RH (RH) 2024 Q1 法說會逐字稿

Good day, everyone, and welcome to today's RH first quarter fiscal 2024 earnings Q&A call.

(Operator Instructions)

Please note that this call is being recorded and I will be standing by if you need any assistance.

It is now my pleasure to turn the conference over to Allison Malkin.

Please go ahead.

Good afternoon, everyone.

Thank you for joining us for our first-quarter fiscal 2024 earnings conference call.

Joining me today are Gary Friedman, Chairman and Chief Executive Officer; and Jack Preston, Chief Financial Officer.

Before we start, I'd 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 our outlook of our business and other matters referenced in our press release issued today.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

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

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

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

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

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

Great.

Thank you, Allison, and good afternoon, everyone.

We're actually calling you live from New York at our Guesthouse, as we just got back from our opening at RH Madrid last night.

I'm going to start with with our letter to our people, partners, and shareholders, and then we'll open the call to your questions.

To our people, partners, and shareholders, we are pleased to report that our demand trends inflected positive in the first quarter and continue to build momentum despite operating in the most challenging housing market in three decades.

We believe our investments in the most prolific product transformation and platform expansion in our history has positioned our edge to gain significant market share in North America, while building the foundation for our long-term global expansion across the United Kingdom, Europe, Australia, and the Middle East over the next several years.

Our results for the first quarter largely reflected expectations, with revenues of $727 million, adjusted operating margin of 6.5%, and adjusted EBITDA margin of 12.3%.

Demand was up 3% in the quarter, slightly below our guidance as growth softened when interest rates once again exceeded 7% post the hawkish Fed commentary throughout April.

While aggressively investing during a downturn put pressure on short-term results, it also positions us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation.

Those opportunities are beginning to materialize as a growing number of online furniture brands have ceased operations and the vast majority of demonstrated difficulty reaching profitability.

We do expect the constantly changing outlook regarding monetary policy will continue to weigh on the housing market through the second half of 2024 and possibly into 2025.

Nonetheless, we remain confident that our continued investments towards transforming our product and expanding our platform will generate significant long-term value for our shareholders.

Every active creation is first an active destruction, Pablo Picasso.

We have worked hard to describe the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry.

Our product transformation plans for 2024 include the launch of our new RH Outdoor Sourcebook, the most dominant collection of luxury outdoor furniture in the market arrived in homes in the first quarter with 14 new collections.

Outdoor trends continue to remain strong, and we expect to gain significant market share in fiscal 2024.

The unveiling of our new RH Modern Sourcebook arrived in homes throughout early June with 30 new collections across living, dining, bedroom, and bathroom.

We expect the launch of RH Modern to further accelerate our demand trends in the second quarter and throughout the second half of fiscal 2024.

The second mailing of our new RH Interior Sourcebook is now planned to be in home starting July, with new collections and improved in-stocks, which should also provide an additional lift to demand in the third quarter and continue to build through the remainder of the year.

We will be mailing an updated RH Contemporary Sourcebook in early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends.

A second mailing of the RH Modern Sourcebook and third mailing of RH Interior Sourcebook are expected in the second half of 2024 with additional new collections, refreshed galleries, and improved in-stock.

These mailings will result in a doubling of our Sourcebook circulation and customer contacts in 2024 versus 2023.

Our data would suggest the increased number of contacts alone should provide another lift factor for our business.

As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category.

The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale.

Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers, and builders.

While RH has a meaningful trade business, the vast majority of our revenues are generated by consumers.

We believe there's a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience similar to how we've expanded other trade focus businesses and brands over the years.

Our plan is to launch with a 3,500 square foot Waterworks showroom in our largest new design gallery in Newport Beach, California, opening in the fourth quarter of 2024.

We will also be developing a Waterworks Sourcebook with plans for a test mailing in 2025.

Waterworks today is just shy of a $200 million business with mid- to high-teens EBITDA margin that we believe has the potential to become a $1 billion global brand on our platform.

Let me shift your attention to the expansion of our platform.

Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion-dollar opportunity.

Our platform expansion plans for 2024 include: the opening of five North American design galleries, including Cleveland in Palo Alto, which are now open; plus Raleigh, Newport Beach, and Montecito, all with integrated RH interior design offices, restaurants, and wine bars.

The opening of two international galleries in Brussels, which opened in the first quarter and in Madrid, where we hosted a well-attended opening event last night.

Both galleries are located in beautiful historic buildings that elevate our product and render our brand more valuable.

The opening of our first RH interior design studio in Palm Desert, California.

We believe there's an opportunity to address new markets locally by opening design studios in neighborhoods towns and small cities where the wealthy and affluent live, visit, and vacation as we've done in East Hampton and the Napa Valley, as well as augmenting some of our design galleries in larger markets with additional design services and standalone design studios.

Outlook.

While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our business trends to accelerate throughout fiscal 2024.

As previously communicated, due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately 4 to 8 points until we read and react to the new collections, reduce backorders, and shorten special order lead times.

Therefore, we will be guiding to reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze our business.

We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately $110 million to $130 million due to revenue lagging demand throughout fiscal 2024, which will negatively impact operating margin and adjusted EBITDA margin by approximately 140 basis points.

Additionally, investments and start-up costs to support our international expansion are estimated to be an approximately 200 basis point drag for fiscal 2024.

We continue to expect demand growth in the range of 12% to 14% and revenue growth of 8% to 10% on a 52- versus 52-week basis.

We are forecasting adjusted operating margin to be in the range of 13% to 14% and adjusted EBITDA margin in the range of 18% to 19%.

For the second quarter of fiscal 2024, we are forecasting demand growth in the range of 9% to 10% and revenue growth of 3% to 4%.

We are forecasting adjusted operating margin to be in the range of 11% to 12% and adjusted EBITDA margin of 17% to 18%.

RH business vision and ecosystem, the long view.

We believe, there are those with taste and no scale and those with scale and no taste; and the idea of scaling taste is large and far-reaching.

Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world.

Our brand attracts leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antique and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade.

Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally.

Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and place maker.

Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated to render more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like our HR Yountville, an integration of food wine, art, design in the Napa Valley; RH1 and RH2, our private jet; and RH3, our luxury yacht that it's available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation.

These immersive experiences expose new and existing customers to our evolving authority and architecture, interior design, and landscape architecture.

This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the brand and amplifying our core business while adding new revenue streams while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize and sell spaces.

Moving beyond $170 billion home furnishings market, it is a $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning time-starved consumers.

The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies the up market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today.

A 1% share of the global market represents a $70 billion to $100 billion opportunity.

Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.

Taste can be elusive and we believe there is no one better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable.

Never underestimate the power of a few good people who don't know what can't be done.

For the past 23 years, we've heard others tell us what can't be done.

And for the past 23 years, we failed to listen.

We avoided bankruptcy while being accused of lunacy.

While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world.

When Wall Street didn't think our stock was worth buying, we bought 60% of it ourselves.

When everyone told us we should be working from home, we were in the center of innovation, working on rebuilding our new home, and it's almost ready for prime time.

From the largest product transformation in our history to the most inspiring retail experiences in the world, from couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, guesthouses, from Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich and San Francisco to Sydney, soon the world will be within our reach.

Never underestimate the power of the future that people who don't know what can't be done, especially these people.

Onward, team RH.

Carpe Diem.

Now, operator, we'll open up the call to questions.

(Operator Instructions)

Steven Forbes, Guggenheim Securities.

Hey, Gary, Jack, Allison.

Obviously, Gary, nice to see the business returning to growth here.

So I was curious if you maybe can help us contextualize the success of the new collections as you see it today, realizing it's early.

But can you speak to sort of how many collections are showing signs of resonating with the consumer?

And what maybe some of the early learnings are around the designs themselves as it relates to sort of product expansion opportunities or sort of broadening out the exposure, right, of the designs to different pieces?

Sure, Steve.

As it relates to resonating, one, we have a lot of new collections being introduced.

