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.

Thank you. And as a reminder, to ask a question, you will need to press star and then the number one on your telephone keypad. And to withdraw your question, just press the pound key. Given time constraints, please limit yourself to one question and one follow-up. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Stephen Ford from Guggenheim. Your line is open.

Good afternoon, Gary, Jack, Allison. Gary, given the combination of supply chain challenges, rising cost pressures, which I believe is driving rising retail, curious if you could just discuss at a high level whether you're seeing any changes in customer engagement or customer conversion trends, as well as cancellation rates. and the idea is just trying to gain a level of comfort here on what's driving your conviction to raise guidance yet again this year as we look towards the back half without having this new product launch potentially stimulating more demand.

Yeah, well, Steve, I'd start with the fact that we have insights into the quarter. We're relatively well into the third quarter today and we have accelerating demand in the quarter. kind of month over month already. And we can see, just stand back and think about newness is going to add to a very large business we have here. It's not going to replace the very large business that we have. So the underlying business is very healthy. We went through a period of our highest out of stocks and highest back orders that we ever experienced Our inventory levels are starting to get better. And even though we're delaying the launch of contemporary, we're delaying, once again, all the newness that would go into RH interiors, RH modern, RH rugs, RH, you know, everything else, beach house, ski house, everything else we would normally mail. You know, the guidance is our best view. of what we see. And I think if you just, I don't know, look at the last four or five years of history, since we kind of reconceptualized the supply chain and moved to membership in 2016, I don't think we've missed a quarter in five years. So I don't know how much more conviction or pattern recognition you'd need

That's helpful. And then just a quick follow-up. As I think back to the first quarter letter, there was commentary about the broader international pipeline. I think it was five leases were signed, five in final negotiations. Any update on how that pipeline has come together? Any update you can provide would be helpful. Thank you.

Yeah, nothing really new, or we would have talked about it in the letter. You know, it's a little difficult to kind of travel and, you know, Thank you very much. As you know, our galleries are very, very unique and not somewhere you can just walk to a street and find a building that we need. But we're confident that we're going to be able to scale the brand. We're one of the only people in Europe with any kind of a specialty business that can sell off multiple levels and multiple floors, that can use gardens and rooftops and so on and so forth. So but you know our focus to launch the brand is the number one priority in the company right now you know that and the expansion of our product and our you know our hands are a bit tied on the product and you know less tied on the international expansion but you know unless something else drastically changes in the world or with you know with new strains of the virus. We feel very confident that we're gonna deliver everything that we've just put out in this letter. So this is our best thinking today and we're really confident about this. If something new changes, I don't think when we talked last, there was much of a Delta variant or anything that was happening. I went on vacation in July, you know, and, you know, but like, you know, masks are off and wow, wasn't that interesting? Threw all my masks away and came back to work and needed to buy a new mask. So, you know, the world is changing quickly here and I think we've all got to learn to improvise, adapt, and overcome, you know, at a, you know, whole new level. But, you know, you build new muscles and, you know, I'm Extremely proud of the team for our execution thus far. If you would have asked me a year ago when we were running 47 comp in August, I think that was our peak month, guys, right, in the core business. Were we going to come around and comfortably comp 47? I wouldn't have said yes. that I would be confident about that based on the fact that August is in the rear view mirror and the first couple of weeks of September look really good and our in-stocks are starting to get better a bit and we have flow of goods coming but we focus the flow on our core business on our best sellers and the things that drive our business. As we should, by the way. The customer is not going to walk in and go, oh, where's that? I thought you were going to have that. They've never seen that. They've never seen anything in it. There's no expectation. Our business is one, if you think about it, it's not really an impulse business. You're furnishing a home. It's not a big impulse business. You're you're planning it, you're shopping, you're working with designers our time with a consumer is weeks and months to do an order so even if the newness comes in there's a multiple month kind of ramp period but I would just say I'd stand back and say if we were selling cheap goods a lot easier to bring in cheap goods in the market right now. We're selling the highest quality goods at scale in the world in the home business. We're trying to elevate the quality of the goods. The next round of goods is a whole other level of quality and design. You don't rush quality. You wait for it. Guess what? People pay for it. If If someone thinks they want to measure us in a pandemic where there's a lot of people that are sick and dying in Vietnam right now, and I feel terrible for what's going on there. People that their lives depended on it to feed their families, and they can't work. We're going to be okay here. Our business is ripping. Maybe somebody else has 40% two-year growth, not many. I don't think anybody's going to have the two-year growth that we're going to report in the third and fourth quarters because our business is accelerating. It's but I just focus on the big picture and what's really important and what's really important is our demand is building. We've had some of the best business in the industry. We're taking market share. We're expanding operating margins and there's people sick and dying out in the world today and you've got to make the right decisions. Help them prioritize their lives do what's right for the long term. I told the team from the very beginning of this pandemic, we're not going to chase every sale here. We're lucky. We've had a tailwind. Most of the world has had a headwind. People are sick and dying for almost two years now in this world. Our business is doing great. We feel blessed.

Thank you.

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

Good evening. Thanks a lot for taking my question, Gary. Are you planning for your path over the next few years from a sales and a margin perspective to be linear? You have all these initiatives in place. Some of them are being delayed from this year to next year. That's going to mean some costs. shift from this year to next year. So should we be modeling your business that sales and margin over the next few years continue to build year after year?

You know, Michael, we're not giving kind of detailed guidance over the next couple of years. I would say you know It's like someone who asked me, well, gosh, you're saving money so your earnings are up because you're not mailing your catalog. Well, we don't mail our catalog and get zero, and we don't mail our catalog to lose money. So we're not mailing our catalog so we're not getting revenues. So we invest in things that drive revenues and drive profits. where we've got new business investments, where we've got to make some infrastructure investments as we launch Europe and things like that. Of course, you're going to have some initial period to ramp. What does that look like when we open in a new country? let me see, let me look at past data. Oh, I'm sorry, I don't have any. I don't mean to make a joke about that, but I just like, there's some things you can waste a lot of time thinking about. I think what we've got to do is open great consumer experiences in Europe. We've got to launch with a great website. We've got to launch with real intelligent marketing. We've got to be prepared to execute whether the first year's 50 million or 250 million. You tell me. Like, let's stand back and think about this for a second. There's 39 million people in California. If I had new exciting design galleries in California, California would be, I don't know, an $800 million business for us. You know, maybe a little bit more. There's 68 million people in the UK. there's relatively similar demographics slightly wealthier in California but more people you know so you know I would say California when we continue to expand the brand looks like a billion dollar business let's call the UK a billion dollar business let's call the UK today 800 million what happens when you have a brand that's really well known in a very small market like ours right like we're at the top kind of they're very top of the pyramid there's not a lot of people there they have a lot of money they have a lot of homes and they spend exponentially on the home they directionally I mean you know that some of the data we've seen and you know some of the research we've seen from some of our large investors who have you know done pretty deep research done their own research and you know have researched interior designers in the UK and in France and you know what percent of interior designers know us like 80, 90%. So almost 100% in some cases. So they know us. They're a key customer for our business. High-end consumers I think pretty much know us and admire us. So what happens when you open an incredible 73-acre estate probably will be and one of the most exciting innovative retail experiences in the world. Granted, it's a bit outside London but our business is a destination and what happens when you launch with a website with 40,000 SKUs and the most dominant assortment in the country and and you have relatively high awareness. I don't know. I got to believe it's going to be better than other people that, you know, target a big wide audience and don't have high recognition because they've got to spend a lot of time getting known. So, you know, I really don't know if first year sales in the UK will be 50 or 250 million. That's our range. I know directionally what we have to spend, you know, but I'm just trying to be honest with everybody here. No matter if it's 50 or 250, it's going to be really big over the next couple of years. So, you know, we're going to learn a lot when we get going. And I think I say that, you know, I don't mean to kind of go into a long ramble on questions. I say that so I don't get the same question four times in a different way. That's helpful.

