RH

Ladies and gentlemen, thank you for standing by and welcome to the RH Third Quarter Fiscal 2022 Earnings Conference Call. I would now like to turn the call over to Alison Malkin of ICR. Alison Malkin, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for a Third Quarter Earnings Conference Call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. please refer to our SEC filing 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 opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. During this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you, Allison, and thank you, everyone, for joining us today. I will start with our prepared remarks from our shareholder letter to our people, partners, and shareholders. We're pleased to report better-than-expected results for the third quarter with net revenues of $869 million versus $1.006 billion a year ago. and up 28% versus third quarter 2019, net revenues of 678 million. Gross margin contracted 50 basis points in the third quarter, primarily due to fixed occupancy due leverage partially offset by an increase in product margins as we continue to resist promoting the business. As previously mentioned, widespread discounting continues across our industry, and while it's been almost two years since we've deployed a promotional email, we've been receiving two sale emails per day from many home furnishings retailers. Although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there's certain long-term risk of brand erosion and model destruction for those who choose the promotional path. It's that discipline and long-term thinking that has enabled us to set new standards for financial performance in the home furnishings industry And our results now reflect those of luxury brands as we delivered 20.8% adjusted operating margin in the third quarter, also exceeding our outlook despite the dramatic slowdown in the housing market. Our results are inclusive of investments related to the launch of RH Contemporary, the opening of our first RH Guesthouse, the development of RH International, and the rollout of RH In Your Home. which led to approximately 200 of the 640 basis points of adjusted SG&A deleverage in the quarter. Additionally, we experienced adjusted SG&A deleverage due to lower revenues versus a year ago. Our business generated $102 million of adjusted free cash flow in Q3, ending the quarter with $12.5 billion in cash on our balance sheet, $2.5 billion in cash on our balance sheet, Total net debt of $375 million and trailing 12 months adjusted EBITDA of $1 billion. Fiscal 2022 outlook. As noted in our previous shareholder letter, we expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated monetary policy and the cycling of record COVID-driven sales and backlog reductions. Based on our current trends, we now expect fiscal 2022 revenue growth of negative 3.5 to negative 4.5% versus our prior outlook of negative 3.5 to negative 5.5 and adjusted operating margin in the range of 21.5% to 22% versus our prior outlook 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, we believe our long-term investments will enable us to continue driving industry-leading results. RH business vision and ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America and $20 to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services, and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yongeville, 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 for the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the 170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers. The entirety of our strategy 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 for shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 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 RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive. And we believe no one is better positioned than our age to create an ecosystem that makes taste inclusive. And by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, 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 other brands want you to. We are not from their neighborhood, nor invited to their parties. We do 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 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 our contemporary, the world of RH, RH San Francisco, RH 1, 2, and 3, as well as the opening of our first RH guest house in New York, begins to demonstrate the imagination, determination, creativity, and courage of this team and our relentless pursuit of our dreams. I mentioned at the start of this year that in over two decades leading our age, I've never been more excited about our future and I've never been more uncertain about the present. Although my uncertainty regarding the short-term has expanded due to the complete collapse of the luxury housing market, my excitement for our long-term opportunity has grown exponentially as I believe the investments we're making to elevate and expand our product and platform will once again be transformative. As we look forward to 2023, we will introduce the largest collection of new product in our history across RH interiors, modern, contemporary, outdoor, beach and ski house, baby and child and teen, baby child and teen. To amplify this historic launch, we will once again unveil a revolutionary new gallery design as well as redesign and remodel all of our current galleries. We'll be introducing RH to the UK and the rest of Europe this spring summer in the most inspiring and unforgettable fashion with the introduction of RH England, the gallery at the historic Ainho Park, a 16th century, 73-acre estate that will feature three restaurants, the Rangerie, the Conservatory, and the Terrace, plus the Ainho Architectural Library and the Deer Park. inclusive of the largest herd of white deer in Europe with a viewing from the Grand Lawn. We are also under construction on RH Paris, the gallery on the Champs-Élysées, scheduled to open in 2024, and RH London, the gallery in Mayfair, scheduled to open in 2024-25. We've also secured locations in Milan, Madrid, Munich, Dusseldorf, and Brussels, some which will also open in 24 and 25. RH also announced today the following acquisitions and hires to accelerate the brand's transformation and climb up the luxury mountain. The acquisition of Dimitri & Co., a to-the-trade custom upholstery atelier, and the hiring of Dimitri founders Donna and David Feldman to create RH Couture Upholstery. The acquisition of the business of Juke, Inc., a to-the-trade custom bespoke furniture workroom, and the hiring of Joseph Ju to create RH Bespoke Furniture. The hiring of Marco Russell, former editor-in-chief of Architectural Digest and El Decor, to create RH Media, an editorial content platform that will celebrate the most innovative and influential people and ideas that are shaping the world of architecture and design. Today's announcement, plus our previous acquisition of Waterworks, firmly plants four RH flags at the very top of the luxury mountain and clearly states our intention of establishing RH as an arbiter of taste and design. These brands and businesses, thoughtfully integrated and amplified on what we believe will be the world's most innovative and dynamic global design platform, will begin to fundamentally change the landscape of the luxury home furnishings market and the to-the-trade design industry. As we approach the holidays and new year, I would like to express our gratitude to all of our people and partners around the world for your contributions and commitment to our cause and for bringing our vision and values to life. It's not easy striving to become the most inspiring brand of the world, and it's surely not for the faint of heart. It takes courage to lead rather than follow. It takes collaboration to build a brand that can break through the clutter in this world. It takes teamwork to reach the top of a mountain no one else has attempted to climb. 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxidol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11, leads to the development of the mental and moral strength that builds character in individuals and forms cultures and organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be learned by building one or by reaching the top of the mountain.