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spk10: Hello, my name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Restoration Hardware second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Ms. Allison Malkin of ICR. Please go ahead.
spk09: Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release 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 issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as a state of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.
spk15: Great.
spk09: Hi, everyone.
spk15: We are live from RH New York, the RH guest house in New York. And for those of you in town, hopefully you'll come by over the next few days and come say hi. I'll be here through next week. And it is a place you should come by and see. And we have the best breakfast, by the way, in New York City. So anybody looking for a good place for breakfast, Lunch or dinner, but particularly, you usually can't find good breakfast in this town, at least that's what I believe. I'm going to start with our letter, as I always do, to our people, partners, and shareholders. We are pleased to report better than expected results as revenue increased $992 million versus $989 million a year ago, and up 40% on a two-year basis from revenues of $709 million. Results exceeded our revised guidance due to faster backlog relief, despite a deteriorating macro environment. Gross margin expanded 350 basis points in the second quarter, primarily due to an increase in product margins as we continue to resist promoting the business as demand trends continue to slow. As we've mentioned, there continues to be widespread discounting across our industry. And while there may be short-term risk of market share loss as a result of our choice not to promote, we believe there's certain long-term risk of brand erosion and model destruction 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 continue to reflect those of the leading luxury brands, as we delivered 24.7% adjusted operating margin in the second quarter, also exceeding our outlook. Our results are inclusive of investments related to the launch of RH Contemporary, the openings of RH San Francisco and RH Guesthouse, the development of RH International, and the rollout of RH In Your Home, which led to approximately 400 of the 530 basis points of SG&A deleveraged in the quarter. Our business generated $23 million of free cash flow in Q2, ending the quarter with $2.1 billion of cash in our balance sheet, total net debt of $446 million, and trailing 12 months adjusted EBITDA of 1.1 billion. We purchased 1 million shares of our common stock in the second quarter at an average price per share of approximately $255. We also spent 82 million in cash to repurchase 18 million and 39 million of the 2023 and 2024 outstanding convertible notes in privately negotiated transactions. Following these transactions, there remains 44 million of convertible notes outstanding as of July 30, 2022. We move to our fiscal 2022 outlook. As noted in our updated outlook provided on June 29, 2022, our expectation is for continued softening in our business trends during the remainder of fiscal 2022 as a result of ongoing weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated interest rate increases and the cycling of record COVID-driven sales levels in 2021. Additionally, due to the construction and approval delays, we are pushing the opening of RH England to the spring of 2023. While disappointed to miss the peak summer fall season in the English countryside, we believe waiting until we can open with a full expression of our brand is the right long-term decision. Additionally, RH Palo Alto, which we plan to open in the fourth quarter of 2022, is shifting to the first quarter of 2023. Based on our current trends, the uncertain macro environment, and the shift of RH England to spring of 2023, we are providing the following outlook for the third quarter and fiscal 2022. Third quarter net revenue in the range of down 15 to down 18, with adjusted operating margin in the range of 18.5 to 19%. Fiscal 2022 net revenue growth in the range of down 3.5 to down 5.5 with adjusted operating margin in the range of 21 to 21.5%. 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 and 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 long-term industry-leading performance. 2022, the year of the new. As we've mentioned, while many of our plans have been delayed by the virus, they were not disrupted by it. We continue to believe the important investments and introductions we are making in 2022 will mark the beginning of the next chapter of long-term 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. RH Contemporary has been recently expanded to RH New York, and the initial results look promising. We plan to expand RH Contemporary into more galleries as our inventory levels improve in the first half of 2023. The elevation of RH Interiors and RH Modern, inclusive of new collections and enhanced quality. The September 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. We began accepting inquiries for a stay at the RH Guesthouse yesterday, as our website, rhguesthouse.com, went live, and the dining room at RH Guesthouse New York, our new live-fire restaurant, is now open for breakfast, lunch, and dinner. We plan to unveil the Champagne and Caviar Bar at the Arts Guesthouse New York next week. The introduction of an elevated new live-fire restaurant at RH San Francisco and the RH Guesthouse in New York since opening our new live-fire concept in San Francisco is significantly outperforming our original gallery restaurants, and we are now planning to expand the concept to our new bespoke galleries in North America and Europe. With the September debut of our first champagne and caviar concept in the RH Guesthouse New York, we now plan to expand this offering to future galleries in Paris, London, Milan, and Aspen. We will have more to report on this exciting new concept by next quarter. The premiere of the World of RH, our new digital portal highlighting the connected power of our evolving ecosystem, which we believe will begin to properly shape and position the brand in the minds of our website visitors, especially as we launch the brand globally. The liftoff of RH1 and RH2 are customized Gulfstream G650 and 550 jets that will be available for charter later this year. The christening of RH3, our luxury yacht, that is available for charter in the Mediterranean and Caribbean for the wealthy and affluent visit of vacations. 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. We moved to our RH business vision and ecosystem, kind of our long view. We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH contemporary RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of 5 to 6 billion in North America and 20 to 25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces. by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yachtville, an integration of food, wine, art, and design in the Napa Valley. RH1 and RH2 are private jets, and RH3 are luxury yachts that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business while adding new revenue streams in 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 customers. The entirety of our strategy comes to life digitally with the world of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to 7 to 10 trillion one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 to $100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by our age, creating an emotional connection unlike any other brand in the world. Taste can be elusive. And we believe no one is better positioned than 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, 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 have a deep understanding 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. We believe the level of work we have introduced this year, inclusive of RH Contemporary, RH San Francisco, RH 1, 2, and 3, plus the opening of the RH Guesthouse New York, begins to demonstrate the imagination, determination, creativity, and courage of this team and our relentless pursuit of our dreams. 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-to-box-it-all 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. Lessons that must be earned by building one or by reaching the top of the mountain.
spk03: Onward, PMRH. Carpe diem. We'll now open the call to questions.
spk10: At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Steve Forbes with Guggenheim.
spk13: I guess good evening, not afternoon, right? Gary, just wanted to start really with your high-level thoughts around the value, as you perceive it, of the real estate pipeline given the delays today. So really, can you talk through the anticipated 2023-2024 opening cadence? I mean, can you speak about any of the projects in a little more detail and any sort of a timeframe on, on when we should expect you to get back to a more normalized opening cadence?
spk15: Yeah. You know, I don't know what's going to be exactly normal based on the kind of projects and experiences that we're building. You know, I mean, we're, I mean, I know it's, you want more normal, but we don't build normal. Right. So we don't really, you know, roll out a 10 or, 20,000 square foot store that you can open in a mall. You know, we don't know, you know, open windowless stores that have a, you know, maybe a glass storefront, you know, in a shopping center that, you know, you can stamp out, you know, every one of our projects is a development project, you know, and it's, it's complex and it's, uh, uh, you know, hard to do and it's hard to get approved and, uh, they take longer and, uh, uh, you know, it takes more human capital and more financial capital. And, um, you know, more imagination, more determination. And that's why they're so much more valuable than other things, you know, and, you know, that others might build and, you know, they might be able to be more consistent. But, you know, we rarely build many stores that are exactly alike. And, you know, it's funny, we've used the word prototype here on and off for a little while in the last few years. And I finally said, you know, like, just take that out of our vocabulary, because honestly, Every retailer I know that develops a prototype and starts to roll it out wakes up about five years later with a bunch of old stores. And in today's world where things are evolving so much faster, information is flowing so much faster, the world is so much more visual based on social media platforms and just the immediate movement of images and photography across the world. instantaneously that yeah I just think that you know having a prototype and trying to be more predictable is is a dangerous strategy because we're in a world that innovation is going to only speed up and I think duplication is is going to be something that puts brands at risk so you know I you know I just don't know if that's necessarily our goal Steve you know our goal is to do really extraordinary and remarkable work. And what we've learned, you know, if you came to the Center of Innovation and walked through the portal, you know, we've got a new sign above and it says RH, the home of the extraordinary, the remarkable, and the amazing. And what we've learned in our journey is that when we do extraordinary and remarkable work, we've always figured out how to monetize it. And we found it hard to monetize ordinary and unremarkable. And I think that You could just look at our numbers and the math would tell you that. If you look at our productivity per square foot versus anybody else's in our space, if you look at how much we do per store versus anybody else in our space, it's reflective of the effort and the amount of work and the amount of imagination and determination and creativity and courage it takes to do work that nobody's seen before. You know, if you want to have results that have never been achieved before, you know, you have to do things that have never been done before. So, you know, I appreciate your comment, you know, but I just tell you, like, we sat here and said, hey, can we rush and get England open?
