RH

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and fiscal year 2021 RH Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today. Alison Malkin, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2021 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer 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 issue 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 opinion 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, Alison, and thank you for joining us today. I'm going to take a few minutes and walk you through our shareholder letter, and then Jack and I and the rest of our leadership team who's in the room will open the call open to questions. To our people, partners, and shareholders, we are pleased to report another year of record results with net revenues increasing 32% to $3.759 billion versus 2.84 billion a year ago, and up 42% versus 2019. If you exclude money losing online businesses, it represents one of the highest two-year growth rates in our industry. Demand versus 2019 grew 49%, which resulted in an incremental backlog at the end of the year of approximately 200 million of net revenues that we expect to fulfill over the course 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 25.6% in 2021, up 1,130 basis points versus 2019, reflecting the strongest two-year growth in our industry. Our performance demonstrates the desirability of our elevated and exclusive product range, the connected power of our evolving ecosystem, the profitability of our fully integrated business model, and the significant strategic separation created by our inspiring physical spaces. For the quarter, net revenues increased 11% within our guidance range, despite the virus variant that magnified supply chain issues in the second half of Q4. We once again exceeded our adjusted operating margin outlook in the fourth quarter reaching 25.2% versus 23.7% last year and up 780 basis points on a two-year basis. We generated 97 million of cashflow in the quarter and 477 million for the year inclusive of $191 million increase in inventory of which approximately 60 million is due to increased transit times and the balance targeted to alleviate our end-ship demand backlog. We ended the year with $90 million of net debt and nearly $2.2 billion of cash on our balance sheet, while generating ROIC of 73% in 2021. 2022, the year of the new. As we've mentioned, many of our plans were delayed by the virus. While many of our plans were delayed by the virus, they were not disrupted by it. We use these past two years to reimagine and reinvent ourselves once again and believe 2022 will mark the beginning of the next chapter of growth and innovation for the RH brand. 2022, the year of the new, will include the opening of RH San Francisco at the historic Bethlehem Steel Building, our most extraordinary new bespoke gallery to date, the launch of RH Contemporaries, the most compelling and potentially disruptive product introduction in our history. The elevation and expansion of RH interiors and RH modern, inclusive of new collections and enhanced quality. The unveiling of our first RH guest house in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury in the $200 billion North American hotel market. The introduction of two new culinary concepts, an elevated live fire restaurant opening in San Francisco, England, and the New York Guesthouse, plus a champagne and caviar bar also opening in the New York Guesthouse this year, with plans to expand both concepts to our future galleries in Paris, London, Milan, and Aspen. With average restaurant volumes approaching 10 million annually and a very profitable four-well model, we are making significant investments to build a world-class hospitality organization and see endless opportunities to elevate and activate our places and spaces, creating integrated and inspiring experiences for our members and customers that cannot be replicated online. The debut of the world of RH, the first phase of our new digital portal, highlighting the connective power of our evolving ecosystem of products, places, services, and spaces, all designed to inspire customers to dream, dine, travel, and live in a world thoughtfully curated by RH will create an emotional connection with our customers unlike any other brand in the world. The liftoff of RH1 and RH2 are customized Gulfstream G650 and G550 that will be available for charter later this year. The former has already generated press and praise as featured in the pages of Architectural Digest, the Wall Street Journal, and the 20 titles of Modern Luxury. The christening of RH3 our luxury yacht that will be available for charter in the Mediterranean and Caribbean. RH3 will be featured in the Rob Report, Sea Magazine, and Boat International over the coming months. The continued rollout of RH in your home, a unique and memorable delivery experience with brand ambassadors guiding every detail of the delivery and extending the selling experience into the home. The expansion of the RH brand globally, beginning with the opening of RH England, the gallery at the historic Einho Park, a magical 17th century 73-acre estate in the English Petric side 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 RH Palo Alto, the gallery at Stanford Shopping Center, which will represent the next evolution of our highly productive prototype galleries. Now let me move to our business outlook. While we enter 2022 with confidence that our efforts will continue to elevate and expand the RH plan for years to come, we also recognize there are several external factors, such as record inflation, rising interest rates, and global unrest that create uncertainty. Although we lack the ability to predict economic outcomes on a macro scale, we do have the business model, strategy, and balance sheet to take advantage of opportunities that may present themselves, whether it be times of economic expansion, contraction, or dislocation. While first quarter sales and margins trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed. We believe it is prudent to remain conservative until demand trends return to normal, and we are providing the following outlook for the first quarter of 2022. First quarter net revenue growth in the range of 7% to 8% versus 78% last year, with adjusted operating margin in the range of 23% to 23.5% versus 22.6% a year ago. Fiscal 2022 net revenue growth in the range of 5% to 7% versus 32% last year, with adjusted operating margin in the range of 25% to 26% versus 25.6% in 2021. Our outlook is inclusive of opening RH San Francisco in late spring, the RH Guesthouse in early summer, RH England in mid to late summer, and RH Palo Alto in the fourth quarter. Now let me turn to our 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 the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand 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 RH, 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 Yonkville, an integration of food, wine, art, and design in the Napa Valley. RH1 and RH2 are private jets, and RH3 are luxury yachts that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business while 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. The entirety of our strategy will 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. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by our age. creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than our age to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Aston Martin to Amman, Louis Vuitton to Laura Piana, Harry Winston, to our maze, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We understand that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxidol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, The courage required in the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can't be learned in a classroom or by managing a business. They must be learned, earned by building one or by reaching the top of the mountain. Onward, Team RH. Carpe diem. Now operator will open the call to questions.

Thank you. Ladies and gentlemen, as a reminder to ask a question, you need to press star then one on your telephone. We ask that you limit yourself to one question and one follow-up. 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 Steven Zaccone with the city. Your line is open.

Steven Zaccone Great. Thanks very much. Good afternoon, everyone. First question, can you just elaborate a little bit more on the full-year revenue expectations? So the full-year guidance the $200 million of backlog demand being fulfilled despite all the newness in the business. Maybe just help us understand what you're seeing in terms of the softening that started in February. and how that factors into your outlook for the balance of the year versus first quarter. Thank you.

