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.

Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press 1 on your telephone. We ask that you limit yourself to one question and one follow-up. After that, you may recue up for more questions. Again, that's star one to ask the question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen Forge with Guggenheim Securities. Your line is open.

Good evening, or I guess good night, everybody. The Gary, you highlighted several exciting launches that are planned for 2022 in the letter, but I was curious if you can comment on the real estate pipeline here within the states. How many leases are secured currently, and should we expect the number of openings in 2022 to reaccelerate to that five-plus level?

Yeah, at this point, Steve, we're silent on that just because there's so much kind of change and chaos happening in the the world of construction and development on so many levels that we're going to wait until we have a little bit more clarity as we get through the fourth quarter to talk about what we think will happen in 2022. So you'll hear more about that with our fourth quarter release.

Perfect. And then just a quick follow-up. It's great to hear that RH Contemporary is still slated for launch next year. But we'd love to hear your current thoughts on how impactful newness could be to demand next year, maybe of a high level, right, as you think about the creation of the source book and just where you guys are. We'd love to just hear how excited you are about it, any sort of comments on how impactful you think it could be to brand awareness, you know, and overall demand growth.

Yeah, personally I think it's a complete game changer. I think it's the best work we've ever done. I think it eclipses the work of RH Modern, which was huge. Although Modern got out to a stumbling start from a production point of view, Modern has kind of changed the game for RH. I think this changes everything. I think when people see the taste level, the sense of style, the quality and sophistication of contemporary I think it opens up another entirely new market. I think it will attract some of the highest-end interior designers to our brand. I think it will have the customers of the highest-end interior designers point them to our brand. I think it is one of those undeniable things that we're going to do that you can't ignore it. It's going to be a big deal in our industry.

Thank you. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Adrian Yee with Barclays. Your line is open.

Thank you very much, Gary, Jack, and the entire team. Great navigating through very difficult times. Gary, I wanted to see if you could give some color context on the quarter with regard to supply chain freight inventory requirements. in a backdrop there, the exposure that you had in the current quarter, and what the line of sight looks like on these items into the first quarter. And then, Jack, can you, or maybe Gary, can you talk about the timing of RH England? And when you say that you've identified the secured locations for London, Paris, Munich, and Dusseldorf, could we expect those to be opened in the latter half of 2022? Thank you very much.

Sure. Yeah, let's... start with the supply chain and everything, it's a mess, okay? The worst we've ever seen. So, you know, it's a time to improvise, adapt, overcome. It's a time to collaborate more deeply than you've ever collaborated with your partners, whether it's on the manufacturing side, the freight side, you know, what you're doing to the ports, what we're doing with just line haul everything, right? There's execution issues everywhere. There's cost inflation everywhere. And you have to be really smart and thoughtful. But to say everybody in our industry, we're sure in a reactionary state, but with a leadership kind of mentality. How do we lead this to where it's the best outcome? We like to say inside our company, vision leads the leader. It inspires and generates the energy within. Leaders have to be comfortable making others uncomfortable because you're taking people somewhere that you've never been, doing things you've never done, and this is one of them. Navigating through this period is a tough one, but it takes real leadership and it takes real thought And we have to be reactionary, but we also have to spend a lot of time, you know, thinking until it hurts, until we can see what others can't see so we can do what others can't do. And I'm proud of the team and how we've navigated through this thus far. You know, I'm grateful and appreciative to all of our partners around the world who have, you know, especially those in Vietnam who've had to suffer through, you know, just a really, really difficult time, you know, from a, you know, health perspective, you know, disabled, that country worse than any others that we've worked with. You know, earlier it was India who had, you know, such a challenging time. But look, I think, you know, in our results and our guidance demonstrates our ability, you know, to navigate through times like these from an operational perspective and demonstrates the strength of our brand. from a revenue generation and margin expansion perspective. So despite it all, we have expanding margins against our best margins last year, and we absorbed a lot of cost and a lot of chaos. So I think that bodes well as you look forward to hopefully things getting better. I know it's Omicron or I can't say it right. Yeah, Omicron. You know, who knows what the next variant is going to be? Who knows how many variants we're going to have? You know, the early data would say things are, you know, not as bad as Delta. You know, it might spread faster, but it doesn't seem to have the same health risk Hopefully, we'll all be able to navigate through this and get to the other side. When you think about the expected timing for the opening of RH England, we believe we'll open RH England early summer, late spring. You don't want to open in the UK too early. We don't want to open out in the English countryside. It rains every day. By the way, it rains almost every week. For sure, it rains every month in England. We'd like to open when the weather's nice. You don't get a second chance to make a first impression. We're on track to open, I think, in the late May, early June. It could be a weather call, honestly. We're looking at the weather report, and you go to your phone and you see rain every day. We're probably not going to open yet. But when we see the first few sunny days, we'll kind of be ready, and we want to open on a day that everybody's smiling and everybody's happy, including our people. But we'll be open by early summer unless we don't see a clear day. That's the only thing that might hold us up. We have confidence about that. Could we expect other international openings this year? No. If we did, we'd be talking about them. You've got to think about the complexity and size and dimension of the projects we're opening. They're not easy. They take years. What we're doing is not a quick rollout. We like to say extraordinary takes more time, It requires more people, you know, costs more, you know, it takes more time, costs more money, requires more people, you know, working in a more complicated manner, but it's worth it. And so I think what we've learned in our journey here is that, you know, when you do extraordinary and remarkable work, you can always figure out how to monetize it. It's really hard to monetize ordinary and unremarkable. Extraordinary and remarkable, it takes more time, it costs more money, it requires more people doing more things in a more complicated manner. It's hard to actually forecast and predict when these are going to open, but I'd say the ones we've listed will have Some opening in 23. We'll have some opening in 24. We'll have stuff opening in 25 and 26. And I feel good about the pipeline. And the way I think about it, by the way, is that it's not like in the US. We're not opening markets. We're opening countries. And I can't overemphasize that, not just to shareholders or the analyst community on the phone. but to our team and our partners around the world. We can't look at these like one gallery. RH England opens up England, opens up the United Kingdom. If we open in Paris, it opens up France. When we open in Milan, it opens up Italy. When we open in Munich or Dusseldorf, it opens up Germany. These are big economies and one by one we're going to open up countries. With the amount of business that is moving online and if you think about one of the long-term financial benefits of this virus is it made people a lot more comfortable shopping online and shopping online for just about anything. you know, we like our timing from that point of view. You know, we're going to learn how many galleries we need in these markets, you know, and, you know, how we penetrate them correctly. But we're not, to our consumer at the high end, you know, we're not unknown to the high end. I think I might have mentioned on another conference call that, you know, there was a an analyst report that came out and said RH has really low consumer awareness in Europe. They ranked Target, Walmart, Ikea, and a whole bunch of people way ahead of us. That was a real firm grasp of the obvious because our customers don't shop those places and definitely those customers don't shop RH. We wouldn't even be on their radar. But one of our really smart investors, and they're probably listening to this right now, you know who you are, they did research and researched interior designers in the UK. And what was the market awareness of RH in the UK? I think it was 90%, close to 90%. And what was the percent that had an intent to buy when we opened in the UK and I think it was somewhere around 80. So those numbers are off the charts, right? Those are off the charts. So this dynamic of opening countries when you have the kind of brand we have and when you're so unique in a market and you open the way we're going to open, we're not opening like this company started in the United States with little legacy stores with 6,000 square feet or 7,000 square feet of selling. We're opening with our best work. So we have a running head start because we have pretty good brand awareness with the right consumer. We're opening extraordinary galleries, like some of the most exciting things we've ever done. Like I think almost every one of them, you know, is, is one of the most exciting galleries we've ever opened in incredible historical real estate, you know, that we're re-imagining. So, um, yeah, so, so when I think about the business and our team thinks about the business over the next five years, I mean, I think it puts us in a position to outgrow anybody in our industry.

