RH

Thank you for holding and welcome everyone to the RH fourth quarter and fiscal year 2022 earnings conference 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. Thank you. I will now turn the call over to Alison Malkin with ICR. Ms. Malkin, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2022 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal 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 filing as well as our press release issue today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we discussed 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.

Thank you and welcome, everyone. We'll start with a reading of our letter to our people, partners, and shareholders, and then open up the call for questions. To our people, partners, and shareholders, fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic's peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It's clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses, and it's also clear the lift, like the pandemic, was a temporal isolated event versus something structural or systemic. We believe the questions are, what, if anything, has permanently changed? What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be? Those are not easy questions to answer in light of the massive backlog relief and a return to discounting at most home furnishings retailers, which distort short-term results. Additionally, inflation that was thought to be transitory is now deemed persistent by the Federal Reserve, resulting in a record rise in interest rates, triggering a dramatic decline of the housing market, with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that an underperforming stock market and a banking crisis no one saw coming, and the data points to business in our sector likely getting worse before it gets better. It's times like these that businesses tend to move in herds, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It's also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That unique path for RH is our climb up the luxury mountain and our long-term strategies of product elevation, platform expansion, and cash generation. Product elevation. Our strategy to elevate the design and quality of our product is central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our climb as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it's a climb that becomes more difficult as we reach new heights, it's also one we've navigated successfully over the past 22 years So don't expect us to waver from our vision anytime soon. This spring summer, we'll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across outdoor, interiors, contemporary, modern, baby and child, and teen. It represents a massive leapfrog for our brands. These new collections reflect a level of design and quality inaccessible in our current market and a value proposition that will be disruptive across multiple markets. We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year. The new pieces will be gracing the pages of a new source book design with the objective of creating a cohesive collection of titles, reinforcing our design and quality leadership. The first of those titles, RH Outdoor, began arriving in homes last week with our trademark belief inscribed across the cover. There are pieces that furnish a home and those that define it. Platform expansion. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multibillion-dollar opportunity. This summer, we'll be introducing RH to the UK in a dramatic and unforgettable fashion with the opening of RH England, the Gallery of the Historic Ainho Park, a 73-acre, 17th century estate that will be a celebration of history, design, food, and wine. RH England includes three full-service restaurants, the Orangerie, the Conservatory, and the Loja, plus three secondary hospitality experiences, the wine lounge, the tea salon, and the juicery. Guests will appreciate views of Europe's largest herd of white deer grazing on the vast and scenic property from the 46 windows adorning the south-facing main building and can enjoy a glass of wine or afternoon tea service while sitting around monolithic stone fire pits on the grand viewing terrace. One of the most unique attractions at RH England is the Ainho Architecture and Design Library, featuring rare books from the foundational masters of architecture, Palladio, Scamosi, and Alberti. The centerpiece of the collection is one of the first printings of De Architectura, the Ten Books of Architecture by Vitruvius, whose work from the first century BC inspired Leonardo da Vinci's drawing of the Vitruvian Man, 1,500 years after Vitruvius sketched the original. The principles at the core of Vitruvius' philosophy have also inspired the design ethos at RH, which is reflected in our galleries, interiors, and gardens. The gallery will also include the Sir John Stone exhibit, honoring one of England's greatest architects in partnership with the Stone Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Ainho Park. We believe RH England, the Gallery of the Historic Eindhoven Park, also represents RH's greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe. Our global expansion also includes openings in Brussels, Dusseldorf, Munich, and Madrid, as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan, and Sydney, in 2024 and 25. Regarding our North American transformation, we'll be introducing a new gallery design this year in Palo Alto and Cleveland, plus opening new galleries at the historic firehouse in Montecito and the Linden House, a 178-acre estate on a private lake in Indianapolis. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. We have several existing locations that validate this strategy in East Hampton, Yonville, Los Gatos, Pasadena, and our former San Francisco gallery in the Design District, where we have generated annual revenues in the range of $5 to $20 million in 2,000 to 5,000 square feet. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize. That's why we raised 2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. Times like these also require us to have the discipline to say no to the things that are nice to do in order to focus our time and resources on what is truly important. That includes making the difficult decision to graciously say goodbye to team members whose roles are no longer essential in our new view of the future. enabling us to work in a more integrated and collaborative fashion on fewer, more important priorities. Please know we've treated everyone with respect and dignity and appreciate the contributions all have made to our cause. Approximately 440 roles were eliminated as part of our organizational redesign, and we expect to achieve cost savings of approximately $50 million annually, inclusive of associated benefits and other cost savings. Concurrently, we'll be focused on reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality. Outlook. As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis, and the cycling of record COVID-driven sales and backlog reductions. Based on current trends, we expect fiscal 2023 revenues in the range of 2.9 to 3.1 billion and adjusted operating margin in the range of 15 to 17%, which includes an approximate 150 basis point drag due to the ramp of our global expansion. We estimate the 53rd week will result in revenues of approximately 60 million. For the first quarter of 2023, we are forecasting revenues of 720 to 735 million and adjusted operating margin in the range of 13 to 14%. 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 products to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, patient, 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 Johnstville, an integration of food, wine, art, and design in the Napa Valley, RH1 and RH2, our private jets, and our H3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, with a 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 and 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 breadth and depth and dimension of our brand. Our authority as an arbiter of taste will further amplify 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 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 RH, creating an emotional connection unlike any other brand in the world. Case 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 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 plan to introduce this year, inclusive of our new product collection, new source book design, new gallery design, and the introduction of RH to the UK in an innovative and immersive fashion, continues to demonstrate the imagination, determination, creativity, and courage of this team, and the relentless pursuit of our dream. Twenty 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 in learning, 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 in 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. Onward, Team RH. Carpe diem. At this point, operator, we'll open the call to questions.

Certainly. Again, if you'd like to ask a question, please press star 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity. Stephen Forbes with Guggenheim Securities. Your line is open.

Good afternoon, Gary Jack. I wanted to expand on the new product launches. Gary, you mentioned the timing of these launches as an inflection point within the business. So curious if you can contextualize sort of what's implied by the guide if you're sort of baking in a reacceleration right in demand trends at the back half. And then maybe more importantly, how would you think about in-stock versus special order mix

and the potential revenue contributions of these new collections in the back half? Sure.