Well, the softness and the newness is all implied in our guidance. And as we've said, we believe it's prudent to take a conservative view at this time based on kind of the disruption. But we saw our business soften since the beginning of the uh, the conflict and the market volatility followed. Uh, and, and I think you've got to kind of also consider the fact that you've got, it's clear now to, uh, everyone that, uh, inflation isn't going back to 2%, even though Janet Yellen, you know, not too many weeks ago when it was four or five said it was going to two and two weeks later, it went to 7.5 and now it's at 7.9. And, uh, we've got, you know, Jerome Powell saying that, uh, they waited too long. And now we're going to have, you know, two years of interest rate increases, rising interest rates. So you've got a lot of news and a lot of noise out there compounded by, you know, a war and invasion. And, you know, I think the invasion of Ukraine by Russia, you know, just became a kind of a reckoning point, if you will, where People had to stop and pay attention to everything. And we saw our business slow about 10 to 12 points. And it's been relatively consistent during that period. When it returns to normal, not sure. How aggressive is the Fed going to be? Not sure. There are things we know, and I don't mean to be a pessimist, but history would tell us four to five times the Fed raises interest rates over a sustained period. we have a recession and I don't need to tell you guys that math. That's just a fact. You know, so look, we, we tend to, as I like to say, pray for peace and plan for war. And so, you know, we believe we've got a great hand going into this year. We believe we have the most exciting, you know, lineup of initiatives, product, you know, experiences in the history of our company. We've got, the best strategy, the best business model, you know, one of the best balance sheets in our industry, the highest ROIC in our industry. So kind of game on, you know, whatever happens, happens, you know, and we're just putting ourselves in a position to win.

Yeah, that's very helpful detail. Thank you for that. I had a question on just the margins for international companies. So I think you said in the past that Europe can be the same or higher than the margin profile for the U.S. How should we think about the profitability curve as you do some of these initial openings the next few years? I guess in another way, should we assume there's a little bit of dilution in the operating margin guidance you've given for this year just from U.K. opening and then Europe next year?

Yeah, that would be the right assumption. But I'd say we're all going to learn together, right? It's the first time we've done it. You know, there's not a ton of history of a business like ours expanding globally and taking control of the brand versus, you know, licensing the brand to others, which is an easier way. We believe a long-term, less profitable and value-creating way for shareholders. You know, and history, you know, has demonstrated that many of the great brands that license their brand or franchise their brand, you know, spent years and a lot of money buying their brands back. So, you know, we, you know, we believe it will be accretive to earnings long-term. That's what the math would say is you kind of study others' models. But exactly what the curve is going to look like, you know, look where it's the first time we've done this. So I don't think we have, and a better view than anybody on this phone, we'll kind of communicate as it evolves. But I think we become more confident every month, every week as we get closer. We realize we've got greater brand awareness and greater brand affinity you know, as we meet people, talk to people, there's a lot of excitement for RH opening in Europe. And there's a relatively high awareness of our brand with the target consumer. So we feel very confident in it. And long term, you know, we believe it's going to be accretive to our operating margins. And I'd say if you just kind of think about where we are today and we are still not a business of complete scale in the United States. We're not a retailer that is closing stores, that is shrinking to optimize their business. We're still growing. We have lots of new galleries to transform and have several billion dollars more we're going to do just in the U.S., And with that scale, and as our product continues to evolve, transform, and go to a higher level, we can kind of see operating margins approaching 30%. And when you think about international possibly being accretive on top of that, should be accretive on top of that, we could have a model here long-term that looks like some of the best luxury models in the world. If you kind of segment LVMH or Kirin or look at the individual brands, because a lot of times great brands and great businesses get lost in kind of multi-branded business models. But Hermes has operating margins in the mid-30s. Chanel has operating margins in the mid-30s. Louis Vuitton, if you segment it out, has operating margins in the mid-30s. And Gucci has operating margins in the low to mid-30s. And by the way, if you just stand back and think about those luxury brands, they have a lot of competition of scale. There's actually a lot of choice for a wealthy consumer to access luxury. quite a few brands from an apparel point of view. It's also a lot of brands to access from, you know, if you think about the jewelry sector or the watch sector, if you think about luxury cars, if you stand back and think about luxury home furnishings and luxury design, if you think about, okay, who is the fully integrated brand at the top of the luxury mountain in the world It's a big void. It's a really big void. You've got a very fragmented kind of portfolio of kind of category, niche category brands that are relatively small, that don't have scale, that don't have control of their brand. They're franchised out. They control brands. very little of their distribution. I mean, if you just take BNB Italia, for example, in North America, I think BNB, how many points of distribution they have, you know, call it 40, 50 points of distribution. They control four of those points of distribution. You know, so their brand is like thrown around in a bunch of places. And they're probably the best global brand, you know, in the upholstery category, but they don't cover all the categories. And then you've got, I think it's Industrial Design Invest, something like that, some group that's got the other ones at B&B Italia, Floss Lighting, some other things. People are trying to kind of throw stuff together and figure out what to do. And so I look at it and I kind of say, we have like a 20-year lead in our sector. It takes a long time to build something like we're building today. And we're just getting to a place where people are going to start to understand what this brand's capable of. You know, people are just going to start to see in a consistent way the kind of physical environments and experiences that we're building for customers, the exciting hospitality concepts that, you know, are going to bring people to those physical experiences and connect with people and you know, create greater brand awareness, greater brand affinity. You know, when people see what we're going to do internationally, you know, in North America, we've had to unwind, you know, a really kind of chotchy, crappy business, you know, in little stores and spend a great part of our journey unwinding the kind of a shitty business, turning it into an okay business, you know, spending many years of this journey, just not going bankrupt, you know, trying to exit, you know, lots of categories, lots of businesses, trying to move from a, you know, from a promotional model to a membership model and then reposition not only the product, but all the real estate and not, you know, it's like, Frank Sinatra says, not in a shy way, right? I mean, we haven't taken our galleries, which are not necessarily small when you look at other players or competitors in our market. I mean, we have 10,000 to 12,000 square foot, our legacy galleries with 7,000 to 8,000 feet of selling space. It's not small, but we're not taking them and just remodeling them. We're not taking them and making them 20% bigger or 50% bigger. We're making them like 500% bigger. And, you know, they're really the most exciting and interactive and experiential and dominant, you know, physical experiences of their kind in our industry today across any category, I'd argue. So, you know, I think when you, think about taking the very best of who we are and going to Europe with that and not being kind of plagued with, with our old identity, not being positioned like other people kind of have been, you know, and you know, you walk them all where we've got a legacy store in them all today, you know, there's us and there's three or three other people or four other people, depending, you know, who, who do you want to pick? You know, and you know, the names, um, Those people aren't international in any meaningful way, nor are they really positioned to compete against us today, even in the U.S. And so internationally, it's so fragmented. There's nobody of scale. Most of them don't control their distribution. And most of them are kind of like where we were 20 years ago. So I just think the opportunity globally for this brand is maybe like no other brand in the world. You know, if you really stop and think about it, you know, you just like, you take any other category and say, who's, who owns it at the high level? How many brands are there? Who are the leading brands that have control of their brand, you know, control of their product, you know, on all levels, um, you know, have the platform we have, have, have the, uh, you know, the business model that we have, like we're not going over there with negative EBITDA trying to grow in Europe. We're not going over there with like 5% EBITDA and trying to grow in Europe. We're going over there with like close to 30% EBITDA. So we just have, we are in such a great position. And I don't think, I don't think anybody but us really gets it just because we've been studying it for so long and thinking about it so long. So, you know, and, and, and then what we're doing next from a physical point of view in Europe is better than anything we've ever done. Like when you guys see what's coming, you know, I wouldn't want to be in Europe competing with us. I'll tell you that, you know, I thought I didn't want to be competing with us here in North America in our category. You really don't want to be competing with us in Europe. And I don't mean to say that arrogantly. I mean, you just got to take a close look. So there you have it.