My follow-up question is you're articulating a lot of enthusiasm and confidence for the back half of the year in part because of the quarter-to-date trends, the demand comp, the two-year accelerating based on what you experienced in the second quarter. Can you give us what The second quarter demand comp was so we can have a calibration for our models on how that metric unfolded?

Yeah, it's just too crazy right now. Look, I don't want to make it a habit. We gave demand comps during the most kind of crazy time of the pandemic in the first year. And I don't want to give demand comps for the rest of our lives. I think Again, just like I answered Steve's question, I think we have a pretty good track record of doing what we say we're going to do. I don't think we have a track record of guiding aggressively. So the numbers may look aggressive to you. I'm sure Q1 looked really aggressive to everyone. We took the numbers up pretty big. Gary Friedman, Eri Chaya, Jack Preston, Stefan Duban, I sit here with 20 people for hours and hours and hours going through categories and trends and every detail in our business. We turn over every rock. We gain alignment and clarity. We gain clarity and then we gain alignment on where we believe the numbers are going to be and we've been doing it Long enough that we've gotten pretty good with it, even in a time like this. So I think we were one of the first ones to start giving an outlook. Now, a lot of people didn't even give any kind of directional guidance. We did. And we did because we're confident that we know our business. If something massively changes in the world, Got it. All bets are off. But based on what we know today, based on the data you're looking at and we're looking at, this is our guidance. It's generally not too aggressive. Thank you. Thank you very much. Good luck.

Thank you. Your next question comes from the line of Max. Racklin Cole from Colvin and Company. Your line is open.

Great. Thanks a lot. So a couple of bigger picture questions here. So the first one is, Gary, what do you think is your share of the luxury segment of the market today? You had a comment in one of your recent letters that your competitors are closing or downsizing their stores. And with RH continuing to transition to galleries longer term, where do you think your market share could go over time?

Yeah, I think we have a clear line of sight to five to six billion in North America. And that may be bigger depending on the product innovation and elevation and all the concepts that I've articulated, which are really not all of them are even in that number, right? So I'd say to not hit the 5 to 6 billion, something would have to go really wrong here. If we just continue to transform existing galleries to design galleries and launch contemporary and it does directionally what we think it's going to do, continue to expand and upgrade our product assortments and interiors and modern expand our rug business, build and dimensionalize our textiles business, continue to build and expand our lighting business, and add the new categories. And if we're directionally right, does that number get bigger than 6 million? More likely than not. But today, we're very confident about 5 to 6 billion in North America. So I think to do that, we have to take market share. right like take Marin County here you know we had a gallery that's doing about 18 million um you know and we have a new gallery that we opened I mean I might even be able to throw a football and hit our old gallery from our new gallery standing on the roof maybe you know but you know it's not very far like a 20 20 yard pass um and you know I don't know how many people have done this before, but we're, you know, we opened a new gallery and it's trending, what guys, at about 50 million, somewhere in that range. And I think it's a combination of us creating a new market because people are seeing products that they've never seen before presented in a way they've never seen before in an environment that's inspiring and interactive and you know full of light and fresh air and you know theatrical presentation we you know we we call them galleries because we say it's an artful abstraction of home furnishings in a gallery setting right so you know we don't really just merchandise our stores we you know we create kind of artistic installations of home furnishings so that you know people haven't seen anything like this before So, you know, I think it, from some degree, it creates a new market. But, you know, some of the math I give people examples, say, like, if you take our Marines, our H Marines, you know, because we're talking about that one right now. You know, five years ago, four or five years ago, there were 32 what I call higher-end home stores from Sausalito to Santa Rosa, including, you know, the Napa Valley. I'm not going to name them because who knows people are sitting on the phone listening to our call but there's small boutiques, mom and pops, some regional players and their stores are about 3,500 to 15,000 square feet. Our gallery was about 6,500 square feet so it's kind of in the middle. In our gallery here in Marin I think we had five Sofa collections, six sofa collections, five dining collections, and five or six bedroom collections in the gallery. So the other galleries, if we were right in about the middle, we looked like everybody else. We weren't really differentiated. And by the way, in that gallery, when we closed it, it had less than 2% of our assortment. right like two percent call it maybe one and a half percent of our of our assortment so you couldn't really see our assortment in that gallery that's why we mailed really big books right because if you saw our big book you know hit your doorstep and other people's thin books you'd you'd go hey those guys have a lot more than everybody else because if you just went in the physical world we don't look like we have any more than anybody else where we have you know our our you know

traditional galleries.

Now, you know, our galleries in and of themselves are, are, are, uh, legacy galleries, you know, probably outperform competitors three to four to one in the same square footage. Uh, but, but when we open a big gallery, I always tell people that the 32 is going to 32 kind of be what you call, maybe could be competitors, higher end, you know, home boutiques, you know, and, uh, generally more expensive than us, long wait times, don't have the infrastructure. But I'd say half of them go away pretty quickly. And we'll do another survey and do the counts of did it go, after year one, did it go from 32 to 25? Did it go to 32 to 18? Did it go to 32 to 10? But yeah, we're not, it's just not Completely a new market we're creating. But it's like, you know, I compare it. Don't take this wrong. You know, they'll probably write this in some letter. Gary Friedman now compares it to Apple. You know, I can't remember who last time he said something that we, you know, was claiming that we're comparative to some, you know, to Hermes. That's right. You know, he's talking about the financial model. But, you know, Apple was kind of the last people into the cell phone game. but they created a new game. They created a new market. It was more than a phone. So it created a new market and it also took massive market share. I think directionally, we're kind of similar to that. We're creating a new market and we're taking market share pretty aggressively. on both sides of the scale. And I think when we look at Europe, just to kind of talk about that for a second, the competitive landscape in Europe is significantly weaker than it is in the U.S. So I think we'll be even more disruptive and differentiated in Europe, and that's why we're very confident about it.

Great, that's very helpful. And can you discuss your cash deployment priorities? You're now sitting with almost $300 million of cash on the balance sheet, and with free cash flow set to accelerate over the coming years, you'll have a lot of opportunities. So how are you thinking about reinvesting back into business versus M&A or ramping up share repurchases? Thank you. Thinking about all of the above, Jack.

I don't know.

I was going to say the same thing.

And even more things, yeah.

Every quarter, and I think we answered. Yeah.