And so we are reading and responding to all those and trying to put those into context.

And we have many more coming, just in the modern book alone, which is just now getting into homes, and we're getting some early reach on that.

I think that the best news is we have a few collections that are new number-one collections, big broad collections.

And I tell the team here, you get a new number-one collection generally once every 7 to 12 years, something that really is a market mover that resonates broadly across the entire platform.

And those things permanently move the business.

The way we think about our business and think about our assortments, we talk a lot here about the thirds.

We talk about the top third of the assortment or the top third in any part of our assortment, not just overall.

But if you're looking in the dining business, the living room business, the bedroom business, the outdoor business, the lighting business, the rug business, et cetera, et cetera.

And if you think about our business or any retail business and if you try to simplify it down to what's in the top third, what's in the middle third, and what's in the bottom third, and how to think about those thirds, if you can introduce newness in the top third, that will lift the entire company, right?

It will lift the entire category; it will lift the entire company.

If you introduce newness in the middle third, you're going to mostly be neutral unless it's in the top portion of that middle third.

And you know, we also talk about the top half and the bottom half, but the thirds is really the way we mostly focus on this.

And if you introduce anything in the bottom third, you're going to likely pull down the company's business.

The great news is we have the majority of the newness, the vast majority of the newness is in the top half and a big percentage is in the top third.

And in some cases, there's the top collections in the top third.

And that's what's really going to pull the business forward.

So we really like the early reads of the business, but you're always going to have a top third, middle third, and bottom third.

So you've got to be disciplined.

If you have 90 new collections -- well, not necessarily the way to think about it.

But if you have 90 total collections, you're going to have 30, 30, and 30.

So you have to kind of recalibrate it and recalculate it.

But our initial reads are really quite good.

You know, we're really excited about the vast majority of what we're introducing.

And then as we think about how do you dimensionalize the best collection, the key is how do you optimize it?

You optimize it by one, moving from just the books and online into the galleries.

That gives us the biggest lift factor.

And then you look at things like how do you dimensionalize?

Is the collection fully dimensionalized?

Is it in all the finishes it can be?

Is it in all the silhouettes and functions it can be?

Are there other variations you can create within that collection?

Or even if you have key items, it's the same kind of questions.

How many finishes?

How many fabrics?

How many times are we presenting it?

How many sizes is it in?

So on and so forth.

So there's a lot of work to do.

The work doesn't stop with just launching new product.

Actually, one of the biggest ways to grow the business is dimensionalizing that product and optimizing that product.

And so we've been going through, since our new book started really meaningfully hitting the market and the new collections last year, reacting to dimensionalizing and optimizing the assortment and getting the stock in those things.

That's a meaningful lift factor.

So lots of things as you think about it.

So we're not here just watching it.

It's really -- think about it as we're analyzing and then we're reprioritizing and we're reacting to it from the sense of how do we dimensionalize and optimize the best work and anything in the top half, which will move the business.

That's helpful.

And then maybe just a quick follow up.

There's so many different contributors to demand this year and the idea of sort of scaling it as we move throughout the year.

I don't know if you can maybe help us digest the visibility into demand scaling into the back half.

How many sort of factors do you have a large degree of confidence around?

How many factors or what percentage of the demand scaling is still sort of a large sort of forecast?

You think about like RH Modern's contribution to demand scaling.

Any way to sort of just shore up the confidence in the demand revenue build into the back half for investors here?

Of course, yeah.

Really good question.

First, I'd say you've got to really think about kind of what's year over year or kind of season over season, first half versus second half and how do you think about the lift factor.

There's seven significant lift factors that we're focused on.

Those factors have kind of multiple, some have multiple dimensions.

So the first is just the books year over year and the circulation year over year.

So we have more than doubling of the circulation in contacts year over year.

That's meaningful.

You don't have that many times in the growth of a business.

You usually only see that at the very early stages of business development when brands are in the early stages.

The way to think about it as you relate it to RH.

Because you say, well, we're not really in the early stages of this brand, but we're in the early stages of the product transformation and the platform expansion.

So you want to think about what's happening.

Because we had kind of a pulled back during COVID and we had very little newness and we had little circulation in contacts, now, we're past the midpoint.

We're at the two-thirds point of the product transformation and you're going to see past the halfway point.

With Modern, we're kind of now past the halfway point heading to the one-third point.

So we still have -- you're looking at the second half here.

Modern's really going to impact the second half.

You also have the outdoor book that we had 14 new collections in.

You know, that's going to be meaningful in the second half.

A lot of people think about outdoor as just a first half business.

Yes, it's got a peak season, but we're a year-round outdoor business.

We're very different than anybody else in the outdoor business because of our new design galleries, which have anywhere from 24 to 36 collections presented year round.

So we're a true destination for outdoors.

So for us, you have to think about the outdoor business, not as a seasonal business.

Some companies, they bring out a collection or two on the floor and then they take them off.

Or they set up some umbrellas and folding chairs and then they take them off.

We're a year-round outdoor business in a good portion of our galleries, and that portion of the galleries are growing.

So you have the modern book, which is one of the seven significant lift factors.

You've got the interiors book that's going to be mailed, a significant lift factor in newness and context, right?

You've got the contemporary book in newness and context.

You've got the second mailing of the modern book that will happen in the second half -- the second mailing of the interiors book that will happen in the second half.

Then you've got this factor of more than doubling, the circulation and context in the second half, and then you've got the seventh one, which is really the increase in store months in the second half versus a year ago.

So we have 48 new store months in the second half of this year versus 12 new store months in the second half of last year, which is a 4x factor in new store months year over year.

So this is really unusual, right?

I'd say if you took anybody else, any other furniture retailer or furniture and/or home furnishings retailer or home furnishings retailer, any of the mature ones, they may say, hey, we have two new collections year over year, furniture collections.

We might have three.

Somebody might have one.

We have a massive amount.

I don't have that data right in front of me, but it's like 40.

And we have -- they're going to have -- maybe they're going to have a little bit of circulation year over year.

We're going to have a doubling circulation in contacts year over year.

They may have -- so you're looking at circulation, you're looking at contacts, you're looking at circulated pages.

And then the other one that I didn't mention is a significant lift factor, but it is.

It's really what are in stocks year over year.

So we've had a lot of newness introduced.

And I like to say, every plan we have in this company, whether it's new products, every plan we have is some degree of wrong, right?

When you're looking into the future, it's a plan.

It's your best educated and informed guess.

I've never seen anybody take the dart and hit the exact middle of the dartboard, okay?

But the key is, are you directionally right?

Are the darts on the dartboard.

Are they moving towards the center?

And how are you optimizing it?

So we just have quite a lot of collections.

I mean, I've told you we have a few things that are at the very top.

When you get anything in the top third, you're generally not going to have enough inventory.

Unless you're -- you just take a lot of risk upfront.

That's why we don't introduce a lot of newness in our galleries, because it's expensive to transform our galleries, to change out our galleries.

It's expensive to change out all the product.

And we test everything in the books and online first.

And we get a read.

And when you get a read and something is a hit, you generally don't have enough inventory to move into the galleries right away.

Or you might have, in our case, take the biggest collection -- we have a new biggest collection in the history of the company, probably by a factor of 40%.

And it might be more than 40% or 50%, because we're in the process of dimensionalizing that and optimizing that.

So it's moving into different finishes, configurations, different materials, and so on and so forth.

And then we'll ride those things.

So it's no different than think about the cloud sofa.

The cloud sofa is, by far, the best-selling sofa.

It's the higher end of the market, the better end of the market, by a factor of three, probably, of anything in the world.

And the cloud sofa will move the market.

We have what we believe is likely the cloud sofa of the wood furniture business.

And the cloud sofa, we introduced it.

And we had it in one fabric.

And then we had however many fabrics in special order.

And then we dimensionalized the cloud sofa.

If you looked at the history of our sourcebooks, once we introduced it, then we moved it.

