Q3 2022 RH Earnings Call

December 8, 2022

Speaker 2: I.

Speaker 3: You

Speaker 4: The.

Speaker 5: Ladies and gentlemen, thank you for standing by and welcome to the RH third quarter fiscal 2022 earnings conference call. I would now like to turn the call over to Allison Malkin of ICR. Allison Malkin, please go ahead.

Speaker 6: Thank you. Good afternoon, everyone. Thank you for joining us for a third quarter 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.

Speaker 7: that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Speaker 8: Please refer to our SEC filings as well as our press release issue today for a more detailed description of the risk factors that may affect our results.

Speaker 9: Please also note that these forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, please note that these forward-looking statements reflect our opinion only as of the date of new information or future events. Also, please note that these forward-looking statements reflect our opinion only as of the date of new information or future events.

Speaker 10: During this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP-to-GAAP measures in today's Financial Results Press Release.

Speaker 11: A live broadcast of this call is also available on the investor relations section of our website at IR.RH.com. With that, I will turn the call over to Gary. Great. Thank you, Allison, and thank you, everyone, for joining us today. I will start with our prepared remarks from our shareholder letter to our presenters.

Speaker 12: 2019 net revenues of 678 million.

Speaker 13: Gross margin contracted 50 basis points in the third quarter primarily due to fixed occupancy due leverage partially offset by an increase in product margin as we continue to resist promoting the business.

Speaker 14: As previously mentioned, widespread discounting continues across our industry, and while it's been almost two years since we've deployed a promotional email, we've been receiving to-sale emails per day from many home furnishings retailers.

Speaker 15: Although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there is certain long-term risk of brand erosion and model destruction for those who choose the promotional path.

Speaker 16: 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 now reflect those of luxury brands as we delivered 20.8% adjusted operating margin in the third quarter.

Speaker 17: Also exceeding our outlook despite the dramatic slowdown in the housing market.

Speaker 18: Our results are inclusive of investments related to the launch of RH Contemporary, the opening of our first RH Gas House.

Speaker 19: the development of RH International and the rollout of RH in your home, which led to approximately 200 of the 640 basis points of adjusted SG&AD leverage in the quarter.

Speaker 20: Additionally, we experienced adjusted SGN-AP leverage due to lower revenues versus a year ago.

Speaker 21: Our business generated 102 million of adjusted free cash flow in Q3, ending the quarter with 12.5 billion in cash on our balance sheet, 2.5 billion in cash on our balance sheet, total net debt of $375 million and trailing 12 month suggested EBITDA of $1 billion.

Speaker 22: fiscal 2022 outlook.

Speaker 23: As noted in our previous shareholder letter, we expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated monetary policy and the cycling of record COVID-driven sales and backlog reductions.

Speaker 24: Based on our current trends, we now expect fiscal 2022 revenue growth of negative 3.5 to negative 4.5 percent versus our prior outlook of negative 3.5 to negative 5.5 and adjusted operating margin in the range of 21.5 percent to 22 percent.

Speaker 25: versus our prior outlook of 21 to 21.5%.

Speaker 26: While we expect the next several quarters to pose a short-term challenge as we cycle the extraordinary growth from the COVID-driven spending chip and shed less valuable market share.

Speaker 27: We believe our long-term investments will enable us to continue driving industry-leading results.

Speaker 28: Our business vision and ecosystem, the long view.

Speaker 29: We believe there are those with taste and no scale and those with scale and no taste.

Speaker 30: And the idea of scaling taste is large and far-reaching.

Speaker 31: Our goal to position RH as the arbiter of 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.

Speaker 32: Our brand attracts the leading designers, artisans, and manufacturers.

scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet.

Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques and Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade.

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

Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces.

by building an ecosystem of products, places, services, and spaces that establishes the R.H. brand as a global thought leader, taste, and place maker.

Our products are elevated and rendered more valuable by our architecturally 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 extend beyond the four walls of our galleries into RH guest houses.

Our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion American hotel industry.

Additionally, we are creating bespoke experiences like RH Johnville and integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3 are a luxury yacht that is available for charter in the Caribbean and Mediterranean for the wealthy and affluent visit and vacation.

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

This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries.

elevating the RH brand and amplifying our core business.

by adding new revenue streams while disrupting and redefining multiple industries.

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

Moving beyond the 170 billion home furnishings market into the 1.7 trillion North American housing market with the launch of RH residences, fully furnished luxury homes, condominiums and apartments with integrated services that delivered taste and time value to discerning time-starved consumers. I would also table one of those restaurants in the swimming area that=- alarm and yes, that Pittsburgh, Miss McDowell deals in person.

The entirety of our strategy comes to life digitally with the world of our age, an online portal where customers can explore and be inspired by the depth and dimension of our brand.

Our authority as an arbiter of taste will be further amplified when we introduce RH Media.

a content platform that will celebrate the most innovative and influential leaders for shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies the market opportunity to 7.7 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 to $100 billion opportunity.

Our ecosystem of products, places, services, and spaces inspires customers to dream, design, travel, and live in a world thoughtfully curated by our age.

creating an emotional connection unlike any other brand in the world.

Taste can be elusive, and we believe no one is better positioned than our age to create an ecosystem that makes taste 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 to Cartier, Louis Vuitton to Laura Piana, Harry Winston to Hermes was born at the top of the luxury mountain.

Never before has a brand attempted to make the climb to the top, nor do other brands want you to.

We do not, we are not from their neighborhood nor invited to their parties.

We do 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 of, requiring those at the top of the mountain to tip their hat in respect.

We also appreciate this crime is not for the faint of heart.

And as we continue our ascent, the air gets thin and the odds become slim.

We believe the level of work we have introduced this year, inclusive of our contemporary, the world of RH, RH San Francisco, RH 1, 2, and 3, as well as the opening of our first RH Guest House in New York, begins to demonstrate the imagination, determination, and the importance

creativity and courage of this team and reflects and our relentless pursuit of our dream.

I mentioned at the start of this year that in over two decades leading our age, I've never been more excited about our future and I've never been more uncertain about the present.

Although my uncertainty regarding the short term has expanded due to the complete collapse of the luxury housing market, my excitement for our long term opportunity has grown exponentially as I believe the investments we are making to elevate and expand our product and platform will once again be transformative.

As we look forward to 2023, we will introduce the largest collection of new product in our history across RH Interiors, Modern, Contemporary, Outdoor, Beach and Ski House, Baby and Child and Teen.

To amplify this historic launch, we will once again unveil a revolutionary new gallery design, as well as redesign and remodel all of our current galleries.

We will be introducing RH to the UK and the rest of Europe this spring summer in the most inspiring and unforgettable fashion with the introduction of RH England, the gallery at the historic Einhoppe Park, a 16th century 73 acre estate that will feature three restaurants, the orangery, the conservatory and the terrace.

plus the Einho Architectural Library and the Deer Park, inclusive of the largest herd of white deer in Europe with viewing from the Grand Line.

We were also under construction on our Paris.

The gallery on the Champs-Elysees.

scheduled to open in 2024. NRH London, the gallery in Mayfair, scheduled to open in 2425.

We have also secured locations in Milan, Madrid, Munich, Dusseldorf, and Brussels, some which will also open in 24 and 25.

RH also announced today the following acquisitions and hires to accelerate the brand's transformation and climb up the luxury mountain.

the acquisition of Dimitri & Co, a to-the-trade custom upholstery atelier, and the hiring of Dimitri founders Donna and David Feldman to create RH Couture upholstery.

The acquisition of the business of Juke Inc.

a to-the-trade custom bespoke furniture workroom, and the hiring of Joseph Yu to create RH Bespoke Furniture.

The hiring of Mark Russell, former editor in chief of Architectural Digest and Elle Decor to create RH Media, an editorial content platform that will create the most, that will celebrate the most innovative and influential people and ideas that are shaping the world of architecture and design.

Today's announcement, plus our previous acquisition of Water Works.

firmly plants four RH flags at the very top of the luxury mountain.

and clearly states our intention of establishing RH as an arbiter of taste and design.

These brands and businesses thoughtfully integrated and amplified on what we believe will be the world's most innovative and dynamic global design platform will begin to fundamentally change the landscape of the luxury home furnishings market and the to the trade design industry.

As we approach the holidays and New Year, I would like to express our gratitude to all of our people and partners around the world for your contributions and commitment to our cause and for bringing our vision and values to life.

It's not easy striving to become the most inspiring brand of the world, and it's surely not for the faint of heart. It takes courage to lead rather than follow. It takes collaboration to build a brand that can break through the clutter in this world. It takes teamwork to reach the top of a mountain no one else has attempted to climb.

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

The lessons in learning, the passion and persistence, the courage required and 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 and forms cultures and organizations.

lessons that can't be learned in a classroom or by managing a business, lessons that must be learned by building one or by reaching the top of the mountain.

