RH (RH) 2024 Q3 法說會逐字稿

Hello and welcome to the RH third-quarter fiscal 2024 earnings call.

(Operator Instructions)

I would now like to turn the call over to Alison Malkin of ICR.

You may begin.

Thank you.

Good afternoon, everyone.

Thank you for joining us for our third 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 laws, 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 can cause actual results to differ materially.

Please refer to our SEC findings, 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 opinion only as a 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 welcome, everyone.

I will start with our shareholder letter that was released in the last hour.

The positive inflection of our business continued to gain momentum with third quarter demand increasing 13% despite operating in the worst housing market in 30 years.

Our vector is increasing in both magnitude and direction with November demand up 18%, as the most prolific product transformation and platform expansion in the history of our industry continues to unfold.

Our industry leading growth is being driven by the RH brand where November demand increased 24% with the introduction of our new RH Modern Sourcebook and has continued to accelerate into December with month to date demand up 30%, demonstrating the disruptive nature of our product transformation.

The performance of the RH brand reflects market share gains of 15 to 25 points in Q3, accelerating to 25 to 45 points in Q4 based on our current trends and the expectations of furniture based retailers.

We believe our collections reflect a level of design and quality inaccessible in our current market and a value proposition that is disruptive across multiple markets, positioning RH to gain significant market share for the foreseeable future.

Our contract, outlet, baby, and child, and teen businesses should benefit from our product transformation in 2025, as one, the new assortment becomes more widely available to support our contract business; two, returns of new product drive our outlet business; and three, the most successful designs are translated into smaller sizes for baby, child, and teen.

We are also pleased that results for the third quarter reflected our guidance, with revenues increasing 8.1%, adjusted operating margin of 15.0% versus 7.3% last year, and adjusted EBITDA margin of 20.8% versus 12.4% a year ago.

Based on our current trends, we are raising our fourth quarter and full year guidance to Q4 total demand growth of 20% to 22%, and revenue growth of 18% to 20%.

Q4 adjusted operating margin of 12.2% to 13.2%, and adjusted EBITDA margin of 18% to 19%.

Fiscal year total demand growth of 9.9% to 10.4%, and revenue growth of 6.8% to 7.2%.

Fiscal year adjusted operating margin of 11.5% to 11.7%, and adjusted EBITDA margin of 17.2% to 17.4%.

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

We have worked hard to destroy the former version of ourselves and 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.

We believe the important investments we are making during this depressed housing cycle are creating a level of strategic separation in our industry that rivals the most important brands in the world.

Our product transformation plan for the remainder of 2024 and select 2025 highlights include the second mailing of our new RH Modern Sourcebook arrived in homes in November, with 54 new collections across furniture, upholstery, lighting, rugs, and textiles.

Based on our demand trends and confidence in the new offering, we increased our advertising investment by approximately $6 million in the quarter to further expand both page count and circulation.

The quarter-to-date demand leaves us to believe that this investment will prove to be a wise decision over the course of the fourth quarter and into the first half of 2025.

As a reminder, post analysis of our circulation data we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern Sourcebooks 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 introduction of our new RH Interiors Sourcebook is now planned to be in homes beginning early February with 89 new collections across furniture, upholstery, lighting, rugs and textiles.

The new collections and improved instocks, should further increase our vector and market share gains in the first half of 2025.

The introduction of our 2025 RH Outdoor Sourcebook, featuring the most dominant assortment of high quality outdoor furniture in the world is also planned for early February.

The new Sourcebook will include eight new outdoor furniture collections, an exciting new outdoor textiles offering, plus a significantly improved in-stock position to start the season versus a year ago.

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 to further elevate the brand and build 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 is 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.

This week, we will begin to introduce the Waterworks brand across the RH platform beginning with a 3,000 square foot Waterworks showroom in our largest new Design Gallery opening tomorrow in Newport Beach, California.

Our interior designers around the world will now be able to specify Waterworks in their design projects and customers will be able to view and purchase Waterworks on rh.com in the next few weeks.

We also plan to test a Waterworks Sourcebook in the second half of 2025.

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

We also have plans to unveil RH Couture Upholstery by Dmitriy & Co. in the first half of 2025.

We purchased Dmitriy & Co. in 2020 with a vision of making the most exquisitely designed and crafted upholstered furniture in the world, previously only available to-the-trade, accessible to consumers on the RH platform.

While there has been much speculation regarding how we might change Dmitriy & Co. to address a larger market, our plan is just the opposite.

We believe, by not changing anything, we will change everything.

Like Waterworks, we believe transitioning some of the most admired brands in the world from a solely trade based to a blended consumer and trade-based business model is a very big idea, and one that can result in exponential growth for these highly desired brands.

Additionally, we plan to introduce a significant new brand extension in the Fall of 2025 that we believe will meaningfully expand the market size and share of the RH brand.

This new brand extension will include a new Sourcebook and have a significant website presence on rh.com. We expect to present the product in our Galleries in early 2026 and will share more details of this exciting new venture in the new year.

Lastly, we do not expect a negative impact to margins as a result of the most recent communications regarding the potential for increased tariffs in 2025.

We have been proactively moving sourcing away from China over the past several years with the expectation of fully exiting the country by the end of the second quarter.

We are also transitioning products manufactured in Mexico and believe we can successfully reposition our sourcing with no disruption to the supply chain.

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, a 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 plan for the remainder of 2024 and 2025 includes, RH Newport Beach, opening tomorrow with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean.

It will be one of our most dramatic, immersive, and brand defining physical experiences to date, and will replace three legacy Galleries in the region.

RH Newport Beach, The Gallery at Fashion Island features the RH Ocean Grill, a 270-seat indoor-outdoor rooftop restaurant with uninterrupted views and dramatic sunsets over the California coastline, two wine and barista bars, our first Waterworks Showroom, an interior design atelier, and the most expansive luxury outdoor furniture assortment in our industry.

We believe RH Newport Beach will be an inspiring destination in the Southern California market and has the potential to become our second $100 million-plus gallery.

RH Montecito, also opening this week, is a reimagination of the Historic Fire House in the charming enclave perched above Santa Barbara.

The Gallery will feature The RH Firehouse Grill, an indoor-outdoor Courtyard Restaurant with fireplaces and fountains, a wine and barista bars, plus an interior design atelier.

The first RH Interior Design studio is opening this week in Palm Desert, California.

