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spk01: 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.
spk00: 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.
spk13: 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.
spk07: R.P.D.M. At this time, we'll open the call to questions.
spk01: If you would like to ask a question, please press star 1 on your telephone keypad. And as a reminder, please ask one question and then re-cue. Your first question comes from the line of Stephen Forbes from Guggenheim Securities. Please go ahead.
spk16: Good afternoon, Gary Jack. Gary, I was hoping you could maybe just expand on what's driving your confidence and seeing an inflection in the business during the back half, and what the early indications from the RH Interior book, and I guess RH England as well, inform you about what the potential reacceleration in demand could look like as we think out the 24 and beyond?
spk13: Sure. I think there's a couple of dynamics happening. I think you've got kind of a cycling of the, you know, backside of COVID, and you've got a cycling of the, you know, the dramatic rise in interest rates and the you know, and the fall off of the highs of what I call a COVID and a zero, you know, federal funds rate driven home market. So, you know, from our view, I think that cycling happens at the end of this year. And the question is, you know, the question is, is there a longer downdraft in the, you know, in the home cycle? I think that The unanswered questions really deal with, you know, if you say, what's the problem with the housing market today? You've got this real delta in interest rates between people who bought a home over the last several years at dramatically low interest rates that are sitting there with 2.7 to call it 3.5. 4% interest rates, 90% of the market is fixed. So you've got 90% of market owning homes with really low interest rates. And you've got an interest rate gap. Current 30-year mortgages are going for 7%, somewhere between 6.8% to 7.4%. It's kind of the range depending on credit. So you've got a huge spread there. and what's what's compounding that huge spread is you haven't had home prices drop enough yet right to offset that margin spread uh you know if home rates dropped you know you know home prices went up 42 percent in the two years you know in the two years post the covid you know through the covid boom you know once covid hit and there was a you know um Everybody was stuck at home and focused on exiting cities. You had the biggest migration from cities to suburbs in history and biggest migration to second homes in history. So you got a lot of people that moved at a record rate. You got a lot of people locked into really low interest rates. Now you've got really high interest rates, and you have no inventory in the market, and you have no inventory in the market because people can't afford to buy a new home once they sell their home because they're going to trade a – but 2.7 to 3, uh, 3.4% interest rate for, you know, call it a seven, 7.2% interest rate at maybe at the midpoint. Um, and so you've got a lock on that. Well, we're, we're, we're going to begin to cycle this. So if, if they're, if, if the fed has CPI, you know, if, if, if they have inflation under control and we don't, you know, there doesn't have to continue to be kind of tightening, um, you know, the question is, when do home prices come down enough for people to step up and pay the higher rate? Or when do rates come down and, you know, close that gap? You know, either housing prices have to come down or interest rates have to come down or the gap doesn't close, right? So you may kind of wallow at the bottom or there could be, you know, further downdraft if there's a more broader, you know, economic issue in the economy or if anything is happening with The commercial market with offices is not a good market. Our view is not all that negative news has unveiled itself. From our view, we're at the end of the worst of it. Is there going to be a bounce? If you look forward at the markets, it's saying that we should expect interest rate cuts you know, starting next year in Q2, Q3, you know, on a Q4, maybe a hundred, you know, basis points, you know, there's a hundred basis points of interest rate cuts, move the housing market much. Maybe it moves it a little, but I think there's going to be a bigger, you got to close this gap. You know, it's a gap that I've never seen. I don't think anybody on the phone has ever seen, you know, that, that's created kind of a conundrum, you know, in the housing market. And then you've got, you know, look, the news and the press says, Oh, new houses are up, you know, 20%. Well, new houses, We're only 10% of the market. The existing home sales is 90% of the market. So until you get existing home sales and this market's stabilized, not a downdraft, that's going to be critical. So we expect stabilization, we think, next year. We don't think there's going to be acceleration until there's interest rate cuts or pricing comes down, home prices come down to kind of close that gap. So let's put that off to the side. That's one issue. Then you've got what we're doing, which is a complete transformation, reimagination, refresh of the brand that we've been working on now for several years that's going to be unveiled here over the next several quarters. So the early indications on the books, and again, we're hitting 40% of the books in-home by the end of this week, look really good. The early, early indications. Now, you've got to be careful in how you extrapolate that because you have to extrapolate it on, okay, what does this look like when all the books get in home? What does this look like when the end stocks reach their optimum levels? What does this look like when you start refreshing the galleries and the stores? With those, there's all lift factors to all of that. So when we look at this and we extrapolate this, we think there's going to be a real inflection point. You know, how big is that inflection point? You know, to us, it looks like a meaningful inflection point. And then there is, you know, part of our decision to kind of pushed the mailing into Q3 was to kind of take a longer-term view of what should be our contact strategy as we've now, you know, are going through this brand refresh and reimagination and repositioning. And our view was, you know, we, through history, we went through cycles where we contacted the customer twice a year, you know, with each book and periods where, you know, years where we contact the customer once a year, you know, one kind of big cycle of mailings. And our view is, I think we've got to reacclimate the consumer to, you know, the RH brand to, you know, the newness, the excitement that's in the brand and everything we're doing. And our view is to set up a two contact strategy. So So the timing of those contacts we believe should be a fall contact and a spring contact. It's how I'd frame it. So fall being kind of a mid to late August contact that gets in-home by end of September. Our book's you know, especially our interior books, our interior book is 604 books. Nobody does a 604 book page book than, you know, other than us. And getting that printed and bound and through, you know, through the system takes longer than it will on our other two books that will be more in the 300 page range. So, you know, we've got this first contact that'll get all in home, kind of call it end of September, first week of October. And then, you know, We're going to come out with the contemporary book kind of mid-October through late October, and then we'll come with the contemporary book in the October period, and then the modern book in early January when people get back from holidays and so on and so forth and everything reopens again. Then we'll cycle back around and we'll hit everyone with this next contact, you know, if you'll