Q2 2022 RH Earnings Call

[music].

Hello, My name is Lisa and I will be your conference operator today.

At this time I would like to welcome everyone to the restoration hardware second quarter 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question Press Star one again.

Thank you I would now like to turn the call over to MS. Allison Malkin of ICR. Please go ahead.

Thank you good afternoon, everyone. Thank you for joining us for our second quarter 2022 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 state.

That's a great booking 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.

Detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our opinions only as the date of this call and we undertake no obligation to revise or publicly release the results.

Revisions 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 non-GAAP financial measures.

A reconciliation of these non-GAAP to GAAP measures in todays financial results press release.

Live broadcast of this call is also available on the Investor Relations section of our website at IR Dot dot com with that I'll turn the call over to Gary Great Hi, everyone.

Our lives from RH New York.

Each guest house in New York.

For those of you in town.

Tim by.

Over the next few days it comes a high will be I'll be here through next week.

It is a place you should you should come by AMC and.

And we have the best breakfast by the way in New York City.

Anybody looking pretty good place for breakfast lunch or dinner, particularly usually can't find good breakfast understand at least that's what I believe.

I'm going to start with a letter as I always do to our people partners and shareholders. We are pleased to report better than expected results as revenue increased $992 million versus $989 million, a year ago and up 40% on a two year basis from revenues of $709 million results exceeded our revised guidance due to fast.

Your backlog release, despite the deteriorating macro environment.

Margin expanded 350 basis points in the second quarter, primarily due to increased an increase in product margins as we continue to resist promoting the business as demand trends continue to slow.

As we've mentioned there continues to be widespread discounting across our industry and while there may be short term risk of market share loss as a result of our choice not to promote we believe there are certain long term risk of brand erosion and Mark and model destruction. Once you begin down that path.

It's that discipline and long term thinking that has enabled us to set new standards for financial performance in the home furnishings industry and our results continue to reflect those of the leading luxury brands as we delivered 24, 7% operating adjusted operating margin in the second quarter also exceeding our outlook.

Our results are inclusive of investments related to the launch of RH contemporary the openings of our eight San Francisco and are each guest house.

The development of our H international and the rollout of our <unk> in your home, which led to approximately 400 530 basis points of SG&A deleverage in the quarter.

Our business generated $23 million of free cash flow in Q2.

In the quarter with $2 1 billion of cash in our balance sheet total net debt of $446 million and trailing 12 months adjusted EBITDA of $1 1 billion.

We purchased 1 million shares of our common stock in the second quarter at an average price per share of approximately $255.

We also spent $82 million in cash to repurchase $18 million and $39 million of the 2023 and 2024 outstanding convertible notes in privately negotiated transactions. Following these transactions there remains $44 million of convertible notes outstanding as of July 32022.

Let me move to our fiscal 2022 outlook as noted in our updated outlook provided on June 29, 2022, our expectation is for continued softening in our business trends during the remainder of fiscal 2022 as a result of ongoing weakness in the housing market over the next several quarters and possibly.

Longer due to the federal reserve's anticipated interest rate increases and the cycling of record Toby driven sales levels in 2021.

Additionally, due to the construction and approval delays.

We are pushing the opening of <unk>, England to the spring of 2023, while disappointed to Miss the peak summer summer fall season, and the English countryside, we believe waiting until we can open with a full expression of our brand is the right long term decision.

Additionally, Orange Palo Alto, which we plan to open in the fourth quarter of 2022 is shifting to the first quarter of 2023.

Based on our current trends the uncertain macro environment and the shift of our H, England to spring of 2023, we are providing the following outlook for the third quarter and fiscal 2022.

Third quarter net revenue in the range of down 15 to down 18 with adjusted operating margin in the range of 18, 5% to 19%.

This will 2022 net revenue growth in the range of down three 5% to down five 5% with adjusted operating margin in the range of 21% to 21, 5%.

While we expect the next several quarters to pose a short term challenge as we cycle the extraordinary growth from the Covid, driven spending shifts and shed less valuable market share as we continue to as we continue to raise our quality and navigate through the multiple macro headwinds. We believe our long term investments will enable us to continue driving long term industry leading.

Performance.

2022, the year of the new.

As we've mentioned while many of our plans have been delayed by the virus. They were not disrupted but we continue to believe the important investments and interactions. We are making in 2022 will mark the beginning of the next chapter of long term growth and innovation for the RH brand 2022, as the year of the new includes EMEA opening of our San.

Francisco The gallery at the historic Bethlehem Steel building, our most extraordinary new bespoke gallery to date.

The launch of RH contemporary the most compelling and potentially disruptive product introduction in our history Alright temporary has been recently expanded to RH, New York and the initial results look promising we plan to expand our edge contemporary into more galleries.

Inventory levels improved in the first half of 2023.

The elevation of our agent carriers in RH, modern inclusive of new collections and enhanced quality.

The September 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.

We believe that we began accepting inquiries for stay at it.

<unk> guesthouse yesterday as our website RH guest house Dot Com went live in the dining room that are each guest house in New York, Our new life by a restaurant is now open for breakfast lunch and dinner, we plan to unveil the Champagne and caviar bar at the artist guest House in New York next week.

The introduction of an elevated new light fire restaurant at our eight San Francisco and the.

Guest House in New York since opening our new led by our concept.

In San Francisco significantly outperforming our original gallery restaurants, and we are now planning to expand the concept to our new bespoke galleries in North America and Europe .

With the September debut of our first Champagne and caviar concept in the RH guest House in New York, We now plan to expand this offering to future galleries in Paris, London, Milan and Aspen.

We will have more more to report an exciting new concept by next quarter.

The premiere of the world of our age our new digital portal highlighting the connected power of our evolving ecosystem, which we believe will begin to properly shape and position the brand in the minds of our mindset of our website visitors, especially as we launched the brand globally.

The lift off of our H, one and our HQ, our customized Gulfstream <unk> hundred 50, <unk> hundred 50 jet.

That will be available for charter later this year, the christening of our <unk> III, our luxury yacht that is available for charter in the Mediterranean Caribbean, where the wealthy and affluent visiting vacation the rollout of our 18 year home a unique and memorable experience with brand ambassadors guiding every every detail.

<unk> of the delivery and extending the selling experience into the home.

Let me move to our business.

Business vision and ecosystem.

Our long view.

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

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

Our goal is to position our HSE arbiter taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world.

Our brand attracts the leading designers artisans and manufacturers scaling and rendering their work more valuable across our integrated platform and.

Enabling <unk> to curate the most compelling collection of luxury home products on Atlanta.

Our efforts to elevate and expand our collection will continue with the introductions of RH contemporary art Defeature RH bespoke RH color RH antiques and artifacts alright utility and.

In other new collection scheduled to launch over the next decade.

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

Our products are elevated and 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 expand 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 RH, yountville and integration of food wine art and design in the Napa Valley, our H, one and our HQ, our private jets, and our <unk> III or luxury yacht that is 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, while adding new revenue streams, and disrupting and redefining multiple industries.

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

Beyond the 170 billion home furnishings market into the $1 seven trillion in North American housing market with the launch of our each residences fully furnished luxury homes condominiums and apartments with integrated services that deliver taste and time value to discerning time starved customers.

The entirety of our strategy comes to life digitally with 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 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 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.

Our ecosystem of products places services and spaces inspires customers to Dream design Dine traveled and lived in a world thoughtfully curated by our H, creating an emotional connection unlike any other brand in the world.

<unk> can be elusive and we believe no one is better positioned in RH to create an ecosystem that makes tastes inclusive.

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

Climbing the luxury mountain and building a brand with no peer.

Every luxury brand from Chanel T Cartier Louie Louie Baton to Laura piano, Harry Winston to Amaze was born at the top of the luxury mountain.

Never before has a brand attempted to make the climb to the top.

Nor do the other brands wants you to we are not from their neighborhood you are invited to their parties.

We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable as Rick.

We're acquiring those at the top of the mountain to tip their hat and respect.

We also appreciate that this climate is not for the faint heart and.

And as we continue our ascent VR it gets thin and the August become slim we.

We believe the level of work we entered we've introduced this year inclusive of RH Contemporary art San Francisco, our H, one two and three plus the opening of the RH guest House, New York begins to demonstrate the imagination determination creativity encourage of this team and our relentless pursuit of the pursuit of our dreams.

20 years ago, we began this journey with the vision of transforming nearly bankrupt business with a $20 million market cap in a box to box in a laundry detergent on recover of the catalog into the leading luxury home brand in the world.

The lessons and learnings the passion and persistence the courage required in the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strength that builds character in individuals' informs cultures and organizations lessons that can't be learned in the classroom or by managing our business.

Lessons that must be earned by building one.

Or by reaching the top of the mountain.

Onward, TMR H <unk>.

We will now open the call to questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

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

I guess good evening good afternoon right.

Hey, Gary just wanted to start really what your high level thoughts around the value as you perceive it of the real estate pipeline.