We dimensionalized it to multiple sizes.

We had -- we put it from the [lax] sit to the -- we did the classic sit.

We then put it in 16-inch soft fabrics, right?

And moved the business greatly.

We dimensionalized it into different arm configurations.

We did -- instead of a wide track, we did a thin track.

We did a slope, so on and so forth.

So all of those kind of moves, are moves you make.

And what's different and what might be hard for people to wrap their head around is, God, this is a mature business.

And how do you move a mature business in a big way?

You make big moves.

The only way you can do this is making big moves.

So that's really the key.

I don't know anybody who's attempted a product transformation of this size and scale in a business at scale.

I never have.

I feel fortunate that I have the years of experience in this category.

And I've got a team that has years of experience in this category doing this.

But this is -- it's like a new company again and is what we're unveiling.

And so when you think, it's just a little different to scale.

If we were building this in early, early stages, we might see a doubling of our business.

But we're doing it at scale, so we think it's going to build into the 20-point range in demand build.

And again, it could be bigger depending on how quickly we move, how well we dimensionalize and optimize the business and opportunities.

And then put the right aggressive marketing behind it, meaning store presentation, finishes we're presenting it in, where in our galleries, how in our galleries, how much space we're giving it in our sourcebooks, the amount of circulation it's going to get, what's going into advertising campaigns, email campaigns, so on and so forth.

So that's how to think about it.

You know, so this is something I've never been through at scale, a move this big.

And I'm sure you guys have never seen it scale.

But when you just do the math, which we spend a lot of time doing and you dimensionalize the math just like you dimensionalize the ideas, you can kind of build into these lift factors and say the business should be here.

And you've got some things that are more concrete.

And the real concrete -- you've got some super concrete things like store months year over year, you know, 48 over 12 in the second half.

You know, we know what happens when we take a legacy gallery to a design gallery.

We know what happens when we open a new gallery in a market.

We're pretty close.

We're within points of that.

We've got a lot of data, and we're not doing a lot of really different things there.

But we also have -- I would point out, you know, all the galleries this year that are new all have hospitality.

So hospitality gives you an added layer of business also.

Thank you.

Sure.

Steven Zaccone, Citi.

Great.

Thank you for taking my question.

Maybe to follow up on Steve's question, I was curious about the commentary on pricing.

Gary, you've talked about it in the past, that pricing has gotten too high, and more broadly, the industry has gotten promotional.

How do you feel about pricing now on the new product?

Where are you seeing some customer adoption?

And do you feel like some of the pricing challenges for the business are in the rearview mirror?

Yeah.

Hi, Steve.

Good question.

We've been doing a lot of work around value.

And the way we think about our business and the way we think about how consumers respond is we're not in a portion of the market.

The first thing on the consumer's mind is price.

No one walks into our galleries or looks at anything in our sourcebook that they think the design is ugly and they buy it because of price.

I don't think any of our customers, say, hey, I don't mind how the product looks, at that price, I'll buy it.

I think people come to RH because we are a design-driven business, we are a curation-driven business, and we're an integrator of a business.

We sell you the end result.

We sell you the whole, not the drill.

And so we look through a lens of design, quality, and value in that order.

Is the design great?

That's what consumers are responding to.

If the design's not great, nobody walks up to it or nobody gets, clicks closer to it online to try to perceive the quality.

If they love the design and they think it's really good quality, they make an equation in their mind.

For this design, at this quality, what price is a good value to me, right?

The consumer will then make that calculation.

And so value is really -- pricing is a result of design and quality.

And so if the design is great and people love the design and they think the quality is at the level they expect or above the level they expect, you've got a lot of room in pricing there.

Now, of course, there's price elasticity, there's -- if you price things lower and lower and lower, you can appeal to a bigger and bigger market.

If the pricing's higher and higher and higher, we might have appealed to a smaller market.

But you've also got a margin lever you're -- using in there, like what margin, where do I optimize size of business, profitability of business, and so on and so forth.

So we've done a lot of work.

We feel like we're in a really good place.

We feel for our design and our quality.

We're at really good values, and in some cases, we're at disruptive values.

If you look at it -- you're always going to have some -- today's world, I don't know if I just read, some famous designer just made a dupe of his own product because he knew the product was going to get copied.

We're in a world where the copies happen so fast.

Almost instantly you can look at anybody's product.

I don't care what -- excuse me.

I've lost my voice from the Madrid party last night.

I had to talk to a lot of people.

I didn't have to talk to a lot of people; I did talk to a lot of people.

I don't know if you think I was not happy talking to them, but I talked to quite a few people.

So my voice is going a little bit.

But the key here is: how do you create an optimal model?

And we're constantly testing those things.

But the idea with the dupes, I think it was Tom Dixon, maybe it was, right?

He designed something, a light or something, and then he immediately did a dupe of his own light at a cheaper price.

And he said he wasn't going to wait, but I don't care at what level the market is, you're going to see it.

If Chanel does something today, I mean, in a very short amount of time, you can go on Alibaba and see copies of almost anything in the world.

You can see things online.

I mean, they're just so fast.

But you can't always perceive the quality with the fast followers and knockoffs.

But we kind of look at the most of the market that's most relevant, where's our customer going?

I don't think our customer is waking up searching the Internet for the best price.

I think their time is really valuable to them.

And they're shopping at -- higher end customers are shopping at places that are editing and integrating for them, that are selling them the end result.

It's no different than just participation at restaurants, right?

If you look at the wealthier people get, somebody else is making their food.

They're either going to really nice restaurants or they might have a home chef, right?

Because time becomes more valuable to them.

So they're not -- unless they're really a foodie and someone who's -- that's their hobby is cooking for themselves.

But generally, higher demographics are eating out more.

And they might be eating at home, but it's being delivered.

Or they have a chef at home and somebody else is cooking for them.

I think at the higher ends of apparel and home goods and other categories, people pay more when you do more work for them, when you create time value for them.

And I think that's what we do.

I think we are curators, we are integrators for the consumer, and we're selling them as close to an end product as we can.

And in many ways, sometimes it's a complete end product.

If they're engaging our interior design teams, we're doing their whole house in a beautifully integrated way.

We're coming in and we're organizing the install and organizing lights being hung on ceilings and pictures being put on walls and so on and so forth.

A lot of our customers come home to a fully furnished, detailed home.

And we'll go as far as they want us to go.

In some cases, we're buying antiques for them and so on and so forth.

So when you're doing that kind of work, people pay for it.

But in a general sense, I'd say, I think our pricing is in a really good spot.

Newness, you never know.

You may think, this is so good, it's so unique, nobody else has it, I'm going to price it here, and you might have priced it too low.

And it blows out too fast.

You could have got a higher margin.

You might take prices up.

You might have priced it a bit too high.

And it's a little under what you thought and you adjust the pricing.

So you're always kind of trying to fine tune and optimize.

So I wouldn't let -- I made comments about the contemporary book.

I don't know, what was that, a year and a half ago.

I mean, it was quite a long time ago.

And I thought we were overpriced.

We just didn't pay close enough attention and challenge enough about fabrics on the sofas, things like that.

We just had some things that were -- that just kind of went to a level where it's not that the product wasn't worth it.

The product at that price created a smaller market than we would have liked.

It's not that we're not going to sell a product at that price.

It's just -- you want to not make sure that's -- like, we had some sofas that were introduced in a Holland and Sherry fabric that were only available in that fabric when we launched.

It was in stock in that fabric.

Well, that made a sectional in our source book, $24,000.

That was made in Italy.

It was the highest quality.

It's the highest quality you can make it in the world with Holland and Sherry fabrics.

So if you would have made that same sofa to the trade and you would have made it in a workshop, it would have probably been, I don't know, $30,000, $40,000.

We had it for $22,000.

It was a good value.

It was just a smaller market than we generally addressed.

And so I thought we kind of jumped too far.

We still have many of those products.

We may have maybe showing them in a different fabric.

We may have optimized them as far as how we're buying them and have better values.

