Q3 2021 RH Earnings Call

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Yeah.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 are H Q&A conference call.

At this time all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session to ask questions. During the session you will need to press Star then one on your telephone please.

Please be advised that today's conference is being recorded.

We're quite any further assistance. Please press star then zero.

I'd now like to turn the conference over to Allison Malkin ICR.

You may begin.

Thank you good afternoon, everyone. Thank you for joining us for a third quarter fiscal 2021 Q&A 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.

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 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 results 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 happy holidays, everyone in Europe.

Paris, Jack Guy in.

Eric The leadership team are all here were actually in a real estate trip.

And I've seen a couple of exciting new international galleries.

But it's a little late here if we if we sound like we're in a different.

Different times than we are.

And we haven't flipped a lot this week.

We're excited to talk to you about our results. So let me let me start with the <unk>.

Highlights from the letter that we put out on the wire to our people partners and shareholders. We are pleased to report yet another quarter of record results with net revenues, increasing 19% to $1 6 million versus $844 million, a year ago and up 49% versus 2019.

Representing the strongest two year growth in our industry.

Our performance demonstrates that the desirability of our exclusive products and our ability to overcome the compounding supply chain challenges that led us to delay the launch of RH contemporary the opening of our first stage guesthouse and several galleries and the mailing of our fall source book until spring 2022.

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 as adjusted operating margin reached 27, 7% versus 26, 7% last year, we generated $279 million of adjusted operating income in the quarter of 24.

Compared to $225 million a year ago.

Adjusted net income increased 25% to $209 million and adjusted diluting diluted earnings per share reached $7 three.

Versus $6 20 centers in the third quarter of last year.

We generated $311 million of adjusted EBITDA in the quarter and $145 million of free cash flow.

The third quarter ended with total net debt of $178 million and trailing 12 months adjusted EBITDA of $1 $54 million.

Raising our fiscal 2021 outlook.

Well, we believe a conservative view of revenues in the fourth quarter is prudent due to the uncertainties posed by the new virus variants.

To postpone the opening of our new San Francisco Gallery until the spring and the continued shipping and port delays the power of our operating model gives us confidence to raise our outlook for fiscal 2021 for the third time this year.

We now expect fiscal 2021 revenue growth of 32% to 33% versus our prior outlook of 31% to 33% and adjusted operating margin in the range of $25 three to 25, 5% versus our prior outlook of $24 nine to 25, 5%.

2022.

Here are the new.

While our plans for fiscal 2020 in 2021 were delayed by the virus make no mistake, we're not disrupted by it.

Quite the contrary.

We refused to shelter and shrink not allowing our culture to be shaped by stay at home mandates or like collaboration and be replaced by zoom calls and isolation.

No leadership team RH made their summer home their permanent home.

There were no debates if we would return to work only discussions of when we could we.

We wasted no time, allowing ourselves to be victims of the current reality.

We chose to be visionaries, destroying today's reality to create tomorrow's future.

We used our time to re imagine and reinvent ourselves once again.

Let this be remembered as the time RH unleash the greatest display of innovation our industry has ever seen.

That's why we referred to 2022 as the year of the new and it will include the following.

The introduction of RH contemporary the most meaningful new product launch in our history inclusive of a 500 plus page source book, a freestanding RH Contemporary gallery, a dedicated website and a national advertising campaign.

The elevation and expansion of RH interiors in RH modern inclusive of multiple new collections enhance quality.

An exciting new presentation of photography across our physical and digital platforms.

The launch of our global expansion with the opening of our age England. The gallery at the Historic Idaho Park, a magical 73 acre estate designed to 16 15 by the legendary English architects are Johnstown that will introduce our eight to the U K and a dramatic and then forgettable fashion.

Additionally, we have secured locations for galleries in London, Paris, Munich and Dusseldorf.

And are in lease or purchase negotiations for galleries in Milan, Madrid, and Brussels in France.

The opening of our first are each 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 unveiling of the world of our age a new 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 and placement.

The lift off of our H, one and our <unk> to our customized Gulfstream G 650, ER and <unk> $5 50 that will be available for charter.

Former already already garnering press and praise is featured in the pages of architectural Digest The Wall Street Journal magazine.

And the 20 titles of modern luxury, including Los Angeles Confidential Manhattan Magazine, San Francisco Magazine, Boston, Common Dallas Palm Beach, and ask and Aspen magazine to name a few.

And also including the <unk>.

<unk> thousand social media posts and <unk>.

Reprints of of all of these articles.

The christening of our age three our luxury yacht that will be available for charter in the Mediterranean Caribbean, where the wealthy and affluent visiting vacation.

The expansion of our aging your home are unique and memorable delivery experience with furniture ambassadors guiding every detail of your delivery and.

In extending the selling experience into the home.

We enter 2022 with optimism and confidence that our efforts will continue to elevate and amplify the RH brand, creating significant separation.

Emotionally strategically and financially.

The RH business vision and ecosystem the long view.

We believe there are those with taste and those scale and those with scale Endo taste.

And the idea of scaling taste is large and far reaching.

Our goal is to position our age as 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 our age 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 art couture.

Bespoke.

Great color.

RH antiques and artifacts or <unk> and.

And other new collection is 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 billion to $6 billion in North America, and 20 to 25 billion globally.

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

Our products are elevated and rendered more valuable by our architectural eats firing 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 extend extend 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 our <unk> and the integration of food wine art design in the Napa Valley.

Our H, one and our H two are private jets, and our <unk> III, our luxury yacht that is available for charter in the Caribbean Mediterranean, where the wealthy and affluent visiting vacation.

These immersive experiences exposed to existing and new customers to our evolving already an 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 themselves spaces moving.

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 that deliver taste and time value to discerning time starved consumers.

Our ecosystem of products places services and spaces inspires customers to dream design.

<unk>.

Travel and live in a world thoughtfully curated by our H, 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 our age and online portal, where customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter of taste will be further amplified when we introduced RH media.

A content platform that will celebrate the most innovative and influential leaders, we're shaping the world of architecture and design.

Our plan to expand the 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.

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

Tastes can be elusive and we believe no one is better positioned than <unk> to create an ecosystem that makes taste inclusive.

And by doing so elevating rendering our way of life more valuable.

This is the time to be defined by our vision not by a virus.

As we move forward past the dark days of the pandemic, let this be a time, where we once again rise up.

At time, we expanded shine.

We've re imagined and reinvent ourselves once again.

<unk> team RH unleashes the greatest display of innovation, our industry has ever seen.

This is the time to be defined by our decision not by a virus Carpathian.

And at this point operator, we'll open the call to questions.

Thank you.

Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone.

With that you limit yourself to one question and one follow up after that you may re queue up for more questions.

Again, that's all I wanted to ask a question to withdraw your question press the pound key.

Please standby, while we compile the Q&A Boston.

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

Good evening, I guess Goodnight.

Body.

Gary you highlighted several exciting launches that are planned for 2022 in the letter.

But I was curious if you can comment on the real estate pipeline here within the states.

How many leases are secured currently and.

And should we expect the number of openings in 2022 to reaccelerate to that five plus level.

Yes at this point.

Steve.

We're silent on that just because there's so much change and chaos happening.

The world of construction and development so.

So many levels that we're going to wait till we have a little bit more clarity as we get through the fourth quarter to talk about what we think will happen in 2022.

So you'll hear more about that with our fourth quarter release.

Perfect and then just a quick follow up it's great to hear that RH contemporary still slated for launch next year.