We have a cash chessboard sitting here. You know, so there's all kinds of moves and, you know, just waiting for the right time to make the right moves. But we're looking at a lot of things, whether it's, you know, you know investments into the business and innovation in the business whether it's investments into M&A and acquisitions that will strengthen our you know positioning or or you know elevate our our business and brand you know we're thinking about share repurchases and everything you'd think that we're probably thinking about we're we're thinking about so but we we tend to you know be opportunistic and and Patience. So at the right time, I think we'll make a good move on our chessboard. Right now, all the pieces are still there. We haven't moved anything yet, but we've contemplated a lot.

Understood. Best regards. Thank you. Thanks, Max.

Thank you. Your next question comes from the line of Adrian Yee from Barclays. Your line is open. Excuse me, Adrian, can you please unmute your line? Your line is open now.

Hello? Hi, Adrian, you might be on mute. Can you hear me? Can you hear me?

Yeah, we can hear you. Hi, Adrian.

Hey, sorry about that. I don't know what happened, but congrats on the consistency, the success, and the progress. Just awesome to see this. Gary, I wanted to continue to focus on the European Opportunity The 15 to 20 billion outside of North America. Can you talk about specifically the TAM in Europe? And I guess really what I want to know is it really feels like, you know, are its contemporaries going to come online? It sounds like there's more investment, more design, elevating the product overall. And as you shift into the international market, do you feel that the target household income or the demographic is materially different Thank you so much.

you know it's directional math you know based on looking at the pie in many ways you know wealth, consumers, housing markets you know the high net worth ultra high net worth ratios it's based on looking at luxury brands and penetration and volume and you know so so we've looked at the math multiple ways and I think we're directionally right if you were here you'd see a big giant room where about 40 people get together generally on Thursdays you know big cross-functional team and we've got all of Europe first we had the whole world and it's just too much to look at so we said like yeah right now just get the rest of the world in the next room got it at the top line but you know let's really break down Europe and understand it understand each country, go deeper, look at other people's approaches and real estate strategies, whether it's not everybody that has an Apple phone shops at our age, but most people at the high end of the market spend a lot of money at Apple, I'd say. So we look at where are the Apple stores, where are the iconic Apple stores, where are We're the big suburb Apple stores. We're, you know, other businesses that we're familiar with. We're the, you know, the luxury good players in the suburbs. You know, the hardest thing, I think, in Europe is going to be, you know, we don't know their suburbs like we know our suburbs. You know, we don't know their market like we know their market. Now, we've expanded our team. I think we've got a great leader. He knows Europe very well. But there's no one like us, right? There's not a real comp. but there's enough similarities that gives us, you know, confidence as we dimensionalize what we believe the market opportunity is, at least today. So I, you know, and again, as I look at it, I think, and I believe, you know, most of our senior team and not, I don't think really influenced by me because we, you know, we tend to just debate everything here. And, you know, when I usually, If I say something and she goes, Gary, it's usually, sorry, Eri, she's sitting right here. She says that all the time, by the way.

I would say she keeps me out of the ditch.

We've spent a lot of time together cross-functionally debating this. We've had people who have a lot of insights on European expansion and so on and so forth that we We feel good about that. I think we're going to be directionally right. And that's all you need to be at this stage. You don't really want to boil the ocean. I always say it's like the settlers that came to America. Some people said, hey, go west, young man. There's gold in them, their hills. And some people just went west, and they kind of hit Sierra Nevada, and there was gold. Other people, like, were sitting in Boston trying to figure exactly where on the West Coast they wanted to be. And by the time they, you know, got in their courts and, you know, parks, the other people were, you know, they were, like, getting to the Sierra Nevadas. So we, you know, we don't exactly, does it really matter if we're $10 billion off? would we not do what we're doing today doesn't really matter right like if the opportunity is only 15 billion you know or 10 billion in Europe does it matter would you not go that's what I mean that's the kind of stuff I say to the team so just being transparent you just you go you know like and you go to Europe first you know it's the most it's the most familiar it's the most connected so so anyway um and then I say the idea that the target demographic material is different than where Arch has been over the past five to ten years, yes. Here it is and it's going to be there and it's going to continue to evolve. We're going to continue to go up. I think we'll continue to shed consumers at the bottom and we'll grow consumers at the top of the funnel where there's exponential spending and By doing that, I think all of a sudden long-term will pull people up because the brand will be more aspirational. People will save to buy art sofa. There's a demographic that will be younger and less affluent, but they'll have great taste and style and they'd rather have a few good pieces than a whole bunch of crap. that's the way I grew up I remember I bought my first Schwinn 10 speed you know it's like it's $65 technique I mowed a lot of lawns to get that Schwinn 10 speed I didn't buy you know a crappy Montgomery Ward spike you know and so you know I mean it's just it's that kind of stuff you know and I'm sorry I don't mean to you know overly simplify it but there's going to be consumers that you know they want a part of the very best in life and they aspire to it. Nobody thought the Apple phone was going to be the number one phone in the world. Nobody thought the Apple phone was going to sell in China. It became the best selling phone in China. People want better quality all the time. Gavin Grover, our lawyer, says this to me all the time. History has proven that people want better and better quality. and the world is generally heads in that direction. So we think, again, we're going west. There's gold in them there hills. We're going in the right direction. We're going to be fine.

Gary, I love it. It's great. Fantastic. Always food for thought. I appreciate it.

Thanks, Adrienne.

Thank you. Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, good afternoon. Nice quarter. Gary, just curious on the long-term opportunity as you see it for RH Guesthouse. And then in your prepared remarks, you spoke to the migration of consumers to larger homes and the demand that's driving. I was just wondering if there's a way to contextualize the size of that demand. Thanks.

