RH (RH) 2024 Q2 法說會逐字稿

Good day, everyone, and welcome to today's RH second-quarter 2024 earnings call.

(Operator Instructions) Please note today's call will be recorded and I will be standing by should you need any assistance.

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

Please go ahead.

Thank you.

Good afternoon, everyone.

Thank you for joining us for our second 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 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 law, including statements about the outlook of our business and other matters referenced in our press release issued today.

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

Please refer to our SEC filing 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 event.

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.

Good afternoon, everyone.

Thank you for joining our call.

I will start with our prepared comments and shareholder letter and then open the call for questions.

To our people, partners, and shareholders, we are pleased to report that demand was up 7% in the second quarter, and it's continued to inflect positive, gaining momentum each month with July finishing up 10%.

Demand accelerated into the third quarter with August up 12% and product margins inflecting positive despite operating in the most challenging housing market in three decades.

Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America, while building the foundation for our long-term global expansion across Europe, Australia, and the Middle East over the next decade.

While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry.

Vectors are measured in magnitude and direction and can be effective in forecasting strategic separation and future market share gains.

It is now clear that our vector is increasing by both measures as we are outperforming the industry by 15 to 25 points.

We expect our performance will continue to gain momentum in the second half of 2024, fueled by our multi-year effort to elevate our product and multi-decade effort to elevate and expand our platform.

We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and adjusted EBITDA margin of 17.2%.

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

We believe our demand performance demonstrates we are the best positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower, closing the affordability gap that has pressed the market for the past several years.

Every act of creation is first an act of destruction, Pablo Picasso.

We've worked hard to destroy 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 plan for the second half of 2024 include the second mailing of our RH Interior Sourcebook, which arrived in homes mid-July through mid-August and is fueling our industry-leading demand.

With new collections and improved in-stocks, our demand should continue to build throughout the second half of 2024.

Post analysis of our circulation data, we decided to consolidate our RH contemporary source book collections into the RH interiors and RH modern books to optimize overall mailing depth and efficiency.

Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry and is aligned with our gallery strategy of fewer, more immersive, and brand-defining physical experiences.

The second mailing of the new RH Modern Sourcebook is scheduled for November with additional new collections and an expanded assortment, including the contemporary book consolidation.

Again, we believe our expanded assortment improved in-stock position will provide an additional lift to our business in the fourth quarter.

The third mailing of the new RH Interior Sourcebook is planned to be in homes early January through February, capitalizing on what is traditionally one of the largest selling seasons for furniture, post-consumers, and designers returning from holiday travel.

This mailing should help generate a strong finish to 2024 and continue the momentum as we enter next year.

As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bathroom 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 its revenues from the trade market, selling to architects, designers, developers, and builders.

While RH has a meaningful trade business, the vast majority of our revenue is 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 have expanded other trade-focused businesses and brands over the years.

Our plan is to launch with a 3,000-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 source book with plans for 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 billion-dollar global brand on our platform.

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

We continue to open the most inspiring and immersive physical experiences in our industry, and some would say the world; spaces that are a reflection of human design, the study of balance, symmetry, and perfect proportions; spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality; spaces with garden courtyards, rooftop restaurants, wine and barista bars; spaces that activate all of the senses, and spaces that cannot be replicated online.

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 the second half of 2024 includes RH Newport Beach opening in November, with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean will be one of our most dramatic, immersive, and brand-defining physical locations today.

And we'll put -- replace three legacy galleries in the region.

With a 260-seat indoor-outdoor rooftop restaurant with uninterrupted views of the California coastline, two wine and barista bars, an interior design atelier, our first Waterworks showroom, and the most expansive luxury outdoor furniture sortment in our industry, RH Newport Beach will be an inspiring destination in Southern California market and has the potential to become our second $100 million-plus gallery.

RH Rally, also opening in November, features 50,000 square feet of indoor and outdoor space over three levels with a rooftop restaurant, garden courtyard, a wine and barista bar, and an interior design atelier.

RH Montecito, opening in early December, is a reimagination of the historic firehouse in the charming enclave perched above Santa Barbara, California, featuring an indoor and outdoor courtyard restaurant with fireplaces and fountains, a wine and barista bar, and an interior design atelier.

The opening of our first RH interior design office in Palm Desert, California, this November.

We believe there's an opportunity to address new markets locally by opening design offices in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation.

The Palm Desert location is a unique test of a consumer-facing professional interior design office separate from the gallery.

Our goal is to establish the RH brand as the leader in the world of professional interior design and enable us to attract the highest caliber of interior designers in the industry.

As we look forward, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris and London in 2025 and Milan in 2026.

It is then we will begin to have the scale to support the advertising investments necessary to build their business across Europe.

We're looking forward to discussing our global expansion in further details once we open those important markets.

We are also making meaningful investments to elevate and differentiate our online experience and we'll be making meaningful upgrades to our website throughout the second half of 2024.

Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market.

We plan to file for design patents on several of the user interface and presentation designs, and we'll begin to discuss the new website strategy in more detail as we roll out the new functionality.

Now, let me turn your attention to our outlook.

Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024 and into 2025.

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 back orders, and shorten special order lead times.

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

We believe it is also important to note that we are now forecasting to end the year with an increased backlog of approximately $80 million to $100 million due to revenue lag in demand throughout 2024, which will negatively impact the adjusted operating and EBITDA margins by approximately 100 basis points for the year.

Additionally, the investments in startup costs to support our international expansion are now estimated to be approximately 230-basis-point drag for 2024.

Due to our inflection ramping later than expected, we are adjusting our full-year forecast for fiscal 2024 as follows on a 52-versus-52-week basis.

Demand in the range of 8% to 10%, revenue growth in the range of 5% to 7%, adjusted operating margin in the range of 11% to 12%, and adjusted EBITDA margin in the range of 17% to 18%.

For the third quarter fiscal 2024, we are forecasting demand growth in the range of 12% to 14%, revenue growth in the range of 7% to 9%, adjusted operating margin in the range of 15% to 16%, and adjusted EBITDA margin in the range of 21% to 22%.

Leaders have to be comfortable making others uncomfortable.

Leadership is about pursuing a vision, something you've never seen that's somewhere you've never been.

As creatures of habit, change is uncomfortable for humans.

But for the people and partners of team RH, the culture of leadership and innovation is at the core of who we are and we're collected in everything we do.

We've grown comfortable making ourselves and others uncomfortable for over two decades and plan to continue doing so for the foreseeable future.

It's what leaders do and how we know we're on the right path.

Whether it's launching the most prolific product transformation in the history of our industry while others are hunkering down during the worst housing market in three decades, we're opening the largest and most immersive physical retail experiences around the world while others are shrinking or closing their stores and moving online.

By refusing to follow the herd into the anything but social world of social media, you won't find us on Instagram or paying a bunch of strangers called influencers by phone to say they love our brand on TikTok.

One thing you can be sure of is that place you will likely find us is on the road less traveled.

One guided by our vision and values that will continue to ignite our spirit and inspire our customers.

Over 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of oxydol laundry detergent on the cover of its catalog into the leading luxury home brand in the world.

The lessons in learning, insights in intricacies, the sacrifices made, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and form cultures in organizations, lessons that can't be learned in the classrooms or by managing a business.

Lessons that must be learned by building one.

In a world that rewards duplication and penalizes the inherent bumpy road of innovation, especially for companies in the public domain, we, the people, and partners of team RH will continue to drive ourselves to destroy today's reality so we can create tomorrow's future, while remaining completely comfortable, making ourselves and others uncomfortable.

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

Onward, teammates, RH, carpe diem.

Operator we will now open the call to questions.

(Operator Instructions) Curt Nagle, Bank of America.

Great.

Thanks so much for taking the question.

Yeah.

So just know with the inflation demand trends driven by all these new product launches coming through, I'm feeling pretty good about the product margins.

And I think you called that out in the press release, stable, hopefully after the rest of the year, putting you, I guess, above the fray for a market that feels a little more promotional.

What are your thoughts on that?

I'm sorry, you were kind of -- we couldn't quite hear you.

Yeah, just with the inflection, new products, good margins.

How are you feeling about the product margins for the rest of the year?

