Q1 2020 RH Earnings Q&A Conference Call
Ladies and gentlemen, thank you for standing by today's conference call scheduled to begin momentarily until that time your life will again be placed on hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to restoration Hardwares first quarter 2020, Q when they call to ask a question during the call you'll need to press star one on your telephone.
If you like to withdraw your question. Please press the pound key now we'd like to turn the call over to your speaker today, Allison Malkin I see our please go ahead.
Thank you good afternoon, everyone. Thank you for joining us for first quarter 2020, <unk> Conference call. Joining me today, our Gary Friedman, Chairman and Chief Executive Officer, and Jeff Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make certain statements today.
Okay, Great are forward looking within the meaning of the federal securities laws, including statements about the outlook for business and other matters referenced in our press release issued today.
These forward looking statements dissolve the number of risks and uncertainties that could cause actual results could differ materially.
Do you see for turret FCC filings as well with our press release issued today for more detailed description of the risk factors that may affect our diesel.
Please also note that these forward looking statements reflect our opinions only as of the beat up this call and we undertake no obligation to revise or publicly released the results of any revisions to these forward looking statements in light of new information or future events.
Also during this call we may discuss non-GAAP financial measures, which adjusts our GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures and the reconciliation of these non-GAAP <unk> GAAP measures.
Entities financial results press release.
Hey live broadcast of this call is also available on the Investor Relations section of our website at <unk> Dot RH dotcom.
With that I'll turn the call over to the operator to begin our team in a session operator, we're ready for questions.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad, if you'd like to withdraw the questions. Please press the county, we do after you limit yourself to one question and one follow up question.
Your first question comes from Michael Lasser, Yes. Please go ahead.
Good evening. Thanks, a lot for taking my question, Gary what are the building blocks for this year to get you to positive operating margin expansion.
And as part of that can you describe what assumption is being made about your steels outlook, particularly in light of all the uncertainties in the world.
Maybe a way to frame it is what.
Under what sales environment with it.
Generating positive operating margin expansion just don't be possible.
[noise], well I think I'd point you to.
If you look at our record when we reported that kind of 2019 results I think we oh it was that would be for coded when we laid out kind of a bridge.
To a expanding operating margins nothing's really changed about the bridge.
You know there's modifications based on.
You know a lower lower rate of sales than we had anticipated and you know that we've made some modification to organizationally as you would expect and as we articulated I thought you know to our.
Expense structure and and.
You know spending structure and and.
Yeah, we've we've really tried to reimagine the business again, I mean, if you look at our history.
Yeah. We are DNA is really kind of built for difficult times right. We've had a kind of when the very beginning dig ourselves out of a whole the business that was restoration hardware that was.
You know selling completely different product that was basically into into bankruptcy and raise money three times in the first here to try to stay alive, we had or <unk>.
Reimagine ourselves again in 2008, nine and Ah you know when everybody else was.
Kind of yelling valu valu valu, when taken quality down and so they can take prices down we went the other way and we imagined the business completely and Oh, yeah appointed.
Higher and moved faster and this is kind of another time right. So.
But but at the base if this thing, but the foundation of where we started coming into this we said we had at least 200 basis points of operating margin expansion. So you know the key words, there's at least so if you start there and you think about.
I don't know take take Q1 way, we reported 10% against what eliminate last year right. So yeah. Yeah. We yeah, we had a pretty tough Q1 half of our stores were older stores were closed for the entire time, we've got outlet stores and restaurants and things like that the did zero rep.
These have no on mine component.
And we weren't able to hi.
Kind of lead our lead our teams and our teams were able to lead their teams through I've never seen a time like this right you know D.V. the most volatile difficult.
Hi time for retail business, you know restaurant business whoever you know all the businesses that have everything shut down.
You can imagine and [noise].
Yeah, we were yeah, we only lost 980 basis points of operating margin.
And you you can.
Yeah, if you read in our our press release, we say the businesses accelerated right. So yeah, you can kind of take the numbers there and.
Imagine what would be like can you know so if you.
If you just go back to that their prior release look at the bridge I you know, it's got all the pieces the outlet business the that moving from a single source rock vendor to a I like to two I you know direct sorts model no. Other things we're doing within the core business you know elevating the brand Sony So forth.
Yeah, we see a very clear path to now I believe 20% plus operating margins right. Its we are.
It's yeah. This is is we continue to elevate the brand in and.
Yeah, we you can see us emerging you know as it was a true luxury brand that generate luxury margins and if you try to give stand back and think about that you say like what other luxury.
Kind of designed furniture brands are there.
In the world.
You know just ask yourself that question vertically integrated covering all the categories.
Presenting the business like like us that generates the kind of productivity that we do.
Yeah, there's a lot of luxury apparel brands, there's a lot of luxury jewelry brands. There's a lot of luxury car brands. There's a lot of luxury brands in every category.
And it into our category I'd argue that you really can't 0.21, you can point to somebody who might be a luxury so for brand upholstery brand somebody who might be a luxury lighting brand somebody might have luxury.
Pieces of businesses, but.
There's really not a business like us.
You know on on any level anywhere in the world and so.
Yeah, but but look you yeah, it's a long time like say it's it.
Yeah, it's a long hike up the luxury mountain right and we have to earn our way there we have to do such extraordinary work that we create a forced reconsideration of this brand name is really interesting I I kind of.
You know kind of made a face it our team at the table here because.
You know the conference call. Operator, you know introduced this is said Oh, yeah welcome to the restoration hardware conference call not the name of our company anymore, where our age yeah, but it's hard to shed you know old perceptions right now no different than.
Every analyst on this call.
Most of you I'd say not everyone. Most of you still think of it adds a furniture store and you kind of complex again, Ethan Allen and other kind of people in it.
It's not even the same.
Business [laughter] like you did not even close right and so.
I think it you know, it's just going to take time for everybody to kind of I think see us in a way, where we're going in and I think look weve to prove ourselves.
And yeah I remember all the reports that came out when when we had 11.4% operating margins Yep couple of years ago.
If you actually little over year ago.
Hi.
Yeah. There was a couple of report said Oh, they've hit 11.4 and.
You know Williams Sonoma at their peak with a 10.5, but nowadays eroded the 8.5 and there's no way our age can maintain 11.4 short the stock right and I had so many people that's like Oh, you can't maintain these operating margins and then we went from 11.4 to 14.3.
Yeah, and now people are actually saying the same kind of thing can they maintain those operating margin you know I. Yeah. I mean, you know we're used to this right we're used to.
Kind of they get peep, yes, having a lot of skeptics and yep, beating people don't generally believe something until they see it unless they're part of the team that's creating it.
Right. Thank you know this access our vision that anybody else's right. So yeah. So we we you know as our vision a you know unveils itself as as our work Yep becomes real high.
Then.
People, we'll see it and believe it but you know I could you know I could probably tell you every detail right now and you're not really going to understand how we're going to do it.
Yeah.
On the inside yeah, [laughter], but yet you know what any like though right, but it's laid out right. Its if then that's been up you've got three hey, Michael though Q3 329 teams that are that December yeah. There's there's four building that have upside there and as Gary said, we at that point, we're talking about 200 basis points of upside at least yeah east.
Gary You know has has alluded to obviously when we say that theres.
Yeah, we're not gonna say at least if we had 200 basis points right Yep sure honestly, Yeah. Let me ask again, let me ask a quick follow up you is.
Results that you've seen that in may in quarter to date in June and been Oh, no. Very notable has there been driven by the the reopening. So your sales have grown by just just more design galleries reopening or are you seeing.
Increasing accelerating rose a in the design galleries it had been open sort of walk through the telling.
Yeah, I mean, if it gets combination of both we'd like to the.
You know even as all stores were closed in galleries are close to where in our business would be a building week over week as we started opening a gallery encino incrementally a few this week a few that week I don't know what our biggest week was maybe 10 or something in a week. Yeah. You know clearly art art, our business is way better.
With a gallery with the retail store I mean, the people to think retail stores are gonna go way because of pandemic like.
Our braindead [laughter] <unk> made is that you know he does that everybody is pointing to like well if nobody needs. The store anymore. So you know the red the retailers that use this opportunity to actually shrink their store base are going to shrink their company.
