RH (RH) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the RH Fourth Quarter 2020 Conference Call.

(Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the call over to your host, Ms. Allison Malkin of ICR.

Thank you.

Good afternoon, everyone.

Thank you for joining us for our fourth quarter and fiscal year 2020 Q&A conference call.

Joining me today are Gary Friedman, Chairman and CEO; and Jack Preston, CFO.

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 opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.

A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com.

With that, I'll turn the call over to Gary for opening remarks.

Great.

Thank you.

Good afternoon, everyone, and thank you for joining us.

We're going to try a different format for this call.

It's been recommended to us that many of you sometimes are scrambling and don't necessarily get a chance to read the letter before the call starts since there's only an hour between we put out the release and we've had a suggestion to start with the letter and read the letter.

And in that way, everybody is grounded in what we just said and it might just elevate and improve the quality of the dialogue as we go forward.

So I'm going to start with reading the shareholder letter that we just released to our people, partners and shareholders.

As we anniversary what has been one of the most difficult years in recent history and as we begin to see the light at the end of the dark tunnel of this deadly and disruptive virus, we do so with a greater appreciation for our freedom and the simple gestures in life, like a handshake or a hug.

We also turn this corner, knowing that we used our time wisely to reimagine and reinvent ourselves once again.

In times of turmoil, humans tend to move in herds, hunkering down and finding comfort in conformity.

Even those who analyze and report the news seem to find reassurance in replication, trying to fit everything into a predictable pandemic piles of headlines we've all been reading.

We, for example, have been put into the "there's no place like home" pile.

Others have been placed into the eCommerce is everything file.

Both are actually good piles because if you're one of those, you are looked upon favorably, whether you're on the top or the bottom of the pile.

I believe many on Wall Street are managing their portfolios in piles, looking through the reading glasses when they really need a microscope and a telescope, a microscope, to search for the details and differences in those rare brands and businesses who belong anywhere with the pile and a telescope to see the opportunities that they will exploit post this pandemic.

Since we, the people of team RH, generally move in the opposite direction of the herd, are allergic to hunkering down and surely don't believe we belong in the pandemic pile, we've taken a shot at 4 simple headlines that require neither a microscope nor a telescope, the 4 Ps that give you an insight into what you might expect us to do next.

Because while most of the world spent this past year sheltering in place, we've spent the time reimagining and reinventing ourselves at a never-before seen pace.

So let me talk about these 4 Ps: our product; our performance; our prospects; and our people.

Our product.

We are building the most comprehensive and compelling collection of luxury home furnishings in the world.

The desirability and exclusivity of our product amplified in our inspiring spaces has enabled us to gain significant market share with RH core demand up 36% in the fourth quarter.

Our demand has accelerated sharply with February up 73% in the first 2 weeks of March, up 96%, prior to the cycling -- prior to cycling the closing of our galleries, restaurants and outlets a year ago.

Adjusted gross margin increased 480 points in the quarter, 540 basis points for the year and 1,210 basis points on a 3-year basis versus fiscal 2017, again, demonstrating the desirability of our exclusive offering and the pricing power of our brand.

The strategic separation we've created will continue to grow as we further elevate and expand the RH brand with the introductions of RH Contemporary in 2021 plus RH Color, RH Couture and RH Bespoke over the next several years.

Additionally, our plan is to unveil The World of RH, a digital portal presenting our products, places, services and spaces this fall.

We will begin to bring the different parts of our integrated ecosystem to life with rich content that we believe will enhance our brand and connect with our clients on a much deeper level.

Our performance.

We continue to build the most productive operating platform and business model in our industry, with adjusted operating margins increasing 750 basis points to 21.8% versus 14.3% last year, on only an 8% revenue growth.

Let me say that again.

750 basis points on only 8% revenue growth.

It's an operating margin never seen before in the furniture/home furnishing market and more than 50% better than the closest competitor.

The ROIC -- our ROIC of 53% in 2020 also puts us in a class of our own.

Our results represent a systemic lift that is not merely a temporal pandemic shift due to an unsustainable revenue gain.

Remember, virtually 100% of our core business is direct-to-customer, with less than 1/10 of 1% being cash and carry from our stores, which is basically floor model sell-offs at the end of the season.

That is why our demand to revenues lagged -- our demand to revenue lag is much greater than other home furnishings retailers, who have seasonal assortments and large cash and carry businesses.

It's also important to note that due to the virus-induced supply chain disruptions, approximately $150 million of demand that was generated in 2020 will be recognized as revenue in 2021, while the majority of the selling cost to generate that demand was absorbed in 2020.

If those revenues were recognized last year, our adjusted operating margin would have reached 23%.

I often quote Bernard Arnault, the Chairman and CEO of LVMH, as he says, "Luxury goods are the only area in which it's possible to make luxury margins." At 21.8% adjusted operating margin in 2020, RH has now eclipsed the operating margin of LVMH, and we have a clear line of sight to 25%-plus operating margin over the next several years.

With less than $3 billion of net revenues, you can imagine the leverage we should experience as we scale.

RH has also become one of the top-performing consumer stocks for the past decade.

Since our IPO on November 2, 2012 at $24 per share, RH has outperformed Apple, Amazon, Google, Facebook, Nike, Starbucks, LVMH, Home Depot, Hermes and just about everyone else, but Tesla.

Warren Buffett says time favors the well-managed company.

We believe our performance has and will continue to prove that point.

Let me move to our prospects.

We ended 2020 with just less than $3 billion in net revenues and believe the data supports the RH brand reaching $5 billion to $6 billion in North America and $20 billion to $25 billion globally.

We believe that number will continue to grow when you consider our opportunities in hospitality and home building, as we continue to expand the RH ecosystem with the introduction of RH Guesthouses and RH Residences.

We are tracking to begin our international expansion in Europe with the opening of RH England and RH Paris in 2022.

We are planning to open our first Guesthouse in New York City this fall, followed by our second Guesthouse in Aspen, which will include our first RH Bathhouse & Spa in the fall of 2022.

We are currently in design development for our first RH Residences as part of our larger Aspen ecosystem and have already received multiple unsolicited proposals to purchase our home site unseen.

And to put -- or to place deposits and reserve a home.

I mean we haven't put anything out there.

We've said nothing put out the original press release, and we probably could presell every single home today.

We believe the revolutionary design of both the Guesthouses and Residences have the potential to create entirely new markets in their respective industries, while also positioning RH as a thought leader, taste and place maker.

We also plan to open 4 new Design Galleries in 2021, all with integrated restaurants and wine bars, RH San Francisco, The Gallery at the Historic Bethlehem Steel Building; RH Dallas; The Gallery on Knox Street; RH Oak Brook The Gallery at the Center; and RH Jacksonville, The Gallery of St.

Johns Town Center.

We talk about our people.

I believe we have the most resourceful team in our industry, and again, not by a little.

Tony Robbins talks about resourcefulness being the ultimate resource.

It's not about time, money or technology.

It's about passion, persistence, vision and values.

Starting with no resources, we transformed a nearly bankrupt business selling nostalgic discovery items with a $20 million market cap into the leading luxury home brand in the world, with a market value in excess of $10 billion.

History has proven that men and women will work for $1 but die for what they believe in.

We say inside our organization, this is not our company.

It's our cause.

It's an authentic reflection of who we are and what we believe in.

Some people say, don't take it personally.

Those people are not our people, make no mistake.

This is very personal to us.

We believe brands with more control will become more valuable.

We have always invested in controlling our brand from concept to customer, avoiding intermediaries who will never care as much as we do.

That's why we've avoided partnerships, sponsorships, franchising or licensing and continue to believe brands with more control will become more valuable.

The easy path of expanding the brand rarely pans out to be the best path.

The road to global expansion is littered with brands that put their trust in others, only to spend years negotiating repurchase rights decades later after the damage is done.

That's not to say there won't be exceptions where there's an outstanding partner in a challenging country, but it will be a rare exception as we expand the RH brand around the world.

We also continue to invest in taking more control of the customer experience and have been testing RH In-Your-Home in Los Angeles and San Francisco markets and are extremely happy with the early results.

As Fernando Garcia, our President of Furniture Operations and Home Delivery describes it, RH In-Your-Home is not a different or better experience, it's a unique and memorable experience as we extend the gallery into the customer -- into our customers' home.

With furniture ambassadors managing every detail, it creates an impression with our customers that can last the lifetime.

Additionally, we are opening a 1 -- a new 1 million square foot furniture distribution center in Southern California this spring.

The new facility will allow us to reduce delivery times by 7 to 10 days for both outdoor furniture and special order upholstery in most major markets.

2021 has all the signs of a very good year.

While 2021 would surely be a tale of two halves, the fact that we have a booming housing market, a record stock market, low interest rates, the expectation of a rebound in the economy and jobs market, combined with recent further acceleration in our demand trends as it's feeling more rather than less optimistic that it might just turn out to be two very good halves.

What we expect to face -- while we expect to face continued difficulties ramping vendor production to meet demand, and we don't see the challenges with ocean freight or port congestion resolving themselves anytime soon, it's hard not to forecast first quarter revenue growth of at least 50% and adjusted operating margin in the 20% range.

With the momentum in the business, we believe it's safe to say 2021 should result in revenue growth in the range of 15% to 20%, with adjusted operating margin expanding 100 to 200 basis points and ROIC in excess of 60%.

We have made the decision once again to delay the mailing of our Source Books and the launch of RH Contemporary until the fall of 2021 to enable our manufacturing partners to catch up to the increasing demand trends.

This decision should also support a strong second half as we have held back new collections for the past year, which will result in one of the -- one of our largest new product launches in our history.

Our RH Outdoor Source Book filled with 10 new collections is scheduled to be in home starting this week, with the digital Source Book and new outdoor collections live on our website today.

This is the time to be defined by our vision not by a virus.

As we move past the dark days of the pandemic, let us remember a resurrection, a time we reimagined and reinvented ourselves once again.

A time our results redefined possible for a home furnishings brand, a time when our performance forced the rest of the world to remove us from the pandemic pile and see us for who we truly are: a team of people who don't know what can't be done.

This is the time to be defined by our vision, not by a virus.

Carpe diem.

Okay.

I'll turn it over to you, operator, to open the call for questions.

(Operator Instructions) And your first question comes from the line of Steven Zaccone from Citigroup.