Yeah, I don't think... I don't think anybody's got the real data on it. The key is there's been an exodus from cities. COVID was the stimulus for that. I'm not the one that made this up. Actually, one of our big shareholders identified this early on, and they said they did their math on this, and it was going to exponentially, they thought, play in our favor. and then we did some smaller research, but that's what's happened, right? You've had people migrating to suburbs, migrating to second home markets, places like Napa, Aspen, the Hamptons, Palm Desert, kind of second home markets like that that are drivable for people. that they're at some distance where they can work part-time in the cities but live out of the cities. Those markets have exploded. You can't buy homes in the nice suburbs. It's just multiple offers and rising prices. The simple math is this. Someone lives in a 2,500 foot apartment in New York or a very nice 3,000 square foot apartment and they've moved to a house in Greenwich what's a comparable house in Greenwich? 6,000 to 10,000 square feet could be 2 to 3 times the square foot footage those rooms aren't going to be empty not if they can afford to furnish them so that's kind of a good thing for us and that's why I think that even without any newness for almost two years, you know, our two-year comp is, you know, is growing, you know, so and what's the main thing that changed is we're in a much better stock position, like back orders are down 10 points or more, you know, like with the latest world. I mean, don't tell everybody, just hold your fingers up to me. But like the last time I looked at a couple of weeks ago, it's about 10 points, even more than 10, more than 10. So as back orders are going down, demand's going up, right? And that makes sense. Like, you know, I mean, our back orders at their peak, you know, were four times normal. Yeah, four times normal. And, you know, so now, you know, they're down to probably, Two and a half times normal. Yeah. And, you know, it should get better because I think we've done a good job prioritizing production and flow. And I'm glad we didn't try to do newness because newness usually takes longer. I think it's going to be great. I think we'll have the best newness introductions we've ever had in our history. We've had more time to refine samples, to get things right, to quality assure things. you know we're not rushing our manufacturing partners you know and so we will have by the time Nunes launches we'll have two years of Nunes four seasons of Nunes like I don't I we've never launched that much Nunes at one time I like you know people are going to think it's like Christmas again at RH we don't even sell Christmas stuff but you know it's going to be like what the heck just happened you know I think that that the The aesthetic evolution and the quality evolution of the brand will be shocking to the consumers. It looks so good. I mean, seriously, I wish everybody on the phone, including all our people, because I know we usually have, you know, like a lot of, you know, our teams, all our galleries probably have an open line, our DCs have an open line, and there's, you know, there's probably a couple thousand people in our company listening to this call, maybe more. and like I wish I seriously right now you know we were out of COVID we can get everybody together and take everybody through what's coming contemporary is shocking it's so good it's like I you know I thought modern was great contemporary is the best work we've ever done you know it's just gonna it's just gonna open up the aperture of the brand I think people at the highest end the highest end interior designers are gonna go what did they just do like it looks so good yeah and there's maybe you know 20 interior designers in the world that we're not going to completely impress you know yeah it's like the really silly rich people you know they use them like everybody else yeah they're you know they're just going to go oh yeah we better join that that movement there or we'll get left behind it's really really great stuff in the pipeline and we've had a lot of time to refine it and make it better you know we'll probably have you know we'll launch with the lowest returns the lowest you know damages you know all the kind of things that happen when you ramp up you know new goods you know new factories if you have new materials new materials new construction you know especially with a big Thank you so much for joining us. a couple of them are sitting in the room right now they look like they're gonna like they have their masks on but you can tell they're smiling and turning red but like the best that we have some of the best people in the in the industry when the industry hears who's on our team everybody's gonna go uh-oh you know so um you know just great stuff coming I couldn't be couldn't be more excited you know I just wish everybody could be here and see it and uh yeah but that's okay we'll just make it the good news is like we keep making it better so every you know every season we delay it you know like it gets so much better so so it's between now and next spring it's going to continue to get better the presentation that you know the execution and you know so we're you know super super excited you know and and I think that the market you know that's I think there's look I was the guy you know I'm the guy who thought there'd be a recession the last five years you know I was like I was ready for a recession last five years. I've been really wrong. Instead, what happened? A pandemic. So, you know, but now I'm finally thinking, okay, you know, I called this wrong. I never thought we'd be comping 47 comp with no new goods, you know, and, you know, back orders, you know, at three times historical rates, two and a half times historical rates, you know, and, you know, but we are. and so I think that that again that the home business you know the home people buy a home they don't furnish it all immediately you know it's over a period of time you know it takes a long time I mean right now you can't get a contractor to remodel a bathroom you know you can't get interior designers are all backed up you know our teams have been backed up you know like you know customers complaining like how come I have to wait so long for an interior designer you know I mean they're all busy you know professional services around the home. We're all busy. You know, there's not enough homes. There's not enough people to build homes. There's not enough people that, you know, design, you know, do interior design, you know, there's backups everywhere now. Yeah. So, so even if, and we're at record levels everywhere. So even if the market slows down, if you'll go, Oh, the home business is a little off or, you know, Pulte took numbers down a little bit. The question is, did Pulte take numbers down a little bit? How are those numbers? compared to historical numbers. They're still really good numbers. And so if you're in our position and you're kind of a brand without a lot of peers and building a market of one and you're the place to go, and especially where we have these new galleries that are having outsized growth, we're in a really good place today. So I just think that... you know I've gotten more optimistic you know and you know it's my fault that we have the highest back orders too you know I cut the inventories too aggressively and then you know when the trends you know went to 20 I said buy 10 you know when the trends went to 40 I said they'll never stay there buy 20 you know they're only going to be there for two weeks and then they didn't stop you know so you know so like you know the fish stinks at the head right like I kind of screwed a lot of the stuff up too because you know I didn't make some of those calls were just kind of risky you know you don't want to all of a sudden bite a 40% increase and you know then you're kind of pregnant with all the inventory and the sales drop from 40 to 8 you know up 8 and you're like uh-oh We've been chasing this the whole time. I'm probably not the only person that was too conservative buying inventory. I think that pent-up demand and some of the commentary in the home business about pent-up demand, I think it's all kind of right. I think about why I got the economy wrong over the last five years. I think there's a new economy. When you think about the dynamics of the current global economy, the stock markets, and what's driving everything, there's there's new businesses there's new kind of companies there's new industries that are being formed there's faster and faster you know innovation and you know technology is changing the world in an exponential way so you know look at the last recession which was now like I can't believe like 2008-09 it's like you know going on 14 years so wait right like we're you know going to be 22 pretty soon I think the longest economic expansion in the history of the United States before that was 11 years. So we've never seen this. And even through a pandemic, which was kind of, I guess, a recession, but not normal. So I think there's this underlying structure of a new economy that is making businesses more productive, You know, I think about how much more productive we are because of technology and the things we're doing inside the company, you know, at all levels, you know, and, you know, how other companies must be more productive and all the new innovative kind of companies that are changing the world. And, you know, in 08-09, I think there was two companies that were 500 billion, like GE and Exxon, right, or something like that. Like maybe Apple, I think, you know, was getting close. now there's multiple trillion dollar companies and many more 500 billion dollar companies and they're growing so I think that there's a lot of things that are different that probably are harder to see because of the pandemic but when I try to listen to the people that are way smarter than I am about this. There's a lot more optimism in the smartest people I know who have generally been more critical and pessimistic. And yeah, they try to listen to them and connect the dots as it relates to our business. But I think things are very different. I think the pattern of recognition of before There's probably just going to be all new patterns that we have to be prepared for.

Thanks, Gary. That's helpful. My follow-up was just you talked about PULTI, and I'm just a little bit curious on RH residents, how that's going to be implemented. I guess what's the timeline on that? Just any more color on that would be interesting to hear. Thanks.

yeah just really long term you know we we're going to test some things in Aspen you know that's where we'll have a controlled launch of an ecosystem and uh um you know and and you know a lot of a lot of this is going to benefit the brand is just as far as awareness and kind of place placemaking and you know becoming a you know tastemaker and a you know placemaker and a space maker and you know so on and so forth so um and we learn from these things. I think that's the other thing that people underestimate. When you do new things, it's not just about the new thing. It's about building new muscles and getting smarter and solving new kinds of problems and, you know, as human beings, growing exponentially, right? And having, you know, individuals and an organization in an upward spiral of learning and growing, you know, that's what's invigorating for humans. and that's what makes, you know, great companies invigorating. You know, so when you stop inventing and you stop, you know, learning and educating and it's even like, you know, it's so funny, I used to think, you know, when I grew up at the Gap, we had all these formalized training programs and all this stuff and I, you know, like, you know, it's this training program for everything, you know, like you couldn't, it's big manuals and I used to think like, oh gosh, you know, you got to have all stuff and I realized like, you know many of those years early in the gap you know before Mickey Drexler got there it's all about management right and it wasn't very exciting growing up there back then until Mickey Drexler got there and then things changed you know and I think when you're you know when you're inventing and innovating you know it's just really stimulating for smart driven people you know because they're learning by doing you know they're learning by being evolved you know they're not learning by studying an operational manual you know they're not in some theoretical training class talking about theoretically how you might do this and being taught by someone who's never done it you know and so we kind of like do shit here like we get into it and we get really involved and we all get really deep and you know and it's just super exciting you know Someone would have said I'd be more excited than any point in time in my life at my age. It's impossible. I'd say, no way. I'm so excited I can't sleep, which is not good for my health. But seriously, I'm so excited I can't sleep. It's kind of a beautiful thing for people that really want to create and invent and evolve and grow and do new things. And that's why one of your questions about what exactly do you think Europe's going to be?

