RH (RH) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the Restoration Hardware Holdings' third-quarter fiscal 2012 earnings conference call. At this time, all participants are in listen-only mode. As a reminder this conference is being recorded. I would now like to turn the call over to Cammeron McLaughlin, Vice President of Investor Relations. Thank you. Ms. McLaughlin, you may now begin.

Thank you. Good afternoon, everyone. Thank you for joining us for Restoration Hardware Holdings' first earnings conference call. Joining me today to discuss the Company's third quarter of fiscal 2012 results are Carlos Alberini, Chief Executive Officer; Gary Friedman, Chairman Emeritus, Creator, and Curator; and Karen Boone, Chief Financial Officer.

Before turning the call over to Carlos, I would like to remind you of our standard legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws including statements about the outlook for our business and other matters referenced in our financial results press release. 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 financial results press release for more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, December 12, 2012, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Also during our call today, we will discuss a number of non-GAAP financial measures including, adjusted EBITDA, adjusted net income, and adjusted earnings per share. You will find additional disclosures regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's earnings press release. A live broadcast of this call and an accompanying slide presentation is also available on the investor relations section of our website at ir.restorationhardware.com. With that, I will now turn the call over to Carlos.

Thank you, Cammeron, and good afternoon, everyone. I first want to thank you all for joining us today as we report earnings for the first time as a new public company. This is an exciting time for us as we celebrate this important milestone in our history positioning our Company well to pursue our powerful growth strategy. I will start with an overview of our third quarter financial performance and the progress that we have made on key operating and strategic initiatives. Then Gary will provide an update on our brand initiatives and upcoming product launches and after that, Karen will address our financial performance in more detail.

We are very pleased with our third-quarter performance and financial results. During the period, we delivered industry leading sales growth with a revenue increase of 22% on top of a 25% increase in last year's third quarter as our customers continue to respond well to our product offering. This performance, which is consistent with the 22% growth that we achieved for the nine months year-to-date, marks our 11th consecutive quarter of double digit revenue growth. This performance has been driven by growth across all of our businesses and all of our channels. We also saw significant earnings growth in the quarter delivering adjusted net income of $2.7 million during that period and adjusted earnings of $0.07 per share. This performance contributed to a 95% increase in adjusted net income year-to-date reaching $47.9 million or $0.37 per diluted share.

During the quarter, we made significant progress with several key strategic and operating initiatives. First, we have focused on our inventory position as sales had out paced our inventory growth in the past several months. Our goal is to strategically increase our position in key products, to enhance delivery times and customer satisfaction, reduce costs, and minimize backorders. This should contribute to increased overall sales and enhanced profitability. We have partnered very effectively with our suppliers to execute on this strategy and plan to close the year with an improved inventory position in spite of the recent Long Beach port strike which set us back a few weeks from our planned receipt levels.

Second, we continue to invest in our infrastructure to support our growth plans and maximize profitability. The key areas we focus on included sourcing, distribution, logistics, and technology. We enjoy a strong global sourcing network and have full control of and partner directly with our suppliers with no intermediaries. We continue to strengthen and streamline this organization.

Regarding distribution, we recently opened our new distribution center near Baltimore, Maryland. This new facility has over 1.2 million square feet and supports 60% of our furniture fulfillment in the US. Construction is also underway for our new 850,000 square foot furniture distribution center in Dallas. In addition, we recently began a 400,000 square foot expansion of our Ohio small package distribution center which will be fully automated. Both of these projects are scheduled to be completed by mid 2013. We are also continuing our efforts to in-source home delivery hubs in our top market. We just completed in-sourcing the greater New York area, which is the largest home delivery market in our network. As we have only in-sourced five hubs to date, we are in the early stages of this process and we see significant opportunities to reduce the returns and damages over time and improve customer satisfaction while reducing cost.

With regards to technology infrastructure, we continue to invest in both hardware and application software including our website and mobile capabilities and we have recently rolled out iPads in all of our stores, enabling our field associates to have the entire product assortment in the palm of their hand.

