RH (RH) 2002 Q2 法說會逐字稿

Good day.

All clients are now on the conference line in listen-only mode.

At this time I'll turn the call over to your moderator, Mr. Kevin Shayhan, Chief Financial Officer.

Go ahead, sir.

Good afternoon, and thank you for joining Restoration Hardware second quarter conference call.

With me here today are Gary Friedman, our President and Chief Executive Officer; Tom Bazzone, our Chief Operating Officer; Cindy Love, our Vice President of finance; and Stephen Gordon, the company's founder and Chairman.

Cindy will start us off on this call with comments regarding forward-looking statements.

Thanks, Kevin.

Good afternoon, everyone, and thank you for listening to our earnings release conference call for the 2nd quarter.

This conference call will contain forward-looking statements that involve known and unknown risks.

These forward-looking statements include statements concerning or relating to implications of the company's financial results for the second quarter ended August 3, 2002, and the periods thereafter, guidance for the company's next three fiscal quarters through the first quarter of fiscal 2003, statements relating to the company's new strategy, and other statements containing words such as believes, anticipate, estimate, expects, may, intend, and words of similar import or statements of management's opinions.

In particular, guidance offered or commented on by the company represents a point in time estimate made by management of the company.

We caution you that such guidance and other forward-looking statements are just projections, and actual results may differ materially from those in the guidance or other forward-looking statements.

Important factors that could cause such differences include, among others, those factors detailed in the company's filings with the S.E.C., including its recent filings on forms 10 K, 10 Q, and 8 K, including by not limited to those described in the company's form 10 Q for the 1st quarter of fiscal quarter 2002 and management's discussion and analysis of financial condition and results of operations under the caption "Liquidity and Capital Resources," and factors that may affect our future operating results.

With that, I'll turn the call back over to Kevin.

Thank you, Cindy.

Let me first take you through the agenda for today's call.

I'll start us off by reviewing the financial results for the quarter just ended.

Then Gary will follow up with comments on our current business trends and the outlook for the remainder of the year.

Tom will then give you an update on current operating initiatives, and then we'll open up the call for your questions.

As you know, in the 1st quarter of this year, we completed a year-long repositioning of the company, remodeling and remerchandising our entire store base, redesigning our catalog and website, and rebuilding the website to have increased usability and capacity.

After the significant investments and expense involved in the work of positioning the company for long time growth, we're excited to report that in the 2nd quarter, we began to see a packback for our efforts.

Sales for the quarter were solid.

For all channels, we booked a 12% increase to 85 million compared to a year ago.

Comparable store sales were up 8.9%, and the direct channel which includes both catalog and Internet increased 40% from last year's levels.

While these sales were less in our previous guidance, primarily as a result of more difficult than expected comparisons to last year's late 2nd quarter heavy promotional activity, our loss per share finished the quarter at 12 cents, which was at the low end of our previous 12 to 13 cent loss guidance.

This was the result of several factors, including strong gross profit performance and careful management of expenses.

Gross profit as a percent of sales finished the quarter at 27%, compared to 19.1% last year and previous guidance of 26%.

This improvement was a result of improved initial merchandise markups, a reduction in markdowns, and the leveraging of fixed occupancy costs.

Selling, general, and administrative expenses as a percent of sales were 32.7% in the 2nd quarter, up from 30.4% a year ago.

A large part of this increase was the result of increased marketing expenses in both the store and direct channels.

Comparing to previous guidance, we realized expense savings of approximately 700,000, but increased slightly from the 31 to 32% of sales guidance range due to deleveraging as a result of lower sales.

Moving on to our balance sheet, inventories in the 2nd quarter at 90.5 million, up 10% from last year.

This is in line with our 12% sales increase for the quarter and our expectations for sales over the next quarter.

Inventories are somewhat higher than previous guidance as a result of several factors.

First, our decision to take inventory for our fall lighting sale directly from our supplier's overseas factory rather than from his domestic warehouse.

This decision will significantly improve our merchandise margins and ensure a timely receipt of goods, but did require us to take receipt of the inventory at time of shipment.

Second, in addition, we shipped holiday merchandise from overseas suppliers earlier than last year to protect against flow interruptions from a potential dock workers' strike.

In evaluating the productivity of our inventory, we have seen a 62% increase over last year in inventory yields and a 53% increase in gross profit comps versus last year at 22% and gross profit comps versus two years ago.

We ended the 2nd quarter with 23.2 million of back debt, an increase of 8.4 million versus 14.8 million of bank debt at the end of the same period a year ago.

Accounts payable on accrued expenses increased 5.2 million to 42.3 million from 37.1 million a year ago.

Capital expenditures from the 2nd quarter totaled 3.6 million, primarily to complete the store remodel program.

We anticipate only a minimal level of additional capital spending for the remainder of the year.

From a cash flow perspective, in the 2nd quarter, we saw a loss from operations excluding depreciation and amortization charges narrow to a negative 200,000, close to break even, compared to a negative 2.8 million for the 2nd quarter a year ago.

We are forecasting this measure to turn moderately positive in the 3rd quarter and massively positive in the fourth.

As for our current liquidity status, we have the liquidity we need to complete our holiday inventory buildups, and based on our plan for this year, we expect to be free cash flow neutral and to end the year debt free.

Now I'd-like to turn the call over to Gary.

Thank you, Kevin, and good afternoon everyone.

I'd like to share a few minutes sharing my perspective on our current performance and outlook for the remainder of the year.

First, let me say that I'm very proud of the efforts the entire Restoration Hardware team has put forth this past year and especially this past quarter.

In one year we have completely repositioned our business and brand, introduced the new merchandising strategy, launched a new catalog, redesigned our website and remodeled our stores.

Our efforts are now beginning to bear fruit as we've reversed our negative sales trend, improved our merchandise margin, significantly reduced our operating losses, and are on track to return Restoration Hardware to profitability and long-term growth.

I will tell you what I told our board a few weeks ago.

I am more excited and confident than ever about the forward-looking performance prospects of our company.

The reason why: We now have a few months of results operating under our new operating strategy.

Unlike the last quarter where we had to forecast with no history, we now can see trends developing in our new core businesses which give us confidence in more accurately predicting our future performance.

Our greatest challenge last quarter was predicting our comp store sales because of the heavy clearance activity from a year ago as we began our transition.

I want to add some perspective to our comps this past quarter and give you insight as to why we confident that our comp store sales performance will continue to be strong.

As many of you know, we communicated in mid-May that comp store sales were trending approximately 20% up month to date.