That's the core of the question.

Well, I think as I mentioned in the third quarter, they've inflected positive.

And we feel very good about the business right now.

The inflection happened a couple quarters later.

When you're making big moves and big innovations like this, as I've said, it's not as much about the timing as it is the vector and increasing magnitude and direction of that vector and what that helps you kind of see down the road.

And now we got enough data through those product introductions we've made over the last several seasons.

And now it's about refining and polishing, continuing to learn and improvise and adapt.

And we've got a lot more in the pipeline.

So I sit here and I think about the mix will begin to shift today, but we like where we are.

We'd like the demand vector that's unveiling itself.

We like that margins have inflected positive.

We like that we got multiple galleries, new galleries opening in front of us, one of them could be -- one of them's worth like three or four galleries in and of itself.

And when you think about the kind of value RH Newport Beach is going to be -- I think it's going to be a dominant and disruptive force throughout Southern California.

And we're really excited about what's ahead of us.

So yeah, we're going to continue to do what we're doing.

We're going to continue to learn, grow, improvise, adapt, and refine and continue to elevaute our strategy.

So I can be more happy about where we are.

Would have liked it to happen a couple of quarters earlier, but that's not really the point, right?

I said to somebody, how many times does Elon Musk been on time?

When you're making big moves, it's really hard to be on time.

If you're really innovating, it's really hard to be on time.

If you're just iterating, it's easy to do that and be on time.

It's just that the size of the outcome is never that meaningful in a long-term strategic perspective.

So if you think about where we started, it's a $20 million market cap brand that was on the edge of bankruptcy with a box to box at all, laundry detergent and selling, nostalgic discovering Knickknacks with 52% of our business.

And to think that we made it out of that and built the brand that we built today, I bring that up from time to time to help people think about, if we could come from there and get to where we are today, what's the potential of where we can go next?

So we couldn't be more excited, but we also couldn't be more focused.

We're very focused right now.

And we're going to get more focused.

And we're going to continue to edit and get more clear and allocate our time better, allocate our capital better.

So in many ways, yeah, we're just kind of warming up with this thing.

This is the beginning of the inflection.

So couldn't be happier.

Got it.

And then just a quick follow-up.

So you noted that consolidation of the contemporary catalog, totally understand the efficiencies.

Do you think that maybe points to maybe the scope of the question being a little bit smaller than anticipated?

Or is it maybe just more of a timing thing, or it's selling a very high priced set of products and market is still pretty choppy?

The point about -- I put it in last year and I talked about contemporary at some point and said that we're kind of arrogant in pricing on the product.

That just a partial issue.

It's more about as trends develop and evolve in any industry, there's an opportunity to segment and focus on different looks, aesthetics, perspectives.

And we have been successful to this point at thinking about taking assortments, focusing them, and getting them to break through the clutter.

Yet all kind of still integrated as one brand with a singular point of view, but delivered to the consumer with more clarity than shopping, like some online thing like [Paragould] or Wayfarer, where you've got to look at a lot of stuff and you can't really find things.

So the ability to just focus our business and deliver the business with really clear and compelling way is what we'll continue to do.

Just in this case, there is a big, you know, a big trend movement no different than the big movement that was made that led us to isolate versus integrate RH modern.

That was a big discussion here years back.

As we developed that assortment, do we integrate it into our RH materials book and evolve that book?

Or do we isolate it and create a more focused message to the consumer?

And yeah, so you got to think about what are the size of the trends, how do the trends develop, how long the trends are, and, you know, you're constantly thinking about how to present in a clear and compelling way if this is going to break through.

So we've done a lot of things, a lot of different books, RH Beach House, Ski House, things like that, which you'll see come back and continue to communicate the breadth and depth of the RH brand.

And we've done big smile, small spaces, all these kinds of things.

And you don't have to keep doing them, doing them with regularity.

You've got to kind of keep painting a picture and breaking through and having people see you.

We are in a world -- we have six senses.

And out of our six senses, our dominant sense is our sight site.

And our sight drives 80% of our behavior, right?

And so, if you can't break through visually, the odds are you're just not going to be seen.

And if you're not going to be seen, how can you inspire anybody?

How can you create any kind of a destination or reaction?

So we're always doing that.

You'll always see us continue to think about how to be seen, how to break through, how to communicate visually in this world.

People don't see what you're selling, nobody cares.

Now, if they don't care about the quality, if they don't like the design, where the overall presentation doesn't break through the market and they just don't see you.

So, our business is all about kind of design quality and value in that order.

Everything has to be in the right hierarchy, and you got to break through.

So contemporarily, it's kind of like modern.

If you went back in history, people ask me all the time, where did the trends come from?

And I always tell them the debt.

It catches people off guard.

What do you mean?

And I said, well, look, generations pass away the belongings.

Going to the stage fails, the stage fails feed the high-end antique markets.

The high-end antique markets feed the high-end interior design market and the high-end reproduction market.

And then it trickles down from there, and it trickles through always in a unique and of the moment way, but whether it's mid-century modern or that came through or that whole trend or the contemporary trend that followed that, the next trend that is kind of going to start building, if you just lump them on a website, which nobody can see, by the way, it's an invisible store.

It's a great platform if your position is kind of price and things like that.

But if you're kind of leading an aesthetic system, if design is really critical to your positioning, launching online is very limited.

Nobody walks by you.

Nobody sees you.

You have to spend a whole bunch of money buying words and names, and you're buying other brands names, like a weird thing that is, right?

Oh, let me buy their brand name.

So I hope if somebody stumbles into my brand?

And maybe they'll see me or when you buy a bunch of words or things like let me, hey, like, is this so many kind of weird ways that people are trying to break through.

I mean, we just go at it differently and uniquely and we're very good at that.

So we're not perfect at it, right?

So contemporary, we never thought it was going to be with a big trend.

But what it did is it became bigger than we thought and it kind of blurred lines.

And so the lines between the interiors book, the modern book, and the contemporary book, we're becoming too blurred.

There wasn't the need to have all three.

It would be better to consolidate, make the other two more dominant, mail a more dominant book into the marketplace at greater depth and get a better financial result.

That's the key here.

It's not like a contemporary didn't work.

The goods are out there.

We have some stuff that was too expensive.

And when we first did Italian upholstery and things like that, and we put $70 a yard, $80 a yard fabric on it, not a $20 yard fabric on it, and all said we had price points that were too high, yeah.

But that's okay.

Mistakes are part of innovation.

People are afraid of mistakes, never innovate, never take the risk.

And mistakes for us is just another lesson, another learning just kind of what we do.

So I don't think contemporary is a mistake.

I think we priced some of that book incorrectly.

That was a mistake.

But we learned a lot.

And our view based on the data and the numbers is consolidated.

And if it's just going to break through, the lines were too blurred.

Well, you'll see us come out of other things in the future that may or may not continue to kind of -- the goods may lend in another way.

But you've got to continually breakthrough, right?

Not doing the same thing over and over again, kind of expecting different results doesn't work, not in a world that's constantly evolving, right?

But being consistent and having consistent values and beliefs and consistent approach and point of view is really important, right?

So everything we do goes through our filters, and whether it's modern, it's an RH point of view on modern, whether it's interiors, whether it's classic, traditional big-small spaces, beachhouse, ski house, all the things we do, I think, are recognized out there.

And people go, oh, that's RH.

I mean some people still call us Restoration Hardware.

So I just try not to do that.

We're trying to hone the brand, make it simpler, get is a breakthrough.

So anyway, yeah.

Appreciate that.

Understood.

Thanks, Gary.

Okay.

Thank you.

Thanks, Curtis.

Steven Zaccone, Citi.

Great.

Good afternoon.

Thanks for taking my questions.

I wanted to talk about the product assortment because there's been a lot of newness.

And I think last year, you gave this point that 80% to 85% of the assortment would be new.

So I'm curious, are we at that point now?

Or do you need more newness in the second half of the year?

And just with more product newness coming into the business, do you feel like you're at the right cadence now or as we get into '25, you'll have incremental newness to present to the consumer?

Thank you.

Sure.

Thanks, Steven.

Good question.

So we have a lot of newness coming in the second half and a lot of newness coming throughout next year.

