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Operator
Good afternoon.
My name is Ben and I will be your conference operator today.
At this time, I would like to welcome everyone to the RH First Quarter Fiscal 2017 Q&A Conference Call.
(Operator Instructions)
I will now turn the call over to Cammeron McLaughlin.
Ma'am, you may begin.
Cammeron McLaughlin - SVP of IR & Strategy
Thank you.
Good afternoon, everyone.
Thank you for joining us for RH's First Quarter Fiscal 2017 Q&A Conference Call.
Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Karen Boone, Co-President, Chief Financial and Administrative Officer.
Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook for our business and other matters referenced in our press release issued today.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.
Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.
Also, during our call today, we may discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact on certain items.
You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.
A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com.
With that, I will turn it over to the operator to take our first question.
Operator
(Operator Instructions) Your first question comes from Michael Lasser from UBS.
Michael Lasser - MD and Equity Research Analyst of Consumer Hardlines
So you talked about being encouraged on some of the renewal rates you're seeing with respect to the Grey membership program.
Can you give us an explicit sense, quantitative sense, of what the renewal rates are and what you're assuming within your guidance as you look forward over the course of the year about renewals and new sign-ups?
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So we're not giving the specific renewal rates.
All we wanted to make sure we got across is that we did have a modest assumption for renewal rates and it is exceeding those expectations.
So overall, we, I guess, are really, really happy with the program just from what it's done both on the operational side of the business and what it's done from a marketing perspective in elevating the brand.
We also will benefit this year from higher recognition of the revenue because we won't have as much deferral.
But we're not giving a lot of specifics on very limited data metrics.
Michael Lasser - MD and Equity Research Analyst of Consumer Hardlines
And then my follow-up question is on the margin outlook for the second quarter [will be] impacted by the continued disposition and discounting of inventory.
Philosophically, how long is that going to last?
And does it suggest something about customer that you could potentially tap into who would buy RH products but are price-sensitive?
Because it does seem like you're making some sales on these, but it's not coming with much incremental profit.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure, so you're exactly right that Q2 is going to have a lower margin profile than what we had previously expected and kind of talked about.
So that is a result of 2 things.
We've spent a lot of time over the last few months and certainly over the last month or 2 on overall architecting the business.
But a big part of that has been D.C. network design.
And we continue to believe, and are even more positive in our kind of early thinking, that operating out of fewer facilities is the right thing for the business.
So we do plan to accelerate even further some of the outlet inventory optimization and getting out of some of that -- the second quality goods.
And the SKU rationalization effort that we began in earnest last year about this time will continue through the second quarter and into the third quarter, whereas before we thought it would be done and we've added further SKUs to that kind of list of what we're going to get out of and also we're just optimizing inventories to put into fewer facilities.
So that will have an impact on the margin profile.
The outlet business is just mostly second-quality good.
We don't have an intention to have that be a growth vehicle for the business.
This is kind of a means to the end in the short term.
Operator
Your next question comes from Steve Forbes from Guggenheim.
John Edward Heinbockel - Analyst
Heinbockel on for Steve.
Maybe talk a little bit about the investments that you're making in Hospitality and where those investments are coming, and how you think about ROI around those investments.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So the biggest investment is just around the team.
So I think we've shown on videos and talked about in the past about our fearless leader on the hospitality effort, Brendan Sodikoff is the President of RH Hospitality.
He has now hired what I consider to be a world-class team who is now getting ready to ramp the F&B experience in several of our new galleries this year.
And in virtually most, or if not all, of the galleries in the future will have an F&B experience similar to what we have kind of dabbled within and kind of introduced into Chicago.
So that's the biggest investment is on the people front.
Then when we open in each -- and then there's, of course, systems that go into operating at scale right now.
We had a small effort in Chicago, now we have to have systems in place to kind of scale that business.
And then when we open the individual locations, there's kind of typical preopening type costs that we would have for a gallery.
We have those same ones where we have to hire the team in advance of the opening and have testing food, testing the site, et cetera.
Gary G. Friedman - Chairman and CEO
Yes, I think -- this is Gary, I think the way to think about the investment in hospitality, which is a very, very different model than our core businesses, very people-intensive business, is if you think about opening a restaurant, we're opening restaurants and cafés this year, specifically in the second half of this year, you've got all the start-up costs happening and you don't have full year of sales.