It is it's it's it's an impossible move you know so so it's I mean to me. It's a very interesting time to just sit back and watch because if people are asking you know that people ask me. So are you going is still open galleries, you know where you're going to still open. Your stores are you going to stop look what's happening with Amazon or you know Instacart ER.
This is that like I got it yeah essential goods.
Ordering toilet paper, you know things like that.
Yeah I think.
Good.
Yeah, right retailing that that takes taste and style in presentation and imagination, and so on and so forth Ah you know.
Acumen don't like I don't know about anybody in this call did anybody like being home. The last three months every day [laughter].
It certainly has been interesting.
That is anybody dying to get out of your house and go somewhere see something sees some people.
No, it's anybody's like like waiting to not have to where a mask.
Like everybody is.
Thank you you know you you see it on that now the TV. The reports is like you know they they barely open certain places you know in yeah beaches are flooded bars or that you know flooded with people and Ah you know something so far so it will work.
Yeah, we're really optimistic about.
You get our business our model.
Yeah, we've got a huge direct business Oh, Yeah were yeah. We think we're very capable direct retailers digital retailers whatever you want to call it web retailers and everybody's got a different name for it.
Just another channel and we're going to get better and better with that channel. We've got some exciting announcements that are coming in as far as how we're going to reimagine, our entire web platform and part of it was in my annual shareholder, which parts of that I repeated here because you got to kind of keep saying the same thing a lot of time spur for people to get it but yeah, you're going to you know here soon about the.
You know the world of our age which is a portal or you know it thick that'll take you into the products places services and spaces, where h. and.
Yeah.
We're just going to keep getting better.
What we do and so.
You know we think that there's.
Yeah. The galleries are gonna tend to be stronger if they the biggest question we have and I think probably every retailer has is as you reopen.
I mean do two things one you know as you reopened you know how much pent up demand you know is snapping back and how much comes back.
And how long does atlassian and what does that look like I and then the second one is.
What are the seismic shifts in spending I mean, clearly you know wayfair goes from up 18 to up 90.
Right.
The reason is driving that you know all their competitors at home bed Bath and be on lot of people like that like all this you know store centric business is shut down like it's driven to Wayfair. Yeah. Wayfair is got to you know a huge.
I kinda kitchen kind of the you know that you did furnishings business. So you've gone Wayfair I think they have I didnt like 20 pages of Toasters, right 600, toasters or something like that yeah, [laughter] and and so you know that like nobody was going to restaurants, nobody was eating out right like I can't tell.
You how much my significant other she spent you know at that you know my my Alma mater, Williams Sonoma, you know it and so but but you know the question is okay. The seismic shifts and these lifts, which I think we're you know we're benefiting clearly people are staying home, they're looking around at their house going like God, We're gonna be here for well when we make it.
Look better we're not traveling we're not gonna vacation, we're not doing all kinds of things. So you know, there's a seismic shift the spending happening.
And is that sustainable you know does that you know is there a give back what is the timing look like you know we don't know any of that we can't tell any that theres no way to kind of really figure out that data.
Hi, but we know long term people are going to still live in homes.
Pete for now you know they're going to still.
By furniture, and furnishings and lighting its own it so forth in and if we have the yeah. The best assortment in the categories that were in pandemic or no pandemic you know presented the best way with the best value at the Best Service you know, we're going to do just fine and Oh, So yeah and work Yeah, we're focused on the long.
In terms of <unk> and I'm not I, Yeah people ask me like it's going to switch pent up demand what about this was like yeah, I don't know like I yeah.
Exactly.
Yeah, it'd be I didn't know if we do anything different if we did.
Oh, we know there's like long term, we think we're going to build one of the most admired brands in the world and that's what we're focused on.
Thank you very much and good luck.
Thank you.
Your next question comes from Curtis Nagle with Bank of America. Please go ahead.
Good evening, we're just good afternoon. Thanks very much for taking the question you remember, it's one of touch quickly or maybe not quickly.
The Orange governance business, just maybe go into little bit more detail in terms of.
Kind of one now how long you've been developing concept you know what are the economics partnering.
I guess with handover should do it I'd just love to hear a little bit more about so I guess the vision for I guess, what you think.
We are pretty pretty big opportunity.
Yeah, It's really what we tried to do is put out there are kind of.
Kind of big long term, yes.
Vision for the business right. One that you know will will out live me you know so you know I think we have it a vision for this it's Brandon. This you know this company that is going to be multi generational right. Yeah. You know when you sit here and think about the you know if you.
Yeah, if you sit and think about what we wrote.
It's.
It's probably yeah throws a lot of people back, but if you think about it if it's all kind of connected in a very simple way and.
If you start with the idea that you know theres those with taste to know scale and those with scale window taste.
The the idea of scaling taste, we believe it's very large and far reaching and you know everything that we're going to do here is is not in a silo right. So it's it's all it all amplifies ER and elevates and renders the core brand more valuable.
So you know residences is it's just that.
It's just a space right. If you think about spaces we.
Already do spaces, we build some of the most inspiring spaces in the world. If you think about what those spaces look like are we.
Were you know we're obsessed with great architecture, we either.
Find historical great architecture, and read DAPT, it or we build great architecture.
And that a great architecture amplifies the product and.
We we do you have great architecture, we have great interior design. We you know if you look at our rooftops or gardens, we have great landscape architecture. If you think about those categories because let's let me step into it for a second if you think about those businesses there are none of them or consumer facing business.
Yes.
You know where do you find an architect.
Do they have an office that reflective of great architecture, not really you don't even know where to go like trying to find a dentist right you ask the friend or where do you find a landscape architect where do you find any tire period designer.
I will say Oh, you can find those things on housing yeah, you can but there's no.
Physical manifestation of the business and you know we have a physical manifestation of great architecture, Great Interior design, great landscape architecture, you know so embedding a services business inside a business. It stands for those things seems pretty logical you know we've had very we've had great success with our interior design business.
You know and believe we can take that too yeah, it to a much higher level.
We practice great architecture today, we build great architecture.
In design it and develop it we designed great set some great rooms, we do great interior design, we do great landscape architecture, so that.
You know, we're we're really good if those things so it's logical to have a services business and expanded services business that provides services in yeah, you know.
You know in multiple businesses that are not consumer facing.
It's a it's why you know it's it's why we've been able to build our age because high end luxury furniture for the most part is not consumer facing you know at least it hasn't been right. The design districts is buying buildings a unit, yes, I used to say, yes behind the iron curtain of right that they did to the trade design.
Showrooms need to be interior designer, you know and have resale license to get into those places. So same kind of things other businesses, you think about homes today.
Yeah, I would I would ask everybody in this this call if you get a second Tonight go on Zillow go on Redfin.
Go on pick your website for real estate.
Go look at 100 homes Tonight.
You know in a price range that you think we might play out.
And tell me how many have great architecture tell me how do we have great interior design and how many have great landscape architecture.
If it's 1%.
You know if it's more than 1% like you much lived in a really great area, you know, but even in the grade areas. It's so low.
How many friends houses do you go to you say Wow. This is beautiful architecture. This is great interior design. This is great landscape architecture.
Almost never.
Almost never.
It's like a completed complete uncharted world.
Yeah. When you when you really look at the Big Homebuilders.
You know there they're kind of stamping out.
You know some but it's not a mcmansion anymore color or whatever you want but it's a stamp out right and it's a nice organize development, but theres.
There's no one providing.
Completely turnkey sounds like you know like every says to me a lot like they don't they don't sell you a car without an interior.
You know you don't go go by a.
Beautiful Mercedes or whatever brand you like and it comes with that an interior and you've got to figure it out yourself.
I don't know how many people in his phone have tried to do their own interior designer furniture house.
It's a nightmare, it's a nightmare for me and I do it for living I have a house in the Napa Valley, they finish remodeling like three and a half years ago, it's not furnished yet.
It's considered that hard into painted the AF and.
And so.
Yeah. So it's you know we know how hard it is we we knew we know we're good at it and and we believe that if you you know I used to work when I worked for Howard Lester at Williams Sonoma He used to say.
You sell the whole not the drilled.
Right.
Don't sell them the drill fell in the whole.
That's what the drill does right and you know any Williams Sonoma you know what they've been fantastic at right is selling you the idea of pizza not the pizza Pan.
