Q3 2020 RH Earnings Q&A Conference Call

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Ladies and gentlemen, thank you for standing by and welcome to the our age third quarter 2020 Acuity conference call at this time, all participants on the listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question at that time. Please press Star then one when you touched on telephone as.

As a reminder, today's call is being recorded.

That was from the columns, you hold out and Dolphin RCR.

Oh, sorry, yeah.

Sorry, I think we're ready to go right and acuity.

Oh no. It's okay I'll start. Thank you. Good afternoon, everyone. Thank you for joining us for a third quarter fiscal 2022 in a conference call. Joining me today are Gary Friedman, Chairman and CEO and Jack Preston CFO before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the.

Moving on.

Excuse me federal Securities laws, including statements about the outlook for our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please.

Please refer to our SEC filings as well as our press release issued today on a more detailed description of the risk factors that may affect on results. Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the result of any revisions.

These forward looking statements in light of new information or future is on.

Also during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures on a reconciliation of these non-GAAP to GAAP measures.

Measures in today's financial results release.

Like broadcast on this call is also available on the Investor Relations section of our website at IR got RH Dot com with that I'll turn the call over to the operator to begin working on a session operator, we're ready for questions.

On a good ladies and gentlemen, I'd like to ask a question from supposed Star then one on you touched on the telephone.

One moment for questions.

Our first question comes from agency of Barclays. Your line is open.

Great. Thank you very much on it.

You know what I just have to say Wow I mean, this is a really remarkable performance. So congratulations to everybody at our age on.

Gary I guess my first question for you. It's a you know in the past you've mentioned two macro drivers that benefit the company one being kind of high on housing gross and the second being robust stock market returns. So we're in a market that we have both and based on the historical perspective no.

No how long have the you know what's in a lag on in terms of the effect, obviously, we're seeing it sort of immediate today, but what's been the duration of the positive impacts to your business from that on.

And then my second question is on the sales galleries in Europe, what size will they be and how should we think about I guess the annual sales contribution you know of each of those thank you very much and congratulations.

Thank you. Thank you.

You know, it's hard to be specific on duration I think it depends on severity of correction in any of the markets.

Particularly you've seen.

As you know with.

With sharp stock market moves a huge sometimes we'll pause consumers are at the high end.

So you know hard pressed to kinda give.

Give you a number or a range there, but but I'd say, there's no there's nothing different than how you might assume.

The consumer would behave depending on the severity of the changes in the marketplace I I would say.

Yeah, we see a very healthy whole market right in and you know I've been asked.

Recently about cheese, how do you feel about you know that the cities you have galleries and better you know consumers are moving out of somebody that you keep them cities based on pandemic and there's a boom in.

The suburban housing market in the second home housing market were generally I would just say again were generally in different because people moving in buying homes. It is just a good thing right. We we have galleries in every major market said that well you know that that will all kind of balance it itself.

And NR NR keep keep market galleries like New York tend to draw from the sea broader suburbs and everywhere, because its where our best assortment as but but it's you know the uptick in the housing market and how long that will last I can't we we don't.

I have a crystal ball I, yeah, there's usually a longer tail there because its anybody.

On the phone knows that if you bought a new house or moved into new how simple and.

It it triggers a lot of spending on the home and it's it's not an easy job you know it takes a long time [laughter]. So so we think that that the tail from the from just the housing market move looks pretty good. It's it's it's hard to say today, what's going to happen with the stock market [laughter].

Yeah on and how you know the markets get a.

Read what happens next to the pandemic.

It's hard for us to understand how it yet.

But the market will cycle through day.

Stay at home stocks as they call them versus others and yeah. We just you know we try not to get.

Two two focused on on those things, we can't control, but as you think about the the galleries in Europe and.

How you should think about that the sales contribution.

We we think it's it's very different.

Obviously from that perspective book work, if you think about the U.S. when we.

But when we open a new gallery almost all of them are replacing an existing gallery. So there's there's something very good about that day and there at yet from from the perspective that there's little risk and we have a lot of history right. We know we have the galleries is doing.

Yeah, 18 million and we opened a new gallery that has hospitality generally on the yeah first 12 to 36 months it will double to 36 million and we.

We have a point of reference in each of those markets.

[music].

But.

All right when you think about opening internationally.

We're not replacing any store. So you have a bit of an unknown on on that and like on yeah, and and that can be a negative.

Because yeah, there's there's more gas working there's less data to use.

Net were relatively yeah, very accurate on understanding whats going to happen with.

With our.

With our expansion in the U.S. and and even where we have good news new markets that we opened in the U.S.

We were relatively accurate in predicting the performance.

So we had less less data internationally, we we don't know exactly what the reaction will be.

But and so that's a negative I'd say on the positive the way to think about it is you're you're not opening a market you're opening the country right and so.

So I think about it I think about it from the perspective of UK, just if you start there.

No.

California today, you call. It Directionally, you know five but directionally $500 million market for the business.

Without all the gallery conversions go longer term [laughter], probably had 700 billion dollar.

Plus market for our age you know probably adds as we continue to expand the assortment sindicom El.

More disruptive dominant brand called California long term, maybe it's close to a billion 800 million, but if it's easy to easy to Cseven hundred million as you think about transforming California will take the UK and 68 million people right versus California, 39 people on 39 million people, you've got similar demographics similar well.

I've, you know populations and so on and so forth you know little total change on the density So you're you open it.

Gallery in and you know.

England, London or whatnot, you know and we've got it.

Kind of a unique strategy, there, where we're opening day, it really terrific [laughter] galleries image and impact and kind of conversation point of view RH, England, which is this magnificent has stayed on 73 acres in Oxfordshire, you know its five minutes from the Southern Farm House, It's a good thing Paul.

That the courthouse in Great Britain and.

Yeah, but it's it's you know it's kind of out from the population it will create a lot of awareness on the brand hi, Gary and just because of the footprint on the uniqueness of the gallery and it's.

It's and it's got a great sizes, but I think were 50 something thousand square feet, there and the three buildings.

And then do you have a very different warning in Central London Day Fair right, where we're we're right in the heart of it and yeah. We're we're framed by Seville, ROE and I personally think Burlington gardens, and I get where block on new Bond Street, and the flagship Ralph Lauren and the Big project that LVMH is doing a and no ones.

And on the wealthy people know what on Miss a share I I think everybody will hear about us in Oxfordshire, how many people go not sure but that by the way to think about it is.

It's not just us the galleries, you're opening up entire direct markets right and we've always been a brand we used to refer to on itself is a direct centric brand a if you think about.

Yeah, and it's funny, because I just wrote about physical first right and that.

And it's not that it's not like people think Oh, he doesn't believe on the Internet can be building. These these big extort sees the galleries, but.

The way, we got to do to even be where we are today is we did that through the direct business right. When we when we started here where these little stores Ah.

And we had a little assortment and there's no way you could show our assortment and you know the 6000 square feet of selling or 7000 square feet of selling we had the average galleries and.

We had a strategy that we used to talk about in.

And on kind of first leg as a public company and and and I didn't talk about it so much when we when we re entered the public markets, but we still talk about direct centric growth than what we meant by that is we said we were going to size the assortments to the potential of the market not limit them.

The store.

And use the sorts cash scan and the website to reach a much broader market and by doing that you know we were we were able to grow the company you know a company that was add on the edge of bankruptcy in a very capital efficient way.

And and that it's going to kind of play through when you think about moving into new countries right. Here, we started with 106 stores and we kind of right sized it down to we think.

60, 70, whatever it'll end up being as we optimize the footprint.

I don't know if we have to have this many galleries in Europe right with it because the internet continues to be.

A better and better tool to shop or to convert right and so so if you're well positioned you may not need as low as many physical stores. Its just it today, we know what the physical stores do we know we can double the business and every market, yes, it's from retail point of view on.

So so they said when you open up its a gallery or to win in England I again in greater the UK when we open up a gallery and in Harris right, you're going to open up all the France and greater parts of Europe, you're going to open up your business to all the travelers.

Yeah and.

So we're not sure exactly how to think about that.

Until we until we have a couple but I'd say.

The the asymmetrical risk to the upside.

From how we think about our business because we are we have been a company that had yeah. Before we are transforming our galleries wonder galleries, where undersized, 50% of our business was was.

Direct to customer Omni channel digital first whatever you want to call. It [laughter] you know, we just call it on liner and on our website, yes were transacted and so we we believe.

Yeah opening up markets. It is opening up countries is it's a big deal a really big deal and that.

I think gives us asymmetrical risk to the upside.