Our goal is to establish RH as the leading interior design firm in the world, as we’ve moved the brand from simply curating and selling product to conceptualizing and selling spaces.

The Palm Desert location is a unique test of a consumer facing interior design firm, not a gallery.

Our theory is, by presenting RH Interior Design in a singular fashion, as a professional interior design firm, we will attract the highest caliber interior designers, and therefore the highest value consumers.

We believe this might be one of the most important strategies to elevate and distinguish the RH brand as a global design authority at the highest end of the market.

We are also developing an RH Design Ecosystem in Palm Desert, with plans to add a 10,000 square foot RH Design Gallery and a freestanding 5,000 square foot RH Outdoor Furniture Gallery on the same street.

Additionally, we are considering a freestanding RH All Day Cafe to complete the ecosystem in the near future.

RH Raleigh opened in November of this year, with 50,000 square feet of indoor and outdoor space over three levels.

The gallery includes a rooftop restaurant, garden courtyards, a wine and barista bar, and an interior design atelier.

We plan to open seven North American Galleries in 2025 including Montreal, Manhasset, Detroit, Oklahoma City, Los Gatos, Palm Desert and Aspen.

Additionally, we plan to open two International Galleries in 2025, RH Paris and RH London.

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 gain scale to support the advertising investments necessary to build our business across Europe.

We are pleased with the second year growth trends at RH England as the gallery is up 42% July through December, while the web business is up 111%.

Current demand trends would indicate the gallery would reach approximately $31 million in its second full year, with the web demand reaching $7 million in its second full year.

To put these results in the proper perspective, if an RH Gallery in the English Countryside, with an estimated population of 100,000 in a 10-mile radius almost two hours outside of London, can generate $38 million of demand in its second year, what can an RH Gallery in the center of Mayfair, the most exclusive district of London, a global city with a population of 9.7 million, do in its second year?

We believe exponentially more.

We are also making meaningful investments to elevate and differentiate our online experience with plans to upgrade our website in the fourth quarter of 2024 and throughout 2025.

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 will begin to discuss the new website strategy in more detail as we roll out the new functionality.

Leaders have to be comfortable making others uncomfortable.

Leadership is about pursuing a vision, leading people somewhere they've never been, doing things they’ve never done.

As creatures of habit, change is uncomfortable for humans, but for the people and partners of team RH, a culture of invention and innovation is at the core of who we are, and reflected 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 investing in the most prolific product transformation in the history of our industry, while others are hunkering down during the worst housing market in three decades, or opening the largest and most immersive physical retail experiences in 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 strangers, influencers, to say they love our brand on TikTok, we chose to, in the words of Ralph Waldo Emerson, go instead where there is no path, and leave a trail.

We aim to craft our own unique identity, one built on a foundation of invention and innovation, truth and trust, taste and style, leadership and love.

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 and learnings, the insights and intricacies, the sacrifices made and 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 a classroom, or by managing a business, lessons that must be earned 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 team RH, carpe diem.

At this point, operator will open the call to questions.

(Operator Instructions) Michael Lasser, UBS.

Good morning -- good afternoon.

Thank you so much for taking my question.

Your outperformance relative to the industry has obviously been very wide.

So how are you thinking about taking advantage of this, such that would you further accelerate some of the investments that you're making in 2025?

And if that were the case, would you be willing to trade some margins, so suppress margins, even if it meant that you were still accelerating your sales?

Thank you so much.

Michael, I think that's always a question for business leaders.

What does an investment cycle look like?

What does the harvesting cycle look like?

How are you thinking about the business long term versus short term?

I think it's an interesting time in our industry.

There's multiple people pursuing different paths.

Generally, a time like this is a hunkering down or harvesting time.

People pull back investments.

If you look at our history, this has always been an investment period, because the other side of a downturn in a housing market usually leads to the potential to gain significant market share on the other side.

So as we look forward, I would say, today, the view would be most of the significant investments are behind us.

The early investments into Europe, not that we don't have more initial investments into Europe to just put in a platform, to be able to launch a business there is pretty significant.

We do have some significant investments with RH Paris and RH London and RH Milan.

But most of that cash spend is behind us, even as we think of the investments we've made to transform the product over the last 24 months, because the real effort began a couple of years ago.

So the ramping up and building the muscles that you need to operate at a level that we are operating at today is really behind us.

If you think about the new significant brand extension we're discussing, most of that product is in the pipeline.

I mean, we could technically launch it today.

We're just kind of polishing it up.

So those investments are mostly behind us.

But our company is based on invention and innovation.

It's based on investing into the future.

And it's based on kind of endless growth, if you will.

So I wanted to think that that generally happens to retail brands over time.

I like to say that a retail mall is nothing but a graveyard for short-lived ideas.

That's because most retailers open a new concept, they get enough rights, they expand it, they don't evolve it, they don't innovate.

They kind of get a model of we're going to open 20 of these a year, 40 of these a year, and pretty soon you blink and seven years goes by.

Then somebody has like range of 100 to 300 stores, and they're all kind of dated and they're all tired because there hasn't been a focus of invention and innovation.

There's been a focus of rollout and duplication.

And that's why most retail brands don't even last the full term of their lease.

If you look at a retail mall and take a snapshot of it today and look back 10 years or look forward 10 years, about 65% of the retail mall evolved every 10 to 15 years.

And a lot of retailers don't make it to the term, at least.

So we're someone different in that nature, right?

We've been on this journey now.

This is my 24th year.

We took a business that was basically a bankrupt business and we had to kind of dig it out of the grave, right?

So we started underground, if you will, had to kind of dig our way out.

And then we've been building it.

We've been kind of pursuing a path of a climb up the luxury mountain and try to build the luxury brand.

And that's taken considerable investment.

But today, if you just, again, motor up and look at the platform we built and think about, put the current numbers into context, right?

We have a lot of deleveraged to our operating model, because of significant investments we've made.

All of the cash investments are behind us.

And so I look forward, I think about the cashflow over the next couple of years, and I see significantly increasing compounding cashflow model.

I don't see really significant capital investments beyond the kind of iconic brand building galleries.

Even from that point of view, the cash is mostly out the door in the company, in Paris and London and so on and so forth.

Some of it, you're going to have a drag on depreciation going forward, because we've made a lot of investments.

And that's why we think it's probably important if you think about our model looking forward, to focus on adjusted EBITDA margin, right?

Because that's going to be the -- that's just the EBITDA margin and kind of cashflow a generation.