I'd say, mid to late next year, we will start to be on a more predictable cadence, right?

So we will hit the 85% in the first half of next year.

There's a lot coming in the second half, and there's a lot coming in the first half of next year.

I'd say by the second half of next year, we'll be on a new regular cadence.

So the business will be very different.

But we'll also there'll also be other things, right?

Other category we might address, like Waterworks.

I mean we've got a really small kind of bath business.

I mean, we're taking the best -- arguably the best bath brand on the planet, most desired and coveted bath brand on the planet.

And if you think about the industry, the general trade industry is generally 80% of their business or a little more.

But directionally, think about it, 80% of the business is to architects, designers, builders, so on and so forth, right?

It is a business-to-business kind of platform.

And while we have a big trade business, 80% of our business is to the consumer.

But a lot of trade showrooms and they're not even open on weekends.

They closed at 5:00 or 6:00.

They're not open at night.

They're not in places where consumers.

There's high traffic or so on and so forth.

It's a completely different model.

So what we've learned over our journey here is we took trade brands and businesses years ago.

I mean, one example is Perennials, one of the great brands in the high end to the trade -- high-end outdoor fabric business and evolved into indoor fabrics and other textiles, et cetera.

And convinced David and Ann to give us a world.

I think it was a long courtship.

But we've decided to partner and test, and it really worked out well for both of us.

And their trade business is bigger today, and their business with us and other consumer businesses is very big.

I don't know their numbers, but it's worked out well for both of us.

It's no different than why we made the acquisition of Waterworks, why we acquired Dmitriy & Co, Couture Upholstery, Joseph [Juth], kind of the furniture -- to the trade businesses and great design and quality of products, even more importantly, just remarkable people and talents.

And if you think about it, we bought Waterworks eight years ago.

It takes time to refine polish, think about integration, do things really in an incredible way.

And I think if anybody in this call comes to the opening of Newport Beach, which I would say, is not to be missed RH experience, if you want to see how we can really disrupt the market, that's going to be a great example.

And we're going to launch our first integrated Waterwork Showroom, and the brand will be seen by so many more people.

As I said, sight is our dominant sense, right?

And so what we have today, 14 Waterwork showrooms?

Yeah, yeah.

There's 14 Waterwork showrooms in the world, right?

And I think the biggest one is like 10,000 feet, something like that -- somewhere 3,000 feet.

But they're not in the most highest traffic areas.

It's just most trade brands aren't.

But when you put the best brand in the world in front of multiple times more people who have the financial ability to buy the best product in the market, why wouldn't they, right?

Why wouldn't they do that?

You take the design and quality of Dmitriy & Co. You put it in front of a massively bigger market or Joseph Juth and put it in front of a massively better market at a greater value because you work at building the platform to scale that level of quality.

I mean, I used to say way back when, when we were first breaking through and building our model, that furniture of this quality wasn't sold in quantity, and we had to build a new railroad like a supply platform for this level of quality.

I mean, people we work with them beginning the businesses were $1 million a year, $3 million a year, $7 million a year companies.

And those companies are like $150 million to $200 million today, selling that level of quality.

It just wasn't available right?

I mean you kind of stopped at Pottery Barn, stopped at Creighton Barrel and maybe throw Ethan Allen in that, but a different kind of aesthetic, and I wouldn't say it's negative, but just wasn't what was kind of evolving in the market.

And so we did that.

We made a lot of investment.

We invested in the company.

We lend people money.

We did whatever we could to help then help us, right, and create -- that's why I say in every letter, I write to our people, our partners, and our shareholders in that order, that is the hierarchy.

That is the order of success.

And we try to build incredible partnerships and we try to take 1 plus 1 equal more than 2.

And sometimes it can equal 10.

But it doesn't happen like that as we kind of created, I think, a new market.

And look, whenever you're a market leader, there's going to be followers and there's followers and people are coming in and you've got to keep innovating and reinventing and evolving faster than others.

And competition is good.

It makes you better.

Our market ahead of us, I mean we're the kind of the biggest of our kind in the world.

And the opportunity is massive ahead of us.

But that takes a long time to see like Steve Jobs never saw Apple like what it was -- trying not to go bankrupt.

Then he got fired.

Then he came back and saved the company from bankruptcy.

And then you keep looking around corners, you keep learning and growing, listening and learning, testing and trying improvising and adapting, adapting and you grow, and that's what it's all about.

But you can't become a manager of a business.

You'll never create.

You'll never create or build of a market-defining brand.

So I think that's what makes people uncomfortable with now and then it makes us a little less predictable.

That's what we do.

And if you look at our history in the last 24 years since we've been on this journey from where we were with no resources, no capabilities, bankruptcy -- trying everyone would go try to not go bankrupts while you're trying to evolve the business.

If we're able to get from where we were to where we are, you can only imagine where we can go next.

But along the way, we're going to test and try things.

We're going to, at times, try to do too many things, and get a little unfocused as that happens and try to continue to just be maniacally focused.

And I think for the last few years, I think about last five or seven, I think we tried to do too much.

And it's not fun when you kind of only great at a few things and maybe your -- the outcome, you've got to be great at all things.

If you want to be the real market leader, you've got to have the best product, the best presentation with the best brand, and you have to have the best financial results and the best shareholder returns and all those things.

And so as we go forward, think about cadence and newness and stuff like that, you're going to see us continue to edit and focus.

Building what we just went through.

None of us here had ever done that, like I've never let a team through a period like we're going through right now.

And all the things you've got to kind of design, develop, integrate, present.

It's a lot.

But really the best thing, how much we learned and how much better we are.

Not just the brand that leapfrogs.

It's the leaders that leapfrogs.

So you don't build the business.

You build the team, and the team builds the business.

So the people here that have built this business, that's what you want to focus on.

Like if you didn't die trying along the way over the last 18, 24 months here, you were way better.

You are way smarter, and you have a capability now to go toward a whole new level.

So that's what I'm really most excited about.

All the people that, as I like to say, a time marks through hell for a heavenly cause, that got us here that now have the ability to take us to a whole new level because what we've all learned together, how we've grown together.

That's what's most important, and that's what's most exciting.

Great.

Thank for all that detail, and I look forward to the invite to the Newport opening.

Look forward to seeing you.

Steven Forbes, Guggenheim Securities.

Gary, last call, we briefly discussed, right, the idea of top, middle, bottom tiers of the assortment, the new collections.

So would love to hear you sort of talk through how you think the collections are mixing into those tiers today as we all try to sit here and conceptualize like what the potential aggregate demand lift could be from the actions thus far into '25 and beyond?

Yes.

Well, how many of the new collections made it in the top?

Those will really move the business.

They made it into this top middle third, they'll move the business up.

If they made it into the middle.

They're not going to make that big of a difference except when you get enough to the top 30 -- pulls the whole thing up and the middle gets higher, and there's a new middle -- when you think about this analogy and how I kind of describe it.

And your bottom third is a bigger -- it's a much more productive bottom third, but you've got to kind of keep getting things into the top third, right?

That's the key, because the top third pulls everything up, it's like great people.

It's like great leaders, right?

They pull everybody up.

They set a whole new expectation and a whole new bar, and all the people that are capable and have the desire and the capability reach a whole new level and everything moves up.

So the real key here today is, like if I just look at it and I go, okay, where are we versus the industry?

Where are we?

Where is our demand versus others?

What does the vector look like?

What are we learning from the new top third?

Because you wouldn't have the inflection we have, unless you redefined the top third, right?

And you redesign the top third, it's forever redefined.

And then the middle third is forever redefined.

And the bottom third is forever redefined, right?

And it's no different as you think about the product, as you think about people, right?

Somebody goes out, take the Olympics, as a point of reference and breaks a record in the 100 meters or in some swimming race.

It's a whole new standard.

Everybody swims faster.

Everybody runs faster.

It's a whole new game.

You just keep redefining.

So that's the way to think about it.

It's the whole three-thirds are moving up or moving down, right?

If you throw too many things in the middle, you're probably going to fall behind because everybody is moving forward, right?

The world is evolving.

If you're out there and you throw things into the bottom third, and you're more weighted that way, you're going down.