Outside of maybe not having as much specific data right I could be like being the brands from today.

Third as we have today and opening up California with a magnificent store in L.A. right at an incredible Gallery I don't know call. It in the Napa Valley or somewhere that you know people visit vacation and go to for weekend. So yes.

So what does that do we.

We think it's it's some kind of a really good outcome would be our best value.

Today.

That's very helpful. Thank you very much.

Yep.

Thank you again, because I got the question from supposed Star then one our next question comes from Max really thought of Cowen and company them on itself.

Hey, guys. Thanks, a lot for taking my question and dock, perhaps on the nice quarter. So it's really good to see that you're a cancel rates are below last year do you think that that could remain the case over the coming months or could there be some risk assets supply a will trail demand for a bit longer than I. You know you previously.

You anticipated and then just separately how are you guys thinking about cash allocation priorities at this point you're on your free cash flow starting to ramp and with fewer major on capital heavy projects as well as debt maturities.

Do you think we could see on accelerated share repurchase a special dividends on M&A just style wanted to get your thoughts on that thank you.

Yeah, they cancel rates to have but.

Been down for yes.

Several quarters now so.

That that trend would would indicate that there is not a risk right that the consumer and I think theres not a risk because one because I don't think we have a lot of direct competition and are you.

Yeah.

Where we are in the market.

We are one of the few people that stock higher end luxury home furnishings in most places it's a much longer wait time custom et cetera et cetera.

And.

And I think that the consumer needs the product and I, just don't think anybody elses and stop right. I mean, we we were running.

The highest back orders in the history of the company since I've been here 20 years now so.

I've never seen this.

Kind of phenomenon right they've never seen.

Backwaters at all time highs and cancel rates at almost all time lows right. So so one is that tells you the consumer price doesn't have a lot of other choices.

What choices they perceive they have on.

Also don't have product does ship right away.

And they really need the product so they're not.

Yes, many cases force to wait right. So you kind of go if I got it if I don't order now how long might I wait right, how many more weeks Mike might the delay be so so the numbers would tell you over the last few quarters.

That there doesn't look like the risks that that doesn't mean things weren't change I just don't see any reason for them to change so our high degree of confidence of converting.

The the orders to revenues is very very high right. We have a lot of data now and very very consistent back orders.

It trended lower not higher backorders have been below a year ago and they were they were low net by backwards seamy cancel rates the low you're going there are below year ago low.

I fear and adds back orders.

Have increased every quarter right because you can't.

You know what else. There are just started trending up yeah, we weren't buying for afraid we cant from Florida and Tim if they start trending up 20%. We're buying for 20 per cent also on they went up 30% and then you are buying for 30, then we got 40% you're like graduate from buy for 40, Let me ask wait a few more weeks and they go okay. It looks like a trend that you buy for 40% to.

We on a compounded basis, then they went up to 47% right. So we kind of got behind right. So as we thought we would start catching up we also we actually fell behind because the demand continued to accelerate and you would have thought that cancel rates would be impacted but but for the reasons I stated.

I believe that there haven't been impacted and now I.

Kind of have a more from view that I don't believe they will be does it mean.

We won't be wrong about that but that's that's our view today and as we think about cash allocation priorities.

[noise] you know what we're free to work on a world, where where things are changing daily right that get worse. We just went into in the state of California shelter in place orders right retail, it's operating at 20 per cent capacity.

You know the malls and shopping centers have less traffic than.

Then they they've had in the last few months.

We just saw the most severe drop off.

Of the.

[noise] Black Friday day to cyber Monday, selling season that we've ever seen and it disgusting.

With other retailers and I.

Yes leaders in the business people saw a massive fall off during that period like we're sitting here going Oh like.

We adjusted orders is you know is the tailwind to over and it just seemed that it based on on the fact that that the virus was with spiking people decided not to go out and shop and all of a sudden once we got past.

Cyber Monday, our business started to ramp back up so when you're on it.

Kind of a business situation.

With so many unknowns that that were and whether you have a headwind or tailwind. That's it from me doesn't really matter I mean, we have more optionality with the tailwind am I do I feel better being on this side of the table then maybe apparel people, who are the people have their business or or restaurants, and I feel on their business devastated.

Yeah of course, you choose this decide we're on but it. It you know it doesn't mean you should adjust anything long term means you could just.

Kind of do your best day to day week to week month to month as new data comes in.

To make really good decisions for what you know and don't lose sight.

Of your long term vision and strategies that will create a net.

That you believe will create significant shareholder value long term and I think weve proven based.

Based on.

Big decisions, we've made and and from moving from a promotional.

Promotional modeled on a membership model when I talked about having a March you held for heavenly costs, and staying true to that and transforming our whole way of doing business that was a long term view and we didn't let short term noise distract us we.

Redesigned and re architected the entire operating platform of the company.

Yes, well on a short term noise as we are doing that we stayed focused on where how we could create long term value and and that's hasn't changed and that's why you.

Yes, I wrote one of my longer shareholder letters share tried to give you as much detail as we could it's how how transparent if we can't have we're seeing the business, but things are changing all the time so to kind of have a strong view about what you're going to do from a capital allocation point of view.

Baxter M&A.

M&A or other things, we're always going to be opportunistic but.

You know I.

It's just.

Hard to kind of commit to too many things today I mean, we we were.

We're pretty certain we were gonna open RH, England yeah.

And.

Oh, it's and travel shuts down in the UK, we can't go unless we quarantined for two weeks and you can't send your leadership team and other people to go.

Corn team in the hotel for two weeks.

You know to work to day I'm I'm back and you know so we just decided like yeah not a good time, we had to make a decision to commit to yeah.

Yes distribution infrastructure and other investments in people and so on and so forth and we just felt like Netflix look.

It's important that we take a long term view here the long term view is like its.

Adults everybody will still be there if we if we wait to 22 will be more prepared will do a better job, we'll have more visibility will understand what this looks like on the other side of the pandemic. So yes.

Right right now would you say.

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Too many moving parts to to be committed to kind of any kind of net.

You know specific activity if if the right thing comes along that day symmetrical risks to the upside that there's real opportunity.

We'll do those things.

We've we've made some small acquisitions I think you'll read about in our filings on.

They're they're not really material, but we're taking opportunities to do things that will elevate the brand and investing the brand or and yes, we will continue to do things like that.

Where are we gonna.

Make significant share buybacks with all the uncertainty.

I don't think so not right now.

I think with let's let things pass and.

Yeah I did note no different then look I think we are we're very smart it not raising debt right away, we yeah, when well since pandemic hit in our business went down on.

Business moved 50 point stripe everybody's like you have enough cash is what this look like and we research day, we created a lot of Optionality, we a lot of choices to raise capital.

The interest rates would have been really high it would have been very expensive money and.

You know it might have bought us some optionality, but.

You just don't need to take risk without having real clear visibility I mean, some people thought we took a big risk buying back on.

60% of the company.

$1.2 billion, we didn't see it is risky right because we understood what was going to happen. We understood we are going to.

Hi, Rearchitected supply chain, it takes $4 million to $500 million out of inventory, we knew what would happen. We had really good assumptions I say, we knew we had really good assumptions, we knew our business really well.

And we made some moves that to other people look.

Look risky to us.

It had more asymmetrical risk to the to the upside and so right now as you know I think it's just you are going to really uncertain time. We gave you is much forward looking information as we could you know tried that I kind of look at this is.

Yeah, it's looked at this over a two year period right if it fits.

This book 21 is that is that.

It is a day feeling from 20 is it.

Is it down first half up second half fiscal 21, it's just the opposite I look at the two years together and say what kind of company do you think you have when you balance it all out we think this.

This is a company on its way to being one of the great companies and and that's what we're focused on so.

Yeah, that's that's that side.

Yes characterize our frame of mind today.

Got it thanks, a lot Gary and I are happy holidays to every day.

Happy holidays to you.

Thank you.

Our next question comes from Stephen Force of Guggenheim Securities. Your line is open.

Good afternoon.

Gary I mean, maybe to start on the last call you talked a lot about the reallocation of human and financial capital right and I.

I Wonder if you can provide more context around the potential benefits here right as you Digest those moves and Gary.

Is the is the launch of RH contemporary right in Orange color like a result of these efforts ready sort of speak to.

The potential benefits right of that strategic change not dropping the source book in the fall.

Sure well not dropping the source book in the fall was with the decision.

Based on the fact that I you know inventory.

Was it was chasing demand massively and we were only going to create a.

Greater pressure I.

And and possibly.

I am.

