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.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. And your first question comes from a line of Steven Zaccone from Citigroup. Your line is open.

Great, thank you. Congrats on the strong results and happy to be a new addition to the earnings call. Gary, you have a lot of momentum in the business right now. There's a significant amount of product newness. You're growing the hospitality offerings and the margin profile significantly outpacing your early outlooks for the business. With all this momentum in mind and thinking about how the world has changed from a global pandemic standpoint, where have you gained more confidence in the long-term growth potential of this business?

You know, I don't know if anything's really changed for us based on the pandemic. In fact, I don't think as much has changed as most people think or believe. I mean, look, you just start with the fact that our business is basically 100% direct to customer platform. So we've been channel neutral our entire existence here. We don't really care where anybody places an order. And whether it was through the pandemic when order shifted from stores to online or virtually with our people, As soon as our galleries reopened, our business looked pretty normal. And I know there's a lot of talk about, well, this is going to accelerate the growth of the Internet by 10 points over the next several years. That may or may not be true. I would say we're indifferent to that. We're really indifferent with the inherent channel shift that is going to happen over the next several decades. We've anticipated that. We knew that was going to happen. We're indifferent to that happening. You know, people are kind of reframing their models and closing stores, you know, at an accelerated rate due to the fact that, you know, there's been this channel shift. And, you know, that may be true because their model was an architected, you know, with a view across, independent view across all channels, you know, strategically or financially. It might have been an old model that was architected just for a retail business. And they've more recently got into a direct customer business and had a rush online without strategically thinking about all the implications of it. We built this business beginning 20 years ago as a channel neutral business. And it's a platform looking ahead at the next 20, 30, 40 years and saying, we could see the world going there. So whether it gets there, whether it goes 5% or 10% faster and there's a greater shift or a slower shift, were completely indifferent. It doesn't change anything about our real estate strategy or online strategy or anything we're doing. We believe physical, you know, physical, great physical, let me think, great physical experiences in this physical world we live in are going to remain relevant. If anything, I think we're going to be even more relevant post this pandemic because it's, you know, it's, I think it's scared a lot of people out of investing into the physical world. And it's just motivated a lot of people to follow the herd into rush to be an online business, rush to be a digital first business, rush to be a digital first business with a few stores. I don't know where everybody's rushing to. And we only rush to someplace that we figured it all out and we've thought about it a long time and very deeply. So I'd say nothing has fundamentally changed about our strategy based on the pandemic. We're indifferent to the pandemic. We're solely focused on building the most compelling product assortment presented on the most inspiring and immersive platform in the world with the most incredible services that anybody can have in this industry. and we think those are the right things to focus on. Not chasing shifts in the business. That's very kind of tactical. Oh, there's a shift to online. Great. If you didn't see it coming until now, you're way, way behind.

Great. That's very helpful detail. Just a question on the margin outlook for the 100 to 200 basis points expansion. How should we think about that from a A gross versus OPEX leverage standpoint, and then specifically on the growth side, you've had two strong years here of product margin expansion. Do you expect that strength to continue this year? Thanks very much.

I'll let Jack take that one.

Go ahead, Jack.

Yeah, well, you know, like you said, in the last couple of years, our margin expansion has been primarily driven on the gross margin line. So for fiscal 20 of the 750 basis points increase, you know, three quarters nearly were in gross margin line. And so I think on balance, you're going to see that quality of that margin increase continue. And so while we're not guiding specifically to say what exact portion of the 100 to 200 is going to come from gross margin, I would characterize it as at least half, if not more.

Yeah, and let me build on Jack's point. I think as you ask that, it makes me think about probably what is probably not obvious. If you're in the outside of this business, because people have seen us repositioning the product. It seems to take pricing. But I think it's probably not clear that as we evolve this brand and as we continue our climb up the luxury mountain, the product quality is going to continue to move substantially. And the The pricing will move with the product naturally, but the value equation will get stronger, not weaker. As we get smarter here and we develop better and deeper relationships with our key manufacturing partners. So what might not be clear is as you take the prices up and you get product margin, in that equation, you also get leveraged throughout the supply chain, right? And so, you know, and that's probably a simple mathematical equation that maybe not everybody's connecting the dots on, but it's relatively simple if you think about it. And if you just kind of try to capture the essence of Bernard Arnault's quote that only in luxury products, you know, can you have the ability to make luxury margins, you know, there's a simplicity and a truth to that. This would be very hard to build a model like ours if you're playing in the middle of the market.

Great. That's very helpful. Thank you.

And due to time constraints, we do ask that you please limit yourself to one question and one follow-up. Your next question comes from the line of Adrienne from Barclays. Your line is open.

Great. Thank you very much. Wonderful news on the momentum continuing. Gary, we've spoken before about demand creation, how it's no longer a single number on the P&L, like a percent of sales, but a confluence of the investments you're making in Aspen, London, RH3, et cetera. It seems RH is building more of desire creation and a pipeline of future customers who want the RH lifestyle and everything that comes with it. So how should we think about that advertising demand creation line in and of itself going forward? Thank you very much.

It's a really good question, and it's the right way to think about it. Building one of the most admired brands in the world, desired brands in the world, whichever adjective you want to use – Really, it takes a different path. It takes a different way to communicate. And I think we're in a world where it's harder and harder to get your message out because there's so much information out there. I read a study, I think it's about a year ago, that humans are consuming 700%, seven times the information than they were 20 years ago. And what an astonishing number, if you think about that, that and 20 years ago, we're consuming seven times more information because of these devices we have and the amount of information, the amount of platforms we're communicating on and the ease of communicating to us. So the way to kind of break through, right? Steve Jobs said something, if you watch his original kind of YouTube presentation when he's in his Shorts and Flip Flops on a Little Apple stage when he came back to Apple and he was talking about, he was reintroducing the Think Different campaign. And he said, you know, we live in a really noisy world and it's going to be really hard for anyone to remember anything about any of us. And that it is so important to he talked about marketing being about values about those things you deeply believe in and connecting with people about values and he talked about some of the great brands he talked about Nike being one of the great brands in the world and he said if you think about Nike they're selling a commodity they're selling tennis shoes they're selling shoes for the most part and he said but yet in their advertising They don't talk about the shoe. They don't talk about the sole. They don't talk about the laces. They celebrate great athletes and great athletics. And he talked about Apple believed that people, that they're passionate enough, really could change the world. And that... and that in that Apple brand, the Think Different campaign, it was also a campaign that was more than anything else. It was about the absence of the product, right? You didn't see it on iMac. You didn't see anything in the campaigns. You know, you don't really think about Nike. You know, it hasn't built their brand based on any particular shoe. We all remember the Jordan shoe, but why do we remember the Jordan shoe? Because of Michael Jordan, not the specific shoe. So if you think about the great brands and you think about how they built them and how they communicated, very unique path. Think about this. Stand back. Tesla is the fastest growing, most valuable car company in the world. They've never had a TV commercial. Think about that.

Yeah.