But would love to hear your current thoughts on how impactful newness could be to demand next year, maybe by a high level as you think about the creation of the source book and just where you guys are.

Would love to just hear how excited you are about it any sort of comments on but how impactful you think it could be to brand awareness.

But overall demand growth.

Yes.

Personally I think it is a complete game changer I think it's the best work we've ever done.

I think it clipped the work of RH modern which is.

Which was huge.

Modern got got out to assembly and start from a from a production point of view.

Modern is kind of changed the game for our H I think I think this changes everything I think when people see that.

The taste level.

The.

Sense of style.

The quality and sophistication of contemporary I think it is.

Opens up another entirely new market I think it will.

<unk>.

Some of the highest end interior designers to our brand I think it will.

Have.

The customers at the highest end interior designers point them to our brand.

I think it is one of those.

Undeniable.

Things that we're going to do that you can't ignore it it is going to be a big deal in our industry.

Thank you.

Yeah.

Thank you. Thank you.

Our next question comes from the line of Adrienne <unk> with Barclays. Your line is open.

Thank you very much Gary Jack and the entire team navigating very difficult time.

Gary I wanted to see if you could give some color context on the quarter with regard to supply chain freight inventory in the backdrop there.

So that you had in the current quarter and what the line of sight looked like on these items into the first quarter.

And then Jack can you or maybe Gary can you talk about the timing of England and when you say that you've identified here.

Houston, London, Paris, Munich, and diesel board could we expect those to be opened in the latter half of 2020. Thank you very much.

Sure Yes.

Starting with supply chain and everything it's a mess okay. The worst we've ever seen.

So.

Yes.

It's a time to improvise adapt overcome it's time to collaborate more deeply than you've ever collaborated with your partners, whether it's on the manufacturing side the freight side.

Youre doing a parts what we're doing.

With just line haul everything right.

There's execution issues everywhere, there is cost inflation everywhere.

And.

You have to be really smart and thoughtful.

But to.

To say everybody in our industry.

We're sure.

A reactionary state, but with the with our leadership.

Mentality, how do we lead this to where it's the best outcome.

And we like to say inside our company vision leads the leader.

Yeah.

Inspires and Jenny.

<unk> the energy within <unk>.

Leaders have to be comfortable making others uncomfortable.

Because you're taking people somewhere that you've never been.

Doing things you've never done and this is one of them navigating through this.

This period is a tough one.

But it takes real leadership and it takes real thought.

And we have to be reactionary, but we also have to spend a lot of time.

Thinking until it hurts until we can see what others can't see so we can do what others can't do and I'm proud of the team and how we've navigated through this thus far.

I'm grateful and appreciative to all of our partners around the world, who have especially those in Vietnam, who have had to suffer through just a really really difficult time from a health.

Perspective.

Disabled.

Country worse than any others that we have.

We've worked with.

Earlier Europe earlier, it was India, who had.

It's a challenging time.

But if I look at I think.

And our results and our guidance demonstrates our ability.

To navigate through times like these from an operational perspective and demonstrates the strength of our brand from a.

Revenue generation and margin expansion perspective, so despite it all we are expanding margins.

Against our best margins last year.

And we absorbed a lot of cost and a lot of chaos. So.

So I think that bodes well as you look forward.

Two hopefully things getting better.

Omicron or.

I can't say it right right Yeah omicron.

Who knows with an experience going to be how many various we're gonna have.

The early data would say things are.

Not as bad as Delta.

Widespread faster, but it's it.

It doesn't seem too.

At the same.

The same health risk.

So hopefully.

Well I'll be able to navigate through this and kind of get to the other side when you think about.

The expected timing for the opening of RH, England, We believe will open.

England kind of kind.

Kind of early summer late spring.

Hi.

And you don't want to open in the U K too early we don't open up in the English countryside.

It rains every day.

Yeah.

And by the way it ranged almost every week for sure it rains every month.

In England.

We'd like to open when the weather's nice we'd like to get a second chance to make a first impression.

And so we're on track to open I think of that.

Late May early June.

It could be a weather call honestly.

We're looking at the weather report.

You go to your phone.

See you see rain everyday.

Probably not going to open yet.

But when we see the first few sunny days will kind of be ready and willing to open any day that everybody is smiling and everybody is happy including our people.

But that will be opened by early early summer.

Summer unless we don't see it unless we don't see a clear day.

That's the only thing that might hold this up.

So we have confidence about that could we expect other international openings. This year note. If we did we'd be talking about it.

You got to think about the kind of the complexity and size and dimension of the projects we're opening they.

They are not easy they take years.

You know what we're doing is not a quick rollout and.

We like to say.

Extraordinary picks.

More time requires more people.

Cost more.

Great.

More time class more money requires more people.

And in a more complicated manner, but it's worth it and so.

What we've learned in our in our journey here is that.

When you do.

When you do extraordinary remarkable work.

You can always figure out how to monetize it and it's really hard to monetize ordinary unremarkable and so.

But extraordinary remarkable.

It takes more time it costs more money.

It requires more people doing more things in a more complicated manner.

So yes.

It's hard to actually forecast and predict when these are going to open.

But I'd say the one.

Once we've listed.

We will have some opening in 'twenty three we will have some opening in 'twenty four we will have opening in 'twenty five 'twenty six.

I feel good about the pipeline.

And the way I think about it by the way is that.

It's not like in the U S. We're not opening markets, we're opening countries and I can't overemphasize that.

Not just too.

Shareholders or the analyst community on the phone.

But to our team and our partners.

Round the world.

We can't look at these like one gallery.

RH, England opens up England.

The United Kingdom right.

Hi.

If we open in.

Paris, It opens up France, when we open in Milan, It opens up Italy, when we opened in Munich Dusseldorf It opens up Germany.

So these are big economies and.

And one by one we're going to open up countries and with the amount of business that is moving online and if you think about.

One of the long term financial benefits.

This virus is it made people a lot more comfortable shopping online and shopping online for just about anything.

So.

We like our timing from that point of view.

We're going to learn how many galleries, we need in these markets.

And how.

How we penetrate them correctly, but.

We're not.

Two our consumer at the high end.

We're not a known to the high end I think I Might've mentioned on another conference call that there was a.

Our reported an analyst report that came out and said RH has really low consumer awareness.

In Europe.

<unk>.

Ranked.

Like target Walmart Ikea.

A bunch of people way ahead of us.

So that was a real firm grasp of the obvious right.

Our customers don't shop, those places and.

Definitely those customers don't shop porridge, we wouldn't even be on their radar.

But one of our really smart investors and they are probably listening to this right now you know who you are.

They did research and.

Research and.

Interior designers in the UK.

And how many and what was our.

What was the market awareness.

Our RH in the UK I think it was.

90% close to 90% and what was the percent that had an intent to buy.

When we open in the U K and I think it was somewhere around 8%.

So those numbers.

Are off the charts.

Those are off the charts. So this dynamic is opening countries. When you have the kind of brand we have.

And when you are so unique in a market and you've opened the way we're going to open we're not opening.

Like this company started this company started in the United States with little legacy stores.

6000 square feet or 7000 square feet of selling.

We're opening with our best work.

So.

We have a running head start because we have pretty good brand awareness with the right consumer we're opening.

Extraordinary galleries.

Some of the most exciting things we've ever done.

Almost every one of them.

Is one of the most exciting galleries, we've ever opened in incredible historical real estate.

<unk>.

So.

So what I think about the business and our team thinks about the business over the next five years.

I mean.

I think it puts us in a position.