But you have to start with generally in every market, somebody is doing a good job in moving the market forward.

And they're going to create a higher standard and and other people will follow.

Other people will learn from them whether they're there or not.

If they're smart, they'll study the market leaders, not just to emulate them.

Maybe short term to emulate them, but if they want to be the new market leader, they have to conceptualize and conceive a vision that can leapfrog that market leader.

It's really hard to take a market leader up, takes sometimes decades.

How long was IBM at the top.

How long with Microsoft at the top?

Microsoft at one point was 800 times more valuable than Apple. 800 times and then Apple leapfrog them, but Microsoft is coming back.

Their new CEO is leading a crusade.

If someone has said, Microsoft would bounce back like that.

I say no way.

They're dead.

Once that vector starts, you leave people in the dust.

And I mean probably a lot of people here.

I mean it was the BlackBerry -- it was into the movie or was Blackberry.

Movie.

Great movie.

If you want to think about vectors and market disruption and changing of the guard, what's the BlackBerry movie?

They were so far ahead.

They had so many things right.

And they stopped inventing.

They got complacent.

And the Apple iPhone comes and that's seen when they're -- it's like the guys walking, they had the leader there, walking down his pits and he thinks he's going to get it back and he sees his people and Steve Jobs just presenting the iPhone going through.

It's a phone, it's a music player.

It's an Internet device.

It's the phone.

It's a music platform.

It's an Internet device.

And he goes, do you get it?

It's one thing.

It's the iPhone, and changes everything all the people are like, oh, s***, we're dead.

But then you saw in the later part of movie, the partner, I think, is pitching some of its partners for the platform and they’re going -- well, here's the lines, here's the market.

There's how Apple is inflecting, and it was to -- let Apple ran away.

But the new CEO of Microsoft, that's the guy to me.

I mean that's like, wow, one of the great comebacks in American business history, you don't see that you can see IBM’s come back, you're going to see Xerox come back.

You can see all time -- you can name a lot of them.

It's like were Ford, we're Chevy, we're this, we're that.

If somebody starts to make a move and that inflection happens, it's hard to come back.

But yes, it's all about leadership.

It's all about innovation and invention and leading and not managing.

And being a newsmaker, not a new caster.

But if you're going to do that, they're not all great days because you're going to break some glass along the way, while you're building something nobody has seen before.

And it's whole top third, middle third, bottom third, right?

You've got to take big risks, you've got to place big bets.

You got to do things like it's not a contemporary it work, Kepler is just a stepping stuff.

You're going to see new things when you try new things.

But I like where we are.

But I'll tell you this, we're more focused than we've ever been.

We are smarter than we've ever been, and we've got a big edge.

So we're going to make some really smart moves over the next several quarters and several years.

And I think we're just going to be a lot more focused.

I mean that's the thing Steve Jobs said, yes, about saying no to 1,000 things.

We got the same no to more things.

Like you always think you think as you've done some great things, you think, oh, I can do so much more.

I can do so much more.

You generally didn't get there by doing a lot.

I mean, I took over RH, I eliminated 100% that was skewed, like we don't have one thing.

I eliminated 50% of use in my first season and had to try to figure out how to navigate that.

So you've got to make big moves and you're not going to get them all right.

Okay.

I had to sell slippage for 10 years.

Did I like selling foot today selling out?

It put debate with that a steppingstone to get to Italian betting and Belgian linen and Waterworks and all the things we're doing today.

Yes, of course.

So anyway, not facing to you guys when you have questions, probably I've got hundreds, if not thousands of our team members on this call.

So speaking to the constituencies that are on that letter.

Simeon Gutman, Morgan Stanley.

It's Simeon.

I wanted to ask twist on maybe what Steve was just asking, the confidence that this initial demand that you have here has durability.

And I know Gary, you mentioned the vectors and the market share spread I think you have a lot of newness, you have catalog or sort of books.

So you have reasons to be stronger than them at this point, and you had this coming.

So how do you look out several quarters?

And then related to Steve's question, when you talked about the different tiers or tranches, do you have enough product out to see how some of the initial product is trending?

How many of those top third categories might you already be sitting on?

Yes.

Look, we've learned a ton.

Yes, we've got a lot of data.

And so, yes, we're very confident in our outlook and what's ahead of us despite whether we get interest rate cuts are not interest rate cuts, right?

It's not a -- as all of you know, look, we came into this year, everybody expected it was I think in the markets we're betting for five to six interest rate cut.

And so far, we haven't had one.

And now they're saying, oh, it's time to an interest rate cut.

Well, those are the same people that said, oh, when inflation went from 2% to 4%, it was going back to 2% over the next few quarters and then it went to 9%.

So that's not as big at those people, by the way.

Leading and trying to look into the future is really hard, right?

You guys do models and everybody, you have forecast on everybody.

My sense is almost every plan you have, every forecast you have in some degree of wrong, right?

And so the key is, are you more right than wrong?

And are you learning?

Are you gathering more data?

Are you sharpening your store and can you see around the next corner?

So we have a lot of confidence.

We have a lot of data.

We put a lot of products in the market.

We've learned a lot, and we have a lot of news coming in, and we're rebuilding everything here, every model, every part of our organization, everything is kind of under inspection, under its path.

We're going to reinvent every way we do things.

And then as we do, the things we did best, we'll optimize those and we'll focus those and those will be our next round of habits and behaviors.

But you got to be careful, you can't stick with those things too long because other people will learn from you and you got to keep moving forward.

So we had a lot of reasons that will be stronger than the competition for a long time right now, a lot of reasons.

And a lot of reasons why we'll take a lot of market share.

I mean it's not an accident, right?

I mean we've been talking about this a long time.

The question was, well, when will it happen?

I mean some guy that I know that used to work here as an analyst put out a report last week, never talked to me I don't know probably 15 years.

And he said, oh, they're product transformation is a complete dud.

I don't know how he feels today, but he's going to feel worse in the coming quarters.

You don't learn anything by being a sideline predict.

If you want to learn something, come here and ask you some questions and you learn something, but you want to be a fad-like credit, you're not going to learn a lot, and you'd be wrong a lot more than you're right.

So we look out over the next several quarters, over the next several years.

If you think about the real estate pipeline we've built an incredible real estate pipeline coming incredible.

You feel -- I mean we're just infants in Europe.

Yes. yes, fairly.

We're learning what do we do, and we kind of opened some galleries in an order we didn't want to, but we couldn't have got the other galleries without taking those in a real estate deal.

And so we've launched but not really the way you launch if you want to build great market awareness.

So when we opened Paris and London and Milan, there's going to be a significantly different awareness of RH.

So it's not that we don't love the ones we did, but not necessarily in the order we would have picked as we were thinking about positioning and building the brand.

But sometimes, you got to take the opportunity that they come.

And you've got to -- it's not perfect when we're not rolling out like formula of mall stores or 5,000 or 10,000 square foot things or even 15,000 square foot things and go into a mall or going to look somebody else's box and building a storefront and then like floating a couple of walls or something with a run-on setting to ship on a floor.

It's like not what we do.

We build things they're going to last generation.

Like other people talk about their great showroom.

I mean, put one next to ours and tell me what's going to stand the test of time.

What we're doing, I think, long term is going to be incomparable and massively durable.

I mean we came from nothing, came from a bankrupt business, selling [shot shoes], and we built the market leader.

And we went through a massive -- we're in the middle of it a massive transformation.

I've never done this before.

No one's ever done it.

The industry has never seen it.

But now you're going to start to witness the potential of the RH brand and the team behind that brand, more important.

So we just couldn't be more excited.

And do we have a product that -- the product tiers are trending?

Oh, yes.

Oh, yes, and we like what's in the pipeline.

We've seen a lot, and we're going to keep building it.

And we've got -- we've got too many ideas to execute right now.

The key for us is focused and hierarchy.

And what is the right hierarchy, what comes first, what comes second, what comes third, how do we allocate the human and financial capital in the very best way, and how do we stay now to 1,000 things.

That's going to be the hardest part right now.

What are we going to stay now to?

What are we not going to do?

It's going to be as important, if not more important than what we do right now.

But we might decided to work on what is actually number one.

But we also worked on number three and four and five at the same time.

