RH

Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the RH first quarter 2023 Q&A 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. To withdraw your question, again press star one. Thank you. I will now turn the call over to Allison Malkin of ICR. You may begin your conference.

Thank you, Brianna. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 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 law 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 may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Great. Thank you for joining, everyone. I'm going to begin with our prepared comments on our shareholder letter and then open the call to questions. To our people, partners, and shareholders, revenues of $739 million, adjusted operating margin of 14.9%, exceeded our financial outlook in the first quarter despite continued decline of the overall macro environment, especially for home-related businesses. With 30-year mortgage rates trending at 20-year highs, the possibility of continued economic tightening required to tame inflation, and uncertainty regarding the recent regional banking crisis, we expect luxury housing markets and broader economy to remain challenging throughout fiscal 23 and into next year. Based on the above and current demand trends, we're now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters. We are raising our revenue outlook for fiscal 2023 to a range of 3 billion to 3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximately 150 basis point drag due to the ramp up of our global expansion. As previously mentioned, it's times like these that businesses tend to move in herds, pursuing broadly adopted short-term strategies that lead to mostly similar outcomes. It's also times like these that present opportunities to pursue long-term strategies that can create strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That path for our age is our climb up the luxury mountain and our long-term strategies of product elevation, platform expansion, and cash generation. Product elevation. Our efforts to elevate the design and quality of our product are 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 the climb that becomes more difficult as we reach new heights, it's also one we've been navigating successfully over the past 22 years. This year, we'll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH interiors, contemporary, modern, outdoor, baby and child, and teen. These new collections reflect a new 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 collections 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 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 multi-billion 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 17th century, 73-acre 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 our H-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 10 books on architecture by Vitruvius, whose work from the first century BC inspired Leonardo da Vinci's drawing of the Vitruvian man 15 years after Vitruvius sketched the original. The principles at the core of Vitruvius' philosophy have also inspired the R.H. design ethos, which is reflected in our galleries, interiors, and gardens. The gallery will also include the Sir John Soane exhibition, honoring one of England's greatest architects in partnership with Sir John Soane's Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Iron Hill Park. We believe RH England, the gallery that's historic on Hill 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. We'll be unveiling RH England at an exclusive private event Saturday, June 3rd, and will be open to the public on Friday, June 9th. Our global expansion also includes opening 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 2025. Regarding our North American transformation, we'll be introducing a new gallery design in Palo Alto and Cleveland, as well as opening RH Indianapolis, a 178-acre estate on a private lake this year. RH Montecito, the gallery's historic firehouse, will now open in 2024. Additionally, we have 12 North American galleries and 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 plan 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. As mentioned, we'll be focused on turning inventory into cash and continuing to optimize costs throughout the organization, further strengthening our balance sheet to maximize optionality. Outlook. We are raising our revenue outlook for fiscal 2023 to a range of 3.0 to 3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximately 150 basis point drag due to the ramp up of our global expansion. We estimate the 53rd week will result in revenues of approximately 60 million. For the second quarter of 2023, we are forecasting revenues of 765 to 775 million and adjusted operating margin in the range of 14 to 14.5%. The second quarter of fiscal 2023 includes incremental advertising expense of approximately 18 million versus last year for the new RH interiors and RH contemporary source books, plus the opening of RH England representing approximately 230 basis points of operating margin deleverage in the quarter. 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 to 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 RH, the RH brand, as a global thought leader, pace, and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yonville, an integration of food, wine, art, and design in the Napa Valley. RH1 and RH2 are private jets, and RH3 are a luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit in vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries. Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the 170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning time-starved consumers. The entirety of our strategy comes to life digitally with the world of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 to $100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by our age, creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than 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 did the other brands want you to. 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 collections, new source book design, new gallery design, and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity, and courage of this team and the relentless pursuit of our dreams. Over 20 years ago, we began the journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxivale laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals and forms cultures 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, Gary. At this point, operator, we'll open the call to questions.

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Please limit questions to one question and one follow-up and re-queue for any additional questions. Thank you. Your first question comes from Steven Zaccone with Citi. Your line is open.

Great. Good evening. Thank you very much for taking my question. I wanted to start on the need to take the increased markdowns. So, Gary, I was just curious if you could comment, you know, what you saw in the business over the past couple months that this was updated in guidance now versus, you know, factoring into your original outlook when you spoke to us in the end of March?

Sure. Well, I think what we've seen is an increasing headwind from a demand point of view and, you know, a slowing of our cycling through our discontinued inventory, you know, as we've increased our markdowns to begin to cycle through this product to be prepared to move the old product out and bring the new product in. And then just projecting what it may cost us to cycle through transforming all of our galleries. Remember, we've got product in all of our galleries that we have to kind of do floor model sell-off and transition through our outlet business, we now believe it's going to cost us more from a markdown perspective to move through that inventory in this environment.

Okay, fair enough. Then the follow-up question I had was on the UK market opportunity. I think it was a couple calls ago, you know, you talked about the potential size of the UK market being as large as California. I guess on the, you know, on the cusp of opening England now, How do you think about the opportunity now? Maybe how do you think about the competitive environment, how you plan to merchandise this first gallery? Anything you could say would be helpful. Thank you.

Sure. I don't think we see anything that's different from how we've always viewed the opportunity. I think, you know, the timing, you know, is from a macro environment is somewhat different. So our initial expectations are more muted, as you would expect. And from a competitive environment, I don't think anything has changed. Just as we become more connected to the market, as our people have been there longer, working, training, et cetera, developing early connections and relationships with interior designers, the trade industry, and so on and so forth, We believe it's going to be a huge opportunity for us, but there's also a lot of unknowns in a new country. So, you know, we believe we're being, you know, cautiously optimistic as we dip our toe in the water and begin. And I, you know, I just remind everyone that RH England, you know, is really, you know, it's a unique kind of uh, move in the market. So can unique play in the market where, you know, our goal is to create the right conversation, uh, and not, I wouldn't, I wouldn't say RH England is our play to maximize commerce. Originally, uh, that will happen as we continue to, um, open RH London and in other parts of the UK, but how do you take a brand and introduce a brand to, uh, United Kingdom and broader Europe in a way that positions the brand correctly for the long term. And if you stand back and think about the world and think about the world of luxury brands, I mean, basically all the luxury brands in the world are from Europe and the UK, mostly France and Italy. And if you look at what are the true luxury brands in the U.S., you can argue who really makes that cut. I would argue that the brand that's most clearly identified as a luxury brand from the United States is Tiffany, right? Because they haven't pushed their brand down or to broader markets as others may have. And the French just bought Tiffany a few years ago, right? So- I wouldn't say we're particularly seen as the U.S. is seen as the tastemakers of the world, you know, and because we've usually looked to Europe for inspiration. And, you know, the U.S. brands I characterized are more followers than leaders. To build a true luxury brand, I think you have to be seen and respected as a leader, a thought leader, a place maker, a taste maker, however you want to characterize it. So we're approaching our introduction in an entirely unique and one-of-a-kind way by opening a store somewhere no one has ever opened a store, introducing a brand in a manner that no one has introduced the brand. Um, and there's, you know, there's a level of risk to redefine a brand. There's a level of courage that's required to kind of go from where you are to, to, you know, where you want to be. And in our case, we characterize it climbing the luxury mountain. And so, you know, what the world will see in a few weeks here is, um, I think the most unique and inspiring retail experience anywhere in the world, bar none. And I think it has a chance to be the most talked about retail store and the most admired retail experience of anything anybody's ever seen. And prioritizing creating the right conversation versus, you know, maximizing, you know, the commercial activity in the market initially, we believe is the right sequencing to build the brand. So, you know, it's very unique. It does open the entire market from an online point of view. But we're an hour and 45 minutes outside of London, right? On many levels, you know, people would say this makes no sense. But that would only be looking backwards, you know, and saying, well, no one's ever done anything like that before. Why would it work? Why would it, you know, everyone's had different goals than we've had. Again, we're on a one-of-a-kind journey here. You know, we're on a climb that no one's ever attempted to make. And we're coming from a place that has only had what was the biggest economy in the world. It would argue we only have one real luxury brand, and now the French own it. Yeah, so it's a different path, and I don't expect it to be understood initially. I do believe it will be respected, and it will inspire people eventually.