To outgrow anybody in our industry.

That's extraordinary helpful. Gary Kudos on the execution and the future obviously had turns off the Kennedy.

Thank you.

Thank you.

Our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.

Hey, Thank you great results.

One is on deferred revenue.

Customer deposits are up sequentially. So I'm curious if you've started to make any progress on bringing down the backlog levels I believe at one point earlier in Europe, they stood at about $150 million.

Have you started to bring them down.

Or how many quarters do you think it's going to take for you to clear out some of that benefit.

Hey, Chuck it's Jack So we gave you that update for the $150 million at the beginning of the year.

We haven't updated it and we will we will do that when appropriate one thing you have to realize though as we resolve some of that backlog theres new backlog created so thats, what youre seeing a sort of sequential if you look at our sort of sequential revenue and really the volume of revenue and this is our highest revenue quarter.

Of all time, and you obviously heard in less last quarter higher than the prior quarter, So you're going to see a sequential build in those.

And again I think as we get at.

The supply chain and everything else results over time.

We'll get through it but right now it's sort of.

Flex the size of the business.

And as Gerry mentioned about supply chain.

We're working we're providing for adapting.

And it's all going to come together.

I'd say right now.

Our view is the backlog won't won't get all the way down by next year.

It is a high likelihood we'll enter the following year with the backlog.

Got it okay.

And then you also referenced the Newberry and your and your update.

Sorry for the near near term question, but I'm. Just curious have you seen any any unusual demand trends over the past couple of weeks and then bigger picture you talked about the supply chain is still being a factor.

I'm curious have you seen any changes in consumer behavior willingness to wait for products already.

Any uptick in the.

The cancellation rates or maybe not.

Yes.

We have a lot of people coming in and wanted to buy masks.

That was a joke ive effect.

Now in our business.

You don't get a immediate upticks right.

Furniture things like that.

Just kind of early news, but we'll see how it how it shakes out.

And.

Yes.

<unk>.

Customers have been conditioned to wait.

Alright.

The.

The key to it.

How we all are.

Operating in this world is based on expectations.

I like to use the example of.

You go to Disneyland.

And if you want to get on that.

Star Wars rider that.

A warrant or whatever pick your pick youre right.

They are assigned.

Yes.

<unk> 45 minutes from here.

And you see a line of about 400 people.

And do I really want to get in line with my two daughters to get on the Matterhorn today.

Says $40 45 minute wait and I think nobody in the world would get in a line that says 45 minutes from this point, but the fact is.

You get in that line, because youre condition to get in that line and Disney.

Because the execute so well.

I'm one of those people that generally looks at my watch and then times it and all the times I've gotten into a line at Disneyland.

It says 45 minutes and they were always 45 minutes, that's where they put the sign up.

I've been in the last two years, because my daughters, you got a little older but they're actually want to go again this year. So.

But you always get on the right somewhere around 39% to 43 minutes.

So they never make you wait longer than 45 minutes and what we're trying to do is be Disneyland.

Don't say four weeks, if it's going to be five if theres a risk aside if it's the risk of five.

Six.

And if we lose a little demand.

That might happen.

But there is nothing worse than disappointing consumers, but I would say the bigger thing is consume Richard we're all conditioned to wait.

Try to get anything built right now try to remodel your house on time right now I think I read and it actually just read a report that.

50% of the people said they are waiting longer and they're spending more money.

I'd love to know their contractors.

50%, because I know nobody who's getting anything built on time.

And I don't know anybody who is not spending 50% to 100% more than they thought they were going to spend on any kind of remodel.

I mean, there's everything is costing more.

On on every level.

And Thats the world, we live in today, and we've all been conditioned to wait and it's almost like a crazy surprise, if you get something on time.

So.

If the post makes driver shows up on time with Europe, Neil or the Grubhub person shows up you are kind of like.

Super excited because they are the only people are kind of on time today.

Check one thing to keep in mind too I think when a customer for any reason doesn't want to wait there is actually there is.

Plenty of in stock Thats, what were talking about whenever one of our strategic.

Vantage is the in stock inventory.

And including on our website you can shop in stock.

I was one of those design customers that for one reason I needed to what I wanted in stock items fast and I was able to get them, obviously, some items and wait for that.

Yes.

The address book.

Great. Thanks for the commentary I can get that fast pass it works pretty well.

Good luck the rest of the year. Thank you.

Yeah.

Thank you.

Our next question comes from the line of Anthony to combo.

Capital market your line is open.

Thank you so much for taking my question before I ask my question I'm, just going to private systems I was not the analyst wrote that report about your low European brand awareness. So I just wanted to clear that up.

Yeah.

We thought ultimately also wanted to mention that.

I recently went to your your new RH, Oh bookstore and it was just spectacular I mean, just absolutely problems we brought ticket.

But on to my question.

So you talked in the in your <unk>.

Letter about how youre expanding our reach in your home.

And I know white glove is very very important and obviously you have the gross margin dollars and each transaction to afford that.

That cost.

I'm just wondering is it.

Is there any significant.

You know our cost.

Sort of increase that we should be factoring in because of the expansion of orange in your home.

There's going to be an investment we're going to make it meaningful significant investment we think there's a good return on that investment the math would say.

To go I don't know if Fernando Fernandez here at Banana Gucci as our chief supply chain officer President of home delivery.

<unk> kind of been the visionary behind RH in your home and we just had as leader of our aging your homes Dana out and we have an inspiring presentation.

Guarantee if any of you on this call we are in the room.

I wanted to be an investor in <unk> in your home.

So.

Fernando you want to mention anything in Alright senior home.

Yes marriage in your home as Gary referred some of those areas is unique and memorable experience that requires an investment however, the return of the investment.

Significant part of the brand not only from the demand that Gary mentioned Brooklyn customers Spirit.

The desire for the brand.

The investments we can.

Create and we over the last two years, we have been able to negotiate.

Great contracts with our partners that allow us to consider financial investment in our agenda.

Got it.

That's all very helpful.

Thank you. Thank you so much and keep up the good work guys.

Thank you Anthony.

Thank you.

Question comes from the line of Curtis Nagle with Bank of America. Your line is open.

Good evening, thanks for taking the question.

So.

Quick one on.

Product launches.

It looks like.

Modern an incremental launch.

Next year I, just looking back to the last year.

Yeah.

And I guess, just how incremental I mean, it's you know, it's obviously a big part of the brand.

I don't think it's obviously bigger than kind of the core.

Business, but what are your expectations for moderate and I guess what.

How's it Brandon.

Like a sub brand evolving in terms of I'm not sure. It moderates a meaningful part of our business today, and we think about the way we think about the business today with RH interiors RH modern RH contemporary so modern is now part of core that's how we think about it it's got it sounded static, but it's not new.

More but both interiors and modern will have.

The most amount of newness that they've had in years, because we haven't mailed the book in two years.

And we have introduced a new collection in two years.

So you've got kind of two years' worth of development kind of backlogged.

And we think now is the <unk>.

Where the supply chain has caught up enough.

Yeah.

Where we won't disappoint customers and create longer wait times, we hope knock on wood.

If nothing changes as far as the variance and what happens.

But.

Contemporary is going to feel massively new with lots of incremental new product that should make our age.

Excuse me contemporary will be all incremental well not all incremental put it this way it say I would expect.

50% to 60% incremental from contemporary as it is.

So new and differentiated.

The new incremental.

<unk> new collections in both modern and interiors interiors is our biggest book monitors. Our next biggest book biggest part of the business.