And we never gave, number one, the focus it needed to change everything, right?

So that's how we're thinking right now.

We've got a lot of edge.

We've got a lot of focus.

We've got a lot of energy we're very enlightened and very excited.

But also, we have a lot of edge.

We're not taking anything for granted.

I couldn't be more excited about where we are and what's ahead of us.

Max Rakhlenko, TD Cowen.

Great.

Gary, so you earlier walked through the importance of galleries.

Can you provide an update on where you stand in resetting making store assortment.

I think on the last call, you discussed being around 50%.

So just curious, where is that now?

And when do you think it will get closer to or fully reset just given the potential that it could have to the business?

Yes.

We're at the very early stages of that.

Like, again, do you want to think about we reset on the early data, then we get better data, and then you've got new newness.

And then you've got -- so you're going to constantly read and react and refine.

And I mean, I mean we're right now so excited about some of the stuff going really, okay, how do we run to get that in the galleries.

What do you do?

Like your life depended on it, how do you get the goods in the galleries now because they're going to really massively lift.

I think like public, right, our mix, right?

Yeah, everybody, 70/30 kind of -- no, not really.

No?

Okay.

Okay.

I mean the game is get to goods in the gallery right now.

We get the right goods in the gallery on the floor in the right place.

That alone is a massive move, a massive move.

But we've got you got to ramp up the production, you got to get it, you've got to dimensionalize it, you've got to -- that's why we're running with a higher level of inventory right now, we've got so many things.

These transitions are really tricky.

You're not going to buy it right.

So you've got to kind of invest in kind of some downside protection, right?

And you've got to carry heavier inventories for a while, while you're learning and then you've got to kind of edit and refine and go through it.

But what you're identifying is one of the next big moves.

I would say where are we on the galleries having all the right goods.

I mean I know Stefan, would you say?

Yes.

Yes.

Will we say 30%.

I would say 35%, 40%.

Yes, 35 -- yes, 35% to 40%.

Yes.

There's some big turns there.

Big moves.

Got it.

That's helpful.

And then maybe we can keep this one for and it might be rudimentary, but where do you stand now in the promotion in your promotions and sort of winding down the old, discontinued products demand is picking up.

So should we think that you're probably in the latter innings or how should just we think about it?

And then just the key drivers of the product margin inflecting here more recently.

Yes.

I'd say, look, we're in the middle of kind of the big moves in and out, right?

So you're learning, you're transitioning and you're kind of building the bridge to the next place.

So I wouldn't really I mean I think everybody is making that a bigger deal.

And I agree the report don't know, they got to get rid of the clearance or whatever, you've got to build a bridge to the future.

[indiscernible] way ever be overly focused on that.

I just focus on, hey, is our demand growing and is our margin inflecting positive again, right there.

And then how do we organize the brand and the business all throughout build the platform and infrastructure and organize the company for where we are and where we're going next, make it really efficient.

So we're in a very inefficient stage, right, massively inefficient as we've been laser focused on just kind of almost one thing.

And so a lot of things -- we've got to kind of rethink this all up and put things in the right order, and yeah.

So yes, but that's what we do.

So we've been doing this more time.

We love doing it.

It's what we do.

We love big moves like this.

We love these times.

Yes, this is what we live for, figuring it out, doing it better than anybody else in the world, leaving no doubt.

But it's like exactly how much we're marking down and what that is.

I mean, the question is what does the vector look like?

What does the vector look like demand?

What it looks like in margin, where eventually will the vector be as you think about leverage and cost and what will the model become what's the timing of the big things here.

You've got this big thing, Europe, we're just entering that, we had and make a lot of investments that honestly, not the greatest time under construction during COVID, post-COVID, the most expensive times to do things or try to and stock back.

So we got to get the big brand building markets and galleries open and the brand will build and then the demand will build there and get a vector going there?

What is what does Europe and international look like over X number of years and what's the leverage and the cost structure there.

And look, there's so many opportunities.

I mean, crazy amount of opportunities ahead of it.

But we got to stay focused.

We've got to be laser-focused and we've got to do first things first.

We cannot get distracted right now.

That's the hardest thing.

Andrew Carter, Stifel.

.

I wanted to ask a little bit about the -- I think you're going to hit with your guidance here, seven design galleries this year plus the design studio.

Are you in a position to hit that cadence every year?

I know to international, you've reiterated today.

And I know you're talking a little more about prioritization.

Where do the white space markets kind of fit in within that?

And are the white space markets still in scope for all design gallery types?

Just processing the multiple questions right now.

So the first one is about we're opening.

How many are we doing this year?

With seven to nine, but we're

--

Seven galleries, one studio.

So eight total.

Okay, eight total.

Okay.

So yes, I think we were doing nine.

Okay.

So position it that chat feature.

I think there'll be years we'll hit that cadence and do more in the years that we do less because our kind of pipeline yes, if you try to go force things in, if you screw up the real estate moves like we make, you can't getting unwinding from that is very expensive.

So can we open 80 years

Yes. we haven't released what we're doing next year, but I'd say it's kind of in that direction might be more might be less.

Look, the pipeline is really big.

We've got a lot of things in the pipeline.

So I think over the next four, five years, there's going to be a lot more galleries that we opened over the last five years.

Think about it that way.

But they're very big and complex projects.

Andrew, come see Newport Beach or something like, yes, that's the evidence.

And it knocked down the whole part of the mall and open up, but I don't know how many but 4 retailers, something like that. and give us the path that we needed and the positioning that we want to have views of the ocean from three of the four floors and probably the most incredible kind of rooftop restaurants in all of Southern California with the views we're going to have, and that's why we didn't even make it any outdoor furniture up there.

I mean, the whole thing is a 260 feet beautifully designed indoor, outdoor eating experience.

It's an incredible weather incredible views I don't know how many of you tried -- how many restaurants now, the new menu is like four.

In New York the rest

--

We're rolling out and upgrading and transforming our menu in our galleries, it's terrific new menu.

And the menu a gallery is going to be fantastic.

I think you'll see some of our innovations happening there that have been previously working on for a long time.

So yes, that's going to be a lot.

And where does the white space thing -- what was that question?

Where is the white space fit or something?

I mean it's more of a transformation, Andrew, right?

There are white space opportunities for design studios, of course, as Gary has talked about over the last quarter.

And there's some galleries.

Yes, we've got probably 10 markets.

We can open a midsized salary in a couple of we can open a big one in North America, right?

Yes.

Yes, we do.

Montreal and Oklahoma city there.

Yes.

I mean what we're going to do in Naples is unbelievable.

I haven't talked about that yet.

No, yes, coming -- you got me excited.

I'm debating right now myself, I talk about it?

Do I not talk about -- well, it can probably be in the press?

I mean it's a whole new three-dimensional RH experience called the compound, the RH compound.

And it's a multi-building kind of integrated experience with gardens and courtyards and connecting buildings and like nothing anybody has ever seen.

And we partnered team and Naples and you got the former Nordstrom's pad that sits over looking at beautiful pond.

It's an incredible new idea.

And again, evolution of different ways to have more cards you can play to going to take a bigger site, how would you use the site, what would it be?

And also, we think it might be able to build might be massively more efficient to build than some of the galleries we're building today and another innovative thing.

So it's -- yes, I mean I think generally, again, as you as you grow, you see more, as your brand grows and does more dollars per location and all of a sudden, different markets look -- they look a lot better than they look when you were doing a lot less volume, right?

And the cost of the markets look different, everything looks different.

So I remember a Williams-Sonoma when I first joined and Howard Lester and Chuck loans telling me, we can only have, at the most, 75 Williams-Sonoma stores and the most in North like maybe only 50, and I think when I got there, there was like 35 of I don't know how many wins in stores are there like 250 or something -- it's 200, I don't know, something like that.

you keep building a brand and it's become more productive, it gets better and more market awareness and you create markets.

I mean market leaders create markets.

And so Today, in North America, what do we think is right, like

[60 to 70].

I don't know.

It's like -- so we'd be sitting here in five years, and that's [80 to 100], maybe, I don't know.

Yes.

So as we learn, yielder.

Great.

Looking forward to Newport Beach.

