RH

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2021 RH Q&A conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask questions during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to turn the conference over to Allison Malkin of ICR. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2021 Q&A 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 that we will make certain statements today that are forward-looking within the meaning of the federal securities laws including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you. Happy holidays, everyone, and bonjour from Paris. Jack Guy and Ari, the leadership team, are all here. We're actually on a real estate trip and have seen a couple of exciting new international galleries. But it's a little late here. If we sound like we're in a different time zone, we are. We haven't slept a lot this week. But we're excited to talk to you about our results. So let me start with the highlights from the letter that we put out on the wire. To our people, partners, and shareholders, we are pleased to report yet another quarter of record results, with net revenues increasing 19 percent to $1.6 billion versus $844 million a year ago, and up 49 percent versus 2019, representing the strongest two-year growth in our industry. Our performance demonstrates both the desirability of our exclusive products and our ability to overcome the compounding supply chain challenges that led us to delay the launch of RH Contemporary, the opening of our first RH Guesthouse and several galleries, and the mailing of our fall source books until spring of 2022. 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 reached 27.7% versus 26.7% last year. We generated $279 million of adjusted operating income in the quarter, up 24%, compared to $225 million a year ago. Adjusted net income increased 25% to $209 million, and adjusted diluted earnings per share reached $7.03 versus $6.20 in the third quarter of last year. We generated $311 million of adjusted EBITDA in the quarter and $145 million of free cash flow. The third quarter ended with total net debt of $178 million and trailing 12 months adjusted EBITDA of $1,054,000,000, raising our fiscal 2021 outlook. While we believe a conservative view of revenues in the fourth quarter is prudent due to the uncertainties posed by the new virus variant, the postponed opening of our new San Francisco gallery until the spring, and the continued shipping and port delays, The power of our operating model gives us confidence to raise our outlook for fiscal 2021 for the third time this year. We now expect fiscal 2021 revenue growth of 32 to 33 percent versus our prior outlook of 31 to 33 percent. An adjusted operating margin in the range of 25.3 to 25.5 percent versus our prior outlook of 24.9 to 25.5 percent. 2022. the year of the new. While our plans for fiscal 2020 and 2021 were delayed by the virus, make no mistake, they were not disrupted by it. Quite the contrary, we refused to shelter and shrink, not allowing our culture to be shaped by stay-at-home mandates or let collaboration be replaced by Zoom calls and isolation. No leaders of Team RH made their summer home their permanent home. There were no debates if we would return to work only discussions of when we could. We wasted no time allowing ourselves to be victims of the current reality. We chose to be visionaries, destroying today's reality to create tomorrow's future. We used our time to reimagine and reinvent ourselves once again. We said, let this be remembered as the time RH unleashed the greatest display of innovation our industry has ever seen. That's why we refer to 2022 as the year of the new. and it will include the following. The introduction of RH Contemporary, the most meaningful new product at launch in our history, inclusive of a 500-plus page sourcebook, a freestanding RH Contemporary gallery, a dedicated website, and a national advertising campaign. The elevation and expansion of RH Interiors and RH Modern, inclusive of multiple new collections, enhanced quality, and exciting new presentation of photography across our physical and digital platforms. The launch of our global expansion with 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 will introduce RH to the UK in a dramatic and unforgettable fashion. Additionally, we have secured locations for galleries in London, Paris, Munich, and Dusseldorf, and are in lease or purchase negotiations for galleries in Milan, Madrid, Brussels, and France. The opening 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 unveiling of the world of RH, a new 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 place maker. The list off of RH1 and RH2 are customized Gulfstream G650ER and G550 that will be available for charter, the former already garnering press and praise as featured in the pages of Architectural Digest the Wall Street Journal Magazine, and the 20 titles of modern luxury, including Los Angeles Confidential, Manhattan Magazine, San Francisco Magazine, Boston Common, Dallas, Palm Beach, and Aspen Magazine, to name a few, and also including the hundreds of thousands of social media posts and reprints of all of these articles. The christening of RH3, our luxury yacht that will be available for charter in the Mediterranean and Caribbean where the wealthy and affluent visit a vacation. The expansion of RH in your home, a unique and memorable delivery experience with furniture ambassadors guiding every detail of your delivery and extending the selling experience into the home. We entered 2022 with optimism and confidence that our efforts will continue to elevate and amplify the RH brand. creating significant separation emotionally, strategically, and financially. The RH business vision and ecosystem, the long view. 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 an 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 introductions of RH Contemporary, RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH 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 product to conceptualizing and selling spaces. by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and placemaker. 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 extend 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 in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yachtville, an integration of food, wine, art, and design in the Napa Valley. RH1 and RH2 are private jets, and RH3 are a luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose existing and new 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 that 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 to 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 to $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. This is a time to be defined by our vision, not by a virus. As we move forward past the dark days of the pandemic, let this be a time where we once again rise up. a time we expand and shine, a time we reimagine and reinvent ourselves once again, a time Team RH unleashes the greatest display of innovation our industry has ever seen. This is a time to be defined by our vision, not by a virus. Carpe diem. And at this point, operator, we'll open the call to questions.