Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the our eight fourth quarter and fiscal year 2019 earnings Conference call.
As time, all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question. Please press star one on your telephone please be advised that today's conference is being reported if you acquire any further assistance. Please press star Zero I would now like they had the conference over to your speaker today, Allison Malkin Investor Relations. Thank you. Please go ahead.
Thank you good afternoon, everyone. Thank you for joining us for fourth quarter and fiscal year 2019, QNX Conference call. Joining me today, I guarantee Friedman, Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you up on legal disclaimer that we will make certain.
Payments today that are forward looking within the meaning of the federal securities laws, including statements about the outlook for business and other matters reference in our press release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results could differ materially.
Please refer to current FCC 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 opinions only as of the date of this call and we undertake no obligation to revise or publicly release.
The result was any me there's into these forward looking statements in light of new information or Keytruda that Oh.
Also during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain item you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP 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 <unk>, our dot our inc. dotcom with that I'll turn the call liver could be operator could begin our key money session operator, we're ready for questions.
Hi, Good question. Please press star one and please limit yourself to one question and one follow up and then re queue for further questions. The first question is from like a lift or have you B.S. Please go ahead. Your line is open.
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But do you need to go up my question.
[laughter] pardon.
If you look at.
Low to mid 40% run rate decline that you experienced a.
Stores.
You see separately.
Oh, we run rate.
<unk>.
That's great. So it's good to kind of model, but the business as long as both towards Oh.
Given the.
Dynamic how should we think about the possibility of the business [laughter] run rate.
Q.
Sure Michael I first let's just say.
Yeah, I think we're way too early to you I comment on any realistic run rate.
I think we've we've had a what do we have been closed for 11 days now.
Got 11 days, so I wouldn't.
Necessarily commit to anything where you know we're in such a time Oh change and uncertainty I. You know you. If this is this is a time where things are changing you know not weekly not daily, but changing hourly a if you just step back and thing for a second you know the president of the United States.
On Friday, I believe that that the country will reopen on the 12.
The President United States on Sunday.
The other countries now going to be closed through the end of April.
You know that there's so many things changing right now yeah. The important thing is the pay attention.
What's changing a you know the important thing I think right now it's quite the noise.
You know, it's not a time to rush, it's not about the amount of decisions.
You make its about the quality of the decision to make yeah and yeah. We believe it the time to do lessons think sports. So we can do more and you know and yeah I know.
I try to motor up and see the whole board Yeah, if you will from it.
Yes point of view and.
I try to take the most recent data and information that's available in.
Hi, it's trying to establish patterns and try to look ahead, but.
Two weeks ago.
Yeah, a little over we see a nobody knew every store in the country was gonna be close.
Hi, I you know so.
Hey, you know this into the unimaginable I'm to be leading a business to be leading the company and Ah.
Yeah, we're not going to kind of rush to try to.
Bigger everything out I don't think you can I think you you've gotta kinda.
Oh look you know look at kind of the big picture and make.
The right you know the right big decisions write down and you know everything that we we put in our press release everything we wrote the letter.
What we can see in what we know today.
Hi, beyond that or is it would you would uh huh.
Yeah, just beyond wives, the comment beyond any anything that we've already said.
Okay, and nobody did mentioned you're pointing to.
The pay down to $300 million.
This summer.
[laughter] for what the burn rate or the cap rate of the business like we can get it.
Have a better understanding the book would be a business, especially as the stores were closed and increasing suppression. Thank you very much.
Yeah, again, I I think we're not going to comment beyond what we would commented in the letter we yeah, we feel confident.
Yeah. It's a you know into you know just based on what we know today and what we see and yeah, we were taking the appropriate actions and.
Hi, yes, deferring capital and reducing costs.
And we were a position we're confident to say that that we can pay down to $300 million of convertible notes in cash just this week, we plan to before so nothing different there.
Okay. Thank you very much.
Okay.
Thank you.
Your next question comes from it's even a fourth of Guggenheim Securities. Please go ahead, Sir your line is open.
Good afternoon.
I wanted.
Hey.
Just thinking about times now right. So I sort of one of the focus on the efforts of the design team a broadly right now that the stores are close together you can I don't know if you could expand on how they're interacting with your customer base. Today, you know what successes you've seen on the back of those efforts, whether you think those efforts and help.
Some of the stress.
On the business more recently.
Sure sure.
First I'd say that the amount of innovation, a that's being generated.
By our people across you know every every part of our company. It's been extraordinary I you know over these past couple of weeks and.
Yeah, We're we're doing daily conference calls a including the weekends I don't know Jack would we have it eight or nine our conference call with leaders across the country yesterday and Saturday.
And yet you know this is in its is such an important time to kind of listen learn and then lead or you know because we'd like to say it's companies at the smartest people are those that are closest to the customer and those of us who've gotten farther and farther away from the customer generally get dumber in dumber and that makes me the done this guy and the company. So the only way to lead people through.
Anytime its the first listen a then learn and then lead and and I'm just I guess, so impressed by the amount of innovation this happening across our country, where we're re imagining our age I lived in a moment.
And you know, particularly from a you know from like a gallery Yep point of view, you know not having a physical location and trying to imagine how do you work with people I, you know and how do you continue right.
Not only continue how do you just reimagine how you how you interact with customers that you do interior design and and and so and so forth how do we how do we market to our customers. What you know what should we be marketing now what are the you know what are the <unk> what is the most valuable.
Yeah, 'cause because everybody's bombarded with communication just start right. There that you know the amount of news people are consuming today, you know the amount of information just trying to stay up and step to date.
And just yes stay safe is basically overwhelming and so you know communicating in a typical way is is a you know we believe fruitless hi, So we try to imagine reimagine, how we're communicating how we're working with consumers.
Yeah. If you go to our website you can get a sense for you know what we're doing a the whole front of the website starts with a a letter for me addressing yeah. The current situation led lighting, everybody know or galleries are closed and let everyone know.
You know that or you know, what we say you know our door. It may be close, but our hearts and minds are open or design teams here to help in anyway. We can set of virtual appointments using face time hang up Skype do you know or call you know like we were lives.
You know innovating.
Improvising adapting and overcoming hi, ER and I you know the the demand that our teams are generating during this time, but yet.
Yeah, I think it's extraordinary and.
And you know we're learning we're learning hourly and daily so.
Right.
Hey, you know this is you know if you if you look back in and think about.
You know that the really big important moves a lot. This this company in this brand has made in its history.
They were the most important moves we made a you know the them the biggest transformational.
Ah Hey, you know steps, we've taken I had been in the times are the most in certainty and Anna and I and I believe as I articulated in the letter this will be no different so yes, I think Winston Churchill said, yeah never let a good crisis go to waste and Uh huh.
It for our culture. This is probably what when we're at our best.
So.
I think you're gonna do see yep, and Oh evolving changing or you know effort in an upward spiral and how we just run our business that are that is that it's not just.
Yeah, it's that that's not going to just define the short term and this period I, but is that they're gonna be different ways to kind of a kind of leader business and then run our business. You know forever. You know I think I didn't know different then then this virus is going to forever change this country in the world.
AH Yes. This time is going to forever change.
Our company and our way of doing business and in many ways you know elevate yeah elevate our culture. So.
Yeah. So yeah, I think it's one of our great strengths is.
Hi, Yeah, we really do have the largest interior design firm in North America today, you know residential interior design firm.
And you know having that is that it truth strategic differentiator in strength.
And we also have a large you know b to B business in our contract and trade side of our business or that you know that that are both you know you know both have similar attributes of being you can can operate in a b to b into it you know it direct way with the customer.
And yet we're leveraging all our assets and all are lot knowledge, right now and and or you know in learning daily So.
Ah, yes, indeed, it was what I tell the team said.
Hi.
Look right now it's just the headlights, yeah, it's good to get worse before it gets better but make no mistake it will get better.
So you know how much worse it gets a yeah, we're all doing or is it coming up their own assumptions and.
Modeling all the different possibilities and downside a you know I think the greatest risk for our industry is if.
You know if governments.
I decide to.
I kinda I'd like it did describe Ah, yes, if they if they do it if they change the essential business.
Descriptions on yeah, warehousing transportation transportation or you know in surface aspects.
Are you know deal with the supply chain and logistics I think as long as we can run the direct side of our business.
We're very confident I think for everybody in our industry if that gets redefined if if Ah you know how governments I'd describe a business functions that today. They are defined is essential if that changes and everybody's site warehouses change and you have transportation.
And delivery.