People line up for Teslas, right? So we say inside our company, for example, we don't have a marketing department, and that may shock a lot of people. We don't have a marketing department because marketing a lot is about putting lipstick on the pig, right? It's like taking an average idea and trying to dress it up and spin it and make it something better than average. And that's really hard to do, right? That's just really hard to do. And we don't have a marketing department because we say it's not what we say, it's what we do that defines us. So we have a truth group. And our truth group, in the past, they'd come to me and say, someone wants to write a story about this, and they're going to put us in that story. And I go, well, that's not what we believe. Like, why would we want to be in that story? It's not our truth. And so our work is our truth, and we define ourselves through our work. and we connect with people through our work. And that's why launching kind of a fully integrated revolutionary ecosystem in a place like Aspen where the wealthy and affluent visit and vacation and doing something extraordinary there, you've got the attention of the right people. and we're not gonna bang pots and pans and say, look at us, we're just gonna do some extraordinary work. That's why I say climbing the luxury mountain and taking the path we've taken, all the luxury brands were born at the top of the mountain, right? Like you think about any luxury brand, they're all born at the top of the mountain. We weren't born there. We weren't even born at the bottom of the mountain, right? We were born underground. We were basically a bankrupt company. So we had to kind of dig ourselves out from under the ground and then decide we're going to make a climb that no brand has ever made. No one's ever tried to make this climb. And so people atop the mountain, they don't really want you to make that climb. You're not from the neighborhood. You don't get invited to their parties. And so we have to do work that is so extraordinary, so remarkable, so amazing that it creates a forced reconsideration of our brand. that it forces people at the top of the mountain to tip their hat, right? To kind of say, nice job. We have to earn their respect. So there's a famous quote that says, when you don't come from royalty, you have to earn it, right? And so this work that we're doing, the things that we're doing to build this brand, we believe is the right kind of work. We believe if we do extraordinary work, that breaks through the clutter, people are going to talk about it. And by the way, we put out a press release, a single-page press release talking about Aspen. And I don't think I've ever had more billionaires reach out to me and send me notes, you know, saying, what are you doing in Aspen? Like, I personally had three requests to buy one of our homes. You know, our partner has had about 12 requests. Nobody's even seen a home. We haven't even put a rendering up. So when you think about that, we are about spaces. We're about design and architecture and living and spaces and places. And that's what we're about. And so doing incredible spaces, creating inspiring environments, we believe will break through the clutter. And it's way more powerful than just doing an ad and trying to talk about it. So that's why we don't have social media. That's why we don't have an Instagram account. We don't have a Twitter. We don't do this. Everybody's told me, you need to tweet. You need Pinterest account. You need to have an Instagram account. People will follow you guys. Gary, if you tweet, you'll have all these followers. I don't want to spend my time thinking about what to tweet tomorrow. I don't want to spend my time. I don't want to have a department that's reviewing what pictures to put on Instagram that day. By the way, just as a point of reference, we don't have a Pinterest, a Twitter, an Instagram, yet we're the most pin brand of our kind in the world. We're the most tweeted about brand of our kind in the world. And we're the most Instagram brand of our kind in the world. And so that's why we believe it's about our work. And that's why we're doing the things we're doing. And by the way, by doing the things we're doing, like even building the inspiring galleries we're building, we're now looking at the model and we're saying, in these galleries, and especially the ones with the restaurants that are driving significant traffic. We don't believe we need to spend as much money mailing catalogs in that market because we have thousands of people we feed every week. And so when you think about our financial model and opportunities and leverage and investments, just because we used to invest a certain way doesn't mean we should keep investing that way because as we continue to innovate, we can see around more corners. We have more data. We have more learning. And I sit here today and I go, gosh, we haven't mailed a sourcebook in how long? A year, right? Yeah, a year. A year. We won't have mailed a sourcebook for 18 months or something by the time we mail the false sourcebooks. I don't know, do we need to go back to mailing source books twice a year? Do we need to mail them as deep? Like in the markets where we have these magnificent, you know, architecturally significant spaces and places we built, you know, how much are those worth to marketing, right? And I get it. You know, you might be closing stores if you're building kind of crappy stores that are in line in a mall that, you know, everybody's got a glass storefront and all you have is your logo up above it. that's different. But that's not what we're doing. We're doing something different. That's why I say you can't put us in the pandemic pile. You can't put us in the pile with everybody else. You'll miss the whole story here.

Gary, that's incredible.

It was one of the best questions I got in a long time.

Your philosophy is always welcome. Jack, a really quick one. Actually, this one is 73% and 96% demand growth and then we're now in the part where the stores were closed. The at least 50% revenue growth, is that due to poor congestion or lack of inventory? It seems like the spread between those two numbers would be tighter.

You're going to see the same dynamics in terms of the supply chain constraints and for the same reasons that demand growth exceeded revenue growth in Q3 and Q4, with the strength in business, you're going to continue to see that in Q1 and potential acceleration given the strength and acceleration demand.

Yeah, and again, the key word is at least. It's at least, right? So we've given you at least how many times over the last few years? At least this, at least 18% operating margin. Then it's at least 20. So we tend to kind of give you – we want to make sure – Whatever happens, we're going to hit the at least, but we generally beat the at least pretty handedly. But, yeah, there's a lot of things to kind of consider, but at least means we have more than that.

Understood. Great luck. Great job. Thank you.

Thank you, CJ. Thank you.

Your next question comes from the line of Curtis Nagel from Bank of America. Your line is open.

Good afternoon. Thanks very much. So, Gary, perhaps a bit of a piggyback question on Adrian's. Perhaps just a little bit more specific, just thinking about the ecosystem that you guys are in the midst of rolling out. you know I guess kind of two questions you know how meaningful do you think that could be as you know a brand enhancer for RH over say the next three to five years and you know as a standalone business you know how important that to you know as a revenue and profit contributor or is I guess kind of the former points you know more important how should we think about that?

Yeah well I think it's going to be a a meaningful brand enhancer and I think if you know it's funny if you would ask me five or seven years ago we started working on this I would have told you it was going to be a meaningful brand enhancer now I look back and I go that wasn't even any good at all what we were working on seven years ago because we tend to keep making things better and you know that's the great thing about kind of Only having a vision about something versus kind of start working on something, right? You really learn when you start doing, and that's when you can really start accelerating your education and connect more dots and see around more corners. I think what we're about to unveil in New York and Aspen, I don't think anybody has any idea what it is. I really don't. I've been fortunate enough in my life that I've been traveling since I was a relatively young man and traveling all over the world. And I've been in a design business, whether it be at the former company I worked at or today, where we search the world for the best stuff. The best of design, the best hotels, the best places, where are we going to get inspired, what are we going to see? So I've seen a lot, right? I've been to most of the almond resorts in the world. I've been to so many places, both personally and professionally. And someone asked me, how long have you been working on the guest house? And I told them about 30 years, because that's how long I've been thinking about it. That's how long I've been traveling around. to really great places and asking myself questions like, why don't they have this? And why hasn't anybody thought of that? And why does it have to be like this? And I think when you see what we've done with the guest house, there's just things that no one has ever done in hospitality. And it's why they say a lot of the, most of the innovation in the world happens outside It comes from outside of industries, not inside of industries, right? Like, again, I go back to Tesla. The guy never built a car, ever, ever. And it's massively turned over the car industry, and now every car company in the world is racing, racing to catch up, racing to have electric cars, right? We've never opened a hotel before, and we're not going to now, you know? because it's not a hotel. It's a guest house. And it's importantly said that. And when you see our website launch in the West, on the website launch when we open, the first thing you're going to read on the website, it says, this is not a hotel. Because it's not. It's a completely new way to think about an experience like that. And so So I think when you do work like that, one, it has a great chance of having people at the top of the mountain tip their hat because they haven't seen it. I mean, think about this. Like, if we want – like, go to the top of the luxury mountain and say, okay, who lives there? Who has the biggest house? Bernard Arnault, right, runs the biggest luxury platform in the world. You know, I say internally – I joke around and say, look, Bernard Arnault just bought Belmont for $3 billion, right? Nobody thinks we're impressing Bernard Arnault. I guarantee you when he sees this guest house, he's going to be forced to tip his hat because nobody's seen anything like this in the world. That is what is going to create the conversation. That is what's going to change the perception of the brand. A brand that started underground had to dig its way out of the brave and start climbing a mountain that's never been climbed before. You just have to do things that people can't imagine. And I think this is all about, you know, it's all about brand building. It's all about truth and respect, right? The work is our truth and I believe our work will be respected and our truth then will be respected and people will listen closer. They'll pay more attention to us. And then out of that, you know out of that and same thing with the with the with the homes that we're doing the residences that we're doing and other things you'll hear about I mean let me just go back for a second just start here we we never knew anything about restaurants right a few years ago you know everybody said you're gonna open a restaurant like what are you gonna do who's gonna run it this and that we had a partner to start now we run the whole thing ourselves we have we're vertically integrated hospitality organization we have 10 restaurants today our are restaurant volumes and how they're tracking, you know, because we keep innovating and evolving. And the things we've done, you know, in the last 18 months, 12, 18 months, you can't even see them yet because of the pandemic. But our restaurant volumes will rival the highest volume restaurants anywhere, you know, besides the one or two, you know, great ones. but when people, when we reopen and really reopen, when we can seat all our restaurants, our volumes are going to be among the best. People used to talk forever about mall developers really wanted a cheesecake factory because they did $10 million on average a restaurant. It's very likely very soon our restaurants will be at that kind of volume. And it has to do with not only just the number of customers coming through, but the average ticket of the customer coming through, which then influences who's coming through, which makes sure we have an audience that is aligned with the target consumer and who we want to impress. But we're going to be a pretty good restaurant company. If you looked at the numbers and the returns and the margins on our restaurants today, they're three times better than they were three years ago. And so we're pretty good at that. And I think what happens is with things that you really care about, right? We talk in our company about three lenses we look at every decision based on. We choose based on what is the emotional value of an idea, what is the strategic value of an idea, and what is the financial value of an idea in that order, right? Because if you just focus on the financial value of an idea, if nobody really believes in it, if nobody's going to die trying to bring it to life, the financial value is never going to manifest itself. But if you've got ideas that have really high emotional value, that the people in the organization really give a shit, they really care about it, that they're going to get knocked down 10 times and get up 11, the effort and the passion and the learnings that happen just change the outcome. I've seen things that have really high financial value, really high emotional value, really high strategic value, but moderate financial value that have turned out to be The biggest financial ideas in the company because the work turns out to be so good. And on the opposite hand, I've seen just the opposite. I've seen things with moderate emotional value, relatively high strategic value, and super high financial value. Somebody thought it was worth those, the $500 million idea, it wound up being a $5 million idea because nobody cared enough about it. And to do great work, the effort has to be, you want an extraordinary outcome, you have to put in an extraordinary effort. There's no shortcuts. Elon Musk was asked, you know, Elon, you run three different companies. You run Tesla and SolarCity and SpaceX. How do you do that? He said, look, it's as simple as just physics. He goes, you know, the average executive might be working 40, 50 hours a week. And he said, I work about 150 to 160 hours a week. So I work three times more hours than the average person, so I could do three times more. And he goes, it's very simple math. If you hung out with the people in our organization, you'd find out that we really love what we do. You cannot stop us. We are going to figure it out or die trying because it's more than just a job to us. It's our life. And when you work on stuff like that, the outcome tends to be much greater than you could even imagine in your original vision, you meaning us, right? And so that gives me – like if somebody said, hey, do you think you'll ever make money? in the guest houses. I said, look, if I don't lose a lot of money, it's going to be a really good thing for the brand. I actually think we now, when I look at it, I think this is going to work. I mean, we haven't sold a room night yet, but let me tell you something. I sure want to stay there, not just because I built it, but we have thought so deeply about it that we're going to do things that no one in hospitality has ever done, and they're really good ideas. and the same thing with our residences. We've designed the one on Red Mountain. It's shocking. It's so good. And it's because we're passionate about it. These ideas have huge emotional value and when it has high emotional value, people, they don't put in a day's work. They put in a week's worth in a day and the outcome reflects that. So So I think these will, you know, at a high level, these will massively, massively elevate and render the brand more valuable. And I'm hopeful today that they'll also have really good financial models. I feel more clear about the homes, by the way. I think that the homes is easier math for me because, you know, I own homes and bought homes and like I'm the consumer and I know what we can build and what we can sell them for and How much we can make, and I think we'll create an extraordinary product, and I think we'll make a lot of money in the home business. Whether it's single-family homes, condominiums, things like that. If we do luxury apartments, which is a really interesting market, there's no great apartments in the world. They're just not designed well. But think about it. If we do fully furnished luxury apartments, and how many people need to go into a market, live somewhere for a year or two, don't want to buy a home, but they got a lot of money. and they want to live in a really beautiful place. I mean, we think that could be a fantastic idea. The guest house thing, I don't know. We're doing things no one's ever done. We got no meeting rooms. We've got no weddings, no nothing, no celebration. It's very private. It does a few things better than anybody else in the world, but it doesn't do all the things. it all depends what kind of room rate can we get for these extraordinary rooms and this unbelievable sense of privacy and luxury we've created we'll know soon but we're excited about it clearly and thank you for the very thoughtful answer and hopefully come fall we can start to see some of this in person so good luck with the rest of the year and thanks we'll figure out how to kind of do a little like we're thinking we don't know how to how do you do a launch party in a you know in a in a 10 room hotel right you can't have just people like walking around the hallways right and um and so like we we then we thought like I thought I'm going to do it like a I might do a week of sleepovers right where you get invited for a sleepover you know but I can only do like if you get two people in a room you know times 10 rooms we have 20 people a night but it's still 100 people we get the right influencers and the right people and you know we're going to try to we're going to try to open this we think um coincide with Fashion Week and we think Fashion Week will come back and everybody in New York will be back from the Hamptons. We think people will be traveling again in September. It could be like the greatest coming out party in the world and some of the who's who maybe want to come for a sleepover and get to see something no one's ever seen and we start the right conversation. But I think what we'll do is probably during that week we'll stay there for a while and maybe it's a good time to do an investor meeting in New York and bring everybody up to speed and do a tour of the guest house probably right before we really open it to the public. Because once it's open, you can't tour anybody through it, right? Because it's about privacy. We can't be taken, hey, these are a bunch of Wall Street guys we're taking through here. Sorry, sorry, excuse us. Yeah, we know this is about privacy, but not today. So there's going to be one shot to kind of really see it, and we'll have to kind of do that before it opens.