Congrats on the strong results and happy to be a new addition to the earnings call.

Gary, you have a lot of momentum in the business right now.

There's a significant amount of product newness.

You're growing the hospitality offerings and the margin profile significantly outpacing your early outlooks for the business.

With all this momentum in mind and thinking about how the world has changed from a global pandemic standpoint, where have you gained more confidence in the long-term growth potential of this business?

I don't know if anything has really changed for us based on the pandemic.

In fact, I don't think much has changed as most people think or believe.

I mean, look, you just start with the fact that our business is basically 100% direct-to-customer platform.

So we've been channel-neutral, our entire existence here.

We don't really care where anybody places an order.

And whether it was through the pandemic when orders shifted from stores to online or virtually with our people, as soon as our galleries reopened, our business looked pretty normal.

And I know there's a lot of talk about, well, this is going to accelerate the growth of the Internet by 10 points over the next several years.

That may or may not be true.

I would say we're indifferent to that.

We're really indifferent with the inherent channel shift that is going to happen over the next several decades.

We've anticipated that.

We knew that was going to happen.

We're indifferent to that happening.

People are kind of reframing their models and closing stores at an accelerated rate due to the fact that there's been this channel shift.

And that may be true because their model wasn't architected with a view across -- independent view across all channels, strategically or financially, it might have been an old model that was architected just for a retail business, and they've more recently got into a direct-to-customer business and had a rush online without strategically thinking about all the implications of it.

We built this business beginning 20 years ago as a channel-neutral business.

And it's a platform looking ahead at the next 20, 30, 40 years and saying, we could see the world going there.

So whether it gets there -- whether it goes 5% or 10% faster and there's a greater shift or a slower shift, we're completely indifferent.

It doesn't change anything about our real estate strategy, our online strategy or anything we're doing.

We believe physical -- great physical -- let me say great physical experiences in this physical world we live in are going to remain relevant.

If anything, I think we're going to be even more relevant post this pandemic because it's -- I think it's scared a lot of people out of investing into the physical world.

And it's just motivated a lot of people to follow the herd into rush to be an online business, rush to be a digital-first business, rush to be a digital-first business with a few stores.

I don't know where everybody is rushing to.

And we don't -- we only rush to some place that we figured it all out and we've thought about it a long time and very deeply.

So I'd say nothing has fundamentally changed about our strategy based on the pandemic.

There's -- we're indifferent to the pandemic.

We're solely focused on building the most compelling product assortment presented on the most inspiring and immersive platform in the world, with the most incredible services that anybody can have in this industry.

And we think those are the right things to focus on.

Not chasing shifts in the business.

It's very kind of tactical.

Oh, there's a shift to online, great.

If you didn't see it coming until now, you're way, way behind.

Great.

That's very helpful detail.

Just a question on the margin outlook for the 100 to 200 basis points expansion.

How should we think about that from a gross versus OpEx leverage standpoint?

And then specifically on the growth side, you've had 2 strong years here of product margin expansion.

Do you expect that strength to continue this year?

I'll let Jack take that one.

Go ahead, Jack.

Yes.

Well, like you said, in the last couple of years our margin expansion has been primarily driven on the gross margin line.

So for fiscal '20, of the 750 basis points increase, 3 quarters that nearly were in gross margin.

And so I think on balance, you're going to see that quality of that margin increase continue.

And so while we're not guiding specifically to say what exact portion of the $100 million to $200 million is going to come from gross margin, I would characterize it as at least half, if not more.

Yes.

And let me build on Jack's point.

I think as you ask that, it makes me think about probably -- what is probably not obvious if you're on the outside of this business because people have seen us repositioning the product, you've seen us take pricing, and -- but I think it's probably not clear that as we evolve this brand and as we continue our climb up the luxury mountain, the product quality is going to continue to move substantially and the pricing will move with the products naturally, but the value equation will get stronger, not weaker.

As we get smarter here and we develop better and deeper relationships with our key manufacturing partners.

So what might not be clear is, as you take the prices up and you get product margin in that equation, you also get leverage throughout the supply chain, right?

And so -- and that's probably a simple mathematical equation that maybe not everybody is connecting the dots on, but it's relatively simple if you think about it.

And if you just kind of try to capture the essence of Bernard Arnault's quote that, "Only in luxury products can you have the ability to make luxury margins," there's a simplicity and a truth to that.

This would be -- it would be very hard to build a model like ours, if you're playing in the middle of the market.

(Operator Instructions) Your next question comes from the line of Adrienne Yih from Barclays.

Great.

Wonderful news on the momentum continuing.

Gary, we've spoken before about demand creation, how it's no longer a single number on the P&L, like a percent of sales but a confluence of the investments you're making in Aspen, London, RH 3, et cetera.

It seems RH is building more of desire creation and a pipeline of future customers so -- who want the RH lifestyle, right, and everything that comes with it.

So how should we think about that advertising demand creation line in and of itself going forward?

It's a really good question, and it's the right way to think about it.

Building one of the most admired brands in the world, desired brands in the world, whichever adjective you want to use, really, it takes a different path.

It takes a different way to communicate.

And I think we're in a world where it's harder and harder to get your message out because there's so much information out there.

I read a study, I think it's about a year ago that humans are consuming 700%, 7x the information than they were 20 years ago.

What an astonishing number if you think about that, that from 20 years ago, we're consuming 7x more information because of these devices we have and the amount of information, the amount of platforms we're communicating on and the ease of communicating to us.

So the way to kind of break through, right, -- Steve Jobs said something, if you watch his original kind of YouTube presentation when he's in his shorts and flip flops on a little Apple stage when he came back to Apple and he was talking about -- he was reintroducing the think -- reintroducing Apple and introducing the Think Different campaign.

And he said, we live in a really noisy world, and it's going to be really hard for anyone to remember anything about any of us.

And that it is so important to -- he talked about marketing being about values, right, about those things you deeply believe in and connecting with people about values.

And he talked about some of the great brands, he talked about Nike being one of the great brands in the world.

And he said, if you think about Nike, they're selling a commodity.

They're selling tennis shoes, right?

They're selling shoes for the most part.

And he said, but yet, in their advertising, they don't talk about the shoe, they don't talk about the sole, they don't talk about the laces, they don't talk -- they talk -- they celebrate great athletes and great athletics, right?

And he talked about Apple believed that they could -- that people, if they're passionate enough, really could change the world.

And in that Apple brand, the Think Different campaign, it was also a campaign that was -- more than anything else, it's about the absence of the product, right?

You didn't see an iMac, you didn't see anything in the campaign.

You don't really think about Nike.

It hasn't built their brand based on any particular shoe.

We all remember the Jordan shoe, but why do we remember the Jordan shoe because of Michael Jordan.

Not a specific shoe, right?

So if you think about the great brands and you think about how they've built them and how they communicated a very unique path.

Think about this, just stand back.

Tesla is the fastest growing, most valuable car company in the world.

They've never had a TV commercial.

Think about that.

People line up for Teslas, right?

So we say inside our company, for example, we don't have a marketing department, and that may shock a lot of people.

We don't have a marketing department because marketing a lot is about putting lipstick on the pig, right?

It's like taking an average idea and trying to dress it up and spin it and make it something better than average.

And that's really hard to do, right?

That's just really hard to do.

And we don't have a marketing department because we say it's not what we say, it's what we do that defines us, right?

So we have a truth group.

And our truth group, in the past, they'd come to me and say, someone wants to write a story about this, and they're going to put us in that story, and I go, well, that's not what we believe.

Like why would we want to be in that story?

It's not our truth.

And so our work is our truth, and we define ourselves through our work, and we connect with people through our work.

And that's why launching kind of a fully integrated revolutionary ecosystem in a place like Aspen, where the wealthy and affluent vacation -- visit and vacation and doing something extraordinary there, you've got the attention of the right people.

And we're not going to bang pots and pans and say, look at us, we're just going to do some extraordinary work.

It's why I say climbing the luxury mountain and taking the path we've taken, all the luxury brands were born at the top of the mountain, right?

Like if you think about any luxury brand, they're born at the top of the mountain.

We weren't born there.

We weren't even born at the bottom of the mountain, right?

We were born underground.

We were basically a bankrupt company.

So we had to kind of dig ourselves from -- out from under the ground and then decide like we're going to make a climb that no brand has ever made.

No one's ever tried to make this climb.

And so we're -- and people at the top of the mountain, they don't really want you to make that climb.

You're not from the neighborhood.

You don't get invited to their parties.

And so you have to -- we have to do work that is so extraordinary, so remarkable, so amazing that it creates a force for reconsideration of our brand, that it forces people at the top of the mountain to tip their hat, right?

To kind of say, nice job.

We have to earn their respect.

So there's a famous quote that says, when you don't come from royalty, you have to earn it, right?

And so this work that we're doing, the things that we're doing to build this brand, we believe is the right kind of work.

We believe if we do extraordinary work that breaks through the clutter, people can talk about it.

And by the way, we put out a press release, a single-page press release talking about Aspen.

And I don't think I've ever had more billionaires, reach out to me and send me notes, saying, "What are you doing in Aspen?" Like I personally had 3 requests to buy one of our homes.

Our partner has had about 12 requests.

Nobody has even seen a home.

We haven't even put a rendering out.

So when you think about that, like, we are about spaces.

We're about design and architecture and living and spaces and places, and that's what we're about.

And so doing incredible spaces, creating inspiring environments, we believe we'll break through the clutter, and it's way more powerful than just doing an ad and trying to talk about it.

That's why we don't have social media.

Why?

We don't have an Instagram account.

We don't have a Twitter.

We don't do this.

Everybody is telling me, you need to tweet, you need a Pinterest account, you need to have an Instagram account.

People will follow you guys.

Gary, if you tweet, you'll have all these followers.

I'm like, I don't want to spend my time thinking about what to tweet tomorrow.

Now I don't want to spend my time -- I don't want to have a department that's reviewing what pictures to put on Instagram that day.

And by the way, just as a point of reference, we don't have a Pinterest, Twitter and Instagram, yet we're the most pinned brand of our kind in the world.

We're the most tweeted about brand of our kind in the world, and we're the most Instagram-ed brand of our kind in the world.

And so like that's why we believe it's about our work.

And that's why we're doing the things we're doing.

