Michael Lasser: A cursory view of the communication that RH had during the fourth quarter would suggest that it was more aggressive, cleaning out inventory, messaging on price. And that was also evident from the gross margin compression that was experienced during the quarter. And yet if we just, the sales growth in the fourth quarter for a like number of weeks, your sales growth, trailed behind some of the peers in the space. So, a) how much do you think you saw from in terms of sales from some of the pricing actions that you took in the fourth quarter? And b), why do you think you might be losing share to some of your key competitors in the sector? Thank you.
Jack Preston: I don’t know if I got last question. What?
Gary Friedman: One second, Michael. We’re trying to kind of break down your question.
Jack Preston: I mean, the first part is, is that we underperformed peers in the fourth quarter with being down 11 on a 52-week basis.
Gary Friedman: So, yes, that, I don’t know. Is there specific people you’re talking about? There’s a lot of, I don’t know who you’re calling a peer and who you’re not. If you look at people that are heavy content furniture business, I think we’ve performed relatively in line, some better, maybe, some were a little better, some were a little worse. But when you say we broadly underperformed peers, I don’t know. But I’d say like, I don’t think there’s anything different that happened in the fourth quarter than what we expected, except, for the major storms that I think impacted everybody. and again, it will impact furniture people who have longer lead times and deliveries, more and people that are more exposed to sourcing. And specifically, if you think about, size of our outdoor business and the amount of that comes out of Indonesia, which is the capital T, affected us. So, I’m not, again, do you want to be more specific or like I’m not sure where you’re going.
Michael Lasser: I guess if we look at some of these, competitors out there, they were down six to seven in the fourth quarter versus down 11 for RH. And that’s even with a more aggressive posture on clearing out inventory, but..
Gary Friedman: What’s their product mix? Are you talking about people that sell tabletop and cookware and seasonal businesses and Christmas ornaments and all kinds of things that we don’t sell? Those are going to get hit less in a housing market downturn than furniture. If you want to talk about furniture related people that compare us to furniture related people, but don’t compare us to Home Depot, don’t compare us to Pottery Barn, don’t compare us to William-Sonoma. You’re talking about apples and oranges.
Jack Preston: And compare us to people with the same fiscal year end or quarter.
Gary Friedman: Yes.
Jack Preston: If you don’t end in January, it’s not even.
Gary Friedman: Yes. They didn’t end in January. They didn’t get hit by the canal and they didn’t get hit by the ice storms. That’s why I said, you want to be more specific, like I’ll try to answer your question, but in a broad sense like that, it’s not as relevant.
Michael Lasser: Okay. My follow-up question is, if we add back some of the margin drags that you highlighted this year, you would put RH on pace to have a 16% operating margin in 2025. Is that the right way to think about the basis for how we should be modeling over the next few years? Or would you expect the investment cycle that is going to happen this year is going to persist for multiple years, which will pressure profitability for an extended period of time. Thank you very much.
Gary Friedman: Yes, we’re not guiding to 2025. We’re guiding to 2024 and we’re giving you all the data as it relates to that. I think I just said a couple of questions ago that, we feel very good about getting back to 20% operating margin over the next several years. So we’re still in a challenging market with the housing that record lows, so, I don’t think anybody’s guiding 25 yet, are they?
Jack Preston: No.
Michael Lasser: No. I guess I was more so asking about the persistence of the investment cycle and how long that might impact your profitability rather than looking for specific guidance for–
Gary Friedman: Is anybody guiding on that in 25 yet, because that would be guidance, right?
Jack Preston: Yes.
Gary Friedman: I mean, yes, we’re not guiding to 25 yet, we never have, but we have a long-term view, that, we can return to 20% operating margins. And, , again, we have some investment cycles that we’ll have to roll through and I would say to all the people on the phone that are trying to build a model, that’s beyond where our guidance is, you’re going to have to connect the dots and come up with your own assumptions. I can’t do your work. I mean, I’m not asking you to do my work. Don’t ask me to do your work.
Operator: Next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.
Brad Thomas: Just in light of you wanting to focus a little bit more on the demand trends this year, given some of the timing nuances, I was wondering if you could just share a little bit more with us about perhaps how demand has trended quarter to-date. You did reference this exceptional reaction to the outdoor catalog. Curious what you’ve been seeing of late and maybe just as we think about, the comparisons you’re up against from a demand standpoint, are there any quarters that you’d call out where something had been unusual and not lining up with sales?
Gary Friedman: Look, we’re pretty close to — pretty far down the first quarter, right? So you can probably come up with some kind of demand. We did the first quarter demand, mid single digits. So yes, mid-single digits, is where we think demand is going to be in Q1.
Jack Preston: We’re not providing any quarter-to-date guidance, monthly breakdowns or anything like that.
Gary Friedman: Yes. I would say our demand trends are building, and they’re going to build through the whole year. So that we expect, let me give you a couple more breadcrumbs. The outdoor business is up to extraordinary start. And it biggest part of the year is coming up, right? So we have a lot of confidence as we look at the next quarter or two. We have a lot of confidence in the whole year, but we have a lot of visibility, if you think about that, right? Like the outdoor business, you can, again, just think about when people are buying outdoor furniture, they’re buying a lot less in February and they’re buying a lot more in March and they’re buying even more in April. And if that business is off to a great start, that’s really easy to connect those dots and forecast as we’ve those goods have been out there now for several weeks and we’ve got real, real data.
