Q4 2020 RH Earnings Call

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Maybe you can gentlemen thank you for standing up a quarter 2020 conference call at this time. All participants are in a listen-only mode after the speaker's presentation. There will be a question-and-answer session to ask a question during the summer. You will need to press * 1 in your telephone as a reminder today's call is being recorded. I would now like to turn the call over to your host Miss Allison Vulcan icr.

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2020 Q&A conference call joining me today or Gary Friedman chairman and CEO and jack off before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal Securities laws including statements about the Outlet business and other matters referenced in our press release issued today these forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially, please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

in light of new information

or future events

Also during this call. We may discuss non-gaap Financial measures, which adjust our Gap results to eliminate. The impact of certain items. You will find additional information regarding non-gaap Financial measures and a Reconciliation of these non-gaap to gaap measures in today's Financial results. Press release a live broadcast of this call is also available on the investor relations section of our website at with that. I'll turn the call over to Gary for opening remarks.

Great. Thank you. Good afternoon, everyone and thank you for joining us. We're going to try a different format for this this call. It's been recommended to us it many of them. Sometimes we're scrambling and and don't necessarily get a chance to read the letter before the call starts since there's only an hour between we put out the release and we had a suggestion to start with uh, start with the letter and read the letter and then that way everybody's grounded and what we just said it might uh, you know, just Elevate and improve the quality of the dialogue as we go forward. So I'm going to I'm going to start off with uh, reading the shareholder letter that we just released to Our People Partners and shareholders as we anniversary what has been one of the most difficult years in recent history and as we begin to suck the light at the end of the dark tunnel of this deadly and disrupted virus we just do so with a greater appreciation for freedom and the simple gestures in life like a handshake or a hug we all suck.

Turn this corner knowing that we used our time wisely to reimagine and reinvent ourselves. Once again times of turmoil humans tend to move in herds hunkering down and finding Comfort Conformity. Even those who analyze report the news seem to find reassurance in replication trying to fit everything into a predictable pandemic piles of headlines. We've all been reading wage for example and been put into the there's no place like home pile others have been placed into the e-commerce has everything file both are actually good piles because if you want of those you were dead on favorably whether you're on the top or the bottom of the pile, I believe many on Wall Street are managing their portfolios and piles looking through their reading glasses when they really need a microscope and a telescope a microscope to search for the details and differences in those rare Brands and businesses who belong anywhere but the pile and a telescope to see the opportunities that they will exploit Post-Dispatch.

Since we the people have Team our age generally move in the opposite direction of the herd are allergic to high Brewing down and surely don't believe believe we belong in the pandemic file. We've taken a shot at 4 Simple Head Burns that require neither a microscope nor a telescope the 4 P's that can that give you an insight into what you might expect us to do next because we'll most of the world sent this past year of touring in place. We spent the time reimagining and Reinventing ourselves at a never-before-seen pace.

So let me talk about.

Please for peace our products our performance our prospects in our people our product. We are building the most comprehensive and compelling collection of luxury home furnishings in the world wage higher ability and exclusivity of our product Amplified and our inspiring spaces has enabled us to gain significant market share with RH gordum and up 36% in the fourth quarter.

Or demand its accelerated sharply with February of seventy 3% and the first two weeks of March of ninety six percent prior to the cycling prior to cycling the closing of our galleries restaurants and clubs. It's a year ago adjusted gross margin increased 480 points in the quarter 540 basis points for the year and 1210 basis points on a three-year basis for his fiscal 2017 again, demonstrating the desirability of our exclusive exclusive offering and the pricing power of our brand.

The Strategic separation we've created will continue to grow as we further Elevate and expand the RH Grant with the introductions of Rh contemporary can 20 21 + RH color RH pitcher down the slope over the next several years.

Additionally our plan is to unveil the world of our age a digital portal presenting our products places services and spaces. This fall will begin to bring the different parts of our integrated ecosystem Thoughts with Rich content that we would believe will enhance our brand and connect with our clients on a much deeper level.

our performance

we continue to build the most productive operating platform in business model in our industry with adjusted operating margins increasing seven hundred fifty basis points to 21.8% versus 14.3% last year an only an 8% Revenue growth. Let me say that again seven hundred fifty basis points on only eight percent Revenue growth. It's an operating margin never met before in the furniture Home Furnishings market and more than 50% better than the closest competitor the roic our roic 53% and twenty twenty also took sit in a class of Our Own.

A results represent a systemic lift that is not merely a temporal pandemic shift due to an unsustainable Revenue game. Remember virtually 100% of our Core Business is direct-to-customer with less than 1/10 of 1% being cash-and-carry from our stores, which is basically floor model fell off at the end of the season that is why our demand to revenues lag lag lag lag is much greater than other Home Furnishings retailers who have seasonal assortment and large Cash & Carry businesses.

It's also important to note that due to the virus and do supply chain disruptions. Approximately 150 million of demand that was generated in 2020 will be recognized as Revenue in 2020 Jeep while the majority of the selling costs to generate the demand that demand was absorbed in 2020. If those revenues were recognized last year or adjusted operating margin would have reached fifty-three percent. I often quote Bernard arnault the chairman and CEO of lvmh as he says luxury goods are the only area in which is possible to make luxury. Margin at 15.8% adjusted operating margin twenty-twenty RH has now eclipsed the operating margin of lvmh and we have a clear line of sight to 25% plus operating margin over the next several years.

with less than three

Net revenues you can imagine the leverage we should experience as we scale.

RH is also become one of the top-performing consumer stocks of the past decade since our IPO on November 2nd 2012 at $24 per share. All right is out performed Apple Amazon Google Facebook Nike Starbucks. Lvmh Home Depot and just about everyone else but Tesla off Warren Buffett says time favors the well-managed company. We believe our performance has and will continue to prove that point. Let me move to our prospects.

We ended 2020 with just less than $3 billion in that revenues and believe the data supports the RH brand reaching five to six billion in North America and twenty to twenty-five billion globally wage. We believe that number will continue to grow when you consider that Center are opportunities and hospitality and Home Building as we continue to expand. They are 8 ecosystem with the introduction of Rh guest houses and Rh wage. We're tracking to begin our International expansion in Europe with the opening of Rh England and Rh Paris in 2022. We are planning to open our first guest house in New York City this fall she followed by our second guest house in Aspen, which will include our first RH bath house and Spa in the fall of 2022.

You're currently in design development for our per charge for sarees residences as part of our larger Aspen ecosystem and have already received multiple unsolicited proposals to purchase our home and seen and to play or to place a deposit and reserve a home. I mean, we we haven't put anything out there, you know there it said nothing but going to put out the original press release and we we probably can pre-sell a single home today. We believe the Revolutionary design of both the guest houses and Residences have the potential to create an entirely new markets and their respective Industries will also position in our life if you thought leader taste in place maker

We also plan to open for new design galleries in 2021. All with integrated restaurants and wine bars are a San Francisco The Gallery at the historic Bethlehem steel building RH Dallas the gallery Knox Street RH Oakbrook The Gallery at the center and Rh Jacksonville gallery of st. Johns Town Center.

We talk about our people. I believe we have the most resourceful team in our industry. And again not by little Tony Robbins talks about resource resourcefulness being the ultimate resource. It's not about time money or technology. It's about passion persistent vision and values starting with no resources. We transformed and nearly bankrupt business selling nostalgic discomfort items with a 20 million dollar market cap into the leading luxury home branded the world with a market value in excess of $10 billion.

History has proven that men and women will work for a dollar but died for what they believed in we say inside our organization. This is not our company. It's our cause if they're not static reflection of who we are and what we believe that some people say don't take it personal those people are not our people make no mistake. This is very personal to us.

We believe

Branch with more control will become more valuable.

We have always invested in controlling our brand from concept concept of customer avoiding intermediaries who who will never care as much as we do that's why we avoided partnership sponsorships off franchising or licensing and continue to believe Branch was more control will become more valuable the easy path of expanding a brand rarely pans out to be the best path the road to Global expansion is life with Brands to put their trust in others only to spend years negotiating repurchase rights decades later after the damage is done. That's not to say there won't be exceptions where where there's an outstanding partner in the challenging country, but it will be a rare exception as we expand the RH brand around the world.

We also continue to invest in taking more control of the customer experience and have been testing RH in your home in Los Angeles and San Francisco markets and are extremely happy with the early results as Fernando Garcia our president of furniture operations and Home Delivery describes it in your home is not a different or better experience. It's a unique and memorable experience would extend the gallery into the customer into our customers home with Furniture ambassadors management every detail. It creates an impression with our customers that can last a lifetime.

Additionally, we are opening a new 1 million-square-foot Furniture Distribution Center in Southern California. This spring the new facility will allow us to reduce delivery times by seven to ten days for both outdoor furniture and special order upholstery in most major markets.

20-21 has all the signs of a Very Good Year. Well twenty Twenty-One would surely be a tale of two halves the fact that we the fact that we have a booming housing market a record stock market long straights the expectation of a rebound in the economy and jobs Market combined with recent further acceleration and our demand Trends as it's feeling more rather than less optimistic that that I it might just turn out to be two very good halves what we expect to face while we expect to face continued difficulties ramping vendor production to meet demand and we don't see the challenges ocean freighter Port congestion resolving themselves anytime soon. It's hard not to forecast forecast first-quarter Revenue growth of at least fifty percent and adjusted operating margin in in the 20% range with the momentum in the business. We believe it's safe to say twenty Twenty-One should result in Revenue growth in the range of 15 to 20% with adjusted operating margin expects.

A hundred to two hundred basis points and roic in excess of 60%

We made the decision. Once again delay the mailing of our source books and the launch of Rh contemporary until the fall of 2021 to enable our manufacturing Partners to catch up to the increasing demand Trends. This decision should also support a strong second-half as we have held back new collections for the past year which will result in one of the one of our largest new products that launches in our history.

RH outdoor sourcebook filled with ten new collections is scheduled to be in home starting this week with a digital Source book a new outdoor collections live on our website today.

This is a time to be defined by our vision not by a virus as we move past the dark days of the pandemic. Let us remember our Resurrection a timely reimagined and reinvented ourselves. Once again, a timer results redefined possible for a home furnishings brand a time. When our performance forced the rest of the world to remove us from the pandemic file and see us for who we truly are a team of people who don't know what can't be done. This is the time to be defined by our vision not by a virus carpe diem.

Okay, I'll turn it over to you operator to open the call for questions.

Thank you, as a reminder to ask a question. You will need to press * 1 in your telephone. And your first question comes from the line of Steven Cohen from Citigroup. Your line is open.