I say, you know, I think based on, you know, the times we're in and the uncertainty we're facing, whether it's the continued rise of interest rates, you know, or the next bank or two that gets these, you know, it's hard to be anything but conservative right now. And I think it would be foolish to be. not just from perspective of disappointing investors, but disappointing ourselves and possibly making decisions and investments before we can see around the next corner. Now, I can tell you as someone, the unsettling feeling of being a person on a Saturday afternoon who's watching a Warriors basketball game, have the news cut to a line formed around your local bank, while the bank was sending hourly emails trying to tell you that they're committed to serving you. It's a very unsettling feeling, okay? And those of you maybe on the East Coast that didn't experience what happened here on the West Coast, maybe aren't as close to it. But I, as a person that was close to it, have never seen anything like it. I don't know, how long was it between the fall of Bear Stearns and the fall of Lehman Brothers? What's going to be the next shoe to drop or pin to fall? That's very unknown right now. So we believe there will be an inflection point in the second half. What we don't know is what will be the economic environment in the second half. What will be the condition of the banking industry in the second half? Where will interest rates be in the second half? Where will inflation be in the second half? You know, I think Powell has been very direct and consistent about addressing persistent inflation. You know, all one has to do is, you know, Google the history of the federal funds rate and zoom in on the 1970s to 1980 and look how many times the Federal Reserve thought they had inflation under control, lowered the federal funds rate only to have to raise it twice as high, all the way to I think 21%. But if you look at those moves and you look closely, zoom into that chart, you realize that we're in uncharted waters today from an economic environment perspective. There's not many people on the planet in levels of authority and responsibility that were old enough to experience those times. And I think that, you know, having a conservative view and being prepared, you know, having a strong balance sheet and trying to see the whole board and all the moves. You know, we like to say inside RH, don't move until you see it. You know, and so, you know, our view is just you know, be conservative, be prepared, and try to capitalize, you know, in the, you know, capitalize on the opportunities that may unveil themselves in times like these, in times of dislocation, because this is a time of dislocation. You know, anybody that thinks it's not a big deal that three banks went down, You know, where they don't think it's a big deal as a government-directed 11 banks to lend $30 billion to my bank, you know, just to, you know, save that bank. You know, it's living, you know, in a, you know, with a euphoric view of the world. I've been on the planet for long enough to know this is not normal, and this is dangerous. So, you know, we want to make sure we navigate this period in the most thoughtful way that we can. and position ourselves to, you know, position ourselves to really capitalize long-term. And that's what we've done in every past time like this. Whether you look at 2001 when I joined the company, you know, 2007 and 8, you know, 2007, 15, 16 period, you know, where we had, you know, we had a slowing housing market and, you know, some issues in the oil industry, as well as in, you know, an internal issue with the launch of RH Modern. But we've, you know, we've made during those past times, you know, we have a history of making, you know, a few very important moves that have, you know, positioned a company that really shouldn't be here today, right? It was really a bankrupt company. And for them to see one of the leading companies, you know, in the world with what we do. So that's how we approach things. It may be different than everybody else. You know, we're not pushing the panic button of promotions. I wouldn't even call it a panic button of promotions. It's really, you know, trying to hang on to the illusion of where business was during the pandemic, right? Like the pandemic has come and it's gone. Some of the after effects are still lingering. We're acting like it never happened. And so whatever the give back is, the situation is, does it really matter? If our business looks more like 2019 coming out of it, but it's really built on a strong base and foundation, with a really exciting long-term strategy and vision, that's what we think is important. You know, not hitting the sale buttons, not sending out sale emails. I don't know, you know, check your inboxes unless you're getting filtered. You know, a lot of people are saying, oh, we're not really returning to promotions. I'm sorry, if you're sending me promotional emails every other day, if not every day, multiple times a day, calling them different things. You want to call your promotion something different? That's interesting. Let's see what happens when all those people have to anniversary those promotions, right? Let's see how many more promotions they add, you know, when they anniversary those promotions. Let's see what happens over the long term as their operating margins start to grind down to where they were historically, because that's what's going to happen here. We're not doing anything different in our operating margins this year. We guided to a midpoint of 16, yet 150 basis points of drag for international. You've got 17.5. We entered the pandemic with 14.3. So without changing anything, we're ahead of where we were. I don't know if everybody else is going to end up there. I think there are some new businesses that is, you know, that have, you know, grown quickly up a smaller base. But, you know, but based on some of the sales growth that you see, you know, the operating margins aren't where you think they would be. So I like, you know, I like where we are.

You know, we thought deeply about the decisions we made.

And this is the game we're going to play right now. And we feel good about it. As it relates to the you know, the stock versus SPO mix for these new collections, you know, what are the in-stock levels? We're going to be in stock, you know, many of the products. We run our upholstery business mostly as a special order business just because the customers want choice in color of fabric. And then we generally stock, you know, our broader furniture collections. We also are planning uh to uh you know transform our galleries and our floor sets uh you know beginning in the late second quarter into the third quarter when we can get the um enough product in our collections you know for us to uh to put a single collection you know in in a gallery uh that's generally what would we order i don't know 1500 to 2000 pieces of that collection you know and so um getting factories to ramp up for that kind of a change out is pretty massive. And so you're balancing the decision between flipping the galleries and being in stock. Our view is we want to flip the galleries sooner than later. We think this product, I mean, one of the reasons we haven't flipped more of the stores into contemporary, quite frankly, and we're, you know, we're happy with contemporary. Contemporary in its first year is tracking to do more than modern in its first year. So, yeah, And that's even in this environment. And the product that's on its way is by far the best work we've ever done. I mean, and the breadth and depth of the assortment, the value proposition that we're going to have in the market, you know, that I think will be disruptive, not only at the high end, it's going to be disruptive to people that, you know, are below us in the market, just because We have the scale to buy in stock inventory. Many people don't. The platforms that are out there today, whether it's Wayfair or others, you got to understand they don't take position in inventory. They can't really buy in volume. Because they can't buy in volume, they can't drive efficiencies. A lot of people say, well, aren't you worried about platform flow? I think platforms ought to be worried about us too. There's not a platform that's made a dollar yet, I don't think. I mean, Wayfair made money during the peak of the pandemic, for God's sake. And look, may Wayfair be able to cut their prices and make it? I don't know. All I know is that we've got a really great model. We've got, I think, the most compelling vision in our industry. We're trying to do something that's never been done. So you know, what the stock versus SPO, again, the SPO mix for the business, special order mix for the business will be, is kind of a really small rock, quite frankly. You know, so those are just little nuances in the business. You know, the key is really going to become I think when, and it's hard to, you know, it's hard to communicate it until you've seen it. I mean, I don't know how many people on the phone have got the outdoor book, but the outdoor book to me, I mean, just visually looking at it, looking at the cover, you know, looking at the mock covers we've developed for all the other books, feeling, you know, the quality of the cover, the page, the matte finish, it looks like a new brand. And the outdoor book has, probably the smallest percentage of newness, yet it's a lot. It's got 10 new collections. Many of our competitors don't have 10 collections. When you see what's going to happen, it's the biggest move we've ever made in our history. It's the most exciting time in the history of our company, yet it's the most uncertain time I'd say in the history of leading this business. I think it's more uncertain than 2008 and 2009, because you didn't have the inflation problem that we have today. You didn't have some of the political unrest that you have today. And the inflation issue is going to be an interesting one. If the Fed can navigate to the other side of that, you know, with a positive outcome, with what I'd call any kind of landing, you know, any kind of landing is good. Just land the plane on the other side, whether it's hard, you know, whether it's bumpy, you know, just don't completely crash this. A complete crash would look like the 70s and the 80s. That will take over a decade to recover from. You know, a recession, which people are worried about and afraid of, like, we have recessions Every seven to ten years in this country, you know, it's like we've had the longest economic expansion in our history. Don't be afraid of the recession, I tell people. Recession is a temporal event. They usually last, you know, 12 to 18 months, maybe 24. Pull up the history of the federal funds rate and zoom in to the 70s and 80s.

That's what we should be scared of. Thanks, Gary. I'll get back to you.

It's Simeon Goodman with Morgan Stanley. Your line is open.

Hey, everyone. Hey, Gary. Hey, Jack. Gary, has your approach to the, I guess, the next 12 months of promotional posture, is it changing? Will it change if the environment gets worse? Or, you know, we know what to expect in terms of pricing and promotion for you.