spk03: We could. And it would be
spk15: it'd be probably extraordinary based on everybody else's standards. It, you know, they, they, you know, they can't imagine the kind of work we're doing. Um, but it would be, it would be less than we can see in our imagination. And, you know, and I think, you know, what I like to tell the team here is, you know, you, you just can't rush quality. And, um, you just can't rush greatness. And I don't know, you tell me, how many times has Elon Musk been on time with a product launch? I just thank God I didn't put the $250,000 down on the roadster, what, like five years ago, six years ago? But I just think that what we're trying to do, and we're trying to be the most admired brand in the world. And we used to say one of the most, and now we believe we can be the most admired brand in the world. We think we can do work that's so extraordinary, it really inspires people across all industries. And it just takes more time. It takes more effort. And, you know, and so, you know, I don't know how you put invention and innovation on a time clock. You know, it reminds me of the quote from Thomas Edison. You know, a journalist was asking him, Mr. Edison, you've tried and failed 10,000 ways making a light bulb. You know, how do you feel? And he said, you're exactly wrong. I've learned 10,000 ways how not to make a light bulb. And that's, you know, the journey of invention and innovation is not a journey of duplication. But the results of the journey of invention and innovation, you know, is extraordinary and drives the kind of results that I think, you know, that we've now been able to begin to show, you know, and we have, you know, a massive strategic difference between our age and anybody else. And even though, you know, some of the businesses, people ask me about this one or that one, how do you feel? Are they taking your market share? You know, we started this such a lower level. You know, if you look at anybody versus us from 19 to 22, you know, take their estimates, take our estimates. Yeah, they might've had a higher percentage increase, but did they capture more dollars than us? No. Did they expand their operating margins farther than us? No. Did they maybe look like they got more sales because they're picking up our crumbs as we're shedding less valuable sales? Yeah. There's going to be people that pick up our crumbs and they're going to feel really good for a while until they wake up and just realize they have an average business and an average brand. It's just not what we're trying to do. We're really trying to build the most admired brand and business in the world. And it's, you know, and sometimes, like we're going to open, let me give you a little color of England. RH England is going to have six hospitality experiences.
spk08: Six.
spk03: Three full restaurants, right?
spk15: Three secondary, you know, hospitality experience. But we have the Orangerie Light Fire Restaurant. We have the Conservatory... you know, more casual American bistro kind of restaurant. We've got, you know, the loggia, you know, we're going to call it the terrace of the loggia. We're going back and forth. It's a beautiful kind of outdoor space, partially covered, incredible views, you know, with live fire pizzas and beautiful charcuteries and, you know, other, you know, other dishes that, and, you know, and wine, you know, and they're all restaurants, quite frankly, that no one in retail has anything like, you know, and, you know, and every one of, every one of them has a view of, you know, beautiful landscape. And, you know, we've got on the property that the largest herd of white deer in all of Europe, you know, and so, uh, and then we've got secondary hospitality experiences like the wine room, the tea room, we're going to serve high peace service in a way that, you know, contemporary way that people haven't seen. You know, the wine room would be seen, you know, the wine kind of impact and experience we started to create in R.H. San Francisco, where, you know, just, you know, the wine selection and curation. If you come to R.H. New York for dinner, I mean, you're just going to see a completely different wine list. And if you come next week when we open the Champagne and Caviar Bar, I think you're going to see the most unbelievable Champagne and Caviar Bar in the world, right? Not just even in New York, like in the world. And I think our restaurant we're opening in New York is, I think it's one of the best restaurants in the world. I really do. And I think the food's that good. And the room in, you know, the RH Guesthouse, New York, is maybe the most beautiful room in the world. You know, dining room in the world. We have probably the most beautiful exterior, you know, terrace ever built in New York. It's the first elevated restaurant elevated outdoor sidewalk terrace that New York's ever approved. And those things take longer. You've got to get knocked down 10 times to get up 11. You've got to keep going back and be nicer and smarter and nicer and smarter and practice the art of wearing them down to do really extraordinary work. So the things that are coming, like when you see the next iteration of our design galleries, With the first one, where will it be? I don't know. It'll be in Houston. It'll be in Naples. It'll be, you know, like, the next version, like, we've already destroyed. You know, if you've seen R.H. Moran, you've seen, like, that's why it's not even a prototype. It's already dead. Like, we're never building another one. Unfortunately, Palo Alto was too far in construction. We couldn't modify it. But when you see, like, the next generation design gallery, it's like a sculpture. I mean, it's like maybe one of the most beautiful buildings you've ever seen. And, you know, and again, it's going to just communicate what this brand is capable of and where we're going. And I think it will inspire others and, you know, create a movement around this brand. And that's what you have to do to, you know, to try to make the climb we're trying to make. And, you know, so, you know, and we say, look, leaders have to make, leaders have to be comfortable making others uncomfortable. So sometimes we're going to make you guys uncomfortable. because it's just not going to fit into the spreadsheet very well. But what great invention and innovation has ever fit into a spreadsheet? Who's been able to forecast the greatest things that have happened in this world? I appreciate that, Gary. So anyway, sorry for that, but I'm pretty inspired. You've got to come see this guest house, because I was worried that I thought, you know, I've always been a fan of the Amman resorts. And, you know, I grew up, not grew up, but, you know, I was really young. But in the last 25 years, I've traveled to a lot of them. It's where I learned a lot of architecture. I studied, you know, countless Amman resorts, and especially the ones that Ed Tuttle did that were one of the great architects in the world. And I was really worried that, oh, my God, what timing, you know, the Amman is opening, you know, in New York about the same time we're opening. I tell you, I think we've built something way better. We stayed there a few weeks ago. This is significantly better. And by the way, that's why we priced our starting room rates higher than the almond in New York.
spk03: And by the way, we've already got, what, 50 inquiries.
spk15: It's going up by the minute. 76 inquiries to stay here. Okay, and with, I mean, it's picking their room, picking their dates, knowing how much it costs, with guest rooms starting at $3,500 a night and guest suites starting at $7,500 a night.
spk03: The almonds starting at $3,400. Huh? What's that?
spk15: Oh, no, by the way, that's right. And we don't even have photos of the room on our website. We're the only ones that didn't put photos because this is about privacy and security, you know, private entrance, you know, high security entrance. No one, you know, no one's going to get in here, but the people staying in here. And because we don't allow photos and we don't allow you to post on social media, you know, I mean, we didn't print photos of the rooms. That's why, you know, Wall Street Journal magazine, you know, doing this article and And when I told our team, you know, they can't take a photo of the room, they said, like, that's, well, you know, we can't run the story. And I said, that's okay. You know, it's just about privacy. And, you know, they really wanted a photo of me somewhere in the guest house. I said, okay, I'll give them a photo. You know, so I sat in the bathtub. You probably saw that picture. But I didn't show them the whole room. I gave them a little peek and like how magnificent the bathrooms are here. You know, and if you zoom in on the photo, not only do you see this all vein-matched Italian travertine slabs, which you'll never find anywhere. You may find in a few of the best homes in the world. But tell me if you've ever seen a home or a commercial environment, if you zoom into the ceiling, that not only has done a full travertine slab ceiling, but had the crown moldings carved out of travertine in Italy.
spk03: Yeah. Where we're going is just not comparable. Thanks, Gary. What does the pipeline look? I'll tell you what will be normalized.
spk15: Great, extraordinary, remarkable work will be normal here.
spk13: Just a quick follow-up. It's been 18 months since the JV investment. So I'm just curious if you could give some high-level thoughts on on how the partnership with Mark is going and, um, you know, if the, if it's involved at all, uh, you know, whether in line or, um, just, just how it's helping the process, right. The real, whole real estate process.
spk15: Yeah. It's really been, you know, completely additive and, um, and again, a whole nother level of innovation because I think our partner is, is incredibly creative, uh, and, uh, uh, intelligent and resourceful and the ability to source real estate that we probably would have never found has been massively incremental. We just got one of the last palaces in Madrid that's going to be incredible. And when you see You know, what we're doing in Indianapolis, I mean, it's nuts. We have a 178-acre estate in Indianapolis next to Butler University with this incredible home on a lake, you know, behind this wall. Like, you think, like, what is back there? And the wall goes for miles, right? Like, you drive along. And, you know, I mean, I think we're – we're just seeing so many more creative things. We, um, we just closed on, uh, I guess we haven't even announced that yet. Now, I guess I can talk about that, right? Sure. Yeah. Yeah. We own it. We, we, we, we, we closed on 856 acres in the Napa Valley, probably the most beautiful piece of property in all of Napa. Um, It was the site of the historic Soda Springs Resort from the 1800s. Still has the ruins where we'll build a guest house and residences and a winery. We have some of the best soil in all of the Napa Valley. You know, organic farms. We'll build an experience that the world's never seen. You know, we're close to closing. Are we, as we talked about, I'm whispering. I can't talk about that yet. No, okay. There's like an incredible, incredible property somewhere in Europe that you'll hear about soon. I can't talk about that one yet. But yeah, I mean, a lot of these things that we're doing with the JV, we're just seeing things that we've never seen before. I mean, different guest house opportunities. And now I would just tell you, like being here in this guest house, there's no way this thing isn't going to be incredible. I mean, there is nothing like it in the world. And the world needs this, I think. You know, they're just, you know, all the great hotel brands have just marginalized themselves. You know, because they all have this, nobody has control. You've got a developer controlling the development. You've got a hotel flag that's trying to design it. You've got conflicts and, you know, what they're going to design, how much it's going to cost to build, so on and so forth. And so nobody's really doing extraordinary work. You know, and I think, I actually think now, like this thing is, I mean, it's, could define an entirely new market that doesn't exist. And so, yeah, so there's just a lot of stuff that, you know, I mean, we've got a lot of, you know, a lot more optionality, a lot more opportunity, and, you know, we continue to, you know, strengthen our internal team on, you know, more what I'd call more typical deals, but, you know, the joint venture platform is gonna continue to allow us to do extraordinary things in a capital light way and give us, control our debts anymore and actually extract value for the value we've created for the developer. So in a low capital way. So we'll have real estate value that we'll monetize now and then we may refinance properties, pull capital out. And I think because we're building such unique things and we're not building like strip center retail stuff. These are really bespoke properties. And I think as our brand continues to do well and at our level of performance, it makes the real estate even more valuable. So it's just a lot of optionality that we're going to have long-term, a lot of flexibility. But the most important thing is just the creativity and deal sourcing. I mean, I really think... Mark's organization, you know, that he has is incredibly creative and resourceful. I mean, and they're just fun to work with, you know, because they're also highly creative. So lots of good stuff.