Great. Thank you congrats on the restaurant results and happy to be a new addition to the earnings call Gary. You have a lot of momentum in the business right now. There's a significant amount of product newness. You're growing the hospital offerings in the margin profile significantly outpacing your early outlooks for the business with all this momentum in mind and thinking about how the world has changed from a global pandemic standpoint. Where have you gained more confidence in the long-term growth potential of this business?

You know, I don't know if if anything's really changed for US based on the pandemic. In fact, you know, I don't think as much as as much as changed as as most people think or believe I mean look at you just start with the fact that our business is basically a hundred percent direct-to-customer platform. So we we've been Channel neutral our entire existence here. So we don't we don't really care where anybody places an order and whether it was through the pandemic when you know order shifted from stores to online or or virtually with our people, you know, as soon as as soon as our galleries reopened our business looked pretty normal, and I know there's you know, there's a lot of talk about well, this is going to accelerate, you know, the growth of the internet buyback points for the next couple years, um, that that may or may not be true. I would say we're indifferent to that. We're really in different with the the inherent Channel shift that is going to happen over. Yep.

Several decades we've we've anticipated that we knew that was going to happen. We're indifferent to that happening, you know, people are kind of reframing their models and closing doors, you know, an accelerated rate, um, uh due to the fact that you know, there's been this channel shift and you know, that that may be true because their their model with an architected, you know off with a view across independent view across all channels, uh, you know, strategically or financially it might have been an old model that was architected just for a retail business and you know, they've more recently got into a a direct customer of business and you know had a rush online without you know, strategically thinking about all the implications of it, you know, we built this business beginning twenty years ago as its Channel neutral business and it's a platform looking ahead at the next twenty Thirty forty years in saying we could see the world going there. So whether it gets there

Yeah, you know if whether it goes five or 10% faster and there's a greater shift or slower ship were completely indifferent. It doesn't change.

Anything about our real estate strategy or online strategy or anything we're doing we we believe physical, uh, you know physical great physical limits a great physical experiences in this physical world. We live in are going to remain relevant. If anything, I think we're going to be even more relevant post this pandemic because wage, you know, it's I think it's scared a lot of people out of investing into the physical world and it's just motivated a lot of people to follow their heard into rush to be an online business rush to be a digital-first business rush to be a you know, digital first business with a few stores. I don't know where everybody's rushing to you know, and and we don't we don't we we only rush off to some place that that we figured it all out and we thought about it a long time and very deeply so

I'd say nothing has fundamentally changed about our strategy based on the pandemic. There's there's there's you know, we're we're indifferent to the pandemic. We're we're we're slowly flashing sign, you know building the most compelling product assortment presented on you know, the most inspiring immersive platform in the world with you know, the most incredible Service, uh home services at anybody, uh can have you know, in in this industry and um, and we think that those are the right things to focus on, you know, not not chasing shift shifts in the office. It's very kind of tactical, you know, there's a shift to online great. Um, if you didn't see it coming until now you're way way behind it.

Great, that's very helpful detail. Just a question on the margin outlook for the hundred to two hundred basis points expansion. How should we think about that from a gross vs. Effects leverage standpoint and the specific on the gross side. You've had two strong years here product. Margin expansion. You expect that strength to continue this year. Thanks very much. Take that one. Yeah. Well, you know like you said in the last couple of years. Our margin expansion has been primarily driven on the gross margin line. So for fiscal twenty of the seven hundred fifty basis points increase that you know, 3/4 that nearly were were engrossed. And so I I think on balance you're going to see that that's that, um, you know, the quality of that of that margin increasing continue and so, you know while we're not guiding specifically to say what the exact portion of the 100 to 200 is going to come from gross. Margin, I would you know, I would characterize it as at least at least half. If not, if not, if not more. Yeah and let me let me build on on Jack's point I think dead.

Yeah, they do ask that it makes me think about probably what what is probably not obvious. If you're in the outside of the this business, you know, cuz people, you know seen us reposition the product to take, you know, take pricing and and uh, but but I think it's it's it's probably not clear that as we evolve this brand and and you know, as we continue our life, you know our climb up the luxury Mountain the product quality is going to continue to move substantially, you know, and the you know, the pricing will move with the product naturally but the value equation will get stronger not weaker, you know as as we get smarter here and I you know, we we developed we we develop better and deeper relationships with with our key manufacturing Partners. So what you know what might not be clear off.

As you take the prices up.

And you get product margin in that equation. You also get leveraged throughout the supply chain, right? And so, you know, and that's probably a simple mathematical equation that maybe not everybody's connecting the dots on but it's it's relatively simple if you think about it then and if you just send it to try to capture the essence of barnardo's quote that only in in luggage products, you know, can you have the ability to make luxury margins, you know, there's there's a Simplicity and a truth to that. Um, you know, the this would be good, but this would be a very hard to build a model like ours if you're you're playing in the middle of the market.

Great. That's very helpful. Thank you.

And did the time constraints we do ask that you please limit yourself to one question and one follow-up. Your next question comes from line of a dreamy from Barclays. Your line is open Monday. Wait, thank you very much. Wonderful news on the the momentum continuing Gary we've spoken, you know before about demand creation how it's not no longer a single number on the p&l like a percentage of sales but a Confluence of the investment you're making in Aspen London. Rh3 etcetera. It seems RH is building more of Desire creation and a pipeline of Faith customers. So who who want the orange lifestyle right and everything that it comes with it? So how should we think about that advertising demand creation line in and of itself is not going forward. Thank you very much.

It's a really good question and it's the right way to think about it, you know building a building one of the most admired brands in the world desired brand new the world, you know, whichever way you want to use. You know, really it takes a it takes a different path. It takes it, you know a different way to communicate and I think we're in a world where it's harder and harder to get your message out because there's so much information out there. You know, I I read a study. I think it's about a year ago that humans are consuming seven hundred percent seven times the information than they were twenty years ago. When I said an astonishing number, if you think about that that that some twenty years ago were we're consuming seven times more information because devices we have and the amount of information the amount of platforms, you know, we're communicating on uh, and and the ease of communicating to us. Um, uh, so so the faith,

The way to kind of breakthrough right? I see I receive job said something if you watch his original, um kind of YouTube when presentation when he's in his shorts and flip-flops suck little apple stage when he came back to Apple and he was talking to about he was reintroducing to think that reducing the apple and and introducing the think different campaign and he said we live in a in a in a really noisy world and it's going to be really hard for anyone to remember anything about any of us and that it is is dead. So important to you know that you talked about marketing being at about values right about those things you deeply believe in and and connecting with people about values and he talks about some of the great birthday. He talked about, you know, Nike being one of the great brands in the world and and he said if he think about Nike they're selling a commodity. They're selling tennis shoes off.

Right. It's a huge for the most part and and he said but yet in there.

advertising

They don't talk about the shoe. They don't talk about the soul. They don't talk about, you know, the laces and it's how they talk. They celebrate great athletes and great Athletics off. Right and and he talked about Apple's believed that they could you know, that people you know that they're passionate enough, you know, really could change the world and that and that in that Apple brand the think different campaign. It was also a campaign that was more more than anything else is about the app that the product right you didn't see it on iMac. You didn't see anything that campaigns, you know, you don't really think about Nike, you know hasn't built their brand based on any particular shoe. We all remember Jordan shoe. But why do we remember the Jordan shoe because of Michael Jordan?

Not too specific shoe, right? So so if you think about the great Brands and you think about how they built them and and and how they communicated they they very unique path, I think about this to stand back.

Tesla is the fastest growing most valuable car company in the world.

They've never

how to add a TV commercial

Think about that people sign up for Tesla's right? So so we say inside our company like for example, we don't have a marketing department and that may shock a lot of people. We do have a marketing department because marketing a lot is about putting lipstick on the pig right? It's like taking an average idea and trying to dress it up and spin it and make it something better than average and that's real life to do right? It's just really hard to do and we don't have a marketing department because we we we say it's not what we say. It's what we do that defines us, right so long of a truth group and R-Truth group, you know in in the past they'd come to me and say someone might want to write a story about this and they're going to put us in that story and go. Well, that's not what we believe like, why would we would be the next story? It's a matter of Truth, you know, and and so our work is R-Truth and we Define ourselves through our work and uh, and we connect with people. Yep.

Or work and that's why you know launching kind of a fully integrated revolutionary ecosystem in a place like Aspen where the wealthy and of course, you know vacation, you know, visit in vacation, um and doing something extraordinary there. You've got a you've got the attention of the right people and and we're not going to bang pots and pans and say look at us. We're just going to do some extraordinary work, you know, it's that's why I say when climbing the luxury mountain and you know taking the path we've taken all the luxury Brands wage board at the top of the mountain right like you think about any luxury Branch. Yeah, they're all born at the top of the top of the mountain. We we weren't born there. We were we were born at the bottom of the mountain right we were born underground to we're basically a bank company. So we had to kind of dig ourselves from from out from under the ground, you know, and then decide like we're going to we're going to make a climb that no brand has ever made.

No one's ever tried to make this climb. And so, you know, we're people that swap them out. They don't really want you to make that climb. You're not from the neighborhood. You don't get invited to their parties, you know anything and so

You have to have to do work. That is so extraordinary. So so remarkable. So amazing that it that it creates a forestry consideration of our brand that it forces people at the edge of the mountain to tip their hat right to kind of to kind of say nice nice job, you know, we have to earn their respect, you know, so, you know, there's there's a famous quote says if off when you don't come from royalty you have to earn it, right? And uh, and so this work that we're doing the things that we're doing to to build this brand. Uh, we believe is the right kind of work. Do we believe if we do extraordinary work that breaks through the Clutter people can talk about it. And by the way, we put out a press release a single page press release talking about Aspen.

And I don't think I've ever had more billionaires reach out to me and send me notes, you know, say what are you doing in Aspen? Like I personally had three requests to buy one of our home, you know, our partner has had about twelve requests. Nobody's even seen a home. We have any put a rendering out, you know, so so when you think about that, you know, like if we are about we're about five spaces where that design and architecture and living and you know, spaces and places and that's you know, that's what we're about and so doing incredible spaces, you know took in inspiring environment. Uh, we we believe will break through the Clutter, you know, and and it's way more powerful than just doing an ad, you know trying to talk about but that's why we don't have a choice immediate why we don't have an Instagram account account. We don't have a Twitter or we don't do this at everybody saw the you need to tweet you need to you know, you need Pinterest Pinterest account. You need to have an Instagram account, you know, people will follow you guys suck.