And by the way, by doing the things we're doing, like even building inspiring galleries we're building, we're now looking at the model, and we're saying in these galleries -- and especially the ones with the restaurants, right, that are driving significant traffic, we don't believe we need to spend as much money mailing catalogs in that market, because we have thousands of people we feed every week.

And so when you think about our financial model and opportunities and leverage and investments, just because we used to invest a certain way, doesn't mean we should keep investing that way because we're -- as we continue to innovate, we can see around more corners.

We have more data.

We have more learning.

And I sit here today and go, gosh, we haven't mailed a Source Book in how long?

A year, right?

Yes.

A year, a year.

We won't have mailed a Source Book for 18 months or something by the time we mailed the fall Source Books.

I don't know, do we need to go back to mailing Source Books twice a year?

Now do we need to mail them as deep, like in the markets where we have these magnificent architecturally significant spaces and places we build.

How much of those worth to marketing, right?

And I get it, you might be closing stores if you're building kind of crappy stores that are in line in a mall that everybody's got a glass storefront and all you have is your logo up above it.

That's different.

But that's not what we're doing, right?

So we're doing something different.

So you can't -- that's why I say you can't put us in the pandemic pile, right?

You can't put us in the pile with everybody else.

You'll miss the whole story here.

A long answer to your question, but it was one of the best questions I've gotten in a long time.

Gary, that's incredibly helpful.

Your philosophy is always welcome.

Jack, a really quick one, actually.

This one is 73% and 96% demand growth translate -- and then we have -- we're now in the part where the stores were closed.

Why -- the at least 50% revenue growth, is that due to poor congestion or lack of inventory?

It seems like the spread between those 2 numbers would be tighter.

Yes.

Well, look, you're going to see the same dynamics in terms of the supply chain constraints.

And for the same reasons that the demand growth exceeded revenue growth in Q3 and Q4, we're -- with the strength in business, you're going to continue to see that in Q1 and the potential acceleration given the strength and acceleration of demand.

Yes.

And again, the key word is at least, is at least, right?

So we've given you at least how many times over the last few years, at least this, at least 18% operating margin, then it's at least 20%, then it's -- so we tend to kind of give you -- we want to make sure whatever happens, we're going to hit the at least.

But we generally be at least pretty handedly, and -- but there's a lot of things to kind of consider.

But at least means we have more than that

Your next question comes from the line of Curtis Nagle from Bank of America.

So Gary, perhaps a bit of a piggyback question on Adrienne's.

Perhaps just a little bit more specific.

Just thinking about the ecosystem that you guys are in the midst of rolling out, I guess kind of two questions.

How meaningful do you think that could be as a brand enhancer for RH over, say, the next 3 to 5 years?

And as a stand-alone business, how important is it to -- as a revenue and profit contributor?

Or is, I guess, kind of the former point's more important.

How should we think about that?

Yes.

Well, I think it's going to be a meaningful brand enhancer.

And I think if -- it's funny, if you had asked me 5 or 7 years ago we started working on this, I would have told you it's going to be a meaningful brand enhancer.

Now I look back and I go, that wasn't even any good at all.

We were working on 5 or 7 years ago because we keep -- tend to keep making things better.

And that's the great thing about kind of only having a vision about something versus kind of start working on something, right?

You really learn when you start doing, and that's when you can really start accelerating your education and connect more dots and see around more corners.

I think what we're about to unveil in New York and Aspen, I don't think anybody has any idea what it is.

I really -- I don't.

It's -- I've been fortunate enough in my life that I've been traveling since I was a relatively young man and traveling all over the world.

And I've been in a design business, whether it -- be it my former -- the former company I worked at today where we search the world for the best of, the best of design, the best hotels, the best places where we're going to get inspired, what are we going to see.

So I've seen a lot, right?

I've been to most of the almond resorts in the world.

I've been to so many places, both personally and professionally.

And someone asked me, how long have you been working on the Guesthouse?

And I told them about 30 years because that's how long I've been thinking about it.

That's how long I've been traveling to really great places and asking myself questions like, why don't they have this?

And why hasn't anybody thought of that?

And why does it have to be like this?

And I think when you see what we've done with the Guesthouse, there's just things that no one has ever done in hospitality.

And it's why they say a lot of the -- most of the innovation in the world happens outside, come from outside of industries, not inside of industries, right?

Like, again, I go back to Tesla.

The guy never built a car ever.

Ever.

And it's massively turned over the car industry, and now, every car company in the world is racing to catch up, racing to have electric cars, right?

We've never opened a hotel before and we're not going to now.

Because it's not a hotel, it's a guest house.

And it's importantly said that.

And when you see our website launch in the west -- the website launch, when we open, the first thing you're going to read on the website it says, this is not a hotel, right?

Because it's not.

It's a completely new way to think about an experience like that.

And so I think when you do work like that, one, it has a great chance of having people at the top of the mountain tip their hat because they haven't seen it.

I mean, think about this, like if we want -- if I go to the top of the luxury mountain and say, okay, who lives there, who has the biggest house?

Bernard Arnault, right?

Runs the biggest luxury platform in the world.

I say internally, I joke around and say, look, Bernard Arnault just bought Belmont for $3 billion, right?

Like nobody thinks we're impressing Bernard Arnault.

I guarantee you when he sees this Guesthouse, he's going to be forced to tip his hat because nobody's seen anything like this in the world.

And that is what is going to create the conversation, right?

That is what's going to change the perception of the brand.

A brand that started underground had to dig its way out of a grave and start climbing a mountain that's never been climbed before.

You just have to do things that people can't imagine.

And I think this is all about -- it's all about brand building.

It's all about truth and respect, right?

The work is our truth, and I believe our work will be respected.

And our truth then will be respected, and people will listen closer.

They'll pay more attention to us.

And then out of that, out of that -- the same thing with the homes that we're doing, the Residences that we're doing and other things you'll hear about, I mean -- let me just go back for a second.

Just start here.

We never knew anything about restaurants, right?

A few years ago, everybody said, you're going to open a restaurant, like what are you going to do?

Who's going to run it?

This is not -- we had a partner to start, now we run the whole thing ourselves.

We have -- we're a vertically integrated hospitality organization.

We have 10 restaurants today.

Our restaurant volumes and how they're tracking -- because we keep innovating and evolving, and the things we've done in the last 18 months, 12 to 18 months, you can't even see them yet because of the pandemic.

But our restaurant volumes will rival the highest-volume restaurants anywhere, besides the 1 or 2 great ones.

But when people -- when we reopen and really reopen, when we can seat all our restaurants, our volumes are going to be among the best.

People used to talk forever about mall developers really wanted a Cheesecake Factory because they did $10 million on average a restaurant.

It's very likely very soon, our restaurants will be at that kind of volume.

And it has to do with, not just the number of customers coming through, but the average ticket of the customer coming through, which then influences who's coming through, which makes sure we have an audience that is aligned with the target consumer and who we want to impress.

But we're going to be a pretty good restaurant company.

If you look at the numbers and the returns and the margins on our restaurants today, they're 3x better than they were 3 years ago.

And so we're pretty good at that.

And I think what happens is with things that you really care about, right?

We talk in our company about 3 lenses we look at every decision based on.

We choose based on what is the emotional value of an idea, what is the strategic value of an idea and what is the financial value of an idea.

In that order, right?

Because if you just focus on the financial value of an idea, nobody really believes in it, if nobody is going to die trying to bring it to life, the financial value is never going to manifest itself.

But if you got ideas that have really high emotional value, that the people in the organization really give a (expletive), they really care about it, they're going to get knocked down ten times and get up eleven, the effort and the passion and the learnings that happen just change the outcome.

I've seen things that have really high financial value, have really high strategic value, really high emotional value, really has strategic value, but moderate financial value that have turned out to be the biggest financial ideas in the company because the work turns out to be so good.

And on the opposite hand, I've seen just the opposite.

I've seen things with moderate emotional value, relatively high strategic value and super high financial value.

Somebody thought it was worth -- that was the $500 million idea, it wound up being a $5 million idea, because nobody cared enough about it.

And to do great work, the effort has to be, you want an extraordinary outcome, you have to put an extraordinary effort.

There's no short cuts, right?

Elon Musk was asked, Elon, you run 3 different companies, you run Tesla, Solar City and SpaceX.

How do you do that?

He said, look, it's simple, it's just physics.

He goes, the average executive might be working 40, 50 hours a week.

And he said, I work about 150 to 160 hours a week.

So I work three times more hours than the average person so I could do three times more.

And he goes, it's not -- it's just very simple math.

If you hung out with the people in our organization, you'd find out that we really love what we do.

You cannot stop us.

We are going to figure it out or die trying because it's more than just a job to us, it's our life.

And when you work on stuff like that, the outcome tends to be much greater than you could even imagine in your original vision.

You, meaning us, right?

And so that gives me -- like, if somebody said, "Hey, do you think you'll ever make money in the Guesthouses?" I would say, no.

If it -- I said, look, if I don't lose a lot of money, it's going to be a really good thing for the brand.

I actually think we -- now when I look at it, I think this is going to work.

I mean, we haven't sold a room night yet, but let me tell you something, I sure want to stay there, not just because we -- I built it and -- but like we have thought so deeply about it that we're going to do things that no one in hospitality has ever done.

And they're really good ideas.

And the same thing with our residencies.

Like -- we've designed the one on Red Mountain, it's shocking, it's so good.

And so -- and it's because this is -- we're passionate about it.

These ideas have huge emotional value.

And when it has high emotional value, people -- they don't put in a day's work.

They put in a week's worth in a day, and the outcome reflects that.

So I think these will -- at a high level, these will massively, massively elevate and render the brand more valuable.

And I'm hopeful today that they'll also have really good financial models.

I feel more clear about the homes, by the way.

I think that the homes is easier math for me, because I own homes and bought homes, and like I'm the consumer.

And I know what we can build and what we can sell them for and how much we can make.

And I think we'll create an extraordinary product.

And I think we'll make a lot of money in the home business, whether it's single-family homes, condominiums, things like that.

If we do luxury apartments, which is a really interesting market.

It's like there's no great apartments in the world.

They're just not designed well.

But think about it, if we do fully furnished luxury apartments, right?