So we believe the return on investment of these restaurants will be quite good because they don't have the inventory carrying cost of our core business, they don't have the back-end infrastructure of our core business.
As Karen said, you have some light systems, et cetera.
But you have the people-intensive focus of building and ramping the business.
But we expect in the first 12 months of these businesses that they will be positive cash flow businesses.
John Edward Heinbockel - Analyst
All right.
And then just secondly, on the reduced cadence of gallery openings.
How do -- obviously, now you've got to prioritize which ones you want to do sooner rather than later.
So how does that change your thinking at all?
I imagine it might, to some degree, which projects you want to tackle sooner, and I would guess they're -- the higher potential projects would come up more quickly, real estate dependent.
Gary G. Friedman - Chairman and CEO
That -- I think you're correct there.
We've got a list of priority stores ranked in volume, ranked in market opportunity.
But because we're a development-type business now, we're not doing typical retail leases inside a shopping center, where you could go to 1 or 2 shopping centers and take your pick of multiple locations.
Each one of our deals is a unique development deal to do galleries of our size.
So you can't always pick and choose when those developments are -- the opportunity is going to unveil itself.
So while we've got them ranked from top to bottom, there's times where an opportunity comes up like one we're opening in Nashville.
It might not have ranked at the top of the list, but the opportunity to have a significant location in the best development in Nashville is there.
You've got to take that opportunity because it may not come up again.
Operator
Your next question is from Matthew Fassler from Goldman Sachs.
Matthew Jermey Fassler - MD
My first question relates to just trying to discern what's transpiring in the full price piece of the business.
I know you have a lot of SKU rationalization.
How are you assessing what's transpiring with your core collections, for example, the new Modern book, the Outdoor book?
To the extent that you can look at the base business without some of the noise of SKU rat and the outlets and clearance activity, et cetera, how are you assessing the health of that piece of the business versus your expectations and even versus last year?
Gary G. Friedman - Chairman and CEO
Sure.
We -- Matt, it's Gary.
We feel really good about the core business.
If you think about the comparable number of up 9% or the total growth of 11% without Waterworks or the accelerated outlet warehouse sales, I think that indicates the core business is strong.
Your next question is probably how much of the 9% -- of that 11% is impacted by SKU rationalization in the business, we think there's an incremental 1 to 2 points in that number.
Matthew Jermey Fassler - MD
You got into my head, so you saved me that question.
Gary G. Friedman - Chairman and CEO
Yes, yes.
Yes, so think about the business at -- somewhere between 7% to 8% in the core business on the regular-priced part of the business.
Matthew Jermey Fassler - MD
Got it.
And then -- so the follow-up I will ask, it also relates to the hospitality and restaurant business following up a bit on John's question.
How do we think about -- because now you're going to have a couple of restaurants, and we know that Chicago was kind of enormous volume-wise.
And I think you said that the ROI is favorable.
How do we think about this impacting the geography of the P&L over time, both from the restaurant piece of the business in and of itself?
And then what happens to a gallery when you have a successful high-volume restaurant appended to it?
Gary G. Friedman - Chairman and CEO
Yes, Matt, for competitive reasons, we just don't want to talk about that.
You probably could see in the news, we're in a litigation about proprietary information regarding our hospitality business, et cetera.
So look, we believe the model is really compelling.
We're very excited about it.
We're building an organization to pursue it.
And it will have different dynamics to it.
As I said, it's -- you don't hold inventory, right?
Your inventory is pretty self-liquidating.
You don't need big back-end infrastructure for the business.
It drives significant additional traffic to our galleries, which we think creates incremental revenues.
And more importantly, I think it creates an environment and an experience that is unlike anything in our industry.
Yes, I think that if you went to the Chicago gallery and you spent several hours there and ate there, and for people who have been there, I think they're astonished at what a differentiated customer experience is created the way we've integrated it.
I mean, it's not just we've added a restaurant.
Other people have added restaurants, right?
You -- we've had -- a department close to us here just remodeled in the mall, I won't say the name, but they remodeled their whole store.
They expanded it.
They put in a brand-new restaurant.
You walk into the department store, you can't find -- you couldn't find the restaurant if your life depended on it.
You walk to the store, you go up the escalator, it's not on the first floor.