Happy Holidays Team RH, RPDM.

Any for questions.

The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad. If at any point you would like to withdraw from the queue, please press star 1 again. You will be provided the opportunity to ask one question and one further follow-up question.

We will take a moment to render our roster.

Our first question comes from the line of Sibian Gottman from Morgan Stanley . Please proceed.

Hey, good afternoon, everyone. I wanted to ask a question about written orders in the third quarter. I don't know if you'll comment. But if you use that run rate as a proxy for the business, does that get worse? And then my question is that we now, since you beat in the third quarter, we have a slight...

with the second part, Simeon.

But in the beat in Q3, I think most of that I would characterize as just timing and sales from Q4 to Q3. Not necessarily – some of that is obviously relieving backlog faster than expected, but we had expected to relieve that backlog and continue to do so throughout the year.

So, look, I think on the year we're still talking about 3.6 billion in sales, I don't think are sort of...

Numbers change materially in terms of that outlook. Slightly steeper, sure, but it's not, you know, kind of a rounding error in a sense, you know, with all due respect. But, you know, I think it's pretty consistent with what we've.

talked about before and simply that just Q3 said some pull forward of sales from Q4 and a little bit of faster back log group.

Okay, and then as a follow-up, maybe more for Gary, knowing that you're going to continue to invest for the future and still be somewhat responsible here for the near term. Question is, are you looking at prioritizing things differently? Does anything get sacrificed? I'd love to hear how you think about this, especially as the year keeps evolving with the Fed still tightening. Okay, thanks, Gary. Great question. Thanks, Mark. Thanks, Mark. Thanks, Gary. Thanks, Mark. Thanks, Mark. Thanks, Mark. Thanks, Mark.

Yeah, how do you define responsible?

I don't know. I'm just trying to understand. Yeah, I was trying to understand your question. I think we're cut back on it.

We're communicating what we're doing. We believe everything we do is responsible. So

I don't quite know how to answer that.

Well, maybe it's the second part, which is, you know, is anything getting sacrifice meeting or some of your longer term investments putting on pause or no, and that's maybe that's just the right way to look at it.

But we're not putting any longer-term investments on pause.

I mean, we're playing for the long term, so.

We're.

you know, we're not doing irresponsible things that other people are doing like promoting their business and selling, you know, sending, I don't know, 30 emails to a customer a week with, you know, fail time. So.

That I think might be irresponsible. But I guess it depends on your strategy. If your strategy is to stand for price, then maybe that's an okay strategy. Our strategy is.

to stand for design and quality and innovation. So, you know, it's positioned the company around product and that price.

I think we've been really consistent with our strategy and when you think about priorities, we re-prioritize all the time here. We like to say you've kind of got to get going. Are we strategically right? Are we directionally right? We believe we're strategically and directionally right.

We believe that if we make the right long-term investments...

right long-term investments.

you know, and build this business for the long term will become.

one of the few brands in the world that exists over a long-term period of time.

So, um.

That's unusual in our industry. Most people build a concept and then they roll out 300 or 500 stores and at the end of 10 years it's an old concept. We like not to get old and we like to continue to reinvent the business.

whatever the cycles are, if you look at it for us, if you look back at history, since I joined in.

2001, there was a recession at that time and

We elevated the product and kind of transformed the brand. We did the same thing in 2008 and 2009, the financial crisis. We went through another cycle again in 2015, 2016, 2017 when we...

made the move to membership and re-architected the back end. We also introduced modern and, you know, continue to evolve and make the brand relevant and make sure we're leading the industry. And we think the work that has begun with the introduction of RH Contemporary, which will...

triple in size next year from an assortment point of view. And the introductions we're gonna make across the entire portfolio, but.

the new gallery design that we're going to unveil and we'll go through and remodel and redesign all of our current galleries and refresh all of those, as well as the platform we're building globally for the brand.

is gonna once again transform our age and man.

Bye.

put us in a position where we create massive strategic separation. So we're kind of comfortable being the others and going the other way. So a lot of people are hunkering down right now.

and slowing down, we're kind of speeding up. We're more excited, less fearful. I think we saw this coming.

It's not a game that's the first time we've seen it. It's just different. But our moves over the last 22 years have been very consistent. I think we're pretty disciplined in the things we do. They're unusual. When we were opening 50 to 60,000 square foot stores, the rest of the industry was closing stores and drinking footprints and...

Steven Zacon from CIDI. Please proceed.

Great. Good afternoon. Thanks for taking my question. I wanted to focus on RH Guest House. The last time you were on the call, you talked about some of the initial interests. How would that perform the first three months that it's been open? What are some of the early learnings for the hotel and do you see opportunity to open more of these concepts going forward?

Yeah, I mean, we just opened, we think it's extraordinary. The feedback we're getting from our guests is incredible. The feedback we're getting on the restaurant has been incredible. And so, you know, we're just an early learning period. You know, we're not. You know, I missed the 1st time we've ever done this so far. We're really excited. We're going to be opening our.

champagne and caviar bar soon. We've got our feet under the ground, you know, underneath us on our new live fire restaurant. And, you know, so we couldn't be more excited about it. You know, I mean, the feedback from our guests is...

You know, a lot of people are saying, gosh, how am I going to be able to get in long term? Because it's just not that many rooms. But yeah, we're excited. There's going to be learnings here that will help us evolve and make.

has been better and so on and so forth. So this is just very early, big test.

It's kind of a small thing in a very big organization.

that if it becomes a big thing long term, great. But right now, you know, it's really positioned to be something that helps redefine the brand and have people look at us differently, so.

I think it demonstrates.

the kind of creativity and passion and attention to detail to do something.

It's extraordinary. People from the hospitality industry have come and seen it and toured it. Luxury CEOs that have come and toured it said they haven't seen anything like it anywhere in the world. So we just let it kind of unfold here.

Great. Very helpful. The other question I had was on gross margin. So the first quarter of the business has seen a decline, obviously on occupancy, de-leverage. But as we look forward, is that the likelihood that you probably see gross margin decline again in the fourth quarter? How should we think about the trajectory from here?

Yeah, I think when you look at the sequential change in our absolute sales, so when we went from revenue in Q2 of $992 million and gross margin of $52.8 and going to $869 in Q3 and $49.7 million.

As Gary mentioned, a lot of that is doc CT leverage.

If you think about Q4, there's a further sequential decline. Q4 is a smaller quarter for us. So at the midpoint of the guide, we're at 789. So if you do, we're not guiding gross margin, but if you do sort of like.

similar sort of math and transposition of numbers going from Q3 to Q4 as you did from Q2 to Q3, you'd naturally see a gross margin decline built into that because again the absolute sales are lower than Q3. So it's just math.

Directionally probably 100 basis points ish, but again, we're not we're not officially guiding gross margin. It's just a yeah. I would just say, look, if you look at the housing industry and track the housing industry. And if you check track the performance of home furnishings retailers against, you know.

past housing downturns, that would tell you things are going to get worse before they get better here. The housing industry is in a free fall. The National Association of Realtors just reported that housing demand was down 37% in October .

You know, we've never, at least in my lifetime, I've never seen interest rates rise so quickly. I don't think anybody on the phone has either. You know, and the impact on the housing market, especially when you look at it versus the housing market that was overinflated and run up by COVID.

you know, you're gonna have some wild swings here. And it's happening first to the luxury market if you look at the numbers and if you track the last.

nine months or the reporting on Redfin, I think it started, the luxury housing market started going down in the Q4 of last year. And the luxury housing market went up faster and higher and the luxury housing market is gonna go down faster and lower. And that's, you know, and that's, you know,

Next thing you know, you've got to send out a thousand emails to let next year too. You're just in a, you know, what I call the downward spiral.

you know, we're in the ditch. And so.

Yeah, we kind of expected from the beginning that.

this COVID lift wasn't anything that we manufactured. And generally when that happens, those kinds of things go up and then they go down. And you try to stay focused on the longterm, but.

You know, we're not going to try to break our model.

to try to, you know, and promote the business in a period. I mean, we have people that are in our industry right now that has some pretty good sales. Their whole website is 30 to 40% off. If I put our whole website, 30 to 40% off,

We change the sales trend by 50 points.

Problem is...

you're just gonna have a much less productive business you'dvi

Doing more volume and lower margins and all that volume also creates costs that are inefficient through a model. I've already run companies like that.

So yeah, we have a different model. Someone asked me the other day.

Hey, you know, what if you're wrong on your long term view?

Look at the market, it's not $25 billion.

I know okay. What if it's not?

What if it's half that? What if it's 12 and a half billion?

And we, you know, and we have 30% EBITDA.