Changes if everything stops you've got an entirely new ball game and yes of course, yeah. If you're smart you have to model all of that and and understand what does that look like but.
That that also has implications on.
Yeah, the the entire the entire.
System of the United States right. Like every report would have to shut down you know the movement of containers would have to shut down.
You know every distribution center in the World would backup or you know every quarter would become yep Yep on operable, you know and yes, the shipping industry worldwide would shut down right. So yeah you know.
You know that that to me, it's the greatest risk.
Any of us in this industry face because I think almost everybody today have some sort of online business and some some way to interface with with customers. So yeah. We on the other hand of had a you know a direct business that at one point was 50% of our business in it you know it's come down some as we open the speaker galleries this week.
Back did I, but yeah, but work, we're very capable direct to customer business not only through our website, but through our contract and trade business and a you know hospitality a you know business himself. So far so ER and what's your hospitality mean, hospitality contractedness, not not or hospitality food and beverage business.
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Yeah. So yeah. It's it it this current moment and again you have things can change all the time, yeah, We're I've never I've never.
Ben Yeah. Yeah, then in a leadership position and then look I've been doing what I've been doing quite quite a long time I'm.
Yeah, Yeah, not not a young guy anymore.
But I I've never seen at a time, where things are changing this rapidly.
From day to day moment to moment a in so I think the important thing for everybody is I pray for peace plan for war.
Try to try to see the whole board you know be patient don't move until you see it.
Yeah, you know there I think there's there's more risk in this environment by rushing to make decisions and making the wrong.
Decisions for the short terms that are like that that it can be devastating you know from a strategic point of view. So you know this this will get worse, but it will get better a in the key is you know how do you navigate through yeah. This this period, a and and we have data right. We've we've seen.
The curves in China, or we're not so sure you know how good the date and try and isn't it looks very different in China, you see videos of people getting off buses in planes and been sprayed down like cattle right. Yeah, like so that that's probably not going to happen in our country. You know said the curves maybe.
<unk> different but yeah, but even in countries like Italy, and Spain, and you know where they've had really bad break that you can see the curb start to flatten you can see things starting to change.
All right and you can you you. This is temporal you know it yeah. The question is is it a month is it too much is it three months or you know is it possibly longer than three months does it you know does it go through mid summer, but at some point here changes. The question is how do you know how do you optimize your business through this time.
And how do you position yourself you know you know how do you have navigate to survive. During this time and how do you position yourself to thrive on the other side of this and you know that that's what we're thinking about.
And then and Gary just a quick follow up on that right sort of thinking about getting ahead.
I guess do you envision any potential future supply chain disruption right given the global reach or the virus or what do you sort of doing you know to get ahead of Ah.
Whether it's more back orders were just disruption in the global supply chain.
Sure sure. So you know that.
You mean, the you know the biggest piece of the disruption is already happened you know on our end of the business and that really dealt with China, and you know and Asia. The broader yeah business that we sourced out of Asia, a and that is it's pretty much back to normal you know potentially hundred percent <unk>, Yeah, hi, 100% back.
Yeah, and so I did the challenge the challenge because once and then then if you look at it more globally.
Yeah, we've got a pretty big business coming out of Italy, where the biggest importer battalion bedding in the world. Yeah, We've got some yep furniture and upholstery coming out of Italy, We've got a a you know and so we'll have some disruption there that's not a big percentage of our business. A you know the betting side of the business, where we've got relatively good back stock Yeah, you know situations and so we.
You know, we don't think that will be yeah massively material you know as long as you know the curve flattens in Italy, and Oh, you know in India things come back in the next several months.
No, but most of our you know and then and then really you know what's going to happen in the U.S., we still have a relatively good portion of our business, especially if it deals with upholstery and special order business you know happening in the U.S.
I'm coming out of Mexico.
But but I think the the biggest challenge is is behind US you know the age of challenge you know that the virus, it's been relatively well controlled data Vietnam or you know we're you know all all of our you know all abrasion factories or are back to 100%. So the key becomes.
How do you you know you think about our you know our manufacturing platform is it is it true strategic advantage for our company right I've always said that furniture. This quality has never been made in these quantities before so you know weve built in partnership with you know with all of our.
Key key partners Yep Yep built the manufacturing or you know platform and in the key is how do you or not.
The virus, yeah create Ah, yes, any you know.
Permanent damage and and I think it again it it it's working in partnership it's no different than.
You know then then in the real estate World right like you know, there's some people sending letters out there that are saying you announcing their pain no rent.
Well you know how did you like it'd be a landlord on the other side of that letter you know when the letter hits the public press and you you know you just make a declaration you're paying no rent.
That's not really a partnership.
Right.
You know just going out and canceling orders.
You know is does not how you build partnerships you know it. This is not how you solve problems or and and you know the great companies are are built on great partnerships. A in there you know and there and that the business is built in a very integrated way and so you know from the supply chain point of view.
The key for US is to recognize we have a problem.
You know there's business dislocation that demand is down or you know it may stay down throughout the year in and most likely at this point you know we believe it will will stay down to 40% no. Yeah. We'll stores reopened you know in the next month to month three months, yes, Yep is it.
Is it one month or is it three months, that's I know do they come up in staggered order are most likely a you know so I said you know what this scenario looks like and then is it down after it's down 40 to 45 for a while you know is it down 25 for a few months then is it down 20, then is it down 15.
In and you know you get back to down 10 by the end of year I think some of that depends on how promotional people decide to get didnt, yeah. It sounds so forth, but the key becomes back to the supply chain and enter partnerships is there a product that is being manufactured today. There is product that's been manufactured over the.
Last several weeks you know this being finished at today, a there's product this on the water today.
How do we handled that product in partnership.
A you know how do we share the pain in partnership you know how do we not yet try to you know create another enemy.
You know that they were already happened and you know and invisible enemy the virus.
We don't need to create more enemies today, we need to build better partnerships or and and greater relationships because because that's where the opportunity is it's going to is going to exist on the on the other side of this when when things do a return to normal.
And so it doesn't matter if it's the supply chain it doesn't matter if it's it fits the real estate partnerships. We have if it's the you know, but yeah. The manufacturing partnerships. We have the design partnerships. We have yeah. A you know the partnerships, we have inside and outside the company today.
It's you know, it's a time for people to come together and work together to solve problems and and imagine new ways of doing business not only through the short time. This is that the opportunity becomes re imagining new and better ways of running running our businesses together, yes forever.
And so you know, it's it's kind of disheartening honestly you know when when I see you know some of the behavior. That's happening you know you know sounded <unk> that people are making proclamations about you know not paying rent or canceling orders or yep, great. Good for you.
No those those are.
You know those are not that's not a strategic way to navigate a business in a time like this.
No you know that only partnerships will overcome the problems.
Thank you Gary.
Your next question comes from Curtis Nagle of Bank of America. Please go ahead. Your line is open.
Curtis Nagle your line is open.
Hi, Curtis you guys, Hey, Gary, Yes, sorry, sorry about strike a in a small apartment on a mutual no no worries [laughter] trying to keep the is even worse, but anyway. Thanks for taking the question first or just a quick one for Jack what there.
Current revolver availability is she gets around 600, but that may not be the case and then Oh for you Gary or maybe getting a little <unk> head of myself your book.
Oh, you know kind of thinking.
You know about when the dust clears things normalize.
All the macro environment hopefully gets better.
You know.
Thank you, but I guess kind of competitively are you guys are already pretty decent capital position.
I would you say I guess your most direct competitors or positioned in terms of liquidity and and a you know.
Capital structure that kind of thing and you know when things do get better do you think there could be an opportunity for.
Maybe more market share gains or you know is it just you know maybe that's not the appropriate thing to think about right now.
I sure well, let me take that question I'll to help Bob I give it back to Jack I give whatever to Jack to do we have just a question about yeah that that credit facility and availability.
Look I I, you know I've been through a significant downturn you know we went through the the great Depression, and I think our operating margin going into the great Depression was.
7% or something like that yeah, 5% to 7% and you know I know how difficult that was to survive yeah. We're.
Yeah, We just reported operating margins of 14.3%.
We had talked about on the last call in the last press release of having at least 200 basis points of operating margin expansion opportunity in 2020 right prior to this virus.
So if you just do the simple math, if we if we guided yeah. If we just reported 14 three and we said we had at least 200 basis points of margin expansion you get to 16, three if you get the least you know if you. If you say hey, there was more than that you know you could take it more optimistic view and say Hey, This company.
Before this happen probably had it you know operating margin in that.
<unk>.
Higher teens, if you will you know somewhere somewhere above 16, three you know because we obviously wouldn't have given you.