As we look forward, we remain focused on executing our key growth initiatives which include the transformation of our real estate portfolio and the expansion of our products and services. We are confident in the potential growth opportunities in our business and our goals are to deliver mid to high teens revenue growth for many years to come. Our real estate transformation represents the single largest growth opportunity for the Company. Today, our gallery stores on average display less than 25% of our current product assortment. In fact, this number is less than 10% if you include our baby and child assortment. Yet, we know that product displayed at retail typically experiences anywhere from a 50% to 150% lift in sales versus when the product is only represented in our Source Books and online. The true power of our real estate transformation lies in our ability to unlock the value of our assortment which is currently not fully realized in our legacy mall locations.

Our new full line Design Galleries enable us to display a much larger portion of our assortment at retail, offering a significant opportunity to transform our economic model and the early results of this transformation are very encouraging. With the opening of our Scottsdale gallery in November, we now have three full line Design Galleries in operation. Our first full line Design Gallery, Los Angeles Beverly Boulevard with over 17,000 selling square feet, opened in June of 2011. After experiencing 90% growth in-store demand during the first year of operation, this gallery has been consistently achieving double digit comp growth since its first anniversary. Our new Design Gallery in the Houston Highland Village opened in November 2011 and has 22,000 selling square feet. During the first year of operation, this gallery drove store demand growth for the market of over 60% and has also been delivering double digit comp growth since its first anniversary. The average gallery at Scottsdale Quarter is our newest, full line Design Gallery with more than 25,000 square feet of selling space. Since its opening in November, store demand in the market has grown by over 60%.

We have identified 50 markets in the US and Canada to introduce our full line Design Gallery concept. We believe that we have an opportunity to more than double our selling square footage in North America as we transform our real estate. We are actively pursuing opportunities in key markets and we have secured several locations already. Our Boston full line Design Gallery, at the former Museum of Natural History, will now open in the first quarter of 2013. Our Greenwich Gallery, at the historic post office, is scheduled to open in the fall of 2013. In addition, we have either executed leases or in advanced negotiations in several other key markets. This includes Atlanta, Indianapolis, and a number of others. I'd like to now turn it over to Gary who will be talking about our brand initiatives and upcoming product launches. Gary?

Thank you, Carlos, and good afternoon everyone. I'm going to spend some time updating you on the performance of our new and developing businesses and speak to some of our new launches planned for this year -- next year. We believe we are building a truly unique brand in consumer experience in the luxury home furnishings market and believe long term we can curate a world that goes far beyond the four walls of the home. Our ability to innovate, curate, and integrate new product categories and businesses at the level of quality, taste, and style that is unique and authentically our own sets us apart from others and positions us for sustainable long term growth. We have a proven ability to test, scale, and roll out new businesses in a very efficient manner leveraging our unique multi-channel platform.

As an example, the slide you're looking at represents how we tested, scaled and are now rolling out our baby and child business. You can see we tested a 96-page catalog in 2008, refined and scaled the business to a 308-page Source Book and online experience by 2012 and have begun to test and roll out the concept at retail. I would point out that this example was during a very difficult economic period with limited capital. In today's environment, we would move much faster to retail roll out. On the next slide, you will see an example of the product and the distinct point of view we bring to the marketplace. As mentioned, we recently opened our third and largest Baby & Child Gallery last month in Santa Monica, California. We believe these new galleries represent an entirely new and differentiated aesthetic and consumer experience. We also believe this concept can have a retail presence in at least the top 50 markets in North America.

Let me spend a moment on Big Style/small spaces. We introduced Big Style/small spaces with a 52-page catalog in spring of this year and quickly scaled the business to a 156-page book by fall. We believe there's an opportunity to make our level of quality, taste, and style available to a much larger audience by scaling down the product to work in smaller homes, condos, and apartments as well as making the price points more accessible for the aspirational customer. We are pleased with the initial customer reaction and will continue to refine the assortment in 2013. We plan to test a retail footprint of this concept on a separate floor in our Next Generation full line Design Gallery opening in Atlanta in 2014.

