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.