I don't know.

How much volume did I think the big galleries are going to be? Did I think they were going to be as big as they were? It's been exactly in November it'll be exactly 10 years since we opened RH Houston. We opened that. People said it was the best retail home store in the world. Maybe one of the most beautiful retail stores in the world. A 10-year lease is up. We're going to tear it down, and we're going to build a store four times bigger? Like, how many Houstons did we build? Kind of two. We built one there, and we built one in Scottsdale, and then the next thing we did was two times bigger? And three times bigger? And then, you know, like... I remember we had some people on the board at the time that really wanted, like, Houston was so great. They said, just roll these out. Just do Houston. I don't think anybody that's sitting at this table that I'm looking at right here right now, you know, or any of the people in our leadership team meetings, I don't think anybody would be here if we were just rolling out Houston. I think we'd have a completely different, uninspiring, management team and I don't know if everybody knows this but we don't even use the word manager in this company like we're allergic to that word you know management is about kind of arranging and organizing the status quo everybody here is titled a leader right because you know leadership is about taking people somewhere they've never been doing something they've never done you know when we say leaders have to be comfortable making others uncomfortable you know because, you know, you're in uncharted waters all the time. And when you get comfortable with that, it's exhilarating. And, you know, but I think we'd have a completely different team, you know, if we were just, like, shooting at the same target the same way, you know, just kind of organizing and arranging, you know, the status quo. You know, it's not what we do. We just stay here, like, is it Directionally right? Is it strategically right? Is it more right than wrong? Is it asymmetrical risk to the upside? You know, we do tons of math. We think really hard, really deeply about it. But then we get going because that's where you learn. That's where you grow. You know, and you get going and then, you know, it's going to learn exponentially faster than everybody else. You know, and that's, you know, so residences and stuff like that, like, you know they're going to come and ask in my test and try other things Jack and I met with an incredible guy he's probably on this call let's say say your name but I can't do that but but uh incredible like super inspiring yeah grew up in the business um you know sought us out and you know wants to help you know go put in a dent put a dent in the universe with us and uh create a whole different kind of a home business. And he knows like so much more than we know about building homes. And it's exactly like a lot of times in our organization, what gets these ideas going is the right people, right? Someone comes along and knows more than you do, has greater vision about the idea than you do, is ready to go and excited to get going. And then you go, that's when it's time to go. we know it's directionally right it all makes sense but you need someone to kind of really lead us all there you know and uh so if you're on the call you know who I'm talking about um you got my email the other day ping me back because we were traveling for a while so we lost touch but uh and and if he joins the team you'll probably hear about our residences sooner than later but that's how it comes together. Thank you, Gary.

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

Good evening. Thanks very much. Just a product question on All right, antiques. At least to me, that's a new one. Would you be able to give just, I don't know, maybe a sneak peek in terms of what you envision for this collection and how you might integrate it with the entire offering?

Sure. Yeah, I'd say, you know, go into one of our new galleries and go just walk through and count how many antiques and artifacts are in our galleries. A lot. People want to buy them. And we have to say no all the time. Every once in a while they make us such a silly offer, we say yes and then we replace them. But we would say no to some of the silly offers because we have some really cool stuff in our galleries and it all renders our product more valuable. And it's no different than people's homes where they want to be really unique and they want some things in their homes that makes it theirs. So, well, our antiques and artifacts will be limited to a degree because you can't go manufacture them. You know, what makes them unique and special is there's not that many. And so, and I think we're good curators of it. I mean, we have warehouses of antiques and artifacts. We're probably, as a buyer of antiques and artifacts, we might be the biggest buyer in the world. You know, if I told you what we spend on a new store in antiques and artifacts, Eri's shaking her head. I'm not going to tell them. you know you'd be shocked at the number but go walk a gallery and you could probably you know take a little pad out or take the phone and do the calculator and you're probably walking you probably get close enough if you guess but if you really look at it like you know they really help you know help us look unique and our and our customers want their homes to be unique you know so we have some of our team you know in here leader galleries that are all shaking their heads yes so you know that's that's how to think about it you know it's It's about all of these things in integration, not in isolation. We don't think about anything that we do in isolation. When we do, we're usually wrong looking at it incorrectly. So everything we do has to render everything else that we do more rather than less valuable. Usually when you try to do more, you actually do less. When you try to be additive, you're actually dilutive because you didn't think deeply enough about it and think about How will one plus one equal three or more? So we believe things like RHN peaks and artifacts will, just like they render our galleries more valuable, they're going to render our customers' homes more valuable. And our designers would tell you they're going to close a lot more sales. They're going to sell a lot more furniture. They're going to get a lot more unique homes. that they may not get today because right now we don't have that. And we've discussed internally, like, I don't know, do we open it up? Do we let them go shop first dibs, other things for antiques and artifacts and just charge the customer for the service and make a margin on buying it just like an interior designer does. But first dibs, First Dibs, by the way, which I think is great. So, you know, I think they've done a great job aggregating the world's antiques, but it's like you've got to look through every, you know, to find the needle in the haystack, like that's, it's really hard on First Dibs. I mean, it used to be a lot easier. It's much more curated. Now it's like anybody who sells antiques can be on First Dibs. So instead of finding the needle in the haystack, make the haystack out of needles, right? That will be are ancient Pekin artifacts. You won't have to dig through the haystack to find the needle. The haystack is made out of needles. Completely different way to think about it.

Very interesting. Appreciate it, Gary. Thanks. Yeah.

Thank you. Your next question comes from the line of Tammy Zakaria from JP Morgan. Your line is open.

Hi, Gary, Jack, and everyone. I hope you're doing well, and thanks so much for taking my questions. I have a couple of quick ones, actually. So first, I saw some of the convertible notes you have were moved to the current liabilities section of the balance sheet. So are these redeemable in the next 12 months?

well so the convertible notes became convertible once we exceeded the certain percentage of the convertible price so they've been convertible for a while and they're coming in as you see on the balance sheet we have remaining converts 652 million but with redemption requests that have come in that will be settled momentarily we're actually left with 411 million essentially as of today

Got it, got it. That's helpful. And then the second question, can you talk a little bit about the design services market in Europe and what kind of opportunities you see there for our age given this has been a great success for you in the U.S. market? So do you plan to have complementary interior design service in Europe as well when you launch there?