Given given the delays today.

So really you can you can you talk through the anticipated 2023, 2024 opening cadence I mean can you speak about any of the projects and a little more detail.

Any sort of.

A timeframe on when we should expect you to get back to a more normalized opening cadence.

Yes.

I don't know whats going to be exactly normal based on the kind of projects and experiences that we're building.

I mean I know.

You want more normal.

But we don't build normal alright, so yeah, we don't really rollout at 10 or 20000 square foot store that you can open an a mall we don't know.

In a windowless stores that have maybe a glass storefront in a shopping center that you can stamp out every one of our projects is a development project.

Complex and it's.

Yes hard to do and it's hard to get approved.

They take longer.

And it takes more human capital in more financial capital.

Yes, more imagination more determination and Thats why.

There is so much more valuable than other things now and.

That others might build and they might be able to be more consistent.

We rarely build many storms that are exactly alike.

It's funny, we use of the word prototype here on and off for a little while in the last few years I believe.

Take that out of our vocabulary because honestly.

Every retailer I know that developed a prototype of <unk> starts to roll it out wakes up about five years later with a bunch of old stores.

And in today's World, where things are.

Things are evolving so much faster information flowing so much faster the world so much more visual based on <unk>.

Social media platforms.

Hi.

Ed.

Yes.

Movement of images and photography across the world instantaneously.

Yes, Thanks Ed.

Having a prototype and trying to be more predictable.

This is a dangerous strategy is we're in a world that innovation is not only speed up and I think duplication.

It's going to be something that puts brands at risk.

So.

I just don't know if thats necessarily our goal Steve our goal is to do really extraordinary and remarkable work and what we've learned it came to the center of innovation and walked through the portal.

A new sign above and it says RH the home of the extraordinary the remarkable and the amazing and what we've learned in our journey is that when we do extraordinary remarkable work we've always.

Figured out how to monetize it.

And we've kind of hard to monetize ordinary and unremarkable and I think that.

Yes, you can just look at our numbers and the math would tell you that if you will.

Look at our productivity per square foot versus anybody else's in our space. If you look at how much we do per store versus anybody else in our space.

Yes.

That's not.

Not.

It's a reflective.

The effort and the amount of work and the amount of imagination, and determination and creativity and courage. It takes to do work that nobody has seen before if you want to have results.

<unk> never been achieved before.

You have to do things that have never been done before.

So I.

I appreciate your comment.

We sat here and said Hey, can we rush and get England open.

We could.

And it would be.

Probably extraordinary based on everybody else's standards.

Yes.

Great, Thanks, and I can't imagine that kind of work we're doing.

But I would see it would be less.

And then we can see in our imagination and.

And I think what I tell the team here.

Can't rush quality and.

You just can't Rush right now.

You tell me, how many times as Elon Musk then on time with the product launch.

I just thank God I didn't put the $250000 down on the roadster wet like five years ago six years ago.

Yes.

I think what we're trying to do.

We're trying to be the most admired brand in the world and we can we used to say one of the most and that we believe we can be the most admired brand in the world. We think we can do work that so extraordinary really inspires people across all industries and this just takes more time it takes more effort and.

And so I don't know, how you put invention and innovation on a time clock.

It reminds me of that.

A quote from.

Thomas Edison journalists was asking and Mr. Edison, you've tried and failed 10000 ways, making a light bulb. How do you feel and you said youre exactly wrong I've learned 10000 ways had not to make a light bulb and thats backup.

I think that journey of invention and innovation.

Is not a journey of duplication.

But the results are.

The journey of invention and innovation.

Yes.

Extraordinary and and drives the kind of results that I think.

Yes.

We've we've now been able to begin to show.

Yes, we have.

<unk> strategic difference between RH than anybody else and even though yes.

Some of the businesses people ask me about this one of that one and how do you feel are they taking your market share.

We have started this such a lower level.

If you look at antibody versus <unk> 19 to.

<unk> to 'twenty to take their estimates take our estimates.

They might've had a higher percentage increase.

But did they capture more dollars in us now.

Did they expand their operating margins further and Thats now.

Did they maybe it looked like they got more sales because they are picking up our crem says, we're shedding less valuable less valuable sales yeah. Yeah, I mean, there's going to be people that pick up are crumbs and theyre going to feel really good for a while until they wake up and realize they have an average business and an average brand.

It's just not.

What we're trying to do.

We're really trying to.

Build the most admired brand and business in the world.

And in sometimes.

We're going to open let me give you a little color in England are a chain Glenn is going to have six hospitality experiences.

Yes.

Three full restaurants.

Yes.

Three secondary.

Hospitality experience.

We have the Orion jewelry light fire restaurant, we have the Conservatory.

More casual American bistro kind of restaurant week.

We've got.

The low yet.

So we're going to call. It the Paris has the luxury of going back and forth with the beautiful kind of outdoor space, partially covered incredible views with wildfire pieces and.

Beautiful chart <unk>.

Other.

Other dishes that end.

And wine.

All.

Restaurant is quite frankly.

No one in retail has anything like.

And.

And every one of every one of them has a view.

Beautiful landscape than we've got on the property that the largest heard of white deer in all of Europe .

No.

And then we've got secondary hospitality experiences like the wine room, the tea room, we're going to serve high Tech service and I think in a way that contemporary way that people haven't seen the wine room would be seen.

The wine.

<unk> have impacting experience, we started to create in our San Francisco.

We're just.

The wind selection and duration of Upended RH, New York for dinner, I mean, you're just going to see a completely different wine list and a few <unk>.

Next week, when we open the Champagne and caviar bar I think you're going to see that the most unbelievable champagne and caviar bar in the world.

Right.

Just even in New York in the World.

And I think our restaurant growth and in New York.

I think it's one of the best restaurants in the world It really do and I think the food that good in the room.

The RH guest House, New York is maybe the most beautiful room in the world.

Dining room in the world with probably the most beautiful exterior.

Paris ever built in New York.

It's the first elevated elevated outdoor sidewalk Paris.

New York ever approved.

And those things take longer.

You've got to get knocked down 10 times get up 11, you've got to keep going back can be nice turn smarter and nicer and smarter and in practice the art of wearing them down.

I do really extraordinary work so.

The things that are coming.

Like when you see the next iteration of our design galleries with the first one where will it.

It will be in Houston will be enables there'll be like the next version like we've already destroyed if you've seen RH Miranda <unk> seem like Thats why its not even a prototypes are debt whenever building. Another one unfortunately, Palo Alto was two foreign construction modify it but when you see like the next.

Generation design Gallery.

It's like a sculpsure I mean, it's like maybe one less beautiful buildings, you've ever seen and yes, and again, it's going to just communicate.

What this brand is capable of and where we're going and I think it will inspire others and create a movement around the brand and that's what you have to do it.

To try to make the climb we're trying to mix and.

Yes so.

Yes.

Hey look leaders have to make.

Leaders have to be comfortable making others uncomfortable so sometimes we're going to make you guys uncomfortable.

It's just not going to fit into the spreadsheet very well.

But what great invention and innovation as ever fit into a spreadsheet.

<unk> been able to forecast the greatest things that have happened in this world.

I appreciate that Gary.

Yes.

So anyway, sorry for that but I am pretty inspired do you get to come see the guesthouse.

Yes.

I was worried that.

I've always been a fan of the Almond resort.

I grew up by that grew up but that was really in the last 25 years I've traveled to a lot of them, that's where I learned a lot of architecture studied.

Countless almond resorts.

Specially the ones that did.

One of the great architects in the World.

I was really worried that Oh, my God what timing.

<unk> opening in New York because at the same time, we are opening.

I think we build we build something way better we stayed there few weeks ago.

This is significantly better and by the way that's why we price our starting room rates higher than the almond.

In New York.

And by the way we've already got what.

50 inquiries.

We have about 76 inquiries to stay here, Okay, and I mean, thats picking their room picking their dates and knowing how much it costs with guest room, starting at 3500 Tonight and guess fleets starting at 7500 Tonight.

<unk> starting at 3400.

App.

With that.

Oh by the way that's right, Larry Sandy and we don't even have photos at the room on our website. We're the only ones that input photos because this is about privacy and security.

Yes private entrance.

Hi security entrance knowing Ken.

No one is going to get into here, but the people standing here.

And because we don't allow photos and we don't allow you to post on social media.

I mean, we didn't print photos of the rooms.

That's why the Wall Street Journal magazine.

This article and when I told our team.

Take photos of room nights.

We can't run the story I said thats okay.

Is this about privacy and they really wanted to photo of me somewhere in the gas assets that okay, I'll give him a photo.

So I sat in the bathtub price either picture.

But it has shown the whole room, we gave them a little peek and like how magnificent the bathroom chart here.

If you zoom in on a photo not only do you see this all vein matched Italian travertine slabs, which you'll never find anywhere you might you may find in a few of the best films in the World.

But tell me if you've ever seen a home or a commercial environment, if you zoom into the ceiling.