And how many people need to go into a market, live somewhere for a year or 2, don't want to buy a home, but they got a lot of money and they want to live in a really beautiful place.

I mean, we think that they could be a fantastic idea.

The Guesthouse thing, I don't know.

Like it's -- we're doing things no one has ever done.

Like, we got no meeting rooms, we've got no weddings, no nothing, no celebration.

It's very private.

It does a few things better than anybody else in the world, but it doesn't do all the things.

So it all depends, what kind of room rate can we get for these extraordinary rooms and this unbelievable sense of privacy and luxury we've created?

So we'll know soon.

We'll know soon, but we're excited about it.

Clearly, thank you for the very thoughtful answer, and hopefully, come fall, we can start to see some of this in person.

Good luck to the rest of the year.

Yes, we'll figure out how to kind of do a little -- like we're thinking -- we don't know how do you do a launch party in a 10-room hotel, right?

You can't have just people like walking around the hallways, right?

And so like -- then we thought -- like I thought I'm going to do it like -- I might do a week of sleepovers, right, where you get invited for a sleepover.

But I can only do -- like if you get 2 people in a room, times 10 rooms, we got 20 people a night.

That's still 100 people.

We get the right influencers and the right people -- and we're going to try to, we think, coincide with Fashion Week, and we think Fashion Week will come back, and everybody in New York would be back in the Hamptons.

We think people will be traveling again in September.

It could be like the greatest coming out party in the world.

And some of the who's who maybe want to come for a sleepover and get to see something no one's ever seen, and we start the right conversation.

But I think what we'll do is probably during that week, we'll stay there for a while, and maybe it's a good time to do an investor meeting in New York and bring everybody up to speed and do a tour of the Guesthouse, probably right before we really open it to the public.

Because once it's open, you can't tour anybody through it, right?

Because it's about privacy.

We can't be taking, hey, these are bunch of Wall Street guys we're taking through here.

Sorry, sorry, excuse us.

We know this is about privacy, but not today.

So there's going to be one shot to kind of really see it, and we'll have to kind of do that before it opens.

Your next question comes from the line of Max Rakhlenko from Cowen & Company.

And congrats on the incredible quarter.

So as we think ahead about 100 to 200 basis points of EBIT margin expansion in '21, what do you see as the biggest buckets of opportunities?

And then, longer term, as we look ahead to the 25%-plus, what do you see as additional opportunities beyond 2021?

Well, look, the -- we've kind of said 100 to 200 basis points.

We also kind of put some dots out for you, right?

We said, "Hey, of that $150 million had shipped this year, we would have been at 23%." So start with -- we're kind of at 23%.

And so then we got another 100 basis points -- and to get you to 24%, which is 200 basis points higher than 21.8%, right, 2,200.

So you can get there pretty easily.

It's not a lot of moves.

And some of it will depend, just how much -- where do the revenues really go here, we don't need a lot of revenues to kind of get to where we're pointing you.

If, for some reason, these revenue trends continue, like -- I mean, it's really interesting.

I've never -- this is -- I've never seen anything like this.

I mean, I've been through the Great Recession, I've been through multiple recessions in my career.

I've been in the home category now, like how many years, 34 years, this is my -- Jack reminded me the other day was my 20th year anniversary here, not to get everybody to wish me happy anniversary, but I didn't even know that.

He goes, "Oh, God, I'm sorry.

I missed your anniversary." I didn't even know it was my anniversary.

So I've been here 20 years, at Williamson over 14 years.

So I've been 34 years in the home business, and I've seen a lot of cycles during that time.

And I've never seen anything quite like this.

I tend to -- when there's really good news like this, I tend to be the pessimist in the company.

And I tend to be the one with this -- whatever demand hit we're getting right now, it's not because of us, it's not going to stay, don't architect the business for this.

This is going to go away, and it hasn't went away yet.

And I talked to some pretty smart people that have given me different insights into, look, Gary, what -- like here's one that I think is interesting for everyone to think about.

This is really smart.

And it comes out of analysis from a really credible, deep thinking, smart person that the move -- the move of America that you're seeing today, the pandemic shift of out of cities into suburbs or into second home markets -- which, by the way, the suburb thing is a great thing for us because 80% of our business is in the suburbs.

And so the move to the suburbs is not just to move to the suburbs, it's a square footage expansion by -- they believe it's 2x or more square footage expansion for the consumer.

And I hadn't thought about that before.

I thought that was a really interesting point.

And their math said, look, Gary, your customers that are moving from the cities maybe in a 3,000 square foot apartment, are moving to a 6,000 to 10,000 square foot house in the suburbs.

And they didn't have outdoor furniture in their apartment in the city, and now, they all have outdoor furniture.

And they have big yards and lawns and pools and so on and so forth.

And so I'm just like, that stunned me, right?

I hadn't really thought about it like that.

I didn't think of the square footage expansion of the consumer.

And the other thing they said was that the issue with getting a contractor right now is a huge issue that you could go out and buy a house, but if you have to remodel it or do anything to it, you have to wait 6 months to get a contractor.

So they do believe -- 6 months or longer in some markets.

There's this real lag.

And so this person believes that -- and they said this to me, and I was like, I didn't even know the response.

Like they believe that our business was going to accelerate because of the lag because of this massive shift, right, that the longer the pandemic went, the more people started moving permanently.

I'm not talking about the people that kind of flew back to their place in the Hamptons.

That's very different, right?

Like think about New York, everybody went to the Hamptons that could.

Anybody that had a house was at their Hamptons house, right?

They relocated there for the year.

Anybody that could rent a house in the Hamptons rent.

When everybody could buy one, like, bought one.

But a lot of them are coming back.

And at first, everybody was like a temporal thing.

And then all of a sudden, there's a shift of a different perception of how people wanted to live and it could be a more permanent kind of thing.

So I think this moving thing could be a much longer tail and a much bigger move.

And then you say to yourself, well, how long does it last?

It all depends on how permanent the move is, right?

Like so if you think about our business, I'll give you some numbers that I've never really talked about before.

But our business, prior to the pandemic was 80% suburbs, 10% second home markets, and 10% urban markets.

So when I say urban markets, I'm talking about the city, right?

Like not -- Beverly Hills is not the city in Los Angeles, right?

The city is the vertical part of Los Angeles that's called Los Angeles City.

So we have some vertical markets like Manhattan or Chicago, right, that are really vertical that have a lot of high-end homes, and we have relatively big volume.

But almost everywhere, our business is much more suburban driven.

And that makes sense.

The homes are bigger, you got backyards, you've got kids, you've got like more bedrooms, more spaces, more family rooms, et cetera, et cetera.

And then the pandemic hit and it shifted things and you had this explosion of second home markets.

And all that happened to our numbers really is the second home markets went from 10% of our business to 20%.

Now they grew exponentially faster, and this is a percentage shift, right?

So 12% -- 10% to 12%.

Yes, 10n% to 12%.

And then suburbs basically stayed the same and cities just went down by 2 points to 8%.

But if you think about our model of being 92% of our business -- and this is not where the demand generated, this is a shift to addresses.

This is where the product was going, right?

So if you think about 92% of our business is architected perfectly for whatever long-term change this pandemic has -- and there's another study about the kind of the big shifts and kind of moves, when -- and I was trying to remember the data -- this other person was talking to me about it, and how every so many years, there's a shift here, and there's a shift, people are moving here, like the big move into the suburbs of the '50s and '60s and '70s, and -- or the -- you had kind of a move back into the into the cities over the last 10 to 15 years, right, gentrification and all this kind of redoing cities.

But the shift that might be happening might really stick.

That's the logic that certain people are kind of sharing with me.

And they think this is not temporal.

They think there's going to be a lot less people that go rushing back to the city.

And they think that the rush back to the city is going to be at a much younger consumer going back.

And that the consumers that are 40, 50, 60 years old that moved out of the cities are going to stay out of the cities.

They don't think they're coming back.

And then that becomes -- when I think about it, that becomes really good for our business long term.

Because that also means even the moves within the place -- like not everybody.

If you think about it, if you moved out to the suburbs, you scramble and got a second home during this pandemic rush, the kind of -- it's almost like a movie, right?

Like everybody's got to going to leave the cities and all the cars are backed up and you get out.

And it's a -- the odds of you getting the house you really wanted in that moment is really low, right?

And I got to believe there's a lot of people renting homes.

I know we're doing a lot of quick design installs, people go like, I need the furniture in 2 weeks, right.

And luckily -- and one of the advantages -- here's another advantage.

This is like kind of a little side point to this, but I think it's worth saying and sharing with everybody, as we all try to figure out where things are going and what's happening here is -- like I thought about this, and I thought, why is our demand really accelerating right now?

What is happening?

And I think that there's just back up -- this pent-up demand just like people couldn't get contractors, people are now -- can finally come.

But for all the people that are moving out and they need new furniture and they need it in 30 days, so they need it in 3 weeks or 2 weeks, I think we're benefiting now because we actually stock furniture.

We are one of the few places that actually stocks the product and you can get it quickly.

Not everything.

We have a big special order business, and we're in backorder now.

But this is where times like this is where I think our model is advantaged versus a Wayfair, Perigold, anybody else online, what I call a marketplace model where they don't own the inventory, right?

Like that's one of the beauties of a model like that.

It's a low capital model and should set up for high returns if you can get the earnings model to work right.

But no one ever really thought about what's the inherent weakness of that model?

If you go on Wayfair and like -- and we mostly look at what they're doing on Perigold.

We look at anybody who might be competing with us.

And the amount of out of stocks and what you can buy there is unbelievable because their then -- their weakness is, you've got a lot of these small and capitalized businesses trying to just sell sh** on a platform like that in a marketplace.

And they'll take anybody, by the way.

It's not a big approval process.

If you want to go sell something, at Wayfair.

So you don't get to that many vendors that quickly if you have really high standards of who's selling on your platform.

You can't possibly talk to that many people.

It means a lot of low level people are approving a lot of new vendors.

But I look on there, and I know some of the people, like we know who the factories are all around the world.

And again, those people don't have any money.

They can't afford to have the inventory, right?

So I think in sustained things like this, we actually -- like I'd never thought of it, but we actually have the inventory.

Like we actually -- if you needed your house furnished next week, we could pull it off if you live in a major market.

So that's a big, big opportunity for us.