You get on -- get up the escalator to the second floor, you can't find it.
You walk through the children's department and then there's a little portal, and you go into a restaurant that has nothing to do with the brand or the retail experience of the store you're in.
We're doing something I think that's entirely different.
I don't think anybody's ever pursued a strategy like ours and integrated an F&B experience into a retail store like ours.
And I think we're advantaged from the sense we're a home business, right?
And homes have kitchens, homes have -- you cook in your home, you serve people in your home, you have hospitality in your home.
So we're taking the idea of home to another level and integrating it in a way that just -- it kind of amplifies the entire experience.
Operator
Your next question comes from Brian Nagel from Oppenheimer.
Brian William Nagel - MD and Senior Analyst
So I think to a certain extent my question maybe a follow-up to Matt's, just on the product that you're clearing.
So the question I have there -- and there's a [cold] piece that you all try to shove it together, but where is this product coming from?
Because if I go back to some of the initial commentary about clearing the products, it seemed to me that there was a distinct amount of product that was designated for clearance.
But now, I would gather that, that amount is actually getting bigger.
So is there more product that's now being cleared?
Or are you doing it faster?
And then the follow-on question I have is, with this clearance now spreading over multiple quarters, to what extent could this impact your ability to sell products full priced?
Is it potentially a condition that a customer would look for clearance activity within the brand?
Gary G. Friedman - Chairman and CEO
Sure.
Well, let's work backwards on that one.
Let's start with maybe Matt's question a few minutes ago, right, what is the -- how do we think about the health of our full-price business.
And we feel very good about the health of the full-price business.
We do believe the business in our full-price stores is being augmented by a point or 2 because some additional SKU rationalization efforts.
But a majority of the impact is coming from our outlet business and warehouse sales.
So we may expect that, that division grows slower next year in the future and also has significantly better margins in the future.
But where is the product coming from?
I think I've articulated on several conference calls over the last year or maybe more that I had a belief that our supply chain network design was somewhat flawed in the fact that we had too many distribution points.
And in a business like ours, where you got a high-ticket, low-velocity product that also has SKU dependency, putting that product in multiple distribution points can (inaudible) the inventory and can also put you in a position where you've got the inventory in the wrong place.
And so as we're redesigning and rearchitecting...
(technical difficulty)
Gary G. Friedman - Chairman and CEO
Sorry.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Someone's on the line.
Gary G. Friedman - Chairman and CEO
Yes, somebody -- yes, okay.
So I'm not sure what happened just there.
But yes, we believe that we should be operating the business out of fewer facilities.
We think there's going to be a significant production of inventory in the company and we're going to have a meaningfully better working capital model in the future here, and we're going to operate the business on significantly less operating cost.
So the closer we get to this and the deeper we get into what we believe is the right design for the operating platform, yes, it starts to unveil a clear path, and we believe we should move more quickly to the endpoint rather than less quickly.
So right now, in some cases, we're driving it faster, sell down the inventory to allow ourselves to have more flexibility to architect the back end of the business more correctly, more quickly.
So you're seeing higher revenues at lower margins, which is dragging down earnings, but it's also going to have a positive effect on cash flow and it's going to have a positive effect on getting to the optimal operating platform more quickly.
Brian William Nagel - MD and Senior Analyst
Got it.
So Gary, what -- is it fair to assume then that the planning process -- that Q2 then should be the last quarter where we see this outsized clearance activity?
Or could it spread into the back half of this year as well?
Gary G. Friedman - Chairman and CEO
Yes, I think if you think about what we said in the press release saying -- given our focus on the architecture of the new operating platform, maximizing cash flow, we may, as we're doing in the second quarter and fiscal year outlook, accelerate the rationalization of our product offer to enable us to move more quickly, right?
And so we've made a decision, we're going a little wider in the SKU rationalization effort.
And as we're seeing what the productivity of our collections look like with fewer SKUs, with fewer finishes, we're seeing that we can optimize the offer, we can reduce the offer somewhat more, and we are moving through those goods more quickly.
So we're taking more aggressive markdowns.
And today, as we look at the quarterly cadence, we believe it will still impact Q3 meaningfully and will -- and to a much lesser extent, Q4.
And we will be in a really good position in 2018 to rearchitect the back end.
