Q2 2021 RH Earnings Call

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Good day and thank you for standing by welcome to the RH second quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode.

The speaker's remarks, there will be a question and answer session.

Asked a question during the session you will need to press Star and then the number one on your telephone keypad. Please be advised that that East conference is being recorded.

You require any further assistance please press star zero.

I would now like to hand, the conference over to your first speaker today Ms. Allison Malkin Ma'am. Please go ahead.

Thank you good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2021 earnings Conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make certain statements today.

Are forward looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially please 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 opinions 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 GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in todays financial result.

The press release, a live broadcast of this call is also available on the Investor Relations section of our website at IR Dot RH dot com with that I'll turn the call over to Gary.

Great. Thank you Allison and thank you everyone for joining us today I'm going to start with our shareholder letter and then we'll open the call to questions.

So our people partners and shareholders. We are pleased to report another quarter of record results with adjusted net revenues, increasing 39% to $1979.0 million versus $710 million, a year ago up 40% compared to the second quarter of 2019.

RH continues to set a new standard for financial performance in the home furnishings industry and our results now reflect those of the luxury sector as adjusted operating margin increased to 26, 6% versus 21, 8% last year.

We generated $263 million of adjusted operating income in the quarter up 70% compared to $155 million a year ago.

Adjusted net income increased 105% to $252 million and adjusted diluted earnings per share reached $56.0 versus 490 in the second quarter of last year.

This year suggested net income benefited from an unusually low tax rate of one 3%.

Versus 16, 1% a year ago due.

Due to an increase of stock options exercised in the quarter and the nearly three <unk> increase in our average stock price.

If our tax rate in the second quarter was comparable to last year adjusted diluted earnings per share would have been $28.0, an increase of 47% versus $94.0 in the second quarter of 2020.

We generated $290 million of adjusted EBITDA in the quarter and $95 million of free cash flow.

The second quarter ended with total net debt of $296 million.

And trailing 12 months adjusted EBITDA of 1 billion, a new milestone for RH.

While inventory on the balance sheet increased 32% to $646 million inventory on hand was $400 million up 12% to last year as in transit inventory of $163 million increased 85% to a year ago compared to a year ago.

Raising fiscal 2021 outlet.

Based on the continued strength of our business and the power of our operating model. We are once again, raising our outlook for fiscal 2021.

We now expect revenue growth of 31% to 33% versus our prior outlook of 25% to 30% and adjusted operating margin in the range of 24, 9% to 25, 5% versus.

Versus our prior outlook of $23 five to 24, 3%.

We're also raising our ROIC outlet for the year to 70% versus our prior outlook of 60%.

Yes.

Our demand growth has accelerated during a demand growth has accelerated during the third quarter on a two year basis and has continued to build momentum. Despite cycling the most difficult comparisons from a year ago and the continued supply chain challenges that have been amplified by the by the spread of the Delta variant.

We believe the Delta that we believe the data and current trends support the argument.

A more long term sustainable step change in consumer spending on the home.

An important point to consider when analyzing the strong demand in the housing market is the migration of consumers to larger suburban and second homes.

This trend is resulting in substantial square footage growth that is driving increased furniture and furnishings demand.

Add to that historically low interest rates, a record stock market and the reopening of several large parts of the economy and elevated spending on the home could very well have a long tail.

Looking forward several factors lead us to believe fiscal 2022 is shaping up to be the most exciting year on record for the RH brand as we are planning the largest new product cycle in our history highlighted by the launch of RH contemporary in the spring of 2022.

Our latest Ari can periods of modern source books, which have not been mailed since the spring of 2020.

The opening of RH, England the gallery at the Historic Idaho Park, a magical 73 acre estate designed in 31 by the legendary English architects are John zone that will.

We will introduce RH, the U K and a dramatic and then forgettable fashion.

The unveiling of our first RH guest house in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury and the $200 billion North American hotel market.

The launches the worlds of our age of digital portal presenting our integrated ecosystem of products places services and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader taste in place maker.

As it relates to the ongoing supply chain challenges the Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the Delta Darrin. This.

This began with partial shutdowns in early July and expanded the full factory closures by late July we are currently expecting manufacturing to restart in Vietnam in October with production ramping to full capacity by the end of the year.

Additionally, suppliers globally continue to.

<unk> experienced a number of challenges, including sourcing raw materials, and we are seeing price increase and then because the majority of our product categories. Shifting also continues to be a headwind with longer transit times and higher transportation costs.

As a result of our accelerating demand trends and compounding supply chain challenges, we are delaying the launch of RH contemporary until spring of 2022.

Additionally, we are pushing out the mailing of our fall source books to enable manufacturing partners to focus on reducing the backlog of four products, while ramping in refining production on new collections to meet our elevated quality standards.

Based on similar supply chain challenges and uncertainty of how the Delta variant will impact the hospitality industry. This winter we've made the decision to delay the opening of our first.

New York guest out our first guest house in New York City until spring of 2022.

Our plans to open new design galleries with integrated hospitality in Chicago Jacksonville in San Francisco This fault remain intact.

The long view, the RH business vision and ecosystem.

We believe there are those with pace to know scale and those with scale and no taste.

And the idea of scaling taste and large is large and far reaching our goal to position RH. If the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world.

Our brand attracts the leading designers artisans and manufacturers scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH contemporary.

RH procure.

RH bespoke.

RH color or AT&T and artifacts Archie <unk> and other new collection is scheduled to launch over the next decade.

Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment generating revenues of $5 to $6 billion in North America, and 20% to 25 billion globally.

Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products places services and spaces that establish the RH brand as a global thought leader taste in place maker.

Our products are elevated rendered more valuable by our architectural inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we expand beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury and the $200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like RH, yountville and integration of food wine art and design in the Napa Valley are each one in RH to our private jets, and our <unk> III or luxury yacht, but it's available for charter in the Caribbean, Mediterranean, where the wealthy and affluent visiting vacation.

These immersive experiences expose new and existing customers to our evolving authority and architecture interior design and landscape architecture.

This leads to our long term strategy of building the world's first consumer facing architecture interior design and landscape architecture services platform inside our galleries elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize yourself spaces.

Moving beyond the 170 billion home furnishings market into the $1 seven trillion in North American housing market with the launch of RH residences.

Fully furnished luxury homes condominiums and apartments with integrated services delivered taste in time value to discerning time starved consumers.

Our ecosystem of products places services and spaces inspires customers to dream design Dine travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.

The entirety of our strategy is designed to come to life digitally as we launched the world of RH, an online portal, where customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter case will be further amplified when we introduce our each media.

A content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies, the market opportunity to seven to 10 trillion.

One of the largest and most valuable addressed by any brand in the world today.

1% share of the global market represents a $70 billion to $100 billion opportunity.

Pace can be elusive and we believe no one is better positioned in RH to create an ecosystem that makes it taste inclusive and by doing so elevating and rendering our way of life more valuable.

The right people are our greatest greatest asset.

At RH, we believe deeply that.

The right people are our greatest asset.

We value people with high energy, who have the ability to energize others people, who are smart creative and have a point of view.

People, who see the answer in every problem versus those who see the problem. In every answer people, who are driven determined and we will take no for an answer we value team players people, who are more concerned with what's right rather than who's right.

Good morning price, our chief operating servicing values officer, often says the right people are our greatest asset and the wrong people are greatest liability.

Also reminds us that the right people are a reflection of all 11 tenants of our people value above.

I want to thanks to the right people, who bring our vision and values to life each and every day. The 11 out of 11 SDP would call them. Thank you for your energy your point of view, we're not taking no for an answer and for being more concerned with what's right rather than whose rate as we continue our quest to become one of the most admired brands in the world.

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At this point I will open the call to questions operator.

Thank you and as a reminder to ask a question you will need to press Star and then the number one on your telephone keypad and to withdraw your question gets suppressed mcconkey given time constraints. Please limit yourself to one question and one follow up.

We will pause for a moment to compile the Q&A roster.

Your first question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, guys Jack Allison.

Yeah, Gary given the combination of supply chain challenges right rising cost pressures, which I believe is driving rising retail.

Rising retail curious if you could just discuss at a high level, whether youre seeing any changes in customer engagement or customer conversion trends as well as cancellation rates and the idea is just trying to gain a level of comfort here on what's driving your conviction to raise guidance yet again this year as we look towards the back.

Half without having this.

This new product launch.

Potentially stimulating more demand.

Yeah, Steve let's start with the fact that we have insights into the quarter.

We're relatively well into the third quarter today, and we have accelerating demand in the quarter.

Kind of.

Month over month already so.

And we.

We can see.

Stand back and think about newness is going to add to a very large business. We have here, it's not going to replace.

It's a very large business that we have so the underlying business is very.

Very healthy.

Went through a period of our highest out of stocks and highest backwards that we ever experienced.

Our inventory levels are starting to get better.

And even though.

Even though we are delaying the launch of contemporary or delaying once again, all the newness that would go into RH interiors RH modern RH rugs, I'm sorry, yes.

Everything else VITAS ski house everything else, we would normally male.

Yeah.

The guidance is.

Our best view.

What we see I think if you just look.

Look at the last.

Four or five years of history since we.

Kinda reconceptualize, the supply chain and move to membership in 2016.

I don't think we've missed the quarter and.

Five years so.

<unk>.

I don't know how much more convinced conviction or pattern recognition you would need.

No. That's helpful. And then just a quick follow up as I think back to the first quarter letter there was.

His commentary about the broader international pipeline I think was five leases were signed five and final negotiations any update on how that pipeline has come together.

Any update you can provide would be helpful. Thank you.

Yeah, No I think nothing really new or if we would have we would have talked about it in the in the letter.

It's a little difficult to kind of traveling.

Negotiate an international business right now so.

And coordinate the kind of meetings and conversations but.

Nothing's changed I think we.

Still.

We have kind of five deals.

That where we're moving.

Moving forward with we have.

Multiple deals.

We're looking at more of the.

The pipeline as far as opportunities that we're looking at is will continue to grow.

Our galleries are very very unique.

And that's how are you.

Walk to the street and find a building that we need so, but we're confident that we're going to be able to.

Scale the brand.

One of the only people.

In Europe with any kind of a specialty business that can sell up multiple levels and multiple floors that can use gardens, and rooftops and so on and so forth. So.

But you are.

Our focus to.

Launched the brand is.

Is that.

The number one priority in the company right now that in the.

The expansion of our product and our <unk>.

Hampshire bit tied on the products and.

Less tied on the international expansion.

Right.

Unless something else drastically changes.

In the world or with.

With new strains of the.

As the virus.

We feel very confident that we're going to deliver.

Deliver everything that we've just put out in this letter so.

This is our best thinking today, and we're really confident about this.

New changes.

I don't think when.

When we talked last there was much of a delta variant or any anything that was happening yet.

I went on vacation.

In July.

Yes and.

But like.

Masks are asking why wasn't that interesting.

Through all my masks away and came back to work and needed by a new mass so yes.

The World is changing quickly here and I think we've all got to learn to improvise adapt and overcome.

At a.

Whole new levels, but you build new muscles in.

I'm extremely proud of the team.

For our executing execution, thus far if you would have.

Asked me a year ago.

When we were running 47 comp in August.

That was our peak months guidance right in the core business.

Where are we going to come around.

Yes.

<unk> costs were 47.

I wouldn't have said, yes that would be.

Confident about that based on the fact that.

August is in the rearview mirror.

And.

The first couple of weeks of September.

Look really good and our in stocks are starting to get better a bit.

And we have flow of goods coming.

But we focus the flow on our core business.

On our best sellers and the things that drive our business and as we should by the way the customer is not going to walk in and go.

Oh.

Where's that I thought you were going to have that they've never seen that ever seen anything there's no expectation.

Our business is one if you think about it it's not really an impulse business I mean, you're you're furnishing a home it's not it's not a big impulse business you're you're.

Yeah, Youre planning at your shopping.

Working with designers.

Are.

Our time with the consumer is weeks and months too.

To do an order so.

Yes, even if the newness comes in you know, there's there's a multiple month ramp period.

But I would just say.

Yeah, I'd stand back and say what would it look if we were selling cheap goods a lot easier to kind of bring in sheet goods in the market right now right, we're selling the highest quality goods at scale in the world.

In the home home business.

So and we.

We're trying to elevate the quality of the goods.

The next round of good is a whole another level of quality and design.

You don't rush quality, you wait for it and guess what people pay for it.

And so.