That's extraordinarily helpful, Gary. Kudos on the execution, and the future obviously has tons of opportunities. Thanks.

Thank you.

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

Hey, thank you. Great results. My question is on deferred revenue and customer deposits. They're up sequentially. So I'm curious if you've started to make any progress on bringing down the backlog levels. I believe at one point earlier in the year they stood at about $150 million. So have you started to bring them down, or how many quarters do you think it's going to take for you to clear out some of that benefit?

Hey, Jack, it's Jack. So we gave you that update for the $150 million at the beginning of the year. We haven't updated it, and we'll do that when appropriate. One thing you have to realize, though, as we resolve some of that backlog, there's new backlog created. So that's what you're seeing is sort of sequential. If you look at our sort of sequential revenue and really the volume of revenue, and this is our highest revenue quarter of all time, and obviously higher than the last quarter and higher than the prior quarter. So you're going to see a sequential build in those. And again, I think as we As the supply chain and everything else, you know, resolves over time, we'll get through it. But right now, it sort of reflects the size of the business. And as Gary mentioned about the supply chain, you know, we're working, we're improvising, we're adapting, and it's all going to come together. Yeah, and I'd say right now, you know, our view is the backlog won't get all the way down by next year. You know, there's a high likelihood we'll enter the following year with a backlog.

Got it. Okay, cool. And then you also referenced the new variant in your update. Sorry for the near-term question, but I'm just curious if you've seen any unusual demand trends over the past couple of weeks. And then bigger picture, you talked about the supply chain still being a factor. I'm curious if you've seen any changes in consumer behavior or a willingness to wait for products or any uptick in the cancellation rates or maybe not.

Yeah, we have a lot of people coming in wanting to buy masks. That was a joke. In fact, no. In our business, you usually don't get immediate upticks, right, like on furniture, things like that. I just kind of early news, but we'll see how it shakes out. And I think customers have been conditioned – to wait. The key to how we all operate in this world is based on expectations. I like to use the example of you go to Disneyland and if you want to get on the Star Wars ride or the Matterhorn or whatever, pick your ride. They have a sign that says 45 minutes from here. and you see a line of about 400 people, and you go, do I really want to get in line with my two daughters to get on the Matterhorn today? And it says 45-minute wait. Now, you'd think nobody in the world would get in a line that says 45 minutes from this point, but the fact is you get in that line because you're conditioned to get in that line, and Disney, because they execute so well, I'm one of those people that generally looks at my watch and then times it. And all the times I've gotten into a line at Disneyland, when it says 45 minutes and they're always 45 minutes, that's where they put the sign on. I haven't been in the last two years because my daughter's got a little older, but they actually want to go again this year. But you always get on the ride somewhere around 39 to 43 minutes. So they never make you wait longer than 45 minutes. And what we're trying to do is be Disneyland. Don't say four weeks if it's going to be five, if there's a risk of five. If it's a risk of five, say six. And if we lose a little demand, that might happen. But there's nothing worse than disappointing consumers. But I would say the bigger thing is consumers are all conditioned to wait. Try to get anything built right now. Try to remodel your house on time right now. I actually just read a report that 50% of the people said they're waiting longer and they're spending more money. I'd love to know their contractors, the other 50%, because I know nobody who's getting anything built on time, and I don't know anybody who's not spending 50% to 100% more than they thought they were going to spend on any kind of remodel. You know, I mean, everything's costing more, you know, on every level. And that's the world we live in today. And we've all been conditioned to wait. And it's almost like a crazy surprise if you get something on time. You know, so, you know, if the Postmates driver shows up on time with your meal or the Grubhub person shows up, you're kind of like, you know, super excited because they're the only people who are kind of on time today. It checked one thing to keep in mind, too, and I think when a customer, for any reason, doesn't want to wait, there is actually plenty of in-stock. That's what we talk about. One of our strategic advantages is the in-stock inventory, and including on our website, you can shop in-stock. I was one of those design customers that, for one reason, I wanted in-stock items fast, and I was able to get them. Obviously, some items I'm waiting for, but we have the ability to address both.

You can get that FastPass. It works pretty well. Good luck the rest of the year. Thank you.

Thank you. Our next question comes from the line of Anthony Chukumba with Loop Capital Markets. Your line is open.

Thank you so much for taking my question. Before I ask my question, I'm just going to preface this and say I was not the analyst who wrote that report about your low European brand awareness, so I just wanted to clear that up. I also wanted to mention that I recently went to your new RH Oak Brook store, and it was just, I mean, spectacular. I mean, just absolutely, positively breathtaking. But on to my question. You know, so you talked in your letter about how you're expanding RH in your home. And I know white glove is very, very important, and obviously you have the gross margin dollars in each transaction to afford that cost. But I was just wondering, is there any significant cost sort of increase that we should be factoring in because of the expansion of RH in your home?