Operator
Your next question comes from the line of Peter Benedict from Robert Baird.
Peter Sloan Benedict - Senior Research Analyst
Gary, just following up on that last comment there.
So rearchitects, is that going to start in 2018?
Just trying to understand what the endpoint looks like when you get the network redesign done.
And just, I guess, a rough timing as to when you think you'll get to that point.
Gary G. Friedman - Chairman and CEO
Yes, we're architecting it now and running our numbers and models and trying to see where we believe the optimal place is.
But we still have a lot of data we're gathering and a lot of learnings that we're going through.
So I'd say we will have the inventory mostly in the place we want it to be to be able to make the decisions by the end of this year regarding how many facilities we want to operate in, in 2018, and is there further simplicity and consolidation and optimization in 2019.
So all I'd say is that the moves we're making are going to meaningfully change the model of this business and make this a significantly more efficient model.
So we're making the right long-term decisions to build what we believe will be the best model in our space.
Peter Sloan Benedict - Senior Research Analyst
Okay, that's helpful.
And I apologize if you guys mentioned this already, but on the outlet sales, can you give us a sense for the contribution that's implied in the second quarter?
I think the 9% to 12% revenue planned for Q2.
What are outlets sales expected to contribute in that period?
Karen Boone - Co-President and Chief Financial & Administrative Officer
About 2 points.
Peter Sloan Benedict - Senior Research Analyst
Two points, okay.
And then the last questions I just had was, where do you expect inventory to settle in by the end of the year?
I mean, it sounds like that's what you're really focused on this year.
Any guideposts as to where we could -- should expect that to settle in?
And when you talk to the significant free cash flow this year, you did $115 million, I think, in the first quarter.
Is that a number we should expect builds across the balance of the year and so it's significantly higher than that?
Or should we think about that?
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So we're not going to a year-end inventory number, but I'll just say that we continue to make progress in getting rid of inventory and reducing inventory levels.
So it will go down from where it is now as far as inventory levels.
And then with respect to cash flow, we're not really guiding to that either.
I will just say that we -- our cash flow and our inventory, the biggest driver this year is the working capital benefit from inventory along with those reduced CapEx.
So we expect -- we've made great progress, we expect to continue to make progress.
We're not -- this is not the only quarter that we'll have positive free cash flow, but we're a little hesitant to give a specific target at this point.
Gary G. Friedman - Chairman and CEO
Yes, we -- I would not, Peter, take the $115 million and go times 4.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Right.
Gary G. Friedman - Chairman and CEO
Right?
So it's not that simple.
Operator
(Operator Instructions) Your next question is from Kelly Halsor from Buckingham Research.
Kelly Lauren Halsor - Associate
I guess I just wanted to understand this -- where your guidance really changed here.
So given you were very promotional last year, where is the source of the guide down in net income coming from?
Is it SG&A-related?
Are you bringing up that assumption as well?
And also, are you assuming then that -- any color around where we should expect gross margins to be, whether up or down, and any cadence by quarter would be helpful.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So the biggest change to the guidance from last quarter is around margins and the inventory, as Gary noted in his quotes in the release.
So basically our decision to move faster on the inventory acceleration and optimization is putting a -- is putting pressure on margins and earnings.
But as he mentioned, that's where you're getting the higher sales and that will also have a good impact on cash flow.
So that's the biggest change.
Secondarily, we did note that we moved out some of the store timing.
So a couple of stores shifted into '18.
So those are 2 big changes from the last time we spoke.
On margins, we do expect in Q2 to have some modest -- it won't be as bad because we're anniversarying some significant SKU rationalizations from last year.
So -- and then in the back half, we'll be up against even more, we actually should see gross margins improve.
Kelly Lauren Halsor - Associate
So just to clarify there, you're expecting gross margins to be down in the second quarter?
Karen Boone - Co-President and Chief Financial & Administrative Officer
No, just modestly positive.
Operator
Your next question is from Oliver Chen from Cowen and Company.
Oliver Chen - MD and Senior Equity Research Analyst
We continue to see a lot of intensification of competition from both Amazon and off the off-price channel as well.
What are your thoughts for how the back half will unfold and if customers will skip the trip?
And how are you kind of competitively positioned?
And if you can also just give us an update on your thoughts about how you're feeling about optimizing Modern across the chain and what learnings you've had as you continue to make progress there.