get over a 12-month period. And that will be kind of a, you know, March, April, May, June contact. And so the three books we'll hit again. We'll have another, you know, meaningful round of newness coming. And by the end of that contact, we will be kind of fully transitioned. Doesn't mean we won't have. new product in the next contact when you think about the next fall. But the percentage newness will be more in the 15% to 20% range, where this is basically an 80% refresh of the brand. It's massive. It's the biggest product move I've ever made in the history of my career, and I've made some pretty big product moves. So you've got to kind of think about how you're spreading it out. How much can the consumer digest at a time? you know, how are you going to read it correctly and how are you going to have the contacts, you know, not overwhelm them and the news not overwhelm them. So as we kind of took, you know, a bigger view at it instead of, you know, this kind of one view and looked at it more, you know, how do we think about it strategically, maybe call it over the next three years. We think this is the right contact strategy and, you know, we'll create, you know, by the peak of the inflection, I think it will be really meaningful. I think we will gain significant market share versus anybody else in our category. And I think the other thing to put into context is just how we think about disruptive pricing from a circular point of view, which I think in our efforts to elevate the brand, I think we We weren't as kind of critical-minded looking at price. I mentioned last conference call. I thought we probably were a bit arrogant looking back. And now I think we're laser-focused and laser-sharp. So we're going to be very aggressive. We're going to use the size and strength of our platform and the leverage it gives us to, you know, be disruptive from a pricing point of view. And so, and I think that's going to make a meaningful impact. I think if you look at the new book, you know, and you look at the messaging and you look at the key items and you look at the key collections, you know, and you look at the quality of the product, you know, the design, the quality of design and the quality of the make of the product, and you look at the value, the price, you know, value of that product, I think it's, going to disrupt a lot of people. And so I think we're as confident as we've ever been. I think that's the timing. And then the unknown is, what does the housing market do? Is it flat? Does it go down another 5% or 10%? Or do we get a bounce? Regardless of whatever happens with the housing market, we're going to have a meaningful inflection point with the business and the brand. And that's why we deployed the capital. That's why we bought back 17% of the shares, 3.7 million shares. And so we like what we see early with the books here. We like our strategy. I think we're laser focused on this. And I think we're going to come out
spk17: looking really good. So that's how we see it.
spk07: Thank you, Gary.
spk01: Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.
spk08: Hey, Gary. Hey, Jack. My question, one question, maybe two parts, is you mentioned product transformation and margin dilution. Is that all contained to 23, or does some of it move into 24? And then And then, Gary, to your point, if this market wallows a little and we do have another downdraft, given that you have leverage or the business has leverage now or a little more than it's normally used to, do you operate anything differently if the macro just takes longer to come out and then maybe the curve is steeper in later years but it's flatter in the medium term?
spk13: Yeah, I think by this first half of next year, the inflection is – going to be much more significant than the macro. So I don't think it changes anything for us.
spk12: On the margin dilution, Simeon, look, I think about it also just where the margin or the discounting activity and clearance of that inventory will be in Q1 of 24 versus Q1 of 23. So yeah, there's going to be still some of that in the first part of the year, but
spk13: But there's going to be, I think about it, that's two things, right? You've got margin dilution from a product margin point of view as we're transitioning the assortment. But you're going to have leverage and margin accretion throughout the model based on what we believe will happen with our top line. So, yeah, I think 24 is going to be a very good year unless there is some kind of crazy crisis that, you know, we don't believe is on the horizon. You know, I think that, you know, I think, you know, the history would tell us if, you know, things really got worse that the Fed is going to ease. You know, like if I look back at the last 20 years, I mean, the Fed's been very consistent. We've lived in a very long period of really low interest rates. with just a few slight blips that are high. And I think the Fed will act in a way that will stimulate the economy again. And then housing will, at some point, housing will take off. You've got a lot of pent-up demand. It's just that the demand can be super pent-up, but if the gap doesn't change, if either pricing doesn't come down or interest rate gap doesn't change. Interest rates have to come down. One of the two things happen. If they both happen, prices come down and the Fed eases, you know, you can get, I think we can get a really good bounce in the housing market. But, you know, we just can't control that. We have a point of view on it, you know, share a point of view. We, you know, look at a lot of things and we've, you know, got a lot of data that we study. The key for us is, you know, it's like if you're, you know, we think about the balance sheet, which we do, I mean, you know, we deployed a lot of capital. We have a lot of confidence in the model. We're in the middle of a transformation. This is not by any means the first time we've done it. It's the biggest thing we've ever done. Our experience in making moves like this is deeper than anyone in this industry. We're laser focused on it. We understand you know, we understand our balance sheet really well and, you know, what our cash flow is going to be like and, you know, the timing of capital and, you know, outflows and, you know, and projected inflows and we, you know, all kinds of downside models and know how to operate in any kind of environment, you know, any kind of difficult environment. I mean, you know, so, you know, we don't, you know, fear the leverage and we've had a lot more leverage on this business and people have seen us navigate through you know, those situations, you know, in a relatively uninterrupted way except for the, you know, the real depths of 2008-9 or, you know, something like that. So we feel great. And, you know, but I think the key headline I'd say, you know, I just would be really, it would be shocking if we don't outperform whatever macro might happen in the first half of next year unless it is so severe. you know, that it becomes some kind of a crippling thing across the economy. And I just don't think that's going to happen. I think the Fed's going to do the things that the Fed, you know, usually does. And if we get any kind of stabilization or uptick in the market, like, we'll have an incredible year. So I think we're set up better than we've ever been set up in the history of the business. And I think we'll have, you know, the biggest inflection point we've ever had is my view by Q2 of next year. You know, like, there'll be an inflection point before that that I think will peak when I look at all, you know, all the lines and, you know, I think about production and in-stocks and floor sets and all that, you know. all the transition moves we have to make. I think that, you know, in the second cycle of the books, I think, you know, it will start to peak then, and then I think we're going to have an incredible run.
