RH (NYSE:RH) Q4 2023 Earnings Call Transcript

RH (NYSE:RH) Q4 2023 Earnings Call Transcript March 28, 2024

RH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH Fourth Quarter 2023 Q&A Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like 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 fourth quarter fiscal year 2023 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 filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revive 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 the 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 industry relations section of our website at ir.rh.com. With that, I’ll turn the call over to Gary.

Gary Friedman: Thank you, Allison, and good afternoon, everyone. I’m going to start with our prepared comments, which are included in our press release and shareholder letter. To our people, partners, and shareholders, fiscal 2023 was a year of diversity, innovation, and investment for Team RH as we faced the most challenging housing market in three decades while investing in the most compelling product transformation and platform expansion in our history. We have positioned the RH brand to gain significant market share in 2024 and beyond while building the foundation for a global expansion across the United Kingdom, Europe, Australia, and the Middle East over the next several years. While aggressively investing in the downturn has put pressure on short-term results, it also positioned us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation.

We’ve demonstrated our confidence in our strategy by repurchasing 7.6 million shares of our stock during fiscal 2022 and 2023, representing approximately 35% of the shares outstanding, and believe that investment will create meaningful long-term value for our shareholders. Turning to our fourth quarter and full year results, revenue was negatively impacted by $40 million in the fourth quarter due to the severe January weather and shipping delays related to the ongoing conflict in the Red Sea. We do expect the majority of the deferred revenue will be realized in 2024 when transit times normalize. Adjusted operating margin was 9.1% and 13%, and adjusted EBITDA margin was 15.3% and 18.2% for the fourth quarter and the full year, respectively, reflecting deleverage from lower revenues, increased markdowns to support our product transformation, and investments in international expansion.

Every act of creation is first an act of destruction, Pablo Picasso. We have spent the past 18 months destroying 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 plans for 2024 include the launch of our new RH Outdoor Sourcebook, the most dominant and disruptive collection of luxury outdoor furniture in the market arrived in homes late February through mid-March with 14 new collections. The initial response has been exceptional and we expect to gain significant market share in this important category in fiscal 2024.

The unveiling of our new RH Modern Sourcebook is scheduled to be in home late April through early May with 30 new collections across living, dining, bedroom, and bathroom, including original designs from the Harvey Probber Estate, one of the most influential modern designers of the past century. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of 2024. The second mailing of our new RH Interiors Sourcebook is planned to be in home late May through early June with new collections and improved in stocks, which should also provide an additional lift to demand in the second quarter and continue to build through the second half of 2024. We will be mailing an updated RH Contemporary Sourcebook in late July through early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends.

A second mailing of the RH Modern Sourcebook and third mailing of the RH Interiors Source Book are expected in the second half of 2024 with additional new collections, refreshed galleries, and improved in stocks. These mailings will result in a doubling of our sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business. We are also increasing print and digital advertising across major home design publications in 2024. You will see our ads in Architectural Digest, Elle Decor, Veranda, Gallerie, World of Interiors, Luxe Interiors and Design, Business of Home, the Financial Times, plus the Wall Street Journal and T Magazine design issues.

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 seven 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 their revenues from the trade market, selling to architects, designers, developers, and builders. While RH is a significant trade business, the vast majority of our revenues are 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’ve expanded other mostly trade-focused businesses and brands over the years.

Our plan is to launch with a 3,500 square foot Waterworks showroom in our newest and largest 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 that we believe has the potential to become a billion dollars-level brand on our platform. Let me shift your attention to the expansion of our platform. 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 plans for 2024 include the opening of five North American design galleries, including Cleveland, which opened last week, Palo Alto, Raleigh, Newport Beach, and Montecito, all with integrated RH interior design offices, restaurants, and wine bars.

The opening of our first RH interior design studio in Palm Desert, California. We believe there’s an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation, as well as augmenting some of our design galleries in larger markets with additional design services in standalone design studios. We will also be opening two international galleries, one in Brussels, which opened last week, and Madrid, opening this summer. Both galleries are located in beautiful historical buildings that elevate our product and render our brand more valuable. Unfortunately, RH Paris has been delayed until Spring of ’25 due to construction restrictions relating to preparations for the Olympic Games this summer.

We are also pleased to announce RH Sydney, the Gallery in Double Bay, a five-story development with a rooftop restaurant and wine bar, received council approval last month with plans to open in fall of 2026 in what we believe is the most vibrant and desirable location in Australia. Now let me turn you to our outlet. While we expect business conditions to remain challenging until interest rates ease and the housing markets begin to rebound. We expect our demand trends to accelerate throughout 2024, due to the extensive transformation of our assortment, we do expect revenue to lack demand during the year by approximately four to eight points until we read and react to new collections, reduce back orders, 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’s also important to note that we are forecasting to end the year with an increased backlog of approximately 110 million to 130 million due to revenue lagging demand throughout 2024, which will negatively impact operating margin adjusted EBITDA margin by approximately 140 basis points for the year. Additionally, investments and startup costs to support our international expansion are estimated to be at approximately 200 basis point drag for 2024. For fiscal 2024, we are forecasting demand growth of 12% to 14% and revenue growth of 8% to 10% on a 52 versus 52-week basis. We are forecasting adjusted operating margin in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%. For the first quarter of fiscal 2024, we are forecasting demand growth of positive mid to single digit and revenues of negative low single digits.

We are forecasting adjusted operating margin in the range of 6% to 7% and adjusted EBITDA margin in the range of 12% to 13%. Now let me turn you to the RH business vision and ecosystem, the long view. We believe there are those with taste and no scale, and those with scale and no taste, and the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of 5 billion to 6 billion in North America and 20 billion to 25 billion globally. Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establishes the RH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yonceville, an integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture. This leads to our long-term strategy of building the world’s first consumer facing architecture, interior design and landscape architecture services platform inside our Galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the 1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste on time value to discerning time-starved consumers. The entirety of our strategy comes to life digitally with The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies the market opportunity to 7 trillion to 10 trillion, one of the largest and most valuable addressed by any brand in the world today, a 1% share of the global market represents a $70 billion to $100 billion opportunity. Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and by doing so, elevating and rendering our way of life more valuable. Never underestimate the power of a few good people who don’t know what can’t be done.