Your next question comes from the line of Max Wachlenko from Callanan Company. Your line is open.

Great. Thanks a lot, guys, and congrats on the incredible quarter. So as we think ahead about the 100 to 200 basis points of EBIT margin expansion in 21, what do you see as the biggest buckets of opportunities? And then longer term, as we look ahead to the 25% plus, what do you see as additional opportunities beyond 2021?

Well, look, we've kind of said 100, 200 base points. We also kind of put some dots out for you, right? We said, hey, if that $150 million had shipped this year, we would have been at 23. So start with we're kind of at 23. And so then we got another 100 base points. And to get you to 24, which is 200 basis points higher than 21.8, right? 2,200. So you can get there pretty easily. It's not a lot of moves. And some of it will depend just how much, where does the revenues really go here? We don't need a lot of revenues to kind of get to where we're pointing you. If for some reason these revenue trends continue like I mean it's really interesting I've never you know this is I've never seen anything like this I mean I've been through you know the great recession I've been through multiple recessions in my career I've you know been in in the home category now like how many years 34 years this bike Jack reminded me the other day it was my 20th year anniversary here not to get to everybody that wished me happy anniversary but I didn't even know that he goes oh god I'm sorry I missed your anniversary I didn't even know it was my anniversary So, you know, I've been here 20 years at Williams-Sonoma, 14 years. I've been 34 years in the home business. And I've seen a lot of cycles during that time. And I've never seen anything quite like this. You know, I tend to, when there's really good news like this, I tend to be the pessimist in the company. And I tend to be the one to look with, you know, whatever demand hit we're getting right now, it's not because of us. You know, it's not going to stay. Don't, you know, don't architect the business for this. you know this is going to go away and it hasn't went away yet and and you know I've talked to some pretty smart people that have given me different insights into look Gary what like here's here's one that I think is interesting for everyone to think about and this is this is really smart and and it comes out of an analysis from a really credible you know deep thinking smart person that the move The move of America that you're seeing today, the pandemic shift of out of cities into suburbs or into second home markets, which by the way, the suburb thing is a great thing for us because 80% of our business is in the suburbs. And so the move to the suburbs is not just a move to the suburbs, it's a square footage expansion. They believe it's a 2X or more square footage expansion for the consumer. And I hadn't thought about that before. I thought that was a really interesting point. And their math said, look, Gary, your customers that are moving from the cities, maybe in a 3,000 square foot apartment, are moving to a 6,000 to 10,000 square foot house in the suburbs. And they didn't have outdoor furniture in their apartment in the city. And now they all have outdoor furniture because they have big yards and lawns and pools and so on and so forth. And so, you know, I just like that stunned me, right? I hadn't really thought about it like that. I didn't think of the square footage expansion of the consumer. And the other thing they said was that the issue with getting a contractor right now is a huge issue, that you could go out and buy a house, but if you have to remodel it or do anything to it, you have to wait six months to get a contractor. So they believe, yes, six months or longer in some markets, there's this real lag and so this person believes that and they said this to me and I was like I didn't even know the response like that they believe you're that our business was going to accelerate because of the lag because of this massive shift right that the longer the pandemic went the more people started moving permanently I'm not talking about the you know the people that you know kind of flew back to their place in the Hamptons. That's very different, right? Like you think about New York, everybody went to the Hamptons that could. Anybody that had a house was at their Hamptons house, right? They relocated there for the year. Anybody that could rent a house in the Hamptons, rent one. Everybody could buy one, like bought one. But a lot of them, you know, are coming back. And at first, everybody was like a temporal thing. And then all of a sudden, there's this shift of a different perception of how people wanted to live and could be a more permanent kind of thing. So I think this moving thing could be a much longer tail and a much bigger move. And then you say to yourself, well, how long does it last? It all depends on how permanent the move is, right? So if you think about our business, and I'll give you some numbers that I've never really talked about before, but our business is prior to the pandemic was 80% suburbs, 10% second home markets, and 10% urban markets. And when I say urban markets, I'm talking about the city, right? Like not Beverly Hills is not the city in Los Angeles, right? The city is the vertical part of Los Angeles is called, you know, Los Angeles City. So, you know, we have some vertical markets like Manhattan, or Chicago, right, that are really vertical, that have a lot of high-end homes, and, you know, and we, you know, have relatively big volume, but almost everywhere, our business is much more suburban, you know, driven, and that makes sense. The homes are bigger, you've got backyards, you've got kids, you've got, you know, like, more bedrooms, more spaces, more family rooms, you know, et cetera, et cetera. And then the pandemic hit, and it shifted things, and you have this explosion of second-home markets, and all that happened to our numbers really is the second home markets went from 10% of our business to 20. Now they grew exponentially faster and this is the percentage shift, right? So you're, huh? 10 to 12, yeah, 10 to 12. And then suburbs basically stayed the same and cities just went down by two points to eight. But if you think about it, our model of being 92% of our business. And this is not where the demand generated, this is the shift to addresses. This is where the product was going, right? So if you think about 92% of our business is architected perfectly for whatever long-term change this pandemic has. And there's another study about the kind of the big shifts in kind of moves when, and I'm trying to remember the data, this other person was talking to me about it and how, you know, every so many years, you know, there's a shift here and there's a shift people are moving to here, you know, like the big move into the suburbs of, you know, the 50s and 60s and 70s and, you know, or the, you know, you had kind of a move back into the cities over the last 10 to 15 years, right? Regent gentrification and, you know, all this kind of redo of cities, right? but the shift that might be happening might really stick. That's the logic that certain people are kind of sharing with me and they think this is not temporal. They think there's going to be a lot less people that go rushing back to the city and they think that the rush back to the city is going to be a much younger consumer going back and that the consumers that are 40, 50, 60 years old that moved out of the cities are going to stay out of the cities. They don't think they're coming back. And then that becomes, when I think about it, that becomes really good for our business long term. Because that also means even the moves within the place, like not everybody, if you think about it, if you moved out to the suburbs, you know, you scramble and got a second home during this pandemic rush, you know, it's almost like a movie, right? Like, like everybody's got to you know leave the cities and all the cars are backed up and get out and you know it's it's the odds of you getting the house you really wanted in that moment is really low right and I got to believe there's a lot of people renting homes you know I know we're doing a lot of quick you know design installs people go like need the furniture in two weeks right and luckily and and one of the advantages here's another advantage this is like kind of a little side point to this, but I think it's worth saying and sharing with everybody as we all try to figure out where things are going and what's happening here is like I thought about this and I thought, why is our demand really accelerating right now? What is happening? And I think that there's this backup, this pent up demand, just like people couldn't get contractors, people are now can finally come. But for all the people, that are moving out and they need new furniture and they need it in 30 days or they need it in three weeks or two weeks. I think we're benefiting now because we actually stock furniture. We were one of the few places that actually stocks the product and you can get it quickly. Not everything. We have a big special order business and we're in back order now. But this is where Times like this is where I think our model is advantaged versus a Wayfair, Paragold, anybody else online, what I call a marketplace model where they don't own the inventory. That's one of the beauties of a model like that. It's a low capital model and should set up for high returns if you can get the earnings model to work right. But no one ever really thought about what's the inherent weakness of that model. If you go on Wayfair, and we mostly look at what they're doing on Paragold. We look at anybody who might be competing with us. And the amount of out-of-stocks and what you can buy there is unbelievable because their weakness is you've got a lot of these small and capitalized businesses trying to just sell shit on a platform like that, in a marketplace. And they'll take anybody, by the