Yeah, that was great. I appreciate all the details. Best of luck this year.

Thank you. Our next question comes from the line of Stephen Forbes with Guggenheim Securities. Your line is open. Check to see if your line is on mute.

Can you hear me? Yes. Yep, we can hear you, Steve. Sorry about that. So I wanted to focus on the new product launches. So Gary, if you can, can you update us on the specific timing of the launches, contemporary in the elevated collections, in modern, in interiors, any changes? And you also color on the breadth of the new collections as we try to conceptualize the impact. And then whether the current supply chain environment has or is anticipated to impact these launches in any way.

What do you think? Of course it's impacting the launches. I mean, everything is somewhat late, you know, and a little fragmented as it's coming together. So, look, we would have liked to be out there with contemporary in March. You know, we would have, I mean, before, you know, the variant in the fourth quarter kind of ripped through. And again, it really, I think it impacted the U.S. a lot, you know, not that greatly. You know, it just kind of went through the U.S. very quickly. But, you know, when you think about countries like China or Vietnam or some of the places that we, have big sourcing out of... It just all got kind of goofed up. I think we're about a couple months behind. Also, we want to be smart just as we think about the economic landscape we're going into. If the economic landscape is you know, it's volatile, you know, you, you want to be careful, um, especially if you've got a, uh, you know, a source book catalog business like ours, you don't want to mail into a big headwind. So, you know, we're, we're reevaluating our plans. We're, I mean, we're kind of, we, we thought we might launch with, you know, 450 to 500 pages of contemporary. I think it's going to be probably more like three to 350 pages. Just stuff is late. Um, You know, my sense is it might even be later. I mean, the supply chain, you know, I think many of us thought it would have been, we would have been caught up by now. I mean, we'll be lucky to be caught up by the end of the year. And, you know, because it's just hitting everybody from all angles, all the raw materials, all the transportation issues, you know, not just the transportation getting it to us, you you know, having to get all of their components from all over the world, you know, shipped to them. You know, so you just have this compounding supply chain kind of puzzle happening. So I think the key thing is, you know, just don't rush it right now because you can probably make mistakes that you'll, you know, you'll wish you didn't. You know, I think just like we said, we're being a little conservative. You know, how aggressively do we go with circulation? we'll see, you know, we kind of pushed modern interiors to the second half, you know, let contemporary kind of, you know, kind of take the stage in the first half, but it'll be coming in May. We don't want the book to get out there, you know, before we have some goods in stock and it's, you know, and it's all running late. So, you know, and that's probably, you know, also contributed to just our, conservative view for the year. So, you know, and even on the, you know, on the galleries, on the projects, you know, just, we're in a world that is, it's just, I've never seen it so chaotic, honestly, from an execution point of view, whether it's construction, you know, sourcing, manufacturing, you know, shipping, supply chains, you know, freight, uh, you know, everything's a little out of sync in the world right now. So, um, but, but everybody's dealing with it. So I think it's, it's just, how do you, how do you do it in the most intelligent way? Uh, you know, and I, I, you know, it's like, I like to say, you know, it's like quality, you know, you, you kind of got to wait for quality and, and in, in, We're not going to get any bonus points for rushing right now. I just don't think we are. I think there's more risk of winding up in the ditch. So we're kind of slowing things down a bit. We're trying to be more thoughtful. We're trying to make fewer, bigger, more important moves. And that's just our view. I don't know. everybody else is approaching things, but that's our view. We tend to spend a lot of time here thinking very deeply about a few big moves. This is a year where we got a lot of big moves because they all kind of got backed up. And so, you know, we don't want to create more chaos in our world and our customers' world. So, yeah, so what you see in front of you right now is, And the letters is the best news I have. It's different news than my last letter. You know, I wrote the last letter. I didn't know. I didn't know how to say it. Omnicon. Omnicon. Yeah. You know, all of a sudden, you know, that hits, you know, then all of a sudden, you know, boom, we've got a war. You know, you Russia invades Ukraine. Boom. You know. You know, Yellen says inflation's going from four to two, and then it goes to seven and a half, and Powell says, you know, we're behind. I mean, there's a lot of, everybody thinks supply chains are getting better. I don't think they've gotten better at all. You know, I mean, it is what it is. I mean, product is on the water for a long time. Getting, you know, ships into port, It's taken a long time. We've got generally about five extra weeks in our supply chain right now. That's a lot of time. It's a lot of money. And that's the average. So that means some stuff's coming on time and some stuff's 10 to 12 weeks behind. And when you run kind of an integrated business like ours where you need all the pieces of the puzzle to kind of paint the picture, that just makes it more complex and more difficult. But at the same time, right now, everything on that list, the year of the new, I'd be shocked if it doesn't all happen. If you ask me what's the biggest risk, Palo Alto goes into first quarter of next year. But that's not going to make a difference to the year anyway.

Gary, super helpful, right? Because I think as we try to contextualize the prudence of the guide, it almost appears like you're not incorporating a contribution from a lot of these year, the new factors, right? I mean, any, any comment on, on how you sort of built the guide from a bottom up standpoint or how you would define the prudence behind it. And you have, you have a great track record here. So any thoughts on just, um, the guide in a holistic context on just the prudency behind it?