I don't know, that directionally looks like some other people. Orndra, Youtube channel, oronsequential

and people like that, you know, like, I mean, there are even higher than that, but you know, we've been a zip code where this company would be worth a lot of money. And so, you know,

Whether we become 12 billion or 25 billion.

dollar mark if

you know, not really what's most relevant is do we get there? And do we become really the first?

Yeah.

integrated luxury home brand in the world.

And, you know, and that's just going to be a different path than anybody's taking because no one's ever done it.

So, yeah.

There's gonna be some ups and downs here, but the housing market's gonna free fall. And it's gonna get worse before it gets better.

Um, you know,

So far we've been more right than wrong about that.

You know, we don't really try to lead our business based on hope.

We try to run our business the best we can based on.

facts and math and logic and patterns and

So.

I may not sound really optimistic right now short term.

I'm not.

I'm super optimistic long term.

So if you want to play a short-term stock, don't play ours.

You want to bet for the long term.

This is a good place to put your money.

Duly noted. Thank you. Happy holidays. Happy holidays.

Next question comes from the line of Max Reklenko from Cohen. Please proceed. Please proceed.

Great, thanks a lot. The way that you're seeing your margins play out over the past couple of quarters with upside both 2Q and 3Q, does that give you more confidence in keeping at least 20% EBIT margins next year if the environment remains challenging? And then just more broadly... goes the other way?

How are you thinking about the durability and margin power of the business today, given some of the moves that you've made recently?

It depends on our, you know, it's that always going to depend on your.

investment and your investment timing, our underlying core business.

If we wanted to, yeah, we can crank it all back and stay at 20.

I'm not sure that's.

the long-term priority. You know, I don't know how.

you know, how bad this market's gonna get. And

And we don't want to promote the business over the short term to try to create some short term outcome that's going to be irrelevant two quarters after that.

there's going to be a lot of decisions to make. The really difficult environment for those of us in the home industry.

And especially if you're at the higher end, you know, it's more challenging. And for some people, it's not intuitive, but you've got to think about it. We have the greatest migration.

of people moving from cities to suburbs in the history of America during COVID and to second home markets.

The people that did that could afford to do that. The people that moved the most and bought the most homes were the luxury customers that had the capability to do that.

That's why the luxury market went up so high and the housing market, the luxury housing market benefited most and we're gonna have a flip side here. So.

you know, look, we didn't, all that extra money we made during COVID, we didn't waste it, you know, and on the flip side, you know, if we have a bigger give back, that's okay. If you look at every home furnishing retailer and look at where their operating margins are, we do have a little bit more funding, bright investment into that because then you

in 19, you know, when they entered COVID and where they exited in 21.

We had the highest operating margins going into COVID amongst all home furnishings retailers.

And we exited with even higher.

margins than anybody else. We picked up more margin than others. We had more strategic separation.

So, and I believe as we should, our consumer moved more, our consumer had more urgency and, you know, and in some cases where other people promoted, maybe they got a little bit more top line than us, but we just didn't promote. But, you know, like trying to.

Act like, oh, this is a surprise.

Oh, this is a surprise. Yeah, like.

I mean, the Fed pumped so much money into the economy, they created inflation.

They held interest rates at such low levels, they made it easy for people to buy homes.

interest rates at such low levels, they made it easy for people to buy homes. Now we're on the other side of that.

quantitative easing, interest rates are up, we've got inflation.

Who's seen this game before?

Anybody on this phone?

Not unless you were in the market in 1975 to 1982.

This is a whole new ballgame that no one's even seen. We're trying to just look at the patterns and look ahead and say, what's the best way to play this? That's L cube.

This is a whole new ballgame that no one's even seen. We're trying to just look at the patterns and look ahead and say, what's the best way to play this where we come out?

And we really are positioned for the next five to 10 years.

not the next two to three quarters, you know, or even the next five or six quarters.

That's not relevant long term.

relevant long term is what's the next five to 10 years gonna look like and what are the decisions we're making today that are gonna impact that vector, right, that tilts us slightly more up, and over the long term makes a big, big difference.

So that's how we're focused. We're not managing this business, we're leading this business.

how we're focused, you know, we're not managing this business, we're leading this business.

bigger and brighter.

And, you know, our journey is.

going to be a little longer, it's going to take a little longer. So, there's going to be people that have patience.

and there's gonna people that don't have patients.

We have patience. You need patience if you really want to be extraordinary in this world.

Got it. That's very helpful. And then can you just separately speak to the customer reception to contemporary, how is that going compared to your expectations? And then just any updates on the timeline of the rollout to other galleries.

Yeah, we're very happy with the initial response. We wish we could get more product faster. It's two things. A lot of it got impacted by the supply chain backups, which are now just kind of all coming unopposed and unlocked, but also always from one be a maximum and droolingDesire R ds on C C and C D Ds.

almost all of the new product is really new product that has never been made at scale before. So one of the things that is gonna happen to us during cycles, this happened to us.

in 08-09 when we kind of transformed the assortment in the business. It happened to us in 15-16 when we moved to modern and it's happened to us now. When we make these big moves and they're generally every seven or eight years because those are kind of the big cycles.

in our business. I mean, trends can last 10 to 15, but there's generally, I think every.

Every brand needs a major refresh every seven or eight years. And so ours just happened to be timed to economic downturns. And a lot of that coincidental, quite frankly.

In 1516, it wasn't really an economic downturn. We created somewhat of a downturn when we moved to membership, because that was a year transition to do that.

an economic downturn, we created somewhat of a downturn when we moved to membership, because that was a kind of a year transition to do that. But umm...

You know, when you bring in this much new product that the world hasn't seen before, that no one's ever scaled, you know, travertine furniture, you know, or burl wood, you know, at scale, you can see pieces out there at antique stores or, you know, some retailers have a piece or two, a couple pieces.

you know, they don't have collections with

130 SKUs and you know and no one's out there making that stuff at scale. So we are going to constantly, for the rest of time.

30 SKUs and no one's out there making that stuff at scale. So we are gonna constantly, for the rest of time, have to continue to build.

the supply chain capability

that enables us to invent. I mean, if you're gonna invent something new and scale something new, it means it hasn't been done before.

It's gonna take longer, it's gonna be bumpier.

And it's the difference between

you know, leading a business, managing a business, invention and innovation versus duplication. So, and you know, I think we're gonna go through the same thing with contemporary. It's taken longer to scale this stuff. I mean, we just got back from the quarries in Italy, you know.

but meeting some of the best families and quarry owners and building partnerships for stone. And so we can make stone furniture at scale and we can have better economics and a better supply chain. We, I mean, I don't know, two weeks ago, we went around the world, we were pen...

for 10 days, I think we were in seven countries or something like that. And you know, in the factories and...

meeting with the factory owners and talking about scaling, not only what they're scaling up now, but what's coming next, which is

I mean, you've just seen the first little introduction of contemporary. Can you see what happens next year?

It's extraordinary and revolutionary. I mean, I think it's gonna be, you know, we're just gonna own this entire.

kind of aesthetic and look and be no different than how we approach.

0809, when we took kind of the European, Belgian kind of aesthetic and we went out there and owned it and did it at scale and it became kind of the RH look in the industry. And then we didn't just dabble in modern, we launched with a 450 page book or something like that.

we do. So you've seen like the first kind of

the first course of the meal. Call it a four course meal. And next year there'll be two more big courses and there'll be another big course in 24. And by 24, I think we'll have it rounded out.

But it's going to be, I think it's going to be the most extraordinary thing we've ever done. So, we're really excited about it. Wish we had more goods right now. Wish we could roll it out to more galleries right now.

But so far, every gallery we put it in, there's been really good response. And we're really excited about getting it into more galleries.

Thanks a lot, Gary. Jack Allison. Happy holidays, everyone. Happy holidays, everyone.

Happy holidays, Max.

Our next question comes from the line of Curtis Nagel from Bank of American.

comes from the line of Curtis Nagel from Bank of American. Please proceed.

Great, thanks very much for taking it. Maybe one longer term question, then a quick model one. First, Gary, I'd love to talk about the acquisitions and how much they step up your high-end trade in interior design business for us, a little less in the know, and how big an opportunity from a revenue perspective you could see. And then just as a follow-up, I'd like to ask you to take a look at the

I just wanted to clarify that comment, it kind of loosely made about 20% margin next year if you pulled back on investments. Maybe I misheard, but just if you could clarify what you were talking about there.

I just wanted to clarify the comment you kind of loosely made about 20% margin next year if you pulled back investments. Maybe I misheard, but just if you could clarify what you were talking about there. Yeah. I think... Speaking of debt I want to say, you see, I have one mistake, my laptop missed it and I

Yeah, like if you think about, you know, the high end design and trade, you know, how big is the revenue opportunity? The people at the very top of the mountain...

you know, own the most homes. Not only do they own the most homes, the homes are more expensive. On average, someone spends about 10% of the home costs on furnishings, decor, and art, right? So, when they buy.

nicer homes, they buy nicer furniture. They furnish the whole house. They have multiple houses.