You know, there's going to be an investment we're going to make. It's a meaningful, significant investment. We think there's a good return on that investment. You know, the mouth would say to go. I don't know. Fernando is here. Fernando Garcia is our Chief Supply Chain Officer and President of Home Delivery. He's, you know, kind of been the visionary behind RH in Your Home. And he just had his leader of RH in Your Home, Dana, out. And we had an inspiring presentation. And I guarantee you, if any of you on this call were in the room, you'd want to be an investor in RH in your home. So, you know, Fernando, you want to mention anything in RH in your home?

Yeah, I mean, RH in your home, as Gary refers in the layer, is a unique and memorable experience that requires an investment. However, you know, the return of the investment is significant for the brand, not only because not from the demand that Gary mentioned, but from the customer experience and the desire for the brand, the investment, you know, we create. And, you know, we, over the last two years, we have been able to negotiate, you know, great contracts with our partners that have allowed us to consider financial investment in our H&U home.

Got it. That's all very helpful. Thank you so much, and keep up the good work, guys.

Okay, thank you, Anthony.

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

Good evening. Thanks for taking the question. So a quick one on product launches. It looked like a modern and incremental launch next year. I was looking back to the last year later. I didn't see it. And I guess just, you know, how incremental? I mean, it's obviously a big part of the brand. I don't think it's obviously bigger than kind of the core business. But, yeah, what are your expectations for Modern? And I guess how is the sub-brand evolving, you know, in terms of the new product?

Yeah, sure. Yeah, Modern is a meaningful part of our business today. And we think about, the way we think about the business today, we have RH Interiors, RH Modern, RH Contemporary. So modern is now part of the core. That's how we think about it. It's got its own aesthetic, but it's not new anymore. But both interiors and modern will have the most amount of newness that they've had in years because we haven't mailed a book in two years, and we haven't introduced a new collection in two years. So you've got kind of two years' worth of development kind of backlogged And, you know, we think now is the time where the supply chain has caught up enough, Curtis, to where you won't disappoint customers and create longer wait times. We hope, knock on wood, I mean, you know, if nothing changes as far as the variance and what happens. But, you know, contemporary is going to feel massively new with lots of incremental new product that should make RH, you know, excuse me, contemporary will be all incremental. Well, not all incremental. Let me put it this way. I would expect 50 to 60% incremental from contemporary because it's, you know, so new and differentiated. The new, there's incremental new collections in both modern and interiors. Interiors is our biggest book. Modern is our next, you know, biggest book and, you know, biggest part of the business. And then contemporary, we look at it and we think contemporary could be bigger than modern and over time rival interiors and just lift the whole brand. It's a new sweet spot is how we think about it. And in some ways, we've made lemonade out of lemons. you know, through the pandemic, it's given us more time to look at it, more time to dimensionalize it, more time to be critical of it, more time to tweak it and dimensionalize the idea. And, you know, we kind of get more excited every week about it here because we've been able to continue to kind of innovate and expand and dimensionalize the idea. So that will be a huge piece of incremental business. And then there'll be a percentage of both interiors and modern that will be incremental. Ari is sitting here. Ari, anything you want to add that I'm missing out on?

No, I would agree. I think the contemporary point of view is absolutely fresh and exciting and very relevant right now. And like you said, I think it will rival modern when we launch. And I think it could eventually eclipse that concept. And it's super exciting. I think made the concepts and collections much bigger and elevated the design and quality along the way.

That sounds very exciting. Maybe just a quick modeling question for Jack. Look, I know you guys haven't contextualized or given detail on price increases or anything like that. I'm not asking for that, but just kind of thinking through next year and, you know, the backlogs and, you know, how long it takes for inventory to flow through. I guess, would it be fair to say that at least through maybe the first quarter to next year, you still should see some uplift from price increases you've already taken, or should we think about it differently?

Another way to ask us for 2012, look, look, look, I think based on, again, our, our, you can look at our source books online or you can, if you follow them, you know, we've made no secret of having taken some price increases this year to address the supply chain. You know, will there be some wrap in the first part of the year? Sure. Again, we're not speaking in specifics, but I think that's a good way to look at it. Yeah, I'm not even sure price changes are over yet. You know, so, yeah, you know, there's still price inflation happening and, you know, so, you know, we're going to continue to do what's fair and right and, you know, but we don't want to do anything that kind of undercuts the, you know, margin structure that we have.

But everywhere it's happening.

Our restaurant's crazy, you know, price increases and a lot of the input costs and, you know, we're just – doing what we believe is right and fair. As our prices are growing up, we're passing them through. I think because of the stimulus in the market and what the government's doing to keep everything afloat and everything moving, it's balancing it all out. In some good way, this pandemic is not isolated to any one country and it's a global issue. It allows everyone country in the world to print money and not devalue their currency in a massive way. It's never happened before. We've never seen this. We all sit here and go, what's going to happen? Who knows how long everybody's going to print money for, how long prices are going to go up, what's going to happen with inflation. Hopefully, you've got a dovish point of view on interest rates, you know, in the, in, in the fed. Um, I think everybody's pretty happy. Powell is reelected. Um, and, um, you know, so, so far so good. I would, I would have thought, you know, a lot of things would gone wrong by now, but again, we've never seen this one, you know, the world's never seen it. So, um, you know, I think price increases are going to probably be here for awhile.

Sure. Okay. Thanks very much. Appreciate the time, and good luck on the rest of the year.

Thank you, Curtis. Thank you.

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

Good evening. Thanks a lot for taking my question. Recognizing that there is a lot of uncertainty out there and there's some supply chain challenges, your implied fourth quarter guidance, suggest that demand trends are slowing, or at least your revenue trends are going to slow in the fourth quarter, especially on a stock basis. So do you think that the affluent consumer, which has been maybe less mobile over the last 18 months, is starting to get fatigued of being at home and starting to shift spend to other categories, and that might continue in the next year, and that's a sign that you're already starting to see in the business?