Selling these idea if you know pasta or had a bacon apple pie, but.
That's selling that the whole not the drill and you know I sit here and go well.
Why can't we were really get an architecture really get it interior design really getting landscape architecture.
I know, we can design and build things.
And furnishing that people will like and I think there's you know if you think about people with money. Okay. You think about.
You know just what's the most valuable asset time.
Right by far the most valuable asset.
Everybody on this phone can figure out.
If you lose your money you can figure out how to make more money. If you lose your time you just can't get it back right. So we think a lot about you know businesses that deliberate time value will become more valuable.
And.
I I just bought a house you know in.
Beverly Hills.
Why do they buy it.
I walked in it which fully furnished it was it was designed by an architect and furnished by the architect is also the interior designer does one house every five or seven years and it's completely done.
I walked in.
I would like.
I'm good [laughter] skin save me two years of my life and.
You know it could immediately move in and use the house and and we did a test house I don't know if everybody knows but you know if you can still go online I think the video still online. If you look up you know, but what it was eight palms the arts resident in the.
The video still out there yeah, we did a test house in the Napa Valley. We took a we you know you've watched the video and look what we did the before and after we did it yeah, Hey, It took a house that was kind of needed. Some love we completely re did it and furnished it and and sold you know so.
Yeah. So we we have more of those coming you know it's like anything we do we'll test it will try it will work. It you know you've got a perfect. It. So it's not like we're gonna stamp these things out I mean again that.
The division for the ecosystem is a big giant vision.
We think we're almost I shouldnt that we are we if not funded right now it's like I don't know if we signed the deal yet like everyone else like opened yet yeah, I can't say anything, but let's just say we have a place where well yeah, we'll announce our full first ecosystem, where we'll have an RH gallery and our each guest house.
And our each residences in.
You know really very cool place and yeah it'll be a.
He will be a great test weve been working on that the deal in the vision for a long time and Ah, Yes people really love you know these first.
Handful of houses that we do I think we're gonna have five six resonances yet.
Hi, the residences will be serviced by the guest house.
So you know you want housekeeping you want someone that yep set up and cater a meal at your residents and so forth. A this is not connected it's not a you know it's not a vertical yeah, we have vision for vertical ones and support but you know what we'll see we'll see how our guest houses do we think our guest houses are going to create a new market for.
Privacy and luxury if you think about the idea privacy. We think privacy is can become a very big market. He just stand back and think about privacy is the one thing everybody is given away.
On social media.
And it.
The one thing that the Internet is taken away.
You could Google anybody you can find out anything may not be true, but you can read a lot about almost anybody today.
But but I think we're in a world where you had it so exploited privacy is going to become very valuable and if you see what we're doing with guest houses when you see it we opened in New York and meet the can keeps getting kicked down the road to something else Atms than we have pandemic.
Not like <unk>, even though we probably hope we can it opened it in the fall I got you know, it's just feels like bad luck to open.
Hospitality experience on the heels of a pandemic. So I think were yeah, we don't to open all set up close.
We're shelter in place for another month, but.
But yeah, we're going to create something I think extraordinary in hospitality.
Not ordinary at all extraordinary.
There's there's ideas and our guest house that have never been seen in the hospitality world and we have to do things like that because we have to force the best in the legends of hospitality to tip their hat and respect that's because it's another rung up the luxury mountain.
And and I think where we've got to I think it's it's entirely new market I mean, no in addressing that like we're addressing it.
[music].
And so you think long term you think about hey, if I can have guest houses at work if that works that model looks really good if I put 10 residences on top of the guest House Tonight.
I can have a total ecosystem, where you know arc FNB and our restaurant services.
The room services third the restaurant you could you know it in our second guest houses we talked about our second guessed elsewhere. It is yeah. We have has hit the news right. Yeah. It's an absolute yard second guesthouse isn't Aspen and you know in Aspen, we'll have our first RH bathhouse some spot in the basement and yeah. When you stop.
Our thinking of these.
These elements coming together in creating.
Residential ecosystems that you know kit that all kind of.
You know amplify elevate and render each other more valuable in so many ways and and you come back to time and you think about businesses that deliver time value will become more valuable and we believe that deeply.
We think Thats why are you know our business.
He is very successful today because.
You don't have to go to 10 different showrooms you didn't have to coordinate deliveries from everybody you don't have to take the time and have the hassle you know it were much simpler were.
Much less friction.
Much less time.
So.
So you know all these elements of the ecosystem. We think we can do their things we already do in some way shape or form and you know weak. The ideas. We have the for them are going to be very good and and I thought you know look this is a real crazy time right now.
Pandemic, we've got civil unrest, we've got.
Global trade wars.
All kinds of it all kinds of crazy stuff going on.
[music].
For us there wasn't a better time to unveil our long term vision.
Yes.
Even if it's just for ourselves even if it's just for our people the world needs hope needs inspiration.
It needs to need to positive thrush did needs me needs more light and less darkness.
You know, it's and you know so.
You know whether anybody believes in it right now I don't really care, we believe in it and the things we believe in we usually bring to life.
And we usually do them pretty well so.
Yeah, we're not going to give you a model in the resin is right now we've you know Weve got models.
They're all some degree a wrong. The question is are they more right than wrong.
Because once you get going and you can you do something that's when you really start learning and that's where the learning curve accelerates and that's when you begin to really no improvise adapt and you know shape it into the right direction into the right thing.
But I think our our vision is a lot more right than wrong.
Maybe some degree wrong.
[music].
I think we're in it as we do everything else.
We generally the things we do.
We we.
We take a real swing at it.
We do the relatively well they don't all work.
But.
No.
If we're half right on this vision.
It's a basket idea if were quarter right on this vision.
It's.
The company's going to be.
10 times bigger than it is today.
You know I sit back and to go look Elon Musk is is doing.
Electric car solar power space travel tunnels.
No I think you know humans we.
We don't tend to push ourselves to find out what's really possible and so I.
You know in our lifetimes here, we're going to try to do extraordinary work you know what we lived to do it's what were built to do.
And it's what we believe and if so.
I think we'll be more right than wrong, and you know it and as we prove it it'll play out.
Yes so.
I'm, sorry, I wanted you and I appreciate it.
Let's think about I'll touch on someone else.
Thanks for.
Just extrapolating on that.
Sure.
Your next question comes from Adrian with Barclays. Please go ahead.
All right.
Afternoon, Germany keep on this team because I think it truly is revolutionary on that reminds me of soccer at hotel REIT, taking that luxury brand and then turning into new business.
I guess my question is did you not kind of tested that back in 2016.
In Crystal Cove. It was in Newport Beach, how is that different where you only doing the interiors and what did you learn from that and then secondly, like what's the sort of timing at the launch of services. So not necessarily this piece of the business, which seems far longer term, but the services that you talked about earlier. Thank you very much.
Sure sure the Newport Beach Crystal Cove project was a project that are.
Contract Division contract and hospitality Division partnered with the builder.
We were really hired to kind of do the interiors and.
Yeah. So there was it was about partnership kinda there wasn't really we didnt control. The architecture, you know the design of the homes and and so forth, though is really more of an in mid tier your job and.
You know they did they wanted to use the Brandon Yeah, we I'm always little careful about that we kind of let 'em use the brand.
I you know, it's like I, usually into you know I hope you guys personal care varnon, but like there's not too much step that other people do in this kind of niche.
Architecture interior design landscape architecture.
That we believe people can do better than us.
And so.
Yeah, and that and that's why we think it'll work when you think about the timing of.
The launch of services.
That'll be unveiled right now we're we're highly focused on.
Elevating the interior design business and investing heavily in interior design you saw in our press release, where you know we swung the investment.
Pendulum back the other way and.
We're going to continue to invest aggressively into our future and interior design. We think we can take it to a now their level of professionalism and anda and capability.
We will probably test sooner than later I you know in a market maybe it's here in the Bay area, Yeah, somewhere we get where we we test architecture and landscape architecture.
Yeah, but thinking about.
Yes.
Like right now in San Francisco, We've got a big New Gallery opening we've Gotta Gallery opening here Moran at the right here.
Yes, do we do we tested in those two galleries do we take our our old San Francisco Gallery ended up any be seen it. It's one of most beautiful little buildings and the Middle design District. It was built by Ed Hardy, who is one of the famous.