And so that's the most lucrative part of the business. It'll be the most profitable part of the business. It has the most leverage, you make the most money there.

So we think it's really important strategically and we went out and met who we believed.

you know, had the best.

reputation and quality and design in upholstery and the same in kind of case goods and furniture.

They're big believers of trying to scale this level of quality and design.

And so, you know, we're really excited about it.

It's going to take a while. We've got to get it up and going and test it and see how it goes. We've got to figure out exactly how it's integrated.

We've got to get it up and going and test it and see how it goes. We've got to figure out exactly how it's integrated. But in the long term,

I would just say probably today right now there's a bunch of people in the high-end trade industry that just kind of said, you know,

WTF, you know, and...

And then like now what is gonna happen? And so this is a big move for us strategically, but we've got to build capability. There could be other acquisitions to build capability here. And it's a big move for us, but we've got to build capability.

And you think about the investments we're making building a media platform and a content editorial platform that will position the brand as an authority in the industry, not speaking about ourselves, speaking about the people who are really shaping the world of architecture and design.

evolve and change. I mean, not too different. Like, you think about Apple, right? I mean, Apple.

I mean they started pretty high up with a $400 phone or something we started and what's the latest Apple phone like $1100 or something like that? $1200? Yeah, I mean they kind of created a high-end market for phones.

when I think the average phone back then was like $69, the Motorola Razor or something. So I think, you know, one, we're not just going after a market and how big is the revenue opportunity there, we're also gonna create a market because that product, at that level of the market, it's not accessible.

You can't go into those showrooms, the goods aren't priced.

you know, you're kind of blind and

And you have to go through.

you know, go through a middle person to even, to have active

quality of that quality and that design. So we think there's gonna be a big unlock just starting to make that level of quality and design available. We think we will grow the market. We think it will be a big, big plus to our brand to get us into.

those customers' main rooms. I think today we mostly play in the family room, the second bedroom, I don't know. We get that customers.

living room, master bedroom, main house, I think it's just gonna open up a lot of opportunity. But lots to test, lots to learn, lots to figure out. We thought about it for a long time. We worked on this for a long time. And today we decided that

tell you officially that we're doing it.

And for everybody knows, I know that yeah, in step.

We're super excited about the talent. It's also what I'd say is that talent acquisition too. I mean these people are just incredible

incredible, incredible culturally, creatively, entrepreneurially, just incredible, incredible talent. We've all, in a short time, we've been together, we've learned from each other and they've rendered us more valuable. I think we've rendered them more valuable. So it's kind of an upward spiral.

Yeah, the underlying model, you know, like the underlying model, I think I think you've always said it can withstand it 20% down, you know, and probably hold the margins around 20%. So, tell

The underlying model, I think we've always said it can withstand at 20% down and probably hold the margins around 20%. So, you know,

That doesn't necessarily mean that's what we're going to do, that we're going to pull back investments when we should be investing.

So, um.

You know, right now, I, again.

I don't think the idea here, I don't think it's strategic to go, hey, let's have 20% operating margins in 2023.

You know, I don't think a lot of people get up in the morning and go, you know, you know, go to work and fight for 20% operating margins. They get up and they go fight to do incredible, inspiring work that they think is going to create great long-term opportunities.

And if we didn't have a whole lot of things to do, if we didn't have a lot of great ideas that we're pursuing right now, yeah, you know, I might say, hey, you know what?

We don't have anything that's really that big worth investing in. So let's.

Let's here we go. Let's hit 20% operating margin. Let's make that the you know the goal You know, but we have some incredible That's we're working on the most exciting stuff we've ever worked on.

by far and You know the kind of stuff that you're so excited you don't even you can't sleep You know you can't even go home You're just so excited and you know it groups of people that here have been all through all kinds of hours like figuring stuff out because the work is is really that special

So, you know, so we're investing in that work because we think that work will, you know, change the vector and will change everything and will create massive strategic separation. So, we're not really looking at the

I wouldn't say, you know, if you said, hey, Gary, what's your focus on financial outcome in 2023?

If you said, hey, Gary, is your focus on financial outcome in 2023, not really.

Our focus is on creating a leapfrog.

in 2023 and 2024 that when we come out of this cycle.

that people look around and go, where did they go?

that we've just made such a leapfrog that we're so much farther ahead of everybody else on every level.

And that...

you know, that will create big returns.

And we know how to create big returns. We built the best model in the industry.

So we're going to do things that make the model better. But you can't do that by not investing and go, okay, we're 20, let's hang on, let's do luck.

That's the downward spiral. That's the long-term death spiral. And that's not the game we play.

Thanks very much and happy holidays.

Our next question comes from the line of Jonathan Matsitsuki.

From Jefferies, please proceed.

Great. Good afternoon and thanks for taking my questions. Gary, you mentioned 2023 will mark the largest introduction of new products and company history. So how should we be thinking about your source book strategy next year? How are you thinking about mailings relative to maybe this past year?

I think it's the best work we've ever done. So we're going to shout from the rooftops.

Gotcha. And then, you know, my follow up question on supply chain, can you help us understand the cadence of how supply chain costs tailwinds may flow into gross margin next year? The reason I ask is I think 70% of your cost of goods sold is sourced from Asia.

So, how should we be thinking about the timing? Once we're on the other side of elevated inbound container rate next year. Any color there would be helpful. Thanks. Hey, John , so we're kind of getting some of that already. If you think about the ocean freight contracts, they, they reset roughly June 1.

So that's where we saw the initial burden of those much higher rates as we talked about on various calls.

But I would say every month since then, we have actualized a number lower than contracted and the way you achieve that, obviously, you're not always going on contract with the spot rates lower. So you're going out in the spot market and those rates have been coming down. There's excess availability, especially along certain Asia-Pacific routes.

And so while we initially saw a margin of structure from the higher rates.

in I would say, you know, the first four or five months. We're at a point now where we, like this last month, we're lower than we were for the sort of contracted rates.

For the prior year.

So, and if you think about our turn, you know, call it 2, 3 times, you know, depending on the product category. And a lot of our business special orders, there's an immediate impact on that. But the part that stocked, I mean, we felt pressure and we're kind of now getting into the.

some of the initial tail, you know, tail-its. So, they're kind of, we're kind of, and that's reflected in our guidance, but that, that we expect, honestly, as we look at it and we think about what's happening with supply chain, I think there's there's probably more to come there, more opportunities. And so, those are starting and we'll continue to see this in the next year, we believe.

That's helpful. Best of luck for the rest of the year.

Thank you.

Our final question comes from the line of Michael Lasser from UBS. Please proceed. Good evening. This is Atul Mahaswamy from Michael Lasser. Thanks a lot for taking your time. Gary, your stock buybacks slowed quite a bit this quarter.

The question is why did you go slow on buybacks so much? Was it because of the M&A or has anything fundamentally changed about how you view buybacks in the current landscape given you still have over $2 billion of cash in balance sheet?

Yeah, look, I think that the housing market has collapsed.

you know, and it's went down pretty viciously as interest rates have went up. And so,

and it's went down pretty viciously as interest rates have went up.

I think Simeon's first question was about being responsible.

we're not going to necessarily change the world through a buyback strategy. When you're going into

kind of a storm that you haven't seen before.

You don't want to sail, or they say, let's say you're not in a sailboat, and you're in a boat, you don't want to.

spend all your fuel before you can see the shore.

and run out and be floating around out there. So.

You know, there's lots of examples of people who went out and spent a lot of money on buybacks and

went bankrupt, you know, and Bed Bath & Beyond will probably be the next one that does.

Yes, they're pretty famous for how much stock they bought back.

So, I don't know exactly how.

I don't know exactly how this.

housing market's gonna play out. I don't know if the housing market's gonna, almost always, the housing market is in a recession. I mean, if somebody doesn't think that, I'd love to just do a Zoom and put our numbers up for you. But the luxury housing market has trailed down since last.

down 24 in July , that's 28 in August . And the new numbers will come out for the next quarter and we'll know how far it goes down, but.

The odds are it could be down 35, it could be down 40.

So when we start seeing trends like that.

start seeing trends like that.

I don't know how it comes all apart. Did anyone see?

2008

Thank you for having me.

Because the way the market reacted, it didn't seem like it. Nobody sees the big implosions.

We're not greedy. Again, we're not going to accomplish our goals here.

Based on a buyback, so we're spending our, you know, we'd rather just go look.

you know, like where is the world going right now?

We've never pumped this many trillions of dollars into the economy.

Interest rates have never accelerated this fast. Inflation, you know,

hit numbers that we haven't seen in 40 years.

It seems like Powell kind of you know, found relatively confident when he's up there but

He's the guy that raised interest rates way too slow. You know, he's the guy that didn't start easing. I mean, he should have raised interest rates and not let the housing bubble happen.