For the past 23 years, we’ve heard others tell us what can’t be done and for the past 23 years, we failed to listen. We avoided bankruptcy by being accused of lunacy. While others have been shrinking and closing stores, we’ve been building the largest and most inspiring spaces in the world. When Wall Street didn’t think our stock was worth buying, we bought 60% of it ourselves. When everyone told us we should be working from home, we were in the center of innovation working on rebuilding our new home and it’s almost ready for prime time. From the largest product transformation in our history to the most inspiring retail experiences in the world, from couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, Guesthouses, from Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney, soon the world will be within our reach.

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. And now we’ll open the call to questions.

Operator: Thank you. The floor is now open for your questions. [Operator Instructions] We’ll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Simeon Guttman with Morgan Stanley. Your line is open.

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Q&A Session

Simeon Guttman: I think the most important element of the outlook is the sales guide, because it hasn’t been growing, and now we’re flipping to growth. So I wanted to see if we can approach it from two sides, and I’d love to hear your perspective. First, on one side, if you end up meeting or beating this outlook that you’ve given us, if we look back, I mean, it clearly could be the products resonating more than you thought, or should we look at it as, you gave us more of a conservative trajectory than what even the business is implying today. And on the other side of that, if you end up falling short of it, was it either product didn’t resonate, or maybe there was more pent-up demand, and you’re over-reading that curve. Curious how you think about both sides of it.

Gary Friedman: I think you just covered the answer in many ways. I would say, look, we have visibility trends in our business that can help us connect the dots. I mean, if you read the letter a few times, and you look at the pieces that add up to directionally where we’re going, we feel very confident in the plan we’ve laid out, the guidance we’ve laid out. And this is what we’ve been working on for the past 18 to almost 24 months. So it’s been a lot of thought, a great attention to detail. We’ve been flying at the highest levels, and we’ve been into the lowest levels of detail inside the company and the organization to rebuild the brand from the bottom up. And I think this is the best work we’ve done. I think this is the best team we’ve ever had.

And I think what we’re about to do is going to create another leapfrog for our age, just as we’ve done every seven or eight years, if you looked at our history when we’ve done transformations like this. So we’re highly confident. We think we have enough data and information to read. If you were in our Center of Innovation right now, you’d be looking at all the whiteboards that I’m looking at. And every category of our business laid out every month with demand this year, last year, two years ago, percentages, trends, book drops, collection units. I mean, this is built up at a very detailed level. No one has a crystal ball. I always tell the team as we buy inventory or do anything, every plan we have is some degree wrong. The question is, is it more right than wrong?

And is it directionally right? And have you identified the risks in the plan and the things that maybe you haven’t seen as you’ve been building something up from an optimistic vision perspective? And we believe we’ve done that. We’ve been here with all of the key leaders, all the key team members at every level, building this, again, for a long time, talking about how many trips to Asia, how many trips to Europe, how many… We don’t have meetings in our company, we have adventures. Because we say meetings is about arranging and organizing the status quo, and adventures is about leading people somewhere they’ve never been, doing things they’ve never done, and in search of better ways and brighter days. So, we’ve been through countless adventures.

I think we’ve looked at all the data that’s available and created new data. So, I personally feel great. I think the team feels great. I think if you came here and you spoke to the people really doing the work, I think they’d all feel great. Our competition might not feel great over the next couple of years, but that’s not really our problem.

Simeon Guttman: As a follow-up, if I can ask about Europe, if you can share how much of Europe’s sales is in this guide, and I guess you’ll ever get comfortable sharing the Europe forecast. I don’t know, every gallery may be different, and there’s a wide range. And then, I guess the 200 basis points, that’s, I think, the first time maybe we’ve gotten explicit quantification. Does that taper quickly or slowly, and is that like the peak, or call it international investment? And now that revenues build, even as you add more galleries, we don’t step back from that level further. Thanks.

Gary Friedman: It’s a long question, so let me maybe take the same amount of time and process it. Look, Europe, I’d say there’s a few points. If you kind of motor up and think about what we’re in the very early process of doing, first stand back and say, what have we done so far? Last year, in mid-June or so, we opened an extraordinary, never seen before, multidimensional experience in the English countryside, that we opened through a lens of conversation, not commerce. And the why that we’ve articulated between that was we, fortunately and unfortunately, we did a package real estate deal that enabled us to get two irreplaceable locations in London and Paris, but also required us to take other locations we had to open sooner.

As a result, these smaller markets are not benefiting as we first opened. We didn’t think they would. From the brand awareness, Alo, the key markets would provide and will provide. So, Arch England was born out of that kind of conundrum of, hmm, not really opening in the places we’d want to open first. And there was a big expense if we didn’t do that, and other lease requirements and other hurdles that would have been a little messy. So, that’s what drove us. Because we weren’t going to be able to open London and Paris first, that drove us to say, what can we do? What would we do? What kind of investment would we make that would introduce RH to Europe and the broader United Kingdom in an inspiring and unforgettable fashion? Why is that important?

I think it’s important because just about every luxury brand in the world is from Europe and the UK, except for a couple. You can argue that we have Ralph Lauren and Tiffany. Ralph isn’t pure luxury, right? So, there’s a bigger, broader distribution strategy there that’s a big part of that business. So, if you said pure luxury, what are the pure luxury brands in the U.S. that are really top of mind internationally and have been for a long time, I’d say it’s Tiffany. And the French just bought it just a couple of years ago. So, I started first and foremost, I wouldn’t say Americans are described internationally as tastemakers, as architectural thought leaders and so on and so forth. You look at the beautiful historical architecture across Europe and the U.K., and then you look at the U.S. and you go, okay, if you start in the East Coast, you’ve got some, and you start moving West and it kind of falls off a cliff pretty quickly.

And so, how does an American brand that hasn’t really been doing what it’s been doing for very long and looks like we did 15 to 20 years ago, a kind of [chachky] [ph] little shop with back scratchers, selling back scratchers and moon pies, things that, how do you want to introduce yourself if you want to earn the respect of the tastemakers, of the placemakers, of the people that kind of not only set the standard, but set the direction for consumers broadly around the world? And that’s how we came up with the idea for RH England and opened Aynho Park, a historic 17th century estate, 73 acres. That’s why we invested in probably among the best architecture and design libraries that’s not an institutional location, but a private collection in the world.