Kind of 200 basis points at least unless we had more than that so so I look at it this way I say you know.
I'm going into it the difficult time like this.
Yeah. This team has navigated a really difficult times with.
Operating margins and seven.
Yeah, what does it look like with operating margins at 17 <unk>.
It looks like heck of a lot better.
And Ah Ah and it what what it does is it it clearly opens up the aperture of potential opportunities you know the key is is again how do you.
Navigate the short term.
But you know they stay short term.
Right. So you can set up yeah, the rights strategic view and the strategic moves that you know that you know can't happen you know how do you.
You know put yourself in a position to see the opportunities that are going to.
Kind of unveiled themselves in times like this.
And so you know that the market share gains for us long term.
Are gonna be massive.
Yeah, if if if you think about the fact that were for the most part yeah most of our key a.
Manufacturing partnerships were.
I don't know one averaged 50% to 80% of their business and called their other 50% to yeah 20 to 20% to 50% is.
It's probably mostly.
Individual stores mom and Pops smart smaller regional players that that don't have Ah Ah you know don't have our operating model don't have or are you know our our distribution platform I don't have arc.
Capital structure I don't have all the resources if a company like this.
And so you know the opportunities for us to become bigger and more important to be yeah.
It just more integrated with all of our key partners everywhere. You know same thing it's not it's no different than a real estate point of view like what you know what the opportunities are we you know.
I think it probably three to five years ago. When we started building these big galleries everybody thought.
Yeah, those will never make money you know if you read.
You know 80% of the analyst reports the that are being written three to five years ago. You know how are they going to possibly be <unk> build money. You know a you know friedman's building mansions for is he going to all kinds of crazy stuff written yeah, and now I think people realize that Ah Ah you note that the they weren't trying to build.
Mansions it wasn't about magic there was nothing about you know gut instincts. It you know, it's all about map and it was all about logic and and so you know we we have.
Yeah, probably arguably one of the most exciting hi, yeah.
Okay retail experiences and and one of the most productive and profitable yeah, physical and you know physical environment in in our industry today.
And so you know.
There was this dislocation, they're just going up for a period of time, there's going be a lot less players. There is gonna be a lot of people that are you know that are handicapped are on crutches and you know financially and and there's gonna be I think even more opportunity for our age to become more important with the most important part.
Nurse, there's gonna be yep more opportunities present themselves or you know, but through the the dislocation that we don't know exactly yeah, what what's the longer term impact too you know to the economy are we gonna be in a recession that.
You know that yeah downtown are down 20, you know is they gonna be greater than that.
Yeah, but.
But a you know there's gonna be all kinds of opportunities are and you know the key is just kind of don't do anything right now like we said like look just don't do anything inter company to make things worse, let's not rush and accidently you know like.
Kind of screw anything up or heard anything right now.
It's it's it you know it's a time for deep thinking it's a time for you know real objectivity at that time for listening and learning a in seen the bigger moves right seen what others can't see so we can do what others can't do.
And that's why you know honestly right now we haven't.
Taking markdowns at all we're not promotional at all in 2008 in 2009.
Yeah with 7% operating margin just like we had a pull levers immediately.
We're not pulling any levers today, we think we are.
Uniquely position a we think we have a brand or you know that is that is you know in many ways doesn't have a real appear in the industry. We don't mean that in arrogant way. We you know we think if you just stand back and take a look at what you know what we do and how we do it you know the.
We have in how we present it there's not anybody really like US we think we've got incredible physical environments that when people by the way like I didn't know what is the potential slingshot effect here when people who are cooped up I don't know how you guys feel like I mean today I'm in our office with Jack and Dave a you know restaurant teams on it.
On a you know calling in <unk> and the Jack and Dave and I are all about 15 feet. Apart a you know we haven't sprayed each other with lysol, yet, but [laughter], but but yeah. We've been so cooped up you know at it yeah and and people are going to want to get out you know people are going to are gonna be dying to get out spring.
He is coming the whether it's gonna be nicer, hopefully the virus subsides and speed people are going to want to get out.
What kinda physical environment do you think is gonna do better when people want to get out you know I think I think one that's got magnificent architecture. That's got rooftop parks. That's got integrated hospitality you know that's got you know that's that's you know inspiring a you know from a but you know from in the you know interior.
<unk> design point of view I, you know I I, just think I think you know what what's just happened everybody's forced to spend so much time at home.
Like if you spend as much time at home as I've been spending.
The last couple of weeks you start looking around at going like Oh, My God. There's so many things that I wish were different about my house Oh, My God I can't believe like I need to update myself is rag need to update these pillows or God my window treatments. The you know, it's probably time for a refreshed and and by the way I think the home because of you know what is transferred.
I heard here because of this virus.
It's going to become even more important.
And the way people live at home and and having an inspiring place to live at home. So you know whether whether it's something like this it happens or just the fact that yeah. Like I also think about things like how many vacations are being canceled right now how many people are really going to travel to Europe, or Hawaii or wherever.
They were going to go South America, yet Africa, Yeah, how many people are gonna be traveling this summer I think a fraction of I've been number of people that travel you know last summer you know I know just personally you know weight yet I mean, our plans are all changing.
But how many people are gonna be inspired to kind of reimagine their home and create you know a permanent kind of.
Kind of escape you know and a re imagined home. That's you know that that feels more like an environment that you would go to a when you're on vacation you know how many people are going to and by the way that's what I think our galleries feel like our or galleries feel like a vacation from real life and you know said it you know so many opportunities a you know.
And things that I think that set up an opportunity for us to.
Think about our H. Reimagine you know what are all the different things. We can do what are all the advantages. We have today you know how would we swing. The pendulum you know so far to the other side too you know not see incremental change, but to see true leap frog moves.
Because we're in a position to do that we're in a position to invest where in a position to you know to partner in ways that nobody else can yeah. We we you know we're passionate about doing great work.
And and I think.
At times like these get people too.
Kind of focus more and think about whats really important and I think.
You can't escape the your home.
He is really important that the relationships you have with your family. You know are really important you know your friendships are really important.
But I, you know and and where you're going to spend your time over the course of the next year to too you know well. This virus is still probably somewhat alive in this world.
You know probably spent a hell of a lot more time.
And your primary residence second home somebody else's home.
But and Ah you know I think that that all creates.
Potential tailwind for us.
But but short term yeah, we've got to get through the here and now you know and you know we've got to make sure. We as everybody else do everybody else does yeah, we have to live to fight another day and we have to make a lot of tough short term decision and and make those decisions in the context about.
You're teaching view of the future you know and not screw anything up here you know by moving in haste, you know and yeah being driven by fear. So yeah. We you know we say the facts removed. The fear you know what do we know what are the facts, what's the data how do we think about it how do you know how do we now do we recognize right patterns are and how do we.
Yes set up but you know <unk> you know set up the.
The next 20 moves or you know if you like playing chess if you ever seen that the movie searching for Bobby Fischer. If you haven't world locked down right now at home you know I encourage everybody to watch that moves about a young young boys, who plays chess you know named Josh and is trained by a street player in it and it you know in Russian Master.
You know when it gets to the you know the pointed we use it as kind of a leadership training movie in our company a you know and the final game. If you can you can actually just Google and pull up but you know the you too but of the final game searching for Bobby Fischer you know, it's all about don't move until you see it.
Right I don't see the whole board don't move until you see it and see the big moves and and if we see does and we make those moves correctly are you know.
I think we're going to redefine ourselves in a way that's it's exponentially greater than we did no wait no nine a you know that's exponentially greater than when we redefined ourselves and.
Hi, 516, and 17, you know when when we decided to pull the car in the pits. After you know after our arc Rocky start with RH modern and we decided to move from a promotional model to a membership model that allowed us to re architect the entire operating platform of the business a you know and elevate the brand in a you know what I think the.
Global opportunities when it happened it in an opt in an environment like this are incredible incredible.
And so yes, that's a lot you know it's like but yeah. We're we're where we don't have a really great script here right now so I'm just like things are kind of evolving we're giving you our lives lifetime evolving thoughts I'll turn it over to Jack Hey, Curtis said as far as a revolver availability.
So the $600 million is the full line size, but but as a reminder, it is an asset based loan so it depends how much inventory and other collateral we have and in the 10-K that will be filed momentarily you will see that we ended the year with $322 million available and then as we sit today.
It's a it's $308 million available.
Got it thanks very much guys appreciate it.
Yes.
Comes from.
Please go ahead your line is open.
Thanks, and good afternoon everybody.