Thanks for the detail. Best of luck with the opening. Thank you.

Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, Gary and Jack, how are you? So I have, maybe I'll make a two-part question, one question. Just to confirm, it looks like the domestic business seems to be hitting your forecast or bottoming outside of potential, let's say, consumer recession, so that the change to the guidance, other than the markdowns, is mostly the Europe inclusion. And then my second question, this is more theoretical, thinking about the EBIT margin of the business, with the mix of Europe, U.S. re-accelerating, and then, you know, hospitality and luxury coming into the mix, getting back to, let's say, 20-plus, is that going to be a much longer timeframe, or how should we think about that? Thank you.

I think it depends on the macro. You know, if we get stability and, you know, there's any kind of, you know, the headwinds you're gonna have a new baseline. And I think it depends on how well we've executed this next major product transformation. I mean, we went through transformations like this. We generally do one every seven or eight years as we've continued to elevate. the brand and expand and, you know, just move the assortment upwards. So today I'd say, you know, this is the best work we've ever done. You know, we're launching it into maybe the worst home environment at the high end that I've ever seen in my career. You know, I've never seen luxury housing down at the levels we've seen, you know, from recent reports. You know, and we're at you know, 20-year high, you know, interest rates. So, you know, there's some level of caution. You know, I can't, we can't control the macro, but I'd say I'm more optimistic and less optimistic about our model long-term. I don't see any reason that we can't return to 20% plus, you know, mid-20s operating margins long-term. You know, we We have to prove out the European strategy and expansion. I think we have to be smart how we allocate capital and how we build that infrastructure and how we keep things simple. I think our strategy is unique. We're not duplicating corporate roles in Europe. We're not looking at Europe as a you know, a separate business with a separate infrastructure besides, you know, our supply chain distribution piece. But that, too, is even an extension of what we do in the U.S. So we look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of look at countries in Europe like states in the United States, you know, except Europe. You know, there's the borders are different. There's some uniqueness there. But, you know, we run our business very well in North America. And from our view, you know, we're building really a global leadership team, you know, and a kind of a global organization that will lead and oversee the business in a, in an identical way that we do in North America, except that there are some unique differences within the countries. So we try to keep it simple. And, you know, if we get any kind of reasonable demand and business, you know, we should be able to begin to leverage the initial investments in supply chain and so on and so forth you know, that creates some deleverage initially. You know, I think we, you know, we have a whole new whiteboard really, you know, to kind of address, you know, how to physically open the brand in the U.S. So we don't have to reverse engineer that. You know, we don't, you know, when I began here, we had 106 legacy stores, you know, that weren't designed for the vision, you know, the business that we had. And so we've had to reverse engineer this thing and, you know, go from, you know, taking a, you know, really nothing about the infrastructure was correct for the brand with here with we've got a clean slate, you know, building the right infrastructure for the brand. You know, they deliver furniture in Europe. That's not unique to North America. Furniture gets delivered every day. You know, there's all kinds of things that happens. What we're not entirely sure of is just the consumer is generally aware of our brand at the high end. But humans are, you know, we're creatures of habit. So we have habits of shopping different places and going to different places when we think about our needs and wants. And so we have to kind of change those habits and, you know, identify our age as a more inspiring and attractive place, you know, to allocate capital from a consumer point of view. And we think our assortment, especially as you see us go through this transformation over the next several months, we think it's unmatched in the world. We think our design leadership, our quality, and then the value equation for that design and that quality, we think our value equation is as disruptive as ever. And, you know, if I look back and I'd say, hey, where did we maybe kind of not optimize, you know, our business, you know, last couple of years with all the tariff, you know, hits from the cost level, the supply chain costs that went up all through COVID, you know, the price changes that were taken, you know, and then when you have easy business, I think our value equation suffered. And I think our value equation, you know, is going to be swung in a direction where it will be unmatched in the marketplace. And that's really important, no matter what country you're in, right? People first look at the design of a product. If the design of the product is not good, you just don't walk up to it or you turn the page. So you have to have great design. People have to see and be attracted to the product or nothing else matters. the next thing you have to win on is you have to win on quality. And so consumers are going to look at the design. If they love the design, they're going to get closer. They're going to look closer. They're going to walk up to it, touch it, interact with it. And they'll make a perception about quality. And then the next thing they'll do if they're interested is they'll look at the price. And for that design and that quality, do they perceive that product

is a good value, a great value, or not a value.

And then that will create the decision to purchase or not purchase. And that's why everything we do is through a lens of design, quality, and value. And I think if I look back and critically look at what happened over the last, call it three, four years with all the conflict with China, the tariffs, you know, all the dislocation of supply chains and all the increase in freight, increase in raw materials, increase in product costs, so on and so forth, and then an easy demand environment. You know, I think the world took prices up, and we all know that because inflation, you know, went to 40-year highs, right? And, you know, that is going to affect things, you know, and I think we're probably... you know, somewhat too arrogant in our ability to raise pricing in an easy demand environment. And as the easy demand environment has waned and, you know, it's required us to kind of really challenge, you know, is our value equation going to create the level of demand, you know, that we believe is right for the business. And so, you know, that's, I think people, are going to really respond to this new trans product transformation. I think it is, it is the best design we've ever done. The quality is, is really outstanding. You know, the level of detail and the work we've done into has gone into it. And because we've now had some experience with Italy, with Italian upholstery, Italian soaps and so on and so forth and other places, uh, people see that we actually can, you know, scale and, uh, you know, have the ability to create efficiencies at the higher end of the market, that our value equation is going to be significantly better at very high margins. So I wouldn't say the value equation is going to result in a lower margin structure than we've run. It may result once we've cycled through, you know, just the, you know, discontinued product that we have to move through to transition you know to this next next kind of climb and step up the luxury mountain for our brand uh i think it's going to be you know the best value proposition we've ever had you know because we've really worked on it and uh you know we've really you know just in super critical thinking and really challenging and you know, really looking at the competitive environment and the competitive environment from a broad point of view, like, you know, up and down the food chain and to make sure that, you know, we are disruptive, not just at the high end, we're disruptive, you know, I'm not saying going all the way down to the low end, but, you know, in some of the cases, I mean, we're disruptive everywhere. And I think when you do that, you know, it's, you know, that's,

when you can get a real outsized share of the market. Okay, thank you.

Your next question comes from Curtis Nagel with Bank of America. Your line is open.

Thanks very much. Good afternoon. So kind of along some of the lines of Simeon's question, Gary, I'd just love to hear an update on the contemporary line of you know, fully realizing it's an abnormal year, of course. But just in terms of, you know, how many galleries it's been rolled out to and what the reception's been for the ones where it's been placed for, you know, I guess an appropriate amount of time where, you know, it could be judged in terms of the reception. Sure.

