RH (RH) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal Year 2021 RH Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker for today, Allison Malkin. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2021 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 could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release.

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

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

Great. Thank you, Allison, and thank you for joining us today. I'm going to take a few minutes and walk you through our shareholder letter, and then Jack and I and the rest of our leadership team who's in the room will open the call up to questions.

To our people, partners and shareholders, we are pleased to report another year of record results with net revenues increasing 32% to $3.759 billion versus $2.84 billion a year ago and up 42% versus 2019. If you exclude money-losing online businesses, it represents one of the highest 2-year growth rates in our industry. Demand versus 2019 grew 49%, which resulted in an incremental backlog at the end of the year of approximately $200 million of net revenues that we expect to fulfill over the course of 2022.

RH continues to set a new standard for financial performance in the home furnishings industry, and our results now reflect those of the luxury sector as adjusted operating margin reached 25.6% in 2021, up 1,130 basis points versus 2019, reflecting the strongest 2-year growth in our industry. Our performance demonstrates the desirability of our elevated and exclusive product range, the connective power of our evolving ecosystem, the profitability of our fully integrated business model and the significant strategic separation created by our inspiring physical spaces.

For the quarter, net revenues increased 11%, within our guidance range despite the various -- virus variant that magnified supply chain issues in the second half of Q4. We once again exceeded our adjusted operating margin outlook in the fourth quarter, reaching 25.2% versus 23.7% last year and up 780 basis points on a 2-year basis. We generated $97 million of free cash flow in the quarter and $477 million for the year, inclusive of $191 million increase in inventory, of which approximately $60 million is due to increased transit times and the balance targeted to alleviate our unshipped demand backlog. We ended the year with $90 million of net debt and nearly $2.2 billion of cash on our balance sheet while generating ROIC of 73% in 2021.

2022, the year of the new. As we've mentioned, many of our plans were delayed by the virus -- while many of our plans were delayed by the virus, they were not disrupted by it. We used these past 2 years to reimagine and reinvent ourselves once again and believe 2022 will mark the beginning of the next chapter of growth and innovation for the RH brand.

2022, the year of the new, will include the opening of RH San Francisco at the historic Bethlehem Steel Building, our most extraordinary new bespoke gallery to date; the launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history; the elevation and expansion of RH Interiors and RH Modern, inclusive of new collections and enhanced quality; the unveiling of our first RH Guesthouse in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market; the introduction of 2 new culinary concepts: an elevated live-fire restaurant opening in San Francisco, England and the New York Guesthouse, plus a champagne and caviar bar also opening in the New York Guesthouse this year, with plans to expand both concepts to our future galleries in Paris, London, Milan and Aspen.

With average restaurant volumes approaching $10 million annually and a very profitable 4-wall model, we are making significant investments to build a world-class hospitality organization and see endless opportunities to elevate and activate our places and spaces, creating integrated and inspiring experiences for our members and customers that cannot be replicated online.

The debut of The World of RH, the first phase of our new digital portal highlighting the connective power of our evolving ecosystem of products, places, services and spaces all designed to inspire customers to dream, dine, travel and live in a world thoughtfully curated by RH, will create an emotional connection with our customers unlike any other brand in the world.

The liftoff of RH1 and RH2, our customized Gulfstream G650 and G550 that will be available for charter later this year. The former has already generated press and praise as featured in the pages of Architectural Digest, the Wall Street Journal and the 20 titles of Modern Luxury.

The christening of RH3, our luxury yacht that will be available for charter in the Mediterranean and Caribbean. RH3 will be featured in the Robb Report, C Magazine and Boat International over the coming months. The continued rollout of RH In-Your-Home, a unique and memorable delivery experience with brand ambassadors guiding every detail of the delivery and extending the selling experience into the home. The expansion of the RH brand globally beginning with the opening of RH England, The Gallery at the historic Aynhoe Park, a magical 17th century, 73-acre estate in the English countryside that will introduce RH to the U.K. in a dramatic and unforgettable fashion.

Additionally, we have secured locations for galleries in London, Paris, Munich and Düsseldorf and are in lease or purchase negotiations for galleries in Milan, Madrid, Brussels and France.

The opening of RH Palo Alto, The Gallery at Stanford Shopping Center, which will represent the next evolution of our highly productive prototype galleries.

Now let me move to our business outlook. While we enter 2022 with confidence that our efforts will continue to elevate and expand the RH brand for years to come, we also recognize there are several internal -- external factors such as record inflation, rising interest rates and global unrest, that create uncertainty. Although we lack the ability to predict the economic outcomes on a macro scale, we do have the business model, strategy and balance sheet to take advantage of opportunities that may present themselves, whether it be times of economic expansion, contraction or dislocation.

While first quarter sales and margin trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed. We believe it is prudent to remain conservative until demand trends return to normal, and we are providing the following outlook for the first quarter of 2022: First quarter net revenue growth in the range of 7% to 8% versus 78% last year with adjusted operating margin in the range of 23% to 23.5% versus 22.6% a year ago, fiscal 2022 net revenue growth in the range of 5% to 7% versus 32% last year with adjusted operating margin in the range of 25% to 26% versus 25.6% in 2021. Our outlook is inclusive of opening RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid-to-late summer and RH Palo Alto in the fourth quarter.

Now let me turn to RH business vision and ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste, and the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier and other new collections scheduled to launch over the next decade. Our plan to open immersive Design Galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion to $6 billion in North America and $20 billion to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that establishes RH -- the RH brand as a global thought leader, taste and place maker.

Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the 4 walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art and design in the Napa Valley; RH1 and RH2, our private jets; and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture.

This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business while adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers.

The entirety of our strategy will come to life digitally as we launch The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity.

Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive and by doing so, elevating and rendering our way of life more valuable.

Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Aston Martin to Aman, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb nor do the other brands want you to. We are not from their neighborhood nor invited to their parties. We understand that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim.

20 years ago, we began this journey with the vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures and organizations, lessons that can't be learned in a classroom or by managing a business. They must be learned -- earned by building one or by reaching the top of the mountain. Onward, team RH. Carpe diem.

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

(Operator Instructions) Our first question comes from the line of Steven Zaccone with Citi.

First question, can you just elaborate a little bit more on the full year revenue expectations? So the full year guidance incorporates the $200 million of backlog demand being fulfilled despite all the newness in the business. Maybe just help us understand what you're seeing in terms of the softening that started in February and how that factors into your outlook for the balance of the year versus first quarter.

