RH (RH) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Restoration Hardware Holdings Inc first-quarter 2013 earnings conference call.

My name is Taisha, and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Cammeron McLaughlin, Investor Relations.

Please proceed.

Good afternoon, everyone.

Thank you for joining us for Restoration Hardware Holdings first-quarter fiscal 2013 financial results conference call.

Joining me today are Carlos Alberini, Chief Executive Officer, Gary Friedman, Chairman Emeritus, Creator and Curator, and Karen Boone, Chief Financial Officer.

Before turning the call over to Carlos, I would like to remind you of our standard 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 for our business and other matters referenced in our financial results press release.

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 financial results press release 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 or any revision to these forward-looking statements in light of new information or future events.

Also during our call today, we will discuss a number of non-GAAP financial measures, including adjusted operating income, adjusted EBITDA, adjusted net income and adjusted earnings per share.

These measures 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, as well as a reconciliation of adjusted P&L items on page 10.

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

With that, I will now I turn the call over to Carlos.

Thank you, Cammeron.

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

I would like to start with an overview of our first-quarter performance, and then share our progress to date on our long-term strategy.

Gary will then provide an update on our current business trends, and discuss the new business launches we announced today.

Karen will close our prepared comments, with a review of our first-quarter financial results, and update you on our outlook for 2013.

After that, we will open the call for your questions.

We are extremely pleased with our first-quarter performance and financial results.

Once again, we delivered industry-leading sales growth with a net revenue increase of 38%, on top of an 18% increase last year.

This performance marks our 13th consecutive quarter of double-digit net revenue growth during a time when we continued to contract our store base.

As we previously announced, during the quarter we experienced strong customer response to our product assortment and benefited from our better inventory position.

Contributing to our strong top line growth was an outstanding 41% comparable store sales increase, which was on top of a 26% comp increase in the year ago quarter.

In the period we drove better than expected profitability, while investing in our infrastructure and new businesses to support our growth.

Our business remains strong, and we continue to gain market share.

Our growth has been driven by the expansion of our assortment.

However, as we have said before, less than 20% of our current assortment is displayed in our retail galleries today.

And this number becomes even smaller, when you consider the continued evolution of our assortment.

Time and time again, products that are displayed at retail experience a 50% to150% lift.

The transformation of our real estate remains the key to unlocking the true value of our assortment.

This is one of our highest priorities for the Company, and it is core to our long-term growth strategy.

We are still in the very early stages of this transformation, but let me update you on our progress.

We now have four -- five -- excuse me -- five Full Line Design Galleries, and the results from all of them continue to exceed our expectations.

Los Angeles and Houston are now included in our reported comparable store sales figure.

Both markets drove comp growth in excess of 50% in the quarter, and have delivered over 38% growth since their first anniversary.

Both of these galleries also continue to deliver annual sales per [sales] square foot in excess of $1,500.

Our Full Line Design Gallery in Scottsdale has delivered store demand growth in that market of approximately 95% since its opening in November of 2012, and is delivering annual sales per sales square foot of about $1,000.

The early reads from our Boston Full Line Design Gallery are strong and ahead of our expectations as well, delivering store demand growth in that market of approximately 125% since we opened it in April of 2013.

We also opened our Indianapolis Gallery in April, and store demand in that location has reached nearly 200% growth since opening.

We are receiving overwhelming support and interest from the landowner community, with offers to become an anchor tenant in several of the most prestigious shopping centers in North America.

We just returned from a great ICSC conference in Las Vegas, and our deal pipeline is robust, a further confirmation of this enthusiasm.

These anchor tenant deals will provide opportunities for higher sales, increased earnings, lower capital investment and higher IRIC that previously expected in our initial target store economics.

They also provide for increased square footage to accommodate the continued expansion of our core assortment, our Small Spaces collection, Baby & Child, Objects of Curiosity, as well as any of the future new businesses that we are considering.

Based on the outperformance that we are seeing, coupled with the improved [deal] economics, we now see opportunities to have Full Line Design Galleries in even more than the 50 markets that we originally targeted.

Currently, we are in negotiations for sites in over 30 markets in North America, including New York, Chicago, Miami, Denver, Nashville, New Orleans and San Diego among many others.