spk01: Your next question comes from the line of Stephen Zacon from Citi. Please go ahead.
spk04: Good afternoon. Thanks for taking my question. So I wanted to shift to the R.H. England opening. It sounds like it's a good, successful opening event, but it'll take some time to maturity. Do you expect the rest of your international openings to resemble this maturity curve, or is this the longest one since it's kind of your first? And then similarly, the letter confirmed nine international openings by 2025. Can you talk a bit more about the pace of annual openings for international going forward? Is three kind of the right number? Thanks.
spk13: Yeah, let's start with the first one. One, RH England is unlike anything we've ever opened, not just because of an international perspective, but really the kind of location and our view of how we wanted to introduce the brand and when we wanted to introduce the brand. When we wanted to introduce the brand in a very unique and unforgettable fashion. Just because the U.S. isn't really seen from a European perspective when you think about design, taste, and style, luxury markets, so on and so forth, that's not really the game we play really well. I think I made the comment before, the only true luxury brand we've had, I think, in the United States is Tiffany, and now the French own it, right? And all the luxury brands are from Europe. So how are we going to go into that world and introduce ourselves? We thought that was really important. And we also thought the timing, like how do we kind of get the name known and establish ourselves in a unique way. And, you know, we could have waited and opened, you know, Paris first, or we could have waited and opened London first. We would have had to wait longer, and we came across this opportunity at this property, and we thought this could be something remarkable. It could be a really great introduction for the brand. And, you know, I've always said that we've made the decision on RH England because of its location. It's an hour and 45 minutes outside of London. It's in the Cotswolds. It's around wealthy and affluent people, but it's not around density. You don't have anybody walking by this gallery. It is a true destination. You've got to go out of your way. You're going to something that's spectacular that you've never seen before. The impression of it... is like nothing else. And, you know, I don't want to make the wrong comparison here, but if you just think about kind of things that have went into the, you know, what I call the middle of nowhere and changed everything, you know, you think about Disneyland. Disneyland opened in the middle of nowhere. If you went back when they opened, that's the middle of an orange orchard, and there was no one around. You know, no one, there was no population density anywhere near it. and it changed everything. If you think about, you know, Las Vegas, you know, Las Vegas didn't exist. Uh, you know, it was created and I don't, I'm not trying to make a correlation that's exactly right. What I'm trying to say is it, we're trying to create a brand, you know, at a, at a, you know, a level of the market that hasn't been created before. Uh, you know, and, um, And our view was that this was a decision that was more to drive a conversation than it was to drive commerce. We never thought this was going to be a high-volume gallery. But we didn't think it'd be no volume. I think it's going to be fine. I think it would take much longer. If you took anything like this and put it in London, I mean, it's going to do multiple times. immediately, multiple times faster, you know, it's a little inconvenient, but it's extraordinary, you know, and a lot of really extraordinary things in the world started as being inconvenient, right? It was inconvenient to get an iPhone, inconvenient to get a Tesla, you know, how long did people wait to get a Tesla? How long did people wait? Yeah, how long did they wait at to get the new Roadster or the Cybertruck. So you've got to kind of think about what are the long-term things you're trying to do. We're trying to shape the brand in a way that brand has never been shaped before. Introduce the brand to Europe where the luxury brands are and create the right conversation with the right people. and create that right halo for this whole thing to then, as you introduce it in the other places, there's an excitement about it. They've heard about it. It's coming. They've seen it posted. They've seen it written about. I mean, the press we've got on it is just incredible. It's multiple times higher than any gallery we've ever opened because it's something nobody's seen before. And it's given the world something to talk about. And we have really interesting and high-profile people showing up there, setting up appointments there, and wanting to do collaborations with us. Some of the highest-end car brands in the world want to do car shows on our property and things like that. I mean, it's so interesting. you know, I think it's just going to open up all kinds of new opportunities and new conversations and new perceptions and possibilities for the RH brand. But it's not the gallery I would use to kind of say, oh, let me extrapolate what happens here. We don't have anything like this in America. You know, we don't have any kind of location like this that's similar to this at all. You know, so, and that's why I think it's, It's getting so much conversation, but it's not the most convenient place to shop. We knew that going in. So this is really to kind of introduce the brand, create the right conversation, let it build. Let's go through a winner. Let's go through a cycle. Let's see what we have to do. And remember, we haven't mailed a book yet in the U.K., So we've got very little advertising. We've got all the press that everybody's written about, and then we've run a few ads in some magazines and stuff like that. So I think all the other locations we're opening are highly visible in the major markets, lots of traffic around them, more what I call traffic. typical from a location point of view, not typical from a competitive or market point of view. There are going to be extraordinary galleries, some more extraordinary than others. Some of the markets are more important. In some locations, we took some of the Abercrombie locations that we might not have taken to get London and Paris because they were such incredible locations. And so there's some things that are smaller that we're not investing much capital to, but we're going to open them and we're going to learn. But I'd say you can't use this as a proxy. I don't know if we'll ever build something like this again. We may, but it's not what anybody would typically do. But that's why everybody's so interested in it, and that's why they're writing about it, and that's why they're talking about it, and that's why the quality of people that are going there are people you just probably wouldn't... You might not have had them come had you opened something ordinary. But they're coming because it's extraordinary. But it's just one small piece of a much bigger... you know, much bigger composition and puzzle we're putting together to, you know, build the RH into a, you know, truly, you know, dominant, successful luxury design brand.
