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spk01: Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the RH fourth quarter 2023 Q&A call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the conference over to Alison Malkin of ICR. Please go ahead.
spk00: Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter fiscal year 2023 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 for 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 the 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.
spk02: Thank you, Allison, and good afternoon, everyone. I'm going to start with our prepared comments, which are included in our press release and shareholder letter. To our people, partners, and shareholders, fiscal 2023 was the year of diversity, innovation, and investment for Team RH as we faced the most challenging housing market in three decades while investing in the most compelling product transformation and platform expansion in our history. We have positioned the RH brand to gain significant market share in 2024 and beyond, while building the foundation for global expansion across the United Kingdom, Europe, Australia, and the Middle East over the next several years. While aggressively investing in a downturn has put pressure on short-term results, it also positions us to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. We've demonstrated our confidence in our strategy by repurchasing 7.6 million shares of our stock during fiscal 2022 and 2023, representing approximately 35% to the shares outstanding, and believe that investment will create meaningful long-term value for our shareholders. Turning to our fourth quarter and full year results, revenue was negatively impacted by $40 million in the fourth quarter, due to the severe January weather and shipping delays related to the ongoing conflict in the Red Sea. We do expect the majority of the deferred revenue will be realized in 2024 when transit times normalize. Adjusted operating margin was 9.1% and 13%, and adjusted EBITDA margin was 15.3% and 18.2% for the fourth quarter and the full year, respectively. reflecting deleverage from lower revenues, increased markdowns to support our product transformation, and investments in international expansion. Every act of creation is first an act of destruction, Pablo Picasso. We have spent the past 18 months destroying the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive barrage brand. inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plans for 2024 include the launch of our new RH Outdoor Sourcebook, the most dominant and disruptive collection of luxury outdoor furniture in the market, arrived in homes late February through mid-March with 14 new collections. The initial response has been exceptional, And we expect to gain significant market share in this important category in fiscal 2024. The unveiling of our new RH Modern Sourcebook is scheduled to be in-home late April through early May, with 30 new collections across living, dining, bedroom, and bathroom, including original designs from the Harvey Prober Estate, one of the most influential modern designers of the past century. We expect the launch of RH Modern will further accelerate our demand trends in the second quarter and throughout the second half of 2024. The second mailing of our new RH Interior Sourcebook is planned to be in-home late May through early June, with new collections and improved in-stocks, which should also provide an additional lift to demand in the second quarter and continue to build through the second half of 2024. We will be mailing an updated RH contemporary sourcebook in late July through early August with new collections and a compelling value proposition, which we believe will also accelerate demand trends. A second mailing of the RH modern sourcebook and third mailing of the RH interior sourcebook are expected in the second half of 2024 with additional new collections, refreshed galleries, and improved in-stocks. These mailings will result in a doubling of our sourcebook circulation and customer contacts in 2024 versus 2023. Our data would suggest the increased number of contacts alone should provide another lift factor for our business. We are also increasing print and digital advertising across major home design publications in 2024. You will see our ads in Architectural Digest, El Decor, Veranda, Gallery, World of Interiors, Lux Interiors and Design, Business of Home, the Financial Times, plus the Wall Street Journal and Tea Magazine design issues. As you know, we fired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past seven years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of their revenues from the trade market, selling to architects, designers, developers, and builders. While R&D is a significant trade business, the vast majority of our revenues are generated by consumers. We believe there is a significant opportunity to amplify the Waterworks business on the R&D platform by exposing the brand to a much larger audience, similar to how we've expanded other mostly trade-focused businesses and brands over the years. Our plan is to launch with a 3,500 square foot Waterworks showroom in our newest and largest design gallery in Newport Beach, California, opening the fourth quarter of 2024. We will also be developing a Waterworks source book with plans for a test mailing in 2025. Waterworks today is just shy of a $200 million business with mid to high teams EBITDA that we believe has the potential to become a billion dollar global brand on our platform. Let me shift your attention to the expansion of our platform. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform expansion plans for 2024 include the opening of five North American design galleries, including Cleveland, which opened last week, Palo Alto, Raleigh, Newport Beach, and Montecito. all with integrated RH interior design offices, restaurants, and wine bars. The opening of our first RH interior design studio in Palm Desert, California. We believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation, as well as augmenting some of our design galleries in larger markets with additional design services in stand-alone design studios. We will also be opening two international galleries, one in Brussels, which opened last week, and Madrid, opening this summer. Both galleries are located in beautiful historical buildings that elevate our product and render our brand more valuable. Unfortunately, RH Paris has been delayed until spring of 25 due to construction restrictions relating to preparations for the Olympic Games this summer. We are also pleased to announce RH Sydney, the gallery in Double Bay, a five-story development with a rooftop restaurant and wine bar, received council approval last month with plans to open in fall of 2026 in what we believe is the most vibrant and desirable location in Australia. Now let me turn you to our outlet. While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, We expect our demand trends to accelerate throughout 2024. Due to the extensive transformation of our assortment, we do expect revenue to lack demand during the year by approximately four to eight points until we read and react to new collections, reduce back orders, and shorten special order lead times. Therefore, we will be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business. We believe it's also important to note that we are forecasting to end the year with an increased backlog of approximately 110 to 130 million due to revenue lagging demand throughout 2024, which will negatively impact operating margin adjusted EBITDA margin by approximately 140 basis points for the year. Additionally, investments and startup costs to support our international expansion are estimated to be at approximately 200 basis point drag for 2024. For fiscal 2024, we are forecasting demand growth of 12 to 14% and revenue growth of 8 to 10% on a 52 versus 52-week basis. We are forecasting adjusted operating margin in the range of 13 to 14% and adjusted EBITDA margin in the range of 18 to 19%. For the first quarter of fiscal 2024, we are forecasting demand growth of positive mid to single digits and revenues of negative low single digits. We are forecasting adjusted operating margin in the range of 6% to 7% and adjusted EBITDA margin in the range of 12% to 13%. Now let me turn you to the 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 Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America and $20 to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, case, 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 four walls of our galleries into RH guest houses. 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 Yonville, an integration of food, wine, art, and design in the Napa Valley. RH1 and RH2 are private jets, and RH3 are 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 by 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 value to discerning, time-starved consumers. The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 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. Never underestimate the power of a few good people who don't know what can't be done. For the past 23 years, we've heard others tell us what can't be done. And for the past 23 years, we failed to listen. We avoided bankruptcy by being accused of lunacy. While others have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world. When Wall Street didn't think our stock was worth buying, We bought 60% of it ourselves. When everyone told us we should be working from home, we're in the center of innovation, working on rebuilding our new home. And it's almost ready for prime time. From the largest product transformation in our history to the most inspiring retail experiences in the world, from couches to caviar, beds to bellinis, architecture to airplanes, homes to hotels, guest houses, from Pittsburgh to Paris, Los Angeles to London, Boston to Brussels, Miami to Munich, and San Francisco to Sydney. Soon the world will be within our reach. Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward, Team RH. Carpe diem.
spk03: And now we'll open the call to questions.
spk01: Thank you. The floor is now open for your questions. To ask a question this time, please press star followed by the number one on your telephone keypad. You'll be provided the opportunity to ask one question and one further follow-up question. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Simeon Gottman with Morgan Stanley. Your line is open.
spk08: Hey, good afternoon, Gary and Jack. I think the most important element of the outlook is the sales guide because it hasn't been growing and now we're flipping to growth. So I wanted to see if we can approach it from two sides and I'd love to hear your perspective. First, on one side, if you end up meeting or beating this outlook that you've given us, if we look back, I mean, it clearly could be the products resonating more than you thought, or should we look at it as, you know, you gave us more of a conservative trajectory than what even the business is implying today. And on the other side of that, if you end up falling short of it, was it, you know, either product didn't resonate or maybe there was more pent-up demand and you're, you know, over-reading that curve. Curious how you think about both sides of it.
spk03: I think you just covered the answer in many ways.