spk03: Thank you.
spk10: Your next question comes from the line of Max Relenko with Cowan & Company. Thank you.
spk05: Great. Thanks a lot, guys. So first, can you provide just any more color on contemporary demand in New York and San Francisco? Any early reads or anything to call out? And then with this five-chain pressure easing, is there an opportunity to get it into maybe some more of your galleries faster? Because I think the timeline has actually been pushed out a little bit from what you noted last quarter. And then I guess given all this is 1Q23 or maybe even 2Q of 23, the first few quarters where contemporary is going to have a meaningful impact to your top line?
spk15: Yeah, sure. Well, one, we're really happy with how contemporary is performing. I mean, both in San Francisco and in New York and, you know, I mean, it's, yes, San Francisco, we've been really, really pleased in New York. It actually meaningful, meaningful, meaningfully has changed the, you know, the direction of the business. And, you know, so we, that one was a little bit easier to measure, right? Because in San Francisco, we went from this little tiny store to a big store at the restaurant. In New York, you've got kind of an apples to apples comparison. And New York's not completely done. It's not completely set up. One will be all done probably another month or so, a few weeks. We're redoing every floor of New York. And by the way, probably at the end of the year, in January, we might redo the restaurant too, just freshen it up and tie it into kind of the whole new aesthetic and color palette, you know, so to keep, you know, keep that restaurant really relevant and exciting. So, and then as it relates to, you know, supply chain ramping, because these are all new goods, you know, you just can't ramp too fast. But the big headline is, you know, when our goods and our, when our product is in our retail stores, it sells fast. you know, significantly higher than it does when it's only online, you know, or in a source book. So that's the big opportunity. I mean, the big, the great thing is right now we're getting, you know, some early reads, you know, what are the, you know, what are the best sellers, what things are, you know, what categories, what aesthetics and finishes and things like that are our clients responding to. You know, what are our design teams excited about? What are they speccing? What are external interior designers, you know, excited about and speccing? And then how are we adjusting, you know, our on orders to present those things in our galleries and expand and dimensionalize, you know, those ideas further, you know, throughout the collection. So, you know, lots of exciting things happening. If you've been into RH New York, I mean, we kind of got it in here a few weeks ago. I mean, the team's been in here, though, this past week, really kind of polishing it up and making it look great. I was just in a couple days ago, and I think the gallery looks significantly different. We repainted the walls on floor one to kind of a buff white, kind of like our San Francisco is just a better canvas for this new collection versus the gray paint. So, you know, we're going to redo every floor. And so, you know, that'll take us to the course of probably a couple of months, you know, close off sections, repaint, re-merchandise. And then we'll, you know, plan a complete transformation across all the galleries. And the great news is about not rushing this is when we make the changes across all the galleries, there'll be really intelligent, you know, decisions based on real data. you know, when you have a launch this big and this much newness all at one time, I mean, every plan we have is going to be some degree wrong, right? And the question is, are we directionally right and strategically right? And we are. And now it's just, you know, fine-tuning, getting the data, you know, adjusting the manufacturing and the on-orders, dimensionalizing the big ideas and directions, and then optimizing the opportunity, you know, sometime let's say you know first half next year and depending on how big you know how big we decide to go on um the transformation of the galleries you know we just painting the insides are we doing more than that um you know so we'll you know we'll keep you posted but we're really excited i mean like yeah i've i've never been more excited i mean we you know it's so funny because we're People keep saying, are we going to be in a recession? We're in a recession. Anybody who thinks we're not in a recession is crazy. The housing market's in a recession, and it's just getting started. It's probably going to be a difficult 12 to 18 months in our industry, but these are the times where you can really capitalize. What I love is the big moves we've made are all directionally right and strategically right. you know, whether it's contemporary, whether what we have in the pipeline that we're working on, whether it's the investments of RH in your home, whether it's the, um, yeah, you know, what we're doing in Europe, which I think is, again, it's going to be extraordinary. What we've just done with the guest house, you know, all these things that are like big, you know, big kind of vector movers, you know, that really put us on a different long-term trajectory. Um, And there'll be more opportunities over the next, I think, 12 to 18 months as we write out what it's going to be. I think it's going to be a more difficult time than a less difficult time. And that's versus how I felt a quarter or two ago. I think things in the world and just, I think the Fed finally really understands what they have to do. And it's not going to be pretty when interest rates go up the way they are. I mean, we can all look at history and the key is, are you prepared for times like this? Are you prepared to capitalize on times like this? And I think, you know, we put ourselves in a position to play offense when possibly everybody's playing defense. And what's funny, you know, with, and we, you know, we, during COVID, we didn't really play, play offense from a small rock point of view. You know, I think our competitors ran around and tried to collect all the little rocks, you know, or like what I call the apple catchers, right? Like, like the, you know, the apples are falling from the tree and, you know, they're picking them up from the ground. Well, you know, while everybody was like running around trying to pick up the apples on the ground, you know, we, you know, we, we figured out how to, you know, build, you know, an apple harvesting company, if you will. And so, um, yeah, it's just a different game we're playing. And, and, uh, you know, so, I think we just feel really good right now. I mean, feel really clear, really passionate, but there's a level of kind of calmness. Like, you know, we've, we've been through storms before. We've been through recessions before we, you know, we've been through the great recession before we've, you know, we, we know what to do. We know how to play this game. And we think there's a lot of other people are going to stumble and fall. They're not going to know what to do. You know, there's a lot of newly public companies that are, you know, they're going to, you know, have pressure, feel the Wall Street pressure to grow, and they're gonna do so right at the wrong time, with the wrong balance sheet. And I like where we are. I mean, look what happened. I mean, what happened to Wayfair this morning, right? Like doing a convertible notes and $40 shared, like their stock was $300 a share for almost a year, but they were playing a small game, you know, so they couldn't even pay attention. Like if there was any time you're going to do a convertible note raise is when you could have done, done it at $300 and hedged it up a hundred percent to $600 and paid zero coupon. There's no zero coupons today, you know, and, you know, doing convertible notes at 40 some dollars a share. I mean, if they, if, if they make it through the next, you know, big, you know, this, this difficult time, I mean, the amount of massive dilution, if the company does well, it's going to be incredible, you know, from that. You know, so there's, you know, I just look at the, you know, like how people are playing the game, what people are doing, what's like, you know, I just go like, I like where we're at. I like the path we're on. I like, you know, the strategy we're pursuing. And, you know, I think we're going to have a lot of fun. And, you know, look, it's, you know, Powell said, we're going to have some pain. It only hurts if you're not prepared.
spk05: Got it. That's very helpful. And then just going back to 2Q quickly, how much of that top line was supported by working through the backlog? And then just where does it stand today? And how long do you think it will take you to get back to a more normalized level? Thanks a lot.
spk14: Hey, Max. It's Jack. You know, obviously when we relieve a backlog, we're generally also building it at the same time. But I'd say, you know, if you think about even just the revenue beat versus our expectations, Gary noted, that was backlog relief. I think through the first half of the year, you know, we'll call it probably, you know, 50 to 75 million through it. So relative to that 200 million we originally noted at the beginning of the year, you know, we still have that work left ahead of us. And, you know, while supply chain constraints and other things are easing, you know, they're still not back to it. If there's a level of normal, if we all believe 2019 pre-pandemic is normal, they're still not there and they're still you know, a number of factors that are, that are continuing to have that, that backlog, you know, persist. So we'll see, you know, I think there's a chance to get through it by the end of the year. And, but if not, you know, we'll just, you know, we'll just, we'll just continue to chip at it. And at some point we'll normalize, especially, you know, with the macroeconomic environment and the shape that it's in.
spk03: Got it. Thanks a lot, guys.
spk10: Your next question comes from the line of Adrian view with Barclays. Good afternoon, everybody.
spk16: Gary, I kind of want to stay on the topic of how the brand is shifting. It seems like the DNA of the brand is actually the piece of it that's shifting. And I'm just wondering if that's the right way to think about it. Is the company still rooted and founded, the foundation being home furnishings? It seems like future CapEx or hotels and real estate property and these physical assets And while, yes, you're still opening the stores, they're more experiential. So I'm just wondering how you think about sort of the root DNA of the company. And then, Jack, just really quickly, next year, as we think about 1H23 Estune dollar growth, because a couple of the Palo Alto and England are opening then, how should we think about that dollar growth? Thank you.