You know, housing prices went up from 2020 to 2022 by 45%.

Housing prices went up from 2020 to 2022 by 45%.

That's never happened, except in the 70s.

The two year period, housing going up 45%.

And so, you know, like.

I don't want to sit here and.

have all kinds of debt and not have any clarity of, you know, what it looks like out there. So let's, you know, let's let the storm become clear. Let's make sure we can see the shore. You know, does that mean, oh, maybe the stock runs a little bit and we buy a little less? I.

It's not you know, we're not here spending all our time trying to figure out how to optimize a buyback

We think our stocks undervalued today.

Could it get worse?

I think business will get worse before it gets better. Will our stock get worse before it gets better? I don't know.

better will our stock get worse before it gets better I don't know

I haven't been here for 22 years.

But, you know, I spent all my time thinking about that. We've got much more exciting things to focus on. When we have a better view of the shore.

that will make the right decision.

That's fair, Gary. Thank you for that. As a related follow-up,

At this point, how much visibility do you have on some of the plan gallery openings in Europe and even the US over the next 12 to 18 months? And if the macro does turn for the worse, would you…

Would you look to maybe delay some of the openings until when the macro stabilizes so as to get the most customer attention to some of the great work that you and your team have been doing.

Yeah, it's a little tough to do that. Once you're in construction, if you stop, you're just going to make a gallery cost twice as much. And you're still paying rent and you still have costs.

I mean, I don't think we've ever opened a gallery that doesn't make money. So, you know, our new galleries I anticipate will do well. I mean,

So business goes down 30%.

70% of the people still buy. All our galleries are really productive in the company today. So, you know, again, so we open a little.

lower and then it just means when we come out of this.

Those galleries have big comps.

You know, we don't try to time things like that. I mean, we're not, if we were a company that had like, you know, five to 8% operating margin or, you know, even 10 or 12% operating margin and you hit a downturn like this, you know, that could be sustainable and it pulls, you know, pulls you down and, you know, you might have cashflow problems. Yeah, then.

we're not going to let ourselves have a cash flow problem. That's why we haven't deployed $2 billion buying our stock back yet.

we're not gonna let ourselves have a cashflow problem. That's why we haven't deployed $2 billion buying our stock back yet. I don't know.

You know, does Powell and his team know what to do? Are they just tinkering around they haven't seen this before and is you know someone gonna Make some calls here and we go into a ditch You know, it's not gonna be a subprime thing, but it could be something else

Nobody saw, nobody's seen any of these big things coming except for one or two people. You know, the guy in the big short. He got it. Maybe a few others.

Nobody's seen any of these big things coming except for one or two people. The guy in the big short, he got it. Maybe a few others.

most people don't get it right. And right now I've never seen more confusion. You read the headlines of the top papers in the world and I mean, who's saying what? Who thinks, I mean.

you know, the KPMG consulting group, they think housing prices are going to drop 20% next year.

Goldman Sachs thinks housing prices are going to drop 7.5% next year.

The National Association of Realtors think housing is going to go up 1.2%. Prices are going to go up 1.2% next year.

Generally, people...

speak from a place of kind of self-consideration. Like if you're a realtor.

you need to sell houses to make money. So you're gonna have the rosiest outlet. You're a banker.

You don't want transactions to stop. You don't want the banking industry to slow down, right? And if you're a consultant, you don't want to stop.

you don't mind telling everybody the bad news because people hire you when they're all screwed up and panicking, you know? So maybe they're, you know, they're the ones that can tell you the worst case. I don't know.

That's a big spread, don't you think?

That's a big spread, don't you think? Housing prices are going to go up 20.

Have you go down 20 or they're going to go up one?

But it sounds like everybody's on the same page.

Yeah, so it's just a lot of uncertainty right now, but one thing I'm certain of the housing market is collapsing.

At a level I haven't seen since 2008. I haven't seen this kind of drop since 2008.

So go look at, you know, how far housing dropped in 2008 and 2009 because these numbers look just like that. These numbers, that's way, way up.

That sounds ominous. Thanks for that Gary and happy holidays.

Thank you. Thank you. And we do have one final question from Seth Basham from Wedbush Securities. Please proceed. Thanks for taking my question. First, Ari, I'm sorry I jumped on late. Okay.

if you already addressed this, but we noticed some of our work that you're partially rolling back some pricing increases on select products. We've also seen a higher level of clearance on your website. Can you characterize that relative to your pricing and brand strategy? Sure, sure. Well, you know, the

As Jack mentioned, freight costs are coming down, raw material costs are coming down, pricing is coming down, and we're not going to...

not want to have a good value in the marketplace. So of course we'll adjust pricing as our pricing comes down. And then COVID.

Sales are down. So, did we plan for sales to be down this far? No.

Did we think that housing market was going to collapse this fast? No. We're going to go up this fast.

Do we think the housing market was going to collapse this fast? No. Do we think interest rates were going to go up this fast? No.

So do we have more inventory than we'd like? Yes. Should we be accelerating the things that we don't want to have in our assortment long term that we're clearing out because we have new product coming in? Of course. Will we have more than normal? Of course we will.

inventory than we'd like? Yes. Should we be accelerating the things that we don't want to have in our exorbitant long term that we're clearing out because we have new product coming in? Of course. Will we have more than normal? Of course we will. That shouldn't surprise anyone.

It's the retail business. You have new product coming in. You've got to get rid of old product.

So you mark it down. Your sales are down, you've got more old products. So you're going to mark it down a little faster.

Otherwise, your DC can't process it. So yeah, that's all that's happening. But and if prices go up, raw materials go up, shipping goes up like everything that happened with COVID.

You're going to take your pricing up. The customer, consumer's going to understand it. They're also going to understand when things come down.

And so, you know, our whole business, we look at everything through a lens of design, quality and value in that order.

If the design is not beautiful and inspiring, nobody buys it. If the design is great, then they get closer to the product and they assess the quality. If they love the design and they believe it's really good quality, it's great quality, then they look at the price. And then the consumer...

makes the decision, for that design and that quality, is this a good value and do I buy it?

We try to guess where that.

we try to guess where that best point is.

Sometimes we're right, sometimes we're wrong.

So, we adjust pricing all the time.

So, we adjust pricing all the time. Bye-bye.

We're never gonna price anything exactly.

We're never going to price anything exactly right. We're never going to buy it exactly right.

As it relates to your clearance strategy, Gary, is the primary –

a channel of clearance through your full price stores and website as opposed to your outlets.

Oh, yeah, yeah, you want like we we've got way more galleries with way more people coming into them. Right. And we have a website, you know, our full price website is.

where we had the most traffic. So you don't wanna move product out of that channel right away, you know, like we have, yeah, we would.

you know, you just back up inventory really fast. I mean, this isn't the luxury apparel business where they just throw it in a dumpster and burn it. You know, this is furniture. Again, we're never gonna run it exactly like the luxury apparel people or the luxury jewelry people and stuff like that. I mean.

you know, our business, we can't throw away the product. And, you know, it's just got a different thing. We're going to have a different kind of outlet clearance model all the time. Something comes back as a return, you can't take it back to the store, can't put it back on the shelf.

You know, I mean once once it goes on a truck and it's out of the box

you got to take it somewhere so you have outlets. If the customer doesn't like it or it's got a tiny scratch or you know that you can't fix or something's wrong, you got to figure out what to do with it.

But, you know, when you have plans to say, okay, you know, here's the collections, here's the things that are gonna be going out, that you're gonna be marking down and your demand falls.

pretty rapidly, that.

you know, that's gonna change your pricing strategy. It has to, because you've got inventory that's on order that's coming in.

Got it. That's very helpful. So, you know, bulky goods like ours, you know, you better keep that inventory moving because, you know, Fernando's sitting here, you know, if we don't, you know, move the inventory, he'll figure out, he'll have to figure out where to put it and we might not like what he does with it. Okay thanks very much, Commando, okay, and thanks everyone.

Okay. Lastly, if I may, a point of clarification. Did you say earlier that you could do 20 percent operating margins next year if you pulled back on a lot of investments? So with this tough macro investments or environments, we think of 20 percent as the high watermark for next year.

Well, I think it all depends where demand goes, what happens to the housing market.

what's going to happen with interest rates, inflation in the housing market and.

you know, are we in a, you know, how long of a downturn are we in? Does the downturn get worse? If housing falls off.

Okay ready. Raider raid

just demand's gonna go down. Our business is tied.

to the housing market because, you know, if you look at our business, it's tied to events. Someone bought a new home, they're remodeling a home.

or they are redecorating their home. The core of our business is not like the person that goes, yeah, I need.