I think everybody just has to look at their own behavior. When you don't have an ability to travel but your income hasn't changed, you're either saving money or spending it somewhere else. Travel and leisure is three times the size of the home furnishings market. Clearly, that part of the economy was shut down and that part of the economy has opened up. If you try to get a flight these days or try to book you know, book a hotel room at, you know, many places you might want to go. It's a lot different than it was a year ago, and it's massively different than it was two years ago at the beginning part of the pandemic. So the question is, I think, you know, how has this affected the long-term view of the home, right? And how has this changed the perspective? You know, it's I think there's a short-term cycle here that, yes, spending will shift back to travel and leisure and other parts of the economy. People are going to spend money on weddings. There weren't weddings. There weren't events. So many things went to zero. Nobody went to concerts. I happen to be a fan of the Golden State Warriors. The last couple of years, You didn't really want to go to a Warriors game and be one of 2,000 people in a 20,000-seat arena. It just didn't have a lot of energy and wasn't a lot of fun. But now there's 20,000 people back in there spending money on tickets, going to games, spending money on F&B. It's an expensive night out no matter where you're sitting in that arena. And I would imagine arenas everywhere, you know, whether it's soccer games, whether it's other events, whether it's concerts that are happening now. You know, so all, you know, travel, leisure, entertainment, so on and so forth, people are getting out. Yet you would have thought there would be a much bigger shift out of the home. And I think what, you know, we're learning is that this is, this may have created some kind of a permanent shift in the importance of the home, the amount of time people are gonna spend at home, the way they're gonna spend their time at home, the amount of entertaining at home they're gonna do, the number of homes they wanna have, if you can afford to have that. And just the threat of you know, not only new variants, but, you know, another pandemic. You know, you don't ever expect anything like this. You've never seen anything like this. But once you've seen something like this, you start saying, what happens if it happens again? Hey, honey, okay, got it. We made it through this pandemic. Everybody's healthy. What do we do now? What happens if another one hits in three years, in five years? How are we going to be ready? What does ready mean for another pandemic? Ready means having a second home. Ready means having a great backyard. Ready means making your home a place that you want to stay in. I think the pandemic caught everybody off guard. We all had to spend a certain amount of time at home. We all sat around and saw all the things that maybe weren't great in our home. We all kind of said, hey, why don't we make our home better? We're going to be here for a while. And I think that if it wasn't your home, there might have been a shorter-term impact. But for many people, and especially upper-end consumers, it's the most important place you go. It's where you sleep almost every night, you know, and – It's where you eat most of your meals. It's where you raise your family. Now, for most people, if you're working and you're an affluent consumer, you have a home office. You have somewhere to work at home. You now have a habit of entertaining more at home. Anybody who tells me they haven't cooked more than they've cooked in the last two years, you're welcome, William Sonoma, by the way. Everybody's cooking more. It's, you know, it's, it's gotta be good for the home. The new habits have to be good for the home. And I think the, you know, the, we're all surprised how long, you know, like, I don't know who coined it. Um, you know, one of you wrote it, you know, wrote reports and there's stronger for longer. And I, I think it's, it's been stronger for longer because it's the home. It's not like you just bought a new car and you buy a new car. and you don't furnish the car you don't do anything to the car you know maybe you wax it you know you clean it but you kind of you know you get everything you need when you buy a car when you buy a home you're kind of furnishing it for years you're doing stuff to it for years and now that it's even more important and you're spending more time there and you predict you might be spending more time there in the future and there might be risk of another pandemic i think the home might get a permanent shift here. How big? Is it going to slow down? Sure. You know, like, we're not going to see the same growth rates. I mean, but then again, you know, if you saw our business plan for last year, it was a lot lower than how we performed because we thought there could be a big giveback after the lift of 2020. You know, and we thought it would be a giveback in 2021. Will there be a giveback in 2022? I don't know. You know, it's so far, you know, what did Maverick say in Top Gun? You know, it's looking pretty good so far.

Right. That's very helpful. My follow-up question is, understanding you don't want to provide guidance for 22 yet, can you touch on two factors that will impact the model? One is the startup cost with all the various initiatives that you have coming up in the new year. And two, you obviously just did a big recapitalization of the balance sheet. Can you give us some indication of how that's going to impact the model in 2022? Thank you so much.

Yeah, well, look, the recapitalization is pretty black and white, right? There's, you know, we borrowed $2 billion as an interest rate on that money. You know, that's a one-time step up in costs. And, you know, there's not a magic thing on the other side that makes that go away. We think it's an investment that puts us in a position to create a great return on that $2 billion. Exactly how that plays out and when that plays out, we'll see. But we wouldn't have raised the money if we didn't have plans for it. But we're patient. We want to be opportunistic. We don't know what's going to happen in the future. But there's a one-time cost to that as it relates to other initiatives and things we're doing. And Jack will add more color. Yeah, we're going to spend more money. We're going to invest more money. And we're going to open up countries. We're opening up new DCs. We're doing things like that. And there's an investment cost to that. I think we've been relatively good for a number of years now, maybe the last five years, of being relatively accurate in how we guide the investment community and where we think numbers are going to be. We tend to be more conservative than less conservative, and I think we'll continue to be so. We're not guiding 22 yet. There's a lot of things that we'll learn in the next couple of months here. When we have a clear view of demand trends and other things, we know what our investments are going to be as it relates to international, as it relates to RH in your home, as it relates to other things. We're going to invest with a long-term view. We invest in this company like we own 100% of the company. And so we invest for the long term, and that's why we have the best operating margins in our industry, not by a little. I mean, I don't know what the high mark was in our industry besides our age. I think it was probably around 15%, 16%. In the third quarter, we're 27.7%, so we're probably 1,100 basis points higher than the next best person. How do you get results like that? You make the right investments. It's not luck. You make the right investments, and you've got to make those investments with a long-term view. The worst thing that could happen with this company today is if we start playing a quarterly game. If we start, like someone said to me the other day in a meeting, you have to protect the brand. Every company I've worked in, every time I've been around people that say you have to protect the brand is when brands start to erode. Because they stop playing offense. They stop investing with the same courage and passion. And they stop having the same drive and energy to make things better and greater. So we're allergic. to the status quo. We are passionate about finding big ideas. We don't care where they are. We are so excited about RH In Your Home. If anybody, we should almost repeat that meeting for this group. If everybody on this call could have seen that on tape, the team presenting RH In Your Home. I seriously want to take money out of my wallet and say, can I invest personally in this? It's going to be tremendous, but there's startup costs. It's not cheap, but you get what you pay for in this world. Expect us to make meaningful investments and expect us to not respect the status quo at all here. Expect us not to ever play defense and expect us to never try to protect this brand. Expect us to build this brand and to invest in this brand and to make this one of the most admired brands in the world. Not the most admired home furnishings brand in the world, one of the most admired brands in the world. Put us up against anybody in the next few years. What's in our pipeline is going to take this company to a whole new level. Michael, Jack, I think I would just add two things, obviously not adding any specifics. to the numbers of the startup cost. But keep in mind that much of the cost related to initiatives follows the revenue. So you have that aspect in terms of matching. And then I think the second thing I'd say is just think about our scale. We have over a billion dollars of EBITDA. And so whatever numbers you put around the investments, whether it's launching contemporary or whether it's global expansion, again, I think relative to what we produce here at Currently, it's still in some ways modest, and to Gary's point, it needs to be material, and we need to be thoughtful about it, as we always are.