Yeah, I'd say we're happy with the response of contemporary, you know, considering the environment, you know, it's only been rolled out to four galleries. And the reason why we didn't push it farther is because we have so much more newness and so many more choices to think about moving into the business. So we've held some of it back because I think, you know, contemporaries say, you know, it was our worst level of execution from what I'd say the disruptive value equation, right? I think that's where I'd be most critical of us. You know, some of the price points just, hit highs that, again, maybe in a tailwind, in a COVID, everybody's buying everything and everybody wants everything tomorrow. The biggest migration from cities to suburbs and second home markets in any history we've seen I think we're just too aggressive with the pricing, too arrogant maybe to some degree. We've re-looked at that. We've looked at the sourcing. We've challenged everything. I think as you see what's coming, whether you're looking at interiors or contemporary or modern You're just going to see a real meaningful value equation connected to design and quality leadership that will change the trajectory of everything, including contemporary. So contemporary, look, if you look at it with the context compared to modern, things like that, you know, off to a really good start. But if you look at it compared to the work we're about to unveil, you go, oh, you know, it's just... The next level of transformation from a product point of view, I think it's like having a trump card in a game. It's just going to win, we believe. I look at contemporary, not just in isolation, but integrated with the broader thing. I think everything, every interiors, Modern are going to look entirely new and different. Contemporary is going to also look pretty new and unique. There's a lot of new collections contemporary. Contemporary, really, only we have five full collections, four full furniture collections. And that will, I think, more than doubles, right? Yeah. So contemporary, you're really seeing this next phase is a much more robust assortment.

Okay, great to hear and really helpful. One other just quick follow-up, Gary, just curious to hear a little bit more detail on the format for Cleveland and Palo Alto. I know Palo Alto, I think, is a little smaller, 25,000 square feet, but anything else in terms of perhaps how it's sorted, the layout that they feel? Just curious, yeah, to hear more about that format that you mentioned.

Yeah, in a lot of ways, you know, they represent, you know – an aesthetic change and, you know, a freshening, you know, you'll see us begin to evolve away from gray, you know, and create really the, you know, the platform for where the goods are going. You know, we've kind of ridden the gray wave for the last, I don't know, 14 years or so. And, you know, there's big cycles in product. You know, people ask me a lot, hey, you know, what's next and you know, how do you know what's next and where did the trends came from? And I, you know, I like to say, you know, the trends in our business come from the dead, uh, you know, generations pass away. They're, you know, their belongings go into a state sales, the state sales feed the high end antique field, the antique markets, uh, the antique markets, uh, really what drives the high end interior design market, you know, then that, you know, is, It then goes into the high-end reproduction market, and then it starts to trickle down from there. And if you look at the major trends, whether it was what I call the Belgian-European look that we kind of exploded at a commercial level throughout the United States in 2009, 10, 11, 12, 13, we made probably the biggest move in modern uh you know if you look at the mid-century movement that started to roll through uh you know and you can kind of time things back if you look at you know winter consumers generally in their peak buying years for furniture uh it used to be you know 40 to 50s because there was a shorter lifespan uh you know lifespans have gotten longer if you look at You know, the high end of the demographic that has the greatest access to health care and are more focused on longevity and fitness and eating well. You know, I think it's now up to 87 years old. Right. And so what that does is it pushes up, you know, as people get older, more wealthy, there's more focus on the home. you know, until, you know, they can't really use their home. They get to an age where, you know, they're just not really mobile and they can't enjoy as much. But if you look and say, you look back in the 1950s, you'd say, you know, 40 to 50 really the peak buying years for furniture, you know, for real furniture. You know, people get to an age where they're in their second or third home in their life stage and they've done well financially and, you know, they can afford to furnish a home. And then if you look at the average lifespan and how old people are, you know, today, well, now those people are really old, right? So that cycle is now moved through. Mid-century modern is, you know, is a waning trend. The next cycle that went through was actually called contemporary. That's where we launched contemporary. You know, the contemporary trend was really, you know, happened in the, you know, 70s, you know, and 80s. And then in the later 80s, that trend, it moved to kind of an eclecticism and mixing more contemporary things with antiques and so on and so forth. And so if you just look at those cycles, the cycles tend to come back through. And so what you want to think about is what is the right platform for kind of those kind of trends or those influences. And not that we have a brand that's a trendy brand because everything gets filtered through an RH point of view and how we, you know, how we interpret the trends and how we present the trends. But you, you know, I'd say, you know, as I've looked at retail throughout my career, one of the things I've been critical of others is I've just seen people create a retail concept and then roll out 300 stores and seven to 10 years later, they're all old and tired and it becomes a dead concept. And the platform that you place your product in, you know, is either going to render that product more valuable or less valuable. And so as we look at our product transformation, and this is really the largest product transformation in the history of our brand is our platform is prepared to render that product more valuable. Now, the good news is from an architecture point of view, they're beautifully architected and timeless buildings. They're perfectly balanced and symmetrical. They have fresh air, natural light. They're proportioned correctly. All the things, you wouldn't change anything. The buildings, a lot of the buildings we built can arguably stand up to great historical architecture. It's all the same principles. But the way we skin them, no different than what are the surfaces, the finishes, the colors, the backgrounds, and how they're presented, what does that canvas, that background look like, is very, very important. So in a lot of cases, it's kind of an aesthetic, surfacing kind of feeling that will be, I think, a more relevant and exciting experience canvas and background to amplify the product um but the logic of our galleries and you know how they're laid out you know is very scientific and and architecturally um timeless and relevant you know so um but it will look very fresh and new to a consumer no different than when did, when did we do like 2009, 10, you know, 2009 and 10, you know, we took all of our galleries from silver sage paint and white trim and, you know, blonde maple floors. And they went to all gray, you know, with, you know, gray wash floors. I mean, that was 14, 14, 15 years ago. So I always think about the cycles are generational, right. And if you, you know, the, the definition of the generations is 15 to 20 years, right? And so every 15 years or so, there's a, I think that there's generally a major move to make. And every seven or eight years, there's also in between cycles of refresh. So this is, you know, this is the next major move from a product point of view. And, you know, and just making sure everything's presented on the right platform and the right canvas that renders the product more valuable. So, you know, you'll see, you'll see these new ones start to happen. And then you'll see us go through the, you know, through the platform, you know, the platform over the next several years and update, I'd say every gallery to, you know, aesthetically just colors, walls, paint finishes, possibly replastering the outside of galleries from gray to, you know, a beautiful buff color that we think is the right, uh, you know, the right canvas for the next 10 to 15 years. And Curtis, Jack, one thing to add on your size question, Palo Alto is basically the same size as Corte Madera. So it's, I think you mentioned 25,000. It's not that. It's about 48,000. And Cleveland's just around the same size, just slightly smaller.

Okay. Very informative. Thanks. And, yeah, good luck with the rest of the year.

Thank you.

Your next question comes from Steve Forbes with Guggenheim. Your line is open.

Good afternoon, Gary Jack. I wanted to ask about regional trends during the quarter. Are you seeing any disparity by region, anything that either builds on optimism or caution right around the revised revenue outlook you guys provided?

Steve, there's always regional differences. You know, just echo prior comments.

We don't really comment on those unless they're so massive that they stand out like oil markets one year did. So there's nothing that we share to read into any trends on that.

Then maybe just as a quick follow-up, given your comments around the holistic value equation and improving across the portfolio, any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?

On supply chain costs, specifically you're talking about like ocean freight or?

Any cost relief, right? That would maybe help fund, right, a better value proposition. Well, we've been getting that.

