Q2 2020 RH Earnings Q&A Conference Call

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Standing by and walk due to our age second quarter 2020 earnings conference call. At this time, all participants are email list.

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Thank you good afternoon, everyone. Thank you for joining us for a second quarter 2020 can you update conference call. Joining me today, our Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make sense.

Statements today that are forward looking within the meaning of the federal securities laws, including statements about our outlook for business and other matters referenced in our press release issued today.

These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

We usually for secure SEC filings as well as our press release issued today for 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.

Oh obligation to revise or publicly released the results that any revisions to these forward looking statements in light of new information for future of them.

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 a reconciliation of these non-GAAP.

GAAP measures in today's 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 Dot com.

With that I'll turn the call ever could be operator to begin our Kieran he session operator, we're ready for questions.

Ladies and gentlemen, as a reminder, if you would like to ask questions. Please press Star then pin number one on your telephone keypad. Please be advised to limit your questions one and one follow up question one moment for your first question.

Your first question comes from the line of Steven Forbes with Guggenheim Securities.

Ask your question.

Good evening.

So it's very your spoken to letter right about the expectation for revenue growth flag demand I think it was 5% to 10% in the third quarter. So I want I want to start there right just as we can touch wise the build for the back half year given the current trends. So we're not he can talk about how much of the closure between this expectation.

And the 16% to Q spread.

Is due to demand being filled right versus sort of a more natural closure.

In the spread between demand comp in revenue comp.

I think you did mention right that you expect to fill the majority of that demand over the next three quarters any any like sort of color that could help us walk will build it out over the three quarters as we think about filling this unfulfilled demand over the next three quarters would be helpful.

Sure Hi, Thanks for the question Stephen I'll try to add some color maybe Jack can fill in some pieces, but if you if you kind of start back when.

Right.

We spoke to you last.

Last quarter.

We we expected.

Revenue did kind of lag demand comps by about 10 to 12 points and what happened. The reason the GAAP got bigger and it got to 16.2 in the second half of the quarter, our demand really accelerated ER and you know kind of ran away from.

You know our trends.

And our inventory flow yeah. So it built up a much bigger gap as you think about where you know we're responding is as quickly as I cant as you look at that.

Kinda demand builds month over month as we laid out in the latter.

You know, it's hard hard to plan for something like that if it started with a big picture inside.

The the pandemic hit in.

Mid March.

The late March in our our revenues dropped by just about 40 points.

And in a three month period, a little over three months sorry.

Demand is went from 40 down to 40 up right roughly just directionally, that's an 80 point swing.

And we we responded very quickly to the down.

Yeah, the downdraft in.

Yep based on our analysis, we didn't know how long are our our galleries, we're gonna be close then what the.

Impact was gonna be but but we wanted to react quickly and we did and we were able to.

Yep cut receipts and push out inventory.

And then yes, that's demand built yeah, we thought she said it looked good coming back from down 40 that.

Down 20 tick down 10 to up seven.

And and then it just took off so so if you start there you know we're behind I, then you compound that with the fact that the pandemic hit everybody right. It hit every country in the world. It hit every one of our manufacturing partners in the world.

And they you know and they had dislocation a weather was a loss of workers for shutdown. So on and so forth weather was in North America, whether it's in Asia, whether it's in Europe or South America.

So.

Hi.

Just now I would say Oh, we.

Have way.

Relatively good visibility if things don't change drastically from here.

You know I'm I'm not sure how will demand continue to grow month over month fight.

I don't think so but I don't know that it won't we're off to a pretty good start in the.

First two weeks to September and what's different about September year over year is yes last year.

We had a higher mix of what I'd call clearance inventory that we wanted to get rid of older. Good. So yeah last labor day, we ran a.

Kind of labor day sale with clearance inventory.

And were able to liquidate goods and that that give it gave us a lift or you know so so that kind of slowed down trends. If you just think about the first two weeks or what will happen in the next several weeks I'm not sure.

Yeah, we yeah, it's funny have never spent so much time.

Looking at our business kind of day to day [laughter]. They did it change so dramatically.

Day to day in and we're learning so it's as we as we look at that this second half.

Our expectations, if we look at expected inventory flow yeah, we should start to a catch up and close the gap and and then a you know we should start to shift over that gap right. So.

Okay and have a positive so I guess, it's I think about when do we.

And I get caught up and wash through this.

Probably the ended the first quarter, maybe the second quarter of next year.

Yeah, I mean are our product is not that you know quick to be made and shift. So you got a lot of it can have lead times up to six months.

In some categories like rugs nine months or.

And Oh, yeah. So what we're doing this is trying to give you are our best view of how we think this kinda.

Demand will convert to revenue.

And.

You know well I think we'll be directionally right, but.

Yes, I like to say every plan. We have here is some degree of wrong. You know the question is it more right the wrong and I think.

We'll be more right than wrong and left.

You know unless our demand.

Demand trends change dramatically.

No Jack Thank you don't want it okay yep.

Got you no no no I think those great [laughter] Oh, yeah yeah.

Well, maybe maybe one for you.

Where do you either Jack Mcgarry, if I, if I think about the Twoq. Your gross margin right. Because this this was clearly a focal point for for us and investors heading into the quarter and as we as we think about raising the long term guidance here right.

25% EBIT margins from from 20 versus the 23 delivered what what's the right gross margin profile for this business I mean, if there is there's still a lot of opportunity as we think about whether its delivery right damages, where you had adverse engineering.

The outlets and as a whole supply chain, I mean, where where where's the right margin profile for that long term target as it stands today.

I don't know peak call. It the right margin profile or you know what what we think about what's possible and.

I don't think anybody would it.

Yeah, I don't I don't think Theres, an analyst on the street that had us it 20% operating margins in the next five years.

No. So when you say whats right. It there's you know there.

We we if we saw a path to 20 I you know how quickly what they can unfold yeah. It a lot of it.

Comes down to.

Hi, the desirability of your product when it relates to margin right.

So we're seeing now as we've transitioned.

Hi, and transition from a single source, yeah rug relationship to a direct sourcing model in rugs, we've got a very different business and it's very different margin profile that you know lift in the business. We talk to you guys about Ah I kind of.

Annualizing.

The accelerated.

Clearance of products through our outlet Division I you know your go that drag margins Ah that's now washed through and Ah you know, we're seeing what I'd call more normalized margins there.

No I am.

Let's start with it.

Do you think about the 21 eight or the 47 five we hit in margins stay we did that on.

Yeah, it even thinking about it from a gross margin point of your operating margin point of view, we did that have flat revenues right. So.

So what we're doing is when when I.

Wrote in the letter that we.

We now expect that we will reach 20%.

Operating margins in 2020.

With 5% revenue growth.

What is trying to do is give you a floor.

Right a floor for this year I you know I don't think Theres any way, we'll go under 5% revenue growth, but I don't know all the stores shut down again.

Yeah, who the Hell knows what what can happen with his pandemic I mean.

It seems like things are kind of getting better not worse and.

Hi, you know so we we think that Ah, yes consumers are used to worry mass now people used to social distancing.

In.

Yep many markets you see.

Case is going down so we think we're pretty safe to say I mean, you guys could do the math if you back into the map on 5% revenue growth for the year, it's about 18% of the second half right.

So we kind of thing today.

That seems like a floor and and at that kind of revenue growth.

We're comfortable with having 20% operating margins then if you just kind of step away from the pandemic and you know the whole all the things that are happening with cobot I'm actually yeah.

Quite happy to take its true that that our revenues were flat this quarter. Because you would it does is it helps get rid of the noise and helps that see our underlying business model and helps yeah potential investors see and recognize the underlying business model that we built here right that that we've invested it.