Yeah, look, we have, as we said, the biggest collection of new product in our history coming through. So we're going to have to, you know, we're going to have to clear existing products, right? So there'll be some promotional activity and clearance activity in the business, as we always have, that may get bigger. And also, you know, our view, because of the uncertainty in the market, you know, we may decide to just move stuff, you know, through our outlets, you know, and online, just faster than we may normally do just to turn inventory, you know, non-strategic long-term inventory into cash, right? And position us to have maximum optionality during these times. So, you know, we think leading the business with a cash focus is really important. There's going to be opportunities that we probably couldn't imagine that might unveil themselves, you know, whether it's from a real estate perspective, business opportunities that might exist, ability to accelerate our business in different ways, whether it's, as we mentioned, kind of what I call, I almost call them interior design offices, where if you stop and think about our business, Interior design is really something that elevates and amplifies our product. But we've become really the largest residential interior design business in North America and likely the world. And it's become more and more important to our business, long-term attracting the very best people in this industry that are aligned with where we're going. you know, creating incredible, you know, offices and spaces for them to, you know, approach business in, you know, versus maybe, you know, having to always be in a retail store. You know, so, you know, our design studios are going to kind of thread a new needle, I think, in the business. You'll see the first one in London, you know, the first of the new concepts. And, you know, we'll have some other ones that I think will pop up relatively quickly. But I don't think it's, I mean, we're in a really good position to play offense, right? And that's what you want to be in. Like our, you know, there's no risk here to our balance sheet. There's no risk here to our operating models besides like, hey, we may make less money. Got it. We made a whole lot more money during COVID, you know, and we stashed that away. So we're just in a great position. So I'm not, you know, I'm not worried about exactly where our business is today. And I don't, I mean that to sound like we're not focused on it. We're just focused beyond this next 12 months. We have a lot of things that we're excited to bring to life in this next 12 months.

But it's not like, think about it this way. Did you see any of us sell stock at $700 a share? Did you see me sell stock when our stock was $700 a share?

No. Nope. There's a reason I didn't sell stock at $700 a share. We believe it's going to be worth significantly more than that, right? So we're just playing a very long-term game. And if we're right, we're going to create extraordinary shareholder value in this company. You know, we're going to do something nobody else has done. So Expect us to play our game. If something really crazy happens, I can't imagine it, something worse than COVID that shuts down multiple parts of the economy again, we may have to improvise, adapt, and overcome. But based on what we can see and anticipate that might go wrong today, I think we're good with the game we're articulating, the strategy that we're articulating.

If I can sneak a quick follow-up, this follows up to Steve Forbes' question. The tax that you took, the approach to the guidance, are you taking the fourth quarter sales and run ratings? Have you made tweaks? I mean, in the last two weeks, even given the banking crisis, like how, and then are you building in a back half improvement because of the new launches?

Yeah, there's back half improvements in the new launch. You're not going to, you know, launched with, you know, we're doing without some improvement. I would say we're not, you know, we're not baking in what might happen in better times.

Or worse times, frankly, because in the same way we did in 2022 when we were baking in a deterioration, I don't, you know, that's really part of the story as we look out.

Yeah, look, do we think things are going to get significantly worse? I don't think so. I've never seen a luxury home market down 45% a quarter ever. not even in 2008 and 9. So I think we're near the bottom, but could it get a little worse? I think it could. Was there erosion during the banking crisis? Yeah. Our business dropped about eight points, but it's kind of bounced back a bit. We didn't factor that drop through the rest of the year because it's kind of returned. So I just don't know if the banks are stable yet. So there could be, I don't know, maybe there's another 10-point drop if things become destabilized further. Can we withstand that? Yes, we can. I think we've got our top structure in a good shape. You know, there's levers we can pull and things we can do from a cost and investment perspective. You know, we could slow things down a little bit. You know, it may be times where it's more opportunistic to, you know, to repurchase our stock, you know, that could benefit long-term shareholders. So, but listen, we're more excited than we've ever been. You know, we're working harder than we've ever worked, not because we have to, because we want to, because the work is that exciting right now. So, you know, and I think the customers, our existing customers, and I think the new customers that we're hoping to acquire, I think they're going to be kind of hard to not be excited about what I'd call the next,

you know, the next chapter of RH. So we feel good. Thank you for the thoughts. Max Recklenko with Tahiti Cowan.

Your line is open.

Great. Thanks a lot, guys. So first, on the 15% to 17% even margin outlook, just how should we think about gross margin versus SG&A? And then also, how should we think about the four-wall gallery margins versus a lot of the investments that you'll be making? So just thinking about the core versus some of the growth initiatives. And then I've got a follow-up.

Well, Max, we don't break out the gross margin STNA split, obviously.

I mean, clearly with lower volume, 23 versus 22, again, you guys can do the math on what the leverage would occur on lower volume from fixed occupancy costs, just like we had in Q3 and sequentially in Q4.

So I'll just say keep doing that math.

And what about gallery level versus the investments?

What do you mean by that?

I'm not sure what you're asking.

Just thinking about the four wall gallery profitability, you know, where you are now versus where you were before. And then also just, you know, a lot of the investments you've got international, which you pointed out, but then you've got a bunch of gallery openings in the U S as well as some of the other growth areas that you're focusing on. So, just trying to think about more one time in nature versus, you know, the run rate of business.

Well, the economic model of the U.S. sort of our North American four-wall gallery base hasn't changed other than in the same way that, you know, would have been impacted as our businesses evolved, you know, whether margins come down as we talked about. But it's not, I think you don't think about it the same way, you know, I guess on that basis. On the international side, we'll have more to say when we open. I don't think there's – that's a question of also the size, ultimately, of the business. And as Gary's talked about, we don't have – it's quite a wide range of what could happen here as we launch.

Got it. Okay. And then on just the new openings, any color on the cadence, both U.S. as well as Europe, throughout the year? And then just any color on the new real estate prototype? that you're looking to roll out. How should we just think about that annually versus the regular types of galleries that you open? And then just anything on margins and profitability there.

I mean, again, Gary referred to the cadence in the letter.

So, you know, talking about England opening in the summer, you know, the other galleries are sort of H2 galleries. you know, timing. We'll update you as that unfolds. And then also the design studio, same thing. I think it's, you know, when we have more to share, we will share it at the moment. That is what we have.

Got it. Okay. Thanks a lot, guys. Best regards.

Thank you. Steven Zicone with Citi. Your line is open.

Great. Good afternoon, everyone. Thanks for taking my question. I wanted to follow up on international because it did look like you listed some new cities and that included Sydney. So I'm curious how you think about that timetable. And on the international stores in particular, how do you plan to merchandise these stores versus a gallery in the U.S.? Like, will you have RH Contemporary in the U.K. opening?