And, you know, I think Gary mentioned that at last call or the prior call that, you know, when someone asked about select price changes. But we've already been seeing some cost relief that we're putting back into product prices. From a supply chain and ocean freight perspective, I mean, we're at a point – given our turn and, you know, given the way our team approaches, you know, getting the best rates for the sailings, you know, we're in a, it's a creative now. We're on the other side, you know, there's ocean freight contracts. We're past the bad news of May 2022. And we're into sort of a lift now, a slight lift in the margin from that good news.

Thank you.

Your next question comes from Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question. Gary, as you had mentioned before, that you might have been too aggressive with increasing some pricing. And in the past, you've talked about pivoting to serve a more affluent consumer, and that might have limited your addressable market. should we interpret some of your current thinking to be, Hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points. Cause that would ultimately drive the sales of the business higher and in turn, the profitability of the business higher.

Um, I, I'd say we, again, I start, you know, with the lens of design quality and value, right. And, um, I think we've been most successful when we've won with design. We have the best design in the market. That design is at a quality level that's appreciated and respected. And for that design and quality, the value of Create Equation is disruptive, clearly to the market above us. If you look at any people left and right, massively disruptive. and even disruptive to slightly below us, just because we really have, you know, the biggest platform, right? So we have the ability to have real scale. And I think as we've, you know, we've, you know, launched contemporary, been moving the brand up, you know, when demand is easy, you know, like it was through, you know, the event of COVID and the migration that happened because of COVID and the focus on the home because people couldn't travel and, you know, the shifts in spending by big market segments. You know, when demand is really easy, you know, and you can get higher prices, you tend to take them. And then all of a sudden it flips, you know, and it makes you reevaluate. So as we reevaluate, you know, just, where our pricing was and has been, I just think, you know, through, you got to remember, we went through a big pricing cycle increase because of tariffs, right? And then we went through a massive supply chain disruption and raw goods, raw material costs going up, labor going up, everything going up, freight going up, that massively impacted pricing. And so I'd say, Probably we, as probably anybody in our industry, optimize what you could get. I think that you're going to see some people repricing things and trying to optimize whatever market you're going after. Ours is a little trickier because we're moving up and we're trying to get a more affluent consumer and get a bigger piece of their wallet because they spend exponentially more on the home. Not a little bit more, exponentially more. I mean, customers above aren't worth a little bit more. They might be worth 10 times more. You know, you think about the peak of the pyramid. It's like flipping the pyramid upside down when you look at spending on the home, you know, at the rate, really affluent levels and so you know we are still going after those customers we've got a win there on design and quality and our value will be massively disrupted there because we're only the only platform with scale in the entire world you know in these products uh and so um When our age creates a relationship with anybody from a manufacturing point of view, it's a big deal to those people because we can change their lives. And if they put their product on our platform, it changes everything. But we've got to always think about, is that a great value? If it's not a great value, people will look around. If it is a great value and they trust you for that value equation, they don't even have to think about it. I think in the age of the internet, you have so much more visibility, you have so many more prices, you have so many more choices. It's harder to distinguish, I'd say, both design and quality online. I think that all works its way out at the end because you know, if you buy something and you thought it was really great value and you get a piece of crap in the mail, you know, and the quality is crap or the finish is crap and, you know, it's not good, you're going to return it, you know, or you're never going to shop there again. So that will all shake out over time, you know, like all the marketplaces and all this other stuff. I think those will all really serve branded products that, you know, like... consumer goods and things like that, you know you're buying some toothpaste or whatever you're buying. You know it's from this brand. It's what you buy. But when you have a lot of blind product, and our industry is, I'd say, more blind product than branded product, sometimes it's a little confusing for a customer, but it all works itself out. If you go on to name your Name your marketplace. You know, there's just an endless aisle of choices. One, they're not curators. You know, two, you know, from a design point of view or not from a quality point of view and not from an aesthetic taste, you know, or point of view. You know, so, you know, our platform really is unique in the world today. And, you know, and I think what we're doing next is going to prove that. So, you know, I think you're always, every business is going like, you know, how big is that market and where do I go and so on and so forth. I think, yeah, it's really difficult I think it's difficult for any of us in this home industry where all of a sudden, boom, your demand goes up 40 points. It goes down 40 points, then it goes up 40 points. And all of a sudden, you have too much goods, and you don't have enough goods, and anything you can throw out there, customers want, can you furnish my house next week? And so on and so forth. And then all of a sudden, you get on the other side of COVID, and then you compound that with... inflation which required you know the fastest rise of interest rates in history uh which you know firm grasp for the obvious that's not good for mortgage rates of the housing market um and and you go it makes you re-examine everything which which you should you know and so i think the key becomes how do you you know how do you act on that other side like for instance you know people ask me about this all the time oh you might be losing more market share this is that like well you have to say, what's the quality of the market share? You know, could we push a promotional button today? Could I start sending out sale emails like everybody else does? And does it matter whether you're doing whatever promotions, you call it site-wide promotions, everybody's trying to, you know, kind of create a veil of, you know, kind of non-transparency out there. You know what they're doing. If you're promoting the business and you're sending sale emails, like you're going to be known as the promotional business. And, you know, you're also creating, I'd say, a layer of long-term, low-quality revenues, right? Those will never be high-quality revenues. You've got to put categories on sale or, you know, whatever on sale to get those revenues, right? Well, you've got to put all those products on sale. So how many people would have bought your product at full price, at really healthy margins, And then for the incremental lift, how much margin did you have to give back across everything that you marked down? Whether it's site-wide or category or if it's only bed and bath or it's lighting, now you're doing a lighting sale or now you're putting all this on sale. I mean, interesting, not relevant, but what do your emails say? You know, like just look at the emails and look at the sale banners on all the emails and look at the things, you know, Memorial Day sales, this sale, this sale, that sale, you know, all hitting you right now. Those people are all going to affect their model long term. I'd rather give away lower value market share long term, low quality market share long term, hold to our pricing integrity and our messaging that's more about design and quality, and just transform the business for the next cycle. And if we're successful, which we've been, I don't know, this is my 23rd year here. You know, we've done this a lot of times. We've transformed a lot of times. We've been through all kinds of cycles here. This is not a new leadership team. You know, so we like what we see next, but you just have to take a longer term view. So, you know, That's why I always say, people ask me, should I buy your stock? And I ask them, are you a trader? Are you an investor? If you're a trader, you're looking for short-term episodic moments and ups and downs and trying to optimize. And if you're a trader, don't buy our stock because we're making long-term moves. If you're a long-term holder and you want to be on a winning side, I mean, look at our performance over 20 years. You know, look at our performance even over the last five years, and you're going to be a happy shareholder. Look at our performance if you bought us during COVID, you know, or different times, you know, and you thought everything was going to stay that way forever. Well, okay, maybe you're someone who hadn't been through cycles before. Maybe you didn't understand the dynamics of COVID, or you read the press and it said, you know, it's the decade of home. It wasn't the decade of home. It was the, you know, it's the goddamn... pandemic. That's what it was. It's a temporal thing. So, but you know, but now we're on the other side of it. Now we're in high interest rates. You know, what are the choices people are making and what are going to be long-term choices, you know, and what are going to be high quality choices? You know, if, if I was worried about the stock price on a quarter to quarter year to year basis, you know, I, I, some CEO that had a short-term view and wanted their stock options to best and sell out at the right time, I might push the promotional button. I'm the largest shareholder of the company. It's taken me a long time to get here. I'm not going anywhere. We're going to do the right things that are going to reward long-term shareholders and investors. Just to Different games, you know, how we look at it and how we think about it. You know, we'll make tougher long-term decisions than other people will. We'll be an outlier. Sometimes on the lower end, like right now, you know, we're clearly somewhat underperforming other people because we're not pushing promotional buttons. But over the long term, I think you'll find, you know, we're going to be a big winner, you know, and we're very confident about that. It's just, you know, during times like these, we look different. And then over the long term, we also look different.