We plan to open our next Full Line Design Galleries in Greenwich, Connecticut and Atlanta in 2014, and we expect increased opening activity beginning in 2015 and forward.

Regarding our infrastructure, we continue to make investments to support our operations and position the Company for long-term growth.

During the second-quarter, we will open our third furniture DC near Dallas, Texas.

This facility will also have a customer care center.

During this period, we will also complete the expansion of our Ohio shelf stock facility.

We continue to make progress with our in-home delivery initiative, and are on track to have in-source tasks in seven of our top markets by the end of this year.

We have an amazing team, and continue to attract some of the best talent in the industry.

As we announced today, Richard Harvey has joined our team as Chief Merchandising Officer of our new business, RH Kitchen and Tableware.

Richard is arguably the most experienced and talented leader in this industry, and we are thrilled to welcome him to our team.

We are very pleased with the strength of our business, and remain confident in the strategic direction of our Company.

We have tremendous growth opportunities ahead, and we have a terrific team to execute our vision.

We believe we are disrupting the marketplace and gaining significant market share.

We have a powerful business model that we believe will capitalize on this opportunity, and drive operating margin expansion and increase earnings.

We look forward to continuing to update you on our progress.

With that, I would like to now turn this over to Gary.

Gary?

Thank you, Carlos, and good afternoon, everyone.

I am going to spend some time updating you on the performance of our business including our new and developing concept, and speak to some of the new launches planned for this year and next.

First, let me start by trying to frame the bigger picture.

Our continued industry-leading performance is a reflection of our demonstrated ability to innovate, curate and integrate new products, businesses and experiences across our multiple channels.

Our growth has been driven by a combination of new products, new categories, new businesses, and the re-conceptulization of both of our retail and direct platforms.

We believe we are not only building a proprietary offering, but also a completely new ecosystem to experience our collections and inspire our customers.

Both these factors are producing industry-leading sales per square foot in our galleries, and with continued innovation and refinement, will also result in what believe will be one of the most compelling and productive multi-channel experiences in retail.

What is important to note is that we are in the very beginning stages of our growth story.

Our results to date have been restricted by the fact that our assortment has been trapped in legacy real estate that was designed for an entirely different Company.

The transformation of our real estate as Carlos mentioned, will unlock the true value of what we -- what we have in our building, and will have an exponential effect on both our top and bottom line growth and financial performance.

While many of our initiatives, such as bigger catalogs and larger stores may not be intuitive, and seem to move in the opposite direction of the rest of the industry fascinated by digital trend, we drive ourselves to think, as we say, until it hurts, so we can see what others can't see, so we can do what others can't do.

The results of our initial test stores in Los Angeles, Houston and Scottsdale have provided the learnings, and the new anchor tenant deal structure that Carlos mentioned, gives us the confidence that we can now further expand our footprint and dominance in the marketplace.

This will lead to significantly higher sales and earnings than our previous expectations in each and every market.

As you think about our more immediate opportunities, let me point you to the performance of our Spring Collection, represented across our six Source Book titles and 1,600 pages that just arrived in homes last month.

We are extremely pleased with the early response to our effort to expand the offering and increase our market share.

Our expanded assortments of furniture, finishes and color, as well as the response to our Small Spaces and Baby & Child collections are driving strong results.

Additionally, the early response to our Tableware and Objects of Curiosity has been above our initial plans, and we are excited to watch the results as these collections roll out into our retail galleries in the second half of this year.

We are extremely excited to announce that Richard Harvey has joined us as Chief Merchandising officer for RH Kitchen and Tableware.

As you know Richard had a distinguished career at William Sonoma, most recently as President of the billion dollar William Sonoma brand.

I have had the pleasure of working with Richard for more than 10 years while at William Sonoma, where we created the Grande Cuisine store concept.

We are both thrilled to once again have an opportunity to reimagine and reinvent this very important part of the home.

As mentioned RH Kitchen and Tableware will be a meaningful part of our next-generation design galleries, and will be launched with a distinctive and unique catalog and online experience in late 2014.

Also announced today is our plans to launch RH Antiquity.

Our plan is to develop an online platform of curated antiques that will fill customer demand, that we currently see in our galleries.

We see this as a highly fragmented and un-edited $25 billion market.