spk15: Sure. Well, let me take the first part, Adrienne. So I just tell you, if you have our shareholder letter in front of you, and if you just go to the RH Business Vision and Ecosystem, the long view, if you read it carefully, what it will communicate is that everything that we're doing is designed to elevate and render the core business more valuable.
spk03: Everything.
spk15: Everything we're doing. And if you just read it really carefully, you'll pick up everything here. You know, 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, right? Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries and RH guest houses. You know, we're goals for a new market. It's all designed to elevate and render the core business more valuable. If you go to architecture, interior design, and landscape architecture, all designed to elevate and render the RH brand more valuable. Doing homes that are fully furnished, all designed to elevate and render the core brand more valuable. So it's just a different way to communicate and build a brand than anybody else has done. That's okay. Elon Musk has taken a completely different approach. He uses Twitter. Never does an ad. We just believe what we're doing is going to position our brand correctly, elevate it and render it more valuable. That's why we call it an ecosystem.
spk03: You know, so there's nothing here that is dilutive to the brand, right?
spk15: It's just a different way to communicate than a, you know, free shipping or, you know, a Labor Day sale or, you know, financing sale or, you know, pay now, you know, buy now, pay later. You know, all the different ways that people or communicating with their customer.
spk03: We're just communicating differently. Yeah, that's helpful.
spk14: And Adrian, on the SG&A dollar growth, look, um, you know, there's variable components in there. There's six components. I think maybe you're asking sort of like, what's the fixed investment that we're making? Um, cause clearly, you know, it'll flex on the variable side as it, as it has as our business has grown. But, um, You know, we're making investments international. We're talking about that. Some of those are in the base this year. You know, we've got pre-opening. It's something that we've called out, you know, San Francisco and Guesthouse this year. Those won't repeat. Obviously, there'll be other elements of pre-opening next year. You know, it's different every year, whether it's a new level or higher or lower. So, you know, we haven't really guided, but just kind of give you some perspective into, you know, some moving pieces there. And, again, there's going to be pieces that are variable, pieces that are fixed. But from an investment cycle, you kind of know what we're doing. And, you know, Gary called out in his letter the pieces that we're investing into this year. And some of those, again, that are in the base, we'll cycle those. And, you know, if there's more investments to be made, we'll be talking about that.
spk16: Okay. Thank you very much. Best of luck.
spk03: Thank you.
spk10: Your next question comes from the line of Curtis Nagel with Bank of America.
spk07: Good afternoon. Thanks very much for taking the question. So I guess the first one I wanted to go to was just coming back to contemporary. Great to hear, you know, promising start. But yeah, just kind of thinking about this brand, kind of further out, like, I think Gary, you said, you know, this is potentially the next billion dollar brand, right? Presuming that still stands. What do you think the timeline is in terms of like, how that ramps? What that does to other brands? Is it additive? Is it cannibalistic? You know, at what level do you think it gets to a mature level? Does it take two, three years? Yeah, how do we think about the ramp of that?
spk15: Yeah, I mean, it'll take about three years to ramp or so. And we'll keep expanding it and dimensionalizing the brand, that part of the business. And everything you do is somewhat cannibalistic. It's hard to tell at this early stage. you know, what that looks like. But, you know, because some customers will just trade up. But for the most part, I think it's going to be more incremental than not. And it'll open up more of a new market, especially at the high end of the, you know, at the high end where people have bigger homes, more homes, spend more on the home. You know, it'll open up the market to high-end interior designers, as will even more so RH bespoke furniture and RH couture upholstery. So, yeah, I mean, I think, I mean, we, look, the way we kind of encapsulate ideas allows us allows those ideas to break through the market and penetrate and have us be seen and known for things. I mean, in a lot of ways, it's just an expansion and evolution of the brand. It's just we choose to do it our own way and tend to, instead of letting things kind of dribble out there and get a lot of impact or get noticed, You know, we tend to kind of hold back, build an idea, build a big idea, and then try to break through the clutter. And then it can really move the needle, you know, like RH Modern did. You know, the biggest debate inside our company, you know, 2014-15 was, you know, do we integrate RH Modern? Does it just integrate into the RH, you know, brand, the core books? Or do we isolate it and we try to break through? And we went back and forth, back and forth, back and forth. Last minute, we said we're going to isolate it, you know, because we're just not known for modern. And it'll have a better chance to break through the clutter. And so that's, you know, so, you know, that's what we do sometimes. And, you know, just how we approach it, you know, it's not really a, I don't even know if it's right to call it a brand. You know, it's a collection. It's an evolution of our business that will be, we believe will be, really incremental and will move us up and open up, you know, open up the market for us at a higher end. So it'll attract more, you know, more valuable customers. And, but at the same time, you know, there's some cannibalistic nature to it. And at the same time, we're shedding business at the bottom, right? Like we're letting go of, you know, things that hold the brand back, right? that might have once been important to the brand, you know, but now are actually rendered the brand less valuable. You know, so we, you know, we're constantly having that discussion inside our company. Is this, you know, is this additive? Is it dilutive? Is it helpful? Is it hurtful? Is it render us more valuable? Does it render us less valuable? And as you're trying to craft, you know, a brand and a business model like, like we are, you know, you know, all those discussions are really, really important. And those decisions are really, really important. Um, and, uh, yeah, but yeah. So, so it's not like we also go, Oh, contemporary, let's just do this, you know, and start throwing goods out there. You know, we try to think really deeply about these ideas and we say, we have to think until it hurts until we can see what other people can't see. So we can do what others can't do. And, um, yeah. And, and, and, And our ideas generally, our big ideas generally are strategically and directionally right. And then we get going, and we get real data, and then we can, you know, we can evolve from there. And, you know, so. I think that's Adrian. Okay. Oh, Curtis, I'm sorry. Yeah, okay. Anyway, so, yeah, so that answers your question, hopefully.
spk07: No, it does. Holistic, you know. for sure. Uh, the brand, all that makes total sense. And I just got to ask a question on the buyback. I think it was the first time you've been in the market, I think in like 12 quarters, right? Kind of why now you've had cash on the books, a lot of cash in the books for awhile. Um, so yeah, I guess what triggered that? I mean, what do you see in the business? Is it the valuation and the certainty in the longterm growth should we expect you to remain in the market? Um, Yeah, just very curious about that.
spk15: Yeah, yeah. Well, first, we only have very small windows when we can be in the market, right? And I think sometimes not everybody's aware of that. You know, we have, what, generally how many weeks in the market?
spk14: It would be typically, it's through the second week of the final month, a quarter. So by the time we announce, like five or six weeks.
spk15: Yeah, we generally, once we announce, we have a five or six week open window. And so most of the quarter we can't buy our stuff, right? So I think there's a lot of people who read different reports and people think like we're out there buying. Well, we can't buy. But it's generally, we're looking at multiple things. We're looking at valuation. We're looking at what the environment looks like, where we think things are going to be. I mean, it's not like we have a lot of capital on our balance sheet right now that we raised and And there's a lot of optionality we have. You know, there's in a market like we're going into, you know, there may be businesses we want to acquire. There's real estate we may want to acquire. There's, you know, other things we may want to do. There's, you know, our stock we may want to buy. I don't know. Maybe we want to buy stock of someone that we want to buy, you know, like Bernard Arnaud does. You know, there's a lot of things you can do when you're in the position we're in and And you've got optionality. You've got a really good business model that you can capitalize in any kind of a market, especially if we're heading into a recession. So we're just constantly looking at all of our options and saying, OK, based on what we know right now, what's our best use of capital? Sometimes it's just, yeah, we want more data. So, you know, we don't just mindlessly buy. I mean, look what happened at Bed Bath & Beyond, for God's sake. You know, they spent $12 billion buying their own stock back, and look where they are today. I'm sure some of the people there thought it was a good time to buy. You know, they probably wish they had that $12 billion.
spk07: But, you know, so... That's sort of a question, right, because you guys have been so thoughtful, and we're just disciplined, right? So it just, you know... first time in a while. So I just, I thought that was worth highlighting because you are, you know, restrained, disciplined, right? Have the balance sheet. So, yeah, I just thought it was an interesting point. Yeah.