So.

You know like if someone thinks they want to measure it.

Pandemic.

We're there.

There's a lot of people that are sick and dying in Vietnam right now and.

I feel terrible for what's going on there people that you know.

Their lives dependent on it on it yet.

To feed their families and they can't work.

So.

We're going to be okay here are bart businesses with them.

We have like I said I mean, maybe.

Nobody else has.

40%.

Two year growth.

Not many I don't think anybody is going to have the two year growth that we're going to report in the third and fourth quarters, because our business is accelerating so.

Yes.

But I I just focus on the big picture and what's really important what's really important is our demand is building.

We've had some of the bed.

S business in the industry, we're taking market share, we're expanding operating margins.

And yes people sick and dying out in the world today, and you've got to you've got to make the right decisions help help them prioritize prioritize their lives do.

Do what's right for the long term.

Yes.

It's like I've told the team from the very beginning of this pandemic.

We're not going to chase every sale here.

We were lucky we we've had a tailwind most of the world has had a headwind.

People are sick and dying for almost two years now in this world.

Yep.

Our business is doing great.

We feel blessed.

Yeah.

Thank you.

Thank you. Your next question comes from the line of Michael Lasser from UBS. Your line is open.

Hi, good evening. Thanks, a lot for taking my question. Gary are you planning for your path over the next few years from a sales and a margin perspective to be linear you have all of these initiatives in place some of them are being delayed from this year.

Next year, that's going to mean some cost shift from this year to next year. So should we be modeling your business that sales and margin over the next few years continuing to build year after year.

Yeah.

Okay.

Yeah.

Michael we're not giving.

Detailed guidance over the next couple of years I would say.

Yes.

It's like someone.

Asked me.

Well gosh, you're saving money. So your earnings are up because youre not mailing your catalog.

We don't Mailer cataloging <unk> zero, and we don't mailers catalogue to lose money. So we're not mailing catalogs for not getting revenues.

Yes, so we invest in things that drive revenue engine drive profit.

Where we've got new business investments, where we've got to make some infrastructure investments as we launch Europe and things like that are of course youre going to have some initial period to ramp what is that look like when we open in a new country let.

Let me see let me look at past data, Oh, I'm, sorry, I don't have any.

I don't mean to make a joke about that but no.

I just like there are some things.

You can waste a lot of time thinking about I think what we've got to do is.

Open great consumer experiences in Europe, we've got a launch.

<unk> launched with a great website, we've got a launch with real intelligent marketing.

We've got to be prepared to execute.

Whether the first year is $50 million or $250 million you tell me.

Stand back and think about this for a second.

There's 39 million people in California.

If I had new exciting design galleries in California, California would be I don't know $800 million business for us.

Maybe a little bit more there are 68 million people in the U K, there's relatively similar depth demographics slightly wealthier than California, but more people.

So I'd say, California, when we continue to expand the brand looks like $1 billion business, let's call. The U K, a $1 billion business lets call the UK today $800 million.

What happens when you have a brand that's really well known in a very small market like ours right.

We're at the top kind of the very top of the pyramid, there's not a lot of people there. They have a lot of money they have a lot of homes and they spend exponentially on the home.

They directionally I mean, yes, there's.

Some of the data we've seen and some of the research we've seen from some of our large investors.

<unk> done pretty deep research done their own research and.

Research interior designers in the UK and in France.

What percent of interior designers know us.

Like 80%, 90%, it's almost 100% in some cases.

They know us.

They are a key customer.

For our business.

High end consumers.

Pretty much know us.

And admire S. So.

What happens when you open an incredible.

73 acre estate.

Probably will be.

The most exciting.

Innovative retail experiences in the world.

Granted.

A bit outside London.

But in our business as the destination and what have you.

You've launched with the website with.

Yeah.

Yes, 40000 Skus and.

The most dominant assortment in the country and.

And.

And you have relatively high awareness.

I don't know I got to believe it's going to be better than other people that target a big wide audience.

And don't have high recognition.

Got to spend a lot of time getting out and so yeah.

I really don't know if first year sales in the U K will be 50 or $250 million that Saar range.

I know directionally, but we have to spend.

I'm, just trying to be honest with everybody here.

No matter, if it's 50 or 250.

It's going to be really big over the next couple of years.

So.

We're going to learn a lot when we get going and I think I would say that yes.

Kind of go into a long rambling question I'd say that so I don't get the same question four times in a different way.

Alright understood.

Yes.

That's helpful.

My follow up question is.

You're articulating a lot of enthusiasm and confidence for the back half of the year in part because of the.

To date trends the demand comp the two year accelerating based on what you experienced in the second quarter can you give us what the second quarter demand comp was so we can have a calibration for.

For our models on how the how that unfolded.

Yeah, It's just crazy right now look I don't want to make it a habit, we gave demand comps during that.

Most kind of crazy.

Crazy time of the pandemic in the first year and I don't want to give demand comps for the rest of our lives.

I think again I would just like I answered Steve's question I think we have a pretty good track record.

Doing what we say we're going to do.

I don't think we have a track record of guiding aggressively.

So the numbers may look aggressive view.

Sure.

Q1 looked really aggressive to everyone right.

We took the numbers up pretty big.

When we reported Q1.

Earnings in our stock went up $100 a one day.

Right.

And I got a lot of questions like that you really pick the numbers up do you think youre going to make them.

Yes.

Yes, yes.

I don't.

Thanks, Ed.

We it's not like someone hands me.

And says here's the recommended guidance Gary.

I sit here with.

20 people.

For hours and hours and hours going through category and trend and every detail on our business. We turned over every rock we.

Gain alignment and clarity we gain clarity on that.

Dan alignment on.

Where we believe the numbers are going to be.

And we've been doing it.

Long enough that we've gotten pretty good with it even.

In a time like this.

I think one of the first ones to start giving an outlook.

Not a lot of people didn't even give any kind of directional guidance.

Yes, we did.

Yes so.

And we did because we are confidence that we know our business.

Something massively changes in the world.

Got it all bets are off but based on what we know today.

Based on the data Youre looking at were looking at.

Yes.

Okay.

Yes.

This is our guidance.

It's generally not too aggressive.

Thank you Bruce good luck.

Thank you. Your next question comes from the line of Max Gravlin call from Cowen and company. Your line is open.

Great. Thanks, a lot. So a couple of bigger picture questions here. So the first one is Gary what do you think is your share of the luxury segment of the market. Today, you had a comment and one of your recent letters that your competitors are closing or downsizing their stores and with RH continuing to transition the galleries.

Longer term, where do you think your market share could go over time.

Yes, I would say we have.

Clear line of sight to $5 billion to $6 billion in North America, and that may be bigger depending on the product innovation.

And elevation and all that.

Concepts that I've articulated.

Which.

Our <unk>.

Really not all of them are even in in that number right. So I'd say to not.

Hit the 5% to $6 billion.

Something would have to go really wrong here.

If we just continue to transform.

Existing galleries to design galleries and yes.

Launched contemporary and it does directionally, what we think it's going to do continue to expand and upgrade.

R R.

Assortments in interiors and modern.

Spanned our rug business build and Dimensionalize, our textiles business continued.

Continue to build and expand our lighting business.

And add new categories, and if were Directionally right.

Does that number get bigger the $6 million.

More likely than not.

But today, we're very confident about $11.0 billion in North America.

So.

So I think to do that.

We have to take market share right like take Marin counting here.

At a gallery that is doing it.

$18 million.

<unk>.

Yes.

To have a new gallery that we opened.

I mean I.

I might even be able to throw a football and hit our own or gallery from our new gallium standing on the roof, maybe but.

Not very far like a 2020 aircrafts.

And.

I don't know of any people who've done this before but were yeah.

We opened a new gallery and its trending what guidance at about $50 million somewhere in that range.

And.

I think it's a combination of us.

Creating a new market because people are seeing product.

That they've never seen before presenting it in a way we've never seen before in our NIM.

<unk>, that's inspiring and interactive in.

Full of light and fresh air.

Okay.

The article presentation.

We call them galleries, because we say, it's an artful abstraction of home furnishings in a gallery setting right. So yes.

We don't really just merchandise our stores, we create kind of artistic installations of home furnishing people havent seen anything like this before.

So I think from seven to some degree it creates a new market but.

And some of the math.

For example, safely if you take our RH, Brian because we're talking about that one right now.

Five years ago, four five years ago, there were 32.

I would call higher end home stores.

From Sausalito to Santa Rosa, including the Napa Valley.

And.

Not going to name them, because who knows.

People are sitting on the phone listening to our call.

Yes.

Small boutiques mom and pop's some regional players and their stores are about 3500 to 15000 square feet. Our gallery was about 6500 square feet. So it's kind of in the middle and our gallery hearing more and we I think we had.

Five sofa collection fixed dose of collection.

<unk> dining collections and.

Five or six bedroom collections in the gallery.

So.

The other galleries, if we're right about the middle we had.

We look like everybody else kind of we werent really differentiated.

And by the way.

In that gallery, when we closed it.

It had less than 2% of our assortment.

Great.

2% call it maybe one 5% of our of our assortment.

So you couldn't really see our assortment in that gallery.

That's why we mailed really big books right because if you saw our big book.

Hit to your doorstep and other People's Spin books, you could you'd go pay those guys have a lot more than everybody else because it just went in the physical world. We don't look like we have any more than anybody else, where we have.

Our.

Traditional galleries now.

Our galleries in and of themselves are our.

Legacy galleries, probably outperformed competitors three to four to one in the same square footage.

But when we open a big Gallery I always tell people that the 30 to 32 kind of Gucci, Paul may be could be competitors higher end home boutiques.

Generally more expensive than long wait times don't have the infrastructure.

Yes.

But.

I'd say half of them go away pretty quickly.

And yes, we will do another survey and do the count or did it go after year one day to go from 32 to <unk>.

25 did it go to 32 to 18 did it go to 32.10.

But yes, we're not it's just not completely a new market we're creating.

But if.

If I compare it.

Don't take this wrong they'll probably write this on some letter Gary Friedman now its comparison to Apple.

I remember last time, you said something that.

I was claiming comparative system to <unk>, that's right, yes talking about the financial model.

But.

April was kind of Alaska.

People into the cell phone games.

They created a new game they created a new market it was more than a phone so.

It created a new market and it also took massive market share.

Think directionally.

Yes.

<unk> to that we're creating a new market.

And we're taking market share pretty aggressively.

On both sides of that scale and I think when I. When we look at Europe, just to kind of talk about that for a second.

Competitive landscape in Europe.

Is significantly weaker than it is in the U S.

We will be even more disruptive.

Yes and differentiated.

In Europe, and that's why we're very confident about it.

Great. That's very helpful and can you discuss your cash deployment priorities you are now sitting with almost $300 million of cash on the balance sheet and with free cash flow is set to accelerate over the coming years, you'll have a lot of opportunities. So how are you thinking about reinvesting back in the business versus M&A.

Or ramping up share repurchases. Thank you.

Thinking about all of the above Jack I don't know what that was going to stay the same thing and even more thanks.

Every quarter and I think we are.

Yeah. So we have a cash chessboard sitting here.

So we theres all kinds of moves.

Yes.

We're just waiting for the right time to make the right moves, but we're looking at a lot of things.

Whether it's.

Investments into the business and innovation in the business, whether it's investments in M&A and acquisitions that will strengthen our positioning or or elevate our business and brand.

We're thinking about share repurchases.

Everything you'd think that we're probably thinking about we're thinking about.

So, but we tend to.

Be opportunistic and.

Yes, so and patient so well at.

At the right time.

I think we'll make a good move on our chessboard right now all the pieces are still there we haven't moved anything.

But we've contemplated a lot.

Understood Best regards.

Thank you thanks Max.

Thank you. Your next question comes from the line of aging E from Barclays. Your line is open.

Yeah.

Excuse me Adrian can you. Please mute your line your line is open now.

Okay.

Adrian <unk> can you hear me can you hear me, yes, we can hear you hi, Adrian.

Hey, sorry about that.

I don't know what happened, but congrats on the consistent theme that's exciting the progress.

Just awesome to see that.

Gary I wanted to continue to focus on the European opportunity. The 15 to 20 billion outside of North America.

Can you talk about specifically the Tam in Europe, and I guess really what I wanted to know is it really feels like.

Art contemporary is going to come online it sounds like there's more investment more design elevating the product overall and as you're shifting to the international market do you feel that the target household income or the demographic is materially different than sort of where our age has been maybe say over the past five to 10 years.