He's done a really good job streamlining your cost structure on which Im sure you really happy about now just wondering if you guys could dive a little bit deeper into the components of I'll be your cost structure, both cluster gets old yesterday.
You know gets a little bit maybe a little bit of telling how much of those costs are fixed versus variable. What you think you can flex down would you pay your continue to pay your employees. If you know the stores are gonna be closed for.
Beyond the April Thirtyth deadline, and I'm, just any color about something would be helpful.
Yeah, that's not too much detail outside of what what's communicated in our you know financial filings I you know if you think about us being.
Being shut down what while our stores are shut down we have a you know they make.
Good.
A relatively high percentage of our people that are engaged in working because of our interior design business and because of the direct nature of a lot of art transaction. So you know we're connected we're reaching out a you know we're operating or you know what will we have to you know if things remain calm.
Close them stake.
Yeah and stay as his occur environment or we have to you know kind of a.
Redesign you know our cost structure of course, we do a is it is a significant is.
Other industries and other businesses I I don't believe so I just saw the you know the news about Macy's today, and I know businesses that yes that really rely on traffic much more than we do.
You know remember we have a lot of a lot of galleries that or are you know there very unusual places you know start with Chicago, It's it's fixed blocks for many other retail store you know it's in a residential neighborhood. It's in the gold coast. We had to you know they get the city to read zone, the entire neighborhood for one day.
Okay and approved by Us and zone. It back so there wouldn't be another retailer getting up because we said you know we don't build retail stores, a you know we build inspiring spaces and.
And so are you know our business is much more destination I think that plays in our favor or you know, it's not that that that walk in traffic is not important of course. It is like people you know how I want to enter inner interact with the goods they want to feel the environment than being space.
By the space and then there's people that are just visiting that that are coming in for for a bite Eaton coming into our restaurant and and all the sudden there in this inspiring space that makes them reimagine their home and yet and and connects with them. So I.
So so look I you know there's I've had people ask me you know so is this an opportunity to kind of.
Become a real direct business and start digital advertising and be like Amazon is that no not at all you know you want to really should you have changed the cost structure. The business start you know start wasting a lot of money on digital advertising you know that's that's a you know there's nothing [laughter], there's no advantage to having that is the.
Base of your cost structure and Ah you know so we.
We are short term.
There's there's gonna be.
There's gonna be dislocation, but but we also are gonna have a lot of people working a and it through a lot of parts of our company. So you know your we're not going to that could be like Macy's or somebody's. Other places where you know the vast majority of the people are furloughed, yeah. We're gonna have to make intelligent decisions that's why the way.
Why we've waited you know it's another one of those decisions of don't move until you see it a you know extending the length of time.
You know that we're you know pain or people, you know and extending full benefits or it is one it's good for them.
It allows them to get to understand.
If if if are you know, possibly there are there are some furloughs here what does that mean, you know did it's a unit to them, we're very open and tranche. The you know transparent there are people right now.
You know the the it's it's good for US, we're getting organized and smarter, we're getting information about.
You know all this stimulus or you know support you know for businesses and for people. During these times and Oh, Yeah. We'd want to think is trying to get more data you know it's a so yeah. We think we're going to weather the storm very well.
Yeah, it's clearly going to be very different oh, yeah vastly different in the short term less different in the medium term and more normal in the long term.
But will come out of this a re imagined our age and and I believe Oh, you know a vastly different and significantly better brand and business.
No different than any other time, we've we've faced like this.
Okay, Great and then I guess my focus will be you know there's been some data points out outdoor signaling a weakness on the coast relative stability.
And the other part of the country just curious on what you're seeing across the U.S. and then as a follow up to that you're one New York City now on the books I guess could you speak to any big picture learnings that you have good or bad what you think you can apply to future openings. Thanks.
Yeah, I don't think that there's there's vastly different business dynamics on the coast. Then there is in the Midwest today, that's not what we're seeing a yeah. We were seen relatively similar impact across the country because the biggest impact to the businesses. So you know closure of our.
Our physical location. So you know that that is been a relatively democratic decision and a consistent or impact you know across the country.
So Oh you know look is you know do expect things to get worse in New York for the get better of course are yeah, and then if you go back to look at New York in a bigger picture what didn't learnings after your one.
One of the learnings are.
Yeah, we probably have the opportunity to do more business in markets than less business or you know and as we as we think about.
Yeah, designing physical experiences New York was the first store, we embed. It Didnt you know of a visible interior design team you know interior design business into the physical gallery, you're going to see that happening in all of our new galleries.
You know the hospitality experience on the rooftop, which started I think our first one's Palm Beach right. You know started with Palm Beach was the only place we stop construction for nine months, it's the only place we could figure out where to put a restaurant we were scared.
Net debt to do it because it was on fourth floor and we thought would if nobody goes up there. Yeah. You know New York you know again, you know reinforced that a hospitality experience on the rooftop is economically viable. It's it's a you know more economical to build it that way.
And and that's why you're you're gonna see it because the Palm Beach in New York and you know few the others. We recently opened you're gonna see restaurants on rooftops, we think it's a great experience for consumers to give some beautiful views and beautiful environments to eat you know you know amongst that in a glass box you know looking out in a beautiful rooftop garden.
[music].
And Ah.
You know and and and other other aspects that other things we've we've learned from New York.
But yeah and it gives us a lot of common is thinking about what what we should do internationally and some of the other very important cities. We think about the yeah that the potential in New York Ah Ah you know and the volume we're doing with just.
Yeah, one store in New York, a you know should we have a second store in New York that should we have some kind of a unique environment at the upper east side, and some kind of re imagined you know brownstoner home or you know what what should we do in London in Shanghai, you know in other big Yes cities.
And metropolitans like that yeah. So.
Yeah, and and that you know that the news the new galleries, we have we have calming or you know are all all reflect our you know most recent data and learnings and and you know and a you know and evolve even our yeah. What we call. They say factor we went to start stop calling it a prototype right because a prototype means everything.
Stagnant and doesn't involve and that's just not or culture. So we say innovation is that the core of what we do and we're always trying to reimagine everything we do and make things better all the time and say we're always on finished off and on the move so I'm not going to talk about it that our prototype will talk about it is as our you know the most recent iteration.
Of our design galleries Ah you know they they're oh, yeah. They they.
They're an integration of all of our best thinking and learnings from.
All of our experiences you know good and bad together, we built so far so we think they're going to continue get better and more productive and you know and then we've you know we think about different buzz bespoke experiences you know they they integrate our best learnings just in new and better ways and sometimes set up an opportunity to learn something we have learned before I.
Think when everybody sees what we're going to do in New Jersey, you know, it's it's just incredible if someone's mind blowing yeah, we decided to not take a anchor position you know at this short hills small we decided to <unk> purchase of five and a half acre piece of property you know in in Morristown, New Jersey.
The Township, New Jersey, we've taken a historic home that was on the property were you know, adding kinda two buildings to the property you know the most beautiful exterior gardens that you've ever seen you know a an entrance that you know some somewhat like first I liken yet.
Things that you just never seen that Weve never done that I think it's gonna be the most inspiring destination in the state and New Jersey, if not on the East coast and people will come from everywhere, you know and and why do we have the confidence to do things like that because we keep learning <unk> you know from our successes and we keep learning from our shortfalls.
And you know and we continue to connect the dots than you know in Reimagine, what's possible here, Yeah. I mean, the now what we're doing New Jersey, which I think it's just yeah, it's one of us exciting things.
Hi, anybody's ever seen in our industry you know, it's a combination of what we learned in Chicago, you know of yeah going off the beaten path and going into it you know very high Democrat <unk>, a Democrat I'd add demographic area, a that doesn't necessarily have high traffic, but has a high prestige.
And yeah, integrating businesses and new and unique ways, there's learnings from our John build there as far as gardens, and connecting spaces and integrating hospitality and a unique way. There's you know learnings from Palm Beach, there, where we got incredible gardens and yeah experiences as you pull.
Up and were how you Parker car and how you enter our compound a you know because we said when we did palm Beach that you know that the key we were actually in West Palm Beach, and you know that the joke was that a lot of people from Palm Beach Island don't go to West Palm Beach, and you know, we said well you know all these people kind of fly in and you know and they you know.
Coming from the airport, whether they're you know on their private jet or just went in and then they go to their compound and you know they kind of stand there compound and if they come out of their compound the.
Yes, they might go to you know friends compound or go to it you know a restaurant in Palm Beach, where we said we we have to build the must inspiring compound you know in that whole area and that whole region. So so that got customer feels comfortable leaving their compound and coming to our compound and so it's you know it's complete Walden compound you pull up your car in front of AFFO.