And some of them we may not have went forward with them.

But for the most part, I mean, when I think about the main things, I think we still have them all.

They're just smaller volume than we anticipated.

And we wouldn't have made them like the very front of the sourcebook.

It's like we would have teased those things throughout, presented them as really, really unique items and communicating what we're capable of as far as designing quality and using them in that sense, but not to drive the business.

So we made some mistakes.

It was a year and a half ago; we learned from them.

We've now evolved and we have that data.

And we won't make that mistake again.

Okay.

I appreciate all the detail.

Hopefully a quick follow up here.

But from a macro perspective, what are you most focused on here to see engagement in the category return?

We've seen somewhat of an inflection in luxury price homes turn over.

I mean, is that the key metric you're looking for here?

Anything else you could steer on the macro would be helpful.

You know, it's funny.

I don't know what metric everybody's looking at.

Because they vary greatly, right?

There's an association of retailers that have some number that luxury homes inflected up and other numbers say it was 2%.

I don't know whose data is right.

I don't think that there's been a meaningful move, a sustained move in the luxury home sales.

It might be a little ticking up and that's because some of the pricing is starting to come down in some cases.

And it's starting to come down because of holding power, especially if you had a developer, someone who is building homes to sell them.

Or if you've got a home flipper who bought something to remodel and fix up and then they go to sell it.

And in a market like this where you've got high interest rates, your consumer base shrunk meaningfully and you've got a burn rate depending on how long you hold it.

But I don't think that there's a meaningful sustained move in the home market.

I think you've got little ticks up here and there and kind of bouncing around the bottom.

And I think it will be until we have a meaningful move in interest rates.

I think we began this year where everybody expected six interest rate cuts.

I think that was the numbe.

But if you looked at how the market was betting, I think the Fed was pointing to kind of four cuts and the market priced in six cuts.

Because they figured that the Fed is always very conservative, right?

And I think that where are we now today, the math says I think there's a 90%-something chance based on yesterday's comments that we're going to have one interest rate cut.

That's like way off.

That's only, you know, a few months, right, like not that many months, like way off.

If you think about the Fed's forecast of going from four to one, I mean, think about last quarter, Powell went on and I think he shocked the world.

He said for the first time in his commentary in a while, I don't think we'll need to hike rates.

Everybody was listening to him talk about -- they're waiting for him to say: how many rate cuts we would have?

And he said, I don't think we'll need to hike rates.

And then you've got Jamie Dimon out there saying, you should not be cutting interest rates.

You should not be cutting interest rates.

I mean, as much as the Fed's supposed to be independent, if the best banker in the world is the best bank in the world is on TV multiple times saying you should not cut rates, I think that has a little influence on what the Fed thinks.

You may not listen to Gary Friedman's point of view because I put it out there when I told them they were behind the curve on inflation.

I said they should call some business people.

And we thought massive inflation and they thought, oh, it's what do they call it, transitory.

Transitory and interest rates will go from 4 back to 2 in a couple of months and they went to nine, you know.

So we saw that coming.

But I just think that there's a lot of noise out there right now.

I think there's a lot of pressure on the Fed.

I think the Fed is going to be massively data dependent, which means the Fed will be behind the curve.

And so they were behind the curve on seeing inflation.

I think they'll be behind the curve as it relates to assessing, is inflation under control?

And I think they'll be behind the curve as it relates to it's time to cut interest rates.

So our view is probably a little bit more negative than it was a quarter ago.

I think a quarter ago, we were feeling a little bit more optimistic that there'd be rate cuts and the housing market would begin to meaningfully move in a sustained manner.

I think it may not be until, you know, '25 or second quarter '25 maybe.

So I don't think there's going to be a sustained inflation in luxury home sales at these interest rates.

So, yeah, that was interest rates.

It's just an affordability factor.

You've got home prices up 50% or more, 50%, 60% from post-COVID.

Home prices went up 42% in the two years of COVID, and then they've continued to compound the last two years.

So your home prices have roughly 50%, 60%.

And now you've got interest rates, 7% or higher when they were, you know, 2.6% to 3.3%.

I mean, it's just simple affordability now.

Yeah, there's a silly thing.

If you're going to buy a home at any price, they can.

But the other thing you can't trust, by the way, that's wrong in the data externally is when they talk about cash sales.

It's such a stupid number to focus on.

They say, oh, like, there's more cash home buyers.

There's people wealthy paying cash on homes.

I don't care how wealthy you are.

Not a lot of people own their homes that don't have a mortgage on them.

I'm relatively wealthy.

The New York Times just reported I bought a couple of homes in Malibu.

Did I pay cash for them?

Yes.

Did I pay cash for my Douglas Hills home?

Yes.

Did I get mortgages put on them?

Yes.

But does the Association of Real Estate Brokers, who reports on any of this stuff, they record me as a cash buyer.

No one's going to really pay cash.

You're going to have a mortgage on your homes because you think your money can generally make more money somewhere else.

And so that data is never right either.

So you're just going to parse out the data and say, what is real credibility?

Because the data we get from the Fed isn't very reliable right now.

I don't know.

There's some hard facts, but numbers on homes sometimes -- people are -- I saw reports that what Redshin said, luxury homes were up 2%.

Another report said luxury homes were up like 30%.

I don't know which one's right.

Got it.

Appreciate on the color.

Simeon Gutman, Morgan Stanley.

Thank you.

It's Simeon Gutman.

Guys, I want to ask about the gross margin outlook.

And if I can segment it into two pieces, first, the new product lines and launches and then everything else.

I'm curious if gross margins are roughly stable.

And then thinking about the guidance and the torque in it in the back half, is it simply better sales and then better expense leverage or is there some variability that could still happen with gross margin of the business?

Thank you.

As I say, gross margins are relatively stable.

We do have a lot of new goods come in and you're going to be right on time, you're going to be wrong and others.

And you're in one of the worst housing markets in 30 years, the worst one I've had seen in my career.

And as I said, there's always going to be just have a higher promotional environment than -- across the industry and you're going to have to react to some of that stuff.

So you're always going to carry a higher percentage of promotional mix during market times like this, right, as you've got to keep the inventory moving in.

So I think we're pretty confident about what our margin mix is going to look like, unless something happens meaningfully or meaningfully wrong on demand.

Margins likely go down a little meaningfully, right?

Our demand margins go up a little.

No different than buying a product that's really performs well.

You're going to have higher margins than if it performs poorly.

But as I say I don't think we have a lot of risk in margins in the second half.

Simeon, just obviously, as you guys build your models and look at our margins, just note that we have growing -- or variability in our quarterly revenue.

So it can only remain stable to the extent the revenues are the same.

In a sense, I think there's a different nuance here when you're talking about product margins versus gross margins, which have fixed occupancy.

I know it's a firm grasp of the obvious.

But obviously, when a quarter is lower midpoint, example, like Q1, you'd get to $5 billion model.

I'm not taking Q1's gross margin saying that's flat.

I don't think that's necessary.

You're saying we're going to have growing revenue throughout throughout the year, our transition to build your models, and make sure you're looking at six.

Yes, that's helpful.

And so I guess just related to that, and then I'll include the follow up.

I guess I meant that there isn't some piece of clearance that has to occur with older legacy lines like we're through that part.

And now the normal cadence of the business happens and the variability will be based on the mix of promotions with the current product.

But we're through the worst of whatever clearance that you were trying to do to clean up the portfolio ahead of all these new launches.

And then

--

We're not (inaudible) transformation in our history.

We're in the middle of that, I would say, well underway.

I think we're through the worst of it, like we're in the middle of the product transformation.

We're just going on the second half of it.

So yeah, it clearly doesn't just go away in a business like ours.

It isn't selling T-shirts and sweaters where, put it on a clear and stable and it flies off.

The whole business, when you're transforming it like we are and you're making big moves and you put things on clearance but it's limited, people don't buy it in bed, if they don't need a new bed.