That not only has done a full travertine slab ceiling.

But had the crown moldings carved out of travertine and Italy.

Yes.

Yes, where we're going is just not.

It is not comparable.

Okay.

Thanks Darren.

Pipeline look it's going to be I'll tell you what will be normalized.

Great extraordinary remarkable work will be normal here.

Just a quick follow up it's been 18 months since the JV investment.

So I'm just curious if you could give some high level thoughts on how the partnership with Mark is going in.

If the if it's evolved at all.

Whether in liner.

Just as to how it is helping the process right through the whole real estate process.

Yes, this has really been.

Completely additive and.

And again, a whole another level of innovation, because I think our partners.

Incredibly creative.

<unk>.

Intelligent and resourceful and yet.

The ability to source real estate that we probably would have never found has been massively incremental.

Yes, we just got one of the.

The last palaces.

Palaces in Madrid.

Yes.

Newcrest and.

Sure.

And then when you see what we're doing in Indianapolis.

Next we have a 178 acre.

Our stake in.

Indianapolis next Butler University.

With this incredible home on a lake.

Behind this wall.

Do you think like what it is.

Back there in the Waltham It goes from minus right like Drexel and.

Yes.

Yes, I mean, I think we're good.

<unk> seen so many more creative things.

We just closed on.

I guess, we Havent announced that now I guess I can talk about that Russia, yes, yes.

Yeah, we haven't.

We.

We closed on 856 acres.

In the Napa Valley.

The most beautiful piece of property in olive Napa.

It was decided that historic soda Springs resort from the 18, hundreds still has the ruins and where we will build.

Our guest house and residences.

Winery, we have some of the best oil and all of the Napa Valley.

Organic farms will build an experience that the world's never seen.

We are close to closing.

That has been talked about.

I wish.

I can't talk about that yes, okay.

Like an incredible.

Incredible property somewhere in Europe that Youll hear about soon I cant talk about that one yet.

But yes, there's a lot of these things that we're doing with the JV. We're just seeing things that we've never seen before I mean different guesthouse opportunities.

And now I would just tell you like being here in this guest house. There is no way this thing isn't canopy incredible.

There is nothing like it in the world and the world needs Us I think.

They are just all the great hotel brands <unk>.

Marginalized ourselves because they all have this nobody has control you've got a developer controlling that development you guys Hotel flag is trying to design it you've got complex.

What theyre going to design, how much it's going to cost to build and so forth and so nobody is really doing.

Extraordinary work.

I actually think the App.

The same is it could define an entirely new market.

It doesn't exist.

So there's just a lot of stuff there.

We've got a lot of a lot more optionality is lot more opportunity.

Yeah.

Hi.

And yes.

We continue.

Again strengthen our internal team.

More what I would call more typical deals.

But.

The joint venture platform is going to continue.

Allow us to do extraordinary things in a capital light way.

And and give us.

Control, our destiny more and actually.

Extract value for the value we've created for the developer so.

In a low capital way.

Yes, it will have real estate value that will monetize now and then we may refinance properties pull capital out.

And I think because we're building such a neat neat things in.

We're not we're not building like strip center.

Retail stuff. These are really bespoke properties and I think it's our brand.

Continues to do well and at our level of performance that makes the real estate, even more valuable. So there's just a lot of optionality that we're going to have long term a lot of flexibility, but the most important thing is just the creativity and deal sourcing.

Yes, I really think.

Yes March organization that has this.

Rapidly creative and resourceful.

And then just funded work with because they are also highly creative.

So lots of good stuff.

Thank you.

Your next question comes from the line of Matt <unk> with Cowen <unk> Company.

Okay.

Great. Thanks, a lot guys. So first can you provide just any more color on contemporary demand in New York and San Francisco.

Any early reads or anything to call out and then with the supply chain pressure easing is there any opportunity to get it into maybe some more of your galleries faster and I think the timeline is actually been pushed out a little bit from what you noted last quarter and then I guess given all of this is <unk> 23, a year, maybe even <unk> of 'twenty three.

The first few quarters, where contemporary and it's going to have a meaningful impact to your top line.

Yes, sure well, one we're really happy with how contemporary performing.

In San Francisco and in New York.

Yes.

San Francisco, we've been really really pleased in New York, It actually meaningful meaningful meaningfully changed.

The direction of the business and.

So that one was a little bit easier to measure right because in San Francisco went through this little tiny store.

Our big stores the restaurant in New York.

Got kind of an apples to apples comparison in new York's not completely don't technically set up when it will be all of them probably another month or so few weeks. We're redoing every floor of New York and <unk> and by the way at the end of the year in January we might redo the restaurants to just freshen it up.

And kind of the whole.

New aesthetic and color palette.

Yes, so to keep keep that restaurant.

Really relevant and exciting.

<unk>.

So.

And then as it relates to.

Supply chain ramping because these are all new goods.

Just can't ramp too fast.

But.

The big headline is you know.

Good dinner when our product is in our retail stores themselves.

And a significantly higher than.

And then it does one is only online.

In a sports book, so that's the big opportunity.

The great thing is right now we're getting some early reads.

What are the best sellers what things are.

What categories.

The aesthetics and finishes and things like that.

Our clients responding to it.

What are our design team is excited about what do they expect an order external interior designers excited about inspecting and and then how are we adjusting our on orders.

But present those things in our galleries and expand Dimensionalize.

Yes, those ideas further throughout the collection so.

Lots of exciting things happening if you've been into RH New York.

Okay.

We kind of got it in here a few weeks ago. The team has been in here. This past week really kind of polishing it up and making it look look great.

I was just saying a couple of days ago.

And I think at.

The gallery looks significantly different we painted the walls on floor one.

To kind of.

Buffy white kind of like that are each San Francisco, just a better candidates for this new collection versus.

Thanks.

We're going to redo.

We're going to redo every floor and so that will take us through the course is probably couple of months now close off sections repaint re merchandize.

And then we will.

Yes plan, a complete transformation across all the galleries and the great news is that not rushing this as when we.

Make the changes across all the galleries they'll be really intelligent.

Yes decisions based on real data.

So when when you have a launch this big and this much newness all at one time.

Yes.

We plan, we have is going to be some degree of wrong right.

The question is are Directionally, right and strategically right and we are and now it's just.

Yes, fine tuning and getting the data.

In the <unk>.

Manufacturing in the on orders Dimensionalize the big ideas.

And directions.

And then optimizing the opportunity some time it has taken a first half next year and depending on how big.

How big we decided to go on the transformation of the galleries.

Painting, the insides are we doing more than that.

So we will keep you posted but we're really excited.

Yes.

I've never been more excited.

So funny because were yes.

People keep saying that are we going to be <unk>. We're in a recession anybody thinks we're not in a recession as Tracy housing market centers.

And it's just getting started so it's probably going to be a difficult.

12 months to 18 months in our industry.

But these are the times, where you can really capitalize.

What I love is the.

Big moves we've made are all directionally right strategically right, whether it's contemporary whether it's what we have in the pipeline that we're working on whether it's the investments of our age and your home whether it's fee.

Yes.

What we're doing in Europe , which I think has demonstrated extraordinary just download the guest house all of these things that are like.

Yes.

Kind of vector moves that really put us on a different long term trajectory.

<unk>.

And and there'll be more opportunities over the next I think 12 to 18 months is as.

As we write out.

Can it be I think.

I think it's going to be a more difficult time than less difficult time, and thats and thats versus how I felt a quarter or two ago I think things in the world just yet.

I think I think the fed finally really understands what they have to do.

And yes, it's not going to be pretty when interest rates go up the way. They are we can all look at history.

Okay.

Repaired for times like this are you prepared to capitalize on times like this and I think we've put ourselves in a position.

Play offense, when possibly everybody's playing defense and was funny.

Yes.

You are in Covid, we didn't really play.

Play offense from a small rock point of view.

Competitors ran around and try to collect all the little rocks.

Well, what I would call the Apple captures rate like like the the apples are falling from the tree picking them up from the groundwork well everybody is.

Like running around trying to pick up the apples on the ground.

Yes.

We figured out how to.

Yes.

Built.

And Apple harvest in company, if you will.

Yes.

Yes, it's just a different game we're playing.

Yes.

Well I think we just feel really good right now and we feel.

Really clear really passionate, but theres a level of kind of calmness.

We've been through storms before.

Been through recessions before.

We've been through the great recession before.

Yes, we know what to do we know how to play this game and we think there is a lot of other people are going to stumble and fall. They are not going now to slide newly public companies that are there.

We're going to have.

<unk> pressure field of Wall Street pressure to grow and they're going to do so right at the wrong time with the wrong balance sheet and.

Yes, I like I like where we are I mean look what happened.

Whatever the way fair what this morning, Greg during our convertible notes.

$40 a share.

Our stock was three.

$300 a share.

We're almost a year.

But.

Airplane a small gain.

We pay attention.

Anytime youre going to do convertible note raised is when you could've done centered at $300 and hedged up a 100% to $600 or paid zero coupon.