In for the past five years kind of re architecting, the entire business model and and kind of positioning the brand.

More as the luxury brand.

I think that there's opportunities.

ER in in every part of the margin structure the business, we weird that early stages about elevating the product I mean, you'll hear.

No more.

Soon about.

Really important strategic <unk> strategic moves we're going to do to continue to elevate the orange, France and positioning is that a luxury brand in the marketplace I think that is going to give us.

More product margin opportunity.

And.

And that also can relate to shipping margin opportunity right. It's the product prices go higher and you have the same cost structure moving product through the.

Supply chain.

The other thing that you've got to think about is.

We're still pretty early in the transformation of our real estate.

And when we.

Well, we transform a gallery in a market.

Yeah, we.

We basically you know the first year or two I think we about coupled with longer than two years, but the call. It went first one year to three years and mostly one year, we doubled the revenues.

At retail in that market. So you think about the.

Yeah, just the leverage you're gonna get.

Get in the Aucs decided but the business, but also gets yesterday and today side of the business.

Got it got a corporate level right.

So you know, we can see a pretty clear path.

That that we feel pretty confident over the long term that we now see an opportunity to get to 25% operating margin in the business.

And that a you know that assumes investments in international and if the assumes you know there yeah there'll be a little bit or that you know kind of its not going to be if we complete straight line there'll be some quarters, where we're opening a new D.C. internationally and.

It will be a drag for a little bit I don't think it'll be enough of a drag to massively impact the company because.

We're not just opening the D.C. and having our revenue move a little were up in a DC in an entirely new continent, and I think we're going to see pretty fast revenue growth and so I think we'll we'll see you know kind of it.

That normalized very quickly.

But.

Yeah, I'd say, yeah. If you just think about since I don't know 2016, when we as I said, when we launched modern and the ended 2015 and you know the <unk> I'd refer to it is yes proverbial you go public and you put a car in a race track and you know you're on the quarterly racetrack and it kind of narrowed your view.

You and yeah, we were kind of the perfect public company I think for 13, 12, or 13 straight quarters, and and then we blew attire and and most companies blow tire and bring the car into the pits and.

Change the tire and fill up the gas and they go back on the racetrack and.

We decided.

We were going to rebuild the whole car go and we decided we knew it was going to we're going to take a lot of flat for it and yeah. We refer to it is we were going to.

Yes March through Helfer, heavenly cost and we.

We kept the car in the pitch for but I don't know your and a half [laughter] and yeah, nobody really believed.

Yeah, what we were working on and.

You know if we said if people don't believe and what we're doing what we do and yeah, we raised $1.2 billion or somebody bought back 60% of our company and.

Ah, Yes brought an entirely new car onto the race track you know like good like with a jet engine.

So weve now slingshot to.

Past everybody in our industry right. It you know, 20% or 20% plus operating margins wherever it unfolds, yeah, we're gonna have.

It might be what I like is at five 5% revenue growth would have you know we would have had a planned slightly higher than maps of the fact that.

We're at 20%. This year you know just says that the underlying business model has is systemic shift it really has nothing to do with coal.

At all right Theres going to be a lot of people that have a very temporal lifted our business and.

When this thing changes and kind of.

Heads back to normal I, you know there may not be anything systemic there.

Yeah, we have at 20%.

Operating margin floor now you know on basically flat to.

Well up 5%.

So now you think about the business growing at 8% to 12% over.

Over the next several years, you think about where you're going to get leverage in margin in that model you think about continuing to take.

This brand up the luxury mountain.

And the kind of leverage that will get.

Hi, you know the key because it's it's one of one of the reasons why in the second half right, we decided not to mail our fall books, because quite frankly, one we yeah, we'd be mailing.

And then possibly creating incremental demand we don't have product for a you know that the newness because the the factories are behind would be late so you know that's costly to how back orders.

And we thought let's take this time and focus on the next few really big moves.

So you know all that that time and energy it would take us to normally develop the seasons and felt the books and launch everything we're actually going to.

Refocused had time to rebuild every category in the business and we believe we can take the floor up there.

All right and if you think about if we really do our job well there might be.

10, or 20 comp in the core business just by going category by category, Yeah, It's down to the detail and re architecting the assortment switch.

You know you you don't get a chance to do when you're kind of just running the business.

And so.

You know and then.

Focusing our time on on Architecting, the web portal that world of our age, which we think will be a leap frog.

And and.

Focusing our energy on I know.

Yeah launching launch in Europe. So.

I think whats.

What's different about.

What's different about our age in a lot of ways. Then what's unique about US is is we invest really.

You know with a long term view.

And I think Thats why we have one of the best performing stocks since our public offering in 2012. It's funny is doing in interview with someone from magazine and you know clearly this person with had been talking to a bunch of short sellers are non believers in our company I could just tell by the tone at the question.

Okay.

And I said you know like.

Hi, I can tell your tone you know you you have a lot of sources that are sharing their feelings with you and I said well what do we just start with some facts because a lot of times. When you think about a company like ours that.

That invest with a long term view you have somewhat of a volatile stock over the short term, but it can really perform as long term I said, so what do we moved from feelings to facts. They said, yes, here's effect for you on November 2nd 2012, Our company went public at $24 a share.

It's increased I don't know where the stock will close tomorrow, but you know where close today, it's increased 14 times and value in just under eight years.

It's one of the best performance is a publicly traded company during that time period.

It's better than LVMH, it's better than home depot, it's better than Starbucks, it's better than Nike, it's better than Lulu lemon.

And even better than Apple.

And it depending on where our stock close is tomorrow, it's better than Amazon.

And I don't think anybody even recognizes that right I don't think anybody stops to kinda motor up and look at the long term and say.

What are they doing here you know I think people get trapped in a short term view ported ordered a quarter kind of you know microscope and they can't see the bigger picture and.

We try to motor up Didnt see the whole chessboard right and we try to see all the moves and we'd like to say inside our company don't move until you see it.

And.

Yeah. So.

For most part I'd say since we brought the car, which is now a jet out of the pits in 2000 late 2016 early 17.

I think we basically done everything we've told you we were going to do right and we probably delivered now we're going to deliver 20% operating margins.

I mean five years ahead of I think any analyst status on wall Street or seven years. It gives wasn't anybody's model.

Lot of people how does it like 17% five years from now you know.

18%.

We thought we were two to three years away.

And now it's kind of reset right, we're saying we've got to new floor.

And we have a.

A path to 25% operating margins.

You know, we don't make stuff up here, Yeah, I mean, I can't give you every single little detail of the puzzle but.

You know I say, yes.

If you look at our past performance and you look at the Big picture.

Yeah. We're company. The 20 years ago started this journey as a nearly bankrupt company with a $20 million market cap.

Yeah, I don't know tomorrow will probably be if that was marked up somewhere around 7 billion you know so.

Yeah, We think we're really get that you know and I think people that takes a long view and.

Look at the Big picture here and look at the facts versus their feelings.

I think they're going to they're going to be really happy they invested in our age if they want to hold the stock for five to 10 years because.

I think we'll be among the best.

The best performers in anybody's portfolio over that time horizon.

The longer.

And then you asked but [laughter] a shared the big pay per view so.

Thank you Gary.

Your next question comes from the line of Curtis Nagle with Bank of America, keeping don't ask a question.

Good afternoon.

Thanks for taking the questions I'll just.

A quick one on.

Sure you know hearing a lot of you started evidence of some of your clients moving out urban centers Barnes second home.

Second or maybe even third homes.

Hard to imagine a company, that's probably better positioned for that.

Maybe over the next few years.

I guess could you extrapolate it wouldn't more in terms of how much demand. That's driving you know maybe hard to know about how sustainable that book to bill.

