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.

Onward team RH. So at this point, operator will open the call to questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, just press the pound key. Please limit yourself to one question and one follow-up in the interest of time. Please stand by while we compile the Q&A roster. Our first one comes from the line of Simon Gutman from Morgan Stanley. You may begin.

Hi, everyone. It's Simeon Gutman. Gary, my first question is on promotional environment and the discipline that you spoke to. Can you give us, I guess I'm a newbie to this, can you give me maybe a sense of the tolerance you'll take in terms of market share loss? Is it steadfast, or will you adapt to the market if you have to, if it continued along a more promotional path? That was my first question.

I think it depends on how you define if you have to. So, you know, I think we are really well positioned with the best operating model in our industry by far. Um, but really strong balance sheets and, you know, lots of optionality, uh, to create, you know, capitalize on opportunities and kind of any environment. So, uh, I think the last thing you want to do when you're, when you're trying to build a brand like ours and, you know, trying to scale, as we say, the luxury mountain is you, you have to remain disciplined about brand perception, desirability, um, you know, and you just can't fall into a discounting phase. Now, you know, if for some cataclysmic reason, you know, the world was ending and, you know, we needed to stay liquid, would we make decisions to move inventory and turn it into cash? Of course we would. We're not going to let the company go bankrupt. But, you know, the path we're on, you know, the road we're on is a long road, right? It is a very long journey. It's not a short journey. It's not a year-to-year or quarter-to-quarter journey. It's a decade-to-decade journey. And it's trying to build a brand with no peer and trying to build something that's truly sustainable in this world. And there's not a lot of brands that have done that. It's way less than 1% of the retail businesses that ever get introduced. I'm I joke around sometimes when I say a retail mall is like a graveyard for short-lived ideas because most retail brands don't live out the life of their lease. And if you went back 10 years and walked the mall, you'd be surprised how much is not there. Generally, 65% to 70% of a retail shopping center turns over, and then there's a handful of businesses that continue on. And, you know, that's what we're trying to build here. So, you know, we're prepared to make the decisions for the long run. It's served us well thus far, and I believe it will serve us well in the future.

Thanks for that. And the follow-up, the buyback question, you've been pretty exacting in terms of your timing in the past. Is there anything you can share on how we should think about, you know, using the cash to your advantage?

Yeah, well, we raised the capital to have optionality. And there's, you know, there's a lot of different choices we can make during uncertain times. And there's going to be a lot of, you know, a lot of opportunities to see things in a new light. Well, they will look much more valuable than they may have looked in the past. So whether that means, you know, returning capital to our shareholders through share repurchases to great value, whether it means there's opportune times to do real estate deals and capitalize on what is certain to be, I think, a difficult real estate market over the next year or two, or acquisitions or other forms of accretive decisions that we can make that will create long-term value for shareholders. So as Warren Buffett says, when You know, others are greedy, be fearful, and others are fearful, be greedy. So we're trying to prepare ourselves to have the optionality to make decisions that will put the company in a place to benefit long-term.

Thank you.

Our next question comes from the line of Stephen Forbes from Guggenheim. Your line is open. Good afternoon, Gary Jack.

Gary, I was curious if you could just provide some color around the assumed contributions of RH Contemporary and RH England during the remainder of the year and any thoughts or updated thoughts on the potential year one sales of RH England as we approach the opening.