I think our model is going to be you know almost identical you know but it'll be just kind of on the edges it'll be modified for the market you know so um you know in a lot of ways you know some of the things we're doing you know again you get to you know you get to think like a beginner right like you're going to a new market like you're not saddled with you know legacy stories you're not saddled with old ways of doing things you're not saddled with well this is the way we've always done it like you know we get to kind of Be a beginner again. You get to ask a whole lot of questions about what about this and what about that? What if we did this way or that way? It tends to stimulate a lot of innovation and thinking and opportunity. I think for the most part the brand will be very recognizable but in in many parts and ways, it will be better. I think that some of the big, when I think about RH England, RH London, and RH Paris, they might be the three most interesting stores we've ever opened and exciting stores we've ever opened, you know, galleries we've ever opened. I mean, they're so different, but so unique. and when I say that in comparison to the competition it's an even greater strategic separation so like I go back and forth you know which ones I you know like the most like right now you know it's tough to say you know England and Paris you know in London are just incredible you know and all very very different but Spectacular. I don't think we could have found anything better for Paris. I mean, I really don't. I think it's perfectly placed. It's, you know, you have the world of luxury surrounding us. We're, you know, within two blocks, the top executives from many of the top luxury brands in the world. They're going to probably come to lunch at our gallery. they'll probably go up to the rooftop and have a glass of champagne and have some caviar and look at the Eiffel Tower there's going to be some of the I can't say what I was going to say you know what I was going to say about I got it, no but the people that are talking about us in Oxfordshire that know we're coming it's exactly the people that you want talking about it's funny, in Oxfordshire people are asking what are they doing there? Is it a private club? How do I get on the list to be a member? It's really interesting the kind of questions we're getting through sources but yeah, we'll have design services initially they'll be free unless we change our mind between now and then I don't think that's going to happen but I always say we always reserve the right to change our mind for a better idea and better thinking so right now I don't think so but I will say long term you know you can think about our brand as evolving to have you know just like you think about couture upholstery bespoke furniture other things you know who knows maybe long term there could be you know RH bespoke interior design you know like a whole other level that we charge for that's you know as we continue to kind of pull up and elevate up and elevate the brand and evolve the brand. So the good thing in Europe is, again, we get to start with fresh eyes and we can ask ourselves, like, what about this? What about that? Like, we've never had a gallery with a champagne and caviar bar. I don't think we would ever even think of putting a champagne and caviar bar in the gallery except for in Paris, this beautiful little kind of space you know the top floor kind of terraces back and beautiful like a jewel box and we figured out a way to get up to the roof and use the roof and we got approval to use the roof and we're gonna have this spectacular rooftop garden and from the roof and from the level below where the champagne caviar bar is you see like two-thirds of the Eiffel Tower I mean it's it's incredible like how's that you know how does the American company come and get a building like that and all of a sudden you have a champagne and caviar bar you know you you can't call it champagne unless it's from champagne champagne's in France right like we're opening a champagne and caviar bar in Paris on a rooftop with views of the Eiffel Tower with a garden rooftop like you can't make that stuff up you know like it just you know sometimes we just think like we're in the right side of you know Good fortune. I just sit there and go, wow. It's going to be incredible. Just think about it as you're going to see the new best version of us. We will evolve. We will have new and fresh ideas. You'll see the first RH architecture and design library at at RH England. You know, we've designed one for RH Miami, you know, in a location we're still working on 10 years later, you know, which will be like, if it all comes together, it will be a mind-blowing experience. So, you know, because we're working on an integrated gallery, guest house, beach club, and bath house, right, on the beach in Miami. You know, if it comes together, you know, it'll I mean it's designed you know we're ready to go so you know but there's again there's always going to be new exciting things that evolve here yeah and uh and I think they will all render the brand more valuable and yes someday we may charge for all interior designs don't know you know right now it's working pretty good you know doesn't mean we shouldn't change it we One of our beliefs, we have our values and then we have our beliefs and our beliefs we call the RH rules, the RESTO rules. And rule number one is vision is everything. And we say vision leads the leader. And those with vision are leaders and without a vision are managers, arranging and organizing the status quo. And we say leaders have to be willing to destroy today's reality to create tomorrow's future. We have to be willing to tear down our very best work to do something exponentially greater and more valuable. And I think we've proven that we do that, right? That's why it's 10 years later in Houston in its moment with the best home store in the world and we only built another one in Scottsdale and then we left it in the dust, right? And so... Don't feel bad if the team in Houston right now are Scottsdale. Don't worry, we're working. You know, in Houston, we've got a new location. It's going to be incredible. And in Scottsdale, we're working on it.

Great. That's awesome to hear. Thank you so much, and best of luck for the quarter.

Thank you.

Thank you. Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open.

Great. Good afternoon, Gary and Jack. Thanks for taking my question. I had a question on the RH guest house. How do you think about the opportunity there relative to the competitive landscape in the hotel industry? And maybe how do you see the TAM opportunity for guest houses over time?