Yeah, you know we tried to articulate it.

You know in the letter and.

You know it's I you know your your guess is as good as ours, but that we like the data we see I think that because that pandemic is lasting as long as it has.

I'd staff.

My Doctor few weeks ago, I said, how long do you think we're going to be worried BAF and he said at least two more years I said really two more years. He said, yes, you got to think about the math.

He said it did it take at least have 270 million people.

Got it does have the anti bodies or the vaccines to get to herd immunity.

Right and and most likely the vaccine is not going to come until the spring of 21, it's going to take at least 18 months.

To move really fast to get 270 million to people to herd immunity.

So he said we've got a new behavior shift he thinks that's going to last for a while I don't think any any of us.

Conceptualize that early on and now it starts to.

Make sense right and that the data in the shifts of things I'm I'm surprised how quickly.

People responded to this pandemic from the activity in the home market how quickly people move device second homes to get.

Out of cities and zone and so forth.

Yeah, and I've got I wouldn't say all out of cities just get second homes to have somewhere to go to yeah. They still many many of them is still have their city home and then you have people that are.

Moving to suburbs in fact, there's kind of new suburbs being formed I mean, I was talking to some people that there's a whole new view.

In how how they think about suburbs in Silicon Valley, you know so many of the people now that they they're learning if they can but work remote more said, they're moving their buying homes in palm desert.

Yeah, So and Palm Desert now is kind of getting recast from a retirement.

Community.

To a suburb for many people right younger people, where they can get a bigger home they get up more space, there's a perception that yeah. There's.

Less crowds didnt more safety, probably and and so and so forth and.

Who knows when we're all going to travel again.

I mean, that's our biggest question on international we can't go to Europe, Yeah, unless we want to go and quarantine for two weeks.

So I you know I got it like huh.

Is this going to completely snapped back is it yeah, there's got to be some some real somewhat permanent changes in behavior, how long does that last.

If you think about that kind of the home buying cycle and the home furnishing cycle, it's it's not a short cycle.

And I do think we're well positioned for it because ah, yes, because of our assortment and our unique interior design ability, where we can just come in and do someone told my work, we're doing more full projects than ever before people are looking for a solution to that that saves them time.

Hi, and we can do that so.

Yeah. So like I said in the letter I think I think we're going to have a higher water level and.

Through 2021, but I don't know I've never seen anything like this right I mean.

Maybe you know.

Yeah, you know that the air comes out of the balloon sooner or maybe there's just a permanent shift I mean, when you get people thinking about something.

You know that mean this could create a whole new market for the home. Let me just thinking about this <unk>. How many people are not going out to dinner today or limited amount of people going out to dinner I read some stat that.

You know open table reservations are down 50%.

Somewhere in that direction I I've got it out to dinner I think 80% less than I was.

We're going to People's homes for dinner people, we know well and.

And I think what happens when when there's a shift like this.

People go to other People's homes, and then they look at someone else's home. They go Oh their homes really much nicer than our home honey.

We got to redo our home because we can't have them over to our home yet.

You know for dinner until we make our home better you get you know this it's the interesting about humans right we.

We.

Kind of compare and contrast ourselves all the time you know what we were what we drive where we live yeah.

Our home the size of her home it all those little things, where we go where do you go on vacation I went to.

Peppery Oh, Yeah, we went to free to you know all the other kind of stuff that you know humans do and so I think this focus on the home and this amount of time people spend on the home and that the entertaining focus now on the home I could create a whole perception of home that you've got to kind of have.

Much better homes.

And your homes got to be all furnished Dan It's gotta look a hell of a lot better and because you're just going to have more people over and you're gonna be spending more time, there and so that that could become just like a permanent shift.

Right.

You know, but like I said in the letter I you know I don't know had a plan for that stuff you know I don't want to take too much risk because not sure. Yeah. So we're going to continue we're going to invest.

Very thoughtfully, we're going to.

Continue to let.

Yeah, let cost chase demand.

First is you know demand chasing cost, we don't want to build a big cost structure based on 40% demand comps than habit go to attend and go Oh you know so.

But but I think that there's this is this is a lot longer than than any of us here thought a and it feels more permanent.

Yeah.

At least it feels like it's gonna have a longer life.

But we don't know yeah. So.

And we're going either way I mean, we like our business model long term either if this is more temporal than systemic whatever.

Got it no underserved Doug.

Thoughtful answer thank you and there's just a quick one in terms of.

Capital structure, so the pay down to converge.

You guys I don't know, we think are running at one three and leverage something like that.

How do we think about that going forward. It do you do you remain underleveraged what does the capital structure look like given.

The explosion in margins.

Yeah, you know, we're just going to how you know he we're going to generate a lot of cash so yeah. The capital structures going to look really good.

Well, it's we said in the latter will remain opportunistic as it relates to sources and uses of.

Capital and.

He just yeah, there's there's always going to be some kind of opportunities and.

Dislocated markets like this and whether they're short term or more medium term oh, yeah, we'd like to maintain optionality. So.

But we'll see you guys like we'll see how long. These these rates last.

You know our model.

You know just from an investment perspective, even though we're we're doing Europe, we've got.

You know surprisingly.

That.

The first several galleries are not going to be capital intensive, but once you know just central London, where we're kind of stringing together four buildings and making them into one and that you know that'll be a a bit more of the gift capital investment kind of like New York, but.

Paris is not a heavy capital investment are each England is not happy capital capital investment.

You know the ones that follow that we've got to more deals done in signed or are not.

Heavy capital investments, so and then in the U.S. we were.

We'll see a start to ramp up there'll be more prototypes, which we've got that model now kind of fine tuned in you know we will have a.

Less capital investment.

Approach there and then if you think about the last couple of years with some heavy capital.

Intensive storage we had.

Yes, our each New York, we had just the development its first few prototypes right those.

As you're working on them for a long time, and making a lot of changes is like developing a new iPhone or something right. Its.

You know that store is really like an R&D project. So you know there's a lot of capital there arch San Francisco lot of capital in our first guest house in New York again, it's like an R&D project. That's a lot of capital you roll through that and we don't have as many galleries that are.

Capital intensive galleries, and then as we said in the.

Letter.

Our performance is going to drive a new kind of.

Credit profile in our company, which is going to make us a much more valuable development partner for any developer right.

Like they'll get a better cap rate on our rent and our credit than they will and other tenants so that tends to allow us to get.

Yes more T.I.

Lower rent, so and so forth and it really helps us in our own development deals.

Yes, because we can we should be able to get better cap rates.

No different than.

We we sold Minneapolis, and the middle of the pandemic right.

Crazy first that the other people one way they thought they were going to get a big bigger price and we said like walkaway aiming at this is tempur were okay. Then they came back and you know we closed out of 5.5 cap.

And I think initially when we talked about that one.

Several years ago, I think in New York, we were going to put a $1.8 million rent on it and sell it for 33 million instead, we decided to put a $1.4 million rent on it and sell it for 25.6 million, but the fact is we got to 5.5 cap.

And that was before we leapfrog to 20% or 20% plus operating margins and yeah. The cash flow profile in the return of capital profile that you're going to see I mean, I think that there's a chance we'll exceed 50 per cent.

Return on invested capital this year.

That was a long term target yeah, I didnt update that long term target because I I was like.

You know you start to be silly math, what are we gonna have like 75% return on invested capital you know, but it's going to be a really good model.

As we kind of flip over and don't have as many capital intensive projects.

So and even like you think about our second guest house that we're building an ASP and that's a joint venture development. Its a very capital light guest house, you know and and were able to.

Kind of how to deal like that because we were already in construction and had the designs and plans for the first one.