Not satisfied just have that customers frustrated with us and so on and so forth. So we give up topline in.

Bye bye not mailing book sure. We did if we would have made on the books would there been incremental top line, there or whatever would would there have been higher back orders or whatever would there have been more frustrated customers and wait times, there or whatever and so we thought the right long term move was not to try to chase.

This kind of.

Yeah optimize the business in this time of the pandemic, but had a shift <unk>, yeah arc, our human capital and focus on.

The longer term and and so we we reallocated our time and energy.

Towards.

Other things contemporary being one of them you know we held back from newness right that would have been generating demand today.

I feel really good that demand in the core business is.

It's bounced back to what it was up 39 right that are up 39 with no book.

Right with no newness. So we're up against last year's book were up against last year's newness and we're still up 39, and so good we've been up.

48, or 52 I had maybe.

But you know our business would have been messier and it's never good to kind of create a a messy business I mean or Brian those before this company's run in a messy way before I you know to caddick way, it's just no different than.

Yes, it's pretty clear if you just look at the emails you received on your end boxes that.

There was a period, where very few people were promoting now it looks like a period of a lot of promotions and so my sense is there's a lot of people on the retail business.

That are you know trying to fueled the fire with increased promotions I think that's a I think thats not a good long term view, because then you're up against all that next year when.

You know when you've got a cycle. These difficult comparison site next I Hadnt next year and I got to feel really good.

We've got a cycle demand you are up about 40, yeah, I maybe that fourth.

Fourth quarter will be less than that because we didn't mailed. The book. So we don't have the newness, but next year, we're going to have a lot of newness and we're going to be have really thoughtful constructed.

And Architected assortments and that will even be more strategic and we've been able to make investments in other or other elements of our business that will elevate the brand.

And and so.

Yeah, we feel very good next year about next year, unless something big happens assets, we have a stock market crashed on the bottom falls out of the home yet the home visits but from the most part.

I like how next year is shaping up because of the decisions. We've made I think we're very excited to think tremendous new product in the pipeline.

Almost too much you know you've got it it's got to make sure we were being disciplined about our investments from an inventory point of view on our risk on newness, but it's a lot of great newness and ER and I think RH contemporary.

It's going to open up book and entirely.

Another new layer on the market right that for us, it's going to it's going to bridge the gap between the kind of class updated classics of interiors and the more you know a harder edge modern and and fill in with some statics that we just hadn't pursued.

For in it in a very RH way right through our own unique point of view and I think it's going to be really exciting to the consumer and we've got some tremendous new talent from.

From it.

Design, an artisan point of view coming onto the platform I don't know if anybody's picked up the new architectural digest, but you'll read a two page article about Allison Berger coming on to our platform with day.

With some incredible new lighting designs that Dallas and is that I mean is known as one of the.

One of the great lighting designers and last designers.

In the world today I mean.

Hello, Yes exclusively on Hollyhocks platform, which only has been noticed that and then the best High end interior design show room in the United States and Yeah, you have someone like Alison come over to our platform you know kind of kept things again, right in and but yes, I just about the product and the people.

Joining the platform on the people joining me on the Cogs, There's just a lot of momentum I in.

In in our brand today I'm from a human capital point of view, both inside and outside RH that are going to contribute to our age.

From design manufacturing.

Hi, yes.

Business intellect merchandising capability and so on so forth so.

Yes, I guess that.

You know the way to think about it is there is there.

Theres theres going to be a a balance sheet right of way.

Kinda not mainly on the books.

And not having any newness and then cycling around next year and.

Not just mailing the books, but mainly more bucks right and index with more new and it's good enough contemporary and and you're going to have this kind of upward momentum now what will happen to the markets do we think some air it's going to come out of the demand we think.

These you can't it'd be foolish to think like this thing last for real on top.

Not at this level like we think it's you're going to cycle its going to normalize there is going to still be momentum in the home business from our point of view because of long tail in that.

In that that happens when people buy homes and move on.

But the long term if you just think about the moves we're making strategically.

Those are not temporal the pandemic is temporal.

Right the moves we're making are systemic.

And strategic and they're going to last a long time.

So that that's what we're focused on what is what are the moves we're making the investments we're making that are going to.

Good day.

The RH brand and render our brand more valuable in the marketplace more desirable.

More unique more authentic I and and that are going to have a lasting value.

'cause it's.

Look on our stock went up 120 or $30 in the last 30 days or something like that like I said you know the stock is going to move around you know you're going to have like the short term stuff is.

You get too focused on that and you start.

Kind of managing.

Managing your business right and managers generally arrange and organize the status quo and try to protect the present you know we're we're builders here. We we don't have anybody with the title of manager in this company I, we only have leaders you know and it leaders.

Leaders are taking people somewhere that they've never been doing things, they've never done right and and and they're building things and they're building value and that's the culture of our company.

If you walked in are centered on innovation you know you've walked through a portal that says RH the home of the extraordinary the remarkable in the amazing right because that's.

Well, we think right what what are we focused on that's extraordinary remarkable and amazing.

That's the kind of work yeah, that's kind of focus you have to have.

To build one of the most admired brands in the world and that's it that's our DNA that's our focus.

So.

Yes, all the other stuff is kind of noise and distractions.

The important things are the big moves on the big investments that are going to continue to change everything.

For a very long time.

And then maybe just a quick follow up [laughter] per per Jack I don't know, if you could sort of speak to.

What's the right level of expenses as we look out to 2021 or if you just want to sort of based on the third quarter here and maybe help us conceptualize what some of the transitory factors were right like the removal of the store structure so for us as we.

As we think about our 2021 models.

You know, we don't give guidance, we gave you our outlook and I think it reflects our confidence in the business and this sort of.

Operating structure and <unk>.

Look from some of things I love to.

Continued strength in gross margin and profit margin like that that is a strong part of the story and when we look when we look out you know and our confidence to to reach.

25% margin.

In inner outlook on longer term outlook I mean, those are the strong elements of the story as far as like specific elements in 2021.

You know we're not in a position to provide at this time, Oh look Gary because any anything else no. I mean look we we believe we're going to have Doug double digit revenue growth and expanding operating margins.

We'll we'll know more each day.

Each week each month as the pandemic kind of plays out here and the world's returns to some kind of a more normalized.

Environment for people you know how people are going to behave and what's going to happen but that.

You know, we're we're not going to get out over our skis from it from a cost point of view [noise].

Right and.

Yeah, we've had as you you can't so we're in it we're in a kind of a temporal environment, you've got to be smart about that so.

That's why we feel confident.

Net that margins will continue to expand because we've got a good handle on expenses and we have a day.

We have a good line of sight into the product pipeline or.

And what.

What we believe can be the margin structure from a product point of view, which is.

The key lever and expenses Weve.

You know we.

We're pretty disciplined around here.

From an investment point of view, it's it's it's a.

We tend to have a culture that doesn't spend money, we have a culture that invest money based on what we think a return on that investment will kind of what kind of return we will that generate so.

As we keep that discipline.

We don't become complacent or arrogant.

Based on.

This business trends that are happening today, you know, we keep our edge we continue to be.

On satisfied curious critical.

Always on finished always on the move on.

Well.

Well, we will continue to.

Do great work so.

I don't think there's any other people that are giving you much more.

Dave on the we're giving you today [laughter] I think are the shareholder letter has a lot in it.

[noise]. Thank you both happy holidays.

Happy holidays.

Thank you. Our next question comes from Gordon Haskett. Your line is open.

Hi, Thanks, I can I can be being can you just put it into some context, how big of an opportunity the outdoor furniture market. It could be for you guys and then for Jack just trying to understand the connection between.

Deferred revenue and customer deposits on your balance sheet, there I believe over 60% year over year, and then your demand comparators low or the lower than that just wonder if you could connect those two dot force.

Yes, I think as you look outdoor I'd say <unk> outdoor business is a lot like the general RH business I think when you when you build a brand like ours.

You in many ways are creating a market and that.

Yeah, your inspiring people to.

Hi to purchase an investor I versus other purchases and investments. They may have made you know based on what they see and.

You know no different than Apple yeah.

Created a new market.

You know they didnt look at the cell phone market and say, how big Apple create an entirely new market around smartphones and the iPhone.

Nobody thought it would sell in China became is definitely tone. It day in China you know.

When when when you.

When you create a really good.

Product.

And I'd, just a single product I'm talking about it you know.

Well integrated branded proposition.

Do you have an opportunity to create new market right to.

Disproportionally expand to market.

Because you're putting something out there that wasn't there before.