spk02: I would say, look, we have visibility trends in our business that can help us connect the dots. I mean, if you read the letter a few times and you look at the kind of pieces that will – that add up to directionally where we're going – we feel very confident in the plan we've laid out, the guidance we've laid out. And this is what we've been working on for the past 18 to almost 24 months. So it's been a lot of thought, a great attention to detail. We've been flying at the highest levels and we've been into the the lowest levels of detail inside the company and the organization to rebuild the brand from the bottom up. And, you know, I think this is the best work we've done. I think this is the best team we've ever had. And I think what we're about to do is going to create another leapfrog for our age, just as we've done every seven or eight years if you looked at our history when we've done transformations like this. So we're highly confident. We think we have enough data and information to read. If you were in our Center of Innovation right now, you'd be looking at all the whiteboards that I'm looking at that have every category of our business laid out every month. with demand this year, last year, two years ago, percentages, trends, book drops, collection newnesses. I mean, this is built up at a very detailed level. No one has a crystal ball. You know, we're going to, you know, I always tell the team as we buy inventory or do anything, you know, every plan we have is some degree wrong. The question is, Is it more right than wrong? And is it directionally right? And have you identified the risks in the plan and the things that maybe you haven't seen as you've been building something up from an optimistic vision perspective? And we believe we've done that. We've been here with all of the key leaders, all the key team members at every level, building this. Again, for a long time, talking about how many trips to Asia, how many trips to Europe, how many... We don't have meetings in our company. We have adventures. Because we say meetings, it's about arranging and organizing the status quo. Adventures is about leading people somewhere they've never been, doing things they've never done, and in search of better ways and brighter days. So, you know, we've been through countless adventures. We've, you know, I think we've looked at all the data that's available and created new data. So I personally feel great. I think the team feels great. I think it's, you know, If you came here and spoke to the people really doing the work, I think they'd all feel great. Our competition might not feel great over the next couple of years, but that's not really our problem.
spk08: As a follow-up, if I can ask about Europe, if you can share... How much of Europe sales is in this guide? And if I guess you'll ever get comfortable sharing the Europe forecast, I don't know, every gallery may be different and there's a wide range. And then I guess the 200 basis points, that's I think the first time maybe we've gotten explicit quantification. Does that taper quickly or slowly? And is that like the peak or call it international investment? And now that revenues build even as you add more galleries, we don't step back from that level further.
spk03: Thanks.
spk02: It's a long question, so let me maybe take the same amount of time and process it. Look, Europe, I'd say there's a few points, if you kind of motor up and think about what we're in the very early process of doing. First, stand out back and say, what have we done so far? Last year in mid-June or so, we opened an extraordinary, never seen before, multidimensional experience in the English countryside that we opened through a lens of conversation, not commerce. And The why that we've articulated between that was we, fortunately and unfortunately, we did a package real estate deal that enabled us to get two irreplaceable locations in London and Paris, but also required us to take other locations we had to open sooner. As a result, these smaller markets, you know, are not benefiting as we first opened. We didn't think they would. For the brand awareness, ALO, the key markets would provide, right, and will provide. So RH England was, you know, born out of that kind of conundrum of not really opening in the places we'd want to open first. And, you know, there was a big expense if we didn't do that and other lease requirements and other hurdles that we, you know, that would have been a little messy. So that's what drove us, you know, because we weren't going to be able to open London and Paris first, that drove us to say, what can we do? You know, what would we do? What kind of investment would we make that would, introduce RH to Europe and the broader United Kingdom in an inspiring and unforgettable fashion. And why is that important? I think it's important because just about every luxury brand in the world is from Europe and the UK, except for a couple. You know, you can argue that we have Ralph Lauren and Tiffany. You know, Ralph isn't pure luxury, right? So there's a bigger, broader distribution strategy there that's a big part of that business. So if you said pure luxury, what are the pure luxury brands in the U.S. that are really top of mind internationally, you know, and have been for a long time? I'd say it's Tiffany. And the French just bought it like a couple of years ago. So I started first and foremost. I wouldn't say Americans are described internationally as pacemakers, you know, as, you know, architectural thought leaders and so on and so forth. You know, you look at the beautiful historical architecture, you know, across Europe and the UK, and then you look at the US and you go, okay, if you start in the East Coast, you've got some, you know, and you start moving west and it kind of falls off a cliff pretty quickly, right? And so, as an American brand that hasn't really been doing what it's been doing for very long. And, you know, looked like we did 15 to 20 years ago, you know, kind of choppy little shop with back scratchers, selling back scratchers and moon pies, you know, things that it's, you know, how do you want to introduce yourself if you want to earn the respect of the the tastemakers, of the placemakers, of the people that, you know, kind of not only set the standard, but set the direction for consumers broadly around the world. And that's how we came up with the idea for Ari Chinglin, you know, and opened in Ainho Park, you know, in a historic 17th century estate, you know, 73 acres. You know, that's why we invested in probably among the best architecture and design libraries. That's not an institutional location, but a private collection in the world. That's why we have three restaurants, the third one opening this spring. We wanted to introduce ourselves in a way that no brand has introduced itself to Europe and the United Kingdom. Did we think we were going to do a lot of volume out there? No, not initially. You know, did we think we were going to open the market to the internet? Yes. And we'd learned from that. And we'd learned likely from, you know, how the divine trade profited from, you know, that came to us and connected with us and interacted. And we also knew that we're opening somewhere where in the kind of winter months, you know, in the late fall and early spring months, you know, it gets dark as early as 3.30 up there. And it's really cold and not a lot of people are going out there. I mean, they might have been going out there more during COVID because there's nowhere to go. The last thing you want to do is be in a big city. So, you know, so we did something very unusual. And that's why if you go to that gallery or if you've been there, The first thing you see when you walk into the entry is a unicorn, and it talks about how unusual and inspiring we believe the place is. And I think we've introduced ourselves in a way that's captured people's attention and imagination. And I think the conversation is the right conversation. And I think that conversation will build as we're open for a full spring-summer and we have all three restaurants open. and we'll really learn a lot more. But that's why we did that, right? And the next galleries we've opened have been open weeks. You know, we opened in November, mid-November or something, and it's been 20 weeks for the German galleries. Yeah, okay, so, yeah, you know, so, you know, months, and... And so in places we've never been, and not necessarily what I'd say, you know, it's like Paris and London are two of the most famous cities in the world. They're two cities anchored in fashion and style and so on and so forth. And I'd throw Milan in there, too, because we also have, you know, we're making, I think, you're doing something extraordinary in Milan. But those all were going to take longer. And so... We're not opening in the order that we wanted to open in. But, you know, it was always our intention to open in Paris and London first in an iconic location from a brand awareness point of view. But what we've learned so far, you know, there's a higher mix of trade than we anticipated or seen anywhere. And trade is exterior interior designers and more of a B2B business, you know, hospitality contract kind of design. So it's a much higher mix of trade right out of the gate. And what does that surprise us? Not really, because the consumer doesn't really know us yet. But if you're someone who's aware of the home, if you're aware of design, if you're an interior designer, you know, if you're doing commercial projects or residential projects, you know our age, you know, and you may have likely shopped from us in the U.S. or you've been to our key galleries. And so what I like about that is it's really the right people and the most influenced people who are out indexing today. We didn't anticipate that, you know, we didn't think about that, but when I do think about that, I think I'm very, very happy about that. I think it wouldn't be good if it indexed the other way. Because you want to get the right people, especially if you think about where we're trying to take this brand. So the right people, the people most interested in architecture, interior design, and taste and style, are coming to us at a higher mix. And that deals with building our book of business, which is an important part of this business, building the pipeline of design projects, both in our trade business and in our own internal interior design business. And so when we look at the book of business for RH England and we look at the trends now that we've been open, that business from a retail point of view you know, like a gallery point of view, is going to be right about where I think we thought it'd be directionally for, you know, opening in such an unusual location and thinking about what might happen. What surprised