May happened to be the only month that was void of unusual markdown activity from a year ago, thus reflecting the best measurement for comparable store sales performance versus our new strategy.

We finished May up 18 to 20% comp.

By the middle of June we started to anniversary the mark down and clearance of approximately 3,500 items a year ago as we began to rid ourselves of under-performing inventory to prepare for our repositioning.

June comps moderated to the 10 to 12% range as merchandise margins began to increase significantly.

By July, we were up against the full effect of last year's clearance activity, and comps fell to the flat range with merchandise margins running approximately 1200 basis points better than last year.

Clearly, we could have become more promotional in July to drive higher comps, but felt that the right strategic position for our brand long-term was to continue to transition our customers from buying on sale to purchasing at full price.

As our clearance activity from last year decreases each month in the 3rd quarter, we expect our comparable stores sales performance to increase each month.

Already our sales have rebounded with August month to date comps trending up 8 to 10%.

We expect comparable store sales to continue to build throughout the quarter and are forecasting comps in the 12 to 15% range for Q3.

By November of last year, we removed what was left of the clearance from the sales floor so we could present our holiday assortments with more clarity and focus, and for the nine-week November/December holiday season, reported comps of 6.9%.

As we anniversary those holiday sales numbers this year, our confidence comes from the fact that we did not have any of our new or expanded core businesses last year and will not be up against the clearance activity we are up against today.

Therefore, the sales from those new businesses will be incremental through the 1st quarter of 2003.

Our new and expanded core businesses also are continuing to build each month as we become more top-of-mind with the customer and a destination for businesses like bath hardware, bed and bath textiles, window treatments, et cetera.

The build of these core businesses should continue throughout the next year as we fill in assortments and refine the offering.

This will create a solid, improved, and more predictable revenue base for Restoration Hardware stores.

Our direct business continues to grow at a rapid pace as sales for the quarter increased 40% over a year ago.

We accomplished this while increasing our average order to $200 plus and increasing our profitability in this division.

We have finished just paginating our famous fall lighting sale catalog and feel extremely bullish about this important event which runs through the month of October.

We are introducing new collections and our current trends in lighting are over 20% comp.

In addition, as Tom Bazzone will talk in more detail about in a moment, we are launching our private label credit card and custom payment plan next week in all of our stores, catalogs and online.

As we visited stores this past holiday, it was the number one customer request we received from all of our associates.

We believe this should add incremental sales to our businesses this fall.

Both Steven and I are merchants, and all of our store managers feel this year's holiday lineup is our best ever.

We previewed our collection two weeks ago at our national store manager's conference, and if you go into one of our stores you may want to ask our store managers yourself how they feel about this year's holiday lineup.

Based on progress we have made in product development, merchandising, inventory management, and sourcing, we are expecting significant improvements in delivery and flow of holiday goods and should have very few late deliveries or air freight versus a year ago, all of which should contribute to greater sales and improved margins.

I would also like to comment on the continued strengthening of our management team and the appointment of Lisa Salomony as Executive Vice President and general manager.

She joins us after a highly successful 16-year career at Gap, Inc., where she started as a merchant, and worked her way up the ranks, holding the positions of Sr. Vice President, Divisional Merchandise Manager of the women's business, the Executive Vice President and general merchandise manager of women's, men's kids and baby for the US where she was responsible for approximately $8 billion of volume.

With her last position being Executive Vice President for global merchandising for the Gap adult brand worldwide until her departure 18 months ago in March of 2001.

Lisa's responsibilities included merchandising, planning, sourcing, production, and visual merchandising.

I believe Restoration Hardware is lucky to attract a talent like Lisa.

Her tremendous track record and experience building and running businesses much larger than ours will be of great benefit as we build organization and grow our business.

At this time I would like to turn the call over to Thomas Bazzone our Chief Operating Officer.

Thanks, Gary.

Good afternoon, everyone.

I'd like to give you an update on some key operational initiatives.

First as Gary mentioned, is the introduction of our private label credit card.

One week from today we will lunch the RH card nationwide in all three channels.

We are very excited about this as our program has some unique advantages.

First, the RH card can be used in two distinct ways.

For every day needs, the RH card can be used like any other credit card, but for large ticket purchases, customers can take advantage of our low 9.9% annual percentage rate equal pay program.

For example, a $5,000 bedroom suite purchase could equate to $163 a month for 36 months.

We will have very clear signing and literature in our stores outlining this feature of our program.

We also have a very simple application process for both the customer and our store associate to complete.

Over 85% of the applications in our pilot store group were processed in less than one minute.

Once approved a customer can use their card immediately.

We will aggressively market the RH card in our fall lighting catalog which is in homes on September 24.

We will pre-approve over 800,000 recipients and incent them to activate their card in the channel of their choice.

We are pleased with the approval rates and credit line extensions we saw in our pilot store group and believe it will allow our customers to step up and step up and make the big ticket purchases.

From a distribution expected, we completed the roll-out of our nationwide home delivery program in the 2nd quarter, which gives us the ability to market two-week or less delivery service to nearly 75% of our customers.

We began to market this service in our fall catalog, and will get more aggressive in promoting it in the months to come.

We have really hit our stride in handling the merchandise assortment in the distribution centers.

During the 2nd quarter, we were able to increase units processed per hour by 21% over the same period last year.

This is primarily due to reduced skew count and higher average item retail.

From a fulfillment perspective we've also seen leverage as our average orders increased dramatically.

With an average order of over $200, we have been able to reduce our fulfillment expense as a percent of sales by nearly 200 basis points over last year.

Our next area of focus is store labor.

We have seen a 40% increase in our average transaction at store level and believe there is an opportunity to see more expense leverage in store payroll with better scheduling and improved back room operations.

In general, we are very well prepared for the upcoming holiday season and look forward to continued expense leverage in our key operating areas and the launch of the RH card next week.

I will turn the call back over to Gary.

Okay, thank you.

At this time we will turn the call -- we will open the call up to questions.

Thank you.

At this time if you would like to register for a question, please press the one on your touch-tone phone.

You may withdraw your question at any time by pressing the pound key.

Once again, to ask a question please press the one on your touch-tone phone, and at any time you may withdraw your question by pressing the pound key.

We'll take our first question from the site of Marcia Erin with Pacific Growth Equity; go ahead, please.

Yes, good afternoon.

Gary, can you talk a little about the gross margin, where are you relative to your goal?

And then can you maybe talk a little more about your strategy when you come up against clearance?