Right and.

Yeah, I think thats happening in many places right and look at a lot of brands that are creating new markets.

So in outdoor it's much the same if you just stood back and said.

[laughter], where do you go by outdoor furniture.

Yeah, there's not a lot of consumer facing outdoor furniture stores.

Right Yeah, they are kind of out off the beaten trail and as you know kind of.

In Weird places.

You can come up with an aim to driven by on before but but he said its high end outdoor furniture.

Where do you go where do you even see it where do you can get an inspired to buy it.

It's no one really presenting 'cause it tends to be more seasonal in nature.

As far as the peaks of the business.

Yeah, I used to joke around on a state that tell people.

He is what you net.

Remember that this is called Smith, and Hakan right and they.

Now they opened like 50 stores and then almost went bankrupt and then they took another go at it and I'd say, you know white wedding Smithen Hawkins make any money.

And.

Synergies, what we don't know it's it will be on for the most part they had to pay rent right and they paid ground floor rent for a very seasonal business and.

And if you look at our strategy and what we've done with rooftops and terraces and things like that Weve in our new galleries. We present, you know somewhere between 20 and 30 outdoor collection just hanging on to that.

The outdoor garden space and.

The rooftop space.

Nobody faces the customer like that in the outdoor furniture business and because we're facing the customer I'd gotten inspired environment, we're creating a new market.

And we're creating a new market and outdoor furniture at a very high return on invested capital.

So you know so we really really like that business and and say well why can't other people do that will other people don't build galleries as big as we do so they're rooftops never be as big or they don't control the real estate like we do and they don't you know very hard to emulate.

What we're doing.

Right and that's why the physical nature of our business is so important right like I say.

You know a website isn't invisible store right you don't.

See it you don't pass it you have to.

Be prompted to go do it if it physical stores people drive by they see you know, it's if you're on the right locations here in the <unk>.

You're you're going to be constantly visible and you can present.

Products and categories of waste that you can't online you know where the online on on like this it's very Democratic right. We everybody has the same size screen.

Yeah, Yeah, you Polys.

Polys home store can look as big as our H. on line I want to say Holly's home store, it's nobody named Poly. It's just you know just refers to it.

Higher end local furniture.

Yep, Yep specialty store that that someone's running and but.

But those kind of businesses can't do what we do and that's why we're so disruptive so when you're disrupt like that you you're taking share, but even most more importantly than taking share you're creating a new market and.

That's that's how we think about it.

[music].

And then Jack can you comment on if you have from Sandler deposits on revenue, Yes, I mean, obviously with the strength of the business and the high demand and supply chain constraints. We talked about those are the two items you know two key items, you're going to see that grow.

With customer deposits and that sort of deferred.

That especially on the business that we have that business comes from the bonds and then as the business gross or.

You know naturally you're going to have a growth in the deferred revenue balance you're looking year over year I would have.

How do you look sort of sequentially sort of where Q2 to Q3 grew as well that's a that was like an 18% sequential build so you know I think you know the utility both book and me wrong, but I think as far as impact from walking down from a demand down to revenue growth to come on to look at that that sequential built so like I said that was an 18 per.

Uh huh.

Gross most and very much expected relative to the to the trajectory of the business.

That's a good color look at it sequentially then and then just my follow up would be I'm. Just wondering if you guys describe a little bit more art than science, but just any sense for how much of your revenue growth is coming from consumers, who are actually buying second homes and or people, who are shifting out of city them to larger suburban homes.

[laughter].

We've looked at the data Chuck.

Yeah look the data is what exactly we do expect that suburban homes are have high growth rates second home markets have the highest growth rates and then you have as Gary talked about an exodus out of out of cities, which so but but again we were in all these markets on our customers whether they have a primary on minute urban market on happened.

To be moving out there you know it's on it's all you know at the on the day good for our business we.

We haven't gone into much more detail, but I think the trends like I said that hierarchy of second home, having strongest growth suburban you know very strong growth in urban or you know.

That being the weakest of the three kind of it's kind of from grass the obvious as we say, sometimes but from the shirt. Gary you got anything else that no no I mean look our business has always been our biggest part of our business is a suburban market business right. If its just were more large homes are you know.

Were those large homes have more bedrooms more living space outdoor furniture space, so on and so forth.

[music].

And yet no surprise is the largest part of our business and so that the suburban market, which is significantly large part of our business is cash.

Tailwind, a you know and as people moving to it that's good for us.

But yeah, it's again it's.

We we know all the data we've got it we yes, we will look at it I don't know if any of it tells tells us to do anything differently or expect anything differently.

No there's not like markets, we go Oh, my God, they're buying homes there again.

You know they don't know about it sort of looks rush to open a gallery or stuff like that I mean, you know.

Some some place you go okay, we'd been looking in.

Palm Desert, Southern California for years and.

It's on fire.

And you know.

Staff, who is our Chief Gallery officer went to see his grandparents every Thanksgiving and said, we really really need a gallery there on a coke yeah.

It's on the list you feel that strongly biotic.

Yeah, you know go find a location on getting them quickly I mean, it but it's not like it's you know it's not like Oh My God.

That's going to change so much is price a little mark that you know but.

You know were really well positioned in North America to to capitalize on based on.

Anyway.

It shifts within the market, we just like that the market's up right, what we're well positioned to capitalize on no matter, where they are moving.

You know in North America, I think the only place like like we were not represented in Montreal and were not represented in Hawaii I'm trying to think.

Yes, so theres a couple of places like that Naples.

Yeah, Yeah, yeah, Yeah, Weve from yet we're not in Naples, we plan to be in April, but we do great business Naples, even though we're not there [laughter].

Got it thanks very much.

Thank you.

Our next question comes from Michael Lasser vs. Your line is open.

Good evening. Thanks for taking my question, Gary can you give us a fleet growth of the consumer behavior that you're experiencing to drive this strong demand growth how much is coming from new customers from repeat customers and how much is coming from larger baskets are you seeing a trend of customers who are more often buying furniture.

More than one room in their houses on that.

What you're seeing is it stronger birds.

Well, our our interior design business keeps growing and has been growing and so you'd think in a big move like this it's kind of everything is lifted here you had some things shifted we had you know outdoor was off the charts in the beginning because a lot of people I think realize you're not going to travel for.

Thanks for.

For the summer and extend a lot more time at home, yes, but but the consumer behavior.

It's it hasn't it's it's no different than what you'd expect with demand like this yeah.

It's that.

It then.

New customers too.

You know higher spends from existing customers since on support them the metrics.

Don't make us.

You know think about doing anything.

It meaningfully differently then.

Then what we are doing so.

Yeah, you know so we you know our business as it had been.

Been growing if you think about that.

Got you know size of baskets on so forth, it's because we've moved the business from a.

Net from just.

You know conceptualizing selling product to our just kick it kind of creating product conceptualizing and selling spaces and the effort to be behind building an entire interior design platform on a national scale. If you go into a new galleries and you see the dedicated office space for our interior designers and the design affiliation.

On the meeting rooms from the space. We designed it will tell you that that obviously is something we're investing into.

So.

Yes, we think thats going to be yet.

Yet create [noise].

Strategic separation for a long time to come on you know all these investments will continue to create strategic separation I.

And render our brand more valuable long term and.

And so that's that's what we feel best about Hey look at all these pieces and say what will this look like in over the next decade, which I.

Try to get people would be Latin told you what sitting behind me Im looking yes, no one's change the whiteboard. So same whiteboard [laughter] you know that that's how we think about the business as I've always said.

Yes, when people ask Gary Baskins cash buyer stock and I always say assets in question a sales.

Are you on Investor your trader.

If if your trader and you're focused on short term episodic swings in the stock market or you know.

At quarter to quarter kind of things like Delphi or stock, it's going to be a volatile stock because we're building something people haven't seen before it's going to be misunderstood its going to get overvalued and undervalued and you're going to not sleep a lot at night, yeah, and yeah, but if you're an investor and you take a long term view.

I think one of the best place to put put capital.

You know I said that 10 years ago.

And you always said that five years ago and that if you look at our performance.

We.

Were.

You'd say take book.

Okay, I do wish it I wish I, just hung on hung on to our age stock. If I look at you look at our biggest share hold true today is is fidelity and the team at fidelity has been there. The whole time has held our stock they've held 15% of our stock at one point you went up to almost 30, because we bought back at the company and they had a research.

Friction there they can hold that much but that you know they would like to but that team is.

Not sold their stock.

At all since the IPO and and I think they feel pretty good.

Hey, Dave.