Jonathan Matuszewski, Jefferies.

Gary, first one is just on housing.

I think investors are trying to understand how the eventual recovery in housing will impact furniture category spend maybe across different income cohorts, so just wanted your perspective how you see luxury housing reacting to the Fed rate cut maybe relative to homes that nonluxury price points.

Do you see luxury housing reacting more quickly?

And if so, why?

I think a lot of it is about, again, the affordability gap.

And are we getting -- do people see three rate cuts of 25% or -- yes, 25 basis points or 50 basis points.

And how much are you going to close the affordability gap?

I mean the average US home, I think is, what, up 50%-something versus pre-COVID and the prices of housing got too expensive, and then the price of a mortgage got too expensive.

And there's just a lot of people locked in at very low interest rates.

And when does that affordability gap close enough that people that are -- I mean there's a lot of pent-up demand.

I mean people are waiting, waiting, really want a new house, we really want to move the families expanded, they need more room.

I mean the big buildup here.

But how does that affordability gap kind of just come together.

Like that's the key.

So I don't know exactly how it's going to move or there's a lot of pent-up demand.

So it may top quicker or it may take time to ease.

And yes, it's going to depend on kind of what the Fed does.

And it's going to depend on the homeowners.

Are they going to lower their price or are they going to hold out?

I put a house on the market in Beverly Hills.

And I got a lot of lowball prices and I had it on the market for 6 months, and I didn't need to take the lower price and I took it off the market.

And there's a lot of that right now.

There's a lot of like homes are coming on the market and people are testing it out and then the homes are coming off the market.

And but there's more people testing today.

But I do think -- I mean I knew I had to lower my price, but I had a price was lower to

(inaudible).

The price I take, but I didn't being get that offer.

And I did the math as you do and say, okay, I get the super low mortgage rate.

And if I hold for a year, I'm going to have to pay this.

But if interest rates a year from now come down where I think they might go, if we have inflation under control, look, they could do one or two 25-basis-point cuts and all of a sudden, we can see inflation tick up and then all of a sudden, like, look, like I tell everybody here, we've got a chart that we all look at, and it's taking the team through it, I don't know, four years now.

Like look at -- pull it up, but the last six -- some years of federal funds rate and go to the 1970s and look at what happened, lien went up, took rate sets.

They thought they had it, they took them down.

They thought they had it, they have been up and down, up and down, up and down, up and down, up and down till they got the federal funds rate was like 21%.

But they thought they had it, if you look at this to zoom in on like a 8- to 10-year period, I mean, up down, up and down, up to like maybe 100 or something times, like you probably get it really do mean just have the patients to account it. who says that can't happen again.

I hope not.

I'd rather personally.

I tell the team this all the time.

I'd rather have them not cut the rates.

It's bad for our business do not cut the rates until you are absolutely have killed inflation, leave no doubt because if it starts going up and down and so on and so forth, it anywhere like that period I just like the worst 10-year economic period in American history, except for the great depression.

And you don't want that to happen.

I'd rather hang on, and we're going to inflect no matter what.

And we're kind of indifferent.

Will it be good when the housing market inflects?

Yes.

Will it inflect?

Yes.

Will the Fed get it right?

Who knows?

And again, not being critical with that.

I was critical to the Fed when they said, oh, inflation is going from 4 to 2, it's transitory.

And over the next few quarters, when we go back to 2, I'm like, do they talk to anybody in business, our ocean freight rates that went up 120% price.

Wood was up 80%.

Steel got like all the imports, all our prices were going up like I think it's going back to 2, there's no way.

Like I think what do they have so 400 PhD data scientists, forecasters or more than anywhere in the world in the Fed.

We call some business people.

I know it's really going on like I don't know if anybody would have told them that, that inflation was going down.

And again, I'm not -- like it was critical about what the hell it happened.

I think Powell since then has done a really good job.

I think he's got to hold this ground.

And for us, we're not going to worry about that.

If it comes, it comes, we'll be ready, and we'll be in the best position of anybody but I'm totally different.

I am much more rooting for TIL inflation, leave no doubt even if we go into a recession for a while, whatever, it's the recession, not a plague, that makes a lot of sense.

And just a quick follow-up, Jack.

Just on the international investment this year.

It looks like the headwind ticked up a little bit.

Just if you could contextualize for that.

Is there a kind of any incremental investments that are being made in international versus what was previously planned?

Yes.

Good question, Jonathan.

Yeah, part of it was just refining the number of sales came down a little lower, and we had set approximately 200, and we were in that zip code.

So we're just refining -- giving you a number as the year plays out and we see greater visibility than the sales growth.

So just sales coming down overall and the impact.

Brad Thomas, KeyBanc Capital Markets.

Great.

Gary, you've touched on international a bit and some other comments that you've made in answers, but I was wondering if you could just give us an update on how you're feeling about the trajectory of that business?

And how you how some of the data points are coming in as you lap the one-year anniversary of some of these locations?

Yeah.

I mean, look, they're all going to get better.

I think the real conversation happens.

We opened Paris next spring, we opened London late next year.

Ones cross our fingers, it's a complex job string together four buildings and hopefully, that plays out.

And then we have Milan to fall after that.

Spring up here at six.

Yes.

So, yes.

So I think we've got to get open in the big markets.

I mean people go like, oh, you're kind of in London.

No, we're outside of London.

We tried to do an inspiring unforgettable experience because we have a chance to -- like here, we were introduced years ago, selling a lot more totally as some brands as people still remember that like we still fight that perception a lot.

And Restoration Hardware, that's where I buy my stocking stuffers like, okay, we have sold stock in peppers in seven years.

So like how you don't in light of me.

But perception in brands is really key, and we were able to open and kind of it's a whole new thing, and that's why we ,we did what we did.

And because we said, look, let's do something unforgettable and leave an impression and as I said many times, that was -- that investment was about conversation, not necessarily about commerce.

I wouldn't have opened out there to say, hey, let me show you what I can do in the UK and 1 hour and 50 minutes outside of London without anybody walking by key cars.

So we've learned a lot.

Business is in flexing, it's all heading in the right direction.

Our design business is growing.

Our brand recognition is growing but when we open it, London in Mayfair and stringing together the four buildings we're screening together, when you see that the consumer sees that gallery like when they see that restaurant I mean, it's unbelievable.

It's like the amount of people that will see it not only in London from all of the world like to walk around Mayfair and it's a goal wealthy global and -- so we're right in the heart of it.

I love our position.

It's kind of almost like free standing in this multiple intersection place.

And we're not wedged in on one of the busy streets and people in cards are linked and pass by you or walk by you.

I mean, like, you can't miss us.

And we're like, that's the really nice place.

And the restaurants that our teams designed like I tell Kristen and our team, it's like they can like he's going to die.

I told her yesterday, how many Babes sellers.

Do you know how many people he tells that we came up with this design for this restaurant.

If you gave me 100 years to conceptualize the design of this restaurant that we have that in like the original bank of inline or something like that.

Like it's like credible 30 high ceilings with these columns and everything.

And like what she designed is just I can't help like show everybody the pictures.

I probably had just put them on Zoom and show you guys, but like I want to do it in the right way.

I might bring back one of our videos.

It's like when I used to do those videos.

And because it's such a visual business.

I sit here and talk and try to tell you how excited we are and stuff like that.

But scene is believing, right?

Physical evidence is the key.

And so maybe in a quarter we put together one of our videos with music and you'll see the images come through.

Paris unthink unbelievable, Milan.

I mean those three galleries are so unique and different, but unreal.

I mean just -- but again, let's think about Rutland incredible, like there's not that many people go out there.

And so yes, in this summer except the winter that to many people.

But when London opens, I think the business will go up in RT England because the brand awareness is going to go up.

And all the people that go out there are going to know about it.

And when we opened in Paris and London and Milan.

Milan is center of the universe for design.

It's the home of alone, the biggest design show in the world at 500,000 people go to the one any -- as every great interior designer in the world and brands in the world and aspiring designers and so on and so forth.

And I mean, there's nothing in Milan like what we're doing.

Nothing close.

It's incredible.

I mean it gives goosebumps talking about it.

And I said all of them, I mean Paris, unreal.