Yeah, good question. I think what we're trying to do is to create a a new market for travelers seeking privacy and luxury and I tell people that we believe privacy is going to become a very important thing and it's going to become a real market that people are going to I think privacy is the one thing everybody's given away with social media and it's one thing that the internet's taken away because you can google anything about everybody so there's a whole level of privacy that the world has lost and I think that there's just going to be a desire to find your place to be in that place that's special to you that gives you that level of privacy and exclusivity and level of luxury that you just can't find anywhere else because someone's trying to do you know two or three hundred rooms or even fifty or a hundred rooms. Our first two guest houses have nine and ten rooms. We're going to open in New York with nine rooms and a residence. Six rooms, three suites and a residence. Residence means it's just the top floor and the idea is Mr. Friedman's residence and he will let people stay there when he's not there and he will approve anybody who's going to stay there. Of course, I'd approve all of you who are on the phone. It's not good to know. Thank you very much. Good to know. Thank you. It's not going to be cheap. But anyway, we're going to open the smallest hotel, I'd say, in the biggest city, one of the biggest cities in the world. And it's going to be like nothing you've ever seen. There's things that no one's ever done in hospitality that you're going to see in our guest house. And and we think it all makes sense. When we launch it, you'll hear about it. You'll know what it is. I think a lot of people will go, why hasn't anybody ever done that before? I think a lot of it really makes sense. We're not trying to be different to be different. We're trying to be better. We're trying to create a new product that and like at this point I was so excited about I think the idea of the guest house is again first and foremost to elevate the brand you know and position RH as a kind of thought leader taste and place maker in the industry so it's not really what anybody thinks it's going to be you know it's just not going to be that you know People ask me, oh, you're opening a hotel? I say, no. They go, what are you doing? I say, guest house. They go, what's the guest house? I say, we're trying to create a new market for travelers seeking privacy and luxury. And then they go, oh, I get it. It's going to be a showroom for your furniture. And I say, no. Why would we do that? We have a 90,000 square foot showroom 20 steps away. Then I say the thing that kind of you know kind of like this glazed look I say in fact it's not going to have any of our furniture and then they say well whose furniture is it going to have and they say it's not really going to have any furniture it's not about furniture it's about a completely different experience you know it's about a completely integrated you know singular design you know point of view that no one's ever done before so you know you're just going to see something that you've never seen you know and execute it at the highest level of taste and quality and design and I think I think it's going to break through I know we all want to stay there and so that usually works right you never want to be you know the worst thing is when you're in a meeting you go like okay like somebody's presenting some new product and there's 30 or 40 people in a meeting and say okay how many people here you know if it wasn't about price you can afford how many people would buy that table and when all the hands go up or you know 70% of the hands go up you kind of know the odds are that's going to be a winner when none of the hands go up or a couple hands go up you go there's not anybody who's seen our guest house whether it's inside this company or you know outside this company the people working on it you know the trades you know they're a lot of them said to me personally like we know we'll never work on something like this again this is the best thing we've ever worked on like they're just so proud of it you know so so we're taking it to a level the world's never seen if you you want to think about you know this idea of climbing the luxury mountain when I say we have to create a forced reconsideration of our brand we're not from the neighborhood we're not invited to their parties they don't really want us to make that climb you have to do work that is so extraordinary and so remarkable that you force the people at the top of the mountain to tip their hat and I would say pick whoever you want in our industry who's at the top of the mountain I've said his name before so you probably know who I'm talking about. If he shows up and sees the guest house he's going to tip his hat. He just built probably the best hotel in the world that opened this week. We're doing things to kind of elevate the brand and by doing I've always said One thing that I've learned in my career is when you do extraordinary and remarkable work, you can usually figure out how to monetize it and that it's really hard to monetize ordinary and unremarkable. I believe and I think we believe that our guest house is extraordinary and remarkable and something that the world has never seen before and we believe We're going to be able to monetize it, but it's not really in our numbers. We're not sitting here saying, oh, we should have remodeling 50 guest houses or something like that. I think it'll become that, but that's not the idea. The idea is to have a guest house in New York, have a guest house in Aspen, Miami, Malibu, St. Barts, maybe a few in Europe, maybe one in Paris. and, you know, London and, you know, maybe one in Saint-Tropez or a few places like that, you know, where, you know, where the wealthy and affluent visit a vacation, you know, the Hamptons, things like that. You know, it's like they will have a handful. And my sense is, my sense is right now, New York and Aspen, what we've designed, I think there's a real market. I think people will pay a price that will, you know, create a new market. I had a really smart person who has kind of success in the hotel industry say you can never make money in a hotel under 100 rooms. I also had a lot of people tell me that no one is going to go to your Chicago store that's five blocks away from everywhere else. And I had people tell me that nobody does volume in the meat packing district in New York you know that no one makes money in flagship stores in New York you know who shops in the meatpacking district it does you know it does you know a third of the business of Soho and half the business of Flatiron you're moving from Flatiron to the meatpacking it's the highest volume home store in all of New York you know at the you know mid to high end um I don't know what we do in Chicago 60 million you know It makes over $20 million a year, so it replaced $16 million a year in revenue. We do a lot of things that haven't been done before, but we focus on doing extraordinary and remarkable work. When we do that, we usually figure out how to monetize it. Steve, you tell me. When we open, we'll give you a tour. Before we open, we'll be ready to open. We could open it in late November, December if we wanted to. You don't get a second chance to make a first impression. I don't want to open in the winter. We've got the most incredible rooftop park with a 40-foot-long infinity swimming pool and private dining terrace that's mind-blowing but has some of the best views in the city. It's want to open everybody's got masks on it's just weird right now like so you know it's easy to say hey like okay the Travertine from Italy is coming in late you know we could open in November what do you think and I'm just like yeah we've waited this long we'll wait till spring yeah we'll open it and it'll give us more time to practice and get fine-tuned and nail the service and nailed the restaurant. We've got a whole new restaurant concept there. Live fire restaurant the world's never seen. You've never seen anything like this restaurant. And I think we have the most beautiful room I've ever stood in from an experience of a restaurant. Like, there's not a bad seat in the house. It's so perfectly proportioned. Yeah, so, like, we just have a little bit more time to make it better. Yeah, that's what we do. So, you know, leave no doubt. But again, you know, I'd like to say you can't rush great quality. It takes time. And people will pay more for really great quality.

Yeah, I appreciate all that detail. Thank you so much and look forward to seeing it in person.

Yep.

Thank you. Your next question comes from the line of Brad Thomas. Your line is open.

Hi. Thanks for taking my question. Gary, I think you alluded earlier to being interested in potential acquisitions. I believe the last one you did was Waterworks in 2016, and I was hoping you could just talk a little bit about, you know, what you learned from that most recent acquisition and how you think about what might fit, you know, as an incremental piece of the puzzle here for you.

We've learned a lot from Waterworks. I think that one of the most difficult things, challenges, like we work in a very integrated way here. We're very visually oriented and we made an acquisition of a business that was in Connecticut. So that made it a little, I think, more difficult. You have to kind of you can't just see somebody in the hallway or walk over to where they sit or walk into a room you can't walk by the product all the time and see things and talk with people about ideas and talk about what they're excited about so I think that's made it different I think over time we've all got to know each other better we said initially rule number one, don't screw it up it's the best brand in the space it wasn't exactly we weren't really ready to buy it when we bought it but it's like those things that come along you know once in a lifetime when it's for sale you know if you don't buy it you may never see it again you know so um so we always admired it it was actually one of two things on our list the only two things on our list for the first 15 years of our existence here you know and uh you know the other one got screwed up it was Dean and DeLuca you know and it got screwed up and stuff but we thought we could do something really great with Dean and DeLuca and who knows maybe we still will it went bankrupt maybe we'll bring it back to life actually put that on the list guys no but you know Waterworks I think is going to you know fit perfectly into where we're going because you know Waterworks has always been kind of The Admired Desired Brand. And so we've learned a lot watching how they run their business and how they think about their brand. And so I think we've learned a lot from Peter and Ralph and the team. And I think they've learned a lot from us. And I think there's a lot of respect on both sides. And I think we have really a great shared vision for the future. And a lot of pieces are coming together that I would say and I think a lot's going to transpire over the next just year. I mean, I think we're really close to a lot of things. You know, we could be sitting here six months from now, 12 months from now and be talking about a lot of new, very exciting things that help catapult us up the mountain and how it'll all integrate and come together. So, you know, so and the water business now, I think people know that we struggled with in the beginning financially. We had to write off most of its book value and now it's performing really well. I think not just because of COVID, I think just because of learning from each other and some things we do really well that they learn from us and some things that they do well we learn from them at the higher end of the market and I think they're going to have a record year not by a little, probably by 50 or 60% better than the best year they've ever had in their history at their peak and I think it's on the right trajectory strategically even if I COVID adjust it, it's the best numbers they've ever had. That's how we think about things, by the way, internally here. We know there's COVID tailwind. I don't mean to sound like, gosh, we think this is just going to be here forever. I mean, I think that one of the great things about if there is ever, I just think it's going to be a much softer landing than I thought and much longer kind of tail to this thing. And I think for us, what I like is, you know, as it evolves, you know, as things might evolve, you know, from COVID, I think we're going to go into the biggest innovation cycle in the history of the company. And we just might outperform everybody, you know, even if, you know, there's some slowdown or give back sometime in the future. So, but, you know, I think the same things happen with Waterworks. I think the opportunity for Waterworks looks so much bigger now than it ever looked, you know, five years ago. So, and I think all the pieces of the puzzle, you know, they're going to fit together beautifully.

Great. Thank you, Gary.

Thanks, Brad.

Thank you. Your next question comes from the line of Seth Basham from Redbush. Your line is open.

Thanks a lot. Good evening. It's Seth Bash. I appreciate you taking my question. My question is a little bit more about Europe and just the roadmap in terms of the operations and infrastructure to support as much as $250 million in sales in the first year. Can you give us a little bit more color on how that's coming along and what the building blocks are there?