spk15: I mean, like, especially right now, I don't know exactly how this is going to play out. You know, just like, you know, all the investors you interact with, right? How are they deploying capital? Who are they buying based on what information is in the market? And, what's the right time to buy what? And, you know, and, and look, this is kind of like optionality capital in times like this. We're not, it's not the most important thing we do. Right. It's the most important thing we do is, is really, you know, all the big efforts here to build one, you know, build the most admired brand in the world. So that's where most of our time is. And, And then we, you know, we spend some time thinking about, we're looking at data and we have capital. Is it a good time to buy our stock based on the data and where we, where we think things are going or is it better to hold off and be, you know, get more clarity on what the market's going to look like and, you know, how our, you know, what our business is going to look like in that market. And, you know, is there other opportunities? Is there, you know, businesses that look like things that we want to strategically do and that we may be able to acquire at a fraction of the price and maybe get a, you know, five-year head start on something that if we were to try to do it internally, you know, might go faster. I mean, nothing else. I'll just say this. When I want to talk about things like that, you know, I'll send the press and say it. oh, Gary Freeman talked about like buying businesses and it becomes like our big strategy. That's not our big strategy, but there are things that we're working on and doing and even things that we've articulated that we want to do that there are things that other people are doing and they've been doing a long time. Maybe they just don't have the scale we have or the platform we have or the infrastructure we have. And yeah, they're too small of a business to be a good public business or even a good private business. And yet you could maybe take business like that, put it in our platform and, you know, and it could do much better. I mean, and, you know, in long-term it becomes a big opportunity for us. So, you know, it's just, yeah, we're just always looking at a lot of things and, and we get people to bring us a lot of options and look at things. And there's things we've been looking at for a long time. Like we, you know, we knew we wanted to have Waterworks as part of the portfolio and, the whole 22 years I've been here. It was finally the right time. We bought Waterworks and it was a little bit of a rocky start in the beginning. And, but now, you know, Waterworks is performing really well, you know, record EBITDA, really good model. Uh, you know, there's going to be a bigger opportunity to synergize, uh, what Waterworks is doing with, with RH on our platform. I think our brand is now, you know, starting to catch up with their brand and the brands and come into harmony and, And it'll be the right time to have a much bigger play. And, you know, so you just got to say with all this kind of things that you're, you're really taking a long-term view, you know, it's not, I mean, there may be a short, a really good time to buy and, you know, but you tend to make more mistakes when you just buy things on price, right. You know, that's, that's why I kind of say the thing, you know, like on Bed Bath & Beyond or something, you know, the, somebody just didn't think deeply enough or know the business deeply enough, because I'm sure in retrospect, they look back and go, that was the worst allocation of $12 billion, maybe one of the worst in history in retail, you know, companies that size. And, but somebody thought that was a good idea. And I would say they probably just didn't think deeply enough. They didn't think about the risks. They didn't think about other opportunities and know their business well enough. And so we, you know, we spent a lot of time thinking here, a lot of time debating, You know, we try to get all the brains in the game and the egos out of the room. And, you know, we say none of us are smarter than all of us. And, you know, that usually gets us to better decisions than most people are making.
spk03: But, yeah, so, you know, we're no rush.
spk15: You know, I mean, I don't know.
spk03: Like, I mean, if we go into a really bad recession, where will they price our stock? You know, you tell me. probably lower than it is today. All right, thanks very much for the experience.
spk10: Your next question comes from the line of Simeon Gutman with Morgan Stanley.
spk11: Good afternoon, guys. A little bit of a near-term question, so pardon these. First, when you lowered the guidance, it was June, and it sounds like that might have been the low point for a lot of retail Realize you're catering to different clientele and customers in a different end market, but curious if anything picked up. And then the bigger question is, I guess, how much are you willing to sacrifice in terms of market share? You know, the down 15 to 18, I don't know if that's a representative run rate beyond, but I guess when do you step in with price? And is that a 23 decision or it could be an end of 22 decision?
spk15: Yeah, like I think I said last time, it's not really a plan B as it relates to that. I don't think we're going to need to do that. And it doesn't mean that we're not cycling. We're always going to be cycling through inventory, right? There's always going to be, I think, a level of inventory that we're cycling through. If the market gets really bad, we might cycle through the bottom part of our inventory more quickly. And so we may burn a couple hundred base points of margin to not lose market share, but we're not going to promote across the brand. I don't see that as needing to take place. And I don't think that other people are going to take that market share because they don't have our product and they don't have our positioning and our experience and our brand. Right. So like, I, you know, like a lot of people say, Oh, this is your competitor. That's your competitor. I go really go, go to their store. You really think it's your competitor. Like we, you know, we do three times per square foot than they do. They're not really our competitor. And then we're doing three times per square foot, like versus some of the next best players, you know, you know, so I don't mean to sound arrogant at all, you know, or dismissive, but, um,
spk03: The world would just have to really fall apart for us to deviate at all.
spk15: So could that happen? Maybe. But I can't see anything in the future that would say, oh, my God, this happened, and that's going to force us to screw up the model. I just really don't. We don't sell any seasonal goods. We don't even sell Christmas stuff. We have no seasonal inventory. We have no summer inventory. We buy no winter goods. Nothing like that. So we're very different than everybody else.
spk03: Who else do you know in retail that didn't have a Labor Day sale? Only the luxury brands. Did you see us mail a Labor Day sale email? You think if I would have mailed it Labor Day sale email, we might have done more business? Sure we would have.
spk15: Like, you know, somebody asked me the other day, somebody said, our house was on a call and they said they're taking market share from RH. When's the last time anybody checked our house's website? The whole business is on sale.
spk03: The whole business is 25 to 35% off.
spk15: Every item on the website.
spk03: Do you think that's sustainable? Ask me about our house in two to three years. Yeah.
spk04: Yeah.
spk15: I was like, okay, our house is up 50% in revenue, but their operating margin is not going up.
spk03: I don't want to play that game. If we hit the promotional button here, our sales would go up 50 times easily. Just not the game we're playing. You know, so, you know, just, I don't know, ask Hermes or ask, you know, Chanel or ask Ferrari or ask everybody else. You know, ask the luxury brands what they're going to do. We're going to do what they're going to do. Yeah, that's, you know, it's just the path we're on.
spk11: Yep. As a quick follow-up for international, I forget, was there anything embedded in sales guidance for contribution and how much, I guess, gets pushed if there was?
spk14: In fiscal 22, yeah. Yeah, you'll notice we took a bit out of revenue by a point. So you can view that as a combination of international and Palo Alto coming out of the forecast, essentially.
spk15: And we took down the high end of the operating margin by 50 basis points, right? That's right.
spk03: Yes. Good luck. Thank you, Simeon.
spk10: Your next question comes from the line of Anthony Tsukumba with Loop Capital Markets.
spk00: Thank you so much for taking my question and thanks for all the helpful information. I guess my question was on RH Guesthouse, which just sounds spectacular. I mean, how do you think about the potential financial implications, you know, and just like how do you, how does that kind of work through the model? I mean, I know it's mainly about, you know, advertising for the RH brand, which makes perfect sense to me, but I was just wondering if, you know, how we should be thinking through the financial implications, particularly given those room rates. Thank you.
spk15: Yeah, and check with us next quarter. You know, let's see what the demand's like, what the restaurant does. I mean, the San Francisco restaurant is just, it's, doing incredible. And this is, you know, the same, but thank God we practiced, you know, we decided to put it in San Francisco at the last minute and practice there and fine tuned it. But I think our, you know, our restaurant could, I mean, the restaurant, the guest house, you know, if you combine it with the champagne and caviar bar, which is 32 seats kind of in a cellar underground, I mean, between those two things, I think it's going to definitely be by far the highest volume, uh, just, uh, food and beverage kind of restaurant experience we've ever done. I think it's going to be significantly higher volume. And then say, you know, just a different model, right? Most hotels, you know, they're really good at rooms and they suck at F&B. And, you know, so their whole model is just a room model. Our model is a slightly different model. We're a street front F&B business. You know, we have 100, I think we have 115 feet of street front here. you know, for a restaurant. And, you know, we have a very discreet entrance, you know, private entrance to the guest house. And so it's like a restaurant with sleeping rooms on top, right? So if you're, you know, a good restaurant operator, you've got a good model, you're already starting way ahead. And then you've got the rooms, which, you know, everybody told me for so long, you can't make money in a hotel with at a hundred without an under a hundred rooms. And, you know, you can always say, well, I'm not opening the hotel. And they say, what are you doing? I say, guest house. And they say, what's that? And, you know, trying to create a new market for privacy and luxury. And, and then, you know, they'd say, oh, I get it. It's going to be a showroom for your furniture and say, no, why would we do that? We have a 90,000 square foot showroom, you know, I think 47 steps away. And, you know, they say the thing that usually twists their head. And I say, well, in fact, it's not going to have any of our furniture. And then they go, They get the trout look, you know, like what? And so it's not about the furniture, it's about, you know, elevating, you know, it's about elevating RH as a thought leader, placemaker, and tastemaker in the world. And, you know, so it doesn't have any of our furniture here. And, you know, so, but I think because it's so unique and so extraordinary that, I don't know, you know, let's say, Typical persons getting, I mean, the higher end hotels like the Mark and Carlisle and other people, you know, the starting room rate is probably about $1,300 to $1,600. You know, the rooms are 350 to 450 square feet. And, you know, I was taking the team