Gary G. Friedman - Chairman and CEO
Yes, we don't really see any kind of meaningful threat from Wayfair or Amazon at this time.
We -- those are very different businesses and presenting their goods in a completely different way and, in many ways, targeting a different customer.
So I think if you -- as I said in the -- in my letter, if you step back and consider, we're really building a brand with no peer and creating a customer experience that cannot be replicated online.
And we've got total control of our content from concept to customer.
I think those businesses are going to -- they're going to hurt people who don't control their content.
They're going to hurt brands that are sold in multiple channels and where people are shopping price.
And so we feel -- we've never felt better about our positioning from a competitive point of view.
Oliver Chen - MD and Senior Equity Research Analyst
And on the Modern side, just curious about what kind of learnings you had or if you've made a different reaction in terms of what you observed as it gets rolled out.
Gary G. Friedman - Chairman and CEO
Yes, the second edition of RH Modern just mailed last month in May.
I think it all got in-home by week 3. So we're very early in starting to read that, but we expect that second mailing to be significantly more productive than the first mailing because the first mailing had no data, so we obviously had a lot of data.
We were able to make a lot of changes and improvements.
And like we said in the letter, that we expect Modern to become a billion-dollar-plus brand.
We think it's -- it is the only fully assorted, fully integrated Modern lifestyle brand in the market at this time.
If the level of the market...
Oliver Chen - MD and Senior Equity Research Analyst
Okay.
Gary, just a last thing.
On RH, you've been really creative about building this as a lifestyle brand with a DNA that makes sense.
What are your thoughts on the continuation of both vertical integration as you seek to optimize the quality experience at point of delivery, and also along the axis of Restoration Hardware being a bigger brand across multiple kinds of experiences that are more than just furniture?
Gary G. Friedman - Chairman and CEO
Well, we believe, I think I've said, I've been saying it for the last year, we believe we have a bias to take more control than less control of the consumer experience.
So if that means moving from our physical store experience and moving into the delivery experience and the in-home experience with our design services, we think there's opportunity there.
We think being closer to the customer's home is a big advantage.
The ability to get into the customer's home is a big advantage.
The ability to make sure delivery and installation is as outstanding of an experience as the experience in our galleries is a huge opportunity and a point of differentiation.
I think if you stand back and you think about our brand of business today, our goods are significantly differentiated and uniquely ours.
Our print experience through our Source Books reflect the same.
Our website reflects the same.
And our galleries are significantly unique experiences and differentiated.
Yet today, I would say, we deliver furniture kind of like everybody else, and we shouldn't.
So you're going to see us make significant changes and investments to differentiate our brand at every customer touch point, right?
I don't think we should be just as different as every other touch point -- or we should be significantly better than anyone else at every single touch point.
That's how we think about it.
And as you think about the business in other expressions of lifestyle, I think we're aggressively investing in that with our hospitality experience, integrating that into our retail experience with our galleries.
So I think our retail experience is going to leapfrog the entire industry.
And as it is today, I can't tell you how many people from all over the world are traveling to Chicago and seeing that gallery and taking pictures and trying to understand what we're doing there.
I think -- I really think there's nothing like the customer experience we've created in Chicago.
And our ability to recreate that experience and that energy and that fully integrated customer experience is going to further differentiate our brand.
And it's such a more meaningful way than even the Design Galleries that we opened over the last 3, 4 years.
And I do think it's going to be very hard to replicate.
It's going to be very, very hard for anybody to replicate it.
Operator
Your next question is from Brad Thomas from KeyBanc Capital Markets.
Bradley Bingham Thomas - Director and Equity Research Analyst
I wanted to ask, I guess, a little about the second half, and Karen, any color that you might be able to provide on how you think about revenues and margin puts and takes in 3Q and 4Q as we refine our models.
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So as we enter the back half, we will not have, obviously, the benefit of Waterworks.
We lapped that acquisition in the second quarter.
And then as outlet was growing last year in the second half when we expanded that footprint with more stores, we'll -- we won't be growing as much.
That 6 points that it contributed in Q1 will go down to 2, and then it'll be even more modest in the back half.
What is a very big difference for us this year is our Source Books strategy.