That's going to be the right way to look at a model like ours; no different than for how many years Amazon had a depressed model because they were in a serious investment mode to build a platform nobody else has ever built.

And you might never see it again.

I believe that's relative to our story.

If you just go back over the last 10 or 12, 14 years, and think about the investments we've made in our platform.

Think about the number of significant galleries we have that are unlike anything in our industry, nobody close.

And think about what we've built over the last several years, think about the product transformation we've went through and the investments that takes to build that, the inventory -- investments it takes to front load a business like ours with inventory so you can add the inventory to create an inflection, right?

And then think about the inventory that you have to kind of invest into to kind of bridge from where you were to where you are, so you don't create a ditch as you transition from current product to new product.

All of that is a serious investment cycle and, you know, somewhat distorts the short, term view of our model.

I think if you take the vector, which is significantly increasing, right, in magnitude and direction.

And you just kind of chart out that vector over time, and you think about a significant amount of investment cycle kind of being behind us, you could plot out what this model might look like over the next two, three, four, five years.

And then if you, compound out with an accelerating housing market, which will come, right?

I mean, it's the most depressed housing market any of us have seen in the history of our experience, and you have to kind of appreciate the position we're in today as you look out over the next five years.

Thank you.

Very helpful.

And my follow-up question is, as we look out over the next couple of years, A, should we think -- is your baseline assumption that as the housing market does improve, it will lead to an acceleration in the recent trajectory of the business that you've seen?

So we should think about that as we start to model next year and beyond?

And B, given the pacing of margin decline that RH has experienced over the last couple of years as sales have been under pressure, is that the right frame of reference to think about how margins will recover that the same degree of sharpness as the pace of sales growth maintain is like you've seen it recently?

Thank you.

Yeah, I think that's directionally marked right.

I mean, the question is, what is the housing market worth?

It's not only worth 5% when it comes back. it's likely worth 30%, right?

And that'll kind of compound over a couple of years.

It might start out worth [10] and it compounds to

[15].

But it might just spike and you might see the housing market come back, like you might see 30% growth, you could see 50% growth.

If you think about how depressed it's been for how long, you think about the built up, potential demand and how many people have wanted to move for several years, expanding families, people relocating, turning into renters, and so on and so forth.

Because of the significant gap between interest rates, right, and how many people are locked into low interest rates.

So that's just going to evolve, that's going to change.

You know, exactly when it happens, we're kind of ambivalent about that.

Quite frankly, sometimes I talk internally about, hey, I hope the housing market stays flat for another year.

We'll have a lot less competitors if it does.

We'll gain a lot more market share if it does.

So I'm not necessarily enthusiastic about when this housing market comes back because a bad housing market for a brand like ours, position the way it is, is actually kind of a good thing.

If you think about what the future will look like -- because a lot of the ankle biters that were able to raise capital easily for the last 5, 10 years, and especially pre-COVID, five years before COVID and the four or five years after COVID.

I mean, everything in the home business was looking great and you could raise capital really easy and sometimes you could start an online brand and all that is some level of competition.

There's just more places to shop.

There's more people marketing.

There's more people on Instagram marketing or online marketing and so on and so forth.

And there's been a proliferation of competitors in the housing market.

You see that now shrinking very quickly.

I mean, there's been a lot of public bankruptcies or, I say almost bankrupt or kind of bankrupt and bought out of bankruptcy, because there's a couple of online aggregators.

I can't remember the name of one of the brands that's bought a bunch of them.

I probably don't need to say it anyway.

You guys probably know who they are.

Yeah, but kind of Gavin Grover, our lead outside council, always says, two drunk people leaning against the bar doesn't create a better situation.

So you take kind of multiple bad brands and put them together and you hope for leverage through that aggregation.

It usually doesn't work.

I mean, look at the recent situation with, you know, overstock.com and Bed Bath and beyond.

I mean, anybody that's been on that marriage.

I think it's going to look good over the long term.

Yeah.

So we would think that, yes, there's so many levels of opportunity.

There's the housing market, there's the housing market stays down, there's going to be more people struggling. in our market in the furniture, based on furnishings market.

And there's going to be more opportunity on the other side.

I mean, our inflection is happening regardless, right?

Yeah.

So ask yourself, when is the last time a brand of our size and scale in a mature market has created a market share lead of more than 5 points?

10 points?

Yeah. 5 points would be considered really good. 10 points would be considered outstanding.

What does 25 to 45 points look like?

Track that out over the next few years.

You know, that can completely change everything.

Thank you very much and have a good holiday.

Thank you, you too.

Christopher Horvers, JPMorgan.

Thanks, good evening, everybody.

So I'll keep my question to a two-parter.

The first question is, is your guiding the fourth quarter below what you're seeing quarter to date?

Is that just caution on your behalf?

Is there some sort of seasonality of the business to think about pursuing into the quarter?

And then the second part is you've put a lot of clearance in the past few years to introduce all this newness, 80% newness this year.

Is it your expectation that over time that you can get that clearance margin back?

Thanks very much.

Good question.

The guide is -- we think is kind of a correct guide.

It depends on what -- how the rest of December and January plays out.

So, 75% roughly of our business, the balance is between 73% and 76%, I think, is our kind of core RH brand, if you think about it.

And then we have another quarter of our business that are other things like contract, outlet, baby, and child, teen, Waterworks, Neatree, et cetera, et cetera.

And if you just kind of pull back and think about the -- you know, those businesses are not accelerating like the core brand, right?

It kind of outlined in the letter that those should accelerate, many of them.

You know, obviously Waterworks won't be impacted by our product transformation.

But our platform will enable the Waterworks brand to do some things that they might not have been able to do in the past.

No different than other -- how we scaled other businesses.

But the markdown percentage, if you looked at the history of our business and our core business, would say the amount we have on markdown -- like today if you looked at it, 75% of our -- or today if you look at it, about 80% of our business in the third quarter is at full price, with the full price.

And about 20% is on a markdown.

You know, it'll fluctuate.

2022, 78%; '22, 80-20.

Over the years, like in a really up housing market, that could be as low as 90-10, but there's always a percentage of clearance.

I would say our competitive set, or just the general industry as a whole, would love to have an 80-20 mix.

Love to have an 80-20 mix.

Is the clearance part of the business maybe more under pressure than it would be in a good housing market?

Sure.

You know, is the clearance part of the business going to be bigger during a bad housing market?

