RH

Ladies and gentlemen, thank you for standing by and welcome to the RH first quarter fiscal 2021 earnings 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 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Alison Malkin of ICR. Thank you. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2021 conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook for 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 opinions 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 gap results to eliminate the impact of certain items. You will find additional information regarding these non-gap financial measures and a reconciliation of these non-gap to gap measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Thank you, everyone.

We're going to start with an overview of our shareholder letter, which highlights our results and outlook, and then we'll open the call to questions.

To our people, partners, and shareholders, fiscal 2021 is off to a strong start, with revenues up 78% in the first quarter versus down 19% a year ago. Total company demand increased 101% in Q1, and our core demand increased 109%. The strongest demand trends in our industry. We continue to set a new standard for financial performance among home furnishings retailers with adjusted operating margin increasing 1,260 basis points in the first quarter to 22.6% versus 10% a year ago. Adjusted net income increased 375% and adjusted diluted earnings per share increased 285% to $4.89. versus $1.27 last year. We generated $228 million of adjusted EBITDA in the quarter and $136 million of free cash flow. Q1 ended with total net debt of $382 million and trailing 12 months adjusted EBITDA of $896 million. Our expectation is to be net debt free by the end of this fiscal year. Increase in fiscal 2021 outlook. Based on our current business trends, we are raising our outlook for revenue growth in fiscal 2021 to a range of 25% to 30% versus our prior outlook of 15% to 20%. We now expect adjusted operating margin in the range of 23.5% to 24.3%, an increase of 170 to 250 basis points versus our prior outlook of 100 to 200 basis points, with ROIC in excess of 60%. As it relates to the second quarter, we expect revenue growth in the range of 35% to 37% and adjusted operating margin in the range of 25.9 to 26.1%. While fiscal 2021 will surely be a tale of two halves, there are many data points that lead us to feel optimistic that our strong performance will continue through the second half of 2021 with growth accelerating in fiscal 2022 and beyond. These include a strong housing and renovation market, both with pent-up demand and a long tail, a record stock market, low interest rates, and the reopening of several large parts of our economy. Additionally, the unmasking of the general public could lead to a roaring 20s type of consumer exuberance. Town & Country captured the feeling perfectly on the recent cover of their magazine titled, Remember Fun? Get Ready for the Comeback. Combine that with the largest new product introduction cycle in our history beginning this fall and the launch of RH International next year and fun it could be. You should also rest assured that we have pressure tested our business assumptions and risks and are confident in our ability to maintain an adjusted operating margin in excess of 20% in just about any economic downside scenario we can envision. The emergence of RH as a luxury brand generating luxury margins. We've spent decades building a brand and business model that generates industry-leading profitability and return on invested capital and believe, like Bernard Arnault, luxury goods are the only area it is possible to make luxury margins. With 21.8% adjusted operating margin at fiscal 2020, RH has eclipsed the operating margin of LDMH, and we now have a clear line of sight to 25% plus adjusted operating margin over the next several years. As it relates to our business model, what is often overlooked is the simplicity and low-risk nature of what we have built. I thought it would be helpful to highlight some of the key attributes. No seasonal inventory. We don't offer seasonal categories like Valentine's Day, Easter, Halloween, Thanksgiving, or Christmas. Nor do we carry collections or color palettes tied to spring, summer, fall, or winter like many home furnishings or home improvement retailers. We spent years eliminating those categories to avoid seasonal markdowns, enabling us to have a significantly higher margin business. Limited fashion risk. Our business is not driven by the fashion cycles found in retail models that require frequent discounting. The major trends that drive our business are tied to architecture and the dead. Architectural trends tend to change over decades, not years. As an example, Many points to the 1997 opening of the Guggenheim Museum in Bilbao, Spain by legendary architect Frank Gehry at the beginning of the recent modern movement. We launched RH Modern almost two decades later in the fall of 2015 when a critical mass of modern homes and condominiums was reached, establishing a sizable new market. As it relates to the dead, generations pass away and their belongings move through estate sales, which feed the antique markets, which drive the high-end interior design market, which influences the high-end reconstruction market, and the trends continue to flow downstream. If you want to know where the mid-century modern trend came from, do the math or visit a cemetery. Membership. Moving from a promotional to a membership model, as we did in 2016, simplified and streamlined our business, eliminating the chaos and costs associated with a constantly changing customer proposition. Membership also deepened our relationship with our customers as the majority used our interior designers to furnish their homes. This evolved our business from selling products to selling spaces, driving higher average orders and lower customer acquisition costs as RH has become their top of mind choice for luxury home furnishings. Luxury positioning. Luxury brands have proven to be less susceptible to economic downturns as their customers may temporarily pause their spending but not do not lose the ability to spend. Additionally, investing in a home grows exponentially as customers accumulate wealth, acquiring more homes, which drives higher sales, resulting in lower advertising costs and a more profitable operating model. A compelling vision for the future. We enter this decade with a compelling vision for the future, a team passionate about bringing that vision to life, and the strongest brand and business model in our industry. We plan to launch an unimaginable amount of new innovative strategies designed to further elevate and expand the RH brand. As I did in my recent annual shareholders letter, I will outline the strategic separation we've created and the strategies we are pursuing as we continue our quest to become one of the most admired brands in the world. Product Elevation We have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories, and channels that we control, and their desirability and exclusivity has enabled us to achieve industry-leading revenues and margins. Our customers know them as RH Interiors, RH Modern, RH Beach House, RH Ski House, RH Outdoor, RH Rugs, RH Lighting, RH Linens, RH Baby and Child, RH Teen, and Waterworks. Our strategy to elevate design and quality of our product will continue as we introduce RH Contemporary in 2021 with a 400-page sourcebook, dedicated website, national ad campaign, and a freestanding RH Contemporary gallery in the San Francisco Design District. We also have plans to introduce RH couture upholstery, RH bespoke furniture, and RH color over the next several years. Gallery transformation. Our ability to transform our legacy stores into multidimensional design galleries that double our retail revenue and profitability in every market will enable the RH brand to reach $5 to $6 billion in revenues with mid-20s adjusted operating margin in North America. These inspiring and disruptive physical experiences render our products more valuable while creating strategic separation and unmatched brand awareness. enabling us to gain significant market share at lower advertising costs. This presents a conundrum for our competition who are closing or downsizing their stores while we build the largest specialty stores in the history of our industry. We believe our galleries are proving to be a huge competitive advantage, enabling RH to acquire customers at lower fixed costs versus variable digital advertising costs that can change daily for storeless or store-closing brands. All you need to do is walk a mall to notice most retail stores are archaic windowless boxes that lack any sense of humanity. There's generally no fresh air or natural light. Plants die in most retail stores, and they can't be a good environment for humans either. That's why we don't build retail stores. We create inspiring spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces that are filled with fresh air and natural light. with garden courtyards, rooftop parks, restaurants, and wine bars, spaces that activate all of the senses and spaces that cannot be replicated online. RH Dallas, which opened in May of this year, is off to a tremendous start with our rooftop restaurant booked until August. Our plan is to open three additional design galleries in 2021, including RH San Francisco, RH Oak Brook, RH Jacksonville, A freestanding RH contemporary gallery opening in San Francisco, plus our first RH guest house opening in New York this fall. Brand elevation. We are beginning to evolve the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products, services, places, and spaces designed to elevate and render our product more valuable while establishing the RH brand as a thought leader, pace, and placemaker. Our products are the core of our ecosystem and include RH interiors, RH contemporary, RH modern, RH beach house, RH ski house, RH outdoor, RH rugs, RH lighting, RH linen, RH baby and child, RH team, and waterworks. Our services, RH interior design, RH contract, RH trade, and RH in your home render our product more valuable while extending the brand into adjacent businesses that amplify the core. As an example, we believe that RH Interior Design has become the largest residential design firm in North America and has facilitated our transition from selling products to selling spaces. RH Trade serves external interior designers and design firms, partnering on projects and acting as a support organization managing the logistics of large, complex designs. RH Contracts serve the hospitality and commercial markets with design and logistics support for large-scale volume projects. RH in Your Home elevates the customer experience with furniture ambassadors managing every detail of your delivery, extending the selling experience into the home while creating a memorable and lasting impression. We're also exploring the opportunity to expand our services to include RH Architecture and RH Landscape Architecture. as we receive constant inquiries regarding the design of our galleries, garden courtyards, and rooftop parks. Our places include RH galleries designed to elevate and render our product and brand more valuable, RH restaurants, which further elevate the customer experience while driving high-quality incremental traffic to our galleries, RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion hotel industry, and RH residences, fully furnished luxury homes, condominiums, and apartments with integrated services that will deliver taste and time value to wealthy and affluent, time-starved customers. Our spaces, conceptualized to inspire and elevate the brand, will initially include plane and yacht design and charter, where customers can access our design experience, view our work online, and charter RH1 and RH2, our private planes, and RH3, our luxury yacht, which is available in the Mediterranean and Caribbean, where the wealthy and affluent visit and vacation. We will also be unveiling our first RH bathhouse and spa as part of our Aspen Guesthouse, scheduled to open in the second half of 2022, as well as other exciting spaces we will be revealing over the next several years. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, Design, Dine, Travel and Live in a World Thoughtfully Curated by RH, creating an impression and connection unlike any other brand in the world. Digital Reimagination. Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally, regarding how we innovate, curate, and integrate all the dynamic aspects of our brand, and externally, as we introduce our customers to the world of RH, a new digital portal presenting our products, services, places, and spaces. This multi-year effort began internally last year with the reimagination of our Center of Innovation and Product Leadership, which will incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentations. Our external efforts will begin this fall with the launch of Phase 1 of our new digital portal, The World of RH, which will include rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable. We believe an opportunity exists to create similar strategic separation online as we have with our galleries offline, reconceptualizing what a website can and should be. Global expansion. We believe that RH has the potential to become a $20 to $25 billion global brand in its current form and possibly larger if aspects of our ecosystem become meaningful revenue streams. Our view is the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, or brand of RH. Our global expansion begins in spring of 2022 with the opening of RH England, the gallery at Ainho Park, a 73-acre historic estate designed in 1615 by Sir John Stone, arguably one of the most respected and celebrated architects of his time. RH England will feature the Ainho Architectural Library, the Ainho Organic Gardens, the RH Restaurant and the Lingerie, and the RH Champagne and Caviar Cellar, among other unique experiences. Pending reopening plans for France, our goal is to open RH Paris, the gallery on the Champs-Elysees in the fall of 2022. Customers will arrive through magnificent 18-foot gates and walk down a decomposed granite path lined with majestic hedges that lead to a garden courtyard where you encounter 18-foot brass doors that open to a six-foot atrium connected by traversing brass staircases and a glass elevator. RH Paris will include a restaurant overlooking the gardens inspired by the Grand Palais, a sparkling champagne and caviar bar on the top floor, and a romantic rooftop garden where you can sip an RH Bellini while enjoying views of the Eiffel Tower. In total, we have secured five locations in Europe, including London, Munich, and Dusseldorf, and are in final lease negotiations for an additional five locations, which will open over the next two to three years. climbing the luxury mountain while building a brand with no peer. Hermes, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany, and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain. Never has a brand started at the base as we have and made the climb to the peak. We believe RH can be the first to make the climb, knowing very well those at the top don't necessarily want us to. The truth is, were not from their neighborhood nor invited to their parties. To make the climb, we understand our work has to be so extraordinary that creates a forced reconsideration of our brand, requiring those at the top of the mountain to tip their hat in respect. It is not a climb for the faint of heart, requiring imagination, innovation, and a great deal of persistence and perspiration. We have to be willing to endure short-term pain to drive long-term gain. as we did moving from a promotional to a membership model, elevating our products, transforming our stores, redesigning our operating platform, or managing the business with a bias for earnings versus revenues as we built a financial model to support long-term, high-quality growth. We also understand the strategies we are pursuing, opening the largest specialty retail experiences in our industry while most are shrinking the size of their retail footprint or closing stores, Moving from a promotional to a membership model while others are positioning their brands around price versus product. Continuing to mail inspiring source books while many are eliminating catalogs and refusing to follow the herd in self-promotion on social media. Instead, allowing our brand to be defined by the design and quality of the products and experiences we are creating are all in direct conflict with conventional wisdom and the plans being pursued by many in our industry. We believe when you step back and consider, one, we are building a brand with no peer, two, we are creating a customer experience that cannot be replicated online, and three, we have total control of our brand from concept to customer, you realize what we are building is extremely rare in today's retail landscape, and we would argue will also prove to be equally valuable. I want to thank the people of Team RH who live our values and fight for our cause. A team that is building a culture of leadership versus followership that strives to innovate versus duplicate. A team of people with the courage to continue the climb even as the air gets thin and the odds get slim. A team of people willing to get knocked down 10 times and get back up 11 as they strive to plant the orange flag at the very peak of the luxury mountain. Carpe diem. We'll now open the call for questions.