That's very helpful. Thank you so much, and have a good holiday.

Operator, are we still there?

I'll check in with him. Michael?

You're here. You're here. You're here. Yeah.

You're here. I don't see Kalonda.

Wait, did we lose the operator?

I'm here. I'm here. Our next question comes from the line of Steven Zaccone with Citi. Your line is open.

Great. Good evening, everyone. Most of my questions have been answered, but I wanted to just circle back on supply chain. You know, it would be helpful if you could just quantify maybe how much did supply chain challenges weigh on revenues in the third quarter? Maybe how much is that impacting you in the fourth quarter? And then, you know, as we look to next year, like if supply chain continues to be this pain point for the business, talk about your ability to maybe diversify into some other areas, some other vendors. What are the other options you can pull?

I think if you're to diversify, you've got to go to another planet. Thank God for Elon Musk. But, you know, when you have a pandemic, you don't know where it's going to hit. You don't know what country it's going to hit. You can move from Vietnam and that could be the worst thing you do, right? Because Vietnam now it's going to get on the other side of the pandemic and you're going to put yourself in some country that maybe it's hit by the pandemic. So again, you can't play short term here and you know, we're, we're relatively diversified. You know, you take company like Nike, I think, what was it? 40, 50% of their business in Vietnam. What our business is 20 something. Yeah. 20 something percent in Vietnam. Vietnam, has great craftsmanship. They have high quality. They have a committed labor force and a great culture. And we get some of our best product in the world out of Vietnam. We're not going to leave Vietnam because there was a temporal issue, like a pandemic. That would be a really bad business decision. The pandemic didn't permanently damage Vietnam. It temporarily hurt Vietnam. It'd be like saying, oh, our bedroom furniture business was down because of the pandemic. Let's get out of bedroom furniture. It's not how we think about the business, nor how we should think about the business. As it relates to the supply chain, the supply chain's going to be what it's going to be, every kind of business in the world is impacted by the supply chain. You kind of write it out. You learn from it. You react intelligently. You don't panic and do dumb things. We're fine with this. In business, there's always... shit that goes wrong all the time. It's not what happens, it's how you react to it that matters long term. I wouldn't make too much out of the supply chain. The news is making too much out of it. Everybody's making too much out of it. Did we lose revenue in Q3? Of course we did. Did we lose revenue in Q4? Of course we did. Imagine what our numbers would have looked like had we the supply chain not blew up in Q3. I mean, if you think about it, at the beginning of Q3, Vietnam shut down the entire country, 27% of our business. By mid Q3, it was up to 20% production. By the end of Q3, it was up to 40%. By mid Q4, it's up to 80%. Up to 80%, doesn't mean you're really at 80%. It means production's at 80%. Everything that was at zero, and then the 80% when you were at 20%, the 80% that didn't get made, and then the 60% that didn't get made when you're 40%, that's all in backlog. It takes months, quarters, a year to catch up, but it is what it is. It's okay. Life goes on. Business goes on. It's not... It's not strategic. You know, it's temporal. So I just wouldn't make too much about it unless your clients are short-term hedge fund traders that just, you know, want to play us week to week or month to month or quarter to quarter. Tell them don't buy our stock.

Yeah, appreciate the color. Your details, though, do help to contextualize the situation, so appreciate that. And then just to circle back on the capital raise, you know, to follow up on the previous question, how do we think about some of the priorities for cash now? Like, as you go international, do you think having a little excess cash on the balance sheet is more prudent for the business? Just how do we think about those priorities now as you kind of go global?

I think everything we said in the press release, nothing's changed since we did the press release on the, you know, as it relates to the $2 billion, you know, term line. So, you know, nothing's changed. We don't need the money to go international. We don't need the money to go global. You know, we have a 70% plus ROIC. You know, we turn investments into cash pretty quickly. You know, we're going to throw off a lot of positive cash flow this year. And, you know, if things, you know, remain in some kind of, you know, current normal directionally, we'll throw off even more cash next year. And so, you know, if you read the press release, it'll tell you exactly how we're thinking about the $2 billion. Fair enough. Thank you. Happy holidays. Thank you. Happy holidays, Stephen.

Thank you. Our next question comes from the line of Max Wake-Lenko with Cohen & Company. Your line is open.

Great, thanks a lot and congrats on a really nice quarter. So first, can you maybe help us sequence some of the major projects the team is working on next year? For instance, contemporary world of RH and some of the other concepts that you discussed in the letter, just so we can have a better cadence about growth throughout next year.

Yeah, contemporary will be kind of late spring time. It will be the launch of contemporary. Interiors, modern, airy, late spring, early summer, you know, late spring, early summer, you know, kind of sequence. Think about, I'd say those three books and collections will all kind of happen in the first half. Yeah, it'll be kind of staged a bit. Contemporary will come first, and then what? Interiors and modern, yeah. And then, you know, the launch, the global expansion will happen kind of late spring, early summer. With England, the guest house will kind of open late spring. The unveiling of the World of RH, late spring, early summer, you know, about the time other things are happening, right, that will be coordinated with contemporary and guest house. RH1 and RH2 and RH3 and all this stuff goes on the world of RH. The digital platform has to be ready to go. When all that happens, the world of RH will happen. RH1 and RH2 and RH3 will be available for chartering beginning late springtime. RH3 will be available somewhat sooner. You know, because the boat, we're stopping to see it in Miami on the way back, and we think it's probably just about done, right, team? And so I'm going to take the first cruise, so I'm going to christen the boat. I'm not really a boat guy. I get seasick. But I thought it's better for me. And I'm paying full price, so everybody knows, for the charter. Okay. So I I'd rather have me be the Guinea pig in case, you know, like the boat hasn't been out in the water for a couple of years with, with COVID. So we use the time to kind of reimagine the boat and take it to another level and tie it into the aesthetic of RH1 and RH2. And, you know, and so, you know, now they all look like a family and, um, RH3, you know, statically is aligned with that. And we made some major enhancements. So if you, if you've seen the video of RH3, you know, that, that was up, It looks like a whole new RH3. It's super cool now. It was a super cool boat when we bought it, but it's really, really cool. But we want to make sure the service is right, the food's right, and all that stuff. So I'll be the guinea pig on that over the holidays. But that will be presented on the website. And then RH in your home is happening. We had such a great meeting. We kind of green-lighted. As fast as the team can go, we will go and RH in your home. So it's all happening sooner than later this year.