But I want to go -- just go to that point about the 25% operating margin and what are the opportunities beyond '21.

Just scale this thing, right?

Like we have a lot of strategies and initiatives that we think are margin-enhancing strategies, initiatives.

I think while RH In-Your-Home is initially an investment, I think it's going to have a great return on investment.

And we just have a lot like that.

We keep fine-tuning our model on our new galleries.

And I think they're going to be more productive than less productive.

Our restaurant business is going to be massively better.

Our Waterworks business, we've got the -- versus 3 years ago, I think we've got -- the EBITDA would probably be 12, 14 points better, 15 points better, something like that.

Yes.

So -- and then you just scale this thing.

Just -- I think about this, like we're a $2.8 billion company that could be so much bigger, and we've built a really smart and simple platform here that you can scale.

And so the leverage as we scale, you think about like other -- somebody brought up Sonoma to me last week, and because they obviously had great results and fantastic outcome.

And I think they're doing a tremendous job.

And -- but they're already at $6.5 billion or something, what are they?

$6.5 billion, $7 billion?

Say, yes, $6.5 billion, right?

Like we're not even half the size of Williams-Sonoma, and we have the operating margins that we have today, right?

So just do scale map, pick up 20 basis points in like 8 different places in the company.

You get to real leverage, right?

And so that's why we think -- yes, we have a line of sight, 25%-plus operating margins today, plus.

And so far, every margin target we've given you, we've got there much faster, much sooner than later, right?

So -- yes.

So we wouldn't be so confident and clear and tell you -- like if we couldn't see it and we couldn't draw the straight lines to the numbers.

So we just keep learning here.

And we're kind of always unsatisfied, always on the move.

Like we rarely celebrate like it's -- for a moment.

So it's not that we don't at all.

We get super excited, for constant students, we learn.

And so like if you keep learning, you keep seeing more.

And if you can see more, then you're just never satisfied with where you are.

So -- and that's kind of our culture, right?

I think this team, and we've integrated like 10 new senior leaders into our leadership team.

We've got -- some people I can't talk about yet because we haven't went public with the ideas.

But we've got leaders of international -- leaders of international supply chain.

We've got lots of new talent sitting around the room, and that also allows us to do more.

We've made a lot of human capital investments here.

So anyway, long rambling answer, sorry about that.

But just some -- I thought some of that stuff could be helpful.

It was helpful to me to think about, how to think through this pandemic, just like the moves and the move to the suburbs and how that might affect us and the square footage growth.

I think the square footage growth is a really interesting one because -- you said you could be selling 2 to 3x more furniture just because -- to the same consumer.

And it's interesting because our tickets are going way higher, our average orders are going way up, so it's kind of actually playing out like that.

Your next question comes from the line of Steven Forbes from Guggenheim.

Gary, you mentioned getting more control, right, in the business.

And I was hoping you can maybe expand on that theme, right?

Where your mind is that, what other aspects of the business are you looking to gain more control over, whether it be manufacturing, whether it be the whole design process, right, I think RH In-Your-Home experience.

Would love to just hear your thought process on some of the ideas around control.

Yes.

Yes.

So Steve, this is a good question.

As we think about it strategically, right, like our model is going to throw off a lot of cash here.

And what are we going to do with that cash?

I mean, clearly, there's -- you can invest it into the business, you could buy back your stock, you can pay dividends or so on and so forth.

But if you look at our model and look at it over the next 5 years, you've got to kind of get out in front of it and say, what should we do?

And where do we see the biggest opportunities are to create more value?

And one of the biggest ones we're discussing is this idea of controlling more of the brand.

I think we're realizing as we scale the luxury mountain, there's just so much fragmentation.

And I always like to say product for this quality has never been made in these quantities.

And I think taking more control of the product pipeline, whatever that might mean, whether it's the manufacturing, whether it's the sourcing, whether it's -- there's so many aspects of it, whether it's raw material procurement, like do we take -- like most of our furniture is made with 4 species that wood, right?

I don't know, do we take positions into certain woods to give us a competitive advantage?

Meaning that, one -- like if -- one, it's just sometimes getting the raw materials.

If you're as big of a platform as we are in outdoor furniture, securing peak is one of the challenges.

And should we own outdoor furniture manufacturing, so we have access to -- to have more control and more access to raw materials that could give us a massive competitive advantage.

Other parts of the business we've done, we've tested.

We have our own furniture upholstery manufacturing in North Carolina.

It's not very big, but we've learned a lot doing it, and we've got thoughts about that.

But also, just thinking about if you keep climbing up that luxury mountain, there's less and less scale in manufacturing as you get up there.

It's more what I call a workshop business, very high end, very, I should say, couture and bespoke, maybe.

Put out a bread crumb, but -- and how do you scale that?

How do you build a platform and scale that?

And/or just think about this, if you think about going global, right?

I mean our goods tend to be bulky and heavy, and it's not super efficient shipping furniture all around the world.

It works today, and there's certain things that are -- different countries are better producing than others.

But the world is going to kind of keep -- I think with technology, the world's going to keep getting smaller and smaller.

Competitive advantages between countries, I think, they're going to go away long term, and I think there'll be -- there's going to be more neutralness to the world.

Not going to be so easy to find cheap labor here or efficiencies here, someone can manufacture that.

I think your -- I think the world in 10 years from now is going to look very different than the world of today.

And we think about it as what's the right way to build our platform?

Should we have furniture made in America for America, should we have furniture made in Europe for Europe, should we have furniture made in Asia for Asia.

Is that the right model?

So you build a supply chain that is country-centric, especially where you think your biggest parts of your business are going to be, and you have -- you replicate manufacturing capabilities.

And then also, you don't have single points of failure.

I mean, one of the things you can learn in the pandemic or something like this, right, like you have all this demand and it's like you got one person making that or you have tariffs happen.

And like oh (expletive), we make all of this there, and now, all of a sudden, there's 25% tariffs.

And you've kind of got -- you got no move, right?

Your only move is to kind of negotiate and try to figure out any way around it.

But I -- think about it.

Just because the situation hit us is, what does a global supply chain look like for a $25 billion brand?

What should that look like?

And by the way, no one's built one in our industry.

So I think we've got a chance to completely whiteboard it and do something that's just never been done.

And we've got the -- we got the capital structure to invest, right, to invest to have even more strategic separation and capability than others.

And we're at the high end, right?

So we have a lot of leverage in what we do, right?

There's a lot of leverage in selling the things we sell versus selling the things other people sell at lower ends of the market.

So yes, we're thinking about kind of every aspect.

And whether it's the supply chain and home delivery, whether it's manufacturing, whether it's raw material procurement and how do you control the raw materials and have leverage there, but also just leverage -- just have accessibility.

Like if we -- we have a run on peak, and we can't get to peak, like that's just -- you're crippled, right?

And so yes.

So throughout, there's going to be opportunities because there's strategic acquisitions we make that give us capabilities and things like that.

How do you think about capital allocation over the next 10 years as we try to fulfill our vision?

So it's the right thing to think about.

We're spending a lot of time thinking about all those things right now.

And we -- go ahead.

No, no.

I was just saying, we've already made -- with those with some of the things I can't tell you about yet, but you'll hear about it soon.

Well, we anxiously await them.

The -- maybe just a quick follow-up, given the unsolicited proposals for the residences out in Aspen, it sounds like it has you thinking right that the idea is bigger -- maybe not bigger than you originally thought.

But curious if those proposals indicate something bigger about the opportunity, maybe a quicker maturation behind it or where the mindset is on just the residences as a whole?

Yes.

I don't think we've got to kind of rush here.

I think we've got to kind of rush to learn and kind of conceptualize the right model.

I don't think it's going to be hard for us to build beautiful homes and sell them.

I think that we can do.

Like what is the right model?

How do you do it?

What do you -- like -- is it -- is this one where we're -- let's say, we decide to really do this.

Let's say, we have some tests, and we're like, wow, this really works.

And we've also had strategic inbounds, people that want to partner with us and people that have read the Aspen press release.

I've had CEOs of companies that -- reaching out, wanting to know would we want to partner and build RH homes together and do a JV.

And there may be opportunities like that, right?

There may be people that have what we don't have today, the ability to procure and secure land, know how to build homes at scale but don't have our creativity, our taste, our style, don't have our brand, so to speak.

And so there could be opportunities where you see us partner with a major home brand or acquire one, I don't know, like if we get really good at it.

So there's not -- there's lots of optionality here.

I think we did -- the great thing -- I've said for years here to the team that we're only in the 10% of the business.

And sometimes people -- new people would say to me, "What do you mean we're only in the 10% of the business?" We're in the 10% of business.

On average, at the high end, people spend about 10% on the furnishings of their house compared to the price of the house.

So if you bought a $10 million home, you spend about $1 million furnishing it.

You spent a $5 million home, you spend on average $500,000 furnishing it, right?

And that's just the math, $2 million, probably $200,000, that's generally the allocation breakdown.

It's not always perfect, but it's directionally right.

So I've always said, like we're in the 10% of the business.

We don't sell the home.

And we're actually handicapped being in the 10% of the business because we're, a lot of times, furnishing a really crappy architecture home, like a half-designed home, a bad proportioned home.

And so it doesn't even render our goods more valuable, right?

Like all of our galleries are architected beautifully, proportionately in a way that it renders the goods more valuable.

Our -- most of the homes we do -- like most homes, like you go in -- again, I would say, go in Zillow, go in Redfin, go in whatever one you want, like just click through and tell me how many homes really have great architecture and how many have good interior design.

It's like such a small number.

It's like less than 1 in 100, like less than 1%.

So I love thinking about this market in that way.

And like we could -- whenever it's like that, when the numbers look like that, you can create a new market, right?

You can create an entirely new market.

And that's what our big idea is, not just to sell some home.

It's to create a new market at the high end for homes that people really want on RH Home because they're just so well designed.

Not furnished, just like the architecture, the logic, the siding of the house, the landscape architecture, the pool, the everything, like the whole thing is just so well designed.

And then it's furnished incredibly.

And so you just go like you just want to move in, right?

It's like we save you time.

And again, people with more money have less time.

People with more time have less money, right?

And what can you sell at the high end?

You can sell time value.

People will pay for time value.

There's a lot of people on this planet that have more money than time.

They've accumulated wealth, and now they're my age.

You're 63.