As a reminder, To ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chuck Guam with Gordon Haskett.

Hey, thank you. I mean, incredible results to the team. Gary, is there any way to size up the degree to which a category such as outdoor is supporting total sales growth? Maybe the penetration of the category in 2018 versus where you think 21 can end up. And are there any other categories that you believe you're seeing outsized growth today? It's just exceptional results.

Yeah, I think if you look at our demand trends, everything's way up, right? But outdoor is one of our best performing categories. I mean, we're the most dominant outdoor brand at the high end in the world today and have the biggest business in the world at the high end for outdoor by multiples. So you would expect that we'd dominate that category, even though there's really long lead times and we've been sold out for a good part of the past year.

Great. Is there any other categories that you would highlight besides outdoor?

Again, you know, if you take the core business at 109% demand growth in Q1, they're all way up. You know, so, you know, the business is strong across all categories.

Great. And then in your shareholder letter last week, you wrote, we have to be willing to endure short-term pain to drive long-term gain and you referred back to a lot of the growing pains in the business over the past few years but I was just curious if there's something down the road that you were referring to in terms of the future outlook.

It's the mindset of investing with a long-term view to build one of the most admired brands in the world and it's not a path that most people take. Most of the world is focused on duplication and moving a lot of small rocks and We tend to focus on big rocks that create big value, and those sometimes take multiple years to move and to bring to life. Look, I think if you look at our guidance, it would indicate we don't see anything in the near future that could be disruptive to our results. Today, as we think about the investment horizon over the next several years, whether it's international or digital reimagination or product elevation or any of the big moves we're making, they're all implied in our outlook and our guidance. But from time to time, there may be a significant investment we have to make that's going to leapfrog the business further into the future. I mean, that's the way we have an operating margin that's I don't know, almost twice the next best person in our category.

We ask that everyone limit themselves to one question and one follow-up question. Next up, we have Adrienne Yee with Barclays.

Good afternoon. Let me add my congratulations. Eloquent as always, Gary. Gary, I guess my question is about the TAM opportunity or actually the 5 to 6 billion sales target in North America and the 20 to 25 billion. You talked about it being in the company's current format. So can you talk about the number of galleries that supports in North America, but more importantly, the number of galleries that supports globally? And is it just focusing on the home furnishings industry with no hospitality, no B2B, etc.? ? So just wanted to get some more color there. And my follow-up will actually be, when you're opening the stores internationally, all the different cities and different countries, is there anything that you're doing from a product market research or customization for each marketplace? And should we assume that each of those stores delivers the same sales dollar, or is every one of them distinct? Thank you.