way. It's not a big approval process if you want to go sell something on Wayfair. So you don't get to that many vendors that quickly if you have really high standards of who's selling on your platform. You can't possibly talk to that many people. It means a lot of low-level people are approving a lot of new vendors. But I look on there, and I know some of the people. We know who the factories are all around the world. And I go, those people don't have any money. They can't afford to have the inventory. right so so I think in in sustained things like this we actually you know like I'd never thought about but we actually have the inventory like we actually if you needed your house furnished next week we could pull it off if you live if you live in a major market so you know so that's a big big opportunity for us but uh but I want to go just go to that that but point about um the 25 operating margin and what what are the opportunities beyond 21 you know just and many more. I think they're going to be more productive than less productive. Our restaurant business is going to be massively better. Our waterworks business, versus three years ago, I think we've got the EBITDA would probably be 12, 14 points better, 15 points better, something like that. And then you just scale this thing. Think about this. We're a $2.8 billion company. That could be so much bigger. And we've built a really smart and simple platform here that you can scale. And so the leverage as we scale, you know, you think about like other, you know, somebody brought up Sonoma to me last week, you know, and because they obviously had great results and fantastic, you know, fantastic outcome. And, you know, I think they're doing a tremendous job. And, you know, but they're already at six and a half billion or something. What are they, six and a half, seven billion? Yeah, six and a half billion. We're not even half the size of Williams-Sonoma and we have the operating margins that we have today. So just do scale math. Pick up 20 basis points in eight different places in the company. You get to real leverage. And so that's why we think Yeah, we have a line of sight 25% operating margins plus today, you know, plus. And so far, every margin target we've given you, we've got there much faster, much, you know, much sooner than later, right? So, yeah, so we wouldn't be so confident and clear and, you know, tell you, like, if we couldn't see it and we couldn't, you know, draw the straight lines to the numbers so um yeah so we we just we just keep learning here you know and um you know we're kind of always unsatisfied always on the move uh like we rarely celebrate like it's it's for moments so it's not that we don't at all we get super excited but we're constant students we learn and so you know what if you're if you keep learning you keep seeing more uh and and if you can see more then you're just never satisfied with where you are so um and that's kind of our culture. I think this team and we've integrated 10 new senior leaders into our leadership team. We've got some people I can't talk about yet because we haven't went public with the ideas but we've got leaders of international supply chain. We've got lots of new talent sitting around the room and and that also allows us to do more. We've made a lot of human capital investments here. So anyway, long rambling answer. Sorry about that. But just some, I thought some of that stuff could be helpful. It was helpful to me to think about how to think through this pandemic, just like the moves and the move to the suburbs and how that might affect us and the square footage growth. I think the square footage growth is a really interesting one because they said you could be selling two to three times more furniture just because to the same consumer. And it's interesting because our tickets are going way higher, our average orders are going way up. So it's kind of actually playing out like that.

Great. Thanks a lot. That's incredibly helpful. Best of luck.

Great. Thank you, Max.

Our next question comes from a line of Stephen Forbes from Guggenheim. Your line is open.

Good afternoon. Gary, you mentioned, you know, getting more control, right, in the business. And I was hoping you could maybe expand on that theme, right, and where your mind is at. What other aspects of the business are you looking to gain more control over, whether it be manufacturing, whether it be the whole design process, right? I think RH in your home experience. We'd love to hear your thought process on that. and some of the ideas around control.

Yeah, yeah. So, Steve, that's a good question. As we think about it strategically, right, like, you know, our model is going to throw off a lot of cash here. And, you know, what are we going to do with that cash? I mean, clearly there's, you know, you can invest it into the business, you could buy back your stock, you can pay dividends or so on and so forth. But if you look at our model and look at it over the next five years, you get it. get out in front of it and say, what should we do? And where do we see the biggest opportunities are to create more value? And one of the biggest ones we're discussing is this idea of controlling more of the brand. I think we're realizing as we scale the luxury mountain, there's just so much fragmentation and and I always like to say products of this quality has never been made in these quantities. And I think taking more control of the product pipeline, whatever that might mean, whether it's the manufacturing, whether it's the sourcing, whether it's, there's so many aspects of it, whether it's raw material procurement, like do we take, Most of our furniture is made with four species of wood, right? I don't know. Do we take positions in certain woods to give us a competitive advantage? Meaning that one, it's just sometimes getting the raw materials. If you're as big of a platform as we are in outdoor furniture, securing teak is... is one of the challenges. And should we own outdoor furniture manufacturing so we have access to have more control and more access to raw materials that could give us a massive competitive advantage. Other parts of the business we've done, we've tested, we have our own furniture, upholstery manufacturing in North Carolina. It's not very big, but we've learned a lot and we've got thoughts about that. But also just thinking about if you keep climbing up that luxury mountain, there's less and less scale in manufacturing as you get up there. It's more what I call a workshop business. You know, very high end, you know, very, I should say, couture and bespoke, maybe. Put out of breadcrumb. But and, you know, how do you How do you scale that? You know, how do you build a platform and scale that? You know, and or, you know, just think about this. If you think about going global, right? I mean, our goods tend to be bulky and heavy and, you know, it's not super efficient shipping furniture all around the world. It works today. And, you know, there's certain things that are, you know, different countries are better. are all better producing than others. But, you know, the world's going to kind of keep, I think, you know, with technology, the world's going to keep getting smaller and smaller. You know, competitive advantages between countries, I think, are going to go away long term. And I think there'll be, there's going to be a more neutralness to the world. It's not going to be so easy to find cheap labor here or, you know, inefficiencies here. Someone can manufacture that. I think the world in 10 years from now is going to look very different than the world of today. We think about it as what's the right way to build our platform? Should we have furniture made in America for America? Should we have furniture made in Europe for Europe? Should we have furniture made in Asia for Asia? Is that the right model? So you build a supply chain that is country-centric, especially where you think your biggest parts of your business are going to be, and and you have, you know, you replicate manufacturing capabilities and then also, you know, you don't have single points of failure. I mean, one of the things you can learn in the pandemic or something like this, right, like you have all this demand and it's like you got one person making that, you know, or you have tariffs happen and like, oh crap, you know, we make all of this there and now all of a sudden there's 25% tariffs and you're kind of got you got no move right your only move is to kind of negotiate and try to figure out any way around it but I think about just because those situations hit us is what does a global supply chain look like for a 25 billion dollar brand what should that look like and and by the way no one's built one in our industry so you know So I think we've got a chance to completely whiteboard it and do something that's just never been done. And we've got the capital structure to invest, to invest, to have even more strategic separation and capability than others. And we're at the high end. So we have a lot of leverage in what we do. There's a lot of leverage selling Selling the things we sell versus selling the things other people sell at lower ends of the market. So yeah, we're thinking about kind of every aspect, whether it's the supply chain and home delivery, whether it's manufacturing, whether it's raw material procurement and how do you control the raw materials and have leverage there, but also just leverage, just have accessibility like if we you know we have a run on teak and we can't get the peak like that's just you're crippled right um and so um yeah so so throughout throughout you know there's going to be you know opportunities these are strategic acquisitions we make that give us capabilities uh and and things like that you know how do you think about capital allocation over the next 10 years uh as we you know as we try to fulfill you know fulfill our vision so um It's the right things to think about. We're spending a lot of time thinking about all those things right now.