Collectors and sellers of and peaks.
You know what are the key people at Sotheby's for years and built is beautiful Palladium building beautiful varden courtyards, it's what inspired us years back to do gardens and rooftop garden.
And so we're seeing a do we just we just hang onto that building we own it.
Very small investment to do we.
Do we put our.
Our services business into its own offices in this beautiful building that represents everything.
Because we can't sit at all into the galleries right you'll have a consumer facing part like if you have into one of our new galleries, you know in kind of the middle in the back in one of our prototypes. We've got our agents are designed very visible offices that you see through a glass wall and so eventually that will become our age.
Architecture interior design and landscape architecture. So the vision is to have a kind of forward facing integrated services business right that kind of catches people, but you can't really you don't really want to operate a whole offices business out of I don't think out of the gallery and out of that space I think it'll.
It will it won't fit exactly right right. It's good for kind of a consumer facing part to kind of interface meet people.
Make the connection and then have an office a true office for the services. That's entering so you really have to space for people to work in the right equipment in tools and so forth. So.
Yeah, what you'll see us testing that you'll see us testing look we had the residents the residences, you'll becoming very quickly a you know the first test in a market over the next couple of years you know we're building out the ecosystem that you'll hear more about that and in the one test market will be are first one you'll hear.
You'll start to hear about the services business, we'll be testing that that's why I wanted to get the vision out here, because you're going to hear more about them you're going to see him.
I will start to be able communicate more.
And then we look the biggest thing we've got coming.
The short term the biggest thing is is.
Yeah.
Our each international and.
We've got or the deal signed how many are sign that we got one signed or to one is like they're almost all ready to sign I mean like working out but the details Dave you are not as Dave on the call not on Speaker line, Yes, I would not have speaker line. Okay day can't talkies like he asked to be okay. Yes, like he probably is talking right. Now you guys can't here and we didn't get aligned to talk into.
You know Davis, it's really laid out any credible.
Beginning strategy in Europe.
For the brand I think we're just going to.
It's going to be incredible I mean, we.
Its mind blowing for us so I can only imagined what would be like for consumers but.
The first gallery.
Could be opened in 2021 in the summer of 2021, we've got too.
Move relatively quickly.
And and its a.
The latest still be spring at 2022 Bucks, but it could be 2021.
That will open to our each England.
That will be followed by.
Yeah.
Lets something goes wrong with the deals at the last minute, but they're just basically done but.
Followed by our each Paris, RH, London, a we've got multiple other ones that I won't go any farther you know you want to Jinx anything I, probably went too far but yeah, you know, but those those will yeah. There is next two will be.
22, or 23, the complexity of the architecture.
On our age London is is a.
Depends on how far we we go with it it's kind of three buildings were integrating with a beautiful rooftop in a restaurant and all kinds of things, but it will be incredibly it'll be one of the most exciting stores and all of London. The thing we're doing in England, which is kind of right outside London, Mindblowing mindblowing be the most exciting I mean, there but.
So those would be the most exciting retail experiences we've ever done that.
Yeah, it's as good or better than New York in their own ways.
And one is just you can't even imagined it so to some 0.1 of the next decision I know, we're going to hit the timing will.
You will probably do it in industry analyst day will lay the step out we'll show you able to pictures everybody can kind of really really understand it.
But but no one's ever introduce themselves.
Into Europe like this ever.
It will be the most incredible first impression of brand has ever made.
And so we're just extremely excited about that opportunity that you think about that like.
75% of our business should be outside the United States.
That's what the model should look like that's what the wealth model is that's what does that get LVMH and caring and everybody else in amazes business looks like so.
That's that's really that.
The the big.
That you think about those pieces and how we go but yes, it's all going to start happening and that's why we put it out there and we thought.
Yes, two really good time.
To be.
Yes.
Sorry to be visionary and inspiring.
And.
So.
If for no one else but ourselves.
Now I mean, it it's very inspiring so.
Sector.
Thank you.
Thank you.
Your next question comes from Chuck Grom from Gordon Haskett. Please go ahead.
Thanks. Good afternoon can you give us some speak to the peso foot traffic within some of your channels, maybe the galleries outlet stores and restaurants since theyve been reopened and then can you remind us just you talked about just just now but your expectations for gallery openings in in the balance of.
2020, and also into 2021, thank you.
Sure sure so yeah we.
We don't have high foot traffic.
[music].
Retail stores. If you just start there right were relatively low traffic business, except for when we have restaurants, you right now the restaurants or.
We have four of them open only happened opening there been open a week or two and their operating unlimited capacity and.
Yes, both only I think 50% capacity so.
[music].
Yes, we're we're not really a traffic counting company, you know and and.
Yeah, We you know our business is just.
[music].
Yes.
We'd like to say.
We don't really care about mall traffic it seems like the people that have time to walk them. All the only thing they have to spend it's the day right. So.
We we we generally talk about creating.
Our own destination and.
Having fewer of the right customers inside insider galleries, it's one of the reasons why you'll see some changes that we're making in New York.
Even from a hospitality experience a bit guided by Covidien, you know not having having to operate with social this and same but just the fact that.
In New York are.
Kind of our brief the bar wine bar kind of became.
Kind of that.
We started become the best.
Free we work to free Soho House the free.
A way better Starbucks.
And we are serving a lot of people coffee and stuff like that you know, they're sitting around or furniture, all day and.
Making it hard to sell so we're going it we're modifying things to actually have less traffic because it's not so much about traffic, it's really the right traffic right in our in our business. That's what we focus on.
And and we don't even talk about traffic, we really talk about the right customers.
So.
So we we don't really we look at it through a different lens the gallery openings for 2021.
Weve Charlotte opening kind of that.
Middle of June we have.
Our each marillyn I will open towards the end of June or early July we're just got to work with the local restrictions here and and things like that.
Yeah, we're ready to go it's all merchandise it looks great.
Landscape looks amazing we've got it still we're still Dave if you're on the phone we got to tweak the delighting around that the crown molding, but that's the only only little thing. This left those their last night, but.
And then we may.
We may have RH, San Francisco opened in the.
Fourth quarter.
Yeah, we kind of shutdown construction everywhere, except for marine in Charlotte and.
And so now were rebooting up and so we've we've got to see what is the complexity booty not been getting back in as everybody knows that constructions never never smooth.
But oh, we could get San Francisco over the line.
And then you know then we'll unveil next year.
A little later when were more certain.
Your next week Nobody knows is is that.
You know, we're going to have another break out of the virus and.
You know the late third or fourth quarter, you know, they're going to be anymore kind of disruption and so and so forth.
What's that going to cause will be worked shutdowns.
Yes, so thats, yes, some things we're up against but.
So you'll see two or three happened this year.
Okay. That's helpful. Gary we talk a little bit about the progression of your demand curve on a core part of your business, but you guys said down 11, one queue up 11.
So far in June could you maybe amplify a little.
Little bit on what you're seeing byproduct by region, Justin just any color would would be helpful. Thanks.
I am.
Yeah, you know, it's a general lift I mean theres some of the things that you.
You know that you're reading broadly about the outdoor business things like that that have.
Bigger lifts and other things, which completely makes sense people aren't going on vacations, there probably by outdoor furniture, and then be spending time opt out outside so we were having a strong outdoor season.
And then you know other parts of the business you had nothing.
Yeah, nothing that's surprising.
Okay.
Our best Sellers are still our best sellers and.
I think what will be interesting.
And I kind of mentioned it in the.
The letter on an affair be picked it up but.
We're now going to mail Ace bring interiors book I guess are going to be a summer interns book in the summer.
That modern book So we had initially pulled back all circulation, we we killed the books and that's how we were able to what was 50 million of AD cost we took out right.
Because we killed the books in the first half.
And then we saw you know we saw the demand coming back difficult thing as you know our offices were closed so we can shoot all the newness that we had so we're pushing the newness to fall, but we did get a repackaging at the books, we had a couple of new things that we got shot we got into the books, but you never want to mail books I mean.
Ever want to advertise into a massive headwinds like we had right. This those those first several weeks I guess three to four weeks were.
Yes.
You couldn't do anything to get the demand to change much.
You know even businesses that were running 10 or 15 points ahead of other businesses also everything went down.