Sure. That's a good question. The way we think about contemporary, while it's clearly the best work we've ever done and I think the most, you know, dramatic evolution of our brand towards where we want to go. Whether you're looking at, you know, all made in Italy sofas and, you know, the highest quality fabrics in the world with, you know, the introduction of Holland and Sherry, you know, the Travertine collection, you know, that you've seen that, you know, these are all bespoke collections, bespoke furniture and, The designers in our company that have had an early look and the ones that especially got to travel to RH San Francisco to help set up the gallery, I mean, they've never been more excited. And they believe our consumers are going to just love this, and we're going to also open up an entirely new market. And that's really the feedback we've gotten, too, from other really high-end interior designers, people we've had through RH San Francisco and given a tour and shown them even the broader collection. So we couldn't be more excited about contemporary. But remember, our business is, you know, to optimize our business, it's really dependent on, you know, the goods being seen at retail. You know, there's only so much business you can do in an online business. And, you know, it's interesting, you know, over the last, I don't know, it's probably been eight or ten years where everybody thought, you know, we were the crazy ones because we were opening retail stores, you know, and people have been, you know, shrinking stores and closing stores. And we've been building the biggest specialty stores probably in the history of our industry, for sure, throughout the history of the world. And, you know, of all industries in retail. And, you know, that has proven very beneficial and very creative to our business growth and to our operating model. As people are finding out, it's probably the lowest cost of customer acquisition, you know, any form you can take. And that's why we see a rush to opening retail stores. So getting contemporary into retail will be critical to understand the potential of contemporary. We'll get early reads. We obviously have all the math, and we can extrapolate how something does when it's presented online and in our source books and translating that into what it would be worth. And so we actually like launching goods online. in our source book and online, because we then do a much better job of projecting inventory and placing bets. But this is one we'll move pretty quickly. We've already got inventory kind of on order, you know, and of course, you know, that's been difficult over the last several months, but we've got inventory on order to, you know, get the goods into, right now they're in San Francisco, but to get the goods into New York, into Chicago, West Palm, some of our biggest, most important galleries and markets, because a lot of times our customers will travel regionally, right? They'll be working with the designer in Greenwich, Connecticut, or in New Jersey or somewhere, you know, places where you might have a legacy store, and they'll plan day trips and, you know, take consumers to see the goods in person. So getting the goods out there regionally is key, but getting the goods into all the galleries, I think, is going to be transformational. So first you have to kind of stand back and say, what's the bigger picture? And especially as it relates to Where's our demand versus others? How are we performing? So on and so forth. What does the external market look like? You have to remember that we made some critical choices at the beginning of COVID. And we believed COVID was gonna be temporal. You know, I had people tell me, oh, it's the decade of home. It's gonna be, you know, it's gonna be always like this. And, you know, I said, look, I've been in this industry a long time. Nothing's always like anything. You know, everything's always changing. And, you know, our view is, you know, the COVID list was going to probably last, you know, a year. And it got extended by another year because of, you know, all the variants. And we were in and out of offices, stores were opening and closing, restaurants, you know, were closed. And then they were 25% and 50%, you know, occupancy increased. You know, we've had a very chaotic couple of years. And what we did was very different, I think, than many other people. We decided not to try to optimize the period of COVID. We decided not to chase revenues, you know, chase demand during that period. We said, look, there's already more demand than we could, you know, than we could fulfill. Why don't we use this time in a much more strategic way and focus on moving some really big rocks that'll set up the next decade of growth at our age. And that's what we did. We focused all our energy on kind of taking contemporary to another level. We actually didn't mail a source book over the last two years and had no newness over the last two years. Now think about that. Basically, no marketing and no newness, yet we outperformed everybody in our sector We had 42% two-year growth over COVID. Besides Wayfair, that is not exactly a similar business model. Wayfair was selling all kinds of things that were related to the pandemic. All kinds of categories that were greatly benefited, no different than an Etsy or people. If you're selling masks, you're selling a lot of things that people needed during a pandemic, you're going to probably outperform. But if you look at the Home furnishings retailers, any of those brands, we outperformed anybody with no newness and no books. So what did that mean? It meant we probably left demand on the table, because if we would have had newness during that period, we would have had incremental demand. We wouldn't have had incremental revenues, but we might have built up a bigger backlog. I would assume that. But what we did instead is we took contemporary to a place we couldn't even imagine. You know, we re-architected the way we did product internally. We re-architected parts of our center of innovation to work and collaborate in a new way, to integrate the product in a new way. And I think we created, I would say, you know, our each contemporary is like almost a new company within the company. If you look at the assortment, if you go online and you page through the source book and you tell me, okay, think of all the home brands that might have launched in the last five or 10 years. You know, all these, you know, there's all kinds of ones that started online. They have a catalog. They might have a couple of stores. And you take a look at that assortment and you compare it with contemporary, which by the way, is only 70%. of the collection because the vendors just, you know, we didn't want to put things in the book and online that weren't going to be shipped for six months because the supply chain is still somewhat backed up. But we believe contemporary is like almost a new company within the company. We think it's going to be bigger than modern. Modern today is roughly a billion-dollar business, right? So you think about that. We introduced modern at the end of 2015. You know, and if you really attribute all the correct sales to modern, right, when you take parts of our textiles assortment, our rug assortment and things like that, you know, not just the furniture and the lighting that, you know, and even some of the lighting, you know, modern really moved the business massively and kind of changed the game for our age and opened up the aperture, you know, the aperture of the market for us. You know, consumer saw us entirely different. I think contemporary will have a bigger impact on this company than modern. Not just from a design point of view, but from a quality point of view. People have taken digs on us over the years because they believe product made in China is not as good as product made in America, which is not true, by the way. you know, the iPhones made in China. It's the best piece of technology in the world. A lot of great things are made in China. They're very industrious and, you know, hardworking people. And, you know, but you can make a lot of cheap shit there if you want to, excuse my language, you know, but that's not what we do. And, you know, where people will, being as it's made in Vietnam, some of the best furniture manufacturers and artisans in the world out of the UK and Europe went to Vietnam years ago to make super high-end furniture. Is there cheap furniture made in Vietnam? Sure there is. There's also cheap furniture made in the United States, by the way. And there's cheap things made everywhere. The key is to know where to go and where to make high quality things. But when all of a sudden you take a category like we have with upholstery and say, hey, we're going to make it all in Italy, the Italians have a sense of design and detail that is probably better than anyone's in the world. You know, it's the home of Da Vinci and, you know, Michelangelo and so many people that have done some of the most extraordinary architectural work, artwork in the world, design in the world, so on and so forth. So I think that communicates something entirely new. When you, I think it's, I don't know, probably on the fourth swipe with the source book, and it says made in Italy. And, you know, you've got two families, two companies, Italian families, generations, of making the highest quality product sitting on our sofas, you know, with an article about them, you know, I think it communicates something new. When you swipe a