Yeah. Well, look, I mean, it's probably one of the most difficult guides, you know, since 2008 and nine, because we, you know, we're, we're right in the middle of this disruption, you know, from Ukraine and Russia, which I think, I don't think it's all Ukraine and Russia. I think it's triggered a greater awareness. Like it's like someone, you know, I think this was ringing the bell, everybody pay attention, and then all of a sudden everybody started talking. All of a sudden the Fed's off to the races, and that creates concern. You've got housing prices at all-time highs. I mean, is this sustainable? I don't know. For how long? The math doesn't make sense on kind of what's happening in the housing sector and other places that You've got inflation like I've never seen. You know, I was telling people, you know, when Yellen said we're going back to 2%, we were just signing our new freight contracts, ocean freight contracts. I just wonder if anybody at the Fed picked up the phone and called a business person and said, hey, what do you think is happening with inflation? How's ocean rates? How's this? How's that? I mean, you know, I, I think, I don't think anybody really understands what's coming from an inflation point of view, because either businesses are going to make a lot less money or they're going to raise their prices. And I don't think anybody really understands how high prices are going to go everywhere in restaurants, in cars and everything. It's, And I think it's going to outrun the consumer. And I think we're going to be in some tricky space. So everything's kind of happening at once. And I think you've got to prepare for war. I mean, if you're going into a very difficult, unpredictable time, you've just got to be super flexible. You've got to be able to improvise, adapt, overcome, and kind of be ready for anything. And I don't mean that by playing defense. I mean it by playing offense. But I wouldn't call it happy days right now. I'd call it pensive days. Be ready. And when we play like that, you know, we usually have our best outcome. When we get overly optimistic, we have a higher likelihood to wind up in the ditch and get ahead of ourselves. But if everything, if the worn crane ends and inflation slows down some miraculous way, I don't know, everybody can sign new freight contracts. I mean, most of the world, it's all signed new freight contracts. Two years ago, the price of a container for us went from $2,400 to $4,800. Yeah, doubled. I'm not going to tell you what it just went to, but just let's say that looked like a nice increase. And it's not just that, it's everybody. Either people are going to do stupid things like take quality down to make their goods look like it's better value, or they're going to not they're going to have to take prices up and where they won't take prices up and they'll hurt, you know, their, their margin profile is going to change, but it's not just us. It's everybody I know in every industry. And I, you know, I, you know, I, I just don't think it's like the, it's like, again, I don't want to scare everybody, but I, you know, you talk about him, like there's, it's the scene in the big short where, you know, everybody's in that ballroom. And the guy, I think it's the guy from Bear Spurns or someone's up there, one of the things. And he's saying how they're going to buy back, you know, a billion dollars of their stock, this, this, and that. And then, you know, one guy's on his BlackBerry. He goes, can I ask a question, sir? In the 20 minutes that you've been talking, your stock's down like, you know, like 35%. And everybody ran out of the room. You know, I just think, you know, look, we tend to just try to be transparent and honest. And, you know, look, maybe our stock is going to, take a big hit because of this and people are going to think Gary Friedman wasn't excited. I've never, you know, I've never been in my 22 years here, I've never been more excited. I've also never been more uncertain. Right? So, and I think you have to take a real balanced view right now.

Super helpful. Thank you, Gary. Jack, best of luck. Thank you.

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

Hey, Gary. Hey, Jack. Thanks so much for the somewhat brutal honesty, but I think we have to hear it. I guess my question is, Gary, you've talked about in the past two events that tend to impact your business, market volatility, high net worth, ultra high net worth, individual. That sounds like You have baked that into the guide. And then the second would be, you know, deceleration in high-end housing, which we haven't necessarily seen yet. How much of that is potentially in the guidance? And then, Jack, on the $2 billion term loan that was taken out, what are the plans there? Thank you very much. Yeah. Francisco looks awesome.

Oh, thank you. Thank you. Yeah, like I wish I had more to tell you, you know, what's baked in, all our best thinking. But like I said, you know, there's just a lot changing. There's a lot evolving. I mean, you know, like you have to ask yourself, I mean, where's inflation going the next time they report it? You know, what's really happening today? I mean, we're just trying to, you know, build a plan and a view that – puts us in a position to win. So we thought about everything we can. I don't know. We can't impact nor can we forecast big macro trends until you see them. I mean, the Fed can't do it. Janet Yellen can't do it. I don't think anybody in this call can really do it. No one ever really gets these things right. But you can capitalize on any environment if you're prepared. And that's all we're trying to do. We're just trying to be in a position to win, be in a position to take advantage of any opportunities that present themselves. We're going to be patient. we may look a little slow to some people, but when, you know, we like to say, don't move until you see it, right? So we're going to wait until we see it and then we'll move. And when we move, we generally move aggressively. Right now, a little hard to see it. You know, when all of a sudden your business kind of drops 10 to 12 points overnight and, you know, there's just, more news and unrest in the world, you know, just, you got to change what you're doing. You know, if you, if you don't change things, things won't change. So we're changing things. We're, you know, adjusting and improvising as we go. Um, we're excited as hell. Um, but you know, like this is, look, this is similar, similar conversation I had with our board, you know, said, you know, my opening was a, uh, you know, in my 22 years, never been more excited in my entire career. Here's why all the things I read you all happening, by the way, you know, almost everything there is happening in the, in the next 12 weeks, you know, most of it, um, you know, it's like a few things happening in the fall and how out and stuff. And, uh, uh, but also because of all the things that, you know, rising interest rates, runaway inflation, uh, unrest, so on and so forth. You say what's happening in the housing market is a really good thing. When things get too hot, they usually get cool. Again, I don't want to scare people. I'm just trying to tell you you can see the numbers that we see. The last time houses had multiple bids like this, the last time prices went up like this, there wasn't a great other side to it. But things are different. We're in a different economy. There's new kinds of businesses. There's new kinds of wealth creation. There's new kinds of productivity, things driving the economy. So I don't know. Is there enough good things, whether in our business or other parts of the economy, that motorists through and we don't have a recession, we don't have a slowdown, does Ukraine get settled sooner? I don't know. Maybe I should be the one and we should be the one asking you guys the questions today. We spent a lot of time, I wrote everything that we know. If you guys know stuff and have points of view, we'd love to hear what you think.

And, Adrian, I think that also answers the plans for the term loan question. Look, we raised the capital to provide optionality. It allows us to be opportunistic. And I think, you know, I think Gary summarized well sort of how we're thinking about, you know, not moving until we see it. So when we move, you'll know.

But any plans to retire the converts early?

Yeah, all kinds of things. But you also look, you have windows that you can do things in in our company. You've got You know, I've got expiring options that's putting me in a position to have to, you know, sell roughly 1.1 million shares of stock. You know, all those things. You can't have too many things happen at one time, you know, and have conflicts happening. You know, it's probably not appropriate to be buying back the stock when the CEO is selling the stock, right? Right. You know, so, yeah, there's just a lot of things you got to think about, right? You know, so, you know, we don't have complete flexibility on all those decisions, you know, and so, but look, we'll make, I believe we'll make great decisions for our shareholders. Like, if I didn't have to sell the stock, I wouldn't be selling the stock. I actually thought maybe there's some way we can expand then the options. And I found out, nope, that's an IRS thing. The IRS doesn't let you go past 10 years. And then, you know, the options expire. So, you know, my options expiring in November of this year. And, you know, I think it's better to try to get it out of the way so we can have more operating flexibility. You know, so, you know, my situation actually, you know, constricts us a bit.

Got it. Thank you very much for all the information.

It's very helpful. Thank you. Our next question comes from the line of Curtis Nagel with Bank of America. Your line is open.

Great. Thanks very much for taking the question. So, yeah, just, Gary, I guess thinking about, you know, a lot of noise going on, obviously, as we've kind of gone through and a lot of detail here on the call, volatility, supply chain, malaise, All sorts of stuff. I guess kind of thinking about the state of the industry and thinking about, you know, the premium and luxury end of things, at least in the U.S., it's still pretty fragmented. I guess maybe sort of cynically thinking here, do you think you guys might have a bigger opportunity to take share? You know, how do you think that plays out? How has that changed, you know, over the past, I don't know, couple of years? You know, thinking about the next, I don't know, two to three.