They they didn't stay up so that's what you never want to mail book into into a wind.
So.
But but now that the business has changed several weeks ago. We said, we'll do we have enough time can we improvise can we adapt and we overcome we get the books in the mail because it looks like you know theres, they're coming back and.
We've got a bit of a tailwind and so.
So we just me on the books now you know the books could make.
I mean, they're not going to do nothing okay. We're feeling millions of books do our two highest volume books and they're not going to do zero. So.
But I also don't know what the curve looks like what the pent up demand looks like what.
So we don't exactly no.
Yes, so we could be could be hey, maybe the business slows down into the books pick up and we're still up 11, maybe.
Theres more pent up demand and as we opened more galleries. The 11 is going to go to.
15, or 17, and the 17th can go to 25 with the books I don't know.
But.
If you ask me I today.
I had a bad I think it's going up not going down.
Not all of her galleries are open.
To hit our restaurants or.
Only only half open.
And.
Yeah, and our restaurants.
Drive a lot of the right customers into our spaces and.
So.
Right now.
As the world's reopening up we we feel a lot more optimistic than pessimistic and a lot more excited and we've learned a lot going through this pandemic were way better for it our people are you know the.
The kind of imagination, and innovation that came out of our teams and how to operate differently through this and how to collaborate and I mean, we're way better coming out of this we're way better team like were like.
At least 30% better than we were maybe 50.
Just because what we had to go through.
Thanks, guys. Good luck.
Thank you.
Your next question comes from Brian Nagel at Oppenheimer. Please go ahead.
Hi, good afternoon.
Thank you for taking my question.
So maybe a gary maybe a bit of a follow up yet to prior question, but clearly a really nice rebound trajectory here right held up well through Q1 of your core business here into the second fiscal quarter to what extent as you look at the trends in your stores to what extent are you seeing within this crisis.
New customers.
No you, reaching new customers and that customer helping to drive the superbly trajectory in sales.
I'm.
You know I haven't seen if you if you look at arc and the best way to kind of look at that as through membership.
And so that the numbers in membership.
Don't look that different you know.
New member growth.
You know renewals et cetera, so for it so.
Hi.
You know I think.
Yeah, it's kind of a different business. When you think about our business were an event driven business people either bought a new home remodeling, a home or or redesigning their home and that only happens.
You know what happens very infrequently so.
You might get a new customer and they might come in to spend a lot of money do design job and you might see them again for another 10 years.
Were they might just coming to give some betting or some towels and stuff like that but our businesses. You know it's very much in event driven business.
And so.
It's.
Yeah, it's not like a lot of people.
New homes, we know that data right. So.
Yeah, it in and so I I've always thought about this week is we debated it here.
We you know we got shut down we were running abate.
Our business in the core business.
Went down 40.
So we lost 48 points of business.
Do all those people now not need furniture.
Do they not.
Did.
Yes people like you know, we inspire a lot of people to buy furniture, but most of our business is it good part of our business I'd say is a need based business right. So so when you when you're in a need based business. If you have a disruption.
And that disruptions you have a fine we entered the interesting thing that happened to us.
We didnt just like you know wait no nine we had a financial disruption.
That was permanent.
When I say permanent like for a year and a half right like it like the whole the whole thing melted down. It was the market went down. The you know it was it was a very different kind of impact and.
You know this.
How permanent is this like yeah, we can talk about I mean, how what's the unemployment now 40 that 30 million 20 million totaled 40 million like it look there they're coming back I mean, we've we've now brought back 75% of our furloughs almost 80%.
And they're all coming back next week or that we kept will be 100% back you know everybody. We furloughed is coming back.
You know in and in many of the business is going out a lot of people coming back.
So.
To me to me, there's you know how much of this is now.
The demand.
And then you might have some new customers for outdoor furniture.
But where they just gonna by.
Six months later next year now you pull them forward like how much is pulling forward how much is sustainable like look I would not like I'm not picking a wayfair. Some people think I'd pick on wafer I see I just think it's really interesting.
They have a market cap this like four times bigger than ours and we make.
So much more money we have.
Operating margins were like 20 something points higher than there is like if they catch up to us in this lifetime, but it will be a miracle.
So, but but the point is I am glad I'm not wayfair.
Wait there if I if someone to take a bet on his wayfair going to be able to comps next year no way.
They're going to go up against 90 comp and they're going to be down 40.
There are 30, or it's going to be a a big change. So I you know I know thats why we like a membership model not a promotional modeled right you have all these.
Kind of episodic things going on and it's harder your business is more complicated you got to comp it and you know wayfair is going to sit there and think about how do we comp 90 90, when we were really only running up 18.
How do you do that.
Unless there is another pandemic in or something else drives everybody to buy you know cookware and toasters and all the other things in essential than stuff and.
Yeah.
I know, we're not going to spend as much money on all that stuff next year for our homes like we've got all new stuff now.
Don't need new coffee makers don't need new waffle makers or whatever stuff like that there because we are like we see that every night Nelson were even home every night.
So you know said you know some of these things are going to be.
It's kind of interesting I guess, that's why I kind of sit there go yes, indeed, we get new customers exists and that I don't know like.
Honestly those are all really little small rocks like.
If you focus too much in the little small rocks do just can move little rock surrounded it looks a little different you think you know more you know, but if none of it's that important what we're trying to do is look at what are the big rocks right. What are the big things that can create real value and how do we moved the big rocks and how do we create real value.
Big opportunity so.
<unk>.
You fall then we had the best data tracking we knew how many people were new customers.
We do anything different.
Nothing that was going to be significant strategically right. So.
Yeah.
But we just try to be.
Better all the time at the core things, we do and and if we are more people are going to wake up in the morning is think about us when they want to design their home think about us when they need.
I knew chandelier, new so quest.
Yeah, and hopefully long term think about us when they.
One of new House.
Yes so.
We have gives me great if those core things and then usually the rest takes care of itself.
I appreciate the color. Thank you. Thank you.
Your next question comes from Oliver Chen with Cowen and company. Please go ahead.
Hey, this is Max on for Al. Thanks, a lot for taking your question. So first you noted product margins are significantly higher quarter to date I can you maybe touch on what's driving that and then secondly, more broadly.
You are thinking about future gallery real estate developments.
Just a current environment effect that its full of store closures does that more advantageous position as you look to continue to negotiate these.
Capital light models.
Thank you.
I am.
Yeah, the product margins, that's kind of again all laid out in that it was a third quarter press release, Jack all the bridge to the operating margins a lot of it has to do product margins that yes cycling.
The outlet business accelerated burned down of inventory you know year ago. So outlet sales are going to be down but margins are going to be way up break as we we close that DC in the fourth quarter of.
2018, we pushed all the outlet inventory out.
And sold and accelerate away so you've got to impact there you've got an impact from going from a single source.
Drug manufacturing relationship, but to a direct sourcing relationship that's.
Kind of laid out in that bridge and then you've got just various other things where.
The businesses were expanding that things, we've done that price changes.
Price increases we've taken the new collections, you bring new collections in that or.
More differentiated and.
Higher margin and they worked well they lift the whole thing we think about the businesses. The top third the middle third and the bottom third right and if you bring in goods that are in the top third it lifts everything up whether its sales or margin breguet, bringing things and they kind of performed like the middle nothing happens bringing things.
That are in the bottom third and it drags everything down whether sales or margin. So.
We've been.
You know I think we've been just doing better work, making smarter investments from it inventory point of view and it product point of view that are.
You know that better lifting lifting margins and things like that and we're just also just.
We.
Yeah like for instance, we.
Like everybody else right with its pandemic happened and.
This is actually great. So tell the story.
We're thinking like Okay. What are we going to do do we promote like God. If we promote will we screw up our model that we.
Work, so hard to build a membership but weve you know we've got convertible debt coming on the whats the business stays down 40, what if it goes down 50, all that all the modeling we have doing.
And.
Yes, we you know we.
Didn't do anything in Memorial day, we Didnt do one promotion.
Our.
Gallery leader.
One of our calls with our all of our teams are galleries leader from Toronto said it said.
Look Gary just.
Yes told it to the teams you guys don't do it.
Don't.
Don't take a markdown.
It's given its going to be really hard to climb that luxury mountain with crutches.
Right and we got a visual that we felt like we can't do it we can't go back there right. So.