I believe you have another big clearance activity in January, if I'm not mistaken, and will you hold the line like you did in the 2nd quarter in terms of your promotional activity?

Sure.

Let me first talk about gross margin versus our goal.

As we look at this turn-around over kind of a three-year period, we are tracking probably slightly ahead of where we thought we'd be from initial mark-up in our product in gross margin point of view.

As you know, Fran Hammond joined us as Vice President of global sourcing, and she's a very experienced leader in that area.

She's moved quickly to help us renegotiate core categories and core products as well as helped us initiate more direct resourcing.

Our merchants have also been very aggressive in moving our production to direct sourcing overseas in a lot of our key categories, we're seeing strong initial mark-up, so we're tracking slightly ahead of our goals there, but continue to see a lot of road ahead as far as improvements for reduced cost of goods and improved merchandise markups for the next several years.

As far as clearance in January, as I've mentioned in my comments, we took the remaining clearance off the floors last year in November/December to be able to present our holiday goods with more focus.

We brought those goods back out onto the floor in January and sold them through January, February, and March, as we also took additional markdowns after December on holiday goods.

Those goods at that point, by that point in time, in January, February, March, were at fourth, fifth, and sixth markdowns.

They did not generate significant sales volumes, but put enormous pressure on our merchandise margins because we're selling them at negative margins, so they're pulling them down significantly.

We think we have real comp upside in January, February, and March as we come up against those numbers, and because we're going to have all the core businesses this year that we didn't have last year.

So we feel quite good as we look forward into January and also into the 1st quarter.

Also into the 2nd quarter.

One other point I should make is we launched this new strategy, if you take a category like textiles, when we launched in April we were doing 5 to 6 hundred thousand dollars a week in textiles.

At this point in time we're doing a million dollars a week in textiles.

Over the next two months we expect that to grow to 1.2 million, as we keep mailing catalogs and keep building top-of-mind awareness in customers, and we become as a known as the destination for these businesses.

So, as we go around and cycle around next year, even though we'll come up against the launch of these new core businesses in the April/May period a year ago or through the 2nd quarter, we're going to have much higher run rates and should continue to have significant comp store performance based on that, and that's why we feel -- we start to feel confident as we look ahead at the comps now.

We have enough history and we can see how the core businesses are performing on a weekly basis.

We can start to straight line some of the numbers, and we're not so much at the mercy of did we find the next record player.

Right.

Another question: when you talk about that, can you give us a sense of how the longer lead time business is?

You touched on them briefly in your prepared remarks, but things like the window treatments, the bath hardware, and those kinds of items, how are they ramping?

Those are the ones I'm referring to, whether it's window treatments or bath hardware, bedding, bath textiles, all of the core businesses are performing -- I shouldn't say all of them -- let me say that there are some that are outperforming our expectations, some that are performing on expectations and there are a couple that are not performing up to our expectations.

The ones that are not -- I think I mentioned before, which is the floor coverings business, has been one of the drags on the business, but we're making up that volume with the outperformance in bath textiles and now we're starting out of performance window treatment as well as bath hardware and bath furniture.

Great.

And then my last question is as you look at the holiday book, my sense is because you have more novelty in that book than you may have in others in the past, it's been a lower average transaction, will you keep the assortment of novelty in the holiday book?

Absolutely.

You'll see a whole emphasis in holiday wrap that deals with our holiday wit and wisdom, the traditional Restoration Hardware, interesting finds and stocking stuffers, and one of a kind gifts.

If anything, I think it's one of the most exciting assortments wit and wisdom assortments we've merchandised, and I think when you see the holiday catalog come out and see it paginated, as well as how we're going to approach the store presentation, we'll have the most exciting stocking stuffer display in America this year.

We're just quite excited about it.

Great.

Thanks and good luck.

Okay, thank you.

Thank you.

Our next question comes from the site of David Rose with J&P Securities; go ahead please.

Good afternoon.

Three quick questions if you could, please.

The first is can you go over the restatements of the costs of goods sold in the SG&A lines in the 2nd quarter and then what they will be like in the 3rd and 4th quarter?

It looks like your cost of goods in SG&A moved by a little over a million dollars over a year ago; they were restated.

Secondly, if you can give us comfort in in terms of how you're managing the inventory in light of Q3 sales guidance being lower, and I'm assuming Q4 guidance being lower as well?

And then thirdly, if you could you explain where the shortfall in the direct to consumer business was.

Let me take a shot at reclassifications question and then, I think, Gary, perhaps you can address the other issues that David has.

What we've done with respect to the reclassifications, and this is material that we've presented in the 10 Q for 1st quarter, is to reclass certain distribution center to store freight and third party warehousing costs from SG&A to costs to goods sold.

That's to get it in line with our presentation from this year.

We've made those changes in order to treat the gross margin and SG&A areas in a way that's consistent with our past experience and the way we'd like to look at it.

In terms of the dollars that are involved and are and moving around, if you look at those as a percent to sales, you'll see a relatively consistent level of those dollars moving from quarter to quarter as the year proceeds.

Next year, when we're comparing against reclassified numbers in this year, we won't have these comparative issues.

Okay, let me take a shot at the next couple of questions.

Let me first talk about the direct to customer question.

I think your question is how are we dealing with the shortfall in direct to customer business?

Actually I was hoping to get a little more elaboration on the direct to customer business.

The guidance was 50%.

You came in 40%, and does that apply in the forward quarters as well, a downward revision on direct to customer business?

Right.

We'll see our first mailing of our new catalog was off to initial plans, and we have since revised the catalog for the fall book.

The first book, the real intent of the first book was twofold.

One, we wanted to launch all the new categories.

We probably merchandised the books more from a retail perspective than mail-order perspective, because, really the biggest bet was to get the retail business operating and performing.

We were able to do that.

We did come up short to our plans in the direct to customer business.

Since we made our revisions, we mailed our fall book.

That's performing on plan.

Some of the revisions we made from a merchandising point of view, and we made some circulation changes and pulled back our circulation somewhat to increase our productivity in the fall book.

That fall book is now performing on our plan and where we believe it should be.

Response rates are up, average order has grown even more than in the spring summer book, and we feel quite confident as we go forward.

In fact, we're now evaluating our holiday plans and now believe we've learned more and we'll probably increase our holidays circ based on our current trend.

Regarding the change -- does that answer your question?

That helps on the direct to customer business.

So, essentially, the way you were marketing it was a little different than what you're going to be marketing going forward.

You're really going to focus on outside of the store versus really targeting at the store for distribution.

