RH

Well, good day, everyone, and welcome to the RH Fourth Quarter and Fiscal Year 2024 Earnings Call. I would now like to turn the call over to Ms. Allison Malkin. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for our Fourth Quarter and Fiscal Year 2024 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 security 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 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 adjusts our GAAP financial 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 . A live broadcast of this is also available on the Investor Relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Thank you, everyone. Welcome to the new world when we're, at least at this moment, inventory is your friend. I was going to say maybe I just shouldn't read the letter, but heck, let's go through it and we'll kind of improvise, adapt, and overcome as we're reacting live time with all of you. To our people, partners, and shareholders. The important work and substantial investments we've made over the past two years are now resulting in meaningful share gains and significant strategic separation. Positioning the RH brand to expand its leadership position across the luxury home market over the next decade. The positive inflection of our business continued to accelerate in the fourth quarter with revenue up 18% and adjusted operating income increasing 57% in each case on a comparable 13-week basis. outperforming other home furnishings businesses by a wide margin as the most prolific product transformation and platform expansion in the history of our industry continues to unfold. Our industry-leading growth in the quarter was driven by the RH brand, where fourth quarter demand increased 21%, demonstrating the disruptive nature of our product transformation. While demand softened in mid-December after mortgage rates spiked and mortgage applications fell 22%, post the Fed signaling rates would remain largely unchanged this year, the RH brand demand stabilized at up 19% in January. While we expect a higher risk business environment this year due to the uncertainty caused by tariffs, market volatility, and inflation risk, we believe it's important to separate the signal from the noise. The fact is, we've been operating in the worst housing market in almost 50 years. For context, In 1978, there were 4.09 million existing homes sold when the U.S. had a population of 223 million. Contrast that to 2024, where 4.06 million existing homes sold with a population of 341 million, and it illuminates just how depressed the housing market has been this past year. Despite that fact, we are performing at a level most would expect in a robust housing market. We believe it's a result of investing with a very narrow focus and a long-term view, or what we like to call an inch wide and a mile deep. Elevating and expanding our platform by creating the most desired products presented in the most inspiring spaces in the world, with bespoke interior design services and beautiful restaurants that generate energy, engagement, and tremendous awareness of the RH brand, while also serving as a profitable customer acquisition vehicle. our intentions and attention to detail in everything we do and in every house we turn into a home. While we ended the year with meaningful debt, mostly due to our stock repurchases of $2.2 billion, we also ended the year with incredible business momentum and meaningful assets. These assets include real estate that we believe has an estimated equity value of approximately $500 million. which we plan to monetize opportunistically as market conditions warrant, and excess inventory of $200 million to $300 million at cost that we plan to turn into cash as we optimize our assortments post our product transformation. Inclusive of our plans for significant and growing cash flow from operations, we remain confident in our ability to make the necessary investments to continue our industry-leading growth while paying down debt and lowering interest expense. Now let's shift to our outlook. Based on our current plan and the uncertain macroeconomic environment, we are providing the following financial outlook for the full year and first quarter. For the fiscal year 2025, we're forecasting revenue growth of 10% to 13%, adjusted operating margin of 14% to 15%, adjusted EBITDA margin of 20% to 21%. In the first quarter, we're forecasting revenue growth of 12.5 to 13.5%, adjusted operating margin of 6.5 to 7%, adjusted EBITDA margin of 12.5 to 13%. The above outlook includes a negative 160 to 200 basis points of operating margin impact from investments and startup costs to support our international expansion. Every act of creation is first an act of disruption, Pablo Picasso. We have worked hard to destroy the former version of ourselves. We're in the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand. We believe the important investments we are making during this depressed housing cycle are creating a level of strategic separation in our industry that rivals the most important brands in the world. Our product transformation plans for 2025 include The introduction of our new RH Outdoor Sourcebook, featuring the most dominant assortment of high quality outdoor furniture in the world, arrived in homes early February with eight new furniture collections, an exciting new textiles offering, plus a significantly improved in stock position to start the season versus a year ago. The introduction of our new RH Interior Sourcebook arrived in homes mid-February through early March, featuring 42 new collections across furniture, upholstery, lighting, rugs, and textiles, as well as an additional 15 new collections launched on RH.com. While we had planned a higher amount of new collections for this book, due to the rapidly changing economic outlook, we believed it was prudent to delay some of our introductions until later this year. The launch of a significant new brand extension in the fall of 2025 that we