Thank you for all that. Just so we can calibrate our models and forecasts properly, if you had to guess collectively, how much do you think you will roll back price? Is it going to be in the double-digit range, so on average 10% across the assortment? Is that a a reasonable guess?

I wouldn't say we're, you know, roll back price, you know, at a broader level, right? It's, you know, again, we're going through a major product cycle. Like, you know, do you see us lowering price on the cloud SOPA? Yes. We've lowered price on it. When did we introduce the cloud SOPA? 2015, right? So we're in our eighth year, right? So things in their eighth or 10 year, you know, like that, you know, they start to wane and, you know, and you've got to, you know, you're going to have more, you know, there's, you know, I mean, how many do some cloud sofa? Who doesn't get an email every day of, you know, another cloud sofa knockoff on TikTok or on this thing, or, you know, it's a famous sofa, you know, so, you know, but it's also, you know, it's the sofa that carried us the last 10 years. It's not the sofa that'll carry us the next 10 years. And not that I'm telling people don't buy a class soap. It's a great soap. It'll be here the next 10 years, but I don't expect it to perform the same way. It will just find its new level. And we'll be more competitive, but we also, our manufacturers will be sharpen their pencils and everybody's sharpened their pencils because they want to keep as much market share as possible. So I wouldn't think, you know, I wouldn't call it a big rollback. I'd say, you know, I think of it really about a spring forward because there's so much newness. You really got to kind of look at where the product's going, not where it's been. And so, and then, you know, also look at what is the current competitive environment and what does it take to be, you know, to win and, and, and, Winning on a large scale generally means being disruptive. And, again, you have to kind of really look at it through the lens of design quality and then value based on that design and quality. And I think based on the design and quality that we have coming, I think we're going to be massively disruptive.

Thank you very much, and have a great day.

Thank you.

Your next question comes from Sigmund with Barclays. Your line is open.

Hey, everybody. It's sort of a follow-up to that last question, but just thinking about last quarter, you announced some cost reductions, the $50 million in annualized savings. I guess just in light of the markdown pressures and your demand comments and that this could just last longer, which is not unreasonable, how are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any other inefficiencies. Thank you.

Yeah. I, you know, I think we're always looking at that. So, you know, but look, we had a meaningful change in demand. Yeah. And whenever you have a meaningful change in demand, you know, whether it's to the positive and the negative, you know, there's going to be investments or you're going to rationalize costs, right. You're going to constantly, we, we, look at the organization every year and we try to re-architect the organization based on where we think the business is and where it's going. And we try to, you know, always look for efficiencies and always look for better ways to do things. So, um, but you know, we had always known, look, if there's a meaningful step down on the upside of it, we're obviously going to have to optimize the organization at that time. That's what we, that's what we did. Uh, so, uh, If demand weakens again and so on and so forth, we'll make the right decisions for the business and try to optimize things and sharpen our pencils just as any good leadership teams would. And I think a lot is going to depend on what happens with the macro. Does the housing market begin to recover. And again, when you think about the housing market for us, you've really got to look at the luxury housing market, which has taken, you know, like a 10 point greater hit than, than the overall housing market. Like, so yeah, so you, you know, those are the key things, but you really got to, the key is, I'd say just, it's about the goods, right? That's what we sell. And if, you know, if, If we're directionally right with the product and where we're going, we'll see some kind of inflection. Headwind or no headwind, right? Is this product transformation, is it worth five points, 10 points, 20 points? I don't know, 30 points? Look at our history when we've done these things. When we've done these things, we've been a lot more right than wrong. and we've been able to inflect the business. And then you've got to kind of put it in context with just this COVID cycle, the downside of COVID and then compounded with the rising interest rates and the collapse of the luxury housing market and say, when we hit bottom, okay, What does it look like as we come off the bottom? I mean, there's history and cycles, right? Everyone can look at. And so we really like where we are. I mean, yeah, is it a tough time? We have to make a lot of tough decisions and redesign the organization and part with some people. We did. And those are tough decisions that you have to make in business. But the key is, what does it all look like on the other side? How are we positioned on the other side? Did we make good long-term decisions? We don't have to cycle all the sale emails that everybody else does. They have to cycle all those promotions. They have to cycle all those sale emails. We don't have to cycle one of them. Do we have a lower base? We do. Could that mean we have a higher rise off a lower base?

You'd think so.

That's possible. We have a massive amount of new product coming. It's revolutionary from anything we've done. We really like how the horizon looks. I wouldn't feel that way if I'd been promoting for the last six or 12 months or, you know, however long everybody's, you know, when the pivot back to promotional emails hit, you know, but just, you know, you guys collect emails from everybody in our industry. I'm sure just line them all up. You haven't seen a sale email from us in over two and a half years. You know, maybe we get close to three now. When did you start getting sale emails from everybody else? When are they cycling those? How challenging is that going to be? How many more sale emails are they going to go to next? What are they going to do next to drive demand? So I think that the next 12 to 24 months for our age is going to look very different than the next 12 or 24 months for everybody else in our industry.

Yep, no doubt. Can I just ask you a follow-up around the guidance? So you did raise the low end of the sales guidance for the year modestly. Help us with the message there in light of some of the cautious demand comments. Do we just interpret that as confidence and visibility and optimism around new product or the expansion? Just help us frame that a little bit more. Thank you.

Really two things. One, what you just said, you know, our confidence about the new product has, you know, All samples got finalized, costing, negotiations got finalized, value equations got finalized, you know, presentation, you know, how we're presenting it in the books, how we're going to present the stores, how we're going to cycle things, what the productivity per square foot of each area of our salaries are going to be. You know, we go down to the detail level. You know, we're replacing this product with this product. What do we think? You know, how did this product perform? know per week at what margin what's the new product going to perform per week at what margin you know and so yeah and we try to figure out the arbitrage of every decision we make and um you know positive or negative right and then what's the aggregate of all those decisions and we feel more optimistic as we spend more time on you know on looking at what's coming and what's new and how what we're going to transition and uh and then and then look it's it's um It's going to cost us more to cycle through the product. So we're going to have to take deeper markdowns than we thought because of the greater headwinds that have developed. And so that's going to provide a lift. So you're going to get some lift from the greater markdowns. So the low end of the guidance we gave we think it would be hard. We'd have to have another meaningful economic macro event for us to kind of consider the low end based on what we know today, you know, based on what's happened in the last seven weeks, you know, and, you know, the quarter and what's happened in the, you know, the last, since the last quarter, we've talked to you, you know, the last three months. I mean, yeah. So, you know, that's, that's how we, feel about it now and based on all the data we have. And I think we're, you know, we're calling it kind of straight down the middle. We hope that there's, you know, there's a lot of people that think that we're not at the end of the banking crisis. We're at the beginning of the banking crisis, you know, and it's very smart people, you know, believe, you know, okay, you know, you know, the, you know, the, The balance sheet situation is getting corrected, but there's going to be a whole credit issue going forward with regional banks. You know, that could become a big problem. I don't know. Those people are smarter than I am. I've never ran a bank, and I'm not an economist, but, you know, I've been in business a long time, and I've seen cycles, and what I've seen is that nobody calls it exactly right. You know, and it just... you know, if you said, what, what am I most worried about? It just seems a little odd that, you know, banks get seized over weekends, you know, and my bank, you know, basically gets seized and sold for nothing to JP Morgan. And, and, oh, and it's all over now. It's all better. It just seems kind of strange, you know, like, so, you know, everybody's, thought it was all better back in the, the other banking crisis. And then, you know, more banks fell. So, you know, I'd say that's the thing. If you ask me, what am I most worried about? I'm most worried about what's next in the, in the, uh, in the world of regional banks, you know, which could have a, you know, further impact on a lot of things, you know, lending to small businesses, uh, you know, the economy, you know, supportive innovation, uh, you know, an invention, uh, you know, massive tightening of credit, you know, more banks to get seized, you know, government have to get more involved and, you know, and just general uneasiness by the consumer. So, but, you know, we can, you know, we can take another hit and I think we'll still be in that range if there's a big hit, you know, if there's another big macro move, you know, I think things will change for everybody. You know, so we're, you know, we're giving you what we can see. But I don't think there's anybody out there that's completely at ease with the regional banking issue. And if they are, I'd say, whoa, be careful. I think it's a good time to pray for peace and plan for war. And so that's how we're kind of positioned. We think no matter, again, no matter what the macro looks like, even if there is a bigger banking crisis,