14 foot wallet falling water you know we Valley Park you you know you're in this amazing experience.
And so when when you see what we're doing in New Jersey, It's yeah, it's five and a half acres. It's it's a it's like a beautiful est Andy's unbelievable gardens. A you know so you know what you're going to see coming from US like our best work is ahead of us not behind US you know a lot of people thought like when our operating.
Margins got to 11% everybody said Oh, that's it that's it or you know you know the former you know former leading company you know peaked out at operating margins of 10, five and they've slip backwards and and these guys hit 11, they probably stretched ourselves too far and a you know here we are at 14 three and.
You know you know what I just told you you know if we didn't have a perona virus.
Scare here, we yeah.
We'd be much higher than Sixteenthree ER and you know this you know this company is going to continue to innovate a it's gonna can continue to.
Ah you know reimagine, the future and and and and invent a and ER and we're going to continue to get smarter and and and stronger. So this is it's just the temporal if it is really you know yeah. Its unimaginable time.
No. It's like it's it's it's you know it's it's scary for everyone. Its you know its heartbreaking to know that there's so many people being affected by this virus and you know and people dying from this virus. We've never had anything like this in the United States. You know we live in a country that is you know it's never been invaded in our lifetime.
Right like this is an invasion, it's like a war we've never experienced this we've never experienced walk down we've never went through things like this but.
But it will pass.
And Ah Ah you know it will get worse before it gets better but it will get better so and work.
Yes, we're going to continue to lead our vision and let our values guide us and you know and yeah leverage you know they you know the hearts and minds of all over people and you know ignite the human spirit inside yeah, everything we can't control inside our company and and I think what you're going to see.
In the future from US is is gonna be extraordinary.
Actually the color guys. Good luck.
Yep.
Your next question John.
Please go ahead your line is open.
Hi, Gary really quickly.
Did the RH being down 40% since closing he's done a shipment number or order number could you give clarity. Please that yeah. That's demand yeah. That's demand demand lead ship. So I'm, giving you deal with 11 days since we've been close Jack told they said it today. They 13, so I'd say 13, okay. So orders essentially orders.
Placed brand Yep. Thanks, and then quickly on my follow up you know the commentary around a exploring debt its sort of an opportunity offensive maneuver in a is that really the case or.
Might it be something that just sure up the cash position given I just don't know what the future is.
What was the question.
Well I think I think the letter speaks to it it's about the liquidity is that offensive or defensive Oh extends offensive yeah.
Yeah. So you view as an opportunity to maybe make a real estate deal or do something it's not an effort to shore up liquidity position no no. But you know our liquidity is is fine yeah. It's it's as you've seen us in the past or you know were relatively opportunity.
<unk>.
Great. Thank you for the answers <unk> <unk>.
<unk>.
Yes.
Oliver Chen.
Please go ahead your line is open.
Hey, guys mismatch on for Oliver Thanks for taking your questions. So first can you maybe update us on the size of your direct business at this point.
And what have those trends and the over the past few weeks and then can you remind us where your Dcs are located in the U.S. and then we'll follow up.
Yeah. We you know we really don't report you know our channels separately week, we run the business in an integrated way, we're not too concerned where the customer transacts clearly there's only one you know one place for them to transact. Today. So are you know that's you know that's where it all goes but if he just yeah. If you step back and just did the simple math answer.
Said, where we last quarter 60, 40 somewhere around there right. Yeah, you know as our business was 60 40, you know our yeah, and and yes that you know <unk> San retail, 40%, Yeah, Yeah, Yeah, and you know used to be 50 50. So its you know it's all happening in it you know through that.
Direct channel today kind of you know, but really being facilitated by our retail teams Oh, you know big part of it by a retail team so.
It's kind of irrelevant exactly what's happening you know like in it. So we yeah. We look at the data that we think it's really important that we.
Can impact in effect.
So it where it where it lands where the customer places the order we placed the order for the customer.
Somewhat irrelevant to us right now.
And and has been for quite awhile.
And then as far as or where do you see is located we have our furniture de sees one in Patterson, California.
And another one on the East coast in Baltimore, Maryland, and then we have a small parcel of facility in in Ohio, Yeah, and I'd say you know just look if you stand back and just again pick up the high level view. This in say yeah. There's so many people over the last 10.
15 years that I've spoken about their retail business versus our direct business and you know their direct business is more profitable than retail business or the retail business more profitable direct business and you know if you can get lost and all that noise when they get lost in how they are allocating cost and you know they build silos inside their company.
A lot of people thought like why are you guys. So ambivalent about this why don't you care more other people seem to care. So much more about you. It's just because we see it differently and you know we care about the integrated outcome and I think that's why we have operating margins that are yeah, basically two times, our next closest competitor today.
And growing you know so.
You know if I tell you not important new us yeah. There's.
Probably a reason now and its you know because there isn't a more important way to look at your business.
Got it and then just shoot me out a little bit can you just update us how was the RH ski I'll share our age beach trendy before the slowdown and at this point do you expect to our each caller each will likely be pushed back into 2021.
Yes, yes, yes. So we just said we're going to defer all new business launches its not a time you it's not a time to.
You never in the direct business mail a book into the when you know it's just not a good thing [laughter]. It's then my history I you know it it's the worst time to invest because you have no flexibility email a book a into the wind right now it's all reverse leverage has that you know the.
I would tell you you can't make that significant of a difference and change the consumer behavior. I went there has been a.
Kind of but.
Yes, there's some some kind of action of epic proportions, that's changed consumer behavior, it's just too expensive to change that behavior right now so I guess, so yet we're pushing that back where we're also you know reevaluating all of our AD cost a you know evaluating what if any books, we should be mailing right now.
Now how should we be allocating capital right now how should we be allocated advertising right now you know I and by the way you know I would tell you. This that are you know the data would say that our source books are significantly significantly a better allocation of capital than digital advertising.
What I'd be worried about is if I was just massively disproportional Ah online business today, and I had a rely on digital advertising and I didn't have direct catalogs like that a disaster I you know here we are.
Primarily a retail base business with a very strong direct business. It operates in an integrated way and our and our main just your main channels just stop but I can tell you. This that the you know even with the channel stopped right were.
Yeah close we still are our interface, saying you know from from retail way, Yeah, and that's what I feel very good about yeah. We haven't done anything from a price point of view, we haven't added one promotion we haven't done one promotional email since this all started.
Hi, you know the what we've done differently is try to do things that are you know high quality value add a and brand elevating so I think the emails that we send out the way we quickly kind of redesigned the you know the the the website Ah I and the way, we're operating isn't a very high quality way that.
As you know, it's it's a way to elevate the branding at one of our teammates.
One of our conference calls.
I said I you know we were talking about how we're going to navigate this crisis and yeah. We were talking about you know, possibly you know you know what do we promote would be not promote what do we do and you can't commit to anything right. Now we don't know how bad this is going to get a and you know you you know you can't let inventoried backup too much I mean.
Good thing is we don't sell perishable inventory, we don't have any seasonal inventory none none right. We don't have any Easter. Good. We don't yeah. We don't we don't really have any summer goods or we don't have any color palette. Good you know, we got we get the least amount of of C.
Seasonal risk.
Anybody in our industry right go no go look yeah look through People's catalogs right now go walk retail stores. If you want to think about how to define risk right. Now go go no go peak in the Windows retail stores go look at a you know other People's catalog go into web site and look at how much Easter stuff they have.
Look at how many Easter place they have looked at how many Bonnie candlesticks, they're selling look at you know all the other Tchaikovsky crap, right and and ask yourself.
How well that gonna do now once once the stores reopened and we're past Easter that's his aster right. If you want to want to think about short term risk or one of the you know that that's that's a disaster. So you look at a business like ours or go you know go look at it anybody selling it.
We have perishable goods disaster right now you know selling any kind of fashion goods in in apparel. You know the spring season is a disaster you know how how people even get rid of the goods you know when the storage surplus inventory in the stores. You know are they going to pack up all the stores are they going to.
Box up those goods incentive somewhere else, what you can't send him anywhere else. There's nowhere to sell you know well Ross you know just close stores instead, they're not take you could like there's you know Ross and TJ Maxx, everybody like you do the math going through there was you know that logic train like where to all those goods go.
Yeah, how much your you'd have to sell those four maybe that you want to talk about fire sale. We have no fire sale risk, we have possibly inventory backing up right and figure you inventory backing up and that we will either hold you know in country, you know and wherever there's warehouse space it.