Adrian, that was a lot of questions, more than questions. Where do you want me to start? Let's see. The opportunity as it relates to the $6 billion in North America, $20, $25 billion in the current format, how many galleries in North America and how many galleries internationally? It's an interesting question because in North America, I think we've always said about 60 to 70 galleries in North America that kind of penetrate North America. And you've got to think about the fact that we built North America while we've transformed the brand and transformed the business, right? So we had a... Pretty logical footprint that was in all the major markets and all the major suburbs, so on and so forth. And we basically consolidated and transformed and are opening large design galleries and replacing the former footprints. And the question is, do you need as many galleries internationally as the world continues to evolve and change? Right? As... Thank you very much. You've really got to be careful in today's world not to look at the channels independently. I really would caution any retailer who's doing that. I think it's a foolish way to look at a business because we're physical beings living in a physical world, and being able to see brands and know brands in a physical manner, being able to understand how big they are, what their assortment is, what they stand for, what the quality is like, What the taste and style is like is, I think, critical. And so my sense is we're going globally. Might we be able to build a few less galleries? I don't know. I don't think so. I think that replacing physical stores with digital advertising is a bad move. I don't know why anybody would want to sign up for a variable cost variable cost structure that could change daily to market a brand. And so physical stores are basically big brand building statements that are three-dimensional that customers can interact with. They can touch the goods. They can interact with the brand. They can see the size and scale of things. They can understand the taste and quality and style, all kinds of levels. and I think that's impossible to replace that with some kind of digital advertising or other advertising format, especially when it's not a fixed cost format. So our view, while there's migration online and stuff like that, there's just natural migration online even if you have a physical gallery. That doesn't mean it. It just means once the customer knows your brand and is shopping from you, they might go home and make a transaction online after they've seen it in a physical store. The people that believe they can close a lot of stores and have the same market share, I think, are naive. So, you know, when we look at this, we think our footprint will be similar to North America. That's how we look at it today. You know, we're studying, you know, I think I mentioned on the last conference call, our business basically breaks down in 80% suburbs, right? 8%, 12% second homes and 8% kind of city urban locations. And I believe that'll be similar internationally. You know, I think we wouldn't be wise if we said, oh, all we need is a store in the major, you know, cities in Europe. I just don't think we capture the market share we would in North America. It's no different than when you're in a country or in a city, you kind of know the business better. For instance, if you came to Corte Madera, California, and you're at our Center of Innovation, four blocks down the street is R.H. Marin at the village of Corte Madera. There's no luxury stores in that mall today, not one. Nordstrom's, if you want to call it a luxury store, I don't call it a luxury store. is the highest brand store. And if you want to call Apple luxury, you can call, you know, there's an Apple store there. But there's not another luxury store in that entire mall. We opened a, you know, one of our big new galleries there. It's got a restaurant. And it's, you know, it's going to be massively successful. And if we probably weren't here and didn't have a, you know, what the legacy store in the mall, we wouldn't have understood the potential in Marin County. and we would have been a lot smaller. I'm sure other luxury brands, now that we've built our big gallery, are going to follow. In fact, I heard Tiffany is taking a location now and now that LVMH owns Tiffany, I think we're going to see that change. I think we're going to be pretty similar as it relates to the products. I think the world's going to be smaller and smaller. A lot of people say to me, oh, the houses are smaller in Europe. Not really. Are the city homes somewhat smaller? Yeah, the city homes are so much smaller in the urban demographics of North America also. And everything we carry comes in all sizes. We sell sofas from, what, six feet to whatever, however many feet you want, right? You want it five feet, we'll make you a five-foot sofa. So, you know, our products come in all kinds of sizes. I think we've got the assortment that will be appropriate for the world. And I think the world wants our age. There's nothing like us out there. And I think our brand is going to translate very well. I tried to answer all those questions. I don't know if I missed anything. You did.

You did. Amazingly. Yes, you did. Thank you so much.

All right. Thanks, Adrian.

Our next question comes from the line of Stephen Ford with Guggenheim Securities.

Good evening.

Hey, Gary. Given your comments in the letter about maintaining a 20% EBIT margin in any scenario you can envision here, because I think we're all living in the scenario land. I'm curious if you can provide some color on how you're thinking about the potential paths of demand growth as we head into the back half. And if you can contextualize sort of, you know, the downside scenario, right, that you tested in the model so, you know, we better understand the flexibility that you see or that's sort of inherent, right, to the model that you have. Sure, sure.

Look, I think anybody that's not, you know, things that go up generally that you have no control over don't necessarily stay up. The question is, how long do they stay up? What does it look like when things evolve and return to some kind of normal? But, you know, this isn't a new normal, you know, and I think it's naive to not really look at all the models. And look, if you were talking to me a month ago, you know, I was a lot more pessimistic than I am now. Today, I'm a lot more optimistic a month later because I have more data and the organization, we can see more trends and we can see what's happening and not just data internally and how our demand trends look and as we look ahead and what's happening and what we think will happen, but just what's happening in the housing market, what's happening in the stock market, what's happening in the remodel world, the pent-up demand that exists. And if you think about people that are building homes. The homes are taking longer to build. You can't get the trades. People can't get people to remodel their homes. All of that means that they haven't bought their furniture yet, right? We're kind of the last stop on the journey. So there's this kind of pent-up demand, backup, a lot of things that indicate to us when we think about our pipeline and look at our pipelines, that look very good as we look out into the rest of the year and possibly into next year. And when we get into next year, we've got some step-ups, right? We're going to introduce a record amount of kind of new products beginning in the later part of the second half this year. That will mostly accelerate revenues in 2022. We'll ship some of it this year, but not a lot of it.

So as we look at it, we kind of look at the current trends.

We'll get something in the second half for new stores that we just opened, new stores we are opening. We'll get some for new products, but really those will set up 22. So we have all of that momentum going into 2022, and then we start opening internationally. And internationally is very different. Thank you very much. you know in those countries already but we're not in the United Kingdom right we're not in France we're not in Germany we're not in the Netherlands we're not in Spain you know I mean on and on and on and so we're going to be opening countries which is a very different dynamic right and we're not only opening countries with a handful of galleries we're opening countries with you know a multi-dimensional digital portal that people are going to have and the entire country is going to have access to the brand. And then we'll probably figure out how do we think about selling cross-borders until we establish a presence there and delivery and stuff like that. We may be able to We may be able to reach more of the continent. I'm sure there's going to be customers that are going to want to ship to Russia and the Middle East and so on and so forth. And we'll figure out how to do those things. We won't officially open up the continent of Europe when we open the first handful of galleries. It's just a bit complex from an operational point of view and would create too much upfront cost. So we'll kind of learn as we go there. But that gives us a step up. So when you think about that, The downside model, which is important to look at, right? And like we've had it ever since we've been, you know, ever since we saw this uptick, you know, we said, look, it's, you know, how is this going to play out? And so today, my view is the rest of this year looks pretty good based on everything I can see and know right now, right? Did the stock market fall apart? I don't know. Could it? You know, could the housing market slow down? I don't know. Like, you know, your guess is as good as mine. And, you know, my data is probably as good as yours and vice versa. So we're all kind of, you know, speculating into the future. And every plan we have is some degree wrong. The question is, are we more right than wrong? And today, I believe we're more right than wrong about the outlook we gave you, right? And we tend to be relatively conservative in our outlooks and give ourselves some room to navigate. But... I think about it this way. As we built our models, we went back and said, what would normal have looked like? What would 2020, 2021, and 2022 in our long-term outlook for the company look like? It would have looked like 10% growth in 2020, not 8% because we couldn't shift things. We didn't really benefit from COVID last year. and that's the point I tried to make on only 8% revenue growth. We take operating margins of 21.8%. So not really a COVID leverage like most other retailers. We have no cash and carry product, right? We don't sell one-tenth of 1% of our sales walk out of a store. I don't think we have anything that walks out of a store in a bag unless somebody really needs a towel that day. So we have a really direct-to-customer platform. It's all delivered to customers' homes. A lot of it's special order. It has longer lead times, things like that. And it's not things that all of a sudden you can turn on a dime and say, hey, we're up 40, and the manufacturers can start delivering at that level. So we have this big backlog that's flopping over. Well, that backlog continues at about the same amount, about $150 million, as we look forward. Will it all catch up this year? We don't know. It depends on how the trends look. Probably not all of it will flop in this year because as we ship those goods, we'll create new backlog. So, you know, we're not exactly sure when it'll all kind of normalize. But if you looked at our longer-term plan, we would have said, hey, normal looked like up 10, up 10, up 13 to 14 in 2022 as we opened internationally, right? And we would have had a bigger uptick then. So we kind of look at it and say, okay, we're up eight instead of up 10. This year, you know the guide. And then we kind of look at it and say, in 2022, if we landed where our normal business would be, what would that look like, roughly, right? And then at that level, we're saying, okay, Now let's give back any of the COVID lifts. You know, so we've got math around what did we get that we shouldn't have got, and we take that out, which is, you know, some number. You know, you can do the math. And then we said, what if, like, we're in the longest, you know, economic expansion in the history of the U.S., right, without a recession. So at some point, something's going to happen. You know, be naive and foolish to think it'll never happen, so you've got to be ready for it. So we say, okay, let's say there's an economic downturn of 20% in 2022, you know, and you take that, and that's a big one, right? Because that looks like 2008, 2009, you know, where we were down about 15 or so. So, you know, so take 20% out, and so it's taken out a COVID list that's taken out 20%, and we're still, you know, at 20% operating margin, slightly above. So... What I feel, you know, what I feel good about is that's how good our model is, right? That's how good our model is. And what I feel comfortable and confident about when people ask me, you know, hey, should I buy your stock? And I tell people the same thing. I say, look, if you're, you know, if you're a trader, you know, and you're short-term, you know, you just focus on short-term and static moves, don't buy our stock. If you're an investor and you have a long-term view and you're going to hold the stock for five years or more, you know, You're going to make a lot of money here, just as people did since we IPO'd. You guys have seen the numbers on that. There's a lot of upside in this story. It's by far the best model in our industry. No one's got anything close. It's all little maps because some people have a lot of COVID left right now, and it looks like their business is better and their margins are better. are not promotional. No one's promotional right now. Jesus, for God's sake, how can you be promotional with the kind of demand trends and you can't even get the inventory? The good news is it doesn't affect us because we're never promotional. Our margins are our margins. You can count on our margins being our margins. Would I count on everybody else's margins being their margins? Not at all. There's no way Thank you for joining us. The only thing you're seeing in our margin structure that might be giving us a little lift, you know, in through this period is we have less advertising expense. You know, so we, you know, we cut back advertising and couldn't get the goods. But if we would have had the advertising expense, we would have probably done more, you know, more volume. But there's no sense spending the advertising and mailing books when you can't get the inventory, right? That would have been like just burning money, you know, lighten a match and burn the money. So we decided not to, you know, Not to launch any products, not to advertise. So my sense is when the advertising investment returns, we'll have the inventory and we'll get an incremental lift in the top line. And that's another thing that we're – I should have wrote about that in the letter now that I think about it. The fact is we've pulled back on advertising. So when we start mailing books again – that's also going to create momentum in the business. So that's why we feel today, Steve, very confident about how we think about the rest of this year and what it looks like next year. And we feel extremely confident that if the world changed and the home industry gave back to any COVID lift and you pop on top of that at a recession and you give back another 20% of the business, we're going to be in the 20% range and we're going to be able to play offense and take a lot of market share and do a lot of smart things that I don't believe other people are going to be able to do.

