RH

Good day, everyone, and welcome to today's RH Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Allison Malkin of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2024 earnings conference call. Joining me today are Gary Freedman, 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 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 filing, 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.

Great. Thank you, Alison. Good afternoon, everyone. Thank you for joining our call. I will start with our prepared comments and shareholder letter and then open the call to questions. To our people, partners, and shareholders, we are pleased to report that demand was up 7% in the second quarter and has continued to inflect positive, gaining momentum each month with July finishing up 10%. Demand accelerated into the third quarter with August up 12% operating in the most challenging housing market in three decades. Our investments in the most prolific product transformation and platform expansion in our history are now resulting in RH gaining significant market share in North America while building the foundation for our long-term global expansion across Europe, Australia, and the Middle East over the next decade. While our inflection developed a couple of quarters later than expected, we believe the important measure is not the timing, but rather the size of the vector we are creating in comparison to our industry. Vectors are measured in magnitude and direction and can be effective in forecasting strategic separation and future market share gains. It is now clear that our vector is increasing by both measures as we are outperforming the industry by 15 to 25 points. We expect our performance will continue to gain momentum in the second half of 2024, fueled by our multi-year effort to elevate our product and multi-decade effort to elevate and expand our platform. We are also pleased that results for the second quarter reflected our guidance with revenues of $830 million, up 3.6% versus a year ago, adjusted operating margin of 11.7%, and adjusted EBITDA margin of 17.2%. While aggressively investing into a downturn has put pressure on short-term results, It is also positioned RH to capitalize on the long-term opportunities that present themselves during times of disruption and dislocation. We believe our demand performance demonstrates we are the best positioned brand in our industry to benefit from the anticipated rebound of the housing market once interest rates decline and home prices reset lower, closing the affordability gap that has pressed the market for the past several years. Every act of creation is first an act of destruction, Pablo Picasso. We've worked hard to destroy the former version of ourselves and are in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand, inclusive of the most prolific product transformation and platform expansion in the history of our industry. Our product transformation plan for the second half of 2024 includes the second mailing of our RH Interior Sourcebook, which arrived in homes mid-July through mid-August, and is fueling our industry-leading demand. With new collections and improved in-stocks, our demand should continue to build throughout the second half of 2024. Post-analysis of our circulation data, we decided to consolidate our RH Contemporary Sourcebook collections into the RH Interiors and RH Modern books to optimize overall mailing depth and efficiency. Mailing fewer, more meaningful books enables our brand to break through the compounding clutter across the consumer industry and is aligned with our gallery strategy of fewer, more immersive and brand-defining physical experiences. The second mailing of the new RH Modern Sourcebook is scheduled for November with additional new collections and an expanded assortment, including the contemporary book consolidation. Again, We believe our expanded assortment and improved in-stock position will provide an additional lift to our business in the fourth quarter. The third mailing of the new RH Interior Sourcebook is planned to be in homes early January through February, capitalizing on what is traditionally one of the largest selling seasons for furniture post-consumers and designers returning from holiday travel. This mailing should help generate a strong finish to 2024 and continue the momentum as we enter next year. As you know, we acquired Waterworks in 2016, arguably the most desired brand in the luxury bath and kitchen category. The Waterworks team has done an outstanding job over the past eight years, further elevating the brand and building a highly profitable business model that can scale. Waterworks, like most other luxury brands in the home space, generates the vast majority of its revenues from the trade market, selling to architects, designers, developers, and builders. While RH has a meaningful trade business, the vast majority of our revenue is generated by consumers. We believe there's a significant opportunity to amplify the Waterworks business on the RH platform by exposing the brand to a much larger audience, similar to how we have expanded other trade-focused businesses and brands over the years. Our plan is to launch with a 3000 square foot Waterworks showroom in our largest new design gallery in Newport Beach, California, opening in the fourth quarter of 2024. We will also be developing a Waterworks source book with plans for test mailing in 2025. Waterworks today is just shy of a $200 million business with mid to high teams EBITDA margin that we believe has the potential to become a billion dollar global brand on our platform. Let me shift your attention to the elevation and expansion of our platform. We continue to open the most inspiring and immersive physical experiences in our industry, and some would say the world. Spaces that are a reflection of human design, a study of balance, symmetry, and perfect proportions. Spaces that blur the lines between residential and retail, indoors and outdoors, home and hospitality. Spaces with garden courtyards, rooftop restaurants, wine and barista bars, Spaces that activate all of the sessions and spaces that cannot be replicated online. Our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform expansion plans in the second half of 2024 includes RH Newport Beach, opening in November, with over 90,000 square feet of indoor and outdoor space spread over