us the most, I'd say, is the direct web business is slower than expected. You know, we thought that the web was going to be a much larger mix of the total since we were opening an entire country, right? And so when we stand back and reflect on that and say, okay, what didn't we think about? What did we miss in that analysis? I think it's just the overall time it might take to build the brand and ramp the brand to a consumer. And also the first gallery in the UK kind of not being by anybody. I mean, what puts the population of Idaho Park A few hundred people. A few hundred people. A few hundred people, right? Like, we opened in a town of 300 people. And, you know, and there's nothing really that close. It's, you know, we're 30-minute stocks for, you know, so we have some major things. We're in a few other places. But it is a place that people aspire to go to, spend time with, especially in the, you know, late spring, summer, you know, early fall period. And also we have plans. And once we get our feet on the ground, you know, to think about long-term doing events and other things on that property to bring the right people. And we're also have some partnerships happening that actually have sourced us to do different events dealing with whether it's beautiful high-end car brands or, you know, the racing and things that happen and, you know, a lot of the prestigious things that happen out in the English countryside. So, And then I think the other thing I'd say, you know, I'm just giving you kind of context of how we think of Europe right now, is we didn't open with the full assortment. And I think when we go back and we're analyzing that, that part of the assortment that we didn't open with is probably really important to consumers and the web business. So building awareness that opens up the internet and the web business to get that to move more quickly is going to be important. But I think a lot of it is going to take opening the key iconic galleries in London and Paris and Milan and so on and so forth. These big ones with restaurants and champagne and caviar bars and wine bars and barista bars and, you know, architectural and design libraries and all the really incredible experiential things that people are going to discover the brand and say, what is this? But right now, the only one with those experiences is in a very unpopulated part of England, and it's going to take longer to be discovered. But when people discover it, it is the right people and it is the right conversation. So we're super happy about that. But I say we're still so early. You've got to let the book of business build. We've got to get our feet on the ground. I'm massively optimistic long-term, and I'm massively optimistic because I think there's no one like us in the market. I think we've got to open these big galleries. That's what's going to build the brand. We've got to open in the big key cities that define fashion and taste and style. and be in that conversation. But I like that the trade business is over-indexing because those are the right people. They're the influential ones. But it's going to take a while. We're just out of the gate and we're not out of the gate in the order that we would have liked to. But nonetheless, we're out of the gate and we're learning. That's the important thing. And all of these things are going to benefit from the product transformation that we're going through and all the things we, you know, we're doing that we have in the pipeline. And look, I only, I only listed out what we're doing in 24, like what we're doing beyond that. And what we have come for 25, and there's some things I didn't even, I can't even put in the, in the big long view, because I don't want to be too specific and give any information, you know, to the broader industry competitive set. So, but, you know, like next year, I think we're going to launch something that's really big. And, you know, it's going back and forth. Do I put it in this letter or not? But, you know, we've got enough in this letter. When I look back and look at this letter, I go like, okay, it's kind of ridiculous. This is very exciting. We don't need to tell everybody what's in the pipeline. But we're, you know, look, we're feeling really, really great about where the brand is, where it's going. And I think, yeah, Europe's going to, going to take a while, you know, like building great brands and, you know, you've got to be very, very strategic. You've got to be very smart. You've got to be patient. You don't go rushing and build one of the great brands in the world, you know, rushing to the finish line. You know, it's like we say fastest and slowest we go, but we also say we have to do less and think more so we can do more. So it's spent a lot of time thinking, get deep in the data, really analyze things right, do the next thing, do the next thing, do the next thing. But I really like where we are. I like where we're going. I like everything that's unfolding. And I especially like how we're positioned for the other side of this kind of difficult housing market, right? We You know, the worst home sales in 30 years, that's a long time. And how we're positioned for that rebound, I think, is better than anyone on multiple levels, too. You know, like when I look at the whole assortment, whether I'm looking kind of at the level we're at, if I try to look at people above us and I look at people below us, I just think we're going to be holistically disruptive across all a pretty big size of the market we're trying to hit. I think we've opened up the aperture a bit without compromising the most important tenets of what we're trying to build. So long rambling answer, hopefully it gave you a few data points that were important.
spk03: Thank you. Good luck. It looks for rabbits.
spk01: Our next question comes from the line of Stephen Forbes with Guggenheim Securities. Your line is open.
spk03: Good evening, Gary Jacks.
spk11: Gary, given the spread between the first quarter demand guidance in the full year, I was just curious if you can maybe help us better think about how the business is rescaling or ramping on the back of the recent store resets and And then how should we think about the cadence of resets on a go-forward basis, you know, married together with the cadence of source mailings that you talked about in the letter?
spk02: The spread between Q1 and full year, I mean, it's just the building, again, you know, everything, if you just, you know, read the letter carefully and, I mean, those are all meaningful things we're doing, right? Those are all meaningful things. books that were unveiling that were, you know, completely re-merchandised and, you know, you have a lot of, you know, a lot of revenue, you know, and if you just look at the contact that we're making year over year, I don't know, what if every company doubled their customer contacts in circulation? I don't know what might happen. It's going to be, you know, it's going to be meaningful. We don't, you know, we don't introduce new products and get zero. We don't introduce, we don't mail source books and get zero. And, you know, we just, I think, you know, post-COVID, you know, because we took a little over a year off because we're trying to catch up on backlogs. you know, we lost our muscle in an atrophy and we tried to get restart, you know, what I call the engineer or the machine. And, you know, the machine sputtered a bit and it took us a while to get back into our groove and, you know, with new product and, you know, source books and, you know, just all the things you've got to do. And it's probably one of the bigger mistakes I've made in my career. And, you know, but now we've rebuilt the machine. We've, you know, we have better muscles than we had from before, you know, we're way more intelligent. We've went to a much deeper level and, uh, the quality of the work is just the best work we've ever done, you know? And so, and we've got enough internal data, right? When you see your business and how you're rebuilding it from, you know, down the teams to where we are and you look at the mix of business and the categories and you come out of the gate, you, you look at, uh, What outdoor is doing, I mean, outdoors, it's just exceptional right now. And I think that the design and quality and value equation is so unmatched in the industry that we're going to take tremendous market share. And it's just setting up what we're going to do with outdoor in 25, 26, 27, because when you see what we're going to do from a physical perspective with that business and how we're going to exploit it, I think we're going to own it. And, you know, so, you know, it's like there's real numbers here in outdoor. Outdoor is a meaningful part of our business. And the work and learnings that we did in outdoor that's also applied to every kind of category, you know, you can just trace it all and see how it's going to come together. And we have enough data and numbers from, you know, the RH interiors and the new collections and, you know, RH contemporary and, yeah, the new collections and the adjustments we've made and, the adjustments we've made to the value equation perspective. I think we went back to just having more edge. The edge that it took to build this brand and business I think has returned. I think I said a few calls before. I don't know. It was widely quoted. I've got to be careful what things I say. I think I said we were arrogant about pricing because of all through the period of, you know, tariffs and supply chain disruptions, you know, from COVID and raw material prices escalating, you know, that forced price increases and, you know, drove inflation. I think, you know, I don't think we had our value edge and hats on as, you know, as we kept climbing the luxury mountain. And I think, you know, Being a great luxury brand doesn't mean that price doesn't matter. You know, like everything has to have a value equation. Everything has to go through a lens of design, quality, value, you know, in that order. If somebody doesn't love the design, they don't even look at the quality nor the price. But if you have, you win on design, you know, then you're through kind of door number one. And then you've got to, win on quality, because then the customer will get closer to it. They'll read about it, touch it, and interact with it. And they'll make their own perceptions about quality. And you can influence that with what you say and how you communicate. But at the end of the day, the consumer is going to make the decision about how great is that design, how great is that quality. And for that design and that quality, What is the value? Like how do we think about the price that you're asking for that? And is that a lousy value? Is that a decent value? Is that a good value?
spk03: Or is that a great value?