Adjusted in stock in that when we went public at 24 and.

Continued investing.

It looks like a good investment even though its went crazily up and down right I'm one of the big shareholders on the company and.

People ask me on days when the stock does really well or stock. This does really bad it's like I don't.

Don't think about that.

Do you think about this is a long term investment.

This is a great place to invest and I think that.

The character.

In the makeup of our shareholder base.

We would tell you the same thing.

So.

Yeah.

My question is these periods of disruption are owed to the opportune time to learn how to operate differently given the green on that.

On the cost side, <unk> third quarter, and recognizing that nobody has seen a decline was from.

On the source book is RH now equals on operating model Black Hawk.

Sensibly with a lower amount of LIBOR, so we shouldn't necessarily expect it on a LIBOR and <unk>.

Moving forward.

And how would you think about reinvesting some of that back on the business.

Well look the model is going to continue to evolve right when.

If you just take a simple moved in our model and say Hey, we.

Hi, Matt.

We went from a legacy Gallery do design Gallery.

And that design gallery will essentially double the business overseas.

In one to three years.

We're not going to mail anymore source books into that market.

We generally don't we maybe do a little splash because we're opening a gallery. So people are aware of it.

Our <unk> cost at it yeah.

At that level right Leverages massively.

And I think people, sometimes miss that in a model like ours right because they see this the gallery that go on must come from a lot of money it much more expensive and they don't think about the dynamics of what happens okay.

Because no ones like no one's ever taken a really productive kind of legacy store like we have and then been able to.

Just change the footprint and basically doubled their business site.

Never seen it before.

Consistently across the entire country, we can do that and so when you think about ABS costs like that gives you big leverage when you have a temporal situation like this.

With.

The pandemic and you make a decision to not mail a book.

Are there things, we can learn there yeah, but it's really.

It's a little tricky you know, it's like as we go to reinvest and mailed the books.

We mail as much as last year, we do remain on more do we made on less do we what do we test I mean, there is we're going to look at a lot of data we're going to run the models were always looking for opportunities to be more efficient to optimize you also don't want to under into the business in time, so, but but our model again although.

Way through do you think about doubling.

Revenue at retail, which is a big part of our business you know in a market and what that does to the cost structure. It corporate with that that's good cost structure against all the other operating areas our distribution centers since on so forth you are going to have leverage when you think about kinda, claiming the luxury mountain as we are and.

Making quality up.

And desirability up and.

Price is up.

That's going to give you leverage right and then you think about.

You know just kind of book.

On a being consistently I'm satisfied with whatever today's performances, which is our culture, you're always looking at how to do things better and so its route.

The cost structure.

And yeah, we're we've got all kinds of initiatives going on all kinds of investments, we're making that we think will have really good returns that will make the model.

More efficient more profitable.

So I guess.

Yes, it whether it whether it's labor savings, it's not so much good luck.

Labor savings its.

Leverage on in this <unk>.

And.

And and strategies doing that are making the business.

Yes.

More and more profitable.

So and we have a lot of things happening that we believe will do that and you know our history right over the last several years I mean, I remember when we said we were going to kind of be 10% operating margin average like you can't be 10% on pretty much like once and then we then we had 11 four right.

What I remember reading reports.

On the company 11 for no. It's like it's higher than you know whoever in and it's unsustainable right. They only have half the revenues at this other company that they're high was 10% or whatnot. It.

On slept force on sustainable and we'd be yeah, we hit 14.1% operating margin and like everybody sustainable you know now we're going to be a 21%.

And 21% on you know call it seven per cent revenue growth like really the way to stand back and think about the pandemic is like most of the year altogether.

We're only going to have revenues up 7%.

And operating margins are going to be 21 day.

Does it really matter how those revenues came over the course of the year or does it matter that on 7% revenue growth. They hit 21. So I don't know if we didn't have a pandemic.

Would we have.

Hit 20 earlier to take 22.

It's not like the pandemic from a revenue point of view.

Has enabled our operating margin this year.

It really has it if anything it's de leveraged our operating margin. This year made us less efficient when you look at to how things are happening I think about this.

We're generating like Oh, yeah, roughly $80 million to $100 million of future revenue.

We spent all the money like engaging all the customers, helping all the test for US you know doing doing all the design work.

And we're getting no revenues this year that 80 to 100 million.

Put that 80 to 100 million in your model this year and what would the operating margins for our HP like 'cause it wouldn't really be much more cost right like most of the cost is already behind us we would had shipping and stuff like that but you look at the flow through on that you go operating margins would be higher than 21.

Right like you.

That's what I'd folks I focus on wait a minute on 7% operating margin they hit 21.

Well they they were we thought they were hired 14.

Hi.

And we thought they were really high of 11, [laughter], Yeah, and then and then.

It starts to help you think about like where are they going next week. When we said we had a clear line of sight.

At 20, it just came sooner than you expected right.

We say we have a clear line of sight at 25.

We have a clear line of sight.

We think it's over the next several years.

All depends on what's going to happen if flow don't go into a recession. If we go into recession to stop right. There it will be reset it will take a little longer but if we don't and if the economy continues to just perform like if we just grow it.

You know, 8% to 12% a year.

We're gonna do pretty good if we accelerate like.

Like we think next year is going to be double digits right. So that's [noise].

[noise] henner over you.

And so we wouldn't tell you double digits. If you didnt really think it looked pretty certain.

I, even like not you're not expecting the trends in.

In the second half of next year we.

We think when we anniversary those numbers, it's not going to look like this but we can look ahead and say here's all the things we're doing that will create upside here's what's going to cycle forward and there's the plus what that pluses and minuses I.

I mean, if you just take the lost revenues on our New York restaurant.

And add those back.

Not it's not a little.

And if that was.

The very high volume restaurant and yeah and.

Once the vaccines get out there and it's.

Start going back to restaurants by the way if you think about all the traffic we lost in restaurants.

Do you think we run the restaurants just for the restaurant business of course, not all that traffic drives business in.

In our in our galleries to to our brand and so when you. When you go Oh, the restaurant business today I didn't within the last few months were down like 70% right to our plan.

Hi, so when that comes back there seem to be a whole lot of people in RH galleries.

Hold on people discovery on a lot of new product.

You know whole lot of people you know hopefully be inspired by our environments.

And you know theres going to be kind of tailwinds here, but but the real point is like don't get lost in the Pandemics right like it's a crazy year right.

Down in the first quarter towards close stores close part of the second quarter things all the things swing back I kind of wash it all weighing go.

Revenues up seven.

Looks like Okay, we're little behind our 8% to 12% growth, but operating margins are going to be 21.

I really like this model [laughter] you know this is a really good model.

Like it's I wouldn't bet against this.

Yeah, we've done what we said we were going to do very consistently and we've exceeded people's expectations massively over the last few years since we since we transformed the entire company on so many levels and now we've got a kind of a you know a brand with no.

Here and and we have a DNA that's just massively on satisfied.

If we get Super excited for like a few minutes and then we're really intense around here about like what snacks and if I.

Making things right. So I just I like the password on and yes. It is a big shareholder here yet.

I really like the next 10 years and I wouldn't have told you that if it really wasn't stuff on the whiteboard behind me my teams all non human smiling right like we look at this we are yeah thinkers, we look at a long term view and so yeah I.

I know you have a lot of customers that are real short term focused.

Okay, you know like [laughter] fell on don't buy our stock price.

Like if they want to you know if they want if they want to on one stock with a long term view is a good place.

Yeah, that's very helpful. Thank you very much and emanates holding.

Thank you.

Thank you. Our next question comes from Curtis Nagle of Bank of America. Your line is open.

Hi, good evening, thanks very much.

So yeah, I wouldn't turn I guess to the RH contemporary line.

Maybe just get a little more detail from.

The vision and strategy Gary took you described it as a bridging between interior and modern lines in a low.

Better.

I think there's a I guess, what I'd say is an extremely strong chance you wouldn't rule. It out if you started.

Okay Wise do you just think business. So I'm just kind of curious what what gives the confidence I think that there's going to be a good incremental business.

I wish I had a few other lines yeah, how should we think about it.

I think about it if we're excited about it and you ought to be excited about it.

We're not excited about things that we don't want to buy and that that Oh, we.

They were we might be too excited about it right if anything last night late as selling area like okay.

Yes, let's make sure we're looking at the whole.

You know the whole board here because it is really exciting I mean, there's a lot of really new.

New product and.

And so.

Yeah, We just think it's kinda it opened the aperture of the brand.