Less expensive I will slow down manufacturing or yeah, we will yeah, holding in our D.C. I and yeah, we will lower our order rates and then our <unk>. Yeah, then we'll adjust inventories and you know if we can navigate through this without having to.
You know do anything to permanently impact you know, our our new model right, which is the best model in our industry by far that's what we're going to do well with to take yeah does it take a hit in the topline, let's say I don't go Chase you know an extra $100 million in revenue.
By promoting the business and and make the longer term decision that I'm not going to get into the game and I'm going to protecting Chegg study the brand. That's T. I mean, one of our team members to tell you said, yes, we're talking about this topic, it's like GE scary I Hope you know we hold our ground you know and and you know don't get back on the crisis.
Back on questions because he says it's really hard to scale the luxury mountain on crutches, that's worth trying to scale. The luxury mountain right. We're trying to position this brand as as one of the most admired brands in the World you know like or maybe you know like fish and now you know what you have like a leave a time you know like the great brands or there is.
No really great brand for the home worldwide you know at a luxury level you know and everything we have to do you know everything we should be doing is focusing on climbing that luxury now you know and not compromising elevating the brand not just expanding the brand it's easy to expand and and then lead times for expansion you have around.
It's very hard to elevate yep, yeah. The people that a top of the luxury mountain. They were born there I you know they they you know you know they look if someone like and no one ever made decline a bit like you're not know once ever started where we work and climate Mountain and Ah you know and by the way. They don't want you to make that climb you're not from the neighborhood you know we didnt grow up.
You know you know, we're not necessarily worthy we don't get invited to their parties. You know what we have to do things that are so extraordinary we have to have such extraordinary parties I want to be at our party, we have to bill such extraordinary stores. They they you know they they they look in dream that one day that their stores could be indices fire and is ours with it you know do do work that is.
Yeah that that creates a forced reconsideration of our brand.
And if so important for us today based on where we're going you know based on becoming one of those handful of truly admired businesses that stand. The test the time that are generational businesses I, yeah. It's not about the short term short term will navigate through this long term strategic.
So even like how each house doing husky hatched doing.
You know be before you know there what they're doing fine, but they're little tests, you know that's not like not a big deal I you know it looks like the last thing on my radar [laughter] outreach assets. Each house are doing I. Yeah. This is are you know those are just new little business categories that yeah that yeah, they tested well.
They were yeah, you know ski house, Oh, we mailed it basically in Q4. So you have to invest all the <unk> advertising costs and the launch costs. You know one time, you can't amortized costs anymore. It's all the cost one into Q4 with very little revenue ski house in Q4.
But most of it is it's going to roll over into Q1 and stuff like that but.
But yeah those those are.
Yeah. Those are small little pieces. The key is what are the big moves right. Now you know how to get navigate through this short term time you know how do you you know how do you not make strategic mistakes. How do you continue to focus on elevating the brand how do you not all the said to jump back on the crutches and try to climb.
In the luxury mountain and crutches, Oh, Hey, how do you.
How do you out thanks, everybody.
And yeah and position ourselves that when we come out of this.
Terrible time, not just economically but socially <unk> you know terrible part one of that no. One of the worst time, you know that that this nation. You know this world has has had a gotta go through outside of probably.
The last World War, I and how do you come out of this in a way that.
Yeah, you're really ready for the brighter days, so yeah and any color courses can be pushed back you know it's like yeah of course I didn't it was a quick back to 21 is pushed back to 24 irrelevant irrelevant to the bigger picture.
Now that it's the big strategic moves right now is the big things that can lead to leapfrog.
Hi that you know that creek strategic separation, you know that render our brand more valuable that's that's all that's important right now.
Your next question.
Awesome.
Securities. Please go ahead your line is open.
Thanks, and good evening.
I know that Big picture is really what we're focused on but we're also thinking about some of the near term options that you had in talking about potentially cutting capex could you give us a sense of how your capex budget. A is formulated for this year what types of things that you could consider cutting for starters.
You look it's.
And though in the last in the last downturn, we cut capex to 2 million, we cut capex or whatever we want it cut it too right now we're stopping everything okay does that mean everything will be stop.
When the when things start to be come back to normal.
Oh, you know, but Ah you know how we stopped everything right now we've stopped everything outside of Ah you know, we're finishing Charlotte right 'cause, where what Theyve got a month away from finishing Charlotte. So you know were month away from finishing Charlotte.
You know our our Ah yes.
Partner in the development Ah you know has as.
Ah guarantee that they're going to continue to find that tenant allowance and and so we're going to keep going you know, but yeah, we're managing the business with a bias for cash right. Now managed this for cashes, we should be we're deferring all capital right now basically all capital I'm trying to think of anything Besides Charlotte we're spending money on you know we stop every.
The thing in the company I, you know, we yeah, well, we keep everything stopped for the whole year I doubt. It I doubt you know like stores are going to be close for the rest of year. Yeah. We work I think our we have capital plan was somewhere around 150 million that Jack somewhere around that.
Original Yeah original plan, we spent some of the first quarter, but yeah, we can.
We can save the vast majority if we wanted to we could probably save 80, 980% to 90% of that yep, yeah, probably 90% of that somewhere around there directionally.
So that gives us a lot of flexibility I you know it yeah. The AD cost we're planning to spend in the first half yeah, we're going to really spend a fraction of the ad cost.
Yes, so yeah, we once we have the all clear and yep and physical stores reopened again.
And we're back running and we see what those trends are like it that's that changes everything.
That changes everything is we think about capital allocation.
Being a position to Ah you know realize opportunities so.
Yeah, its balancing plane.
Short term defense, while youre developing offensive plants.
Right, so, but yeah, yeah. So we've got lots of control.
Like right now everything stop you know except for one store.
Got it alright ill leave it there. Thank you very much they taste.
[laughter].
Your next question is from Peter Benedict of Bard. Please go ahead. Your line is open.
Yeah. Thanks, guys I'll be quick but that's my question has been answer to your but so just following up on that so if you can obviously take your marketing data you can take the Capex way down I'm just curious how do we think about SGN, a if you take out marketing that remaining bucket how much of that is truly variable and then.
We can kind of thinking about how we might be able to manage that other bucket, but just what percentage I guess, the best unite aster marketing is truly variable.
Yeah, we don't disclose that but we yeah.
Yeah, we got a lot of things are variable in times like these so yeah [laughter] somethings are more variable in the short term and it reverses the long term, but in this times like this it's unprecedented and we clearly are prioritized cash yeah. It's a everything yeah Everything's negotiable right now right a everybody's got to think about yeah partnerships and priorities and you know how to go.
Theres this time so.
No okay listen that's fair enough. Thanks, Thanks, so much and good luck.
Thank you thanks Peter.
Your next question.
Barclays. Please go ahead your line is open.
Hi, Good afternoon, Gary I wanted just step back a little bit and talk about your R&D network kind of pre the transformation said before you would invest it started on kind of fixed salary R&D innovation design talent and now that the global net.
Work I want to say, it's a little bit more variable that.
It's sort of globally going around and creating a group of talent that you can take from and sort of you know.
I think slow depending on how you eat that skill set and when you need that skill sets can you talk about that and help us understand exactly what the changes are there. Thank you very much sure sure what we think about us is Ah.
You know just like the Apple App store right or Apple has the best developers in the world developing applications, a you know or in this case, even music rights developing music. The main platform for music main platform for apps today is the Apple platform why they're the best platform right and so when you think about.
Our industry and it yet.
And you think about.
Good that are targeted to.
At the high end luxury market, where the best platform in the world and so I'm, even more so now I think there's gonna be Oh.
Yeah, it's going to tilt our way, they're going to be even more people that want to develop for our platform because we're going to be even more viable we're going to be even more disruptive. We're in it take even more market share I, but what do you think about the cost structure and how that works if it's all amortized into the goods right and so.
Yeah, if people are designing developing ideas for us that we don't like the we don't pick Theres no cost.
Ah you know so it's.
Yeah, it's it's a.
True advantage, we don't really have the biggest design team here, we've got only one or two to <unk> technical designers inside the company that work with our partners on some specifications in quality and engineering, but for the most part.
95% of that development costs it outside our company is amortized in the product.
Yeah, it's either a.
Yes, the either built into the cost of goods from the perspective.
You know artisan manufacturing level design level or or it's yeah. If someone were paying a you know it's the certain royalty designed fee on the goods and so it's all built into the cost of goods. So the flexibility there when you think about it versus other people doing what we do is massively more flexible and and.