spk02: And, you know, I think we are highly focused on having a great value, a disruptive value, you know, with clear comparisons of anything that might resemble or be like things we sell in the market. And so, you know, we're laser focused. We're into, you know, the greatest amount of detail. And, you know, I think that the design quality value and, you know, that if you took that lens against, outdoor, which you guys have visibility to, really take the time to go through that book and go through the collections and look at the quality of the extraordinary design and the extraordinary presentation of that design. And then you do some work on the quality, whether it's the materials it's made of, how it's made, where it's from, all the different things. And then Put it through a value lens. Try to find any product similar. Find the most similar product from other places.
spk03: Put them up all in a wall. And compare them to ours.
spk02: And you might understand why I'm saying outdoor is exceptional out of the gate. Because it wins. Door number one, we win. Door number two, we win. And door number three, we really win. And because of the size of our platform and our scale, and because at the most senior levels of this company, we're in the factories. We're with our partners. We're helping to conceptualize and put the same creativity you know, to how we source and how we buy and how we, you know, the scale we have and, you know, negotiating the price. And, you know, it's not really a negotiation where one person wins, one person loses. It's how do you get all the brains in the game and think about it and figure out how everybody wins. And that's how we're able to, I think, have extraordinary value. You know, it's like you can't delegate greatness. And so all of us here at the most senior levels are leading companies The work, you know, we're learning together, you know, we're listening together, we're learning together, and we're leading based on that. And I think the work that's happening is, I think, the best work in the history of my career. You know, and I've been in this industry a long time, and I think it's the best work in the industry. And I think it's going to be disruptive and it's going to create strategic separation. And it's going to, you know, I think we're going to gain a lot of market share. So I don't know how to give you a more specific thing, but it's like that's what we're doing. And so, you know, if you want to build a ramp, you know, like, look, you can take, you know, where Q1 is going to be, you know, and you know what that demand looks like. And you can take, you know, like where we think we're going to have the year and, to build your own little graph. Uh, you know, I give you guys all one, but you know, everybody gets too myopically focused on that. Like, it's just gotta be directionally right. Like, you know, if we have it a little wrong, it's like, well, how, why wasn't that exactly right? Well, it's not going to be exactly right when you're building something and transforming something, you know, you've just got to be directionally right. And we believe we're directionally right. We believe, you know, we're going to deliver these numbers or more. And, uh, And we're very confident about that. And Steve, you asked about four sets as a piece of that. As Gary's talked about, that's one piece of the puzzle, right? You have a new product from the evolution of the product. You have better availability of that product. You have source book contacts. Again, all things Gary has said. And four sets, another, you know, one of these factors that drives the business. And in stocks and so on and so forth. Yeah, we've been doing four sets. They're continuing. And, you know, we have one particular... collection that we talked about in the last call that, you know, that's still coming in will be in, in all galleries, you know, in, in the, in the second quarter.
spk14: Yeah.
spk02: And throughout the year, it will be reading, like the floors will continue to evolve. You know, the galleries will continue to evolve all year. Right. And, and so there's a lot of news coming in. There's going to be, you know, several cycles and adjustments that we'll make. So, um, You know, there's just, we're going to have a lot of choices and a lot of optionality. That's what else I like. You know, it's like when I look at the bigger picture and I stand back and I go, whether it's, you know, whether it's source books or advertising or contacts or floor sets or inbox or placing bets here, reacting to this, dimensionalizing, you know, different parts of the business. I mean, we just have a lot of things in play. and a lot of opportunities, and you can mathematically take all the pieces and build it up. And we're not new at this. We've done this for a long time. And I think I'd say, to put it in context, is how are we thinking about the guidance in the context of the market? We're guiding through a lens of market neutral. the housing market doesn't get meaningfully worse or meaningfully better, right? So we're saying neutral market, yes, there will be interest rate cuts. There's probably going to be quarter point cuts. They're going to come later in the second half of the year. You know, a quarter point cut isn't going to massively move mortgage rates. If you look at the delta between, you know, where people are locked in on mortgages and where they'd have to you know, step up to, you really need two things happening. You need home prices to come down, and you need interest rates to come down. And that gap, I think, is going to take longer than three-quarter point interest rate cuts. You know, but hopefully those happen. And, you know, you put some more interest rate cuts on the other side, you know, 25, and people can't hang on as long from a pricing point of view. And some of that giant inflation that Build the housing market, which really one of the biggest impacts of markets. Think about how home prices in America went up 42% in two years, the two years COVID. And then they've been stubbornly high because there's been no inventory. There's been no inventory because people had record low interest rates. And they'd have to trade up to a higher interest rate. So, you know, the data, like, it's all super logical. Why we're in this freeze and where we are. The key is what really has to happen for the thaw and for everything to get moving again. And it's interest rates and housing prices. And it's a combination. We believe it's a combination of both, unless interest rates go down really quickly, mortgage rates get readjusted, and you get a big move down there, then maybe housing prices hold up. My sense is that you've got a lot of people just holding on as long as they can, A lot of people have to move. They've got a new job somewhere. And some people have grown their families, had more children. They've gotten married. They need to buy a house. And so there's pent-up demand. And I think that's a good thing when you look at it. But I still think you've got to have movement. We've got to have real movement in the interest rate market. And we have to have some movement in the pricing market. And when those things start to converge, I think we're going to see a snapback. And I think no one's going to be better positioned for that snapback than us. Like we're going to be in the absolute best position. So that's what we're super excited about. Like right now, like we're looking at market neutral. Not going to get meaningfully worse, not going to get meaningfully better. If it gets a little better, do we feel better about the guidance? Of course we do. You know, of course we do. We're going to feel a lot better. So, you know, but I just think at all ways we look at it, it's all some form of good to great and, you know, let time unfold and we'll keep doing what we're doing and playing our game.
spk03: Thanks for that. I'll pass it over.
spk01: Next question comes from the line of Curtis Nagel with Bank of America. Your line is open.
spk09: Gary, maybe I'll just start with what, you know, is kind of a small piece of business right now, but sounds like it's getting a bit bigger over time. Waterworks, I think it's the first time you've called out a long-term outlook at a billion dollars, you know, so implying it would effectively quintuple. I guess just, you know, at this point, you've had it, I think, since 2016. You know, what gives you, you know, I guess the confidence, to put out, you know, a pretty bold, pretty impressive, you know, target. And I guess kind of, you know, why now? What's driving the excitement, maybe ask it more simply.
spk03: Sure, sure. Good question.