You know Gary if you tweak, you know, you'll have all these followers like I don't want to spend my time thinking about what to tweak tomorrow. No, I don't want to spend my time. I don't want to have a department that's reviewing what pictures to put on it took him that day, you know, and by the way, just just as a point of reference. We don't have a Pinterest, you know, a Twitter and Instagram yet where the most were the most pin brand of all kind in the world where the most tweeted-about brand of Our Kind in the world and where the most Instagram, you know, brand of Our Kind in the world, you know, and so like that's why we believe it's about paperwork and and that's why we're doing this thing's we're doing and and by the way by doing the do think we're doing like even building inspiring galleries. We're building we're now looking at the model and we're saying, you know in these galleries, you know, and especially the ones with the restaurants right that that are driving significant traffic.

We don't believe we need to spend as much money mailing catalogs in that market because we have thousands of people we feed every week, you know, and so, you know, so when you think about our financial model and wage and opportunities and leverage and investments just because we used to invest a certain way, you know doesn't mean we should keep investing that way because we're you know, as as we walk, you know, as we continue to innovate, you know, we can see around, you know, we can see around more corners. We have more data. We have more learning and you know, I sit here today and I go you know, gosh we haven't mailed to be mailed the sourcebook and how long are you right? Yeah. Yeah year a year. We we won't have mailed the sourcebook for eighteen months or something by by the time we mail the fall Source. I don't know. Do we need to go back to mailing Source books twice a year now, do we need to mail in this deep like in the markets where we have these magnificent, you know?

architectural significant faces and places we built

Might be closing stores. If you're building kind of crappy stores that are in line in the mall that you know, everybody's got a glass storefront and all you have is your logo up above it, you know, that's that's different but that's not what we're doing. Right? So, you know, we're doing something different so you can't that's why I say you can't put us in the pandemic file, right? You can't put it in the pile with everybody else. You'll you'll miss the whole story here.

You know, how much are those Worth to marketing right and I get it, you know.

Nothing calling after but it was it was one of the best questions. I got in a long time. Your philosophy is always welcome. Actually. This one is off 73% and 96% demand growth, you know translate and then we have we're now in the part where the stores were closed why you know, the at least fifty percent of Revenue growth is that due to poor congestion or lack of inventory. It seems like the spread between those two numbers would be tighter.

Yeah, so you're going to see the same Dynamics in terms of the supply chain constraints and you know for the same reasons that that demand growth exceeded Revenue growth. In fact, you know Q3 and Q4. We're we're you know with the strength of business you're going to continue to see that q1 and and potential acceleration given the strength and acceleration. Yeah. And again the key word is at least six is at least right? So we giving you at least how many times over the last few years at least this at least 18% operating margins and it's at least twenty then it's you know, so often we we tend to kind of give you we want to make sure whatever happens we're going to hit the at least but we generally beat the at least pretty handily and off but yeah, there's a there's a lot of things to kind of consider and you know, but

You know at least means we have we have more than that.

Understood great luck great job. Thank you.

Your next question comes from the line of Curtis Nagle from Bank of America your line is open.

Good afternoon. Thanks very much. Perhaps a bit of a a piggyback question on Adrian's the prep just you know, a little bit more specific facts about the ecosystem that you guys are you mr. Rolling out just kind of two questions that you know, how meaningful do you think that could be as as, you know, a Brandon hash over say the next three to five years and you know as a stand-alone business, you know.

How important it to you know, as a revenue and profit contributor or I guess kind of the former point, you know more importance. How should we think about that?

Yeah, well, I think it's going to be a meaningful brand enhancer. And and I think if you know, it's funny if you would ask me five five or seven years ago. We started working at is already told you was going to be any meaningful Brandon hand right now. I look back at it Go event. That wasn't even any good at all. We were working on five seven years ago because we you know, keep tend to keep making things better. And and that's that's the great thing about kind of, you know, only having a vision about something versus kind of start working on something right you you really learn when you start doing and that's you know, that's when you can really suck accelerating your education and you know connect more dots to see around more corners. Um, I I think what we're about to um unveil in New York and a spin-off. I I don't think anybody

Has any idea what it is, you know, I really I don't.

It's you know, I've been fortunate enough in my life that you know, I I've been travelling since I was relatively young man and traveling all over the world and life and I've been in in a design business, uh, whether it be at my former, you know, the former company. I worked at you know, or today work we searched the world for the best of you know, the best of design the best choice hotels the best places where we're going to get inspired. What are we going to see? So I I've seen a lot right? I've been to most of the, and resorts in the world. I've been to you know, so many so many places both personally and professionally and you know, someone asked me

How long have you been working on the guest house? And I told them about thirty years because that's how long it been thinking about it. That's how long you've been traveling to to really great places and asking myself questions. Like why don't they have this? Why isn't anybody thought of that and why is it have to be like this? And um, and I think when you see what we've done with the guest house, there's just things that no one is ever done in hospitality. And as why they say, uh, a lot of the uh, most of the innovation in the world happens outside that comes from outside of Industries not inside of Industries, right like again, I'll go back to Tesla.

The guy never built the car ever ever and it it's massively turned over the car industry and now every car company in the world is dead racing racing to catch up racing to have electric cars. Right? We've we've never opened a hotel before and and we're not going to now, you know, because it's not a hotel it's the guest house and it's it's and it's it's importantly said that you know, and you know, when you see our website launched in the West on the on the on the on the website launch when a when we when we open the first thing you're going to read on the website it says this is not a hotel.

Right because it's not it's it's a completely new way to think about an experience like that. And so so I think when you do work like that one, it has a great chance of having people off the top of the mountain tip their hat cuz they haven't seen it. I mean think about this like if we want if you like go to the top of the luxury mountain and say okay who lives there who has the biggest house Bernard or know right off the biggest luxury platform in the world, you know, I say internally I joke around is Bernard arnault just bought Belmont for 3 billion dollars, right?

Like like nobody thinks were impressing Bernard or no, I guarantee you when he sees this guest house. He's going to be forced to tip his hat cuz nobody seen anything like this in a while and and and that is what is going to create the conversation. Right? That is what's going to change the perception of the brand, you know, a brand that started up around had to dig its way out of a brave, you know and start climbing them out and it's never been climbed before, you know, you just have to do things that people can't imagine and and I think this is all about you know, it's it's all about brand building. It's all about truth and respect right? The work is R-Truth and I believe our work will be respect and R-Truth, then we'll be respected and people will listen closer they'll they'll pay more attention to us and then out of that wage.

out of that and the same thing with the with the with the homes that were

Doing the residences that we're doing other things you'll hear about I mean, let me just go back for seconds to start here. We we never knew anything about restaurants right away a few years ago, you know, everybody's like you're an open a restaurant like what you going to do who's going to run at this and that we had a partner to start now, we we run the whole thing ourselves we have we're vertically integrated Hospitality organization. We have 10 restaurants today.

our our restaurant volumes and how they're tracking, you know, cuz we we keep innovating and evolving and and the things we've done, you know off the last

18 months twelve eighteen months. You can't even see them yet because it's pandemic but but our restaurant volumes will rival the highest volume restaurant anywhere else, you know, besides the one or two, you know, great ones, but when when people when we reopen and really reopen when we can seat all our restaurants are are volumes are going to be among the best, you know, people used to talk forever about, you know, Mall developers really wanted to a you know, a Cheesecake Factory cuz they did ten million dollars, you know on average a restaurant.

It's very likely very soon. Our restaurants will be at that kind of volume and and and it has to do with you know, not just

The number of customers coming through but you know the average ticket of the customer coming through which then influences who's coming through which make sure we have an audience that is aligned with the target consumer and who we who we want to impress but but we're going to be a pretty good restaurant company if you you look at the the numbers in the returns in the margins on a restaurants today.

There three times better than they were three years ago. And so so we're pretty good at that and I think what what happens is with things that you really care about, right? We we talk in our company about three lenses. We look at every decision based on we choose based on what is the emotional value of an idea? What is the Strategic value of an idea of what is the financial value of idea in that order? Right? Because if you just focus on the financial value of an idea of nobody really believes in it, if nobody's going to die trying to bring it to life the financial values never going to manifest itself. But if you got ideas that have really high emotional value that the people in the organization really give a shit. They really care about it that they're going to get knocked down 10 times and get up 11 the effort and the passion and the month, you know, the learnings that that happened, you know, just change the outcome. I've seen things that have really high Financial value. I really high strategic value really high emotion really high emotional value really has yep.

value but moderate Financial values that have turned out to be the biggest Financial ideas in the company because the work turns out to be so good and on the opposite hand I've seen just the opposite I've seen things with

Moderate emotional value relatively High strategic value and super high Financial value. Somebody thought it was worth the five hundred million idea wind up being a five million dollar idea cuz nobody cares enough about it, you know and to do great work the effort the effort has to be you want to extraordinary outcome. You have to put an extraordinary effort. There's no shortcuts right back on much with that, you know, you know and you run three different companies you run Tesla and Solar City and SpaceX. How do you do that? You said it's as simple as just physics he goes, you know, the the average executive might be worth forty fifty hours a week and he said I I work about a hundred a hundred and fifty to a hundred sixty hours a week because I work three times to three times. I work three times more hours than than the average person so I can do three times more you guys it's not it's very simple math. Um, you know, if you if you hung out with the people in our organization, you find out the week, we really love what we do.

You cannot stop us. You know, we are going to figure it out or die trying because it's it's it's it's more than just a job to us. It's our life. And when you when you work on stuff like that the outcome tends to be much greater than you could even imagine in your original Vision. You meeting us, right? And so that gives me like if somebody said hey, do you think you'll ever make money in the Guesthouse? It's under chuck. If it I said look if I don't lose a lot of money, it's going to be a really it's going to be a really good thing for the brand. I actually think we now when I look at it, I think this is going to this is going to work. I mean, I you know, we haven't we haven't sold it yet. But let me tell you something. I sure want to stay there not just because we you know, I built it, you know in in you know, but like we have thought so deeply about it that we're going to do things that no one in Hospitality ever done, you know, and they're really good ideas and and the same thing with our residences like, you know, we we've designed, you know, we designed the one on Red Mountain.

It's shocking. It's so good. So and it's because this is you know, we're passionate about it. They have these ideas have huge emotional value and and when it has a promotional value people, they don't put in a day's work. They put in a week's worth in a day, you know and and and the outcome reflects that so so I think these will be you know at a high level these will massively massively Elevate and render the brand more valuable and I'm hopeful today that they'll also have a really good Financial models. I I I feel more clear about the homes by the way. I think I think that the homes is easier math for me cuz you know, I I own homes and bought homes and like the consumer and

And I I know what we can build and what we can sell them for and how much we can make and I think created extraordinary products. I think we'll make a lot of money in the home business whether it's you know, single family homes condominiums things like that, you know, if we do Luxury Apartments which you know, which is really interesting Market, you know, it's like there's no great apartments in the world. They're just not designed. Well, you know, but think about if we do. Luxury apartments, right and how many people need to go into a market live somewhere for a year or two don't want to buy a home but they got a lot of money and they want to live in a really beautiful place. I mean, we we think that they could be a fantastic idea off the guest house thing. You know, I don't know like it's we're doing things no one's ever done like we got no meeting rooms. We've got you know, no weddings know nothing, you know, no celebration. It's very private life. It's you know, it it does a few things better than anybody else in the world, but it doesn't do all the things so, you know, it all depends. What kind of room rate can we get for these these extreme?