Got it. That's helpful. And then maybe one that's a bigger picture, but how do you think about price elasticity for your shopper unrelated to supply chain and the inflation-driven price increases? How do you view your ability to take pricing seriously? longer term and also continue to launch more and more higher end products as you guys climb the luxury mountain.

Yeah, that's exactly what it's relying on, right? It's relying on the taste and style, uniqueness and differentiation, the desirability that's driven by that. It's driven by our ability to present it in a really beautiful way that drives desire and the quality. The design of the product and uniqueness of the product, the presentation of the product, the quality of the product. We should be on the same path we've been on the last several years. We don't think we're at a point where we say the quality everywhere is at its very best. We think we can continue to evolve the quality and take it higher. We'll continue to trim from the bottom so we don't over the long term look like some good, better, best assortment. We want the assortment to represent the very best in the world. We think we're on that path, and we think as we continue to climb up the luxury mountain and we continue to elevate everything, right, the perception of the brand, when people, yes, when you open Arc Digest and you see a multi-page story about, you know, that's titled RH lifts off and you, you know, read about RH1 and Arc Digest, which, by the way, the last jet they printed in the magazine was 25 years ago. Yeah, it was the Getty's jet, the Jetty. you know, which is 707 or 727 that was redone. So, you know, when all of a sudden a brand has what Arc Digest, you know, kind of, you know, markets as one of the best new beautiful private jets that says something about your taste and style and, you know, thought leadership and creativity. And I think when people see RH3, it's going to do that. And I think the game changer and, you know, the dots don't connect. Most of the world has to see it to believe it. We say internally we have to believe it to see it because it's our vision. But it's hard for anybody who hasn't seen what the guest house is going to look like to really get it. When the world sees the guest house and understands what we've done there, Yeah, from a hospitality perspective. And not just the rooms. The rooms are extraordinary. The world's never seen rooms like this. There's things that have never been done in hospitality. And not different to be different, different to be better, right? And there's things that are really extraordinary. And you kind of wonder, like, why hasn't anybody ever done this? Just because, you know, people start to... do what they've always done, and then they try to protect what they've done, and they stop inventing and innovating. And so we think the guest house could be the next new market, right? Like no different than when Anushka Hempel and Ian Schrager invented the boutique hotels. This is kind of a completely new thing. There's nothing like it. And when you look at the consumer-facing hospitality part of it, from a restaurant point of view, I really think it's one of the most innovative new restaurants in America, you know, not because we're trying to be fancy or fussy, you know, it's just the kind of food you can eat every day done at such an extraordinary level in a dramatic fashion. You've never seen a restaurant like the Guesthouse Restaurant, you know, or the Guesthouse Kitchen or the Guesthouse Dining Room. We don't know what we're going to call it yet. But, and then we've got a, you know, another intimate experience, you know, we've got a champagne and caviar bar that the world's never seen you know that's part of the guest house and when we open our second guest house in aspen it's got the first rh bath house and spa and it's a bath house and spa like the world's never seen so when the world kind of sees these things and and you know it those two will elevate the brand they will change the perception of rh it'll make rh more desirable even though a guest house won't have any of our furniture. The idea of the guest house, the execution of the guest house will elevate the brand and position RH in consumers' minds. We believe it's a thought leader, a place maker, and a taste maker, and that will make our brand more desirable. No different, by the way, than our new galleries make our brand more desirable and render our product more valuable. It's just a different way to communicate than most people do. Like I said, inside our company, it's not what we say, it's what we do that defines us. Although we're the only business of our kind that doesn't participate in social media, we don't have an Instagram account, we don't have a Pinterest account, we don't have a Twitter account, because of the work we do, we're the most Instagram brand of our kind in the world, the most pinned brand of our kind in the world, and the most tweeted brand of our kind in the world. So, you know, and I think these investments we're making and things we're doing and the halo we're going to create, like I think about, I talked to somebody the other day, you know, about the fact that, you know, you think about a brand like Nike, right, and Nike, you know, celebrates great athletes and great athletics. And they don't really talk to you about the rubber, you know, the air sole or this thing or the shoelaces or they don't market this and that. They have LeBron James, you know, wearing their shoes. They have Serena Williams. They have, you know, the best athletes in the world. And they celebrate athletes and great athletics. And they make a massive investment in those things. And it defines and elevates their brand. Well, Think about our galleries. Think about our restaurants. Think about our guest houses. Think about our residences. Think about RH1, RH2, RH3. Think about our investment in creating an integration of food, wine, art, and design in Napa. When you see what we're going to do in Europe at RH England, today we were out in the French countryside and saw the most incredible chateau I've ever seen in my life. Not that I'm a chateau expert, but, you know, I've seen a lot of pictures, let's just say. And, like, you know, we might do RH France, and people are going to go, like, are people going to really go to shop there? People are going to be inspired by it. And anything we've done like that in our, you know, career, we've always figured out how to monetize those kind of things. Right. And the guest house, in the beginning, I never thought if I can break even on the guest house, that'd be a good thing. I think the guest house is going to make more money with 10 rooms than a lot of our galleries because it's that good. And so when you think about price elasticity, you've got to think about all these things that we're doing and all these investments we're making that will render the RH brand more valuable, that will render our product more valuable and more desirable. We think we're on a path in our industry that's not too dissimilar to the path of Apple, the path of Nike, the path of Tesla, the path of people who really, really built you know, the best brands of their kind in their industries and they became the best brands in the world. So, and that gives you a lot of pricing power. You know, everybody thought the Apple phone was really expensive at $400 when the Razer flip phone was $69. Well, you know, go buy the new Apple phone today and it could cost you $1,200 or more. I mean, who would have thought people would spend $1,200 for a phone? Who would have ever thought people would spend $20,000 on a Birkin bag or more? It's all about perception. So, you know, we're just not anywhere near the top of the mountain. And when you get to the top of the mountain, you have even more pricing elasticity.

Thank you. Our next question comes from the line of Brad Thomas with KeyBank Capital. Your line is open.

Hi. Good evening. Great results. And I would add that the new RH Jacksonville store looks really nice, having had a chance to visit that. My question was just going to be about some of the changes here in the leadership team. And, Gary, if you could address the Monty's retirement from RH and how the team is evolving after that.