little farther and you get to the spread, the mark, you know, the kind of the, you know, the article on Holland and Sherrick, and it says that, you know, the noble fibers of Savile Row, you know, and you see that fabric on a suit form being made, you know, where the highest quality suits are in the world. This is arguably the best fabric house in the world. It is the, you know, favorite fabric house in fabric from the highest end of interior design. You know, the very best designers. I think a lot of people's eyes are going to go wide open when they swipe through either online or, you know, or in our source book and see that, we're carrying Holland and Sherry fabrics. And no different than probably 10 years ago now when we started carrying perennials, right? And we changed. And what's interesting, what happened to perennials? A lot of people thought we were going to kill the perennial business to the trade. It actually grew. And we became a massive part of that business. I think the same thing is going to happen with Holland and Sherry. But contemporary sets a whole new standard. How does it roll out into demand? There'll only be so much demand we can do online and in our source books. Although I would tell you I've never seen Our designers and our teams and our galleries, such huge advocates of anything you've done. So we've got an incredible, incredible, you know, we don't have a marketing department of the company. We have a truth group. So we've got an incredible, you know, truth advocates that are going to talk about our work, right, and what we're doing. And so, you know, I think we'll get a pretty good response, but the goods also have to kind of keep trickling in. You know, there's still, you know, it's going to take a month or two for all the goods to be in stock. But, you know, but our business generally ramps, you know, over the course of a few months. You know, by month three, you know, you start to really understand the trends, you know, because consumers are working on projects, you know, not just buying products. And then by fall, Erin, when do we think we'll be in a position to start to roll it out? Is it September we should think about? Yeah, so probably September. We're not only going to roll out contemporary to the company, and it'll probably become, I'd say, the first third of every gallery. So whether it's a legacy gallery that's, you know, 6,000 square feet, the first 2,000 square feet or more will be contemporary. You know, if it's, you know... A new design gallery is the entire first floor, I'd say. We'll flip the contemplative. That's how confident we are in this product line. And by Q3, you're really going to understand the demand. The other thing we're going to do is if you remember, I don't know, was it 2010, 11, when we remodeled all the storage? We've done it several times. But if you remember when all our galleries went to gray, right? We ripped out all the old white fixtures on the walls. We you know, we got rid of the silver sage and white paint. We stained the floors and we made everything look new again. Well, you're going to see us evolve in a very dramatic way in even our legacy galleries. I mean, it's going to look like an entirely new company in Q3. And even some of our newest galleries are going to transform pretty dramatically. Even New York right now, where one has been repainted and So by the end of June, you'll see contemporary on the first floor of New York. You know, I think we've already painted the first floor in New York. But, you know, we kind of have a little strategy inside the company to kind of get the gray out, but not entirely get the gray out. But you don't see a lot of gray in contemporary, right? So this is kind of like, to me, 2009, 2010, 2011, one week. really transformed the entire company and the entire business uh it is it is like one of those you know massively transformational times uh so you're just going to see the brand uh not evolve you know but but it'll be it'll be a kind of a evo you know a huge evolution revolution um by the second half of the year um and and so i'd say q3 you'll really understand the demand Q4 contemporary will start to impact our revenues, you know, because as we ramp and when we're shipping, you know, it'll be smaller. So it'll start to impact Q4. And by next year, contemporary will be a force in our industry, not just in our age, in our industry, a transformational force. And then turning to RH England, and I won't be as long with England, but it is our first. You can tell I might be a little excited about contemporary. But... RH England is, you know, I think about it as way more than a gallery, right? It's really opening a country and in many ways the continent. And, you know, I think the way we're opening in this truly inspiring, magical way. I mean, no one's ever opened a retail store in a, you know, 17th century, 73-acre estate in the English countryside. And And while some people will say, well, gosh, how do you know it'll work? I don't know. We have a pretty good history with these things that have never been done before. So, you know, and if anybody's on the West Coast, go see RH San Francisco, because nobody thought we should have done that one either out in the, you know, in a part of San Francisco nobody ever ventured into. And I think we've begun the transformation of the entire waterfront. And we signed that lease before Chase Stadium was ever, anybody knew it was going to be built. You know, we just knew that we thought we could redefine, you know, that part of San Francisco, do something extraordinary, and that people would come. And I'd say Art of San Francisco today is the most extraordinary gallery we have in the company, the most inspiring one. And it has an incredible new hospitality concept, our new live fire restaurant. You know, we love it. I mean, like... You know, and so far, I think, you know, the reviews on it are when we have 4.5, 4.8 on Yelp and other things. You know, it's a whole new level for the brand from a hospitality point of view. You know, new wine bars, you know, so on and so forth. But England is like nothing the world's ever seen. And it's a multidimensional experience. You know, we have... three full hospitality concepts, you know, two minor hospitality experiences on the property. You know, of the three major ones, you know, two will open when we open. The third restaurant is going to take a little longer. When you're dealing with this building, you know, because it's built in 1615, and so it's an important building. It's deemed a grade one heritage building in England. And just to put it in perspective, Buckingham Palace is a grade one listed building. So when you try to do anything in a grade one listed building, you almost need the queen to sign off on it. So it's been going a little slower than normal. And also because there was COVID and nobody was working or everybody wanted to do things on Zoom. And by the way, the companies that want to run their business on Zoom in the future, good luck with that. I thank God Elon Musk sent that note out. you know, like, yeah, you're just going to phone it in. You know, like anybody who thinks the world worked better over the last two years, you know, those are people that just don't want to work. You know, those are the kind of people that you're paying to breathe in your company. So, you know, we're excited that the world's going to get back. It's going to help us get things done. So, but RH England, when we open it, I think it's going to create a huge conversation. What will the you know, the demand be like right away? You know, I don't know. You know, we're excited about it. Things we tend to get excited about, other people get excited about. We know a lot of people in England and in London are talking about it. You know, we think now we just got the approvals for the last things we wanted to do. We think we'll get it kind of wrapped up now, kind of late August, You know, and then we need about two to three weeks to kind of, about three weeks to kind of set a gallery like that, maybe a little longer because of the two hospitality concepts. But, you know, we'll have, you know, a full restaurant. The Orangerie will open. The Loge will open, which is a more casual. And we have a third restaurant that will open. I think it will open next spring. Probably it will open in the winter, but probably not a good time to open out there. But it will be unlike anything else in the world. And I think, you know, we'll get a lot of excitement there. we'll, we'll get some demand, but, you know, hard to promise anything at this point. Um, but, uh, yeah, it could be a wide range. So it's hard to say what will year one sales of RH England be. Um, you know, I, I wish we could, you know, we were better at guessing at things like that, but that one, it's just a hard one for us. Uh, so, uh, yeah, we'll, we'll see how it goes. Um, You know, we like to say inside our company, every plan we have is some degree or wrong. The question is, are we strategically right? Are we directionally right? And if we're directionally right and strategically right, we kind of get going and we move pretty quickly. And then we get feedback, you know, we get real feedback and real data. And then we kind of improvise, adapt, overcome, you know, adjust and try to make things, you know, extraordinary. So, you know, but we're excited about it. I think it's going to be the coolest store that's ever opened in the world. And that's hard to say after you just opened our H San Francisco.