There is no generic coupons today.

And June convertible notes of $47 a share.

I mean yesterday.

If they make it through the next.

This difficult time.

I mean, the metric the amount of massive dilution if the companies as well this is going to be incredible from that.

Yes, I just look at the like how.

How people are playing the game what people are doing what's like yes.

I like where we're at I like the path, we're honored by like the.

The strategy we're pursuing.

Yes, I think we're going to have a lot of fun and looked at it.

Paolo said, we're going to have some pain.

It only hurts if youre not prepared.

Got it that's that's very helpful. And then just going back to <unk> quickly.

How much of that top line was supported by working through the backlog and then just where does it stand today and how long do you think it will take you to get back to a more normalized level. Thanks a lot.

Hey, Matt it's Jack.

Obviously, when we believe it backlog. We're generally also building at the same time.

But I would say if you think about even just the revenue beat versus our expectations as Gerry noted that was backlog release.

I think through the first half of the year, we're call it probably 50% to $75 million through it.

So relative to the $200 million originally noted at the beginning of the year, we still have that work left ahead of us.

And.

While supply chain constraints and other things are easing.

There is still not back to <unk>.

There is a level of normal if we all believe 2019 pre pandemic normal there is still not there and there is still.

A number of factors that are that are continuing to have that backlog.

So we will see I think there's a chance to get through it by the end of the year, but if not we'll just.

We'll just we'll just continue to chip out at some point will normalize, especially with the.

Canonic environment, the shape that it Tim.

Got it thanks, a lot guys.

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

Good afternoon.

Afternoon, everybody.

Gary highlighted stay on the topic of.

And how the brand is shifting.

Okay.

The DNA of the brand is actually the piece of it is shifting and I'm. Just wondering if that's the right way to think about it is the company still rooted in sounded the foundation being home furnishings, it seems like future capex or hotels and real estate property in the physical assets.

And while yes, youre still opening the stores, they're more experiential. So I'm just wondering how you think about the DNA of the company and then Jack just really quickly.

Next year as we think about $1 23, SG&A dollar growth because a couple of the Palo Alto in England opening then how should we think about that dollar growth. Thank you.

Sure well, let me take the first part Adrian.

I would just tell you if you have our shareholder letter in front of you.

And if you just go to the RH business vision and ecosystem the long view.

If you read it carefully.

What it will mean.

Communicate is that everything that we're doing.

<unk> is designed to.

Elevate and render the core business more valuable everything.

Everything we're doing.

And if you just read it really carefully you'll you'll pick up everything here.

Our products are elevated and rendered more valuable by our architectural inspiring galleries, which are further elevated and render more valuable by our interior design services and seamlessly integrated hospitality experience right. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries that are each guest houses.

Our goal is to grab new market is all designed to elevate and render the core business more valuable. If you go to architecture interior design and landscape architecture, all designed to elevate and render the RH brand more valuable.

Doing homes that are fully furnished.

Yes.

All designed to elevate and rendered.

The core brand more valuable.

So.

It.

It's just a different way to communicate that build the brand than anybody else has done.

That's okay, I mean, Elon musk has taken a completely different approach uses Twitter <unk>.

<unk> doesn't add.

Sure I'll take this.

Yes.

We believe what we're doing.

Is going to position our brand.

<unk> elevated render it more valuable.

And.

Yes that at all at all that's why we call it an ecosystem.

There is nothing here.

That is dilutive.

To the brand.

Right, it's just a different way to communicate.

Then.

Free shipping or labor day sale or.

Yes.

Financing sale are now paying.

Paying out buy now pay later all the different ways that people are communicating with their customers.

We're just communicating differently.

Yes, that's helpful.

And in Asia on the SG&A dollar growth look.

There's variable components and the other six components I think maybe you are asking sort of like what's the fixed investments that we're making.

Because clearly it will flex on the variable side as it has as our business has grown.

But.

We're making investments in international we're talking about that some of those are in the base this year.

We've got Preopening, that's something that we've called out San Francisco just us this year.

Those won't repeat obviously, there will be other elements of pre opening next year.

It's different every year, whether whether it's new leveler.

Higher or lower so we don't we haven't really guided to just kind of give you some perspective.

Some moving pieces, there and again there is going to be pieces that are variable pieces that are fixed but from an investment cycle and you kind of know what we're doing.

And Gary you called out in his letter to the pieces that that we're investing in this year and some of those again that are in the base will will cycle those.

There's more investments, we've made where we will be talking about that.

Okay. Thank you very much.

Best of luck.

Thank you.

Your next question comes from the line of Curtis Nagle with Bank of America.

Good afternoon. Thank you very much for taking it.

The question so.

The first one I wanted to go to was just coming back to contemporary.

Great to hear.

Promising start.

But just kind of thinking about this brand.

And a further outlook I think Eric you said.

This is potentially an extra $1 brand.

Presumably that still stands.

What do you think the timeline is in terms of how that ramps.

Just other brands rather than as a cannibalistic.

What level do you think it gets.

Step two okay mature level does it take two or three years.

How do we think about our broker ramp of that.

Brandon.

Yes, it will.

Think about about three years to ramp or so.

And we will keep.

We will keep expanding it and dimensionalize it the brand.

That.

That part of the business so.

And everything you do is somewhat cannibalistic, but hard to tell at this early stage.

What that looks like.

But some customers will just trade up but for the most part I think it's going to be more incremental than not and.

Yes.

It will open up more of a new market, especially at the high end of the.

Yes.

Hi.

At the high end work.

People have bigger homes more homes spend more on the home.

Open up the market to high end interior designers.

Even more so.

<unk>.

Okay.

Furniture, and our picture upholstery.

So.

Yes, I mean I think.

If we look at our the way we have.

And Capsulate ideas.

Allows us allows us ideas to breakthrough the market right and penetrate.

And as we've.

We've seen a known for things I mean.

And a lot of ways is just an expansion and evolution of the brand.

It's just we choose to do it our own way intend to.

And let us instead of like letting things kind of dribble out there and.

Get a lot of impact.

It didn't notice we tend to kind of pull back build an idea of build a big idea and then try to break through the clutter.

And then it can really move the needle.

Our each modern did the biggest the biggest debate inside our company in two.

2014 <unk> was.

Do we integrate RH modern and suggest integrate into that.

Alright.

I mean, our brand a core book or do we isolate it and we try to breakthrough and we went back and forth back and forth back and forth last minute. We said were an isolated.

We're just not known for modern and it will have a better chance to break through the clutter.

And so that's so yes, we do sometimes.

How we approach it.

Not really.

I don't know you can have so I think call it a brand issue.

It's a collection as an evolution of our business that will be we believe will be really incremental and will move us up and open up.

Yes.

Open up the market for us.

At a higher end sottile track.

More.

More valuable customers and.

But at the same time, there is some cannibalistic nature to it and at the same time, we're shedding business at the bottom right like letting go.

Things that that hold the brand back.

That might have once been important to the brand.

But now.

Our actually render the brand less valuable.

We're constantly having that discussion inside the company exists.

Is this additive, but it's a dilutive is it helpful. As it hurtful as it renders us more valuable as a lender it's less valuable.

And as Youre trying to craft.

A brand and a business model like.

Like we are.

All those discussions are really really important and as decisions are really really important.

And.

Yes.

Yes, so it's not like we also go a contemporary let's just do this start throwing goods out there we try to think really deeply about these ideas and we say we have to think until it hurts until we can see what other people can't see so we can do what others can't do.

And.

Yes.

Okay.

And our ideas generally are big ideas generally are strategically and Directionally right and then we get going and we get real data and then we.

Can.

Yes, we can evolve from there.

Yes.

Good morning.

Think thats Adrian.

So Curtis I'm, sorry, the service okay.

Anyway.

Yes that answers your question hopefully.

Its holistic.

For sure.

Well the brand all of that makes total sense.

Just wanted to ask a question on the buyback I think it is.

The first time, you've been in the market I think in my 12 quarters right.

Alright.

Kind of why now you've had cash on the books a lot of cash on the books for a while.

So, yes, I guess what triggered that.

What are you seeing the businesses that the valuation for the certainty and the water growth should we expect it to remain in the market.

Yes.

They're curious about that.

Yes.

We only have very small windows when we can be in the market right I think sometimes not everybody is aware of that we are generally how many weeks in the market it would be terrific.

Through the second week of its final months per quarter. So by the time, we announced five or six years, yes. We generally once we announced we had a five or six week open windows.

And so most of the quarter, we cant buy our stock.

Alright, so I think theres a lot of people agree different reports and people think like we're out there buying well we can't fight.

But it's generally but we're looking at multiple things we're looking at valuation we're looking at.

What the environment looks like where we think things are going to be.

Yes.

It's not like we have a lot of capital on our balance sheet right now that we've raised in.

And Theres a lot of Optionality, we have.

In a market like we're going into.

There may be businesses, we want to acquire Theres real estate, we may want to acquire theirs.

