RH

Good afternoon, my name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2023 RH 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, please press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. We also ask that you limit yourself to one question and please re-queue. Thank you. I will now turn the conference over to Allison Malcolm of ICR. You may begin your conference.

Thank you. Good afternoon, everyone. Thank you for joining us for our second 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 laws, including statements about our outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. 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.

Thank you. Let me begin with our letter to our people, partners, and shareholders. Revenues of $800 million and adjusted operating margin of 22.2% exceeded our guidance for the second quarter due to a $25 million revenue benefit from faster-than-expected deliveries, and a shift of approximately $40 million of advertising costs from Q2 to Q3, reflecting the later mailing of our RH Interior's source books. We are raising the low end of our revenue guidance for the year and now expect revenue in the range of 3.04 billion to 3.1 billion versus our prior outlook of 3 billion to 3.1 billion and are maintaining our outlook for adjusted operating margin of 14.5 to 15.5%. We continue to expect the luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year as mortgage rates continue to trend at 20-year highs and the current outlook for rates to remain unchanged until the second quarter of 2024. The company repurchased 3.7 million shares in the second quarter at an average price of $325.65, representing approximately 17% of the total shares outstanding at the beginning of the second quarter. Product Elevation We recently mailed our new 604-page RH Interior Sourcebook, and while it's too early to read the response with only 40% of the mailing in the home this week, the early indications do look promising. We continue to expect our business trends to inflect in the second half of this year with the mailing of our RH Contemporary Sourcebook in late October and our RH Modern Sourcebook in early January, as well as the refresh of our galleries over the next several quarters. We believe our inflection point will peak in the first half of 2024 as our new collections fully ramp and we begin another cycle of source book mailings, completely transforming and refreshing the assortment across the entire brand over a 12-month period. We believe the new collections reflect a level of design and quality inaccessible in our current market and a value proposition that will be disruptive across multiple markets. positioning RH to gain market share throughout fiscal 2024. While a product transformation of this magnitude will be margin dilutive in the short term as we cycle out of waning collections, we believe it will once again become margin accretive as selling rates stabilize and allow for supply chain and sourcing efficiencies. 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 introduced RH to the United Kingdom in a dramatic and unforgettable fashion with the opening of RH England, the gallery at the historic Ainho Park, a 17th century, 73-acre estate that is a celebration of history, design, food, and wine. We had a spectacular turnout for our opening event, in early June, and the national and global press coverage the brand received was multiple times greater than any gallery we've ever opened. Due to RH England's countryside location, we expect the majority of revenues to be driven by our interior design and trade businesses, which are dependent on building books of business with high-value repeat clients like interior design firms and hospitality projects. The quote books are building and we'll soon mail our first source book in the United Kingdom. While pleased with the early response, there is still much to learn about the seasonality of the business in the English countryside, especially in the winter season. We will know more once we start mailing source books and experience a couple of seasons. Our global expansion also includes openings in Dusseldorf and Munich later this year, with Paris, Brussels, and Madrid scheduled for 2024, and London, Milan, and Sydney for 2025. Regarding our North American transformation, we continue to plan opening RH Indianapolis and RH Cleveland in the second half of this year, while RH Palo Alto and RH Montecito will now open in early 2024. Additionally, we have 12 North American galleries in the development pipeline scheduled to open over the next several years. We also believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. We have several existing locations that have validated this strategy in East Hampton, Gauntville, 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 just secured our first new location for Design Studio in Palm Desert, which should open in the first half of 2024. We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Outlook. As mentioned, we are raising the low end of our revenue guidance for the year to a range of $3.04 billion to $3.1 billion, and maintaining our outlook for adjusted operating margin in the range of 14.5% to 15.5%. We estimate the 53rd week will result in revenues of approximately $60 million. For the third quarter of fiscal 2023, we are forecasting revenues of $740 million to $760 million, and adjusted operating margin in the range of 8% to 10%. We expect to have increased advertising costs of approximately $50 million versus Q2 2023, reflecting the shifting of the RH Interior Sourcebook from Q2 to Q3, the mailing of our Arch Contemporary Sourcebook, and the mailing of our first Sourcebook into the United Kingdom. For the fourth quarter of fiscal 2023, we are forecasting revenues of $760 to $800 million, an adjusted operating margin in the range of $14.4 to 16.6%, with incremental advertising costs of $5 million versus the fourth quarter of last year. RH business vision and ecosystem, the long view. We believe there are those with taste and no scale, and those with scale and no taste. And the idea of scaling taste is large and far-reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 to $6 billion in North America and $20 to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and placemaker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking luxury and privacy in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yontville, 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 and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the brand and amplifying our core business while 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 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 to $10 trillion, one of the largest and most valuable addressed by any brand in the world today, a 1% share of the global market. represents a $70 to $100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by 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. The end of COVID confusion, the beginning of the next evolution. We've spent far too much time over the past four years debating if this was going to be the decade of home or the death of retail. If inflation was transitory or fiscal tightening was mandatory. Home sales and prices shooting up like a rocket and now falling to earth like a rock. For the first time in my career, retailers were comparing their growth rates to any one of the past four years in any given month of any given year. The fact is we're directionally in the same spot we were four years ago. We're in about a financial recession, and the polls saying we might have a presidential regression. If there was ever a time the world needed a compass, this might be it. For the people of Team RH, our compass is our vision, values, beliefs, and culture. those things that drive us and unite us, those things we live for, would fight for, and die for. After several years of being apart during COVID, we finally returned to the Palace of Fine Arts Theater in San Francisco for what used to be our annual leadership conference, and we talked about those things. For the first time in the past four years, everything came into focus. Clear replaced fear, and connections were personal and not virtual. It felt different because it was different. There is a different level of accountability when someone is standing in front of you, looking straight into your eyes and making a suggestion or a request versus blankly into a screen, not knowing if those on the other end have you on mute or just aren't very interested. It's time to break the bad habits of COVID. It's time to get off the screens, get out of our home office and reconnect in our team office or as we did at the palace. It just felt different because it was different, and I'm sure it's going to lead to an outcome that's different. Yet it also felt familiar, like finding our way back home, back with our people where none of us are smarter than all of us, getting all the brains in the game and the egos out of the room, listening and learning, discussing and debating, elevating and aligning. It felt like the beginning of our next evolution, and it felt like we were beginners again. Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward Team RH.