Thank you, Gary.

Thank you. Our next question will come from the line of Steven's a cone from city. Your line is open.

Great. Thanks for taking my question. And I appreciate the shout out for the Italian lineage on the call. So, um, I wanted to ask about the guidance change for the year. So could you just comment a bit more on maybe the softening of demand you've seen as of late? You gave such great color the last time you reported. So what are you really seeing in the business to guide 2Q, you know, revenue to be flattish and then take the second half of the year down? And I guess I'm curious how much of it is a reduction in demand versus maybe a delay in some of these new initiatives?

Yeah.

Yeah, you know, I don't know how much more color I have. I mean, you know, demand slowed at the beginning of the war. It softened further, you know, as, you know, the next couple of months. And, you know, most of the narrative, I think, is out there. You know, I think we've, you know, we're guiding it as we see it today. You know, how do we, you know, How does this all unfold? I don't think anybody really knows right now. It's the first time anybody's seen inflation like this in 42 years, right? So I don't know. How many people on this call were adults 42 years ago? Not a lot, right? Not adults that had a lot of wisdom, at least that's what I like to say. So the people that really had wisdom 42 years ago, you know, are 80, 90 or 100 years old. So it's not a lot of those people still highly active in decision making roles. I guess like we have a president that's, you know, at least he might have been old enough to kind of know what's going on, but it doesn't seem like they know what to do. You know, Janet Yellen finally did come out and say I was wrong. I mean, I mean, everybody's giving her all this credit for the maya culpa. Like, what took so long? Like, how clear did it have to be to kind of admit you were wrong, right? Like, how long ago did inflation go from 2% to 4%, 4% to 7.4% and then 8.5%? And you have to ask yourself, like, where is inflation really today? You know, I've had a chance to interact, you know, at a dinner down in, Woodside with some, you know, really interesting small group of people, you know, from mostly North America, but also someone who runs one of the biggest companies in the world out of China. And, you know, one of the biggest venture capitalists, you know, cryptocurrency experts, you know, so on and so forth. And, you know, we all get to ask several questions at the end of the night before we were wrapping up, I asked, okay, No one's getting out of here without saying, what's going on right now? What do you think's happening? What's going on with this economy? And my sense is, and it was the same way I was lucky enough to attend the Wonder Conference that Jeffrey Gasterberg put on not too long ago that had 150 people from around the world. I think a lot of people don't know exactly where we're at. I think that if you look at what's happening, say we've got you know, we've got really high inflation. Is it going to come down? Is it done? If you ask me to tell you what the consensus of the people I talk to, you know, business leaders and people who run big portfolios of businesses and so on and so forth, whether venture capitals or not, they say inflation's running much higher than the stated numbers, you know, and we would concur with that. We know that the Fed has to raise interest rates. We know when interest rates rise, it usually leads to a recession. It surely is not good for the housing market. Anybody who thinks that rising interest rates is a good thing for the housing market hasn't been alive long enough. And so, you know, you've got rising interest rates. You have the government, you know, starting to... been doing quantitative easing, then we're going to tighten. That's not good for the debt market. The cost of money is just going to go way up everywhere. And there's a lot of things about, did we have multiple contractions? Are we in somewhat of an earnings recession based off the highs? And where does it go from here? So None of us know, none of us have a crystal ball. We can just look at the best data that we can get our hands on and try to make the best predictions and forecasts that we can. But it's a time to remain highly, I believe, highly flexible. And it's like we like to say inside the company, pray for peace, but plan for war. And how do you prepare yourself for almost anything and everything that could happen in a market like this. Part of our strategy was to raise capital, be prepared, have our balance sheet prepared. We want to be able to protect the business model, want to be able to capitalize in an environment that might get volatile. Look, all of a sudden, for some reason, miraculously, they figure out how to fix inflation without raising interest rates too high and there are some magic bullets in the economy that change things. So we paid a little bit of interest expense. All the term loan debt we have is repayable. So we don't spend the money. We haven't spent any money yet. We've got the money. We're paying for optionality right now. So we think our guidance is our best view of the future today. but it's a very uncertain future today, very uncertain future. And I'd say doubly uncertain for anybody in the home business, because we're on the other side of COVID, we're up against big numbers like everybody else. You've got rising interest rates, you're coming off a super hot, had a couple of years in home prices and home sales, And even though there's low inventory, it doesn't matter if there's low inventory if you have low demand. So a lot of people moved over the last few years. I don't think that there's going to be anywhere near the amount of movement in America than there was. We went through a historic amount of movement, especially the migration from cities to suburbs, which was very good for our business and our industry. You have people maybe moving from a 1,500-square-foot apartment to a 3,000 square foot home, 4,000 square foot home. Needs a lot more furniture. Are they moving back? I mean, they might be. Are they going to buy all new furniture again? I don't know. I mean, but I don't think a lot of people are necessarily moving back. I don't think there's a whole lot of people moving. I know there's been people who have cited reports that were on Google and stuff. That's a lending tree report. That was from January 11th, by the way. It's not very fresh data. If you want to put your, you know, your confidence in reports from January 11th that are posted on Google by LendingTree, you know, good luck. You know, I don't think there's going to be a lot of movement and I don't think there's going to be as much activity. So what do you have to do in a market like that? You have to be really fresh and new. And that's what we are. I mean, we are going to be the most exciting thing in maybe the most uncertain market that we've seen in 10 or 15 years, you know, so. I like how we're positioned no matter what happens. You know, so I'm, you know, I hate to say I'm indifferent, but I, you know, at a big picture level, I'm indifferent. You know, our long-term strategy is unbelievable. You know, what we're going to do over the next several years is the world has never seen before. And we're doing it with the best model in our industry by, you know, roughly 50%. You know, so for people that have a long-term view, There's not a better place to park your money. For people that are jittery around the short term, like, I don't know, I don't invest in our sector. There's a lot of, you know, it's going to be very uncertain, I think, for at least throughout this year, at least until the government figures out what to do with inflation and how high do interest rates have to go. You know, if you look back in the 70s and 80s, you know, I remember buying, my team will crack up, I'm going to say this, I remember buying a waterbed, you know, when I was, you know, in college and I was paying, I bought a $125 waterbed and I was paying 26% interest, right? Credit cards had like 28 or 32% interest. I think by the time I paid off that waterbed, it was like $1,000, right? The years later. You know, so our interest rates, you know, is the federal funds rate going to go back to 20%? I don't think so. Is it going to stay under four or five? I don't think so. You know, so I think we've got a long ways to go in raising interest rates to fight inflation. And I think you just have to be prepared for anything right now.

Great. Thanks for all the detail.

Thank you. Our next question will come from Chuck Grom from Gordon Heskett. Your line is open.

Hey, thanks very much. One for Jack on the guide. You know, you gave us some of the important building block sales, some SG&A color by quarter, which is helpful, but it doesn't seem like you're anticipating much gross margin degradation throughout the year. Obviously, 1Q is great. Curious what gives you that comfort level given the recent change in demand and current inventory levels?

Um, yeah, everything I just said, you know, we have incredible new project products, you know, coming in, uh, that I think is going to, you know, transform our, you know, our market. Uh, you know, I think we're going to be the most exciting game in town. Um, and, uh, you know, I think that, uh, it, I, it's, it's, it's a really good time to have a membership model like we have right now. And so, um, We have a model that allows people to, you know, get a really great value, get a discount, you know, if they become a member of our age. And, you know, I think that's a competitive advantage right now. And so there's, you know, a lot of parts.

Jack, if you want to go to you. Chuck, I don't know if you're asking again. We've addressed the promotional point. That clearly is a risk factor for anyone that gets into the promotional game. So I think Gary's addressed that fully. And then it's a question of, you know, what else could be happening for this margin? You know, whether it's, you know, shipping expense or occupancy costs or any of those other pieces, you know, could there be, you know, just on the guide, could there be some modest occupancy deal leverage maybe? But it's, you know, you just have the moves we've made with product margin, and we have visibility into those, you know, persisting and wrapping those. So, you know, I think it's just a function of the model we've built.

Okay, great. I just wanted to clarify. And then just looking back on the first quarter, you exceeded your plan by a pretty wide margin, up 11. The plan, I think, was 7 to 8. I'm curious how much of that was fulfilling backlogs versus current demand trends throughout the quarter, and how do we think about backlog levels currently and over the next couple of quarters? Thanks.

Yeah, I think there's certainly some of the backlog relief that occurred in Q1. Oh, backlog, the beat. That helped us. Yeah. You know, when you think about that $200 million in backlog, you know, again, is it, you know, 20, 30 got, you know, got addressed in Q1, and we still have, you know, a big amount of that left. But certainly, you know, I think part of the beat, as Gary just mentioned, the biggest part of the beat is related to the backlog. So, but still more to come on that.