I need some new bedding. Our business is tied to those three things. So if people are not buying homes, if people are not remodeling a home, and by the way, when people remodel a home.

they're generally buying a home to live in, our customer is, while they're remodeling. So that's actually kind of good for our business. But if the real estate activity stops,

it hurts our business, you know, so if you have 20% downfall in the housing market two out of ten people didn't buy a home you know if it's 30% three out of ten people didn't buy a home

and then, you know, or didn't move, then, you know, or not, you know, remodeling activities. I mean, what is it? Mortgage applications were down 47% in October .

That's just the number. I'm not the doomsday guy. That's just the number.

We look at these numbers.

So mortgage applications down 47% isn't good for the outlook of our industry. It's the highest print yet.

So next year is like a month and a half away. That slowdown already know that like that.

you know, they don't buy a house and they buy the furniture the next day. You know, so there's a whole pail to all this stuff.

And, you know, so how it cycles through.

I just don't know where it's going yet. I don't think anybody does. I think anybody tells you they think they know where the housing market is going.

I don't know where it's going yet. I don't think anybody does. I think anybody tells you they think they know where the housing market's going. So that's my restaurants are you digging yourself up,

I don't know who's been right yet. This is not, by the way, for the housing market interview, there is no soft landing. We're way beyond the soft landing. This is a really hard landing or a crash landing, and it's looking more like a crash landing in the housing market. It's looking.

But sometimes the truth isn't what everybody wants to hear.

But it's just the truth, they were the facts. You guys could read that. Yeah, yeah, so.

Understood. Thank you for your candor and happy holidays.

Happy Holidays. That does conclude today's questions. I would now like to turn the call over to Gary Friedman for closing remarks.

Great, thank you everyone. Well as we said in our letter, we really want to thank all the people and partners, all the world that contribute to our cause, our shareholders for believing in us. And we just wish everybody a happy, happy holiday and we look forward to speaking with you in the new year.

Thank you. Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect..

Goodbye.

So.

I I.

joining us for a third quarter earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws.

to our FCC filing as well as our press release issue today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revise or publicly review...

certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available.

on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary. Great. Thank you, Allison, and thank you, everyone, for joining us today. I will start with our prepared remarks from our shareholder letter to our people, partners, and shareholders.

We're pleased to report better than expected results for the third quarter with net revenues of 869 million versus 1.006 billion a year ago and up 28% versus third quarter 2019 net revenues of 678 million. Gross margin contracted 50 basis points in the third quarter primarily due to fixed stock when CD leverage.

Although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there is certain long-term risk of brand erosion and model destruction for those who choose the promotional 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 now reflect those of luxury brands as we delivered 20.8% adjusted operating margin in the third quarter.

Also exceeding our outlook despite the dramatic slowdown in the housing market.

Our results are inclusive of investments related to the launch of RH Contemporary, the opening of our first RH guest house, the development of RH International, and the rollout of RH in your home, which led to approximately 200 of the 640 basis points of adjusted SG&AD leverage in the quarter. Our results are inclusive of investments related to the launch of RH International, the opening of RH International, the opening of RH International, the opening of RH International, the opening

Additionally, we experienced adjusted SG&AP leverage due to lower revenues versus a year ago.

Our business generated 102 million of adjusted free cash flow in Q3, ending the quarter with 12.5 billion in cash on our balance sheet, 2.5 billion in cash on our balance sheet, total net debt of $375 million and trailing 12 month suggested EBITDA of $1 billion.

fiscal 2022 outlook. As noted in our previous shareholder letter, we expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters and possibly longer due to the Federal Reserve's anticipated monetary policy.

and the cycling of record COVID-driven sales and backlog reductions. Based on our current trends, we now expect fiscal 2022 revenue growth of negative 3.5 to negative 4.5 percent versus our prior outlook of negative 3.5 to negative 5.5 and adjusted operating margin in the range.

of 21.5% to 22% versus our prior outlook 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 shift and shed less valuable market share, we believe our long-term investments will enable us to continue driving industry-leading results.

Our business vision and ecosystem, the long view.

We believe there are those with taste and no scale and those with scale and no taste. And the idea of scaling taste is large and far reaching.

Our goal to position RH as the arbiter of 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, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH infrastructure.

generating revenues of $5 to $6 billion in North America and $20 to $25 billion globally. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces.

by building an ecosystem of products, places, services, and spaces that establishes the RH brand as a global thought leader, taste, and place maker. Our products are elevated and rendered more valuable by our architecturally 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 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 in the $200 billion North American hotel industry.

Additionally, we are creating bespoke experiences like RH Johnville and integration of food, wine, art and design in the Napa Valley. RH1 and RH2 are private jets and RH3 are luxury yachts that is available for charter in the Caribbean and Mediterranean for the wealthy and affluent visit and vacation.

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

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

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

The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders in the world.

for shaping the world of architecture and design. Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 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 to $100 billion opportunity.

Our ecosystem of products, places, services, and spaces inspires customers to dream, design, travel, and live in a world thoughtfully curated by our age.

creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste 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 to Cartier, Louis Vuitton to Laura Piana, Harry Winston to Hermes was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do other brands want you to. We are not from their neighborhood.

appreciate this crime is not for the faint of heart.

And as we continue our ascent, the air gets thin and the odds become slim.

We believe the level of work we have introduced this year, inclusive of our contemporary, the world of RH, RH San Francisco, RH 1, 2 and 3, as well as the opening of our first RH guest house in New York begins to demonstrate the imagination, determination, creativity and courage of this team.

and reflects and our relentless pursuit of our dream. I mentioned at the start of this year that in over two decades leading our age, I've never been more excited about our future and I've never been more uncertain about the present.

We will introduce the largest collection of new product in our history across RH Interiors, Modern, Contemporary, Outdoor, Beach and Ski House, Baby Child and Teen. To amplify this historic launch, we will once again unveil a revolutionary new gallery design as well as redesign and remodel all of our current galleries.

We'll be introducing RH to the UK and the rest of Europe this spring summer in the most inspiring and unforgettable fashion with the introduction of RH England, the gallery at the historic Einhope Park, a 16th century 73 acre estate that will feature three restaurants in the mooring of the Shahz Angela).

the ringerie, the conservatory, and the terrace, plus the Einho architectural library and the deer park, inclusive of the largest herd of white deer in Europe with viewing from the Grand Lawn. We are also under construction on our Paris, the gallery on the Champs-Elysees.

scheduled to open in 2024, and RH London, the gallery in Mayfair, scheduled to open in 2425. We have also secured locations in Milan, Madrid, Munich, Dusseldorf, and Brussels, some which will also open in 2425. RH also announced today the following acquisitions and hires to accelerate the brand's transfer of

custom-bespoke furniture workroom and the hiring of Joseph Yu to create RH-bespoke furniture.

The hiring of Mark Russell, former editor-in-chief of Architectural Digest and Elle Decor, to create RH Media, an editorial content platform that will create the most, that will celebrate the most innovative and influential people and ideas that are shaping the world of architecture and design. Today's announcement, plus our previous acquisition of Water Works.

firmly plants four RH flags at the very top of the luxury mountain and clearly states our intention of establishing RH as an arbiter of taste and design. These brands and businesses thoughtfully integrated and amplified on what we believe will be the world's most innovative and dynamic global design platform.

will begin to fundamentally change the landscape of the luxury home furnishings market and the two the trade design industry. As we approach the holidays and New Year, I would like to express our gratitude to all of our people and partners around the world for your contributions and commitment to our cause and for bringing our vision and values to life.

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

or by reaching the top of the mountain. Happy Holidays Team RH, RPDN.

Any other questions? The floor is now open for your questions. To ask a question at this time, please press star one on your telephone keypad. If at any point you would like to withdraw from the queue, please press star one again.

You will be provided the opportunity to ask one question and one further follow-up question. We will take a moment to render our roster. Our first question comes from the line of Sibian Gottman from Morgan Stanley . Please proceed. You will be provided the opportunity to ask one question and one further follow-up question. Please proceed.

to the fourth quarter. Is that less backlog? Is it more macro risk? What's changing from third down to fourth?

Maybe starting with the second part, Simeon, in the beat in Q3, I think most of that I would characterize as just timing of sales from Q4 to Q3. Some of that is obviously relieving backlog faster than expected, but we had expected it back to Q logs faster than expected.

You know, there's kind of a rounding at her in a sense, you know, with all due respect. But, you know, I think it's pretty consistent, you know, with what we've talked about before. And simply just Q3 said some pull forward of sales from Q4 and a little bit of faster backlog loop.

Okay, and then as a follow up, maybe more for Gary, knowing that you're going to continue to invest for the future and still be somewhat responsible here for the near term. Question is what, you know, are you looking at prioritizing things differently? Does anything get sacrificed? Love to hear how you think about this, especially as the year keeps on evolving with, you know, the Fed still tightening. We've already had high rates of

Yeah, how do you define responsible? I'm serious. I'm trying to understand your question. I think we're.