Other things that we may want to do when there are.

Our stock we may want to buy.

Don't know, maybe we want to buy stock with someone that we want to buy.

Bernardo notice.

Yes.

There is a lot of things you can do when you're in the patient position, we're in and <unk> got Optionality and got a really good business model that you can.

Capitalizing any kind of a market specially heading into a recession.

So.

And so we're just constantly looking at all of our options and saying, Okay based on what we know right now.

With our best use of capital, sometimes it's just yeah.

We want more data.

So we don't just mindlessly by I mean look what happened at bed Bath and beyond for God's sake.

$12 billion.

And their own stock back and we are there today.

I'm sure some of the people here that it was a good time.

Bye.

Probably we should add that $12 billion.

But.

Yes.

Good morning, My question, because you guys have been so thoughtful.

Where does disciplined right.

No.

First time in a while so I thought that was all.

Worth highlighting because you are.

Yes.

Disciplined cabot balance sheet so.

Yes, I just had a discussion point.

Yes, I mean, especially right now I don't know exactly.

As this is going to play out.

Yes, just like all the investors you interact with rate how are they deploying capital who are they buying based on what information is in the market and what's the right time to buy what and.

And look this is kind of like Optionality capital.

In times like this we're not.

It's not the most important thing we do.

Okay.

The most important thing we do is really all of the.

Big efforts here to build one.

Build the most admired brand in the world. So that's where most of our time.

And then.

Spent some time thinking about we're looking at data.

We have capital is at a good time to buy our stock based on the data and where we where we think things are going or is it better to hold often.

The get more clarity on what the market is going to look like.

How are what our business is going to look like in that market.

Is there other opportunities as they're busy.

Businesses that look like things that we want to strategically do.

Debt.

And we may be able to acquire at a fraction of the price and maybe get a.

Five year head start on something that if we were to try to do it internally.

Might go faster I mean, nothing net house just say this.

I wanted to talk about things like that and the process. Gary for you we've talked about like buying businesses that have become like a big strategy, that's not a big strategy.

There are things that we're working on and doing and Dave and things that we've articulated.

That we want to do that.

There are things that other people are doing and if you're doing a lot of time, maybe they just don't have the scale, we have or the platform, we have and the infrastructure, we have and they're too small of the business to be a good public business or you're going to get private business.

And yet maybe take business like that but in our platform and do.

We do much better.

And in long term it becomes a big opportunity for us.

Yes, we're just always looking at a lot of things in and we get people to bring US a lot of options and look at things and there are things we've been looking at for a long time.

Yes, we knew we wanted to.

Waterworks is part of the portfolio.

Yeah.

The whole 22 years I've been here.

It was finally right tightened about waterworks as little bit of a rocky start at the beginning.

But now waterworks is performing really well.

Record EBITDA really good models.

Yes, there's going to be bigger.

Bigger opportunity to synergize.

Waterworks is doing with our <unk> on our platform I think our brand is now starting to catch up with their brand in the branch and come into harmony and it'll be the right time to have a much bigger play.

And so you've discussed with all of those kind of things that <unk> really taken a long term view.

I mean, there may be a short.

Really good time to buy and but yes.

You tend to make more mistakes when you just buy things that price right.

That's why I kind of say the thing.

On bed bath and beyond or something.

Some of these didn't think deeply and after no the business deeply enough because I am sure in retrospect, they look back because that was the worst allocation at $12 billion.

Maybe one of the worst in history.

Companies that size and.

With so many thought that was a good idea and I would say probably just didn't think deeply enough. They didn't think about the risks they didn't think about other opportunities and know their business well enough.

And so we just.

Yes, we spent a lot of time thinking here a lot of time debating we try to get all the brains in the game and the egos out of the room.

We say none of us are smarter than all of us and that usually gets us too.

Better decisions and most people are making.

But.

Yes.

We are no rush.

And then I don't know like.

I mean, if we go into it.

But really bad recession at wherever they price our stock.

You tell me.

Probably lower than it is today.

Alright, thanks very much for that.

Your next question comes from the line of Simeon Gutman with Morgan Stanley .

Good afternoon guys.

A little bit of a near term questions. So pardon needs first when you lowered the guidance. It was June and it sounds like that might have been the low point for a lot of retail.

Realize you are catering to different clientele and customers in a different end market, but curious if anything picked up and then the more the bigger question is I guess, how much are you willing to sacrifice in terms of market share the down 15% to 18, I don't know if thats a representative run rate beyond but I guess when do you step in with price.

Is that a 'twenty three decision or it could be an end of 'twenty two decision.

Yes, like I think I said last time, it's not really a plan b as it relates to that I don't think we are.

And I need to do that I mean, it doesn't mean that we're not.

We're always going to be cycling through inventory right. There is always going to be.

Our level of inventory that we're cycling through the markets.

If the market gets really bad we.

We might cycle through the bottom part of our inventory more quickly.

And so we may.

Burned a couple of hundred basis points of margin to not lose market share, but we're not going to promote across the brand.

So I don't see that as needing to take place and I don't think.

Debt.

Other people are going to take that market share because they don't have our product and they don't have our.

<unk> and our experience and our brand right. So it's like.

Clive can say Oh. This is a competitor that competitor, but really go to their stores you can really think of as your competitor.

<unk>.

We do three times per square foot than they do.

They're not really a competitor.

<unk> per square foot.

Versus some of the next best players.

I don't mean arrogate at all dismissive, but.

Yes.

Yes.

The World, we just have to really fall apart.

Two.

Deviate at all.

So.

That happened.

Navy.

But there is I can't see anything in the future that would say Oh my God. This happened.

And thats been a for SaaS to screw up the model I just really darn.

We don't we don't sell any seasonal goods, we don't even sell Christmas stuff, we have no seasonal inventory if no summer inventory.

By no winter goods.

Nothing like that so we're very different than everybody else like.

Who else do you know in retail, but didn't have a labor day sale.

Only the luxury brands.

The Vcs mail labor day sale email.

You think if I would've mailed it labor day sale email, we might have done more business.

Here we were.

Right.

Somebody asked me the other day so.

Somebody said our house was on a call and they said they are taking market share from our H.

One is last time anybody checked our houses website.

The whole business is on sale.

The whole businesses 30, 25% to 35% off every item on the website.

Do you think thats sustainable.

Asked me about our house and two to three years.

Yes, yes.

Ed.

I was like Okay. Our house is 50.

50% revenue, but their operating margin is not going up.

I don't want to play that game.

If we hit the promotional button here.

Our sales would go up 50 comp easily.

Just not the game we're playing.

Yes so.

I don't know asks are amazed or ask.

Chanel or ask for Ari or ask everybody else escalator to grants, what theyre going to do.

We're going to do what theyre going to do.

Yes.

It's just the path we're on.

Yes.

As a quick follow up for international I forget was there anything embedded in sales guidance for contribution and how much I guess gets pushed if there was.

Fiscal 'twenty two yes.

You'll notice we took a took a bit out of revenue, but a point. So you can view that as a combination of international and Palo Alto coming out of the forecast essentially.

We took to answer myself high end of the operating margin by 50 basis points right that's right yes.

Yeah.

Okay. Good luck.

Thank you Tim.

Your next question comes from the line of Anthony <unk> with loop capital markets.

Thank you so much for taking my question and thanks for all the helpful. Information I guess my question was on RH guest house, which just sounds spectacular.

How do you think about the potential financial implications.

How do you how does that kind of work through the model I know, it's mainly about advertising for the RH brand, which makes perfect sense to me, but I was just wondering if how we should be thinking through the financial positions, particularly given those room rates. Thank you.

Okay check with us next quarter.

Let's see what the demand is like what the restaurant does I mean, San Francisco restaurant.

It's doing incredible and this is.

The same.

Thank God, we perhaps we decided to put it in San Francisco at the last minute.

Very fine tune, it, but I think our.

Our restaurant.

Restaurant guest house, if you combine it with the Champagne and Caviar bar, which is 32 seats kind of been a seller underground.

Between those two things I think it's going to definitely be by far the highest volume.

Just.

Food and beverage.

Kind of restaurant experience, we've ever done that needs to be significantly higher volume.

And.

And then just a different model right most hotels.

They are really good at rooms, and expected F&B and.

Yes, so their whole model is just a room model our model is slightly different model, where our street front F&B business we have.

100, I think we had 115 feet Street front here.

For our restaurants.

And again, we have a very discreet entrance private entrance to the guesthouse.

And so it's like a restaurant with sleeping rooms on top right.

Yes, good restaurant operator, we've got a good model youre already starting way ahead.

<unk>.

And then you've got the rooms, which.

He told me for so long.

You can't make money in a hotel at 100 without an under 100 rooms.

I'd say, we're not opening the hotel and we said what are you doing I would say a guest apps, let me say, what's that and trying to fit the market for privacy and luxury.

And then they say Oh I get it can be a showroom for your furniture and I'd say now why would we do that with a 90000 square foot showroom.