That was super helpful, Gary. I really appreciate that. And then just as a quick follow-up, it's sort of hard not to get excited here about RH International, so just curious as we're less than a year away, what else needs to be done to ensure a smooth and seamless launch as you sort of prepare for this grand opening here. Sure. You know, all the things that you would expect.

I mean, we've got to build the operational platform from a distribution and logistics and home delivery perspective, which we're working on and building. We've got to, you know, make the inventory investments and be able to get the inventory, which we're working on. And, you know, we couldn't have launched this year if we had no inventory, right? So, you know, so we had to delay everything by a year. Thank God we did because, you know, we wouldn't have any goods to sell. So we have to have the inventory. So, you know, build the inventory. And, you know, you'll start to see that being reflected in our balance sheet as we build the inventory for international. All right. and then we've got to continue building the team and the good news is, what's the latest poll? How many people from our organization want to work for us internationally? Yeah, we have several hundred people that have already volunteered from America to go work in Europe, you know, so we've got and some of them are from Europe, you know, so we've got a lot of enthusiasm about people who want to go help us open internationally but plus we've got a team that's, you know, we've got a leader on international and and, you know, we're building that team and, you know, if you came here and you're in our center of innovation, we have, you know, a giant RH International room with maps and dots and cities and numbers and country volumes and populations and, you know, things we have to do and where we have to go and where do we open home delivery, where do we open this and that. So, yeah, we're working on all the things you have to do. I mean, the good news is there are all the things that we do here. You know, so it's not like there's anything really new. You know, it's just For the most part, everybody's speaking English. It's not like 50 years ago. There's slightly different currency, things like that. Then the question is, how do you price the goods? I think that the good news is we study it and we look at how other brands have priced their goods. There's probably a bigger margin opportunity than we thought. We feel... Thank you, Gary. Our next question comes from the line of Tammy Beccaria with J.P. Morgan.

Hi, this is Tammy. Thanks for taking my question. So my first question is around international openings. I think in your shareholder letter you mentioned you're going to open ten locations in total over the next two to three years. So probably the cadence, I'm guessing, is two to three international opens per year. over the next two, three years. So does that mean you plan on opening an equal number of U.S. and international locations over the next couple of years? So basically what I'm trying to understand is what is your gallery opening cadence over the next few years, and how is this split between international and domestic?

Sure, sure. Thanks for the question, Tammy. And by the way, you're kind of a – you had a crystal ball. I saw your note right before we announced, and, you know, your projections are pretty close to our projections, so good job on your models. But the gallery opening cadence in North America, you know, will remain somewhere around, I'd say, three to five or so, you know, maybe four to six, depending on how these deals come together. And then international, I would look at and say we've got two in the first year as long as France opens and we can get work done there. So Paris will either open in the fall of next year and if for some reason we continue to have COVID delays and we can't get in and do the work we need to do. It could go into the spring of the following year, but beyond that, we have the other locations. Some of them are much easier to open than others. They're less complex. These first few are relatively complex, and then London's relatively complex. Some of them are less complex. Some are not quite as big of footprints, and where we have an ability to kind of test, if you will, and have some flexibility. We don't want to be locked in everywhere in a bunch of countries where if we made a mistake, we have a permanent mistake. Net-net on Einho in England, that'll be a relatively low net capital deal as we bought the property, investing some money, we'll do a sale lease back. We'll have more capital in In Paris, that's a long-term lease, and then we'll have more capital, and we're more pregnant, as you will, in London, in Mayfair, where we're kind of stringing together four buildings to make a spectacular gallery. But some of the other locations, we have shorter leases on, and we're making a much smaller capital investment, just so we can understand the markets and understand the country. Still spectacular locations. Real estate and buildings, I mean, the great thing about Europe is you have all these spectacular buildings. I mean, you know, the United States, North America, you search for, you know, a building of stature and, you know, taste and style and great architecture. Europe is filled with them. So we love the buildings. We love, you know, the real estate we're taking. You know, we believe they're the right location, but, you know, we don't know for sure. So we want to learn. So we've got, you know, some with shortage from leases that give us flexibility. We're going to invest less capital. We're not going to open restaurants everywhere because that's a bigger capital investment. And we'll kind of test and learn, and then we'll have kind of flexibility and mobility to kind of make a bigger investment once we know those markets better. But to the consumer's eye, they're all going to be spectacular. As we look at it, they're slightly smaller markets. are not all going to have the restaurant investment, but we have a lot of galleries in North America that are our old legacy galleries that do big volume or highly productive, and these are much bigger than those. I'd say some of them are more like our kind of 1.0 design galleries, like Houston or even Boston, where you've got 15,000 to 25,000 square feet as opposed to 50,000 to 60,000 square feet.

That was all I had.

The next question comes from the line of Michael Lasser with UBS.

Good evening. Thanks a lot for taking my question. Gary, it seems like what you're suggesting is RH has spent the last 20 years or so building this unique luxury brand that hasn't existed in home furnishings. It now has pricing power and should command Thanks for having me, Gary. because of or the size of your core customer segment because of these unique conditions and that could change on the other side of this. So that's the first part of my question is and then the second part is who is in the demographic that you've seen coming by and what have they been coming to buy in the last couple of months to drive this level of growth? Thank you.

I'll start with the second question. It's really, it's kind of a core RH customer, nothing different in the demographics that's buying from us. You know, just more activity, more movement, you know, more people moving, more people moving for cities and suburbs, second homes, things like that. And then more people just refurnishing their current homes just because they've been spending so much time in their home, you know, and they couldn't really travel. So, you know, people doing their, you know, outdoor spaces and stuff like that. and, you know, that's all continued to be strong. As it relates to COVID speeding anything up, it really hasn't speeded anything up. Not for us. I mean, this year it's going to give us a lift. But, again, if you just go back to last year and say on 8% revenue growth, 7.7% revenue growth, we had 21.8% adjusted operating margins, right? So that's, you know, that was lower than we thought we were going to be. We thought we were going to have 10% to 11% growth growth. and so you know our model is pretty clean if you look at it through 2020 and then this year you've got you know you have some lifts obviously going to be up 25 to 30 you know and so the way the way I'd look at it is you know model it out you know over three if you if you model this at kind of 10 10 and 13 you know you kind of be directionally right you know plus or minus a point or so here or there and then You know, the question is, what is 2022? You know, is 2022 a good back year, you know, or, you know, flat year? Because, you know, the COVID cycle and, you know, the focus on the home goes back. I mean, could be. We've got things that should make it a better year than that because of the fact that we haven't introduced new products. How long has it been now? 18 months almost?