You know and truly more powerful right because you know I used to say that you guys do yeah, there's <unk>.
In my career, a you know its most influence it my time at the gap right. So I.
Mickey Drexler transformed the gap from a 300 million dollar business to a $15 billion you know that the leading global apparel company in the world right and and that was yeah. Mick you make a direct one less wexner really where the pioneers and the inventors of vertically integrated retailing as we know it today.
That model was with Super powerful.
And there was a lot to like about that model, what what I've learned not to like about the model and what what gave US. The idea was when we saw you know Apple.
I never someone asked me to stick to go to that that's CST is that what they call you see yes, yes, yes, yes, CES show you know at a friend that within technology should come with me, you'll learn a lot about technology and I live here in the Bay area right. So I've got a lot of friends that are in technology I used to be in white PEO and.
A lot of the key leaders and in that space you know during the last yeah. Yeah last 10, 20 years I've got to know relatively well and I feel good come to Las Vegas come see this and I you know I always have Apple fan from you know.
For a long time, they say well, it's yeah, Oh, great. It's apples gonna be there and I can you could see you know all the new access for listen, it's Steve jobs, and and and they didn't know now you know a you know it you know because they said everybody kind of if they don't break the Apple to Apple doesn't sound recently company that is how many so really what what do they do they said well they they do their own caught conference and you know I started.
Looking at Apple through a different lands and notice that when they launched the the App store you know how all the best developers were developing for Apple.
And then.
Yeah, whoever gets it drags was like Blackberry and.
You know all that all the reps right like the Android platforms and stuff like that the so you know delightful went off for US here and we said look Apple is built the best platform.
Right. They built a flat that's platform and and they their platform creates the most leverage or you know for for all the best developers and designers right and maybe we're doing this wrong and maybe we had a turn this model that yes served me very well right that I learn from the very best in the industry and turned the stuff.
Hi, down and yeah, because you know realistically we'd have these big design teams and they would design you know all this product.
And honestly I.
I never like to more than about 3% of what anybody showed me you know and and so I I you know, it's like it's not like Wow, Okay. We spend so much money in energy and we're developing all this product in a samples come from all over the world and you know what I I hardly like any of it.
And and so you know with Leipold went off we said like you know that was really happened in also right around 2008 in 2009, and we said what why don't we turned upside down why do we not have a design team why don't we just have some really great curators people to with great taste and style that had a really great I and and well.
Never get all the best designers in the world working here in quite a bit era like you know the best people generally in every industry are our entrepreneurs you know there a lot of them are working for themselves you know and they they have.
Third independence and control is is is paramount to them.
So we said like why don't we built the best platform in the World and how people design for the rest platform and instead of being a design driven company will be a curations be driven company and not only curated product but curated.
Product people ideas and inspiration and then and then and then really you know that the truth talent differentiating factor in our company will will be that you know that building that platform and attracting the very best people, but but they they hidden talent, which people Miss about us is our ability to energy.
Right right is it integrating all of its people those products all his ideas and inspiration in a way that when it all comes together. It has its own unique you know 0.2, and our age point of view, a that really differentiated defined for us, but when you think about it for me a financial model point of view, it's massively massive.
Really.
You know more more powerful and more efficient and you know serves you well in all times, whether its times like this or other times like we don't have a big massive design team that we've got to cut you know or that's sitting there not really productive and by the way Here's an interesting thing.
I have all the products that were presented.
For the most part we still don't like more than 5% of what we see you know, but Ah, but but we don't you know, but when I concur all that waste inside our company.
That makes sense.
That's very helpful. Thank you very much Gary and best of luck sure. Thank you.
Your next question is from Brad Thomas of Keybanc Capital markets. Please go ahead. Your line is open.
Hey, thanks, everybody for running long after all the color as usual I'm just a couple of housekeeping questions. Here from me I guess, when we think about a new world where revenues are likely likely down here can you give us essentially be where are you could bring inventory level down to can you bring that down much lower.
From here, particularly with the made to order nature of a lot of the product.
And then how should we think about working capital in general enrolled her sell the declining. Thank you. Yeah. This is a really good question, it's something that we're kind of talking about and kind of study and so we you know we believe we we pushed inventories down to about as tight as we could be and we saw you know in the fourth quarter we saw.
You know backorders kick up in and you know not only higher back orders, we had missed demand I you know the company and so we thought okay. We you know we obviously, we think we pulled out on an apples to apples basis about $500 million out of our inventory if you looked at our kind of.
For your put five year plan, you know back about three four years ago, I worry about $500 million less inventory than we planned to have you know prior to us redesigning the operating platform and the supply chain.
So yeah, we are trying to find if they weren't whereas equilibrium where is the most optimal.
Optimal ways that we can run inventory. So we think we push it a bit too far in Q4, you know we gave up or you know some demand is sales at probably cost us I'd say somewhere in the neighborhood, yeah $20 million yourself.
Hi, and that's fine yeah, there's cost to learning and cost to you know optimizing and so so now it's you know when you think about this period.
You know you've got some.
You got to kind of deal with the immediate problem, that's that that's happening and the immediate problem as we have a lot less demand and we've already bought into that demand and and you know you you can't cripple. Your your partners by just saying Oh I'm just cutting all those orders and you deal with it I mean, yeah. That's.
No way to have great partners for the long term going forward.
Yeah. So yeah, we were right now and live discussions with everybody around the world.
Like you know, we don't say like Hey, I have a problem that our age you know and you have a price we have a problem. They know how we can deal with it and and I I'm sure I'm sure what will come out of this.
Isn't entirely new way to think about the supply chain entirely new way to think about how to flow goods entirely new way to think about because he did this is what happens during times like these right. When you have pressure. That's when you can turn coal to diamonds.
And I don't know exactly the answers yet we're in life discussions right now you know dealing with the short term issues dealing yep yep.
Cash flow issues not so much on on Orion today, not yet yeah, if and Oh, Yeah. We don't know how long this is gonna be but but yeah. There's clearly a you know in our partner sides is gonna be yeah. There can be issues. They have a lot of independent yep customers around the world lot of smaller players that are that have no choice then to cancel.
All their orders.
You know so.
How do we working partnership how do we become more important partners and more valuable partner to you know I you know to these yep.
Yes. He you know key people you have many of them to back the very best in the world at what they do and so I think depressed become more important than less important and yeah, we'll we'll get our inventories.
But you know I think.
You know things play out Directionally, how you know, we we we might imagine I would say well you know will be heavy on inventories throughout the year end will probably be able to get inventories re corrected yep by this time next year.
Yeah, but you're going have to work through.
You know just work through this kind of issue that that's been created you can't you can't make this issue go away.
Anybody says that they're gonna be able to cut all the orders and it's not going to be an issue is fully shit.
It's impossible right now.
That's helpful. Thank you Gary good luck.
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Yeah.
<unk>.
He Morgan. Please go ahead your line is open.
Hi, Thanks for squeezing me and I know, it's getting laid in the east coast. So I'll I'll ask about a quick question.
So you've mentioned tied to the dislocation in the business in March demand and core business was up 8% in February so how much of that was driven by back order fulfillment versus core growth and did that include a 4% drags from Lord outlets feels like you're planning.
I know they didn't include that the court because that's just the court core each business right. So that's that's not inclusive of I'd be outlet business. That's why we characterize the outlook outlet business separately.
And so how much of that was from backwaters zero that was demand.
So that was order generation that with demand I and the reason we put that in just give you a point of reference.
How our core business had kind of recovered post the elimination of hall holiday right. So you know that over the fourth quarter businesses, where business was influenced a lot of taking the holiday business out taking other promotions out that we had characterized in previous press releases and discussions with everyone.
And what we had is we had greater than anticipated collateral damage that related to the of the elimination of holiday. So if you think about it you know where it where we kind of missed our forecast here was.
There was more kind of attached to business I, you know through the through the traffic in activity in the peak weeks of holiday and the peak weeks. A January you know when all of that kind of Christmas stuff is you know goes on sale you know all the ornamental wall decor, all the gifting stuff you know goes on sale you have Inc.
For mentally more traffic going to the web and incrementally more traffic going to stores and what we were able to analyze post.
Elimination holiday, except there was more attached.
Probably mean someone coming to the website are coming into a gallery and they were buying.
Yes, sale Christmas ornaments or sale other tchotchkes fees and stuff like that.
That they might have seen some sale dining chaired somebody does seem some sale betting they might have seem some sale other things. So the elimination of that traffic and the you know the connected the connected possible other transactions, which we refer to as a collateral damage.