Well, the softness is -- and the newness is all implied in our guidance. And as we've said, we believe it's prudent to take a conservative view at this time based on kind of the disruption. But we saw our business soften since the beginning of the conflict, and the market volatility followed. And I think you've got to kind of also consider the fact that you've got -- it's clear now to everyone that inflation isn't going back to 2%, even though Janet Yellen, not too many weeks ago when it was 4% or 5%, said it was going to 2%. And 2 weeks later, it went to 7.5%. And now it's at 7.9%. And we've got Jerome Powell saying that they waited too long. And now we're going to have 2 years of interest rate increase -- rising interest rates.

So you've got a lot of news and a lot of noise out there, compounded by a war, an invasion. And I think the invasion of Ukraine by Russia just became a -- kind of a reckoning point, if you will, where people had to stop and pay attention to everything. And we saw our business slow about 10 to 12 points, and it's been relatively consistent during that period. When it returns to normal? Not sure. How aggressive is the Fed going to be? Not sure. There are things we know, and I don't mean to be a pessimist, but history would tell us 4 to 5 times the Fed raises interest rates over a sustained period, we have a recession. And I don't need to tell you guys that math. That is just the fact.

So look, we tend to, as I like to say, pray for peace and plan for war. And so we believe we've got a great hand going into this year. We believe we have the most exciting lineup of initiatives, product, experiences in the history of our company. We've got the best strategy, the best business model, one of the best balance sheets in our industry, the highest ROIC in our industry. So kind of game on, whatever happens, happens. And we're just putting ourselves in a position to win.

Yes. That's very helpful detail. I had a question on just the margins for international. So I think you said in the past that Europe can be the same or higher than the margin profile for the U.S. How should we think about the profitability curve as you do some of these initial openings for the next few years? I guess said another way, should we assume there's a little bit of dilution in the operating margin guidance you've given for this year just from U.K. opening and then Europe next year?

Yes. That would be the right assumption. But I'd say we're all going to learn together, right? It's the first time we've done it. There's not a ton of history of a business like ours expanding globally and taking control of the brand versus licensing the brand to others, which is an easier way and we believe a long-term, less profitable and value-creating way for our shareholders. And history has demonstrated that many of the great brands that licensed their brand or franchised their brand spent years and a lot of money buying their brands back.

So we believe it will be accretive to earnings long term. That's what the math would say as you kind of study other's models. But exactly what the curve is going to look like, look, we're -- it's the first time we've done this. So I don't think we have any -- a better view than anybody on this phone. We'll kind of communicate what -- as it evolves. And -- but I think we are -- we become more confident every month, every week as we get closer. We realize we've got greater brand awareness and greater brand affinity as we meet people, talk to people. Yes, there's a lot of excitement for RH opening in Europe, and there's a relatively high awareness of our brand with the target consumer. So we feel very confident. And long term, we believe it's going to be accretive to our operating margins.

And I'd say if you just kind of think about where we are today, we are still not a business of complete scale in the United States, right? We're not a retailer that is closing stores, that is kind of shrinking to kind of optimize their business. We're still growing. We have lots of new galleries to transform and have several billion dollars more we're going to do just in the U.S. And with that scale and as our product continues to evolve, transform and go to a higher level, we can kind of see operating margins approaching 30%. And when you think about international possibly being accretive on top of that, should be accretive on top of that, we could have a model here long term that looks like some of the best luxury models in the world.

If you kind of segment LVMH or Kering or look at the individual brands, right, because a lot of times, great brands and great businesses get lost in kind of multi-branded business models. And -- but Hermès has operating margins in the mid-30s. CHANEL has operating margins in the mid-30s. Louis Vuitton, if you segment it out, has operating margins in the mid-30s. And Gucci has operating margins in the low to mid-30s.

So we -- and by the way, if you just stand back and think about those luxury brands, they have a lot of competition of scale. There's actually a lot of choice for a wealthy consumer to access quite a few brands from an apparel point of view. There's also a lot of brands to access from, if you think about the jewelry sector or the watch sector, if you think about luxury cars. If you stand back and think about luxury home furnishings and luxury design, if you think about, okay, who is the fully integrated brand, yes, at the top of the luxury mountain in the world, it's a big void. It's a really big void. You've got a very fragmented kind of portfolio of kind of category -- niche category brands that are relatively small, that don't have scale, that don't have control of their brand. They're franchised out. They control very little of their distribution.

I mean, if you just take B&B Italia, for example, in North America, I think B&B, how many points of distribution they have, call it, 40, 50 points of distribution, they control 4 of those points of distribution. So their brand is like thrown around in a bunch of places. And they're probably the best global brand in the upholstery category, but they don't cover all the categories. And then you've got, I think it's Industrial Design (inaudible), something like that, some group that's -- the other one I said B&B Italia, Flos lighting, some other things, people are trying to kind of throw stuff together and figure out what to do.

And so I look at it and I kind of say, like we have like a 20-year lead in our sector. It takes a long time to build something like we're building. And we're just getting to a place where people are going to start to understand what this brand is capable of. People are just going to start to see in a consistent way the kind of physical environments and experiences that we're building for customers, the exciting hospitality concepts that are going to bring people to those physical experiences and connect with people and create greater brand awareness, greater brand affinity.

When people see what we're going to do internationally, in North America, we've had to unwind a really kind of tchotchke, crappy business and little stores and spend a great part of our journey unwinding kind of a (expletive) business, turning it into an okay business, spending many years of this journey just not going bankrupt, trying to exit lots of categories, lots of businesses, trying to move from a promotional model to a membership model and then reposition not only the product but all the real estate and not -- it's like Frank Sinatra says, not in a shy way, right?

I mean, we haven't taken our galleries, which are not necessarily small when you look at other players or competitors in our market -- I mean, we have 10,000 to 12,000 square foot, our legacy galleries with 7,000 to 8,000 feet of selling space. It's not small, but we're not taking them and just remodeling them. We're not taking them and making them 20% bigger or 50% bigger. We're making them like 500% bigger. And they're really the most exciting and interactive and experiential and dominant physical experiences of their kind in our industry today across any category, I'd argue.