No, no, no, no.

We'll still be mailing into store areas, but we will be merchandising the book and paginating the book to garner a better mail-order response and direct to customer response where we kind of swung the pendulum the other way to make sure we merchandise categories to drive retail response.

In some cases we'll continue to do that.

If you look at the current fall book, you'll see a two-page spread of our paradigm towels.

Clearly from a mail-order productivity, you may not do that all the time.

But when you're thinking about trying to own the premium-end towel market in the United States and I want to -- you want to drive customers into the stores, that's a good decision to make.

For instance, when we dropped that book, our towel business was up 50% in the stores.

That's where we did the majority of that business.

From a mail-order point of view, that spread is operating about even, kind of middle of the road in the rest of the book, so we didn't really take much of a hit in the catalog, but able to drive significant sales in our stores, so we'll continue to make strategic decisions like that.

But throughout the book, the fall book is slightly more dense.

We're starting to focus on more catalog-only items and catalog-only spreads.

You'll see the catalog only content continue to build throughout next year as we get up to 30%, 35% catalog-only.

The book we mailed in April was less than 10% catalog-only.

That hurt response in store areas.

Nothing's really changed about our strategy.

We think we can run a very profitable multichannel strategy with a catalog that's mailed into store areas, driving store traffic and also has good response rate and is a profitable channel itself.

Kevin, do you want to -- what was the next question?

The last question had to do with inventory levels again.

You managed inventory in this quarter, it was a little bit higher than you expected.

As you mentioned, you wanted to hold the margin.

As your sales guidance goes down in the 3rd and 4th quarters, you've already bought the inventory, so how will you manage the inventory in the 3rd and 4th quarters given the shortfall in sales?

The guidance for the 3rd quarter is slightly lower than our previous guidance in the 3rd quarter, but still very strong when you look at our inventory growth, and especially when you lock at our yields on our inventory and our return on our inventory versus last year or the year before, so we feel fine about that.

If anything as we look at the 4th quarter, we are not expecting to take our sales estimates down.

If anything, there's a higher chance that we would take those sales estimates up because we were very bullish about the 4th currently and feel quite good about our outlook.

We're only guiding comps in Q4 right now at 7%.

We'll get more clarity over the next two months.

At this point we feel very confident in that number.

Okay, great.

Thank you very much.

Thank you.

We'll take our next question from the site of Eric Swergold with Gruber and McVine.

Go ahead, please.

Once again, our next question comes from Eric Swergold with Gruber and McVine.

Go ahead, Eric.

Good afternoon.

Could you tell us what the operating margin was, X the stores you plan on closing over the next two years, and then could you give us the schedule again of store closings for the underperforming stores for the next two years and details on the credit card?

I'm not sure if you gave the interest rate, who's doing the credit card for you, and who's absorbing the recourse on that credit card.

Thanks.

Sure.

We have not given guidance particularly when we would close underperforming stores.

We've said there's probably six to eight underperforming stores in our portfolio that we would be look to be closing over the next two to three years, and we have lease termination agreements in probably two-thirds of the stores, so we would be able to exit most of those locations with a minimal impact to the company, but we have not given any kind of guidance as to, you know, how that factors into operating margins going forward.

I'll turn it over to Tom regarding the credit card questions.

We have fixed interest rate on the credit card at 21%.

ADS is our banking partner and it is a fully non-recourse agreement with the bank.

They absorb all risk of loss.

As Gary mentioned, we have a 9.9% equal payment program for large ticket purchases over $2,000 for the customer to take advantage of.

All purchases the purchases would be at 21%.

Okay, thank you.

Thank you.

Our next question comes from the site of Lawrence Kaan with Sonic Capital; go ahead, sir.

Good afternoon, gentlemen.

My question is how can -- you're guiding down on the store sales for the next quarter, but you're keeping your earnings the same.

How does that work?

Does the gross margin go up?

And secondly, your shortfall this quarter came late in the quarter.

How can you assure that that won't happen this time around?

Well, I don't know if you heard my commentary regarding sales and the specifics of this last quarter, but clearly, we don't have a repeat of the, you know, one time mark down of 3,500 items from this year.

Basically we started last year with about 7,200 SKU's and marked down 3,500 in late June and July.

That was really the event we were up against as we began the transition of our inventory.

Our selling activity -- our clearance selling activity as a percentage of our total versus a year ago shrinks each month, so we're up against a smaller and smaller percent of clearance activity month by month as we now move forward.

We don't have any kind of issues or risks as we look at in October.

If anything, in October we feel quite good because we have our famous fall lighting sale happening.

We're running strong comps in lighting today, and we believe our marketing and merchandising plans for October are quite good, plus we're bringing in some of our holiday key items early to coincide with the 10/15 holiday catalog drop that will preview some of the items for holiday earlier than we have in the past.

What was the second part of the question?

Well, the same store sales guidance goes down, so that does that mean that the gross margin goes up?

Yeah.

No different than in this previous quarter, our margins are running ahead of our projections and our expenses.

We have some -- we believe we have continued expense leverage opportunities as we get smarter about managing our business with the new dynamics.

We have significantly higher average order in our direct channel, and we have significantly higher average transaction in our store channels.

Those give us expense opportunities all throughout the back end of our business.

So we can expect the gross margins to be somewhat over30%?

Yes, in that range.

We would assume that any sales shortfalls at this time can be made up by gross margin enhancements.

Along with improved expense controls.

Thank you very much.

Thank you.

Thank you.

Our next question comes from the site of Andy Graves with Compass Point.

Go ahead, please.

Thank you, gentlemen.

I wonder if you wouldn't mind if you're dealing if you're running at the 8 to 10% comp range thus far in August, which is a bit stronger than some other retailers relative to their plans, how would you then get to the 12 to 15% guidance for this quarter?

What should we sort of expect to see in the months of September and October in terms of comps?

Sure, Andy.

As I mentioned earlier, each week and each month, we are going to go up against a lower and lower clearance percentage from a year ago.

So as the clearance business contracted a year ago, our comps will increase this year and expand this year, so -- and that's what we're seeing.

So we expect, you know, each week, as we're up against less and less clearance each week, our comps are going to be stronger and stronger.

And can you give us any sort of detail about what percentage of your goods or how many SKU's were discounted in August, September, and October of last year?

Sure.

About 3,500 items were marked down last year.

It was about half of our total SKU count.

So in the month of August of last year, how many of those items, or what percentage of your gross sales were discount, and is there any way to track that as you move forward from August through the end of October?

Sure.