spk07: Second part.
spk13: Oh, the international opening cadence. Yeah, I think this is a start from the opening cadence. You know, I like our start. I think, you know, moderately aggressive, I think. We've got We're planting a lot of flags in important places and really dominant, fantastic real estate, and we're super excited about it. I think we're going to learn a lot in the next three years.
spk17: Thank you very much. Sure.
spk01: Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.
spk14: Good afternoon. Hi, Brian. My question, with regard to the buyback, so you clearly stepped up the buyback significantly here in the quarter. So the question I have is, how should we be thinking about this? Was this more or less a kind of a one-time adjustment, or should we expect the buyback to stay aggressive here going into future quarters?
spk13: You know, we communicate our intentions with every kind of you know, buyback. We still have open to buy on the buyback. I think a few hundred million, several hundred million. And so I think we made a relatively aggressive move here. And it's, you know, we think we bought the, you know, we bought the 17% of the business at a really attractive price. And I think our, you know, our shareholders are going to benefit from that. And, you know, If we're right with our view of the next couple of years, it's going to look like a really great investment. How aggressive we'll be in future quarters, I think you've looked at us historically. We're kind of opportunistic. We're not like a big corporation that sets up a regular buyback every quarter and stuff like that. you know, if that was so smart to do, Warren Buffett would do it, right? You know, Warren Buffett is a very opportunistic, you know, repurchaser for their, their stock, you know, and, uh, you know, we're trying to be opportunistic, uh, investors, you know, whether it's in our stock, whether it's in anything that we do. So, um, so we think this was a great time to deploy capital and buy back a meaningful position in our company. Uh, and, uh, It depends what the market does, depends on what we see and how we feel, what we'll do in the future.
spk17: I appreciate it. Thanks, Derek.
spk13: Sure. Thank you, Brian.
spk01: Your next question comes from the line of Curtis Nagel from Bank of America. Please go ahead. Hi, Curtis.
spk09: Great. Hey, Gary. How are you doing? Thanks for taking the question. I just wanted to Go back on the point. You mentioned the shareholder letter just about some of these early signals that we're reading pretty positive from the source book launch, right? Like you said, still early. But curious if you just elaborate just a little bit in terms of what you meant. Are we seeing more people come back to the brand? Are we seeing conversion rates go up in a larger order size? We'd just love to hear a little bit more about some of those findings in detail if you could.
spk13: Yeah, well, we, you know, look, the new collections that we think are the meaningful collections are acting like they're going to be meaningful collections. And, you know, the markets that, you know, the books are getting into, you know, look good. You know, the responses look good. And so, you know, you just got to see it over a period of time. You know, our business isn't, our business is a, it's driven mostly by events. It's driven by people buying a new home, remodeling a home, or deciding to redecorate a home, all of which don't happen very often, right? So it's a very high transaction value kind of business. So if you look at our customers over a period of several years and take their peak day, they spend roughly 80% to 85% of what they spend with us in a kind of a 90-day period, right? And then they spend very little if you look out the next couple of years on the end. So, you know, you've got to kind of get them when they're buying. And that's why, you know, the business will get impacted more than others during a, you know, a cyclical down market like this. And look, we know when we exited, you know, the holiday businesses, you know, and all the, you know, you know, the Christmas business and the accessories business, you know, we're not very dominant in those businesses that we used to be. And, you know, in a down cycle, we wouldn't take as big of a hit because people are still buying the small things. You know, we don't sell really much of the small things, and we don't sell any kind of seasonal holiday stuff, right? So, you know, we'll take bigger hits than other people in these down cycles, but we'll have bigger ups in the up cycles. because of the mix and stuff like that. But you're not going to see people right away. The books won't hit, and you're not going to see the full potential. You need to let these books kind of get in. Usually, we get ramped in a book by three months. We hit kind of ramp rate. And that's if in-stocks, you know, happen well and so on and so forth and things, you know, build and so on and so forth. But we like everything we see. You know, I mean, we really do. I mean, the early signals are good. And we just want more time. And we want to, you know, transition and set a few stores with some of the new goods. We want in-stocks to build. You know, we've got a lot of new things that, you know, Some look like they're going to be runaways. And so, you know, you've got to say, okay, how do I get in front of that? And how do you reallocate production time and so on and so forth? And you've got some things that are, you know, you're always going to have things that outperform what you think and underperform what you think. So, you know, you take all the pluses and minuses and aggregate those, but then focus your efforts to optimize, you know, your real winners. And, you know, but everything, real early, everything looks good. I'd say real good for only 40%. So just keep that into context. I'll have a lot more to say next quarter. And if something really is meaningful enough, maybe, you know, we talk to everybody or do something sooner. You know, we'll see. You know, I mean, this is, you know, we're very early and, you know, we're very positive, but we're still in a, you know, we're still in a, you know, not so positive housing market and environment so it's going to be a conservative tone to a degree but we'll be a lot smarter in another eight weeks and then we'll have enough information to make moves to kind of think about investments in the first half of next year from a mailings perspective You know, how big, how deep do we go? How right are we? And how big do we go? But we're going to be some degree of right here. This is not going to be a swing and a miss. I mean, I don't want to jinx anything, but, like, we've been doing this a long time, and, you know, we're good at reading the data. So it's just, I think it's to the, you know, what degree of really good to great is the outcome. you know, and then what's that worth as a reset? And then, you know, and then how do you compound on kind of that reset?