Of course, it is.

Those are all firm graphs to the obvious, right?

But the other thing we're doing is, you read my letter.

You hear me talk about disruptive nature of our brand.

And you've seen us kind of move in the past couple of years into much more of an attack mode.

And we think that there is an ability to take more oxygen out of the room, if you will, by playing the game that we're playing right now.

And that's not necessarily -- it's a clearance game, but it's a design, quality, value game.

It's looking at disrupting the market from a design point of view, a quality point of view, and a value point of view.

And I think that's what we're doing today.

So maybe that's putting a little bit of pressure on margin initially.

But as you grow like we are, there's inherent efficiencies and scale, right?

So if you think about the demand trends we have today, if you think about us ordering back into product, if you think about the leverage that we're going to get and our partners, manufacturing partners are going to get, and what the future orders might look like, those could be at much higher margins, right?

But taking the market share, taking the oxygen out of the room, creating leverage in the business model from a top line point of view, putting the investments in place, and then continuing to expand margin through the leverage you get throughout the platform.

And when I say the platform, I also am talking about our manufacturing platform, our vendor partners.

We do own some of our own manufacturing.

We have a factory in North Carolina, upholstery and stuff, et cetera, et cetera.

But mostly, We don't own the manufacturing platform, but if you're a partner of ours, we talk about and we interface with our partners like we're one company.

And we talk about where is there leverage?

Where scale can create better margin, better pricing, more disruptive pricing, and so on and so forth?

I think right now is that it is a better time to invest in disruptive pricing and disable competitors than it is to harvest the business and take lower sales.

Different people are taking different paths.

Some people are taking -- giving up market share, not trying to take market share and they're harvesting, right?

And expanding operating margin to margins right now.

We could do that too.

We could do that too.

I'd rather be trending up 30% in my core RH business than down 3% or 5% giving up share during this time.

There will be lots of leverage on the other side of running up 30%.

It will -- lots of leverage and a significantly stronger market position.

Thank you so much.

Have a great holiday.

Thank you.

Simeon Gutman, Morgan Stanley.

Hi, this is Zach on for Simeon.

Thanks for taking your question.

Following up on some of the free cashflow commentary earlier, can you speak to when you expect RH to turn into a free cash flow positive and a follow up.

How do you think about the funding needs and whether it's self funded?

Thank you.

Yeah.

We believe that next year will turn three cash flows positive and we'll be able to self-fund the business.

I mean, the significant part of our debt is we don't really think about it as debt.

We think about it more as a currency swap.

You can say, oh, they have a lot of debt.

We look at it somewhat differently.

We think of it as the currency swap.

One, we didn't spend the money.

We didn't buy anything.

We didn't buy any physical assets.

We didn't buy any buildings with our debt.

We didn't build any distribution centers with our debt.

We exchanged one currency debt for what we believe is an exponentially more valuable currency, our stock, which is a highly liquid currency, right?

We can turn our stock into cash tomorrow.

So we took on debt, we exchanged that currency for our stock.

Today, post the interest costs on the debt, we've turned a $2.25 billion investment into significantly -- we've made several hundred million dollars on that investment already, based on the closing price of our stock today.

I mean, if you look at where our stock's trading after hours, that investment looks significantly bigger.

So based on our business trends and an expected return to growth in the housing market, that return, we believe, will grow exponentially.

We don't have debt on our balance sheet, because we needed cash.

We have meaningful part of debt on our balance sheet, because we wanted to do a currency exchange. we wanted to purchase our stock when it was undervalued.

I think we bought 7.6 million shares at an average price of $2.95. I don't know, where's the stock after hours right now?

$6.4-something?

Yeah. $50 last I saw it.

$4.51. Yeah, $452.

So that's a pretty good return.

Yeah, we have a, what would that return be?

I mean, like, what's the cost of capital over that period of [100] and something?

$350 million return.

So look, we've done this before.

This is not the first time we've done this.

If you look at our history, we have taken debt, exchanged it for our stock, and created significant value for shareholders.

I'm the largest single shareholder in the company.

That's the way I think about it.

Steven Zaccone, Citi.

All right, good afternoon.

Thanks for taking my question.

Congrats on the accelerating momentum.

I was curious, Gary, if you could just help us understand the drivers of really the acceleration in the business?

What's really changed with the product?

How do you feel about your competitive positioning?

Why do you think you're outperforming the industry by such a wide margin?

And then if the industry comes back stronger in '25, do you think you're well positioned to scale and fulfill that higher demand?

Well, I think everything that we believe is in the letter.

I don't know if there's a lot more to say than, what's in the letter or what I might've commented on thus far why we think we're outperforming.

I mean, it's -- we have a lot of competitive advantages.

We have a platform that significantly we believe better than anybody else in the industry.

We have product capabilities you know, savvy tastes that we believe better than anybody in the industry.

Yes, I've said before there are those with taste in no scale and those with scale and no taste and we believe the idea of scaling taste is large and far reaching.

So that's what we're doing.

We believe our taste level, you know, demonstrated not only through the product, but demonstrated through the galleries we built, the physical aspects of our business, our Sourcebooks, our website, and so forth.

You know, we believe we're building a platform for taste that's got to be highly disruptive and lucrative over the long run.

And that's that taste level.

And the capabilities we have at scaling taste our ability to curate, our ability, curate products, our ability to integrate products, and our ability to present the product better than anyone in the world, I think is demonstrated based on the size and scale and profitability of our business thus far, and will continue to create strategic separation as we go forward.

So that's who we are at our core, right?

That's what we do.

That's what we've spent 24 years building and You haven't seen our Center of Innovation and Product Leadership.

You have anybody on the call, I recommend.

Yeah, try to schedule a visit because nobody has anything like it.

You know, that has been built.

It's a huge competitive advantage.

Our methodology is the way we think about the business, the way we strategically think about categories, the way we strategically integrate categories into a singular and focused point of view that breaks through the clutter in the market.

All of those are reasons why we're outperforming.

Look, we talked about the strategic mistake I made when I turned off the product engine during COVID because we couldn't get the goods.

When we cut orders in the beginning of COVID, the business went down 40%, then the business went from down 40% to up 40%, moved 80 points.

Just as we cut orders, factories were shutting down and so forth.

And we had a hard time getting products.

So I said, let's shut off the product engine for a year, then Omnicron hit and you had another cycle of COVID and so the product engine was off for two years and then we tried to turn the product engine back on.