I think 47 steps away.

And I'd say the thing that usually twister head is at with that.

<unk> not going to have any of our furniture and then they go and they get the trials look like.

And so it's not about the furniture ella's.

Elevated.

By elevating our H.

Leader.

Pacemaker tastemaker in the world.

So it doesn't have any of our furniture here.

And.

So, but I think because it's so unique and.

So extraordinary that.

I don't know lets say.

Typical person is getting the highest the higher end hotels like the margin.

The Carlisle and other people starting run rate is probably worth.

13 to 1600 rooms, or 350 to 450 square feet.

And he has taken the teams joined Kelly one of the rooms like what do you see we looked at pictures of their rooms.

And so what we see painted sheet rock walls.

On a little piece of Crown molding, maybe if they have it.

See any down lights in the ceiling no not a download one of our sales.

Any updates anymore now nellix.

<unk>.

You sit if you want to have breakfast.

Let's look at that.

The vast and listen to this.

Yes, I think if you find it you still look at the best hotels in New York City.

And even the new yes.

Yes.

Joe and Theyre aspirate toward the room, probably give it to you.

And I think.

The sales engine and it's yes.

Not that quality level.

<unk> and <unk>.

Yes, I think we've just.

I have a level of design and quality of the world's never seen.

And I think we'll it will demand at a price.

No one has seen in New York.

A level of.

Exclusively scarcity.

Yes.

Kind of like a luxury brand.

Kind of like our Birkin bag so to speak.

Yes.

And yes, so I think in a quarter, we're going to probably have a good sense of okay. What are the restaurant revenues look like.

What are the.

Room rates look like I mean, the great thing in this business.

At most hotels to tell you that.

And you have 80% margin in the rooms.

Fully up 80% margin in the rooms the rooms are.

400 Bucks an ounce.

The arms 200 Bucks a night slot different through <unk> <unk>.

<unk> thousand 800 Bucks light it's different.

The rooms are starting at 3500.

And I.

You can imagine what the margin might be like in the Williams, yes, it might be.

97% margin, 98% margin because you are not particularly spending that much more.

For housekeeping and other things, we are making investments into security.

Safety and.

We've got.

Some of the best.

Security and safety experts.

Yes.

That protect the wealthiest people in the world.

<unk> designed our systems and security here. So this is going to be a very safe place for wealthy affluent people stay very private place.

And it varies a curious place.

We're just going to be able to we have something nobody else has.

With the room, we think will get and we do the hospitality and hospitality model works. The way, we think it's going to work.

You can make a lot of money.

And then if it does then we have another.

No.

Profitable.

And a communication device about who we are call. It market. If you want that we don't have a marketing department, we have a truth group. So we don't use the word marketing that much.

Yes.

Let's say, it's not we say, it's what we do the declines so we do great work like this and it makes money no different than our restaurants right.

Again, most people in retail have restaurant, they don't make any money lose money or our restaurants to make money to do.

$10 million.

An average restaurant today.

And so this becomes another.

Another way to speak to our.

<unk>, that's an accretive customer acquisition vehicle and it's not just unique to sit there and go where Gary we only have nine months in our residence.

That's true, but we ever restaurants, it's going to probably see 5% to 6000 people week.

And.

People, even if you havent stayed here, you're going to hear about it and youre going to understand the aesthetic and the attention to detail.

Just a thought leadership when youre in the restaurant are indeed, youll be blown away by the cap Champagne and caviar box and yes the conversation.

Create but then you kind of think about 40 million unique visitors, who go to our website that Mike.

Read about and look at.

Guesthouse.

And then that becomes maybe a $100 million of 100 million people globally.

Europe , yes.

No different than it's not about.

The six to 12 people that are going to charter or three a year.

50.

Two to 100 million people.

Yes, three to four years from now, but you can see it on the website same thing with <unk>.

And a handful of people that are going to reach out to us about designing their plan or combining of yet which we haven't.

We have decided to.

How many of those do we want to do.

So, but but with another great thing I think people may not realize is that a project like this desktop is what we learned by doing work like this how much better we are by solving the problems. We solved here how much higher our case level is.

And how much more we understand the high end of design because we've just done work nobody else has done.

I mean, we're so much better at our core business because of projects like this are so much better at our core business by designing the galleries that we desire.

And just doing the design work and putting ourselves in a position to really understand.

How you win at the highest end of the market.

It's an investment in the education of the leadership and team.

You might not get anywhere else or ever in your life.

Got it that's very helpful keep up the good work.

Thank you Anthony.

Your next question comes from the line of Stephen Mccall with Citi.

Good evening. This is advantaged share of loss on for Steve. Thanks, So much for taking our question how do we think about pricing in the back.

23, do you still see opportunity to take price increases, even though demand has weakened.

It was the first question sorry.

Cut out there for a second.

Thanks.

Sorry ballpark, how do we think about pricing in the back half and into 2022.

And I think we're always thinking about pricing what have you.

The inputs and outputs.

Yeah, I mean, you've got you've got freight rates kind of coming down.

And.

Yes, raw materials are stabilizing although everything is still high right. So freight rates are down, but they are still higher than they were historically.

Inputs are still high I'm going to start coming down, but most things are higher than we were historically.

So we're constantly thinking about it.

As we make decisions, we'll let we'll let you know where we want to say anything.

You might notice it and the pricing I think we've got way more flexibility than other people just because.

Yes, we have a higher average price point and.

Now people don't shop for a home furnishings and furniture everyday so.

Salaries are constantly looking at it you notice like though that went up.

3% or 5%.

So I think we've been able to demonstrate that.

<unk>.

Continue to.

Do what we need to do.

Have the kind of model, what we have said a lot.

So, yes, there'll be more I don't know Jack.

Look we continue to have.

Pricing power given the brand.

Yes.

Approach, our thoughts that way.

Then we're going to watch the supply chain constantly Gary you said I mean, the good news is are coming down so.

But honestly sale, but elevated or if they go back up or there's other cost pressures that clearly will we have price as a lever to us.

Retainer margin.

Half of the year.

Absolutely. Thanks, so much I also wanted to ask on operating margin in the past you've cited the 20 per song all plus portion of the business do you still see that as a floor at the macro picture continues.

And are there certain macro factors, you're monitoring that would put that 24 right.

Yes look I think when we talked about if revenues were down 20%, we believe that margin operating margin will be above 9%.

But yes at or above that's logistically.

In the in the way of a year plays out how we get to a 20% like you think about it you make that decision at that point you know the.

Revenue would be down 20.

But youre going to have things like we have preopening costs, you have other things that could impact the.

The earnings power of the business, let's say that revenues were down 20.

Absolutely.

I think thats the takeaway again is it plus or minus a little bit because one titles.

Youre doing some different things, yes, that's not the critical that's not critical message.

Great. Thanks, so much.

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

Good evening. Thanks, a lot for taking my question given the third quarter guidance should we think about demand comps trending down in the in the 20% range.

You ended last year with around 460000 members that should provide a good leading indicator on the trajectory of the business and the movement to higher price points, which may.

Give up a little bit resulting the lulu.

Market share loss, but.

Being able to capture more share per customer. So what is the recent trend of membership.

Thank you.

I think I would start with.

There is.

You got a couple of things going on and I think you have to really separate people that are in the home business or selling furniture from.

What else is happening, sometimes you'll say Oh <unk>.

People are.

And all are doing this to that COVID-19 hit different businesses very differently our business.

Went way up in Covid, what other People's business went down in Covid.

And now when some people are looking at coming up against lower numbers and they're catching back up in <unk>.

This is like ours that are going to get business back because COVID-19 was really a big pull forward.

And so.

It's like it's trending.

Trending down 20%.

What exactly.

We're up against I mean, if you adjust the redfin data from July .

I think it came out right.

Qunar July June for the FERC and the per square and the entire housing market I think was down 5% and the luxury home market was down 18 wireless the luxury home market, Danny and I would argue we're really the only one in the luxury home market. Some people again are trying to put other people in there because they are not.

Selling really low end goods, but theyre not at our level.

But the luxury home market was down 18.

And.

<unk>.

Why does it down 18 wells are down so much more because it was up against.

Up 80.

Up 80.

And why was the luxury home market up 80.

Because all the people that had the money to move during Covid move.

And allow the other people didn't have the money to move.

So.

Just take New York people move to the Hamptons they've moved to Miami. They moved the Palm Beach, they moved to ask spin they move too.

In April .

Move.

Almost everywhere, but in New York at one point in New York with a hotbed for Coke.

And all the people with money and wherewithal and the ability to move second homes or biotech numbers moved and it drew again drove second home prices and the Hamptons in Aspen All these other places through the roof.

Well a lot of those markets are coming down.

And.

When something goes up 80.

It doesn't.

Growth from there and it doesn't.

Stabilized share it goes down and so our customer.

Is the one that moved that was where all the activity was right and so.

Yes.

And it drove it drove a significant amount of business since at the high end, it's going to come down.