Rooms and and this unbelievable sense of you know, privacy and luxury we've created well, we'll know soon, you know, we'll know soon but we're excited about it.

Answer it and hopefully come fall. We can start to see some of this in person. So we'll figure out how to kind of do a little like we're thinking of them know how to how do you do a launch party in it, you know in a in a 10 room hotel, right? You can't have just people like walking around the hallways, right? And um, and so like we then we thought like I thought I'm going to do it like a I might need a week of sleepovers right where you get invited for a sleepover, you know, but I can only do like if you get two people in a room, you know, x 10 room food when you have 20 people at night, but it's still a hundred people we get the right influencers and the right people like wage and you know, we're going to try to we're going to try to open this we think um, you know coincide with fashion week and we think Fashion Week, we'll come back and you know, everybody in New York would be back from the Hamptons. We think people will be traveling again after September, you know, it could be like, you know, the greatest coming out party in the world. And yeah and you know some of the who's who maybe want to come for a sleepover and you know it get to see something no one else.

Yeah clearly. Thank you for the very thoughtful.

Ever seen and you know, we start the right conversation, but I think what we'll do is probably during that week, you know, we'll we'll stay there for a while and and maybe it's a good time to you know, do an investor meeting in New York and bring everybody up to speed and do it at home of the guests the Guesthouse probably right before we really open it to the public. Cuz once once it's open, you know, you can't tour anybody through it, right cuz about privacy we can't be taken. Hey, these are a bunch of Wall Street guys taking through here, you know, sorry. Sorry excuse. That's yeah. We know this is about privacy but not today, you know, so so there's going to be one shot to kind of really see it and we'll we'll have to kind of do that before it opens.

Your next question comes from a line of Max with Franco from Calvin and Company you're line is open great. Thanks a lot guys and congrats on on the incredible quarter so long as we think ahead about a hundred to two hundred basis points of even margin expansion in 21. What do you see as the biggest buckets of opportunities and then longer-term as we look ahead to the 25% plus what do you see as additional opportunities Beyond 20 21

Well, you look you know, we've kind of said a hundred two hundred basis points. We we also kind of put some dots out for you. Right we said hey if that 150 months and had shipped this year, you know, we would have been at twenty-three, you know, so start with we're kind of twenty-three, you know, and so then we you know, we got another base plates and um, you know to get you to 24, which is 200 basis points higher than 21 8, right 2,300 so you can get there pretty easily. It's not a not a lot of life moves and you know, some of it will depend, you know, just you know, how much you know, where is the revenues really go here? Um,

You know, we don't we don't need a lot of revenues to you know to kind of get to where we're pointing you if if for some reason these Revenue Trends continue like Thursday, it's really interesting. I've never you know, this is I've never seen anything like this. I mean, I've been through, you know, the Great Recession. I've been through multiple recessions in my career, you know been in in the home category now, that's how many years thirty four years is like Jack reminded me the other day was my twentieth year anniversary here not to get to everybody that wished me happy anniversary, but I didn't even know that he goes. Oh God, I'm sorry. I missed an anniversary package. It was my anniversary. So, you know, I've been here twenty years at William Sonoma 14 years 7 34 years in the home business and I've seen a lot of Cycles during that time and I've never seen anything quite like this, you know, I I tend to when there's really good news like this. I tend to be the pessimist in the company and I tend to be the one left with you know, this and whatever demand hit wage.

Meeting right now. It's not because of us.

You know, it's not going to stay don't you know don't architect the business for this, you know, this is going to go away and it hasn't gone away yet and and you know talk to some pretty smart people that it giving me different insights into look very what like here's here's one that I think is interesting for everyone to think about. I let this this is really smart and and check it out of internet from analysis from a really credible, you know deep thinking smart person that the move the the the the move of America, you know that you're seeing today the month, you know, the pandemic shift of out of cities into suburbs or into second home markets which by the way the suburb things are great thing for us because eighty percent of our business is in the suburbs. And so I I moved to the suburbs is that just a move the suburbs. It's a square footage expansion.

Bye they they believe it's a 2X or more square footage expansion for the consumer and I hadn't thought about that before. I thought that was a really interesting point and their math said your customers that are moving from the cities maybe in a 3000 square foot apartment are moving to a six to ten thousand square foot house in the suburbs and and they didn't have outdoor furniture in their apartment in the city and now they all have outdoor furniture out big big yards and Lawns and pools and so on and so forth and so do I just like that's done to me right? I hadn't really thought about it like that. I didn't think of the square footage expansion of the consumer and the other thing they said was that the that's the issue with getting a contractor right now is a huge issue that you could go out and buy a house, but if you have to remodel it or do anything to it you you have to wait six months.

To get a contractor so that they they believe it's six months or longer and some are there's this real lag. So this person believes that and they said this to me I was like, I didn't even know the response like that. They believe you're that our business was going to accelerate because of the lag because this massive shift right that the longer the pandemic went the wrong people started moving permanently. I'm not talking about the you know, the the people that you know, kind of flew back to their place in the Hamptons, that's very different right like like think about New York. Everybody went to The Hamptons they could anybody that had a house was that they're Hamptons house, right? They relocated there for the Earth anybody that could rent a house and half his rent when everybody could buy one like bought one suit, but God, but but a lot of them, you know are coming back and and and at first everybody was like a temporal thing and then they'll send there's the shift of a different perception of how people want to live and we're dead.

It could be a more permanent kind of thing. So I think this this moving thing could be a a much longer tail and a much bigger move and and then you

You say to yourself. Well, how long does it last it it all depends on how permanent the move is, right like so if if if if you think about our business, they don't need some numbers that I've never really talked about before but uh our business prior to the pandemic was 80% suburbs 10% second home markets and 10% Urban markets going to be marked talk about this city. Right? Like not Beverly Hills is not the city in Los Angeles, right? The city is the vertical part of uh, Los Angeles is called, you know, Los Angeles city. So, um, you know, we have some some vertical markets like Manhattan or Chicago right that that that are really vertical that have a lot of high-end homes and you know, and we you know have relatively big volume but but almost everywhere our business is much more Suburban, you know, driven. Yep.

And that makes sense. The homes are bigger got backyards. You got kids you've got, you know, like more bedrooms more spaces more family room, you know, et cetera et cetera and then the pandemic wage and it shifted things and you have this explosion of second home markets and and and all that happened to our numbers really is the second Home Market went from 10% of our business page twenty. Now the group spent exponentially faster cuz and this is the percentage shipped, right? So you're at 12:10 to 12. Yeah, 10 to 12 and then and then suburbs basically stayed the same. He's just went down by two points to 8 a.m. But but if you think about our model of being 92% of our business and this is not this is not the demand generate generated. This is the ship to address has this is where the product was going. Right? So if you think about 92% of our business,

Is architected perfectly.

For whatever long-term change this pandemic has and and there's another there's another there's another study about the kind of the big shift and kind of moves when and I was trying to remember the data. This other person was talking to me about it. Now, you know every so many years, you know, there's a shift here and there's a shift people are moving to hear, you know, like the big money move into the suburbs of you know, the fifties and sixties and seventies and and you know, or the you know, you had kind of a move back into the into the cities over the last ten to fifteen years right reject gentrification a month, you know, all this kind of redo of cities, but

But the ship that might be happening might really stick, you know, that's the logic that certain people are are kind of sharing with me and they they think this is not temporal. They think there's going to be a lot less people that go rushing back to the city and they think that that the rush back to the city it's going to be a much younger consumer going back and that the consumers that are you know, forty fifty sixty years old that moved out of the cities are going to stay out of the Cities. They don't think they're coming back from wage and then that that becomes when I think about it that becomes really good for our business long term because that that also means even the moves within the place like not everybody if you think about if you moved out to the suburbs, you know, you you scramble and got a second home during this pandemic rush, you know the kind of you know, it's almost like a movie right like like everybody got, you know, leave the cities and all the cars are backed up and down.

out and you know, it's it's uh, um it it's the odds of you getting the house you really wanted in that moment is really

Right and I get a believe there's a lot of people renting homes, you know, I know we're doing a lot of quick, you know design installs people like need the furniture in two weeks, right and luckily and and one of the advantages in Los Banos. This is like kind of a little side point to this but I think it's it's worth saying and and sharing with everybody as as we all try to figure out where things are going. And what's Happening Here is is like I thought about this and I thought

Why is our demand really accelerating right now? What what is happening? And and I think that there's this back up this pent-up demand is like people couldn't get contractor jobs are down now can finally come but for all the people

That are moving out and they need new furniture and they need it in 30 days or they need it in three weeks or two weeks. I think we're benefiting now because we actually stop furniture.

We were one of the few places that actually stalks the product and you can get it quickly not everything. We have a big special order business and you know, and we're back order now, but but is we're times like this.

Is where I think our model is Advantage versus you know, a Wayfarer Paragould anybody else online. You know what I call a Marketplace model where they don't own the inventory, right? Like that's one of the beauties of life like that, you know, so low Capital model and you know should set up for high returns. If you can get the you know, the earnings model to work, right but no one ever really thought about what's the inherent weakness of that model if you go on Wayfair and you know, like and we we mostly look at what they're doing on Paragould, you know, we look at anybody who might you know might be competing with us and the amount of at a stocks and what you can buy them. It's it's unbelievable cuz there is then their weaknesses. You got a lot of these small and capitalized businesses trying to just sell shit on a platform like that, you know in a in a place and they'll take anybody by the way. It's not not a big approval process if you want to go sell some or Wayfair, um, you know, so, you know, you don't you don't get to that many, you know that many vendors that quickly if yep

Really high standards of who's selling on your platform, you know, you can't possibly talk to that many people. It means a lot of low-level people or approving a lot of new vendors, but I look on there and I know you know some of the people like we know who the factories are all around the world and I got those people don't have any money. They they can't afford to have the inventory, right? So so I think in in sustained things like this, we actually you know, like I never thought it was but we actually have the inventory like we actually if you needed your house furnished next week, we could pull it off if you live if you live in a major Mark so you know, so that's a big big opportunity for us. But but I want to go just go to that that but point about the 25% operating margin and what what are the opportunities Beyond twenty one month, you know just scale this thing, right? Like like we we have a lot of a lot of strategies and initiatives that we think are margin enhancing strategies initiatives. I think, you know well or eat in your home

Is initially an investment.