We had kind of lost our muscle memory and we executed poorly in that third year.

So now everybody's competing against, not only kind of who we were, but we built ourselves into a better version of ourselves.

And so that's why we didn't mail our core books for three years.

Yeah, so everybody who thought that they were doing so well with our HR on the sidelines, don't feel so good today.

And now, well, we're back to playing our game, but in a very evolved way.

I think we're smarter than we've ever been.

We're more driven and determined than we've ever been.

We're more creative, curious, and critical than we've ever been.

And I think the next five years for this company is going to be the best five years in the history of this company.

And I think five years from now will be better than we are today.

So it's just who we are at our core.

You know, innovation is at the core of what we do.

Understood.

The follow-up I had is just on gross margin.

When you reported the last quarter, you talked about august seeing a positive inflection in product margin.

How did that play out over the balance of the quarter?

And maybe how should we think about product margin in the fourth quarter?

Thanks very much.

Yeah, product margin at the demand level is still positive.

We did have some adjustments below the selling margin.

One of them was in Mark out of stock.

I think we did such. big transformations of our calories that we had some bigger market stock.

When you ship our product outside of the box, it's not generally a good thing.

And so we took a -- when we do a floor set transformation, we take the product off the floor.

We have teams at our local home delivery networks that pick up all that product.

Product's not new, it's not in the box, it's not in the protected packaging.

They take it back and then it gets sent to the outlets.

And we've never made a transformation this large.

And I think we probably had more damages and more things that got banged up moving back and forth in trucks and moving around without boxes.

And so we had to take some write-offs for product that we thought wasn't really sellable at the outlet level.

And elevated costs of moving the product and elevating inventory transfer costs?

Yeah, go ahead, Jack?

Yeah, one time inventory transfer costs too related to moving that product.

We also just rebalanced some product in our DCs just to get it optimally positioned.

So, yeah, this way also move the product from Europe back to America.

We didn't start off with picking all the right products when we filled the DC in Europe.

And now we see the trends and we realized, oh gosh.

So we got too much of this, too much of that.

Well, instead of marking down all that product in Europe, it's better for us to just ship it back to Baltimore, feed the core business.

So we did that.

That's another one-time kind of charge.

But at a general selling level, especially in our core business, we like how our margins are trending.

We think there's going to be upward opportunity in margins, not downward pressure on margins looking forward.

And Gary said on a demand margin basis, it's also on a ship margin basis, the selling margins on the ship basis in the quarter were inflected positive.

Yeah.

Okay, very helpful.

Thanks, guys.

Stephen Forbes, Guggenheim.

Good evening, Gary, Jack.

Gary, maybe just a two-part question on real estate, given sort of the planned sheer number of openings right planned over the next couple years here.

So to start, can you speak to maybe the performance payback periods and store level ROISCs that you're sort of expecting in these classes of galleries, maybe relative to what you've spoken to in the past?

And then how have the discussions with landlords and developers evolved over the past couple years?

Maybe you have seen cost pressures normalize in the uniqueness of your model and just the pipeline itself.

How has the conversation with landlords and developers evolved?

Sure.

So, yeah, let's start with the payback in ROICs.

Historically, we've always said, the payback of, I think, one to three years, we believe that's still the right number.

Where it wasn't the right number was anything built during COVID.

Right?

Because things that's being built during COVID stopped and started three or four times, and you had raw material costs, and some places go up two to three times or 4x.

So anything built during COVID was significantly more expensive, up to three times more.

I'd say in a general sense, building costs today to build at any level, no matter if you're in retail or any kind of business. are somewhere between 70% and 100% higher.

So it costs us more to build a gallery today than it costs us more to build a gallery today than it did.

The good news is we have a significant inflection in our demand and our sales.

And we have an expectation for returning housing market lift.

But most of the galleries, I think, in the pipeline today that we're opening will be relatively quick paybacks, maybe the really iconic ones like London, Paris might take three or four years, but they might take two years.

For example, RH Newport Beach is a good example.

We have a developer and a partner there in Irvine company.

I think they cleared about eight retailers.

So if you think about the investment that a developer partner would make here, they cleared probably eight retailers, took dead rent for several years because our projects take anywhere from two to three years.

It takes a long time to get approvals and build these kind of buildings.

So they cleared rent for several years.

They completely cleared the site, ripped down two or three story buildings to clear the site and make it construction ready for us.

And they invested $25 million, right, we got a TI.

We probably invested in that one an additional $50 million to $60 million, you know, directionally we're still adding it all up.

We had a bit of a chaos just trying to get it open for the opening party.

These things are big and complex.

But that gallery will likely pay back and from our cash point of view in one year, maybe one and a half.

And so -- but you have other ones that -- the ones in Europe, there's not a lot of TI, there's street locations.

So this is -- yeah, somewhat bigger investment and we'll see how the revenue.

London does what we think it's going to be.

Maybe it's a two-year payback (technical difficulty) might be worth it as much as everything that we just did.

I mean, I think it could be massively, massively accretive.

And so, yeah, we'll still call it maybe the fourth or fifth, fourth inning halfway.

But again, that always changes, right, as you evolve, because you connect that thoughts, you see more, so on and so forth.

I think it's like, I don't mean to sound arrogant and compare ourselves to Apple, right, but at what point, someone would ask Steve Jobs when they introduced the first Apple phone, and he said, this is going to change everything.

What inning were they in?

No, I mean, what was their market cap then?

After the first year of the iPhone or second year of the iPhone, maybe $500 billion, something like that?

Maybe $400 billion, $300 billion?

I don't know if Apple's worth today, $2.5 trillion?

Yeah, $3 trillion, something like that.

So the more you do, the more you see.

The more you see, the more you can do.

And you go into what I refer to internally as an upward spiral.

And I'd say today, we are in an upward spiral.

We're doing more, we're seeing more, therefore, we're doing more and seeing more.

And you go through that cycle, you can keep connecting dots and seeing more.

So that's why I say competitors, that anybody is hunkering down or trying to harvest in a harvest mode or they're trying to speak out every path point they can out of an operating model, that's a very temporal condition.

Yeah.

We're in a real upward spiral here that it just going to lead to more and more.

So you'll keep asking me what any of them you're in.

And I might be perpetually in the third to fifth in.

I'll keep that in mind.

And then just thinking about some of your comments previously about harvesting process down the road, I mean, on the investments that you're making or you've made in the past.