our new product will create some level of inflection. That I'm sure of. Thank you for the thoughts.

Your next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Great. Good evening and thanks for taking my question. Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishings. Is there any color you could share on spending patterns across your income cohorts? Are there certain customer segments that are behaving differently lately versus others in the RH business? Just because the reference to giving away low-quality market share. You know, curious what percentage of your members you would consider to be maybe low quality and, you know, what that could imply for maybe what the membership file looks like long term. Thanks.

Yeah, I think if you just, you know, study, you know, the wealth, you know, data in, you know, in studying the ultra high net worth, you know, people and you look at homeownership and, you know, People, as they go up the economic ladder, they collect more homes. The home becomes the biggest source of investment. You keep buying a better home. You generally keep buying a bigger home unless you're in the downsizing mode. And then people buy multiple homes. They buy a second home, then they buy a third home. Ultra high network people have three to five homes, you know, so, and not only those, you know, the data would tell you that at the high end, at the wealth, the second home is on average has twice as many furniture, twice as many bedrooms as the primary residence, right? As people go up the economic cycle, those second homes are furnished beautifully because they're trying to impress their guests and they're trying to create a hotel experience. You're not going into second homes that have a bed frame pushed against the wall with a cheap headboard and some crappy sheets. Look, you can go on Zillow or Redfin and just look at homes. Go to second home markets and look what's on the market. Your first second home, Maybe you're not spending that much on it. Maybe you stretch for the second home. But again, when you go up the economic ladder, people spend exponentially more on the home. That is where the money goes. It goes into more real estate. You have more rooms to furnish. You're now furnishing with better and more expensive furniture because that's how people are defining themselves and defining their success and their place in the world. you know, I like to say, you know, and they go beyond that. If you kind of get silly rich, you know, you buy a plane and you get stupid rich, you buy a yacht, you know, and that's where we have our planes that are also available for charter. And we've done our H1 and our H2 and our H3, you know, because we're trying to communicate to those consumers. And if we can get them and we have some of them, I mean, we, one of our big projects, the one I'm talking about, I can't say the name, but it has how many bedrooms? 30, 28 bedrooms. In that range. It's 28 to 30 bedrooms. A second home. We're doing the entire project. We have some of those clients. We're earning that respect. Our guest house is being visited by the very top of the economic pyramid. It is being talked about at the very highest end. It's very, very top of that ladder. People are aware of our guest house and visiting, staying, touring, asking for tours, so on and so forth. And we're demonstrating what we're capable of. And we're beginning to speak to those consumers What people will see at RH England is at entirely another level for our brand. We're going to speak to people in a way that they've never been spoken to. And by the way, RH England, now every investor and analyst on this call is going to want to come to the opening. RH England is going to have all the newness, almost all of it. If you want to see the new product for the first time, go to RH England. You know, it's being flown there. It's being framed in through windows. But that will be the first view. You know, so we're introducing the brand in an entirely new way with entirely new assortment. Do we have some of the legacy product? We do. Yeah. You know, some of the key items, best sellers, best collections. But it's like, what percent is new? 70% of that gallery is new. So, and how many rooms do we have? There's over 60 rooms. Yeah. 60 furnished rooms. Yeah. Yeah. So, you know, you want to see the new, you want to get a head start and everybody else come to the opening party. But, you know, yeah, I'd say, you know, the lower quality, you know, you're always, we've been shedding customers for 23 years I've been here. We're building a luxury brand. That's just going to happen. It's just going to happen. But if you do it right, you're going to have a positive arbitrage, which we've always had. And I think that we're going to have it again. So I think this move is going to create another positive arbitrage. I think people are going to look at the design and quality of the goods at the highest end uh, you know, and they're going to go, Oh my God, this is incredible. And, and they're going to, you know, look at the price and think like, this is such an incredible value. Do my whole house. Yeah. And we just did, you know, another, you know, I can't say names, you know, person's house, you know, that just, and they did a hundred percent. All right. Contemporary, you know, and, um, The conversation is starting to really happen at that next level, but you got to stay with it. You got to keep investing. These things like the places we build, whether it's the galleries in our San Francisco or most recent one or a guest house, which our restaurant and our guest house just made the Michelin guide. Tell me another retailer in the world that has restaurants that has a restaurant listed in the Michelin Guide. We didn't get a star, you know, but we had Michelin Guide. We had one of the best chefs, arguably the best chef in the entire world, eat at our restaurant two nights in a row and said, you know, said they could have, they could dine there two or three times a week, you know, and thought the food was Outstanding. Gave us some feedback. You know, you'd expect the best chef in the world to give some feedback on what might be better. A little bit more salt here, this, that. But for the most part, a glowing review. And so, you know, again, all those things, all those conversations with people at the top of the mountain starts to change the conversation, the perception, the image, the respect of a brand. And it takes a long time to earn it. And we're working at earning that respect, getting the tip of the hat. And if we do it well, we will have higher quality, higher value, more discerning consumers that just spend multiples of consumers that are just a click or two down from them, a lot more. not a little more because they have a lot more money. And I would argue, you know, if you look at it, you know, the baby boom generation, you know, is, you know, look, luckily studies are saying, you know, if you're, you know, if you're at the high end and you have access to health and, you know, healthcare and, you know, you take care of yourself and stuff, they're saying the average age is like 87 lifespan now. That's up from 77 for lower economic demographics. So what are people going to do as they're living longer? I don't know if they're going to save money. I think they're going to spend money. If someone really says something to me, that's like, oh, you know, did you fly private to get here? And I said, yes. And they said, well, you know, good. Because if you don't, your kids sure will. And I thought that was a really funny comment. You know, it's like, you know, I mean, people that, you know, I think it's going to be baby boomers. They're living longer. It's the biggest, you know, pot of wealth. you know, there's going to be the biggest wealth transfer, but I think there's likelihood we're going to see an acceleration of spending because people are going to say, you know, I don't have that much longer to live. And I think they're going to loosen their pocketbooks. I like all that, all these, you know, kind of sub things underneath, you know, this main trend. I like coming out the other side. You know, I, you know, I like where we're positioned for the next five to 10 years. I think, you know, we get through the cycle here over the next, I don't know, six to 12 months. I don't see it lasting much longer than that. I think, you know, 24, I think is going to look a lot better than 23. And I think if we get inflation under control and whatever happens in the banking thing, you know, like you got to kind of let it happen again. I wish they'd just say they guaranteed all the deposits or something. So, you know, they just stop everything, but we still do have, you know, a credit reckoning that's got to come through. I mean, there's no way those banks lend like they were lending, right? So that's going to have some effect on the economy. But nonetheless, no matter what happens, you know, the path we're on, I think, is a path to a really profitable model and, you know, a really enduring and lasting brand.