Thank you for that. Go ahead, Gary. Go ahead.

No, no, I was going to say, we've already made it with those. Some of the things I can't tell you about yet, but you'll hear about soon.

We anxiously await them. Maybe just a quick follow-up. Given the unsolicited proposals for the residences out in Aspen, it sounds like it has you thinking, right, that the idea is bigger Maybe not bigger than you originally thought, but curious if those proposals indicate something bigger about the opportunity, maybe a quicker maturation behind it or where the mindset is on just the residences as a whole.

Yeah, I don't think we've got to kind of rush here. I think we've got to kind of rush to learn and kind of conceptualize the right model. I don't think it's going to be hard for us to build beautiful homes and sell them. I think that we can do. Like, what is the right model? You know, how do you do it? You know, what do you got? Like, you know, is this one where we're, let's say we decide to really, really do this. Let's say we, you know, we have some tests and we're like, wow, this really works. And we've also had strategic inbounds, people that want to partner with us and people that have, you know, read the Aspen, press release. I've had CEOs of companies that reaching out want to know, would we want to partner and build RH homes together and do a JV? And there may be opportunities like that, right? There may be people that have what we don't have today, the ability to procure and secure land, know how to build homes at scale, but don't have our Our creativity, our taste, our style don't have our brand, so to speak. And so there could be opportunities where you see us partner with a major home brand or acquire one. I don't know. Like if we get really good at it. So there's lots of optionality here. I think the great thing, I've said for years here, team, that we're only in the 10% of the business. And sometimes people, new people will say to me, what do you mean we're only in the 10% of the business? We're in the 10% of business. On average, at the high end, people spend about 10% on the furnishings of their house compared to the price of the house. So if you bought a $10 million home, you spend about a million dollars furnishing it. You spend a $5 million home, you spend on average $500,000 furnishing it, right? Right. And that's just the math, $2 million, probably $200,000. That's generally the allocation breakdown. It's not always perfect, but it's directionally right. So I've always said we're in the 10% of the business. We don't sell the home. And we're actually handicapped being in the 10% of the business because we're a lot of times furnishing a really crappy architecture home, like a bad-designed home, a bad-proportioned home. and so it doesn't even render our goods more valuable, right? Like all of our galleries are protected beautifully proportionally in a way that it renders the goods more valuable. Most of the homes we do, like most homes, like you go on, again, I would say go on Zillow, go on Redfin, go on whatever one you want, like just click through and tell me how many homes really have great architecture and how many have good interior design. It's like such a small number. It's like less than 1 in 100. It's like less than 1%. So I love thinking about this market in that way. Whenever it's like that, when the numbers look like that, you can create a new market. You can create an entirely new market. And that's what our big idea is, not just to sell some homes. It's to create a new market at the high end for homes. that people really want on RH Home because they're just so well-designed. Not furnished, just like the architecture, you know, the logic, the siding of the house, the landscape architecture, the pool, the everything, like the whole thing is just so well-designed and then it's furnished incredibly, you know? And so you just go, like, you just want to move in, right? Like, it's like we save you time and again people with more money have less time people with more time have less money right and what can you sell at the high end you can sell time value people will pay for time value there's a lot of people on this planet that have more money than time you know they've accumulated wealth and now they're you know my age you're 63 you know you you think about how much time you have left and you look to buy time value right and and I think that's if you said, what are you really going to sell? We're going to sell time value and people will pay for that.

Thank you, Gary. And best of luck to the whole team.

Thank you.

Your next question comes from a line of Anthony Chaconda from Loop Capital Markets. Your line is open.

Thank you so much for taking my question. And Gary, I'd just like to say as a, uh, sell-side analysts who've had a buy rating on the stock for the last 300 points. I don't want you spending your time thinking about what you're going to tweet later today either. So I just wanted to kind of get that out there. Thanks, Anthony. That's good. No worries. So these are more just kind of housekeeping questions, probably more so Jack than Gary. Specifically, I just wanted to see if we could get a little bit of color into in terms of specifically the gross margin drivers, the SG&A leverage drivers, and then just what your CapEx expectations are for 2021. Thank you.

Anthony, so I think historically we've talked about very strong results as far as product on the product margin side as it relates to gross margin. and so Q4 is no different than, you know, what we talked about in Q3, about three quarters of the pickup is in our product margin, you know, which had a number of things, you know, that, you know, we've talked about the climbing the luxury mountain, increasing the quality of product, you know, cycling the rug business, operating the rug business at a higher margin among other things, outlet business as we talked about in MD&A. and our filings obviously is a lower promotional level. So, you know, that's where you're seeing the predominant amount of it. And then as far as CapEx for the year is concerned, you'll see in the 10K when it's filed next week, the range that we're giving is 250 to 300. That is, you know, a little higher than, you know, this year we ended up with sort of adjusted CapEx you need to look at because a portion of it ends up putting, it's in the op section of the cash flow, but this year we ended up at 180. So what I'll say about the elevation of the CapEx is, you know, there's a number of sort of development deals that are happening this year that, you know, that we'll monetize in a future period. And then just finishing, one of the stores we're opening was on a land lease. So there's just a number of factors that are just driving a little higher capex this year, including starting to spend money internationally.

Got it. That's very helpful. Keep up the good work, guys. Thank you, Anthony.

Your next question comes from the line of Michael Lasser from UBS. Your line is open.

Good evening. Thanks a lot for taking my question. Gary, there's been a sharp increase in the profitability of many of the players in the home furnishings industry. So do you think that the sector is now just structurally earning higher margins? And how does that inform how to think about RH's profitability in the second half of the year, where when you talked about the Taylor 2 half, in the second half you will be facing some unique factors and much more difficult comparisons?