How are you just thinking about the magnitude and where margins can go a couple of years from now?

No different than we've always thought about it.

And yeah, we're always going to be in some level of an investment stage.

That's what you do if you're a brand that's based in invention and innovation.

So I'd say the phase we just went in with a pretty massive investment cycle, not just to scale up and ramp all the product that we have and build the pipeline and so on and so forth, and build the organization to do that and the new partnerships to do that.

But also launching Europe, right?

I mean, that's a big kind of one-time investment you're making.

And so, You know, some of that is behind us.

Yeah, still up here.

Yeah, some of it's in front of us.

But yeah, once we build a platform in Europe and once we kind of get the brand going -- look, if we were in year two and yeah, we were cycling Ari Jenglen and we were doing like $8 million, like I'd be really worried.

But when I sit there and I go like, okay, we're at demand tracking at $35 million to $40 million, somewhere around, you think net $38 million, something like that.

Then you have turned that into revenue, $32 million, something like that, $33 million.

And then you say, I don't know, what's lending going to be with $9.7 million people in the heart of Mayfair?

If you said it's three times that, which I think could be conservative, that's $100 million in revenue.

I hope it's four times that or five times that, that's $130 million to $160 million in revenue.

And that's by the way, this is with the brand relatively unknown and we went into an unknown place where the only retailer of our kind for like, I don't know, 100 miles.

It's like, it's a long way to anything like that.

So I think, you know, margins are where we think the margin model ought to be on a regular basis going forward.

I mean, we're also in the depths of a bad housing market.

And somebody said, oh, well, you know, homes increased 3%, right?

That's a dead cap bounce.

You know like the housing market has not shifted yet, not meaningfully growing yet.

And when it does, will benefit from it and you'll start to also see where the margin model will be.

But right now, if you're looking at a margin model, you're looking at a margin model based on a bad housing market and a significant investment cycle.

Maybe the biggest investment cycle, actually, absolutely the biggest investment cycle we've ever been in.

So you're probably looking at bottom margins.

Great, thanks a lot.

Appreciate it, and enjoy my month's CTO.

Okay, sorry I missed your first opening, Matt.

Curtis Nagle, Bank of America.

Great, thanks very much for taking it.

Just a couple ones.

One, in terms of just thinking about demand and the revenue trends, when should these equalize or when should the gap narrow?

And maybe more specifically looking at the first half of '25, should we hold it something similar to what we're seeing in 4Q?

Is that roughly the right math and follow up after that?

That's a good question.

I think it's going to -- yeah, it's going to start to narrow.

Our stocks are getting better.

Yeah, we invested in more inventory to kind of close that gap.

And so I think it'll be a little bumpy for a while until the selection of new product slows down a little bit.

But we'll have a stronger point of view in the next quarter or two.

But clearly, we see the gap shrinking.

The end stocks are going up, but there's a whole new cycle of newness coming that could have some real runaways, that create really high back stocks and longer lead times and so on and so forth.

But the initial gap was closing, could get a little wider and bounce around a bit, but directionally, I don't see it going back to as big if it was in the beginning of the transition.

[That would be, I guess, a high-class problem if that does happen].

Second one, I guess, Gary, for you.

Just trying to think through very early stages here, but potential demand synergies for the core product in the trade business with this acceleration and expansion of the Waterworks business, which I think as you said, it has a strong core B2B customer base.

Sure, yeah.

I think, well, when the contracts out of our business start there, almost can't benefit from the new product yet because we're still getting in stock in the best product and we still are building inventory to get into -- to transform the galleries.

I mean, some of the newest product is coming out and outperforming the phase one product, right?

So we're going to have to transition galleries again to get the best product, which is again, part of an upward spiral.

So I'd say the galleries today are a third right.

I think there's two more transitions in the gallery to kind of optimize that, which that means it's going to take a while for the best product to be available to the contract business.

I think that's what you mean by the trade business, but maybe I've got it wrong.

And then Waterworks, just having a higher exposure.

And our interior designers, being able to spec it across their projects and our customers, being able to see it on our website, see it in a source book, just the brand recognition and awareness of Waterworks is going to grow and the accessibility is going to grow.

So we think that's going to be a big idea.

How big can it be?

We think it looks like a billion dollar idea to us when we kind of track it out.

So the synergies, and then just taking the best designs and translating those into smaller sizes for baby, child, teen is going to be a real synergy.

And as much as retailers don't like returns, returns are what drives the outlet business.

The outlet business is dragged behind the core business significantly, right?

Because there's not enough returns of the new product yet, which will drive that.

So again, it's all part of an upward spiral, right?

And one thing gets the other.

And all of the learnings right now, all of the things that we're seeing, all of the dots we can now connect because there's a whole new set of data that we haven't had.

And so the data becomes richer, you become smarter, you start investing wiser.

Your next ideas are likely better than your last ideas, because you're more informed, you have more knowledge, you're making better decisions, assessing things more correctly.

So I don't know if that answers your question or not?

No, that's very clear and I appreciate it, Gary.

Happy holidays.

Thank you.

Great.

Thank you.

Thank you, Curtis.

Seth Basham, Wedbush Securities.

Thanks a lot, and good afternoon.

My question is just regarding the product transformation, and what you've characterized it for as inflection?

You previously talked about peak inflection points, sometime in early 2025.

Well, this upward spiral that you're seeing right now, would you think that peak inflection is extended outward?

Massively outwards.

You know, when I talk about the peak inflection, like think about what I knew, almost nothing.

Right?

We had new products hitting, we saw trends on any product, we're tracking it out, what does it look like, but we didn't have enough data and information to really know any more than we knew.

Yeah.

So, God, worse peak inflection now based on what we know, I think it's several years out.

And previously you talked about deconflexion being sort of the strongest year-over-year growth.

I assume you're not thinking the strongest year-over-year growth is going to be a few years out, but you think that you'll see strong growth for the next few years, in other words.

I think the strongest growth might be a year or two up.

Because the significant brand extension I talked about is significant, not small, it's meaningful.

And the amount of new product that's coming, for example, a year ago, I'd say a year into this transformation, I kind of reframed everything for our internal team and our partners.

And so I said, look, we are still in the early stages of what I called a product development super cycle, something we've never done.

Because we haven't enough data to say, like, this is this can be much bigger.

We think about the market completely differently.

We think about the size of the market, the consumer.