Yeah, but it wasn't demand, you know, it wasn't an increase in demand that helped us. It was things shift faster.

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

Great. Thanks very much for taking the question. So I guess as much as you kind of parse out, just thinking about the pullback you've seen, we don't need to get into the numbers or anything like that, but I'm just kind of curious, I guess, how broad-based it's been across your customer base by demographics, by income levels, anything in terms of regional differences. I'm just kind of curious how that's parsed out or just how broad-based it is in terms of the changes in demand you've seen.

Well, yeah, I mean, there's some small regional differences. You know, you've got – There always are, by the way. There always are, yeah.

And so – But, Curtis, this is not a business where, you know, we have the winter coats, you know, and weather's off somewhere. Again, there's regional differences that are always occurring, and it's not somehow – again, there might be differences, but it doesn't lead you necessarily – manage your, lead your business in a different way.

Yeah, like, you know, people in Texas and, you know, places like that are going to be really happy right now. The price of oil is pretty good. You're going to, you know, you're going to have some, you know, some tailwinds that, you know, they're helping some businesses and, you know, Florida, you know, obviously because all the migration in Texas, you know, they're, and still have a lot of people settling in and, you know, I think that, you know, those markets will be better and they're affected by oil. Oil really affects South America affects our Florida business massively and also positively affects our business in Texas. You know, Canada will be benefited from higher oil prices. So, you know, there's always going to be some movement, you know, demographically. You know, I think, you know, while... You know, while the high end, like, people are going to, like, we've had people reach out to us and say, oh, well, luxury is doing really well. You know, like, aren't you luxury? Like, don't confuse the apparel industry with the home industry. I mean, they're completely different. They're completely different. I mean, how many people bought new clothes over the last two years when you weren't going anymore? Anybody? Anybody? Anybody go to a wedding the last couple of years? Anybody go to any events the last couple of years? How about dinner parties? You know, like, no. Like, you know, we had a pass on many store opening events. We finally, you know, opened at an event here in Cisco. Maps, you know, came off. Apparel sales should rip, you know. Stores were closed. Everybody was staying at home. I mean, people were buying Lululemon and stuff like that. You know, that was like the national wardrobe, you know, at the high end. But now, of course, you know, the luxury brands are going to do well. I mean, yeah, they might have issues and shutdowns in China and things like that. But, you know, travel is going to rip. You know, luxury hotels are going to do really well. Luxury apparel is going to do really well. Yeah. Luxury home, home is a completely different industry. You know, so, you know, like it's, you have to kind of look at it in a very specific way to understand it. But I'm surprised at how many people think, well, gosh, you know, Hermes and Louis Vuitton and, you know, Carrion have really good numbers right now. Why are you soft? You know, I don't know. Sometimes I just, you know, I just want to hang up the phone. It's such a bad question. So, you know, I mean, you know, things are what they are. You know, like, this is, you know, the data that's in the market is really clear. It's not really good for our industry right now. Yeah, do, you know, maybe is our demand going to look softer than others over a period of time? Yeah. I mean, again, we introduced no-use products for two years. In the first quarter, that became three years of no new product until now contemporary launch. You know, so, yeah, maybe we're, you know, we're giving up some share because we've had no newness. I know we're giving up some share because we're not promoting. And, you know, it's evident. People are saying, oh, you know, we're not going back to site-wide promotions. Oh, okay, you know. Got it, but you still sent me, you know, 34 sale emails last month. You know, sometimes multiple a day. You know, so the, you know, like I think you can see who's going to promote, who's not going to promote based on the gross margin line. You know, it's, I've never seen a long-term strategy that works very well where you are trying to promote your business and then, you know, you might be able to, cover the incremental costs with the extra volume. You can't do that forever. It usually becomes a downward spiral. Nobody's devoted themselves to greatness except for discounters. If you're trying to build great long-term brands, there's decisions, you know, great long-term high-end brands, let alone a luxury brand. Again, we're in a path no one's ever tried to take. You know, no one's tried to climb this mountain before. So our strategies are going to be all different than everybody else. We're going to make decisions that are different than everybody else. I don't really care if we are softer than everybody else in Q1 and, you know, part of Q2. I got it. I had three years of no newness. Newness per year generally like five points to our business, maybe more. You know, so you can argue, wow, in the first quarter –

over you know if you compounded it's 15 to 20 points right so we haven't had any newness in three years uh that changes right now i understood and thanks for the uh extrapolation on that just a really quick one figure i just want to make sure i uh i've got my timeline right uh in terms of the um i know Park opening, it sounds like it's going to be fall. I wasn't quite sure when you're expecting it. Is that correct?

Yeah, our construction team, based on the fact that we just Last week, we got our final approvals. Like, I mean, it's been unbelievable trying to get simple approvals. But then again, it's, you know, 16th century, grade one heritage building out in the English countryside. You know, not a lot of people even want to make a site visit. So, you know, I had the empathy for our team. You know, I feel that because I've been on them pretty tough, and I'm like, okay, I got it. I understand what they're dealing with. So it looks like we'll be done with the project late August, and we'll need about three weeks to put it all together. So I'd say early, mid-September, we'll probably – I don't necessarily trust that either. But, no, I think, you know, we'll definitely be open in September, I think, you know, sometime in September.

Beautiful time to be there in England. So hopefully the timing works out in terms of weather. Anyway, September is usually a great time in terms of weather, you know. in England. So hopefully that lines up for you. Good luck and thanks for asking the question.

Rain or shine, we're opening. It's been too long. Thank you.

Our next question will come from Max Raklenko from Callen. Your line is open.

Great. Thanks a lot, guys. So as you continue to climb the luxury mountain, I guess, how do you think about who your core shopper is today, whether it's household income or net worth, just because it does seem like your shopper may be evolving in real time here, especially once you get going with contemporary. So that's the first one.