Yeah, yeah, no, there's, you know, we're building a global brand. And, you know, unless we're in markets that have, for some reason, you know, something that should be vastly different, which there are probably markets we're not going to approach initially. Yeah, you can expect an RH experience that's very similar. So, you know, your question about Sydney, since I outlined the timeline for Sydney, you know, with, you know, same as, uh, Paris and Milan and so on and so forth. So, um, uh, you know, and, uh, you know, so the timetables are all outlined, you know, these are big development projects. Sydney is a, you know, is, is a brand new building. Uh, you know, they'll be going digging into the ground soon, you know, so there's, you know, we have to get certain approvals and things like that, design approvals, uh, you know, for the building, uh, We're hopeful, you know, there could be delays, you know, they could decide they don't like our building and want to make changes, you know, so we're working with, you know, the local developer that, you know, owns the land and, you know, is developing kind of a custom build for RH. So, you know, if we stay in a reasonable timetable, there's no real issues there that should fall in line. Everything else is kind of somewhat under construction or in, you know, demolition or, you know, some are more complex, less complex. You know, some of the bigger, more complex ones are, you know, Milan and London and Paris. You know, those are all under construction. They're moving along nicely. If you're in Paris in, the next few weeks. Uh, and if you anywhere near the Sean, we'll say, uh, Sean, Sean, and, um, Avenue Montaigne, you know, look up, you'll see a, I think it's almost a hundred foot high, something like that. 70 foot, a hundred foot high, 70 foot illustration is the, uh, the Petruvian man, uh, you know, wrapping RH Paris, um, is a symbol of, you know, our design ethos and beliefs. And, uh, And soon, you know, you'll see something like that in London. So it'll be clear to people something's coming that they've never seen. You know, see a building wrapped in a way that, you know, it's never been done. So, you know, everything's moving along. And, you know, Milan is an extraordinary project. And, you know, they dug out the site and the ground. They built the infrastructure for what's going to be an incredible, you know, sunken garden restaurant. And it's a lot of exciting things. You know, we're moving along, make a lot of investments. And, you know, I think we're going to be relatively easy to find in Europe. I don't know how many people actually, you know, know about us yet, but they'll know we're coming. They'll know something's coming that they haven't seen before. So, yeah, so there's – and that's the great thing about the buildings we build, right, is, you know, there's people walking by them all the time, driving by them all the time. You know, so there's inherent – you know, curiosity that gets built up. And, you know, I'm sure a lot of people are going to go to our website and say, who is that? And, you know, and see what we're doing and see who we are. And, you know, so the brand is going to be benefited by not, you know, just popping open a mall store where you can throw a little barricade up along, you know, 300 other little storefronts and say, you know, whoever's coming, you know, in two or three months. I mean, our buildings are under development for two to three years. So people get to anticipate our entry into a market for a while.

So I think that's one of our advantages, quite frankly. Great.

Then the second question I had was, I did want to shift to margins. And I was curious for how to think about the path beyond this year. You know, it's helpful to think about the business where you are today versus 2019, but we always used to think about a 20% margin floor for the business. So as we looked at 24, would you expect this mid-teens to high-teens operating margin level to be the right level for the business? As maybe you return to growth, but it's potentially offset by continuing investments for global.

Yeah, I think you got to think about a, you know, a 20% margin floor, not in the worst housing market, you know, worst luxury housing market I've ever seen. It's been one of the worst housing markets anybody's seen, right? So, you know, I think in the third quarter, luxury housing is down, fourth quarter, luxury, if you think about where luxury housing's been, It was down 18 in the first quarter of 22, down 28 in the second quarter of 22, down 38 in the third quarter of 22, and recently reported a couple weeks ago down 45 in the fourth quarter of 22, which means because you're talking about months and they're kind of going down, it probably means that the last month, the fourth quarter was down close to 50%. It's not 50%. Then you've got a refi market that's down 70%, 80%, some number like that. And housing values, the refinancing market, is another way that drives businesses like ours. When people are refinancing, taking money out, investing money into their home, refurnishing their home, things like that. When you're looking at record inflation, record rising interest rates, record kind of fall-offs in the housing market like this. I don't think I was thinking that we had a COVID give-back and this kind of market environment with the banking crisis and other things all happening at once. So for our customer, they're smart and savvy investors. You know, there's one that the luxury housing market went up, you know, more than regular housing market. I think it's about a 10-point swing between the two, between the non-luxury homes. I think, you know, about a 10-point swing all year. Even more than that in the earlier quarters. And remember, you know, what happens in the housing market is kind of, it kind of trails to our business. It doesn't happen, it happens kind of fast, but not completely. You know, it takes about three months to kind of, completely hit us and settle in. So all of that happening at once, could we be at 20 if we wanted to be? Could we slow down European expansion if we wanted to?

Could we structure the business and make 20 points? Yeah. I mean, we could. Is that the right thing to do long term? No.

You know, so in a typical environment, you know, in a slowing market, you know, if you have one thing hit us at once, but, you know, multiple things are hitting us at once. So, you know, do we think there's anything different about our long-term view? You know, the business being in the mid-20s, you know, operating margin, 30% EBITDA, you know, maybe even higher operating margins than that. Yeah, just, you know, think about our model and imagine it with

Real scale. Imagine what this looks like.

Imagine if we really become one of the great admired luxury brands in the world and what kind of product margins you can achieve when you really reach that level of desirability. There's a lot too.

Businesses, the brand that we're trying to build doesn't happen quickly.

It takes decades and centuries. If you name all the real luxury brands in the world, that's why most people don't even think about building one, because it's too far out of their view. I mean, we may not get there in my lifetime. The key will be, did I set this company on the trajectory to get there and do something that's never been done? Because no one's ever started at the bottom of the mountain like we started. We've been farther ahead. If I would have taken the $60 million I raised in 2020, 2001 and just started from scratch and not invested in RH? Yeah, probably. But it still would have took a really long time. Hermes is 300 years old. Most of these brands are more than a century old, more than 100 years old. I got that everybody's impatient. You know, and we're impatient, too. You know, I think we move faster than most. But this is just a different path. You know, it's not going to be a, you know, we got rolled out and we burned out. You know, there's a lot of things that, you know, really hot with investors for a little while. And next thing you know, they're not ever again. You know, we're trying to build something that's really interesting and unique. It stands the test of time. There's just not many people trying to do what we're doing today. So it's a little foreign. And, you know, for somebody that's not really, that doesn't really cover luxury, you know, I'd say for people who want to understand us more, go read about Bernard Arnault. You know, read about how he thinks about luxury brands. You know, what it takes to build them. You know, the discipline you have to have. You know, the radical innovation it takes The relentless pursuit of a long-term view. People that are doing it. I think people that are more familiar with luxury brands are more familiar with the path that we're taking than a lot of people that aren't.

If you're just covering the home furnishing sector or hard goods, almost none of it relates to the path we're taking, except if we're selling furniture. and home stuff. It's a very different strategy. Great. Thanks for all the details. Best of luck this year. Thank you.

Seth Sigmund with Barclays, your line is open.

Great. Thanks a lot. I'd love to follow up on that last point, actually, just thinking about your ability to maintain and continue to grow Mindshare in this environment and, I guess, whatever a normal environment ultimately looks like. I mean, to your point, there's so much newness, but it is getting more promotional. And it feels like a lot of competitors may go back to pre-pandemic promotional levels, right? So you're taking a firm view on that. How do you cut through that noise, right? And I guess if you continue to restrain from discounting, does that just mean that marketing structurally is higher going forward and just offsets that? How do we think about that?

You know, no different than, you know, you would have thought about it in 2019. You know, just don't, just ignore the pandemic.

You know, people who have, you know, altered their strategies, you know, based on the pandemic, I think they're going to find out that those are going to be things that are hard to hang on to. Because the pandemic is, you know, Is there some things that are modified? Is there going to be more people that work from home? Yeah, there are probably people that should have been working from home. Are most of the people going to go back to the office? Yeah, they're going to go back to the office. You know, are we going to, you know, I mean, I don't know. How many people do you see wearing masks out there right now? It's kind of weird, right? It's almost like the beginning of the pandemic. You know, you saw the people with masks and, you know, I remember my significant other, you have to put this mask on to go into the grocery store. I'm like, I'm not going to put that thing on. It looked weird. I didn't want to put on a mask. You couldn't think of your life without a mask. Just like I had people that came in here pitching me ideas during the And Ari's laughing here. She's smiling right now. Because like I had so many people like with small business ideas or things that they were doing, you know, wanted to pitch us whether invest or partner and whatnot, you know, and telling me it's the decade of home. You know, it's going to change everything. The decade of home. I mean, it's a pandemic. How could you say that? Something the world's never seen. You know, like in our lifetime, right? I've never seen people walking around the United States of America with masks before. I've never had the government tell us we couldn't leave our house except to go buy groceries. I didn't have to wear gloves going grocery shopping. I'd have to wash my groceries in my sink before I even put them in my fridge. I got it. It was a radical change, but it was temporal and not systemic. And it's just, we don't think that there's a lot different than 2009. We're going to play our game. Were people promotional in 2009? They were. Okay, what's different about other people from us right now? They're promotional on top of not being promotional. If I push the promotional button right now in our business and send some promotional emails, our business would go up 10% to 20% overnight. You'll put some pressures on margins, and it would be really difficult to anniversary next year. And you start spending your time on pricing your business from week to week, month to month, not on building your business. You're focused on price, not on product. And you're thinking about product from a promotional lens, and you're... Yeah, you're just playing a completely different game. So...