through it and said, like, look at the rooms. Like, what do you see? We looked at pictures of the rooms and said, well, you see painted sheetrock walls, you know, funny little piece of crown molding, maybe if they have it. I said, like, see any downlights in the ceiling? No, not a downlight in one of the ceilings. Any uplights anywhere? No, no uplights. Where do you sit if you want to have breakfast? You know, where do you sit? Let's look at this, that. You know, let's look at the bathroom. Let's look at this and that. You know, I think, you know, if you find it, if you just go look at the best hotels in New York City and even the New Orleans, you know, if you go in there and, you know, ask for a tour of the room, they'll probably give it to you because I don't think they think you know, they opened and it's, you know, not the quality level I would have expected. And I think we just have a level of design quality the world's never seen. And I think it will demand a price that maybe no one's seen in New York and create a level of exclusivity and scarcity, you know, that kind of like a luxury brand. It's kind of like our Birkin bag, so to speak. And so I think in a quarter, we're going to probably have a good sense of, okay, what do the restaurant revenues look like? What do the room rates look like? I mean, the great thing in this business, like most hotelers will tell you that they have 80% margin in the rooms. Well, they have 80% margin in the rooms. The rooms are $400 a night. The rooms are $1,200 a night. It's a lot different. The rooms are $1,800 a night. It's different. If the rooms are starting at $3,500 a night, you can imagine what the margin might be like in the rooms. It might be 97% margin, 98% margin because you're not particularly spending that much more for housekeeping and other things. We are making investments into security and safety and we've got some of the best security and safety experts that protect the wealthiest people in the world that have designed our systems and security here. So this is going to be a very safe place for wealthy and affluent people to stay. Very private place and a very luxurious place. So I think that we're just going to be able to, we have something nobody else has. with the real rates that we think we'll get, and we do the hospitality, the hospitality model works the way we think it's going to work, this thing's going to make a lot of money. And then if it does, then we have another kind of profitable kind of, you know, communication device about who we are. You know, call it marketing if you want, except we don't have a marketing department. We have a truth group, so we don't use the word marketing that much. You know, it's We like to say it's not what we say, it's what we do that defines us. So, you know, we do great work like this and it makes money no different than our restaurants, right? We, you know, most people in retail have a restaurant. They don't make any money, lose money. Our restaurants make money. They do, you know, close to $10 million an average restaurant today. And so, you know, this becomes another Another way to speak to our customer that's an accretive customer acquisition vehicle, and it's not just you can sit there and go, well, Gary, you only have nine rooms in a residence. That's true, but we have a restaurant that's going to probably feed 5,000 to 6,000 people a week. And people, even if you haven't stayed here, you're going to hear about it, and you're going to understand the aesthetic and the attention to detail and just the thought leadership when you're in the restaurant or when you're You'll be blown away by the champagne and caviar bar. And, yes, the conversation is going to create. But then you've got to think about, you know, the 40 million unique visitors that go to our website that might read about and look at the guest house. And then that becomes maybe $100 million, 100 million people globally, you know, when you count Europe. And, you know, no different than it's not about the 6 to 12 people that are going to charter our H3 a year. It's about, you know, 50 to 100 million people, you know, three to four years from now that are going to see it on the website. You know, same thing with RH1 and RH2. And the handful of people that are going to reach out to us about designing their plane or designing their yacht, which we have now. They've decided, you know, how many of those do we want to do? You know, so, but another great thing that I think people may not realize about a project like this guest house is what we learn by doing work like this. how much better we are by solving the problems we solved here, how much higher our taste level is, you know, how much more we understand the high end of design because we've just done work. Nobody else has done. Yeah. I mean, we're so much better at our core business because of projects like this. We're so much better at our core business by designing the galleries that we design, you know, and just doing the design work and, putting ourselves in a position to really understand how you went at the highest end of the market. I mean, it's an investment in the education of the leadership and the team that you might not get anywhere else or ever in your life.
spk03: Got it. That's very helpful. Keep up the good work. Thank you, Anthony.
spk10: Your next question comes from the line of Stephen Bacall with Citi.
spk02: Good evening. This is Avanti Chirizlis on for Steve. Thanks so much for taking our question. How do we think about pricing in the back half and into 2023? And do you still see opportunity to take price increases even though demand is weakened?
spk03: What was the first question? Sorry, you cut out there for a second.
spk02: Sorry about that. How do we think about pricing in the back half and into 2023?
spk15: I mean, we're always thinking about prices and, you know, what are the inputs and outputs and, yeah, I mean, you've got, you know, you've got freight rates kind of coming down, you know, and, you know, raw materials are stabilizing, although everything's still high, right? So freight rates are down, but they're still higher than they were historically. Inputs are still high. I'm going to start coming down, but most things are higher than they were historically. So we're constantly thinking about it. And as we make decisions, we'll let you know, or we won't say anything. And you might notice it in the pricing. I think we've got way more flexibility than other people just because we have a higher average price point. And people don't shop for home furnishings and furniture every day. it's not like you're constantly looking at it and you notice like, oh, they went up, you know, 3% or 5%.
spk03: So, yeah, I think we've been able to demonstrate that we could, you know, continue to do what we need to do to have the kind of model that we have. So, yeah, there'll be more.
spk15: I don't know, Jack, you got anything else to add?
spk14: Look, we continue to have, you know, pricing power given the brand. And, you know, so, you know, we'll continue to approach our thoughts that way. And then, you know, we're going to watch the supply chain costs, like Gary said. I mean, good news is they're coming down. So, but if they stay elevated or if they go back up or there's other cost pressures, then clearly we'll, we have prices a lever to maintain our margin or, you know, enhance the yield.
spk02: Absolutely. Thanks so much. We also wanted to ask on operating margin. In the past, you've cited a 20% as the score for the business. Do you still see that as a score if the macro picture continues on the current path? And are there certain macro factors you're monitoring that would put that 20% score at risk?
spk14: Yeah. Look, I think what we talked about is if revenues were down 20%, we believe that operating margin will be above 20%. Yeah, at or above. At or above. That's the gist of it. In the way a year plays out, how we get to a 20%, you think about it, you make that decision at the point you know the revenue would be down 20%. But you're going to have things like we have reopening costs. You have other things that could impact that. But the earnings power of the business, let's say revenues were down 20%, are absolutely at 20 or above. I think that's the takeaway. Again, is it plus or minus a little bit, you know, because it's a one-time thing?
spk03: Yeah, you're opening a DC, you're doing some different things. Yeah, that's not the critical message.
spk02: Great. Thanks so much.
spk10: Your next question comes from the line of Michael Lasser with UBS.
spk12: Good evening. Thanks a lot for taking my question. Given the third quarter guidance, should we think about demand comps trending down in the 20% range. And you ended last year with around 460,000 members. That should provide a good leading indicator on the trajectory of the business and the movement to higher price points, which may result in a little bit of market share loss, but being able to capture more share per customer. So, what is the recent trend of membership? Thank you.
spk03: I think I'd start with, you know, there's, you've got a couple of things going on.
spk15: I think you have to really separate people that are in the home business or selling furniture from, you know, what else is happening. Sometimes people say, oh, the luxury people or, you know, Hermes or Chanel are doing this or that. COVID hit different businesses very differently. Our business went way up in COVID. A lot of other people's business went down in COVID. And now then some people are looking up, but coming up against, you know, lower numbers and they're catching back up and there's businesses like ours that are gonna give business back, you know, because COVID was really a big pull forward. And so, you know, like, you know, trending down 20%, you know, What exactly can we pull back? We're up against, I mean, if you look at the Redfin data from July, I think it came out, right? June or July? June for the first quarter. And the entire housing market, I think, was down 5%, and the luxury home market was down 18%. Why was the luxury home market down 18%? And I'd argue we're really the only one in the luxury home market. Some people, again, are trying to put other people in there. because they're not selling really low-end goods, but they're not at our level. But the luxury home market was down 18. And why was it down 18? Why was it down so much more? Because it was up against, up 80, up 80, right? And why was the luxury home market up 80? Because all the people that had the money to move during COVID moved. And a lot of the other people didn't have the money to move. So just take New York. People moved to the Hamptons. They moved to Miami. They moved to Palm Beach. They moved to Aspen. They moved to Naples. They moved almost everywhere but New York. At one point, New York was the hotbed for COVID. And all the people with the money and wherewithal and the ability to move to second homes or buy second homes moved. And it drove second home prices in the Hamptons and Aspen and all these other places through the roof. Well, a lot of those markets are coming down.
spk03: And when something goes up 80, it doesn't grow from there and it doesn't
spk15: stabilized share it goes down and so our customer is the one that moved that was where all the activity was right and so um and it drove you know it drove a significant amount of business and so the high end is going to come down uh so so you say like when's the redfin data come out again i think a week or something a week behind the data so we all know that that housing market that was down five or six in the first quarter was down 20. I mean, existing homes, which is 90% of the market, right? So existing homes were down 20. Well, they were only down five. So existing homes went down 20. And luxury homes, which is defined by the top 5% of the homes in every market, you know, highest prices, top 5% of homes in every market. If that was already down 18, do you think it got better or do you think it got worse?
spk03: My bet is it got worse.