Let me get some kind of broad numbers on this.

I don't want to get drug into too specifics, but I said May was the only kind of true comparable month.

If you wanted to look what's the real comp performance business before you get into the unusual clearance activity from a year ago, if we focus on May 2001, 14% of our sales came from clearance.

In May of 2002, 14.9% of our sales came from clearance.

So we're pretty flat in our clearance activity versus a year ago.

As we got into June and July, our June numbers a year ago, 31% of our business came from clearance.

Our July numbers a year ago, you know, over 40% of our business came from clearance.

In August, that number dropped down to about 30%.

In September, it dropped to 20%.

In October, it dropped to 15%.

So you can see how that number starts to moderate.

That means that, you know, what happens is we're not up against those sales.

Our current core businesses, which are now tracking and increasing weekly and monthly, treats the gap and creates the platform for improved comp performance going forward.

The other thing to think about that isn't going to affect every retailer is hopefully we'rel not have any recurrence of a September 11th event last year.

During the two-week period that was a significant hit to comps in the month of September.

I think we were down in the week of September 11th about 36% comp.

So we do have some increases planned in our business based on the effects from last year.

But so basically in the second half of September and particularly in October you have what could be considered to be not only very easy comparisons from a comp basis, but also easy comparisons from a discounted sales relative to gross sales?

Absolutely.

Thank you.

Thank you, Andy.

Thank you.

We'll take our next question from the site of Cliff Greenberg with Baron Capitol.

Go ahead.

Once again, this question comes from Cliff Greenburg with Baron Capital.

Mr. Greenburg, are you there?

We'll take our next question from the site of Jacob Calvinbal with Instream Partners; go ahead, sir.

Good afternoon gentlemen, and congratulations on your quarter.

Thank you.

I had a couple of questions.

The first one is I'm a little unclear as to what your store opening schedule will be if you're going to be opening stores in the future, what that looks like going forward for the balance of the year.

Second, I want to get some understanding on how your linens are performing.

I don't know if you provided information, but linens as a percentage of sales and any information you can provide on the paradigm 464 sheets.

Just kidding.

[ laughter ]

And then you touched on it a bit earlier regarding the novelty items.

Are there any trends or product strategies we could look for that maybe compare and contrast to last year?

Sure.

Let me first try to take the store opening question.

We have said next year, we will begin to open new stores, probably somewhere between three to five new stores next year, depending on performance the following year, we would open somewhere around 5 to 10 new stores, then the following year after that, we could ramp it up to 10 to 20 new stores.

We're very broad in those ranges today.

What we're really focused on in the short term is returning the company to profitability and building a strong balance sheet for the future.

That will give us the flexibility to make the kind of business growths in the next year.

We're seriously focused on the short term and returning this company to health.

Regarding how linens are performing, you know, we're really quite pleased with some of the areas of the linens business and a little disappointed in others.

In our bath textiles business is out-performing our expectations.

Our window treatments is outperforming our expectations.

Our bed business is slightly below our expectations, but almost there, and it's building each week.

And our -- really our disappointment is in our flooring business, and we believe we just don't have the right assortment today.

We don't think it's differentiated enough.

We think we made a few minor improvements to quality, but things that the customer probably couldn't really tell outright.

And we were priced 20 to 30% more; we just look like we're overpriced.

Where we have clearly differentiated bath towels or clearly differentiated sheeting, where we have clearly differentiated window treatments and window hardware, the customer is voting for higher quality and is willing to pay a more premium price.

And where we don't look different enough and the goods aren't unique, we're not performing.

We have a few things happening.

One, we're repricing our rugs, you might have seen some of that happen last week and the rest is happening this week.

We're taking our prices down.

We have a lot of merchandise margin room in that business.

We are also bringing in -- you probably saw them in our catalog, they're not going to be available in our stores until September, which is a hand-knotted rug program.

When we look at our furniture business and textile business where it is performing, we clearly have a higher quality and at a higher price point, and in rugs I think we were playing too close to the competition, so we're bringing in hand knotted rugs that look tremendous, that look like antique reproductions.

They are more expensive, but we believe the customer who's buying the $3,000 cherry armoir probably wants a better rug than just a tufted rug.

So, we'll see.

I think the thing that gets us excited, as I've told the team here, listen, if we can get the window treatment business to work, then I know we can get the rug business to work.

It's just getting the right assortment.

I would have been more nervous if windows treatments and rugs didn't work.

But there's no reason we -- if the one works and the bedding works and the bath textiles works, it means we have a product problem.

Okay.

And then novelty was a big winner for your guys last year.

Can you touch on any of the trends or strategies that you are going to use into the holiday season?

You'll see us merchandise similar to last year in many ways with a real focus in impact on a lot of the key items and fun, novelty items.

We took cues from last year and made things better, and we also took a lot of cues from Father's Day.

We had a pretty successful Father's Day versus a year ago, and had a lot of hits and winners in Father's Day that will go forward and be presented in this year's holiday lineup.

We have some exciting new key items up our sleeve that we don't want to divulge just yet.

We think the overall trim assortment, the holiday trim assortment is really our best ever.

In all of these categories we were able to focus our efforts on sourcing and improving our margins.

In many cases we were able to make your inventories with significant margin up sides that protects us on the downside if we're wrong on any of these key items or key trend selections.

We have plenty of room if we need to get promotional and get through them and still make a lot of money.

So all in all, we're just very bullish on holidays.

We're more excited about holidays than any other season since I've been here.

And that's all of us, too.

I share your sentiments, Gary.

It's a pretty exciting lineup.

Okay, well we're looking forward to it.

Talk to you guys later.

Thank you.

Our next question comes from the site Michael Wiessburg with ING.

Go ahead, sir.

Thank you.

A couple things.

Could you just go over again what you said about the rugs?

Initially you're going to be taking down markdowns on the existing rug lines, but then you're going to be -- you're bringing in hand knotted rugs at higher price points; is that right?

Right.

With the idea that the quality differential will be sufficient for people to know there's an out for the payout?

Nobody is carrying the hand knotted rugs in any of our competitors today.

The hand knotted rugs are more the $2 to $5,000 price range.

They look like beautiful antiques that people would want in high end homes.

To the trade, these would sell at $6 to $10,000, so we're sourcing them quite well.

Not even an interior designer has access to this quality of rugs with this discount at this kind of price point.

There again, it's probably going to be more synergistic to what we did in the window treatment business, or what we did with the 464 thread count sheets or the 800 grand weight towels.

There has to be a real reason for -- the rug business is long lead times.