With greater than we thought so you know so that cost us a portion of the business and then you know the other biggest piece of the Miss was just we just ran the inventories to tight you know we.
Took out a lot of inventory as you know I think going into the fourth quarter wasn't inventories down 24 24 at the end of Q3, we add up the year down 18, Yeah. So you know down 24, you know going into Q4, and we ended up down 18, we did and that was on top of down last year and started so forth and I'd say the prior third you're down and so.
So we just ran it too tight and I you know nothing strategic hi.
Yeah, and and easy things pick correct, we don't have to transition out of holiday again, I'd say the important point about the abate is hey, you know post holiday in February the core business rebounded to plus eight at the outlet is a completely different story and let me make sure everybody.
Got this and the right context, you'll remember last year, we had higher than you know higher than normal outlet sales because we closed a distribution center in Q4 of 18, and we you know and we decided to accelerate the liquidation of that inventory through our outlet.
That's what we did so we we ran very high outlets sales in.
Q1, Q2, Q3, Q4, I, you know and does not as high in Q4 year over year, you know, but but the first three quarters very high.
And Ah you know and that obviously was a lift to total business and it was that a drag to margins right and so so the way to think about this year is we you know we burned down outlet inventories the lowest levels in the history. The company Oh, we we started the year without a lot of outlet a inventory.
Sorry, obviously, you know will be creating some outlet inventory right now 'cause returns and exchange is right. Now have you know that usually go straight to the outlets and get it get liquidated are backing up because the outlets are close.
So yeah, we'll have a you know will have a position where you got a little bit more inventory, but but really this year is about now yeah.
Yes, if it's now you've cycled those high sales you're not going to have the sales, but you're not going to have the inventory drag. So you know operating margins for the entire company you know would've been up.
Around 100 basis points or more because of that shift in the mix of the business.
Right. So the outlet business I in my mind, I was kind of put it off to the side, because it's really a channel where liquidating returns and damages and and I you know trying to deal with sometimes I. Yeah. You know bad Bad you know from an inventory point of view I and and that you know and so it's an integrated piece of our business its.
It's going to you know it's yeah, it's going to affect you know topline you know to two degree plus or minus a and and that the margin, but yeah. It year over year last year with an anomaly. This year is another anomaly, it's just swing one way or the other so last year sales were up operating margins were down if we didnt have if we had a normal outlet.
I you know a situation last year I, our operating margins in the company would have been.
In the mid 17, three to 17, five and or not I guess excuse me not them three centsfive I've I've got 15, Atthree that's 15th.
<unk> Fifteenthree to 15, five you actually were fourteenthree. So it cost us about 100, you know 100 120 basis points of operating margin last year I. So so this year would have been more normalized operating margins. You know that's why we could comfortably say, we had at least 200 basis points of operating margin.
An expansion because on a pro forma basis, we really had a company that yeah last year that looked like 16, and a half to 17 not.
14 three.
Yeah, and so or you know and that's that's why when you know when I look at the situation where now when I say.
Yes people ask how do you feel about going into this I got well jeez I may comparatively to the last really difficult situation from a business point of view and he can I was wondering is great recession.
You know its leaving the company that had operating margins in the 7% range and now really we yeah. We've got a business that you know that in.
17% range.
So I, you know I feel terrible or the about the health.
No impact and that the destruction. This virus is going to cause you know socially and you know from a humanitarian point of view, but from a business point of view, we've never been and a better positioned to take advantage of a dislocation economically.
Got it that's all I had thanks and best of luck in healthy all Stacy.
Great Stacy I hope you do too thank you.
Yeah. Thank you it comes from Anthony Chukumba Capital markets. Please go ahead. Your line is open.
Thanks for taking my question.
Gary you're not in light of them everything that's going on I know, we're looking to.
Harcourt's credit cards, Europe, that's into Europe, almost Arctic will be real worn for your.
[laughter] safe to assume that are the everything that's going on right now.
Back or is it is too early to tell at this point.
Too early to tell I think yeah, we'll we'll all be a lot smarter in about two or three month. So go as far as it is as far as we're concerned right now where are you know, we're not really spending capital there yet you know were finalizing.
You know finalizing leases and a you know banks doing some architectural work in development work and so on it so far so there's work work that's all going on.
But you know we've got flexibility a as it relates to that for some reason you know there's later cycle developments in the UK or other things that you know forces to push things back a lot lot of flexibility.
I think that.
Yeah that the little bit of data that everybody has you know mostly related to China would say that you know the world is gonna be on the other side of this or other side of this issue you know.
At the latest by the end of the summer.
And so you know the question is.
You know does it when we reentered the coal by instances you know, it's just like a flu does you know does it re up here and you know it is there another infection cycle to go through we don't know that right nobody knows that but.
I have a lot of faith and hope based on.
You know what I hear from people that are in the you know bio Tech field here you know obviously San Francisco in the Bay area as you know epicenter for for a lot of that Oh.
A lot of that industry and.
You know the ability to develop a but developed but.
You know drugs and vaccines and things are going to happen very fast.
You know and and so my sense is.
Yeah. This this could get dragged on you know all year, we could have a a long slog of a year that turns into it a recession and.
And you know when it could be that 2020 is is.
You know becomes you know that meets.
Interesting from one cents you say 2020 should is perfect isight it becomes probably the the least clearly year that we've seen in a long time and that things really in 2021. You know you. You know you have a real sense of clarity of where you're going but you know in 2020 in some ways.
Yeah, it's it's easier to manage the business for cash it's a year to position yourself for the long term, yeah, and you know a year to Ah you had to tick kind of see the opportunities that are going to Ah you know exist on the other side of this and you know position yourself to be up I can that optimistic opportunistic and optimistic.
You know when you when we start to get through the worst part of this but.
You know.
You know it doesn't change anything strategically right doesn't change our opportunity in Europe, maybe changes a little bit of timing on things doesn't change the opportunity globally. What it does is it sets up opportunities.
Globally right from real estate point of view, Yeah, It's gonna be a lot of good real estate deals post. This Ah you know there's going to be a lot of opportunities that happened post. This there's gonna be I, you know capital Axis capital is going to only get better you know and so.
Yeah, like we see more opportunities.
Then last.
You know our our biggest issues right now how do we navigate through this and the most elegant ER and humane way as it relates to yeah all of our people all of our partners.
You know here and around the World you know, we're a very connected company. It's not just you know our team members that are here in our age, but Ah and it's not just the ER the partners at the senior level of you know manufacturing companies all over the world and other partners. It's all of their people you know that are gonna get impacted.
Hi, This we're all connected here, a you know and and you know as well as our with our customers and Ah you know so from just a.
You know a social humanitarian point of view, how do you have you do what's right how do you solve those problems.
You know how do you see it yet as best you can Ah Ah you know how do you try to.
Create a sense of hope and try to ignite the human spirit in the world in a time when you know that's what people need you know that's why we say in our company you know bite by chasing our hopes and dreams wins fire others to chase, there's by fearlessly fighting for what we believe and we encourage others to do the same a and its you know it's the time to play.
Our game ER and you know to.
Shine our light if you will so Ah Ah, but it but yes, it's it's time to have edge and it's a time to demonstrate empathy.
Thank you so much Gary and demonstrating that convention and you should see Mark Warner sellers towards.
Difficult times keep up the good work okay. Thank you.
There are no further questions at this time I will turn the call over to carry Friedman CEO for closing remarks, great well I. Thank you everybody for your time I you know I do want to make sure I. Just think our teams are you know and our you know our people in partners, a you know customers and shareholders all around the world but.
Specifically our team that is you know I have it did had an extraordinary year and fought hard to get to where we are not just this past year, but you know over this past decade, a and for some people you know it you know that then with me here through the past 20 years to get to where we are today.
ER and and a you know this is it's is the most difficult and a challenging time I've ever or you know led a team through and its you know to time for all of us to kind of come together a into band together and to get all the brains in the game in the he goes out of the room and do what's right.
Not just from a business and financial point of view, but do it right from a Ah you know a human a point of view and we all have a lot of.
A lot of decisions to make you know we all had you know face the same challenges right now and I said, it's a time.
It's a time for purpose and it's a time for partnerships and we'd like to say that profit follow purpose I and the key thing for US I long term is too yeah, Yeah live and breathe our values and let profit follow purpose. If we do the right thing Oh, we will all get through this together on so many less.
Well so thank you for your time. Thank you for your patience I. Thank you for your understanding I today, and we'll talk to you soon thank you.
This concludes today's conference call. Thank you for your participation you may now.
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