It will be two years in progress.

Okay, it will be two years, okay, in fall where we haven't introduced new products. Think about that. Two years. No new product at our age. So, we've got quite a backup that will be introduced this fall, next spring, you know, just, you know, the product pipeline, you know, for the next 18 to 24 months is a really dynamic pipeline. And, you know, new products in everything, right? And RH Interiors, RH Modern, not just RH Contemporary, but Interiors, Modern, Baby Child Teen, Beach House, Ski House, there's a lot of new product coming in, as well as RH Couture, Upholstery, RH Bespoke Furniture, RH Color, lots of things we've been working on. So that's a big plus to us, and then we're opening up internationally, and that's a big plus. That's 100% incremental. It's not like just transforming a gallery where it's a market that is already doing $15 million and it's going to go to $30 million or $25 million market and it's going to go to $50. So this is not incremental markets, it's incremental countries and then thinking about it more as an incremental continent because at some point we'll open enough galleries in Europe and we'll have our infrastructure and home delivery figured out and then we'll just open up the whole continent. Whether we have galleries everywhere or not, you know, we'll be able to figure that out. The big thing is why you can't rush to just open up the continent is you have to figure out the reverse logistics, right? You have to figure out, well, what am I going to do with the returns? Because what you don't want to do is all of a sudden, like, open up the country too soon and you've got a bunch of returns in, you know, Russia or Copenhagen or places where you've got no infrastructure and No outlet infrastructure, and you've got no way to handle the goods, and you'll just lose a lot of money all day long. So we're just trying to be prudent about how we open up these countries, at what point do we have the infrastructure in place, and have figured it out, figured out how to handle returns, how to handle the back-end logistics, and how to wire that to change. A lot of people don't know. I mean, I'm public, and I'm going to say it. We made, in our reverse logistics outlet business, it's about a $200 million business. We've had a $100 million difference in profitability in that business over the last four years. $100 million. We know what it looks like when you don't run that business well. We know what it looks like when you run that business well and you figured it out. All the handling and transportation costs and everything that goes wrong there so we just want to kind of build a really great business and a really great model there so we'll go a little slower but when you think about our model and the COVID piece this year is going to have a little COVID lift but if you look at the growth that will come next year whether it slows down or not where we're at this year is kind of a good place because we have other things that will balance it out so but the good news is, and by the way, we didn't really take any price changes increases because of COVID, right? So we just took our normal kind of price increases because that's what we do. And because we have pricing power, we're a luxury brand, we can pass through price increases in other parts of our business and that's one of the advantages you have when you're in the Our next question comes from the lineup of Stephen Saccone with City Research.

Great. Thanks very much. Congrats on the strong results. Maybe shifting to the margin side, given such strong performance here in the first quarter, is there any real change in thinking about the drivers of gross margin versus SG&A on a full year basis versus the initial guidance you provided back in March? And then I guess specific to the second half of the year, given the momentum in gross margin, is there opportunity for gross margin to continue to expand?

Jack, do you want to take that?

Steven, I don't think anything's changed with respect to what we said, you know, in the last quarter. You know, if you look at historically what's driven our, you know, operating income margin increases, you know, I kind of view it as sort of three-quarters of it roughly coming up in gross margin, quarter of SG&A. and, you know, of the gross margin, you know, the bulk of that, you know, call it three quarters coming from product margin. In the movies, we talk about, you know, elevating design quality, taking the margin of the goods up. So that's been pretty consistent as we look at the model, you know, back four or five years, as Gary was talking about the evolution. This year we'll have a little bit odd comparisons because of the way 2020 played out. So obviously with Q1 down 19% last year, Q2 being flat, and the growth rates we have now, you're going to see a little bit swings in sort of I guess the margin deltas versus last year. One thing we were just looking at or that I like to look at is in the same way that people look at two-year growth rates, I would look at margin changes on a two-year basis as well. versus 19, and that sort of formula that I alluded to earlier holds ongoing, and I would expect that going forward. And then I think the opportunity for gross margins to expand just to address that. I mean, there's always that opportunity. I think you know our position on how we communicate our guidance and our outlook numbers to you and how – The next question comes from the line of Anthony Chukamba with Loop Capital Markets.

Thank you so much for taking my question. Congrats on a strong start to the year. So, Gary, I mean, you guys are doing a lot of different things right now, a lot of very exciting initiatives, particularly international expansion, but all the product newness and some of these new concepts. I guess my question is, how are you personally managing Thank you for your time.

We don't work on any things in this company that the cross-functional leadership team can't work collaboratively on. So whether you look at kind of the big product initiatives, and think about the product initiatives, this happened over years, right? So that by the time you're seeing contemporary coming, we've been working on contemporary for a long time. We've been working on color for years. It's just been other things more important than we've launched. so color keeps getting kicked to the back of the bus because we don't think it's as incremental as some of the other things that we're doing sooner or maybe not as important to elevate the product brand but all the big initiatives we take kind of the cross-functional collaboration of the entire leadership team to move the big rocks because they're all big rocks whether it's product elevation whether it's the gallery transformation brand elevation and the things that we're doing there to elevate the product and elevate the brand. The things we're doing to digitally reimagine the business, not just the website, but digitally reimagine, you know, the way we move information and data and how that amplifies, you know, can amplify the productivity of the teams and the decision-making of the teams. And then, you know, global expansion. You know, they're all things that we, as a leadership team... you know we allocate our time we rank everything in this company through a lens of what's the emotional value what's the strategic value and what's the financial value in that order right because you to do really great work you've really got to deeply believe in it you've got to be able you have to be so excited that you know you'd rather be doing that than something else because to do extraordinary remarkable and amazing work is not for the faint of heart it's not easy to do being the best in the world at what you do is not easy to do it takes an tremendous amount of effort. And you're not going to put in that kind of effort. You're not going to have that level of commitment unless there's real high emotional value around an initiative and a strategy. So we only focus on things that we're deeply passionate about, that we're really aligned about, that the entire leadership team is passionate about because we've got to work on that in a collaborative way and we've got to put in a tremendous effort. And then the second thing we look at is what is the strategic value of an idea? How does this idea... Thank you very much. and nobody's really that passionate about it so nobody works that hard on it. You know, nobody, you know, they get knocked down two times and they don't get up a third time. You know, when you're really passionate and you believe deeply in what you're doing, you get knocked down 10 times, you get up 11 times. You just keep going because you care so much about what you're doing. So those financial ideas that people articulate that there's not high emotional value generally don't pan out. You know, they become, oh, what happened to that billion dollar idea? Yeah, you know, we wind up We drove into the ditch and we couldn't get out and it never happened. But the things you really care about, they tend to be worth more over time. We might have something that has really high emotional value, really high strategic value, and it looks like moderate financial value. But what we've learned is over the course of time, people seem, they're working so, they're so passionate, they're working so hard, they tend to uncover more opportunities, see more. The work is better than you could imagine. and the financial value goes up over time. So what you thought might have been a $500 million idea turns into a $2 billion idea because it works that damn good. But we spend a vast majority of our time debating and deciding how to allocate our human capital, how to allocate our time because that's the most important thing we do. I can always go figure out how to raise more money. We can go get more money I haven't figured out yet how to get more time. So we spend our time figuring out how we're going to allocate our time because that is by far the most valuable resource in the company. And when you think of these, it seems like there's a lot here, Anthony, and there is. We've been working on this stuff for years, for years. These are not like new ideas. These are just now we're talking to you about them. And so somebody asked me, How long have you been, you know, working on the guest house? I said, I've been working on the guest house for 25 years. You know, for as long as I've been traveling and frustrated about the experiences and, you know, I just ask, well, why doesn't anybody do this? Why doesn't anybody do that? So, you know, I designed the room for the guest house like 25 years ago. So you'll see, it's way better, by the way. I'm pretty passionate about it as the organization. And by the way, if you ask me two or three years ago, like even three years ago, you know, how do you feel about the guest house? How big of an idea is it going to be? I would say, yeah, I think it's going to be great. It's going to be a very good idea. Now I tell you, I think it's a redefining idea. I think it's going to define an entirely new market for privacy and luxury. I think it's so damn good, it's going to shock people in the industry. But that's just because we're really passionate about it. So it tends to become really great work, no different than our age contemporary. You know, we're really passionate about it. There was a team in here last night, last couple nights until, I don't know, 2 in the morning. you know you couldn't get them out of here because they're so damn excited about what they're doing you know and they know it's going to break through and it's going to kind of change everything so you know so it seems like we're doing a lot but by the way that's our nature we do a lot but we're also highly focused we know how to edit we know how to say no to a thousand things you're seeing the handful of things we decided to focus on and that we have the capacity to focus on And you don't really know the whole team here. You don't know the depth and breadth of the organization we've built. You know, we've got a very deep team and a lot of talent in this organization. So, you know, you don't want to lose people because you're not working on enough extraordinary things. You know, they'll go somewhere and they can go work on something extraordinary. So if you want to have the best talent, you better be working on the most exciting things in the world. Otherwise, they'll go work for somebody else. I wouldn't worry that we're doing too much. People have been saying that about us forever.