And yeah, we're really excited about from about color too. We just can't do everything at once and we keep kicking the can down on down the road on color. We got I think we we are starting to zero in on RH color. It's it's a tough one right we're a neutral space brand.

You know, we're kind of famous for our book and point of view in fact were so famous for it that people don't like color kind of kind of hate our brand almost like if it stayed it offends that theres not a lot of color on our age but that's that's okay. We tell people that look there's not a lot of color in humans, right where else some form of a neutral color from.

Right to dark break and Thats why neutrals is the biggest part of the market.

As you know most great design is a reflection of human Tonight.

That's why it's it's familiar and comfortable with it and that's why you go up because it's a reflection of.

Of self.

But but we do think that there is a market for color, it's not the biggest part of the market but.

That will open up the aperture the brand so.

Yes, just no different than Beach House and ski House opened up the on branded you know people talk like relatively small introductions write small books, but a big conversation I can't tell you. How many people have said oh, it gotten or ski House book. It can't wait we're doing a boat that you'll be test book and so so far so a lot of these things too.

Yes, we say internally, it's if you want to be part of the conversation you have to create the conversation right and contemporary is going to create another conversation color is going to create another conversation yet and you just have to do these things really really well, but but.

Yes, you should be really excited about it because we're really excited about it.

And.

It's sad yeah, what exactly does look like I mean, like I can't say that EPS their remarks [laughter].

Yeah. It is it's going on with very new and fresh.

But again, we like to say the things that really do well or or fresh yet familiar right. So you can't see things that are too far out there those are interesting, but generally not relevant to your business and don't don't sell well, but we think it looks very fresh there's a familiarity to it.

There's.

Kind of.

Really great Historic design.

References that make it familiar so when we get things that are fresh.

And familiar.

They're usually.

Really good.

[laughter].

Oh I'm excited to see it one day when you release it.

As a quick follow up.

I'll go back to Europe, I, you know I don't know in theory do you think that the.

I know there are lot of moving pieces here and it's Super early but do you think that perhaps the price.

Profit contribution could be higher than the U.S. at.

At some point in time would get a little bit scale.

Given the comments you made about perhaps having a less dense.

Dense gallery strategy and the additional international exposure, you price, because you're probably going to share from being in these major capital cities.

Yeah ill, all our research and due diligence would say the potential is for higher higher margins than the U.S.

And that you know and.

Yeah, and then a lot of lot of brands as you know I.

On to have higher.

Higher margins on higher profitability outside the U.S. and they do inside the U.S. and that's because you're getting a lot of leverage off your cost structure right. If you. If you set it up well you know if you're not overly redundant and for US right. We don't have to set up any kind of redundant find organizations or inventory organizations or things like that.

Think about we book.

We don't have any cash from sorry, but what is our cash and carry business on stage left to them per se Roe [laughter].

Yeah, you're right, it's almost it's literally almost right like you don't really sell anything.

I used to be like a per cent or two and now it's almost zero. We just couldn't get we've gotten rid of the holiday stuff, we got rid of the ornaments and everything so every once in a while some advice on how you know or something like on walks out with him for the most for the most part we don't really inventory anything in our stores. So so our model has is.

Very simplistic versus other models like someone is saying to me like go well Oh.

Home depot or target or other people didn't do so well over in Europe or other <unk> well one those are kind of stores not brands right there their store selling other people's brands at most.

Hi end luxury brands work really well globally right and if you are the best in your in your kind of category.

And we believe we are.

But then those brands do it they usually do exponentially better than others and so.

And then you know then Insys just seemed very strategic I actually liked that we gave ourselves a little bit more time on Europe, because we have more time to think about things like this courtesy you know the margin structure, how we think about it the price seen you know all day, all the different nuances and really really.

Think deeply about.

About these moves that we're going to make and positioning the business correctly 'cause.

Uh huh.

Everything we've looked at Red and looked at points references would say, we should have higher profit margins in Europe now there's going to be some short term some expense.

Not yet miners expense de leverage as you ramp up the infrastructure, but.

But that might take care of itself relatively quickly because of the b. The broad based market you're going to address by by opening and just bite by opening it just in the UK.

And you know in London, England in Paris in a couple of these galleries that you've been looking at Munich and.

Dusseldorf from Madrid, and Brussels, and once like just with that little footprint.

You're going to get a massive [noise] mass.

Massive audience right because of because of the internet and because the on like component of the business and and by positioning ourselves in these kind of extraordinary locations in stores and environments that we're looking at it.

It's going to be a great new learning I mean, I I really.

Yeah, that's what I really didnt want to delay at just the right business decision to do it because we're so anxious to learn.

But that but I think what you're saying is directionally right I think that.

It should be based on other points of reference.

More profitable or at least as profitable as our us business, but it should create leverage right. So the net net effect should be overall RH margins going up.

Got it thanks, very much from thoughts and happy holidays.

Thank you happy holidays to you.

Operator.

[noise] [noise] Valerie operator.

That's the last question or the operating we want to have three I don't think we free and that your line.

The work.

[noise] tumor.

Luster operator.

[noise] Party to Thomas Your line is open.

Hi, Gary Jack can you hear me.

You can hear you.

Right, Great Hey, Brad.

Brad Thomas from Keybanc. Thanks for me.

Making time from my question here I'm just.

Hopefully a quick one just on how to think about about for Q I know theres not specific guidance.

If you go back to last.

For years, the fourth quarter's Ben your highest quarter for operating margin in any quarter and so just trying to understand some of the seasonal dynamics you know Gary I think you also referenced that if sales for the full year come in growing about 7% that that might get you to a 21% operating margin, which maybe pushing that for Q operating margin.

Closer to 20% just trying to understand if there is any puts or takes that we should be aware of that make this for Q different than what we've seen the last few years seasonally.

Yeah, well I mean, Jack can give you some highlights but one of the big ones. As you you. Yes, Q3 is helped by not mailing a book.

Hard to say exactly how much because we would have got more revenue.

We.

Yeah, we expect revenues to it.

To slow a bit based on a day.

We don't have the books and so you don't have the ramp on the books and were at record kind of out of stocks and ER and things like that so so so yeah, we're taking a conservative view on I think in the fourth quarter as we should.

But you know I think.

Ah, yes on landscaping is a little hard to look at historically, because there's been so much change change in demand trends change in margins shifting cycling through like when you know when the outlet business and how the outlet business cycles, and then out how that run the business.

Cycles, you know quarter to quarter, you know puts and takes that may have distorted past quarters and past time so.

And then we have things like that.

You know, we generally have a much bigger bonus accrual in Q4 and other things like that where we're having really good years and you know that can distort things. So yes, I know Jack you want on one thing I will let you know as you think about the 21% in the.

2020, as we've talked about that as sort of floor number that's that 7% growth rate. So that it does imply about 20% growth for for revenue as Gary mentioned that is slight deceleration from the 25 points in Q3.

And then margin wise, you know to get the year at 20 to 21, obviously that implies just just shy of 21 for Q4 and I think you know Gary spoke to it.

You can't look at the same sequential trends because Q3 has to the advertising benefit and so you know I was going to make.

Make similar comments on the cycling right so like the rug business.

You know, we had talked about as a sort of wouldn't.

When you think about when we started a clearing that out and put in the new product on the biggest the biggest benefits are going to be through this this quarter, we'll still get some benefit in Q4.

And once you go into next year, you know that'll that'll be fully cycled.

Yeah, I'll, let let loves it per dynamic but.

Directionally I think I think those are some of the pieces.

That's really helpful color. Thank you Tom if I could squeeze in one more housekeeping just around the merchandising newness for next year any more color on maybe the magnitude what percentage your products you may refresh where maybe new in 2021, and how that compares to what you normally chain.

Down from what they can on much easier.

I would just say year over year, it will be it will be a meaningful increase year over year.

Thank you so much hope you all have a great holiday season.

Great. Thank you Brad drag relative to you.

Thank you. Our next question comes from Tammy retiring from Jay.

Good morning, your line is open.

Hi, Thank you so on lots for taking my question I just have one longer on Tom question I think in your press release, you spoke I tend to see is 10% annual sales growth potential.

Oh I understand service on its mid Twentys operating margin.

So what's really driving that optimism of 10 to 15 versus eight to 12 assets that you've been speaking on.

To this trend do you need.

On the new businesses to come to life like the yacht and on.

On its residents in business and to come to life to get that.

Or can you get to that tend to be stand with existing home furnishings business alone.

Yeah sure first let me kind of characterize what you know what I gave you kind of our internal view, what's possible right not necessarily our guidance and we're obviously going to always have a.