Just seems like there's a greater appetite and appreciation for luxury brands.

Brands and goods, when we kind of crossed it crossed the pond. Thanks, so much.

I don't know what I could add to that.

That's correct.

But we see it.

Yeah.

No.

Let me just start with the global opportunity.

Again, it's.

Yeah.

Directional math.

Based on looking at the pie in many ways.

Well consumers housing markets.

Yeah.

The high.

High net worth ultra high net worth.

Ratios based on looking at luxury brands and penetration and volume.

And.

Yes.

So we've looked at the math multiple ways and I think were Directionally right. If you were here you would see a big giant room, where about 40 people get together generally on Thursdays and a big cross functional team and we've got all of Europe first we had the whole world than it is just too much to look at.

We said yeah right now just given the.

The rest of the world in the next room.

At the topline, but let's really break down Europe and understand it.

Understand each country go deeper look at other People's.

That approach is in real estate strategies, whether it's you know.

Not everybody that hasnt happened shops.

Shops that are H, but.

But most people at the high end of the market you know I spent a lot of money to Apple I'd say, so we look at where the Apple stores, where the iconic Apple stores, where.

Where are the big suburb Apple stores, where other businesses that we're familiar with where the you know the luxury good players in the suburbs the heart.

Thing and I think in Europe, it's going to be we don't know their suburbs like we know Ark suburbs.

Don't know their market like we know their market now.

Expanded our team I think we've got a great leader he knows Europe, very well, but but.

But theres no one like us right theres, not theres not a real comp.

But there is enough similarities that gives us confidence as we dimensionalize, what we believe.

The market opportunity is at least today.

So.

And again.

As I look at it I think.

And I believe you know most of our senior team and not I don't think really influenced by me because.

We tend to debate everything here.

And.

Yes, what I usually do.

Eric if I say something and she goes scary.

It's like it usually sorry, Eric.

He's sitting right here.

She said that all the time by the way I would say she keeps me out of the ditch, but.

So but yes.

We spent a lot of time together cross functionally debating this we've had people who.

Yes.

We have a lot of insights on European expansion, and so on and so forth.

We feel good about that.

I think we're going to be some yes, directionally right and that's that's all you need to be at this stage.

You want to boil the ocean at Desert.

I have to say like despite the settlers that came to America. Some people said, Hey go West Young man, there's golden them Theyre Hills.

And some people just went west and.

Kind of at Sierra Nevada, and there is gold.

Other people like were sitting in Boston trying to figure exactly where on the west coast. They wanted to be.

And by the time, they've gotten Eric courts.

Art.

Other people were there like getting to the Sierra Nevada, So we.

Kevin We don't exactly does it really matter, if we're 10 billion off.

Would we not do what we're doing today doesn't really matter right like.

The opportunity is only $15 billion.

$10 billion in Europe, as a matter would you not go.

That's what I mean that kind of stuff I would say that the team. So just being transparent you just you go in you.

You go to Europe first.

Yes.

Most familiar it's the most connected so anyway.

And and then I'd say.

The idea that.

The target demographic materials different than where it has been over the past five years to 10 years, yes.

Here it is and it's going to be there and it's going to continue to evolve we're going to continue to go up.

I think we will continue to shed.

Consumers at the bottom and will can span will grow consumers at the top of the funnel, where there's exponential spending and by doing that I think all of a sudden.

Long term, we will pull people apps, because the brand will be more aspirational people will save to buy our sofa.

There is a.

Demographics that will be younger and less affluent, but they will have great taste and style and they'd rather have.

A few good pieces, then a whole bunch of crap.

And that's the way I grew up I remember when I bought my first twin tends to be like.

At $65 technique I mode, a lot of young mode a lot.

Yeah lines to get that Sri intensity I didn't buy Ah.

Crappy Montgomery Ward's bike instead.

Is that kind of stuff and I'm, sorry, I didn't mean that.

Overly simplify it but theres going to be consumers that.

Yes, they want a part of.

Yes.

Part of the very best in life and they aspire to it.

Nobody thought the Apple phone was going to be the number one phone in the world Nobody thought the Apple phone was going to sell in China. It became the best selling fund in China.

Like people want better quality, all the time and the gathering for over our lawyer says to me all the time.

History has proven that people want better and better quality.

And.

The World is generally.

Headed in that direction so yes.

Yes, we think again.

Going west.

Golden them Theyre Hill.

We're definitely in the right direction.

We're going to we're going to be fine.

Gary I love it.

Fantastic.

Alright, I appreciate it thanks, Thanks Adrian.

Thank you. Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, good afternoon, nice quarter, Karen just curious on the long term opportunity as you see it for RH guest House and then in your prepared remarks, you spoke to the migration of consumers for larger homes.

And the demand Thats driving I'm, just wondering if there's a way to contextualize the size of that commence thanks.

Yes, I don't think yes, I don't think anybody's got the real data on it.

He is there as you know there has been an exits from cities.

With this with the.

Yes, it's been a stimulus for that.

And.

Yeah.

Not the one that made this up actually one of our big shareholders identified this.

Early on and they said they did math you know their mouth on this end.

He was going to exponentially.

They thought play in our favor.

And then we did some.

Smaller research indicated, but it's you know it.

That's what's happened right you've had.

People migrating to suburbs.

<unk> second home markets.

Places like Napa asked Ben the Hamptons.

Yes, Palm desert kind of second home markets like that that are drivable for people.

They are at some distance where they can work part time in the cities, but with out of the cities.

Markets have exploded.

You can't buy homes in the suburbs.

Multiple offers.

Rising prices.

<unk>.

Hi.

The simple the simple math of this like take a somewhat listener.

Yes, 2500 foot.

Apartment in New York are very nice 3000 square foot apartment, and they've moved to a house in Greenwich.

What's the comparable house in Greenwich.

Six to 10000 square feet.

It could be two to three times the square footage.

Those rooms aren't going to be empty.

If they can afford to furnish.

So that's kind of a good thing for us and Thats why I think that.

Even without any newness for almost two years.

R R.

Our two year comp is.

Is.

Growing so.

And what's the main thing that changed is.

We're in a much better stock position like back orders are down 10 points or more.

<unk>.

What's the latest.

Don't tell everybody holds.

Hold your fingers estimate but direct.

Like last time I looked at a couple of weeks back down about 10 points, even more than that more than 10.

That's back orders are going down demand is going up.

Right.

That makes sense.

Our back orders.

At their peak.

We're four times normal.

Yes, four times normal and so now theyre down to probably.

Two five times normal yes.

And.

And they should get better because I think we've done a good job prioritizing.

Production and flow.

And I'm glad we didn't try to newness because noon.

Newness, usually takes longer I think it's going to be great. I think we will have the best newness introductions, we've ever had in our history. We've had more time to refine samples to get things right quality assure things are we're not rushing our manufacturing partners.

And so we will have by the time newness watches will have two years of newness for seasons of newness.

Our guidance, we've never launch that much newness at one time.

If people are going to think.

Like Christmas again at RH, we don't even sell Christmas stuff, but it's going to be like what the heck just happened.

I think that the.

<unk>.

Aesthetic evolution and the quality of evolution of the brand will be shocking to the consumers.

Looks.

Good IMAX serious I wish everybody on the phone, including dollars people because I know, we usually have a lot of yes.

Our teams all our gallium probably have an open line our Dcs have an open line.

Theres probably.

A couple of thousand people in our company listening to this call maybe more.

<unk>.

And like I wish I seriously right now.

We were out of Covid, we can get everybody together and take everybody through what's coming.

Contemporary shocking it's so good.

Mike.

I thought modern was break contemporary to best work we've ever done.

Yes.

Got.

It's going to open up the aperture of the brand I think people at the highest end the highest end interior designers are going to go.

What did they just do.

It looks so good.

And Theres maybe.

Yes.

'twenty interior designers in the world.

That we're not going to completely impressed.

It's like the really silly risk people.

They use them like everybody else.

Yes.

Yeah.

Better joined that.

That movement, there or will get left behind it is really really great stuff in the pipeline and we've had a lot of time to refine it and make it better we will probably have.

We will launch with the lowest returns the lowest damages all the kinds of things that happen when you ramp up.

New goods, yes, new factories, if you have new materials, new materials new construction.

Especially with the big Big aesthetic move in opening up an aperture like we're going to with contemporary but even the product.

Interior to modern new stuff and the quality impact that that.

Our teams that are working on procuring bespoke.

We have like some of the greatest experts from the highest end of the industry. So I wish I could talk about them, yet I'm not allowed to announce anything.

Yes.

Yes, a couple of them are sitting in the room right now look like they're going to like.

They have their mass on but you can tell theyre smiling and turning red.

But the best that we have some of the best people in the industry when the industry here as he is on our team.

Everybody's going to go up.

Just great stuff coming I couldnt be couldnt be more excited.

I, just wish everybody to be here and see it and.

Yes, but that's okay, we'll just make it the good news is.

We keep making it better so every you know.

Every season, we delay it.

It gets so much better so.

So between now and next spring, it's going to continue to get better the presentation that the execution.

We're super Super excited.

And I think that the market.

I think there's look I was the guy.

I'm Gonna guys thought there'd be a recession in the last five years I was like.

I was ready for a recession last five years I've been really wrong and said what happened to pandemic.

So.

But now I'm finally thinking okay I called this wrong.

I never thought we'd be Comping 47 comp with no new goods.

And back orders.

Three times historical rates, two five times historical rates.

And but we are and so I think that again the home business at home people.

People buy homes, they don't furnish it all immediately.

It's over a period of time it takes a long time I mean, right now you can't get a contractor to remodel a bathroom.

You can't get interior designers are all backed up.

Our teams have been backpack, yeah yep.

Yes.

Customers complaining like how come I have to wait so long for an interior designer.

They are all busy.

Professional services around the home are all busy.

Theres not enough homes, there's not enough people to build homes, there's not enough people to.

Designs do interior design backups everywhere now.

Yes, so so even if and we're at record levels everywhere. So even if the market slows down here <unk> got a lot of the home business is a little off or pulse.

<unk> took numbers down a little bit.

Is it <unk> take numbers down a little bit how are those numbers compared to historical numbers, there's still really good numbers.

And so if if you are in our position and you're kind of.

Our brand without a lot of peers and building a market one and you are the place to go and especially where we have these new galleries that are having outsized growth right.

There is.

I think we're in a really good place today, so I just think that.

Yeah.

<unk> gotten more optimistic.

And it's my fault that we have the highest backwards too.

Cut the inventories too aggressively and then when the trends.

Went to 20 I said by pen.

When the trends went to 40, I said they'll never stay there by 'twenty.

They are only going to be there for two weeks and then they didn't stop so.

Yes.

The fish thinks that the head right like I kind of screwed a lot of the step up to because I didn't make some of those calls were just kind of risky you don't want to you all of a sudden bite of a 40% increase.

And then your kind of pregnant with all the inventory and the sales dropped from 48.

And you're like.

So yes, we've been chasing the whole time, probably a lot I'm, probably not the only person that was too conservative by an inventory. So I think that pent up demand in some of the commentary in the home business about pent up demand I think it's all kind of rate.

And even I think about why it got the economy Ron.

Over the last five years, I think theres, a new economy.

When you think about the dynamics of that.

The current global economy, the stock markets and whats.

Driving everything.

There is new businesses Theres, new kind of companies Theres, new industries that are being formed.

Turn faster.

Innovation and technology is changing the world in an exponential way so you know.

Look at the last recession.

Which was now like I can't believe I go eight.

Yes.

Going on 14 years, so we're going to be 22 pretty soon the long I think the longest economic expansion in the history of the United States before that with 11 years right. So we've never seen this right and and even through a pandemic, which was like yes.

Kind of I guess, the recession, but not normal right.

No.

So I think there's this underlying structure of the new economy.

That is.

That is making businesses more productive.

You know I think about how much more productive we are because of technology and the things we're doing inside the company.

In all at all levels.

And.

How other companies must be more productive and all the new innovative kind of companies that are changing the world.

And I think there was two companies that were 500 billion.

G and Exxon right or something like that like maybe Apple I think was getting close.

Now there is multiple trillion yes.

Companies.

And.

Many more $500 billion companies.

And they are growing.

Hi.

So I think that there is a lot of things that are different.

<unk>.

Probably.

Order to see because of the pandemic.

Yes.

When I try to listen to.

The people that are way smarter than I am about this there is a lot more optimism.