spk02: Yeah, we said back when, I don't know if we said this publicly, but it said, you know, it said it internally that, you know, Waterworks was one of two businesses I had on a strategic framework map when I came here 24 years ago, like when I walked in the door. I said, okay, here's the long-term vision, here's where we're going, and I had two acquisitions, Waterworks and Dean and DeLuca. I thought Waterworks was the best brand in high-end bath and kitchen, you know, mostly bath back then, now kitchen too. And I thought Dean and DeLuca had a really interesting brand with more of a food focus, some hard business, but it wasn't merchandised well to make money. And I knew enough about the Williams-Sonoma model that I thought, like, we could create a really cool next generation kind of Williams-Sonoma with a different kind of sensibility aesthetically and taste and style and maybe integrate a little bit of fresh food focus. That's the much... That's the reason why Dena DeLuca never could scale and make money. It's too focused on fresh food and they didn't have the hard goods part. Dena DeLuca didn't make it. It got passed around a couple times. We looked at buying it multiple times. We almost got it. Waterworks came along. It was the right brand at the wrong time. It might not come available again. If you think about when we bought it, you know, we were in the middle of membership, supply chain transformation, you know, all kinds of things, you know, that just launched modern. And we said, look, we may not have another chance to partner with a brand like this. We thought it was a great strategic fit. So we did that. And But the business, you know, was always relatively small, right? I think we bought it with just north of $100 million. And, you know, you had to think about, again, when you had to learn that part of the business, we had to kind of build relationships with the team. We had to get, you know, strategically aligned and without using a lot of time because it was the wrong time. So we spent very little time the first few years. And how do you kind of build the business model and, and, you know, the assortment logic to support the business model and a lot of things. And, you know, so we, you know, through the years, we spent, you know, a little bit of time and got aligned, and the team's done an outstanding job, I think, at almost doubling the business more than doubling the EBITDA. And now it's, I think, a business that's positioned to grow, and I think we have a platform that it's the perfect platform to scale the business on. You know, direct customer component, we have a consumer part of the business that, you know, even though they have 14 showrooms, they're not in places that consumers really shop. And we have experience taking mostly trade-focused businesses and brands over our years and putting those brands on our platform, putting their assortments on our platform and doing multiple times the business, right? Just because it's now the best products are in front of the consumer. But most of these products are not in front of the consumer. Consumers don't really go into waterwork showrooms. I mean, they stumble in, you know, but they're in design districts or, you know, to the trade. They're set up for business to business. They're not really set up for consumer, even though they have a showroom. You know, no different than, you know, any of the furniture brands like that, so on and so forth. And then there's, you know, some distribution and third-party distribution, you know, if they're in there with other brands and, you know, where they, you know, don't have total control of the brand. But I think when you look at the platform we're building and, you know, the stage we're building for the best products in the most important categories, you know, this is a perfect fit I mean, it couldn't be more aligned. And it's also a really hard business. I mean, we've been in the business. We sell water delivery and faucets to cities, and we sell hardware and stuff like that, but we're not experts. I mean, they've got, what, 45 years, more than that, experience, you know, family business. You know, Peter Selick is the CEO and leader there in most of his life, and his mother founded the business, and Ralph Bennett has been CEO for, I don't know, 15 years. It's like, you know, it's like, you know, the leadership team there, it's really smart, you know, has a great view and grasp of the high-end market that we're benefiting from and learning from. And, you know, we think we're pretty smart and we have a great view of the consumer market. But what we're trying to do is merge both of those markets. And we think that's where we think long-term the world's only going to be more transparent. And, you know, it's a long time, but, you know, the best products, not facing the consumer in these categories. And, you know, that's what RH has been trying to do for our entire journey, you know, since I've been here. It's slow going in the beginning. You know, we were on the edge of bankruptcy for, you know, almost my first 10 years. And, you know, so we made it through that. And now, you know, we're doing what we've always wanted to do. And, We're getting smarter and better, and Waterworks is just, you know, great synergies. And, you know, no different than, you know, you'll hear us talk at some point, you know, later about, you know, Dimitri and the kind of couture upholstery brand we bought and, you know, Joseph Ju, you know, kind of bespoke, you know, furniture brand. And, you know, just having these people and the talent inside our organization, learning from them, them leading us to, higher quality, better taste, how to think about the trade market, and so on and so forth. There's just so much synergies. You know, it's like, you know, a lot of times you take one plus one, you know, you get less than one, right? Every time there's another thing or another person involved, there's more complexity. And, you know, Einstein said, you know, the only way to battle complexity is, you know, through simplicity. But Once in a while, you've got one plus one equals more than two, right? And I think we've found that with Waterworks. We found that with Dimitri. We found that with Joseph Ju. And, you know, and other things that we're doing sometimes, you know, maybe not, you know, it's not necessarily an acquisition, but it's, you know, it's a deep partnership and relationship. And I think that's what we're really good at. You know, in Waterworks, again, like, I mean, it's really funny. I could pull out, you know, the PowerPoint from 24 years ago. You know, there's Waterworks in this, you know, little grid. It looks so amateur hour when I look at it back then, you know, what we were thinking. But, you know, but it's always been our radar. And we think it's just a great fit. And you know, RH was restoration hardware. It had hardware. It had, you know, bath. I mean, it didn't have faucets and fittings when I came here. You know, I added that, but it had towel bars and hooks and, you know, a few things like that. And then when I added faucets and fittings, you know, the model was, you know, looking at, you know, Waterworks was the best. So, you know, we're always obviously inspired by them, but we were never going to be Waterworks, right? And so it's much better to just partner with and, you know, integrate with Waterworks. And I think it's going to be, I think it's going to be unbelievable. I really do. You know, and I think it's going to bring, yeah, I think the other benefits is it's going to bring the highest quality trade customers to RH that maybe not are frequenting us yet. And you get into the business at an earlier point in the design stage, We sometimes interact with the consumer at a much later stage. The home is done. They're ready to furnish it, and so on and so forth. Interactive waterworks consumer, you're at the front end. You're at the architectural point. You're at the plumbing point and all this other stuff. So the opportunity to get access to that customer, integrate that customer, be building the design holistically, uh, you know, all the categories that we're in and the categories that we'll, you know, continue to expand into and become more dominant. And I think it's, I mean, it's really like, if you could ever say there's a match made in heaven, I think it's a match made in heaven. Like it's just, it was supposed to be, you know, so we're really excited.
spk03: I think they're really excited and I think it's going to be big, you know?
spk09: Got it. Thanks. And then just a quick one, Gary, just in terms of the, uh, Matt, look, I think on the last call you said something to the effect of you had expected a peak or a reflection peak demand or something like that in QQ or spring. Any changes there? Obviously, you know, the outlook's been strong for the year.
spk02: Yeah, I think it's going to keep peaking because we've done more work since then. You know, like there's more things. We can see more things. So, yeah, I think, you know, like phase one. So what I think about that, Kurt, is like, there's multiple phases of this transformation, right, that we'll be unveiling. But kind of phase one will kind of hit peak, I think, in late Q2. But then there's a whole phase two now that we've got coming that will be unfolding, right? And I think we've got phase three coming. There's just... A lot of excitement, you know, a lot of great work that's being done. And, you know, the debate around here is how do you sequence it? You know, how should it all unfold? Over what period of time? And so I'd say that's peak inflection on, like, phase one, you know, of RH interiors, RH interiors, contemporary and outdoor and modern, right? Like if we knew modern would be coming in, that's like the next of the big books. And I think it looks incredible. Like I'm glad we actually delayed it a bit and took a little bit more time because it took a leapfrog. I mean, it's stunning. And, you know, it's just, I think it's so fresh and cool and, People just see the images and it's all laid out. You're like, wow, okay. It's not a walk on by, I guarantee you. It's not an Aretha Franklin walk on by. That's going to create a big move in Q2. Outdoor is going to be hitting peak you know, March, April, May, June, and, you know, and you've got the, you know, learnings and interiors and that's cycling through. And, and then we've got in stocks that are going to get meaningfully better back order rates are going to go down, which means demand goes up when back order rates go down. You know, there's all kinds of metrics here that, you know, you can just add them up and it tells you what to do. And, and, Um, you know, and, you know, all the adjustments for like, so yeah, so I think at phase one, you know, you'll kind of get kind of peak inflection, you know, might peak a little later at that, but you know, you're going to kind of know, you know, like the, the arrow, like when I talk about inflection, it doesn't mean that the outcome, right? Like that, like the, the curve, the line will be pointed in that peak direction, how it's how high does it go? You know, that might take to Q3 or Q4. But, like, the inflection point will, you know, will angle up, right? And we'll see that in Q2. So that hasn't changed. You know, they just changed a little because we pushed modern out a little, but you're still, you know, modern's going to get in there in Q2. You'll get enough of a read. You'll see where that's going. And then you got, like, you know, just... phase two and phase three and things that are coming through the pipeline. And I think it just all keeps building, you know. So, yeah, you know, so we're directionally, you know, directionally correct. Try to give you a little bit more color there. Hopefully it's helpful.
spk03: Yeah, very helpful. Thanks, Jerry. Yep.
spk01: Next question comes from the line of Christopher Horvers with JP Morgan. Your line is open.
spk03: So I'm just going to put my two questions out there.
spk13: So my first question is, the $40 million that was deferred of January, why wouldn't it come back much sooner if it was a lot of domestic and we're hearing from other retailers that the Red Sea has just added weeks of delivery? And then my second question is, if you look at non-occupancy gross margin pressure, it looks like it got a little bit worse. I guess how far Is that all clearance, and how long before we get through all the clearance, and do you expect to recapture all that pressure? Thanks very much.
