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.