In the smartest people I know.

Who have generally been more critical and pessimistic so.

And yet they try to listen to them and connect the dots as it relates to our business. So.

But I think you know I think things are very different I think.

Having a recognition of before.

Theres, probably just going to be all new patterns that we have to be prepared for.

Thanks, guys that's helpful.

My follow up is just you talked about <unk>.

And I'm, just a little bit curious on RH residents, how those can be implemented.

I guess, what's the timeline on that.

Any more color on that would be interesting here. Thanks.

Yes, it just really long term.

We're going to test some things and Aspen, that's where we will have a controlled launch of an ecosystem and.

And a lot of a lot of this is going to benefit the brand is just far as awareness.

And kind of place place making.

Becoming.

Tastemaker.

Pacemaker in our space maker.

And so forth so.

And we've learned from these things so I think that's the other thing that people underestimate when you do new things.

It's not just about the new thing, it's about building, new muscles, and getting smarter and solving new kinds of problems.

And as human beings growing exponentially right.

Having.

Individuals and an organization in an upward spiral of learning and growing that's what's invigorating for.

For humans and and that's what makes great companies invigorating.

When you stop investing in your stock.

Learning and educating and it's even like.

So financially I think.

We grew up with the GAAP, we had all these formalized training programs and all of this stuff in it.

So the training program for everything.

He couldnt speak manuals and I think by Covid patch you got to have all Stephanie I realize like.

Many of those years early in the GAAP before Mickey Drexler got there.

It's all about management right and <unk>.

And it wasn't very exciting growing up there back then until Mickey Drexler got there and then things changed and and I think when you are.

When youre inventing and innovating.

It's just really stimulating for smart driven people.

Because they are learning by doing.

They are learning by being evolved theyre not learning by studying and operational manual theyre.

Theyre not in some theoretical training class talking about theoretically how you might do this and being taught by phone is never done it.

And so.

We kind of like do ship here like.

We get into it and we get really involved and we all get really deep and.

And it's super exciting.

With that I'd be more excited than any point in time in my life at my age.

Possible I'd say no way.

So excited I can't sleep, which is not good for my health, but it seriously.

I'm, so excited I can't sleep.

Yes.

Yes.

It's kind of a beautiful thing.

People that really.

I want to create and.

Invent and evolve and grow in.

And do new things and Thats why.

One of your questions about what exactly do you think Europe is going to be.

I don't know.

Mike.

It's like how much volume did I think the big galleries are going to be that.

And I think theyre going to be as big as they were.

It's been exactly.

In November it will be exactly 10 years since we opened RH.

Houston.

We opened that people said it was the best retail home store in the World, maybe one of the most beautiful retail stores in the world.

The 10 year leases, we're going to tear it down and we're going to build a store.

Four times bigger.

Like how many Houston did we built.

Two one there and we built one in Scottsdale and then the next thing we did was.

Two times bigger.

And three times bigger than <unk>.

Like I remember it.

And people on the board at the time that really wanted.

Houston was so great and he said just roll these out just to Houston.

I don't think anybody is sitting at this table that I'm looking at right here right now.

The people in our leadership team meetings.

And I think anybody would be here, if we were just rolling out in Houston.

I think we'd have a completely different.

Uninspiring.

Management team.

And I don't know if everybody knows this but we don't even use the word manager in this company.

Like we're allergic to that work.

Management is about kind of a range in an organized and the status quo everybody here.

Title of leader right.

Alright.

Leadership is about.

Taking people somewhere they've never been doing something they've never done when we say leaders have to be comfortable making others uncomfortable.

Because you're in uncharted waters, all the time.

And when do you get comfortable with that it's exhilarating.

And.

But.

But I think we'd have a completely different team.

We are just like.

Shooting at the same target the same way.

Kind of organizing and rating.

The status quo.

What we do.

Let me just say here like is it directionally right. It is strategically right.

Is it more right than wrong is that asymmetrical risk to the upside we do tons of math, we think really hard really deeply about it but then we could go and that's where you learn.

That's where you grow.

Yeah.

And you can't go in and then yes, just going to learn exponentially faster than everybody else.

Yes.

So residences and stuff like that.

Come in Aspen.

My test and try other things.

Jack and I met with an incredible Guy is probably on this call and say that you're in.

Name, but.

Can't do that but.

Hi, Pat.

Incredible like Super inspiring.

<unk> grew up in the business.

Yes.

Wants to help.

They'll put it put a dent in the universe with us.

Create a whole different kind of our home business.

Like so much more than we know about building homes and it's exactly like a lot of times in our organization what gets these ideas going.

Is the right people.

Alright someone comes along and.

Has knows more than you do.

Has greater vision about the idea than you do.

<unk>.

Is ready to go and excited to get going and then you go that's when it's time to go.

It's directionally right. It all makes sense, but you need someone to kind of really lead us all there and.

So if.

If youre on the call who I'm talking about.

You got my email the other day.

Ping me back.

We are travelling coils that we lost touch but.

And if he joins the team.

Hardly hear about RH residences sooner than later.

But that's kind of it.

Okay. So.

Thank you Sir.

Yep.

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

Good evening, thanks very much.

Just.

Product questions on.

Alright and chips.

To me, that's a new one.

What do you feel like you've just I don't know maybe a sneak peek in terms of what you envision for this collection how're.

How you might integrate it with the entire offering.

Sure Yeah, I would say go into our one of our new galleries and go just walked through in.

Count, how many antiques and artifacts in our galleries.

A lot.

People want to buy them.

And we have to say no all the time.

Every once in a while they make us such as silly offer we say, yes, and then we replace them.

But we can say notice.

Obviously, we had some really cool stuff in our galleries and it all renders our products more valuable and it's no different than People's homes, where they want to be really unique and they want some things in their homes that makes it bears so while our aten peaks and artefacts.

We will be limited to a degree because you can't.

Joe manufacture them.

Makes them unique and specialists, there's not that many.

And so and.

And I think we're good curators of it I mean, we have warehouses.

Antiques and artifacts with price.

As a buyer of antiques and artifacts, we might be the biggest buyer in the world.

If I told you what we spend on our new store in antiques and artifacts aerie shaking her head im not going to tell them.

You'd be shocked at the number but you got to walk the gallery and you could probably take it a little Pat out are going to take the bonus the calculator and your frame walking you probably get close enough. If your GAAP, but if you really look at it like.

They really help.

Yes, it helps a slip unique and our and our customers want their homes to be unique.

We have some of our team in here as leader galleries that are all shaking their heads yes.

So.

That's how to think about it.

It's about all of these things.

Integration not in isolation.

Right, we don't think about anything that we do in isolation when we do we're usually.

Wrong looking at it incorrectly so everything we do has to render everything else that we do more rather than less valuable.

Usually when you try to do more you actually do less.

<unk> tried to be additive youre actually dilutive.

You didn't think deeply enough about it.

And think about.

How will this how one plus one equal three.

Or more.

So we believe things like RH antiques and artifacts will just like they render our galleries more valuable theyre going to render or.

Customers' homes more valuable in our in our designers would tell you, it's they're going to close a lot more sales, they're going to sell a lot more furniture theyre going to get a lot more unique homes that they may not get today.

Because right now we don't have that.

We've discussed internally like I don't know if do we open it up do we let them go.

Yes shop first dibs other things for antiques and are artifacts and just charge a customer.

Right.

Yes.

For the for the service and make a margin on.

It's just like an interior designer dense.

But.

First first steps by the way, which I think is great. So I think they've done a great job of aggregating the world <unk> expects its like you got to look through.

To find the needle in the haystack.

Like that.

It's really hard at first steps I mean, it used to be a lot easier is what's more curated now it's like anybody who sells antiques can be on first dibs. So instead of finding a needle in a haystack.

The haystack out of needles.

That will be our AT&T can artifacts.

You won't like have to dig through the haystack find the needle the haystack has made our needles.

<unk> different way to think about it.

Oh very interesting I appreciate it Greg.

Yes.

Thank you. Your next question comes from the line of Tami Zakaria from Jpmorgan. Your line is open.

Hi, Gary Jack and everyone I hope, you're doing well and thanks. So much for taking my questions I have a couple of quick ones actually so first I saw some of the convertible notes.

You have one move to the current liability section of the balance sheet. So are these redeemable in the next 12 months.

Well so the convertible notes became convertible once we exceeded the certain percentage of the convertible price so they've been convertible for a while and they are coming in.

As you saw on the balance sheet, we have.

Remaining converts $652 million, but with with.

Redemption requests that have come in.

That will be settled.

Momentarily, we're actually left with $411 million essentially as of today.

Got it got it that's helpful and then the.

The second question can you talk a little bit about the design services market in Europe, and what kind of opportunity you see there for our age given and this has been a great success for you in the U S market still.

Do you plan to have complimentary interior design service in Europe as well when you launched there.

Yeah.

I think our model is going to be.

Almost identical.

But it will be just kind of on the edges it'll be modified for the market. So.

And a lot of ways.

Some of the things we're doing again you get to.

Good.

Things like a beginner right like you go into a new market like Youre not saddled with.

Legacy stores Youre, not saddled with old ways of doing things Youre not saddled with well. This is the way we've always done it.

We get to kind of be a beginner again.

And.

So you get to ask a whole lot of questions about what about this and what about that what we do.

This way or that way and again it tends to.

Does stimulate a lot of innovation and new thinking and opportunity.

So.

Yes, yes.

I think I think for the most part.

The brand will be very recognizable.

But.

In many parts in ways it will be.

Better.

I think that some of this.

I think that.

RH, England RH London.

And Paris.

They might be the three most interesting stores, we've ever opened and exciting stores, we've ever opened galleries, we've ever opened.

There are so different.

So unique.

And when I say that in comparison to the competition.

It's even greater strategic separation so.

Like I go back and forth, which one site.

Like the most like right now.

Except to say inland in Paris.

In London are just incredible.

All very very different.

But spectacular I don't think we could have found anything better.

For Paris, I mean, I really don't I think.

It's perfectly place it's.

The world of luxury surrounding us.

Within two blocks the top executives from many of the top luxury brands in the world, they're going to probably come to lunch at our gallery.

They'll probably go from the rooftop and have a glass of Champagne and have some caviar and look at the Eiffel tower.

There's going to be some of the.

Yes, yes.

I can't say, what I was going to say, yes.

Say about yes.

Got it no no.

But the people that are talking about it than that.

Oxford chart. They know we're coming like it's exactly the people that you.

Talking about I think its funny I mean in Oxford Shire people are asking.

What are they doing there is it a private club can I, how do I get on the list to be a member.

Like.

It's like it's really interesting like the kind of questions, we're getting through sources. So.

But yes, we will have design services.

Initially there'll be free unless we change our mind between now and then.

I don't I don't think thats going to happen, but I always say, we always reserve the right to change your mind for a better idea and better thinking so like right.

Right now I don't think so, but what I will say long term.

You can think about our brand is evolving.

To have.

Yes, just like you think about torture upholstery bespoke furniture other things.

Who knows maybe long term there could be RH.

RH bespoke interior design.

I like a whole another level that we charge for that.

As we continue to kind of pull up an elevator and elevate the brand and evolve the brand.

Yes.

It's a good thing in Europe is again.

Start with fresh eyes, and we can ask ourselves what about this what about that.

We've never had a gallery with the Champagne and Caviar bar I don't think we would ever even think of putting the gallery.

Campaign, and caviar borrowing the gallery, except for in Paris.

Beautiful little kind of space.

The top floor kind of tariffs is back in beautiful like a jewel box and we figured out a way.

To get up to the roof and use the roof and we got approval to use the roofing arena as it is spectacular rooftop garden from the roof and from the level below where the champions caviar bars.

You see like two thirds of the Eiffel tower.

I mean, it's.

It's incredible.

How's that.

Has the American company come and get it built its patent.

Can I have a champagne and caviar bar.

You can't call it champagne unless it's from campaign Sham.

Champagne in France.

We're opening the Champagne and Caviar park in Paris on a rooftop with views of the Eiffel tower with a garden routes you can't make that step up.

Like.

Sometimes we just think that we're in the right side of.

Good fortune.

Yes.

I would just sit there and go like Wow.

It's going to be incredible.

Yes.

Think you think about it as youre going to see the new best version of US right. We will evolve we will have new and fresh ideas youll see the first.

RH.

Architecture and design library at.

It's RH, England.

We have designed one for RH Miami.

In a location we're still working on 10 years later, which will be like.