In 2011 and 2012, we also introduced several other product initiatives worth mentioning. In 2011, we introduced our exclusive rug collection in partnership with Ben Soleimani of Mansour. We are pleased with the business and have experienced significant growth in the category as a result. We will be expanding the assortment and begin retail rollouts in 2013. We also entered the shades and blind category in fall of this year as we began a strategic partnership with the shade store. As you know, we have been in the drapery business for years. Shades and blinds represents close to 50% of the window coverings category and we believe we can create a substantial business in this custom category. We are pleased with the initial results and plan to expand and refine the assortment in 2013. In 2012, we also introduced new finishes in our living, dining, and bedroom collections where we added dark brown and black finishes. We believe this will broaden the appeal of our assortment and enable us to continue to grow our market share in furniture. We also meaningfully expanded our lighting assortment in 2012 and this continues to be one of our fastest growing categories as we create the dominant destination for table, floor, wall, and ceiling illumination.

As mentioned in our press release, we are introducing three new businesses this spring, RH Tableware, RH Objects of Curiosity, and RH Fine Art. Let me spend a moment on each one. RH Tableware will include dinnerware, serveware, glassware, flatware, linens, bar, and entertaining. We are very excited about our opportunity to build a meaningful business in this very large category. We spent two years studying and developing what we believe is the perfect place and have been equally obsessive about the entire assortment. We think you will find it unique and differentiated from anything that exists in the marketplace today. This business will also open us up to the important holiday, entertaining, gift, and bridal markets.

RH Objects of Curiosity is our attempt to create a highly differentiated assortment of unique and interesting decor items for the home. This is a category we've been underpenetrated in and believe it represents a significant opportunity. The assortment includes everything from functional categories like picture frames and candlelight to collectible decor and objects. We believe this is a very unique and intriguing collection and fills a void in both our assortment and in the marketplace. RH Tableware and Objects of Curiosity will feature their own catalogs and sections on our website. They will be mailed with our Home Source Book in the first quarter of 2013. Many of the products from these new businesses will also be displayed in our retail galleries and create an opportunity to drive higher productivity in our existing retail square footage.

RH Fine Art will launch in the first half of 2013 with an innovative Art Journal, dynamic new website, and a dramatic art gallery in New York City. We are creating a global platform for contemporary artists offering a highly curated and edited point of view. As you know, this is a very large and highly fragmented market and we believe we can leverage many of our core capabilities to redefine the existing marketplace. We also believe this new venture into the world of fine art will render the RH brand more valuable and reinforce our luxury lifestyle positioning.

Lastly, we will be completing the build-out and soon be fully operational in our new RH Center of Innovation and Product Leadership. This is a 100,000 square foot-plus facility that is at the core of our corporate campus in Corte Madera, California. The Center is designed to support the product development process from ideation to presentation. It is the only facility of its kind in the world and has enabled us to reduce our product development cost by 50% and catalog production cost by 80% while streamlining the process to reduce our time to market from 12 to 18 months in the past to 3 to 9 months currently. We believe the Center gives us tremendous long term competitive advantage and is a reinforcement of our culture of leadership and innovation. With that, let me turn the call over to Karen.

Thanks, Gary, and good afternoon, everyone. Now that Carlos and Gary provided you with an overview and update on key strategies, I will take you through some of the financial details of our third quarter. Since Carlos mentioned total revenue for the third quarter increased 22% to $284 million up from $233 million last year. We are very pleased with these top line results as we've now delivered 11 consecutive quarters of double digit revenue growth and have achieved a compounded revenue growth rate in excess of 23% over the last four years. Retail sales increased 21% to $159 million compared to $132 million in the third quarter of fiscal 2011. Our third quarter comparable store sales increased 29% over last year and this is on top of the 36% comp store sales growth we experienced during last year's third quarter. We also operated fewer stores with 73 stores open at the end of the third quarter versus the 84 we had open at the end of the third quarter last year. Our direct sales increased 24% to $125 million compared to $100 million in the prior year's third quarter.