How do you cut through the noise? We've cut through the noise. Read the letter. It's cutting through the noise. That's what we're doing. We're not panicked.

We're not nervous. You know, we have the best model going into the pandemic. We have the best model coming out of the pandemic. And we'll have, and I think we'll leapfrog even farther ahead. when we get to 24 and 25. I think, you know, whenever things kind of, from an economic perspective, you know, get a little normal in the housing market, interest rates, we get inflation under control. You know, that's the big thing. Like I worry most right now about inflation. That, you know, if we don't get that under control and that changes the whole structural, you know, economic environment for so many people. That's the most important thing. If Powell gets this under control, somebody ought to make him president of the United States. Because the people that were here in the 70s completely screwed it up. So right now, I'm betting on Powell. I wasn't happy that he thought it was temporal. They didn't move fast enough. But I'm happy with the stance he's taken. Do I wish he raised interest rates? At half point, I do. Do I think it really matters to the banking industry that he won a quarter point and a half point? No. Not really. The banks that are going to go sideways are the banks that are going to go sideways. The government's going to have to bail banks out. Do I wish Yellen would just tell everybody that we're going to backstop everybody's savings in banks? Just tell everybody that and it'll calm everybody down and it'll stop having people, you know, nervously take their money out of banks. Like I said, when you're sitting there and you see the news, you know, you see a TV cut to a line around your bank, you know, and you're me, you know, and it, you know, I was yelling to my partner, like, we got to get in the car. We got to go downtown. I can still get in the line at the bank, you know, because, you know, people managing my money, we're going to, wire the money out of the bank on Monday. I thought, shit, they seized the other bank over the weekend. Monday might be too late. If you have to experience stuff like that, you just know this is not normal. So I just wish that, look, I think that there's no way the government can't backstop you know, people's savings. You know, like, and if we continue to have runs on banks and have banks lend other banks money and banks buy, you know, the whole thing's kind of a mess. I think yelling out at this, tell everybody to calm down. This is what the government will do. So there's no more runs on banks. Powell let it take the interest rates to wherever he has to take them to, to kill inflation. And then we can get back to normal. Otherwise, you know, zoom in on the 70s and

You think things are crazy now? I can't even imagine what that was like to navigate through. Okay. Thank you for that.

I just want to follow up on one point around the margin outlook. You discussed your philosophy about, I guess, maintaining or, I guess, not maintaining the 20% margin and why that makes sense for you right now. I'm just more curious if you could help bridge us to what is actually different from 20% to you know, your actual guidance. I get the 150 basis points of investments and the deleverage in the model, but what else would be different to drive that delta? Thank you.

Well, I mean, you know, we've got to inflect the revenue growth back, right?

So the housing market has to stabilize. I mean, the luxury housing market was down 45% in the fourth quarter. I mean, I don't know. Do you have any records on, you know, have you seen a housing market worse than this? But our business is tied to the housing market. It's tied to the refinance market. Refinance market is down 70, 80%, like, you know, 78% or something like that. Like, it's not rocket science to know this is a really bad time. I think what's different here than past maybe is usually when you have a recession, you know, it all gets thrown into the same pot. The fact is we've been in a massive housing recession for the past year. Yeah, and, you know, and on top of that, you have kind of this COVID come down. And so, but you had businesses, right, that were kind of shut down during COVID that, you know, that have opened up. So travel and leisure, other things, you know, people are traveling, so they're buying more clothes. That shouldn't surprise anyone. You're going to more, you know, weddings people are going to right now because there's no weddings for two or three years. How many events are happening that people are buying new clothes for, new jewelry for? new perfume to wear, you know, like, you know, people are like, well, Lululemon was really up during the pandemic and they're really up now. Well, yeah, there was nothing to do but work out during the pandemic, you know, but you did it mostly at home. Now you get to go back to your yoga class and your Peloton, not Peloton, SoulCycle, who's like super happy, you know, really happy that, you know, they weren't so happy when during the pandemic and Peloton took all the business, but, you know, they feel pretty good right now. So think about all these things that have changed. I mean, what happened to Peloton? You know, what was it worth, 50 billion? And now it's worth three or something? You know, everybody thought, like, that was going to last forever, you know? Or people thought, oh, like, SoulCycle was never going to open again. Like, just kind of, you know, let the times, you know, the times are more normal. 20% is the floor. This is not normal. So 20% is not the floor. And it's not normal because we're also, you know, on the, you know, right on the steps of, you know, global expansion, making significant investments in people and travel and training and, you know, I mean, you know, opening galleries for us is a massive investment. It's not like, it's not like store opening, you know, for again, a mall store that, It takes you 16 weeks to build and a few days to open. We have people there for a month just trying to set and install in our galleries. We're training people in our restaurants for a month or several months. Some people are several months. We've had teams here in San Francisco and New York training for hospitality experiences overseas and for gallery experiences. Massive investment. you know, will that, you know, all kind of normalized once we've, you know, opened this kind of first, you know, few rounds of countries? Yeah. Yeah. Once we get some scale, you know, the leverage won't be so great.

The investments will be different. You know, so I don't think anybody ought to be surprised. But, you know, I mean, it's, you know, when I said 20%,

you know, we should be able to withstand 20%. That was kind of thinking about a COVID giveback. Not a COVID giveback and a collapse of the housing market.

You know, I'm sorry if anybody's surprised. You know, that math isn't hard to do. Great. Thank you for that, Gary. Appreciate it. No, you're too weird.

Anthony Chukumba with Loop Markets. Your line is open.

Hey, it's sort of a related question. But, you know, I mean, obviously, last quarter, you were talking about the fact that, you know, sales could be down 20% this year, but you could hang on to that 20% operating margin. And now... You're actually not expecting sales to be down quite as much, but the operating margin is going to come in significantly below 20%. So it's just, I mean, is it the macro? Like, I guess I'm just trying to understand, you know, obviously, you know, look, we see all the same headlines you do, but I'm just trying to understand that sort of disconnect, you know, between what you said last quarter and what you're saying now. Thank you.

What I said last quarter was our core business, right, in isolation can maintain 20%. Not with all the investments. So that's what I said last quarter.

Okay.

And Anthony, just in Q3 2021 is when we made, initially made that comment. And so if you think about just relative to the sales we generated in that year, I mean, you could think about it at a $3 billion roughly level. I think I've been trying to clarify this as well. So it's not just 20% in isolation. It is relative to a certain business size. And as Gary, for all the reasons Gary just talked about, could we generate 20% margins at a $3 billion revenue? Yes. Is that the right thing or the thing that we're choosing to do? No. I'll just reiterate what Gary said.