spk09: Got it. I've made just a follow-up international. So you've got Munich and Düsseldorf coming up, right? I think, you know, technically within four months, just, you know, looking at the newsletter. How are you feeling about those openings? And I guess just curious why lead with those two cities, right?
spk13: Those are just smaller ones that don't have a lot of capital. Nor hospitality. Nor hospitality or anything. So those are some locations that we thought the locations were decent. It'll give us some, without putting a lot of capital in, just give us some feedback, get the brand out there. I mean, Abercrombie didn't have any bad locations. These were just, you know, we think we're going to get we're going to learn and get information, right? And then we'll decide, you know, how long might we stay in these locations, you know, because we've acquired some leases and, you know, are there bigger, better places to go? And, you know, what do we do? But I think one of the key things is just kind of get the brand out there in, you know, in a good way. But, you know, the real key was what did we do first? You know, when people met us or heard about us. What did they hear? What did they get pointed to? How did they think? So now we've kind of done that. I don't think people will think Munich and Dusseldorf aren't beautiful galleries. They're just not going to be at the level of London and Paris and Milan and some of the other ones we're doing. But There are locations that we were required to take to get some of the really key locations that we really wanted, and that was central London and the Paris location. So we think these are fine. Let's get going. Let's learn. Let's see how the business builds. Let's quickly learn how to operate in these different countries at a relatively... low investment and much lower effort than doing the really big ones with a lot of work that take multiple years and that have hospitality and other levels of complexity.
spk17: Got it. Thanks. I appreciate the thoughts. Sure.
spk01: Your next question comes from the line of Seth Besham from Web Bush Securities. Please go ahead.
spk03: Thanks a lot, and good afternoon. My question is around margins. How should we think about the product margins on the new product lines if you're planning to be much sharper on pricing? Should we be thinking about consolidated gross margins in the mid-40% on a run rate basis going forward?
spk13: I think we'll have more to say. I think we believe long-term emergence can... can be at our historical highs. I think we've got to, you know, we've got to kind of win some share, you know, some share here. And we got to play a little offense and just, you know, be sharper. And so, you know, there's some, you know, there's a few points of investment we're making there. But, you know, we also have places where, you know, we're playing aggressively, but our margins are at historical highs, you know, so it all depends, like, you know, what we're targeting, how we're targeting, you know, certain categories. Yeah, so we'll have more to say. You know, let's see how these books do when they get in. Let's see what's performing. Let's see what, you know, what we're responding to. You know, there's going to probably be places where, you know, we're you know, we've taken pricing that's really sharp. There may be places we're going to take pricing up, right? We've already got one collection that's, you know, kind of through the roof. Looks like our best collection ever. Then we're going to probably take prices up this week. So, you know, just because we've got so much demand and we think we can, you know, the product is still going to be positioned at a disruptive value. We've probably just swung the pendulum a little too far on some. But the business we're in, it's day-to-day, week-to-week. You're learning. You're getting data. You're rethinking things. Everything you do when you buy a new product is speculative. based on backwards-looking data. Everything we buy is 100% wrong. We've never bought anything, and we go, that's exactly how it's selling. That's exactly right. So you're always adjusting. You're getting real data, real information, and then you're learning from that, and you're extrapolating that, and you're making the next best decision. You know, I wouldn't jump to any conclusions just because of our, you know, what I call more short-term view of, you know, just trying to transition, you know, from the current kind of products to the new, you know, the next generation products and, you know, and playing offense from a disruptive value equation point of view. It's how we got here. You know, I just think, you know, it's probably – we should have kept that edge the way we did. But you go through a period where you're in COVID and your business is running at 40% and your prices are going up. We went through multiple rounds of tariff increases and price increases and supply chain increases and COVID increases and ocean freight increases. And I think... that's why I made the comments I did at the end of my letter. I think we're finally at the point of everything that kind of made everything go up. With COVID, it's one of the kind of the backside of the cycle of everything going down and everything washing through. And I think if you just like kind of take those years and say, okay, what are the best things I learned to now get them out of the way? And you got to kind of rethink about your business but I think I wouldn't make any long-term assumptions based on anything that's happening on a short-term basis right now in this transitionary period. I think you'll see us return to a really good model. If we get the inflection that we believe is going to happen
spk03: in the top line especially you know where we think it'll peak as we get into kind of the first half of next year you'll see our whole business model snap back right but just to be clear gary so the margins the product margins on the new product that you guys are launching over the next say six to nine months is going to be lower by a few points than what you are earning on products during the pandemic and then the real benefit that gross margins could be from volume, improved volumes?
spk12: That's not necessarily. We weren't that specific. We don't guide gross margin, as you know. We don't disclose product margin. So we're trying to tell you just a directional flavor, and I think just to recap a little of what Gary said, some products can be higher, some products can be lower. We're not making a general statement. You can roll back the tape on what Gary said as far as the investment we're going to make. That's right. But as far as what the future is going to look like, let's just let that play out. We're going to make margin commentary, especially gross margin commentary, after each quarter's results because, again, we don't guide that particular line.
spk03: Understood. Thank you, guys.
spk12: Thank you, Seth.
spk01: Your next question comes from the line of Max Relenko from TD Cowan. Please go ahead.
spk02: Great. Thanks a lot. So if we were to bucket your initiatives over the next 12 months into U.S. gallery openings, European openings, and then new product introductions, how would you rank order their magnitude? And then just for clarification, how much of a refresh inside the gallery should we expect both over the next one and two quarters? and then a year from now, both in terms of new products as well as the number of galleries that the new products will hit. Thanks a lot.
