But our big focus is to inflect the US business and the North American business and get back to taking market share and getting our margins back to historical levels and we’re going to, for part of it to get to historical levels, and operating margins in the 20% range, we’re going to need the housing market to unfreeze here and kind of return to a somewhat normal housing market. And that could take another 12 months. I don’t know.
Operator: Your next question comes from the line of Peter Benedict of Baird. Your line is open.
Peter Benedict: Oh, hey guys, happy holidays. Follow up on that comment there, Gary, just so I was going to ask you about the conditions you thought were required to get you back to that 20%-ish operating margin, clearly that an unfreezing of the housing market. I was thinking more is there a revenue level or scale in business around $3 billion now given the cost increases across the P&L just post-pandemic, like, is there a revenue level that you think is required to maybe support that? That was kind of my first question.
Gary Friedman: Yeah, we know that answer, but I don’t know if we want to say that right now. I mean, like, I think it’ll — we clearly have some amount higher than today. We’ve said that the margin will, both gross margin and operating margin, will naturally lever as we as we as we build back the revenue here. So, but we’re not ready to give you that number.
Peter Benedict: Okay got it. Fair enough. I mean other question was just around the membership fee. We just know that you took that up to $200. Just curious the rationale behind that decision that just happened here maybe in the last month or two. So that’s my second question. Thank you.
Jack Preston: Yeah, we just had plans to bump it up a bit. So it’s a natural progression of our business. When we started membership at $100, and for years we didn’t move it but the AOV of the business had increased and so when we first moved it to $150, we talked about that we were kind of — we might see a more regular cadence of increases. So I would just say this is just part of that and then reflects the sort of average order value of our business continuing to creep up. And so it’s membership as a percentage of that is one way we look at.
Operator: And our last question comes from the line of Brad Thomas of KeyBanc Capital Markets. Your line is open.
Brad Thomas: Hey, thanks so much. Gary, I was hoping you could talk a little bit more about the outlook for gallery. When we look at what you’ve done in Indianapolis and what you were working on for Miami, really pushing the boundaries here of what’s going on in the US. I think the letter referenced 40 additional markets you’re looking at. I was wondering if you could just expand a little bit more on what you think the US gallery network looks like 10 years from now with this continuing evolution.
Gary Friedman: Something like Indianapolis is an opportunistic move, right? An incredible home and estate came on the market. We bought it for $14.5 million. Is that what we bought it for? Yeah. It’s in our joint venture. So we own 50% of it. And it’s just an opportunity to get something like that for a $14.5 million investment. What we put into it was pretty minimal versus what our normal investment was. So we have this incredible experience for the customers at a lower investment rate than we’d make, and the lower occupancy costs than we would expect to have. So that was just a — that’s kind of a one-off great outcome. I mean, we’re always looking for things like that to come up, but I wouldn’t say that’s like you’re out looking. We are not really looking for something like that. Like that just, they just kind of happened. So, I think that’s just an opportunistic move. But, what does it look like 10 years from now?
Jack Preston: We have 35 legacy galleries. We’ll have more and more of those converted. We’ll also go back to the existing design galleries. We’ve talked about certain ones that are going to have the next iteration, like a Houston for example will have a big gallery. Los Angeles at some point for example. That in North America will continue. And the 40, Gary talked about the design markets of the 40 and the logic there. So that’s the whole kind of different animal, I guess, in terms of adding to the store base.
Gary Friedman: Yeah, and we may learn in some of these smaller kind of what we refer to as a design studio, it’s really in Palm Desert, it’s like a design office, right? It’s really enabling entrepreneurs, interior designers that maybe don’t want to work in a retail gallery and where there’s market opportunities to do something to improve art and have a more dominant interior design presence, we think that’s really good for the RH brand. So some of these will look a lot less like a small store. They’ll look a lot more like an interior design office with, you know, a couple of small presentations to the product, but really a real office for an interior designer to work with clients in a highly professional way and attract entrepreneurial people that want to run their own interior design business.
And we become a platform that can support them and allow them to do what they really want to do. Yeah, so we may for example, like in the first one that we got in Palm Desert But how big is that? It’s like 3,000 feet. Yeah, it’s like 3,000 feet. We’re also looking to probably do a 10,000 to 20,000 square foot gallery there, probably 15,000 to 25,000, call the range, in that market. And we’ll have both of those locations. One’s really a true interior design office, but that gallery that we’ll build, probably won’t have the same dedicated space for interior design that we might have in one of our big galleries where we have interior design embedded into the gallery. So, this gives us more flexibility, reach more markets, activate the interior design business, which is a growing part of what we do.
And I think we’re going to learn a lot of these, where there’s opportunities for even bigger stores. Like, if we’re right on this transformation that we’re kind of, that began here and we’re right around about how the business is going to inflect, that’s just going to meaningfully take up your volumes and all these markets, makes all the occupancy models look different, right? And allows you to access different things and invest in different ways. So, we’re going to, I’m sure we’re going to have an even new, a new view in the second half of next year. As our baseline performance improves, it changes your economic outlook from a real estate point of view.
Brad Thomas: That’s great. Thank you guys.
Operator: There are no further questions at this time. I will now turn the call over to Gary Friedman, Chairman and CEO, for closing remarks.
Gary Friedman: Great. Well, thank you, everyone. We appreciate your interest. We wish you all a happy holiday and I would say to team RH, we just can’t tell you how much we appreciate the energy and the commitment and passion you bring to our business and to our brand. You are the heart and soul of this company. You are the ones that interface with our consumers every day. Thank you for making us so proud and especially the teams that just brought our international galleries to life. I mean just incredible what we’ve done. We’re in Germany what just two weeks ago or 10 days ago and you walk in, you interface with the people, you look at the gallery, you think it was in North America. I mean — and to be at the very beginning of this and to be executing at that level and to have that quality of people and that energy in the galleries, just gives me and the team here a great deal of confidence of what we can do globally with this brand.
So we wish everyone a wonderful and happy holiday and wish for peace in the Middle East and hopefully this world becomes a more peaceful place very soon. So happy holidays, everyone.
Operator: This concludes today’s conference call. You may now disconnect.