So Saturday illiquid threats and data come out again I think she is weak for some time behind the data.

We all know that the housing market that was down five or six in the first quarter was down 20.

Existing homes, which is 90% of the market right. So existing homes were down 20, well they were only down five existing went down 20.

And luxury.

<unk>, which is defined by the top 5% of the homes and every market.

Highest price cut 5% of uncertainty.

Market if that was already down 18, do you think it got better.

Do you think got worse.

My bet is it got worse.

And again I think.

You got it.

Trying to understand the market and each each of US is planet, they're very very different.

And.

We know our market really well now.

And a lot of times, we disagree with what market set of people.

Bucket.

Yes.

It can be lazy analysis honestly, so that's why.

Still relatively coming with the numbers that we're giving you because when you don't feel calm in 'twenty.

Can't see the board and you can't see the game and you can't see the next several moves to can't anticipate.

No.

Theres nothing in our business that's happening right now the surprise to us that we didn't see.

A long time ago now.

I think I don't know what it was like.

In February and March when I spoke about what I thought was going to happen today.

Four out of five times.

The federal reserve raises interest rates, we have a recession, that's just the math, it's not my opinion.

<unk> added five times, the federal reserve raises interest rates.

The U S goes into a recession.

And then everybody calls me Doomsday forecaster, when I became a meaningful a while there.

So.

But.

Everybody thought like I was Mister negative like Mr positive anybody knows really well there is on price.

Mike.

Wildly optimistic.

Also.

Wildly realistic.

About things.

Things that you can now and yes, there is this data and trends and.

We sat there and said I said to myself, Okay. Let me look at all the data in one I don't know one Sunday I pulled up.

Last 62 years, the federal funds rate.

And you can pull it out it actually comes up.

If you want I'll send yet.

I pulled up G. I think in a sense to the team January 29, Alright January 29%.

And it doesn't look good.

Circle.

The last.

The last 20 years, the average federal funds rate was 2% and if you look at it over the last 30 years I think it's 3% average averaged 3%.

And if you look at the last time, we had real inflation.

Most of the people that are managing a lot of money on wall Street or an important positions.

We're kicks.

Nobody seen what's happening right now.

Nobody seen inflation like this in our lifetimes the only people that did if you did the math.

Fewer.

In 1980.

If you were 40 or 50 years old and I would say usually 50 years old you start to gain wisdom, which are 50 years old and 1980.

Youre 90 years old.

In 2020.

Now that were in 2022 and Warren Buffett is what 90 293.

I saw that are close to that.

Yes.

So you've got like Warren Buffett.

Wisdom in 1980, and you've got <unk>.

Handful of other people George Soros.

A few people that are still active.

Most of the people managing big funds right now.

They might have been five years old.

In 19.

Or anywhere around the <unk> never seen anything like this.

Never seen interest rates never seen it.

Inflation like this never seen interest rates like this.

That's why.

Halloween so wrong at the beginning that's why Janet Yellen was like massively blind.

Wrong.

And fed move to slow quite frankly.

And now because they move to slow we're going to see higher interest rates.

Then we would have if they were to move faster and I would say, we're going to have the interest rates are going to go higher.

It's going to hit the housing market first in the housing market is the biggest part of the U S economy, and it's going to drag down everything.

And if I'm wrong.

Okay.

But.

The data is there.

Now like nobody should be surprised about what's going to happen here.

And so I mean, do we look at our members and stuff like that it's all kind of irrelevant.

And what's really relevant is where an unseen before inflation.

We're an unseen before for most of the people.

In business today.

That or not.

80 years old plus.

Interest rate.

Interest rates are rising.

And where it's going to go and I think Thats why Paul said like Okay. Now we got it.

We have to move.

Because otherwise I'm going to sit here and have a mess like volker.

Yes so.

No.

Thanks.

Yes.

We just don't want to get lost in the weeks.

So.

You get lost in the weeds at these times just makes a lot of that decision. So that's why we're not aggressively buying back our stock. That's why we have raised $2 billion. When we did $2 $5 billion. One day why do we raise it.

Because thats what we saw.

That we'd be in a good position and we have flexibility and optionality.

I really focused on membership declines right now now they're going to decline right now.

Luxury housing was down 18% last quarter.

Housing got worse not better.

Shopping with luxury housing is better than down 18, it's got to be worse than that.

And am I surprised that are.

Our business is maybe down 20 or whatever now.

One.

<unk>.

40 somethings.

We're now recent except the fact that we had a pandemic.

And our customer.

But again you can shop in stores people couldn't go anywhere.

<unk>.

And.

So people sat at home, they're part of the furniture was a pull forward yes. Most of this pull forward.

I mean, I don't think anybody should be surprised about what's going on.

Understood.

Michael just to clarify for you Michael just to clarify obviously, we're not we don't guide demand we did that.

20% comment was your guidance as it were.

Yes down down 12 to 16 at the midpoint.

But yet, but just to clarify okay.

But.

Hello.

My quick follow up my quick follow up question is was the gross margin expansion in this past quarter and presumably you expect for the next few driven by you exercising your pricing power and is there a point at which you might have to start to.

Restrict supply of your products in order to further exercise pricing power much in the way that luxury goods are able to command the margins that they are able to man by the scarcity associated with the value of their products.

I'd say, it's more implied scarcity.

Yes.

Somehow they figure out how to grow.

And say well how scarce.

There is a level of scarcity, meaning you just can't be everywhere and you got it.

Yes.

Having fewer more extraordinary.

Galleries your stores like really positioning yourself well.

We have been where you should be and not where you shouldn't be.

All of those things.

Making more shares and just being smart about it right.

I mean, there's also a level of scarcity, because a lot of them throw away or burn their product instead of selling markdowns.

Alright, and so it's.

Yes.

All kinds of things.

But that drive that.

Yes, we'll figure out all that stuff as we go but.

And just.

Okay.

Good good question, so I just don't know.

All the <unk>.

Good work going somewhere we'd never gone before but.

We've been more right than wrong, we've been directionally right on our on our path and our strategy.

And we keep getting smarter and we keep learning more.

We keep doing better and better work and all of that should lead to.

More trust in our brand.

More admiration of our brand.

And a higher premium people will pay.

For our product.

Part of this brand.

<unk>.

And.

Yes.

Yes, so just a different model and I think and again a lot of times guys.

Yeah.

Yes.

If you said like there's really no one has been trying to do what we're doing.

Paul.

Alright, there's like leaves little later to a whole bunch of little guys, selling either sofas or lighting or this thing or that thing as a bunch of custom people.

Yes, but no one kind of.

Like become the luxury brand.

Like there is Chanel, an amazingly baton yes.

Ferrari here <unk> Vijay.

All of these other kind of categories.

So he is going to be hard for people to figure us out for a while.

And like most new things like bank how long.

Like all of a sudden.

Remember that guy with the IR Guy there is always like Jim Bob <unk>, Bob less yes, the Guy was on CNBC, all the time, saying like.

Cash flow will never make money, there's terrible bankrupt yes.

Thanks, Brian Incredible guide.

On CNBC like every two weeks like taken Tesla down.

And all of a sudden boom.

Tesla.

Hit the inflection point and people realize.

Oh My God.

They've just changed the industry.

And I think our interest can be a little differently.

Not as broad, reaching we're not going to have a model three and stuff like that.

But I think Pete.

People are starting to get where we're going.

Hey, thanks.

Three to five years.

It's going to be undeniable.

And then people would go well.

As a whole different never thought this could happen.

This is it.

I mean, where they've gone to what.

What their model looks like where the brand is I couldn't even see it and thats, Okay, you shouldn't be able to see it.

If you could see it means our imagination isn't good enough our creativity isn't good enough.

Yes.

Like people don't didn't see Apple all of a sudden.

Yes.

Completely turning the cell phone industry upside down.

Who didn't have the Motorola <unk> here.

What happened to Motorola and PNR Dawn.

What happened to it.

1000, Tesla has become the most valuable car company in the World.

So when you are on a different path. It's always makes it harder to be understood because nobody has seen it before and I think we're on one of those paths and I think people are going to wake up three to five years now.

You can see what we've done in Europe , and they're going to see where we're going next and theyre going to see the path ahead, and they're going to see the strength of the model and.

They are going to go Oh my God.

But like I mean.

How many people actually thought on this phone.

Five years ago.

Which would have a 20% operating margin.

I don't think anybody on this phone ever thought that.

But here we are and.

And we think thats kind of the baseline like even if with a recession.

Could it be 18.

One year, because we're investing in it is that yes.

But it doesn't.

Not the relevant point.

Yes, I got it but a lot of you guys like your customer are hedge funds that are like.

Like renters not buyers there are traders not investors and so you've got to kind of make your customer happy.

Look at the kind of the small moves in the quarter to quarter.

Year to year moves like this is Scott.

And we are.

We just have a long term view and.

And if you have customers that are long term oriented talk to them about us.

If you have short term oriented people, telling me not to bug us.