Really appreciate all that color, Gary. And just a quick follow up. You had some helpful comments on the domestic competitive landscape before in terms of, you know, peers who are below you being more promotional. From our check, we're seeing some more, you know, luxury brands in home furnishings out of Italy, you know, increasingly eyeing the US after years of chasing growth in China and India and Brazil. some of these brands are pursuing more sizable showrooms in key U.S. markets. Do you see this as a threat? And any thoughts there would be great. Thanks.

Yeah, you know, I mean, look, everything's a threat, you know, so we don't take anybody for granted. But I just say that our value proposition versus those brands is massive. And they also, most of those Italian brands are two things. One, they're just mostly category focused, right? They either are a, you know, upholstery brand selling sofas, sectionals, chairs, you know, they're a lighting brand or, you know, they're a category specific brand. There's not one that's integrated all the categories like we do and have a complete, you know, lifestyle point of view and can furnish and design a home. And they don't have the size or scale to have our value creation, you know, our value proposition. So our value proposition versus the brands that the ones I think you're talking about, I think we're massively disruptive as brands. And especially now that we're sourcing out of Italy ourselves, you know, so, you know, when you've got made in Italy versus made in Italy and you have a significantly better value proposition because of, you know, your platform, you know, the size of your platform. And then I say that the one, the one other thing I mentioned is they don't control their distribution, right? Some of the brands you're probably talking about, you know, The most famous one, I think, has 800 points of distribution in the U.S. And they control, I think, four points of those 800 points of distribution. And, you know, so there's a whole kind of convoluted platform, you know, and, you know, pricing discrepancy. They don't really get to control price. They've got a lot of dealers, you know, representing them. And, you know, so, you know, it can take them a long time to kind of build what we've built. But nonetheless, you know, look, they're great brands. They built great, great product. I like our positioning way better than theirs. Way, way better.

Really helpful. Best of luck. Yep. Thank you.

Your next question comes from Brad Thomas with KeyBank Capital Markets. Your line is open.

Hi, thanks. Good evening. A follow-up on England, I was wondering, Gary, if you could just give us a little bit of an update on how you're going to be dealing with the supply chain and logistics. Obviously, the furniture industry can be a challenging one from a logistics standpoint. How do you ensure that the customer has a great experience for you, especially these early customers that you get in the months ahead here? And then I was wondering, Jack, if you could give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top line perspective, what's making the guidance any color there would be great. Thanks.

Yeah, let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 years, 18 months to two years. I mean, you know, working, training, you know, but, you know, we, we feel highly confident in the supply chain experience, delivery experience that our consumers are gonna receive from our age. And then, you know, one of the keys is just making sure, you know, we figure out how to be efficient on the reverse logistics. You're always gonna have some level of returns in any business and how we handle that and the ability to, you know, not have too many touches and liquidate, you know, efficiency efficiently through an outlet network and so on and so forth, you know, all the things that we're working on. You know, there'll be some things to learn where the demand is going to all come from, you know, across the UK, you know, some things to work out. But I feel highly confident. We've got a great, great team. We've got a lot of people that have been with us for years that are over there.

Oh, yeah. Yes, I don't know if you want to... Yeah, no, we... In our England gallery, we're going to have eight folks on the gallery side and another five for hospitality that are from RH in the U.S.

And then from a supply chain perspective.

And from a supply chain perspective, we have, you know, one of our best guys over there. Yeah, yeah.

Yeah, Stein, Sarah, you know. And so we feel... We feel highly confident in every level that we will execute well. But there's going to be things for us to learn. We don't know exactly where the demand is going to come from. We don't know exactly. We have to just acclimate everybody to our brand, our services, and everything that we offer. So we'll see. We'll see how the ramp is. I'll tell you one thing, the response to the party invite has been incredible. We thought we were going to have X number of people, and now all of a sudden, just after a few days, we think we might have two X number of people coming. So if anybody's on this call and you want to come, let us know quickly, because at some point we've got to cap this thing. We were really worried, like, gosh, we're out here in the countryside. and we're doing a, you know, doing this opening party, you know, we're sending an email invite, you know, how many people are going to come, and it looks like everybody's coming, so as long as they're, you know, in town, it looks like everybody's coming, so. On the second question, we haven't said, Brad, so, you know, it's modest, and I think we'll all learn together, you know, at one time, you know, Gary had projected that, you know, first-year sales or demand of England could be 50 to 250. The point is there's, you know, we'll learn together. We'll share data when we have it.

But it's a modest amount. It's not worth highlighting. It's in our guides.

Really helpful. Thanks, and good luck with it.

Thank you.

Your next question comes from Brian Nagel with Oppenheimer. Your line is open.

Hi, good evening.

Thanks for taking my question. So I know the call's running longer, so I'll just keep to one question. But the question I have, I guess, for Gary, we talk obviously a lot going on internally with RH and a lot of the really interesting initiatives you have. But if you look at the macro environment, and there's been a lot of talk about the macro environment of headwind, and you know your customers, you're a new customer. To get out of this belay, to allow the macro environment to become a tailwind versus the headwind it is currently, what needs to change most? What are the key factors there?

I don't know if I got that quite right.

Your connection wasn't the greatest. Maybe just kind of repeat the question. Just make sure we get it right.

Yeah, I apologize. I'm driving. So just from a macro standpoint, as you think about your customer and the headwinds, the macro headwinds, to get out of this malaise, what needs to change? What do you think is most important from a macro standpoint to really start to change here to drive for your customers?