Our plan is to launch this business in late '14 or early '15.

I would be remiss not to mention our fall launch of RH Contemporary Art.

As discussed, we will launch an immersive online platform featuring close to 50 international artists, and open our first Contemporary Art Gallery in the Chelsea Meatpacking Arts District of New York City.

Our inaugural exhibition of Autonomy will feature existing and newly-commissioned art works by rAndom International, the creators of the Rain Room which is on exhibit at the Museum of Modern Art in New York, courtesy of RH Contemporary Art until the end of July.

As you might know the Rain Room have been the modern pieces of modern art in recent history, as evidenced by the three to eight hour wait times to view it.

We commissioned the first edition of the Rain Room in the world, and are thrilled to exhibit the works of these extremely creative and innovative team at rAndom International at our inaugural exhibit this Fall.

In summary, we are in the very early stages of a retail renaissance, and believe we can curate a world and a business that goes far beyond the four walls of the home.

With that, let me turn the call over to Karen.

Thanks, Gary, and good afternoon, everyone.

I will first take you through some of the financial details of our first-quarter performance, and will then provide our outlook for the second-quarter and the revised expectations for the full Fiscal Year.

We are extremely pleased with our first-quarter performance.

This is a record first-quarter for the Company.

We delivered industry-leading revenue and comp growth, and reported first-quarter operating profitability for the first time in the history of the Company.

Total revenue for the first-quarter of 2013 increased 38% to $301 million.

Our comparable store sales increased 41% during the period, with our Full Line Design Galleries outpacing the rest of the fleet.

We also operated fewer stores overall, with 70 galleries open at the end of the first-quarter versus the 74 we had open last year.

Our direct sales increased 38% to $142 million, on top of the 20% increase for the same period last year.

The strong top line growth across all of our channels was driven by the customer's overwhelming response to our dominant assortment and product offering, as we believe we are continuing to take market share and disrupt this highly fragmented home furnishings market.

All of our product categories experienced significant growth during the period, with our furniture business leading the way.

Gross profit in the first-quarter increased 35% and reached $101.9 million.

Gross margin decreased to 32.8%(sic-see press release "33.8%") from 34.5% last year due to changes in product mix, strategic pricing on new product introductions, and increased shipping costs resulting from a higher percentage of furniture sales during the period.

These increases were partially offset by leverage on the fixed portion of our store and distribution center occupancy costs.

Turning to expenses, our total adjusted SG&A expenses were $97.3 million in the first-quarter versus $75.9 million in the prior year.

The increase in SG&A dollars was primarily driven by increases in employment, store opening and corporate occupancy costs, and other variable expenses based on our increased revenue.

Our adjusted SG&A excludes variable non-cash stock compensation expense related to the vesting of certain performance-based shares, and legal and other professional fees incurred in connection with our recent follow-on offering.

As a percentage of net revenues, adjusted SG&A expenses decreased by 250 basis points.

This decrease was due to lower advertising expense as a percentage of sales, and leverage on our fixed payroll and other corporate expenses.

Adjusted net income for the first-quarter increased to $2.3 million, up from a loss of $1.3 million in the prior year.

Adjusted diluted EPS was $0.06 during the quarter, based on 38.7 million diluted shares outstanding.

Adjusted net income was calculated based on a normalized 40% effective tax rate, and excludes the impact of non-deductible stock compensation.

Turning to the balance sheet, inventory levels at the end of the first-quarter were $366 million, up 35% from last year.

This increase is consistent with our strategy to increase inventory levels to improve our in-stock position, reduce back orders, improve service levels and drive higher sales.

Our first-quarter benefited from this strategy, as our strong inventory position allows us to ship and deliver products earlier than anticipated.

With respect to our credit line, we ended the quarter with $114 million outstanding on our $417 million credit facility.

Our capital expenditures were $9.7 million in the first-quarter, and we continue to expect capital expenditures in the range of $95 million to $100 million for the full fiscal year.

Over half of our 2013 spend will be invested in our real estate transformation, with the remainder used to fund supply chain, and other infrastructure investments to support our growth.

Turning to guidance, let me start with the second-quarter.

As Gary mentioned, we are extremely pleased with our second-quarter trend, especially during the last two weeks once the Spring Source Books were fully in home.