So that.
We're just running the business in in a very disciplined way and.
And if you have the right goods presented the right way you've got great design great quality.
And then great value and that value is determined by.
The design and the quality the combination of design quality quality at that price, if it's a great value yep people buy it and.
And I think were.
We just keep doing a better job and if you do a better job you can earn higher margins.
We do the same job you know the same margins.
Don't do as good of a job we're going to have lower margins I mean, it's just that simple.
But yeah, we look at it really strategically and we think about how to strategically.
Yep build the model that we want to build gives not accidental that.
We will have higher are higher operating margins than last year.
You know I'm pretty sure will be the only one in our category that does.
And.
Yeah.
Yes.
Yes, that's that's really it meant that the real estate development deals, yes I.
A joke around it's like where that.
Most attractive person at the dance right now.
And a lot of people want to dance with us.
I can get we're we're building not only the most beautiful.
Inspiring retail experiences.
I think the world's ever seen but they are among the most productive.
I would be behind to Apple and.
[music].
Yes.
In many places our new galleries are that the next highest volume.
Experience and in some places we might be higher volume that Apple and in most places were higher volumes and the department stores, except for a few of the nordstroms, but even in some cases were higher volume them or higher volume than.
Neiman Marcus in many places. So so you have the most beautiful inspiring space with the hospitality component.
The looks like nothing else that.
Is more productive than almost anything else in the mall.
And it renders the mall more valuable.
Puts you in a good position to build the bridge and.
And do a deal that's.
Where everybody wins so.
That's why we also paid our rent.
Nobody wants to do a deal with anybody doesn't pay rent so.
Yes, I wouldn't want to being a lawsuit with any my landlords right now.
They're not going to be knife.
Got it thanks a lot.
Your next question comes from Steven Forbes with Guggenheim Securities. Please go ahead.
Good afternoon.
Gary I wanted to touch on a two topics the first as.
Waterworks.
And then the second sort of being.
Noted on the spread between demand revenue growth in really just the manufacturing.
Network.
Maybe just our waterworks can you just give us an update on on the business there and.
You are less about how it performed and more about what you're thinking about the potential integration and that offerings.
In the timeline behind that.
Yeah. So look with waterworks was an opportunistic acquisition at the time right. It wasn't.
Yes, we had so many big things we are focused on but waterworks was marketing themselves and make themselves available we.
It was always on our list is something that as a brand, we we'd love to partner with and integrate.
On the platform that we're building.
And you know, but but it was an opportunistic acquisition and we did the deal when we did.
And.
Quite frankly haven't focused a lot on it we've.
Tried to enable them to focus on on their business and build the best business. They can and I you know, we're getting to a point, where it will be the right time to kind of think about.
You know how to.
Amplify waterworks on this platform and so I'm not.
Not a real timeline, yet you know we've been all distracted and busy trying to get through this time, but yeah. It is sometime probably later this year will talk about what that that could look like and it's not that weve never talked about it. It's just it's it's deciding.
Exactly how and.
When you do that so I'd say, it's a long term opportunity I think it look I think the business on our platform. A you know can be multiple times decides that it is today.
So and then the spread between demand in revenue.
You know really really has to do with the dislocation in the supply chain.
You know thats kind of really three or four things. So we were very aggressive to cut inventory cancel orders when the pandemic kit.
And that looked like a smart thing for that.
First three weeks and then by weak for.
Things looked a little better and then let you know then it started to get traction right. So.
So we you know it's hard when you cancel those orders and shut down it factories pulled back factories laid people off.
And then you had factories got disrupted right factories got shut down and not not just in China and other parts of the world.
But in North America, we we have.
Of our upholstery business.
57% of our upholstery business is in Asia, That's that's China in Vietnam and.
Some other if you are the smaller countries.
And 41% of our upholstery business, which is what really what our biggest businesses is domestic may here.
Yeah.
In the United States and so.
And then we have a small small part of it is is in Italy.
And then if you think about the special order part of that business, which is that it's huge part of special order, 51% of that special orders Asia, 47% domestic right. So domestic manufacturing in the United States within shelter in place shutdown or.
Not not an essential business.
Same thing, we have some very Mexico, right and that kind of shut Mexico got shut down.
And effected our our outdoor furniture business because.
Our cushion manufacturing.
Domestically and in in Mexico shut down.
So big back orders or big Big yet Backorders building time delays sun and so forth and so and then compound that with we cut orders and then we have to try to catch up.
And any increasing demand demand way better than we initially thought.
We could have never forecasted what happened in that the first two to three weeks of the pandemic, we were like and everybody else we were wartime.
Trying to not get hit by the next missile and trying to figure out.
Got it.
Yes, how to protect the business and protect the balance sheet.
So.
So that's that's a big big piece of this and then you've got this the other piece where.
Consumers have to want to take delivery and so we had a have a whole bunch consumers that for whatever reason, maybe they had a second home and now they're not going to be there and you know, we're holding deliveries and so weve. That's a couple of points of it.
And and DAT and then so you've got revenue building, we're trying to catch up on receipts. So we got back orders significantly up all compounding.
Because the back orders are getting bigger and they are projected to get even bigger cause our demand is going to grow so and then factories coming back on line, but then they've got to get back up to speed, it's not that easy its doesn't all said and they come back in there to 100% might take.
Three weeks four weeks to get back.
So we think that a lot of this will.
Kind of I mean are initial numbers looked like a lot more it's coming in Q3 than Q4, but it never is exactly what you think you know you can tend to be optimistic. So you know we think a lot more is hitting in Q3 somebody hitting Q4.
By the time, we get all when I'm talking about all caught up right, where we where we come back into kind of balance and harmony with the business and.
So.
Yeah, and then then you had said ask yourself.
First quarter for too long to do you have a higher cancel rate because of backwater time. So we we could give a point or two that back.
Yeah, I don't know yet.
Generally.
If we hit our dates.
They don't get canceled if but if the factories tell you that they're going to be up in four weeks and instead. It takes eight weeks and then someone gets a backorder notice and it's another four weeks you might see some cancellations.
So, but yes, but theres a big dislocation there you know that's why I wanted to call it out its.
Biggest when I've ever had I've never seen one like this so.
Yes, so well yeah, we'll continue to kind of update you and you know as as it comes out but I think I think our numbers are pretty good I think.
Yeah, I think we'll see.
90, 95% of it will all flow through.
Some may get cancelled, but we'll get we'll get most of it.
And.
And I think the majority today as we look at it will be Q3.
And then just a quick one if I think back to 2016 in some of the RH modern disruption right there was a customer combinations.
In order to provide people at some window of time right. I mean are you are you feeling that from the customer today were or.
Are you sort of explaining the issue and you feel like as a general understanding and appreciation out there.
Yeah, right now, there's a Jay I'd say for the most part a general understanding and appreciation.
Everybody knows the whole world stopped right, it's not like it was our fault like with modern where you know.
We.
We could try to blame the factory customer you know in their mind, it's our factory right. So.
Yes. So we just had to do everything we keep the customers I think everybody has the same some sort of form at the same issue I think every retailer cut orders everywhere.
If you're in a business that that runs back orders you know many retailers don't have a back order business.
Furniture businesses tend to.
So.
I don't think we're the only one.
Yeah, that's going to be in this boat, we are probably bigger because we've got.
You know maybe better performance in certain categories or our business because of our really strong.
You know kind of direct business online business.
Yeah, we probably.
At least from that.
The bigger product furniture side of the business lighting side of the business stuff like that take away the kind of housewares kitchenware those kind of businesses that are creating really big lift for a lot of people. If you if you kind of isolate.
More furniture based retailers and right now right. We don't have any of those other ancillary businesses at all we're super clean we got rid of holiday and everything so.
So so I think when you compare us to people in arc category furniture, we were probably going to have the best numbers in furniture. So Ah.
Yes, it will probably have a kind of.
Bigger gap between demand and and ship sales because of that so but.
Yeah, we've got a lot of history, having gaps like this it generally you might lose a little bit of it depends on how we execute through it if we can.
If the biggest if you have this if you have to push the orders one or two more times right. So that's where you start to get cancellations.
Thank you Gary.
Yep.
Your next question comes from John Baugh Stifel. Please go ahead.