spk15: And again, I think you got to kind of understand the market each of us is playing in. They're very, very different. And we know our market really well. And a lot of times we disagree with what markets other people try to bucket us in. It can be lazy analysis, honestly. That's why, you know, we feel relatively calm with the numbers that we're giving you because we kind of, when you don't feel calm is when you kind of can't see the board and you can't see the game and you can't see the next several moves, can't anticipate. So there's nothing in our business that's happening right now that surprises you to us that we didn't see a long time ago. You know, and I think, I don't know what it was, like, you know, February, March, when I spoke about what I thought was going to happen and that, you know, four out of five times the Federal Reserve raises interest rates, we have a recession. That's just the math. It's not my opinion. Four out of five times the Federal Reserve raises interest rates, the U.S. goes into a recession. And then everybody called me doomsday forecaster, you know, and I became a meme for a while there. And so, you know, but everybody thought like I was Mr. Negative. I'm like Mr. Positive and anybody knows me well knows I'm probably, you know, I'm just like, you know, wildly optimistic, but I'm also wildly realistic about things that you can know. And, you know, there's just data and trends and, We sat there and said, I said to myself, okay, let me look at all the data. One Sunday, I pulled up the last 62 years of the federal funds rate. You can pull it up. It actually comes up. If you want, I'll send you the thing I pulled up. I think I sent it to the team January 29th. January 29th, I sent it to the team. It doesn't look good. When I circled the last The last 20 years, the average federal funds rate was 2%. And if you look at it over the last 30 years, I think it's 3%, average 3%. And if you look at the last time we had real inflation, most of the people that are managing a lot of money on Wall Street or in important positions were kids. And I thought, nobody's seen what's happening right now. Nobody's seen inflation like this in their lifetimes. The only people that did, if you did the math, you said, like, you know, if you were in 1980, you know, if you were 40 or 50 years old, and I'd say usually, you know, 50 years old, you start to gain wisdom. Well, if you're 50 years old in 1980, you're 90 years old in 2020. Now, so we're in 2022, and Warren Buffett is, what, 92, 93? Yeah, right, something like that, or close to that. So you've got like Warren Buffett, who had wisdom in 1980, and you've got a handful of other people, George Soros, a few people that are still active.
spk03: But most of the people managing big funds right now, they might have been five years old in 1980. Or anywhere around the 80s.
spk15: Never seen anything like this. Never seen interest rates. Never seen this. the inflation like this, never seen interest rates like this. You know, that's why Powell was so wrong in the beginning. That's why Janet Yellen was like massively blind and wrong. You know, I mean, and Fed moved too slow, quite frankly. You know, and now because they moved too slow, we're going to see higher interest rates than we would have if they would have moved faster. And I'd say we're going to have the interest rates are going to go higher. going to hit the housing market first, and the housing market is the biggest part of the U.S. economy, and it's going to drag down everything.
spk03: And if I'm wrong, that's okay. But the data is there.
spk15: Nobody should be surprised about what's going to happen here. Do we look at our members and stuff like that? It's all kind of irrelevant. What's really relevant is We're in unseen before inflation.
spk03: We're in unseen before for most of the people in business today that are not 80 years old plus, interest rate.
spk15: You know, interest rates are rising. I mean, like, and where it's going to go. And I think that's why Powell said, like, okay, now we got it. We have to move.
spk03: Because otherwise I'm going to sit here and have a mess like Volcker.
spk15: You know, so I, you know, I mean, I, I think that, you know, I, you know, I, we just don't want to get lost in the weeds, you know, so, uh, you know, you get lost in the weeds at these times, you know, just make a lot of dumb decisions. So, you know, that's why we're not aggressively buying back our stock. That's why we have raised $2 billion when we did, you know, two and a half billion dollars when we did. Why did we raise it? Because that's what we saw. So we'd be in a good position. and we have flexibility and optionality. Am I really focused on membership declines right now? No, of course they're gonna decline right now. Luxury housing was down 18% last quarter. Housing got worse, not got better. It didn't get better. I'd be shocked if luxury housing is better than down 18. It's gotta be worse than down 18. And am I surprised that, you know,
spk03: You know, our business is going to be down 20 or whatever now.
spk15: It went up 40-something for no reason, except the fact that we had a pandemic. And our customer and other people, you know, you couldn't shop in stores. You couldn't go anywhere. You couldn't travel, you know. And so people sat at home. They bought a bunch of furniture.
spk03: Was it a pull-forward? Yeah, most of it's a pull-forward. I mean, I don't think anybody should be surprised about what's going on.
spk12: Understood.
spk14: Michael, just to clarify, hey, Michael, just to clarify, you know, obviously we're not, we don't guide demand. We didn't, the 20% comment was yours. You know, the guidance is that we're, you know, down 12 to 16 at the midpoint.
spk12: Yeah.
spk14: But just to clarify.
spk12: Okay. Yeah. Understood. You go.
spk04: Go ahead.
spk12: My quick follow-up question is, Was the gross margin expansion in this past quarter and what presumably you expect for the next few driven by you exercising your pricing power? And is there a point at which you might have to start to restrict supply of your products in order to further exercise pricing power, much in the way that luxury goods are able to command the margins that they're able to command in by the scarcity associated with the value of their products?
spk03: I'd say it's more implied scarcity. Yeah. Somehow they figure out how to grow.
spk15: So you say, well, how scarce is it? I mean, there's a level of scarcity, meaning you just can't be everywhere. And you've got to, you know, it, you know, having fewer, more extraordinary, you know, galleries or stores, you know, like really positioning yourself well, you know, being where you should be and not where you shouldn't be. All those things make you more scarce and just being smart about it, right? Like not, I mean, there's also a level of scarcity because a lot of them threw away or burned their product instead of selling markdowns. right, and, and so, you know, it's just all kinds of things, you know, that, that drive that, so, you know, we'll, we'll figure out all that stuff as we go, but, you know, I just, yeah, I mean, good, good questions, I just don't know, we know all the answers, yeah, because we're going somewhere we've never gone before, but we've, We've been more right than wrong. We've been directionally right on our path and on our strategy. And we keep getting smarter and we keep learning more and we keep doing better and better work. And all that should lead to more trust in our brand, more admiration of our brand. And a higher premium, people will pay for our product and be part of this brand.
spk03: Um, and, you know, it's just, you know, it's just a different model.
spk15: And I think, and I think a lot of times, because, you know, you know, just, if you said like, I mean, there's really no one has done, tried to do what we're doing in home, right? There's like these little, there's a whole bunch of little guys, you know, selling either sofas or lighting or this thing or that thing. And there's a bunch of custom people, um, Yeah, but no one's kind of like become the luxury brand of home. Like there was Chanel and Hermes and Louis Vuitton and, you know, you know, Ferrari or Audemars Piguet, you know, like, you know, all these other kind of categories. And so, so I think it's going to be hard for people to figure us out for a while, you know, and, you know, like, like most new things, like think how long, I mean, you know, like all of a sudden, you know, everybody's, remember that guy, not Lee Iacocca, there was a guy that was always like- Oh, Bob Letts? Bob Letts, yeah. The guy was on CNBC all the time saying like, Tesla will never make money. They're just terrible. They're going bankrupt. Yeah, going bankrupt. Incredible guy. I mean, like he was on CNBC like every two weeks, like taking Tesla down. And all of a sudden, boom, you know, Tesla hit the inflection point and people realized, oh my God, They've just changed the industry. And, and I think, you know, ours is going to be a little different because it's not as, not, not as broad reaching, you know, we're not going to have a model three and stuff like that. But I think, you know, people are starting to get where we're going.
spk03: I think in three to five years, it's going to be undeniable. And, and then people are going to go, whoa.
spk15: This is a whole different, I never thought this could happen. This is a, I mean, where they've gone to, what their model looks like, where the brand is, I couldn't even see it. And that's okay. You shouldn't be able to see it. If you could see it, it means our imagination isn't good enough. Our creativity isn't good enough. You know, just like people don't, you know, didn't see Apple, all of a sudden, you know, completely turning the cell phone industry upside down. I mean, who didn't have a Motorola or a Nokia? What happened to Motorola and Nokia now gone? You know, what happened to, like, all of a sudden, Tesla's become the most valuable car company in the world. You know, so when you are on a different path, it always makes you harder to be understood because nobody's seen it before. And I think we're on one of those paths, and I think people are going to wake up three to five years now and they're going to see what we've done in Europe, and they're going to see where we're going next, and they're going to see the path ahead, and they're going to see the strength of the model, and they're going to go, oh, my God.
spk03: Like, I mean, how many people actually thought on this phone five years ago RH would have a 20% operating margin? I don't think anybody on this phone ever thought that. but here we are and we think that's kind of the baseline.
spk15: Like if, even if we have a recession, you know, could it be 18, you know, one year because we're investing in that? Yeah. Like, but it doesn't, that's not the relevant point, you know, unless I got it. Like a lot of you guys, like your customer or hedge funds that are, you know, like renters, not buyers and they're traders, not investors. And so you've got to kind of make your customer happy and, you know, look at kind of the small moves, you know, in the quarter to quarter, you know, year to year moves. Like that's just not, you know, how we are, you know, we just have a long-term deal. And, uh, and if you have customers that are long-term oriented, talk to them about us, but if you have short-term oriented people, tell them not to bug us, you know, you know, because it's, you know, you know, we're just, you know, we're probably not going to make them happy and,
spk03: They're not going to make us happy.
spk12: Understood.
spk03: Thank you so much. Thank you, Michael.
spk10: Your next question comes from the line of Brett Thomas with KeyBank Capital Markets.
