RH

Ladies and gentlemen, thank you for standing by and welcome to the RH fourth quarter 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one in your telephone. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Alison Malkin of ICR.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2020 Q&A conference call. Joining me today are Gary Friedman, Chairman and CEO, and Jack Preston, CFO. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the industrialization section of our website at ir.rh.com. With that, I'll turn the call over to Gary for opening remarks.

Great. Thank you. Good afternoon, everyone, and thank you for joining us. We're going to try a different format for this call. It's been recommended to us that many of you sometimes are scrambling and don't necessarily get a chance to read the letter before the call starts since there's only an hour between we put out the release and we've had a suggestion to start with the letter and read the letter and then that way everybody's grounded in what we just said and it might just elevate and improve the quality of the dialogue as we go forward. So I'm going to start with reading the shareholder letter that we just released to our people, partners, and shareholders. As we anniversary what has been one of the most difficult years in recent history, and as we begin to see the light at the end of the dark tunnel of this deadly and disruptive virus, we do so with a greater appreciation for our freedom and the simple gestures in life, like a handshake or a hug. We also turn this corner knowing that we used our time wisely to reimagine and reinvent ourselves once again. In times of turmoil, humans tend to move in herds, hunkering down and finding comfort and conformity. Even those who analyze and report the news seem to find reassurance in replication, trying to fit everything into a predictable pandemic pile of headlines we've all been reading. We, for example, have been put into the there's no place like home pile. Others have been placed into the e-commerce is everything pile. Both are actually good piles because if you're one of those, you're looked upon favorably whether you're on the top or the bottom of the pile. I believe many on Wall Street are managing their portfolios in piles. looking through their reading glasses when they really need a microscope and a telescope. A microscope to search for the details and differences in those rare brands and businesses who belong anywhere but the pile, and a telescope to see the opportunities that they will exploit post this pandemic. Since we the people of Team RH generally move in the opposite direction of the herd, are allergic to hunkering down, and surely don't believe we belong in the pandemic pile, we've taken a shot at four simple headlines that require neither a microscope nor a telescope, the four Ps that give you an insight into what you might expect us to do next. Because while most of the world spent this past year sheltering in place, we've spent the time reimagining and reinventing ourselves at a never-before-seen pace. So let me talk about these four Ps, our product, our performance, our prospects, and our people. Our product. We are building the most comprehensive and compelling collection of luxury home furnishings in the world. The desirability and exclusivity of our product amplified in our inspiring spaces has enabled us to gain significant market share with RH Core demand up 36% in the fourth quarter. Our demand has accelerated sharply with February up 73% and the first two weeks of March up 96% prior to the cycling, prior to cycling the closing of our galleries, restaurants, and outlets a year ago. Adjusted gross margin increased 480 points in the quarter, 540 basis points for the year, and 1,210 basis points on a three-year basis versus fiscal 2017. Again, demonstrating the desirability of our exclusive offering and the pricing power of our brand. The strategic separation we've created will continue to grow as we further elevate and expand the RH brand with the introductions of RH Contemporary in 2021, plus RH Color, RH Couture, and RH Bespoke over the next several years. Additionally, our plan is to unveil the world of RH, a digital portal presenting our products, places, services, and spaces this fall. We will begin to bring the different parts of our integrated ecosystem to life with rich content that we would believe will enhance our brand and connect with our clients on a much deeper level. Our performance We continue to build the most productive operating platform and business model in our industry with adjusted operating margins increasing 750 basis points to 21.8% versus 14.3% last year on only an 8% revenue growth. Let me say that again, 750 basis points on only 8% revenue growth. It's an operating margin never seen before in the furniture home furnishings market and more than 50% better than the closest competitor. The ROIC, our ROIC of 53% in 2020 also puts us in a class of our own. Our results represent a systemic lift that is not merely a temporal pandemic shift due to an unsustainable revenue gain. Remember, virtually 100% of our core business is direct to customer with less than 1 10th of 1% being cash and carry from our stores. which is basically floor model sell-offs at the end of a season. That is why our demand to revenue lag is much greater than other home furnishings retailers who have seasonal assortments and large cash and carry businesses. It's also important to note that due to the virus-induced supply chain disruptions, approximately 150 million of demand that was generated in 2020 will be recognized as revenue in 2021. while the majority of the selling cost to generate that demand was absorbed in 2020. If those revenues were recognized last year, our adjusted operating margin would have reached 23%. I often quote Bernard Arnault, the chairman and CEO of LDMH as he says, luxury goods are the only area in which it's possible to make luxury margins. At 21.8% adjusted operating margin in 2020, RH has now eclipsed the operating margin of LDMH. and we have a clear line of sight to 25% plus operating margin over the next several years. With less than 3 billion of net revenues, you can imagine the leverage we should experience as we scale. RH has also become one of the top performing consumer stocks of the past decade. Since our IPO on November 2nd, 2012 at $24 per share, RH has outperformed Apple, Amazon, Google, Facebook, Nike