I think it's going to have a great return on on investment. And um, you know, we just have a lot like that. We keep fine-tuning our model on our on our new galleries and you know life, you know, and they're I think they're going to be more productive than less productive. Our our restaurant business is going to be massively better our Waterworks business, you know, we we've got the, you know versus three years ago. I think I've got the even probably be twelve fourteen points better fifteen points or something like that, you know, um, uh, yeah, so and and then you just scale this thing just linkage. We're two point eight billion dollar company, that could be so much bigger and we built a really smart and simple platform here that you can wage scale. And and so the leverage as we scale.

You know you think about like other you know, somebody brought up Sonoma to me last week, you know, and cuz they obviously had great results and fantastic, you know, fantastic outcome. And you know, I think they're doing a doing a tremendous job and but yeah, they're already a six and a half billion or something. What do they six? They have 7 billion say, yeah, you know six and half billion right? Like we're not even half the size of William Sonoma.

And we have the operating margins that we have today, right? So just do Scale map pick up twenty basis points in like, you know different places in Iraq, you know, you get used to real leverage, right? And and so you know, that's why we think yeah, we have a line of sight 25% operating margins plus today, you know plus and and so far every margin Target we've given you we've got there much faster much, you know much faster than later, right? So, um,

Yeah, so we yeah, we wouldn't be so confident in clear and you know tell you like if we we couldn't see it and we couldn't, you know draw the straight lines to the number so long. So we we we just we just keep learning here, you know, and you know, we're kind of always unsatisfied always on the move like we rarely celebrate like it's it's for a moment. So it's not that we do it all we get super excited but you know constant students we learn and so, you know, if you're if you keep learning keep seeing more, uh, and and if you can see more then you're just never satisfied with where you are dead. So, you know, that's kind of you know our culture where I think this is team, you know, and we've integrated like ten new senior leaders into our leadership team, you know, we've got you know some some people I can't talk about yet cuz we went public with the ideas, but we got you know leaders of international leaders of international, you know, supply chain. We've got you know dead.

you know lots of you know, lots of new Talent sitting around the room and you know, and that that

Also allows us to do more we've we've made a lot of human capital Investments here. So, uh anyway long rambling answer sorry about that, but just some I thought some of that stuff, you know could be helpful very helpful to me to think about how to you know, how to think through this pandemic just like the moves and the move to the suburbs and how that might affect us and the square footage growth. I think the square footage growth is a month really interesting because you could be selling two to three times more furniture, you know, just because you know to the same consumer and it's interesting because our our tickets going way higher average orders are going way. Oh, yeah, so it's it's kind of actually playing out like that great. Thanks a lot. That's incredibly helpful best of luck.

Right. Thank you Max.

Your next question comes from a line of Steven Forbes from Guggenheim. Your line is open. Good afternoon, Gary you mentioned getting more control the business and I was I was hoping you could maybe expand on uh-uh that theme right and the where where your mind is what other aspects of the business. Are you looking to gain control over whether it be, you know manufacturing whether it be the whole design process, right? I think origin your home experience. Would love to hear your thought process on, you know, some of these ideas around control.

Yeah, yeah, so that's a good question is as we think about it strategically, right? Like, you know, our our model is is in a throw off a lot of cashier. And you know, what? What are we going to do with that cash? I mean clearly there's you know, you can invest into the business you could buy back your stock you can pay dividends or so and so forth. But if you look at our model and look at it took over the next five years, he got to kind of get out in front of it and say what what should we do? And where do we see the biggest opportunities are Ugg to uh to create more values and thoughts and one of the biggest ones were discussing is this idea of controlling more of the brand. We I think we're realizing as we scale the luxury Mountain.

You know, there's just so much fragmentation and and you know, I always like to say product of this quality. It's never been made in these quantities, and and I think

Yes, taking more control of the product pipeline, whatever that might mean, whether it's the manufacturing whether it's you know, the sourcing whether there's so many aspects of it, you know, whether it's raw material procurement, like, you know, do we take like most of our furniture is made with four species would right? I don't know do we take positions in certain Woods, you know to give us a competitive Advantage meaning like one like if one is just dead sometimes getting the raw materials if you're uh-uh, if you're as big of a platform as we are an outdoor furniture, you know,

securing teak

Is is is one of the challenges and you know, should we own outdoor furniture manufacturing? So we have access to money, you know to have more control and more access to raw materials that could give us a massive competitive Advantage, you know other parts business we've we've done with tax a week. We have our own Furniture, you know upholstery Manufacturing in North Carolina. It's not not very big but we've learned a lot doing it and we've got thoughts about that. But but also just thinking if you keep climbing up that luxury Mountain there's less and less scale in manufacturing as you get up there. It's it's more what I call a workshop business. I you know, very high-end, you know.

Very I should say Coture and bespoke maybe put out of bread crumb but and and you know, how do you wage scale that you know, how do you build a platform uh in scale that you know, and and or you know, just think about this if you think about going global, right?

I mean our Goods tend to be bulky and heavy and you know, it's not super efficient shipping furniture all around the world it works today and and you know, there's certain certain things that are you know, different countries are better.

Better producing than others but you know the world is going to kind of cut a key. I think you know with technology the world's going to keep getting smaller and smaller, you know competitive advantages between countries I think are going to go away long term and I think they'll be you should be more neutral Nostalgia world not going to be so easy to find cheap labor here or you know, efficiencies hear some can manufacturers. I think you're I think wage World in ten years from now is going to look very different than the world of today. And you know, we think about it as what's the right way to build our platform. You know, should we have you know furniture made in America for America? Should we have furniture made in Europe for for Europe? Should we have furniture made in Asia for Asia, you know, is that the right model? So you're you build a supply chain that is our country Centric especially where you think your biggest parts of your business are going to be and and you have you know, you replicate manufacturing capabilities and and then and then also, you know, you don't have a job.

Single points of failure. I mean what one of the things you can learn in the pandemic for something like this? Right? Like you have all this demands like you got one person making that you know, or you have tariffs happen and like I said, oh crap, you know, we make all of this there and now all of a sudden there's twenty five percent tariffs in your kind of got you got no move, right? You're only move is to kind of negotiate wage and try to figure out any way around it. But I you know, think about just because of the situations hit us is what does a global supply chain look like four fifty billion dollar brand?

What should that look like?

And by the way, no one's built one in our industry. So, you know.

You know, so I think we've got a chance to completely wipe board it and and and do something that's just never been done and we've got the we got the capital structure to invest money to to invest to to have even more strategic separation and capability than others and we're at the high end, right? So we have a lot of a lot of Leverage what we do right? There's a lot a lot a lot of Leverage selling, you know selling the things we sell versus selling these things other people sell, you know lower end of the market. So Thursday, we we're thinking about every kind of every aspect, you know in um, you know, whether it's the supply chain and Home Delivery whether it's a manufacturing, um, whether it's a raw material procurement and you know, how do you control the raw materials and and have leverage there but also just leverages have accessibility like if we you know, we have a run on teak and we can't get the Dead.

Like that's just your crippled. Right? And so so throughout throughout, you know, there's going to be you know, opportunities as their strategic Acquisitions. We make the same capabilities, uh, and and things like that. You know, how do you think about Capital allocation over the next ten years as we you know, as we try to fulfill off so fulfill our vision, so it's the right thing to think about we're spending a lot of time thinking about all those things right now.

Thank you for that. And and we give you a good I was just saying we've already made it, you know some of the things I can't tell you about yet, but you'll hear about dead we anxiously await them the maybe just a quick follow-up by giving the unsolicited proposals for the the residences out and Aspen. It's it sounds like it has you thinking right that the box is bigger. Maybe not bigger than you originally. So I'll put the curious if if those proposals, you know indicates something bigger about the opportunity maybe maybe a quicker maturation behind it or or dead, you know, where where the mindset is on just the residences of the whole.

Yeah, I don't think we've got a kind of Rush here. I think we've got to kind of kind of rushed to learn and and and kind of conceptualize the right model. I don't think it's it's going to be hard for us to build beautiful homes and sell them. I think that we can do like what is the right model? You know, how do you do it? You know, what do you got like to you know, is it is this one where they were let's say we decide to really

really do this. Let's say we you know, we have some tests and we're like, wow this really works and we we've also had strategic inbounds people that want to partner with us and people that have, you know, read the author's then press release, you know, you've had CEOs of companies, uh that, you know reaching out want to know would we want a partner and build RH homes together and and do a JV there may be opportunities like that right? There may be people that have that have what we don't have today the ability to secure and secure land know how may build homes at scale but don't have our you know, our creativity. Our tastes are Styles don't have our brand so to speak and so, there could be opportunities where you see us partner with a major home brand or or

Or acquire one. I don't know like if we we get really good.

Got it, you know so there's not there's lots of optionality here. I think if you did the great thing I've said for years here team that we're only in the 10% of the business and sometimes people knew people to me. What do you mean? We're only in the 10% of the business. We're in the 10% of business on average at the high end.

People spend about 10% on the Furnishings of their house compared to the price of the house. So if you bought a $10 home you spend about a million dollars furnish unit. You spend a $5 million dollars you spend on average $500,000 Furnishing it right? But yeah, and and that's just the math two million probably two hundred thousand. That's generally the the allocation break. That's not always perfect but directions, right? So I've always said like we're in the 10% of the business. We don't sell the home, you know, and we're actually handicapped being in the 10% of the business cuz we're a lot of times Furnishing a really crappy architectural Homeplace designed home bad proportion Dome, you know, and and so, you know, he doesn't even render our Goods more valuable, right? Like all all of our galleries are protected, you know, beautifully proportionally, you know in a way that it renders the goods more valuable are most of the homes we do like most homes like you go on again as they going to Billow going Redfin going to whatever one you want.

Like just click through and tell me how many homes really have great architecture, you know, and and how many have good interior design. It's like such a small number. It's it's like less than 100 like less than 1% So, you know, I love thinking about this Market in in that way, you know in like we could whenever it's like that when the numbers look like that you can crack a new market, right? You can create an entirely New Market and and that's what our big idea is not just to sell some home. It's it's it's to create a new market, you know at the back end for homes that people really want on our age home because they're just so well designed not furnished just like the architecture, you know, the logic the side of the house that landscape architecture the pool that everything like like the whole thing is just so well designed and then it's furnished incredibly, you know, and and so yep.

Disco, like you just write like it's like we save you time and again people with more money have less time people with more time have less money. Right and what can you sell at the high end? You can sell time value people will pay for time value. There's a lot of people on this planet that have more money than time. You know, they've accumulated wealth and now they're you know, my age or 63, you know, you you think about how much time you have left and you look to buy time value, right? And and I think that's if you said what are you really going to sell?