A view internally of what what can happen I'd start with.

If you if you just kind of thought about it.

Yeah, if you take the belief that hey, RH is building one of the dominant went to one of the kind.

On a premier luxury brands and it's based on the world and if it performs like other luxury brands and you think about that.

If that much.

Market.

At a global level.

It would imply that.

25% of our business should be kind of in the U.S. slashed North America <unk>.

And 75% of our business should be outside of the U.S.

Right and and we believe we can be five to 6 billion long term in North America, you know that would imply that we'd be a 20 to 24 billion dollar global brand as Architected today.

They they yacht is out is a brand elevating conversation right. There's some people that are spending money like everybody else on digital marketing doing things that nobody talks about [laughter]. Yeah, We we mentioned the yacht and a lot of people.

You are talking about it right and when you see it on our website index World of RH, where 30 odd million people will see it every year.

It's going to be a pretty cool thing and a pretty big conversation for a pretty minor investment right and so its not its not about how many people are going to be on the yacht. It's about how many people are going to appreciate the design and the creativity that.

Taste and style of the shot and how many people are going to be aware of it and talk about the yacht right and so yeah. The I'm not a big growth story so yes.

Yes conversation right you got to always say, we do want to be part of the conversation got a great conversation you want to climb to luxury mountain into what people at the highest end.

Of of a high at the top of the mountain to talk about you do things that they are interested in.

Do you know be places, where they spend their time, Oh, yeah, if you're going to see in hospitality, whether its theater guest house do something that forces the very highest people it taste level wealth affluents influence.

Force them to tip their hat that you did such great work that you earn their respect that they they you create a forced reconsideration of your brand right. So so Ah Ah.

Net.

But but that the gross like if you just said hey, we're going to get to that what's going on.

For instance, like seven four day Levered bilateral five yes.

Seven four to 11 five is.

Is like maybe half way to our global potential.

So it's it's for us to have a goal of saying Hey can we grow the sing it 10% to 15%.

We could we could maybe growth faster sense on how much risk it depends on how quickly you can go without.

Putting risk.

Into the work right I mean were.

Yes furniture of this quality has never been made in these quantities. So we have to build this.

The supply chain and the platform to be able to do this right, but I mean, the thing that gives me confidence about that is it from where it's been to where we are.

As to where we are you know we have learned that supply chases demand if you create demand.

Yes people will figure out how to supply that demand because there is opportunity for people to benefit economically right and so we.

We believe we will create a market at the higher end of that market as a potential for price 20, 25 billion globally, and 10% to 15% annual sales growth.

Uh huh.

Could be possible.

I I wouldn't plug it into your model, but if you wanted to look at it on an upside model of what might potentially could be if we start opening countries and opening countries is exponentially more valuable and opening stores in North America that could accelerate our growth rate.

I, we have people knocking down the door here trying to partner with us with our brand at wanting to partner with us and try to partner with us.

In the Middle East partner with Us and Europe partner with US in South America partner with Us and Mexico like there is not I don't think there is a country.

[laughter] unrepresented, you know as far as people like knocking on our door wanting to take our brand globally.

We could go faster.

It might mean less control and we believe brands with more control will become more valuable. If you look at history and you look at all the great brands, they're all buying back their business from partners because they believe they can run the business better and there's greater returns.

So you know we're going to learn from that history, we're going to probably go slower.

And with more control.

And we're going to try to retain as much control of our brand as we possibly can I mean today, we have 100% control of our brand nope.

Nobody presents our products, but us nobody sells our products put us nobody uses our brand or our marks but EPS.

And we think thats going to be more and more important in a world of you know marketplaces and kind of what it called messes right. Like just you know I think any of these brands that you look for the right model look at what are amazes doing look at what Channell's doing book of what the LVMH brands are doing well they are the people that.

Didn't.

Put their brands out in marketplaces that were very discerning about what they've done that the investments that they've made they've taken you look at the great brands, they've taken more and more control of their distribution you look at the brands that didn't make those investments and what happened to them and you get that.

I don't have to name them, but you know who they are I mean, there there the value has been significantly.

Diminished because there's brands that had unit.

Too much of their distribution was controlled by Department store Department store is that Dick aim platform you imagine if you were you built a great brand and your and your distribution platform with predominantly department stores.

And you don't have control of your distribution channel I mean, I think what our no and caring group and you know.

The Chanel teams and other people who have invested over the past 10 to 15 years to take control of their distribution. That's why the brands. They are today. Good news is we're not in any department stores, we're not in any event Nobody's got any control this brand, but EPS and so we love that.

Positioning and we think it may mean, we go slower.

With higher quality and that's okay.

Okay, Yeah, we Oh, the world is only going to get smaller it's not going to get bigger right the Internet and communications and technology is bringing the world together yeah.

English is can become the language yeah. Its it and it's so much different so its every decade, it's exponentially easier to operate internationally. So.

And that just is going to grow faster so.

I just I just think that you know could you.

If you were yeah, I would say, 10% to 15% it's their price people on the long side of this business that have that model probably.

You know should it be a secret that cheese, the RH team thinks that they might be able to grow this a 10% to 15%.

We think we can probably do that is that what we're going to guide you know.

Not until we're more confident there may be a time, we're sitting here and that becomes the guidance. There may be a point that we're sitting here in a few years after we've got.

More data and proof of concept globally.

That the number could be 15 to 20 I don't know.

It's not unreasonable if you think that that the size of the market for the just the core business everything else is gravy do I think.

Great the yacht business is going to be meaningful.

From a.

Taste and style in imaging conversation point of view, yes for a revenue point of view no.

We will do revenues I think we've got like yeah, we have multiple charters lined up on site like that you know we went fortunately had to cancel seven charters on the boat this past summer because the pandemic, but that but there's a there's.

Theres a lot of demand for about but thats irrelevant from from revenue point of view do I think I think things like guest houses.

Could be meaningful long term they might be I think the work is that good I think what it's evolved into it.

It's something extraordinary beyond what my initial vision or expectations for it.

Sure.

And I think it's become that because we control everything that's some third party.

It's not Marriott using our brand you know you have a bunch of bureaucrats with no taste.

Screwing up your brand is that some other little hotel company. That's just you know.

On a revenue share thing with you with total controlling stake do I think RH residences could be a big idea I really do.

I I'm fascinated with it [laughter].

I'm fascinated with selling spaces, because when I go on Zillow and I could go on redfin and I look at the.

Level of taste.

Design I see crappy architecture I see.

Non existant interior design and I'm like me on people with a lot of money.

Don't have the ability or access to make their homework I.

Amazingly low.

Mike why doesn't everybody have an incredible inspiring home, especially if you can afford it why.

Because it makes it really hard to do and there is no way to do it and by the way why wouldn't you buying homes that are fully furnished on that.

Perfect that you just like you buy it and give you the key and you move it enough to spend a year or two or three or four or five or never get your home that lets people just never finish it low.

So like you know areas said to me on time ago like like Hey, They don't sell you a car without an interior sitting on trying to figure out the interior car yeah. It gets picked a color you weren't tangible book Black you went yeah.

So I just think that I'm fascinated with the fact that theres.

So little great architecture, such little Great design, let me start in any market you want like want go to Murray and right now I think the most expensive house is $43 million yes.

Just click down and tell me what you think.

Yes, the architectures and landscape architecture, the interior design the furnishing the taste the style.

It it could be massive.

Could be massive Steve you said like he was there an acquisition we make some day I don't know, maybe we buy one of the big Homebuilders, and we infuse them with great taste and I'm not saying, we're going to do that but you know if you want to think big you know I mean, there's like I think we can create entirely new market.

For.

For residences, whether their condominiums are homeless or single homes and communities and and things like that and you'll hear more about this well, we we are pursuing opportunities and.

Yeah in in that space is in place as part of our strategy.

And you'll hear about our first test of arts residences and.

Yeah, but whether it's whether it's home condominiums, whether its luxury rentals.

Huge opportunity.

The market is full of crap out there.

Massive opportunity.

<unk>.

Got it that's why I hang on.

I was on loans.

Thanks day.

Thank you happy holidays.

You too.

Thank you our final question comes from Seth.

Sean of Wedbush Securities. Your line is on.

Hi, good evening cash from here, Thanks for taking my question.

[noise] on the first question is just around understanding product margin in the quarter, how price margin expansion certainly drove the majority of the gross margin expansion, but could you help us understand how much of the how much the revenue mix shift away from hospitality and outlet helped increase gross margins in the third quarter.