So I think when you think about taking the very best of who we are and going to Europe with that and not being kind of plagued with our old identity, not being positioned like other people kind of have been, and you walk a mall where we've got a legacy store in a mall today, there's us and there's 3 other people or 4 other people, depending who do you want to pick and you know the names, those people aren't international in any meaningful way nor are they really positioned to compete against us today, even in the U.S. And so internationally, it's so fragmented, there's nobody of scale. Most of them don't control their distribution. And most of them, they're kind of like where we were 20 years ago.

So I just think the opportunity globally for this brand is maybe like no other brand in the world. If you really stop and think about it, if you just like -- you take any other category and say, who owns it at the high level? How many brands are there? Who are the leading brands that have control of their brand, control of their product on all levels, have the platform we have, have the business model that we have, like we're not going over there with negative EBITDA trying to grow in Europe. We're not going over there with like 5% EBITDA and trying to grow in Europe. We're going over there with like close to 30% EBITDA. So we just have -- yes, we are in such a great position. And I don't think anybody but us really gets it just because we've been studying it for so long and thinking about it so long.

So -- and then what we're doing next from a physical point of view in Europe is better than anything we've ever done. And when you guys see what's coming, I wouldn't want to be in Europe competing with us, I'd tell you that. I thought if you want to be competing with us here in North America in our category, you really don't want to be competing with us in Europe. And I don't mean to say that arrogantly. It's just -- I mean, just -- you just got to take a close look. So there you have it.

Our next question comes from the line of Steven Forbes with Guggenheim Securities.

Can you hear me?

Yes. We can hear you, Steve.

Sorry about that. So I wanted to focus on the new product launches. So Gary, if you can, can you update us on the specific timing of the launches, Contemporary and the elevated collections in Modern and Interiors? Any also color on the breadth of the new collections as we try to conceptualize the impact? And then whether the current supply chain environment has or is anticipated to impact these launches in any way.

What do you think? Of course, it's impacting the launches. I mean, everything is somewhat late and a little fragmented as it's coming together. So look, we would have liked to be out there with Contemporary in March. We would have, I mean, before the variant in the fourth quarter kind of ripped through. And again, it really -- I think it impacted the U.S. a lot -- not that greatly. It just kind of went through the U.S. very quickly. But when you think about countries like China or Vietnam or some of the places that we have big sourcing out of -- yes, it just all got kind of goofed up.

So we -- I think we're about a couple of months behind. We're -- and also, we want to be smart as this -- as we think about just the economic landscape we're going into. If the economic landscape is volatile, you want to be careful, especially if you've got a source book catalog business like ours. You don't want to mail into a big headwind.

So we're reevaluating our plans. We're -- I mean, we're kind of -- we thought we might launch with 450 or 500 pages in Contemporary. I think it's going to be probably more like 300 to 350 pages. Just stuff is late. My sense is it might even be later. I mean, the supply chain, I think many of us thought it would have been caught up by now. I mean, we'll be lucky to be caught up by the end of the year. And because it's just hitting everybody from all angles, all the raw materials, all the transportation issues, not just the transportation getting it to us, our vendors having to get all of their components from all over the world shipped to them. So you just have this compounding supply chain kind of puzzle happening.

So I think the key thing is just don't rush it right now because you can probably make mistakes that you'll wish you didn't. I think, just like we said, we're being a little conservative. How aggressive would we go with circulation? We'll see. We kind of pushed Modern and Interiors to the second half, let Contemporary kind of take the stage in the first half. But it will be coming in, yes, May. We don't want the book to get out there before we have some goods in stock, and it's all running late. So -- and that's probably also contributed to just our conservative view for the year.

So -- and even on the galleries, on the projects, just we're in a world that is -- it's -- I've never seen it so chaotic, honestly, from an execution point of view, whether it's construction, sourcing, manufacturing, shifting the supply chains, freight. Everything is a little out of sync in the world right now. So -- but everybody is dealing with it. So I think it's just how do you do it in the most intelligent way. And it's like -- I like to say, it's like quality. You kind of got to wait for quality, and we're not going to get any bonus points for rushing right now. I just don't think we are. I think there's more risk of winding up in the ditch.

So we're kind of slowing things down a bit. We're trying to be more thoughtful. We're trying to make fewer, bigger, more important moves. And that's just our view. I know everybody else is approaching things, but that's our view. We tend to spend a lot of time here thinking very deeply about a few big moves. This is a year where we've got a lot of big moves because they all kind of got backed up. And so we don't want to create more chaos in our world and our customers' world.

So what you see in front of you right now is the -- in the letter is the best news I have. It's different news than my last letter. When I wrote the last letter, I didn't know, how do you say it, Omicron.

Omicron.

Yes. All of a sudden, that hits. And then all of a sudden, boom, we've got a war. Russia invades Ukraine, boom. Yellen says interest -- inflation is going from 4% to 2%, and then it goes to 7.5%. And Powell says, we're behind. I think there's a lot of -- everybody thinks supply chains are getting better. I don't think they've gotten better at all. I mean, it is what it is. I mean, product is on the water for a long time. Getting ships into port is taking a long time. We've got generally about 5 extra weeks in our supply chain right now. That's a lot of time. It's a lot of money, and that's the average. So that means some steps coming on time and some steps 10 to 12 weeks behind.

And when you run kind of an integrated business like ours, where you need all the pieces of the puzzle to kind of paint the picture, that just makes it more complex and more difficult. But at the same time, right now, everything on that list, the year of the new, I'd be shocked if it doesn't all happen. If you ask me what's the biggest risk, Palo Alto goes into first quarter of next year. But that's not going to make a difference to the year anyway.

Gary, super helpful, right? Because I think as we try to contextualize the prudence of the guide, it almost appears like you're not incorporating a contribution from a lot of these year of the new factors, right? I mean, any comment on how you sort of built the guide from a bottom-up standpoint or how you would define the prudence behind it? And you have a great track record here. So any thoughts on just the guide in a holistic context on just the prudency behind it?

Yes. Well, look, I mean, it's probably one of the most difficult guides since 2008 and '09 because we're right in the middle of this disruption from Ukraine and Russia, which I think -- I don't think it's all Ukraine and Russia. I think it's triggered a greater awareness. Like it's like someone -- I think this was ring the bell, everybody pay attention. And then all of a sudden, everybody started talking. Yes, all of a sudden, the Fed's off to the races, and that creates concern. You've got housing prices at all-time highs. I mean, is it sustainable? I don't know for how long the math. Yes, doesn't make sense on kind of what's happening in the housing sector and other places that -- you've got inflation like I've never seen.