Sure. Well, look, DP and I worked together for 26 years. Yeah, I remember DP and I were together at Williams-Sonoma. And, you know, so, look, you know, he will remain, you know, one of the most important figures in this company. His quote will remain in my presentation when I talk about our values that, you know, the right people are our greatest asset and the wrong people are our greatest liability. and he's built an incredible team. When you look at three of the people at the table here with me today that have stepped up as DeMonte works through his transition at the end of the year. But Stephan Dubin is our new chief gallery officer and really chief customer officer, and anything that's customer-facing reports to Stephan. He's at 21 years now.

Today.

Today. Oh, my God. Your timing is great, Brad. Steph is right here today. You know, we're all in Paris, and today is his 21st anniversary. Stephen started as a part-time Christmas seasonal in our Thousand Oaks store, and, you know, he's worked his way, you know, I mean, he's been as close to the customer as any of us, you know, more closer to the customer than any of us, which makes him the smartest guy in the room. We always like to say those Those of us who've gotten farther and farther away from the customer generally get dumber and dumber. And the only way we could not be obsolete is to listen and learn to those people that are closer to the customer. The smartest people in the company that's closest to the customer, and Steph's been one of the closest people to the customer. He's run some of our most important galleries. He then took over home delivery, ran home delivery. He helped get Fernando on the team, which kind of changed everything. They're huge advocates of each other. Steph was our chief galleries officer under DP. Steph has got his own unique vision for where this should go, as he should, and thinks he could make a big difference. He's not taking over as a caretaker. he's taking over as a visionary and a leader that's going to take things to a whole new level, and as DP would expect of him, right? And Fernando, who's sitting right next to him, you know, who he helped kind of get here, you know, you guys have heard Fernando's story. He came to America with $5 in his pocket, you know, after the passing of his father. He came from Colombia and, you know, worked as a landscaper, worked as a night janitor in Kmart, and then figured out, had to save enough money to buy a delivery truck and started delivering furniture, and then went on to build, his name's Fernando Garcia, and he went on to build FGO Logistics, which was our number one provider. He had 550 trucks across 26 states, and Fernando joined our company, sold FGO Logistics. became a wealthy guy, doing that will become even more wealthy being at our age, but it's not really about the money for any of us that are here. It's really about the work and about making a difference in the world. Again, he's, thus far, he's been the greatest leader we've had in the supply chain. Not because he has the most experience, because he's done mostly home delivery, But, you know, he's the most resourceful person I've met. You know, he and Steph and Sandy, who's, you know, stepped up, you know, Sandy Piland, who is our chief people officer, 14 years with the company, Sandy, and, you know, was one of our field leaders and then went in under DP and ran all the, she's been under DP the whole time, ran all of our customer care centers, And now it leads all of human resources. And, you know, the people functions in the company, you know, is another force of nature. And, you know, another person, you know, like Steph and Fernando that has her own unique vision for where that function ought to go. And, you know, so it's, you know, a new team, yet a very experienced team. Sandy, 14 years here in our culture. Steph, 21 years here in our culture. And Fernando, only, what, two and a half, three years in our culture now?

Yeah, and seven as a vendor of RH.

Yeah, yeah, and then seven as a partner of RH, vendor, but a partner of RH with FGO Logistics, so he's really been here like almost 10 years. And, you know, so you know, we feel really great about the team, and then, you know, now we just have, you know, like, you know, Airy Jack and I have to keep up with these three. You know, like, you know, we say in our company, you have to ask yourself, are you a fox or an ox, right? Like an ox, you know, has usually a cart behind them with a bunch of rocks that they're dragging up the hill, and, you know, a fox has a bunch of rabbits that you're chasing, and, you know, these three are like rabbits. They've got new ideas. They've got a lot of energy. They have their own visions. And they're making all of us step up our games and move faster, think harder, and try to remain relevant leaders around next to their passion and drive and determination. So I'd say Team RH has never been in a better place. All of us love and respect E.P. He'll be a friend and a partner for life. He'll be available to us any time we want. Love and respect E.P. and his family. He's a man that has given his life for his career and has had an incredible career and been best for an area that some two of the longest best partners I've ever had in my working history. And they've both played a big part in getting this brand to where it is today. But in all things, everything evolves. Someday, these guys will be running this without me. Not anytime soon, just based on my calendar, so just not a prelude to anything. But I don't think any of us could be more excited than the team. We had our first kickoff as a small team. We're traveling together this week. We were together last week in an off-site. We spent three days on our vision, values, beliefs, and culture. We're very much in sync. I think everybody on this team renders every other member of this team more valuable.

Well, that's great. Thank you so much, Gary. Congrats, everyone, and happy anniversary, Stephan.

Great. Thank you. Thank you. Our next question comes from the line of Seth Basham with Wedbush. Your line is open.

Thanks a lot, and good evening. I just want to circle back to the discussion before about the near term for starters, just making sure I understand some of the pieces. Jack, you said that the costs of initiatives will follow the revenues. I'm just wondering if you meant the opposite, that the cost will precede the revenues, especially based on the fourth quarter guidance that implies that operating margins will increase on a two-year basis at a much slower pace than a third quarter.

Well, I'm talking about initiatives. So if you put, you know, if you open a store, you recognize the rent expense, for example, of that store. Let's say it's an international one. When you open it, you don't. Again, the costs beforehand, a lot of times, as in May, the costs are capitalized. As it relates to Q4, though, I think one of the things to keep in mind, if you just look at sequentially what we have in the quarter, in terms of just the sheer revenue dollars, since it's a lower revenue dollar amount than Q3, it's one of the dynamics that's impacting some of the operating income. And again, you know, there's going to be some quarterly, you know, variability here and there. I think just focus on the, you know, the year trends, the long-term trends in our outlook and where we're going. You know, I think if there's a little bit of noise here and there, it's, you know, there's going to be some timing differences here and there. I don't think there's anything to read into that.

Got it. Okay. And just to follow up, obviously you're not giving guidance for 2022, but thinking about some of the additional costs that are shifting from 2021 to 22, like the source books, now you're restarting, should we think about the revenues associated with the source books following the mailing, such that there could be some cost pressure in the first half of the year?