If it all comes together it will be a mind blowing experience.

So.

Yes, because we're working on are integrated.

Gallery guest has each club and bathhouse right on the beach in Miami, If it comes together.

I mean, it's designed.

Okay.

To go so.

But there is again.

There is always going to be new exciting things that evolve here and.

And I think they will all render the brand more valuable.

Yes.

Someday, we may charge for all interior design Donna.

Yeah.

Right now it's working pretty good.

Doesn't mean, we shouldn't change.

One of our beliefs, we are our values and we have our beliefs.

Our beliefs, we call RH rules, the rest of the rules and.

Rule number one is vision is everything.

We say vision leads bleeder and.

<unk> vision, we are leaders in.

That division or managers, ranging organizing status quo.

And we say leaders have to be willing to destroy today's reality to create tomorrow's future, we have to be willing to pare down our very best work.

To do something exponentially greater and more valuable.

And I think we've proven that we do that right. That's why it's 10 years later and.

In Houston in its moment with the best home store in the World and we only built another one in Scottsdale and then we left it in the desk right and so.

Don't feel bad.

Team in Houston, right, now, our Scottsdale, which don't worry we.

We're working you know in Houston, we've got any locations can be incredible.

And.

And Scottsdale, we're working on it.

Sure.

Great that's awesome to hear thank you so much and best of luck further Parker.

Thank you.

Thank you. Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open.

Great Good afternoon, Gary and Chad Thanks for taking my question.

I had a question on the RH guest house, how do you think about it.

The opportunity there relative to the competitive landscape in the hotel industry and maybe.

How do you see the Tam opportunity for guesthouses overtime.

Yes.

Good question I think what we're trying to do is to create a new market for travelers seeking privacy and luxury.

Tell people that we believe privacy is going to become a very important thing and it's going to be a.

Real.

Market.

That people are going to.

I think probably.

Privacy is the one thing everybody has given away with social media and its one thing that the Internet has taken away because you can Google anything about everybody right. So there's a whole level of privacy.

The World is lost and I think.

Yes.

Yes, theres just going to be.

Desire to find your place right too.

Yes.

Being that place that spectrum to use that.

It gives you that level of privacy and exclusivity.

And level of luxury that you just can't find anywhere else because.

So I'm just trying to do.

Two or 300 rooms, or even 50 or 100 rooms, like Kristy guesthouses have nine and 10 rooms.

We're going to open in New York with nine rooms, and our residents with six rooms, three suites and our residents.

And residents need it's just the top floor and the ideas Mr. Friedman's residents.

And he.

We'll let people stay then when he is not there and if you look through.

Anybody who is going to stay there so.

Of course, I'd approve all of you who are on this.

So.

Thank you very much good to know thank you.

Is that going to be cheap.

<unk>.

But anyway.

We're going to open that smallest hotel I'd say in the biggest city in the one of the biggest cities in the world and it's going to be like nothing we've ever seen.

There is things that no one's ever done.

In hospitality that youre going to see in our guesthouse and.

And we think it all makes sense.

Right.

When we launch it.

You'll hear about it you'll know what it is.

And I think a lot of people go like why isn't anybody ever done that before I think a lot of it really makes sense.

So we're not trying to be different.

To be different we're trying to be better we're trying to create a new product.

<unk>.

Yes.

At this point that we're so excited about it I think.

Yes, the idea of the guest houses again first and foremost to elevate the brand and position RH as a kind of thought leader.

Just in place maker in the industry.

So it's not really with anybody thinks its going to be.

<unk>.

Okay.

It's not going to be that.

People ask me Youre opening a hotel I'd say no.

What are you doing anything desktops. They go with the guest house they were trying to revenue market for.

Yes, travelers seeking privacy and luxury and.

And then they go Oh I get it can be a showroom for your furniture and they say.

No why would we do that we have a 90000 square foot showroom 20 steps away.

And then I'd say the thing that kind of.

Yeah.

Okay.

This latest look I'd say.

In fact, it's not going to have any of our furniture.

And then they say who's furniture's theyre going to have.

Okay.

And it's not really going to have any furniture not about furniture.

A completely different experience.

Yes, its about a completely integrated.

Singular design point of view that no one's ever done before so you.

You're just going to see something that you've never seen.

And execute at the highest level of <unk>.

Taste and quality and design.

And I think I think it's going to breakthrough.

I know, we all want to stay there.

So that usually works right you never wanted to be.

We're seeing is when youre in a meeting and you go like okay like somebody is presenting some new products.

30, or 40 people in a meeting and say, okay. How many people here.

It wasn't about price, we can afford and how many people would buy that table.

And.

When all the hands go up for 70% of the hands go up kind of note.

Sorry, that's going to be a winner when none of the hands go up for a couple of hands go up yes.

There is not anybody who has seen our guesthouse whether it's inside this company.

Outside of this company.

People working on it the trades.

While a lot of them said to me personally like we know we will never work on something like this again. This is the best thing we've ever worked on like Theyre, just so proud of it.

So we're taking it to a level of the world's never seen if you want to think about this idea of climbing the luxury mountain when I say.

We have to create a forced reconsideration of our brand.

Yes.

We're not from the neighborhood were not invited to their parties.

They don't really want us to make that clients.

You have to do work that is.

So extraordinary and so remarkable that you've <unk>.

The people at the top of the mountain to tip their hat.

And I would say.

<unk> whoever you want in our industry is at the top of the mountain.

Yes.

But that said his name before.

No I'm talking about.

If he shows up and sees the guest.

It's going to tip the cap.

Yes.

Built probably the best hotel in the World.

That opened this week.

So yes, I mean, we're doing things to kind of elevate the brand and by doing so.

Said.

One thing that I've learned in my career is when you do extraordinary and remarks work.

You can usually figure out how to monetize it and that it's really hard to monetize.

Ordinary and unremarkable.

So it's I believe and I think we believe that our guest house is extraordinary and remarkable and something that the world has never seen before.

<unk>.

We believe we're going to be able to monetize it but.

Not really in our numbers.

We're not sitting here, saying, Oh, we should have.

Modeling 50, guesthouses or something like that I think it will become that.

So that's not the idea the idea is to have it.

First house in New York have a guest Hudson.

It's been Miami Malibu.

St parts, maybe a few in Europe.

And maybe one in Paris.

And.

London.

Maybe you wanted Saint-tropez are a few places like that.

Welcome to fluent visit a vacation.

The Hampton things like that so they will have a handful.

And my sense is.

My sense is right now.

New York and Aspen, what we've designed I think theres, a real market I think people will pay a price.

That will.

Create a new market.

I had a really smart person like has.

Kind of success in the hotel industry say, you can never make money in a hotel under 100 rooms.

Yes.

A lot of people tell me.

That.

No one is going to go to your shift Chicago store, that's five blocks away from everywhere else had people tell me that.

Nobody does volume in the Meatpacking district in New York.

No. It makes money in flagship stores in New York.

<unk> shops in the Meatpacking district it is.

<unk>.

Third of the business of Soho and half the business of flat, you're moving some flattering to the meatpacking.

It's the highest volume home store and all of New York.

That's the mid to high end.

I don't know if we will do in Chicago of $60 million.

It is.

Makes over $20 million a year historic replace did.

$16 million in revenue.

Yes, so like we do a lot of things that haven't been done before.

We focus on doing.

Extraordinary and remarkable work.

And when we do that we usually figure out how to monetize it so.

Can you.

You tell me like when we open.

Mike will give you a tour.

Before we open.

We'll be ready to open we could open it.

In late November December if we wanted to.

You don't get a second chance to make a first impression.

To open in the winter, we've got the most incredible rooftop park with a 40 foot.

Infinity swimming pool.

Private dining terrorist it's mind blowing guidance some of the best use and the city.

Yes, I just don't want to open everybody's got masks on it's just weird right now like so.

It.

It's easy to say hey, like.

Travertine for Middle East coming in late.

We could open in November where do you think and I am just like yeah.

We've waited this long wait until spring.

We'll open it and it gives us more time to practice gets fine tuned and nail the service.

The restaurant, we've got a whole new restaurant concept, there light fire restaurants, the world's never seen you had never seen anything like this restaurant.

We have the most beautiful room I've ever stood in front of it.

Experienced a restaurant like there is not a bad seat in the house so perfectly proportioned.

Yes, so like with <unk>.

It's a little bit more time to make it better.

Yes, that's what we do so.

Leave no doubt.

Yes.

But again.

I'd like to say it can't.

You can't rush.

Great quality it takes time.

Yes so.

Yeah.

And people will pay more.

We're really great quality.

Yes, I appreciate all that detail. Thank you so much and look forward to seeing an in person.

Yes.

Yes.

Thank you. Your next question comes from the line of Brad Thomas Your line is open.

Hi, Thanks for taking my question.

Gary I think you alluded earlier to being interested in potential acquisitions I believe the last one you did was waterworks through 2016.

Hoping you could just talk a little bit about what you learned from that most recent acquisition and how you think about what Mike said.

An incremental piece of the puzzle here for you.

We've learned a lot from waterworks.

I think that one of the most difficult things.

Challenges like we work in a very integrated way here, we're very visually oriented.

We made an acquisition of a business that was in.

Connecticut, So that's made it a little I think.

More difficult you have to kind of.

<unk> been idea you can't just see somebody in the hallway or walk over to where they said or walk into a room.

You can't walk by the product all the time.

See things and talk with people about ideas and talk about what they're excited about so.

I think that that's made a difference I think.

I think over time.

Got it all get to know each other better like we said initially.

Well number one don't screw it up it's the best brand in the space. It wasn't exactly we weren't really ready to buy it when we bought it but it's like those things that come along.

Once in a lifetime when it's.

For sale, if you don't buy it.

We never see it again.

No.

So we always admired it was actually <unk>.

One of two things on our list.

The only two things on our list for the first.

15 years of our existence here and.

The other one we got screwed up it was dean and Deluca, He got screwed up.

But we thought we could do something really great with Dana to Luca and who knows maybe we still will it went bankrupt and they will bring it back to life actually put that on the west coast now.

[laughter].

You bet.

Waterworks I think is going to.

It fits perfectly into where we are as you know.

Waterworks has always been kind of.

We admire desired brand EMEA, so we learned a lot watching how they run their business.

How they think about their brand.

So there is I think we've learned a lot from from <unk>.

Peter and Ralph and the team and I think they've learned a lot from us and I think theres a lot of respect on both sides.

And I think we have really a great shared vision for the future and.

A lot of pieces are coming together that I would say.

And I think a lot's going to transpire over the next year.

Year.

We're really close to a lot of things.

We could be sitting here.

Six months from now 12 months from now.

And be talking about a lot of new very exciting things that help catapult us up the mountain and how it'll all integrate income together so.

Yes.

So and the water business now I think people know that we struggled with in the beginning financially we had a write off.

Most of the book value and.

And now it's performing really well.

It's.

Not just because of Covid I think just because of yes.

Just learning from each other.

<unk>.

Some things, we do really well that they learn from us and some things that they do well we learned from them.

And in the.

The market and.

And I think they are.

Theyre going to have a record year not by a little probably buy.

50, or 60% better than the best year, they've ever had in their history at their peak.

And I think.

And I think it's on the right trajectory strategically.

Even if I COVID-19 adjusted.

<unk> gets the best numbers they've ever had.

That's how we think about things by the way internally here, we know as Covid tailwind.

Yes, I don't mean to sound like.

But gosh, we think this is just going to be here forever I mean, I think that one of the great things about if there is ever when it I just think it's going to be a much softer landing and.

But then I thought in much longer kind.

A tale to this thing and I think for us.

What I like is.

As it evolves.

Things might evolve from Covid I think we're going to go into the biggest innovation cycle in the history of the company and we just might outperform everybody even if.

Yes.

Slowdown to give back some time in the future so.

But.

I think the same thing has happened with waterworks I think the opportunity for waterworks looks so much bigger now.

We had an overlooked.

Five years ago.

So.

And I think all the pieces of the puzzle yet youre going to fit together beautifully.

Great. Thank you Gary.

Thanks, Brett.

Thank you. Your next question comes from the line of Seth Basham from Wedbush. Your line is open.

Thanks, a lot good evening, it's Seth Basham I. Appreciate you taking my question and my question is a little bit more about Europe, and just a roadmap in terms of the operations and infrastructure to support as much as $250 million in sales in the first year, but could you give us a little bit more color on how that's coming along and what the building blocks are there.