Now I was telling people when Yellen said, "We're going back to 2%," we were just signing our new freight contracts, ocean freight contracts. I just wonder if anybody -- the Fed has picked up the phone and called a businessperson and said, "Hey, what do you think is happening with inflation? How's ocean rates? How is this? How is that?" I mean, I think -- I don't think anybody really understands what's coming from an inflation point of view because either businesses are going to make a lot less money or they're going to raise their prices. And I don't think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. It's -- and I think it's going to outrun the consumer. And I think we're going to be in some tricky space.

So everything is kind of happening at once. And I think you got to prepare for war. I mean, if you're going into a very difficult, unpredictable time, you just got to be super flexible. You've got to be able to improvise, adapt, overcome and kind of be ready for anything. And I don't mean that by playing defense. I mean it by playing offense, but it's -- I wouldn't call it happy days right now. I'd call it pensive days, be ready. And when we play like that, we usually have our best outcome. When we get overly optimistic, we have a higher likelihood to wind up in the ditch and get ahead of ourselves.

So -- but if everything -- if the war in Ukraine ends and inflation slows down in some miraculous way, I don't know, everybody can sign new freight contracts because, I mean, most of the world all signed new freight contracts. 2 years ago, price of a container for us went from $2,400 to $4,800?

About that.

Yes. Yes, it doubled. I'm not going to tell you what it just went to. But just let's say, that looked like a nice increase. So -- and it's not just us. It's everybody. So either people are going to do stupid things like take quality down to make their goods like -- look like it's better value or they're going to not -- they're going to have to take prices up. And -- or they won't take prices up, and they'll hurt -- their margin profile is going to change.

But it's not just us. It's everybody I know in every industry. And I just don't think it's like -- again, I don't want to scare everybody. But I talked about the theme, like there's this scene in The Big Short where everybody is in that ballroom and the guy -- I think it's the guy from Bear Stearns or someone is up there, one of those things, and he's saying how they're going to buy back $1 billion of their stock, this, this and that. And then one guy who's on his BlackBerry, he goes, "Can I ask a question, sir? In the 20 minutes that you've been talking, your stock is down like 55%." And everybody ran out of the room.

I just think we tend to just try to be transparent and honest. And look, maybe our stock is going to take a big hit because of this, and people are going to think Gary Friedman wasn't excited. I've never -- I told my team, I've never been -- in my 22 years here, I've never been more excited. I've also never been more uncertain, right? So -- and I think you have to take a real balanced view right now.

Our next question comes from the line of Adrienne Yih with Barclays.

Thank you so much for the somewhat brutal honesty, but I think we have to hear it. I guess my question is, Gary, you talked about in the past 2 events that tend to impact your business, market volatility, high net worth, ultra-high net worth individuals. That sounds like you have baked that into the guide.

And then the second would be deceleration in high-end housing, which we haven't necessarily seen yet. How much of that is potentially in the guidance?

And then, Jack, on the $2 billion term loan that was taken out, what are the plans there? And RH San Francisco is awesome.

Thank you. Thank you. Yes. Look, I wish I had more to tell you. What's baked in are all our best thinking. But like I said, there's just a lot of change, and there's a lot evolving. I mean, like you have to ask yourself, what's -- where is inflation going the next time they report it? What's really happening today? I mean, we're just trying to build a plan and a view that puts us in a position to win.

So we thought about everything we can. I don't know. We can't impact nor can we forecast big macro trends like until you see them. I mean, the Fed can't do it. Janet Yellen can't do it. I don't think anybody in this call can really do it. No one ever really gets these things right. But you can capitalize on any environment if you're prepared. And that's all we're trying to do. We're just trying to be in a position to win, be in a position to take advantage of any opportunities that present themselves. We're going to be patient. We may look a little slow to some people. But when -- we like to say, don't move until you see it, right? So we're going to wait until we see it, and then we'll move. And when we move, we generally move aggressively. Right now, a little hard to see it.

And also, when your business kind of drops 10 to 12 points overnight, and there's just more news and unrest in the world, just -- you got to change what you're doing. If you don't change things, things won't change. So we're changing things. We're adjusting and improvising as we go. We're excited as hell. But like this is -- look, this is a similar conversation I had with our Board. I said -- my opening was, "Hey, in my 22 years, never have been more excited in my entire career. Here's why." All the things I read you, all happening, by the way. Almost everything there is happening in the next 12 weeks, most of it. Expect a few things happening in fall and Palo Alto and stuff. And -- but also, because of all the things that -- rising interest rates, runaway inflation, unrest, so on and so forth, what's -- you say what's happening in the housing market is a really good thing.

When things get too hot, they usually get cool. So again, I don't want to scare people. I'm just trying to tell you. I mean, you can see the numbers that we see. The last time houses had multiple bids like this, the last time prices went up like this, not -- there wasn't a great other side to it. So it's like -- but things are different. We're in a different economy. There's new kinds of businesses. There's new kinds of wealth creation. There's new kinds of productivity, things driving the economy.

So I don't know. Is there enough good things, whether it's in our business or other parts of the economy that motor us through and we don't have a recession, we don't have a slowdown? Does Ukraine gets settled sooner? I don't know. I mean, maybe I should be the one -- maybe we should be the one asking you guys the questions today. We spent a lot of time -- I wrote everything that we know. Like if you guys know stuff and have points of view, we'd love to hear what you think.

And Adrienne, I think that also answers the plan for the term loan question. Look, we raised the capital to provide optionality to allow us to be opportunistic. And I think Gary summarized it well, sort of how we're thinking about not moving until we see it. So when we move, you'll now.

But any plans to retire the converts early?

Yes. All kinds of things. But you also -- look, you have windows so you can do things in our company. You've got -- I've got expiring options that's putting me in a position to have to sell roughly 1 million shares of stock, all those things. You can't have too many things happen at one time and have conflicts happening. It's probably not appropriate to be buying back the stock when the CEO is selling the stock, right?

So yes, there's just a lot of things you got to think about, right? So we don't have complete flexibility on all those decisions. And so -- but look, we'll make -- I believe we'll make great decisions for our shareholders. If I didn't have to sell the stock, I wouldn't be selling the stock. I actually thought maybe there's some way we can extend the options. And I found out, no, that's an IRS thing. The IRS doesn't let you go past 10 years and then the options expire. So my option is expiring in November of this year, and I think it's better to try to get it out of the way so we can have more operating flexibility. So my situation actually constricts us a bit.

Our next question comes from the line of Curtis Nagle with Bank of America.