spk13: Sure. Take the product, and the product is by far the most important thing we're doing. And the new openings and building out the platform, it's the platform for the product. So what we're doing with the product is going to make the most meaningful impact you know, over the next several years. So, you know, when you think about the investment in gallery floor sets, we just began setting RH Marin next to our headquarters. And, you know, we will all see it, you know, for the next, you know, it gets fine-tuned over the next couple weeks. It's kind of a phase one move of it. We have kind of right now phase one and phase two And then we'll have a phase three. I think you'll see you know the majority of the galleries reset By q1 you know of Next year and as we call together. Yeah. Yeah all the galleries. Yeah reset and then You'll have some winners and some losers in the product mix, and as we mail the modern books going in in January, you're going to find out there's some things in modern that are probably really good and better than some things we might have just rolled out into the galleries, and you'll make some adjustments. But I'd say we'll be, by Q2 of next year, we'll be really... educated. Especially by the late Q2, we'll have had two cycles of drops. We'll have a lot of newness. We'll have the first phase, major phase, second phase still not as major as the first phase, but still more meaningful than normal. We'll have had a good period of time to measure and have seen phase one of the product transformation and, you know, first drops. And then, you know, we'll have some data on the second cycle. And we'll be fully ready for the second half of next year. But, you know, to kind of keep optimizing it, right, because we're going to just get a lot of data, a lot of information, be making a lot of adjustments. And, you know, we'll keep doing things that kind of, what I'd say, build the trend. When you go through a big move like this, it's, you know, you're going to get some of it really right and you're going to get some of it wrong. And, you know, as long as you're, you know, throwing more things above the line than below the line, you know, then you're going to learn and then you're going to make adjustments. And those adjustments will move the business higher right so i'd say you know we'll hit max inflection in q2 doesn't mean we'll hit max run rate when i talk about the inflection i talk about the early inflection then we'll build on that right so you know i i would i would assume that the sec you know the the first half of next year will be very good and the second half of next year will be better
spk17: than the first half.
spk01: Your next question comes from the line of Brad Thomas from KeyBank Capital Markets. Please go ahead.
spk11: Hi, good afternoon. I was hoping to follow up on the topic of operating margins. And just hoping we could maybe frame up, you know, some of the puts and takes. You know, obviously the full year implies kind of this mid-teens level for the operating margin. Can you help us think about maybe your latest thoughts on structurally what the operating margins look like in this world where you're opening up stores internationally, in this world where, you know, you have new product coming out, there's more source books? You know, what do you think sort of normalized margins start looking like as you get back to revenue growth again? Thanks.
spk12: You know, I don't think, Brad, we're ready to talk about that. You know, I think, you know, we're talking about some, you know, short-term changes, near-term impacts to the margin, and, you know, and especially moves related to, you know, and making some investments due to competitive reasons, you know, as Gary had talked about. So, you know, what the other side of that looks like We have our discussion with you about each year's guidance in March, so we'll do that and give you a better look then. But as far as we sit here at the end of Q2 and the many sort of changes and levers we're plowing forward with, we just don't have that visibility or that ability to tell you what the steady state looks like. Other than, you know, as revenue... grows and we get leverage in the business, we expect margin to increase from here. Where that baseline level is, I'll let Gary chime in here.
spk13: No, I think that's correct. For the most part, we're giving you color today. maybe slightly more different or a different angle on the color than what's written in the letter. We don't want to talk about things that we haven't really released. We're not really releasing that far out. All of us on this call are going to know a lot more next quarter and the next quarter. we're either going to be more right or more wrong. We think we're going to be more right than wrong, and everything that we said, we believe in. There's some level of speculation, of course, but there's a lot of data that we have based on doing what we're doing, introducing newness, mailing source books, resetting floors. We know all the lift factors and what will happen if we do this, that. We're directionally usually right on those things. We've been rusty. We've been somewhat out of the game. We're going to come back into the game in a very impactful way. We're looking forward to getting the data. The good news is The early data doesn't look bad. It looks good. So, so far, so good. That's as much as we know right now.
spk11: Well, Gary, maybe if I could ask you another way, when you did some significant share purchase back in, I think it was 2017, you later described that time as a period where you'd kind of taken the racetrack off the a car off the racetrack and done a lot of surgery on it, does it feel like it's that significant of a time for you as you think about how you're positioning the company?
spk13: Yeah, bigger than that. We've redesigned the whole fleet of cars. So it's really the biggest repositioning of the business we've ever went through. And, you know, I think the best work we've ever done. So it's much bigger. I think it's going to be much more significant than that. And look, we've just bought back a lot of stock. We put our money where our mouth is. We took a really big position in the stock, and we've allocated a couple billion dollars. That's twice as big, I think, as the buyback. back then. So we wouldn't have done that if we weren't confident. And our board wouldn't have let us do that unless they were confident. So this is a fully informed kind of position we're taking from an investment perspective on inventory, on share repurchases, But, you know, we're not a new team. It's an experienced team. It's an experienced board. Like you said, we've done this at, you know, just a smaller magnitude. We're a smaller company, too, you know, so we're a bigger company. We're taking a place in a bigger bed. So, you know, I kind of like where things are. I think, look, everybody's speculating, right? Like, if you just, like, just look at what's happened in this quarter. Our stock started this quarter, the day after earnings, $274 a share. Yeah, $247 a share. At the end of Q2, it ended today at $369.
spk07: It peaked at $402.