This fall we increased our catalog pages and pages circulated as we expanded our Source Book to showcase new product and made investments to further test various segments of our customer file. Gross profit for the third quarter of fiscal 2012 was $102 million, up 21% compared to $84 million in the third quarter of fiscal 2011. As a percentage of net revenues, gross profit decreased modestly to 35.9% from 36.3% last year. The contraction in our gross margin was driven by a few different factors. First, we saw a decrease in our product margins due to changes in our product mix including higher furniture sales during the period which have lower margins than some of our other product categories. The higher percentage of furniture sales in the quarter also lead to increased shipping costs. In addition, although we had the same number of company and store wide promotions during the quarter, we had higher sales during those promotional events relative to the same period last year. We were able to partially offset these decreases with improvements in our occupancy as we continued to leverage the fixed portion of both our store and distribution center occupancy costs.

Our SG&A expenses as a percentage of net revenues decreased in the third quarter from 38.1% to 35.2%. Excluding the impact of certain unusual non-recurring items, SG&A expenses as a percentage of net revenues decreased by 110 basis points to 34.2% versus 35.3% of net revenues in the prior quarter. The decrease in SG&A expenses as a percentage of sales was due to increased leverage on fixed payroll and other corporate expenses partially offset by increased advertising and catalog costs. Excluding the impact of unusual non-recurring items, SG&A expenses were $97.1 million in the third quarter versus $82.1 million in the prior period. Advertising and marketing costs, as well as other variable selling costs, were the primary reasons for the increased dollar spend in the quarter.

Our adjusted EBITDA for the third quarter increased 17% to $13 million up from $11 million in the third quarter of fiscal 2011. As a percentage of net revenues, our adjusted EBITDA remained relatively consistent with the prior quarter at 4.6% of net revenues versus 4.8% in the year ago period. The decline of 20 basis points represents the decline in our gross margin, partially offset by the SG&A leverage that we achieved during the period. Adjusted net income for the quarter of 2012 increased 147% to $2.7 million, up from $1.1 million in the year ago quarter. This represents $0.07 per diluted share based on 37 million shares outstanding which has been adjusted to include all of the shares issued in our initial public offering. On a GAAP basis, net income increased $6.5 million to net income of $1.7 million in the current quarter versus a net loss of $4.8 million in the third quarter of fiscal '11. Our adjusted net income of $2.7 million in the third quarter excludes management and pre-IPO board fees and expenses as well as legal and other professional fees incurred related to the special committee investigation. Adjusted net income also excludes several non-recurring tax benefits and has been calculated using a normalized 40% tax rate.

Turning to the balance sheet, inventory levels at the end of the quarter were $334 million, up 19% from the end of the third quarter of 2011. This increase is slightly below our sales growth during 2012; however, it is in line with our expectations and our strategy to grow inventory in order to improve our in stock position, reduce back orders, and increase overall sales. As our IPO was not effective until the fourth quarter, the balance sheet presented here is not reflective of the changes in our capital structure. Subsequent to the third quarter, we utilized a portion of our IPO proceeds to make payments of $75 million on a revolving line of credit and repaid our $15 million term loan. Through the quarter, our capital expenditures were $26 million. Based on current plans for new store openings and infrastructure investments, we now expect capital expenditures of $52 million for the full fiscal year.

With respect to forward-looking guidance, we plan to provide annual guidance for fiscal 2013 when we release fourth quarter earnings in April. We do not plan to provide guidance for the fourth quarter during this call. That said, there are a few things that should be considered as we close out the fiscal year. First, I want to point out that we will continue to exclude certain unusual and non-recurring adjustments from our adjusted net income and adjusted EPS in the fourth quarter. The first item relates to one-time stock compensation charges incurred in connection with the IPO. The total amount of this charge is expected to be approximately $116 million and includes grants made as a result of the termination of our prior equity plan and other equity grants that were fully vested during the fourth quarter. The second item relates to income taxes as we expect to be in a position reverse the valuation allowance we currently have recorded against our deferred tax assets of approximately $58 million. Lastly, we expect to close out the fiscal year with a higher number of diluted shares based on the stock price performance subsequent to the IPO which has resulted in the vesting of certain market and performance based stock awards.