And thanks for taking my question, it's very quick.
Obviously, if you're going to expand operating margins overtime to 20% I would expect your return on invested capital to go walk, but I'm just curious with all the various RH residents and guest house and things how the capital piece sort of ways and will that be capital light relative to the margin expansion. Thank you.
Yeah, I guess, a really good question.
A really good question. So yes. The answer is yes. The first guest house is no.
And so.
Yeah, but we've kind of already spent most of that capital. So you know that's in the rear view mirror.
Okay any new thing on task, you've got some investment there you've got to have something to sell in something that partner with people on.
Yes, our guest house model is going to be unlike.
Some of the other people that are doing branded hotels that are really.
Doing it with a flag doing it with another hotel company and doing a.
You know Baccarat hotel with a hotel group Ray.
Wolverine Hotel with some hotel group you know, we're going to control the whole thing.
But but it doesn't mean, we won't have a development partner, but we could be doing deals in the future like if if where the developer.
Hi.
And we think Thats the right way to do a deal will be the developer if.
You know for it for instance in Aspen, we have a at.
Kind of a JV deal right with it a profit centers since stuff and so we we've got different kind of deals in different places that you know aspen is going to be.
Capital Light New York is the first one capital heavy why were we will get capital light now it's been because.
We design something in New York, we had something to sell and we also you think about if we can bring that the value of.
Our business to a property in it helps a developer create value for themselves.
We were in a position, where we can share that value. So.
So I think it's all going to depend on.
How well the first few doing and how excited people are about them.
And.
And you know this is also I think the first few are really important that way and get a second chance to make a first impression so but but this is very different than a you know west Elm hotel or.
What's the other one that did it the watch.
Since the notional people like that you know the I didn't think any of those people are running their own hotels are there just finding a flag deal in.
I don't I didn't think you don't really do much there you kind of as they go use me use my furniture designed it this way, but you know you get a little bit about revenue cut on it.
So you know you don't have a lot of risk, but you don't have a lot of upside either.
It really control the experience we.
No no different than I, I said that a.
Brands that create time value will become more valuable we believe that.
Brands with more control.
Versus less control will become more valuable.
Yeah, I think that one of the biggest weaknesses brands have today is where they don't control their brand they don't control their distribution.
Just one of the challenges with Ralph the rent today, there they have to unwind all at Shitty desk distribution thing about how much of Ralph the rents businesses and really Shitty Department stores.
Mike.
Everything around the brand is rendering the brand less valuable.
And I love, Ralph Lauren by the way when one of the fixed France, but that's that's a hard thing there unwinding like that worked for a lot of years, but as you know, but they don't they don't do a lot of business out of their own stores right. So they don't control their experienced and if you contrast that with what Bernard or no has done over the last 10 to 15, maybe 20 years I think.
You saw this coming and he invested in building his own platform and now you've got a bigger and bigger percentage of LVMH as business controlling the experienced from concept to customer right and those brands that controls experience from concept to customer I think will become significantly more valuable.
And.
Control these branded experience always through and they they have no risk of having somebody else render them less valuable right, but you don't want to be a brand in a department store today up like as meaning with someone who had a great new brand and.
They thought they had a good deal because they're nordstrom's is going to put them in or this or that they you know it's.
It's you know even nordstroms I mean, like it's I wouldn't want to be nordstroms. Today, you know this assist an old model, it's not it's not a great model those.
You know there they're all lucky that farmers are lucky they have such cheap Brent.
But they don't control their goods and then the people that are putting the goods in the department stores don't control the experience right like so you know like IEC bad model like.
You're sitting ducs for someone like Amazon or some version of Amazon to disrupt view.
Where brands that really control.
Yes control that the brand from from concept to customer from probably ideation to product presentation.
I think is going to be the really valuable brands long term and I think thats been proven in the luxury sector.
And I think in LVMH has been a Chinese example, it's like brilliant.
Brilliant transformation and real estate strategy and I think.
Yeah.
Caring is done.
A lot of the same and and or amaze same thing.
Hi, instead, they are less and less dependent so.
Yes, so but presage. This you know it's all that all the things we want to do everything does matter because the guest house doesn't matter if it's a restaurant.
Doesnt matter to residents deal we might have a partner from a development point of view.
But we will control. It you know, we we want to own it we want it to be ours, we want to be great added.
It's hard to be great when you're kind of.
Kind of licensing out parts of your business no one's going to care as much as you.
No when it's going to love it as much as you and you know if you want to be the best in the world. It is not for the fan at heart, it's not you can't rent that.
You can't buy that you've got to build that.
Gary as a follow up on that.
No.
And I know the deals made.
Aren't even complete and you don't want to give them. The way you sort of details that London, Paris aren't free or they would you rate those as capital light capital moderate capital heavy.
Lead there yeah, I'd say two two capital light.
The first three to capital light one.
Don't know capital.
Well one of them, we're working with foster and partners in there. So good you know like does it really is like.
The best architects in the World and yes, they did the Apple camp as they do so many credit I mean, they are so good but their offices are so inspiring and.
They they you know there first pass it kind of weaving. These four buildings together and in London, and what it could be I'm like.
Yeah.
We're gonna have to do that and so it's.
It's going to be I'd say, that's going to be more like a new York investment, but you should be making in New York investment in London.
Right, you should be making a new York investment in London and by the way New York.
To less than two year payback to your payback you know.
That's really good so I think I think London will be like that I think we will open up an entirely new market I think think about lending like.
It's like opening in New York, and not having any store in new Jersey or kinetic it or you know anywhere near like we eat we've got all these stories around they are doing if I took all that volume and I.
Most at all in the New York Yeah. It makes it makes a lot of money then.
So you see might argue well you won't get the whole market well I don't know like if you build something that's incredible and you have a great direct business and a great platform and you have.
You know there's nothing like has we have way more competition in North America than we are gonna have and in Europe.
Way more competition in North America, So we might take us a little bit longer to get.
He gets the brand awareness, but I don't know like in the main main cities they know us.
You know they know us and you know shipping to us or shopping from us they've been in our in our galleries in New York in Los Angeles in Chicago, and and so forth Palm Beach. So.
Hi, so anyway that headline is it'll be a mixture and it.
Hi.
If you have two at a three that are capital light and one kind of capital heavy you're kind of.
You know from a capital point of view, you're in the bottom third which actually is not at that that's the right third for the capital investment, but again you want to do great work right. Its.
Did we spend more money than we thought we're going to spend in New York, Yes is the gallery greater than we thought it was yes was it the right investment two year payback on a flagship store like that New York find another retailer this ever done that.
That's made an investment had to your nope most people don't make money in New York right. You know they build a big store and they don't think they're going to ever make money. It's like it's a billboard.
We don't really have that strategy everywhere, we invest money, we want to make money and.
So, but but some things you've got to you you had the Kurt you like you have to have encouraged to do great work in the London takes a new York kind of investment so be it.
It's.
Arguably the second third most important city in the World you know in the top three.
Mike.
If you're not going to make an investment there are we going to make.
So I.
Anyway.
I appreciate the details good luck.
Thank you.
Your next question comes from.
JP Morgan. Please go ahead.
Hi, Thank you so much for taking my question I haven't really quick one and so can you talk a little bit about how much of that announced $150 million of cost savings did you recognize into first quarter and do you expect any more savings in the second quarter and also how much of this is.
Actually prominent given you eliminated some positions back in April.
Good question, Jack if we can kind of break that out.
How do we think about exactly yes. Good Gary mentioned, we are reinvesting some of those savings back right, Yeah I'd million.
I don't have the breakout tami at my fingertips, Yeah. We're so maybe we can follow up yeah, you've got to you got a chunk into first quarter and and then you've got a chunk in the second quarter.
Most most of it.
His first half because if you think about the compensation savings from the furloughs, obviously you have they'll get.
Upfront and as Gary mentioned, all furloughs employees furloughed employees, we back in the next few weeks so.
Yeah, those were front front and then the AD cost we put back in.
Just kind of later right and.
But.
And then we had some AD cost savings in the second half, we're putting that back in.
Yes, so yes, very say through good question, Yeah, let us maybe we'll do some work around that maybe in the next that you know the next quarter, we'll lay it out a little bit. So we can disclose it in a way that everybody knows you know knows the answer so let's figure that out.