Yes.

And then contemporary.

We all know we look at it and we think contemporary could be bigger than modern and overtime rival interiors and just lift the whole brand. It's just it's just.

It's a new sweet spot is how we think about it in and in some ways.

We've made.

Lemonade out of lemons through.

Through the pandemic, it's given us more time to look at it more time to dimensionalize it more time to be critical of it more.

More time to tweak it.

And Dimensionalize the idea.

And.

We kind of get more excited every week about it here because we've been able to continue to.

Innovate and.

Spanned and Dimensionalize the idea. So so that will be a huge piece of incremental business and then there'll be a percentage of both interiors and moderate that will be incremental aerie sitting here, Eric anything you want to add that I'm missing out on.

Great. Thanks, Vikki point of view.

Absolutely.

Very relevant right now.

I think yes.

Will rival.

Modern.

Okay.

Exactly.

Hum.

Okay.

It's exciting.

Concepts and collection.

Hey, Darren.

And elevated the design and quality.

All right.

That sounds very exciting.

Maybe just a quick modeling question.

Jack.

Just look I know you guys haven't.

Cash Roger or given detail on.

Price increases or anything like that and I'm not asking for that but just kind of thinking through.

Next year.

Backlog.

How long it takes for inventory to flow through.

I guess, what would be fair to say that at least through maybe the first quarter or two next year you still should see some uplift from price increases you've already or should we think about it differently.

Hmm.

Another way to ask is for 2012 look with us with that.

Your way up.

Look I think based on.

You can look at our source books online or you can if you follow them.

We've made no secret of having taken some price increases this year to address the supply chain.

Will there be some rapidly.

Part of the year sure again, we're not speaking in specifics but.

But I think that's a good way to look at it.

Yes, I'm not even sure price changes are over yet so right right. Yes, there is still price inflation happening.

So.

We're going to continue to do what's fair and right and.

But we don't want to do anything that.

Kind of undercutting the margin structure.

That we have so but everywhere, it's happening in our restaurants crazy.

Price increases in.

A lot of the input costs.

We're just.

Doing what we believe is right and fair prices growing up where we're passing them through.

And.

I think because of the stimulus in the market and what the government is doing to kind of keep everything a float and everything moving.

It's kind of balancing it all out right.

And.

And some good way that this pandemic is not isolated to any one country and it's a global issue.

It allows every.

Country in the world to print money.

And not devalue their currency.

In a massive way.

So.

It's never happened before we've never seen this we all sit here and go well what's going to happen.

Who knows.

How long everybody is going to print money for.

How long prices are going to go up.

What's going to happen with inflation, hopefully you've got a dovish.

Point of view on interest rates.

And in.

And the fed I think everybody's pretty happy Paul is reelected.

And.

So so far so good.

Thought.

A lot of things, we've gone wrong by now, but again, we've never seen this one.

The world's never seen it so.

I think price increases are going to probably be here for a while.

Sure.

Okay.

Thanks, very much I appreciate the time.

Good luck on the rest of the year.

Thank you Curtis.

Thank you.

Our next question comes from the line of Michael Lasser with UBS. Your line is open.

Good evening, Thanks, a lot for taking my question.

Recognizing that there is a lot of uncertainty out there.

Supply chain challenges.

Your implied fourth quarter guidance.

Suggest that demand trends are slowing or at least your revenue trends are going to slow in the fourth quarter, especially outlet.

Thanks.

Do you think that the fluid consumer which is.

Maybe let mobile over the last 18 months is starting to get fatigued being at home.

Starting to ship into other categories and that might continue into next year and that's a sign that you're already starting to see.

See in the business.

Well, yes, I think everybody just got to look at their own behavior. When you. When you don't have an ability to travel.

But your income Hasnt changed.

You're either saving money or spending it somewhere else.

<unk>.

Travel and leisure is three times the size of the home furnishings market.

Clearly.

That part of the economy shut down in that part of the economy has opened up there to try to get a flight these days or try to book.

Hotel room.

Many places you might want to go.

A lot different than it was a year ago and it's massively different than it was two years ago at the beginning part of the pandemic. So so.

The question is I think.

Okay.

Yeah.

How how has this affected the long term view of the home.

And how has this changed.

Perspective.

I think there is a short term.

Cycle here that yes, spending will shift back to travel and leisure and other parts of the economy.

People are going to spend money on weddings, there werent ready weddings or where an event. There were so many things went to zero.

Nobody went to concerts nobody went to <unk>.

I happen to be a standard.

We ended the Golden State Warriors.

In the last couple of years.

You didn't really want to go to a warriors game and be one of <unk>.

Yeah 2000 people in at 20000.

<unk> Arena.

Didn't have a lot of energy and wasn't a lot of fun, but now there's 20000 people back and they're spending money on tickets go into games spending money in F&B, just expensive night out no matter, where you are sitting in that arena.

Magic Arena is everywhere, whether it's soccer games, whether it's other events, whether it's concerts that are happening now.

So <unk>.

Travel leisure entertainment and so on and so forth.

People are getting out.

Yet.

You would have thought there'd be a much.

Bigger shift out of the home and I think what.

We are.

We're learning is that this is yes may have created some kind of.

Permanent shift in the importance of the home.

The amount of time people are going to spend at home the way theyre going to spend their time at home.

Out of entertaining at home, they're going to do.

The number of homes.

They want to have.

You can afford to have to have that.

And.

And just the threat of.

Even not only new variance but.

Another pandemic.

You don't ever expect anything like this you've never seen anything like this but once you've seen something like this you start.

What happens if it happens again, hey, honey.

Okay got it we made it through this pandemic everybody is healthy.

<unk>.

What do we do now what happens if another one hits in three years and five years.

How are we going to be ready what is ready for another pandemic ready means have any second home ready means.

Have a great backyard ready mix.

Making your home place.

Place that you want to stay and I think I think the pandemic caught everybody off guard right.

We all had to spend a certain amount of time at home.

We all sat around us so all the things that maybe weren't great in their home.

Kind of said Hey, why don't we make our home better we're going to be here for a while.

And and I think that.

If it wasn't.

Your home.

There might have been a shorter term.

Impact.

But for many people and especially upper end consumers.

The most important place you go.

Where you sleep almost every night.

And.

It's where you eat.

Most of your deals where you raise your family it's.

Now.

For most people.

If you're working in Europe. It fluid can see read out of the home office, you have somewhere to work at home.

You now have a habit of entertaining more at home anybody who tells me they haven't cooked more than they cooked in the last two years.

Youre welcome Williams Sonoma by the way.

Everybody is cooking more.

It's it's.

It's got to be good for the home the new habits have to be good for the home and I think the.

We're all surprised how long.

I don't know who coined it.

What have you wrote it.

Wrote reports and there is stronger for longer and I think it's been stronger for longer because.

It's the home.

It's not like you just bought a new car you buy any car.

And you don't furnished the car you don't do anything to the car.

Maybe you wax.

Painted.

You get everything you need when you buy a car.

You buy a home.

Youre kind of furnishing it for years, you're doing step to it for years.

And now that it's even more important and youre spending more time, there than you predict you might be spending more time, there in the future and there might be risk of another pandemic I think the home.

Mike get a permanent shift here, how big is it going to slowdown sure like.

We're not going to see the same growth rates I mean, but then again.

If you saw our business plan for last year.

He was a lot lower than how we performed because we thought there could be a big get back after the lift of 2020.

And without giving back in 2021 will there be a give back in 'twenty two.

I don't know.