You think about how much time you have left, and you look to buy time value, right?

And I think that's -- if you said, what are you really going to sell?

We're going to sell time value, and people will pay for that.

Your next question comes from the line of Anthony Chukumba from Loop Capital Markets.

And Gary, I'd just like to say as a sell-side analyst who just had a buy rating on the stocks for the last 300 points, I don't want you spending your time thinking about what you're going to tweet later today either.

So I just wanted to kind of get that out there.

Thanks, Anthony.

That's good.

No worries.

So these are more just kind of housekeeping questions, probably more -- for more so Jack than Gary.

Specifically, I just wanted to see if we could get a little bit of color in terms of specifically the gross margin drivers, the SG&A leverage drivers, and then just what your CapEx expectations are for 2021.

Yes.

Anthony, so I think historically, we've talked about very strong results as far as product on the product margin side as it relates to gross margin.

And so Q4 is no different than what we talked about in Q3.

About 3/4 of the pickup is in our product margin, which had a number of things that we've talked about, the climbing the luxury mountain, increasing the quality of the product, cycling the rug business, operating the rug business at a higher margin, among other things.

Outlet business, as we talked about in MD&A in our filings, obviously, is a lower promotional level.

So that's where you're seeing the predominant amount of it.

And then as far as CapEx for the year is concerned, you'll see in the 10-K when it's filed next week, the range that we're giving is $250 million to $300 million.

That is a little higher than this year.

We ended up with sort of adjusted CapEx you need to look at because a portion of it ends up putting -- it's in op section of the cash flow.

But this year, we ended up at $180 million.

So the -- and then what I'll say is about the elevation of the CapEx is -- there's a number of sort of development deals that are happening this year that we'll monetize in a future period and then just finishing -- one of those stores we're opening was on a land lease.

So there's just a number of factors that are just driving the higher CapEx this year, including starting to spend money internationally.

Your next question comes from the line of Michael Lasser from UBS.

Gary, there's been a sharp increase in the profitability of many of the players in the home furnishings industry.

So do you think that this sector is now just structurally earning higher margins?

And how do they inform how to think about RH's profitability in the second half of the year, where when you talk about the tale of 2 halves, in the second half, you will be facing some unique factors and much more difficult comparisons?

Sure.

Yes.

Good question.

I think to answer that question, you really got to look at what's the revenue growth that the business has experienced in 2020, right?

And that's why I made the point and I kind of repeated the point in the letter that we hit 21.8% operating margin on 8% revenue growth, right?

So we had 750 basis points of margin expansion on 8% revenue growth.

So that's the first part of it, right?

So you can kind of book that, right?

That's not going away because that's got nothing to do with the pandemic.

That's got nothing to do with home furnishings tailwinds.

8% revenue growth, nothing to do with that.

So that's all structural.

And we would have -- by the way, it's about what we thought we were going to earn before the pandemic, okay?

Our model was about 22% what we thought we'd make, and then the pandemic hit.

And when the pandemic hit, I mean, what it did is it just turned it into 2 halves.

Now did we optimize a little bit here and there?

We did, but our plan was to have revenue growth slightly higher.

So -- but we came out right about there.

So if you've got people that have grown faster in 2020 than they had historically, there -- you got to kind of say, how much of that sticks?

How much of the leverage sticks?

And then there's a really important one to kind of figure out where everybody is going to land here, is what the price structure and the promotional structure of the business, right?

So we didn't get less promotional.

We are -- we don't have promotions, right?

The only thing we have is we have things that were discontinuing out of the assortment.

But we're not a promotional business, right?

So there's businesses -- if you study our industry, there's businesses that have -- they've pulled back on promotions as they should, right?

And they pulled back on promotions, and we were able to have X amount of demand or revenues.

When the world cycles at some point, can they maintain a nonpromotional stance?

Because I'm sure people have picked up 200 basis points, maybe 300 basis points of product margins because they used to be really promotional, and now they don't have to be promotional because there's this increased demand.

That's -- to me, that's the open switch.

How much of the revenue sticks?

So how much of their margin in our industry is tied to an increased revenues, which ours is not because our revenues didn't shift.

So you -- again, if we -- if you would have -- saw the $150 million of revenues hit in this year, and we would have been at 23% operating margin, 120 basis points of our model, we would have pointed this to you.

We would have said it's kind of, in our view, one-time and maybe not structural.

But there's nothing about our revenues in 2020 that are pandemic-assisted.

There's nothing about our product margin that is pandemic-assisted.

We were not less promotional than we planned to be.

We have a membership model.

So the margin growth you saw in our product is real margin growth.

It's not necessarily temporal at all.

So that's what I'd say -- or if you said -- and then the other piece, the other one I'd point to is advertising, right?

So if you're looking -- particularly if you're looking to somebody like Wayfair, and I'm not picking at Wayfair.

I think honestly, at first, I thought Wayfair was not going to make it.

And I thought like when I studied their S-1, when they're filing, and I thought like, yes, this doesn't look like a real thing.

But I've grown to appreciate and respect the platform Wayfair has built and their ability to generate a lot of revenue very quickly.

The question in my mind with Wayfair is, what's the real structural margin in the company?

And so with someone like Wayfair, I think your -- it's you're snow-blind right now, right?

They're -- like if you think about every restaurant in America and most of the world closed, so anybody who's selling kitchen stuff, the run on kitchen like to go buy toasters and pots and pans and other things like that because now you're not eating out, even people like my household, because my girls are away in college now, I mean, I eat out every night.

Like we eat out every night, my partner and I. And she went out and did like a raid.

And she was like, "We've got a whole brand-new kitchen, right, because we are going to be home, right?" So we got all kinds of new stuff.

She's cooking stuff.

She's never cooked before.

And so I look at kind of categories like that and I go, those may not be sustainable.

And also, those are the things where she was going to buy it whether it's on sale or not, right?

She's going to buy the cookware whether it was on sale or not.

And so the promotional aspects of some of these businesses, some of these categories, very, very different, right?

Like when the pandemic first happened and I was analyzing everything and I was going on everybody's website, yes, I think I joked around and I said, Wayfair has 60 pages of toasters.

And they do.

It might be more now.

It's 60 pages of toasters.

I think 40 or 60 pages are sold out.

So you have a run on businesses like that.

But -- so when I think about the industry and I think about where we sit in the industry, I try to understand the differences of what revenue was a gift.

Like we have a lot of demand that was a gift.

No revenue that was a gift, right?

We didn't ship any of it.

So we have 8% growth and the 750 basis points -- and then the other one is the advertising, excuse me.

You got to think about advertising leverage someone like Wayfair got or other -- every business, right?

We all got some advertising leverage.

Like we missed a catalog cycle, right, a source book cycle last year.

So call that, I don't know, $40 million, something like that, right, or $60 million?

Yes.

Total on the year, which you'll see in the 10-K, is $49 million less in advertising that was (inaudible).

Yes.

So $49 million less, so you've got, what is that, about -- a little less than 1.5%, right?

So you say, "Hey, Gary, can you guys sustain this?

You got to put that advertising back into the model." And that's a good question.

I'm not sure yet.

I'm not sure, but that's something that like we think about.

Like do we need to go back to mailing a book twice a year?

Do -- can we mail less books?

Our big galleries and our investments in restaurants, driving more traffic and what's -- what do we need there?

But I'd say those are the ones, the revenue, the promotional structure and margin structure based on promotions and then the advertising piece of it.

And then, of course, if people got a big lift that they're going to get occupancy leverage and some things like that, that might come back.

So I don't know how sustainable, if I look across our industry, the margin structure is as of today.

Everybody wants you to believe it is.

That's why I made the point on ours.

Like I'm kind of really happy we only had 8% revenue growth because then nobody can be snow-blind here, including us, right?

So I like, hey, do we have roughly a 22% operating margin business today without a pandemic?

That's what we got.

And how much pandemic boost are we going to have in '21?

If our revenues are up 15%, maybe a little, right, because we're going to start growing internationally.

And remember, when we start growing globally, we're going to open countries, countries.

We're going to open in Europe and be able to take online orders and ship to all of Europe.

So it's not like we're opening in a market like Sacramento, or we're opening a new store in Vancouver, Montreal or something.

And we're opening a huge country.

I mean, Europe should be the size, for us, close to the size of the United States in volume, right?

So that's big.

Like it'd be like us coming to America with a brand that people know.

Like I saw some analysts, I don't know if they're on the phone or not, like they tend to write kind of negative things about us all the time.

So they know who they are.

But like anything they could say -- talk like, oh, their business is down in their New York restaurant.

Like, oh, that's -- they're not going to make their fourth quarter.

It's like, give me a break.

But anyway, their -- in one of their notes, they said, like, yes, we have no market awareness, like people don't know us.

And I'm like, don't look at some average market awareness study.

Our customer is the top 1%.

In many cases, it's our -- the core, core of our business is the top half of the 1% due that brand awareness.

Go into London, go into Paris and go talk to the top 1% who all dress in the same labels, they all have Rolex watches and other things.

They all go to the same restaurants.

They go -- all go on vacation to Saint-Tropez, Ibiza, St Barts, Aspen.

They all know each other, and they all know us.

So like you want to know about brand awareness and why we're confident?

Okay, because the people that buy the other great luxury brands, they know about us.

We're the only high-end brand of our kind in the world.

Everybody else is just a category player.

They just sell sofas or they sell lighting, or they sell -- we're the only one of our kind.

And so the opportunity for us, when you think about growth long-term, is when we start opening countries.

Like -- that's like us coming to America and being relatively well-known as a -- at the market segment that you're targeting and opening a gallery in New York and opening a gallery in L.A. or something.

Like I can maybe compare that to Paris and London, right?

And going like -- and then opening the whole Internet to the whole market.

And you go like, you don't think about it as stores.

You don't think about it as markets.

You think about what could the United States generate if I had a store in New York and L.A., amazing stores in New York and L.A., and they knew my brand.

And all of a sudden, they have a website, and I've been wanting to shop from them from years.

And I've had to fly to America to buy stuff, find a container shipping company and ship it myself.

Like I think there could be a run on the house here when we go international.

Like I think it's going to be better than anybody else's model who stepped across the pond.

That's helpful.

My follow-up question is, I guess, we're all trying to figure out what sustainable demand is and when will we know what sustainable demand is.