That’s why we have three restaurants, the third one opening this spring. We wanted to introduce ourselves in a way that no brand has introduced itself to Europe and the United Kingdom. Did we think we were going to do a lot of volume out there? No, not initially. Did we think we’re going to open the market to the internet? Yes. And we’d learn from that. And we’d learn likely from how the divine trade profited from it. That came to us and connected with us and interacted. And we also knew that we’re opening somewhere where in the winter months, in the late fall and early spring months, it gets dark as early as 3.30 out there. And it’s really cold. And not a lot of people are going out there. I mean, they might have been going out there more during COVID because there’s nowhere to go.

The last thing you want to be is in a big city. So we did something very unusual. And that’s why if you go to that Gallery or if you’ve been there, the first thing you see when walk into the entry is a unicorn. And it talks about how unusual and inspiring we believe the place is. And I think we’ve introduced ourselves in a way that’s captured people’s attention and imagination. And I think the conversation is the right conversation. And I think that conversation will build as we’re open for full spring, summer, and we have all three restaurants open. And we’ll really learn a lot more. But that’s why we did that. And the next galleries we’ve opened have been open weeks. We opened in mid-November or something in the 20 weeks for the German galleries.

Yes. Okay. So, yes. It’s months. And so in places we’ve never been, and not necessarily what I’d say. Paris and London are two of the most famous cities in the world. They’re two cities anchored in fashion and style and so on and so forth. [Indiscernible] in there too because we also have we’re making, I think, you’re doing something extraordinary in Milan, but those all we’re going to take longer. And so we’re not opening in the order that we wanted to open in. But it was always our intention to open in Paris and London first in iconic locations from a brand awareness point of view. But what we’ve learned so far, as I tell you, there’s a higher mix of trade than we anticipated or seen anywhere. And trade is exterior, interior designers, and more of a B2B business, hospitality, contract kind of design.

So, it’s a much higher mix of trade right out of the gate. And would that surprise us? Not really, because the consumer doesn’t really know us yet. But if you’re someone who’s aware of the home, if you’re aware of design, if you’re an interior designer, if you’re doing commercial projects or residential projects, you know RH. And you may have likely shopped from us in the U.S. or you’ve been to our key galleries. And so what I like about that is it’s really the right people and the most influenced people who are out indexing today. We didn’t anticipate that. We didn’t think about that. But when I do think about that, I think I’m very, very happy about that. I think it wouldn’t be good if it indexed the other way because you want to get the right people, especially if you think about where we’re trying to take this brand.

So the right people, the people most interested in architecture, interior design, and taste and style are coming to us at a higher mix. And that deals with building our book of business, which is an important part of this business, building the pipeline of design projects, both in our trade business and in our own internal interior design business. And so when we look at the book of business for RH England and we look at the trends now that we’ve been open, that business from a retail point of view, like a gallery point of view, is going to be right about where I think we thought it’d be directionally for opening in such an unusual location and thinking about what might happen. What surprised us the most, I’d say, is the direct web business is slower than expected.

We thought that the web was going to be a much larger mix of the total since we were opening an entire country. And so when we stand back and reflect on that and say, okay, what didn’t we think about? What did we miss in that analysis? I think it’s just the overall time it might take to build the brand and ramp the brand to a consumer. And also the first gallery in the U.K., kind of not deemed by anybody. I mean, what’s the population of Aynho Park? 300 people, right? Like we opened in a town of 300 people. And there’s nothing really that close to 30 minutes to Oxford. So we had some major things. A few other places. But it is a place that people aspire to go to spend time with, especially in the late spring, summer, early fall period. And also, we have plans once we get our feet on the ground to think about long-term doing events and other things on that property to bring the right people.

And we also have some partnerships happening that actually have sourced us to do different events dealing with whether it’s beautiful high-end car brands, or the racing and things that happen and a lot of the prestigious things that happen out in the English countryside. And then I think the other thing I’d say, I’m just giving you a kind of context of how we think of Europe right now, is we didn’t open with the full assortment. And I think when we go back and we’re analyzing that, that part of the assortment that we didn’t open with is probably really important to consumers and the web business. So building awareness that opens up the internet and the web business to get that to move more quickly is going to be important. But I think a lot of it is going to take opening the key iconic galleries in London and Paris and Milan and so on and so forth.

These big ones with restaurants and champagne and caviar bars and wine bars and barista bars and architectural design libraries and all the really incredible experiential things that people are going to discover the brand and say, what is this? But right now, the only one with those experiences is in a very unpopulated part of England and it’s going to take longer to be discovered. But when people discover it, it is the right people and it is the right conversation. So we’re super happy about that. But I say we’re still so early, right? You got to let the book of business build. We’ve got to kind of get our feet on the ground. And I’m massively optimistic long term and I’m massively optimistic because I think there’s no one like us in the market.

I think we’ve got to open these big galleries. That’s what’s going to build the brand. We’ve got to open in the big key cities that define fashion and taste and style and be in that conversation. But I like that the trade business is over indexing because those are the right people. They’re the influential ones. But it’s going to take a while. We’re just out of the gate and we’re not out of the gate in the order that we would have liked to. But nonetheless, we’re out of the gates and we’re learning. That’s the important thing. And all of these things are going to benefit from the product transformation that we’re going through and all the things we’re doing that we have in the pipeline. I only listed out what we’re doing in ’24, what we’re doing beyond that and what we have coming for ’25.

And there’s some things I can’t even put in the big long view because I don’t want to be too specific and give any information to the broader industry. Like next year, I think we’re going to launch something that’s really big. And it’s going back and forth. I don’t want to put it in this letter or not. But we’ve got enough in this letter. When I look back and look at this letter, I go like, okay, it’s kind of ridiculous. This is very exciting. We don’t need to tell everybody what’s in the pipeline. But we’re feeling really, really great about where the brand is, where it’s going. I think Europe is going to take a while, building great brands. You’ve got to be very, very strategic. You’ve got to be very smart. You’ve got to be patient. You don’t go rushing and build one of the great brands in the world rushing to the finish line.

We say fastest as slow as we go, but we also say we have to do less and think more so we can do more. So it’s spent a lot of time thinking, deepen the data, really analyze things right, do the next thing, do the next thing, do the next thing. But I really like where we are. I like where we’re going. I like everything that’s unfolding. And I especially like how we’re positioned for the other side of this kind of difficult housing market, right? The worst home sales in 30 years, that’s a long time. And how we’re positioned for that rebound, I think is better than anyone on multiple levels too. Like when I look at the whole assortment, whether I’m looking kind of at the level we’re at, if I try to look at people above us and I look at people below us, I just think we’re going to be holistically disruptive across a pretty big size of the market we’re trying to hit.