spk02: Yeah, I mean, well, look, for one, you've got to think about, like, there's a lot of people in home furnishings or might sell home goods, and you've got to say, like, okay, what's their furniture content, and what's their special order content? You know, and when you think about those goods, you know, and then what's coming from, you know, Asia and coming around the pipeline. So, you know, now it's coming around Africa and not through, you know, the Red Sea and the Canuck. So we probably have the highest content, right? We have a significantly bigger outdoor business, I think, than anyone. I don't think anyone, you know, holds a candle to us in that category. And so, you know, that's all had to travel and take, you know, a couple of extra weeks. And so that's a meaningful number. You know, our special order business, you know, or any of our other businesses, all our newness, you know, all our things attached to back orders, right, that got delayed. So you've got that delay, and then you're delaying kind of everything looking out. Like, when does... you know, one of the shipping lanes reopened. That's the question. How long, you know, is this two week delay built in? You're not going to catch up with it until the shipping lanes opened or, you know, like it's just kind of permanently deferred for two weeks. That makes sense. Um, and then, you know, the, the, the piece with the weather and, uh, you know, the ice storms that hit, yeah, that, that piece comes back now. And, uh, is coming back. So you generally have a delay with that. But, you know, it's not like it comes back tomorrow because their design price of the design projects, it's special orders, you know, that they're doing. It's outdoor furniture that they were going to buy. If they bought anything that has to do with delay, you know, that's, you know, delaying it more. So, you know, it'll all... cycle back, it's just, you know, what's the timing? Like if you're selling things that are cash and carry, got it. Yeah. You know, like if you look at the product mix of people that, you know, had Christmas product or especially all the Christmas stuff that was on sale, you know, in December and January and stuff like it, of course, all that stuff comes back, you know, like, yeah, it's no, no problem. You know, if you're selling, you know, You know, any home furnishings categories and, you know, if you're selling tabletop food-related products, accessories, cookware, you know, name all the categories that are attached to home. You know, there's all cash-and-carry kind of businesses or, you know, just domestically shipped, you know, from a D.C., You know, we've got a very different product mix and model than anyone else. We probably have the highest furniture content, you know, of anybody that you might compare us with. And, Chris, on the gross margin side, there was a continuing impact on the product margin.
spk01: Next question comes from the line of Max Reclenko with TD Cohen. Your line is open.
spk05: Gary, Jack, congratulations on strong demand that you're seeing as well as the recent openings. I was curious, given all the new galleries that are coming online in the U.S., can you provide an update to the new gallery economics as you convert a legacy gallery to a design gallery? You provided color in the past, but just curious how that has evolved over time.
spk03: Do they have hospitality or not?
spk02: So, yeah, it has been a while, if I think about it. So that's good. Let's pull that together in the right way and make sure we distribute it in the right way so everybody's got the same data.
spk03: Got it. Sorry, could you repeat that?
spk05: It went blank for a little bit.
spk02: Okay, I would say it's a good question. It has been a while since you said that, and there's been a lot of things that have changed. We have restaurants and galleries now, hospitality aspects. It depends where they are in the cycle, how many square feet you're expanding into. There's a lot of things to consider when you look at these. And so I think what we ought to do... is update that data set and create a framework and let us distribute that next quarter in a fashion that everybody has the same information at the same time and it's all accurate.
spk03: Can you hear us? We might be having audio issues. Max, can you hear us?
spk05: Yes. Okay, great. And then my follow-up question is, can you speak to how you're balancing the chart price points? with maintaining elevated product margins? And then just how much are your vendors stepping up and then the opportunity to expand product margins over time from the current level?
spk03: One second.
spk02: Repeat the question because we're just recognizing that the line sounded like it had gone dead for a bit. So repeat the question for both me and Gary, please.
spk05: Okay, yeah, no problem. Just can you speak to how you're balancing the sharp price points with maintaining elevated product margins? How much are your vendors stepping up just directionally and then the opportunity to expand product margins over time in current levels?
spk03: Yeah.
spk02: You know, again, I wouldn't, you know, we're not a price kind of focused price-first company. business, right? I think I spent a lot of time earlier in the call talking about design quality and value in that order. And we, we think about those things, you know, from those three dimensions always. And we try to look at the bigger picture and say, what's going to be a compelling value. And we don't have vendors, we have partners, right? So that's why my letter is addressed to our people, our partners and our shareholders. Um, and, uh, You know, and so we try to work with people as partners, and it's not necessarily so much as, you know, are they stepping up? You know, it's more are we together thinking about how to win the market, right? Like, you know, if it's one person that wins and one person that loses, that's not a partnership, you know, and that never works long term. So we try to take a real strategic view with our partners. We spend a lot of time with them. We talk regularly. directly about how we're thinking. We try to understand their business deeply and where their leverage is and opportunities are. And we try to stand back and say, hey, look, your manufacturer is without stores and we're shopkeepers without factories. So how do we partner and how do we win? And so, but we have no intention in taking margins down. You know, margins have to be looked at holistically, you know, not just at the product level. And I think that's probably what your point is. We're going through a massive transformation, re-architecting, you know, the assortments and positioning things. And I think as you see things unfold here, you know, we believe, if you're thinking about operating margins and so on and so forth, that operating margins, you know, over the next few years can return to the 20% range and, you know, that our model is going to be a great model. But from a timing point of view, we're going through a product transformation and we're, you know, building an international business from scratch. And so there's investments and there's going to be margin pressure and, you know, based on investments we're making on both of those pieces. And, you know, that, you know, will create, you know, some different periods of, you know, higher or lower margins or not. But I wouldn't say there's anything different strategically at all. I think, you know, it's how we've built the company and, you know, we've on that path, you know, but, but that's not about like, Hey, you know, getting the next nickel out of a vendor. I mean, maybe people that have vendors do that, you know, to, to us, it's about the next idea, which let's get the next big idea, whether that's product idea, positioning idea, market ideas. And if you can get all the brains in the game and the egos out of the room, you know, if you truly believe that none of us are smarter than all of us, you know, you're going to work in a partnership and one plus one is going to equal a lot more than two if you do it that way. And that's how we work with everyone. You know, we just try to share all the best information and perspective and we try to listen to them and we try to really think about how do we win in the market? That's it.
spk03: And so I wouldn't say, hey, long term, do we think there's lower margins at our age? No, not at all. Super helpful. Thanks a lot, guys. Speak soon. Sure. Thank you.
spk01: Our next question comes from the line of Seth Basham with Redbush Security. Your line is open.
spk06: Thanks a lot and good evening. My question is just thinking about your comment earlier about opening your aperture a bit more without compromising what you're trying to build. Can you elaborate on this, Gary? are you trying to win back customers that you quote unquote fired during the pandemic? And are you dipping lower in terms of the customer income demographics that you're targeting?
spk02: Yeah, we've never fired customers. So I don't know, maybe this or your words, not our, nothing I've ever said, you know, I said, look, you're going to like, you know, if you think about where we started and the journey we've been on for 24 years, yeah. Like we shed customers and transition to other customers. Yes. You know, of course, like, You know, the best-selling sofa in this company used to be a $9.99 chenille green sofa. You know, we don't have $9.99 chenille green sofas. You know, not even if you attach inflation to it. You know, maybe a $2,000 chenille green sofa. We don't have those. You know, we don't have a lot of things that we used to sell. So, you know, of course, you know, when you're building something, when you're trying to become something that you never were, you know, and you're going to – evolve and acquire new customers. And some customers might come with you and some might not, but there's no intentional firing, but there is an awareness that, you know, as we're heading in certain directions with certain categories, things will evolve and change. Through that journey, we're always going to get data and we're going to learn and we're going to adjust and improvise and adapt and, you know, always, always in a state of change, right? And we're in a evolutionary world, you know, so the world's evolving and you're either evolving faster than the world and gaining, you know, acquiring knowledge and capabilities and market share, however you want to think about it, or you're evolving slower and getting behind. And so, you know, so I would just say, I appreciate that.