Sure. Yeah, good, good, good question. I think to answer that question, you really got to look at what's the revenue growth that the businesses experienced in 2020, right? And that's why I made the point and I kind of repeated the point in the letter that, you know, we hit 21.8% operating margin on 8% revenue growth, right? So we had 750 basis points of margin expansion on 8% revenue growth. So that's the first part of it, right? So So you can kind of book that, right? That's not going away because that's got nothing to do with the pandemic. That's got nothing to do with home furnishings tailwinds. 8% revenue growth, nothing to do with that. So that's all structural. And we would have, by the way, it's about what we thought we were going to earn before the pandemic. our model was about 22% what we thought we'd make and then the pandemic hit and what the pandemic did is it just turned it into two halves now did we optimize a little bit here and there we did but our plan was to have revenue growth slightly higher but we came out right about there so if you've got people that have grown faster in 2020 then they had historically there you got to kind of say how much of that sticks how much of the leverage sticks and uh you know and then there's a there's a really important one to kind of figure out where everybody's going to land here is is what the price structure and the promotional structure of a business right so we didn't get less promotional We don't have promotions, right? The only thing we have is we have things that we're discontinuing out of the assortment, but we're not a promotional business, right? So there's businesses, if you study our industry, there's businesses that have, they pull back on promotions as they should, right? And they pull back on promotions and we're able to have X amount of demand or revenues. When the world cycles at some point, can they maintain a non-promotional stance? Because I'm sure people have picked up 200 basis points, maybe 300 basis points of product margins because they used to be really promotional, and now they don't have to be promotional because there's this increased demand. To me, that's the open switch. how much of the revenues stick so how much of their margin in our industry is tied to an increased revenues which ours is not because our revenues didn't ship so again if you would have saw the 150 million revenues hit in this year and we would have been at 23% operating margin 120 basis points of our model we would have pointed this to you we would have said it's kind of In our view, one time and maybe not structural. But there's nothing about our revenues in 2020 that are pandemic-assisted. There's nothing about our product margin that is pandemic-assisted. We were not less promotional than we planned to be. We have a membership model. So the margin growth you saw in our product is real margin growth. it's not necessarily temporal at all so that's what I'd say or if you said and then the other piece the other one I'd point to is advertising right so if you're looking you know particularly if you're looking at somebody like Wayfair and I'm not picking on Wayfair I think honestly you know at first I thought Wayfair was not going to make it and you know I thought like when I studied their S1 when they're filing and I thought like yeah this doesn't look like a real thing but I've grown to appreciate and respect the platform Wayfair has built and their ability to generate a lot of revenue very quickly. You know, the question in my mind with Wayfair is what's the real structural margin in the company? And so with someone like Wayfair, I think you're snow blind right now, right? You think about every restaurant in America and most of the world closed. You know, so anybody selling kitchen stuff, the run on kitchen, You know, like to go buy, you know, toasters and pots and pans and other things like that because now you're not eating out. Even people like my household, you know, because my girls are away in college now. I mean, I eat out every night. Like, we eat out every night, you know, my partner and I. And, you know, she... you know she went out and did like a raid on the kids like we've got a whole brand new kitchen right because we are going to be home like so we got all all kinds of new stuff you know that you know she's cooking stuff she's never cooked before and and so I look at kind of categories like that and I go hmm you know those those may not be sustainable and also those are the things where she was going to buy it whether it was on sale or not right you know she was going to buy the cookware whether it was on sale or not and uh and so that the promotional aspects of some of these businesses some of these categories very very different right like like when it when the pandemic first happened I was analyzing everything and it's going on everybody's website yeah I think I joked around I said Wayfair has 60 pages of toasters and they do it might be more now it's 60 pages of toasters I think 40 or 60 pages are sold out you know and so you know you have a run on businesses like that um but uh So when I think about the industry and I think about where we sit in the industry, I try to understand the differences of what revenue was a gift. We have a lot of demand that was a gift, no revenue that was a gift. We didn't ship any of it. So we have 8% growth and the 750 basis points. Oh, and then the other one is advertising, excuse me. You got to think about advertising leverage, someone like Wayfair got or other business, every business, right? We all got some advertising leverage. Like we missed a catalog cycle, right? The source book cycle last year. So call that, I don't know, $40 million, something like that, right? Or 60.

Yeah, total on the year, which we'll see in the 10K is 49 million less in advertising. Yeah, 40, yeah.

So 49 million less. So you've got, what is that, about a little less than a point and a half, right? So you'd say, hey, Gary, can you guys sustain this? Do you got to put that advertising back into the model? And that's a good question. I'm not sure yet. I'm not sure. But that's something that we think about. Like, do we need to go back to mailing a book twice a year? Can we mail less books? are our big galleries and our investments in restaurants driving more traffic. What do we need? I'd say those are the ones, the revenue, the promotional structure and margin structure based on promotions, and then the advertising piece of it. And then, of course, if people got a big lift, they're going to get occupancy leverage and some things like that that might come back. So I don't know. you know how sustainable if I look across our industry the margin structure is as of today I everybody wants you to believe it is you know that's why I made the point on ours like I'm kind of really happy we only had eight percent revenue growth because then nobody can be snow blind here including us right so so I like like hey do we have you know roughly a 22 operating margin business today without a pandemic that's what we got and you know how much How much pandemic boost are we going to have in 21? If our revenues are up 15%, maybe a little, right? Because we're going to start growing internationally. Remember, when we start growing globally, we're going to open countries. We're going to open in Europe and be able to take online orders and ship to all of Europe. It's not like we're opening in a market like Sacramento or we're opening a new store in Vancouver, Montreal or something. We're opening a huge country. Europe should be the size for us, close to the size of the United States in volume. That's big. It'd be like us coming to America with a brand that people know I saw some analysts, I don't know if they're on the phone or not, like they tend to write, you know, kind of negative things about us all the time, you know, so, you know, they know who they are, but like anything they could say, you know, talk like, oh, their business is down in their New York restaurant, like, oh, that's, they're not going to make their fourth quarter. It's like, give me a break. But, you know, but anyway, you know, in one of their notes, they said like, yeah, we have no We have no market awareness. Like, you know, like people don't know us. Like, don't look at some average market awareness study. Our customer is the top 1%. In many cases, the core core of our business is the top half of 1%. Do that brand awareness. Go into London, go into Paris and go talk to the top 1%, you know, who all, you know, dress in the same labels. They all have Rolex watches and other things. They all go to the same restaurants. They all go on vacation to San Tropez, Ibiza, St. Barts, Aspen. They all know each other and they all know us. You want to know about brand awareness and why we're confident? Because the people that buy the other great luxury brands, they know about us. We're the only Thank you so much for having me. that's like coming to America and being relatively well-known at the market segment that you're targeting and opening a gallery in New York and opening a gallery in LA or something like I can maybe compare that to Paris and London, right? And then open the whole internet to the whole market and you go like, You don't think about it as stores. You don't think about it as markets. You think about what could the United States generate if I had a store in New York and L.A., amazing stores in New York, L.A., and they knew my brand. And all of a sudden, they have a website. And I've been wanting to shop from them for years. And I've had to fly to America, buy stuff, find a container shipping company and ship it myself. I think there could be a run on the house here when we go international. I think it's going to be better than anybody else's model who stepped across the pond.

That's helpful. My follow-up question is, I guess we're all trying to figure out what sustainable demand is. And when will we know what sustainable demand is? So can you replay the clock or the calendar for us last year? This year, February demand, and we assume that was core demand, was up 73%. February last year was up 8%.

Yeah, February last year was 8%, up 8%.

And how did March unfold to give us some sense? March, yeah, so February last year was 8%.

We told everybody it was up 8%. I think you know before the world fell apart and so February's up eight percent and it was kind of like right where we thought it should be and we're up you know 73 and the core business on top of eight last year in the first two weeks of March I think we were up four one week and down three the other week so we're kind of flat or up one in those two weeks so against the flat first two weeks of March we're up 96. okay so so the way to think about it if you if you said okay If you neutralized the eight on February, you'd add eight points to the 73. You'd be up 81 and 96. If you want to kind of stabilize the two months. Then we're up against all the closed galleries and closed restaurants and closed outlets. And remember, our outlet business, when it closed, it doesn't have a website. So we went to zero on the outlets. We went to zero on the restaurants. And in our core business, RH core business and in our contract business, we could still take orders and stuff. Obviously, the contract business, the longer we got into the pandemic and people realized that hotels and everything were going to be closed for a long time, that business really took a hit. And then our outlet business for a period of time went to zero and our restaurants went to zero. Think about big pickups in our restaurant business year over year, big pickup in our outlet business year over year, and a big pickup in our contract business year over year because the hospitality is now starting to spend again. They're now betting for the comeback cycle. Hotels are reinvesting, buying new outdoor furniture, things like that.

Hey, Michael, it's Jack.

Go ahead.

Do you think it'll be kind of May, June, economy will be reopened, you'll have some reasonable comparisons, and then you'll get a sense for what the run rate of the business is?

Yeah, I think it might take longer than that, Michael. We started comping up pretty good in May and June. In the fall season, we peaked, I think, August, September, Jack, 44%. 45 and 47 or something like that in the core business.

47 in August. 47 in August. 46 in September were the core numbers.