People won't buy any sweater if they don't need a new sweater.

It's on sale, I'll have a new sweater.

You don't buy another bed, just because it's on sale.

So sale and clearance in categories like ours are very different than other categories.

So it takes a longer time to move through and that cycle through.

Thanks.

I'll leave it there.

Thank you.

Yes.

Max Rakhlenko, TD Cowen.

Great.

Thanks a lot guys.

So first, just curious, how much of the assortment in galleries today comes from the new launches over the past year versus the legacy product?

And then when will we get more of the Outdoor and the Modern products inside the galleries?

And then just how should we think about the evolution over the years as far as the new products being shown in the galleries?

Right.

But we're in a level of new today on about 60% now in the bigger galleries, 50% new?

Yes, about 50% new in the bigger galleries.

And the legacy galleries probably about the same amount.

So think about something like Outdoor, we're generally not buying newness to put in galleries, unless we think that it is a sure winner because that's how you can really negatively impact margins, right?

If you buy something upfront really big and you think you're going to buy all the display quantity and you're going to buy it to that level of volume and you're wrong, you're going to be really wrong.

So we're constantly, for the most part, we're buying newness.

And we may buy it bigger and anticipate they want to be somewhat heavier that if we're right, it's going to be big, we're going to move it out to the galleries more quickly than less quickly.

But we're reading -- I mean, modern is just kind of getting out there, right?

If the book's complete, it's all in home this week, complete, yeah.

So it started mailing first week of the month.

And it takes a couple of weeks to get in and get out there.

And then we're kind of reading it, reading the online, and response to the books.

And then we're probably about mix or something.

We have a pretty good sense of the early reads.

As consumers -- again, with this, you got to think about a lot of our business is kind of already booked.

A lot of our demand, it's already kind of been decided.

We've got projects that are in the pipeline, that our designers are working on over three weeks to three-month periods.

And so they're building those orders.

They've got all those quotes.

And you may get -- consumer sees the newness and says, oh, change that or change this.

Or designer may say, change this or change that.

For the most part, that's work that's already done.

So a big part of our demand is already in the pipeline and it takes you like about six weeks to see what those early trends look like versus the early trends of other things.

And then you start to see it build.

It usually takes us about three months to get the full run rate.

But we're making early bets probably by weeks 6 to 12.

Do we think that's going in the galleries, and then we'll start to write new orders and those new orders will take four months to five months to get depending on how big we're buying, right?

If it's like some of the questions that I said were just huge collection, those -- the vendor's capacity may take a while to ramp up on the one big collection that we think is the new redefining collection for us.

That vendor had to open two additional buildings, two additional factories, to ramp up to make the demand that we're seeing.

So that takes you a much longer time.

There's a lot of factors to it.

But I'd say, we're about 50% newness on the gallery floors today.

And then your -- generally, so much newness coming in.

You're going to have other newness that comes in, that might be better than the first newness you put out there, so you might transition that as you're going.

So there's going to be a lot of data.

Will there be something in the new modern book that displaces something that we just put into the galleries?

Maybe.

So the math will kind of tell us what to do.

Got it.

And maybe just a follow-up to that, but some of the books are being delayed or not delayed, but coming out a little bit later than you initially thought?

And then 1Q demand was a little bit softer than what you thought.

So just given how the business does remain somewhat choppy, and there's been a little bit maybe demand pushed out just given the timing of the Sourcebooks, curious to your level of confidence that you'll be able to maintain the full-year demand guide?

And then just separately, it doesn't look like you stop releasing the outlet revenue.

So if you could share what that revenue was in the first quarter, that would be great.

Well, yeah.

We usually don't do one-off.

Yes, we don't do one-off (multiple speakers).

We're not reporting it like -- we're not generally doing one-off things like that but let's see.

The books, booked slightly later and level of confidence.

Well I think I talked a lot based on Steve's first question about how we think about the lift factors in the business.

And the lift factors all look good.

And the key is going to be what is the consumer response to the newness and to the additional contacts.

So we have a lot of data on that.

We don't have a lot of data on the newness.

But we're generally taking a down the middle view of kind of what it should be.

So we feel confident that the numbers we're putting out there are achievable numbers.

And if we get any kind of tailwind behind us, if for some reason, we see some interest rate cuts or other things, that price is dropping meaningfully in the housing market and the housing market picking up, that can be some tailwind.

Can we have more headwind macro wise?

I don't know, maybe.

It looked a little worrisome when inflation about a couple of months ago was ticking up would they have to raise interest rates.

But right now, the latest report says no.

But we feel generally confident about what we're doing.

And we've all been here a long time, building this company and building this business.

So we have a lot of experience doing it.

But at the same time, I do say it's the first time we've been through a transformation this large.

So it's unlike -- and it's not unlike anything else you do that's new and different and innovative and inventive, there's the greater level of reward and a greater level of risk.

So this is our best view today.

Got it.

That's helpful.

Thanks a lot and safe travels.

Thank you.

Curtis Nagle, Bank of America.

Great.

Thanks very much for taking the question.

So maybe just changing gears slightly, Gary.

Just curious if we can get an update, I guess, on the progression and the timing of the Aspen ecosystem?

And then the concept more generally, I don't think that's something we've talked about on the call in a little bit.

I mean, what, Aspen ecosystem?

And more generally the concept, yeah.

Yeah, yes.

It's going slower than we anticipated.

Our development partner likes to say, probably easier to develop on the moon than it is in Aspen and things are taking more time.

Aspen, it's a small town.

And during COVID, they had a lot of disruption and it backed up everything, and we really slowed down because of that.

And then they had a lot of turnover in their whole planning group and that's kind of slowed us down a bit.

But we're up and moving.

Our mountain house is kind of on track.

Our mountain house is that the name for the big gallery we're building there.

It's on the best corner in Aspen.

It will be a three-level experience and two levels of retail.

And we're going to, I think, get a whole world of RH kind of concept there because you get such a global customer coming into Aspen, wealthy and affluent global customer.

And we've got a great restaurant, hospitality experience.

So that's on track for next year, right?

So that will open next year.

We're a standoff at the city on the Guest House and some arguments on if the wall -- that they want us to keep as historic or not historic.

And we believe it's not historic and proof of that.

That slowed us down versus what we want to build.

And then we are getting into process of the plans on the homes and things like that.

We slowed some of it down just because of the uncertainty in the market right now, like do you want to build homes and put them in the market when the interest rates should decide?

But it will be progressing.

It's all kind of going a lot slower than I think we thought, but COVID happened and you're in a small town and difficult to build and develop there and things are taking longer.

And you also have an interest rate move.

When you're a developer, we're now a developer, so your cost of capital is going to be higher and things like that for us and for our partner.

So it's time, usually, on some of the homes and things like that.

We're taking our time a little bit.

We don't think that there there's long-term value issue with anything in Aspen.

If anything, we've had a great timing.

We invested before the COVID boom.

I mean, that's to kind of before anybody had clarity on that.

So we believe our portfolio and investment.

We've made probably made two or three times our money already.

So if we wanted to liquidate our portfolio today, everything we have is worth a heck of a lot more.

But we didn't just do it for that.

I mean, we did see what we can learn about the idea to face in some places and so on and so forth, but we're excited about it.

We'd like to go a little faster.

But the mountain house is taking shape and moving quickly now finally.

And we hope the guesthouse will resume construction soon.

Okay.

Great to hear.

And then just a quick follow-up.

I just want to make sure I caught your comment correctly.

It sounded like -- I think you said, Gary, that in terms of just new products alone that could grow the business, I think, 20 points or more, also -- or maybe 2x.

So just would you be able to clarify just, I guess, kind of the range or just maybe I just misheard?

You mean as far as how we think of lift factors, Curtis?

Yes, exactly.

Yeah.

I think when you start to take it all into account, right, we can see lift factors getting us lifting the business in the 20-point range, right?

And as we move through the second half and all the circulation hits and I was just going to be a lot more people that are going to be aware of the business.