To summarize, we are very pleased with our third quarter results and we remain focused on our business in the fourth quarter and the long term financial goals we have set forth. Our long term financial targets include revenue growth in the mid to high teens, adjusted EBITDA growth in the 20s, and earnings growth of approximately 20%. We are committed to the strategies outlined today and believe they will allow us to consistently deliver upon these targets. I'd now like to open up the line for any questions. Thank you.

(Operator Instructions)

Lorraine Hutchinson, Bank of America.

Karen, I wanted to follow up a little bit on the gross margin. It's the first time its been down year-over-year in quite a while and you went through some of the factors that caused that but can you just talk about how we should expect that to trend as you add new lines and as you move the mix more toward furniture and your expectations for that line item going forward?

Yes, so as we mentioned, we have over time seen an increase in our furniture, that's something we've disclosed in the S1 so as the furniture has increased and the penetration of that has increased, there's two things. One, that is overall a lower margin category versus some of our other categories and it has the effect of also having higher shipping costs which roll into gross margin. Over time, as we increase some of the categories that Gary mentioned with tableware, with the fine art, with those, we think that generally, those will be margin accretive over time with some of those introductions in 2013.

And Lorraine, I would add to that that we just cycled through the product margin reduction so we have seen through the end of October and beginning of November, so the declines that we saw before should not be recurring.

Okay, and then can you just talk longer term how we should think about store openings and closings over the next few years?

Yes, so I mentioned a couple of the deals that we have already executed and we are pretty much on track with every one of those projects, as I mentioned in terms of date. That would provide a very mild increase in square footage for fiscal year 2013 but looking into 2014, we see a very meaningful increase as many of these deals come to life. So if I had to put numbers to that, 2013 we should think about a flattish type of square footage to low single digits growth and in 2014, that number should be in the teens.

And then CapEx, should we expect something similar on a percentage basis?

Yes, our CapEx has two major components. One is all new store and remodeling development and the other component is infrastructure investments and as we are doing a lot of work on our infrastructure, there is some investments that are going to take place both this coming year and into '14. The real estate development piece is expected to be pretty much consistent between this coming year and the following year.

Great, thank you.

Thank you, Lorraine.

Matt Fassler, Goldman Sachs.

A couple questions. First of all, on the inventory front, your inventory came in a bit below the number we had modeled which is consistent with your comments and I guess in the ordinary course, that would be good news. I know that you are planning to drive that number a bit higher, so and you talked about the port strike which I guess was an eight day strike. I don't know if it had a disproportionate impact on the fourth quarter. It shouldn't have impacted 3Q really. So can you talk about the cadence of receipts relative to what you might have thought prior to the quarter ending and how that might impact your in-stocks and ability to convert demand which was obviously quite solid?

Yes, thank you, Matt. We are very confident with our inventory position and we remain very optimistic about being able to weather through the port strike delays that we saw. In fact, we think that we should be caught up either end of this week or beginning of next week, and we feel very strongly in our ability to continue to deliver product based on that. With respect to the third quarter, we have been looking at things in a conservative way and yes, inventories came in a little bit under what we had at some point expected. Frankly our vendors have been amazing in this and they have been partnering with us and delivering pretty much in line with what they had committed and this is across the board, so we are very pleased with how quickly and this type of capacity that they have built over the last few years.

Got it. Secondly, obviously people saw a lot of you and heard a lot from you a number of weeks ago. One element, it might not be a big deal but I don't think we heard that much about was the art gallery in New York and I'm not sure how big a commitment that is and the role that you expect it to play but any color you could provide on your plans there would be great.

Sure, Matt. We've decided to have a separate art gallery to have a physical presence in New York for art. The good thing about the art business and specifically the retail footprint of the art business is it tends to be in kind of emerging neighborhoods, very low cost real estate and it doesn't take much capital to get an art gallery up. So as we kind of analyze the business further, we believe having a physical presence in some of the key major cities to support what we believe will be a very dynamic online global platform is the right thing to do and as we look at it we believe we're going to have very good returns on investment because of that minimal investment that's required.

And Gary, that will supplement the art offering that you'll presumably have in your traditional stores or your Design Galleries as well as in your direct business?