I think we feel great about the next two to three years. So I think we'll take share in any environment, Curtis, in any environment. You know, again, these are all kind of temporal issues, you know, whether it's the war, the You know, the inflation and stuff like that. None of this is permanent. It's just there's a lot of things going on at once. And, you know, the supply chain, everything else, you just have to navigate in the best possible way or you can kind of screw up your business model and make some, you know, strategic mistakes. It's one thing. We're all going to make a lot of mistakes. And I tell everybody in the company, you know, the only difference between their mistakes and my mistakes is my mistakes and it costs the company a lot more money than their mistakes. So, you know, collectively as a leadership team, you know, we have thousands of people in this company, you know, that their livelihood is determined on our decisions. And, you know, we want to make great long-term decisions. We're not here for, you know, a short period of time. You know, I've been here 22 years, and I'm looking over at, you know, Steph has been here, our chief gallery officer, Stephan Devine, who's been here 20, 22 years, a little longer than me, I think, right? You know, Ari has been here 15, 16 years. Jack has really been here 10 or 11, you know, but I mean, technically, if he was with B of A, take nine at our age, plus three with B. Yeah, Sandy, Helen, Sandy, 14 years, our chief people officer. You know, I mean, I go around, there's more people in the room, a lot more people in the room. We've been here a long time. We tend to be, we're going to be here a long time. So we're playing for the long term and we're trying to make really good, big decisions that kind of change kind of the vector of the direction that we're going. And I think we've made some really good ones. I think that's why we've got an operating model that's you know, not a little better than the next best person. It's a lot better than the next best person. And we have really big moves we're making right now that can increase that vector and, you know, accelerate our performance significantly more. You know, we don't sit here and say, oh, we made 25% operating margin. We think this is the best we've ever done, so it's not going to get any better. Right? we think it's going to get a lot better. We maybe see another five to 10 points of operating margin, quite frankly. It's just that right now, I'm giving you guidance right now. We're talking about right now. Right now is a bit confusing. And anybody who's saying it's not, you know, good luck. It's just, I think it's the time you've got to You know, really keep your eyes open, your antennas up, and you've got to prepare for anything that might happen. I mean, again, you know, look, the war could end. Things could get better. Our business could bounce back. But there's a lot of things that are sitting out there. You know, rising interest rates is never a great thing. Now, it might be three years away. before rising interest rates really take a big hit out of the economy? I don't know. You know, there's always patterns. And, you know, we've looked at all the patterns. We've got all the graphs. We've laid over, you know, all the graphs of, you know, all the interest rates. Like, look, the last 20 years in the U.S., the average interest rate was 2%. You go push it out 30 years, it's 3%, a federal funds rate. When's the last time it's looked like that? The 1950s to the 1970s. Okay, that's the last time. How old was everybody in this call in 1980 when the federal funds rate was 20%? I'm not trying to scare anybody, but... almost everybody on this call, in 1980, like I was, you know, I was a kid. You know, I didn't know what I was doing. I didn't have wisdom then. I just don't think there's a lot of people in business today, except for Warren Buffett and Charlie Munger and, I don't know, George Soros. Maybe there's a handful. You know, if you had wisdom in 1980, you know, you kind of get into your years of wisdom in your 50s and, Yeah, you start to get wise. You know, I look back, I go, my 30s, I really didn't do anything. I just, like, worked really hard. My 40s, I just got better. I could get shit done and kind of see a bigger picture. In my 50s, I started seeing a much bigger picture. And in my late 50s and 60s, I think I've kind of gained a lot of wisdom. And I can see a much bigger playing field than I could. If somebody... Somebody was 50 years old in 1980. They're 90 years old today. So I just think a lot of people haven't seen this. When's the last time anybody here has seen interest rates go up two years in a row and six or seven times this year and four or five times next year? Nobody's seen that. Nobody's seen a lot of things that are happening today. So I'm just saying... Look, I'm just trying to be completely honest. Again, I couldn't be more excited, but I couldn't be more uncertain. And that's just the story. Other people might be banging a brighter, happier drum than me. Do they have better numbers than we do? I don't think so. We'll play the game the way we play the game. And We have a lot of exciting things coming, and if we're too conservative, that's okay. Just make more money.

For sure, and certainly appreciate the long-term view. Just one quick follow-up, just in terms of, I guess, pricing that you may be including in the guidance, right? Probably some residual from price taken last year. As you mentioned, lots of new costs coming in, or

continued cost increases so uh you know is uh our another round of uh price increases included in the 22 guide or no yeah we've got everything included in the guidance and again our our business has been evolving for multiple years right so we we are selling you know we are selling higher price points to fewer customers bigger orders you know like in in general we're still evolving this model into a luxury branded model. So, you know, ours is a little different. I mean, contemporary is the highest quality goods we've ever had. It's the highest price points we've ever had. When we get those right, they tend to be the best-selling products we've ever had. Our most expensive sofa is our best-selling sofa. You know, so, you know, when... You know, so... we're probably better positioned to take prices up than others because we've been taking prices up for years. And in our industry, it's kind of event buying, right? It's like buying a car. You're not looking at the price of the car until you need the car. You're not looking at the price of furniture all the time until you need the furniture. So I think we're a little better positioned than others other industries and other categories as it relates to price increases. You know, we are pretty disciplined about taking price increases and so on and so forth. But, you know, but these are going to be bigger. You know, I mean, you know, what's going to be the real when you have this kind of, you know, impact from freight and raw materials and, you know, price increases from suppliers and so on and so forth. I mean, you can say, oh, we're big. We're, you know, we can absorb it. That's kind of BS when what's happening in the world today, you know, like prices are going up everywhere. And if they're not, earnings are going to go down. And so, you know, the question people have to ask is, do I want a bigger, lower margin business? And do I want to chase sales? Or do I want maybe for a while, a smaller, higher margin business and then come out of this really positioned for the long term. And that's the view we've taken, not just recently, you know, but, you know, for almost 20 years and really accelerated, you know, six, seven years ago, you know, seven years ago, we began the move to membership six years ago and, you know, launched Modern and so on and so forth. You know, Modern was, the prices of Modern were 50% higher on average. Yeah. Yeah. when we launched something like that, almost two times in some cases. So, yeah, but it's all, I mean, I know you guys are trying to figure out the model and the guidance and exactly what that's gonna be. You know, I don't know. I think we can all get lost in the details right now. You know, it's kind of the big moves and the big picture that's important and, you know, making really smart, big moves. And I think all our big moves are the right big moves. And if we change our mind in any of them and we decide not to do something, pull back on something, you know, we'll make the right decisions based on how things evolve. But, you know, the business just did change weeks ago. So, you know, we're probably the, I don't know, like, When did other people report? Yeah, I mean, we reported a little later, right? So people probably hadn't seen the real trends yet. You know, unless we're just the only ones getting hit right now, I mean, I'd be surprised if that was happening. But, you know, what I've heard is there's been a broader slowdown in our industry, and it's got to be probably in other places too.