It's just like this jewel box right in the heart of the world electric, run it by who's office and everybody else to fall ground there and I mean they're all going to see -- we're going to enter at a level that might be a step or two ahead of them.

So, I mean, because what we're doing is just we're making investments into just and statements physical experiences that are going to be like just monuments.

I mean, anybody who goes to any of those towns, I guarantee you, guarantee any high-end person that's going to London, it's going to Paris, it's going to Milan.

And they say like, hey, what should I do here?

Like where should I eat?

Where should I go?

We will be on that list?

Concierge influential people, not influencers, but really influential people at the high end.

And I'm just super excited and I'm kind of glad and given Kristin Global accolades here, and she's like there was just one of the greatest design.

I couldn't but match I had 100 years to try to do it.

I would have never came up with the idea.

So yes, the trajectory is the trajectory for now, the trajectory will be completely different over the next couple of years.

So give it a little time.

Things take time, and then they go to boom generally.

It's like there was really no overnight successes.

So let us kind of really get going and kind of plant the foundation.

And then I think everything around it, all that seeds we've it'll be planted and all the galleries they'll all go up.

The whole thing is going to go up.

But just hang on, be patient.

I'm an inpatient guy, but I have to be patient about this.

Like this has been a long-term investment and we got to get those galleries built and then Europe and the UK and the consumer, they'll really not who we are.

You won't be able to miss us.

Michael Lasser, UBS.

Gary, if you look at the updated guidance, how much of the reduction was due to the market is not being as strong as you expected a slower ramp in demand in response to some of the introductions and changes that were introduced?

Or is everything executing a little slower than what was previously anticipated.

And then as part of that, if demand is shaping up to be a little lower than you had expected, could there be a benefit to the spread between demand and sales?

Yes.

Well, so Michael, all good questions.

So thanks.

I'd say to the first one, which is kind of a lot of questions in one, right, dealing with like what really caused the ramp to be slower, I think a little bit of all of it, right?

So I would say -- so let me say this.

The first one, not relevant.

The market is not as strong as we expected.

I don't think that was relevant.

I think it's more just the time it takes to marinate the consumer to see it this time like kind of takes for the books to kind of get in home and might get at home.

Ours are big books, right?

You've got to really intentionally throw it out.

You got to like omit out.

But a lot of people get our book and on the kitchen counter or the coffee table on their desk next to their bed.

And all of a sudden, they might open it.

And then we have a certain amount of people that like there is the home process, they've moved.

They did buy home.

They looked the housing market is not at 0, right, just down comparatively.

I mean we're doing a lot of volume.

But yes, just trying to say what the amount we're doing, it's like take the amount we're doing to say like how long does that take to digest?

How right or wrong are you what's the quality of our execution and what can be the quality of the execution at a massive move, right?

So it's hard to be critical, really the organization when you're doing so much, it's hard to have the points of reference to measure.

And it's hard to know what the ramp is, how fast will it ramp, how it the consumer reaction acceptance, like when does it tip and really get going.

But I'd say we're seeing the data, right?

That's why I say the -- I'm not spending a lot of time really on that question, Michael, it's I wrote it in the letter.

It's not so much about the timing.

It's more about the sector.

It is happening.

That is indisputable, like it's happening.

And we have real points of reference, right?

There's we've reported a little later than others.

So you've got all this points to reference in demand.

That's why I actually kind of gave you months and build so you can have more comparability.

I put some more bread from out there.

And so it's indisputable.

Nobody has hard demand right now.

Nobody is close to our demand right now.

So now it's just -- and so that's how we think about that.

It's like it's not when it's like -- if we're still waiting and we were like bouncing around at negative 3 or -- negative 3 looks -- I guess, it looks like a good number, right?

I mean my former company came out a week or two ago and said, hey, the industry is down 10.

I don't know what industry.

I don't know if that's the furniture industry or that's the home furnishings industry or the cable top industry.

They're in a much broader categories, but they characterized it as down 10.

And yes, so I'm sure that included all the businesses they have.

And they were down 3, and they said, we are taking market share. we're doing a lot better than that.

And we are more of a furniture-based business right?

And so if you kind of anchor us around furniture kind of people versus heavy mix of pump burners, like we are not in a table top.

We don't have a big accessories business.

We don't celebrate any of the holidays, right?

We got no Halloween stuff.

We got no Thanksgiving stuff.

We've got no Valentine's Day stuff.

We don't have any Christmas, any Hanukkah stuff, and we can sell that stuff but just cluttered up the furniture, right?

And we don't sell any defense.

And look, I'm not saying we'll never sell any of that again.

I don't know.

You learn, you might do a little.

They would some giftable thing with size.

I don't know.

But right now, I like where we're at.

But the important thing is, who are you anchoring us to get you could look at our book and count the products on the pages and the space that things yet, and you could make an estimate of what percent of our business I'm sure you can get an estimate or do an industry analysis, right?

If you look at furniture and other categories of what percent of home spend at the high end are all of those categories.

The important thing is anchoring us against people.

Don't anchor us against people selling a lot of accessories or a lot of holiday stuff for tabletop and all this -- we're not in that business. very little of those businesses.

We have any dining table tiled with stuff on them.

You see a beautiful dining table with maybe a centerpiece or something like that.

But if you really compare us to the industry like we have a massive inflection point, massive.

And so if you really kind of look at a home and walk through a high-end home and if you took a pad of paper and pencil and you watch room to room and you say, how much like in this dining room, how much was the table?

How much was the shares?

How much was the side border cabinet?

Do they have a rug under the table?

How much was the rug?

How much was the chandelier?

Okay, let me open this side board of cabinet, the dishes and flatware and the place at tap in, you do that in every room.

And you realize that the amount of business in the categories we're dominant in is the biggest amount of the business.

It's not we won't maybe try tabletop again.

It's just not the big percentage.

It doesn't it anywhere close to the businesses we decided to be in and the business we decided to dominate.

And that's in what I was saying earlier on the call about what you have to say no to.

I mean we've said no, we've edited so many businesses.

We might have -- we probably edited $700 million to $1 billion at a business today.

But the furniture, lighting, rugs, big textile the outdoor furniture, those businesses would be a lot smaller if our stores were cluttered with all that, I'm going to call it craft, but it's not craft.

You need it.

Like it's like we have a little bit of it is just what are you saying out to?

What are you trying to be best in the world at?

But the spreads, you got to look at the spreads right here.

And when the home business comes back, when housing lifts, the people that are selling Halloween stuff and Christmas stuff and all that stuff, those businesses don't go up or down that much.

That means your kids not to trick or treating when the business is tough for something now everybody goes trick or treating.

Does Santa always come?

Does everybody celebrate Hanukkah?

People give Valentine's gifts.

Yes. they do.

Those businesses don't really go way up or down.

So if you've got a bunch of those businesses, you're going to be less fix.

You're also not going to benefit as much as we do from a housing market bounced back, right?

That's why I like us better than everybody else.

I like us better than everybody else because we have the inflection on demand and margin.

We have credible pipeline coming.

We have an incredible platform that's only going to become better and more dominant.

And when they really start buying furniture and chandeliers and rugs and all the big ticket stuff measure our inflection then compared to all those people selling Halloween craft beginning to see their dining table during Halloween.

It's covered with all kinds of total things.

So like I'm not saying this businesses are horrible businesses, you have to say, what are you going to own?

What are you going to be best in the world at it's hard to be best in the world but all those things like we've learned that.

We've got scar tissue, we've made recent mistakes, and we're going to continue to add in the focus and get more focused.

But that's how I think about it.

Maybe I could reframe the second part of the question is when do you expect demand and revenue, the growth rates to converge?

Oh, I don't know -- look, you actually made a really good point, right?

If demand comes down, like we lowered demand that gas will come down and also the backlog, projected backlog, right?

So we kind of modified some of the numbers.

We kept the 4 to 8 because it's a quarterly bounce.

It could be balance sheet, but it's good [gap] narrower, right, depending on timing of things.

But yes, it will all converge.

What do I think it will be, I don't know, like end of next year, like when we're kind of we start to regulate more, right, as far as the ad in the books and the newness and then those gaps will be important, like we won't have many back orders, we want to have imbalances in speed demand, lead times won't be as long from our partners.