In the second-quarter, we expect to grow revenues between 28% to 30% to $375 million to $380 million.

We expect product margins to be consistent with first-quarter trends.

However, our occupancy leverage will not be as significant due to the investments we are making in our distribution center network.

Our adjusted net income for the second-quarter of 2013 is expected to be in the range of $15.7 million to $16.5 million, and assumes an adjusted 40% tax rate.

We are providing second-quarter adjusted EPS guidance in the range of $0.40 to $0.42 which assumes 39.6 million diluted shares.

This share count reflects the addition of certain performance-based shares, as a result of our recent stock price performance.

With respect to the full-year, we are increasing our 2013 revenue growth target to a range of 23% to 27%, from our prior expectation of 19% to 22%.

This will result in net revenues on the range of $1.47 billion to $1.51 billion.

Our updated revenue outlook for the year represents growth in the range of 26% to 29% on a 52-week comparable basis.

We expect adjusted net income to grow between 48% and 54% to a range of $55.8 million to $58.2 million in fiscal 2013, assuming a normalized 40% tax rate.

We are providing full-year adjusted EPS guidance in the range of $1.41 to $1.47, which assumes 39.7 million diluted shares outstanding.

In closing, we are extremely pleased with our record first-quarter performance.

We delivered industry-leading revenue and comp growth, and reported first-quarter operating profitability for the first time in the history of the Company.

Our business remains strong, and we are optimistic about our opportunities for the remainder of the year.

We have a clear vision and solid growth strategy which we believe will consistently deliver long-term revenue growth in the mid to high teens and earnings growth of 20%.

With that, I would now like to open up the lines for any questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Lorraine Hutchinson from Bank of America.

Please proceed.

Thank you.

Good afternoon, everyone.

Hi, Lorraine.

Karen, I believe there was a shift in timing of the catalog drop, and the expectations for the second-quarter were for revenue to be a little bit lower because of this.

Can you just comment on what you are seeing quarter-to-date?

Yes, I think let me just start with that, Lorraine.

You are absolutely right.

We expected business to be somewhat impacted in, especially in the second-quarter because of the later drop of the books.

And we still have that expectation relatively speaking.

That being said, since the books dropped in homes, the performance has exceeded our expectations, and that is what has triggered a pretty healthy guidance today.

So you are absolutely right.

We would expect that third-quarter will benefit more significantly as a result of that shift, and based on the current performance that is even more of -- up to date.

Great.

And then as far as new store openings go, are there anymore Design Galleries planned for this year?

And could there potentially be upside to the two that you have planned next year if some of these deals move more quickly than you expected?

No.

No, we, as you know, this takes a lot of time, of development, and the process is lengthy.

So in terms of brand-new locations, we do not anticipate that.

We will be expanding one pretty significant location towards the end of this year.

It is an existing location that is going to give us a lot more space, and we are very excited about that.

We haven't announced that yet.

Great, thank you.

Your next question comes from the line of Matthew Fassler from Goldman Sachs.

Please proceed.

Hello, good afternoon.

First question, your gross margin decline year-on-year was a bit smaller in the first-quarter, than it had been in the fourth-quarter.

And obviously, your comp was bigger and perhaps leverage of fixed cost was the decisive factor there.

But if you could comment in general on your promotional stance, and perhaps how its evolved since the end of last year?

And just kind of tell us, whether in fact better fixed cost leverage was responsible for the smaller decline?

Yes, hi, Matt.

This is Karen.

You are exactly right, as it relates to Q1.

The higher top line growth did allow us to basically have better leverage on the fixed occupancy cost, in both the retail stores and the DCs.

And then with Q2, as we mentioned that will decrease a bit when we have some of the investments coming online, as we open our Dallas furniture facility and expand our Ohio shelf stock facility.

So that is just some of the timing and the expectation versus Q1.

As it relates to overall promotion, I think Q1, relative to the prior year is kind of where we expected to be.

There is a shift of one event that we moved to coincide with the timing of the book.

So there was one event that shifted from Q -- the end of Q1 to the beginning of Q2.

Great.

A second question if I could.

I know there was a point in time last year when you reached out to more households with your catalog drops, and you grew the base to some degree.

How did you treat the Spring catalog this year in terms of households?