Yes.

So far.

Alright.

Maverick St top gun.

Pretty good so far.

Uh huh.

Right.

That's very helpful. My follow up question is understanding you don't want to provide guidance for 'twenty two yet can you touch on two factors that will impact the model. One is the startup cost with all of the various initiatives that you have coming up in the new year into you. You're obviously you just did a big recapitalized.

As shown on the balance sheet can you give us some indication of how that's going to impact the model in.

In 2022, thank you so much.

Yes.

The recapitalization is pretty black and white right, there's we borrowed $2 billion as an interest rate on that money.

That's a onetime step up in costs and.

There's not a magic.

Staying on the other side that makes that go away.

We think it is an investment that puts us in a position to.

Create a great return on that $2 billion exactly how that plays out and when that plays out.

We will see but we wouldn't have raised some money.

If we didn't have plans for it.

But.

But we're.

We're patient we wouldn't be opportunistic.

We don't know whats going to happen in the future.

So yes.

But there's a onetime cost to that as it relates to other initiatives and things, we're doing and Jack will add more color.

Yes, we're going to spend more money, we're going to invest more money in.

We're going to open up countries or opening up new Dcs, we're doing things like that and there is an investment cost to that but.

I think we've been relatively good for a number of years now maybe the last five years.

Being relatively accurate and are and how we guide.

Yeah.

Guide the investment community.

Where we think numbers are going to be and we tend to be more.

More conservative than less conservative and I think we will continue to be so and we're not guiding 22 yet.

So a lot of things that we'll learn in the next couple of months here.

And when we have a clear view of demand trends.

Yeah.

Other things I mean, we know what our investments are going to be as it relates to international as it relates to our each in your home as it relates to other things.

We're going to invest with a long term view, we invest in this company like we own 100% of the company.

And.

And so we invest for the long term and that's why.

We have.

The best operating margins.

In our industry by not by a little I mean, I don't know if I don't know what the high Mark was in our industry. Besides our age I think is probably around 15, 16%.

The third quarter were 27, 7%, so we're probably 1100 basis points.

Higher than the next best person.

How do you get results like that.

You make the right investments.

It's not luck.

You can make the right investments and you've got to make those investments for long term views that the worst thing that can happen with this company today.

If we start playing a quarterly game.

If we start like someone said to me the other day and our meeting.

<unk>.

You have to protect the brand.

Every company I've worked in every time I've been around people that say you have to protect the brand is when brands start to erode because they stopped playing offense they stop investing.

The same.

With the same courage and passion and they stop.

Yes.

Having the same drive and energy to make things.

Better and greater.

So.

We're allergic.

To the status quo.

We are passionate about finding big ideas, we don't care, where they are we are so excited about our each in your home if anybody like that.

Almost like repeat that meeting.

For this group.

Mike you guys if everybody on this call.

<unk> seen that uptake the team presenting RH and your home life.

I seriously wanted to take money out of my wallet and say can I invest personally in this.

It's going to be tremendous.

Their startup cost it's not cheap.

But you get what you pay for in this world.

And.

Yes.

Expect us.

To make gains.

Meaningful investments and expect us to not.

Respect the status quo at all here expect us not to ever play defense and expect this to never try to protect this brand expect us to build this brand.

And to invest in this brand and to make this one of the most admired brands in the world not the most admired home furnishings brand in the world one of the most admired brands in the world.

Put us up against anybody in the next few years.

Within our pipeline is going to take this company to a whole new level.

And Michael Jack I think.

At two things, obviously, not adding any specifics as to.

As to the numbers.

<unk> cost, but keep in mind that much of the costs related to initiatives follows. The revenue. So you have that aspect in terms of matching and then I think the second thing I'd say is just think about our scale, we have over $1 billion of EBITDA.

And so whatever numbers you can put around the investments whether it is launching a temporary with its global expansion.

Again, I think relative to what we produced here.

Currently.

It's still somewhat modest and to Gary's point.

These two needs.

To be material.

It can be thoughtful about it as we always are.

That's very helpful. Thank you so much and have a good holiday.

Operator are we still there.

Taking the cycle.

Yes.

Yeah, Yeah, yeah yeah.

The commander.

But do we lose the operator I'm here.

I'm here.

Our next question comes from the line of Stephens County, with Citi. Your line is open.

Great. Good evening, everyone. Most of my questions have been answered, but I wanted to just circle back.

On supply chain you know it would be helpful. If you could just quantify maybe how much is supply chain challenges lay on revenues in the third quarter, maybe how much is that impacting you in the fourth quarter and then you know as we look to next year like if supply chain continues to be this pain point for the business talk about your ability to maybe diversify into some other areas.

Some other vendors or just what are the other options you can pump.

If you had to diversify we got to go to another planet Thank God for Musk.

Victor.

So you have a pandemic you don't know where its going to hit you don't know what country. It is going to hit you can move from Vietnam and that could be the worst thing you do right.

Vietnam, now and it's going to get on the other side of the pandemic and you're going to put yourself in some country that maybe it is hit by the pandemic.

Again, you can't play a short term here and were relatively diversified.

Can it take company like Nike I think what was it 40% 50% of the business in Vietnam.

Business is twentysomething, playbooks, and but yes, 20 something percent Vietnam.

<unk> has great craftsmanship they have.

High quality they have a committed.

Labor for us and a great culture.

And we get some of our best product in the world out of Vietnam.

We're not going to.

Vietnam, because there was a temporal issue like a pandemic.

That would be really bad business decision.

The.

The pandemic.

<unk>.

Didn't.

Didn't permanently damage Vietnam.

Temporarily hurt Vietnam.

Like saying Oh.

Our bedroom furniture business was down.

Because of the pandemic lifts.

Let's get out of bedroom furniture.

It's just not how we think about the business nor how we should think about the business.

So.

It relates to the supply chain.

Ply change going to be what it's going to be.

Every kind of business in the world is impacted by the supply chain.

No.

You kind of you kind of ride it out you've learned from it.

You react.

<unk>.

You don't panic.

And.

Do dumb things.

No.

We're fine with this this is like.

Theres always in business there is always.

Shifting goes wrong all the time.

And it's not what happens as how you react to it that matters long term so.

So I wouldn't make too much out of the supply chain like the news is making too much out of it everybody to make too much out of it. So did we lose revenue in Q3 of course, we did we lose revenue in Q4 of course, we did imagine what our numbers would have looked like.

Had the supply chain not blew up in Q3.

I mean, if you think about it.

At the beginning of Q3.

Vietnam shut down the entire country, 27% of our business.

By mid Q3.

It was up to 20% production by the end of Q3, it was up to 40% by mid Q4, it's up to 80%.

Up to 80%.

Doesn't mean, you're really at 80% it means productions at 80%.

Everything that was zero.

Then the 80% when you were at 20% to 80% that didn't get made and then the 60% that didn't get made when you are 40%.

It's all in backlog.

So it takes.

Months quarters year to catch up.

But that's.

It is what it is.

Okay.

It goes on business goes on it's not it's not strategic.

It's temporal.

So.

I, just wouldn't make too much about it than less.

Your clients or short term hedge fund traders.

Want to place week to week or month to month or quarter to quarter.

<unk> built by our stock.

Yeah I appreciate I appreciate the color of your your details.

Health to contextualize the situation so I appreciate that.

And then just to circle back on the capital raise and a follow up on the previous question. How do we think about some of the priorities for for for cash now like as you go International do you think having a little excess cash on the balance sheet is more prudent for the business just how do we think about those priorities now that you've kind of go global.