Yeah, I mean, that's how it works. When we mail the books, you recognize the initial advertising cost, and then you generate demand following that. Again, that's just Quarter-to-quarter timing, again, for the year. We're launching, as Gary said, in the spring and early summer. So I think as it relates to that investment for contemporary, for interior, for modern, I don't get what he's saying there. I think you won't get a 100% return on that investment in the first 12 months. We really think about our source books like a 12-month investment. We'll mail it, and then we'll mail it again in 12 months. Some years we mail a second book. You know, I think this year we'll probably mail one because, you know, we haven't mailed in so long. But it's generally in the past we would have amortized the books over the life of the book and call these books 12 months books because we're going to launch them, you know, kind of early spring, late spring, early summer. You know, you won't get really any revenues in the first quarter and you'll get some revenues in the second quarter. but you'll take all the costs in the first half. So, yeah, so that will be a deleverage. And then, you know, revenues should start to, you know, ramp in three and four, and then you'll get leverage in the first two quarters in the following year, right, because you'll have it wrapping around. You also have to think about our business and not just give timing of demand, and then you have timing of revenues. which will lag demand because we've got a high special order business and you've got to deliver the stuff in the customer's home. Those are just kind of fundamental timing things in the business. Again, they're not strategic. The worst thing that any company could do in the home industry coming out of this pandemic, cycling things, starting to invest again, is even think about this shit. Because you will start making short-term decisions and screw up your long-term strategy. So, like, I am not going to sit here and worry about the fact that ad cost is going to be massively delivered in Q1, Q2, you know, mostly Q2, depending on when the books get in, and all of a sudden try to stagger mailings or do some weird thing like that. You know, we want to create demand as fast as we can and as much as we can. And, you know, we shouldn't be sitting here going, oh, let's, you know, let's wait three more weeks and mail the book at the beginning of this quarter or something like that. That's just dumb stuff, right? And even Elon Musk has come clean on, hey, you know, wrote a letter. I guess, you know, people picked it up and produced it and said, we're no longer going to try to jam all these deliveries at the end of a quarter. and create costs that you would never have and, you know, kind of pack in deliveries at the end of the quarter and just pull revenues forward and do it at incremental cost. So we've got a really clean model. We don't do stupid things. And, again, we invest with a long-term view, and we're not a quarter-to-quarter business.

Completely understand. And then bigger picture, Gary, obviously there are a lot of demand tailwinds right now. but there also has been some stock market volatility recently. Do you see that at all being a demand risk or interest rate increases potentially being a demand risk into 2022?

I think it all depends, again, what the Fed does and how this whole thing gets managed globally. And, you know, stock market volatility, the downside has never been good for our business at the high end. It's not really good for luxury. It's not good for, you know, So it is what it is. I don't know how to control that. And interest rates rising generally can slow down housing and other parts of the economy. And that's never really a good thing. But that's what past history would say. So I'm not telling anybody anything they don't already know. I think what really does happen to interest rates is the Fed correct that this is transitional inflation. Is it going to go back down? Will these supply chain issues go away? What will happen? I don't know. Everybody's got their own guess. We just try to build models and kind of a series of plans that say, if this happens, what's our move? If that happens, what's our move? If that happens, what's our move? And one of our scenarios will kind of unveil itself. So we've got a plan for all the scenarios. We just don't have a control on those kind of macro things that happen, we just have to be prepared for whatever happens and be able to optimize and outperform other people doing what they were doing, take market share, you know, grow and, you know, keep investing in the brand and build a better brand long term. And, you know, there's going to be tailwinds, there's going to be headwinds, just like, you know, There's going to be rainy days and there's going to be sunny days. Like, none of us have control over that. But we can decide what to do on those days.

Of course. Thank you very much and happy holidays.

Happy holidays, Seth.

Thank you. Our next question comes from the line of Christina Fernandez with Telsey. Your line is open.

Hi, good evening. Thank you for taking my question. I wanted to ask about marketing. On the letter you commented about a national advertising campaign which i think is the first time i've heard you comment on that so maybe any thoughts around that and marketing in general if you have a lot of innovation next year how are you telling your customers about about those yeah i you've seen us in the past when we do major launches we usually do some kind of a print campaign uh with um

you know, the kind of shelter magazines because that's kind of fishing where the fish are. Most people who are designing a home, building a home, you know, decorating a home, furnishing a home are looking at magazines or, you know, whether it's a printed one, whether it's a digital, you know, one and so on and so forth. So, we will have, you know, some level of investment in that kind of marketing, you know, print, digital, and things like that that tell people about contemporary because it's really new. We want the world to know about it. It's our best work. We'll stretch that out and make sure as many people know about it, relevant people that know about it. Sometimes people ask me, why don't you advertise in Vanity Fair? Well, it costs two or three times more than a shelter magazine. And it's people that are remodeling or building a new home or designing a new home aren't necessarily reading Vanity Fair for that reason. We've got a real defined market. So we like to say we like to fish where the fish are. Almost everybody I know that's doing anything in their home is Yeah, they're looking, I mean, now there's more resources, there's Pinterest, there's other things that people are looking for, but still everybody in it is doing a home, redesigning the home. They're looking at the magazines, whether it's in digital format, you know, they're looking at, you know, print format. They're still tearing things out or pinning things on their Pinterest board based on, you know, based on what they see and what they think the trends are. So, and just as much so, you know, based on what RH is presenting in the source books or online or in our galleries. We just try to make sure everybody who's somewhat interested in the home and is investing in the home, we have a net that will let them know you should really see this before you buy anything.

No, understood. That totally makes sense. And my follow-up question is on the inventory, you know, it's sort of like, I guess, slightly down from the second quarter, but can you comment on how much of that you actually have on hand versus it's in transit in the water that you'll get later on?

Yeah, good question, Jack. I'll answer that one for you. So we have, as you know, we ended the quarter with $634 million, and $427 million of that is owned inventory on hand. Some of you get the percentages, the two-year percentages. One of the ways to look at this, because obviously the comparability versus 2020 gets a little skewed here and there. The way we look at it is on a two-year basis. I think if you look at Q3, our revenue was up 49% on a two-year basis, and our owned inventory was up 27% on a two-year basis. Still showing that we're behind from relative growth in business.

Thank you.

Thank you. I'm showing up for other questions in the queue, although now I'd like to turn the call back over to Mr. Gary Freedman, Chairman and CEO, for closing remarks.

Great. Well, thank you, everyone, for your interest and for your questions. I'd also like to just really wish everyone a happy holiday. Hopefully, everyone's going to get to spend time you know, doing what they love with people that they love and hopefully without masks or Omnicom, if I've even said it right. But we wish everyone a happy holiday and, you know, just want to thank our team, you know, not just across the United States but around the world that supports our business for, you know, all your really efforts to help position RH as the brand it is today and We look forward to, you know, a great fourth quarter and an exciting 2022. So thank you.