So the development partners like got it that looks amazing Okay. I'll cut this kind of deal the very very first one in New York people thought were not.

Like what are you guys going to do indeed people still think we're not so I think until they see it then you'll get it.

But.

So yeah, we like the capital profile the business, we like the what that it goes we project the new cash flow models and return on invested capital.

Capital requirements the business I think it looks looks like a model I honestly I would've never imagined it would look this good I mean.

Yeah I remember you know my early days here I'd like it was a lot of people sit around the table. There here the whole time right. Just like we were like okay. If we can get to a billion dollars and make 8%. If we can get there like like we've made it.

And so if you told me we would get build the kind of leading luxury design platform in the world and.

Yes.

20%, plus operating margins and the cash growth profile modeled like we have building the kind of galleries are we're building you know we're not building shitty little crappy retail stores I mean, we're developing buildings. You know these these are like get it look great 50 years from now.

So I.

I mean, it's kinda.

Okay remark luxury we say inside our company the thing that I think that thing I've learned in my career is that.

You can always monetize.

Extraordinary remarkable and amazing work.

Andy it's hard to really monetize.

Ordinary and unremarkable work and so the thing we've learned is that you know it's just we just focused on doing really extraordinary remarkable and amazing work.

We can always create a model in a business around that and I think people learned that with the iPhone right like if you think about when Apple incentive the iPhone.

The average phone I think in in the country was $59 and was the Motorola razor.

People introduced it at the time was $600 fund and you know it was $600 just for for six months and they lowered at $400, but the point is it looks like so much more every thought that'll never worked that'll never within it became.

Really what are the best selling phones in North America, and then every said Oh that'll never sell in China, you never sell at 600 800 dollar phone in China, They became bestselling phone to China.

One thing that we we've learned over time to you. If you you do.

Extraordinary remarkable amazing work.

You actually can create a new market you know people we've learned over time.

Consumers want better things.

If there if you really do significantly better.

Work people will pay for it and what we're learning that with Tesla right.

I mean look it yet teslas performance is a new car company.

I never built the car before.

And yes, but he built.

Remarkable car, let me just purely extraordinary compared to anything else in the market and is creating an entirely new market.

And so I think what we're doing is is similar to things like that we're we're kinda, creating a new market.

For the high end home consumer and it's been a market thats been behind.

The iron curtain, if you will have the two design to the trade design centers and you know show rooms that they lack accessibility they lack transparency and they lack scale thinking about that at the high end of the market. They lack accessibility you couldn't even go to him unless you had an interior designer or a resale.

License.

That's a good market besides like I'm going to go compete in a market that lacks accessibility omnicam accessible then it lacks transparency, meaning like the walking to showroom Theres no prices you cant figure it out theres codes, they give designers discounts to get those people discount well give you a discount got to bring a design or so.

So convoluted and and then and then they lack scale and the ability to put it altogether. So you've got to go to like 20 different showrooms to do your house.

And then we come along with something that's accessible.

No and beautiful.

And and its transparent right, we remove all the like who's getting a discount is it your designers that this person is that you know and then by the way we offer design services you know so that helps.

And then we've got scale and Weve integrated it all together, where it it delivers time value to consumer and time.

Yes, the ultimate luxury right. It's nothing is more important the time I would tell people here, how we allocate or time is more is actually more important than how we allocate our capital.

I can always go raise more capital.

I can't I've never figured out how to get more time.

Right so.

Yeah. So I think what we were created is it going to complete can.

This is entirely where I think work create an entirely new market for our business and then we're.

Kind of now in this situation, where well there there might be a systemic shift.

Towards the home and a focus on the home.

You know if that happens at the same time, you know we're kind of.

You kind of evolving into the brand we aspire to be.

You could really get an upward spiral here.

But we don't need that to happen.

To create a lot about that happens will will be like supercharged.

Alright, thanks, very much Gary you ship Yep.

Your next question comes from the line as Chuck Grom with Gordon Haskett, you don't ask your question.

Thanks, Dan just curious if you're talking about sustaining a 20% operating margin goal, which is impressive just wondering if you can contextualize that for us longer trend in the light that you down the path of building out or its resonates and obviously you're going down the path are each guest houses just.

How do we think about the margin structure over time as you as you continue down those avenues or do you view those channels as accretive or dilutive do you think you can sustain.

The operating margin structure. Thanks, Yeah, I think I think we think about them from a couple of perspective one is.

We think that they will.

Elevate and rendered the our each brand more valuable. So you know how do you build the high end luxury brand.

I tell the team it all the great branch, mostly were born at the top of the luxury mountain are amazing LVMH, and Gucci and Chanel and you know just name luxury brands come top of mind, they've always been luxury brands.

We didnt start anywhere close to a luxury brand we had aucs it all up laundry detergent on the cover catalog 595, right and Oh.

So we have to scale this luxury mountain and you have to do things.

It that create a forced reconsideration of the brand that elevate the brand in the right consumers' minds and so whether it's.

Doing it we think in extraordinary.

Extraordinary experience.

Guest house, it's going to create entirely new market for customers seeking privacy and luxury or having RH three a luxury yacht that.

That you can chart in the Mediterranean Caribbean and not a lot people can.

Can use that but I guarantee you when we do the portal of our age and you see it on our website and you see our guest houses and you see the other things we're doing.

The branding of that right the.

We don't have a marketing department and our company, because we say marketing it a lot of highs, but putting lipstick on the pick right people try to take an ordinary thing dress it up and make it like.

Seem better than it is and we say it's not we say, it's what we do that defines session. So so we build our brand through our work right. We don't really run many add seem until after two here are there to home.

Yes magazine like arc Digesters on winning.

Hi, but but really it's mostly our worker galleries are working their extraordinary experiences.

Our our source books our work.

Our web portal will be another version of our work and how we communicate what we do and.

And I think the guest houses and the residences.

If done really well, one they'll they'll elevate the brand and they will.

Help us climbed the luxury mountain.

Because built I think they'll be so extraordinary they force their very best people in those industries to tip our hat.

And.

Again, I I believe we've we've learned that if we do extraordinary remarkable amazing things.

We generally can figure out how to monetize and build a business model and.

Even though we haven't opened a guest house.

Like the few people and the inside of the hospitality World that I've showed it to their like Oh, My God you know how much you can get for those rooms.

Oh, My God and you know if there are half right, we're going to do really well, but but they're not just.

[noise] kinda that new business thinking about it independently of to think about all these things.

And then not not isolation, you have to think about them and integration and how they elevate and render the brand more valuable. It's just like the mistake that department stores made over the years.

If you if you listen to Stanley markets in the beginning Neiman Marcus you tell you like the restaurants were never supposed to be the leading profit driver in the company. The restaurants, we're supposed to get the high end female consumers to come to the store more often and walk through the shoe Department.

And by really expensive shoes, and other things and in an integrated fashion.

The restaurants were very profitable, but if you look at things in isolation, you can make a mistake cannot see the bigger picture, it's no different than quite frankly, it blows my mind, how many retailers right now we're talking about closing stores and just having a website like I guarantee you people start closing stores their web site.

Wrap it is going to plumbing.

You know it can to find out.

Cost of acquiring customers through digital marketing you know the cost of marketing and invisible store online. Good luck with that you know there's all the digital native brands are opening stores you know so.

These these other elements guest houses residences other things you'll hear about that will test an incubator.

They're going to create a big conversation around our brand they're going to be extraordinary.

Extraordinary.

Pieces of work in their industries, and they will elevate the orange brand in rendering more valuable I and and I think we will find they will become.

Real businesses Internet themselves.

And if they are right the ecosystem gets bigger if not we have a handful of them and their tremendous.

Yeah examples of our work in the elevate our brand.