From a product margin point of view or hospitality margins like quite good you, obviously have a higher mix of of employment, but we're also operating the restaurant sick very low.

Low levels of productivity and we're keeping people employed right. So we've we've actually got a pretty big drag.

From from further.

For the rest are on to the overall slide slide a slight lift in the margin too, but very slight Gary a slight aside from all of its not enough sales yeah, it's not enough sales to them they committed.

So.

Yes, but and then the outlet yet we've kind of given you directionally that's year over year and that's that's been.

Yes, that's that's been a big driver because we redesigned and.

Reconceptualize the whole reverse logistics business Scott.

Yes.

530 basis points of product margin essentially half are in our core business you know with some of that still related to the rug cycling as we talked about and then and then half is from Abbott.

Those are the big pieces of the flat there, yet, but but inside the core business I think every categories got positive product margins right absolutely.

Very helpful. Thanks, and then that one item that one area that we haven't really discussed much on this call is the interior design architecture and landscape architecture opportunity could you just give us an update on your rollout plans associated with that business.

Well interior designers is out there right and that's it I.

I think today, we must be the biggest residential interior design from.

In in North America, if you look at the work that we do in the projects that we do.

Architecture and landscape architecture, I will begin to test that I gave you a bigger vision for that how it's going to be within the world of RH, but.

But.

Yeah, we were going to move.

More quickly we push some of the plants.

A bit because of the pandemic, but.

Yeah, we're looking at testing, our first kind of a free.

Free standing I've architecture interior design and landscape architecture studio.

You know in it and it design district.

That will support you know many of our galleries in a market I said well if the way to think about it is where where you see today, if you've been into one of our new galleries, whatever prototypes, where you know the kind of the back part through you look through the staircases big glass wall with.

You know with Destiny and that its right next to our design affiliates, where all of our interior designers assets have their offices and that says right now RH interior design long term we.

We believe it will say launch RH architecture interior design and landscape architecture, and I think about that the galleries because they are a manifestation of great architecture, great interior design, a great landscape architecture will have the only consumer facing.

Business of its kind of like that most architects don't have an office that anybody sees a day and most architect's offices aren't in.

In great architecture necessarily landscape.

Landscape architects like where do you find one like you know interior designers again, not a consumer facing business. So inside these big.

Magnificent galleries that right.

Better example of all those disciplines. It only makes sense that people would go up I tried that we I can't tell you how many times people are in our galleries that ask us to the architect this.

How many people ask us who didnt landscape architecture.

If we do the landscaping here.

Yeah. They obviously know we did the interior design so.

So we think there's an opportunity to continue to elevate and amplify the core business by expanding our services business, which is a very capital light business. If you think about it right at SSAT. Yeah. It's it's not a lot of capital to make the investment to act add those services or the services.

Don't face the consumer it very compelling way so.

So and there are things that we already do really well right. We now do.

Almost all of our architecture internally right now very little externally.

Yeah.

Great internal architecture team Oh, we do all of art landscape architecture internally, we do all of our interior design internally and so their competencies of our company and its just building out the teams.

Kind of market by market right and just just as we did with interior design I'd see it no differently than interior design, yeah, it'll take us several years to kind of do it we'll learn and we'll roll it out but we've set up.

Kind of the galleries, the new galleries to accept those businesses now we may need support offices behind the scenes will interface with the customer there will catch them there will consult with them there will make the initial connection.

But but we probably will need some.

We have some office space to support those businesses, but that office space can be anywhere right. It's not it's not high cost real estate, you're not paying premium.

Retail real estate for the back of House office, we do all of our meetings in the galleries, but we might have to house more team members I'd, yeah doing the production work on the architecture, the landscape architecture and things like that.

So I I, yeah. So we think it's very logical for us to pursue the services side of the business and we think we're really well positioned to capitalize on it and we have the the comp the confidence right. We it is what we do.

That's helpful. Just to clarify Gary I know you don't charge for the interior design services, now and unless I'm mistaken, but do you plan to charge for those in the future and I presume that you crank the charge per day architecture and landscape architecture design services.

Yeah, yet for sure the architecture and landscape architecture design services on how we think about the interior design piece, we're still noodling with that we are.

We believe at some point, we will probably charge for that but.

We may not need to I'm not I'm not sure honestly I mean, I go back and forth on that when all the time.

I had low.

[noise], so more to come in or a box will develop their more but I think as we.

As we test this.

Hi, <unk>.

And kind of get our arms around it and we're going to we'll probably start it here locally.

I guess I could say, we're thinking of doing right like yeah. I mean can we could share I reserve the right to change our mind.

Moving but we you know our plans were opening at a beautiful new New gallery in San Francisco at the Historic Bethlehem Steel building on its really spectacular I when when everybody can travel again I come out San Francisco I, let us know, we'll get you see that the restaurants can be spectacular restaurant will be the first restaurant with.

Our we're actually testing our new guest house concept in menu there it will be kind of a dual restaurant will have a live fire cooking.

On a component to it that that's really great I, but but we're in as a spectacular gallery in San Francisco rooftop Park views of the Bay and the city and and so and so forth and we had this is if you know if you've been in San Francisco, We one of the great learnings for US was when we took this.

This amazing little building in the heart of the design district.

That was the Ed Hardy and peak gallery, and that and he built this charming palladium building and we went into this center the design District and said we've got to put our brand among the very best I remember the headline on that in the local San Francisco paper was there goes the neighborhood chain store going into the design district right. So.

Yes, we we did pretty good work, we opened a beautiful gallery, there I think we see the people's expectations I and it became really fantastic.

From this week.

The gallery this like 20 million right, yes, something like that in 4500 square feet incredibly it was it was it was one of our best real estate moves ever we bought a little building I think from.

Three and a half million bucks, but.

Well, we have this charming building with a beautiful garden courtyard, and Weve learned so much being in that building.

Yeah, we can price on the building for 10 million Bucks or something and we're thinking you know.

We're right in the center of the design District, why don't we take that building and turned it into the first kind of free standing RH architecture interior design and landscape architecture studio right and right in the heart of the design district face to the customer there in the heart of the design District, and then faced a customer in our gallery.

He's and use this is our first eco system for the services platform right here in our backyard. We can go there we can do listen and learn very visible use it at the lab and we think that will really accelerate our learnings so on that.

That that's what we'll do with it exactly when we start.

Not sure yet.

No. We've got a lot of big rocks were moving in different parts of the business right now.

And just want to make sure we.

We do this when well and you know we have team in place that can.

Yeah.

You know really position this well and make a great first impression as we entered the services business.

But that that's what you can expect from US I think will now that I've said it what I like is that we're committed to it right I kind of we've been talking about it but now we're we're committed so it will happen.

But that.

But if it works I think there is it just opens up another aperture a business for us.

If all this and we we become the architect for People's homes.

You are just going to sell them a lot more.

Furniture and.

Lighting and.

Accessories and Rob.

Robinson Bath hardware and all the things we sell.

I get it very exciting thank you very much and happy holidays.

Thank you thanks.

Thank you I'm showing no further questions, let me turn the call back over to management for any closing remarks.

Great well day, Thank you, everyone I want to especially.

I think I think our people and our partners around the world too low.

Worked so hard I through these challenging times to continue to elevate our brand and bring our vision to life, each and every day and I and I and also you know our you know our thoughts and prayers go out to everyone who's suffering through this pandemic, especially people yes.

Who who have been infected by this virus and have family members and loved ones impacted in and thanks to all the people on the front lines that are you know just.

Working to keep us safe and ER and.

And if you can get us through this and yeah. This is Phil just a very.

Yes mixed feelings Reits like it from from our company you. It when there's so many people suffering and your your business is doing well and you're getting a tailwind. It's yes, it's hard to really feel that good when other people on that.

Or having the opposite.

Yes.

The opposite experience I've. So we just hope that we get through this very soon on that.

The world.

We will continue to.

To evolve and improve and yes, it will be here for the long term, but that we want to thank everyone for their hard work their leadership their imagination on their perspiration and in bringing this to life and you know on all our frontline team that is in our galleries. It's a you know on or our call centers, it's in our distributions.

Centres and delivering our products into our customers' homes.

You know if they had to walk a fine line right in and being on the front lines and.

Especially want to thank those teams who.

Who represented our company and our brand so well.

Through these challenging times, so we wish everyone at a wonderful holiday and a safe holiday and that here's.

Here's to getting to the other side of this and if back to bright and Sunny days for everyone on this planet.

Thank you.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you participating you may have a great day you may all disconnect.

[music].