I think we’ve opened up the aperture a bit without compromising the most important tenants of what we’re trying to build. So long rambling answer, hopefully gave you a few data points that were important.

Operator: Our next question comes from the line of Steven Forbes with Guggenheim Securities. Your line is open.

Steven Forbes: Gary, given the spread between the first quarter demand guidance and the full year, I was just curious if you maybe help us better think about how the business is rescaling or ramping on the back of the recent store resets. And then how should we think about the cadence of resets on a go forward basis married together with the cadence of source mailings that you talked about in the letter?

Gary Friedman: The spread between Q1 and full year, I mean, it’s just the building, again, everything, if you just read the letter carefully and I mean, those are all meaningful things we’re doing, right? Those are all meaningful books that we’re unveiling that were, completely remerchandised. And you have a lot of revenue, and if you just look at the contact that we’re making year over year, I don’t know what if every company doubled their customer contacts and circulation, I don’t know what might happen. It’s going to be meaningful. We don’t introduce new products and get zero. We don’t introduce, we don’t mail sourcebooks and get zero. And, we just, I think, post-COVID, because we took a little over a year off because we’re trying to catch up on backlogs.

We lost our muscle in an atrophy and we tried to get restart, what I call the engineer or the machine. And the machines fluttered a bit and it took us a while to get back into our groove and with new products and sourcebooks and just all the things you’ve got to do. And it’s probably one of the bigger mistakes I’ve made in my career. And but now we’ve rebuilt the machine. We have better muscles than we had from before, we’re way more intelligent. We’ve went to a much deeper level and the quality of the work is just the best work we’ve ever done. And we’ve got enough internal data, right? When you see your business and how you’re rebuilding it from, down mid teams to where we are and you look at the mix of business and the categories and you come out of the gate, you look at what Outdoor’s doing.

I mean outdoors, just, it’s exceptional right now. And it’s, I think that the design and quality and value equation is so unmatched in the industry, that we’re going to take tremendous market share. And it’s just setting up what we’re going to do with Outdoor in 25, 26, 27, because when you think, when you see what we’re going to do from a physical perspective with that business and how we’re going to exploit it, I think we’re going to own it. And like there’s real numbers here in Outdoor. Outdoor is a meaningful part of our business and the work and learnings that we did in Outdoor, that’s also applied to every kind of category. You can just trace it all and see how it’s going to come together. And we have enough data and numbers from, the RH Interiors and the new collections and RH contemporary and the new collections and the adjustments we’ve made and the adjustments we’ve made to the value equation perspective.

And I think when we went back to, you know, just having more edge, like, the edge that it took to build this brand and business. I think is returned. And like I think I said a few calls before, I widely quoted, I got to be careful what things I say, I think I said we were arrogant about pricing because of all through the period of tariffs and supply chain disruptions, you know, COVID and raw material prices escalating, that forced price increases and drove inflation. I don’t think we had our value edge and hats on as we kept climbing the luxury mountain. And I think, being a great luxury brand doesn’t mean that price doesn’t matter, it’s like everything has to have a value equation. Everything has to go through a lens of design quality value in that order.

If somebody doesn’t love the design, they don’t even look at the quality nor the price. But if you have, you win a design, then you’re through kind of door number one. And then you’ve got to win on quality, because then the customer will get closer to it. They’ll read about it, touch it, and interact with it. And they’ll make their own perceptions about quality. And you can influence that with what you say and how you communicate. But at the end of the day, that the consumer is going to make the decision about how great is that design? How great is that quality? And for that design and that quality? What is the value? Like, how do we think about the price that you’re asking for that? And is that a lousy value? Is that a decent value? Is that a good value?

Or is that a great value? And I think we’re highly focused on having a great value, a disruptive value, with clear comparisons of anything that might resemble or be like things we sell in the market. And so we’re laser focused, we’re into, the greatest amount of detail. And, you know, I think that the design quality value and, you know, that if you took that lens against outdoor, which you guys have visibility to, if you really take the time to go through that book, and go through the collections, and look at the quality of the — just the extraordinary design, and the extraordinary presentation of that design. And then you do some work on the quality, whether it’s the materials it’s made of how it’s made, where it’s from all that, all the different things, and then put it through a value lens, like, try to find, any product similar, find the most similar product from other places, put them up all in a wall, and compare them to ours.

And you might understand why I’m saying Outdoor is exceptional out of the gate, because it wins, door number one, we win door number two, we win and door number three, we really win. And because of our size of our platform and our scale, and because, at the most senior levels of, this company, we’re in the factories, we’re with our partners, we’re helping to conceptualize and put the same creativity to how we source and how we buy and how we — the scale we have and negotiating the price. And it’s not really a negotiation where one person wins, one person loses, it’s how do you get all the brains in the game, and think about it, and figure out how everybody wins. And that’s how we’re able to, I think, have extraordinary value, it’s like, you can’t delegate greatness.

And so all of us here at the most senior levels are at leading the work, we’re learning together, we’re listening together, we’re learning together, and we’re leading based on that. And I think the work that’s coming is, I think, the best work in the history of my career, and I’ve been in this industry a long time. And I think it’s the best work in the industry. And I think it’s going to be disruptive, and it’s going to create strategic separation. And I think we’re going to gain a lot of market share. So guys, I don’t know how to give you a more specific thing. But it’s like, that’s what we’re doing. And so, if you want to build the ramp, like, look, you can take where Q1 is going to be, and you know what that demand looks like. And you can take like where we think we’re going to end the year and build your own little graph.

I give you guys all one, but everything gets too myopically focused on that, like, it’s just got to be directionally right. Like, if we have it a little wrong, like, well, how, why wasn’t that exactly right? Well, it’s not going to be exactly right when you’re building something and transforming something, you’ve just got to be directionally right. And we believe we’re directionally right, we believe, we’re going to deliver these numbers or more. And we’re very confident about that.

Jack Preston: And Steve, you asked about four sets as a piece of that, that’s, as Gary’s talked about, that’s one piece of the puzzle, right? You have a new product from the evolution of the product, you have better availability of that product, you have sourceful contacts, again, all things Gary has said. And four sets, another, one of these factors that, that drives the business.