And we have 48 store months versus 12 just in the second half.

And we have a lot of new restaurants that they don't do zero, right?

Whether they may not do as much volume as the new galleries, they're not bad.

And so even things that you might think are small.

We're opening Waterworks, I think, what our highest volume showroom is -- New York and L.A.?

New York and L.A. and Long Beach.

I think L.A. is the center point.

I'm pretty sure.

In totality with Modern, yes.

Yeah, and so we're opening a Waterworks gallery within our Newport Beach Galleries.

The Newport Beach Galleries is the biggest gallery we've ever built.

And we're going to have 90,000 square feet.

It's got like 40 collections of outdoor furniture.

We've got, I think, 22,000 feet of outdoor furniture space, and probably the best putdoor furniture market there.

So we have 3,500 feet of Waterworks and Waterworks doesn't have a footprint in Orange County.

So it's like opening of Orange County generally for a lot of brands, you do about as much business as Los Angeles, right?

And so Orange County is going to be big, but Waterworks even that, if it does anywhere near what the Waterworks brand does in Los Angeles, it's a meaningful number.

So they're really excited about it, and we're really excited about it.

We're excited to launch everything it's going to be a good validation.

But there's just a lot, right?

You've got the modern book, interiors book, a temporary book.

The second mailing, a modern; second mailing of interiors, there's a lot of newness when you count all that up.

But there's a lot of also getting in-stock and all that stuff, the cycling, all those first round collections.

We now have read it.

We're reacting to.

We're ordering in the newness, some might have missed and we're marking it down and cycling it out.

And then we've got a doubling of circulation, and 4x into new store months.

And there's a lot of lift factors; as many as you have ever seen, as many as I've ever seen in this stage of the business like this.

So it's just -- it's different.

I know it looks different.

It should be different.

So appreciate all the questions.

And none of them surprised me.

You asked the same questions, if I was you guys.

Okay.

Thanks, Gary.

Thank you.

Michael Lasser, UBS.

Good evening.

Thank you so much for taking my question.

Gary, are you getting as much of a lift from the newness and innovation that you've been introducing as you might have in the past?

And does it make sense to delay further some of the introduction, in light of how challenging the market is, because maybe you would not get as much credit now or recognition now from your customer given what's going on?

Let's see to make sure I get that right, Michael.

Thanks for the question.

Let's see here.

Mike, we are getting as much of a lift from the newness as you did in the past.

Yeah, in fact, in some cases, we're getting better lift, like I said, you get a new -- in a business that's kind of our size and maturity, you don't get new bestsellers very often.

You get a new one probably every 7 or 12 years like a big furniture collection or a big upholstery collection, right?

So we're getting -- I think, we're getting as much right as we kind of ever have.

We always get a certain amount right and a certain amount wrong.

So I think we're probably similar to how we've been in the past, maybe we're a little better because when you get a new all-time number one you go like that changes everything.

And then does it make sense to further delay some of the new introductions, I think, was the question right, in light of the challenging market?

We're not really trying to delay anything.

Usually, when we -- like we pushed the modern book by a month, which then kind of pushes the next book by a month.

We didn't push contemporary, just pushed modern and interiors.

We want to have a certain amount of spacing between those two.

So we didn't overwhelm the customer with too many pages and too much product.

But the reason we delayed modern is because some dots connected while we were working on it.

It's a whole new design.

It's a whole new format.

And we're working with an exciting graphic designer from Madrid, who spent a couple of months living with us two or three months.

And you saw him last night at the party.

But some dots connected and we figured out how we could make it, we thought significantly better.

And we said, look, do the math.

Is it worth doing this and changing this?

And we're going to take a four-week delay and we believe it was worth it.

And I think it's -- I think the most exciting new book we've put out there ever in our history.

I think it elevates the RH brand.

I think it's going to track a higher level of consumer and interior designers.

And I think merchandise beautifully, it's graphically presented beautifully.

So that's where we spend more time.

I mean I don't think -- like we usually don't like go, oh, yeah, let's just kind of delay it.

Like we want to get our work done as we can.

I think when you're innovating and inventing, you're going to see new things all the time.

You're working on new things, you've got new data.

You can look around another corner and you see a new opportunity and you're dividing a page, do we pursue that, do we integrate that in?

Is that how important is it?

And we thought it was important enough to take or more and more weeks and work on the book and take it to this new level and actualize the vision we had.

And that's it.

I'm sure that's no different than anybody that's working on new products.

I don't know if Apple knows exactly when the new iPhone is coming.

There's not usually a schedule.

We're introducing the iPhone on this date or we're introducing this iPod or iPhone on this date.

While you might think it's just a book, it's a book with a lot of newness, we're trying to present it in a newest compelling way.

And you're kind of building and learning and making decisions.

That's why we just took more time we got.

We thought we could see a way to make it significantly better.

And we said, let's keep going.

Let's take the time.

It's going to be worth it, because it's going to be how the consumer now sees it, how it's presented, what's presented which way for the whole life of the book.

So the book is just -- four weeks later, okay, there's a little bit of demand move from one month.

And does it move forward?

If you thought it was worth zero, you wouldn't have done it, right?

Like if you thought, hey, this is going to be x and we're going to move things around and take four more weeks and it's going to still be worth x.

You wouldn't do it.

But if you think it's now going to be worthwhile and over the life of that book where those collections and how they're presented that way, you pick the one that you think is going to give you a better return.

So that's how we make decisions like that.

I mean, look.

I almost -- I mean I love what Elon Musk is doing and he's doing incredible things to change our world and change carbon footprint, the energy, and make this world much more sustainable going and doing all kinds of nutty things, right?

Creating places to live on Mars and ways to change the satellite networks and tunneling and all those things.

But I was going to order that when the Roadster came out, right?

I was all excited.

I wanted the Tesla Roadster.

Right?

You know, they wanted you to put to get the founders one.

I don't know.

I think you had to put $250,000 down or something like that.

And I almost did, you know?

It's not hot, but I got to wait like a year.

Well, I don't know what is it, in seven years?

It had been the Tesla Roadster.

Now I'm happy I didn't give my money, but I'm being like that now that's a real delay.

And I don't know why it delayed it that long.

Maybe it's going to come out and be rocket propelled, and it's going to be worthwhile.

But usually, we don't have like massive delays on things.

But you don't want rigidity to get into the way of evolution and innovation and better ways.

You just want to do the math and say, okay.

If I think about this, let's say, we have a new product and comes down the pipe and we're working on a book and a season, and we're going to either going to launch that product and it's not going to come in for, I don't know, three months?

And you say, gosh.

Wait for the next book.

Say, yeah.

Wait for the next book or you can put it in that book and you can give consumer -- the consumer can see it.

They can order it.

And it's going to get in.

If the next book's a year later, it's going to get in 26 weeks early, not really three months late or something.

It's all simple math, the way we look at it.

So we made a decision to make the book better.

It took us four weeks longer.

We think it's going to be better forever or it would have been not as good forever.

So that's the lens we're looking through.

Got you.

My follow up question is it sounded like earlier in our conversation this evening that you mentioned the consumer is buying more on promotion.

So a, is that right?

And b, is that persist?

Does that change how you think about the path to RH's long-term margin aspiration?

Well, I think it's -- yeah.

I think it's massively down housing markets like this or down.

It's like if we're in a recession in any category or entire -- right now, we're in a massive housing recession and anything that's tied to housing, right?

Apparel is benefiting based on that.

Like, instead of people buying homes and they're saving a lot of money not buying a new home.

So it's easy to go spend some money on apparel.

Hey, honey.

We didn't buy that new home.

But h***, do you want to buy a new purse?

Sure.

Yeah, but it's an easy trade off.

But you always are going to have a higher degree of sale goods in a down market.

Always.

And because just demand's slower, you're going to have more markdowns.

You got to keep inventory moving so on and so forth.

So that's all factored into the margin guidance short term, but it doesn't change the margin guidance long term.