Yes, think about it this way. In our traditional stores, we display more what I'd call decorative art and fine art and especially we learn from the art community and someone who -- an artist does not want their fine art displayed in a retail store with furniture but we know our consumers spend a lot of money on fine art so we will build satellite fine art galleries that will support our online business and we will direct our consumers from our typical lifestyle galleries to shop from these art galleries which again, I would just reinforce there are very low lease costs and very minimal build-out to get an art gallery up.

And is this held on consignment or do you hold the inventory?

It would be a combination.

Got it and then finally, Karen, I hear you on the share price and it's a high quality issue to deal with. If you were 37 million shares or so in the third quarter, if the stock price were to, say, stay at current levels through Q4, how much incremental stock if you would add to the share count?

So good question and I'll point that we don't want to speculate on how the stock price would perform but your point about where we are today, we are going to be filing the 10-Q in a couple days and as of today we have approximately 37.8 million shares outstanding and that's something that will be disclosed in the Q. If the stock price holds, you know, or we're in the middle of a period where some of those stock prices have to meet a 10-day period, then a few more incremental could vest but overall, again right now as of today, it's 37.8 million shares outstanding.

So it's about a 2% increase to the share count based on the fact that your stock is in the high 30s.

800,000 has vested in the last, say, month since we've been public.

Got it. So that would be the target of the increase assuming this is the level and obviously the level moved that will change? Because that, I mean not to speculate on direction, if the stock is up, I guess that would go higher. If the stock were to decline, are those options basically triggered and hence now in the base forever or based on Treasury method, would that number come down?

So there's two pieces. There's the piece that they will be, the market based and performance based awards, once they're triggered they are triggered forever and they are part of basic and then there's the second pool that will have options that will become more in the money and those would be in the Treasury stock method.

Is most of the 800,000 the former rather than the latter?

They were all the former.

Got it. Thank you so much.

Thank you.

Peter Benedict, Robert W. Baird.

Hi guys. Thanks for taking the question. Just back to the promotional environment in the quarter. I think someone had mentioned that you have the same number of promotions as a year ago. Was just curious about maybe the duration of those promotions, do those events last longer? Do they have higher percentages off than maybe last year or was it really just a case of you seeing the customers hit those more frequently?

Yes, so some of the I guess I'll say success of the promotions we think is linked to some of our luxury brand positioning where we will have the same event where it's the same number of days. We might I think in one or two of them add a follow on day where it will be last chance so it's maybe one more day but for the most part they are the same promotions as far as duration and we just find that our customers especially those aspirational customers just respond really well and show up when we have those promotional events.

Let me just jump on. This is Gary. As we have tested the depth of our file and the breadth of our assortment and have nailed deeper, we obviously reach into a more aspirational customer as we reach into the file and combined with adding the Big Style/small spaces Book which is positioned for smaller homes and for aspirational customers, we've seen that aspirational customer respond to be more meaningful during the promotion than when we're not in the promotion, and in retrospect you'd start to I guess expect that, as you reach into the file.

Okay, that's helpful. Thanks Gary. Carlos, did I hear you say that you thought that the product margin pressure that you guys had seen, you're starting to cycle some of that and that is not expected to continue? Can you clarify that?

To the degree that we have seen during the last few months, few quarters, that is exactly right.

Okay, that's helpful, and if you would comment just on how did the business perform around kind of the Sandy event, the election, et cetera, and the holiday thus far. Has there been anything -- we've heard a lot of different things from a lot of different retailers. Can you comment maybe about how the business performed around those events?

Yes, let me take Peter that question and then Gary I'm sure will have a couple of comments as well. So regarding Sandy, first off we would like to express our sincere concern for the well being of all those that were affected by the huge storm of course. But as far as the impact to our business, we had several stores that were closed for either partially or for a few days and of course that impacted our revenue base. The good thing for us is that we do operate an event driven business and of course we have exclusive product and we believe that if the customer cannot shop today they will definitely be there tomorrow as they are pursuing that event driven purchasing. So overall, yes, it definitely had an impact. We think that the impact is not a significant one. Gary do you want to add anything?