We tried to move quickly on what we did.

When you look at our assortment, quite frankly, it's not different enough from the competition, but we did some dumb things -- I don't want to say dumb things.

By the way, if our merchants are listening, I'm not pointing fingers, but in hindsight, we were all part of it.

We made the tufted rugs a little better quality, but you can't really tell if you're a customer.

You can't look at it and tell.

So we did things like we took the natural flooring and we -- instead of doing lapped bindings, we did mitered corners.

But doing that, we made the rugs 20% more expensive.

And the customer -- I don't think the customer really notices it.

We looked at it and said the interior design trades does mitered corners, we have to do it.

The fact is the customer doesn't really notice it.

We look like we have more expensive natural flooring.

The good thing is we have enough margin in this business where we're just going to lower the prices.

It's not going to look like we're a big promotion on the business, but we're just taking clean markdowns, lowering the prices, be more competitive, we're look how we're marketing this business in the catalogs and be more aggressive there.

And we'll be introducing hand knotted rugs.

We'll figure out how to merchandise our way out of this one.

The fact is we got a lot more things right than we got wrong.

The things we got wrong I think we now understand better and we can fix.

Gary, again, when you were talking about linens, the area that was below plan was curtains; is that right?

The floor coverings.

In addition to that.

In addition to that, the bedding is slightly below plan, slightly.

But the window treatments is now turning ahead of plan.

Bath textiles significantly ahead of plan, so that's how it falls out.

Beddings are close to plan, we think that will start hitting the plan over the next couple of months as we have some new, fresh receipts.

But the rug business is our problem, and we have to deal with that one.

One other thing if I could.

I know your price point on your direct sales is very high.

I think you said it was -- it's over 200.

I thought it was even closer to 300.

I know you want to bring that average transaction size down to build up total volume.

Right.

How do you go about doing that, and when do you think you'll start to see it?

You'll definitely start to see it in the holiday period as we have more of an item focus in holiday, and I think you'll start to see it as we also go forward.

There's nothing wrong with the $200 plus average order as long as the response rates are working.

If the response rates were under our projections, average order was over our projections.

As we look at fall, response rates now are on our projections, and believe it or not, average order went higher, and so we're still noodling with that.

I think you'll see more items -- you'll see more accessible items in the catalog as we go forward.

At the same time, if you can run a catalog or direct business with $220 to $250 average order, and you get decent response rates, you can make a lot of money, so you leverage the hell out of the back end.

So we're not so motivated to take our average orders down to $150 or something, but if we can lower them been 10 or 20 bucks or so and increase response significantly, then that's key.

More important lower priced items is catalog-only content and content that is more specific and unique to a catalog.

The kind of items that you can't really merchandise well in a store that you just don't see out there that are more unique that customers respond to.

We beefed up our catalog and direct merchandising team.

We have a gentleman who has a lot of catalog experience in merchandising that joined the team and understands that whole component of the business, and he's adding greatly to that -- to the go forward strategy.

We've got our arms enough around it that we know how to make it better.

But there's still -- we still got some things to learn here.

That's great.

One other quick thing.

Did you say, Gary, you may increase the level of mailings in the Christmas holiday book?

At this point, based on fall trends, we will be evaluating those mailing plans Friday, and we're going to study the fall, re-look at the pagination of the holiday catalogs versus a year ago and make some intelligent decisions based on what we believe might happen.

We're very bullish about this holiday, and we think we have a great lineup in the stores, great lineup in the catalog; we think we're smarter than we were a couple months ago.

Every month that goes by we're getting smarter and smarter here about how to do things.

We think there's more upside than there is downside as we look at Q4.

Great.

Hey, thanks a lot, Gary.

Thank you.

We'll take our next question from the site of Rob Wilson with Retail Stock Investments.

Go ahead, please.

Thank you.

You spoke about average transaction size being 40% greater this past quarter, and your comps this quarter were 9%.

Can you speak to traffic, and is there an implication that there's a customer acceptance issue related to your new products?

A customer acceptance issue -- good issue or bad issue?

Well if you have positive comps at 9%, and your average transaction size is up 40%, what does that tell us about traffic?

Does that tell us anything about traffic?

It doesn't really tell you much about traffic, it tells you about number of transactions.

It's really no different that what we see in the catalog: average transactions gone up, response rate's gone down.

We're doing more business with fewer customers, which is not necessarily a bad thing.

You can make more money that way.

The key is clearly we're transitioning our customer base.

Some of our customer base is clearly coming with us, some of it is going to be new.

The people that were just coming in for the moon pies probably aren't hanging with us.

So I think the positive thing I read from the business is that we've introduced an entirely new strategy.

Our comps are up, our merchandised margins are up significantly, we know our clearance activity will moderate over the next couple of months.

We look at the one month where we didn't have the clearance activity that we were going up against and comps were up around 20%, so that gives us great confidence about how we look at this business in the future.

On an operating basis, you performed roughly the same as two years ago so 12-1/2 million dollars more sales volume.

Could you expect to the merchandise margin this year versus two years ago?

In other words, are we to assume that with 12-1/2 million dollars more sales volume, that you achieved a lower merchandise margin than two years ago?

We don't have that number right in front of us, but -- Kevin, you commented on the gross --

Gross profits increase is up 22% over two years ago.

That definition is essentially the gross profit dollars flowing through comparable stores.

Okay.

That would indicate we have stronger -- stronger inventories and stronger margins.

Right.

Okay.

Fair enough.

Are there any liquidity issues for this quarter?

No liquidity issues at this time.

We feel we have adequate liquidity at this time.

We feel we have adequate liquidity to fund our holiday business.

The company starts building availability in its credit line once we get into the mid-October period.

We look fine today in liquidity and have no issues.

Thanks.

Thank you.

Our next question comes from the site of Robin Merchison with Hibernia South Coast; go ahead, please.

Thanks for taking my questions.

Regarding the bedding, I assume you're talking about the bed coverings, not the sheets, in terms of the performance?

Yeah, the sheets are performing over our plan.

Some of the top event programs performing over our plan.

Particularly the one print which was called -- [ Indiscernible ] until we found out we couldn't use that name; now it's called Rubello.

We have the program in window treatments and in pillows and top of bed.

It clearly has underperformed our expectations.

You'll see that, I think it goes on sale this week or next week at 30% off.

We'll make a presentation to that.

It's our seasonal top event pattern and we'll start to mark that down.

Particularly that -- you know, that program drug down the overall performance.

There was an issue with the blue color, too.

