RH

Good day, and thank you for standing by. Welcome to the RH first quarter 2022 results conference call. At this time, I'll put on your mode. After the speaker presentation, there will be a question and answer session. To ask a question during a session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today. Alison Malkin, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2022 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 security laws including statements about the outlook of our business and other matters referenced in our press release issue 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 opinions only as of the date of this call, and we advocate 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 the reconciliation of these non-GAAP to GAAP measures in today's financial results test release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you, Allison, and good afternoon, everyone. Thank you for joining us. As we do, we'll start with the shareholder letter. To our people, partners, and shareholders, we are pleased to report another quarter of record results as revenue increased 11% to 957 million versus 861 million a year ago, and up 98% versus 2020, representing one of the highest two-year growth rates in our industry. Growth margin expanded 480 basis points in the first quarter, driven by 390 basis points, increase in product margins, and our resistance to promote the business as demand trends began to slow. While there has been a widespread return to discounting across our industry, as evidenced by the barrage of sale emails filling our inboxes, and there may be short-term risks of market share loss by choosing not to promote, we believe there is certain long-term risk of brand erosion and model disruption once you begin down that path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry, and our results now reflect those of the leading luxury brands as first quarter adjusted operating margin reached 24.7 versus 22.6 a year ago. Our results are inclusive of investments related to the opening of RH San Francisco and the RH Guesthouse, the development of RH International, and the rollout of RH In Your Home. which led to approximately 200 of the 270 basis points to base SG&A deleverage in the quarter. We are now forecasting SG&A as a percentage of revenue to peak in the second quarter and second and third quarters as we return to mailing source books after a two-year hiatus. By the fourth quarter, we expect SG&A as a percentage of revenue to be in line with last year. We generated $107 million of free cash flow in Q1, ending the quarter with net debt of $166 million, $2.24 billion of cash on our balance sheet, and trailing 12 months adjusted EBITDA of $1.13 billion. We spent $481 million in cash to repurchase $180 million of our outstanding convertible notes, terminate all of the $3.4 million outstanding warrants, and unwind the remaining bond hedges. Following these transactions, we have 101 million of convertible notes outstanding. Fiscal 2022 outlook. Despite our record financial performance in the first quarter, we've experienced softening demand trends, which began at the time of the Russian invasion of Ukraine, and it further slowed during market disruption over the past several months. Based on our current trends and the uncertain macro environment, we are providing the following revised outlook for the second quarter in fiscal 2022. Second quarter net revenue in the range of minus 1 to minus 3 versus up 39% last year, with adjusted operating margin in the range of 23% to 23.5% versus 26.6% a year ago. Fiscal 2022 net revenue growth in the range of 0 to 2% versus up 32% last year, with adjusted operating margin in the range of 23% to 24% versus 25.6% a year ago. While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending shift, shed less valuable market share as we continue to raise our quality, and navigate through the multiple macro headwinds, we believe our long-term investments will enable us to continue driving industry-leading performance. 2022 the year of the new as we've mentioned while many of our plans were delayed by the virus they were not disrupted by it we believe 2022 will mark the beginning of the next chapter of growth and innovation for the rh brand 2022 the year of the new includes the may opening of rh san francisco the gallery at the historic bethlehem steel building our most extraordinary new bespoke gallery to date The launch of RH Contemporary, the most compelling and potentially disruptive product introduction in our history. The elevation of RH Interiors and RH Modern, inclusive of new collections and an enhanced quality, introducing this fall. The unveiling of our first RH Guesthouse 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 an elevated new live fire restaurant at RH San Francisco with plans to open in RH England and the New York Guesthouse. The debut of a champagne and caviar concept opening in the New York Guesthouse with plans to expand to our future galleries in Paris, London, Milan, and Aspen. The premiere of the World of RH, which launched today, if you haven't been online yet on our website, It's an incredible visual experience that takes you into the products, places, and spaces of our brand. The liftoff of RH1 and RH2 are customized G650 and G550 that will be available for charter later this year. The christening of RH3 are luxury yachts that will be available for charter in the Mediterranean and Caribbean where the wealthy and affluent visit on vacation. The rollout of RH in your home, a unique and memorable 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 Ainho Park, a magical 17th century, 73-acre estate in the English countryside that will introduce RH to the UK in a dramatic and unforgettable fashion. The opening of RH Palo Alto, the gallery of Stanford Shopping Center, which will represent the next evolution of our highly productive prototype galleries. 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 the arbiter of case 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 introduction 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 products 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. 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 Yonfield, 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 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. 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 the $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 RH, creating an emotional connection unlike any other brand in the world. 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. climbing the luxury mountain and building a brand with no peer. Every luxury brand from Chanel to Cartier, Aston Martin to Almond, Louis Vuitton to Laura Piana, Harry Winston to Hermes, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We do 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 and 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 and organizations. Lessons that can't be learned in a classroom or by managing a business. They must be earned by building one or by reaching the top of the mountain.