spk13: It went up 49%, and it peaked at 63% up. Within a quarter, with the only information and disclosures was we bought back 17% of the shares. So everybody could do the math, you know, about how many shares we bought back. And because there's new disclosures that have to be made every time my ownership goes up by one point, you know, there's a lot of disclosures. There's a lot of filings. And so, you know, you would have thought, hey, you know, they're buying back, you know, does the stock go up 17%, does it go up 20%, does it go up 14%? I mean, it went all the way up 63%, you know, and, you know, at the end of today, it was up 49. And after hours, you know, it's still up 36, even though it's down, I don't know, 28, what's it now, 28 points down, something like that. You know, they just flashed it, you know, over here a second ago. So, you know, and, you know, people are like, wow, you know, like, wow, is it a bad day now? Wasn't it a bad day? I don't know. We've had a million good days and a million bad days. within a quarter here, not a million, but so much volatility in the market because so many people are guessing. What's next? What's this? When's the Fed going to ease? They're buying back stock. What does this mean? I would just say stay focused on what we write. You want to know what we mean? Reread the letter. That's why I write these letters. It's on there. It's not random comments from a conference call that can sometimes be less focused. I spent a lot of time writing those letters. The team and I spent a lot of time together crafting what we believe is the best version of the truth and what we believe is going to happen with the business. We're not going to always be right, but Yeah, we have a pretty good track record over a long time. And so, but it's a lot, you know, it's just a lot of volatility. It's a time of speculation, right? When, you know, are the Fed going to ease or are they going to tighten? Is, you know, the housing market bottoming? Is, you know, is the pent-up demand? Is there going to be more inventory? Is, you know, as it relates to, you know, to our market, you know, and, you know, it's RH's new book's going to work or the goods going to be, you know, this customer going to accept the goods, you know, where the margin's going to be at, all kinds of stuff. We just put out a release today that confirmed the year's numbers, confirmed them. And the stock's down 30 bucks in after hours. I don't think any of it made sense going up. I don't think it makes sense right now going down, but maybe it does just to kind of say, hey, Where should it be?
spk17: But we're all kind of looking at the same information.
spk13: I mean, that's the funny thing. So I'd say one of the things you learn if you really study Warren Buffett, there's a real long-term consistent view about how they operate and what they do. you know, we try to learn from people like that or Bernard Arnault and, you know, and how he's built LVMH and, you know, how people have built things. And even if you look at, like, a lot of people think that there's so much inconsistency with Elon Musk. See, I see consistency. He consistently innovates. He consistently keeps innovating. And so has he ever hit a you know, a launch target on anything or an intro target. No, he consistently doesn't because he doesn't manage the business. He leads the business and he innovates consistently. And so there's always going to be kind of more fluctuation short term. But long term, he's building one of the most incredible businesses the world's ever seen. And so I always just kind of stand back and look at the long term. I hear people snipe at Elon Musk. Oh, he bought Twitter and that's stupid. He turned it into X, like whatever. Those are little side shows. The guy's building one of the great companies in the world. People say, oh, he lost his head of HR or he lost this. Now, if you look at it over a number of years, he's building one of the best things in the world. And anybody that's bet against him has lost a lot of money. And I think, you know, we're just trying to build one of those great things. And so, you know, we just try to stay focused on the long term, learn from all the short term data, you know, but don't overreact. We know we made some mistakes, you know, and we know we were arrogant in pricing and we know we kind of, you know, our muscle atrophied a bit in new product introductions and, you know, and trying to ramp back up, uh, you know, wasn't our, yeah, we, you know, wasn't our best work. You know, we learned from that. We're going to snap back from that and you will see us not only snap back, you'll see us better than you've ever seen us. Uh, and, and I feel real confident, like, uh, And so we'll see how it plays out. We'll see how right we are.
spk01: Your next question comes from the line of Jonathan Matucheski from Jefferies. Please go ahead.
spk05: Great. Good evening, Gary Jack, and thanks for taking my question. It's on the contemporary business. In the past, you referenced a billion-dollar milestone over three years. just hoping to see if we could get an update on how that business is looking today as more product has been rolled out across the galleries and how we should maybe think about the run rate of that business, maybe by the time of early next year, which would be a couple of months after the October source book mailing. Thanks so much.
spk13: Yeah, I think about the totality of what we're doing here. I wouldn't just isolate contemporary, right? Contemporary is a It's a new book. You know, do we think it's going to be a billion dollars? Yes, we do. But you've really got to, you know, you've just got to look at this whole thing in concert, right? You know, the biggest book is our interiors book. It will continue to be contemporary, modern, be number two, contemporary number three, contemporary might ramp bigger than modern. You know, we may make decisions like, you know, a lot of times, you know, what exactly goes in contemporary versus what goes in modern versus what goes in interiors can be somewhat subjective. You know, like there's sometimes some blurred lines that are going to be there. You know, I'd say, you know, I wouldn't go kind of micro like that right now. I think you'll miss the bigger picture. the bigger idea. The bigger idea is the totality of the product transformation we're making. And I think about it is we're going to mail about 1,200 to 1,300 pages of product and across that 70% to 80% newness. I think the next biggest book that competes with us is 228 pages. We haven't mailed anywhere near those number of pages in a long time. And we've never had this much new product hit a market like this at the design quality, the quality of the make, and the, what we believe, the value equation. And anytime we've done anything like this, we've moved the business meaningfully. And so this is the biggest thing we've done. I think it will be the most meaningful thing that we've ever done strategically. It will reset the company for the next five years.
spk05: Appreciate the color and best of luck. Thank you.
spk01: Your next question comes from the line of Steve McManus from BMP Paribas. Please go ahead.