Gary Friedman: And we have been doing the four sets, they’re continuing. And we have one particular collection that we talked about in the last call that that’s still coming in, it’ll be in, in all galleries in the second quarter.

Jack Preston: Yes.

Gary Friedman: And throughout the year, it will be reading, like the floors will continue to evolve, the galleries will continue to evolve all year. Right. And so there’s a lot of news coming in, there’s going to be, several cycles and adjustments that we’ll make. So, there’s just, we’re going to have a lot of choices and a lot of optionality. That’s what else I like, you know, when I look at the bigger picture and I stand back and I go, whether it’s sourcebooks or advertising or contacts or four sets or in stocks or placing bets here, reacting to this dimensionalizing different parts of the business. I mean, we just have a lot of things in play and a lot of opportunities and you can mathematically take all the pieces and build it up.

And we’re not new at this, done this for a long time. And I’d say, I think I’d put it in context is how are you thinking about the guidance for the context of the market? We’re guiding with looking at it through a lens of market neutral. The housing market doesn’t get meaningfully worse or meaningfully better. Right. So we’re saying neutral market, yes, there will be interest rate cuts. We’re probably going to be quarter point cuts. They’re going to come later in the second half of the year. A quarter point cut isn’t going to massively move mortgage rates. If you look at the delta between, where people are locked in on mortgages and where they’d have to step up to, you really need two things happening. You need home prices to come down and you need interest rates to come down.

And that gap, I think is going to take longer than three quarter point interest rate cuts, but hopefully those happen. And you put some more interest rate cuts on the other side, in ’25 and people can’t hang on as long from a pricing point of view. And some of that giant inflation that filled the housing market, which really one of the biggest impacts of markets think about how home prices in America went up 42% in two years, the two years COVID, and then they’ve been stubbornly high because there’s been no inventory. There’s been no inventory because people had record low interest rates and they’d have to trade up to a higher interest rate. Like, so, the data is like, it’s all super logical. Why were the freeze and where we are. The key is, what really has to happen for the thaw and for everything to get moving again and it’s interest rates and housing prices.

And it’s a combination. We believe it’s a combination of both unless interest rates go down really quickly, mortgage rates get readjusted and you get a big move down there. Then maybe housing prices hold up. My sense is that you’ve got a lot of people just holding on as long as they can. A lot of people have to move. They got a new job somewhere. There’s going to be, and some people have what they’ve grown their families, had more children, they’ve gotten married, they need to buy a house. And so there’s pent up demand. And I think that’s a good thing when you look at it. And, but, but I still think you got to have movement. We got to have real movement in the interest rate market and we have to have some movement in the pricing market. And when those things start to converge, I think we’re going to see a snapback and I think no one’s going to be better positioned for that snapback than us.

Like we’re going to be in the absolute best position. So that’s, we’re super excited about like right now, we’re looking at market neutral, not going to get meaningfully worse, not going to get meaningfully better. If it gets a little better, do we feel better about the guidance? Of course we do. Of course we do. We’re going to feel a lot better. So, but I just think at all ways we look at it, it’s all some form of good, be great. And let time unfold and we’ll keep doing what we’re doing and playing our game.

Operator: Next question comes from the line of Curtis Nagle with Bank of America. Your line is open.

Curtis Nagle: So Gary, maybe I’ll just start with, it was kind of a small piece of business right now, but it sounds like it’s going to be a bit bigger over time. I think it’s the first time you’ve called out a long-term outlook at a billion dollars. So implying you would effectively quintuple. I guess just at this point, you’ve had it, I think since 2016, what gives you, I guess the confidence to put out a pretty bold, pretty impressive target, and I guess kind of why now? What’s driving the excitement? Maybe asking more simply.

Gary Friedman: Sure. Sure. Good question. Yes, we said back when, I don’t know if we said this publicly, but it’s that, we said it internally that Waterworks was one of two businesses I had on a strategic framework map when I came here 24 years ago. Like when I walked in the door, I said, okay, here’s the long-term vision. Here’s where we’re going. And I had two acquisitions, Waterworks and Dean & Deluca. I thought Waterworks was the best brand in the high-end, bath and kitchen, mostly baths back then now kitchen too. And I thought Dean & Deluca had a really interesting brand with more of a food focus, some hard business, but it wasn’t merchandised well to make money. And I knew enough about the Williams-Sonoma model that I thought like we could create a really cool next generation kind of Williams-Sonoma with a different kind of sensibility aesthetically and taste and style and maybe integrate a little bit of fresh food focus.

Although that’s the reason why Dean & Deluca never could sail and make money at, too focused on fresh food and they didn’t have the hard goods part. And so Dean & Deluca didn’t make it, got passed around a couple of times. So we looked at buying it multiple times. We almost got it. And Waterworks came along. It was the right brand at the wrong time, but it might not come, come available again. So if you think about when we bought it, we were in the middle of membership, supply chain transformation, all kinds of things, the just launched modern. And we said, look, we may not have another chance to partner with a brand like this. We thought it was a great strategic fit. So we did that, but the business was only relatively small, right. It was, I think we bought it with just north of $100 million.

And you had to think about, when you had to learn that part of the business, we had to kind of build relationships with the team way to get strategically aligned and without using a lot of time, because it was the wrong time. So we spent very little time in the first few years. And how do you kind of build the business model and the assortment logic is for the business model and a lot of things. And so we through the years we spent a little bit of time and got aligned and the team has done an outstanding job, I think at almost doubling the business, core than doubling the EBITDA. And now it’s, I think business that’s positioned to grow. And I think we have a platform that it’s the perfect platform to scale the business on. With direct customer component, we have a consumer part of the business that, even though they have 14 showrooms, they’re not in places that consumers really shop.

And we have experienced taking mostly trade focused businesses and brands, over our years and putting those brands on our platform, putting their assortments on our platform and doing multiple times the business, right. Just because it’s now the best products are in front of the consumer, but let’s be proud. It’s not in front of the consumer out yet. Consumers don’t really go into water or showrooms. I mean, they stumble in, but they’re in design districts or to the trade or set up for business to business. They’re not really set up for consumer, even though they have a showroom, no different than any of furniture brands like that, so on and so forth. And then there’s some distribution and third-party distribution is that, they’re in there with other brands and where they don’t have total control of the brand.