We see more consumers, we see more homes, we see more rooms, we see more aesthetics, we see a significantly bigger opportunity for RH.

In some ways, I'd say the classical way to think about us is as a specialty brand, right, with a certain point of view.

And that's how I'd probably say I looked at it over the last20 years.

How do we build this specialty brand with a certain aesthetic point of view and grow this brand?

I think about it differently today.

And I think about it a lot differently just in the last 45 days.

I just haven't articulated it completely and clearly based on what we've learned.

And it is directionally what we've framed over the last five years, right, with our long-term business vision and ecosystem.

We've said, 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.

And then we we've articulated, right?

So we like all the one pager kind of a bigger view of how that can play.

And I think what the nuance is, now I'm beginning to see us and the team.

It has a beginning to see us as maybe a platform for taste, not just a brand.

So you think about -- I don't know.

Think about platforms or marketplaces. t

I mean, Wayfair is a marketplace somewhat.

Is it a brand?

Of course, it's recognized for certain things and so on and so forth, but they don't really -- it's not their product.

It's available everywhere else.

There's nothing unique about the product and Wayfair, but it is a platform and marketplace that's driving $12 billion in revenue, some number like that, right?

You know, not all furniture, they sell lots of things.

But if you start to think, can you transition the thinking about RH from just a classic way to think about a specialty brand?

And think about RH as a platform for taste and think about how you could dimensionalize taste across multiple aesthetics, across different life stages, across different kinds of homes and so on and so forth, that to us that looks multiple times bigger potentially than I thought we could be.

And we're still kind of shaping that thinking, but some of it we can see relatively clearly today.

And that's why I think the growth trajectory or the vector may continue longer than we think.

And we may think, oh, you're running -- the core business is trending at 25 to 30 up, right?

Well, you're going to come up to 25 to 30, are you going to grow 8 or 10 on top of that?

I don't know, can we grow 30 or 40 on top of that?

It's not impossible, based on what we see today.

I don't want to -- I'm not promising anything.

I'm not trying to give any kind of guidance.

I'm just trying to kind of share it with you directly how we're thinking and what we see.

Again, the more we do, the more we see.

The more we see, the more we can do.

And we see a lot more than we've ever seen right now, because of the product transformation and the product development super cycle and the things we're doing and the dots we're connecting.

And so I think this upward spiral that we're in can be exponentially bigger and last significantly longer than if you would have asked me a couple of months ago.

Wonderful.

And just last follow-up.

So I know you'll provide more information next year, but this significant brand extension that you think could be worth over a billion dollars, is it within furniture or is it more adjacent beyond furniture?

No, it's just kind of within the same thing we're doing it's just unique, different, aesthetically different, and probably addresses the biggest part of the market.

And so. -- and we think it's going to be amplified by what we think is that a trend that is coming.

Can't wait.

Thanks a lot, Gary.

Okay, thank you, Seth.

Andrew Carter, Stifel.

Hey, thank you.

Good evening.

Just wanted to ask about the inventory kind of going up.

Again, this quarter, the purchase is up 30%.

Could you talk through kind of what kind of inefficiencies are in there?

Is there some planning around there?

I know that you're exiting China.

Is there any safety stock in there for that?

Already contemplating that, and you're exiting Mexico.

And on those two points, correct me if I'm wrong, China was 22% of your purchase dollars last year.

I don't know if you ever disclosed Mexico.

Where's that going in turn now?

Thanks.

The first part of everything you said, I'd say correct.

That would be my answer.

The last part, where's that going?

I think we've said where we're going in China, it all depends what's happening in Mexico.

Look, Donald Trump wrote The Art of the Deal.

And if you've ever read The Art of the Deal, if you do, you will see the negotiations starting to play out.

It is a global negotiation happening right now.

Where will Mexico -- what will happen with Mexican tariffs?

You know, what move should we make proactively?

We're making some moves proactively.

But I think Mexico's making moves.

You're already hearing from inside sources that they're moving troops to the border.

They're going to try to take more responsibility for immigration.

And if I was the president of Mexico, I sure would, because I wouldn't want the biggest economy of the world to cut me off from trade.

So Mexico, I think, is a little different than China, right?

Mexico's not going to become the next global superpower that has a military that can threaten the United States.

China can, right?

So if you think about why our country has never been attacked besides 9-11, which is basically some terrorists boarding our own planes and flying them into our buildings, that's a very unique attack.

There hasn't been a military that has attacked the United States internationally on our home ground since when?

Yeah, yeah, exactly.

Why?

Because we have the strongest military nuclear arsenal in the world.

So, I mean, look, Donald Trump is a great negotiator.

I think he's looking at the world playing field and saying how do you use leverage?Negotiation

without leverage is impersonation.

Hope that they don't find out you're not who you are.

So he's really good at using leverage.

He's done it before.

We're seeing him do it now.

He hasn't even taken office.

And The Art of the Deal is in full play right now.

It's actually quite impressive, I would say.

And so how's Mexico going to play out?

I don't think -- if you're in Mexico, you do not want that faucet turned off.

Yeah, you don't want 25% tariffs.

I'm not saying it's not going to happen.

It may happen.

It may happen for a while.

I think we have too much leverage there.

China is a whole different story.

It's a whole different game.

But if you even think about what happened to North Korea in Trump's first term, I mean, the guy in North Korea was sending missiles over Japan, what, every week, saying he could hit California?

Trump met with him once and he never sent another missile.

Why?

Because he liked Trump?

No.

For another reason.

You know, so we're going to see a lot of negotiations played out here.

I don't think there'll be a lot of decisions that becomes big negative for us or for the US economy.

I think the United States of America has a lot of leverage right now.

And I think we have a leader that knows how to use leverage.

Fair enough.

And then kind of switching gears a little bit.

You talked about going into a massive cashflow mode.

How are you thinking about that in terms of the external investments you funded?

I know you talked a little bit about prioritization.

Last call, I don't know if those are being de-emphasized as they're off the table, but in terms of the guest house, the real estate JV.

Do you go lean into those more heavily, or is it just more of a prioritization on the core business?

Oh, I think there's always a prioritization in the core business.

There are certain opportunities that will unveil themselves at certain times.

And like an Aspen joint venture and the opportunity to develop an ecosystem in Aspen, which we think is a one of a kind opportunity.

And we think there'll be a -- we think a very, very good, if not, outstanding return on that investment as it unfolds.

Unfortunately, we hit a housing market, but you know down draft and high interest rates and that's not necessarily good for an investment cycle in real estate.