When I'm in the stores I see a lot of the blue merchandise.

Blue was not a good color for us.

The hand knotted rugs, when can we expect to see those in the store?

Early September.

Lastly, just for perspective, in July you had a flat comp and did you see a March difference in the back half of July versus the first part of July or was it a fairly even spread throughout the month?

We saw it drop off in the last two weeks of July.

Thank you very much and good luck.

Thank you.

Thank you.

Our next question comes from the site of Michael Friedman with Sawgrass Capital; go ahead, please.

Good afternoon.

I have a few questions for you.

The first one is I was just wondering if you noticed regional differences on the retail side?

Second, obviously you mentioned you did a good job on gross margins and SG&A to overcome the revenue shortfall.

I was just curious if you could you give us some kind of guidance as we model going forward fixed versus the variable on the SG&A side?

Let's see, third, can you just talk to -- since you've given us good ideas of the clearance last year, what kind of monthly seasonality there is within this quarter?

I know there's the fall lighting sale, but I just don't know whether any month or months of this quarter are significantly busier than others.

Lastly, you've given us a good sense of product loins that you're happy with and what needs more work, but I was just kind of wondering three month in in generalities if there's anything else you can add that you're pleased with and needs to be addressed?

And actually one more.

Since you guys mentioned, I was going to ask you a wise ass questions, but how are the $5,000 rugs selling out of the catalog?

A wise ass questions?

Let me -- the first one was regional performance over our business.

What we're seeing since our launch is that the northeast part of the country, Chicago, as well as most of the bay area has been relatively strong.

Silicon valley has had a tough time as other retailers have, too.

What is exciting to us, our best stores are doing really well, kind of the opinion maker markets in New York and Los Angeles and San Francisco and Chicago are all doing well.

That's usually good indicators for the rest of the country.

Our business is not performing well.

It's been really more in the south.

The Florida market continues to be tough for us.

We're going to have to develop kind of a separate merchandising strategy for Florida as other retailers do.

Our mix and our esthetic is really more of a northeast traditional home look and doesn't play so well in Florida and in some of the other southern metropolitan areas.

But we're excited about how it's working in L.A. because I was worried about that.

In there Florida, the textiles are performing really well there.

We think we have the right feedback from the folks there that start to augment their merchandise and mix and tweak it and give them something a little bit more appropriate.

Kevin, do you want to take the gross margin question?

We haven't guided people on the fixed versus variable.

We don't have that kind of guidance prepared to give you here today.

I guess I would point to the financial statements as far as a big component of affects would be the occupancy costs.

Those are broken out in the annual reports.

What were the other questions?

Monthly seasonality.

Yeah, within this quarter, any months particularly strong?

October would be the lion's share of the quarter.

Is that because of lighting sale or because -- [ overlapping speakers ]

Lighting sale is predominantly in the October period.

Okay.

And just kind of generally, besides the specific product lines that you've mentioned heading below plan, Gary, your thoughts three months into the re-merchandising?

Yeah, we're really excited about bath hardware, furniture, textiles, it's just a natural for Restoration Hardware, all that stuff very strong.

One of the things that's been a terrific surprise, those of you who were early on to this story and know that as we kind of reformatted the stores, we took the two hardware rooms that were in front and consolidated them into one room to bring bath hardware up front.

I thought we could lose 15 or 20% of our business in cabinet and door hardware by consolidating into one room.

We have not lost any business by doing that.

We're quite happy about how that's performing.

I think I mentioned in the past some of the places we've under performed, we probably had too high of expectations.

When we look at the numbers, we're saying we're a little nutty there, we're betting too high.

Things like our vases, frames, et cetera, I think our product's average and it's performing average, but also we planned it too high.

You'll see some of the categories shrink as we move forward.

You'll see re-emphasis on entertaining in restoration hardware.

We think we have a great fall entertaining lineup.

You'll see some minor space allocation shifts.

Some of the things -- we invested the space into the merchandising bath sconces with bath hardware.

That is up 40 or 50% because we're merchandising it in a more unique way.

But that's basically it.

Thanks a lot.

Keep up the good work.

Okay, thank you.

Thank you.

Our next question comes from the site of Dayna Telsey with Bear Stearns; go ahead, please.

Good afternoon, everyone.

Gary, can you talk a little about the lead times for the merchandise?

Has that changed at all?

And as you look out -- and this, obviously is your transition year to the new merchandise assortment -- when you look to spring '03, how are you planning it in, and what should we see as the break down in terms of the categories?

The lead times of the goods, clearly as we transition to -- two years ago, the company direct imported 15, 16% of it was direct product.

Last year, I think we climbed into the 20s, low 30s; this year we'll probably hit maybe low 40s of direct imports.

We think we can get that number up into the 60% range as we go forward.

As we do that, clearly there's somewhat longer lead times on the products.

At the same time, we're becoming more and more efficient on our product development cycle.

We've invested into product development and design teams that are up and functioning well now; we're building product sourcing team; our merchandising teams have a lot of experience and are getting some history with the business.

We're on a pretty disciplined development calendar just in the last several months have taken about four to six weeks out of the calendar, shotten our lead times, and we continue to do that so we can be fast and reactive.

When you're not buying from domestic sources, you'll have longer lead times in categories, but nothing that puts us at a disadvantage from anybody else who's in our categories, but gives us a tremendous margin advantage.

What was the other?

The other part was now that you've done the remerchandising, if you look out to next spring, when it would be a year since you did it, how is the store going to be different, because now that you have the tweaks that are going on?

What should we see that's different today?

Are they in the percentage of space that you allocate to different categories or maybe what you want to see in there?

I don't know if I want to let that information out right now.

We've got some pretty exciting ideas.

You'll see the assortments and the space allocations that's appropriate, and then we have some much bigger ideas we'll be working on for next year that will be opening up more markets and widening our net on our consumer base.

It's too early to talk about in case our competition is sitting on this call.

Thank you.

We'll be watching closely.

Thank you.

Our next question comes from the site of James Grubman from Solomon Smith Barney.

[ no response ]

Once again, this question is for James Grubman from Solomon Smith Barney; are you there, sire?

Our next questions from the site of Jennifer Lammers with Lammers Equity Research.

Go ahead, please.

A few clarifications.

Could you give us the date of the fall catalog drop, and, also, did you give us guidance for inventory at the end of this quarter?

The fall lighting sale catalog is in home September 24th.

[ overlapping speakers ]

The next one coming up is right after Labor Day, on September 3rd.