Everything we said in the press release nothing has changed since we did the press release.

As it relates to the $2 billion.

Loan.

So.

Nothing to say, we don't need the money to go international we don't need that money to go global.

We have a 70% plus ROIC.

We.

Turn investments into cash pretty quickly.

And a throw up a lot of positive cash flow this year.

Yeah.

If things remain in some kind of.

Yet current normal directionally will throw any drop even more cash next year and so.

Yes.

You read the press release to take exactly how we're thinking about the $2 billion.

Fair enough. Thank you Pepe.

Happy holidays.

Thank you happy holidays Steven.

Thank you.

Our next question comes from the line of Max <unk> with Cowen and company. Your line is open.

Great. Thanks, a lot and congrats on a really nice quarter. So first can you maybe help us sequence some of the major projects. The team is working on next year.

James Contemporary World the bar H and some of the other concepts that you discussed in the letter just so we can have a better cadence about grill throughout next year.

Yes right.

Contemporary it'll be kind of late spring.

We will be the launch and contemporary.

Im curious modern aerie late spring early summer.

And at late spring early summer.

Sequentially think about I'd say those three.

Books and collections will all kind of happened in the first half.

Yes, there'll be kind of staged a bit contemporary will come first and then what.

Then ensures that modern.

And then.

The launch the global expansion will happened kind of late spring early summer.

With England.

The guesthouse will kind of open late spring.

Hi.

The.

Unveiling of the world of our age.

Late spring early summer.

At the time other things are happening right that'll be coordinated with contemporary.

Hi.

Yes, guesthouse and.

Our H, one and <unk> three and all of this stuff goes on.

The world of RNA platform.

The platform digital platform has to be kind of ready to go. So when all that happened is the worlds of our H will happen.

And.

And then R. H, one or H 283 will be available for charter beginning.

Beginning Canada.

Late springtime.

Three will be available somewhat sooner.

Hi.

<unk>.

We are starting to see it in Miami on the way back in and we think it's probably just about that team and so.

I'm going to take the first the first cruise Chris in the boat I'm, not really a boat guy who can get seasick, but.

But I thought it's better for me and I am painful price everybody knows for the charter.

And.

So I'd rather have maybe the Guinea pig in case.

Like the boat hasn't been out of the water for a couple of years with Coke. So we used the time to kind of re imagine the boat take it to another level and tie it into the aesthetic of our H, one and <unk> two.

And so now they all look like a family.

Alright, three statically is aligned with that and we made some major enhancements. So if you're if you've seen the video of <unk> III.

That was up.

It looks like a whole new <unk> III Super Cool now it was a super cool, but when we bought it.

It's really really cool.

But we want to make sure that services right the foods right steps, albeit the Guinea pig on that.

Over the holidays.

But that will be.

Be presented on the website.

And then are each in your home is happening.

We have such a great meeting.

Greenlighted as fast as the team can go we will go and are each in your home.

So it's all happening sooner than later.

This year.

Got it that's helpful. And then maybe one bigger picture, but how do you think about price elasticity for your shopper unrelated to supply chain and the inflation driven price increases how do you view your ability to take pricing longer term and also continue to launch more and more.

Higher end products as you guys climb the luxury mountain.

Yes.

Exactly what it is reliant on rate, it's relying on the.

The taste and style.

Uniqueness and differentiation.

The desirability of that is driven by that.

It's.

It's driven by.

Our ability to presented in at.

Really beautiful and weigh that drives desire and.

And in the.

And the quality right.

The design.

As a product and uniqueness of product the presentation of the product the quality of the product.

Should all.

We should be on the same path we've been on the last several years.

We don't think we are.

We're at a point, where you say you have to quality everywhere.

At its very best we think we can continue to evolve the quality and take it higher we will continue to trim from the bottom.

So we don't over the long term looks like some good better best assortment.

We want the assortment to represent the very best in the world.

Yes.

We think we're on that path and we think as we continue to climb the luxury mountain and we continue to elevate everything right the perception of the brand when people.

Yes.

When you open arc Digest and you see a multi page story about that's titled RH lift off and you read about our H, one and our digest, which by the way the last jet a printed in the magazine.

25 years ago. It was the getty's jet the jetty.

Which is seven 7% and 727 that was redone.

So.

What else into brand has.

What Ark Digest.

End of <unk>.

Markets is one of the best New beautiful private jets that says something about your taste and style and.

Thought leadership and creativity and I think when people see <unk> three it's going to do that and I think the game changer and it.

That's the dust don't connect.

It's like most of the world has to see it to believe it we say internally we have to believe it to see it because it's our vision, but it's hard to know.

It's hard for anybody who has been seen.

With the guesthouse.

Is going to look like to really get it.

And.

And.

When when the world sees the guesthouse and understands what we've done there.

Yes from a hospitality perspective, and not not just.

The rooms, the rooms extraordinary the world's never seen rooms like this there's things that have never been done.

In hospitality and not <unk>.

Different could be different.

Different could be better.

And so there's things that are really extraordinary and you kind of wonder like why isn't anybody ever done this just because.

People start to.

Do what they've always done and then they try to protect what they've done.

They stopped.

<unk>, an innovative and so.

We think we think the guesthouse could be the next new market right like no different then.

And if you can help <unk> and Ian Schrager invented the beauty boutique hotels. This is kind of a completely new thing there's nothing like it.

And when you look at the consumer facing hospitality part of it.

From a restaurant point of view it I really think it's one of the most innovative new restaurants in America, not because we're trying to be fancier.

I see.

Just the kind of food you can eat everyday Don it's such an extraordinary level in a dramatic fashion, you've never seen a restaurant like the guesthouse restaurant.

Or the guesthouse kitchen or the guest that's dining room I don't know color yet.

But.

And then we've got another intimate experience.

Got it.

Campaign and caviar bar.

That the world's never seen.

Thats part of the guesthouse and when we opened our second guesthouse and Aspen.

It's got the first are each bathhouses spa and it's the Bathhouses filing the world has never seen.

So when the world kind of sees these things.

Those two will elevate the brand they will change the perception of our age it will make RH more desirable even though a guesthouse.

It won't have any of our furniture.

The idea of the guesthouse the execution of the guesthouse.

The brand and position our agents and consumers minds, we believe as a thought leader.

A place maker and a tastemaker and that will make our brand more desirable.

No different by the way then our new galleries make our brand more desirable and render our product more valuable.

It's just a different way to communicate.

Then.

Most people do.

Yeah.

Inside our company is not what we say, it's what we do that defines us.

And although we're the only.

Business of our kind that doesn't.

Participate in social media, we don't have an Instagram account, we don't have the print. This account we don't have a Twitter account.

Because of the work we do we're the most Instagram brand of are kind in the world. The most.

Brand of our kind of the world and the most tweeted brand or are kind of in the world.

So.

And I think these these investments, we're making and things we're doing and the Halo, we're going to create.

I think I've talked to some of the other day.

About the fact that.

You think about a brand like Nike.

<unk>.

Nike.

Celebrates great athletes in great Athletics, and they don't really talk to you about the rubbers.

Our sole or this thing or the shoe laces.

The market isn't that.

Have lupron James.

Were in their shoes, they have Serena Williams they have the best athletes in the world and they celebrate.

Police and great Athletics.

And then <unk>.

Massive investment in those things.

Defines and elevates our brand.

About our galleries to think about our restaurants I think about our.

Guesthouses think about our residences think about RH, one or two or three think about.