So those things get deprioritized, but we do have a gallery opening there.

We have a guest house that's coming.

We finally got the city to approve our facade and we'll probably do a few residences and other things that we talked about.

Yeah, so that will happen and I think it'll start to become more of a harvesting cycle, from a investment cycle in the Aspen JV.

We'll turn real estate assets into cash.

We'll have a gallery, we'll have a guest house, and so on and so forth.

The prioritization I think will always be on the core business.

Everything we do, whether it is an Aspen JV any other investments we make are all to amplify and render the core business more valuable to amplify the core business, amplify the brand, have people think about the brand, have people see the brand and perceive the brand.

And I think we're doing a very good job in building a globally iconic brand.

I don't think we're there yet.

But we are there, looking through a lot of people's lives.

I mean, this brand, I think, is seen very differently than any other brand in our category.

I don't think anybody is close from a brand perception point of view.

And that's taking years of investment, years of work to craft.

Are we where we think we want to be?

No, this brand will continue to evolve.

But as I said earlier, we are in a significant investment mode, the biggest we've ever had.

We're cycling some of that.

We will keep investing.

I don't think it will be today as the opportunities we see.

I don't think it'll be at the same pace.

A lot of the investments we've made, whether it's billion's new brand extension and other things, there's typical investment paid.

They're an advertising investment to mail a book.

Of course, there is.

Do we have to build new stores for that new investment?

No.

Does it leverage our current platform?

Yes.

Is it merchandised by the same people?

Yes.

Is it the same product development team?

Yes.

Is it -- so there's massive leverage in a lot of things we're doing.

But setting up Europe is an expensive piece.

And so, that'd be leverage, you know, 230 basis points or so, you know, if you just pack that 230 basis points on this business, the model looks a lot better.

If you took some of the other investments out that we've made in the real estate platform and other things that are creating more depreciation, the model looks pretty good in a very down housing market.

Now, recap that model with the inflection and vector that is being built and an investment cycle that's going down, right?

It's how I say it.

So you get a completely different outcome from a pre-cash flow point of view.

Thanks, I'll pass it on.

Happy holidays.

Happy holidays, thank you.

Brian Nagel, Oppenheimer.

Hi, good afternoon.

Congrats on the improving momentum within the business.

So my question, and it's probably going to be a bit of a follow-up here, but just looking at the business.

And Gary, you talk a lot about, you had to talk a lot about the last several quarters about the macro environment we discussed here on the call tonight, but you're looking at the business and the improving demand trajectory you're seeing.

Are you -- do you think -- clearly the new product is helping or driving this, but do you think you're also starting to see maybe the early signs of some, say, let up in the US housing market?

I don't see our competitors having getting that.

So are we the only ones getting it?

I don't know.

Do I think there's a pent up demand and there are few people having to buy homes?

Yes, but the numbers wouldn't say it's the macros is the issue, otherwise, you'd see a more broad pickup.

So, I think people are more optimistic.

I think there might be a few more people stepping into the housing market.

(technical difficult)

For the most part, our industry is down 7% or 8%.

I mean, there's not too many people that have positive growth right now.

And even if you look at our growth from a comparable basis, there's only a two-point difference between total demand and comparable demand.

Right?

So, could we be getting a point or two from the macros a little better?

Maybe.

But I don't, I don't think that's meaningful.

I think it's really meaningful is, is the result of a very targeted and well executed product transformation of a size and kind that the world has never seen.

Helpful.

Then this on that, my follow-up question.

So with regard to the product transformation, like you just said very significant product transformation.

So going forward, I think I was someone asked a question before I think what any we're in, I think someone said 6 or something.

But I guess the question I'm asking is, should we as we think about RH over the next few years?

I mean, is it going to be a more aggressive more consistent product introductions than we had over the last couple years or was this really one big step up?

I think it's -- as I tried to articulate earlier, we see a much bigger market opportunity.

And I think you're going to see a much more aggressive approach to expanding the product, particularly the

[by product].

And really that's how we got it right.

I mean, in the early days, I think I used to talk about -- I think I talked about it publicly.

I came up with a term here called direct sensor growth.

And we said, look, we are going to not -- in the early days, I said, we're not going to limit our assortment to the size of the stores.

We're going to size our assortment to the potential of the market.

So we're going to merchandise beyond the four walls of the stores, and we're going to use our source books and our website to prevent that assortment.

And that strategy is how we went from $300 million to where we are today.

I'd say, in the last 10 years, post the introduction of [MODER], we call it, nine years, we kind of slowed down that process.

I think we perceived ourselves as more mature, slowed down, newness, slow down expansion of the product.

And that's what I tried to articulate earlier, is I think we see the brand differently.

I think we see the brand bigger.

I think by kind of slowing down our product transformation or product expansion and brand expansion, I think we allow competitors to enter the market that would not have been able to be successful doing what we're doing.

And I think it's shaped by the fact that the decision was now kind of seeing the world more traditionally, seeing RH as a specialty brand, not a platform for taste.

Yeah.

So this idea of seeing RH not as a specialty brand, but a taste platform, helps us see a much bigger market.

And allows us to see a much more disruptive RH brand that can take share from more people based on our taste, our style, and it's the power of our platform.

Appreciate it.

Thank you.

Jonathan Matuszewski, Jeffreys.

Great, good evening and thanks for taking my questions.

The first one's on pricing.

Gary, you shared some helpful color related to clearance activity for discontinued product.

I was hoping you could just comment on the pricing strategy for some of the new collections, s when you talk about maybe peak year-over-year sales growth, one to two years out, is that going to be driven by higher prices from the new collections or greater unit velocity?

Thanks.

I don't exactly know.

You know, probably both.

But again, we're going to keep learning.

I think a lot of it is we just see a much bigger market.

You know, we have more leverage.

We can use that leverage to have more disruptive value.

I think people today, if you could buy a dining chair at RH versus somewhere else, I think the consumer would feel better about buying from RH, because of the positioning and the perception of our brand versus online off of some other platform versus way fair versus other competitors we might have.

I think you'd rather walk into one of our galleries and you would perceive that the taste and style is validated by us.

That the brand halo and value you get when you build a brand like us, it makes things more valuable.

It renders the product more valuable.

And I think that all of us tend to buy things based on our trust in that brand, based on what that brand stands for, based on what their values are, and kind of why we buy, why do we trust certain brands

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