.
Good luck with that. It’s — they’re not easy things to do. We spent three years planning that and transitioning the business and the model, but to stop promoting when you’ve been promoting, you’re back on that promotional drug. It’s — you can’t just get off it.
Operator: Your next question comes from the line of Chris Horvers of JPMorgan. Your line is open.
Chris Horvers: Thanks, good evening. So a couple of follow-up questions on the gross margin. So do — once we get past holiday, do you think you’ll be clean to start ’24? And is it fair to say that the vast majority of the non-fixed cost deleverage in gross margin was clearance? And to your comment, Jack, is there any reason why you wouldn’t get that back, presumably with all the newness you wouldn’t expect a lot of markdowns cap?