And could you tell me what the dates are of the lighting sale and what they were last year?

I don't have that right in front of me.

This year, we're planning on running the event -- [ overlapping speakers ]

-- a couple days shorter than last year.

It's a 4-1/2 week event versus last year, started the 24th.

In conjunction with the catalog drop on the 24th and goes that the 19th, I believe, of October.

Almost through the end of October.

Great.

Are you offering the same types of discounts as last year?

Actually, I think we went a little deeper in some cases.

Overall it's pretty much the same, Gary.

But with margin enhancement really.

Okay.

As you spoke to, more direct import.

Could I ask you why you are going direct with the lighting?

You talked about getting it direct -- delivered directly instead of going through the U.S. sources that you had before.

Is it the same sources of lighting?

Domestic resource, Robert lighting who is our top vendor in the lighting category, and previously, they were using their manufacturers in Asia to manufacture the goods, the goods were received into his warehouse in the U.S., they had to process all the goods, they had to do all the paperwork and all the handling and then ship them to us, so it was extra handling, extra paperwork.

We're taking the goods direct L Cs, taking orders shipped from the time they ship out of Asia and hit the water.

They don't have to go through his warehouses, be handled, then shipped to our warehouses.

It eliminates a lot of work and costs, allows us to have better margins and quicker deliveries and shorter lead times.

But the downside is do you have return privileges?

Yeah, same return privileges.

Nothing is different.

This is a follow-up to an earlier question.

You've guided direct sales to be 50% and they came in at 40, and I guess my question is when you made your earlier guidance in May that you knew you were going to be up against the clearance and all the other stuff from last year, so I'm wondering if you can tell us what you think missed in your opinion.

Was it furniture sales, so what category wasn't able to lift you up to where you thought you would be?

Well, a couple things.

One, again, we knew we were up against the clearance sales, but I've been in retail 25 years and I've never been up against an entire half of a store markdown, so we were up against a major transition.

We were kind of throwing darts and giving it our best guess.

In some cases people had said to me why did you even come out with any guidance?

My view on that, a lot of people told us if you don't come out with guidance, then someone will come out with your own guidance.

You better give us your best estimates on what it will be.

We gave us your best guesses, coming into an entirely new strategy against a complete repositioning and transition time from a year ago, and we kind of guessed on the sales and margins and knew we'd be in some kind of ballpark.

We were short on the sales and above on the margins.

Throughout the quarter, we're going to make our best decisions on what's the best way to run the business as we went forward.

Some of the businesses, new core businesses ramped up slower.

We got out of the gates slower.

Window treatments had a slower ramp, window hardware was late, so we missed sales early in the quarter on some of those programs.

Our rugs were very late, and when we got the rugs, they were not performing, so that drug us down.

Basically a lot of it was the building, the weekly building of the core businesses were -- we were kind of below where we thought, and the impact of the clearance last year was greater than we thought.

We thought we'd probably overcome more of it.

One other significant point as I think about last year is we had a tremendous, tremendous response to our outdoor business and our summer business particularly outdoor furniture, and we underbought that, quite frankly, and we left a lot of business on the table in the June and July period, and we'll do that a lot smarter next year.

I was wondering, someone was talking about traffic earlier, if you didn't anticipate that this -- what did you call it, moon pie customer, not only being there for the little toys and other knickknacks you sold, you'd have a hard time to convert them into buying $3,000 rugs and buying bath hardware, so I'm wondering if that was a surprise to you?

Transitioning the moon pie customer into a furniture customer?

Those are the harder transitions, people that were just buying $2 to $5 items, maybe we didn't get as many people transitioned, but -- so we're quite happy with the response rate in a lot of these new categories.

So we took a lot of risks here.

We've done -- we've done a lot of things right.

So we changed about as much in one year as I think as we could, as much as I know anybody else who's tried to change in a one-year period, and right out of the gates, I think we got some pretty good numbers.

We're feeling pretty confident.

One more question Gary.

The new hire, Lisa, from the Gap, this is a new position, correct?

This is a new position.

And this sounds like it overlaps with what Steven Gordon does.

Is he transitioning out?

He's at a remote location.

Steven doesn't act as the general merchandise manager as the company.

I've acted as the general merchandise manager over the last 18 months since I've been here.

Previously to my arrival there was a general merchandise manager in the company.

Steven is highly involved as I have been in the product selection, but as far as someone really acting as general merchandise manager and running the business, day today, week to week, I've filled that role in the Larson year and a half.

Corey straight left the week I'd arrived.

From the first two years, I played the position of GMM and CEO.

We're probably moving a little earlier than we previously planned, but quite frankly, someone like Lisa doesn't come along all the time, and this is a position she was excited about, we're excited about her, it works with her, where she wants to live, she got a fashion for the home business, so if you can get this -- for a company our size, a $400 million company, get someone who's run $8 billion for the business and had a long and successful run with a company like the Gap, this is like a gift.

So we're very excited to have her on the team.

She's going to allow myself to manage the company more broadly.

I think we're very -- we spent -- probably one of the long courtships over the last three or four months.

We feel very good with all the chemistry.

She met with the team players.

Everybody loves her.

She's excited; we're excited.

We think it's going to be a tremendous addition.

One more question, operator and then we'll wrap it up.

Thank you.

Our final question comes from the site of Rob Wilson with Retail Stock Investments.

Go ahead, please.

Follow-up with one thing.

Gary, you're telling us you're going to be profitable this year; that's a great job turning this thing around.

Can we look out a year?

I don't want to pin you down on a number, but on an operating profit basis, where do you go from here?

Do you go from a break even operating profit to let's say a positive 5 operating profit next year and how do you get there?

If we kind of guided in our -- I think in our last quarter, we said the first full 12 months, the 1st quarter this year was last quarter of really the transition and the old rest up.

The first full 12 months, we expect to earn around 3% in the new format, and we think by the second year, we can be 4 to 5% operating margins, and by the third year, 6 to 7% operating margins and continue to ramp that up and get to 8, 9, and 10 long-term, but we feel fairly confident over the next couple of years.

We understand where the leverage points are, we understand the comps we got to get, where we can get the margin increases and upsides, and based on today's trends, we're feeling very optimistic that we'll hit our 3% range in the first full 12 months and get to 4 to 5% in the following year and 6 to 7% in the year after.

Okay.

Fair enough.

Thank you.

Okay, thank you.

Okay, at this point, thank you, everybody, for joining our call.

I thank you for the interest in Restoration Hardware.

We'll look forward to talking to you next quarter.