spk15: Hey, afternoon. Thanks for taking the question. So I had a question on suppliers. We're seeing more and more suppliers go out of business here, a pretty big one on the high-end side last week. So just curious what you're seeing here. you know, with respect to the financial health of some of your key suppliers, any challenges that you're facing right now that's worth calling out?
spk13: Yeah, I mean, you're probably referencing one of our suppliers that, you know, filed for bankruptcy, Mitchell Gold and Bob Williams, really terrific people. It's just an unfortunate thing. I think, you know, they went through some private equity hands and, you know, there's some, you know, they stepped back from the business and, you know, had some wrong leadership, it's bad decisions, and it kind of goofed up the company. And, you know, there's, you know, there's, I don't know, probably 30, 40 million, 40 million of, you know, demand with them. We can resource it all pretty easily. We don't see any meaningful interruptions or anything. You know, they're not one of our big suppliers. And I think it just goes to show how hard it is to do every part of the business. Typically, they were a furniture manufacturing company, really great aesthetic, great marketing, great style. They got into the retail business, too, and that added a lot of complications. It's hard when you try to do both. You try to be a wholesale business, a retail business. manufacturing business, you're kind of in three kind of complex businesses right there. So I think there's always going to be some people that kind of don't make it through different down cycles like this. Could there be more? There could be more on the retail side. There probably will be. But we don't see any real fundamental risk to our business that is going to be meaningful. Otherwise, we would have talked about it in disclosure.
spk15: Got it. Appreciate the color. Thanks, Gary. Best of luck. Sure. Thank you.
spk01: Your next question comes from the line of Michael Lasser from UBS. Please go ahead.
spk06: Good evening. Thanks a lot for taking my question. Gary, is it right to interpret your statement that you expect the business to inflect in the first half of next year to mean that it's going to flatten out in the first half of next year? before resuming a growth trajectory in the second half of next year. And my follow-up question is, would you expect, based on everything that you know today, that your totality of investment spend, independent of if it's going to be in the gross margin or in the SG&A, is going to be greater than, equal to, or less than what you're spending this year? Thank you so much.
spk13: Sure, sure. So, Yeah, let me just try to be real clear and direct that we expect the business to inflect in the second half of this year, right? Meaning, and when I talk about inflection, what does that mean? That means a meaningful move in trend, and this means to the upside, right? So we think our business will inflect and our trend will change to the upside vis-a-vis where we've been trending, how the rest of the market's performing. We think we'll have an inflection that will make a meaningful move against all those metrics. We'll inflect up against our trends. We'll inflect up against the market trends. We'll inflect up against the competitive trends. We think we will reach kind of a peak of that inflection of this first phase from these books we think we will hit that in the first half of next year so I'd say think about an inflection happening here over the rest of this year will inflect up and then in the first half of next year there'll be another kind of inflection above whatever that run rate is right and that's against our trends against the industry's trends against our competitors trends and then as we cycle and get into the second half of next year I think we will build on that trend and but it may not be as big of an inflection, but it will be a building of momentum. Again, kind of disregarding any kind of meaningful thing that happens in the economy, and whatever happens in the economy, I would be surprised if it's more dramatic than our positive inflection. So if the market goes down some step down, our inflection point will be bigger than that step down. Does that make sense? Is that more clear?
spk06: I think I catch your drift. If you've been trending down high teens, low 20% range, the inflection is, look, we're not going to be trending down at this range. The counter argument would be, well, you're going to be facing easier comparisons. It's harder for us to dissect how much is due to just the market getting better, you go.
spk13: Yeah, yeah. No, you just got to think about all those things I just said. What's the industry doing? What are the key competitors doing? What are we doing? We're going to inflect against all of that, right? So it's not just our trend. Our trend will be one of those elements, but we're going to inflect against the industry. We're going to inflect against the key competitors. That's how to think about it.
spk06: Okay. And then on the...
spk13: Which means we'll be taking market share, right? So I think we've been giving market share. We will go from giving market share to taking market share.
spk06: That's clear. And then as you think about 2024, will the magnitude of the investment that you're making be larger than, smaller than, or equal to this year?
spk13: We haven't guided to that yet. So, yeah, we're not prepared to kind of talk about that.
spk06: Okay. Thank you very much and good luck.
spk13: Great. Thank you, Michael.
spk01: Your next question comes from the line of Christina Fernandez from Tesley Advisory Group. Please go ahead.
spk10: Yeah. Hi. Good afternoon, everyone. I wanted to go back to the advertising span and the shift you're making to the to the twice-a-year cycle. Does this mean you go back to 4% of sales spent on advertising? I know the last couple of years was very low. Or with the product introductions you're making and the new store openings in Europe, does it make sense for that spend to be at a higher level? I just want to get a sense of directionally where that spending goes.
spk13: I don't know yet. We'll know a lot more when we see the inflection in the business.
spk01: And we have no further questions in the queue at this time. Gary Friedman, I'll turn the call back over to you for closing remarks.
spk13: Great. Thank you, operator. Thank you, everyone, for your time and interest. Thank you to TMRH for your leadership and efforts. Your hard work is going to pay off. And thank you to all our partners around the world who are part of this team. Your support and efforts mean the world to us. And I can tell you all three constituencies that are all probably listening in to this call, I think, share the sentiment that we shared with you today. I don't think we've ever been more excited about the future. And I believe we'll demonstrate that to the other constituencies, and that's the shareholders that are on this call. So thank you, everyone, for your time and attention today. We look forward to the next few quarters. Thank you.
spk01: And this concludes today's conference call. Thank you for your participation, and you may now disconnect.
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