Great. So just -- Gary, I guess thinking about a lot of noise going on, obviously, as you've kind of gone through in a lot of detail here on the call, volatility, supply chain malaise, all sorts of stuff, I guess kind of thinking about the state of the industry and thinking about the premium and luxury end of things, at least in the U.S., it's still pretty fragmented. I guess maybe sort of cynically thinking here, do you think you guys might have a bigger opportunity to take share? How do you think that plays out? How has that changed over the past, I don't know, couple of years, thinking about the next, I don't know, 2 to 3?

I think we feel great about the next 2 to 3 years. So I think we'll take share in any environment, Curtis, in any environment. Again, it's -- these are all kind of temporal issues. Whether it's the war, the inflation and stuff like that, none of this is permanent. It's just there's a lot of things going on at once. And the supply chain, everything else, you just have to navigate in the best possible way or you can kind of screw up your business model and make some strategic mistakes. It's one thing -- we're all going to make a lot of mistakes. And I tell everybody in the company, the only difference between their mistakes and my mistakes is my mistakes kind of cost the company a lot more money than their mistakes.

So collectively, as a leadership team, we have thousands of people in this company that their livelihood is determined on our decisions. And we want to make great long-term decisions. We're not here for a short period of time. I've been here 22 years. And I'm looking over at Stef, who's been here -- who is our Chief Gallery Officer, Stefan Duban, who's been here 22 years, a little longer than me, I think, right? Eri has been here 15?

16.

16 years. Jack, who's really been here 10 or 11, but -- I mean, not technically. He was with BofA...

9 at RH plus 3 with BofA.

Yes. Sandy has been -- how long, Sandy?

14.

14 years, our Chief People Officer. I mean, if I go around, there's more people in the room, more people in the room. Yes, we've been here a long time. We tend to be -- we're going to be here a long time. So we're playing for the long term, and we're trying to make really good, big decisions that kind of change kind of the vector of the direction that we're going. And I think we've made some really good ones. I think that's why we've got a operating model that's not a little better than the next best person. It's a lot better than the next best person. And we have really big moves we're making right now that can increase that vector and accelerate our performance significantly more.

We don't sit here and say, "Oh, we made 25% operating margin. We think this is the best we've ever done. So it's not going to get any better." We think it's going to get a lot better. We maybe see another 5 to 10 points of operating margin, quite frankly. It's just that right now, I'm giving you guidance right now. We're talking about right now. Right now is a bit confusing. And anybody who's saying it's not, good luck. It's just -- I think it's the time you've got to really keep your eyes open, your antennas up, and you've got to prepare for anything that might happen.

I mean, again, look, this -- the war could end. Things could get better. Our business could bounce back, but there's a lot of things that are sitting out there. Rising interest rates is never a great thing. Now it might be 3 years away before rising interest rates really take a big hit out of the economy. I don't know. There's always patterns, and we've looked at all the patterns. We've got all the graphs. We've laid over all the graphs of all the interest rates. Like looked -- the last 20 years in the U.S., the average interest rate was 2%. You go push it out 30 years, it's 3% -- federal funds rate. When's the last time it's looked like that? The 1950s to the 1970s, okay? That's the last time. How old was everybody in this call in 1980 when the federal funds rate was 20%? I'm not trying to scare anybody. But almost everybody on this call, look, in 1980, like I was a kid I didn't know what I was doing. I didn't have wisdom then.

I just don't think there's a lot of people in business today, except for Warren Buffett and Charlie Munger and, I don't know, George Soros and just a handful. If you had wisdom in 1980, you kind of get into your years of wisdom in your 50s and start to get wise. If I look back and go to my '30s, I really didn't do anything. I just like worked really hard. In my 40s, I just got better. I could get (expletive) done and kind of see a bigger picture. In my 50s, I started seeing a much bigger picture. And in my late 50s and 60s, I think I've kind of gained a lot of wisdom, and I can see a much bigger playing field than I could.

If somebody was 50 years old in 1980, they're 90 years old today. So I just think a lot of people haven't seen this. When's the last time anybody here has seen interest rates go up 2 years in a row and 6 or 7 times this year and 4, 5 times next year? Nobody has seen that. Nobody has seen a lot of things that are happening today.

So I'm just saying, look, I'm just trying to be completely honest. Again, I couldn't be more excited, but I couldn't be more uncertain. And that's just the story. Other people might be banging a brighter, happier drum than me. Do they have better numbers than we do? I don't think so. We'll play the game the way we play the game, and we have a lot of exciting things coming. And look, if we're too conservative, that's okay. Let's make more money.

For sure. And certainly appreciate the long-term view. Just one quick follow-up just in terms of, I guess, pricing that you may be including in the guidance, right, probably some residual from price taken last year. As you mentioned, lots of new costs coming in or continued cost increases. So another round of price increases is included in the '22 guide or no?

Yes. We've got everything included in the guidance. And again, our business has been evolving for multiple years, right? So we are selling higher price points to fewer customers, bigger orders. Like in general, we're still evolving this model and -- into a luxury branded model. So ours is a little different. I mean, Contemporary is the highest quality goods we've ever had. It's the highest price points we've ever had. When we get those right, they tend to be the best-selling products we've ever had. Our most expensive sofa is our best-selling sofa. So when -- so we're probably better positioned to take prices up than others because we've been taking prices up for years.

So -- and in our industry, it's kind of event buying, right? It's like buying a car. You're not looking at the price of the car until you need the car. You're not looking at the price of furniture all the time until you need the furniture. So I think we're a little better positioned than other industries and other categories as it relates to price increases. We are pretty disciplined about taking price increases and so on and so forth, but these are going to be bigger. I mean, what's going to be the real -- when you have this kind of impact from freight and raw materials and price increases from suppliers and so on and so forth, I mean, you can say, "Oh, we're big. We're -- we can absorb it." That's kind of BS given what's happening in the world today. Like prices are going up everywhere. And if they're not, earnings are going to go down.

And so the question people have to ask is, "Do I want a bigger lower-margin business? And do I want to chase sales? Or do I want, maybe for a while, a smaller higher-margin business and then come out of this really positioned for the long term?" And that's the view we've taken not just recently but for almost 20 years and really accelerated 6, 7 years ago, 7 years ago. And we began to move to membership 6 years ago and launched Modern and so on and so forth. Modern was -- the prices at Modern were 50% higher on average, yes, when we launched, something like that, almost 2x in some cases. So yes.