Yes, I mean the key.

Building blocks for us are start with demand creation and how are you going to create demand. So we believe we've got the right.

Initial real estate building blocks and.

And the ability to launch a website and we.

We're learning.

Yes going through Optionality.

Thinking about how to market the brand.

Outside of the physical.

Most of our marketing in.

In the U S.

Is kind of physical.

Marketing.

<unk>.

And then.

Sure.

Print and how.

Tiny bit.

Digital I think we're going to be doing more things.

Got some really good ideas and especially as we are evolving the world of RH.

And that exercises.

Opening our eyes have some really really really good ideas, where we can shoot with the rifle and not with a shotgun.

So.

And.

Those things will yes it.

It will be the pieces a first you got to think about how do I create demand and that's you know.

That's a big part of the focus and then we say now how do we fill demand.

If we say hey, if.

It could be between $300 million.

What risks do you have to take where how do you structure your distribution.

Platform.

<unk> delivery platform.

Small package.

Platform, how do you handle returns and damages that you have to have the reverse logistics and outlet platform.

And that's the major pieces really.

I forget anything.

Those are the pieces of the puzzle that we've got to put together and so yes.

The question is.

How do you.

You hate to kind of say like.

Whom you launch this thing.

And it's like people come.

Driving in from.

Spain.

France, and the Netherlands in every trust income train in or fly into.

England and shop at our gallery and.

And they want to.

Like look today, we have people.

They buy from us.

From Europe.

And our range to have their own good shift.

Well.

I think theyre going to do that a lot more in the U K.

We may not be ready, yet with diverse reverse logistics and other things to handle returns and stuff like that so we're going to start kind of country by country to what we learn.

<unk> open up a country yet.

I don't want the first impression to be a reverse logistics outlet store.

<unk> experienced for RH not.

Alright.

It's just not the right first experience.

Important part of our business.

Yes.

But you don't want to kind of go out there and launch a web business and just your only physical experience and in many countries.

Reverse logistics outlet store I think that's not how you build a great luxury brands. So we're going to build incredible physical experiences will have.

We'll be launching with the new world of RH.

Digital.

And.

Web experience, which is all new.

I'll simplify it all really user friendly great navigation authentic.

Great functionality.

And then we really have to execute well like now here's the good news.

They sell furniture in Europe, and they delivered to People's homes.

So it's not something that is not done.

We know that it's done every day.

Yes, we have to be able to execute it really well.

How are we going to do that with third parties, we've never worked with before even though there are third parties.

Yes.

In Europe that we've worked with in the United States things same company, but yes European Division and whatnot.

Yes.

Get to know people are going to have to make sure they understand our standards and while we expect that we've got.

I think.

Really has an incredible leadership team.

And that part of business and.

<unk>.

Yes, they're super passionate about this.

Yeah.

They are ready to go.

That's like <unk>.

Get going so.

And we've got people now transitioning base there.

Yes.

I think I don't see any parts of the business.

I think.

Yeah.

I don't think we can execute really well with the team we have.

It's just more preparing for the unknown is preparing for that range preparing for $50 million to $250 million.

Maybe it'll be right in the middle of the 125, the first year.

<unk>.

Yeah I.

I don't think its going to be 400 million in the first year and I don't think its going to be 10.

<unk> 10 million in the first year so.

The range is right. It's just a really big Orange and so if it's 50 is there a little bit more earnings drag sure there is.

But you've got to be able to take those kind of risks right. We can't we're not going to get it fine tuned perfectly.

And.

So but.

Yeah.

When we know more we will.

We will share it with you.

Thanks, and just a follow up modeling question for Jack in terms of the operating margin outlook for the balance of the year. You gave some color on how to think about gross margin versus SG&A.

Okay.

We're not we're not guidance at that level I think at the moment, we're just.

We'll leave it at the operating income margin I think you've seen what we've delivered.

In terms of.

Gross margin and SG&A.

Variances versus last year versus the last two years, we've talked about.

<unk>.

Clearly theres been as you look at the SG&A.

<unk>.

Timing differences of advertising.

So I mean, I think you made comments about that last quarter.

And noticed.

With what our plans are with that.

The change in the books this year, so just keep that in mind.

Okay. Thank you very much.

Thank you. Your next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open.

Hey, good evening and thank you for taking my question I want to ask on supply chain.

On the income, particularly can you comment on how much of your product to source ore from the country and.

Do you expect any sort of product categories to be impacted by the noncash on delays.

There's something going on right now thank you.

Yeah.

How much product is sourced from from Vietnam, you said.

Yeah.

Correct, Yeah, how much product to stores and then.

Totally yeah.

I think we've I.

I think we've disclosed in the past the amount in Asia right I don't know if we do it specifically by country, we've broken a China.

Broken out China, Yes, we have.

A meaningful part of our business in Vietnam.

More business has migrated to Vietnam with the tariff situation in China.

It makes.

It makes it really hard.

Small boutique high quality factories that we got involved with.

Got here in 2008 nine.

Eight 910 people that we've grown with it where maybe.

Yes.

3 million to $5 million of now.

We're 50% to $120 million of volume with them first cost. So we've got great relationships in Vietnam.

It's meaningful.

<unk>.

Especially when you think about you can't really buy wood furniture, and China if for bedroom.

Alright.

You paid crazy tariffs is exponential right they make it impossible to buy bedroom third anti dumping and so on and so forth.

And Theres no bedroom coming out of China. So that's always been heavier in Vietnam, and Indonesia and other.

Other countries.

<unk>.

But yes, it's meaningful.

All right.

Got it.

It caused us to.

Yes.

The launch of contemporary.

And hold on.

Our other books, because it's a meaningful part of the newness.

Understood. It also meaningful part of the core business.

Yeah, Yeah, well anything that's meaningful is meaningful to the court.

<unk>.

But with the whole business here.

Yeah.

Okay and then my follow up question would you able to kind of quantify or comment how much of the delay in RH contemporary and asked them to guess how it kind of digital are smaller, but how much of the revenue shifted out of 2021 into 2022.

Hi, it's <unk>.

All in our guidance for this year, we're not we're not.

Guiding 22, yet but.

It it was supposed to first launch in spring denizen launch in fall.

Now it's launching.

Next spring so.

It wasn't zero.

Okay alright, thank you.

Yep.

Thank you there are no other questions. Thank you I will now turn the call over back to Gary for any closing remarks, great well. Thanks. Thank you everyone for your interest and thank you for our team who is kind of.

Leading the charge in <unk>.

Bringing our vision and values to life.

We could not be more proud of the work that everybody's doing the effort that everybody has put through and again we feel.

Super Blessed and fortunate to be in the position, we're in and our Hearts go out to.

Not only the people that are that are suffering in Vietnam, but this suffering all over the world.

Covid and the variance that are continuing to wreak havoc in.

And even right here in America.

And even.

Yes.

Smaller scale people, who suffered just recently here.

The hurricanes and the devastation.

Yes.

It's hard to feel okay.

So good about your business when so many people are suffering.

And.

So, but but we've never been more excited.

We've said this is the time to have.

A lot of edge in a lot of empathy.

And so.

I just wanted to really thank everyone and also just send out.

Our very best wishes to the people.

Yeah.

They're struggling through these times.

And to our people.

Thank you for.

Making this company more exciting more innovative more magical than at any other time.

Debt.

In our history.

And I think we're going to rewrite history as we go forward so great.

Great job everyone. Thank you.

Okay.

That's it operator, operator, thank you.

This concludes today's conference call. Thank you all for participating you may now disconnect.

Goodbye.

Okay.

[music].

[music].

[music].

Good day and thank you for standing by welcome to the RH second quarter fiscal 2021 earnings conference call. At this time all participants are in a listen only mode. I started speakers remarks, there will be a question and answer session to ask a question. During the session you will need to press star.

And then the number one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to your first speaker today Ms. Allison Malkin Ma'am. Please go ahead.

Good afternoon, everyone. Thank you for joining us for our second quarter fiscal 2021 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are.

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

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

Reflect our opinions 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.

<unk>, which adjust our GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release, a live broadcast.

This call is also available on the Investor Relations section of our website at IR Dot RH dot com with that I'll turn the call over to Gary.

Great. Thank you Allison and thank you everyone for joining us today I'm going to start with our shareholder letter and then we'll open the call to questions.

Two our people partners and shareholders. We are pleased to report another quarter of record results with adjusted net revenues, increasing 39% to $1979.0 million versus $710 million, a year ago up 40% compared to the second quarter of 2019.

Alright continues to set a new standard for financial performance in the home furnishings industry and our results now reflect those of the luxury sector. Its adjusted operating margin increased towards the 26, 6% versus 21, 8% last year with.

We generated $263 million of adjusted operating income in the quarter up 70% compared to a $155 million a year ago.

Adjusted net income increased to 105% to $252 million and adjusted diluted earnings per share reached $56.0 versus $94.0 in the second quarter of last year.

This year suggested net income benefited from an unusually low tax rate of one 3%.

First was 16, 1% a year ago.

Due to an increase of stock options exercised in the quarter and the nearly three X increase in our average stock price.

If our tax rate in the second quarter was comparable to last year adjusted diluted earnings per share would have been $28.0, an increase of 47% versus $94.0 in the second quarter of 2020.

We generated $290 million of adjusted EBITDA in the quarter and $95 million of free cash flow.

The second quarter ended with total net debt of $296 million and trailing 12 months adjusted EBITDA of 1 billion, a new milestone for RH.

While inventory on the balance sheet increased 32% to $646 million inventory on hand was $400 million up 12% to last year as in transit inventory of $163 million increased 85% to a year ago compared to a year ago.

Raising fiscal 2021 outlet.

Based on the continued strength of our business and the power of our operating model. We are once again, raising our outlook for fiscal 2021.

We now expect revenue growth of 31% to 33% versus our prior outlook of 25% to 30% and adjusted operating margin in the range of 24, 9% to 25, 5%.

Versus our prior outlook of $23 five to 24, 3%.

We're also raising our ROIC outlet for the year to 70% versus our prior outlook of 60%.

Yes.

Our demand growth has accelerated during at demand growth has accelerated during the third quarter on a two year basis and it has continued to build momentum despite cycling the most difficult comparisons from a year ago and the continued supply chain challenges that have been amplified by the by the spread of the Delta variant.

We believe the Delta that we believe the data and current trends support the argument of a more long term sustainable step change in consumer spending on the home.

An important point to consider when analyzing the strong demand in the housing market is the migration of consumers to larger suburban and second homes. This trend is resulting in substantial square footage growth that is driving increased furniture and furnishings demand.

Add to that historically low interest rates, a record stock market and the reopening of several large parts of the economy and elevated spending on the home could very well have a long tail.

Looking forward several factors lead us to believe fiscal 2022 is shaping up to be the most exciting year on record for the RH brand as we are planning the largest new product cycle in our history highlighted by the launch of RH contemporary in the spring of 2022.

Our latest RH interiors, and modern source books, which had not been mailed since the <unk>.

During 2020.

The opening of RH, England the gallery at the Historic Idaho Park, a magical 73 acre estate designed a 16.15 by the legendary English architects are John soon.

With that we will introduce RH, the U K and a dramatic and unforgettable fashion.

The unveiling of our first RH guest house in New York, a revolutionary new hospitality concept for travelers seeking privacy and luxury and the 200 billion North American hotel market.

The launch is the world of our age of digital portal presenting our integrated ecosystem of products places services and spaces, all designed to elevate the RH brand and communicate our authority as a thought leader taste in place maker.

As it relates to the ongoing supply chain challenges. The Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the delta bearing.

This began with partial shutdowns in early July and expanded the full factory closures by late July.

We're currently expecting manufacturing to restart in Vietnam in October with production ramping to full capacity by the end of the year.

Additionally, suppliers globally continue to to continue to experience a number of challenges, including sourcing raw materials and we are seeing price increase and then is the majority of our product categories.

<unk> also continues to be a headwind with longer transit times and higher transportation costs.

As a result of our accelerating demand trends and compounding supply chain challenges, we are delaying the launch of RH contemporary until spring of 2022.

Additionally, we are pushing out the mailing of our fall source books to enable manufacturing partners to focus on reducing the backlog of core products, while ramping in refining production on new collections to meet our elevated quality standards.

Based on similar supply chain challenges and uncertainty of how the Delta variant will impact the hospitality industry. This winter we've made the decision to delay the opening of our first.

New York guest out our first guest house in New York City until spring of 2022.