We're going to sell time value and people will pay for that.

Thank you, Gary and best of luck to the whole team.

Thank you.

Your next question comes from the line of Anthony chukumba Capital markets.

Thank you so much for taking my question, and and I just like to say as a sell-side analysts had a buy rating on the stock for the last three hundred points. I don't want you spending your time. Thinking about what you're going to Tweet later today either. So, just wanted to kind of get that. Thanks Anthony. That's good. No worries. So, these are more just kind of housekeeping jobs in probably more, you know for more so Jack than than than Gary a specifically. I just wanted to see if we could get a little bit of color in terms of specifically the gross margin drivers The sg&a Leverage drivers found and then just, you know cap. You know what your expectations are for 20 21. Thank you.

Anthony so, you know, I think historically we've talked about very strong results as far as product on the product margin side as it relates to gross margin and so long for is no different than you know, we talked about in Q3. It's about three-quarters of the pickup is in in in in our product margin, um, you know, which had a number of of things, you know that off, you know, we talked about the climate electric mountain increasing the quality product, um, you know cycling the rug business operating the rug business that a higher-margin among other things Outlet businesses we talked about in mdna in our filings obviously has is is a lower lower promotional level. So, uh, you know, that's where you're seeing the dominant amount of it and then as far as capex for the year is concerned about the you'll see in the 10K when it's filed next week. The range that we're giving is 250 to 300 that is you know, a little higher than you know this year. We we ended off

Put sort of adjusted cat facts, you need to look at um, because a portion of it ends up putting it in the top section of the cash flow. But this year we ended up at a hundred eighty. So the the what else say about the elevation of the Catholics is uh, you know, there's a number of sort of development skills that are happening this year that you know, that will monetize in a future. And then just finishing one of the one of those doors were opening was on a land lease. So there's a number of factors that are that are just driving little little higher capex this year including uh, starting to spend money internationally.

Got it. That's very helpful. Keep up the good work guys.

Thank you, Anthony.

Sure. Next question next question comes from

Good evening takes a lot for taking my question. There's been an increase in the profitability of many of the players in the home furnishings industry. So do you think that the sector is now just structurally wage earning higher margin and how does that inform how to think about profitability in the second half of the Year? Where when you talk about life to have in the second half you will be facing the many factors and much more difficult comparisons. Sure. Yeah. Good. Good. Good question. I think I think to answer that question. You really got to look at what's the revenue growth of the that the business has experienced?

in 2020

And that's why I made the point and I kind of repeated the point in the letter that you know, we hit 21.8% operating margin on 8% Revenue growth, right? So we had seven hundred and fifty basis point margin expansion on 8% Revenue growth. So that's the first part of it, right? So so you can kind of book that right that's not going away cuz that's got nothing to do with the pandemic off that's got nothing to do with Home Furnishings Tailwind 8% Revenue growth nothing to do with that. So that's all structural and we would have by the way it's about what we thought we were going to earn before the pandemic. Okay, that's you know, our model was about twenty-two percent. You know, what we what we thought would make and then the pandemic hit and with the pandemic is Faith. I mean what it did is it just turned it into two halves now, did we optimize a little bit here? And there we did we but but you know, our plan was to have Revenue growth slightly higher, so

Yeah, so but but we came out right about there. So if you've got people that have grown faster in 2020, then they had historically off there. You got to kind of say how much of that sticks how much of a leveraged sticks and you know, and then there's a there's a really important one to kind of figure out where everybody's going to land here is is what the price structure in the promotional structure of a business, right? So

We didn't get left promotional.

We are we don't have promotions, right? The only thing we have is is we have you know things that we're that we're discontinuing out of the out of the assortment, but we're not a promotional busy, right? So there's there's businesses. If you study our industry, there's there's businesses that have they pulled back on promotion as they should write and they pulled back options and we're able to have X amount of of of a demand or revenues when the world Cycles at some point.

Can they maintain a non-promotional stance, you know because I'm sure people have picked up two hundred basis points.

Maybe three hundred basis points of a product margins because they used to be really Promotional and now they don't have the promotional cuz there's this increased demand wage. Um, that's to me that's the open switch. Um, you know, how much of the revenue stick so what how much is their margin in our industry is tied to an increased strength, which ours is not because our revenues didn't ship now. So so you again if we if you would have saw the hundred fifty million in Revenue said in this year off and we would have been at 23% operating margin a hundred twenty basis points of our model.

and we would have

Yeah, we just said it's kind of in our view one time and maybe not structural but there's nothing about our revenues in 2028 pandemic assisted. There's nothing about our product. Margin that is pandemic assisted. We were not less promotional than wage and to be you know that we have a murky. We we have a membership model, you know, so the margin growth you saw on our product is real margin growth. Uh, it's it's not necessarily temporal at all. So so that's that's what I'd say are if you said and then then the other piece the other one I I point to is advertising, right? So if you're looking, you know, particularly if you're looking to somebody like Wayfair and I'm not picking a Wayfair. I think I honestly, you know, at first I thought Wayfair was was not going to make it and you know, and I thought like when I studied there there s one when there finally and I thought like yeah, this doesn't look like a real thing, but I've grown to Thursday.

Appreciate and respect the platform Wayfair is built and their ability to generate a lot of Revenue very quickly. You know the question in my mind with Wayfair is what's the real structural margin in the company? And and so so with someone like Wayfair, I think you're it says it's your Snowblind right now right there like you think about every restaurant in town and most of the World closed, you know, so anybody selling kitchen stuff the run on kitchen, you know like to go by, you know, toasters and pots and pans and other things like that because now you're not eating out even people like my household, uh, you know, cuz my my girls are way in college now, I mean,

I eat out every night. Like we we eat out every night, you know, my my partner and I and and you know, she you know, she went out and did like a raid on this case like we we've got a whole brand new kitchen, right cuz we are going to be home like so we got all all kinds of new stuff, you know that, you know, she's cooking stuff. He's never cooked before and and so I look at kind of categories like that and I go home, you know those those may not be sustainable. And also those are the things where she was going to buy it where there was on sale or not, right? You know, she was going to buy the cookie whether it's on sale or not. And if so that the promotional aspects is some of these businesses some of these categories very very different right like like when when the pandemic first happened I was analyzing everything and it's going on a website. Yeah, I think a joke around I said Wayfair has sixty pages of toasters and they do it might be more now it's sixty pages of toasters. I think forty or sixty pages are sold out, you know, and so dead.

You know, you have a run-on businesses like that. Um, but um, so when I when I think about the industry and I think about where we fit in the industry, you know, I I try to understand the differences of what what Revenue uh, you know was a gift like, you know, like we have a lot of demand that was a gift. No Revenue. That was a gift right? We we did not ship any of it. So we have 8% growth and the seven hundred fifty basis points. Oh and then the other one is advertising. Excuse me, you got to think about advertising leverage someone like like Wayfair guide or other business. Anyway, every business, right? We we all got we all got some advertising leverage like we we, you know, we missed a catalog cycle right the sourcebook cycle last year so, that I don't know forty million dollars something like that, right, you know the voice 60. Yeah, that's all on the year. We'll see on the 10K is 49 million less than advertising. That was for 2:40 p.m. Yeah.

So $14 million left.

So so you've got what is that about a little less than a point and half right, you know, so so you'd say hey Gary. Can you guys sustain this do you got to put that advertising back into the model? And that's a good question. I'm not sure yet. You know, I'm not sure but but that's something that that like we think about like do we need to go back to mailing a book twice a year? I do. Can we mail less books, you know our our big galleries, you know and our investments in restaurants driving more traffic, you know, and what's what's you know, what do we need? Everybody else? I'd say those those are the revenue.

The promotional structure and margin structure based on promotions and then the advertising piece of it and then of course, you know, if people got a big lift that you know, they're going to get occupancy leverage and things like that that that might come back so, you know, I I don't know, you know how sustainable if I look across our industry the margin structure is as of today. I everybody wants to believe it is, you know, that's why I made the point in arts. Like I'm kind of really happy. We only had 8% Revenue growth cuz then nobody can be Snowblind here including us, right. So so I I like like how long do we have, you know, roughly 22% operating margin business today without a pandemic. That's what we got. And you know how much how much pandemic wage boost or we going to have in?

In 21, you know, if if our revenues are up 15% maybe a little right cuz we're going to start growing internationally. I remember when we start off globally. We're going to open countries countries. We're going to open in Europe and be able to take be able to take online orders and ship to all of Europe. So it's not like we're we're opening and you know in in a market like Sacramento or you know, we're opening a new store and you know, Vancouver or Montreal or something and and you know, we're we're opening

A huge country. I mean Europe should be the size for us close to the size of the United States in volume, right? You know, so that's big like em, that's I mean to America with a brand that people know like I saw some some some analysts. I don't know if they're on the phone or not. Like they tend to write, you know, kind of kind of negative things about us all the time. So, you know, they they know who they are but like anything they could say, you know talk like oh, they're businesses down to their New York restaurant like, oh that's they're not going to make their fourth-quarter. It's like give me a break but you know, but but anyway, you know the there in one of their notes that says like yeah, we have no we have no Market awareness like, you know, like people don't know.

Like don't look at some average Market awareness.

Our customers the top one percent in many cases that are the core core of our business is the top half of one percent.

Do that brand awareness go go into London to Paris and go talk to the top one percent, you know who all you know dress in the same label. They all have Rolex watches and other things they all go to the same restaurants that go on all go on vacation to San Tropez Ibiza, st. Barths Aspen, you know, they all know each other and they all know us, you know, so like you want to know about brand awareness and why we're confident. Okay because the people that buy

The other great luxury brand they know about us were the only high-end brand of Our Kind in the world. Everybody else is just a category player.

They just sell sofas or they sell lighting or they sell it's where the only one of our kind and you know, so so, you know the the opportunity you know for us when you think about growth long term is when we start opening countries, like that's like a Coming to America and and being relatively well known as a you know, a guy, you know, but if the market segment that you're targeting and opening a gallery in New York and opening a gallery and La you know or something that like I can maybe compare that to E Harrison and and London right and and going and then all internet to the whole market and you go like you don't think about it as stores. You don't think about it as often if you think about what could the United States generate if I had a store in New York and LA?

Amazing stores in New York LA and they knew my brand and all of a sudden they have a website and I've been wanting to shop from them from years and I've had to fly to America by stuff. I find a container shipping company and ship it myself. Like I think there could be a run on the house here when we when we go International like I think it's going to be better than any any anybody else in a model who stepped across the pond.