But I think when you look at the platform we’re building and the stage we’re building for the best products in the most important categories, this is a perfect fit. I mean, it couldn’t be more aligned and it’s also really hard business. I mean, we’ve been in the business. We sell water delivery and faucets in cities and we sell bath, hardware and stuff like that, but we’re not experts. I mean, they’ve got, what, 45 years more than that experience, family business. Peter Selleck, he’s the CEO and leader there, in their most of his life. And his mother founded the business and Ralph Bennett has been CEO for, I don’t know, 15 years. So it’s like, the leadership team there, it’s really smart has a great view and grasp of the high-end market, that we’re benefiting from and learning from.

And we think we’re pretty smart and we have a great view of the consumer market, but what we’re trying to do is merge both of those markets. And we think that’s where we think long-term the world’s only going to be more transparent and long time, but, the best product, not basing the consumer in these categories. And that’s what RH has been trying to do for our entire journey, since I’ve been here as slow going in the beginning, we were on the edge of bankruptcy for almost my first 10 years. And so we made it through that. And now, we’re doing what we’ve always wanted to do and we’re getting smarter and better. And Waterworks is just a great synergies and yes, no different than you’ll hear us talk at some point later about, the V3 and the Couture Upholstery brand we bought Joseph Jeup, kind of Bespoke, furniture brand.

And just having these people and the talent inside our organization, learning from them, them leading us to higher quality, better taste, how to think about the trade market and so and so forth. It’s just so much synergies, it’s like — a lot of times you take one plus one, you get less than one, right. Every time there’s another thing or another person involved, there’s more complexity. And, Einstein said, you know, the only way to battle complexity is, through simplicity, but once in a while you got one plus one equals more than two, right. And I think we’ve found that with Waterworks. We found that with Dmitry, we found that with Joseph Jeup. And other things that we’re doing sometimes, maybe not, it’s not necessarily an acquisition, but it’s a deep partnership and relationship.

And I think that’s what we’re really good at. In Waterworks again, like, I mean, it’s really funny. I could pull out the PowerPoint from 24 years ago, there’s Waterworks in this, little grid. It looks so amateur when I look at it back then, what we’re thinking, but it’s always been our radar and we think it’s just a great fit and RH was restoration hardware. It had hardware. It had bath. I mean, it didn’t have faucets and fittings when I came here, I added that, but it had towel bars and books and a few things like that. And then when I added faucets and fittings, the model was, looking at Waterworks is the best. So we’re always obviously inspired by them, but we were never going to be Waterworks. Right. And so it’s much better to just partner with and integrate with Waterworks.

And I think it’s going to be unbelievable. I really do. And I think it’s going to bring you, I think the other benefits is it’s going to bring the highest quality trade customers to RH that maybe not are frequent, frequenting us yet. And you get into the business at an earlier point in the design stage. We sometimes get interact with the consumer at a much later stage. The home is done. They’re ready to furnish it. So on and so forth. Interact with Waterworks consumer, you’re at the front end, you’re at the architectural point, you’re at the plumbing point and all this other stuff. So the opportunity to get access to that customer, integrate that customer, be building the design holistically, all the categories that we’re in and the categories that we’ll continue to expand into and become more dominant.

And I think it’s really like, if you could ever say there’s a match made in heaven, I think it’s a match made in heaven. Like it just, it was supposed to be, so we’re really excited. I think they’re really excited. And I think it’s going to be big.

Curtis Nagle: Got it. Thanks. And then just a really quick one, Gary, just in terms of the mid-outlook, I think on the last call you said something to affect, you had expected a peak or an inflection in peak demand or something like that in 2Q or spring. Any changes there? Obviously, the outlook has been strong for the year.

Gary Friedman: Yes, I think they’re going to keep peaking because we’ve done more work since then, like there’s more things, we can see more things. So, yes, I think that, like phase one, so what I think about that, Curt, is like kind of phases, there’s multiple phases of this transformation, right, as we will be unveiling, but kind of phase one will kind of hit peak, I think, in late Q2. But then there’s a whole phase two now that we’ve got coming that will be unfolding, right. And I think we’ve got phase three coming. There’s just a lot of excitement, a lot of great work that’s being done. And the debate around here is how do you sequence it? How should it all unfold over what period of time? And so I’d say that’s peak inflection on like phase one, RH interiors, RH contemporary and outdoor and modern, right?

Like, if you knew modern would be coming in, that’s like the next of the big books. And I think it looks incredible. Like, I’m glad we actually delayed it a bit and took a little bit more time because it took a leapfrog. I mean, it’s stunning. And I think it’s so fresh and cool. And, people just see the images and, it’s all laid out. You feel like, wow, okay, it’s not a walk on by, I guarantee you, it’s not an Aretha Franklin, walking by. So that’s coming, that’s going to create a big kind of move in Q2. And outdoor, it’s going to be hitting peak, March, April, May, June. And you’ve got learnings and interiors and that’s cycling through and then we’ve got in stocks that are going to get meaningfully better, backorder rates are going to go down, which means demand goes up when backorder rates go down.

There’s all kinds of metrics here that you can just add them up and it tells you what to do. And all the adjustments we’re going to make. So, yes, I think at phase one, you’ll kind of get kind of peak inflection, might peak a little later than that, but you’re going to kind of know, like the arrow, like when I talk about inflection, it doesn’t mean that the outcome, right? Like the curve, the line will be pointed in that peak direction. How high does it go? That might take to Q3 or Q4, but like the inflection point will angle up, right? And we’ll see that in Q2. So that hasn’t changed. They just changed a little because they pushed modern out a little, but you’re still, modern is going to get in there in Q2. You’ll get enough of a read. You’ll see where that’s going.

And then, and then you got like just phase two and phase three and things that are coming through the pipeline. And I think it just all keeps building. So, yes, so we’re directionally correct. Try to get a little bit more color there. Hopefully it’s helpful.

Operator: Next question comes from the line of Christopher Horvitz with J.P. Morgan. Your line is open.

Christopher Horvers: So I’m just going to put my two questions out there. So my first question is, the $40 million that was deferred of January, that, why wouldn’t it come back much sooner if it was a lot of domestic and we’re hearing from other retailers that the Red Sea has just added weeks of delivery. And then my second question is, if you look at non-occupancy gross margin pressure, it looks like it got a little bit worse. I guess, how far is that all clearance and how long before we get through all of the clearance and do you expect to recapture all that pressure? Thanks very much.