It's just based on the demand environment, how strong is the demand environment.

I mean, as an example, the demand environment for our category in the COVID years was unbelievable.

Margins went way up.

The demand environment post COVID not so good, because up against those numbers.

So margins go down.

Then on top of that, you compound that you're in the worst housing market in 30 years and margins are going to go down again.

So it's all relative to demand, nothing more than that.

I hope that makes sense.

Totally.

Thank you very much.

Okay.

Thanks, Michael.

Jonathan Matuszewski, Jefferies.

Hey.

Good evening, and thanks for taking my question.

Gary, can we get an update on how the brand is resonating with the end consumer in Europe?

I think, on the last call, you mentioned satisfaction with some of the momentum with trade customers to acknowledge a bit slower progress with the end consumer.

So anything you could share in terms of maybe what your customer insights group is seen as it relates to brand awareness or intent to purchase or overall perception would be helpful?

Thank you.

You're talking to the consumer insights.

We're all sitting around the table.

Yeah, what's great is we just got back before we went to RH England -- RH Madrid for the event.

We were in RH England for a visit there and we sat with the team there for several hours just trying to listen and learn and just -- we just celebrated our one year anniversary in RH England and just identifying opportunities.

And we think that -- look, we've never done this before, right?

So we didn't know exactly, I don't know, what it would look like.

We could have guess at what it's going to look like, but we don't know.

We're opening in new countries.

We've never sold there.

You couldn't even buy direct from our brand in any of those countries.

So why would anybody know RH?

And so we're just learning a lot about consumer awareness there, how do we build it, what are the right ways to market the brand?

We always believe that the fastest way to build the brand, we think, is through a physical presence and people can see it, touch it, respond to it, be served in a way have interior design services, all kinds of things.

And so I'd say after a year of being opened in RH England, we're kind of where we thought we'd be.

We're trending at a level -- we're opening a gallery in the middle of the country side that we said we're opening through a lens of conversation versus commerce.

It's not where you would have started if you're trying to optimize commerce, right?

London is where you start, but we knew London was going to be several years later.

And we thought like, let's do something inspiring and elevating and something that would create an incredible first impression.

And to the brand, in that -- and we cited to open in a 17th century estate on 73 acres with the deer park and architecture design library, three restaurants, wine lounge, and a tea salon, and a juicery, and what else do we have there?

Yes.

We've got.

Yes, yes.

Stone exhibit, Sir John Stone exhibit, one of the greatest English architects ever lived.

But there's a lot of wealthy people that go to the Cotswolds, and weekends out there, and weeks out there, and especially during summertime.

And we want to create conversation.

And we think we've created a really great first conversation.

And the business trend in this first year now is where we thought.

I would say Munich, and Dusseldorf, Brussels were not really going to be first on our list, but we had an opportunity to get some good locations and a deal where Abercrombie was closing some of their flagships and we thought they were good locations.

And we opened those.

They wouldn't have been strategically in the order.

We would have liked to probably be in Paris and London first, build the brand awareness, but they were convenient and we could get into them for not a lot of investment as a lot of the infrastructure and stuff is done by Abercrombie.

And we've gotten open in those places, not knowing really what to expect.

I think that for us, the real key is get open in Paris and London and Milan and even Madrid.

Madrid is one of the biggest cities in Europe and the biggest city in Spain.

So I think we're going to learn more.

Just from our conversations.

Yesterday with the team, we had some great feedback and great ideas on how to build the business and get more people to the gallery and so on and so forth.

And some of them, we think and work across the entire -- not only entire Europe, but actually across the entire US market.

So that was really great.

And an incredible investment of our time and great insights from our people and some of the people in our design team.

And so then just even things like products and having the right kind of products for the right markets, right sizes, right delivery times, what are we stocking in the UK versus what we're stocking in the US; what sizes, what shapes, what things, and how do we shift faster on certain things and supply chain lead times to different countries.

So there's a lot to learn.

But I'd say, I feel better and better about it as we go.

Because we're learning more and more and we've got some really great people on the team; really smart, intelligent, passionate people on the team.

We've got a lot of great feedback yesterday.

The teams and all the galleries, I think, are just outstanding.

I think the galleries look great.

I mean, we are in Madrid, and may have been the best work we've ever done from a presentation point of view and interior design and styling and stuff like that.

I mean just breathtaking.

And I think Madrid like set a new standard in our company and gave us a vision of where to take all the galleries and how to execute at that level everywhere and we think it will impact the whole company.

So look, we're opening.

We're learning.

Our business is building.

Every one of our galleries, the design pipeline is building.

And we're in spring-summer period now.

So we're going to start learning a lot more in England, because once people really start going out there again, and we're learning across the platform.

So I'd say, all good.

Hopefully, as we get Paris and London, open in Paris a little bit next year in spring; and London, hopefully, at the end of next year, that was a little complex.

We're stringing together four buildings and different work places and stuff like that.

But right now, we believe it looks like next year.

And I think those are going to really raise the brand awareness massively for us.

And then Milan after that.

That's really helpful.

Thanks, Gary.

And then just a quick follow-up.

In the prepared remarks, you mentioned a growing number of online furniture brands that ceased operations.

We've witnessed this trend as well.

Based on our observations, it felt like disruption was more concentrated at the mid-tier price points.

So are you seeing super premium online brands in your space vanishing?

Or was that comment more so foreshadowing disruption that you see on the horizon for upscale competitors?

Thanks.

Yeah.

I think there's a lot of -- I think, mid-tier is kind of like -- I don't know what's your definition of mid-tier.

I think there's more online players that are going to, what I'd call, a higher-end market; may not be luxury market, but there's a lot of overlap.

A lot of people doing a lot of look-alike things at price points that are overlapping ours that we've seen.

There's some from one of the ones that is having a lot of disruption, a lot of press is -- a lot of it's targeted to the trade and stuff like that.

So many of the ones like we are referencing, what I call, higher-end brands that are targeting trade customers and higher-end consumers.

But there's a lot of them.

Like I added, probably 100, I don't know, about 25%, 20%, or probably blown up now -- or teetering, not blowing up.

But I think there's a market like this, especially when you have the compounding nature of really tough housing market with a really difficult credit market or capital market.

They just can't get easy money anymore.

So there's no free money to kind of just grow brand and not make money.

In a market like this, you got to figure out how to get to profitability real quick, because the odds that someone else gives you money is very low.

And that's why I think a lot -- there's just going to be a lot kind of floating.

And even in the non-online spaces, you've got furniture retailers, regional people blowing up.

You've got higher end people.

Like Mitchell Gold didn't make it through the last management changes that they went through in their business in a market like this.

So I think we're going to see more disruption.

It doesn't look like that the housing market is going to snap back anytime soon.

So I think there's a lot of businesses that are undercapitalized, not making money that you're going to see more and more disruption, and that's going to all the opportunity.

Yeah.

And we're just so much better positioned today from a value point of view, the value of our product, and the disruptive nature of how we're attacking the market in some cases that we're going to be able to get some of that share.

That's helpful.

Thanks, Gary.

Seth Basham, Wedbush Securities.

Thanks a lot, and good evening.

Just to clarify, Gary, you've seen a little bit more negative on the macro than a quarter ago, but it didn't reduce the outlook for the year financially.

Is that just because you see more benefits from some of your initiatives?

Or is there something else?

Yeah, I think we haven't really put a lot of factors.

The macro steps bounces around a little bit, but I don't think it's going to -- unless there's a real another step down, I don't think it's going to move us off our list factors or builds in our business.

So there may be some shorter-term noise within quarters, things might move a little bit, housing market might be a little tougher or not tougher.

If you look at mortgage applications and things like that, those can fluctuate a bit in there.

So there's some macro noise within a year.

But I just don't think that -- we didn't really think that the macro is going to get a lot better.

And so I think we're more right than wrong about what the macro is going to do.

And I mean, even if we get one interest rate cut this year, if they go a 75 or even 50 basis points, it's not going to move the needle.