And it but I think I think long term, we're in pretty fine now that we've worked on them longer I think that we're going to find that their businesses and we won't do anything like.

That's going to destroy value here right like we don't want to all this and try to build an 8% operating margin business.

Well, we've got 20% to 25% operating margin business will just dragged the whole thing down and kind of destroy value. So.

Hi.

The idea is can we build things in an integrated way that that lift the whole margin profile of business I mean, that's what hospitality does in a in our current galleries. If you looked at hospitality in isolation you might think it's a drag if you really do the integrated math and look at how many people turn into.

Two purchasers and then you integrate that and you take that extra flow through and you look at an integrated way.

It's it's a really good model.

But you have to do the math on all of it and so.

Well well test these and try these and we'll learn more.

But I know one thing for sure they will elevate the our each brand they will create a conversation at the highest end of the market and that which really hard to do.

No one is ever climbed a luxury mountain before.

You're starting where we started ever I can't name one brand most brands go down.

Yes. So you know this just requires a different kind of effort.

You know you're not going to do it just running some ABS and magazines stuff like that it's really it's our work has to define us here.

So the only way will earn the respect.

The.

Consumers are the very best brands in the World.

That's helpful. Justin just as a follow up just thinking about the factors that have driven the demand improvement over the past several months probably hard to answer maybe it's not just curious if you guys. Thanks for how much of that is coming from some of that Europeanization movement versus the shift in second home markets versus just the overall housing market doing that.

Furthermore, the last bucket would be just depend dynamic and people just being more hunker down and just wanted.

If you can think about like the different drivers of the recent strike.

Yes, I think it's all of the above I missed yeah. It's all thought so it's all those things together I mean again, you know we work, which we rent was up eight or something before this pandemic.

Yes, so we were running the abate before the pandemic and then we went down 40 and now were.

Up 44, something in the core business or something that you know, but 47 in August up 44, so far bumped. The date in September I mean, yeah, I mean, there's there's a big shift here. The question is.

How much if it is.

Systemic and how much of it is temporal.

And the key is I think you've got to.

You got to play it.

With the expectation that.

Yes, it could be temporal otherwise you can kind of goofed up your model. So we're okay not trying to optimize everything in this market right at the things temporal you can you can.

Change your model and.

Try to run after every sale and optimize this and put your head down in the weeds then.

Maybe you will crank out another 3% to 5% of sales in.

But all of a sudden you.

Focusing on the little rocks and you just screwed up your model right and then I'll send the thing there comes out of the balloon and you're like Okay. Now what you got to.

Just architect your business and stuff in your cost structure. So we're okay. You know we're not chasing any sales when put one thing on promotion.

Yes, we're letting some demand get away, we know we're losing demand with the back order rates were running right. You know there so I'm, but that's okay. This is you know I don't want to be famous for like Hey, They they did really great during that pandemic didn't they.

Did you do you remember them.

Like Oh, my God, They had the best numbers during the pandemic what happened to that.

Oh, yeah, they long term that kind of screwed up their model like we like we look at this is.

Yes, there's some kind of but temporal event that may have systemic long term benefit to the home.

We hope it does but if it doesn't.

Okay.

If we were looking at our model very long term and you know like Thats, what I love. The fact that hey, our revenue was flat this quarter. Thank God. So you don't have a zillion question from everybody like where was the margin well much was this and what the leverage there, but revenue was flat and we have 21.8% on.

Operating margin and that's with 40 basis point drag from the pandemic that said 90 basis point drag from Waterworks, It's got an 80 basis point drag or something like that hospitality confront startup mode.

We've got a you know another drag from some kind of onetime investments, we're making so.

We could take those pieces and that helps us see up 25.

Down that road, so stay down that road.

Don't get lost in the little rock so the pandemic yep.

Yes.

Yeah.

Right. This way the best we can.

But.

You know that I don't think the business stays up.

40% I don't if it might stay here for a couple of years.

Yes, or maybe there's a new water line I don't know I mean, I could you just hard to say it hasn't been that long I mean never seen anything like it.

So.

I, just don't want I don't want to overreact to it in Goofed up you know the last.

On a decade of work.

Yeah. So we're taking a very long term view here.

We're not running around their heads down trying to you know.

Manage the business from week to week.

No, we're not pulling any levers theres no promotions going on here.

Just trying to build they.

Build the best brand of its kind in the world.

Great. Thank you.

Thank you.

Your next question comes from the line, Brad Thomas with Keybanc Capital markets you May ask your question.

Hi, Thanks for taking my question Congrats on all the momentum in the business and bright outlook here.

A question is if you could share any color on how to think about some of the expenses and SGN a in the back half of this year on one hand, I would presume, there's perhaps more sales coming from.

Okay and E commerce for web order rather than in the stores and that May benefit cost. You're also not mailing then sourcebook on other hand of course knock on wood. The sales look pretty good how should we think about expenses to the balance of year. Thank you.

Yeah, we will have obviously some savings in ad cost.

Yeah, we're not going to try to chase and optimize the revenue over the short term here. We think we've got enough and we're we're already chasing it from a supply point of view so we.

[music].

We think we're going to making the right decision to yeah. It's not like we're not mainly the booking not doing anything we're not merely the book and we're going to invest our time and energy and resources.

Make investments in other areas that we think we'll have real long term benefit to the business.

Versus.

Mailing into this doing a lot of work and maybe getting a little extra bump or no bump mailing into it just not.

Not having the goods or were you as a customer arty optimized, yes, so and by the way the other thing that we want to learn is.

I don't know maybe the books aren't as productive anymore. As we think you know so let's take this time and and test our way kind of out of it and back into it and we'll get some new fresh data that says HM.

Maybe when we launched the portal and maybe because we're building all these big new stores.

We can mail less books.

And.

You know said, so theres lots of motivation about kind of testing and learning for the long term.

So.

But.

You know, we're making a lot of investments in long term growth, making a lot of investments in international making a lot of investments to elevate.

And expand the product.

Yes, probably read you if you haven't read we made a small acquisition of a business that we we disclosed.

So we're not saying much about it from competitive reasons, but.

Yes that that we think is going to.

Elevate us and.

The talent didn't yes. The acquisition is going to continue to help drive our kind of product.

Capabilities so.

Yeah. That's that's what we're we're focused on and then we want to really do our best work it introducing the brand.

Internationally in Europe, because that opens a whole door right. If we're if if if we start to demonstrate that this brand.

Can work.

Without you know a long long ramp up you know like if our brand can be introduced internationally and actually ramp.

Anywhere near you know.

You know a market.

Yeah good.

Normal market that we haven't been in say like Canada, when we opened galleries Aaron step.

You know that just means that.

We we can.

That will lay the tracks for the brand being $20 billion globally.

Without really.

Anything else working right. So again I kind of I got to think about it if we if we can prove ourselves internationally.

And we can over several year period kind of ramp up in England in France and then.

Throughout Europe in Spain, and other places, Germany, and so forth.

You know that that probably is going to be a really good indicator, what's going to happen as we move across the Asia.

Australia, and South America, and other parts of the World.

And the world what we feel good about our timing is that the world is exponentially getting smaller right. The visualization that happens on the internet through all the platforms and social media interest and everything else like.

The World is getting smaller the world is adapting the same taste and style and sonus. So forth. So I think that really all of this is really going to benefit.

Great Global brands.

So.

Yes, so we're investing in all those things and and despite the investments again we.

We think will.

Do quite well from a.

Yes.

Profitability in margin performance perspective.

Brad as Jack I'll, just add quickly gear, you're talking about with with as we think about 20% model.