Is that number still growing, are you tapering that list yet?

What were you seeing kind of year-on-year?

Hi, Matt, this is Gary.

We did.

And we communicated that we tested the depth of our file last Fall.

And we are working kind of quarter to quarter to optimize our mailings as we go forward though.

And obviously, with the fish biting as we are seeing in the second-quarter right now, we are actually relooking at our plans for the Fall book, as we look forward and determining how deep we go.

In the direct business, as you see response rates go up to your assortments, you want to take that opportunity and mail into that.

And especially if there is any market trends that are positive.

And we believe everybody probably in home is being affected by the good news and the rebound of the housing market.

Great.

Thanks.

Thank you, Matt.

Your next question comes from the line of Neely Tamminga from Piper Jaffrey.

Please proceed.

Good afternoon, and congratulations on a fantastic performance this quarter, and as you were kicking off Q2.

Thank you.

(Multiple Speakers).

I have got a question for Carlos, and one for Gary if I may.

First for you Carlos.

You did mention the ICSC conference, and that there is clearly an appetite for the RH brand increased.

What does this mean in terms of where the store size is, in the context of the ICSC conversations, and where maybe some of the availability of that space is?

Could you comment on that?

Yes, I think we will take this together with Gary.

I -- let me just start by saying, that we are thrilled with a response that we got during the convention, and the enthusiasm is across the board.

We have a lot of new opportunities that we are talking to, a lot of lenders in many different markets, and this goes even beyond the states into Canada.

The size of the locations, and obviously like we have said in the past, is going to depend on each market, but we see big opportunities for a larger box.

I don't know Gary, do you want to jump in?

Yes, I would say, there is an opportunity -- if you can think about it, start with the fact that we have recently communicated that about 20% of our current assortment is available at retail.

And we know when we put goods into the retail marketplace, and they are deflated retail, we get a meaningful lift on those goods.

So as we tested the first few stores -- think about Scottsdale and Houston and Los Angeles, we have had roughly 15,000 to 20,000 square feet of selling.

And we have had somewhere between 25% to 30% of our assortment displayed in the stores.

Also think about the fact, that we are expanding the assortment since we opened those stores.

So we have had the Tableware catalog launch.

We got the Objects of Curiosity catalog launch.

We are expanding the Rugs business, the Leather business.

Now as we just announced RH Kitchen, and as well as since then we have expanded our Small Spaces collection and Baby & Child collection.

So we believe we can merchandise a significantly larger footprint.

But what we wanted to determine is, how to take that step by step, and how do you optimize the box if you will?

What was significantly different about what is happening now, and what we have tried to communicate, and to kind of give it to you in broad strokes.

Because until we sign a meaningfully number of these deals, we will come back to you with target store economics.

But I think about it from the fact that there is meaningfully larger footprints that we will have, and previously communicated.

They will have lower rent per square foot.

They will have higher landlord build-out contributions per square foot, so less capital per square foot than we were planning from the Company.

And they will lead to meaningfully higher sales, meaningfully higher earnings, profitability per store.

And so, if you do stand back and think about every market, we will extract significantly more sales and earnings out of every market than we -- than our original expectation.

(Multiple Speakers).

Because of this dynamic, now we see that the universe of opportunities here to really build and develop this new Full Line Design Gallery goes beyond what we have targeted, as the markets, we see a larger universe.

That's really encouraging and helpful.

Thank you for that.

And just Gary, if you could just a little bit on your Richard Harvey announcement, I think that that's a great add, well done there, Restoration Hardware, RH Kitchen and Tableware.

Could you help us contextualize how big or significant, that business could be to the total over time?

I mean, is this a 5% or is this something more than that?

Thank you.

I would give away too much competitive secrets, so I am trying to curb my enthusiasm right now.

I would just say we are -- we think it is going to be a meaningful business, it is going to have a meaningful footprint in the new next-generation Design Galleries.

It is going to have its own independent catalog and web experience.

We think there is a just a massive opportunity here.

We don't play in this area at all today.

So think about it from furniture furnishings, all the components that -- the number one room that is remodeled in homes is the kitchen.

So and that is where the significant spending is.

And we believe we can be a dominant player there, and have a real platform.

Thank you, and best of luck.

Thank you.