Got it. Thanks for the clarification. Okay, Anthony.

Thank you.

Michael Lasser with UBS, your line is open.

Good evening. Thanks a lot for taking my question. So you mentioned that the contemporary business is on pace to exceed the modern business at a similar timeframe, and yet you're guiding to a, at the midpoint of mid-20s. sales decline in the first quarter. So how incremental is the contemporary business and how does that inform how you think about the incrementality of the launches that you're going to be doing later this summer? Thanks a lot.

It's all based into our guidance right now, right? Not a normal time. So when you think about incrementality in a time like this, obviously it's different. But it's all based on our guidance.

And the down 20 in Q1, again, is relative, again, on a comparable basis, on a compare basis versus an up 11 in Q1 last year. And the year unfolded with a flat revenue growth in Q2, down 14, down 14 in Q3 and Q4. So I think you just have to take that into account as well, that the down 20 is relative to just a higher level than the business was before the trend started deteriorating early last year.

And you're pushing ahead with a lot of the investment. You're going to be trying to manage the cash flow of the business carefully. How are you going to be approaching share purchases? You've stocked, as you pointed out earlier, well below where it was a few years ago, would this be an opportunity to be even more aggressive with biomechanics stock? Thanks a lot.

Sure. I mean, you know, nothing's different than what we said last time. I mean, we, you know, we like to get some visibility and, you know, certainty about where things are heading, you know, how much capital we deploy and share repurchases. And also, I think everybody should know, like I read sometimes analysts notes that say, yeah, we expect that they bought more shares this quarter. And I don't know if everybody knows the blackout rules of buying shares, but we can only repurchase shares for a certain number of weeks in a quarter. And so, You know, we're not buying shares when, you know, sometimes people are putting in notes, oh, RH must be in the market buying shares right now. And I'm like, do people really not know you can't buy shares the whole quarter? I mean, we can only buy shares at certain times. I don't know, how many weeks do we have open?

Well, I mean, after this quarter, only two weeks, but typically it would be five or six, depending on when we release.

Yeah, so this week we have two weeks to buy shares. You know, this quarter, you know, five or six weeks in other quarters. And so, you know, I mean, share repurchases is possibly one of the opportunities and there's other opportunities that are going to unveil themselves. So we'll see, you know, you make those decisions somewhat in a fluid manner as, you know, as you see how the, you know, the market unfolds and the opportunities unfold. So, but clearly we've, you know, we've repurchased a, a billion dollars of our stock, you know, at an average of what was it?

$2.69 thus far. So, yeah, I mean, I mean, nothing different than what we've communicated in the past. Thanks a lot and good luck. Okay, thank you.

Peter Benedict with Baird, your line is open.

Hi, guys. Thanks for taking the question. I'm curious the CapEx and free cash flow view that you have for this year. You talked about bringing inventory down.

Just that's kind of my first question. So, Peter, just what our range is?

Yeah, what you're thinking in terms of CapEx for this year and free cash flow. That's basically my first question. Concurrently with the release, so 275 to 325 is the range in the 10K. We're not guiding free cash flow, so we'll keep posted on that. As far as inventory, you see it sequentially coming down. Obviously, we peaked in Q2 of last year, and and Q4 came down. So we're clearly, as Gary talked about, we're right-sizing that inventory and making moves to especially move discontinued product and other things.

So at a high level, I'd say inventory will continue to sequentially decrease over the years as we get to a right-sized level and more appropriate for the size of the business.

That makes sense. Thank you. And then just the comments around strengthening the balance sheet being one of the focus areas for 23. Can you talk about leverage, how you're thinking about it as you look out over the next 12 months? Are there any levels you don't want the business to get above? Just any color on that, Jack, would be helpful. Thank you. Yeah, I think we think longer term. You know, swings in leverage, you know, again, it's not something that we're sitting here thinking that, oh, my God, that's a trigger and we're going to now do something, repay debt or raise equity. Again, I'm just throwing out pendulum swing type ideas. Again, that's not how we spend our time. We spend our time focusing on the future. So we've raised a level of capital that we are comfortable with and with a free cash flow profile that we have. the size of the business we're growing to, the size of the prize, the way we spend our time and the free cash flow we'll generate over the next, you know, five, 10 years, whatever the timeframe is. I think obviously we have five years, five and a half years left on the term loans. You know, there's nothing earning in that sense, you know, from our perspective, you know, the short-term stuff is temporal.

So I'm not sure that there's anything to talk about on that topic. Got it. Okay. Thanks very much. Good luck.

Jonathan Matuszewski with Jefferies. Your line is open.

Hey, good evening. Thanks for taking my question. First one was on the membership base. It looks like in the 10K, around 350,000 members at year end, so down around 24%. Are you guys seeing accelerating rates of membership cancellations year to date and Maybe if you could just shed some light on this attrition, I would think the annual membership fee is a small change to your average customer. So just any thoughts there, whether this is just churn of some of your more aspirational customers? That would be my first question. Thanks.

I mean, membership reflects our underlying business, and it's a lag behind sales and demand. And then if you have, you know, increasing AOBs, increasing AURs as we've had, you know, that factors into, you know, having fewer members for the same level of sales. So it's just a, you know, memberships are going to be, you know, again, reflective of the size. And as far as renewals go, I mean, you're going to see some, you know, noise in that number here and there, but I would say it's been, plus or minus at a level that's been consistent over the years. We haven't disclosed that number, but to your specific question, you know, I don't think there's an uptick in sort of cancellations or, you know, any changes in that sort of behavior because of the economic backdrop. And if it is, again, it's just minor. It's not something that's worth highlighting.

Gotcha. That's helpful. And then just a quick follow-up on the organizational redesign question. Can you expand on the workforce reduction? It looks like 440 roles were deemed no longer essential. What kind of initiatives are being deprioritized or delayed in connection with these roles?

Thanks so much. Yeah, I think it's just a level of detail. terribly important to discuss on this call.

So, you know, we, you know, like in any reorganization and redesign, you know, you're, you're going to, you're going to redesign the organization around what the top priorities are. I think we're pretty clear as what we've articulated priorities and, you know, and then things that we believe are less essential and, and whether it's, You know, whether it's just now or, you know, we're pretty disciplined every few years of kind of going through an organizational redesign.

So, you know, so I don't think it's anything that I'd say is worth mentioning. Gotcha. What we are focused on, right? Yep. Yeah. Great. Thanks so much. Best of luck. Thank you.

Steve McManus with BNP. Your line is open.

Great, thanks. So I had a question on backlog relief. What was the contribution in Q4? Is that largely normalized, or is there still some remainder to work through? There is still a remainder. You know, I remember at the beginning of last year, we had talked about $200 million as sort of over and above normal backlogs. As we look out to where we stand today, we've probably gotten through about 100 million of that. So relative to a normalized number pre-pandemic, again, another 100 million to go. I think that roughly split out evenly throughout, as we looked at the numbers last year, call it roughly 25 a quarter, plus or minus, but again, just giving you a directional number. And then as far as how it unfolds this year, it's going to be tied to just getting You know, transit times back to normal, which they're on their way. Production lead times down back to normal, which they're on their way. So I think it's possible that we get through it by the end of the year. But, you know, there's also – we're also looking at 2019 as some, you know, snapshot of perfection. And, you know, it might not be. There could be some difference.

Yeah, the size of the business is different. The backlog is going to be different. I'd also say that based on the historic amount of newness that's going to be introduced, we're never going to buy anything exactly right. So my sense is whenever you have big newness introductions, you're going to drive higher backlogs, higher back orders, things like that, longer special orders. So, yeah.