four floors with views of the Pacific Ocean, will be one of our most dramatic, immersive, and brand-defining physical locations to date, and will replace three legacy galleries in the region. With a 260-seat indoor-outdoor rooftop restaurant with uninterrupted views of the California coastline, two wine and barista bars, an interior design atelier, our first waterworks showroom, and the most expansive luxury outdoor furniture assortment in our industry, RH Newport Beach will be an inspiring destination in Southern California market and has the potential to become our second $100 million plus gallery. RH Raleigh, also opening in November, features 50,000 square feet of indoor and outdoor space over three levels with a rooftop restaurant, garden courtyards, a wine and barista bar, and an interior design atelier. RH Montecito, opening in early December, is a reimagination of the historic firehouse in the charming enclave perched above Santa Barbara, California, featuring an indoor-outdoor courtyard restaurant with fireplaces and fountains, a wine and barista bar, and an interior design atelier. The opening of our first RH interior design office in Palm Desert, California, this November, We believe there is an opportunity to address new markets locally by opening design offices in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. The Palm Desert location is a unique test of a consumer-facing professional interior design office separate from a gallery. Our goal is to establish the RH brand as the leader in the world of professional interior design and enable us to attract the highest caliber of interior designers in the industry. As we look forward, we anticipate an inflection of our business in Europe as we begin to open in the important brand building markets of Paris and London in 2025 and Milan in 2026. It is then we will begin to have the scale to support the advertising investments necessary to build our business across Europe. We're looking forward to discussing our global expansion in further detail once we open those important markets. We are also making meaningful investments to elevate and differentiate our online experience, and we'll be making meaningful upgrades to our website throughout the second half of 2024. Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market. We plan to file for design patents on several of the user interface and presentation designs, and we'll begin to discuss the new website strategy in more detail as we roll out the new functionality. Now let me turn your attention to our outlook. Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024 and into 2025. Due to the extensive transformation of our assortment, we expect revenue to lag demand during the year by approximately four to eight points until we read and react to the new collections, reduce back orders, and shorten special order lead times. Therefore, we'll be guiding and reporting both demand and revenue growth each quarter during fiscal 2024 so shareholders and investors can accurately analyze the business. We believe it is also important to note that we are now forecasting to end the year with an increased backlog of approximately 80 to 100 million due to revenue lag in demand throughout 2024. which will negatively impact adjusted operating and EBITDA margins by approximately 100 basis points for the year. Additionally, investments in startup costs to support our international expansion are now estimated to be approximately 230 basis point drag for 2024. Due to our inflection ramping later than expected, we are adjusting our full year forecast for fiscal 2024 as follows on a 52 versus 52 week basis. Demand in the range of 8 to 10%. Revenue growth in the range of 5 to 7%. Adjusted operating margin in the range of 11 to 12%. And adjusted EBITDA margin in the range of 17 to 18%. For the third quarter of fiscal 2024, we are forecasting demand growth in the range of 12 to 14%. Revenue growth in the range of 7 to 9%. adjusted operating margin in the range of 15% to 16%, and adjusted EBITDA margin in the range of 21% to 22%. Leaders have to be comfortable making others uncomfortable. Leadership is about pursuing a vision, something you've never seen that's somewhere you've never been. As creatures of habit, change is uncomfortable for humans, but for the people and partners of Team RH, culture of leadership and innovation is at the core of who we are and reflected in everything we do. We've grown comfortable making ourselves and others uncomfortable for over two decades and plan to continue doing so for the foreseeable future. It's what leaders do and how we know we're on the right path. Whether it's launching the most prolific product transformation in the history of our industry while others are hunkering down during the worst housing market in three decades, or opening the largest and most immersive physical retail experiences around the world while others are shrinking or closing their stores and moving online. By refusing to follow the herd into the anything but social world of social media, you won't find us on Instagram. Or paying a bunch of strangers, called influencers by some, to say they love our brand on TikTok. One thing you can be sure of is that place you will likely find us is on the road less traveled. one guided by our vision and values that will continue to ignite our spirit and inspire our customers. Over 20 years ago, we began this journey with a vision of transforming a nearly bankrupt business that had a $20 million market cap and a box of Oxfidel laundry detergent on the cover of its catalog into the leading luxury home brand in the world. The lessons and learnings, insights and intricacies The sacrifices made and the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and form cultures in organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be learned by building one. In a world that rewards duplication and penalizes the inherent bumpy road of innovation, especially for companies in the public domain, we the people and partners of Team RH will continue to drive ourselves to Detroit today's reality so we can create tomorrow's future while remaining completely comfortable making ourselves and others uncomfortable. Never underestimate the power of a few good people who don't know what can't be done, especially these people. Onward Team RH. Carpe diem. Operator will now open the call to questions.