And so -- but it's interesting.

We might get a point.

Everybody thinks we're going to get a 95% chance for one cut.

I don't know.

There was a 95% chance for five or six cuts, not too long ago.

So we'll give you our view on the macro, and we take it into account on our business.

When you're bouncing around the bottom, like we are in the housing market today, we kind of think we're going to probably bounce around the bottom for a while.

We hope the bottom doesn't go lower.

I mean could it?

It could.

We're not really macro experts.

We try to interpret what we see and look at the trends and take all the data in it, use our best views on just directionally.

Is it going to get worse?

Is it going to get better?

Right now, we don't think it's going to get worse, and we don't think it's going to get better.

I think it's going to stay about the same through probably Q1 of next year.

Got it.

That's helpful.

And just a related clarifying question.

You previously talked to peak inflection, our peak year-over-year growth, first in Q2 this year.

Now, I'm not sure if it's back half of '24, whether you actually see the peak sometime in early 2025?

Yeah.

I mean it's interesting when we're kind of seen that.

We see a lot more now.

And we can connect a lot more dots now.

We've got some real product winners and things that are emerging, and we can see how to dimensionalize and optimize those now.

So that's, yeah -- that's kind of -- when I say peak, well, let's define peak inflection.

I'm talking about kind of peak inflection of RH sans the macro, right?

We get the macro, like our product peak will look like what?

So I'd say I think it's likely for us looking like late '24, early '25, I think.

But then again, you could say, oh, well, the peak is going to be 10 years from now because we're going to keep getting better, right?

So it's not like we stop, but I'm talking about like the big moves we're making.

I'd say, yeah.

There's more we can see today.

And I'd say it looks more like kind of late '24, early '25, just because we can see more newness.

Look, we've got a big development pipeline from a new product point of view.

And we've got a pretty big development pipeline from a platform point of view, right?

And probably in the next quarter or two, we'll give you some updates on just new galleries and how many we can do.

We're feeling more optimistic than less optimistic about what that pipeline looks like.

And that will give us some more lifts and things like that.

And at some point here, we'll get Paris and London.

And we just got Madrid open.

We'll have Milan open.

I think that business will all start to reflect.

There's a compounding effect of consumer awareness that happens with the brand.

Like, once you start to really acquire customers to get more customers, you're doing a good job.

It's like, you open a restaurant and certain amount of people coming with you and opening night.

Next night, next night, and then they tell more friends, and they tell more friends, and pretty soon you've got a full restaurant, right?

It becomes a compounding factor.

And I think we're going to have a compounding factor in Europe.

When Europe starts to inflect from that compounding factor of awareness, I think, it will grow faster than the core business.

It will grow significantly faster.

It's no different than kind of the compounding factor that's happening in our Guesthouse.

Our Guesthouse, we ran it at relatively lower occupancy rates in the beginning because we only sent out one e-mail and we wanted to be about privacy and luxury.

And we didn't want to -- it wasn't about filling it up.

It was about having it be full of the right people at the wrong time, and a level of viability to it and even accessibility to it, right, not making it too accessible.

And now we've got the who's who of people staying here because you get -- someone stays here and they tell four friends, and then you get two of those friends that stay, and they tell four friends, it just compounds.

And pretty soon something is doing significantly better.

And I think that's an important thing about building a brand like ours.

You got to build it the right way.

Like, the investments we're making now into physical locations in Europe, even in the US -- especially Europe because Europe is -- US is really hard to compare to Europe, because everybody knows us in every market.

There's no market we have in the US that we don't have customers.

We have customers in every market.

And so when we open in a new market, we kind of know exactly what's going to happen within 10% variance.

When you're opening in a new country where no one knows you, there's -- you don't know if you're going to exactly do, but that awareness build is going to be is going to be exponential versus the builds in the US.

Once it gets going, it's like that tipping point the people talk about like, what is it [indiscernible] talks about it, conversion point, the brand starts to get x percent of the market and it tips and your awareness starts to exponentially grow.

So yes, directionally, that late '24, early '25 is what we see today, but I might be telling you '26, '27, because we see more, and we're dimensionalizing more opportunities and optimizing more of the things, and it's worth more.

So

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Helpful.

Makes sense.

And if I may, one last quick one for Jack.

With the delay in the Modern Sourcebook, what was the impact on margin in the first quarter from lower Sourcebook mailing costs?

And will there be any negative impact in the second quarter from the delay relative to your prior expectations?

Yes, we had a minimal impact.

Yes, almost nothing because we were going to -- it was going to start to get in, in the last week, I think.

We've been in the (inaudible) quarter minimal part -- minimal of the expense with

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Minimal Yes.

It was most of the ad cost, almost all of it was in Q2.

Any other questions?

Brian Nagel, Oppenheimer.

So I have a couple of really quick questions.

It should be quick.

So one, just -- and again, this is a follow-up, too.

But Gary, you talked a lot about the tonne of the business and your leverage.

You mentioned strength in Europe.

Should we interpret the better trends lately is a direct reflection of the new products you have in the stores?

Is that -- that's what's happening.

And then the second question I have, just what explains the, I guess, the widening gap between sales growth and demand growth.

Yes.

No, I think that's -- you're right.

It's -- I mean, the new product is creating the inflection point, right?

And whether it's a new product that's just in the books and online or it's new products that we've also now put in the stores that is creating a bigger lift.

And then the other piece I'd say, not to minimize is just getting in stock in the new product, right?

It's -- you're just not going to buy it right, and you're not going to really buy it for all stores right upfront.

And so even if you decided to take an early bet and say, Hey, I'm going to buy this one for half the galleries upfront.

But your demand hits and you're selling way more than you thought, it doesn't even get to those galleries.

It gets to those galleries six months later.

And then it doesn't get to all galleries until six months after that.

And even if -- once you get it into the galleries, your lift might be bigger and then you're out of stock again.

So it takes a while in a business like this to kind of get ramped up because the factories can't move that fast against big numbers.

I mean, we're a big -- we're the biggest business at the high end.

So it was easier when we're smaller to move more quickly, I'd say.

It's harder to move more quickly when you start to have our scale as no one makes scale.

Like I said one of the collections that we did that became out of the gate, you could kind of forecast it, just dimensionalize it, based on the early demand trends that, wow, this is going to be our best collection I mean the manufacturer had a triple building, like they had opened two more buildings of the same size that they were manufacturing it.

They got from one to three factories.

So that just takes a while.

So you got to really think about in-stocks.

Like when we look at some of our lift factors, one of the biggest is, God, when we get in stock in that, when backorders come down, our backorders are record highs right now.

And so that's really the gap between demand and sales is backorders and special order lead times and wait times and then you got some permanent, that permanent, but like the issues in the Red Sea that caused us to go around the tip of Africa and to put almost two weeks 10 days on the product, basically two weeks.

That just creates a backlog itself.

So a lot of our goods are going that way.

And so you take two weeks and that demand that doesn't turn into revenue and it doesn't turn into revenue.

You don't ever catch up on that until we can access the Red Sea again, right?

And so it's the manufacturers catching up and it's getting in stock and it's shortening lead times and shortening special order turnaround times on new product, you're just going to create a big delta.

It's kind of no different really then kind of COVID, right?

Like you had a lot of demand happened and people can't ramp fast enough, and then you've got kind of a hangover for a while.

We're going to have some of that kind of noise here until we kind of catch up and then go on a regular cadence of 15% to 20% newness.

That's very helpful.

I appreciate it.

Thank you.

Thanks, Brian.

That was our last question, right?

Okay.

Well, thank you, everyone, for your time and attention today.

We're really excited about this transformation in our business and the evolution of the brand and the platform.

We think we're doing some of the best work we've ever done and the people are just doing are just doing an incredible job bringing this new vision to life.

And we think very soon, our shareholders will feel really rewarded to this work that we're doing, and we appreciate all of your support.

So thank you, and we will talk to you next quarter

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