Okay, and then on advertising, it looks like that almost doubled this year. How should we be thinking about that in the cadence of, you know, source book circulation moving through this year?

Yeah, like probably any business, we're, you know, we're always trying to find what is the right cadence of investments to optimize the model, you know, this is a business that at one point, you know, spent 10% a year on advertising, you know, then eight, then six, and, you know, four. And then, you know, things changed with pandemic, you know, we've, I think we've historically been around four, right? You know, in the recent history, but, you know, used to run it at eight. And so, you know, I think about it from a strategic perspective. We're opening galleries that are very dominant physical presence in markets, right? And what we've been able to do over time is realize that where we've made those physical, have those physical expressions of our brand in dominant ways, those bring a great deal of brand awareness and require and maybe less advertising, the markets that have a small store and don't show as much of the assortment and don't have such a physical presence. You know, like if you were in Marin here, if you entered anywhere near the parking lot, there's no way you'd miss us, right? So you don't need to be reminded about RH as much. You know, you know where we are. You kind of can perceive how much bigger we are than other people, which assortment we may have. maybe eat in a restaurant and, you know, walk around and just, you know, getting to and from the restaurant, you know, going up and down the stairs, you're going to see and perceive a lot about our business where other businesses, you know, it could be a walk on by, right? Like, you know, there's just another, you know, 50-foot storefront in a mall. So, you know, there's a lot to think about when you think about just the physical expression of our brand that we're building and the value that that brings to, you know, the marketing and awareness of the RH brand and how it's perceived because of, you know, not only the size of it, you know, but the quality and the the architecture and you know the design of it all you know all communicate so many things that you can't communicate you know in a you know pop-up ad you know or you know or even in a magazine you know so um but uh my sense is you know we you know we could build advertising back up to a higher level you know than than that, you know, historically, you know, you would say advertising could easily be 120 million today if you're looking at, you know, what it looked like historically in 2019, you know, so, but we'll see, you know, the pandemic kind of threw it all off, you know, I mean, nobody in the home business needed to advertise at all, you know, and so, you know, we didn't, You know, we kind of banked that money during that period, and now it's, you know, how do we build it up? What's the right level? You know, what's the right level in what market? I think I always say that, you know, the marketing or advertising jobs in companies are the hardest, you know, hardest ones to figure out in today's world with all the choices you have.

That's helpful. Thanks. Appreciate it. Best of luck.

Seth Basham with Wedbush. Your line is open.

Thanks a lot and good evening. My question is just in regards to a statement you made in the shareholders letter about this being the most difficult part of the climb up the luxury mountain. Has there been anything that has occurred over the last year or so that made it more difficult than you previously thought, obviously putting the macro aside, and I know there are many cross-currents.

And that's from a strategic perspective of just the climb up the mountain. I mean, you know, if you throw the inflationary period and the rising interest rates and difficult housing market and so on and so forth, that just makes everything harder, right? But the climb up the mountain particularly, we've always articulated, and why I keep that last section there, you know, climbing the luxury mountain, building a brand with no peer, you know, the higher you go, the more difficult and treacherous the climb. You know, it's a climb no one's ever made before, right? So, you know, you know, Darius is famously quoted in our company. It's where the air gets thin and the, you know, the odds become slim just because it's never been done. It's like, you know, trekking the highest mountain the highest mountains in the world. So we know it's difficult. It hasn't been done. So we know our work has to be more extraordinary and more remarkable. And it has to create a forced reconsideration of who we are and what we're capable of. And it has to force the people at the top of the mountain to tip their hat and respect and accept us and admire us. that's not easy, you know, point to somebody else that has done it. Uh, so, um, we, you know, the, it, it gets more difficult, but we also, um, we, we, we also are significantly better than we were, you know, when we, people climb it at the bottom of the mountain. So you're, you know, you, you're learning as you go, you're, you're becoming stronger and, uh, uh, get more experience and more knowledge, um, get more tools and, So, you know, and as much, look, I address my letter to our people, partners, and shareholders. It's not an accident that it's in that order, right? So, I'm communicating to the thousands of people in Team RH where we're going and what we're doing, right? And it is going to get more difficult, and it is not for the faint of heart, and it is not a climb that anybody's made before. But if we make the climb, the rewards are also, you know, extraordinary and probably never seen before.

You know, so, you know, I, you know, has anything become more difficult? No.

No, it's just, you know, is business more difficult than it was during the pandemic? Of course. Is it more difficult than it was in 2018 and 19? Of course. for businesses tied to the housing market and to interest rates and the refinance market.

And so it'll be more difficult. That's just temporal. That is temporal. The pandemic was temporal. So hopefully we're sitting here in six, 12 months, 18 months,

The Fed's lowering interest rates, the housing market's up 20%. Things are great. You just can't plan for them to be great all the time, and you can't plan for them to be bad all the time. So you try to just take the right long-term view and navigate through the noise and distractions that could take you off your path and have you wind up in the ditch.

That's helpful. And just to be clear, there's nothing that you've seen over the course of the past year that leads you to believe that you're shedding customers that are not just low value, but sort of mid-value that you would prefer not to shed and that you need to course correct for that?

The mid-value. No, you know, we're not going to.

I think what you're seeing, maybe the Delta and, you know, our business and others' business who have turned promotions back on, that's the only Delta that you have right now. You know, could they be taking market share from a mid-value customer that maybe if I push the promotional button here, maybe we get some of those customers? Yeah, but we'd probably lose them over the long term anyway. You know, so, you know, times like these kind of accelerate things. You know, so yeah, I, you know, I like, I like where we're at. I mean, it's not, it's not a, it's not a complete surprise, you know, would you said, Hey, if these things happen all at once, you know, like if these things happen all at once, here's what it could look like. Yeah. What did we have scenarios internally say, look, if COVID is that a big give back at the housing market, you know, if we have a recession in the housing market, you know, you know, has dramatic fall.

What do things look like? Kind of what we thought, you know, not too different. And, but, but I think they'll look different.

I mean, as you see kind of this next big evolution of our brand, right? Like that's the thing I think about climbing a mountain, right. And you get to base camp and, you know, then you kind of go up a little and you're kind of, you know, kind of return to base camp and you're out there for a while and then you make the next track up, right? And you're now at a whole nother level. We're about to make one of those next big moves. You know, so if you think about our brand, you think about where we went from kind of 2001 to kind of 2008 and nine, and then, you know, we hit that difficult period. And then you think about how we pivoted from there and what the next, part of the climb was and how we differentiated ourselves in a massive way. And then, you know, kind of the reset in kind of 16, 17, you know, and how we repositioned ourselves for the next part of the climb. You know, so, you know, now it's just the next, you know, the next chapter, it's the next kind of part of the climb. You know, we'll develop a new base camp, you know, in this next part of the climb.

In the meantime, between that, there was a crazy period, you know, like, you know, a pandemic.

And so that's, I don't know, you know, that just doesn't come along. You know, so how that affects this and all, you know, just watching through the pandemic and seeing to the other side of that correctly and strategically, you know, not getting sucked into being tactical, you know, like, there's just no way you know, that once people start pushing the promotional buttons that they're pushing, that they're not going to push it more times, you know, and there's not going to, you know, be more emails and there's not going to be, you know, like look at the emails you get and look at them and the timing of a quarter. Okay. Like if you think about our business and say, okay, they're driving demand that they have to ship to a customer's home, or they're having sales, in a, you know, in an outlet warehouse sale thing. You know, those are all things to try to hit a number within a quarter. We just don't play that game. You know, that's a game of kind of running around in place and, you know, got it. Everybody looked great during the pandemic, hats off. Let's see where everybody is the next couple of years once we've cycled away from this and we get through this difficult time. I like the game we're playing. I like the strategy we have. And it's just a completely different game than the one everyone else is playing.