spk06: And just a follow up question along the same lines, you know, you're sharpening your value edge as you've referenced. You know, to ask the question differently than it's been asked before, I assume you're not taking quality out to lower price, and if not, why should merchandise margins, excluding freight, be the same or better on new products now versus the product you were selling in 22?
spk02: I'm sorry, I don't know if I get that. Give me that question again towards the end, that why would or what would the product margins be or something? Say that again.
spk06: Yeah, if you're not taking quality out to be more sharp on price, as you sharpen your value edge, as you call it, why should the merchandise margins, excluding freight, be the same or better on a new product relative to what you're selling and earning in 2022?
spk02: Sure. Well, it's about how you buy it and the commitments you make and the long-term view you take and working in a partnership with uh, with, with your manufacturers, uh, and, you know, figuring things out together. But, yeah, so it's, uh, yeah, it's just what, when, when you do that well, you can have a better, when you have a platform as large as ours, you have the scale and you control the platform, uh, you can be really disruptive. You know, so, uh, yeah, it's, uh, We didn't just take pricing down on things we have, right? Think about it as all the new products that's coming in, the value equation that's coming in. There's no intention to ever take quality out, not at all, not at all, ever. So, yeah, that's not part of our strategy. That's nowhere in that one pager, right, in the long view. And I don't think you've ever heard us talk about that at all. in my 24 years here. It's about taking the, you know, elevating the design quality and value of the product. That's all we focus on. So, you know, but it takes, yeah, it takes thinking and, you know, creativity and partnerships and being smart about what you're investing in and what you're leveraging and, what you're buying, and that's how we got here. So I think my prior comments were through a period of multiple cost increases because of China tariffs, and we had a pretty big content back then coming out of China, much smaller now. And those price increases that we needed to take and then the price increases we need to take through the COVID period. And through the COVID period, for a two-year period, you know, I mean, everybody had leverage, right? Like, meaning that there's only so much product. You know, when you have more demand and you have supply, prices can go up and margins can go up. But when you have, you know, lower demand and, you know, supply increases, If you want to move your inventory, prices are going to come down. You know, it's no different. And it's no different than, you know, during this period, right? It's a down-housing market. And, you know, so, and we're, you know, same thing we're doing with, you know, investments. So, you know, you're looking at gross margin. Well, you know, inside of the gross margin, there's a lot of investments that aren't necessarily just product, right? And You know, so, yeah, there's no intention here to be crystal clear about taking quality down to take price down. Never been uttered in our company.
spk03: And just the opposite. Yeah, so that's what people are thinking. They're just dead wrong. There's no value engineering. Okay. Thanks, Gary. Thank you.
spk01: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is open.
spk04: Hey, good evening and thanks for taking my questions. First one was on gross margin for 2024. Imagine you may have some elevated clearance lingering early this year. but then you should have some good margins with all this newness that you mentioned. So how does that all net out for the year? And does the year-over-year trend in gross margin sequentially improve each quarter as product launches build upon each other? Thanks.
spk02: Yeah, we're not guiding to, you know, Gross margin is quarter by quarter. But, you know, you can – And we're not – we don't – I mean, we no longer guide gross margin on the year. So, you know, we'll talk about it as results unfold. But the guidance is, you know, through operating accomplishments. Yeah, it's all implied in the operating margin and EBITDA, you know, guidance.
spk04: Got it. And then Gary, you recently hired a new chief real estate officer. How should we think about changes to the real estate approach going forward with Jared on board? And should we expect any changes to other development related aspects in the company like food and beverage or anything like that? Thanks.
spk02: Jared, how long have you been here now? Eight weeks? Yeah, Jared's been here eight weeks. And so he's a very bright guy, very creative guy, strong point of view, learning the business. And, you know, we're excited and happy to be here. And I think, you know, why don't we all give him a little bit of time to, you know, really assess the situation and the opportunities. And at some point, you'll likely meet him. And, you know, maybe he can kind of share his thoughts. But I think it's going to be a big step up for us. I think he's going to prove to be the best leader we've ever had in this part of the business on multiple levels. So we're very excited about him being on the team.
spk03: I think that's about it for now. That's a lot.
spk01: Next question comes from the line of Michael Lasser with UBS. Your line is open.
spk14: Good evening. Thank you so much for taking my question. A cursory view of the communication that RH had during the fourth quarter would suggest that it was more aggressive cleaning out inventory, messaging on price, and that was also evident from the gross margin compression that was experienced during the quarter. And yet, if we adjust the sales growth in the fourth quarter for a like number of weeks, your sales growth trailed behind some of the peers in the space. So, A, how much do you think you saw in terms of sales from some of the pricing actions that you took in the fourth quarter? And B, why do you think you might be losing share to some of your key competitors in the sector? Thank you.
spk03: I don't know if I get that question. Wait a second, Michael.
spk02: We're trying to kind of break down your question. I mean, the first part is that we underperformed peers in the fourth quarter with it being down 11 on a 52-week basis. Yeah, I don't know.
spk03: It's like...
spk02: Is there specific people you're talking about? There's a lot of, I don't know who you're calling a peer and who you're not. You know, if you look at people that are heavy content furniture business, I think we've performed relatively in line, some better, maybe, you know, some were a little better, some were a little worse, but when you say we broadly unperformed peers, you know, I don't know, but... I'd say, you know, like I don't think there's anything different that happened in the fourth quarter than what we expected except, you know, for the, you know, the major storms that I think impacted everybody. And again, it will impact furniture people who have longer lead times and deliveries, you know, more. And, you know, people that are more exposed to, you know, sourcing and specifically if you think about, you know, the size of our outdoor business and the amount of that comes out of Indonesia, you know, which is the capital T, you know, affected us. So I'm not, again, do you want to be more specific or like, you know, I'm not sure where you're going.
spk14: I guess if we look at some of the competitors out there, they were down six to seven in the fourth quarter versus down 11 for RH. And that's even with a more aggressive posture on clearing out inventory.
spk02: But what's their product mix? You know, are you talking about people that sell tabletops and cookware and seasonal businesses and Christmas ornaments and all kinds of things that we don't sell, those are going to get hit less in a housing market downturn than furniture. If you want to talk about furniture-related people, compare us to furniture-related people, but don't compare us to Home Depot, don't compare us to Pottery Barn, don't compare us to Williams-Sonoma. You're talking about apples and oranges. And compare people with the same fiscal year end or fiscal quarter end.
spk12: If you don't end in January, it's not even up to you.
spk02: They didn't end in January, they didn't get hit by the canal, and they didn't get hit by the ice storms. That's why I say you want to be more specific. I'll try to answer your question, but in a broad sense like that, it's not as relevant.
spk14: Okay. My follow-up question is, if we add back some of the margin drags that you highlighted this year, it would put RH on pace to have a 16% operating margin in 2025. Is that the right way to think about the basis for how we should be modeling over the next few years, or would you expect the investment cycle to that is going to happen this year is going to persist for multiple years, which will pressure profitability for an extended period of time. Thank you very much.
spk02: Yeah, we're not guiding to 2025. You know, we're guiding to 2024, and we're giving you all the data as it relates to that. You know, like I think I just said a couple questions ago that, you know, we feel very good about getting back to 20% operating margins over the next several years.
spk03: You know, so we're still in a challenging market with the housing market at record lows.
spk02: You know, so I don't think anybody's guiding 25 yet, are they?
spk03: No. No. I mean, so...
spk14: I guess I was more so asking about the persistence of the investment cycle and how long that might impact your profitability rather than looking for specific guidance for the out years. Is anybody guiding on that in 25 yet?
spk03: Because that would be guidance, right? Yeah.
spk02: I mean, yeah, you know, so we're not guiding to 25 yet. You know, we never have. But we have a long-term view that we can return to 20% operating margins, and yet we have some investment cycles that we'll have to roll through. And I would say to all the people on the phone that are trying to build a model that's beyond where our guidance is, you're going to have to connect the dots and come up with your own assumptions. I can't do your work. I'm not asking you to do my work.