Yeah, we're communicating what we're doing. We believe everything we do is responsible. So

I don't quite know how to answer that. Well maybe it's the second part which is, you know, is anything getting sacrifice meeting or some of your longer term investments putting on pause or no, and maybe that's just the right way to look at it. We're not putting any longer term investments on pause.

I mean, we're playing for the long term. So we're, you know, we're not doing irresponsible things that other people are doing, like promoting their business and selling, you know, sending, I don't know, 30 emails to a customer a week with, you know, fail signs. So, you know, that I think might be irresponsible.

But I guess it depends on your strategy. If your strategy is to stand for price, then maybe that's an okay strategy. Your strategy is to stand for price, then maybe that's an okay strategy.

to stand for design and quality and innovation. So, you know, it's positioned with the company-run product, not price.

and build this business for the long term will become one of the few brands in the world that exists over a long term period of time. So I'm.

That's unusual in our industry. Most people build a concept and then they roll out 300 or 500 stores and at the end of 10 years it's an old concept. So we like not to get old and we like to continue to reinvent the business.

whatever the cycles are, if you look at it for us, if you look back at history, since I joined in.

2001, there was a recession at that time.

We elevated the product and kind of transformed the brand. We did the same thing in 2008 and 2009, the financial crisis. We went through another cycle again in 2015, 2017 when we made the move to membership and re-architected the back end. We also introduced modern and, you know,

and make the brand relevant and make sure we're leading the industry. And we think the work that has begun with the introduction of RH Contemporary, which will triple in size next year from an assortment point of view. And the introductions we're going to make across the entire portfolio, but we would be stocks with the retail industry, with the rein AJE

unveil and we'll go through and remodel and redesign all of our current galleries and refresh all of those, as well as the platform we're building globally for the brand is going to once again transform our age and man, bye.

put us in a position where we create massive strategic separation. So we're kind of comfortable being the others and going the other way. So a lot of people are hunkering down right now.

and slowing down, we're kind of speeding up. We're more excited, less fearful. I think we saw this coming.

They're trying to move all their business online now. Everybody's opening stores and maybe we're just a little bit ahead of everybody else. Okay, thank you very much. Happy holidays.

Thank you. Happy holidays to you. Our next question comes from the line of Steven Zacon from Citi. Please proceed. Great. Good afternoon. Thanks for taking my question. I wanted to focus on RH Guest House.

The last time you were on the call, you talked about some of the initial interest. How has that performed the first 3 months that it's been open? What are some of the early learnings for the hotel and do you see opportunity to open more of these concepts going forward? Yeah, I mean, we just opened, we think it's extraordinary the feedback we're getting from our guests.

is incredible, the feedback we're getting on the restaurant has been incredible. And so, you know, we're just in early learning period, you know, we're not, you know, I missed the first time we've ever done this so far. We're really excited. You know, we're going to be opening our campaign and caviar bar soon. We've got our feet under the ground, you know, underneath that spinner.

new live fire restaurants. And so we couldn't be more excited about it. I mean, the feedback from our guests is.

has been better and so on and so forth. So this is just very early, big test. It's kind of a small thing in a very big organization that if it becomes a big thing long term, great. But right now, it's really positioned to be something that helps redefine the brand.

and have people look at us differently. So, you know, I think it demonstrates, you know, the kind of creativity and passion and attention to detail to do something extraordinary. You know, people from the hospitality industry have come and seen it and toured it, you know, luxury CEOs that have come and toured it.

said they haven't seen anything like it anywhere in the world. So we just let it kind of unfold here. Okay, great. Very helpful. The other question I had was on gross margin. So it's the first quarter the business has seen a decline, obviously on occupancy, peak leverage. But as we look forward, is that the likelihood that you probably see gross margin decline again in the fourth quarter? How should we think about that?

49.7, as Gary mentioned, a lot of that is doc CT leverage. So, if you think about Q4, there's a further sequential decline, right? Q4 is a smaller quarter for us. So at the midpoint of the guide, we're at 789. So if you do, we're not guiding gross margin, but if you do sort of like similar sort of math and transposition of numbers going from, you know, to the midpoint of the guide, we're at 789. So, if you think about Q4, we're at 789.

Yeah, my impression, I would just say, look, if you look at the housing industry and if you track the housing industry and if you track the performance of home furnishings retailers against you know, past housing downturns, you know, that would tell you things are gonna get worse before they get better here.

you know, the housing industry is in a free fall. Like the National Association of Realtors just reported that housing demand was down 37% in October .

you're gonna have some wild swings here. And it's happening first to the luxury market. If you look at the numbers and if you track the last nine months or the reporting on Redfin, I think it started, the luxury housing market started going down in the Q4 of last year.

And the luxury housing market went up faster and higher, and the luxury housing market is gonna go down faster and lower. And that's, you know, in that.

just an outcome. And, you know, and so, yeah, the question is, that, you know, there's gonna be people that wrote it up and they're gonna try to stay up and they're gonna promote their business and I think they're gonna break their models. And, you know, next thing you know, you gotta send out a thousand emails next year too. And you're just in a, you know, what I call the downward spiral.

You know, we're, you know, we're in the ditch and so. Yeah, we kind of expected from the beginning that.

this COVID lift wasn't anything that we manufactured. And generally when that happens, those kinds of things go up and then they go down. And you try to stay focused on the longterm, but.

You know, we're not going to try to break our model to try to, you know, and promote the business in a period. I mean, we could, we have people that are in our industry right now that have some pretty good sales. Their whole website is 30 to 40% off. If I put our whole website 30 to 40% off, we'd change the sales trend by 50 points.

The problem is you're just going to have a much less productive business because doing more volume and lower margins and all that volume also creates, you know, costs that are inefficient through a model. I've already run companies like that. So yeah, we have a different model. Someone asked me the other day.

Hey, you know what if you're wrong on your long-term view? But if the markets not 25 billion I go okay. What if it's not?

What if it's half that? What if it's 12 and a half billion? And we, you know, and we have 30% EBITDA.

I don't know that directionally looks like some other people like.

and people like that, you know, like, I mean, there are even higher than that, but you know, we've been a zip code where this company would be worth a lot of money. And so, you know, whether we become 12 billion or 25 billion and we're not gonna be able to do that, we're gonna be able to do that. And so, you know, we're gonna be able to do that.

It's not really what's most relevant, it's do we get there? Do we become really the first integrated luxury home brand in the world?

And, you know, and that's just going to be a different path than anybody's taken because no one ever done it.

So, you know, there's going to be some ups and downs here, but the housing market's going to freeze ball. And it's going to get worse before it gets better.

you know, so far we've been more right than wrong about that, you know, because

You know, we don't really try to lead our business based on hope We, you know, we try to run our business the best we can based on.

facts and math and logic and patterns and so.

I may not sound really optimistic right now short term.

I may not sound really optimistic right now short term. I'm not.

I'm super optimistic long term. So if you want to play a short term stock, don't play ours.

I'm super optimistic long term. So if you wanna play a short term stock, don't play ours. You wanna bet for the long term.

This is a good place to put your money. Thank you. Happy holidays.

your money. Duly noted, thank you. Happy holidays. Happy holidays.

Our next question comes from the line of Max Reklenko from Cowen. Please proceed. Please proceed.

Great, thanks a lot. So the way that you're seeing your margins play out over the past couple of quarters with upside both 2Q and 3Q, does that give you more confidence in keeping at least 20% EBIT margins next year if the environment remains challenging? And then just more broadly... Now you can stop up to date with this Sport oils excellence offensively, by just checking

How are you thinking about the durability and margin power of the business today, given some of the moves that you've made recently? It depends on our, you know, that always depends on your.

investment and your investment timing. You know, our underlying core business, if we wanted to, yeah, we can crank it all back and stay at 20. You know, I'm not sure that's...

a long-term priority. You know, I don't know how, you know, how bad this market's gonna get. And, you know, and we don't wanna promote the business over the short term, you know, to try to create some short-term outcome that's gonna be irrelevant, you know, two quarters after that.

You know, so, you know, there's going to be a lot of decisions to make, the really difficult environment for those of us in the home industry, and especially if you're at the higher end, you know, it's more challenging. And for some people, it's not intuitive, but you've got to think about it, we have the greatest migration.

of people moving from cities to suburbs in the history of America, you know, during COVID and the second home markets. The people that did that could afford to do that. The people that moved the most and bought the most homes were the luxury customers that had the capability to do that.

That's why the luxury market went up so high and the housing market, the luxury housing market benefited most and we're gonna have a flip side here. So look, all that extra money we made during COVID, we didn't waste it. And on the flip side, if we have a bigger give back.