Your next question comes from the line of Daniel Hofkin from William Blair & Company.

Please proceed.

Hi, good afternoon.

I will add my congratulations.

Thank you, Dan.

Just, guess thinking about particularly strong sales trends the last couple months, and what seems to be carrying through, on an even underlying basis into the second-quarter.

Where do you feel like the -- is it mostly or all traffic, or is there some additional kind of ticket benefit from higher pull-through of furniture?

I would just be interested in your -- how you would describe that?

Yes, Dan, as you know, we do not disclose those types of stats.

I think that -- I am sure you can read between the lines, because the business has been so strong, and so healthy, and most of those measurements are up.

We do not hold traffic counters.

So that' is not something that we can even refer to.

But overall, you will see a combination of average order value increase and more transactions.

Okay, great.

And as you are, I guess within categories, can you discuss the margin trends?

Not quanitfying it, but just directionally, putting aside the mix differences and some of the investment and supply chain, what you are seeing within merchandise categories?

Yes, we have -- I am sorry, but we have not disclosed margins by product categories.

What we have said in the past is that, (inaudible) the furniture business does carry a lower margin structure, especially when you consider shipping costs that are significantly higher than the rest of the business, and those trends are ongoing.

Okay.

Thank you very much.

Thank you, Dan.

Thanks, Dan.

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

Please proceed.

Hi.

A couple questions first.

If we look at the increased sales guidance for the year and the associated net income increase, I mean you kind of get a flow through margin in the mid teens.

I think that is the way the math works.

So can you just talk about -- I know you are investing a lot in investments -- but how should we think about that, as we look beyond kind of this initial investment phase?

What do you think the flowthrough margin profile is of the business, maybe a steady-state is probably way out -- but what can you help us with on that?

Yes, I guess, just -- this is Karen.

To start, because I want to make sure you fully understand the nature of the investments we are making.

So the supply chain, because we have had this question ongoing, so just to level set, we did have an investment in Q4 of last year, with the expansion of the Baltimore furniture facility.

So we won't anniversary that until the back half, and this next coming Q4 of '13.

And then in this quarter, and second-quarter, we are going to be opening as Carlos mentioned the Dallas furniture facility and expanding our Ohio shelf stock.

So that will anniversary the back half of next year.

So those are two big investments on the supply chain side.

But there is also just other operating investments, when it comes to just building new businesses and building teams.

I think Gary, outlined a lot of the different things that have come online between Tableware, and even some of the things that we are doing now with RH Kitchen.

Now those investments will continue to have costs associated with them, before we have the associated revenue.

Along with a lot of the real estate transformation as we build the teams and expand those stores, we pay rent sometimes before the stores open.

So the flow through model right now in the short-term is not necessarily reflective of what we expect long-term.

We haven't updated our store targets and economics, so we aren't ready to land a very specific number, but it is north of where we are now.

Yes, I would just say, if you just stand back and think about what all the development that' is happening here -- first start with what is happening in our interiors source book and the expansion of the furniture and lighting businesses and textile businesses there.

So that's one.

But then, just as Gary was saying, we developed a Baby & Child business and continue to, the Small Spaces business, Contemporary Art, Objects of Curiosity, Tableware.

We have just announced that we will have a new catalog RH Rugs, another new catalog RH Leather, and now announcing RH Kitchen.

The amount of product and new businesses that are being developed for this new platform are as extensive as probably anything in retail.

And the fact, that we can still do that, and lever the business and grow earnings and invest in the infrastructure is I think, quite a feat in its own.

And you can imagine it is -- and none of these businesses by the way have a retail presence.

So none of them are benefiting from the fact they are in the retail marketplaces.

As we transform this real estate, cycle the investments in the infrastructure, and get into the right kind of real estate, the right kind of economic model, this will look like an entirely different business from an economic point of view.

And what I would say, you asked a question about what should we expect, the great thing about all this is that we are seeing this growth in earnings, in spite of our absorbing all those investments.

And we have not really in reality started to execute on our real estate transformation strategy.

Once you start seeing that, the growth and the opportunity for leverage, when you combine the productivity that we are seeing and the deal economics that we are being offered, and you put it all into one model, you can see a significant opportunity for operating margin expansion.

I think I said during my remarks, that we expect to start seeing a pretty significant increase in opening activity in 2015.