spk03: Don't ask me to do your work. Understood. Thank you very much and good luck. You're welcome.
spk01: Next question comes from the line of Brad Thomas with KeyBank Capital Markets. Your line is open.
spk10: Hi, good afternoon. Gary and Jack, thanks for taking the question. Just in light of you wanting to focus a little bit more on the demand trends this year, given some of the timing nuances, I was wondering if you could just share a little bit more with us about perhaps how demand has trended quarter to date. You did reference this exceptional reaction to the outdoor catalog. Curious what you've been seeing of late and maybe just as we think about on the comparisons you're up against from a demand standpoint, are there any quarters that you'd call out where something had been unusual and not lining up with sales?
spk03: We're pretty close to, you know,
spk02: Pretty far down the first quarter, right? So you can probably come up with some kind of a demand. Will we get the first quarter demand? Mid-single digits. Yeah, mid-single digits is where we think demand is going to be in Q1. We're not providing any quarterly guidance or monthly breakdowns or anything like that.
spk03: Yeah, I would say our demand... Trends are building, you know, and they're going to build through the whole year. So that we expect. Let me give you a couple more breadcrumbs. The outdoor business is off to an extraordinary start. And it's biggest part of the year is coming up, right?
spk02: So we have a lot of confidence as we look at the next quarter to, you know, we have a lot of confidence in the whole year, but we have a lot of visibility if you think about that, right? Like the outdoor business, you know, you can, again, Just think about when people are buying outdoor furniture. They're buying a lot less in February, and they're buying a lot more in March, and they're buying even more in April. If that business is off to a great start, that's really easy to connect those dots and forecast. Those goods have been out there now for several weeks, and we've got real, real data.
spk10: That's great, Gary. I appreciate the breadcrumbs. And if I could add a follow-up on supply chain and sourcing, I guess, you know, for one, are you contemplating any sort of disruptions relative to the closure of the Baltimore port right now? And then can you talk about, you know, kind of your confidence in your sourcing partners, your suppliers, you know, ramping up with all this new product that you're going to have this year. And I presume that's partly why you're assuming you end the year with a greater degree of backlog, but just any more color on your kind of confidence in executing with all this new product would be great. Thanks.
spk02: Yeah, the, look, the, yeah, unfortunate and devastating, you know, accident that happened in Baltimore is, you know, super recent. We obviously have You know, a big facility center in Maryland. Fernando is here right in the room right now, and he's shaking his head, but we don't think there's any major disruptions. And here, let me maybe discuss, it's Jack, but on an inbound perspective, you know, some of our, much of our goods are actually offloaded in New York. We do the cost-benefit analysis of getting the product out earlier in New York before the boat then comes down to Baltimore. For example, the boat that was in the accident had four containers on it, but we unloaded it in New York as per our practice.
spk12: So we don't have any containers stuck on that particular boat, and other boats are getting rerouted. So minimal impact from that disruption.
spk02: Yeah, and I think your second part of the question is what confidence we have in our partners ramping with our new product. We have great confidence, but with new product ramping, you're never going to forecast the new product exactly right. You never sold it before. It's going to be some degree wrong. Some things are going to be more right, and some things are going to be more wrong, and the things that you're more right on and, you know, over form your expectations, there's going to be a period that's going to take, you know, for our partners to scale that product and respond to the trends and so on and so forth. So, but yeah, so far so good. I mean, we've had very minimal issues. Like it's more, it has to do with, I think that the biggest issues are just being able to forecast the nudist. And, and, you know, so, but once we start getting the data, you know, then we're improvising and adapting and, you know, let's say we, we've got the direction, you know, got it directionally right on the orders, but we get the finishes wrong. Well, you know, then we're reacting to and changing the finishes if they're still in the factory. And, you know, the last phase of that is, is the finish. And, you know, we're, shifting from one collection to another collection and, you know, as we get data and all those kind of things. And so, you know, and we have, you know, like we always do, we always have, you know, develop new partnerships and so on and so forth. And, you know, sometimes some of the newer partnerships haven't, maybe they haven't worked at this scale yet. But, you know, we try to anticipate that. But every once in a while, someone new just got, one of the big collections. And so, you know, that maybe is a new experience for them, but we have really great people, you know, inside the organization and in-country that partner in health and work, and we just try to work as partners and, you know, get to the right outcome, you know, once we have the data. So I'd say there's no, you know, there's nothing lurking out there right now. We don't have any other than, you know, some, you know, kind of ramp-up issues that you expect doing anything at this kind of a scale.
spk07: But, you know, I wouldn't say anything unique. I don't know if you guys have any other, you know.
spk02: Okay, I mean, everybody's in the room here, the team, and everybody's shaking their head like, no, no problem, so we're good. You know, because nothing new came up so far today that we haven't heard.
spk03: Good to hear. Very helpful. Thanks so much, Karen and Jeff. Thank you.
spk01: And we do have our last question. It comes from the line of Steve McManus with B&T Paribas. Your line is open.
spk12: Great. Thanks. So clearly very upbeat about the outdoor collection. You've got the data there. Just hoping you could speak to what the customer's reception has been and how demand is ramping for you know, the interiors and the contemporary collection versus, you know, what you were expecting. That'd be helpful. Thanks.
spk02: Uh, yeah, all, you know, responding as, you know, from our, you know, latest expectations, all, uh, you know, responding as we'd expect. And we have, uh, you know, the next, uh, big book is, uh, uh, modern and we feel very optimistic about that. And, uh, then we have, you know, remails of interiors and, uh, contemporary and new, refreshed with new collections and, uh, new creative and, you know, better data and information, better in stocks and so on and so forth. Uh, you know, more of the product because we've had a chance to read and react to it in the galleries, uh, which then, you know, uh, you know, gives us a lift. And, um, so we, you know, feel really good, really optimistic, um,
spk03: And so, you know, I don't think there's any other commentary that I've got. All right, thanks. And if I could squeeze one more in.
spk12: On the commentary to lean into, like, digital and print advertising, I don't think that's something you've really done in the past. Like, what drove the pivot and piecing that together with source book grampings? How do we think about the right run rate for adding to the business?
spk02: Yeah, it's kind of what we always do. There's nothing really new. It's what we generally do when we're in launch mode like this. So we're generally marketing print and digital with all those kind of key publications. We're the consumer. Generally, if you talk to anybody or see anyone who's building a home or furnishing a home, remodeling a home, so on and so forth, they're kind of fishing where the fish are, right? They're looking for inspiration in home magazines and, you know, design magazines and so on and so forth. And, you know, those websites get a lot of traffic with really people with a purpose, right? So we tend to, you know, invest in that way. the difference in our direct mail business and thinking about the list of customer files we've built up and how we prospect and where we get new names from and so on and so forth. So I wouldn't say anything's different. I think you see a ramp up in the investment and you see that based on our confidence of you know, what we've learned thus far and, you know, it's given us indications of what the right investment cadence is, investment cadence and contact cadences. So, yeah, I wouldn't say anything's changed. It's not a pivot. I mean, it may have sounded like that, but like Gary said, it's what we do around launches. Yeah.
spk03: All right, that's helpful context. Thanks, guys. Appreciate it.
spk01: There are no further questions at this time. Mr. Friedman, I turn the call back over to you.
spk02: Okay. Well, thank you, everyone, for your participation. And I'd say thank you to Team RH. Your efforts and leadership have been extraordinary. It has been a tremendous amount of work, I know, for everyone. But, you know, I think I'm feel so proud and excited about what this team has accomplished. And I think, you know, our partners and teammates all through the country, you know, especially our teams in the galleries and interior design, you know, we're going to be handing you off the baton, you know, as all these products unfold and, you know, the teams across our supply chain distribution and everybody's health work with support and our teams in Asia and other countries around the world. You know, I think this is going to be our finest moment. And it really is a result of your commitment and courage and, you know, and your leadership. So we just want to thank you for that. And we'll speak to everyone next quarter. Thank you.
spk01: This concludes today's conference call. You may now disconnect.
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