Our plans to open new design galleries with integrated hospitality in Chicago Jacksonville in San Francisco This fall remain intact.

The long view, the RH business vision and ecosystem.

We believe there are those with taste and those scale and those with scale and no taste.

And the idea of scaling taste and large is large and far reaching our goal to position RH. Its the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build one of the most admired brands in the world.

Our brand attracts the leading designers artisans and manufacturers scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introduction of RH contemporary art.

<unk> procure RH.

RH bespoke.

RH color or AT&T and artifacts, Archie Kelly AG and other new collection scheduled to launch over the next decade.

Our plan to open an immersive design galleries in every major market will unlock the value of our vast assortment generating revenues of $5 to $6 billion in North America, and 20% to 25 billion globally.

Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products places services and spaces that established the RH brand as a global thought leader taste in place maker.

Our products are elevated to render more valuable by our architectural inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.

Our hospitality efforts will continue to elevate the RH brand as we expand beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury and the 200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like RH yountville and the integration of food wine art and design in the Napa Valley are each one in RH to our private jets and our <unk> III, our luxury yacht, but it's available for charter in the Caribbean, Mediterranean, where the wealthy and affluent visiting vacation.

These immersive experiences expose new and existing customers to our evolving authority and architecture interior design and landscape architecture.

This leads to our long term strategy of building the world's first consumer facing architecture interior design and landscape architecture services platform inside our galleries elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize yourself spaces.

Moving beyond the 170 billion home furnishings market into the $1 seven trillion in North American housing market with the launch of RH residences.

Fully furnished luxury homes condominiums and apartments with integrated services deliver taste in time value to discerning time starved consumers.

Our ecosystem of products places services and spaces inspires customers to dream design dying travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world.

The entirety of our strategy is designed to come to life digitally as we launched the world of RH, an online portal, where customers can explore and be inspired by the depth and dimension of our brand.

Our authority is an operative case will be further amplified when we introduce RH media.

A content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies, the market opportunity to seven to 10 trillion.

One of the largest and most valuable addressed by any brand in the world today.

1% share of the global market represents a $70 billion to $100 billion opportunity.

Pace can be elusive and we believe no one is better positioned in RH to create an ecosystem that makes taste inclusive and by doing so elevating and rendering our way of life more valuable.

The right people are our greatest greatest asset.

At RH, we believe deeply that.

The right people are our greatest asset.

We value people with high energy, who have the ability to energize others people, who are smart creative and have a point of view.

People, who see the answer in every problem versus those who see the problem that every answer people, who are driven determined and won't take no for an answer.

Value team players people, who are more concerned with what's right rather than who's right commodity price, our chief operating servicing values officer, often says the right people are our greatest asset and the wrong people are greatest liability. He also reminds us that the right people a reflection of all 11 tenants of our people value above.

I want to thank the right people, who bring our vision and values to life each and every day. The 11 out of 11 SDP would call them. Thank you for your energy your point of view, we're not taking no for an answer and for being more concerned with what's right rather than who is right. As we continue our quest to become one of the most admired brands in the world.

<unk>.

At this point I'll open the call to questions operator.

Thank you and as a reminder to ask a question you will need to press Star and then the number one on your telephone keypad and the withdraw your question gets breast advantage given time constraints. Please limit yourself to one question and one follow up.

We will pause for a moment to compile the Q&A roster.

Your first question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Good afternoon, guys Jack Allison.

Yeah, Gary given the combination of supply chain challenges right rising cost pressures, which I believe is driving rising retail.

Rising retail curious if you could just discuss at a high level, whether youre seeing any changes in customer engagement or customer conversion trends as well as cancellation rates.

The idea is just trying to gain a level of comfort here on what's driving your conviction to raise guidance yet again this year as we look towards the back half without having this new product launch.

Potentially stimulating more demand.

Yes.

Steve I'll start with the fact that we have insights into the quarter, we're relatively well into the third quarter today, and we have accelerating demand in the quarter.

Kind of.

Month over month already so.

Im.

And we can see.

Stand back and think about newness.

Is going to add to a very large business. We have here it is not going to replace.

It's a very large business that we have so the underlying business is very healthy.

Went through a period of our highest out of stocks and highest back orders that we ever experienced.

Inventory levels are starting to get better.

And even though.

Even though we are delaying the launch of contemporary or delaying once again, all the newness that would go into RH interiors RH modern RH rugs, we started everything else VITAS ski house everything else, we would normally male.

Yes.

The guidance is.

Our best view.

What we see I think if you just look at the last four or five years of history since we.

Kind of Reconceptualize, the supply chain and move to membership in 2016.

I don't think we've missed the quarter.

Five years so.

Yes.

I don't know how much more convinced conviction.

Pattern recognition you'd need.

No. That's helpful. And then just a quick follow up as I think back to the first quarter letter.

There was commentary about the broader international pipeline I think was five leases were signed five and final negotiations any update on how that pipeline has come together.

Any update you can provide would be helpful. Thank you.

Yes, nothing nothing really new or we would have we would have talked about it in the in the letter.

It's a little difficult to kind of <unk>.

<unk>.

Negotiate an international business right now so.

And coordinate the kind of meetings and conversations but.

Nothing's changed I think we.

Still.

We have kind of five deals.

Yes.

We're moving forward with we have.

Multiple deals.

We're looking at it more.

The pipeline as far as opportunities that we're looking at is will continue to grow.

Our.

Galleries are very very unique.

And not that's already.

Walk to the street and find a building that we need so, but we're confident that we're going to be able to.

Yes scale the brand work.

One of the only people in.

In Europe, with any kind of a specialty business that can sell off multiple levels and multiple floors that can use gardens, and rooftops and so on and so forth. So.

Great.

Our focus to.

Launch the brand is yes.

The number one priority in the company right now that and the expansion of our product and our and our hands are tied on the products and.

Less tied on the international expansion.

Right.

Unless something else drastically changes.

In the world or with.

With new strains of the.

As the virus.

We feel very confident that we're going to.

Deliver everything that we've just put out in this letter so.

This is our best thinking today, and we're really confident about this.

Any new changes.

I don't think when.

When we talked last there was much of a delta thereafter.

Anything that was happening yet so.

I went on vacation.

In July.

Yes and.

But like.

Masks are asking why wasn't that interesting.

Through all my masks away and came back to work and needed by a new mass so yes.

Yeah. The world is changing quickly here and I think we've all got to learn to improvise adapt and overcome.

At a.

Whole new levels.

You build new muscles in.

I'm extremely proud of the team.

For our executing execution, thus far if you would have.

Asked me a year ago.

When we're running 47 comp in August.

That was our peak months guidance right in the core business.

Where are we going to come around.

Yes.

<unk> com, 47%.

I wouldn't have said that.

That I would be confident about that based on the fact that.

Hi.

August is in the rearview mirror.

And.

The first couple of weeks of September.

Look really good.

And our in stocks are starting to get better a bit.

And we have flow of goods coming.

But we focus the flow on our core business.

On our best sellers and the things that drive our business and as we should by the way the customer is not going to walk in and go.

Oh.

Where's that I thought you were going to have that they've never seen that never seen anything there's no expectation.

Our business is one if you think about it it's not really an impulse business I mean, you're furnishing our homes, it's not it's not a big impulse business.

Yeah, Youre planning that Youre shopping.

Working with designers.

How are you.

Art.

I'm with the consumer.

As weeks and months too.

To do an order so.

Yes, even if their newness comes in.

There is a multiple month kind of ramp period.

But I would just say.

Yeah, I, just stand back and say what would it look if we were selling cheap goods a lot easier to kind of bring in sheet goods in the market right now right, we're selling the highest quality goods at scale in the world in the home home business.

So and we're trying to elevate the quality of the goods. So the next round of goods is a whole another level of quality and design.

You don't rush quality, you wait for it and guess what people pay for it.

And.

So.

Like if someone thinks they want to measure us.

Pandemics.

Sure.

There's a lot of people that are sick and dying in Vietnam right now.

And yes.

I feel terrible for what's going on there.

People that.

Their lives dependent on it on it yet.

To feed their families and they can't work.

<unk>.

So we're going to be okay here are bard businesses ripping.

We have like I said I mean navy.

Somebody else has.

40%, yes.

Two year growth.

Not many I don't think anybody is going to have the two year growth that we're going to report in the third and fourth quarters, because our business is accelerating so.

Yes.

But I just focus on the big picture and what's really important.

Really important is our demand is building.

We've had some of that.

Business in the industry, we're taking market share, we're expanding operating margins.

Yes people sick and dying out in the world today, and you've got to you've got to make the right decisions.

Help them prioritize prioritize their lives.

Do what's right for the long term.

Yes.

It's like I've told the team from the very beginning of this pandemic.

We're not going to chase every sale here.

Yes.

We are lucky.

We've had a tailwind most of the world has had a headwind.

People are sick and dying for almost two years now in this world.

Yes.

Our business is doing great.

We feel blessed.

Thank you.

Thank you. Your next question comes from the line of Michael Lasser from UBS. Your line is open.

Hi, good evening. Thanks, a lot for taking my question Gary are you planning for your path over the next few years from a sale.

Margin perspective to be linear you have all these initiatives in place some of them are being delayed from this year.

Next year, that's going to mean some cost shift from this year to next year. So should we be modeling your business debt sales and margin over the next few years continuing to build year after year.

Sure.

Okay.

Yes.

Michael we're not giving.

End of.

Detailed guidance over the next couple of years I would say.

Okay.

It's like someone.

Ask me.

Well gosh, you're saving money. So your earnings are up because youre not mailing catalogs well.

We don't Mailer cataloguing at zero, and we don't mailers catalogue to lose money.

We're not millions of catalogs for not getting revenue.

Yes, so we invest in things that drive revenue and drive profit.

Where we've got new business investments, where we've got some infrastructure investments as we launch Europe and things like that of course youre going to have some initial period to ramp what is that look like when we open in a new country.

Let me see let me look at caps data, Oh, I'm, sorry, I don't have any.

I don't mean to make a joke about that but no.

Just like there are some things.

You can waste a lot of time thinking about I think what we've got to do is.

Open great consumer experiences in Europe, we've got it.

Launch with a great website, we've got alliance with real intelligent marketing.

Got to be prepared to execute.

Whether the first year is $50 million or $250 million you tell me like Ted we stand back and think about this for a second there.

39 million people in California.

Had new exciting design galleries in California, California would be I don't know $800 million business for us.

Maybe a little bit more there are 68 million people in the U K there is relatively similar demographics slightly wealthier than California, but more people.

So I'd say, California, when we continued to expand the brand looks like $1 billion business, let's call. The UK $1 billion business lets call the UK today $800 million.

What happens when you have a brand thats really well known in a very small market like ours right.

We're at the top kind of the very top of the pyramid.

Theres not a lot of people there they are a lot of money they have a lot of homes and they spend exponentially on the home.

They directionally I mean, some of the data we've seen and some of the research we've seen from some of our large investors.

Pretty deep research done their own research and.

Research interior designers in the UK and in France, and what percent of interior designers know us.

Like 80%, 90%, so almost 100% in some cases.

They know us.

They are a key customer.

For our business.

High end consumers.

I think pretty much know us.

And admire S. So.

What happens when you open an incredible.

73 acre estate.

Probably will be.

The most exciting.

Innovative retail experiences in the world.

Granted it's a.

A bit outside London.

In our business as a destination and what happens when you.

You've launched with a website with.

Got it.

Yes, 40000 Skus and.

The most dominant assortment in the country and.

And.

And you have relatively high awareness.

I don't know I got to believe it's going to be better than other people.

<unk> target a big wide audience.

And don't have high recognition because they've got to spend a lot of time getting out.

I really don't know if first year sales in the U K will be 50 or $250 million that Saar range.

I know directionally, but we have to spend but.

I'm just trying to be honest with everybody here, yes, no matter, if it's 50 or 250.

It's got to be really big over the next couple of years.

So, yes, we're going to learn a lot when we get going.

Say that yes.

Thats kind of go into a long rambling question I would say that so I don't get the same question four times in a different way.

Alright understood.

Yes.

That's helpful.

My follow up question is.

You're articulating a lot of enthusiasm and confidence for the back half of the year in part because of the.

To date trends the demand comp the two year accelerating based on what you experienced in the second quarter can you give us what the second quarter demand comp was so we can have a calibration for our models on how the how that unfolded.

Yeah, it's just huge.

Crazy right now look I don't want to make it a habit, we gave demand comps during that.