As a floor within floods grew 5% Rev. Rec increase you can do the math also what that implies for each to op income and that's 22.2% with 700 basis points right that again thats just the implied math of the of the floor regarding we're not telling you how that's what's been gross margin and SPD, obviously, we're not guiding but but naturally as you've met.

Alluded to on the source books.

That benefit would naturally ominous Denise I'd come more in Q3 than it wouldn't Q4, given that's when the mailing that occur. So I just wanted to look thats. Good point add that from a timing perspective, as you think about quarters.

Great very helpful. Thank you Gary Thanks.

Yes. Thank you.

Your next question comes from declined if we engaged with Barclays. You May know ask a question.

Great. Thank you great content and color Gary.

As you were talking about shortage brand building ill ask somebody is very high end brands. When you look at many brands global brand. They have the line that's called demand creation and so when you think about your catalogs as being sort of three and half 4% to sale.

Let's have the luxury of having another 600 basis points or so in all these different areas like our age Threed art and wine in cash cows.

And hospitality REIT to build that and so I guess my question is that if the right way to think about it.

How much could you bring that demand creation up to as a percentage sales because now you have luxury at this extra margin.

And then to your point on the catalogs.

The catalogs ever turn from content only product only add DS physical manifestation of sorry, the world the bar age in sort of lifestyle content magazine.

So there's a couple my questions. Thanks.

Yes, you have come work here [laughter], our whole leadership teams in the room by the way.

I was like yeah, Okay, yes.

You do you think like we think so yes, correct on all of it yes. So.

Exactly how we think about.

Okay, and then second so that's the forget.

One quick very small banks actually two quick housekeeping and I know dismal initiatives and you have somebody bigger initiatives now, but where are we we are each color and then secondarily what percent of transactions that you're running currently have interior, Sir interior decorating services attached to them. Thanks, so much.

Yeah, we don't we don't give the period designed percentage do we given that gap.

But we don't yet yeah, it's a big big Big part of our business.

But oh, yes.

But just for competitive reasons right now and then like whereas color color is.

It's probably best.

Asked me that question next quarter.

We have a series of off sites and.

Time, we're spending just to evaluate all of our.

Key value driving strategies and initiatives and we.

Yes, we have.

Pretty long list of opportunities and it's yeah. How many can we do at one time, how do we sequence them.

What's the emotional strategic and financial value will be each one of them.

And yeah, that's that's how we kind of allocate our time and.

Yeah, you human capital and financial capital So.

We're excited I mean, I actually it's kind of a gift to tied to say like you know what does.

Don't mail the book right now don't do all that work like just have everybody stop and let's take all our talent in this organization and kind of.

Really see the board.

Really put things in the right order and really focus on kind of these.

The next few big rocks that can kind of change everything again, you know I really believe that if by.

If we use our time wisely over the next six months.

That we can really step change the core business.

From a just a comparable sales point of view, yes, like it did you need you really need to get.

All the leadership to focus including me right. So I and we've got so many things to to work on of so many opportunities and we've been we've also brought in lot of new talent and we have a lot more kind of capacity.

To do more but but it takes everybody together and to really focus to move the big rocks otherwise people are working really hard and all these little rocks and you know there kind of right your range in organizing things in it.

At the end it doesn't really move the needle that much.

But in that just short time, we have started to focus in.

On a couple of the categories I think.

If you were sitting here with kind of our senior leaders of.

Product.

I think everybody's eyes, Gilly wide open and we think Wow, there's a lot of opportunity here.

And and then and not just the product itself, but then.

The physical manifestation of that product in the marketplace.

We got ideas and opportunities to do things today were I'd say we're.

Were exceptional at presenting the product physically in an integrated fashion.

We're a little hard we're kind of hard to shop by category today right you got to one of our big galleries, you try to shop for lighting ill try to shop for Cat you got to kind of walk the whole place and we don't even have the whole assortment and organized way and it yeah. The web helps you there into the books help you there but.

People still really want to see the goods so.

We've got a lot of ideas around.

Doing different physical manifestations of categories in a way that we think can also be massively disruptive.

No I don't know, maybe I should throw one out there everybody a bone so think about.

Most likely just want to come but I'll talk about when they were a little farther along in our thinking just to kind of give you. The idea like we think if you go to any of our.

Any of arc.

You know regular galleries.

Legacy Galeries Lafayette any of our legacy galleries. They show one collection of outdoor furniture on the floor for six months of the year.

Great and then if you go to our Big design galleries, we show 20 to 24 collections.

Year round somewhere around there.

But they're not all of the same place summer on the rooftop some around in garden patios summer on terraces.

And we have now what do we have 45 collection this somewhere like that.

My next year, we might have 60 70 collections of outdoor furniture.

We've got a concept we're working on that could come to life.

Yes faster than slower I actually like saying it because it gives us a faster deadline, but everybody's looking at me here in the room theyre going to like Okay. Here because right now we've got to gets done really fast, but we're working on a concept called our each oasis.

And you know in its going to be a freestanding outdoor furniture experienced like nothing in the world. It will be mind blowing I and we will own the category not only outdoor furniture, but shade and fire and heat and textiles and things presented in a way in an environment.

But you can't even imagine.

And I think it will be massively disruptive and accretive.

Yeah to our business.

And if I just think about that you think about like well gosh is there something he can do is there are each elimination as there are a tender foot is there.

No.

Our age could share upholstery is there arch bespoke for sure is there like.

Like I can go on and on right and everybody is going to shift here. He goes like the whole.

But you can all this and start to imagine and RH compound.

Of this beautifully integrated experience with these isolated experiences around the categories that allow you to shop, both ways and allow us to express our brand in a way no one's ever seen and so you know so we've got these things that we're working on that we're testing and and that's why we get to put everything in perspective is like well, where it's our age.

Color come in well like we got a whole bunch of things like that to choose from Karen.

How many can you do at one time in what order or how do you do it really well.

I got someone in the room looking down at the San are you going to tell about that maybe if I tell about that because we think we're really crazy I mean, she's looking down at me right now but.

Like another another big idea, but were yeah, we're not short of ideas here and.

You know the key is.

We're all short of time and it's just how do we allocate our time.

And I Love the fact that right now this pandemic in some ways, it's given us to permission to reallocate our time.

It dramatically different way and I think we'll be more right than wrong as we measure the outcome of how we allocated our human capital.

Over the next six to 12 months and and we might find that Wow, there's real breakthroughs here and we might be spending our time, but like we know who knows maybe we might find out two years from now three years from now were mailing.

Two thirds less books that we just don't need as many books and they can be different like you said expressible lifestyle differently.

Lots of different ways to do it into the good news is we were kind of always unsatisfied always on the move we're always innovating we're always learning.

We are getting smarter and smarter and I think we'll keep.

Finding better ways to do what we do.

So.

So lots of things.

In the horizon.

Like I gave you thank little Pekin during future now now you guys want ask me in every conference calls like yeah, when our engender foot coming when sorry to eliminate I mean, once this coming ones that coming but that but theres going to be a lot coming over the next 510 years like we're not going to run out of ideas here.

Thanks, Mike Congrats.

Leadership team.

You are creating a truly remarkable.

Thank you. Thank you.

Your next question comes from the line and Michael Lasser, GBS, keeping them ask a question.

Good evening. Thanks, a lot for taking my question is it two quick ones and they may maybe for Jack number. One can you provided explicit break down where the gross margin expansion came from in the second quarter and then I have a quick follow.

Well, we beyond would give you already mentioned the letter because we did talk about 490 basis points of product margin and so the rest would be shipping expense and occupancy expense, which we got a little leverage on each of those.

No we're not going to go in a much more detailed in that.

It did that just come from fewer promotions and discounting.

That occurred in the second quarter.

Yeah, but partly that I mean, but but but partly.