Got it. Thank you so much and I look forward to having champagne and caviar at RH England next year.

Okay.

The next question comes from the line of Curtis Nagel with Bank of America.

Good evening. Thanks very much. Maybe just turning back to international and Maybe a little too early to ask or assess this, but just, I don't know, Gary, how do you think about kind of like what I guess the baselines or sort of the comps would be for some of these early markets you're doing, London and Paris, where you've got these, you know, magnificent spaces, you know, recognition of the brand by certainly, you know, a decent number of people in those cities, but they are new markets. I mean, are the benchmarks, I don't know, perhaps New York, maybe that's aggressive, is it LA, San Fran? How do you think about that? And then just as a quick kind of model question, could you comment on kind of what demand trends are doing now? Are they sort of proportionally similar to what you saw in 1Q in terms of how they are balanced relative to cell food?

Sure. Yeah, as far as international, you know, we think about London like New York. You know, if you look at the population demographic profile that's broader New York market, broader London market. They profile pretty close. If you think about the UK, we think about the UK a little bit like we think California. There's 68 million people in the UK and there's 39 million people in California, so it should be bigger. If you look at the profile of high net worth and ultra high net worth people, California skews a little higher per capita. We look at California and say California is probably long-term an $800 million to a billion dollar market, so London should be somewhere around a billion dollar market. We've got to have the penetration of galleries and the brand recognition to get there. But the upside is we're opening some pretty spectacular places. We're opening with a brand that that's got kind of worldwide recognition with our core customer. It's not like people don't know the brand at all unless they don't travel to America or they don't have any friends in America. If they travel to America and they have wealthy friends in America, we're on their radar. So the question is just like how quickly does it scale? We don't know. We'll know more when we open them. We're going to do a great job. I think we're passionate about it. The work we're doing is going to be extraordinary, and it's going to be remarkable. I like to say that when you do extraordinary, remarkable work, you can usually figure out how to monetize it. But it's very hard to monetize ordinary or unremarkable. So we feel better than worse. We feel excited about this. We're very passionate. As it relates to demand trends, we gave you demand trends through last year because it was kind of such an odd year. You know, we don't want to get in the habit that we're giving demand trends for the rest of our life here and we don't, you know, within a quarter. But you can back into all that stuff with the numbers. We gave you pretty fulsome guidance. So we gave you relatively normal guidance that we would have given before, right? So we're not here not giving you guidance. We gave you guidance for Q2. We gave you guidance for the full year. You can back into those and you can kind of figure out what the demand trends might have been no differently than you would have through our historical guidance. But we just don't want to sit here and all we're going to do is track a bunch of short-term hedge funds and day traders. If we're talking about like, hey, through last week, we're here. Yeah. We want people who are more long-term based, but you can figure that out. I think we've given the most fulsome guidance I've seen anybody give so far this year.

For sure. The members speak for themselves, so it's totally fair. Thanks, Jerry.

Great. Thank you. Thanks, Curtis.

Our next question comes from the line of Max Rocklinko with Callen & Company.

Great, thanks a lot and congrats on a really nice quarter. So just staying on Europe, just curious on the margin side, what do you think profitability could look like versus the U.S.? And I think earlier on the call you said that margins might actually be accretive. So, you know, just curious how you're thinking about GM versus SG&A and then just leverage on the overall business.

I think we're ready to talk about that level of detail. I think, you know, when I think about it directionally and strategically, we believe that, you know, we think it can be accretive to margins long term and, you know, pull our model up as opposed to be dilutive to our model. We're going to have to get some scale. We're obviously going to open distribution facilities and capabilities and make investments in inventory and other infrastructure that we've got to be able to open the business to. Depending on how quickly we ramp and how quickly the business ramps will determine how the model evolves. When we're talking about it, I'm talking about more long-term. I look at We study now a lot of people's businesses, a lot of models, what people are charging, what they're charging there for similar goods. And we look like a tremendous value. And our view is it can be a higher margin business than the U.S. And also the reason it can be somewhat higher margin is you just don't – you're not – Traditionally, a lot of people, American retailers that would open in Europe, they duplicate all kinds of jobs. They duplicate buying teams and duplicate corporate overhead and infrastructure and things like that. You had a lot of levels of duplication and we don't believe we need to do that. We're going to run it more as a look at the world as kind of one place and we'll will have very few duplicative infrastructures. We obviously have to have some human resources and people leaders and people running stores and oversights and stuff like that, but we're not going to duplicate many of the things that other businesses or brands have done. The good news is we don't need a big inventory management team. Think about most retailers. Most retailers are filling a store with product that they're selling out of all the time and they're replenishing all the time. We don't do that. We set up a gallery and nothing moves for a long time. It's like nothing moves. We make sure that we steam the beds and we straighten it up, but nothing's moving in our galleries. You think about the complexity of inventory management in a normal retail store or other home furnishings retailers. that are selling stuff off tabletops and this and that that are in the cash and carry business. We're not in the cash and carry business. Much simpler model. Much simpler model. So they would have to build big inventory management teams and duplicative teams in different countries, right? They'd have to think about all these different profiles and what's the sell-through rates and all that stuff. We don't have to do that. We keep a DC in stock, right? And everything pulls from there. So it's a much, much simpler model. and a lot of those reasons are why we think it's going to be accretive to operating margins. We just don't have a lot of duplication.

Got it. That's very helpful. And then just as a quick follow-up, on RH Contemporary with the continued supply chain disruptions, just how are you guys thinking about fulfilling what will probably be really strong demand Are you guys able to bring anything in ahead of time, or is that not really feasible, given that the business is really custom-driven? I'm just curious how the team is approaching these challenges. As you all said, you have a lot of newness over the coming quarters. Thank you.

Yeah, it's a good question. It's not that it's all special order. It'll probably have a slightly higher special order mix to start. but we will stock a good portion of the product and the real key is the supply chain catching up and what the demand trends are and what's the level of in-stock rates can we be at and that will determine, we'll probably go all the way to the wire to figure out how many books we mail, how big we get behind this, just so we don't drive a and another giant level of back orders and long wait times. So we've got a few months here to see how the supply chain is happening, how people are catching up, what the current demand trends are going to be and we'll figure that out as we go. But there is a bit of a supply chain constraint and that's why we haven't launched anything in a long time. So But right now, we feel pretty good that kind of middle to later, I'd say late September, early October, we look like we can launch contemporary. And we'll launch the business, but it's like our business, people get a book, they don't start ordering that much in the first few days. It's about a month to digest it, and the designs, is that work in my house, and so on and so forth. So By the time people really start ordering contemporary, we should have pretty good in stock rates, but it'll keep getting better and better and better as we move through the end of the year. But we think we'll be in good enough shape. If for some reason the demand trends are bigger than we think as we move into quarters, we may have to just launch contemporary in a smaller way. And so, but look, it's all a good problem to have, right? It's not like nothing's selling here. It's just that, you know, hey, you don't really want the demand trends to go down so you can launch contemporary on time, right? Like that would be bad to wish for. You know, I'd like the demand trends to stay up. And, you know, a good outcome would be, hey, guys, we've pushed contemporary to 2022 because our demand's so damn strong, right? Now, some people would say that's really bad. I think that's really good. That means our business continues stronger than we thought. So it's not really exactly when we launch contemporary. It's just, you know, it's going to happen depending on demand trends and the ability to ramp production.