Fair enough. Much appreciated, Gary. Thank you.

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

Good evening. Thanks a lot for taking my question. So Gary, when you say that you've seen a 10 to 12 point slowdown, presumably that's on demand comps. So where are your demand comps trending over the last few weeks? Are they actually down year over year? And the counter argument would be that while there is a lot of uncertainty in the environment, your core customer came into this year in a very strong financial position, and the high-end housing market is in a pretty good spot. Is it your view that these purchases are merely being deferred, or is there a possibility that prices have been raised so significantly that the customer is now responding to that?

What do you think? I don't know. I mean, we it could be a little bit of everything. It could be the distraction of the war. It could be so many things, Michael. So and we're not giving really, you know, we we we, you know, our demand got hit by 10 to 12 points. You know, we're not actually guiding demand. We just wanted to give you color that there has been a change. And, you know, and there's also one of the biggest dislocations between demand and revenues. I think it's going to be that way for everybody. So we just wanted to try to be transparent and say, hey, look, you know, just because we might, you know, up eight in one, it doesn't mean that that's where demand is. So we're trying to be transparent with shareholders and, you know, and let people know what's really happening you don't want to come back next quarter and say oh yeah well our demand's been down for a whole the first you know for you know the last several months and uh you know we didn't tell you when we could have yeah so you know again i mean it probably hit our stock today i got it you know whatever i mean you know, we're playing for the long run. And I know, you know, everybody's got clients and there's in and out of stocks and these aren't easy times for all shareholders. I, you know, I'm just going to tell you the truth and we're going to be transparent. We didn't have to say this. I think we're the first ones talking about demand. Other people are talking about, they're talking about sales and they're saying sales can be strong. Well, Our sales are going to continue relatively strong in Q1 comparatively to what we're up against. But our demand – so it's just the truth. We don't – we can't – you know, what the consumer's got, do they have more money? Do they have this like – they do. They're not acting like it right now. So that's what you've got to know. Totally. Will it change in three months?

No. That's super, super helpful. Are you seeing this consistently across the board, the slowdown across categories as well, or is there any patterns that you can see? And you're not the only one. I mean, Traeger, the grill company, reported last week, also said that the last three weeks they've seen a pretty big slowdown. So this is probably a broader trend, and it's right for you to point it out as well. So I guess any flavor you can provide on what you're seeing by category of geography. And then the obvious question is, to what degree did you flex your P&L? If this is prolonged and gets worse, is there downside risk to the 25% to 26% operating margin target for this year, understanding that, you will have an opportunity to grow that from that base over the long run.

Look, if it stays down like this the entire year, I think everybody in the industry, well, we will be adjusting our numbers down. We don't, you know, this looks temporal. You know, when things like this happen, they usually don't stick. It all depends on are there any other shoes that drop? So, you know, we've got things that are going to counter this. You know, we've got new goods and initiatives that are going to come into play. So, you know, I mean, this is all we have for you right now. So... I think next quarter we'll have a much better view. And I don't know, Jack, you want to jump in?

On the categories and geography, obviously, Michael, we don't have those kind of items. I think generally no major headlines there. And then, I mean, obviously if there's risks, if the model stays down for an extended period of time, does it risk the margin? Well, that's just drama. But we'll update you. to the extent that happens.

Understood. Good luck. Thank you so much.

Okay.

Thank you, Michael.

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

Hey, thanks a lot. Just to continue on this theme, unfortunately, I was wondering, Gary, if you could compare and contrast some of the consumer behavior that you've seen in recent weeks to December of 2019 when your business office, particularly potentially in the context of that 10% to 12% decline that you just cited?

Well, you know, a 10% to 12% decline looks like a 10% to 12% decline. So there's very different factors that contributed to that. So, you know, how those will play out is the unknown. But again, you know, like we're all kind of like, major focused on kind of right now. I think that, you know, our focus is really on a much longer horizon and the big moves we're making. So, you know, no matter what happens short term, we're going to win. We're going to take market share. We're going to be disruptive. You know, we've got the best model. We've got a great balance sheet. We've got an incredible strategy. Uh, we've, we've got a global expansion that we're teeing up that, you know, the best work we've ever done. Uh, so if you're doing some of those things into a headwind, whatever, we've seen headwinds, you know, this is not the first goat rodeo we've seen. Uh, you know, this is, you know, you just navigate through them and you, and you win through them now, but you know, I'm, I'm not going to sit here and, you know, just, You know, try to act like nothing's happening right now. It would be the wrong thing to do. And so, but, you know, how it compares to 2018, you know, they were both down. Different circumstances. Different time. We're a different company. I don't know. What was our operating margin in 2018? Yeah. Yeah. Yeah, in 2018, we had an operating margin of 11.4. We had a different cash flow profile. A lot of things were different. We have an operating margin open to 26 today. We've got a better real estate strategy than we've had. We've got a higher return on invested capital than we've ever had. We've got more exciting things in the pipeline than in 2018. We're all smarter and better than we were in 2018. So, you know, we're tremendously excited. We're working our butts off here. And, you know, we're super pumped. You know, I may not sound like the most excited right now. I am. But you guys keep asking me the same questions to a degree about, you know, like I'm giving you the best answers, you know, If you want to talk to me more about Europe or more about other things, you'll probably get a little bit of a different tone. You know, I don't know, Chuck. I mean, we don't see anything specifically different in the numbers. I see something different in the environment. And, you know, I mean, in 2018, did we have the Fed say they're going to raise interest rates six or seven times? No. Did we have inflation at the levels we have today? No. Did we have, you know, the chair of the Fed say, hey, we're way behind? No. You know, there's just a lot of things very different, you know, and, you know, I've seen, you know, enough cycles to know that, you know, caution is advised right now. Yeah, that's what I'd say.

I think we all appreciate your honesty. Just maybe a bigger picture on a brighter spot, you called out the $200 billion TAM for RH guest house. Just quickly, can you talk on the ramp how quickly you can build that out over the next, say, three to five years?