It's helpful. My my follow-up question is I guess we're all trying to figure out what sustainable demanded and when will we be seeing about demand is so can you replay the clock or the calendar for it last year this year February Dominion? We assumed that was core demand was up 73% to 80% Yeah, February last year was 8% they presented in in how did March and fold to give us some Palm March? Yeah. Yeah just so does. So so February last year was 8% We we told everybody was up 8% I think you know before the world fell apart.

It's a February update.

That and it was kind of like right where we thought it should be and we're up, you know seventy-three and the core business on top of eight last year in the first two weeks of March. I think we are up for one week and down the other week. So we're kind of flat or up one and in those two weeks so against the flat first two weeks of March. We're up 96.

Okay, so so the the way to think about it if you if you said okay, you know if you neutralized the 8th on February you Dad 8.6 the 73 you'd be up $81.96 is the way if you want to if you want to kind of stabilize the two months.

Very high then we're up against all the Galleries and clubs restaurants and closed outlets and and remember our Outlet business, you know, when it closed it doesn't have a website. So we went to zero on the outlets. We went to zero on the restaurants and and in our Core Business RH Core Business and in our contract business, we we could still take, you know, take orders and stuff. Obviously the contract business, you know, the longer we got into the pandemic and people realize that hotels and everything. We're going to be closed for a long time. You know, that that business really took a hit and then are dead, you know, our our Outlet business for a period of time went to zero and and a restaurant right went to zero so big think about big pickups in a restaurant business year-over-year big big pick-up off in our Outlook business year-over-year and and a big pickup in our in our contract business year-over-year because the hospitality is is now starting to spend again, like they're they're now betting wage.

Work the comeback cycle, right? So hotels are reinvesting buy a new outdoor furniture, you know, things like that.

So I think it'll go ahead.

Do you think it'll be kind of may-june economy will be reopened you'll have some some reasonable comparisons and then you'll get a sense for what the Run rate of the business is.

I think you're going to it might take longer than that Michael. Like we we started, you know, comping up pretty good in May and June. We we kind of in the fall season. We peaked I think August September Jack forty forty-five and forty-seven or something like that in the core business 47 in in in August 27th, August 46 in September where the core number. Okay. Yeah. So so we may have peaked in there and then we had a bit of a Slowdown, you know in the Q4. And um, uh some of that in Q4, we we had more money kind of clearance merchandise that we were moving through last year, you know, so that I probably, you know brought our you know, our growth rates down a bit year-over-year. We just had more stuff we were transitioning phone number floors and and other things so we had some things that we were moving through the cave. It's a little extra Revenue. Um, but yeah, I think that the the real question Michael is this this

kind of accelerated lift that

Started the last two weeks of January, right the last two weeks of January. We we started to see an acceleration, you know up in the fifties and sixties and then it went into the seven seas in February and and and then, you know, first two weeks of of March, you know into the nineties and that that's kind of unexplainable right? But but this is how long we think about it. We we think about it more forget the percentage lift. We look at the dollar trend of the business. So we've got a dollar trend of the business and the dollar trend of the business unless there's a real comic move here. Like if if nothing happens my senses the dollar trend of the business could soften in the second half, but I don't think it's nice to collapse.

Right, and I think that that's probably other people in the home business or looking at that you're saying like yeah. Yeah, the the dollar Trend, you know might swing ten fifteen points, you know, maybe even up to 20.

So I sit here if I if we roll This dollar Trend out, we think it's the year could be unbelievable. Right but we think there's going to be some kind of slow down. It's not so much. Slow down. It's the dollar Trend the dollar Trend right now is much higher than last year's dollar Trend when we were running up 40 right off like in February March, right? So that that means it could be a really good year for everybody in the home sector and that that might just mean, you know, some people like the headline, you know, like stronger the longer. I don't know if that one's yours or someone could sign someone's got the stronger for longer thing. And I think that that could be true this thing could carry us through 21 and it could go through 22 took us know like we're not building a cost structure for that. You know, we we kind of stay inside our company let like cost Chase Sales don't ever have sales Chase cost. You will always be behind dead.

And and I think that that's the other the other positive people are going to get out of this is for the most part. I don't think too many companies are building the cost structure based on the the trend. So every kind of more leverage, uh, you know during this period of time so but we're all trying to figure it out. I mean, you know, we're you know, we're all trying to figure it out and just you know for us is just understand what where is our fundamental business with or without a pandemic so we can think long-term and invest long-term and and kind of be ambivalent about the pandemic kind of like we're ambivalent between you know online or stores or whatnot. We don't care about the channels that we really shouldn't care about the pandemic. Uh, we we need to look through the pandemic, you know, pass this pandemic money to invest intelligently, you know for the future.

It's very helpful. Thank you.

I did want to just add one point when you asked about age to profitability just not giving specific Direction here. But if you think about advertising just want to clarify, you know, in 2020 we mail books in the spring but not in the fall. So most of the spam in in each one versus H to obviously the opposite is going to happen this year. We're clearly male outdoor book, but the books the main books are going to be mailed to the faults you are going to have a flip-flop of advertising shift of advertising that we should probably get. We should probably kind of map that up for people's and get their models, right? Yep. Yeah.

Our next question comes from the line of Brad Thomas from keybanc Capital markets your line is open.

Hi, thanks for taking my question Gary. I was hoping you could tell us a little more about the world of Rh. And is this going to be a redesign of the RH website is the same. How do you think about making your web presence better as a transactional site and importance of that just any more color on on the world of Rh?

Yeah. Yeah, if it's it's really a rebuild of the entire website and you know kind of digital platform of the business, so it's it's you know, just starting from scratch thinking about it across all the dimensions of these kind of new aspects of our business and brand and uh, you know, and and and think about it, you know beyond just a website but we think about it. It's a portal into the world of our age right that can take you through to our our products are places our services are spaces. And so it's you know, it's, you know, all the products and the categories where we have Rh Interiors RH modern wage contemporary coming. We have Rh, baby and child. We have our Teen. Um, we've got RH outdoor. We we're Outreach rugs RH Beach House re Ski House RH color incoming RH, you know coach or is coming or it's just spoke is coming, you know, so when we looked out and we think about just the product world of Rh, how do you architect that how do you how do you have someone navigate home?

Through that how do you get credit for all of that on a on a flat screen? Right and then um and then uh, what you think about our places, it's really our galleries Our Guest Houses off our restaurants and our residences, right? And so those are all our places so thinking about how someone can navigate through those areas. How do you get a you know a reservation or one of our restaurants? How do you you know connect to the Guesthouse? How do you learn about the residences that you know, we're either selling right now or we have and development. How do you took a look at our you know our Galleries and you know what, you know, what are the aspects of the different Galleries and explore galleries online and maybe in a you know, three dimensional way, you know walk walk through a gallery like walk to the New York Gallery like you're there be able to shop the New York Gallery online like you're in the store, you know, it'll actually we're looking at technology on multiple levels to be able to to, you know, create the Rio.

Kind of experience and interaction so that that's our product. That's our places our services as we think about them today. We have Interior Design Services.

We also have our contract business right which is ahead of a service-driven business. Um and uh long-term we we think we can be in the architecture Services business and the landscape architectural services businesses. We think it's about Services is a Services platform, you know, installation services business, you know, all kinds of things that we we can do that can kind of amplify, uh, the Brand New Jersey and then uh, and then our spaces are, you know, kind of a kind of a unique view into kind of spaces of Rh, which deal with um, uh, you know, RH three jobs, are are you know, luxury yacht RH one and Rh to our, you know, our uh today to start, you know, corporate planes, but they'll soon be on the website and you'll be able to Charter or each one and two and and no one's really even seen our planes. But you know, we designed them with the vision of their going to be part of the ecosystem, you know, cuz we're again we're trying to build luxury brand and you think about the very top of the pyramid and

you know you you know, I say, you know you kind of go from

You know buying homes, and then you go up and up the luxury mountain and you buy a lot of homes and then you get you know, really really rich and you buy a jet and then you get kind of silly rich and you buy a yacht club, right? And so those are you notice the hierarchy of kind of spending and that world and so, you know, we're you're going to see you know, RH one and Rh to which you know, if you ask Gulfstream that you know, they would tell you that are each one is the most beautiful plane they've ever built and they've done things that have never been done because we challenge them and help them think through how to do things, you know, in fact when they you know went ahead of gulfstream's telling me, you know, a phone number would we have a 12-hour meeting there, you know till 2 in the morning would you know, they're engineers and everybody and you know the set okay Gary we're doing a recap. I'm going to you know, send you the you know, the upcharge for that custom gallon, you know, you know Galley that you designed did I said like that's great Marcus and I'm going to send you my designs fees for that custom Galley that you're going to want to sell the other clients. So, um, you know, but but we yep.

Have a lot about like plain design right now. We know how to design a beautiful plane. We you know have just kind of kind of redesigned. Rh3 and uh, you know, it'll be ready for Primetime here in about a month. Uh-uh. And I you know, you see a beautiful yacht you'll see other things and other spaces will evolve, you know in this kind of really rich world and contests. I mean, um, you know, but you know, you know, you you basically dead batteries on on on the world of our age that you know, talk about the building of or the designing of something and things that are people are really interested about who are into design and two spaces, uh, you know, lots of life to it and and then a massive upgrade in just the consumer experience for just buying product right massive Leap Frog as it relates to that.

That's great. Thank you, Gary and a modeling question for Jack just as we think about Rising raw material prices and prices that many in the industry are seeing could you give us any sense of how we might think about that impacting the model? Obviously, you all have a pricing power you've demonstrated that but that have any impact on how we should be thinking about the models here.

Let me just jump in for a second again. I point you to the fundamental point that are goods are a lot more expensive, right? So as a percentage of our sales.

Those factors are going to be a lot less.

Right so start with we sell, you know a cloud sofa ten to twelve thousand dollars ten to fourteen thousand dollars.

The freight on a ten to fourteen thousand dollars sofa is a lot lower than the freight on a $2,000 sofa as a percent as a percent to sales, right? So you got to start with Monday. We will we be impacted sure. Will it be to a much smaller degree than

You know if you're CB2 or West Elm or something like that, no, or you know Pottery Barn or crate Barrel or places like that. Yeah, like, you know, you have to look at the price structure of the good life, you know that you know that and and the you know again if if we're using about the same amount of wood, but our product is just designed much better and it's a higher quality product and it's you know, it's going to be a smaller percentage. So, you know, that's why you don't hear us talking about it as much because the impact at this point is less and it's in our model.

Thanks so much.

Sure. Next question comes from the line of Tammy Zakaria from JPMorgan your line is open.