So can you replay the clock or the calendar forward to last year?

This year, February demand, and we're assuming that was core demand, is up 73% (inaudible).

February last year was up 8%.

Yes, February last year was 8%, up 8%.

And how did March unfold to give us some sense (inaudible)...

Well, March, the stores -- March -- Yes.

So February last year was 8%.

We told everybody it was up 8%, I think, before the world fell apart.

And so February was up 8%, and it was kind of like right where we thought it should be.

And we're up 73% in the core business on top of 8% last year.

In the first 2 weeks of March, I think we were up 4% 1 week and down 3% the other week.

So we were kind of flat or up 1% in those 2 weeks.

So against the flat first 2 weeks of March we're up 96%, okay?

So the way to think about it, if you said, okay, if you neutralized the 8% on February, you would add 8 points to the 73%, you'd be up 81% and 96% so -- if you want to kind of stabilize the 2 months, right?

Then of course -- yes.

Then we're up against all the closed galleries and closed restaurants and closed outlets.

And remember, our outlet business, when it closed, it didn't have a website.

So we went to 0 on the outlets.

We went to 0 on the restaurants.

And in our core business, RH core business and in our contract business, we could still take orders and stuff.

Obviously, the contract business, the longer we got into the pandemic and people realized that hotels and everything were going to be closed for a long time, that business really took a hit.

And then our outlet business for a period of time went to 0. And our restaurants, right, went to 0. So big -- think about big pickups in our restaurant business year-over-year, big pickup in our outlet business year-over-year and a big pickup in our contract business year-over-year because the hospitality is now starting to spend again.

Like they're now betting for the comeback cycle, right?

So hotels are reinvesting, buying new outdoor furniture, things like that.

So Michael, it's Jack.

I think it'll -- go ahead.

Do you think it'll be kind of May, June, economy will be reopened?

You'll have some reasonable comparisons and then you'll get a sense for what the run rate of the business is?

Yes.

I think you're going to -- it might take longer than that, Michael.

We started comping up pretty good in May and June.

We kind of -- in the fall season, we peaked, I think, August, September, Jack, [45], [47] or something like that in the core business.

[47] in August.

[47] in August.

[46] in September were the core numbers.

Okay.

Yes.

So we kind of peaked in there, and then we had a bit of a slowdown in the Q4 period.

And some of that in Q4, we had more kind of clearance merchandise that we were moving through last year.

So that probably brought our growth rates down a bit year-over-year.

We said more stuff we were transitioning, some of our floors and other things.

So we had some things that we were moving through that gave us a little extra revenue.

But yes, I think the real question, Michael, is this kind of accelerated lift that started the last 2 weeks of January, right?

The last 2 weeks of January, we started to see an acceleration up into the 50s and 60s, and then it went into the 70s in February and then first 2 weeks of March into the 90s.

And that's kind of unexplainable, right?

But this is how we think about it.

We think about it more if we hit the percentage lift, we look at the dollar trend of the business.

So we've got a dollar trend of the business.

And the dollar trend of the business, unless there's a real economic move here, like if nothing happens, my sense is the dollar trend of the business could soften in the second half.

But I don't think it's going to collapse, right?

And I think that, that's probably other people in the home business are looking at that and saying like, "Yes.

Yes, the dollar trend might swing 10, 15 points, maybe even up to 20."

So I said to everyone, if I -- if we roll this dollar trend out, we think it's -- the year could be unbelievable, right?

But we think there's going to be some kind of slowdown.

It's not so much the comp slowdown, it's the dollar trend.

The dollar trend right now is much higher than last year's dollar trend, when we were running up 40%, right, like in February, March, right?

So that means it could be a really good year for everybody in the home sector.

And that might just mean some people like the headline, I like stronger for longer.

I don't know if that one is yours or so someone's.

But someone's got the stronger for longer thing, and I think that, that could be true.

This thing could carry us through '21, and it could go through '22.

None of us know.

Like we're not building a cost structure for that.

We kind of say inside our company, "Let cost chase sales.

Don't ever have sales chase costs.

You'll always be behind." And I think that's -- the other positive people are going to get out of this is, for the most part, I don't think too many companies are building the cost structure based on the trend.

So everybody is going to get kind of more leveraged during this period of time.

So -- but we're all trying to figure it out.

I mean, we're all trying to figure it out.

And just -- for us, it's just understanding.

Where is our fundamental business with or without a pandemic so we can think long term and invest long term and kind of be ambivalent about the pandemic?

Kind of like we're ambivalent between online or stores or whatnot.

We don't care about the channels.

We really shouldn't care about the pandemic.

We need to look through the pandemic and past this pandemic to invest intelligently for the future.

And Michael, it's Jack.

I did want to just add one point when you asked about H2 profitability, just not giving specific direction here.

But if you think about the advertising, I just want to clarify.

In 2020, we mailed books in the spring but not in the fall.

So most of the spend happened in H1 versus H2.

Obviously, the opposite is going to happen.

This year, we'll clearly mail out our book, but the books -- the main books are going to be mailed in the fall.

So you're going to have a flip-flop of advertising.

Yes.

It's a big shift of advertising that we should probably -- yes, we should probably kind of map that out for people, so they can get their models right.

Yes.

Yes.

Your next question comes from the line of Brad Thomas from KeyBanc Capital Markets.

Gary, I was hoping you could tell us a little bit more about The World of RH.

And is this going to be a redesign of the RH website?

Is this separate?

How do you think about making your web presence better as a transactional site and the importance of that?

Just any more color on The World of RH.

Yes.

Yes.

It's really a rebuild of the entire website and kind of digital platform of the business.

So it's just starting from scratch, thinking about it across all the dimensions of these kind of new aspects of our business and brand and think about it beyond just a website.

But we think about it as a portal into the world of RH, right, that can take you through to our products, our places, our services, our spaces, right?

And so it's -- you know all the products and the categories, right?

We have RH Interiors, RH Modern.

We have RH Contemporary coming.

We have RH Baby & Child.

We have RH Teen.

We've got RH Outdoor, RH Rugs, RH Beach House, RH Ski House.

RH Color is coming.

RH Couture is coming.

RH Bespoke is coming.

So when we look out and we think about just the product world of RH, how do you architect that?

How do you have someone navigate through that?

How do you get credit for all of that on a flat screen, right?

And then when you think about our places, it's really our galleries, our guest houses, our restaurants and our residences, right?

And so those are all our places, so thinking about how someone can navigate through those areas.

How do you get a reservation at one of our restaurants?

How do you connect to the guesthouse?

How do you learn about the residences that we're either selling right now or we have in development?

How do you look at our galleries?

And what are the aspects of the different galleries?

And explore galleries online and maybe in a 3-dimensional way, walk through a gallery.

Like walk through the New York Gallery like you're there and be able to shop the New York gallery online like you're in the store.

Lastly, we're looking at technology on multiple levels to be able to kind of create the right kind of experience and interaction.

So that's our product.

That's our places.

Our services, as we think about them today, we have interior design services.

We also have our contract business, right, which is kind of a service-driven business.

And long term, we think we can be in the architecture services business and the landscape architecture services business as we think that service as a services platform, installation services business, all kinds of things that we can do that can kind of amplify the brand.

And then our spaces are kind of a unique view into kind of spaces of RH, which deal with RH3, our luxury yachts; [RH1] and [RH2], our -- today, it's our corporate planes, but they'll soon be on the website, and you'll be able to charter RH1 and 2. And no one's really even seen our planes, but we designed them with the vision of they're going to be part of the ecosystem because again, we're trying to build a luxury brand.

And you think about the very top of the pyramid and I say, you kind of go from buying homes and then you go open up the luxury mountain and you buy a lot of homes.

And then you get really, really rich and you buy a jet.

And then you get kind of silly rich and you buy a yacht, right?

And so those are -- that's the hierarchy of kind of spending in that world.

And so you're going to see RH1 and RH2 , which if you ask Gulfstream, they would tell you that RH1 is the most beautiful plane they've ever built.

And they've done things that have never been done because we challenged them and helped them think through how to do things.

In fact, when they -- when the Head of the Gulfstream told me after a long -- when we had a 12-hour meeting there until 2 in the morning with their engineers and everybody, and they said, "Okay, Gary, we're doing a recap.

I'm going to send you the upcharge for that custom galley that you designed." And I said like, "That's great, [Marcus].

And I'm going to send you my design fee for that custom galley that you're going to want to sell to other clients.

So -- but we know a lot about like plane design right now.

We know how to design a beautiful plane.

We have just kind of redesigned RH3, and it will be ready for prime time here in about a month.

And you're going to see a beautiful yacht.

You'll see other things, and other spaces will evolve in this kind of really rich world in content.

I mean -- but you may see documentaries on The World of RH that talk about the building of or the designing of something and things that our people are really interested about, who are into the design, into spaces, lots of layers to it.

And then a massive upgrade in just the consumer experience for just buying product, right, massive leapfrog as it relates to that.

That's great, Gary.

And a modeling question for Jack.

Just as we think about rising raw material prices and freight prices that many in the industry are seeing, could you give us any sense of how we might think about that impacting the model?

Obviously, you all have pricing power, you demonstrated that.

But does that have any impact on how we should be thinking about the model this year?

Yes.

Let me just jump in for a second.

Again, I'd point you to the fundamental point that our goods are a lot more expensive, right?

So as a percentage of our sales, those factors are going to be a lot less, right?

So start with -- we sell a Cloud sofa $10,000 to $12,000, $10,000 to $14,000.

The freight on a $10,000 to $14,000 sofa is a lot lower than the freight on a $2,000 sofa.

As a percent.

As a percent to sales, right?

So you got to start with we -- will we be impacted?

Sure.

Will it be to a much smaller degree than if you're CB2 or West Elm or something like that or Pottery Barn or Crate and Barrel or places like that?

Yes, like you have to look at the price structure of the goods that -- and again, if we're using about the same amount of wood but ours -- product is just designed much better and it's a higher-quality product, then it's going to be a smaller percentage.

So that's why you don't hear us talking about it as much because the impact at this point is less, and it's in our model.

Your next question comes from the line of Tami Zakaria from JPMorgan.

Congrats to the entire team on the very strong results.

I do have 2 quick questions.