Oh, I don't know. We have our first one opening. It's knocked on wood. I think it's extraordinary. One of the things we've learned is when we do extraordinary, remarkable work, we've always figured out how to monetize it. And this is some of the best work we've ever done. You know, we have our second one that in Aspen that's coming, you know, a year behind it. And, and that's got, you know, you know, that's very similar in a lot of ways. They're both, you know, kind of a micro hotel. We, we, we've got, you know, 10 rooms in New York and nine in Aspen, but they're incredible rooms or rooms that no one's ever seen. It's, architected for privacy. I don't think anybody's architected a hospitality experience for privacy. We believe privacy is going to be a big market. You know, privacy is the one thing everybody's given away on social media. And it's one thing the internet's taken away because you can Google anything about everyone. So we, we believe privacy is going to be an important market and a market you can monetize. And we're creating a, uh, you know, a, a concept. I think that's unlike anything else in the world. Um, and we're doing things that have never been done in hospitality, it's a place we would all love to stay. You know, it's at a different price point now. And if we get what we think we're going to get for the rooms, we think it can really work. But we don't know. We haven't sold a room yet. We haven't opened a restaurant yet. You know, we have the first... kind of restaurant like that that we put in our bespoke gallery in San Francisco. It's our new live fire restaurant concept that's tremendously exciting. I think, you know, it's got a really wide net. I think it's delicious food. You know, we're doing it internally from scratch ourselves. You know, we've been in there eating almost every night and fine-tuning every detail. And so we think on a lot of levels, the guest house is going to be incredibly exciting exciting concept for us and will elevate the RH brand in, you know, in the world of design and taste and style and, you know, placemaking and stuff like that. So I think it's going to have a huge impact on our brand and how we're perceived in the world. And if it works the way, you know, we are kind of modeling it now that we're closer to it and we can see it and we can think about how to price it. Yeah, it could be a real business, but that's not what we're planning for right now. We're not sitting there, you know, kind of saying, yeah, we're going to go build a billion dollar hospitality business. But then again, you know, I only thought RH could be a billion dollars not too long ago. So it's, you know, I mean, this is, in a lot of ways, it's the best work we've ever done. you know, of any kind of work we've ever done. It's the best work we've ever done. So we'll see what the consumer thinks. And they'll kind of tell us, you know, how excited to get about it. Got it.

Thanks a lot. Thank you.

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

Hey, good afternoon. Thanks for taking the question. Gary, I was hoping to follow up on RH England and see if there was any more color you could provide on how things are shaping up from a supply chain and logistics standpoint, knowing you're going to a new continent here. And what should the customers over there expect initially that might be different in terms of anything like delivery time or relative price points versus what we see here in the United States?

Well, look, Fernando just got back. I'm looking at him across the table. I mean, he's updated us that things look good. Yeah, absolutely. Yeah, I think we're ready to go from a supply chain side on our end. You know, the part of the supply chain we don't control. We'll see how that evolves. But I think so far it looks like, you know, we'll have inventory. We'll be ready. We'll be able to deliver, you know – and execute. The construction, like any construction today in the world of COVID, is taking longer and costing a bit more. But I kind of think about RH England as a kind of a living store. It's like it's a big 73-acre estate, and not everything has to open at once. We are going to have How many hospitality? I'm trying to think about that. We've got three restaurants opening on the property. Altogether, I think there's five or six hospitality experiences. We have the lingerie restaurant. We've got the conservatory. We've got the loggia. We've got the wine room, the tea room. We've got the juicery. What else? Yeah, we've got weekend picnics on the lawn that are going to be happening. I mean, it's going to be a fun place. Like, I don't think the conservatory restaurant will make it for this summer. I mean, we may just, you know, but that might come next time. You know, like next season. But I think this is going to be something that's going to be a really fun, interactive experience. I think if we do it well, a lot of people are going to come. It's going to be a great environment to see our product. It's this beautiful, beautiful state. It gets incredible light. It has incredible views. We have the biggest herd of white deer in all of Europe. We have a deer park that deers graze on it. You sit there, have a picnic, and look at the deer, sit in the lingerie, look at the views, or the conservatory, or the loggia. They all have views. Yeah, it's going to be spectacular. We kind of call it the most unusual store in the world, you know, internally. That's not what we're going to say externally. But, you know, I think it's going to get us off to a great, great start. But, you know, we're running a bit behind. We're, you know, like you always have all kinds of, this is a grade one listed building, just to put it in perspective. That's like Buckingham Palace is a grade one listed building. When you have a grade one listed building, you know, I don't want to say anything, but all of a sudden I get anybody in the English side upset, but you know, it's just not the easiest, uh, to get approvals, to make any changes and so on and so forth. And, and look at the people we're working with in historic England is, they've been tremendous, you know, and they've been excited about our project, but you know, it's just a slower product process and COVID slowed us down a bit. So, um, you know, we're kind of rushing to kind of hit mid summer may could be late summer, but, uh, whenever we get open, it's going to, it'll be spectacular. And that's really the key. You know, you don't get a second chance to make a first impression on something like this. So, you know, whether it opens, I thought we're going to get June. I don't know, you know, it's probably a long shot to get June now, but, you know, could be July, could be August, whenever it opens. You know, I think everybody in our organization is going to be proud of it. I think our shareholders are going to be proud of it. And I think customers are going to be really excited about it. It'll be our best work. And we just did our new best work. If any of you, a few of you came to the opening of our San Francisco, which wasn't the opening of our San Francisco. It was once they announced in the Bay Area, in Northern California, that masks, we didn't have to wear masks. We said, okay, we haven't had a party in two years. We've opened a bunch of galleries. We're having a party in our hometown. So we set the date, we mailed the invites and we had a party, even though everything wasn't exactly done. But those of you that were there, you know, it looks spectacular. It's, it's, it is, you know, it's the most, it's the most extraordinary gallery we've ever built. It's got an entirely new restaurant that, you know, that's been called the Palm Court, this incredible and, you know, new, this new wine experience there is new wine bars and, you know, incredible rooftop with views of downtown San Francisco, you know, but England goes to another place, right? And then, you know, when everybody sees what's coming in Paris, it's just extraordinary. And what we're doing in Mayfair in central London, incredible, incredible. We're stringing together four buildings in this incredible experience. And in, you know, Paris, we're going to have a champagne and caviar bar on the top floor and the roof with views of the Eiffel Tower. I mean, you can't make that up, right? In Paris, the RRH Paris is going to have a champagne and caviar bar with views of the Eiffel Tower. And we used to say, I think Chicago, the three arts still has the record for the most engagement in one of our restaurants, but Paris might take that crown after a few years. And then when you see, you know, we're very close to, I guess I shouldn't say, you know, because we're in negotiations, but something even wildly more spectacular in the French countryside. You know, if we do this one, I mean, it's just an incredible brand enhancer. So the stuff we have coming is, you know, you're just going to have to keep changing your perspective on what's possible and how to see our brand. I think all the people who came to our party last week, I, I think designers were blown away. They thought if you, if you get out on the West coast, you know, even if it's not open yet, I think we'll open kind of mid April. We've got a few more things we had to get done there. But if you're, if you're anywhere near here and you want to see it, let us know. We'll give you a tour because on, on the main floor, we set up our contemporary and it's, shocking. It's so good. It's, it's that good when you see it. I mean, I think people, it's just going to motivate people to change their house, redo their house, no matter how long ago they bought furniture. It's, it's a whole new thing. It's, it's very, very cool. And, uh, and just beautiful and the quality is outstanding. So, um, you know, so, you know, a lot of excitement coming, uh, we're really pumped about England, uh, And if there's no COVID and we can have a party, do not miss that one.