You know, we don't think about them any differently than we've been thinking about them. You know, as we, you know, as we climb the luxury mountain, I say, you know, I tell everyone, I try to tell everyone, maybe I haven't said this publicly in a call, but we are both a share giver right now and we're a share caper, if you think about our climb. So as we climb the mountains, we are kind of giving share to people below us because we're moving this brand up. So we're constantly raising the level of quality, raising the level of design, and building a more you know, a more desirable luxury product and experience. So, and by the way, that's no different than the last 20 years, right? So we've been a share giver. Yeah, like when I, you know, when I got here 22 years ago, the best selling sofa was a 999 chenille sofa. You know, I forget what it's called. It was that green, ugly chenille sofa, best selling one in the company. You know, so we don't have a Chenille SOFA, again, any SOFA that's $9.99 anymore, right? But, you know, again, it's, so we're constantly giving share, leaving share behind, and what we're doing is we're taking share at the higher end of the market. And the key is, is the arbitrage a positive arbitrage, right? A lot of times it is. Sometimes you might be a little wrong. Sometimes, you know, you may not take as much share as you gave up, but you have to be committed to the climb, right? It's like trying to climb Everest. You might, you know, get to a spot where you get stuck, right? The weather's not good. You made a bad decision. You know, you went to a park, you slipped down a bit, you know, and you went down your rope and you got to kind of go back up. You know, it's not a stroll in the park. trying to do what we're doing. This is not a stroll in the park. This is a climb up a mountain that nobody has made before. Nobody's taken a business like ours, you know, what we are selling. I mean, I think the number one item in the company, when I joined with a little cardboard piece of cardboard sold for $2 and it was called auto bingo. Okay. One of the next best selling items was a back scratcher. Okay. The item after that was a foot duvet. You guys remember the foot duvets? We used to have mountains on them, right? We had to sell them back then because they had to not go bankrupt. Like we can go on and on. You know, you want a pocket hand warmer? You've got to go somewhere else. We don't sell them anymore. You know, I go on and on and on. Bite the man, dog, toy, so on and so forth. So You know, we'll be speaking the same way about some of the goods we sell today. You know, I'd say a third to half of our assortment won't be here in the next three to five years. You know, so, and probably the bottom third of the assortment will evolve, excuse me, will evolve over the next 24 months, I'd say, you know, 24 to 36 months. So all of that, you say, well, what happens? Do all the customers that could afford that level of quality and design, can they all afford the next level of quality design? Of course not. Of course not. But we're taking share at the high end, and the people at the high end spend exponentially more on the home. They have multiple homes. They spend more on the furnishings for those homes, and it's a completely different market. So You know, the way to think about our market, if you thought about a pyramid, like people usually look at a pyramid to say a market, okay, you know, the 1% is up here and this and that. There's, you know, not as many people there. There's more people down here in the middle. Well, the way to think about the spending is you have to kind of turn that pyramid upside down and lay it over the typical pyramid. So if you look at the top, you know, 1%, the top half percent, the higher up you go, the spending is exponential on the home. You know, so that line is the widest is at the very top. So, you know, we're going to go to the top. And, you know, how much gets left behind, we'll figure it out as we go. You know, we'll figure out how to optimize it. But, you know, it's worked for other luxury brands in other categories. It just hasn't been done in our category. Right. There's, I mean, there's people have, you know, can argue being the Italians kind of luxury sofas, you know, don't really sell anything else, you know, have a couple of lights. There's no real dominant global luxury brands doing what we're doing. And no one has started where we started and tried to get there. It's, you know, kind of unseen before. So, you know, but then again, we like to say leaders have to make others, you know, You know, that's what we do. So we're going to make you guys uncomfortable. We're going to make ourselves uncomfortable. We're going to make some of our customers uncomfortable, unfortunately. Yeah. You know, but we're going to excite a lot of people and we're going to, you know, we're going to create a lot of extraordinary things and we believe we're going to create extraordinary value.

Got it. That's very helpful. And then, Gary, I think previously when you were talking about the conversion of a legacy gallery into a design gallery, I think you used to say that within like a 12 to 18-month horizon, the store revenues double and then e-com sees a little bit of a lift as well. So just curious, is that still the framework that we should think about or – I think about it, I don't know, six months or a year ago, you said that the restaurants are going to do better. So, you know, just curious how we should think about the long-term growth algorithm, you know, as far as the store openings go.

Yeah, I'd say directionally it's about the same. You know, the base gets bigger, so the double gets harder, right, when you're on a higher volume. If you think about it, when we started this journey, our average sales Our average store volume in the company, I think, was 2.1 million, you know, in our old galleries. And like, for instance, in, let's just take Marin. You know, some of you have been out here at the Center of Innovation. You've seen Marin. You know, our legacy Marin gallery, when I got here, was 2.5 million. When we closed it, it was, what, 1820? Somewhere around there. You know, it was doing about 20 million. So, you know, if you think when we started doing these big stores, our average volumes were probably 10, 8 to 10. You know, then they went to 12, you know, like maybe 8. You know, our average Legacy Gallery today is probably 15. And so, the base has gotten bigger so that, you know, the double gets harder. Actually, when we started, you know, our average volume was 7. That's right. You know, but we have in our average, you know, legacy galleries with an average volume of 15, but everywhere we, we open a new gallery, especially now that we have the restaurant, um, and the, you know, the incremental traffic it brings and so on and so forth. Uh, we are, you know, we're doubling, you know, so if we have a $15 million gallery, it's generally turns into a $30 million gallery, $20 million gallery turns into a $40 million gallery, uh, roughly. So, and, uh, Like Marin, I think is, what are we, like trailing 12 or, you know, trying to 50 million, something like that. So, you know, Marin went from 20 to 50 with the restaurant. With the restaurant, yeah, yeah.

I'm talking all inclusive, yeah. Thank you.

Our next question will come from Jonathan Matuszewski from Jefferies. Your line is open.

Great, thanks for taking my question. First one, Gary, you've mentioned in the past RH Modern price points at launch were significantly above the levels of existing assortments at the time. We can flip through the source book page by page, but can you help frame aggregate RH contemporary pricing relative to some of your other assortments today? Thanks so much.

Sure, sure. Yeah, when we launched Modern, it was on average 50% higher price points than interiors. And contemporary is about 30 to 35% higher than the current assortment. Some things might be 50% higher, some things might be 20% higher. But on an average, we're about 35% higher.

That's helpful. And then just a quick follow-up. On the last call, you indicated the Palo Alto gallery may get pushed to one queue of next year. Is that looking more likely these days? Is that kind of taken out of the new annual guide for revenue or just any clarification there?

We haven't. We still believe it'll be open in the fourth quarter, but we are using that um to kind of evolve the prototype right so we're we're you know it's going to have a new look a new feel um and uh there's some new things that we're doing there so you know if it means that it you know it opens a quarter later it might but today we feel pretty good about q4 but we'll keep you updated thanks so much best of luck thank you

Our next question will come from Brad Thomas from KeyBank Capital. Your line is open.