So once you start pegging those new openings into '15 and going forward, you are going to see a tremendous opportunity for leveraging, and the earnings growth should by far exceed the top line growth.

Okay.

That's very helpful.

Thank you very much.

Just one other question.

Can you give us a sense of what you are seeing in terms of return rates?

I am trying to understand what the typical lag time might be between when a sale occurs, and then you will start to see the returns come in.

We have obviously seen a huge uptick in demand.

So just trying to understand where -- what we should be expecting on that front?

Thank you.

I would just think of that from the fact that our return rates have been relatively consistent.

And we would expect them to track demand, as demand goes up, return rates will be as a percentage of sales.

We are working hard to decrease return rates, and improve quality and so on and so forth, but I wouldn't think of any anomalies necessarily.

Okay, great.

Thanks very much.

Thank you.

Your next question comes from the line of Matt Nemer from Wells Fargo Securities.

Please proceed.

Thanks.

Good afternoon everyone.

Hi, Matt.

Hi, Matt.

So my first question is if we look at the new full-year guidance, I would be curious which new product initiatives are having the biggest impact between Baby, Small Spaces, Tableware, Objects, is it possible to sort of rank order the impact of where you are seeing incremental growth?

Yes, it's probably nothing we would want our competition to know, Matt so.

But we are in context of our plans, we are very pleased with each one of them.

Okay.

And then kind of a follow-up to Peter's question.

If we look at the new product lines that you have announced today like Leather and Rug and Kitchen, how much incremental leverage do they get against the infrastructure versus prior launches like Baby?

Do each require sort of a full organizational build-out, or is the flow through on those launches probably higher?

Better flow through on things like Rugs and Leather, and in Kitchen we will build-out an organization.

(Multiple Speakers).

Okay.

And then lastly, if we given the success of your real estate discussions, it sounds like there is a lot of leases in the pipeline.

How much capacity do you have as an organization in terms of store opening teams and managers?

How many stores can you open in a given year, how many Full Line stores and does there need to be a lot of build-out to do, say north of five?

So the way we look at this is the other way around.

We think about the opportunity and how fast we can go.

And then how do we build the organizational strength to be able to accomplish that.

So and frankly, we are very excited about the talent that we are talking to.

And we are very confident that we are going to be able to put the resources in place so that we can grow it really fast.

The -- you should not be surprised to see that we could open anywhere north of 10 to 15 units in any particular year.

Okay, great.

That's helpful.

Congratulations.

Thank you.

Thank you.

Thanks, Matt.

Your next question comes from the line of Janet Kloppenburg from JJK Research.

Please proceed.

Hi, everybody.

Congratulations on a nice quarter.

Hi, Janet.

Thank you, Janet.

Hi.

Lots of good news.

Carlos, did I just hear you say that you could open north of 15 over time in a year?

Is that what I just said?

You shouldn't be surprised to see that we could open anywhere between 10 and 15 units, and it could even be more frankly, because the way we work.

Right.

So but that would be after 2015?

Well, it's because of the timeline for any one of these projects.

The timeline is pretty lengthy.

Okay.

And so projects that we are discussing today, you shouldn't expect that we will be able to open before 18 to 24 months from now.

Okay.

So you are thinking about '15 will be the first year, where you will see that increased level of activity.

Okay, great.

Well, that's very exciting.

And Gary just a couple of questions on RH Kitchen and Tableware.

I mean, would you ever consider having that as a stand-alone format, or is that something that is being considered to be umbrella-ed into -- in the Restoration Hardware stores?

Yes, I mean, I think many of them could be considered stand-alone, Janet, just like Baby & Child could be inside or outside.

Right.

This could be inside or outside.

There is tremendous economic advantages of figuring out how to integrate these businesses into one box.

And going outside with a kind of stand-alone, I think would put us at a disadvantage of paying much higher --

Okay.

Mall rents and et cetera.

So one of the things we are seeing here is the advantage of integrating these businesses into an entirely unique shopping experience that the world has never seen.

But think about it as a meaningful footprint inside that shopping experience, in a completely innovative way that no one has experienced before.

And would it be totally vertically-integrated, Gary?

In other words, even in some of the electronics and cookware areas, is that going to be your own brand, or are you considering using some of the national brands as well?