But it's all -- I mean, I know you guys are trying to figure out the model and the guidance and exactly what that's going to be, I don't know. I think we can all get lost in the details right now. It's kind of the big moves and the big picture that's important and making really smart, big moves. And I think all our big moves are the right big moves. And if we change our mind in any of them and we decide not to do something or pull back on something, we'll make the right decisions based on how things evolve.

But the business just did change weeks ago. So we're probably the -- I don't know, like when did other people report? I mean, we reported a little later, right? So people probably hadn't seen the real trends yet. Unless we're just the only ones getting hit right now, I mean, I'd be surprised if that was happening. But what I've heard is there's been a broader slowdown in our industry, and it's got to be probably in other places, too.

Our next question comes from the line of Mike Lasser with UBS.

So Gary, when you say that you've seen a 10- to 12-point slowdown, presumably, that's on demand comps. So where are your demand comps trending over the last few weeks? Are they actually down year-over-year? And the counterargument would be that while there is a lot of uncertainty in the environment, your core customer came into this year in a very strong financial position, and the high-end housing market is in a pretty good spot. Is it your view that these purchases are merely being deferred? Or is there a possibility that prices have been raised so significantly that the customer is now responding to that?

What do you think? I don't know. I mean, we -- it could be a little bit of everything. It could be the distraction of the war. It could be so many things, Michael. So -- and we're not giving really -- we -- our demand got hit by 10 to 12 points. We're not actually guiding demand. We just wanted to give you color that there has been a change. And there's also one of the biggest dislocations between demand and revenues, and I think it's going to be that way for everybody. So we just wanted to try to be transparent and say, "Hey, look, just because we might -- I'm up 8 and (inaudible), it doesn't mean that, that's where demand is." So we're trying to be transparent with shareholders and let people know what's really happening. I don't want to come back next quarter and say, "Oh, yes, well, our demand has been down for a whole -- for the last several months. And yes, we didn't tell you when we could have."

So again, I mean, it probably will hit our stock today. I got it, whatever. I mean, we're playing for the long run. And I know everybody's got clients and they're running out of stocks. And these aren't easy times for all shareholders. So I'm just going to tell you the truth, and we're going to be transparent. We didn't have to say this. I think we're the first ones talking about demand. The other people, they're talking about sales, and they're saying sales continue to be strong. Well, our sales are going to continue relatively strong in Q1 comparatively to what we're up against, better demand.

So it's just the truth. We don't -- what the consumer has got? Do they have more money? Do they have this? Like if they do, they're not acting like it right now. So that's what you got to know. Will it change in 3 months?

No. That's super helpful. Are you seeing this consistently across the board, the slowdown in any -- across categories as well? Or is there any pattern that you can see? And you're not the only one. I mean, Traeger, the grill company, reported last week, also said that the last 3 weeks have seen a pretty big slowdown. So this is probably a broader trend, and it's right for you to point it out as well. So I guess any flavor you can provide on what you're seeing by category, geography?

And then the obvious question is how -- to what degree did you flex your P&L? If this is prolonged and gets worse, is there a downside risk to the 25% to 26% operating margin target for this year, understanding that you will have an opportunity to grow that from that base over the long run?

Look, if it stays down this -- like this the entire year, I think everybody in the industry -- well, we will be adjusting our numbers down. We don't -- this looks temporal. When things like this happen, they usually don't stick. It all depends on, are there any other shoes to drop? So we've got things that are going to counter this. We've got new goods and initiatives that are going to come into play.

So I mean, this is all we have for you right now. So I think next quarter, we'll have a much better view. And I don't know, Jack, do you want to...

Yes. Well, on the categories and geographies, obviously, Michael, we don't disclose those kind of items. I think generally, no major headlines there. And then -- I mean, obviously, if there's risks, if the model stays down for an extended period of time, there's the risk the margin will -- that's just strong P&L. So -- but we'll update you to the extent that happens.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

Just to continue on this theme, unfortunately. I was wondering, Gary, if you could compare and contrast some of the consumer behavior that you've seen in recent weeks to December of 2019 when your business saw -- potentially in the context of that 10% to 12% decline that you just cited.

Well, a 10% to 12% decline looks like a 10% to 12% decline. So there's very different factors that contributed to that. So how those will play out is the unknown. But again, like we're all kind of like major focused on kind of right now. I think that our focus is really on a much longer horizon and the big moves we're making. So yes, no matter what happens short term, we're going to win. We're going to take market share. We're going to be disruptive. Yes, we've got the best model. We've got a great balance sheet. We've got an incredible strategy. We've got a global expansion that we're teeing up. That's the best work we've ever done.

So if you're doing some of those things into a headwind, whatever, we've seen headwinds. This is not the first goat rodeo we've seen. This is -- you just navigate through them, and you win through them. But I'm not going to sit here and try to act like nothing's happening right now. It would be the wrong thing to do.

And so -- but how it compares to 2018? They were both down, different circumstances, different time. We're a different company. I don't know. What was our operating margin in 2018? Like 11%?

11%.

Yes. Yes, in 2018, we had an operating margin of 11.4%. We had a different cash flow profile. A lot of things were different. We have an operating margin that opens 26% today. We've got a better real estate strategy than we had. We've got a higher return on invested capital than we've ever had. We've got more exciting things in the pipeline than in 2018. We're all smarter and better than we were in 2018.

So we're tremendously excited. We're working our butts off here, and we're super pumped. And I may not sound like the most excited right now. I am, but you guys keep asking me the same questions to a degree about -- like I'm giving you the best answers. If you want to talk to me more about Europe or more about other things, you'll probably get a little bit of a different tone.

So I don't know, Chuck. I mean, it's -- we don't see anything specifically different in the numbers. I see something different in the environment. And we -- I mean, in 2018, did we have the Fed say they're going to raise interest rates 6 or 7 times? No. Did we have inflation at the levels we have today? No. Did we have the Chair of the Fed say, "Hey, we're way behind?" No. There's just a lot of things that's very different, and I've seen enough cycles to know that caution is advised right now. Yes, that's what I'd say.

Got it. I think we all appreciate your honesty. Just maybe a bigger picture on a brighter spot. You called out the $200 million TAM for RH Guesthouse. Just quickly, can you talk on the ramp, how quickly you can build that out over the next, say, 3 to 5 years?