Hi, good afternoon. Thanks for taking my question. I was hoping to just talk a little more about the source books and just advertising and promotions in general. And Gary, I know that you all don't do marketing or advertising in a traditional way, but I guess I was just curious, you're thinking as you get the source books out, how you're thinking about page count and doing big books like you always do versus maybe supplementing with some smaller books, you know, particularly with the new contemporary product coming out. And then perhaps if you're considering doing more with digital advertising, again, with the new contemporary line and with the World of RH website overall.

Thanks. Yeah, we're considering all of the above. So everything you're talking about. So, you know, as we start to, you know, ramp back up, you know, whether it's the size of the book, the depth of the mailing. I would say we were so excited about contemporary, we expanded the mailing more aggressively. When it relates to size of books, generally, just directionally, when you add more pages to a book, your cost leverages a lot. It's a lot less for incremental pages. And generally, larger books are more productive than smaller books. You're throwing out a wider net So, you know, until that map says differently, you know, we like to be in the range of, you know, three to 500 pages. I mean, some of our books have got to 700 pages. You know, they become a little difficult to get into all the mailboxes and stuff. But the numbers still kind of tell us what to do there, right? We've got just a lot of data. But, you know, it's clear as the world, you know, keeps evolving and we get better devices and, you know, we have more mobility with devices, you know, print will become less and less important, you know, over time. And, you know, things will evolve to become, you know, more digitally, you know, intuitive. You know, that's why, you know, when you look at the World of RH website, like the first part of the launch is just kind of what I, you know, the first layer, right, of what you see and how you might explore our brand and what our brand's all about in, what is it, mid-July we launch part two of The World of Our Age? Yeah, mid to end of July. So mid to end of July, the next transformative part, the whole back-end changes. And so all those... product pages, the way you shop, the way you... Experience and the functionality. All the functionality and customer experience changes massively. I think together, when you see these two parts of the world of RH all come together, it's transformative. It's like no other website in the world. And so right now, you're just seeing kind of the... you know, better word, marketing layer of the brand. And, you know, because before you'd go to our brand and you might just see a light fixture on the front page and you think like, whoa, are they a lighting company? Or, you know, who knows what you see? You know, it's like when you go to web, you know, when you go to the web and companies are still promotional, you know, and it says warehouse sale or, you know, bedding sale, you know, you think that's all they sell.

You know, because remember the web is just this screen you see, you know, you can't see beyond the screen.

Now, it's very different when you have a three-dimensional store. You can see the size of the store. You can tell this store is bigger, must have more than another store. You know, you can walk in a store, and in seconds and minutes, you can figure out what they do and what they sell. Website's very different. Yeah, like, it was so important for us to get this first part of the world of RH done before we launched internationally, right, because we didn't want people to just, like, Like, who are they? Go on our website, and, you know, you see some product page on the front, whatever we're showing, a lighting collection, a sofa collection, whatnot. Now you get a sense for a much bigger idea, a much bigger kind of business, a much bigger kind of brand, you know, that, you know, and if you've looked on again, if you've clicked on it, you know, it goes through, you know, the dream, you know, design, travel thing. dine and experience, you know, the world of our age. And then you see the products, places, services, and spaces. And if you click through any of those, you know, click through our spaces, click through our places, you know, click through our products, you know, click through our services, you get a sense of really what we do very quickly and who we are very quickly. But it's the engine of this website changes and the customer experience changes as you get into it massively, you know, mid to end of July. So, and I think that's going to, it's going to make a big, big difference just as customers discover us, you know, what they get to know. But, you know, you'll see, you know, we're experimenting with some digital advertising, we're experimenting with some, you know, places we think, you know, as the world keeps changing, you know, we're watching consumer behavior, you know, we're looking at, you know, where we might invest, you know, we're always trying things. So you'll see us continue to kind of evolve our approach of getting what we say, getting our truth out there, getting our work out into the world for the right people to see it. So am I going to do a Twitter account. Everybody tells me I got a tweet, you know, I'll have a lot of followers, you know, I, you know, I don't want to do that. I don't want to have to kind of respond to everybody. I don't know how Eli must keep up with it for God's sake. You guys are incredible. He must, I think I don't sleep a lot. I think he might never sleep. This is truly, truly incredible. But, but we, we believe, you know, even though, you know, we've said this before, even though we, we don't, you know, we don't have an Instagram account and we don't have a, Pinterest account and a Twitter account. We're still the most pin brand of our kind in the world and Instagram brand of our kind of the world and tweeted brand of our kind of the world. And we are because we do really incredible work and we build really incredible experiences on this planet for people to go to and experience, talk about, see. And while we don't sit there and say, oh, let's create an Instagram space. Let's like this will be great for Instagram. We just do incredible design and architecture, and the world's not full of that. They don't build things like they used to anymore. There's not a lot of great buildings. There's not a lot of really extraordinary design that's open to the public, and we are. Therefore, people are excited to take their picture there. They're excited to tweet about it, to Instagram about it. They're excited about a product. I wouldn't be surprised if the you know, the reaction on Pinterest, you know, and the number of pins we're going to get in contemporary is going to probably go like wildfire. There's really nothing like it.

Very helpful. Thanks, Gary.

Thank you, Brad.

Thank you. Our next question will come from, I know, Seth Basham from Wedbush. Your line is open.

Thanks a lot, and good afternoon. Gary, if you're successful in climbing the luxury mountain, your business and your customer profile will be a lot different in five years than it is today. But if the arbitrage between taking share at the high stand and shedding share below you is increasingly negative for the next 12 months, even as you elevate your assortment and continue to raise prices, what's the contingency plan? What's the plan B?

You know, I don't know if that's not going to happen. you know, for 12 months. Again, we're not making 12-month decisions, not a 12-month strategy. So I think we'd learn a lot. We'll adjust and so on and so forth. But, you know, there's going to be years we take more, you know, and years that maybe we take less. You know, so, you know, you look back at the transformations we've made over the course of our history here. you know, sometimes there's some short-term pain for long-term gain. It's, you know, you don't know exactly what that looks like until you get there, but you get there and you work through it. You don't go backwards. You know, you don't start going down the mountain when your goal is to go up the mountain, figure out how to get there, you know, and you know, otherwise you never get there. So, you know, we've, We discuss in this company, it's not what we say, it's what we do that defines us. So we will get to the top of the mountain. Believe me, we will get there. We know, we can see what it looks like. We have enough data. There's enough evidence to say that if we get there, we will create enormous value. And this will be a very, very large company. Over the next 12 months, I don't know, like, If it costs us five points or ten points, I'm not selling my stuff. You know, so.

There's a plan A. Plan A. Plan A pans out and isn't too severe. Plan A. Thank you, Gary.