Brad Thomas: Yes. That’s great, Gary. I appreciate the breadcrumbs. And if I could add a follow-up on supply chain and sourcing, I guess, for one, are you contemplating any sort of disruptions relative to the closure of the Baltimore port right now? And then, can you talk about, kind of your confidence in your sourcing partners, your suppliers, ramping up with all this new product that you can have this year. And I presume that’s partly why you’re assuming you end the year with a greater degree of backlog, but just any more color on your kind of confidence in executing with all this new product would be great. Thanks.
Gary Friedman: Yes. Look the unfortunate and devastating accident that happened in Baltimore is super recent. We obviously have a big [indiscernible] center in Maryland. Fernando is here right in the room right now, and he’s shaking his head, but we don’t think there’s any major disruptions.
Jack Preston: And here, let me add, maybe just because — it’s Jack. But on an inbound perspective, some of our, much of our goods are actually offloaded in New York. We do the cost benefit analysis of getting the product out earlier in New York before the boat then comes down to Baltimore. For example, the boat that was in the accident had four containers on it, but that we unloaded it in New York as per our practice. So that we don’t have any containers, stuck on that particular boat and other boats are getting rerouted, So minimal impact from that disruption.
Gary Friedman: Yes. And I think your second part of the question is what confidence we have in our partners ramping with our new product. We have great confidence, but it’s with new product ramping. So you’re never going to forecast the new product exactly right. You never sold it before. It’s going to be some degree wrong. Some things you’re going to be more right. And something is going to be more wrong. And the things that you’re more right on and over form your expectations, there’s going to be a period that’s going to take, for our partners to scale that product and respond to the trends and so on and so forth. So, but yes, so far, so good. I mean, we’ve had very minimal issues, like it’s more, it has to do with, I think that the biggest issues are it’s been able to forecast the newness.
But once we start getting the data, then we’re improvising and adapting and let’s say we get it directionally right on the orders, but we get the finishes wrong. Well, then we’re reacting to and changing the finishes if they’re still in the factory. And, the last phase of that is the finish. And we’re shifting from one collection to another collection and as we get data and all those kinds of things. And so, and we have like we always do is have develop new partnerships and so on and so forth. And, yes, I guess sometimes some of the newer partnerships maybe they haven’t worked at this scale yet. But we try to anticipate that, but every once in a while, someone new just got one of the big collections. And so, that maybe it’s a new experience for them, but we have really great people inside the organization and in country that partner and help and work.
And we just try to work as partners and get to the right outcome, once we have the data. So I’d say there’s nothing lurking out there right now. We don’t have anything other than, some kind of ramp up issues that you expect doing anything at this kind of a scale. But well, once anything unique, I don’t know if there’s any other, no. I mean, everybody’s in the room here and team and everybody’s shaking their head, like, no, no, no problem. So we’re good. Nothing new came up so far today that we haven’t heard.
Operator: And we do have our last question comes from the line of Steve McManus with BNP Paribas. Your line is open.
Steve McManus: So clearly very upbeat about the outdoor collection. You’ve got the data there. Just hoping you could speak to what the customer’s reception’s been and how demand’s ramping for the interiors and the contemporary collection versus, what you were expecting. That’d be helpful. Thanks.
Gary Friedman: Yes. All, responding as from our latest expectations, all, responding as we’d expect. And we have the next big book is a modern and we feel very optimistic about that. And then we have, remails of interiors and contemporary and new refreshed with new collections and new creative and better data and information, better in stocks and so on and so forth. More of the product because we’ve had a chance to read and react to it in the galleries, which then gives us a lift. And so we feel really good, really optimistic. And so, I don’t think there’s any other commentary that I’ve got.
Steve McManus: All right. Thanks. And if I could squeeze one more in on the commentary to lean into like digital and print advertising, I don’t think that’s something you’ve really done in the past. What drove the pivot and piecing that together with sourcebook ramping? How do we think about the right run rate for adding under the business?
Gary Friedman: Yes, it’s kind of what we always do. There’s nothing really new. It’s what we generally do when we’re in launch mode like this. And so we’re generally marketing, print and digital with all those kind of key publications, that’s where the consumer, generally, if you’re talking to anybody or see anyone who’s building a home or furnishing a home, remodeling a home, so on and so forth, they’re, they’re kind of fishing where the fish are, right? They’re looking at for inspiration and home magazines and design magazines and so on and so forth. And those websites get a lot of traffic with really people with a purpose, right? So we tend to invest in that way. There’s a difference in our direct mail business, and thinking about the list of customer files we’ve built up and how we process that and where we get new names from and so on and so forth.
So I wouldn’t say anything is different. I think you see a ramp up in the investment and you see that, based on our confidence of, what we’ve learned thus far and, it’s given us indications of what the right investment cadence and contact cadence is. So, yes, I wouldn’t say anything’s changed.
Jack Preston: It’s not a pivot. It may have sounded like that, but I’d like to, as Gary said, it’s what we do around launches.
Gary Friedman: Yes.
Operator: There are no further questions at this time. Mr. Friedman, I turn the call back over to you.