Yeah, I mean, the key, you know, building blocks for us are, you know, start with demand creation and how are you going to create demand. So we believe we've got the right initial real estate building blocks and the ability to launch a website and we're learning and going through optionality and thinking about how to market the brand outside of the physical. Most of our marketing in the U.S. is kind of physical marketing and and then, you know, print and tiny bit digital. I think we're going to be doing more things. You know, we've got some really good ideas and especially as we are evolving the world of RH, you know, and that exercise is open our eyes to some really, really, really good ideas, you know, where we can shoot with a rifle and not with a shotgun. So, and, you know, and those things will, will be the pieces. First, you've got to think about, how do I create demand? And that's a big part of the focus. And then we say, now, how do we fill demand? And if we say, hey, if it could be between $50 and $250 million, what risks do you have to take? How do you structure distribution platform, home delivery platform? you know small package platform how do you handle returns and damages so you have to have a reverse logistics and outlet platform and that's the major pieces really I forget anything I mean those are the pieces of the puzzle that you know we've got to put together and so you know the question is you know how do you you know you hate to kind of say like boom you launch this thing and it's like people come you know driving in from Spain and France and the Netherlands and every you know drive they come train in or fly into England and shop at our gallery and they want to like look today we have people that buy from us from Europe and arrange to have their own goods shipped. Well, I think they're going to do that a lot more in the UK. You know, we may not be ready yet with the reverse logistics and other things to handle returns and stuff like that. So, you know, we're going to start kind of country by country, see what we learn, you know, maybe open up a country, you know, I don't want the first impression to be a reverse logistics outlet store. The first physical experience for our age. It's just not the right first experience. It's an important part of our business. You don't want to go out there and launch a web business and just your only physical experience in many countries is a reverse logistics outlet store. I think that's not how you build a great luxury brand. So we're going to build incredible physical experiences. We'll be launching with the new world of RH digital portal and web experience, which is all new, all simplified, all really user-friendly, great navigation, all kinds of great functionality. We really have to execute well. Here's the good news. They sell furniture in Europe and they deliver it to people's homes. It's not something that's not done. We know that's done. It's done every day. We have to be able to execute it really well. How are we going to do that with third parties we've never worked with before? Even though there are third parties in in Europe that we've worked with in the United States, same company, but yes, European division and whatnot. And yes, there's going to work to get to know people. We're going to have to make sure they understand our standards and what we expect. But we've got to, I think we really have an incredible leadership team, you know, in that part of the business. And, you know, they're super passionate about this. I mean, they've, you know, They're ready to go. You know, they want to, like, get going. So, you know, and we've got people, you know, now, you know, transitioning base there. You know, so, you know, I think I don't see any parts of the business that I think, you know, that I don't think we can execute really well with the team we have. it's just more preparing for the unknown it's preparing for that range you know preparing for 50 to 250 million you know maybe it'll be right in the middle it'll be 125 the first year you know I don't think it's going to be 400 million the first year and I don't think it's going to be 10 million the first year you know so I think the range is right it's just a really big range and so you know if it's 50 you know is there a little bit more earnings drag sure there is but you've got to be able to take those kind of risks right we can't we're not going to get it fine-tuned perfectly so but when we know more you know we'll you know we'll share it with you.

Thanks and just a follow-up modeling question for Jack in terms of the operating margin outlook for the balance of the year could you give some color on how to think about gross margin versus SG&A?

we're not we're not guiding to that level I think at the moment we're just you know we'll leave it at the operating income margin I think we've seen what we've delivered in terms of you know gross margin and SG&A you know variances versus last year versus the last two years we've talked about and you know clearly there's been you know as you look at the SG&A difference you know there's been timing differences advertising that's been one of the biggest drivers so I mean I think we made comments about that last quarter and you know and then you've noticed and what our plans are with the change in the books this year. So just keep that in mind.

Okay. Thank you very much.

Thank you. Your last question comes from the line of Christina Fernandez from Telesee Advisory Group. Your line is open.

Good evening and thank you for taking my question. I wanted to ask on supply chain, on DNM particularly, can you comment on how much of your product is sourced are from the country, and do you expect any sort of product categories to be impacted by the manufacturing delays, you know, the shutdown going on right now? Thank you.

How much product is sourced from Vietnam, you said?

Yes.

Is that what you're asking?

Correct. Yeah, how much product is sourced?

and then a total I think we've disclosed in the past the amount in Asia, right? I don't know if we do it specifically by country.

We've broken out China. Yeah, broken out China.

Yeah, I mean we have a meaningful part of our business in Vietnam and more business has migrated to Vietnam with the tariff situation in China. Vietnam makes really high, you know, had some Small boutique, high-quality factories that we got involved with in 2008, 9, 10, 8, 9, 10. People that we've grown with that were maybe $3 million to $5 million, and now we're $50 to $120 million of volume with them at first cost. So we've got great relationships in Vietnam. It's meaningful production. You know, especially when you think about, you know, you can't really buy wood furniture in China for bedrooms, right? You pay crazy tariffs. It's exponential, right? They make it impossible to buy bedrooms. There's anti-dubbing and so on and so forth. And, you know, so there's no bedroom coming out of China. So that's always been heavier, you know, in Vietnam and Indonesia and other countries. but yeah, it's meaningful and it's caused us to push the launch of contemporary and hold on our other books because it's a meaningful part of the newness.

Understood. Is it also a meaningful part of the core business?

Yeah, yeah. Yeah, well, anything that's meaningful is meaningful to the core. The core is almost the whole business here.

Yeah. Okay. And then my follow-up question, would you be able to kind of quantify or comment how much of the delay in RH contemporary, and I assume the guest house and the digital are smaller, but how much of the revenues shifted out of 2021 into 2022? All right.

It's all in our guidance, right, for this year. We're not guiding 22 yet, but it was supposed to first launch in spring. Then it was going to launch in fall. Now it's launching, you know, next spring. So it wasn't zero. Okay.

All right. Thank you.

Yep.

Thank you. There are no other questions sent to you. I will now turn the call over back to Gary for any closing remarks.

Great. Well, thank you, everyone, for your interest. And, you know, thank you for our team, you know, who is kind of leading the charge and, you know, bringing our vision and values to life. We could not be more proud of the work that everybody's doing and the effort that everybody's put through. And, again, you know, we feel, you know, super blessed and fortunate to be in the position we're in and our hearts go out to, you know, not only the people that are suffering in Vietnam but just suffering all over the world through this COVID and the variants that are continuing to wreak havoc and even right here in America and even on a much smaller scale people who suffered just recently here through the hurricanes and the devastation so it's hard to feel Yeah, you know, so good about your business when so many people are suffering. And, you know, so, but, you know, we've never been more excited. And we've, you know, we've said this is the time to have a lot of edge and a lot of empathy. And so, you know, I just want to just really thank everyone and also just send out, you know, our very best wishes to the people, you know, and that are struggling through these times. And to our people, just thank you for making this company more exciting, more innovative, more magical than at any other time in our history. And I think we're going to rewrite history as we go forward. So great job, everyone. Thank you.

Thanks.

Thank you.

You're welcome. This concludes today's conference call. Thank you all for participating. You may now disconnect. Goodbye.