Okay, yeah. So we kind of peaked in there and then we had a bit of a slowdown, you know, in the Q4 period. And some of that in Q4, we had more kind of clearance merchandise that we were moving through last year. You know, so that probably... brought our growth rates down a bit year over year. We've had more stuff. We were transitioning some of our floors and other things. So we had some things that we were moving through that gave us a little extra revenue. But yeah, I think that the real question, Michael, is this kind of accelerated lift that started the last two weeks of January, right? The last two weeks of January, right? We started to see an acceleration up into the 50s and 60s, and then it went into the 70s in February, and then the first two weeks of March into the 90s. And that's kind of unexplainable, right? But this is how we think about it. We think about it more, forget the percentage lift, we look at the dollar trend of the business. So we've got a dollar trend of the business. and the dollar trend of the business, unless there's a real economic move here, like if nothing happens, my sense is the dollar trend of the business could soften in the second half, but I don't think it's gonna collapse, right? And I think that that's probably other people in the home business are looking at that and saying like, yeah, the dollar trend might swing 10, 15 points, you know, maybe even up to 20. So I sit here and if we roll this dollar trend out, we think the year could be unbelievable, right? But we think there's going to be some kind of slowdown. It's not so much the comp slowdown, it's the dollar trend. The dollar trend right now is much higher than last year's dollar trend when we were running up 40. Right? Like in February, March, right? So that means it could be a really good year for everybody in the home sector. And that might just mean, you know, some people like the headline, you know, I like stronger for longer. I don't know if that one's yours or someone's, but someone's got the stronger for longer thing. And I think that that could be true. This thing could carry us through 21 and it could go through 22. None of us know. Like we're not building a cost structure for that We're going to stay inside our company. Let cost chase sales. Don't ever have sales chase cost. You'll always be behind. And I think that's the other positive people are going to get out of this is, for the most part, I don't think too many companies are building the cost structure based on the trend. So everybody's going to get kind of more leverage during this period of time. But we're all trying to figure it out. I mean, we're all trying to figure it out and just For us, it's just understanding where is our fundamental business, with or without a pandemic, so we can think long-term and invest long-term and kind of be ambivalent about the pandemic, kind of like we're ambivalent between online or stores or whatnot. We don't care about the channels. We really shouldn't care about the pandemic. We need to look through the pandemic and past this pandemic to invest intelligently for the future.

It's very helpful. Thank you. And Michael, it's Jack. I did want to just add one point when you asked about H2 profitability, just not giving specific direction here. But if you think about advertising, just want to clarify, you know, in 2020, we mailed books in the spring, but not in the fall. So most of the spend happened in H1 versus H2. Obviously, the opposite is going to happen. This year, we'll clearly mail an outdoor book. But the books, the main books are going to be mailed to the false. You are going to have a flip-flop of advertising.

Yeah, it's a big shift of advertising that we should probably, yeah, we should probably kind of map that out for people so they can get their models right. Yep. Yeah.

Our next question comes from a line of Brad Thomas from KeyBank Capital Markets. Your line is open.

Hi, thanks for taking my question. Gary, I was hoping you could tell us a little bit more about the world of RH today. and is this going to be a redesign of the RH website? Is this separate? How do you think about making your web presence better as a transactional site and the importance of that and just any more color on the world of RH?

Yeah, it's really a rebuild of the entire website and kind of digital platform of the business. So it's just starting from scratch, thinking about it across all the dimensions of these kind of new aspects of our business and brand. And, you know, and think about it, you know, beyond just a website, but we think about it as a portal into the world of RH, right? That can take you through to our products, our places, our services, our spaces, right? And so it's, you know, you know all the products and categories, right? We have RH interiors, RH modern, we have RH contemporary coming, we have RH baby and child, we have RH teen, We've got RH Outdoor, RH Rugs, RH Beach House, RH Ski House, RH Color is coming, RH Couture is coming, RH Bespoke is coming. So when we look out and we think about just the product world of RH, how do you architect that? How do you have someone navigate through that? How do you get credit for all of that on a flat screen? And then when you think about our places, It's really our galleries, our guest houses, our restaurants, and our residences, right? And so those are all our places. So thinking about how someone can navigate through those areas, how do you get a reservation at one of our restaurants? How do you connect to the guest house? How do you learn about the residences that Thank you so much for joining us. multiple levels to be able to create the right kind of experience and interaction. So that's our products, that's our places. Our services, as we think about them today, we have interior design services. We also have our contract business, right? Which is a kind of a service driven business. And long-term, we think we can be in the architecture services business and the landscape architecture services business. So we think about services as a services platform. you know, installation services, business, you know, all kinds of things that we can do that can kind of amplify the brand. And then our spaces are, you know, kind of a unique view into kind of the spaces of RH, which deal with, you know, RH3, our, you know, luxury yacht, RH1 and RH2 are, you know, today it's our, you know, corporate planes, but they'll soon be on the website and you'll be able to charter, RH1 and 2 and no one's really even seen our planes but you know we designed them with the vision of they're going to be part of the ecosystem you know because we're again we're trying to build a luxury brand and you think about the very top of the pyramid and you know you you know I say you know you you kind of go from you know buying homes and then you know you go up and up the luxury mountain and you buy a lot of homes and then you get you know really really rich and you buy a jet and then you get kind of silly rich and you buy a yacht right and so those are you know it's the hierarchy of kind of spending in that world and so you know we're you're going to see you know RH1 and RH2 which you know if you ask Gulfstream that you know they would tell you that RH1 is the most beautiful plane they've ever built and they've done things that have never been done because we challenge them and help them think through how to do things you know in fact when they You know, when the head of Gulfstream is telling me, you know, after a long, would we have a 12-hour meeting there, you know, till 2 in the morning with, you know, their engineers and everybody and, you know, they said, okay, Gary, we're doing a recap. I'm going to, you know, send you the, you know, the upcharge for that custom galley, you know, galley that you designed. And I said, like, that's great, Marcus, and I'm going to send you my design fee for that custom galley that you're going to want to sell to other clients. So, you know, but we know a lot about, like, plane design right now. We know how to design a beautiful plane. We, you know, have just kind of redesigned RH3, and, you know, it'll be ready for prime time here in about a month. And, you know, you'll see a beautiful yacht. You'll see other things and other spaces will evolve, you know, in this kind of really rich world and content. I mean... you know but you know you basically documentaries on on on the world of RH that you know talk about the building of or the designing of something and things that are people are really interested about who are into design into spaces you know lots of layers to it and and then a massive upgrade in just the consumer experience for just buying product right massive leapfrog as it relates to that

That's great. Thank you, Gary. And a modeling question for Jack. Just as we think about rising raw material prices and freight prices that many in the industry are seeing, could you give us any sense of how we might think about that impacting the model? Obviously, you all have pricing power. You demonstrated that. But does that have any impact on how we should be thinking about the model this year?

Let me just jump in for a second. Again, I'd point you to the fundamental point that our goods are a lot more expensive. So as a percentage of our sales, those factors are going to be a lot less. So start with we sell a cloud sofa $10,000 to $12,000, $10,000 to $14,000. The freight on a $10,000 to $14,000 sofa is a lot lower than the freight on a $2,000 sofa.

As a percent.

As a percent to sales. So you've got to start with we – will we be impacted? Sure. Will it be to a much smaller degree than if you're CB2 or West Elm or something like that or Pottery Barn or Crate and Barrel or places like that? You have to look at the price structure of the goods. Again, if we're using about the same amount of wood but ours is product is just designed much better and it's a higher quality product and it's going to be a smaller percentage. So, you know, that's why you don't hear us talking about it as much because the impact at this point is less and it's in our model.

Thanks so much.

Your next question comes from a line of Tammy Takaria from JP Morgan. Your line is open.

Hi, thank you so much for taking my questions and congrats to the entire team on the very strong results. I do have two quick questions. The first one is, could you share some details on the distribution center that's coming up live in terms of what would be the incremental rent or incremental operating expense to run it or the incremental capex to build it? So any details around that would be helpful.

Yeah, it's all in our model. I don't know if we're disclosing individual rents of DCs and stuff like that, but it's all in our model. It's all in our projections. It's all in our plan. And the capex is modest as it relates to the $250,000 to $300,000. It's a non-event. Anytime you have a DC, there's a little step-up year. We're in a step-up year, but we're absorbing that cost, and so we'll probably in the first year, it's a bit of a drag on occupancy. But by year two, year three, we'll start getting leverage on the property versus the step up. But it's in our model, it's in our projections.

Got it. So that's a great segue to my second question. I did want to go back to that comment that you saw 750 basis points of operating margin expansion in 2020. on 8% of revenue growth. So for this year, you're guiding to 100 to 200 basis points on top line growth of 15 to 20%. So are you being conservative? Because there should be, I would think there should be natural leverage from all those dollars of sales going through. So is that just for being conservative or are there any, one-time expenses that are pressuring this year and should go away next year and the years to come to help us sort of understand why operating margin expansion would only be 100 to 200 on 15 to 200, 15 to 20% sales growth.