Higher quality product that.

Commanding.

Higher margins and.

It all the things that we've talked about cycling of the outlet death, the cycling of the rug transition so and that's okay and that's about those two or about.

A little over a third of it right little less than half that's right and the rest is just higher margins across the business right press category.

Yes, that's helpful and my follow up is.

Yes, you are on this path to 20 mid Twentys margin overtime deep is there a scenario where you would take your margin would take a step back if you accelerated some these investments.

Or do you think from here you can continue to see margin expansion year over year, even while you do make these investments.

We think we can do it even while we're making those investments because we keep doing it while we're making we've been making investments.

I think the key is is that.

I mean.

Maybe there's a time, we say look we've got so many really good ideas now we're going to invest even more and you know we're going to have a flat year, we might have a year. This a little down I don't know maybe I will tell you when we get there I mean it it we will make really good long term decisions like we're not going.

All of us and become a company that gets to 20% operating margin and start managing quarter by quarter and go into the downward spiral that a lot of companies do because they start quote unquote protecting their brand right. Instead of building their brand you know when they hit what I call the deaf curve.

You know they they're really smart in inventive and innovative well they're building their brand and then they they build something that fits valuable and then they start to protect it and everybody start playing defense instead of offense and that's when you just go into that deaf curve.

Yeah and.

You know you start shrinking because you start playing massive you play more defense and you do often so you know look if it's right for us too.

You know run flat margins are slightly down margins to make an investment to kind of leap frog accompanied by hundreds of basis points of course will do that like you've seen that you'd have to be a short term think or I'm not I'm like.

I'm not.

Trying to get out of this company or sell this company.

None of US our you know we're this is this is our lights not just our job. So we're going to bring to make decisions like we own 100% of the company.

No we're not going to all the sudden play small ball try to play quarter by quarter year by year, you know predictable margin improvement we could have by the way it could have not let this thing slingshot to 20.

I got kind of satellite go looks like.

Then a bunch more money here. So we grew 100 basis points a year hundred 50 basis points year, it's like that's like dump.

We're going to you know, we're going to find big moves and big Leapfrogs that we're going to make the big moves in big Leapfrogs, because you know what they do they lead you to the next big move and Big Leap frog.

You know so we're we're going to keep playing our game and yeah.

And again, if you look at us overtime.

Kind of shared with you go do the math go look at November 2nd if 2012 and look at our stock went public at 24 look where does today and go look up every one of those other brands that I would tell you most people I'd say hey, how do you think these these companies did over the last seven and a half years compared to last.

Everybody you ask that hasn't done the math, which they owe those companies did better than our age.

None of them did better than our age.

Right and the only way to keep keep that kind of performance alive is to continue doing what we're doing and not not play not not get down into the lid rocks not let our.

Our view contract and.

You know and start playing a quarterly or yearly game.

Sure.

We're going to.

10 years from now five year for now 10 years now I think our shareholders going to be really happy.

By start playing like quarter to quarter year by your own my God Weve operating margins might be down 100 basis points. This year be let's not invest in that extraordinary idea, let's not do that.

Like I.

Thanks.

Since Dom yeah. So.

Going to play play the game with a long term view, it's worked for us thus far and I think it'll continue to work for US we want to get better we're going have to take vigorous we'd have to be more inventive more innovative.

Than we've ever been before.

Right you know your EBIT striving to get better you're allowing yourself to get worse. There is no such thing is staying the same that's why it said in the beginning like someone pulled out my first video we can open we're watching it the other night when I said.

If you want to know are better company put down your spreadsheets and.

Go to.

Go to Melrose go to L.A. or go to Atlanta, and maybe you will see what we see you know and.

And also fall in love right and.

Because you have to kind of.

This is so different you'd see it to believe it right but.

We got to we get to get better at doing what we do we got to get more courageous not less courageous we've got to take more risks not less risk otherwise the whole things going to.

If it's going to go into a downward spiral is going to become boring you were going to lose our passion here.

And you're going to be like all the stiffs than the department store industry.

You know like.

Like.

They haven't won done one innovative thing in the last 25 years.

Why because they like their managing the business, they're not leaving.

They're not building.

Yeah. So.

We're not going to be scared that kinda take risks to kinda it.

Yes have our margin.

Yes, like de lever by year Woo.

Thank God, we did what we did in 2000 2016 and 17.

Understood. Thank you very much yet.

Your next question comes from the line as Christine effort Nappies with Telsey advisory.

Ask your question.

Hi, good afternoon.

Got to ask about.

The demand trends, you're seeing it seems like it's a very good opportunity to attract new customers to our each can you talk about whether you're seeing an increase in new customers or is allowed to be men coming from existing members or are we activate a customers that perhaps had shop before but not recently.

Yeah, I mean that I think the numbers would indicate we're seeing a lot of new customers.

Right. This is an acceleration.

In new customers this acceleration existing customers.

But you can't run up 40 demand 47 demand without new customers. So.

Yes. It is people that all but then again the home is become more of a focus it's more important.

This is much more people buying second homes moving.

As an uptick in the home building market.

Yeah, and hopefully this means that you know again to assess the new level of importance on home.

Possibly indefinitely.

And then my follow up can you talk about.

The performance of the two new stores that you opened this quarter and then I am down on your letter you mentioned you couldn't provide.

Opening guidance for galleries, just given all the changes that may beats.

Update on what's going on barrel when do you think you could we assume some store openings in 2021.

Yes, well one surely murder are we're really happy with with both yes, it really pretty extraordinary marine Moran.

It's not performing as well as Charlotte because the restaurant, we opened in the restaurant for three days and we have closed restaurants restaurants in close what for a month and half two months some like that it's really great for everybody. That's.

We have an open for our associates so.

We're feeding our people and it's so we keep keep our team engaged in alive and people or it could get the there, but but our customers can't then that that drives a lot of extra traffic and extra revenues, but in spite of that morons really performing well.

Charlotte is kind of off the hook, great like and what we're finding in some of these.

I don't know if you take health Charlie secondary market, Yeah, I mean, some of these markets like Charlotte in Columbus like extraordinary list I mean lift like.

Way better than we have except expected and I think that.

We're even more differentiated and unique in markets like that because even the great brands. If you look at the luxury brands my sense is they probably under invest in those call, it's kind of markets because they don't understand them.

And there's I think theres a lot of wealth and in many of the markets and my sense is that a brand tend to.

Under invest and so we built our prototype in both Charlotte Moran, but you think about sherlund Columbus.

The the lifts are extraordinary I mean way beyond our expectations not a little beyond way beyond.

So.

So.

It really just making us rethink.

The just the focus and investments on some of these markets because.

They are very home centered in a lot of these markets in Columbus in Charlotte and places like that.

So, but but we couldn't be be happier with how the new new galleries are performing.

And then it's as far as that guidance 21 will open new galleries and 21, we just.

Things are moving around we've had some of the developers of.

They froze their capital outlay, its which is a lot of our T.I.s stuff for a few months since we've lost time, it's hard to get things into local municipalities and get approvals right now you do and zoo meetings.

We're trying to get.

Our each moorestown approved in.

New Jersey, which is a five and a half acre a state with a historic home and we're developing multiple buildings in gardens and.

Food and beverage offerings steps be extraordinary gallery to just sit.

It's hard to with without physical meetings in pound meetings trying to do stuff on zoom is just taking forever. So.

So we got to fit of a slowdown on things and but what will.

We will have new galleries in 2021, I think we just too hard to commit to a number because some things are going to get kicked into 20 to 2022 and things that were 2022, we're going to probably get kicked into 2023, because just everything's kind of backed up.

[music].

Yes, there's going to tech.