Starbucks, LVMH, Home Depot, Hermes, and just about everyone else but Tesla. Warren Buffett says, time favors the well-managed company. We believe our performance has and will continue to prove that point. Let me move to our prospects. We ended 2020 with just less than 3 billion in net revenues and believe the data supports the RH brand reaching 5 to 6 billion in North America, and 20 to 25 billion globally. We believe that number will continue to grow when you consider our opportunities in hospitality and home building as we continue to expand the RH ecosystem with the introduction of RH guest houses and RH residences. We are tracking to begin our international expansion in Europe with the opening of RH England and RH Paris in 2022. We are planning to open our first guest house in New York City this fall, followed by our second guest house in Aspen which will include our first RH bathhouse and spa in the fall of 2022. We are currently in design development for our first RH residences as part of our larger Aspen ecosystem and have already received multiple unsolicited proposals to purchase our homes sight unseen or to place deposits and reserve a home. I mean, we haven't put anything out there. We've said nothing but put out the original press release We probably could pre-sell every single home today. We believe the revolutionary design of both the guest houses and residences have the potential to create entirely new markets in their respective industries while also positioning RH as a thought leader, taste, and placemaker. We also plan to open four new design galleries in 2021, all with integrated restaurants and wine bars. RH San Francisco, the Gallery of the Historic Bethlehem Steel Building, RH Dallas, the Gallery on Knox Street, R.H. Oakbrook, the gallery at the center, and R.H. Jacksonville, the gallery at St. John's Town Center. We talk about our people. I believe we have the most resourceful team in our industry, and again, not by a little. Tony Robbins talks about resourcefulness being the ultimate resource. It's not about time, money, or technology. It's about passion, persistence, vision, and values. Starting with no resources, We transformed a nearly bankrupt business selling nostalgic discovery items with a $20 million market cap into the leading luxury home brand in the world with a market value in excess of 10 billion. History has proven that men and women will work for a dollar but die for what they believe in. We say inside our organization, this is not our company, it's our cause. It's an authentic reflection of who we are and what we believe in. Some people say, don't take it personally. Those people are not our people. Make no mistake. This is very personal to us. We believe brands with more control will become more valuable. We have always invested in controlling our brand from concept to customer, avoiding intermediaries who will never care as much as we do. That's why we've avoided partnerships, sponsorships, franchising, or licensing and continue to believe brands with more control will become more valuable. The easy path of expanding a brand rarely pans out to be the best path. The road to global expansion is littered with brands that put their trust in others only to spend years negotiating repurchase rights decades later after the damage is done. That's not to say there won't be exceptions where there's an outstanding partner in a challenging country, but it will be a rare exception as we expand the RH brand around the world. We also continue to invest in taking more control of the customer experience. and have been testing RH in your home in Los Angeles and San Francisco markets and are extremely happy with the early results. As Fernando Garcia, our president of furniture operations and home delivery describes it, RH in your home is not a different or better experience. It's a unique and memorable experience as we extend the gallery into our customer's home. With furniture ambassadors managing every detail, it creates an impression with our customers that can last a lifetime. Additionally, we are opening a new 1 million square foot furniture distribution center in Southern California this spring. The new facility will allow us to reduce delivery times by 7 to 10 days for both outdoor furniture and special order upholstery in most major markets. 2021 has all the signs of a very good year. While 2021 will surely be a tale of two halves, the fact that we have a booming housing market, a record stock market, low interest rates, the expectation of a rebound in the economy and jobs market combined with recent further acceleration in our demand trends as it's feeling more rather than less optimistic that it might just turn out to be two very good halves. While we expect to face continued difficulties ramping vendor production to meet demand and we don't see the challenges with ocean freight or port congestion resolving themselves anytime soon, it's hard not to forecast forecast first quarter revenue growth of at least 50% and adjusted operating margin in the 20% range. With the momentum in the business, we believe it's safe to say 2021 should result in revenue growth in the range of 15 to 20% with adjusted operating margin expanding 100 to 200 basis points and ROIC in excess of 60%. We have made the decision once again to delay the mailing of our source books. and the launch of RH Contemporary until the fall of 2021 to enable our manufacturing partners to catch up to the increasing demand trends. This decision should also support a strong second half as we have held back new collections for the past year, which will result in one of our largest new product launches in our history. Our RH Outdoors sourcebook filled with 10 new collections is scheduled to be in-home starting this week with the digital sourcebook and new outdoor collections live on our website today. This is a time to be defined by our vision, not by a virus. As we move past the dark days of the pandemic, let us remember our resurrection, a time we reimagined and reinvented ourselves once again, a time our results redefined possible for a home furnishings brand, a time when our performance forced the rest of the world to remove us from the pandemic pile and see us for who we truly are, a team of people who don't know what can't be done. This is a time to be defined by our vision, not by a virus. Carpe diem. Okay, I'll turn it over to you, operator, to open the call for questions.