RH

Good day and thank you for standing by. Welcome to the RH Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star and then the number one on your telephone keypad. 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 first speaker today, Ms. Alison Malkin. Ma'am, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2021 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer. Thank you for joining us. Thank you for joining us. 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.

Great. Thank you, Allison, and thank you, everyone, for joining us today. I'm going to start with our shareholder letter, and then we'll open the call to questions. To our people, partners, and shareholders, we are pleased to report another quarter of record results with adjusted net revenues increasing 39% to $989 million versus $710 million a year ago. up 40% compared to the second quarter of 2019. RH continues to set a new standard for financial performance in the home furnishings industry, and our results now reflect those of the luxury sector as adjusted operating margin increased to 26.6% versus 21.8% last year. We generated 263 million of adjusted operating income in the quarter, up 70% compared to 155 million a year ago. Adjusted net income increased 105% to $252 million and adjusted diluted earnings per share reached $848 versus $490 in the second quarter of last year. This year's adjusted net income benefited from an unusually low tax rate of 1.3% versus 16.1% a year ago due to an increase of stock options exercised in the quarter and the nearly 3x increase in our average stock price. If our tax rate in the second quarter was comparable to last year, adjusted diluted earnings per share would have been 721, an increase of 47% versus 490 in the second quarter of 2020. We generated $290 million of adjusted EBITDA in the quarter and $95 million of free cash flow. The second quarter ended with total net debt of $296 million and trailing 12 months suggested EBITDA of $1 billion, a new milestone for RH. While inventory on the balance sheet increased 32% to $646 million, inventory on hand was $400 million, up 12% to last year, as in-transit inventory of $163 million increased 85% compared to a year ago. raising fiscal 2021 outlook. Based on the continued strength of our business and the power of our operating model, we are once again raising our outlook for fiscal 2021. We now expect revenue growth of 31 to 33% versus our prior outlook of 25 to 30% and adjusted operating margin in the range of 24.9% to 25.5% versus our prior outlook of 23.5% to 24.3%. We're also raising our ROIC outlook for the year to 70% versus our prior outlook of 60%. Our demand growth has accelerated during the third quarter on a two-year basis and has continued to build momentum despite cycling the most difficult comparisons from a year ago. and the continued supply chain challenges that have been amplified by the spread of the Delta variant. We believe the data and current trends support the argument of a more long-term sustainable step change in consumer spending on the home. An important point to consider when analyzing the strong demand in the housing market is the migration of consumers to larger suburban and second homes. This trend is resulting in substantial square footage growth that is driving increased furniture and furnishings demand. Add to that historically low interest rates, a record stock market, and the reopening of several large parts of the economy, and elevated spending on the home could very well have a long tail. Looking forward, several factors lead us to believe fiscal 2022 is shaping up to be the most exciting year on record for the RH brand as we are planning the largest new product cycle in our history, highlighted by the launch of RH Contemporary in the spring of 2022, plus our latest RH interiors and modern source books, which have not been mailed since the spring of 2020. The opening of RH England, the Gallery of the Historic Ainho Park, a magical 73-acre estate designed in 1615 by the legendary English architect Sir John Soane, that we will introduce to the UK in a dramatic and unforgettable fashion. The unveiling of our first RH guest house in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the 200 billion North American hotel market. The launch of the world of RH, a digital portal presenting our integrated ecosystem of products, places, services, and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader, taste, and placemaker. As it relates to the ongoing supply chain challenges, the Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the Delta variant. This began with partial shutdowns in early July and expanded to full factory closures by late July. We are currently expecting manufacturing to restart in Vietnam in October, with production ramping to full capacity by the end of the year. Additionally, suppliers globally continue to experience a number of challenges. including sourcing raw materials and we are seeing price increases in the majority of our product categories. Shipping also continues to be a headwind with longer transit times and higher transportation costs. As a result of our accelerating demand trends and compounding supply chain challenges, we are delaying the launch of RH Contemporary until spring of 2022. Additionally, we are pushing out the mailing of our fall source books to enable manufacturing partners to focus on reducing the backlog of poor products while ramping and refining production on new collections to meet our elevated quality standards. Based on similar supply chain challenges and uncertainty of how the Delta variant will impact the hospitality industry this winter, we've made the decision to delay the opening of our first New York guest house, our first guest house in New York City until spring of 2022. Our plans to open new design galleries with integrated hospitality in Chicago, Jacksonville, and San Francisco this fall remain intact. The Long View, the RH business vision and ecosystem. We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative. as we continue our quest to build one of the most admired brands in the world. Our brand attracts the leading designers, artisans and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introduction of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, Arch Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of 5 to 6 billion in North America and 20 to 25 billion globally. Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that established the RH brand as a global thought leader, taste and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we expand beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury and the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yonkville and integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3 are luxury yacht that is available for charter in the Caribbean and Mediterranean where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and Landscape Architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the 170 billion home furnishings market into the 1.7 trillion North American housing market with the launch of RH Residences. Fully furnished luxury homes, condominiums, and apartments with integrated services deliver taste and time value to discerning, time-starved consumers. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH. creating an emotional connection unlike any other brand in the world. The entirety of our strategy is designed to come to life digitally as we launch the world of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7-10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70-100 billion opportunity. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. The right people are our greatest asset. At our age, we believe deeply that the right people are our greatest asset. We value people with high energy who have the ability to energize others. People who are smart, creative, and have a point of view. People who see the answer in every problem versus those who see the problem in every answer. People who are driven, determined, and won't take no for an answer. We value team players. People who are more concerned with what's right rather than who's right. Damani Price, our Chief Operating Service and Values Officer, often says, the right people are our greatest asset, and the wrong people are our greatest liability. He also reminds us that the right people are a reflection of all 11 tenets of our people value above. I want to thank the right people who bring our vision and values to life each and every day, the 11 out of the 11s, as DP would call them. Thank you for your energy, your point of view, for not taking no for an answer, and for being more concerned with what's right rather than who's right. as we continue our quest to become one of the most admired brands in the world, Carpe Diem. At this point, I'll open the call to questions, operator.