Yeah, I would just kind of look at the history here and ask yourself, are we generally conservative? Are we generally aggressive on our projections? right so you can draw that conclusion right and the comments I made earlier I mean we wouldn't say you know a minimum of 15 to 20 percent growth and 100 to 200 basis points unless you know like that's obviously history would tell you here if you just looked at the last I don't know x number of years that were relatively conservative in how we guide um and we generally outperform our expectations, especially the ones we give at the beginning of the year. The question here is, will there be a big economic change? Nobody knows that. Will there be a recession? Will something else happen? Nobody knows that. But if not, we feel more optimistic I've been pessimistic about things right now, but we tend to under-promise and over-deliver.

Got it, got it. That's super helpful. So there's really nothing one time or sort of unnatural something impacting this year. It's just being conservative, prudently conservative.

You can frame it that way. Yeah, essentially.

Got it. Great. Thank you so much.

I wouldn't say that was wrong.

Great.

Thank you.

Thank you.

Your next question comes from the line of Christina Branders from Telsey Advisory Group. Your line is open.

Hi, good afternoon. Two questions and, you know, hopefully quicker ones. You know, the RH in your home, which you commented a couple of times, you've been testing it for, you know, for some time now, only in California. I guess, what do you think you still need to improve to be able to roll that out, you know, across the U.S.?

Yeah, I think we've only been testing RH in your home for how long, Cornetto, a year? Three months. Three months. So, no, full test, three months, yeah. So, like, this is, this is a whole nother level of kind of, yeah, we've been talking about it for years, testing it for three months. Yeah, we've, we've never really, you know, talked, I don't think we really talked to you in a detailed way about RH in your home and furniture ambassadors and Are they in the Teslas or anything yet? No, not yet. But we'll soon have – you're going to have this gray RH truck and furniture ambassador in a separate Tesla car, gray car, and they don't have the Teslas yet. I thought they might have the Teslas, but Pete's probably got them on order. But it's a whole different experience, right? It's like sending a highly trained furniture ambassador into the home with our delivery team. that is managing the whole process with the customer that is upselling in the home, that is doing all kinds of things. If there's a problem, we solve it immediately. The stress for the customer goes down. It's a completely different experience. It's a different investment, so we're testing it. Obviously, you're putting another person on the road and another person and a relatively high-paid person we're sending in the home. Kind of a almost an interior designer quality person, you know, furniture ambassador in the home.

And then the other question was some of the new businesses, RH Couture and RH Bespoke. I feel like today's the first time you've talked about those. Can you give us some detail to what your vision for those businesses are?

That's all I'm giving you. I would just take the words themselves and use your imagination.

Thank you. Your next question comes from the line of Peter Benedict from Baird. Your line is open.

Well, hey, guys. Listen, most of my questions have been asked and answered. I just wanted to wish Gary a happy anniversary.

Thanks, Peter. Well, let me sneak one in, Gary, just very quickly. The new DC in Southern Cal, I know you guys had closed one a few years ago.

I just don't know if this is just, you know, the business is now getting bigger, so you need it now. But is there anything different you're doing with that DC versus what you were doing previously? That's my only question.

Thanks so much. Yeah, it's really kind of an investment. I think about it as an investment into the outdoor furniture and special order business. So it's architected for those two businesses, designed for those two businesses, and ability to leverage those two businesses and run them in a more focused way to kind of get a better customer experience, grow those businesses and service those businesses better. So before we just had a full DC, in Southern California with kind of redundant DCs in Northern and Southern California. But you just have things like, for example, most of our outdoor furniture is coming out of, teaks coming out of Indonesia and metal furniture coming out of different parts of Asia, Vietnam, China, things like that. So every major container ship that's coming in is first stopping in Southern California and then going up to kind of Oakland, the port of Oakland. So you pick up seven days immediately right there. And then just the way we're going to handle and process and cross-stock those businesses, you know, just the speed to the consumer. And then if you think about the outdoor furniture business, Southern California is our largest outdoor furniture market by far. And then the Southern states, are a lot of our strongest, very logical. So the ability to get the goods delivered faster in the biggest markets and hit the southern states faster. Think about the trucking lines and our businesses. The reason we can do this, not everybody can do this, is our businesses are really big, right? Like our outdoor furniture business is a real business. I mean, I think our outdoor furniture business is bigger than Some of our biggest competitors today at the high end, right? Like some of the, yeah, by far, you know, but just outdoor against their entire business. Like we're having an internal conversation here. I think about like who you might think of like a higher quality national brand, you know, or something like that. So it's a real business, right? That's the great thing about starting to have scale like this. It can allow you to kind of segment and focus on businesses globally. in a very unique way and optimize those businesses like you only ran that business. And then if you think about the special order business, it's a completely different business, got a different model. And how do we run that business in a much more efficient way, better customer service, faster delivery, things like that. So it's really an investment. We've been talking about this internally for a long time, investing into those two businesses.

It makes sense. Thanks for all the color. Good luck.

Your next question comes from the line of Jack Fathom from Wells Fargo. Your line is open.

Hey, Gary. Quick one. One thing you haven't mentioned today is the art curation initiative with general public. Just curious if you could talk about this a little bit and how you see fine art as a potential opportunity for your businesses.

Yeah, yeah. Well, this is an idea that, you know, Portia de Rossi came to us with. And, you know, she's really the entrepreneur behind it. She figured out the technology and the 3D printing or what does she call it? It's called stenograph. Yeah, stenograph. You know, it's like a 3D printing. Like, you know, you can look at a beautiful textured hand-painted piece of art and this replicates it perfectly. Like, you know, you'd need a real kind of art expert to be able to tell the difference. And and, you know, her and, you know, her partner, Ellen, you know, Ellen DeGeneres, you know, they're big art collectors. They've got great taste in style. You know, their homes are fantastic. And, you know, they just have incredible taste in art. And I think Portia's, right, art history major, you know, was one of the things she studied. And, you know, she's just very, very smart, you know, entrepreneur. And, you know, she had a big idea, you know, about this. And she kind of came, you know, through some friends, you know, made a connection with, to talk to me about, hey, here's my idea and it's what I'm doing. She had just kind of got started and we loved the idea and we loved her taste and style. And we said, look, we think we can be the platform that can amplify your idea and be your best partner. And that's what we've done. And she's working on ramping production and expanding the assortment and you know the great thing about about Porsche is like you you just always know like what she's going to show you you're going to want to buy because she's got such incredible taste except I'd say she's probably listening to this conference call those those dog paintings but she came to me a few years ago I know I was joking around but actually I now I now I really like them um and so I think we're going to probably ask them but but I'm just joking around because in case she ever hears this conference call but um but no I think it's it's uh you know it's incredible opportunity for us when you think about all the walls in a home and all the opportunity there's more square footage on the walls than there is on the floor and it's one of the reasons why initially years ago some of you may remember we tried RH Contemporary Art and then we pulled back and we may try it again the tough thing about RH Contemporary Art was you only get to sell the item one time so if you had a best seller you had a great piece that transfer of happiness happens one time and then you're like okay we sold it and then now what do we do you know like I got you know I got a thousand people that want that piece of art and I sold it so the great thing about you know Portia's strategy you know she said what's her line great art to general public I can't remember she has this whole you know great view about it is like her thing is this imagine imagine if the great books in the world, there was only one, that you couldn't publish another copy. Like, you know, that was her whole fantasy. I thought that was just brilliant, right? Like, imagine, like, every book was just a collector's item and only one person could have that book. It makes no sense, right? And so her idea, and the great thing about her, she's tremendously persuasive. So she's great with all the artists. you know because you know a lot of the artists are trapped in the old school of like I made this and that's my piece and now like this one person in the world owns that piece it's kind of goofy like when you think about it it'd be like you know a fashion designer designed like one dress or one coat and no one else could enjoy that except for one person you know so so she's got this different view in the way she's framing it and because she's a credible her and Ellen are really credible art collectors and they've got incredible taste and they've been advocates for the art community for a long time that people trust her and I think she's breaking through and she's getting better and better people on the platform and she's convincing them like why only print one copy of your work? Like great novels there's not just one copy, right? And so people are starting to get that and I think it could fundamentally change the art world permanently.

You know, so that's the idea. Appreciate the color. Thanks, Gary.

And there are no further questions at this time. I will turn the call back over to management for some closing remarks.

Great, great. Thank you very much, everybody, for your time and, you know, attention today and your interest in, you know, our business and brand. We know it's been a crazy and difficult year and we just want to thank all of you, thank all of our customers, thank all of our people around the world that not only just work for our company, that work on behalf of our company making the products and delivering the products and making the supply chain work. This has just been a year like none of us could have imagined and a lot of people made a lot of sacrifices and took a lot of risk to kind of keep everything going in this world. And we sure are thankful, and we couldn't be more excited about the future and about the opportunity. So thank you, everyone, and we look forward to talking to you at the end of the first quarter.

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