Kind of.

Crazy times of the pandemic in the first year and you know I don't want to give demand comps through the rest of our lives.

I think again I would just like I answered Steve's question I think we have a pretty good track record.

Doing what we say we're going to do.

I don't think we have a track record guidance aggressively.

So the numbers may look aggressive view.

Yes, I'm sure.

Q1 looked really aggressive to everyone right.

Alright, we took the numbers are pretty big.

While we reported Q1.

Earnings in our stock went up $100 and one day.

Hi.

And yes, we've got a lot of questions like that you really picked up the numbers up do you think youre going to make them.

Yes.

Yes, yes.

I don't.

Thanks, Ed.

Weak.

It's not like someone hands me.

And says here's the recommended guidance Gary.

I sit here with.

20 people.

For hours and hours and hours going through <unk>.

Category and trends.

And yes every detail on our business we turned over every rock we.

Gain alignment and clarity.

Gain clarity and we gained alignment on.

Where we believe the numbers.

We are going to be.

And we've been doing at <unk>.

Long enough that we've gotten pretty good with it even.

In a time like this.

I think we were one of the first ones to start giving an outlook.

Now a lot of people didn't even give any kind of directional guidance.

Yes, we did.

Yes so.

And we did because we are confident that we know our business.

If something massively changes in the world.

Got it all bets are off but based on what we know today.

Based on the data you are looking at and we're looking at.

Sure.

Okay.

Yes.

This is our guidance.

It's generally not too aggressive.

Yes.

Thank you Bruce good luck.

Thank you. Your next question comes from the line of Max <unk>.

<unk> <unk> from Cowen and company your line is open.

Great. Thanks, a lot. So a couple of bigger picture questions here. So the first one is Gary what do you think is your share of the luxury segment of the market. Today, you had a comment and one of your recent letters that your competitors are closing or downsizing their stores and with RH continuing to transition the galleries.

Longer term, where do you think your market share could go over time.

Yes, I'd say we have.

Clear line of sight to $5 to $6 billion in North America, and that may be bigger depending on the product innovation.

And elevation and all the time.

<unk> steps that I've articulated.

Our <unk>.

Really not all of them are even in that number right. So I'd say not.

Hit the 5% to $6 billion.

Something would have to go really wrong here, if we just continue to transform.

Existing galleries to design galleries and yes.

Launched contemporary and it does directionally, what we think it's going to do continue to expand and upgrade.

R R.

Assortments in interiors and modern.

Spanned our rug business build and Dimensionalize, our textiles business, yes, it's.

Continue to build and expand our lighting business.

And add new categories, and if were Directionally right.

Does that number get bigger and $6 million.

More likely than not.

But today, we're very confident about 5% to 6 billion in North America.

So.

So I think to do that.

We have to take market share right like take Marin counting here.

<unk> had a gallery that is doing it.

$18 million.

<unk>.

Yes.

To have a new gallery that we opened.

I mean, I might even be able to throw a football and hit our own gallery from our new galleries standing on the roof, maybe but yes. It is.

Not very far like at 2020 aircrafts.

And.

I don't know of any people who've done this before but we're yes, we opened a new gallery and its trending what guys did about $50 million somewhere in that range.

And.

I think it's a combination.

Yes.

Creating a new market because people are seeing product.

That they've never seen before presented in a way they've never seen before in an environment, that's inspiring and interactive.

Full of light and fresh air and.

Okay.

The optical presentation.

We call them galleries, because we say it.

Artful abstraction of home furnishings in a gallery setting right. So yes.

We don't really just merchandise our stores, we create kind of artistic installations of home furnishing people havent seen anything like this before.

So I think from seven to some degree it creates a new market but.

And some of the math.

People example, safely if you take our merchants.

RH from rent.

Because we're talking about that one right now.

Yes, five years ago, four five years ago, there were 32, what I would call higher end home stores.

From Sausalito to Santa Rose, including the Napa Valley.

And.

Not going to name them, because who knows.

People are sitting on the phone listening to our cockpit.

Yes.

Small boutiques mom and pop's some regional players and their stores are about 3500 to 15000 square feet. Our gallery was about 6500 square feet. So it's kind of in the middle and our gallery hearing Miranda I think we had.

Five sofa collection fixed dose collections.

Five dining collections and.

Five or six bedroom collections in the gallery.

So.

The other galleries, if we're right about the middle we had.

Look like everybody else kind of we werent really differentiated.

And by the way.

In that gallery, when we closed it.

It had less than 2% of our assortment.

Right.

2% call it maybe one 5% of our of our assortment.

So you couldn't really see our assortment in a gallery.

Thats why we mailed really big books right because if you saw our big book.

Hit your doorstep and other People's thin books.

Go Hey, those guys have a lot more than everybody else because if you just went in the physical world. We don't look like we have any more than anybody else, where we have.

Our.

Traditional galleries now.

Our galleries themselves are our legacy galleries, probably outperformed competitors three to four to one in the same square footage.

But but when we open a big gallery I always tell people that the 32 is 32 kind of Gucci, Paul maybe could be competitors higher end.

<unk>.

Generally more expensive than long wait times don't have the infrastructure.

Yes.

And but I.

I'd say half of them go away pretty quickly.

And yes, we will do another survey do the count did it go after year one day to go from 32 to <unk>.

25 did it go to 30 feet 18 did it go to 32.10.

But yes, we're not it's just not completely a new market we're creating.

But if.

I compare it.

Don't take this wrong it will probably write this on some letter Gary Friedman now with comparison to Apple.

I can't remember, who had last time, you said something that.

Is claiming that comparative system to <unk>, that's right, yes talking about the financial model.

Apple with kind of the last <unk>.

People into the cell phone games.

But they've created and new game, they created a new market it was more than a phone so.

It created a new market and it also.

Massive market share.

I think directionally we're.

Yes, it's kind of similar to that we are creating a new market.

And we're taking market share.

Pretty aggressively.

On both sides that scale and I think when I. When we look at Europe, just to kind of talk about that for a second.

The competitive landscape in Europe is.

Significantly weaker than it is in the in the U S. So I think it will be even more disruptive.

Yes and differentiated.

In Europe, and Thats why were very confident about it.

Great. That's very helpful and can you discuss your cash deployment priorities, you're now sitting with almost 300 million of cash on the balance sheet and free cash flow is set to accelerate over the coming years Youll have a lot of opportunities. So how are you thinking about reinvesting back in the business versus <unk>.

M&A or ramping up share repurchases. Thank you.

Thinking about all of the above Jack I don't know.

I was going to stay the same thing and even more so.

Every quarter and I think we answered yes, so we have a cash chessboard sitting here.

So we theres all kinds of moves.

Yeah.

We're just waiting for the right time to make the right moves, but we're looking at a lot of things.

Whether it's.

Yes investments into the business and innovation in the business, whether it's investments in M&A and acquisitions that will strengthen our positioning or or elevate our business and brand.

We're thinking about share repurchases.

Everything you would think that we're probably thinking about we're thinking about.

So, but we tend to.

Be opportunistic and.

Yes, so and patient so well at.

The right time.

I think we'll make a good move on our chessboard right now all the pieces are still there we haven't moved any.

But we've contemplated a lot.

Understood Best regards.

Thank you thanks Max.

Thank you. Your next question comes from the line of Aegean E from Barclays. Your line is open.

Yeah.

Excuse me Aegean can you. Please mute your line your line is open now.

Okay.

Adrian you might be on mute can you hear me can you hear me, yes, we can hear you hi, Adrian.

Hey, sorry about that.

I don't know what happened, but congrats on the consistent success and the progress.

Just awesome to see that.

Gary I wanted to continue to focus on the European opportunity the $15 billion to $20 billion outside of North America.

Can you talk about specifically the Tam in Europe, and I guess really what I want to know is it really feels like.

Alright contemporary is going to come online it sounds like there's more investment more design elevating the product overall and as you're shifting to the international market do you feel that the target household income or the demographic is materially different than sort of where our <unk> has been maybe say over the past five to 10 years.

Just seems like there's a greater appetite and appreciation for luxury brands.

Brands and goods, when we kind of crossed the cost demand. Thanks, so much.

I don't know what I could add to that.

That's.

That's how we see it.

Yeah.

No.

Let me start with the global opportunity.

Again, it's.

It's directional math.

Based on looking at the pie in many ways.

Well consumers housing markets.

High net worth ultra high net worth.

Ratios based on looking at luxury brands and penetration and volume.

And.

Yes.

Yes.

So we've looked at the math multiple ways and I think were Directionally right. If you were here you would see a big giant room, where about 40 people get together generally on Thursdays and a big cross functional team and we've got all of Europe of course, we had the whole world is just too much to look at so we said.

Yes, right now.

The rest of the world in the next room.

Got it topline, but let's really break down Europe and understand it understand each country go deeper.

Look at other People's.

<unk>.

That approach is in real estate strategies, whether it's not.

Not everybody that hasnt happened shops that are H, but.

But most people at the high end of the market and I spent a lot of money to Apple I'd say, so we look at where the Apple stores, where the iconic Apple stores, where.

Where are the big suburb Apple stores, where.

Other businesses that we're familiar with where the you know the.

The luxury good players in the suburbs.

Hardest thing and I think in Europe is going to be.

We don't know Theyre suburbs like we know are et cetera.

We don't know their market like we know their market now.

Expanded our team I think we've got a great leader he knows Europe, very well, but but.

But theres no one like us right theres, not theres not a real comp.

But there is enough similarities that gives us confidence as we dimensionalize, what we believe.

The market opportunity is at least today.

So.

And again.

As I look at it I think and I believe most of our senior team and not I.

I don't think really influenced by me because we we tend to just debate everything here.

And.

Yes, what I usually.

Hey, Eric.

If I say something in Chico's Gary.

It usually start Eric he's sitting right here.

She said that all the time by the way I would say she keeps me out of the ditch, but.

So yes, we spent a lot of time together cross functionally debating this we've had people who.

Yes.

We have a lot of insights on European expansion, and so on and so forth.

We feel good about that.

I think we're going to be some.

Directionally right and that's that's all you need to be at this stage.

Do you want to boil the ocean at Desert.

I always say like despite the settlers that came to America. Some people said, Hey go West Young man, there's golden them Theyre Hill.

And some people just right.

West and.

Kind of hit at Sierra Nevada, and there is gold.

Other people like were sitting in Boston trying to figure exactly where on the west coast. They wanted to be.

And by the time, they've gotten their course.

Art.

The other people were there like getting to the Sierra Nevada. So.

We don't exactly does it really matter, if we're 10 billion off.

Would we not do what we're doing today doesn't really matter right like.

The opportunity is only $15 billion.

$10 billion in Europe, there's a matter would you not go.

That's what I mean, that's kind of stuff I say to continue being transparent.

You go.

You go to Europe first.

The most.

The most familiar it's the most connected so anyway.

And and then I'd say.

The idea that.

The target demographic material different than where it has been over the past five years to 10 years, yes.

Here it is and it's going to be there and it's going to continue to evolve where it may continue to go up.

I think we will continue to shed.

Consumers at the bottom and will can stand will grow consumers at the top of the funnel, where there's exponential spending and by doing that I think all of a sudden long term, we'll pull people apps because the brand will be more aspirational people will save to buy or so.

Ah.

There is a demographic that will be younger and less affluent, but they will have great taste and style and they'd rather have.

Few good pieces, then a whole bunch of crap.

And that's the way I grew up I remember when I bought my first wind tends to be like.

At $65 technique I mode, a lot of young mode, a lot of ICR.

Lines to get that Sri intensity I didn't buy Ah.

Crappy Montgomery Ward's bikes.

Yes.

Is that kind of stuff and I'm, sorry, I didn't mean to us.

Overly simplify it but theres going to be consumers that.

Yes, they want a part of.

Yes.

A part of the very best in life and they aspire to it.

Nobody thought.

The Apple phone was going to be the number one phone in the world Nobody thought the Apple phone was going to sell in China. It became the best selling fund in China.

Like people want better quality, all the time and Gavin Grover our lawyer says to me all the time like this.

History has proven that people want better and better quality.

And.

The World is generally.

Headed in that direction so.

Yes, we think again, we're going west there is gold in them there hills.

We are progressing in the right direction.

We're going to we're going to be fine.

Gary I love it.

Fantastic.

Alright, I appreciate it thanks, Thanks Adrian.

Thank you. Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, good afternoon, nice quarter, guys just curious on the long.