So high class production. Yeah.

Your next question.

I think we've had it. Yes.

David Bellinger, Wolf Research

and a much larger opportunity on the international side.

Yeah, we don't really give that data. David, I might say, I mean, our membership count is disclosed.

You can look at it in our 10Ks. So last year, as Gary talks about, 8% revenue growth from membership went up by 4.6%. So we went from 415,000 members to 434,000. And that's one proxy. Clearly, you know, sales in general tend to outpace revenue. with increased average order values, other things we've talked about that tend to outpace the growth in members or customers.

Got it. Okay. And then just as you think about the trends here, it's incredibly strong throughout Q1. Are there any regions of the country that you're seeing within that strength that are either outperforming or being held back in some way? Did you see any moderation trend in some of the areas of the country move closer to normal or Is this more of just a broad-based strengthening throughout the entire business?

It's pretty broad-based. Yeah, I mean, you had through this pandemic, obviously, the core dense cities where you had more of an exodus of people. Those were softer. The second-hand markets were explosive. The suburbs were explosive. And now you've got the cities that people are coming back and we're getting close to the unmasking of America that, you know, the cities are – The energy is coming back. The business is coming back. And they'll probably have a stronger kind of later surge is how we think about it. Got it. Fair enough.

Thank you. Best of luck. Thank you.

Next up is Christina Fernandez with Telsey Advisory.

Thank you. Good afternoon. I want to ask a follow-up question on contemporary. Do you think that line will bring in a new customer to the business like Modern did a few years ago? And how are you thinking about presenting in stores the price points? Maybe can you compare that to the launch of Modern, like how this one's going to be similar or different? That would be helpful. Thank you.

We think it's going to be a lot like modern. We think it'll bring a new customer into the business.

It's higher price points like modern was versus the interiors business.

So, you know, it's a higher level of quality. All the new product kind of reflects the elevation of the product and the brand, right? So you'll see higher quality, higher price product kind of flowing in over the next several years as we take the brand up the luxury mountain. You'll see the quality get better everywhere. You'll see the design get better everywhere. You'll see the designers and people we work with, you know, more people will be more aware of them, designers that a lot of people said would probably never design for our age, you know, are now coming onto the platform. And so, you know, you'll see the product continue to elevate, and that should have, you know, positive impact on average order, average ticket, and a lot of good things that help the model of the business. I think that's the thing that you've got to think about long term with our business is you're kind of taking, going up the luxury mountain, you're taking quality up, you're taking design and quality up, you're also taking price points up, you have more pricing power there. You know, all the leverage flows through, right? I tell people all the time, imagine if you're selling a a $2,000 sofa or a $10,000 sofa. And I mentioned a $10,000 sofa because that's our best-selling sofa. So, you know, if it costs you roughly $200 to deliver a $10,000 sofa, you know, it's a fraction from a shipping cost point of view as it is to deliver a $2,000 sofa, right? You're 2% versus 10%. So... cost you one-fifth, and that's why you can get such better margins here. So when you think about margin growth long-term, you've got to understand we're still climbing the luxury mountain from a product point of view. I kind of look at it and say we're slightly above halfway. Maybe we're 60% up the mountain, 65% up the mountain, and the product quality, the product design, the taste and style of the brands, are all going to be very accretive to our model. And that's why you know I think I mentioned before I don't know if it was one or two quarters ago I think it was a couple of quarters ago I talked about kind of the correlation to Hermes and not that you know we put ourselves in Hermes' kind of the place Hermes is in the world from a brand point of view but we aspire to think like that and you know Hermes has a I think 34% operating margin and you know so There's a lot of good things happening during this climb. It's hard to make this climb. No one's ever made this climb. Everybody who's up there is born at the top. So, you know, we're kind of in uncharted waters here as we climb. But it's all good stuff. You know, the leverage, the customer acquisition costs, everything here is margin accretive, the path we're on. And I think a lot of people overlook that because they're so used to building models. You know, no one prior to this, not an analyst or investor, has ever built a model like this for a home business. People ask us all the time, well, are you more like, should I look at Home Depot? Should I look at this? Are you like this? Are you like that? No, we're like nobody. You know, like, go look at other categories. There's people like us in other places. There's no model like us. That's why there's no results like us. So everything we're doing is going to be accreted to margins.

That's very helpful. And then my second question, last year and this year, your source book strategy changed. You only nailed one. Do you think you go back to spring and fall? How are you thinking about just broader about advertising source books as its business normalizes? in 2022. Yeah, yeah.

Sure. We used to be at 11 or 12 a year, right? And then we went from 11 or 12 and we went to, I think, three. Then we went to two. Then we went to one. Then we went back to two. Now we're at zero. So we'll go back to at least one. And then we'll keep testing. You know, the world's changing, right, all the time. When we open these big guys, one of the things to study, to think about, When you take RH, again, I mean, it's great because we have this point of reference here, you know, right next to us. And I encourage anybody who hasn't, if you haven't been to our Center of Innovation and Product Leadership, you ought to come out here and kind of see not only what we're doing, but how we do it. And you'll understand how unique and different we are. And then, you know, we'll take you to lunch at RH Marin and we'll walk you through. But if you just, like, walk the mall and look at, oh, there was our inline store in the mall. And then you see us as a third anchor in the center that you can't miss when you come driving up to this place. You've got to think about the fact like, hey, how many source books do we have to mail in Marin when everybody in Marin who is a potential customer of ours is going to at least come have lunch or dinner with us, you know, once a month? Maybe a little less frequently, but most likely. And every time they go to the mall, if they go to Nordstrom's, they go to Apple, they got to drive by our magnificent gallery with how many hundred-year-old olive trees surrounded? Like, it doesn't even look like it belongs in the parking lot, but it's this magnificent thing. And if you just look at it, and then you look at – you just walk the mall and you look at all these other sad retail stores, you go, well – no wonder they might have to spend a lot in advertising you know they're all like 30 to 50 foot storefronts you know with like a little kind of crappy storefront and they have no windows except for you know little glass in the storefront and you walk into kind of a windowless box and everybody looks the same and you know someone's standing behind the register it's all kind of you know it's all kind of the same and so when you build the galleries that we build and you do the volumes we do and you've got the hospitality component driving lots of traffic. I got to believe we're going to spend a fraction of the ad costs of everybody else to optimize the market. So, you know, no one, everybody looks at the negative investment into a retail store and nobody does a positive. I tell people all the time, you know, you know, it would be an interesting world if we could all just go peek at it would be a world that only had online retail. Think about it, the last couple hundred years, you could only buy things in stores. I mean, buy things online. And there was no stores. And then all of a sudden, somebody invented a store, and they did a bunch of volume. And then all of a sudden, everybody started opening stores, and there was a shift to retail stores. And all of a sudden, you go, fuck, everybody, excuse my language, you go, heck, everybody starts closing their websites because stores is where it's at. Nobody ever kind of shifts the perspective and looks at it differently. We're in a follow the herd mentality. Humans are followers for the most part, and we don't like change. And so everybody is just like following the herd. They think like, oh, everything's going to go online. In my lifetime, we will not see more volume online than we are going to see in retail stores in our category. It's just not going to happen. unless everybody closes their stores and they force it to happen. And that's really good. I hope everybody who sells our goods closes their stores. It would be the best thing to happen for us. Our operating margins might be 40 if they do that. I hope they do. But right now, let them all follow each other and let us be the only inspiring, magnificent physical spaces in the world. I like the fact we'll be kind of a marketed one. So is Apple. So is Tesla. So is all the great companies. They're generally markets to one because they don't follow everybody else. You got me excited on that one. But imagine that world. There'd be like a gold rush to open retail stores. Yeah.

and your next question comes from the line of Brad Thomas with KeyBank Capital.

