RH

Hello and welcome to the Q3 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. We please ask that you restrict yourself to one question and one follow-up, and you may re-queue for further questions. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. I'll now turn the conference over to Alison Malkin. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our third 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 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, Allison. Good afternoon, everyone. As we usually do, we'll start with our shareholder letter and open the call to questions. To our people, partners, and shareholders, net revenues of $751 million were at the midpoints of our guidance to the quarter. An adjusted operating margin of 7.3% was slightly below expectations due to higher than anticipated expenses, including international openings, as well as costs related to our pending acquisition of the New York guest house property and unsuccessful efforts to secure the iconic One Ocean Drive Miami Beach location. While pleased with improved demand trends generated from the launch of our new RH interiors and RH contemporary collections, we experienced increased headwinds in early October when mortgage rates peaked above 8% and the Hamas invasion of Israel triggered the war in the Middle East. With 82% of homeowners having mortgages below 5% and 62% below 4%, We continue to expect the existing housing market to remain frozen until interest rates and or home prices fall meaningfully. Additionally, the home furnishings market has become increasingly promotional, and we believe that it will create a mixed shift towards the clearance products, pressuring gross margins. In light of the current market, We're delaying the mailing of our RH Modern Sourcebook until the first quarter of 2024, when we believe demand trends will likely be more favorable. As a result, we are narrowing our revenue guidance range for the year to 3.06 billion to 3.08 billion, and now expect adjusted operating margin to be in the range of 13.6 to 14%. As mentioned, we are in contact That contract to make an opportunistic purchase of the New York guest house property for approximately 58 million scheduled to close in the fourth quarter. The building was appraised at 85 million last September, when the federal funds rate was half the level it is today, we believe, controlling the outcome of this one of a kind property is in our best interest, however. we will be poised to take advantage of any opportunity to do a failed lease back with the appropriate investor when the commercial real estate market rebounds in the future. Product elevation. We expect our demand trends to accelerate through the first half of 2024, and as our product transformation unfolds, in stocks improve, we complete the reset of our galleries and introduce our new modern NRH outdoor source books in the first quarter of next year. We anticipate our inflection point will peak in the second quarter of 2024 as our new collections fully ramp and we begin another cycle of source book mailings, completing, transforming, and refreshing the entire brand over a 12-month period. We believe our latest 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 the product transformation of this magnitude will be margin dilutive in the short term, we believe it will become margin accretive over the long term as selling rates stabilize and allow for supply chain sourcing efficiency.