Gary Friedman: Yes. I mean, well, look, for one, you’ve got to think about like, there’s a lot of people in home furnishings or might sell home goods and you have to say like, okay, what’s their furniture content and what’s their special order content? And when you think about those goods, and then what’s coming from Asia and coming around the pipeline. So, now that’s kind of coming around Africa and not through the Red Sea and the canal. So we probably have the highest content, right? We have a significantly bigger outdoor business, I think, than anyone. I don’t think anyone, holds a candle to us in that category. And so, that’s all how to travel and take a couple of extra weeks. And so that’s a meaningful number. Our special [indiscernible] or any of our other businesses, all our newness, all our things attached to back orders, right, that got delayed.

So you’ve got that delay and then you’re delaying kind of everything looking out. Like when does, when do the shipping lanes reopen? That’s the question. How long, is this two-week delay built in? You’re not going to catch up with it until the shipping lanes opened or, like it’s just kind of permanently deferred for two weeks. That makes sense. And then, the piece with the weather and, the ice storms that hit, yes, that piece comes back now and is coming back. Yes, so you generally have a delay with that. But it’s not like it comes back tomorrow because they’re maybe design price of the design projects, it’s special orders, that they’re doing. It’s outdoor furniture that they were going to buy. If they bought anything that has the two-week delay, that’s delaying it more.

So it’ll all cycle back. It’s just, what’s the timing? Like if you’re selling things that are cash and carry, got it. Yes. Like if you look at the product mix of people that had Christmas product or especially all the Christmas stuff that was on sale, in December and January and stuff like it, of course, all that stuff comes back, like that’s no problem. If you’re selling, any home furnishings categories and, if you’re selling tabletop, food-related products, accessories, cookware, name all the categories that are attached to home, they’re all cash and carry kind of businesses, or just domestically shipped, from the D.C. We’ve got a very different product mix and model than anyone else. We probably have the highest furniture content, of anybody that you might compare us with.

Jack Preston: And Chris, on the gross margin side, there was the continuing impact on the product margin.

Operator: Next question comes from the line of Max Rakhlenko with TD Cowen. Your line is open.

Max Rakhlenko: Gary, Jack, congratulations on strong demand that you’re seeing as well as the recent opening. I was curious, given all the new galleries that are coming online in the U.S., can you provide an update to the new gallery economics as you convert a legacy gallery to a design gallery? You provided color in the past, but just curious how that has evolved over time.

Gary Friedman: Markets, do they have hospitality or not? So, yes, it has been a while if I think about it. So, that’s good. Let’s pull that together in the right way and make sure we distribute it in the right way so everybody’s got the same data.

Jack Preston: Yes.

Max Rakhlenko: Got it. Sorry. Could you repeat that? It went blank for a little bit.

Gary Friedman: Okay. I was saying it was a good question. It has been a while, as you said that. And there’s been a lot of things that have changed. We have restaurants and galleries now, hospitality aspects. It depends where they are in the cycle, how many square feet you’re expanding into. There’s a lot of things to consider when you look at these. And so, I think what we ought to do is update that data set and create a framework and let us distribute that next quarter in a fashion that everybody has the same information at the same time and it’s all accurate.

Jack Preston: Max, can you hear us? We might be having audio issues. Max, can you hear us?

Max Rakhlenko: Yes. Okay, great. And then my follow-up question is, can you speak to how you’re balancing the chart price points with maintaining elevated product margins? And then, just how much are your vendors stepping up and then the opportunity to expand product margins over time at the current level?

Jack Preston: One second, Max. Repeat the question because we were just recognizing that the line was sounding like it had gone dead for a bit. So, repeat the question for both me and Gary, please.

Max Rakhlenko: Okay. Yes, no problem. Can you speak to how you’re balancing the chart price points with maintaining elevated product margins? How much are your vendors stepping up just directionally? And then the opportunity to expand product margins over time in current levels?

Gary Friedman: Yes. Again, I wouldn’t — we’re not a price kind of focused, price first business, right? I think I spent a lot of time earlier in the call talking about design quality and value in that order. And we think about those things, from those three dimensions always. And we try to look at the bigger picture and say, what’s going to be a compelling value? And we don’t have vendors, we have partners, right? So, that’s why my letter is addressed to our people, our partners and our shareholders. And, so we try to work with people as partners and it’s not necessarily so much as, are they stepping up? It’s more, are we together thinking about how to win the market, right? Like, if it’s one person that wins, one person that loses, that’s not a partnership, and that never works long term.

So, we try to take a real strategic view with our partners. We spend a lot of time with them. We talk to them directly about how we’re thinking. We try to understand their business deeply and where their leverages and opportunities are. And we try to stand back and say, hey, look, your manufacturers without stores and we’re shopkeepers without factories, so how do we partner and how do we win? And so, but we have no intention in taking margins down, margins have to be looked at holistically, not just at the product level. And I think that’s probably what your point is. We’re going through a massive transformation, re-architecting, the assortments and positioning things. And I think as you think, see things unfold here, we believe if you’re thinking about operating margins and so on and so forth, that operating margins, over the next few years can return to the 20% range and that our model is going to be a great model.

But from a timing point of view, we’re going through a product transformation and we’re building an international business from scratch. And so there’s investments and there’s going to be margin pressure and based on investments we’re making on both of those pieces. And that will create some different periods of higher, lower margins or not. But I wouldn’t say there’s anything different strategically at all. I think how we’ve built the company and, keep on that path, but that’s not about like, hey, getting the next nickel out of a vendor. I mean, maybe people that have vendors do that, to us, it’s about the next idea. Let’s get the next big idea, whether that’s a product idea, positioning idea, market idea. And if you can get all the brains of the game and the egos out of the room, if you truly believe that none of us are smarter than all of us, you’re going to work in a partnership and one plus one is going to equal a lot more than two, if you do it that way.

That’s how we work with everyone. We just try to share all the best information and perspective and we try to listen to them, and we try to really think about how do we win in the market. That’s it. And so I wouldn’t say, hey, long term, do we think there’s lower margins at our age? No, not at all.

Operator: Our next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.