Hi, thanks so much. A lot of exciting things to talk about. Gary, you mentioned an interesting point in the letter about the RH Dallas restaurant being booked through August. I was hoping you could just give us an update on where the overall restaurant business stands and its reopening and recovery and how that flow through is translating over to the extent you can tell at the restaurants that have opened sooner than others. Thanks.

I think it broke up a little bit was the question. Around S&B, the overall S&B business.

The S&B business is coming roaring back. One of the things we did, we took the opportunity while everybody was sheltering in places, we reimagined our hospitality business. We redesigned our Our menus, our pricing structure, our turn times, our service standards. We've got a tremendous leadership team, and we believe we're going to make a huge impact once we can go back to full service, a huge impact in our F&B business, both from a revenue and a margin perspective. Many of the restaurants that Thank you very much. You have 82 points of margin on average when you have wine by the glass, so that's a really good business to be in. It's way better than coffee. And look, coffee's not a bad business, right? You wouldn't mind being Howard Schultz at Starbucks. But we like the wine business. It's a really good business. When you're paying somebody to kind of go carry something to a table, if they're carrying a $4.50 cup of coffee to a table versus a $24 glass of wine to the table, Think about what that looks like on their payroll as a percentage of sales. Again, just keep everything we're doing, keep thinking moving up the luxury mountain. Higher price points, more leverage, more volume, serving actually fewer customers, and you make a lot more money. F&B, we've done the same thing. We've elevated the menu, elevated a lot of things. In fact, most of the menu elevation we're doing right here, right now, in Marin, and we'll be rolling that out. I think that'll be a significant impact. I think we have one of the great hospitality businesses in the world right now. Our volumes are incredible. Our model looks incredible. Most of our restaurants are packed all the time, and we can't wait until we can go to 100% seating. Just out of the gate, Dallas looks like it's going to be a $10 million plus restaurant. And with the new wine margin structure, which is really good. And they're drinking a lot of wine in Dallas. So we feel good about it. It's going to be a good part of the model. And when you think about how much traffic it drives to our galleries and what that does and then what that traffic does to offset advertising costs and other things, it all looks incremental to us.

Great. Thanks so much, Gary.

And your next question comes from the line of Seth Assam with Webber.

Thanks a lot. My question, if you can hear me, is around the design services business. And you mentioned it being the largest in North America. Wondering by what metric you're measuring it. And then secondly, can you give us an idea of what you've learned from that business over the last two years to how you might translate it to Europe?

Yeah, just look at the volume our interior design business generates and the volume our trade business, which is really part of our design services, generates for the external interior designers. I mean, we're really, you know, if you look at design firms, residential design firms, I don't know of anybody that's larger than us or close to larger than us. So, you know, it's been a big, big enhancement to our business. You know, it's moved us from, just selling products to selling spaces and moves us from products to projects. And so it's a huge, huge strategic strength of ours, and we've created great strategic separation. And we continue to invest in that business. I mean, it's an important business for us. And, friends, it translates to Europe. We think it's going to be very successful in Europe. You know, people, like, if you just stand back and think, How many times in people's lifetimes do they get to kind of furnish an entire home? Very few times. Therefore, why would they be any good at it, right? You can't be good at something you only do a couple of times in your life. And that's why if you look at, I would say, look at Zillow or look at Redfin or look at anything and just go through the most expensive houses, the least expensive houses, you generally see bad architecture and bad interior design. And so, you know, we think we can make a big impact in the way people live and to live with not just more beautiful environments and spaces but massively more functional and logical. People just don't know how to do it. Why would you be any better? It'd be like walking onto a tennis court the first time. You've only been a bowler or something like that. Why would you be good at tennis? I think it's interesting. A lot of people feel like, oh, I want my home to be really reflect me. Well, that's great. But if you're not any good at interior design, your house will reflect you and it's not going to be any good. And so I think our service, now that it's out there, and the great thing about our design service and why we're so successful at it and why it's so much more impactful than other people is the galleries. The galleries and the source books and the way we present goods. We don't build retail stores. Thank you for joining us. It doesn't look like any home on Redfin and Zillow. It looks like better than any home on Redfin and Zillow. So it's a very inspiring physical manifestation of our brand, and people want their homes to look like that because they haven't seen anything that looks that great. And then, therefore, that gives our design teams credibility because the marketing, they're servicing the customer within the example of the work, right? That's why we have credibility. if you walk into kind of any of the other people that people might go buy from it's a bunch of crap all over you know it doesn't look like you want to live with like a dining table with a bunch of tchotchke you know Halloween or Christmas stuff piled on it or you know pillows all over shelves everywhere and candlesticks everywhere and you know like most retail stores you walk them all or you walk into home stores or furnishing stores they're like a mess you know we look like a Beautiful, inspirational space. So that's why it works, and that's why it'll translate. You can't just say, oh, we have design services. Right, if your stores look like shit, nobody cares.

The next question comes from the line of Zach Tatum with Wells Fargo.

Hey, Gary. Two questions on guest house. You said a lot of exciting things here. So first, I'm curious if there's anything you can share on the revenue model. And then second, maybe you could walk us through the food and bev or experience offerings versus a typical boutique hotel.

Well, we're not building a hotel. So I don't know how to compare us to one. The guest house revenue model, you'll learn more about it once we open it. We're going to have fairly expensive rooms. We're building an experience that the world's never seen. It's not going to be cheap. Think about it this way. The guest house, the flag gets planted immediately at the top of the luxury mountain. Every other luxury hotel in the world is, I think, is going to be forced to tip their hat. And they're going to say, like, wow, we've never done that. Wow, how did they figure that out? We're just going to do a lot of things that have never been seen, and we're doing it at the very top end of the market. So it's going to be an incredible, aspirational, inspiring experience, and it's all designed about privacy and luxury. And I think we're going to command very high rates, and we don't have to sell a lot of rooms. because we don't have a lot of rooms. And so, but most boutique hotels are all about trying to, you know, they're all trying to be hip and cool and, you know, they're trying to have lobbies with a bunch of people sitting in them and, you know, it's like if you go to, what's the one, I forget now, I'm blanking, but the one you go, yeah, the Ace Hotels or anything like that, which I think are cool for the market they're going after, but you walk in and the original W. Yeah, the original W, things like that, but, you know, there's all kinds of people sitting in the lobbies and they have their We see a bunch of little Apple lit up logos. Everybody's working. A bunch of unemployed people working on their laptops in the lobby. That's exactly the opposite of what we're going to have. This is about privacy and luxury. Private entrances with stuff to your room. You don't have to walk by a bunch of people in the lobby. There's no people in the lobby that can get up the elevator to your room. This is like a whole different gig. And then the F&B experience is super elevated. I mean, it's a beautiful, beautiful restaurant with an incredible live fire component to it. I mean, there's no restaurant like it in the world that I've ever seen. And we're really excited about the restaurant concept. We're really excited. New York's going to open with our first champagne and caviar cellar. That's going to be an incredible, I think it's going to be the best experience anybody's seen around caviar and champagne. and it's targeted for a very wealthy and affluent and discerning clientele and the idea is it's going to elevate our brand. It's going to position us as a thought leader, as a tastemaker and a placemaker in the world and Aspen will do the same and Aspen will have our first RH bathhouse and spa and that will have a membership component to it because we only have nine rooms in Aspen so you can't run a bathhouse and spa with nine rooms but Aspen is going to be a really good model for us with having a membership to a bathhouse and spa that will be the nicest spa you can go to in all of Aspen. You'll get it when you see it. It's really hard. This is the kind of stuff we do sometimes. Seeing is believing. you know it's no different than RH Modern when we were first launching that a lot of people were like what? what's going to be? and then we launched it and now it's a huge part of our business and same thing with contemporary same thing with guest houses same thing with everything we do they just haven't been done before so it's basically we try to anywhere we can create new markets right so we don't say oh let's do it like this person you know just a little better we try to kind of conceptualize something that is significantly better and more unique and desirable than anything that's in the market. And we think our guest house is going to be that.

This concludes today's portion of the Q&A call. I will now turn the call back over to Gary Friedman for closing remarks.

Great. Well, thank you, everyone, for your interest. and I want to thank our team for everything they do to bring our brand to life and we're all excited about the unmasking of America and moving past this pandemic. We think it's going to be an exciting time and we have a tremendous amount of innovation in our pipeline and we look forward to talking to you next quarter. Thank you.