Understood. Thank you, Gary.

Christina Fernandez with Telsey Advisory Group. Your line is open.

Thank you. Good afternoon. I have two questions. The first one is on the strategic investments you're making on the global expansion. How should we think about that ramp over the next couple years in relation to the 150 basis points or 45 million this year? I guess should we think about it, you know, sort of linear with store openings or are there a lot of upfront investments you're making, you know, now or last year?

Yeah, I think it's, you know, think about it in relation to pace and, you know, how fast we go and, you know, how many markets we're going to open at a time. And then I think about it just based on where revenues are, right? Because the spend is going to be the spend, right? we happen to be making the spend when our revenues are kind of, you know, kind of what I believe trough revenue, you know, trends and things like that. So as a percent to that revenue, it's 150 basis points. The percent of another number, it's 75 basis points. You know, so, you know, you can kind of assume and do that math that spend isn't going to be different, right? It's based on the, basis points we gave you, you can back into what the dollars are, and then you can say, okay, if their business inflects, whether it's the second half of this year or next year, you know, when the housing market changes, and I mean, we'll inflect to some degree, no matter what the housing market says, you know, what we're doing from a product point of view.

Yeah.

redesign of our source books and the change out, the representation of our galleries and so on and so forth, that's not gonna be zero. The only way that's zero is if the economy gets really bad, right? If the whole banking crisis falls apart and we have another kind of meltdown that takes housing farther down, right? But at some point here, we're gonna cycle the bottom And things are going to change. And so, but we have an inflection point that's going to be some number. You can just take the investment, you know, and probably take a look at like, okay, what are they spending directionally based on all the things they're working on and number of galleries are opening. And then, you know, you'll be able to extrapolate that and we'll give you some kind of guidance long term. But you're looking at it, I'd say, kind of through the,

Maybe the worst lens, things don't get worse in the economy. You know, maybe the worst lens you're going to look through it. Other times it's going to look like a much smaller number. Brad Thomas with KeyBank.

Your line is open.

Hi, thanks so much. Just a couple last housekeeping questions for me. Just one more on the first quarter guidance. You know, Gary, you mentioned the trends had accelerated, I think, about eight points since COVID. some of the banking news was coming out. Is the guidance reflective of kind of the run rate of trends, or is this how things are playing out quarter to date? Just trying to get a better sense of, you know, where demand is tracking and how you all are factoring that in the guidance.

Yeah, again, just to be clear, I said it, you know, it kind of changed about eight points, and then it's kind of come back, right? So right now, I think that there was a, you know, there was a shock and there was a pullback, you know, Things look to be stabilized in the banking world right now, at least for now, for at least what we know. A little odd. I've never seen the government kind of direct the top banks to lend money to the other banks for 120 days. It's a little weird. What's the implications of that? What does that really look like? Is that a permanent loan? Is the other bank going to be able to survive without that loan? For how long will anybody put their money back in those other banks? Did the banks lend them $30 billion? Are they going to own those banks? There's a lot of really questions that are unanswered if you just stop and think about that. Could the banking crisis unfold to be something worse? I think it can. That's why I think that when I talk to the smartest people I know, I most agree that yelling ought to just calm everybody down and just tell everyone that the government, that your money is safe for at least a year or something, but not let it be kind of unknown because that's just going to get people to keep moving money around. That's going to create instability in the banking sector and create more issues. You know, a lot's going to be determined on what really unfolds here, but it looks like the shock was also temporal. It looks like, you know, that people have returned to their, you know, their habits. And, you know, you usually need something meaningful to change consumers' habits. You know, so if they change for a short period of time, they kind of look normal. But then again, you know, we're in a period where, I mean, you know, you think about the yields and stuff, like the change in the forecast on, you know, the interest rate hikes and things like that. I mean, like from one day to the next, it was crazy, you know, like how the markets were pricing in, you know, where interest rates were going and all of a sudden it completely flipped just because of the banks shut, the banks that got shut down over that one weekend. And everybody believes that, there's a lot of people who believe, I mean, think about this, like Goldman Sachs, they weren't gonna raise rates at all. Goldman Sachs, pretty incredible big bank. And just a week before, everybody thought that we were going to go 50 base points and another 50 base points and maybe even higher than that. So, yeah, it's just a lot of unanswered questions from a macro point of view that you have to consider. So, you know, we, you know, are kind of guiding based on what we know today. If it gets meaningfully worse, we'll let you know. You know, we've got some flexibility within our numbers. you know, to navigate through this. And it's just a very uncertain time. So, you know, and if you sit around and just obsess about it, you know, you're not going to be obsessed about building your brand and, you know, and growing your business. So, like, I know I'm talking a lot about it because we think about it and just giving my view, but it's, you know, it's not what we obsess about here. You know, we obsess about the things that are in the letter. and in that order. And we have some extraordinarily exciting stuff about to happen here that's going to, I believe, leapfrog this brand and business to another level.

So we're really excited about that.

In the meantime, we're trying to navigate through you know, the worst luxury housing market I've ever seen.

And, you know, volatile stock market and, you know, recent banking crisis and all kinds of other things.

So, you know, it just, yeah, there's not, there's not going to be kind of any details here that unlock any new view. You know, I just say that.

It's, you know, if it's not in the letter, it's probably, Not big news to us.

Understood. One item that we didn't talk about a lot on this call is the guest house. Any update you could share on learnings that you've had since it's been open?

Yeah, you know, it's open. We're happy about it. We've had great, you know, great. It's created the right kind of conversation around the brand, and that's what we're trying to do. Our second one is under construction in Aspen. This is the only two we've got in the pipeline. Nothing really new. We're open, functioning, running. All good, except we had our first leak. We had to shut down some rooms for a little while. You're a new business. You think different things go wrong and you learn about it. I think we're, yeah, we're tremendously proud of it. And we've been, everybody who stayed there, I believe has had a great experience. That is tremendous experience, you know, trans feedback. I think we're, we're in, you know, the right conversation is, is happening about the guest house today. And, and by the way, we haven't marketed it at all. You know, we, we've sent an initial email, you know, so we're, we're, you know, we're about ready to talk about it a little bit more, you know, get out of the winter months where, you know, New York's kind of quiet, you know, springtime, you know, the trees will start having leaves on the rooftop again. And, you know, so we'll, you know, bring a little bit more attention to it, maybe send out an email, video, some things like that. But yeah, but it's, you know, it's not something we're massively focused on. It's opened, it's, So far, it's done what we intended it to do. We believe it's elevated the RH brand. It's brought the RH brand into a conversation at levels of luxury that we weren't in that conversation before. I think to the people that have come, many global CEOs of luxury brands have brought their teams for a tour of the guest house. I'm invited, just knocking on our door and stuff, reaching out. I think it's created the right conversation with the right people. I think people are more aware of us now. and maybe have more of a level of respect of what we're capable of and the quality of the work we can do. And it's just another step, you know, another stepping stone as we go and kind of, you know, climb this mountain.

Understood. Thanks, Gary.

There are no further questions at this time. I'll now turn the call back over to Gary Friedman for closing remarks.

Thank you, everybody, for your time and interest, and we'll look forward to speaking with you soon.

This concludes today's call. We thank you for your participation. You may now disconnect.