spk01: Hi. Thanks for taking my question as well. Follow-up on the guest house. Gary, can you just remind us at this point in time how many locations you think might be candidates in the United States and globally for guest houses. I know you're going to know a lot more in another quarter, but just wondering initially what your thoughts might be and then maybe what metrics you're looking at most closely to figure out if it could be at maybe the more bullish end of the range. And then just a quick one for Jack. Wondering if you could give us a little bit more flavor for 2023 and with some of these openings shifting and you seeing how this year's sourcebooks are performing. Any insights that we should think about in terms of what margins may look like for next year? Is that an investment year, or do you start to get some back next year?
spk03: Thanks. I think you've got to really give us until the next quarter.
spk15: So, you know, the data is going to tell us, you know, what happens. I'm just so happy, though, that we had the courage to do the first one in New York, you know, because Now, I had some people tell me, oh, you got to do the first one in Nashville or Birmingham, Alabama, or somewhere where there's not going to be all the critics and you can learn. And, you know, like we like to go on the main stage because we believe it brings out our best work, not our, you know, not our average work. And I'm just so happy that we came to New York and we've done something so extraordinary because every time we do, we've figured out how to monetize the idea. Look, we already have a second one teed up in Aspen. The first one, it's like creating the first iPhone. It's like the R&D that it takes and the investment it takes to create something like this, both human capital and financial capital. It's always greater than the next one because we've learned so much here. We can dimensionalize and use those learnings to go much faster and be really efficient as we go forward. But if it works, you know, one, like people go, like, is it going to only be nine rooms? This one's only, you know, six rooms, three suites, and a residence. And I think we've got, I don't know how we call those rooms. Like, those are pretty big rooms. Those are like 1,200 square feet with two full fireplaces and all this other stuff. And the ones in Aspen are pretty nuts. I mean, these are nuts, too. The size and scale of the Aspen ones, we have these. rooftop pool suites that have, you know, you have an 800-square-foot room with two fireplaces and, you know, sleeping area, living area, two bathrooms, and then you've got an 800-square-foot rooftop terrace with, you know, your own fire pit, four chairs, two day beds, two trees, and your own, you know, your own pool. You know, so, like, how do you price that in Aspen? You know, I don't know, but I know Aspen used to have 70 billionaires, and now it's 100 billionaires. And a lot of them have their own home there, but it's the people that go to Aspen. I think it's about as affluent of a small town target market in the world. So we're going to learn a lot in Aspen. But my sense is the good thing about New York is if it works in New York, it means it'll probably work in other cities. And if it works in Aspen, it will work in other cities. kind of vacation destinations, you know, like state parks or, um, center of pay or, uh, the Hamptons or Miami. And yes. And then New York will give us a sense for what cities it might work in, you know, whether it's Paris or London, places like that. And if it works here and it works with like nine rooms, like it'll really work with 20 rooms, you know, or, The question is, at what point is it not as private? Is there something really special about this? I mean, you, there's only three keys per floor. Like, you may never see anybody walking. You'll never, if you have the suite here, no one will, you'll never hear anybody walk by you. If you have the center room, only one person, the person that has the suite will walk by your room. And if you have the first room, up to the right when you get off the elevator, it's like you're the only one that walks in front of your room. And so, you know, there's just a level of privacy that you never see. You know, you see the rooftop, and if you watch the little video, click on rhgs.com, you know, you can take a screenshot of that rooftop, and you see part of it, and there's, I think, I think the journal published it.
spk03: Awesome journal. Magazine published the shot, which shows the private dining terrace.
spk15: It's, there's only, you know, nine rooms in a residence, and there's eight day beds that are, like, eight to ten feet apart with hedges and trees and you know, private dining terrace with four tables and, you know, how many people when they come to New York are going to actually be on that roof terrace? It might be the only one.
spk03: It might be your place. How much would you pay per day to have that roof terrace? And that would help us, you know, price rooms.
spk15: But it's like, I just think we're building something so it needs to be different. If it works here, I think it'll work in other places. And, you know, you may not It's the same room rates, and it would be different room rates, but if you have 20 rooms or 40 rooms, you know, if this one makes money, the other ones will only make more money.
spk03: So maybe if it works, if it works, there's 20 to 50. Yeah, so it could be 600 million to... over a billion. Something like that. That's great.
spk14: Brad, we don't guide 2023, at least not at this time. I think if you're building a model, just don't forget everything we've been talking about in terms of you know, climbing a luxury mountain. So if you're looking at components of margin and, you know, product margin, again, that's your building model. That's something that, you know, as we look at it, you know, that's not something that we have any plans to break. Other components, you know, we'll see where revenue shakes out and we'll guide revenue when it's appropriate. But clearly you have other fixed components in COGS and also in SGA. So... Look, I think the outlook is uncertain, as you've heard us talk about, and so we'll provide more guidance later. But I think just don't forget that as far as you build up the product margin piece of our gross margin, that you know how we're looking at that.
spk03: Thank you very much.
spk10: Your next question comes from the line of Jonathan Matuszewski with Jefferies.
spk06: Hey, great. Thanks for squeezing me in. I'll leave it to one in the interest of time. Gary, a lot of investor questions on this concept of shedding lower value customers. Is there a way to help us understand the spending patterns of maybe the top 10 or 20% of your member base versus the bottom 10 or 20%? Presumably something like that could help us better understand the opportunity to in terms of serving more households in that top, you know, tenth of 1% of the population versus, say, the top 3%, 4%, 5%. Any perspective would be helpful. Thank you.
spk15: I just think it's going to be like other luxury brands. You know, you're going to have a fewer number of customers spending a lot of money, and then you're going to have, you know, very aspirational customers that are reaching up to your brand now and then. you know, I mean, Eri tells a story, Eri Chaya, our president, chief creative and merchandising officer, tells a story of when she saved up her money when she was younger in her career to buy a B&B Italia sofa because it was such an iconic thing or, you know, saving up to buy her first Hermes bag, Hermes Birkin bag, right? And it was, you know, such a kind of milestone in her life. And And now she is, you know, she is one of the customers. You know, she's got a home. She's redoing the home. You know, she's got, you know, she's going to do an incredible house. And, you know, she's going to be one of those customers. Hopefully she buys from us. She has a very high-end interior designer working on her and the whole redo of her house, you know, because of interior architecture and everything she's doing. So, yeah. And I would say the best thing about it, she's learning a lot and she's going to go through that process. She's going to be even better at what she does here because she's actually going through an exercise that our best customers go through. Building an incredible home that's going to be incredibly designed and furnished and she's going to be a lot smarter and have an even better perspective than she has today.
spk03: Jonathan, I might just add on your question, you know, look, you know, you're familiar with the 80, 20 year old freedom principle.
spk14: It applies in many, many things in life. And, and, you know, again, we're not, you know, just directionally, if you think about the top 20% of our customers driving 80% of our volume, that, that kind of relationship tends to hold in business. So again, you do it that way. One, right? Like if you're cutting the bottom, they're not spending as much. It's just by definition, that's just, whether it's SKUs, whether it's merchandise, whether it's customers.
spk15: Yeah, the most important thing for everyone to realize is we've been doing this for 22 years. This is nothing new. We've shed way more customers than, you know, lower value customers than we're going to shed in the future. Way more. You know, so, you know, we're going to shed less, you know, but it's still...
spk03: going to have to do that if we're going to get to the top of the mountain. If we're really going to become one of the great luxury brands. We'll see. The good news is if we don't make it, nobody's going to lose a lot of money. If I sit here and think about this as an investor, oh God, they didn't make it. You're not falling to the bottom.
spk15: A really good model. We're in a really good place to take a shot at making the next third of the climb.
spk03: You know, the final third, I kind of call it. And I go, okay, what's the downside?
spk15: Boom, we're kind of where we are today. And we become global and it's still a very big company with a really good model and everybody's going to make a lot of money.
spk03: Yeah. If I just look at it financially. That's helpful. Thank you.
spk10: At this time, there are no further questions. I would like to turn the call back over to Gary Friedman for closing remarks.
spk15: Great. Well, thank you, everyone. Thanks for your time and your interest, and especially in these kind of uncertain times. I just want to thank our team who continues to drive us up this mountain, make the climb. And to everyone out there, our team internally, external partners, and shareholders, if you get a chance to be in New York, come take a peek. We'll, you know, ping us and we'll get you seated in the restaurant and come quickly because the place is filling up. So I might not be able to give you a tour of the property because it is about privacy. And so, you know, we have clients here. We're not going to be walking people through the hallways or through the building, you know, right now for kind of this week and maybe part of next week. I mean, next week we may have, I guess we have inquiries as soon as next week's other Maybe a few guests here, but if you are in New York, we're here through next week. At least I'm here through next week. Not everybody's here through next week. You want to try to get a quick look-see. We'll kind of take you through, show you a room, show you a suite, and show you the rooftop. Can't take any photos here. If you do, we'll have to take your phone. And so... But... But it is, you know, I'd say for our team and our partners and our shareholders, I think this is really an example of the kind of work that we're capable of and the kind of work that will, you know, that will demonstrate and prove that we can make it to the top of the mountain and build one of the most vibrant brands in the world. So thank you for your time and thank you everyone on our team for your, you know, for your hard work and support and, you know,
spk03: persistence and determination. Thank you.
spk10: This concludes today's conference. You may now disconnect.
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