Like think about our partners trying to react to what we just did.

I mean everybody -- it's a big chaotic for everybody, but it's a beautiful chaos.

And the great thing is when you create order out of that chaos and it's a beautiful pays.

It becomes a really focused, powerful beam that's just going to break through.

But like I don't know.

Look, I wouldn't -- your job is really hard right now trying to build this model.

I can't build the model very good, right?

We were off on the inflection stuff and -- yes, we'll give you the data.

That's why we never guided demand before we didn't give any demand.

But we thought right now, you're not no one's going to be able to analyze our business with what we're going through.

We need to give demand.

And so we're trying to be transparent and give you the important data and be completely honest about what's working and what's not working.

And what's going to take more time.

So -- but it's all -- we're strategically right.

We're directionally right.

The vector is there.

It's growing and magnitude and direction and it's -- I mean, do I see the vector closing?

I mean, man, I've never seen anything like that in my career.

I haven't done this for a long time.

Once you get this right and you get this directionally right, you're generally off to the races.

That's how you go from a brand that we had a $20 million market cap selling oxydol laundry detergent and shakes to where we are today.

It's big moves, big -- big moves and getting being directionally right and then building on that and refining that.

And that's just what we do.

And we're pretty good at it.

We're not perfect.

We're going to miss some things.

We're going to get the timing wrong.

We're not generally wrong completely about the idea, except for what a call side shows, like got us into the contemporary art business, and I thought there's more square footage on walls than there is floors.

And then I realized like, oh, God, you get a best seller and you can only sell one of them.

It's a s***** business.

What do you mean?

I got a best seller, it's only sell one like, oh, no.

It's like, yes, fine, I don't even know how to -- I was like this was dumb.

I mean, again, really good for someone else who's mastered that business like totally for us like, okay, you get the wall that I'm going to do a different well business.

I think what we're doing with Portia de Rossi in general public and get doing like the stenograph like printing like I don't call a 3D printed beautiful reproduction.

Her whole philosophy on art is just fantastic.

And her and Ellen are incredible art collectors, but they want to make or more accessible.

And she says, look, what if the world -- what if there is a great book, and there is only one of them, and you couldn't print the book.

I think about that for a second.

Oh, I have the only catcher in the ride.

Who's going to pay?

What are you going to pay now, $7 million, $10 million, $100 million for that book, then someone has the only whatever.

Like what a silly business that is, right?

And so she's trying to bring more democracy to that and make it more accessible and she's got really good artists that they negotiated her and team ability to reproduce at a high-quality level.

I mean, you look at it, you think it's the real thing.

And it's great.

I got it up in my house, so it's good stuff.

And that's a really good business that we're in building.

But I thought, oh, really, we'll reinvent the contemporary art business like we're going to swing a miss at things like that.

It's like, God, it's that you learn in growth. But yeah, all good stuff. Anyway, I don't want to see the guys to long I could talk about this forever.

Seth Basham, Wedbush Securities.

I have one question, one follow-up. First, you mentioned in your 10-Q that your contract business is growing. I was hoping you can provide a little bit more color on the size of that and the momentum there and whether that's going to become more meaningful to the overall company at any point in the near future?

Yes. Well, look, everything begins and ends with the core RH brand, right, that business. And if that business gets stronger and more powerful than the contract business will get stronger and more powerful all of everything will -- the hospitality business is going to be better. More people are coming to our galleries than buying things and so and so forth. And so and we've got great teams and contracts.

And I mean we've been thinking about our outlet business. If demand is up, if sales are up, you're going to have more returns. You have more returns, you have more inventory on the outlet business. And the outlet is the growth. Like all those businesses generally trailed the core business, right? It's like the lead sled dog or something -- like right -- clearing the past and creating the geese that fly in formation and stuff like that.

The core business is at the front. And everything else will benefit from the core business. And so the core business demand stronger than all the other demands. Sure. Is that right there an opportunity as the other businesses benefit from what's happening in the core? Yes. That's coming tailwind, right? And so we're not breaking that out right now.

But maybe I think the firm graph would be obvious, but maybe it's not. But yeah, the core brand makes it possible to have a contract business. It makes it possible to have an outlet business, makes it possible if to have any other kind of business we're in. Our restaurant is possible from the great galleries and spaces we build and our Baby & Child business. There wasn't an RH brand would there be an RH Baby & Child now.

But all the lessons and all the things, you're starting to see, I don't know if you saw the last the book we just mailed recently for Baby & Child, the team looks incredible, and it's emulating kind of esthetically what's happening in the core, right? So there's so many reasons we're so excited right now.

You got the inflection in the core everything else, it will create clear the path where everything else to follow, and it will bring everything with it. It's just a matter of planning. But the core is going to lead it all, right? So you could expect, I would say, almost with certain, but I could be wrong. Something could pop here and there. But the core will the core business demand growth will be higher than everything else. But they'll all catch up and it all kind of come back into Hermes.

Got you. And then my second question is on inventory, which increased more than 20 percentage points faster than sales this quarter. You talked about some of the reasons why. But can you provide any more color as to how much of this is really for miles and other things, that would be helpful. And relatedly, should we expect this outsized inventory growth sales growth to persist for at least the next few quarters?

Yes, a lot of it is kind of a kind of insurance right? Like how do you make the transition from here to there? How do you not things like drop out and run out of this before you build the bridge to there and all things in a yacht business. You just expect were coming for this. And you're learning every time you know in a big transition like this never done this before.

So we're doing all the math and saying, how do we get them here and there. And then we had early learnings and like, oh, gosh, we're getting out of that too fast, hold on, like how do you optimize? So we're learning. But yes, there's like an insurance policy, call it, inventory to kind of get from where we are to where we're going. And exactly where we're going.

We know directionally where we're going. We don't know exactly what that -- to make up for the pieces and the percentages and the like with optimal now. We're going to learn new things. And so as we learn, you'll learn, I like to say. So we're I mean I wish I had -- I mean I don't really wish I had really precise answer because then I'd be a manager.

I'd see a range in organizing the status quo, and I'd be really accurate telling you what's going to happen next quarter and next year, but it's not what we do. we would never got here if we were managers. We have a leadership culture. We don't have a title of manager anywhere in this company and this brand. There are no managers here.

We don't have medians here. We have adventures, pursuit of better ways and brighter days. So we don't different -- yes, it's a different culture. We do different things. We have different vocabulary and you need a different vocabulary, otherwise, people just go to meetings and people do a nice little PowerPoint and people will go, oh, really good and shake hands with just babies and can't wait to get to lunch. Not usually what we do, kind of a venture and kind of learning a lot.

And sometimes it's difficult. I don't know if you trip and fall and you get up, and you've learned and like we tell the team here, if you want to know what's possible, you have to go to the edge of impossible, right? And you have to look out and try to see what's possible. And we say, just don't fall of; don't die. If you don't die, you're going to learn and you're going to grow. And so that's where we kind of go and that's where we play and that's how we learn and that's how we grow.

So I'm sorry, I can't give you like so buttoned up answers here, and I kind of sometimes give these longer winded, conceptual directional answers, but that's what we do here. like we're figuring it out and we're learning. I tell you right now, we just learned a lot. And boy, we've got some really good data that's helping us like move faster and more accurately towards the direction we want to go.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn it back to Chairman and CEO, Gary Friedman for any closing remarks.

Great. Thank you everyone. Thanks for your time and your interest and hopefully you've learned just like we've learned and so I think as we do here, just thank our people and partners around the world, it's a great time to be on team RH and at all levels. I think we're all working so much. We're just get going. We're getting stronger every day and culture here is because all the brands in the game and the egos out of the room.

And none of us are smarter than all of us. And we're learning together and we're growing together and we're going to build something incredible together. And it takes a lot of energy, and it takes a lot of effort and a lot of courage and a lot of commitment. So thank you, everyone on the team internally and externally, you've brought this to life and it's going to be a fun ride from here. It's going to be a really fun ride.

So look forward to speaking with everybody soon, and yeah, carpe diem.

This does conclude today's program. Thank you for your participation.

You may disconnect at any time and have a wonderful evening.