I think we are totally flexible.

We just want to have the best products, curate the best collection, present it in the most inspiring way.

And I think that what is great here is, the model we are building from a real estate and a direct perspective, is we believe long-term is going to establish competitive advantage from just the cost structure of the platform that we will be able to compete with anybody on almost any product.

Okay.

And on the Antiquities, are you working with a partner on that?

Is the sourcing structure of that business different than what you know in the home business?

And what is the margin profile, obviously you don't have to give me numbers, but some sort of qualitative look at the margin profile of that business?

Yes, a couple things.

I think, we are probably one of the biggest antique buyers in the world today.

Okay.

Right?

So if you think about it a lot of our products they are inspired by antiques.

That is what we do.

We travel the world, and we go to antique fairs, we go to flea markets all over the world.

And we work with great artisan partners that have deep experience in the antique market.

So we have multiple partnerships lined up and teed up that we have been communicating with and working on for awhile.

We have been thinking about this one for two or three years.

And when you stand back, and you think about a fragmented market, I mean it is a massively fragmented market.

There is really only been what I would call a couple of aggregation plays.

Right.

But they aren't editing plays.

So I think first dibs and [Michael Bruno] did a great job of being the first aggregator of our market, right?

But you still have got to schlep through all the crap,

Right.

To find the one good table or the good lamp.

And so people don't have that ability or patience to go through there, unless you are really a trained eye.

What we are going to do is very different.

We are going to edit.

We aren't going to aggregate, we are going to edit and curate.

And so the ability for our consumers, right, our customers to have a place, because nobody wants everything, people love to have antiques, and love to have one of a kind things in their home, is the ability to curate an amazing collection that is always new, changing, unique.

We know there is built up customer demand there today.

We know our customers spending a lot of money on this.

I mean, this is a $25 billion completely fragmented mom-and pop market.

With good margins.

Well, with -- I mean, how do you know what the margins are, right?

How do you compare?

It's all one of a kind.

Well, that's what I meant.

That is what I wanted you to bring out.

Yes.

(Multiple Speakers).

Carlos and I joke around when we think about the antiques market and the contemporary art market, we think this might have been the first time we ever had an appreciating inventory in our lives.

Right, okay.

Good.

I just wanted to make sure I was right that there was a premium margin opportunity there.

We believe there is, yes.

And lastly Karen, should we be expecting the gross profit margin to be compressed for the rest of the year, given the strength of the furniture business?

Or will we start -- do you think we'll start to anniversary some of that?

How should we be thinking about it?

Well, in the -- like I said in the back half, especially in Q4, we will anniversary the investment in the Baltimore facility.

Right.

But in addition, we haven't had as Gary mentioned tableware and objects in some of those businesses that are margin accretive, versus furniture haven't been displayed at retail yet.

So those will rollout and have a physical presence in the stores.

So we will see some of that benefit in the back half as well.

And is there a benefit to the margin from the infrastructure spending on distribution and delivery, Carlos, as those come online?

No, no.

In reality, because of the investments that we are making and they are considerable.

And also you should know, Janet, we are -- we have been investing in inventory too.

Right.

And the additional inventory obviously requires to be housed, and that requires additional DC capacity.

So all that is impacting our numbers in a pretty substantial way in this quarter.

Okay.

And I think it alleviates as we start cycling through some of those investments as we go towards the back of the year.

Okay.

But you shouldn't expect to see the kind of leverage that we experienced in occupancy, even this quarter, actually in the first-quarter.

So you should expect that this is going to be a soft landing, and it is going to take us a few quarters to really cycle through those investments, and therefore start seeing some opportunity for leverage and occupancy.

Okay, great.

Thanks so much.

Ladies and gentlemen, we have no more questions in the queue.

I would now like to turn the conference back over to Mr. Carlos Alberini.

Please proceed.

Well, thank you very much.

I just want to close by saying that we have never been more confident in the strategic direction than we have chosen for the Company.

We are super-excited here.

We have a disruptive and powerful business model that we believe will drive significant market share gains, and support our financial goals for many years to come.

And last but not least, we have an amazing team that is ready to execute.

So we look forward to continuing to update you on our progress.

Thank you very much for participating today.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.