All really exciting stuff. If I could squeeze in a follow-up, perhaps a bit more dry. You all have had kind of different capital structures over the years, and depending on if times are good or bad. Just to circle back on that question of the term loan, I mean, in this environment with inflation where it is and the trends you've been seeing, I guess, how do you think about what the capital structure should look like right now?

I think we've consistently answered that. I mean, I'm not sure that we have a target cap structure. We think very opportunistically about our capital, our capital deployment, our cap structure. So that hasn't changed. I think we've been quite consistent probably for the last nine years about that. We raised the capital to provide optionality and give us some flexibility here going forward. We accomplished that at a very attractive rate.

You certainly did. Great. Thank you so much.

Thank you, Brad.

Thank you. We had another question that came in the queue. It's from Seth Basham with Wedbush. Your line is open.

Thanks a lot and good afternoon. Not to belabor the point that's been brought up by some prior questions, but just in regards to thinking about the margin outlook for 2022, with a more muted sales outlook, I'm surprised to see operating margins expanding in your guidance. And I'm wondering if you are changing anything in your cost structure materially relative to when you last talked to us in December. For example, you're cutting back on some of the source book distribution that you're planning or anything else along those lines. Thank you.

No, well, like, I think I've just looked at us, yeah, since, what, 2017, you know, on relatively modest revenue growth, we've had pretty significant operating margin expansion. So, you know, I would hope you'd get used to it, you know, because we don't expect to not, you know, to anytime soon stop expanding margins unless we make, you know, some kind of short-term big investments that maybe put weight on it. But even with opening Europe, even with a lot of pre-opening expense and investments and, you know, opening Europe means, you know, we've got people over there now, we're flying teams over there, people over there living there, staying there in hotels. We'll have big teams going there. We've had big teams in San Francisco, you know, to get, get that open. We've got big pre-opening costs for the guest house. You know, we're absorbing a lot of investments and, and, it's clear to us, you know, how important, uh, kind of the connective tissue of hospitality is in our business today and will be, you know, and our vision for hospitality now, I think is just magnified and what we can see and what we have confidence in doing. Like, look, look, not too many years ago, we didn't know anything about restaurants and, uh, You know, it was the end of 2015, really beginning of 2016. We had our first restaurant. We didn't even have a host, you know, because we thought no one was going to show up. You know, there was part of it like, okay, who wants to go eat in the middle of a furniture store? And so, you know, the original, if you look at the Chicago video, I think Brendan, who we partnered with in the first few restaurants, he said, you know, like, there's going to be no host, no this, no that, you know. We opened the first day and all of a sudden we had a line out the door and we had nobody seating anybody. We had customers hovering over tables waiting for the next person to leave. But, you know, we went from just one restaurant that wasn't really in our backyard. It was all the way in Chicago and it was with, you know, with somebody, you know, that was not inside our company, right? And now it's uh, you know, so six years later and we've got 13 restaurants that we totally control. Uh, you know, the entire Hustle Valley team is, you know, it's internal. It's not farmed out at all. Uh, we're developing it. We've designed, we designed the restaurants. We designed the menus. We're architecting what this platform looks like. We've done the guest house from scratch. Nobody helped us with that. Uh, we even did all the architecture internally and all these things. So, um, You know, we're like, we're really going to become a hospitality company too, but. Well, some people might think, well, gosh, it's just like another business, not the way we're thinking about it. Like we, everything we do, we think from an integrated perspective. So it's not like we're running a hospitality business. This is really an integrated hospitality business. It's amplifying the core business and amplifying the brand. Uh, and it's a, it's a new way of talking to people. It's a new way to market a brand. It's a new way to connect. Um, and we just see so many more opportunities. So you're going to see us do new things like the new live fire restaurant. You're going to see us, uh, you know, do this champagne and caviar, uh, uh, bar in New York. Uh, and, uh, you know, we'll be the first one. You're going to see the first RH bath house and spa in Aspen. Um, Yeah. And you'll see other things. I think this is, this brand is going to evolve and become something that the world's never seen. And in many ways it's already become in many ways, you know, depending where you are and what you're looking at, it's already become something the world's never seen. Um, especially from a financial outcome perspective, right? No one's had a model like this. Uh, so we, we, we're going to, you know, we're investing heavily in hospitality this year, you know, and, uh, because we think that there's such a big opportunity to enhance the brand. So, you know, we're absorbing a lot of costs this year. You know, like we had almost no travel during COVID. So we're back to traveling. You know, that's why you saw some deleverage in SG&A in Q4. You know, one of the things was travel. We're traveling again. We're working again. You know, we came back to work a lot earlier than everybody else. We don't have a whole You know, we don't have a vote here on, you know, are we coming back to work or not? You know, it's like, you know, I mean, a lot of crazy things happening in the world that I think is going to be bad for productivity. Like not going to work, I think, is one of them. But anyway, but you see in our model that, you know, we're, you know, relatively conservative sales. We're expanding operating margins. Even though we have a lot of investments and we're expanding internationally. So it just tells you about our model. What's the model going to continue to look like over the next two, three, four, five years? Or what's it going to look like over the next decade? I really think it's going to look like the handful of very best luxury brands in the world, if we do it right. I mean, but you've got to build desirability and scarcity and prestige and exclusivity and a lot of things, you know, into really being a luxury brand, you know, like to get people, you know, to really desire that brand. You know, you've got to execute it to such an incredible level. And we're getting there. You know, we're getting better all the time. You know, we've got a ways to go. And so that's what we're optimistic about. We go like, look how we're doing. They haven't seen anything yet. We can see what's coming over the pipeline over the next two, three, four, five years. We know what's in that pipeline. Some of that pipeline is under construction or we're finalizing a lease or we're doing the renderings and finishing the architectural designs on projects that... I wish I could talk about them all right now, but you guys... probably get scared. So I've already pretty scared you enough for one day. Just trying to be honest about what we see. Thank you so much. We're not scared, just to be clear. We're excited. We're just cautious.

Thank you. I'm showing no further questions in the queue. I will now turn the call back over to Gary for closing remarks. Okay.

Well, thank you, everyone, for your time. We look forward to speaking with you next quarter. And do let us know if you're on the West Coast and want to see RH San Francisco or come by and see the Center of Innovation. Okay? You might need a pickup after this call. Thank you.

Take care, everyone. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.