believe will meaningfully expand the market size and share of the RH brand. This new brand extension will include a new source book, a significant website presence, and two freestanding galleries dedicated to the new concept. Our plan includes integrating RH Couture Poultry by Dimitri & Co. and RH Bespoke Furniture by Joseph Jupe into this new brand extension. enabling greater exposure and market reach versus standalone concepts. We will be sharing more details of the exciting new venture during our first quarter earnings call. As communicated last quarter, we do not expect a negative impact to results related to previously announced increased tariffs on products from China, Canada, or Mexico. As it relates to reciprocal and other tariffs that will be announced and have been announced today, As we've done with prior tariffs, we'll be working with our manufacturing partners to mitigate the impact to both our margins and cost to our customers. We believe it is also important to note that we have been manufacturing upholstered furniture in our own North Carolina factory for over 10 years and have recently expanded the facility, doubling our capacity. We are currently projecting that 48% of our upholstered furniture will be produced in the U.S. 21% of our upholstered furniture will be produced in Italy, and 14% of our total business will be produced in the US at the end of this year. Now let me shift your attention to the 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 portions. 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 senses and spaces that cannot be replicated online. Our plan to expand the Yaris brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity. Our platform expansion plans for 2025 include the opening of seven design galleries, two outdoor galleries, plus two new concept galleries. The seven new design galleries are RH Oklahoma City, the Gallery at the Oak, and RH Montreal, the Gallery at the Royalmont, both opening in the first half of this year. RH Paris, the Gallery on the Champs-Élysées, RH Detroit, the Gallery in Birmingham, R.H. Van Hassett, the gallery at the Americana, R.H. San Diego, the gallery at University Town Center, and R.H. Palm Desert, the gallery on El Paseo, are all opening in the second half of this year. Additionally, we plan to expand our brand presence in Greenwich, Connecticut, by developing a multi-building R.H. design ecosystem, inclusive of the existing R.H. gallery at the Historic Post Office, a freestanding R.H. outdoor gallery that opened last month, plus a new concept gallery in the former Ralph Lauren building on Greenwich Avenue, opening in the second half of this year. We also plan to expand our brand presence in East Hampton this summer by opening a freestanding RH outdoor gallery and are exploring plans to further enhance our design ecosystem with a new concept gallery in the near future. As previously communicated, we anticipate an inflection of our business in Europe as we begin to open the important branded building markets of Paris in 2025, plus London and Milan in 2026, all with dramatic and brand building hospitality experiences. We believe post each opening, we will begin to have the scale to support the necessary advertising investments to accelerate our growth in Europe. Every moment has a lunatic fringe. Quite appropriate for today. Theodore Roosevelt, America's first Nobel Prize winner, commander of the legendary Rough Riders, Medal of Honor recipient, promoter of the conservative movement, leader of the progressive movement, noted for his exuberant personality and ranked by scholars as one of our greatest presidents. Theodore Teddy Roosevelt proclaimed in his famous speech as if the born It is not the critic who counts, not the man or woman who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man or woman who is actually in the arena, whose face is marked by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming. But he or she who actually strives to do the deed, who knows the great enthusiasms, the great devotions, who spends himself in a worthy cause, who at his best knows in the end the triumph of high achievement, and who at his worst, if he fails, at least fails while daring greatly. So his place shall never be with those cold, intimate souls who know neither victory nor defeat. While our ambitions are not political, maybe they should be, they are personal. We remain inspired by the progressive thinkers, unafraid to push forward new ideas and fresh perspectives. It's a culture of leadership versus followership, innovation versus duplication, enlightenment versus ego. It's believing none of us are smarter than all of us, that we need all the brains in the game and the egos out of the room. It's about thinking it till it hurts. until we can see what others can't see so we can do what others can't do. That's how you transform a money-losing restoration hardware store in Aventura Mall in Miami that did $2 million in annual sales into an RH gallery that does $44 million in the exact same space with the exact same square footage. It's also how we'll transform that $44 million legacy gallery into a $100 million-plus RH design compound a yet-to-be-unfailed multi-building design resort of sorts in the parking lot of the same shopping center. 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 Occidental laundry detergent on the cover of its catalog into the leading luxury home brand in the world. The lessons and learnings, the 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 and organizations. Lessons that can't be learned in a classroom or by managing a business, lessons that must be earned by building one. Are we part of the lunatic fringe? If it means, as President Roosevelt said in his speech at the Soborn, that our place shall never be with those cold and timid souls who know neither victory nor defeat, then put us in that arena. Onward, Team RH. Carpe diem. Operator, I'll now open the call to questions.