Hi, thank you so much for taking my questions and Congress the entire team on the very strong results. The I do have two quick questions. The first one is could you share some details on the Distribution Center that's coming up lies in terms of what would be the incremental rent or incremental operating expense to run it or the incremental capex to build it any details around that would be helpful.

Yeah, it's it's all in our model. You know, I don't know if we you know, we're disclosing individual rents of DCs and stuff like that. But but it's it's all in our models on our projections solid our plan so long and the cap taxes modest as it relates to the 250 to 300. Yeah. Yeah. Nothing. This is it's a it's an event, you know, like like anytime you have a there's a little there's a little step up here, you know, but, you know, we're in a step up here, but we're absorbing that cost and so will you know probably in the first year, you know, it's a it's a bit of a drag on occupancy, you know, and uh, but by ear to get your three will start getting leverage on the on the property right versus the step up but it's but it's in our model Center projections.

Got it. So that that's a great segue to my second question. I did want to go back to that comment that you saw.

Seven fifty basis points of operating margin expansion in 2020 on on 8% of Revenue growth. So for this year your guiding 202/206 on Top Line growth of 15 to 20% So are you being conservative because there should be I would think there should be natural leveraging dollars of sales going through so it is that just for being conservative or are there any one-time expenses that are pressuring this year and should go away next month and and the years to come to help us sort of understand why operating margin expansion would only be hundreds of $200 on 15 215 a 20% sales growth.

Yeah, I would just kind of look at history here and ask yourself or we generally conservative or we generally aggressive on our projections.

So

You can draw that conclusion, right if the comments I made earlier. I mean we we wouldn't say, you know a minimum of fifteen to twenty percent growth and hundred to two hundred basis points unless off but you know, like I said, obviously

Yes history would tell you here just looked at the last I don't know X number of years that we're relatively conservative and how we guide and we generally our outperform our expectations. Especially the ones we give at the beginning of the year. They the question here is we will there be a big economic change like nobody knows that like will will you know, will there be a recession will there's something else happened? Nobody knows that but if if not we've

yeah, we we we feel more optimistic than pessimistic about things right now, but we we tend to

under-promise and over-deliver, so

Got it. Got it. That's super helpful. So there's really nothing one time or sort of unnatural something impacting this it's just I'm conservative prudently conservative.

You can frame it that way. Yeah, actually got it say, thank you so much. Thank you.

Thank you. Your next question comes from a line of Christina Brandon from Kelsey advisor group. Your line is open. Hi good afternoon, two questions and you know off quicker ones, you know the the Irish in your home, which you commented a couple of times you've been testing it for, you know for some time now only in California, I guess. What do you think you still need to improve to be able to roll that out, you know a across the u.s.

yeah, I think we've

Only been testing RH in your home for how long for Metal Gear 3 months three months. So Now full full task 3 months. Yeah. So like this is this is a whole nother level of kind of off by yeah, we've been talking about it for you for three months. Yeah. We've we've never really, you know talked I don't think we really talked to you being the detailed way about RH in your home furniture ambassadors and everything like Tesla's or anything yet or not yet. You know if I will soon have you know, you're going to have this gray RH truck and you know Furniture Ambassador in a in a separate Tesla car, you know gray car, you know, and and they don't have the test lose yet. I thought they might have the test look but probably got them on order. But but but it's a whole different experience right? It's like I'm sending a highly-trained Furniture Ambassador into the home with our delivery team, right that is managing the whole process with the customer that wage.

Up selling in the home that is doing all kinds of things. If there's a problem. We saw that immediately, you know, the the stress for the customer goes down. It's it's a completely different experience wage. Um, you know, it's a different investment. So we're testing it, you know, obviously you're putting another person on the road and another person, you know, and and it relatively high paid person. We're sending in the home, right so long, you know kind of a almost an interior designer quality person, you know Furniture Ambassador in the home.

And then the other question was some of the new businesses RH Couture and I should be spoke. I feel like today is the first time you've talked about those. Can you give us some details what your page businesses are?

It's all in giving you. I would just take the words themselves and use your imagination.

Thank you.

Your next question comes from the line of Peter Benedict from Baird your line is open.

Hey guys, what's the most of my questions have been asked and answered? I just wanted to wish Gary happy anniversary.

I see her well, let me sneak one in Gary just very quickly the new DC in Southern Cal and then you guys years ago. I I just don't know if this is just you know, the business now getting bigger. So you need it now, but is there anything different you're you're doing with that DC versus what makes the one it previously? That's that's my only question. Thanks so much God. Yeah, it's it's really kind of an investment. I think about it as an investment into the outdoor furniture and special order business. So it you know, it's gone dark attempted for those two businesses designed for those two businesses, uh and Billy to leverage those two businesses. Um, uh and and, you know, run them in a in a more focused life in a more focused way to kind of, you know, get, you know, get a better customer experience grow those businesses and services businesses that are so dead.

before we just had a full DC in Southern California it was

Yeah with kind of redundant DCS and Northern and Southern California, um, you know, but but need to have you know, things like for example, um, you know, all the all the votes the most most of our furniture is coming out of you know teks coming out of Indonesia and you know metal furniture coming out of you know, different parts of Asia Vietnam, you know, trying to things like that. So so every major container ship that's coming in is first stopping in Southern California and then going up to kind of Oakland the Port of Oakland. So you you pick up 7p immediately right there and then just the way we're going to handle and process and talk no crosstalk those businesses. Uh, you know, this is speed to the consumer and then if you think about the outdoor furniture business Southern California is our largest outdoor furniture market by far and then the southern states are are a lot of you know our strongest, you know, very very logical so the ability wage

Get the good deliver faster in the biggest Market, um, you know, and uh, you know hit the southern states faster, you know, think about the the trucking lines in our businesses and then we can do this not everybody can do this is our businesses are really big right like these these are like our our outdoor furniture business is a real business. It's you know, I mean, I think our outdoor furniture business is bigger than some of our biggest competitors today at the high end, right? Like if you took some of the Yeah by far, you know, but just outdoor against their entire business and saying like we're having an internal internal conversation here, I think about like like dead who you might think of like a higher-quality national brand, you know, or something like that. So it's a real business, right? We that's a great thing about starting have scale like this. You can allow you to kind of like stagnant and focus on businesses in a very unique way and optimizes businesses like you only ran that business and then if you think about the special order business is the completely different business got a different model.

And you know and how do we you know, how do we run that business at a much more efficient way, you know better customer service faster delivery things like that. So it's really an investment. We've been talking about this internally for a long time investing into those two businesses.

It makes sense. Thanks for all the color. Good luck.

Your next question comes from a line of attack fadem from Wells Fargo your line is open.

Hey Gary, quick one. One thing you haven't mentioned today is the our curation initiative with with general public. Just curious if you can talk about this a little bit and how long the you know, fine art as a potential opportunity for your business.

Yeah. Yeah. Well, this is an idea that you know, Portia de Rossi came to us with and yeah, she's really the entrepreneur behind it. She figured out the technology and the 3D printing or what did she call it called senographe a graph. Um, you know, it's like a 3D printing like, you know, you can look at at a beautiful textured and painted piece of art in this replicates it perfectly like, uh, you know, you'd need a real kind of art to be able to tell the difference and and you know her and you know her partner Elin, you know Ellen DeGeneres, you know, they're big art collectors. They've got great taste and style. You know, their homes are fantastic and I just have incredible taste in art and and and I think Porsche is Right art history major, you know, it was one of the things she studied and you know, she just very very smart, you know entrepreneur and you know to get a big idea, you know about this and she kind of came, you know through some friends, you know made a connection, you know to talk to me about what you know, here's my idea what I'm doing and she'd just kind of birth.

Started and you know, we loved the idea and we loved her taste and style. And and we said look, we we think we can be the platform that can amplify your idea and we be your best partner and and that's what

We've done and she's you know, she's working on ramping production and expanding the assortment and you know the great thing about about portions like you you just always know like what she's going to show you you're going to want to buy cuz she's such incredible taste except I say she's probably listening to the conference calls those those dog paintings, but she came to me a few years ago. I know joking around. So I said actually I now I now I really like them and so I think we're dead we asking but but I'm just joking around cuz she ever hears this conference call, but but no it's it's uh, you know, incredible opportunity for us when you think about uh, you know, all the walls and in a home and found, you know, all the opportunity there's more square footage on the walls, and there is on the floor. Uh, and so um, you know, and and it's one of the reasons why you know initially years ago some of you may remember we tried RH contemporary life and and then we pulled back and and we made try it again the tough thing about RH contemporary art.

Was you only get to sell the item one time, you know, so if you had it like a best seller you had a great piece. You used that that transfer of Happiness happens one time. You're like, okay we sold it. And then now what do we do? You know, like I got you know, I got a thousand people don't want that piece of art and I sold it. So, um the great thing about um, you know, the Porsche strategy game, so she she said what what's your line? Uh, great art the general public. I can't remember if she has this whole, you know, great view about it is like everything is this imagine imagine if a great books in the world, there was only one that you couldn't publish another copy.

Like, you know, that was her whole I thought that's it was just brilliant. Right? Like imagine like every book was just a collector's item and only one person could have that book. It makes no sense. Right and so her idea and what and the great thing about her. She's tremendously persuasive. So she's great with all the artists, you know, because you know, a lot of the artists are trapped in the old school like I made this and that's my piece and now like if one person in the world owns that piece it's kind of goofy. Like when you think about it, it'd be like, you know, a fashion designer designed like one dress code and no one else could enjoy that except for one person, you know, so so she's got this different view in the way. She's framing it and because she's a credible her an Ellen. It really credible art collectors off and they've got incredible taste and they've been advocate for the art community for a long time that people trust her and I think she's breaking through and she's getting better and better people on the platform and yep.

And she's convincing him like like like why only print one copy of of your work, like like great novels. There's not just one copy and so people are starting to get that and I think it could fundamentally change the art World permanently, you know, so

that's the idea.

I appreciate the color. Thanks, Gary.

And there are no further questions at this time. I will turn the call back over to management for some closing remarks.

Great great. Thank you very much for your everybody for your time and and you know attention today and your interest in in, you know, our business and brand, you know, we know it's been a crazy and difficult year and we just want to you. No, thank you. No thank all of you think all of our customers. Thanks guy. Yeah, thanks all of our people, you know around around the world that not only just work for our company that work on behalf of our company making the products and you know delivering the products and uh, you know, making the supply chain work. Uh, if this is this is just in you know, a year like none of us could have imagined and, you know, a lot of people made a lot of sacrifices and, you know took a lot of risk to kind of keep everything going in this world, and we sure are are thankful and and we couldn't be more excited about about the future and about the opportunity. So thank you everyone and we look forward to talking to you at the end of the first quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.