Seth Basham: My question is just thinking about your comment earlier about opening your aperture a bit more without compromising what you’re trying to build. Can you elaborate on this, Gary? Are you trying to win back customers that you “fired during the pandemic?” And are you dipping low in terms of the customer income demographics that you’re targeting?

Gary Friedman: Yes, we’ve never fired customers. So I don’t know, maybe that’s your words, not ours. Nothing I’ve ever said. I’ve said, look, you’re going to like, if you think about where we started in the journey we’ve been on for 24 years, yes, like we shed customers and transition to other customers. Yes, of course, like, the bestselling sofa in this company used to be a 999 chenille green sofa. We don’t have 999 chenille green sofas. Not even if you attach inflation to it, maybe a $2,000 chenille green sofa. We don’t have those. We don’t have a lot of things that we used to sell. So of course, when you’re building something, when you’re trying to become something that you never were, and you’re, you’re going to, you’re going to evolve and acquire new customers.

And some customers might come with you and some might not, but there’s no intentional firing. But there is an awareness that, as we’re heading in certain directions with certain categories, things will evolve and change. Through that journey, we’re always going to get data and we’re going to learn, and we’re going to adjust and improvise and adapt. And always, always in a state of change, right? And we’re in an evolutionary world, so the world’s evolving and you’re either evolving faster than the world and gaining, acquiring knowledge and capabilities and market share, however you want to think about it, or you’re evolving slower and getting behind. And so, I moved to say, I think —

Operator: Are you still there, Gary?

Gary Friedman: Seth, can you hear us now?

Seth Basham: I can hear you now. Yes. I think I got most of your answer. I appreciate that. And just a follow-up question, along the same lines, you’re sharpening your value edge, as you’ve referenced. To ask the question differently than it’s been asked before, I assume you’re not taking quality out to lower price. And if not, why should merchandise margins, excluding freight, be the same or better on new products now versus the product you were selling in ’22?

Gary Friedman: I’m sorry, I don’t know if I get that. Give me that question again, towards the end that why would, or what would the product margins be or something, say that again.

Seth Basham: Yes. If you’re not taking quality out, to be more sharp on price, as you sharpen your value edge, as you call it, why should the merchandise margins excluding freight be the same or better on a new product relative to what you were selling and, and earning in 2022?

Gary Friedman: Sure. Well, it’s about how you buy it and the commitments you make and the long-term view you take and working in a partnership with your manufacturers and figuring things out together. But yes, it’s just when you do that, well, you can have a better feel, when you have a platform as large as ours, you have the scale and you control the platform, you can be really disruptive. So, yes, we didn’t just take pricing down on things we have, right. You think about it as all the new products that’s coming in, the value equation that’s coming in. And so there’s no intention to ever take quality out, not at all, not at all, ever. So yes, that’s not part of our strategy. That’s nowhere in that one pager, right? In the long view and I think you’ve ever heard us talk about that at all in my 24 years here, it’s about taking, elevating the design quality and value of the product.

That’s all we focus on. So, yes, but it takes, yes, it takes thinking and creativity and partnerships and being smart about what you’re investing in and what you’re leveraging and what you’re buying. And yes, that’s how we got here. So, I think my prior comments were through a period of multiple cost increases because of trying to tear us. And we had a pretty big content back then coming out of China, much smaller now. And those price increases that we needed to take, and then the price increases we needed to take through the COVID period and through the COVID period for a two-year period, I mean, everybody had leverage, right? Like meaning that there’s only so much product. When you have more demand than you have supply, prices can go up and margins can go up.

And when you have lower demand and supply, if you want to move your inventory, prices are going to come down. It’s no different. And it’s no different than, during this period, right. It’s the down housing market and same thing we’re doing with investments. So you’re looking at gross margin. Well, inside of the gross margin, there’s a lot of investments that aren’t necessarily just product. Right. And so, but yes, there’s no, intention here to be crystal clear about taking quality down to take price down, never been uttered in our company and get the opposite. Yes. So that’s what people are thinking that they’re just dead wrong. There’s no value engineering.

Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is open.

Jonathan Matuszewski: First one was on gross margin for 2024. Imagine you may have some elevated clearance lingering early this year, but then you should have some good margins with all this newness that you mentioned. So how does that all net out for the year? And does the year over year trend in gross margin sequentially improve each quarter as product launches build upon each other? Thanks.

Gary Friedman: Yes. We’re not guiding to gross margins quarter-by-quarter. But yes, you can

Jack Preston: And we no longer got gross margin on the year. So, we’ll talk about it as a result of both. But the guidance is through [indiscernible]

Gary Friedman: Yes, it’s all inside in the operating margin and EBITDA guidance.

Jonathan Matuszewski: Got it. And then, Gary, you recently hired a new Chief Real Estate Officer. How should we think about changes to the real estate approach going forward with Jarrett on board? And, and should we expect any changes to other development related aspects in the company, like food and beverage or anything like that? Thanks.

Gary Friedman: Jarrett, how long have you been here now?

Jarrett Stuhl: Eight weeks.

Gary Friedman: Yes. Jarrett’s been here eight weeks. And so, he’s a very bright guy, very creative guy, strong point of view, learning the business and we’re excited and happy to have you here. And I think, why don’t we all give a little bit of time to really assess the situation and the opportunities. And at some point you’ll likely meet him and he can kind of share his thoughts. But I think it’s going to be a big step up for us. I think he’s going to prove to be the best leader we’ve ever had in this part of the business on multiple levels. So we’re very excited about him being on the team and, yes, that’s about it for now.

Operator: Next question comes from the line. Next question comes from the line of Michael Lasser with UBS. Your line is open.

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.

Gary Friedman: Okay. Well, thank you, everyone, for your participation. And, I’d say thank you to Team RH. Your efforts and leadership have been extraordinary. It has been a tremendous amount of work, I know, for everyone. But I think I feel so proud and excited about what this team has accomplished. And I think, our partners and teammates all through the country, especially our teams in the galleries and interior design, we’re going to be handing you off the baton, as all these products unfold and, the teams across our supply chain distribution and everybody’s health work with support and our teams in Asia and other countries around the world. I think this is going to be our finest moment. And it really is a result of your commitment and courage and your leadership. So, we just want to thank you for that. And we’ll speak to everyone next quarter. Thank you.

Operator: This concludes today’s conference call. You may now disconnect.