Yes, I'd just say I concur with Carlos. Clearly we saw a downdraft with Sandy. I think everybody had to if you had any stores in the Northeast and we saw a bit of softening post-election as the headlines became everything about the fiscal cliff, but saw our business bounce back.

All right, great. That's very helpful. Thanks, guys.

Thank you.

Daniel Hofkin, William Blair & Company.

So just I guess maybe big picture in terms of the decision at this point not to provide guidance for the fourth quarter, what were some of the main factors that -- is it just where we are in the quarter or what were they?

Yes, so you know we have decided that we will provide annual guidance and obviously the right time to do that we feel is when we record our fourth quarter financial results which will be next April for us. With respect to quarterly guidance, we will provide additional commentary as we feel necessary and regarding any factor that may impact the quarterly performance and that is what we did today consistent with that policy.

Okay, and I'm sorry you said April for the timing of the fourth quarter release?

Right.

Okay, and then as far as just directionally, given obviously given a choppier trend early in the quarter and it sounds like some of that has started to come back, you've seen an improved trend the last couple weeks or whatever, but would you expect some of the gross margin elements to continue in the fourth quarter and then your thinking per the earlier question that some of the benefits from new categories would be more for 2013 and beyond?

Yes, you know, we are not providing guidance so it's kind of difficult to answer your question directly regarding margins but I think the comments that I made regarding product margins are already ongoing. So yes, with respect to the opportunities to increase margins over time with the new categories that would begin once those categories are launched obviously and that will be in the first quarter of next year and going forward.

Okay, and then I guess the last question I had was I think you guys have addressed this but in terms of the Boston opening, can you just share -- it sounded like it was something pretty specific in just one part of the store but maybe if you could just shed a little more light on that?

Yes. Yes, that was very specific, in fact we are installing an amazing elevator and it's a very unique piece and the State of Massachusetts, there's an Elevator Commission that really required some additional design approvals. I'm very pleased to report today that has been obtained and the authorities liked our plan and we are ready and on track for an opening in the first quarter. We are thinking about what is the right date but we're thinking about early March so stay tuned. We'll definitely let you all know and we would love to have you. We're going to have an event that is going to be pretty remarkable. I think you would love to see the new gallery. I think it's going to take the brand to a completely new level in the New England market.

Looking forward to it. Best of luck through the holidays. Thanks, guys.

Thank you.

Yes, thank you.

Neely Tamminga, Piper Jaffray.

Gary, I was wondering if you could talk a little bit about the tableware launch. It sounds pretty exciting and I guess what we're trying to get a sense of is it going to go -- obviously it will be online, but will it be represented in all doors? And some sort of idea of the skew, that sort of density? And ultimately what we're trying to understand and frame up is I understand the strategic importance around tableware, but can it actually be a fairly significant category in terms of contribution over time as well kind of maybe north of 15% sort of 20%? Just trying to get a sense of what that looks like either for the industry or for you guys?

Probably early to say how big it can be, Neely, but as you know it's a very big market. There's a lot of us here in the Company that have experience with the category, a lot of experience with the category, so we would hope that it will over time grow and become a very important part of the business. We will launch it and learn. It will be presented in all of our current galleries and as we will be doing some modest refixturing and presentation but you'll see everything from dinnerware, serveware, glassware, flatware, you know, table linen, accessories, barware, and it will be a relatively complete assortment although we will start in a prudent way with a good core base assortment and very little fashion assortment and as we learn we'll start to expand the category.

I think in categories like this you have got to be a little careful that --I mean, today no one is waking up in the morning saying hi honey, I need tableware, let's go to Restoration Hardware. So you don't want to make a huge bet when you don't have top of mind awareness but as we build that awareness, as the assortment is in we're doing a separate catalog for it to distinguish it. Within the assortment we're doing a section of the website that will call it out. We will have retail presence around the assortment and so as it builds and as we grow the assortment, we'll become more aggressive and we'll learn and be able to shed more light on it.

Will you be launching then registry, bridal with it in tandem with it or will that come later?