Good question, we don't have the detail let us yeah.
Got it thank you sound like and best of luck.
Thank you Tim.
Your next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead.
Hi, Good afternoon I also heard about two quick one one can you.
Great just have to pay that convert in July, but 300 million relative to the $17 million in cash at the end of the quarter.
So just from free cash flow coming here in the second.
Quarter and then.
Bigger picture question, and even be probably seen definitely.
Shifting to watch digitally might be less so in your business, but you've also rollout vishal disciples consultations in the quarter. So maybe just your thoughts on technology and consumer spending or consumer habit shifted that had.
Thank you.
So I'll start with the first first question Christina.
As we've said, we're going to repeat and cash which means cash both that we've generated cash borrowed on our asset base line. So these are going to see in the 10-Q this could be filed tomorrow.
Is our availability on the line and if you read as to consider us repaying the debt as of today for example, or as if I guess may 29, Thats, what were where we had noted.
We still have availability of $170 million on the line and so we will obviously, but the with the business trends. We have continued to generate free cash flow from there. So hundred 70 on the line at the low point. After you assume if we if we had to have repaid it by last Friday that that is that it. So basically it's I would think of that is low point that is what would have been avail.
Mobile if if we had repaid from the cash we have on on hand with the remainder from the appeal and so again, we would generate free cash flow from here and that that will look a little different by July 50.
Yes, because cash flow negative in Q1 becomes yes, we are expectations becomes positive and all the next three quarters significantly positive correct.
Okay.
And then that shift towards digital.
Hi.
Yes, I mean, we're going to we're making a lot of big investments.
This year, Yeah, we just hired a new chief kind of digital experience officer, who someone we've we've been trying to hire for years I think it's one of them most creative smartest people in the in the space or we.
Consulted with us about 10 years ago area, Yeah, Yeah.
And.
It will be joining us soon and we're going to make some significant investments in a.
Completely reimagine a re imagining.
The.
The whole.
Website, and it will move from a website to a portal and.
We've got some visions for it and you know I'm sure it's going to change 100 times.
You know the gentleman has joined the team is going to have a im sure huge impact and we're also going to bring in other talent, we're going to could try to bring collection of the world's best thinkers.
Yeah, best designers that technically you know just in internally and external resources to kind of create a leap frog experience something that has never been done that's equal to that strategic separation, we have in the physical world today.
So and I think that's going to be harder to do right because.
The screen sizes. The same size you are more in a democratic platform, but.
But we've got a lot of good ideas, we've been thinking about for long time, and now we're going to make meaningful investment and we.
We think we've got the right talent lined up.
So the shift in.
Shifting habits.
Thoughts about technology or the shift in habits I.
I think that you know the shift too.
It probably got accelerated you know if you think about E Commerce World I mean, you've got clearly you've you've got a forced.
A shift in habits and so.
You know I think you, we probably accelerated that shift to digital shift online by.
Maybe three years or something.
Maybe more maybe five years so.
Well it was total online business last year is what 15, 17% something like that.
So when it was the projections for this year, but so maybe you get to 30% three years faster for years faster somebody that in total online business like honest sustainable business sustainable way.
That so I don't think that's that's a massive change I mean, that's.
I think it's a massive change for short amount of time I don't think you're you know this is not going to stick this level of.
Spending I mean, just it very different again, if you're thinking about.
You know just basic essential things and putting them on a reorder with Amazon or.
Whoever shampoo, you buy or wherever you by whatever things you've seen it yeah all that stuff.
You know, there's there's been a four shifting that that will stick.
You know I.
I think.
I think a lot is going to.
The a lot like it was just a little different not.
A lot different for our for our business.
Going to be a lot different for some other businesses right but.
I just think.
You're going to see if the biggest fall out here is that.
Are the biggest changes get if the is the best brands and the you know the best.
Retail businesses will will be much stronger coming out of this and the people that were weak that were on the fringe. The people that don't have a you know as talking to a very smart investors when people I think it's one of smart people I know on the planet.
He said look people they don't have a.
A fully integrated.
Multichannel business, that's in a frictionless for the customer are going to be gone by 2022.
No that this is going to accelerate that you know that it's accelerating that you know the week retailers like it Neiman Marcus was going to always go bankrupt, the just where theyre going to go bankrupt two years from now for three years, an hour and went just went bankrupt now right and you know the.
The weaker businesses. It is just accelerates that says it's like a cleaning house, but history would tell you every time, there's a cleaning house there's like.
Newness that comes you know, there's new grass that grocers, new ideas to come to the market. There is new things that evolving and its you know it's different.
But usually just a lot better you know I don't see.
You know this isn't like.
Uh huh.
You know when people were riding around and horses and carriage is in all said and somewhat came up with a car.
And now.
Nobody.
Uses horses for transportation.
It's like this that going to be also like no one's going to shop and retail anymore. It's not.
Yeah, I think it's just an acceleration.
Have a shift to online in certain categories in businesses and behavior. They just got accelerated a bit so.
Yeah.
I think people get like overly focused on this they're just going to.
Do a poor job of allocating capital.
Because they're going to like the trends going to be Oh, you everybody ought to be doing this like right now it's a great time to be a consultant right like that has some digital pitch like look what just happened in the world like here spend millions with me here, you know and yeah.
It's just yet so it's kind of happens after times like this.
Yes, the consultants will come up with the new.
New things like Omnichannel, but the next thing are you now the post pandemic no platform.
They'll they'll sell a lot of a lot of air.
So it just seems to shift things are.
Think things things were going to be different it just happened a little faster.
Okay.
They were currently no further questions at the time I'll turn the call back to Gary for any closing remarks, great well.
Thank you everyone I do want to say.
To our team who is a.
Yes, just done a remarkable job through this time due.
To our furlough teammates.
Well come back into the to the few that haven't come back we'll all be.
The.
Centered innovation at headquarters, where the majority of people that are not completely backwards.
You know, we're going to be able to be able to open next week and we'll be able to walk everyone back the team and.
And to I'd, just say this time of civil and rushed to you know just at.
Every person of color and every.
Yes Black person in America, you know this is a very difficult time, you know and.
To the African American community and the people to work for us.
They know how we feel and we communicated that we don't need to broadcast that to the world went to things that platform.
Necessarily to grandstand for us we're going to.
You are working to set our example inside our company but.
You know.
Say, what what we've said internally we stand with you.
We.
I have to have a lot of empathy for what's going on in the world and.
Just a lot of leftover really.
Shitty bad habits.
Of judgment and discrimination and.
And I I just hope.
That.
You know the unrest, we're going through which which I think is just needed you know, it's just need it we've got to wipe it cleans and yet is it messy. It is a is it's scary it is.
But it's it's it's it's also needed because sometimes you got to have fear in this world to get people to change.
And you've got to fight.
For what you truly believe in and there'll be people on the French that take advantage of it whether it's saluting or that the burning the things that.
That's not what this is about.
That's that's unfortunately.
What's making the news you know that.
The 99% or 95% of the people that are.
You know fighting for the freedom that they deserve in this country.
And to respect that they deserve in this country you know the words that are in the pledge of allegiance that we all grew up putting our REIT hands over the Hart our hearts and.
You know talking about Atlanta that has justice and Liberty for all.
Not for some.
We're still fighting that fight but.
You know just want to say that.
We're all affected by this.
And we're all troubled by this.
And you know, we all want to think about what's the best way to help.
And yeah, and sometimes it's just.
Letting people know you truly care.
So.
Yeah, we just want everyone know, we care, especially our African American.
MH you know who you know it's got to its got to be a hard time.
You know witnessing this being a part of this and you know and having those things resurface.
Hi, just just know we.
We care and and we are here and anything we can do and if you want to talk I know that.
Your family is here and we're we're standing with you.
Even if we can't be physically with you all the time so.
So anyway, but I just want to thank our thank our teams for just incredible job.
Credible work incredible imagination, and incredible innovation going through the time, we just went through and we are just so much better what doesn't kill you make you may see stronger.
So we are really looking forward to.
The time ahead, you know, whether we have another breakout and pandemic or not we're ready so teams team rest of TMR H. will.
You know will be wet ready for anything.
And really excited about the future. So thank you.
This concludes today's conference call. Thank you for joining you may now disconnect.
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