Yeah, I think we just got to find out where the bottom is, right? Like things just have to stabilize somewhere, you know, interest rates stabilize somewhere, you know, mortgage rates stabilize somewhere and just, you know, get through a cycle, you know, so we're, you know, what's the new baseline? I think that's the key, you know, and then generally, you know, once you, you know, you've kind of hit whatever bottom is and there's a new baseline, you know, And we've got the macro headwinds get stabilized. And history would tell us you start to grow off that new base. And so I think the key is what's the base? Is the base luxury housing down 50? Because it hit down 45 last quarter. That means, you know, if you look at the sequential kind of from quarter to quarter, that would tell you, you know, went from 38 to down 45, probably means the last month of that quarter was down 50 or 54. I don't know, you know, somewhere around there, like I've never seen this kind of stuff, you know, but then again, too, I've never, like the first time we're navigating the brand through a cycle like this, where we've been positioned so high in the market, right? So, And also what I say was different about us today is, you know, we've eliminated, you know, we're not really in the accessory business in a meaningful way. We're not in the tabletop business. We're not, you know, yeah, we're not in the holiday business. We're not selling anything for Easter or Mother's Day or Christmas or anything, right? You don't go in and see all the, you know, Christmas decoration stuff or stocking stuffers anymore. You know, when we had, you know, when the company had a bigger mix of accessories and stuff like that, you know, you're going to, you know, you're not going to get hit as hard, you know, but today we're, we're basically all high ticket, right. We're, we're really furniture focused, you know, between indoor and outdoor furniture, it's the lion's share of our business. And then you've got, you know, rugs and lighting and, you know, and, you know, bedding and bath towels and things like that. But we're, we're not, you know, we're really a furniture focused business today. So we're going to, We're going to swing a little farther than other people during these times. But really, the key is, what's the baseline? What's the new baseline? Are we done with the tightening cycle? Are we done? I don't know. The markets are saying they're betting there's not another raise. And then you've got some Fed people saying there might be another raise. And all of a sudden, interest rates on 30-year mortgages hit 7%. Then they went back to 6.2%. Now, all of a sudden, they're back to 7%. you know like why you know what's that telling you in the 10-year you know they believe interest rates are going up um i think it's just got to kind of go okay have we have we hit the bottom from a housing point of view specifically luxury housing on this cycle you know is is are we done with you know the regional banking you know issues is inflation tamed um and you know are people willing to buy. I mean, it's, you know, people aren't putting houses on the market because they can't afford to trade up. And, you know, so you just don't have a lot of inventory to buy. And, you know, and look, that's better for the new housing market, right? 90% of the market is the resale market. 10% is the new housing market. They only have inventory to sell. They have to sell. They're putting it all on the thing. It's going to be a tailwind. There's going to be some level of tailwind to new homes because they have inventory. Resells don't have inventory because the owners don't want to sell into this market. Once everything gets stabilized, if interest rates stabilize at the bed, it says we're done for now. We've got inflation under control and interest rates stabilize, you know, federal funds rate stabilizes at five or whatever number, you know, and, you know, then interest rates can stabilize. And once you cycle that and you're through that, you know, that cycle for a year, you've got a baseline. And then, yeah, things start to look better and they start to loosen. That will obviously help. But, you know, you still have other things that are, you know, have people worried, right? You've got the commercial, you know, the commercial real estate market. I mean, you know, you don't want to be in the office building business right now. You know, I feel bad for my friends that, you know, own office buildings. I mean, this is, you know, like this thing has, that's not over yet, right? And so that's going to have a wealth effect. You know, there's people out there that, you know, invested in funds that own commercial real estate and, you know, people that own buildings, things like that. I mean, people are already starting to give keys back to the bank, you know, to the banks on commercial real estate offices, you know, because there's people don't want to go back to those companies that, you know, that, you know, working from home and there's people don't want to go back to work and, you know, strikes at Apple and Microsoft, you know, that's kind of crazy, right? But what's going to happen with commercial real estate? You know, so there's there's some things that still have to get kind of worked out. And I'd say that the luxury customer is the most aware of the issues. You know, they have the broadest view of, you know, economic challenges and where things are going and interest rates and all that kind of stuff. And, and you know, when they're going to start buying houses again, when they're going to decide to start selling their houses, that'll create activity. And, I think once everything stabilizes, people kind of go, okay, this is the new reality.

Let's go back to normal. And so long. I appreciate it. Thank you. Sorry about that connection, but thank you. No, no worries. Thank you, Brian.

Your next question comes from Max with Cowan. Your line is open.

Great. Thanks a lot. I'll just keep it to one. But how are you thinking about pricing products in Europe compared to the States? And just your latest view on how profitable those galleries can be in maturity? I think you previously thought once galleries mature, they could potentially have higher margins than in the States. So just curious for an update there. And then just any differences in cost structures that we should keep in mind?

Yeah. We believe that. You know, there's a lot of debate on pricing. You know, we're going right up to the wire, you know, trying to do the math on everything and, you know, make sure we understand it. But I believe, you know, that long-term we could have an accretive strategy because I think we're also building everything, you know, kind of on a clean sheet of paper. So, you know, it should be – the most efficient from a supply chain point of view. There should be efficiencies and things just because it's all going to be new thinking and our best thinking. And, you know, and we'll learn a lot in the beginning here. So, you know, I just say, you know, look, every plan we have generally is some degree of wrong. Are we more right than wrong? That's the key. Are we strategically right? So, you know, we're going to be wrong on a lot of things. uh at launch you know whether it's pricing where's this where you know like and you know the the point is is are we strategically right you know because we'll improvise adapt overcome you know modify and uh you know as we get going so you know we're excited to just get going and start learning you know so like but look there's debates like right now where should we price this or should price that you know who are competitors over there and what does it look like and um You know, so more to learn. I'd say directionally, I feel exactly the same way. But we're not in the game yet.

You know, so ask us in six months. We'll have a much better view. Got it. Thanks a lot. Thank you, Max.

Your next question comes from Seth Basham with Webb Bush. Your line is open.

Thanks a lot, and good evening. My question is around inventories. As you take these markdowns to clear access inventories, do you expect your inventory to be clean by the end of the fiscal year?

Yeah, I think we'll have everything in line by the end of the year.

Great. And then similarly, with the 70 new collections this year, planning for this year. Do you expect to be in stock in meaningful quantities so that they can be additive, materially additive to sales this year?

We do believe that. Yep. Yep. I think we'll be in really good shape mid second half. You know, like, you know, there's always with the ramp up of this much newness, you know, different timings, different things as they go into, you know, production and, have some delays here there and you know as they're going through final finishing and and uh getting into uh uh you know ramp up uh uh uh you know moving from sampling to production uh so but we'll be you know we'll be kind of some things will be in uh in stock you know end of second quarter some beginning of third quarter some mid third quarter i think mid third quarter Yeah, you know, late third quarter will be really good late third quarter as far as shipping, right? And, you know, again, think about our business. Our business will generate demand even if we're not really in stock because people are working on projects. So, but, you know, I think we'll be able to understand what the inflection point potentially can look like. I think by you know, late, late third quarter. And, uh, you know, we'll be, you know, we'll have a lot more data and information and see, you know, where the consumer's really responding and, and what that looks like. And, you know, for us, look, we've got to, you know, we've got to place certain bets and we've got to buy goods long-term because if, you know, on certain things, we, you know, that's our job, right. Is to, is to know what's going to be great. And, uh, and again, we never buy anything a hundred percent right ever in my entire career. The point is, are we directionally right on the, on the investments, on the buys? Uh, and, and, you know, some of these things are going to be really big, right? So we've got to make big bets. We've got to buy inventory kind of out there because furniture can't scale. You know, you just can't ramp up furniture production fast, not at these quality levels. So, um, So we'll learn a lot and we'll cycle through. But that's why we're really, really excited about 24, because we'll have some really good data by the end of the third quarter. And we'll be making a lot of much better decisions as we look out. And then we have another layer of newness that is going to come as we cycle into the spring. You know, it's a lot of news kind of coming through, you know, either late this year, you know, some of it might come or we'll hold it for next spring, depending on what the responses are.

But, you know, so, yeah. Fingers crossed.

That's really helpful. My last question is just on your pricing strategy and architecture as you move up to the very high end and you bump up against pricing from timeless designers. Do you see that being a challenge to convert high net worth customers to shop RH when they could buy the true designer piece?

Yeah, I think we're pretty much, you know, a really good value against any of that. You know, so, you know, there's always going to be interior designers that will take somebody's product and go to, you know, their local Larry upholstery guy and knock it off, you know. So, you know, and, you know, but for the most part, you know, we're going to be, I mean, against the showrooms and against, you know, the real luxury brands, you know, in the categories and stuff like that, we're going to be a disruptive value.

And, you know, so I think, you know, I think, our competitors are going to be scrambling. Okay, thank you. Good luck.

There are no further questions at this time. I would now like to turn the call back over to Gary Friedman.

Great. Well, thank you, everyone, for your interest. And, you know, we hopefully will see some of you at the opening of Arch England. And other than that, we'll talk to you next quarter. Thank you.

This concludes today's conference call. You may now disconnect.