I don't know. We have our first one opening. Like I just knocked on wood. I think it's extraordinary. I think -- and one of the things we've learned is when we do extraordinary, remarkable work, we've always figured out how to monetize it. And this is some of the best work we've ever done. We have our second one that -- in Aspen that's coming a year behind it, and that's got -- that's very similar in a lot of ways. They're both kind of a micro hotel. We've got 10 rooms in New York and 9 in Aspen, but they're incredible rooms. They're rooms that no one's ever seen. It's architected for privacy. I don't think anybody's architected a hospitality experience for privacy. We believe privacy is going to be a big market. Privacy is the one thing everybody has given away on social media, and it's one thing that the Internet has taken away because you can google anything about everyone.

So we believe privacy is going to be an important market and a market you can monetize. And we're creating a concept, I think, that's unlike anything else in the world. And we're doing things that have never been done in hospitality. It's a place we would all love to stay. It's at a different price point now. And if we get what we think we're going to get for the rooms, it's -- we think it can really work. But we don't know. We haven't sold the room yet. We haven't opened the restaurant yet. We have the first kind of restaurant like that, that we put in our Bespoke gallery in San Francisco. It's our new live-fire restaurant concept that's tremendously exciting. I think it's got a really wide net. I think it's delicious food. We're doing it internally from scratch ourselves. We've been in there eating almost every night and fine-tuning every detail.

And so we think on a lot of levels, the Guesthouse is going to be an incredibly exciting concept for us and will elevate the RH brand in the world of design and taste and style and placemaking and stuff like that. So I think it's going to have a huge impact on our brand and how we're perceived in the world. And if it works the way we are kind of modeling it now that we're closer to it and we can see it and we can think about how to price it, it could be a real business. But that's not what we're planning for right now. We're not sitting there kind of saying, "Yes, we're going to go build a $1 billion hospitality business."

But then again, I only thought RH could be $1 billion not too long ago. So it's -- I mean, this is -- in a lot of ways, it's the best work we've ever done of any kind of work we've ever done. It's the best work we've ever done. So we'll see what the consumer thinks, and that will kind of tell us how excited to get about it.

Our last question comes from the line of Brad Thomas with KeyBanc Capital.

Gary, I was hoping to follow up on RH England and see if there's any more color you could provide on how things are shaping up from a supply chain and logistics standpoint knowing you're going to a new continent here. And what should the customers over there expect initially that might be different in terms of anything like delivery time or relative price points versus what we see here in the United States?

Well, look, Fernando just got back. I'm looking at him across the table. I mean, he's updated us that things look good.

Yes. Absolutely.

Yes. I think we're ready to go from a supply chain side on our end. The part of the supply chain we don't control, we'll see how that evolves. But I think so far, it looks like we'll have inventory. We'll be ready. We'll be able to deliver and execute. The construction, like any construction today in the world of COVID, is taking longer and costing a bit more. But I kind of think about RH England as a kind of a living store. It's like -- it's a big 73-acre estate, and not everything has to open at once. Like we are going to have, how many hospitality -- trying to think about -- like we got 3 restaurants opening on the property. Altogether, I think there's 5 or 6 hospitality experiences that we have. We have the orangery restaurant. We've got the conservatory. We've got the loge. We've got the -- yes, we've got the wine room, the tearoom. We've got the juicery. What else? The team -- yes, we got weekend picnics on the lawns that are going to be happening.

I mean, it's going to be a fun place. Like I don't think the conservatory restaurant will make it for this summer. I mean, we may just -- but that might come next time. We'll -- like next season. But I think this is going to be something that's going to be a really fun interactive experience. I think if we do it well, a lot of people are going to come. It's going to be a great environment to see our product at this beautiful, beautiful estate. It has incredible light. It has incredible views. We have the biggest herd of white deer in all of Europe. We have a deer park that deers graze on it. You sit there, have a picnic and look at the deer and sit at the orangery, look at the views or the conservatory or the loge. Yes, they all have views. And yes, it's going to be spectacular. We kind of call it the most unusual store in the world internally. That's not what we're going to say externally.

But -- and I think it's going to get us off to a great, great start. But yes, we're running a bit behind. We're -- like you always have all -- this is a Grade I listed building. Just to put it in perspective, that's -- like Buckingham Palace is a Grade I listed building. When you have a Grade I listed building, I don't want to say anything that all of a sudden might get anybody in the English side upset, but it's just not the easiest to get approvals to make any changes and so on and so forth. And look, with the people we're working with in historic England is -- they've been tremendous, and they've been excited about our project. But it's a slower process, and COVID slowed us down a bit. So we're kind of rushing to kind of hit mid-summer. It may -- could be late summer. But whenever we get open, it's going to -- it will be spectacular. And that's really the key. You don't get a second chance to make a first impression on something like this.

So whether it opened -- if I thought we're going to get June, I don't know. It's probably a long shot to get June now, but it could be July. It could be August. Whenever it opens, I think everybody in our organization is going to be proud of it. I think our shareholders are going to be proud of it. And I think customers are going to be really excited about it. It will be our best work.

And we just did our new best work. If any of you -- a few of you came to the opening of RH San Francisco, which wasn't the opening of RH San Francisco, it was once they announced in the Bay Area in Northern California that masks -- we didn't have to wear masks, we said, "Okay. We haven't had a party in 2 years. We've opened a bunch of galleries with no parties. We're having a party in our hometown."

So we set the date. We mailed the invites, and we had a party, even though everything wasn't exactly done. But those of you that were there, it looks spectacular. It's the most extraordinary gallery we've ever built. It's got an entirely new restaurant that's called The Palm Court that's incredible. There's new wine experience areas, new wine bars and incredible rooftop with views of downtown San Francisco.

But England goes to another place, right? And then when everybody sees what's coming in Paris, it's just extraordinary. And what we're doing in Mayfair in Central London, incredible, incredible. We're stringing together 4 buildings to create this incredible experience. In Paris, we're going to have a champagne and caviar bar on the top floor in the roof with views of the Eiffel Tower. I mean, you can't make that up, right? In Paris, RH Paris is going to have a champagne and caviar bar with views of the Eiffel Tower. We used to -- I think Chicago, 3 Arts still has the record for the most engagements in one of our restaurants. But Paris might take that crown after a few years. And then when you see, we're very close to -- I guess I shouldn't say because we're in negotiations, but something even wildly more spectacular in the French countryside. If we do this one, I mean, it's just an incredible brand enhancer.