Yes go ahead. Thank you.

Your next question comes from delivering Oliver Chen with Cowen and company.

Ask your question.

Hey, guys. Thanks, a lot it's Max on for Oliver can you provide any updates on timing in Europe.

Where are you in the process of just planning where the Dcs are going to be and then the gallery openings seems like maybe it's also been pushed out a little bit so any color there would be great and then we'll follow up.

Yeah, no nothing pushed out in Europe right now the initial gallery that we plan to open RH, England, which we plan to launch with Oh, We still believe we can open it tentatively.

In that kind of early summer.

And of 21 and that anticipating work to be able to travel over there soon.

But you know and the team is identifying.

Distribution and logistics solutions in where we're going to be in whether the DC is it can it be in Belgium, or it's going to be in Netherlands, or it's going to do we opened one in the UK and we've got all the Optionality teed up and teams done a very good job, creating the option has been doing.

The math and thinking about it short term long term.

As we think about the investments and we've got to kind of ramp up being able to we've got a placed the orders and we've got to get goods and they've got to be there by.

April may so we can open in June it's kind of our target.

Maybe we can open as early as may, but but I think it's going to be more like June.

But but a lot of its just going to depend on the the virus.

And what is travel look like and what is yes, local restrictions look like as far as gatherings and shopping or we can have a second wave of the viruses are things going to slow down shutdown or anything we just don't know.

So we said tentatively 2021, that's what we're always going to open.

That first gallery.

We are targeting.

I think 2022, we would have Paris ready to go and maybe another one.

And then.

My sense is central London is just a more complex.

Job that might take longer might be 2023.

But we will seek to its all depends it's like just getting approvals right now and and things like that or are the difficult thing and you know understanding construction timelines and stuff so but.

So far there is no real change.

The only questionable.

Questionable one would.

Can we get our age England open in 21.

You know Theres still some question because we just can't travel right now and there's things we can't do.

Got it Thats very helpful. And then on new opening pipeline, obviously no guidance, we just discussed step, but can you remind us how many of those galleries are planned to be capital light and then what that in mind, just any sort of framework, we should think about our longer term capex.

Where it could be versus let's say the last several years. Thank you.

I don't know for why do you think you'll see more capital light than less capital light, we don't have that many bespoke projects on the.

On the docket doing that right now, which new Jersey, New Jersey Swiss focus, but new Jersey is basically capital light to development deals. So we new Jersey weren't yeah, we're buying it mcelligott bellmon deal where we're.

Sale leaseback, yes, we'll do sale leaseback, we'll get a 100% of our capital back out of New Jersey. So I think about those capital light and we have a little bit of capital, we're putting a front or taking construction loans and we'll get all of our capital back into.

Immediately after we.

We sell it so.

But but I'm just trying to think we most of our big capital jobs I mean, the one on the horizon I'm thinking about is London.

Depending what we do in Orange County that will probably.

Be a little cap more capital, how because it's going to be.

End of a new cochlear gallery.

Miami could be quite Miami, Miami, Yeah, Miami, if we.

Yeah, we have an opportunity to do a deal weve been trying to do for seven or eight years announcements coming looks like it might be coming back which would be extraordinary but.

But but even there I think it's going to.

You've got some of these things that might look capital heavy but they're like New York right, they're going to pay back in two years. So.

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Yeah, but going forward I would say there.

If you think about the real estate pipeline. It will have a better return on invested capital in the next five years than it had in the last five years.

Got it thank you so much.

Yep.

Your next question comes from the line as Tommy is that Korea with JP Morgan.

You May ask your question.

Hi, Thank you so much for taking my question I had two quick modeling one.

So you mentioned cobot 19 related cost what about 40 basis points of drag in the second quarter.

So.

Any any guidance on what we should expect for the rest of the related to that and then.

Could you remind us how much was the annualized savings Rhonda.

Headcount reduction you did back in April.

Hey, Tim Yelp uptick I'll take that.

Look from a cobot perspective, clearly with the reopening activity in in Q2, there's probably.

The bigger hits going to be then with the 40 basis points and so as I think about the rest of the year.

Some amount less than that.

And then as far as the headcount savings look.

We as Gary talked about we went from demand being down 42, demanding up 40, you'll need basis 80 point swing in our business.

And so.

In some ways those savings and that we're making investments from here so.

The bulk of those savings are sort of behind us and in Q1. Some we got some in Q2, but but were but we're in investment mode. Given the given the trajectory the business.

Got it that's Super helpful. And then lastly, another quick one.

Regarding the while the army two when do you expect that to be up and running.

I think it's probably more like spring of 21 somewhere around there.

Got it great. Thank you so lots thank you extend.

Your last question comes from delight that Bazhan wed, let dish security female ask your question.

Hi, Good evening, Seth Basham with Wedbush.

My question really around.

All these great.

Thank you so you've got a really bad connection yeah, you've got to really bad connection we can't understand you on the sense like Darth Vader almost.

We can't.

Yeah, now you've got to really bad connection.

Hi, guys.

He said.

So you're talking about sequencing of of the investments we're making.

Yeah, you can just a little bit more color and how you matching execution risk associated with that I'd be excellent.

So how we manage execution risk with the investments for me.

Yeah again, we spent a lot of time deeply thinking about where we allocate our human and financial capital and and we think about.

Investing in things that have you know.

Much greater asymmetrical risks to the upside.

So.

I don't I don't see any.

Massively elevated.

Level of risk in the investments, we're making you know the one where we obviously have the less the least amount of.

Experience and data is is in the international expansion so.

But when I think we've got that appropriately handicapped and we're moving at a good pace. That's good allow us to kind of learn in improvise adapt and overcome so.

Yeah, but but I don't you know the level of capital that we're putting into the European expansion is.

If you would ask me three years ago to said, we were probably going to be putting in two or three times more capital than we are so that brings the risk level down quite a bit.

And the fact that we were able to.

Get.

Yes.

Yes, a handful of these deals that were ex Abercrombie and Fitch flagship locations, where they put in a massive amount of capital.

Rebuilding the buildings, putting in the H.B.C. in the electrical and all that kind of infrastructure and they built beautiful I mean anybody who have seen some of this abercrombie and Fitch locations are unbelievable. So.

Yeah, we got a handful of those that.

They are going to put us in a more of a capital light perspective, because we can just take out the fixtures and do some interior architecture. The outside of the buildings are spectacular and then we got some capital building a restaurant.

Either on a rooftop or terrorists or.

Things like that that.

No we're not not significant capital so that's what's giving us a.

Pretty.

Pretty high level of confidence in.

That we've mitigated a lot of risk.

Thank you.

All right I'll now hand, the call back to carry Friedman chairman and CEO for any closing remarks, great will they thank you everyone for your time, an interest in the organization I do want to I think our people in partners of of of our age.

Yes.

In the U.S. and all around the world.

Your extraordinary efforts to.

I just in provides through this period and adapt and overcome the challenges and bring our brand a life and new and innovative ways and connect with our customers in new and innovative ways in connecting with each other in new and innovative ways I think its.

He has been extraordinary to watch in its Mekinist made US also so proud and.

I'd say look that the next the next 10 years for this organization.

The opportunities ahead of us or just.

Extraordinary and.

You know if anybody takes a look at what we did in the last 20 years, you with no capital.

And basically trying to dig ourselves out of a grave you think about what this organization going to do with the knowledge Weve acquired you know the capital structure, we have experienced and the passion we have in the love we have for what we do.

We couldn't be more excited about what's next so.

Thank you everyone. We appreciate your leadership.

And we appreciate your partnership thank you.

Thank you, ladies and gentlemen for joining our second quarter 2020 earnings conference call have a great day you may now disconnect.

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