Hey, guys.

Yes.

We're just we're.

We're probably not going to make them happy.

They are not going to make us happy.

Understood. Thank you so much.

Thank you Michael.

Your next question comes from the line of Brad Thomas with Keybanc capital markets.

Hi, Thanks for taking my question as well.

Follow up on the on the guest House, Gary can you just remind us at this point in time, how many locations you think might be candidates in the United States and globally for guest houses I know youre getting a lot more in another quarter, but just wondering.

Initially what your thoughts might be and then maybe what metrics youre looking at most closely.

To figure out if it can be it may be more bullish end of the range and then just a quick one for Jack.

Wondering if you could give us a little more flavor for 2023.

With some of these openings shifting and you're seeing how this year source books are performing any insights that we should think about in terms of what margins may look like for next year is that an investment year or do you start to get come back next year. Thanks.

I think you've got to really give us until the next quarter or so.

The data is going to kind of tell us what happens I am just so happy though that we have encouraged.

To do the first one in New York.

Some people tell me Oh, you have to do the first one in Nashville, or Birmingham, Alabama, or somewhere where there is not going to be able to critics and you can learn.

We like to we'd like to go on the main stage because we believe it brings out our best work not are not our average working and I am just so happy that came in New York.

We've done something so extraordinary.

Yes.

The time, we do we've figured out how to monetize the idea.

Look we already have a second one teed up in Aspen and the.

First one it's always the site, creating the first iPhone right like the R&D that it takes investment it takes to create something like this both human capital and financial capital is always yes.

It was greater than the next one because we've learned so much share we can dimensionalize and use those learnings to go much faster.

Be really efficient.

As we go forward, but.

Yeah.

But if it works.

But people do is you can only benign rooms. This one is only.

$6 three suites, and our residents and I think we got.

Yes.

We call those rooms like this theres, a pretty big room. So it's like 200 square feet with two full fireplaces.

And the one from Aspen are pretty nuts.

These are next to the side.

And scale of the Astral ones with these rooftop.

Rooftop pool suites that have <unk>.

800 square foot room with two fireplaces.

Yet sleeping area living area, two bathrooms, and then you've got an 800 square foot rooftop terrace with.

You are on fire.

Four chairs two day beds to trees and your own.

Your own pool.

Like how do you.

Price that Ashwin I don't know, but I know <unk> been used to have $70 billion and now it's 100 billionaires.

And I don't have their own poem there, but it's the people to go to Ashwin I think it's about as affluent of a small town.

Market in the world. So we're going to learn a lot in Aspen, but my sense is it thinking about New York is Fortunately our convenience it'll it'll probably worked in other cities and if it works in Aspen will work in other.

Vacation destinations.

State parks.

Central PA.

The hamptons or Miami.

Yes, and then in New York will give us a sense for what cities might work, whether it's tariffs or London.

Places like that.

And if it works here works with like nine rooms, like it'll really worked with 20 rooms.

Or.

31 <unk>.

Question is at what point is it.

Not as private is there something.

Without this theres only three keys per floor.

Never see anybody walking.

If you have the sweetener, knowing deliberate or anybody walk by.

At the center run only one person presents a suite bauxite alumina.

Bertrand.

Right when you got the elevators like Youre, the only one to watch.

So there's just a level of privacy.

Pete.

See the rooftop what's a little video click on our desktops Dot com you can take a screenshot of that Blue C.

Part of it.

I think the journal published.

Awesome.

I want to shop, where she is private dining chairs.

Yes.

Sure Sean.

Yes.

Our resident centers datasets that are like eight to 10 feet apart with hedges.

Private dining chairs or tables.

How many people.

Activity in New York and actually beyond that.

I might be wrong one.

Hey, Mike.

How much would you pay.

Per day.

Okay.

Okay.

That would help us price.

We are building.

Different works here.

It will work in other places.

May not.

Room rates.

But at.

$21 41.

With this one makes money the other ones will only make deployment.

So maybe if it works.

Works.

2015.

Okay.

Yes, yes.

The $600 million too.

Okay.

Something like that.

That's great Brian .

We don't guide 2023 at least not at this time I think if you're building a model I mean.

Forget everything we've been talking about in terms of.

Not promoted in terms of.

Let me laggard comp. So if you are looking at components of margin.

Product margin.

To build a model that's something that.

As we look at it it's not something that.

Sprint other components.

Sure.

We will see where revenue shakes out and we've dug revenue that's appropriate but.

We have other fixed components.

<unk>.

And also in SG&A.

Look I think that the.

Outlook.

Is uncertain.

As you've heard us talk about and so.

More guidance later, but.

Just don't forget that as far as sort of as you build up the product margin piece of our gross margin.

No.

Okay.

Thank you very much.

Your next question comes from the line of Jonathan <unk> with Jefferies.

Hey, great. Thanks for squeezing me in I'll leave it to one in the interest of time, Gary a lot of investor questions. On this concept of shedding lower value customers is there a way to help us understand the spending patterns of.

Maybe the top 10 or 20% of your member base versus the bottom 10 or 20%.

Presumably something like that could help us better understand the opportunity.

In terms of serving more household in that top 10th of 1% of the population versus say the top 345% any perspective would be helpful. Thank you.

I, just think it's going to be like other luxury brands.

Youre going to have a few.

Our number of customers spending a lot of money in that youre going to have.

Very aspirational customers are reaching up to brand now and then.

I mean, Eric tells the story.

Chad.

Our president Chief Creative and merchandising officer.

Tells the story of when she saved up for money when she was younger in their career to buy <unk> Italia says that because its such an iconic thing or.

Saving up to buy her or may affect African.

And they've broken back right.

And as such it kind of milestone.

And her life and and now she is.

He is.

One of the customers.

She is redoing their home.

Got it.

Can it do an incredible house.

Okay.

<unk>.

And it would be one of those customers.

Lee to buy from us.

Yeah.

She has a very high and it carries either working on or the whole redo the perhaps.

Interior architecture and everything.

And I would say the best thing about it she's learning a lot and she is going to go through that process. She is going to be even better at what she does here because he's.

Actually going through an exercise.

Our best customers go through.

And an incredible level, it's going to be credibly designed furnished in.

Yes.

It can be a lot smarter and.

Okay.

Even better perspective that just today.

Jonathan I might just add on your question.

Look.

You are familiar with the 80 20 rule Frito principal suppliers of many many things in life.

Again, we're not just directionally, if you think about the top 20% of our customers driving 80% of our volume.

That kind of relationship tends to hold business.

Again, you do it right.

Cutting the bottom they're not spending as much it's just by definition that system.

Whether it's skus, whether its merchandise with its customers again, the most important thing for everything with it realized as we've been doing this for 22 years.

This is nothing new.

We've shed way more customers.

Then.

Lower value customers that we're going to shed in the future way March.

So yes.

Yet less yet but.

But it's still going to have to do that we're going to get to the top of the mountain.

Yes, we're really going to become.

What is it.

Yes.

One of the great luxury brands.

So.

Well see I mean, the good news is.

If we don't make it.

Nobody is going to lose a lot of money.

This is a fight.

Sit here and think about this as an investor.

Oh God they didn't make it.

You're not falling to the bottom.

It really good model, we're in a really good place to take a shot at making the next third a decline the final third I'd kind of call. It.

So.

And I go okay, what's the downside.

Well, we're kind of.

Where we are today.

And we become global and.

It's still a very big company with a really good model and everybody is going to make a lot of money.

Yes, if I dislocated financial.

That's helpful. Thank you.

At this time there are no further questions I would like to turn the call back over to Gary Friedman for closing remarks.

Great well. Thank you. Thank you everyone. Thanks for your time and your interest in especially in these kind of uncertain times.

Just want to thank our team.

Yes, it continues to.

To drive US up this mountain would make the climb.

And.

And to everyone out there our team.

Internally external partners.

Shareholders, if you get a chance to be in New York.

Kind of take a peak.

Paying us and we will get your seat in the restaurant.

How quickly because it's the place is shelling out so I might not be able to give you a tour because the property because it is about privacy and so yes.

With clients here, we're not going to be walking people through the hallways for through the building.

Right now this week and maybe part of next week next week, we may have.

With inquiries as soon as next week, maybe if <unk> gets shared.

If you are in New York, we're here through next week at least I'm here for next week.

Everybody's here through next week.

And want to try to get a quick.

Look see.

Got it.

Ill take you through to show your room showed suite can share the rooftop.

Can't take any photos here.

If you do take your time.

And so.

But it is safe for our team and our partners and our shareholders I think this is.

An example of.

The kind of work that we're capable of and that kind of work that will.

That will demonstrate it proved that we can make it to the top of the mountain.

And build one of the most admired brands. So thank you for your time and thank you everyone on our team for your.

Group for your hard work and support.

Yes, persistence and determination.

Thank you.

This concludes today's conference you may now disconnect.

Okay.

Okay.

Okay.

[music].

Okay.

Yes.

Yes.