So the stuff we have coming is -- you're just going to have to keep changing your perspective on what's possible and how to see our brand. I think all the people who came to our party last week, I think designers were blown away. They thought -- if you get out on the West Coast, even if it's not open yet, I think we'll open kind of mid-April. We got a few more things we got to get done there. But if you're anywhere near here and you want to see it, let us know. We'll give you a tour because on the main floor, we set up RH Contemporary, and it's shocking. It's so good. It's that good when you see it. I mean, I think people -- it's just going to motivate people to change their house, redo their house no matter how long ago they bought furniture. It's a whole new thing. It's very, very cool and just beautiful, and the quality is outstanding. So a lot of excitement coming. We're really pumped about England. And if there's no COVID and we can have a party, do not miss that one.

All really exciting stuff. If I could squeeze in a follow-up, perhaps a bit more dry. You all have had kind of different capital structures over the years and depending on if times are good or bad. Just to circle back on that question of the term loan. I mean, in this environment, with inflation where it is and the trends you've been seeing, I guess how do you think about what the capital structure should look like right now?

I think we've consistently answered that, that -- I mean, I'm not sure that we have a target cap structure. We think very opportunistically about our capital, our capital deployment and our cap structure. So that hasn't changed. I think we've been quite consistent probably for the last 9 years about that. We raised the capital for -- to provide optionality and give us some flexibility here going forward. It's exactly -- we accomplished that at a very attractive rate. So...

We had another question come in the queue. It's from Seth Basham with Wedbush.

Not to belabor the point that's been brought up by some prior questions. But just in regards to thinking about the margin outlook for 2022, with the more muted sales outlook, I'm surprised to see operating margins expanding in your guidance. And I'm wondering if you are changing anything in your cost structure materially relative to when you last talked to us in December. For example, you're putting back in some of the source book distribution that you're planning or anything else along those lines.

Yes. Well, like I think if I've just looked at us since, what, 2017 and relatively modest revenue growth, we've had pretty significant operating margin expansion. So I would hope you get used to it because we don't expect to not -- to any time soon stop expanding margins unless we make some kind of short-term big investments that maybe put weight on it. But even with opening Europe, even with a lot of preopening expense and investments, and opening Europe means we've got people over there now. We're flying teams over there, people over there living there, staying there in hotels. We'll have big teams going there. We've had big teams in San Francisco to get that open. We've got big preopening costs for the Guesthouse. We're absorbing a lot of investments.

And it's clear to us how important kind of the connective tissue of hospitality is in our business today and will be. And our vision for hospitality now, I think, is just magnified and what we can see and what we have confidence in doing. Like, look, not too many years ago, we didn't know anything about restaurants. And it was the end of 2015, really beginning of 2016, we had our first restaurant that we opened. We didn't even have a host because we thought no one was going to show up. There was part of it like, "Okay. Who wants to go eat in the middle of a furniture store?"

And so the original -- if you look at the Chicago video, I think Brendan, who we partnered with in the first few restaurants, had said, like there's going to be no host, no this, no that. We opened the first day and ultimately, we had a line out the door. And we had nobody seating anybody. We had customers hovering over tables waiting for the next person to leave. But we went from just one restaurant that wasn't really in our backyard. It was all the way in Chicago, and it was with somebody that was not inside our company, right? And now it's -- so 6 years later, and we've got 13 restaurants that we totally control. The entire hospitality team is -- it's internal. It's not farmed out at all. We're developing it. We design the restaurants. We design the menus. We're architecting what this platform looks like. We've done the Guesthouse from scratch. Nobody helped us with that. We even did all the architecture internally and all these things.

So like we're really going to become a hospitality company, too. But -- well, some people might think, "Well, gosh, it's just like another business." Not the way we're thinking about it. Like we -- everything we do, we think from an integrated perspective. So it's not like we're running a hospitality business. This is really an integrated hospitality business that's amplifying the core business and amplifying the brand. And it's a new way of talking to people. It's a new way to market a brand. It's a new way to connect, and we just see so many more opportunities. So you're going to see us do new things like the new live-fire restaurant. You're going to see us -- this champagne and caviar bar in New York and -- will be the first one. You're going to see the first RH Bath House & Spa in Aspen, and you'll see other things.

So I think this is -- this brand is going to evolve and become something that the world has never seen. And in many ways, it's already become -- in many ways, depending where you are and what you're looking at, it's already become something the world has never seen, especially from a financial outcome perspective, right? No one's had a model like this. So we're investing heavily in hospitality this year, and -- because we think there's such a big opportunity to enhance the brand.

So we're absorbing a lot of costs this year. Like we had almost no travel during COVID. So we're back to traveling. That's why you saw some deleverage in SG&A in Q4. One of the things was travel. We're traveling again. We're working again. We came back to work a lot earlier than everybody else. We don't have a whole -- we don't have a vote here on, are we coming back to work or not? It's like -- I mean, a lot of crazy things happening in the world that I think is going to be bad for productivity. But not going to work, I think, is one of them.

But anyway -- but you see in our model that we're -- relatively conservative sales, we're expanding operating margins even though we have a lot of investments and we're expanding internationally. So it just tells you about our model, right? What's the model going to continue to look like over the next 2, 3, 4, 5 years? Or what it's going to look like over the next decade? I really think it's going to look like a handful of very best luxury brands in the world if we do it right. I mean -- but you've got to build desirability and scarcity and prestige and exclusivity and a lot of things into really being a luxury brand like that -- to get people to really desire that brand. You've got to execute at such an incredible level, and we're getting there. We're getting better all the time. We've got a ways to go.

And so that's what we're optimistic about. We go like, "Look how we're doing -- like shoot, look at how we're doing." And this is -- they haven't seen anything yet. Like we can see what's coming over the pipeline over the next 2, 3, 4, 5 years, right? We know it's in that pipeline. We're -- some of that pipeline is under construction or we're finalizing a lease or we're doing the renderings and finishing the architectural designs on projects that -- I wish I could talk about them all right now, but you guys would probably get scared. So like I've already probably scared you enough for one day, just trying to be honest about what we see. We're not scared, just to be clear. We're excited. We're just cautious.

I'm showing no further questions in the queue. I would now like to turn the call back over to Gary for closing remarks.

Okay. Well, thank you, everyone, for your time. We look forward to speaking with you next quarter. And do let us know if you're on the West Coast and want to see RH San Francisco or come by and see the center of innovation, okay? You might need a pickup after this call. Thank you. Take care, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.