We do have a bridal business today. We don't have a lot of activity on it because we haven't had the key category of table tops so there will be more to come and we'll be getting behind that whole service initiative.

Okay, that's helpful, and then I was just wondering a little bit on what you're learning from the full line Design Galleries that you have launched so far and maybe give us a sense in terms of the consultation side of the business, the designer side of the business? I would imagine it really attracts the professionals to just sell more because you have more SKUs to kind of walk your clients around to show physically. Are there any sort of key learnings that you're finding in your first fullish year on some of these businesses that you can share with us? In the interior design side.

Yes, on the design side, we're learning on both sides of that coin, you know, both from the exterior/interior design marketplace as designers, the percentage of business being done in these stores is much higher than we initially anticipated from the interior design trade and I think that you're absolutely right. As it is a much bigger footprint and shows more of our assortment, it definitely is more of an attraction and generates more ideas for the customer, and we see that percentage growing over time, as far as the design trade business. Probably as importantly if not more importantly, the interior design services business that we've been developing specifically inside these bigger full line Design Galleries is becoming a very important part of the business and important part of our service strategy long term.

So you'll be hearing more from us about our efforts to kind of upgrade and provide an even higher level of service and we are building our interior design services teams and staff, and I think what's unique about what we are doing versus what many people are doing in the industry. People start to bang the drum that they have interior design services and what's interesting is they don't really have interior designers, and some of the people out there are providing services that we believe at our level, we have to have really certified interior designers that are well trained, that really know how to execute at a luxury level and that's why we move slow here and we're trying to build the right team, the right quality, and the right service experience and as we become ready you'll see us begin to market that more. Today we're relatively silent on the services but we believe the services we're offering and where we're offering them are substantially differentiated than other people in the marketplace.

That's helpful.

And I would add to that that we currently have interior design services in only 24 locations, galleries, and we do have a plan to really increase that presence like Gary just said. We are seeing these very encouraging results in terms of both productivity and the size of the transactions when we do have this type of service in each of those galleries. I think I've mentioned in my prepared remarks about the success that we are having in Scottsdale, Arizona since opening and we are offering this type of service there as well.

That's helpful and Carlos just a couple real quick ones with you. On the store closings, at one point you guys were thinking about closing seven galleries on the smaller format. Is that still part of the game plan or has anything changed there at the end of Q4?

There may be a couple in terms of differences but also you have to keep in mind that originally we were going to close several of the Boston locations, two plus potentially one so total of three this year and now those closures are going to happen next year.

At the end of the year or in tandem with the others?

No, no, no, no. They are going to happen concurrent with the opening of the new full line Design Gallery.

Okay, that's helpful and then just one more for me. I just want to make sure I'm understanding the lack of Q4 guidance in response to Dan's question, too. So basically what you're saying is you guys obviously see all of our published estimates out there, you see our models, you have a good sense as to where the expectations are around your quarter. You would not find yourself in a position to comment on it if you didn't think that necessarily things were going to vary differently off of the estimate? Just want to make sure I'm understanding your guidance policy in general going forward particularly since this is your first call.

Obviously to say that we are for those numbers and confirming those will be providing guidance, so of course we are fully aware of the things that we should or should not say at any particular time. If we were not comfortable with those numbers, we would probably be hearing that today.

Okay, thank you. That's helpful.

Thank you. Operator, do we have any other questions?

I don't show any further questions at this time. I will now turn the call over to Carlos Albarini, Chief Executive Officer, for final closing remarks.

Yes, thank you. So in closing, we believe that we had a very good third quarter and we are very pleased with the progress that we are making on many fronts. We have tremendous momentum. Our brand stands alone and is redefining the home furnishings market. We have multiple growth opportunities including new categories, new businesses, and the transformation of our real estate portfolio. We have a strong infrastructure and a passionate and experienced leadership team that is ready to take this Company to the next level of growth and profitability.

I want to take this opportunity to thank our team for all their hard work this year. It has been a tough year with a lot of extra activities and everybody has done a remarkable job and I want to wish you and all a wonderful holiday season and a healthy New Year. Thank you all very much and we'll talk in April. Thanks. Bye-bye.

Thank you, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.