The first one is, could you share some details on the distribution center that's coming on live in terms of what would be the incremental rent or incremental operating expense to run it or the incremental CapEx to build it?

So any details around that would be helpful.

Yes.

It's all in our model.

I don't know if we're disclosing individual rents of DCs and stuff like that, but it's all in our model.

It's all in our projections.

It's all in our plan.

So...

And the CapEx is modest as it relates to the $250 million to $300 million I gave you.

Yes.

Yes.

It's a nonevent.

Like any time you have a DC, there's a little step-up here.

So we're in a step-up here, but we're absorbing that cost.

And so we'll -- probably in the first year, it's a bit of a drag on occupancy.

And -- but by year 2, year 3, we'll start getting leverage on the property, right, versus the step-up.

But it's in our model.

It's in our projections.

Got it.

So that's a great segue to my second question.

I did want to go back to that comment that you saw 750 basis points of operating margin expansion in 2020 on 8% of revenue growth.

So for this year, you're guiding to 100 to 200 basis points on top line growth of 15% to 20%.

So are you being conservative?

Because there should be -- I would think there should be natural leverage from all those dollars of sales going through.

So is that just for being conservative?

Or are there any onetime expenses that are pressuring this year and should go away next year and the years to come to help us sort of understand why operating margin expansion would only be 100 to 200 on 15 to 200 -- 15% to 20% sales growth?

Yes.

I would just kind of look at history here and ask yourself, are we generally conservative or are we generally aggressive on our projections, right?

So you can draw that conclusion, right?

And the comments I made earlier, I mean, we wouldn't say a minimum of 15% to 20% growth and 100 to 200 basis points unless -- like that's obviously -- history would tell you here, if you just looked at the last, I don't know, X number of years that we're relatively conservative in how we guide.

And we generally outperform our expectations, especially the ones we give at the beginning of the year.

The question here is, will there be a big economic change?

Like nobody knows that.

Like will there be a recession?

Will there -- something else happen?

Nobody knows that.

But if not, we've -- we feel more optimistic than pessimistic about things right now, but we tend to underpromise and overdeliver.

So...

Got it.

Got it.

That's super helpful.

So there's really nothing onetime or sort of unnatural something impacting this year.

It's just being conservative, prudently conservative.

You can frame it that way.

Yes.

Essentially.

I wouldn't say that was wrong.

Your next question comes from the line of Cristina Fernández from Telsey Advisory Group.

Two questions and hopefully quicker ones.

The RH In-Your-Home, which you commented a couple of times, you've been testing it for some time now only in California.

I guess what do you think you still need to improve to be able to roll that out across the U.S.?

Yes.

I think we've only been testing RH In-Your-Home for how long, Fernando, a year?

3 months.

3 months.

So no, full test, 3 months, yes.

So like this is a whole another level of kind of -- yes, we've been talking about it for a year, but we've been testing it for 3 months.

Yes, we've never really talked -- I don't think we really talked to you in a detailed way about RH In-Your-Home and Furniture Ambassadors.

And are they in the test list or anything?

No.

Not yet.

But we'll soon have -- you're going to have this gray RH truck and Furniture Ambassador and a separate Tesla car, great car.

And they don't have the Teslas yet.

I thought they might have the Teslas.

But to be frank, [got them on] order.

But it's a whole different experience, right?

It's like sending a highly trained Furniture Ambassador into the home with our delivery team, right, that is managing the whole process with the customer that is upselling in the home, that is doing all kinds of things.

If there's a problem, we solve it immediately.

The stress for the customer goes down.

It's a completely different experience.

It's a different investment.

So we're testing it.

So obviously, you're putting another person on the road and another person, a relatively high paid person, we're sending in the home, right?

So kind of almost an interior designer quality person, Furniture Ambassador in the home.

And then the other question was on some of the new businesses.

RH Couture and RH Bespoke, I feel like today is the first time you've talked about those.

Can you give us some details or what your vision for those businesses are?

That's all I'm giving you.

I would just take the words themselves and use your imagination.

Your next question comes from the line of Peter Benedict from Baird.

Listen, most of my questions have been asked and answered.

I just wanted to wish Gary a happy anniversary.

Thanks, Peter.

Yes.

Well, let me sneak one in, Gary, and just very quickly, the new DC in Southern Cal.

I know you guys had closed one a few years ago.

I just don't know if this is just the business is now getting bigger, so you need it now.

But is there anything different you're doing with that DC versus what maybe the one you had previously?

That's my only question.

Yes.

It's really kind of an investment.

I think about it as an investment into the outdoor furniture and special order business.

So it's architected for those 2 businesses, designed for those 2 businesses and ability to leverage those 2 businesses and run them in a more focused way to kind of get a better customer experience, grow those businesses and service those businesses better.

So before, we just had a full DC in Southern California with kind of redundant DCs in Northern and Southern California.

But you just have things like, for example, all the boats -- most of our outdoor furniture is coming out of -- teaks coming out of Indonesia and metal furniture coming out of different parts of Asia, Vietnam, China, things like that.

So every major container ship that's coming in is first stopping in Southern California and then going up to kind of Oakland, the Port of Oakland.

So you pick up 7 days immediately right there.

And then just the way we're going to handle and process and cross-dock those businesses, this is speed to the consumer.

And then if you think about the outdoor furniture business, Southern California is our largest outdoor furniture market by far.

And then the southern states are a lot of our strongest, very logical.

So the ability to get the goods, deliver faster in the biggest markets and hit the southern states faster, think about the trucking lines.

And our business is -- the reason we can do this, not everybody can do this, is our businesses are really big, right?

Like these -- like our outdoor furniture business is a real business.

It's -- I mean, I think our outdoor furniture business is bigger than some of our biggest competitors today at the high end, right?

Like if you take some of the -- yes, by far, but just outdoor against their entire business and things.

Like we're having an internal conversation here, I think about like who you might think of like a higher quality national brand or something like that.

So it's a real business, right?

We -- that's the great thing about starting to have scale like this.

It can allow you to kind of segment and focus on businesses in a very unique way and optimize those businesses like you only ran that business.

And then if you think about the special order business, it's a completely different business.

It's got a different model.

And how do we run that business in a much more efficient way?

Better customer service, faster delivery, things like that.

So it's really an investment.

We've been talking about this internally for a long time, investing into those 2 businesses.

Your next question comes from the line of Zach Fadem from Wells Fargo.

Gary, quick one.

One thing you haven't mentioned today is the art curation initiative with GENERAL PUBLIC.

Just curious if you can talk about this a little bit and how you see fine art as a potential opportunity for your business.

Yes.

Yes.

Well, this is an idea that Portia de Rossi came to us with.

And yes, she's really the entrepreneur behind it.

And she figured out the technology and the 3D printing or what does she call it?

She calls it Synograph, yes, Synograph.

It's like a 3D printing.

Like you can look at a beautiful, textured, hand-painted piece of art, and this -- it replicates it perfectly.

Like you'd need a real kind of art expert to be able to tell the difference.

And her and her partner, Ellen DeGeneres, they're big art collectors.

They've got great taste and style.

Their homes are fantastic, and they just have incredible taste in art.

And I think Portia is an art history major.

It was one of the things she studied, and she's just a very, very smart entrepreneur.

And she had a big idea about this.

And she kind of came -- through some friends, made a connection to talk to me about, "Hey, what -- here's my idea, and this is what I'm doing." She had just kind of gotten started, and we loved the idea.

We loved her taste and style.

And we said, "Look, we think we can be the platform that can amplify your idea, and we'd be your best partner." And that's what we've done.

And she's working on ramping production and expanding the assortment.

And the great thing about Portia is like you just always know like what she's going to show you, you're going to want to buy because she's got such incredible taste, except, I'd say, she's probably listening to this conference call, those dog paintings.

But she came to me a few years ago.

I know, I was joking around.

But actually, now I really like them.

And so I think we're going to probably ask them.

But I'm just joking around, in case she ever hears this conference call.

But no, I think it's an incredible opportunity for us.

When you think about all the walls in a home and all the opportunity, there's more square footage on the walls than there is on the floor.

And so -- and it's one of the reasons why, initially, years ago, some of you may remember, we tried RH Contemporary Art, and then we pulled back.

And we may try it again.

The tough thing about RH Contemporary Art was you only get to sell the item one time.

So if you had like a best seller, you had a great piece, you -- that transfer of happiness happens one time.

And then you're like, "Okay, we sold it.

And then now what do we do?" Like I got 1,000 people that want that piece of art, and I sold it.

So the great thing about Portia's strategy, she said -- what's her line?

Great art, GENERAL PUBLIC, I can't remember.

She has this whole great view about it is -- like her thing is this.

Imagine if the great books in the world, there was only one that you couldn't publish another copy.

Like that was her whole -- I thought that was just brilliant, right?

Like imagine like every book was just a collector's item, and only one person could have that book.

It makes no sense, right?

And so her idea and what -- and the great thing about her, she's just tremendously persuasive.

So she's great with all the artists because a lot of the artists are trapped in the old school of like, "I've made this, and that's my piece." And now like this one person in the world owns that piece.

It's kind of goofy, like when you think about it.

It'd be like a fashion designer designed like one dress or one coat, and no one else could enjoy that, except for one person.

So she's got this different view.

And the way she's framing it, and because she's a credible -- her and Ellen are really credible art collectors and they've got incredible taste, and they've been advocates for the art community for a long time, that people trust her.

And I think she's breaking through and she's getting better and better people on the platform.

And she's convincing them, like why only print one copy of your work?

Like great novels, there's not just one copy, right?

And so people are starting to get that.

And I think it could fundamentally change the art world permanently.

So that's the idea.

And there are no further questions at this time.

I will turn the call back over to management for some closing remarks.

Great.

Great.

Well, thank you very much for -- everybody, for your time and attention today and your interest in our business and brand.

We know it's been a crazy and difficult year.

And we just want to thank all of you, thank all of our customers, thank all of our people around the world that not only just work for our company, that work on behalf of our company, making the products and delivering the products and making the supply chain work.

This has just been a year like none of us could have imagined, and a lot of people made a lot of sacrifices and took a lot of risk to kind of keep everything going in this world.

And we sure are thankful.

And we couldn't be more excited about the future and about the opportunity.

So thank you, everyone, and we look forward to talking to you at the end of the first quarter.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.