<unk> and creating a integration of food wine art and design and Napa when you see what we're going to do in Europe.

RH, England.

Today, we were out in the French country side in saw.

The most incredible chateau I've ever seen in my life.

That I must shut tow expert but.

A lot of pictures splits effects and like we might do or a France and.

And if people are going to go with.

Are people going to really go to shop there.

People are going to be inspired by it.

And anything we've done like that in our.

Yes.

We've always figured out how to monetize those kind of things.

And the guesthouse and Divina and I never thought I would make about that if I can break even on the guesthouse that you're a good thing I think the guesthouse is.

It's going to make more money with.

10 rooms.

That a lot of our galleries.

Because it's that good and so when you think about price elasticity.

You've got to think that all of these things that we're doing in all of these investments we're making.

That.

Will.

Render.

The RH brand more valuable.

Will.

Render our product more valuable and more desirable.

And yes, we think we're on a path in our industry.

That's not too dissimilar to the.

The path of Apple the path of Nike.

Path of Tesla the path to people, who really really built.

The best brands.

They're kind of in their industries and they became the best brands in the world.

So.

And that gives you a lot of pricing power everybody thought the Apple phone was really expensive at $400 when that.

Raise your flip phone was 69.

Yeah.

Fueled by the new Apple phones today, and it could cost you 200 or more.

Who would have thought people, we spent $200 per phone.

Who would have ever thought people will spend $20000 on a FERC back or more.

That's all about got assumption, yes.

Yes.

So we're just not anywhere near.

The top of the mountain and when you get to the top of the mountain you have even more pricing elasticity.

Thank you.

Our next question comes from the line of Brad Thomas with Keybanc Capital. Your line is open.

Hi, good evening, great results and.

I would add that the new Jacksonville store looks really nice having had a chance to visit that.

My question was just going to be about some of the changes here and the leadership team and Gary If you could address the monte's retirement from our age and how the team is evolving after that.

Sure well look the P&I worked together for 26 years, I remember GP and I were together at Williams Sonoma.

And.

So.

Look he will remain.

One of the most important figures in this company. His quote will remain in my presentation, when I talk about our values.

The right people are our greatest asset and the wrong people are greatest liability.

And he has built an incredible team.

If you look at three of the people at the table here with me today that have stepped up.

Monty.

Works through his transition.

At the end of the year, but.

Stefan Dubin.

As.

Our new <unk>.

<unk> Gallery officer, and really Chief customer officer anything that's customer facing reports to Stephanie.

21 years now.

Today, Oh my God.

Timing is great Brad.

That is right here today, we're all in Paris today, its 20 <unk> anniversary Stefan started as a part time Christmas seasonal in our thousand Oaks store and.

He has worked his way.

He has been the key.

Close to the customer as any of us.

More closer to the customer than any of us which makes it the smartest guy in the room, we always like to say that those of us who've gotten.

And farther away from the customer generally get dumber, and dumber and the only way we could.

Not be obsolete is to listen and learn to those people that are closer to the customer with smart people in the company that is closest to the customer and steps been one of the <unk>.

These people are customers run some of our most important galleries and then took over home delivery brand home delivery. He help gift Fernando on the team, which kind of changed everything.

They are huge advocates.

Of each other.

And.

Steph was our chief galleries officer under GP.

And Steph as Scott.

His own unique vision for where this should go in.

As you should.

Yes, I think so.

Make a big difference so he's not taking over as a caretaker he has taken over as a visionary and a leader.

Take things to a whole new level and SDP would expected him right.

And Fernando who is sitting right next to them.

Okay.

Hit here.

You guys have heard Fernando story came to America with $5 in his pocket and after the passing of his father, who came from Colombia.

As a landscaper worked as a night janitor K Martin.

Figured out how to.

Hi.

They have enough money to buy a delivery truck and started delivering furniture and then went on to build is named Fernando Garcia and he went on to build Fgo logistics, which was our number one provider he had.

<unk> hundred 50 trucks across 26 states.

And Fernando joined our company sold <unk> logistics.

I'm, a wealthy guy doing that will become even more wealthy painted our H, but it's not really about the money for any of us that are here it's really.

The work and about making a difference in the world.

Hi.

But.

Again he has he is.

Thus far has been the greatest leader we've had in the supply chain.

And that because he has the most experience.

Is that mostly home delivery.

But he's the most resourceful.

Personally I have met.

And Stephan Sandy.

Stepped up.

Yes, Sam.

Sandy pilot.

As our.

Our chief people officer.

14 years with the company.

And it was one of our field leaders.

And then when it under DP and ran all that she has been our deeply the whole time ran all of our customer care centers.

Reached leads all of human resources.

And the people functions in the company.

Other force of nature and.

And another person like Stefan Fernando that has their own unique vision for where that function at ago.

Yes.

Our new team.

And yet a very experienced team.

Sandy 14 years here.

In our culture staffed 21 years here and our culture.

Yes, Fernando only what.

253 years, and our culture now.

Yeah, Yeah, and then 7%.

Our partner vendor.

Vendor, but part of our age with Fgo logistics, so he's really been here like almost 10 years.

And.

So, yes, we feel really great about the team and then.

Now we just have like.

Aerie, Jack and I have to keep up with these with these three.

We send our company you have to ask yourself are you.

Fox Arnox rate.

And ox.

Sure.

As usually a cart behind them with a bunch of rocks. They are dragging up the hill.

Fox has a bunch of rabbits that you're chasing.

These three are like rabbits.

They've got new ideas, they've got new.

Got a lot of energy they have their own visions, and they're making all of us step up our game.

Move faster things harder.

And try to remain.

Relevant leaders around.

Next to their passion and.

Drive and determination, so I'd say tomorrow.

<unk> has never been in a better place.

All of US love and respect the Pea.

<unk>.

And a partner for life, he will be available to us anytime we want.

And so.

But.

I.

Love and respect the fee and his family and.

And he is a man that has.

Given his life for his career.

It has had an incredible career and then.

Yeah.

For an area to the longest best partners I've ever had.

My working history.

They both played a big part in getting this brand to where it is today.

But in all things.

Everything evolves someday.

These guys will be running this without me.

Not anytime soon because based on my calendar. So it is not it.

A prelude to anything can happen, but.

Epic.

Don't think any of us can be more excited the team and distinguish that our first kickoff as his team, but small team were travelling together this week.

We were together last week in an off site.

We spent three days on our vision values beliefs and culture.

And we're very much in sync.

Sure.

And I think everybody on this team renders.

Every other member of this team more valuable.

Well that's great. Thank you thanks, Gerry congrats everyone and happy anniversary.

Great. Thank you.

Thank you.

Our next question comes from the line of Seth Sham with Wedbush. Your line is open.

Thanks, a lot and good evening I just wanted to circle back to the discussion before about the near term for starters, just making sure I understand some of the moving pieces.

Jack you said that the costs of initiatives will follow the revenues and just wondering if you meant the opposite that the costs will proceed the revenues.

Specialty based in the fourth quarter guidance. It implies that operating margins will increase on a two year basis at a much slower pace in the third quarter.

Well I am talking about.

Initiatives. So if you put.

If you open a store you.

Recognize the rent expense for example of that store, let's say, it's an international one.

When you open.

Again costs beforehand.

Tesla.

Many of the costs are capitalized.

So.

As it relates to Q4, though.

I think one of things to keep in mind. If you just look at sequentially, what we have in the quarter.

As a just a sheer revenue dollars right. This is a lower revenue dollar amount.