Victor, we're ready for the next question.

Our next question will come from the line of Chris Horvath from JP Morgan. Your line is open.

Thanks and good evening. So I had a couple of follow-up questions. First on Chuck's question earlier, on the 1% to 3% revenue down guide for the second quarter, are you expecting a sort of similar backlog drain or could it be better if the supply chain is opening up a bit and Does that suggest, you know, you're on a demand side, you're expecting, you know, mid-single-digit decline?

If supply chain is better, I suppose there's an opportunity to have a better revenue outcome. I mean, this is our latest view of what we're seeing with supply chain and lead times and, you know, continued delays, but also the improvement in delays. So I think there's an opportunity there, but that's what we see.

Got it. And then following up on the advertising question, a couple years ago you... We're not commenting on demand.

Say again? We're not commenting on demand. Sorry, I didn't... at that point.

Okay. And then following up on the advertising question, so, you know, last year you spent $40 million in advertising. A few years ago you spent $100. Can you maybe bracket how you're thinking about that? to any extent quantitatively, but, you know, just maybe even in terms of, like, how many books you think you'll spend, send out across the different brands?

You know, the $40 million reflected, you know, essentially no mailing but an outdoor book and some reprints. And so, you know, at that peak, I think, you know, two years ago, we spent $108 million, and that reflected an outdoor book, spring and fall books, and, you know, and reprints. This year's more like that. You know, I don't want to get, we're not guiding advertising. I don't think it's, you know, back to that level, frankly, but it's certainly, you know, on the higher end of the spectrum just based on our current source book distribution plan.

Yeah, it's a meaningful increase.

It's, you know, we're more than doubling the $40 million spread.

Yeah.

And that's in our guidance, obviously. Yeah, that's in our guidance.

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

Good evening. Thanks a lot for taking my question. Gary, how big do you think the market that you're going after is in the United States? If we say total home furnishings is $200 billion, the higher end of the market, top 10, top 20%, that's a $20 to $40 billion market. Are you going after the top 10? 1%, top 2%, that's the first part of the question. And the second part is if we assume that you're trading some sales for margin right now, is there a duration or a level of sales, if it were to fall to, that you would have to reconsider that strategy and start to engage in additional demand creation activities?

Well, first, you're saying the top 10% is $20 to $40 billion? Because you're just running a straight line there, right? So you're not assuming... Yeah, well, that's not the way the home market is. Remember, I just gave an example. You'd have to kind of take that pyramid and flip it upside down. The spending on the home at the high end of the market is exponential, right?

It's no different than the distribution of wealth, right? So you don't have...

You don't have 10% of the people, don't have 10% of the wealth in the world, right? Yeah, I understand what you're saying. Maybe, yeah, look at the wealth distribution. Think about how that affects the home market. Think about how many homes the people at the top have. Think about how much those homes cost. Think about how big they are. Think about how much they'll spend for a sofa versus someone down 10, 20% lower. The numbers are massively different than what you're thinking. Massively different. So I'd start there. The top of the mountain is like, it's like thinking about where is the gold in the mountain? It's the really, all the gold, it's kind of concentrated at the top. So that's why we're trying to get to the top of the mountain, not to just say we had a nice climb. That's where the rewards are. And so it'll be worth whatever kind of, short-term pain we've got to take to get there. And it's just no different than the path we've been on. You know, we've been doing this for a long time now. You know, it just gets a little harder as you get higher. But the decision-making and the criteria is all kind of the same. And, you know, every several years you're going to make big pivots and big moves. And so, you know, COVID created that opportunity for us to kind of look at things again and, you know, make different investments. And so, but we're, you know, is there a sales decline that would, you know, you reconsider additional demand creation, you know, not within a certain period, right? Like if we make some decisions that, you know, we think, oh, you know, we ran up this part of the mountain and, you know, it's slippery up here. There's too much ice. We've got to slow down. We've got to get some different gear. You know, we, you know, We need more ropes or whatnot. You know, we'll obviously make small modifications as we go, but nothing is going to get us to reconsider where we're going. Nothing. And we're smart enough to figure it out. We may not make all the right decisions in the moment, but we are really fast to improvise and change our mind. You know, so we're not wedded to anything but our vision and values and beliefs here. And so, yeah, but we believe this is the right strategy, you know, the right vision to have for the company. And, you know, we can figure it out. We figured out how to get to where we are today. The hardest part of what we've done is, I mean, it's in the past. Like, you know, try not to go bankrupt when you have no capital, not making any money. You know, got to get rid of all this crap. You know, barely can pay your rent. Like, you know, we live at $1.13 billion a trailing 12-month EBITDA. I used to have $40 to $50 million, negative. You know, trying to beg people to lend us money. Now people want to lend us, you know, $2.5 billion dollars. Like we have all, you know, we're way better resourced, but that doesn't mean we're any less determined, that we're any more lazy. It's not like we're not having conversations in this company on are we going to return to work? You know, like, you know, oh, you know, people are going to do a better job working at home. Like that's not the culture we have here. Those kind of people, they'd still be at the bottom of the mountain. Maybe they'd get up to the first third and have a little bit of a view. And then they, you know, camp out there. You know, so, you know, we're going to try to do something that the world's never seen, that no one's ever done. You know, as we say, we have to think until it hurts, until we can see what others can't see so we can do what others can't do. We don't have it all figured out, but I believe we're directionally right. We are strategically right. And, you know, and we're going to create massive value. And we're just, you know, it's not easy, though. You know, so... There are no straight lines in business, you know, unless you decide, you know, unless you fall off the edge, you know, and you go straight down. But when you're trying to climb and build something, there's no straight lines. We're going to get some things right. We're going to get some things wrong. We're going to improvise. We're going to adapt. We're going to overcome. It's just who we are and kind of what we do.

Thank you very much, and good luck.

Thank you. Thank you. And that's all the time we have for Q&A today. I'll turn the call over to Gary Friedman for any closing remarks.

Great. Well, thank you, everyone, for your time. And, you know, we want to thank PMRH for doing such an extraordinary job, you know, not only over these past few years of the pandemic, but the work that is, you know, now bearing fruit and coming out of this pandemic, I think, is transformational. And I, you know, just couldn't be more proud of all the leaders on this leadership team and all the people here at our Center of Innovation headquarters across the country throughout our supply chain. The level of invention and innovation in this company is at an all-time high. Our culture continues to get stronger and I just could not be more proud of the work we're doing. No matter what anybody does for a share price short term, you know, we will reach the top of the mountain. Make no mistake about that. So thank you, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.