So as you guys may recall, we did not have a Modern mailing in all of 2016, so that Modern book, as Gary mentioned, is just getting into homes, just got into homes recently and will benefit the second half.
We'll also have the Interiors book hitting in the fall earlier than it did last year, so those are some things that will benefit the second half.
And then we have a 53rd week, so that's something that's going to contribute to the growth, obviously, in Q4.
So that's on the top line perspective.
Margins, I already gave a little bit of color.
We'll benefit in the second half based on what we're up against.
And as our SKU rationalization efforts and inventory book as well will continue, but they should moderate a little bit into the back half.
We will have some deleverage in SG&A in Q2 and Q3 just with the Source Books strategy, and then that'll temper and they will have some incentive comps that we didn't have last year heading in Q3 and Q4, that'll be -- leverage SG&A a bit.
Bradley Bingham Thomas - Director and Equity Research Analyst
Great.
And then if I could add a follow-up on the share count.
It looks like you're guiding $34.5 million for 2Q.
Could you give us an update of where you ended the first quarter?
And then I think to get to your full year guidance, that would assume that the share count increases in 3Q and 4Q, is that right?
And I guess, more broadly, how are you thinking about the current authorization that you have?
Karen Boone - Co-President and Chief Financial & Administrative Officer
Sure.
So the current share count that you see and how we're kind of playing it out through the year is simply just a weighting, and it does assume some modest option exercises and new grants for new hires and such on the dilutive count.
But obviously, the increase is not related to issuance.
We're not -- we don't have any plans to disclose or kind of talk through our plans with respect to this share buyback.
Obviously, we do have a new fresh $700 million authorization.
We finished the last $300 million.
But at this point, we'll continue to evaluate that as an investment versus all the other investments we have on the table and do what we think is best for the return for to shareholders.
Operator
Your final question comes from Matt McClintock from Barclays.
Matthew J. McClintock - Senior Analyst
Gary, I want to talk about high-level promotions.
It's been over a year now that you took the path less traveled and decided to do something different than the overall industry.
And I'd like to hear your thoughts on, just high level, how that's played out if you knew today what you knew or if you knew back then what you knew today, how would you think about it?
Would you think about it any differently?
And just overall, where you think promotions for the overall industry are going?
Gary G. Friedman - Chairman and CEO
Yes, we're very pleased with the move we've made.
We contemplated making this move for 3 years.
We modeled it for 3 years.
We probably wanted to make it several years before and we chickened out every time.
And so I'm very pleased we made the move.
I think with any plan that we have or anybody has, you're going to be some degree wrong.
And the thing is we've -- where we are off, we've adjusted and made changes.
I mean, I think about -- we launched it and we called it the RH Grey Card, right, and people thought it was a credit card.
And so it was misinterpreted initially.
And we improvised and we changed it to the RH Members Program.
And yes, there's been several little moves and adjustments we've made to the program.
But the main body of the program, I'd say, 70%, 80% of it is intact and is correct.
And I think our ability to forecast the numbers and the percentage of customers that have adopted the program, and the amount -- the percentage of our business that's being driven by the program is almost uncanny with how accurate we've been there.
So -- but the model was based on a lot of math.
And people ask, "Gosh, why only $100?
Why wasn't it more or why wasn't it less?" There's a reason with the $100 when you go through the math.
And what we expected in the percent of our business, we will drive new membership.
And then our expectations is what would happen to the lower ticket part of our business, particularly things like textiles and accessories, we probably underestimated the hit we took to sales there and we have -- we've adjusted there by adding a few promotions per year that deal with those categories, because we are losing more than we thought so we've made some adjustments there.
But we really like this model.
We think it's going to position the company in a way where we just eliminate so much chaos.
We're going to eliminate so much cost.
We're going to be able to now architect our operating platform and our business model based on this, and I think it will give us a long-term superior model.
So we're very happy with it.
I mean, all the numbers that at least we're looking at today, we're good.
I don't want to prematurely call that -- call it a success yet, but we're pretty close there.
Operator
There are no further questions in the queue.
I will now turn the call back over to Gary Friedman.
Gary G. Friedman - Chairman and CEO
Well, thank you, everyone, for joining us today.
We appreciate your focus on our company, and we look forward to talking to you next quarter.
Thank you.
Operator
This concludes today's conference, and we thank you for your participation.
You may now disconnect.