In Q3, it's one of the dynamics impacting.

Operating income.

And again.

There's going to be some quarterly variability here and there I think just focus on.

The year trends long term trends in our outlook and where we're going.

I think if theres, a little bit of noise here and there.

Just going to be some timing differences here and there.

Anything to read into that.

Got it okay, and just a follow up obviously, you're not giving guidance for 2022, but thinking about some of the additional costs are shifting from 2021 to 'twenty two like the source books now you're restarting should we think about the revenues associated with.

The source books following the mailings such that there could be some cost pressure in the first half of the year.

Yes, I mean, that's how it works when we mailed the books.

Recognize the initial advocacy advertising cost and then you generate demand following that.

Again, that's just.

Order to quarter timing again for the year, we're launching as Gary said in the spring.

And the early summer so I think as it relates to that investment for contemporary frontier for water.

Yeah.

Yes.

You won't get a 100% return on that investment in the first 12 months like we really think about our source books like a 12 month investment rate will will nail it and then will mail. It again in 12 months some years, we mail a second book.

I think this Europe, probably mail, one because we haven't nailed and so on.

But it's generally in the past we would have amortized the books over the life of the book called these books 12 month's books, because we are going to launch them.

Kind of early spring late spring early summer.

You won't you won't get really any revenues and in.

In the first quarter and Youll get some revenues in the second quarter, but youll take all the cost in the first half. So yes, so that will be a deleverage.

And then.

Revenues should start to ramp in.

And three and four.

And then you'll get you'll get leverage in the first two quarters and the following year right.

Alright catch youll have it wrapping around and helps you also have to think about our business.

Timing of demand and then you have timing of revenues, which will lag demand because we've got a high special order business and you've got to deliver this stuff in the customer's home.

Yes, I mean, those are just kind of fundamental timing things in the business again or not.

T J so.

The worst thing than any company could do.

The home industry coming.

Out of this pandemic.

Cycling things starting to invest again.

Even think about this <expletive>.

Because you will start making short term decisions and screw up your long term strategy.

So like.

I am not going to sit here and worry about the fact that add cost is going to be massively levered in Q1 Q2.

Mostly Q2, depending on when the books get in.

And all of a sudden try to stagger mailings or do some weird thing like that.

We want to create demand as fast as we can and as much as we can and.

We shouldnt be sitting here going Oh lips.

Let's wait three more weeks and mailed the book.

The beginning of this quarter or something like that that's just.

Stuff right.

And even Elon Musk has come clean on he wrote a letter I guess.

People picked it up and produce to say, we're no longer going to try to jam. All these deliveries at the end of a quarter and create cost that you would never have.

Kind of pack.

Hack in deliveries at the end of the quarter and just pull revenue forward and do it at incremental costs. So we've got a really clean model. We don't do stupid things again, we invest with a long term view.

We're not a quarter to quarter business.

Completely understand and then bigger picture Gary obviously, there are a lot of demand tailwind right now, but there also has been some stock market volatility recently do you see that at all being a demand risk or interest rates increase as potentially being a demand risk into 2022.

I think it all depends again, what the fed does and how this whole thing gets managed globally.

<unk>.

Stock market volatility to the downside is.

Never been good for our business at the high end is not really good for luxury it's not good for.

Big ticket.

So it is what it is I don't know how to control that.

And interest rates rising.

Generally.

And slowdown housing and other parts of the economy, that's never really a good thing.

Right.

I believe that's with past.

Past history would say, so I'm not telling anybody anything they don't already know.

I think what really does happen to interest rates as the fed.

Correct that this is transitional.

No.

Inflation.

Is it going to go back down.

Fly chain issues go away.

It will happen.

I don't know.

Everybody's everybody's got their own guess.

We just try to build models and.

Kind of a series of plans to say if this happens what's our move if that happens what's our move that happens, what's our move and.

And.

One of our scenarios will kind of unveil itself. So we've got a plan for all the scenarios. We just don't have a control on.

And those kind of macro things that happened, we just have to be prepared for whatever happens in and be able to optimize and outperform.

Other people doing what they were doing take market share.

Grow and.

Keep investing in the brand and build a better brand long term and.

There's going to be.

Tailwind or is going to be headwinds.

Just like.

No.

There's going to be rainy days, and theres going to be sunny days like none of us have control over that.

But we can decide what to do on those days.

Of course, thank you very much and happy holidays.

Happy holidays.

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

Oh, Hi, good evening. Thank you for taking my question.

I wanted to ask about marketing on the letter you commented about the national advertising campaign, which I think is the first time I heard you comment on that maybe any thoughts around that and marketing in general if you have a lot of innovation next year. How are you telling your customers about about dose.

Yeah.

<unk> seen us in the past when we do major launches, we usually do.

Some kind of a print campaign with.

The kind of shelter magazines, because thats kind of fishing, where the fish are most people who are.

Designing a homebuilding at home.

Separating our home furnishing home.

Our looking at magazines or whether it's a printed one whether it's a digital one and so on and so forth. So we will have.

Some level of investment in.

And that kind of marketing.

Print digital.

And things like that that tell people about contemporary.

Because it's really new.

So we want the world to know about it and so our best work, So we'll stretch that out and make sure as many people.

No about it relevant people they know about it so we don't.

As soon as people ask me why don't you advertise and Vanity fair.

While the cost two or three times more than a shelter magazines and.

It's.

People that are.

Remodeling or building, new home or designing those arent necessarily reading Vanity fair.

For that reason we've got to.

Ill defined market so.

Like I say, we like to fish, where the fish are.

Almost everybody I know this doing anything in their homes.

We're looking I mean now theres more resources. There is interest there is other things that people are looking for but but still.

Everybody and it was doing at home redesigning the home, they're looking at the magazines, whether it's in digital format.

Print format.

They are still tearing things out or any things under pinterest boards baseline.

Yes.

On what they see what they think the trends are so.

And just as much so.

Based on what our <unk> is presenting in the source books or online or in our galleries.

Or just try to kind of.

Make sure Ed.

Everybody who's somewhat interested in.

In the home and is investing in the home we have.

Our net debt.

Let them note you should really see this before you buy anything.

No understood that totally makes sense and my follow up question is on the.

On the inventory.

It's sort of like I guess, it's slightly down from the second quarter, but can you comment on how much of that you actually have on hand.

In transit in the water that Youll get later on.

Yes, good question, Jack will answer that before it.

So we have as you know.

We ended the quarter with $634 million and $427 million of that is owned inventory on hand.

Some of you had the percentages.

Into your percentage of one of the range to look at this because obviously the comparability versus 2020.

It gets a little skewed here and there the way we look at it is on a two year basis I think if you look at Q3, our revenue was up 49% a two year basis and our owned inventory was up 27% onto your basis, so still showing that we're behind from.

Relative to growth of the business.

Thank you.

Thank you.

I'm showing no further questions in the queue I would now like to turn the call back over to Mr. Gary Friedman, Chairman and CEO for closing remarks.

Great well. Thank you everyone for your interest and for your questions.

I'd also like to just really wish everyone a happy holiday hopefully.

Everyone's going to get to spend spend time.

Doing what they love with people that they love.

And hopefully without mass or omnicom.

<unk> said, it right, but but.

We wish everyone, a happy holiday and just want to thank our team.

Yes.

Not just across the United States, but around the world that supports our business.

All you are really efforts to help position our age as the brand. It is today and we look forward to.

Great fourth quarter, and an exciting 2022.

Thank you.

Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

[music].

[music].

[music].