That's okay. If you look at every home furnishings Retailer and and look at where their operating margins were

in 19, you know, when they entered COVID, and where they exited in 21. We had the highest operating margins going into COVID amongst all home furnishings retailers, and we exited with even higher margins than anybody else. We picked up, you know, more margin than others. We had more strategic separation. So, and I believe as we should, our consumer moved more, our consumer had more urgency. And, you know, and, you know, in some cases where other people promoted, maybe they got a little bit more top line than us, but we just didn't promote.

But, you know, it's like trying to act like, oh, this is a surprise. You know, like, I mean, the Fed pumped so much money into the economy, they created inflation. They held interest rates at such low levels, they made it easy for people to buy homes.

Now we're on the other side of that. Quantitative easing, interest rates are up, we've got inflation.

Who's seen this game before? Anybody on this phone?

Not unless you were in the market in 1975 to 1982. This is a whole new ball game that no one's even seen. We're trying to just look at the patterns and look ahead and say, what's the best way to play this?

you were in the market in 1975 to 1982, this is a whole new ball game that no one's even seen. We're trying to just look at the patterns and look ahead and say, what's the best way to play this where we come out.

And we really are positioned for the next five to 10 years, not the next two to three quarters, or even the next five or six quarters.

That's not relevant long term. Relevant long term is what's the next five to ten years going to look like and what are the decisions we're making today that are going to impact that vector, right, that tilts us slightly more up and over the long term makes a big, big difference.

So that's how we're focused. We're not managing this business, we're leading this business. We're going to be somewhere bigger and brighter.

And, you know, our journey is going to be a little longer, it's going to take a little longer. So, you know, there's going to be people that have patience.

And there's going to be people that don't have patience. We have patience. You need patience if you really want to be extraordinary in this world.

And then just any updates on the timeline of the rollout to other galleries? Yeah, we're very happy with the initial response. We wish we could get more information on the timeline of the rollout to other galleries.

going to happen to us during cycles. This happened to us.

in 08, 09 when we kind of transformed the assortment in the business. It happened to us in 15, 16 when we moved to modern and it's happened to us now. When we make these big moves and they're generally every seven or eight years because those are kind of the big cycles in our business. I mean, trends can last 10 to 15, but there's generally, I think every,

every brand needs a major refresh every seven or eight years. And so ours just happened to be timed to economic downturns. And a lot of that coincidental, quite frankly. In 15, 16, it wasn't really an economic downturn. We created somewhat of a downturn when we moved to membership, cause that was a kind of a year transition.

to do that. But when you bring in this much new product that the world hasn't seen before, that no one's ever scaled, you know.

travertine furniture, you know, or burlwood, you know, at scale. You can see pieces out there at antique stores or, you know, some retailers have a piece or two, a couple pieces, you know, they don't have collections with...

130 SKUs and you know and no one's out there making that stuff at scale so we are going to constantly I think for the rest of time have to continue to build

the supply chain capability that enables us to invent. I mean, if you're going to invent something new and scale something new, it means it hasn't been done before.

It's going to take longer, it's going to be bumpier, you know, and it's the difference between views.

you know, leading a business, managing a business, invention and innovation versus duplication.

So, and you know, I think we're going to go through the same thing with contemporary. It's taken longer to scale this stuff. I mean, we just got back from the quarries in Italy, you know, by, you know, meeting some of the best families and quarry owners and building partnerships for stone. And so we can, you know, make stone furniture at scale and we can have better economics and a better supply chain.

I don't know, two weeks ago we went around the world, we were in 10, for 10 days I think we were in seven countries or something like that. And in the factories and meeting with the factory owners and talking about scaling.

not only what they're scaling up now, but what's coming next. Which is, I mean, you've just seen the first little introduction of contemporary. When you see what happens next year.

It's extraordinary and revolutionary. I mean, I think it's gonna be, you know, we're just gonna own this entire.

kind of aesthetic and look and, you know, be no different than, you know, how we approached 08, 09, you know, when we took kind of the European Belgian kind of aesthetic and, you know, we went out there and owned it and did it at scale and it became kind of the RH look in the industry. And then, you know, we didn't just dabble in modern, you know, we launched with a 450 page.

the first course of the meal. So there's, call it a four course meal. And next year there'll be two more big courses and there'll be another big course in 24. And by 24, I think we'll have it rounded out. But it's gonna be, I think it's gonna be the most extraordinary thing we've ever done.

So we're really excited about it. Wish we had more goods right now, wish we could roll it out to more galleries right now. But so far, every gallery we've put it in, there's been really good response. And we're really excited about getting it into more galleries.

Thanks a lot, Gary. Jack Allison. Happy holidays, everyone. We'll speak soon.

Thanks a lot, Gary. Jack Allison. Happy holidays, everyone. Speak soon. Happy holidays, Max.

Our next question comes from the line of Curtis Nagel from Bank of American.

Our next question comes from the line of Curtis Nagel from Bank of American. Please proceed.

Great, thanks very much for taking it. Maybe one longer term question, then a quick model one. First, Gary, let's talk about the acquisitions and how much they step up your high-end trade in interior design business for us, a little less in the know, and how big an opportunity from a revenue perspective you could see. Then, just as a follow-up…

I just wanted to clarify that comment kind of loosely made about 20 percent margin next year if you pulled back on investments. Maybe I misheard, but just if you could clarify what you were talking about there.

I want to clarify that comment kind of loosely made about 20% margin next year if you pulled back investments. Maybe I misheard, but just if you could clarify what you were talking about there. Yeah, I think.

Yeah, like if you think about, you know, the high end design and trade, you know, how big is the revenue opportunity, the people at the very top of the mountain, you know, own the most homes.

Not only do they own the most homes, the homes are more expensive. On average, someone spends about 10% of the home costs on furnishings, decor, and art. So when they buy nicer homes, they buy nicer furniture. They furnish the whole house. They have multiple houses.

You know, and so that's the most lucrative part of the business. It'll be the most profitable part of the business. It has the most leverage. You make the most money there. So we think it's really important strategically, and we went out and, you know, met who we believed.

you know, had the best reputation and quality and design in upholstery and the same in kind of case goods and furniture. And you know, they're big believers of trying to scale this level of quality and design and so, you know, we're really excited about it.

It's going to take a while. We've got to get it up and going and test it and see how it goes. We've got to figure out exactly how it's integrated.

But the long term, I would just say probably today right now, there's a bunch of people in the high end trade industry that just kind of said, you know, WTF. So it's been a good, it's a good time.

And then like now what is gonna happen? And so this is a big move for us strategically, but we've got to build capability. Yeah, there could be other acquisitions to build capability here. And it was setting the standard for innovation over time in terms of what is a targeting improve or not.

talking about other people. And so, yeah, we're just gonna, you know, we're taking a different path and gonna build a different market and we're gonna continue to.

evolve and change. I mean, not too different. Like, if you think about Apple, right? I mean, Apple, I mean, they started pretty high up with a $400 phone or something, we started it. And what's the latest Apple phone, like $1,100 or something? Like $1,200? Yeah, I mean, they kind of created a high-end market for phones. When I think the average phone back then was like $69, Motorola Razr or something, I think it was $6,000.

So I think, you know, we're not just going after a market and how big is the revenue opportunity there, we're also gonna create a market because that product at that level of the market, it's not accessible. You can't go into those showrooms, the goods aren't priced.

you know, you're kind of blind and, you know, you have to go through, you know, go through a middle person to even to have access to quality of, you know, that quality and that design. So, you know, we think there's going to be a big unlock just starting to make that level of quality and design.

get that customer's living room, master bedroom, main house. I think it's just gonna open up a lot of opportunity, but lots of tests, lots to learn, lots to figure out. We've thought about it for a long time. We worked on this for a long time. And today we decided to tell you officially that we're doing it.

We're super excited about it. The talent, it's also what I'd say is it's a talent acquisition too. I mean these people are just incredible. Incredible. Incredible culturally, creatively, you know, entrepreneurially, you know. you

just incredible, incredible talent. We've all, in a short time, we've been together, we've learned from each other, and they've rendered us more valuable. I think we've rendered them more valuable. So it's kind of an upward spiral.

Yeah, you know, for sure some really impressive resumes there. And then just going to the follow up question, Gary, just a comment you made about, you know, could have 20% margins if you pulled back or something like that. I may have misheard, but just wanted to clarify that. Yeah, the underlying model, you know, like the underlying model, I think we've always said it can withstand a 20% increase in the number of people that are in the workforce.

You know, right now, I again.

I don't think the idea here, I don't think it's strategic to go, hey, let's have 20% operating margins in 2023. I don't think a lot of people get up in the morning and go, you know.

you know, go to work and fight for 20% operating margins. They get up and they go fight to do incredible inspiring work that they think is gonna create great long-term opportunity. And, you know, if we didn't have a whole lot of things to do we didn't have a lot of great ideas that we're pursuing right now.

Yeah, I you know, I say hey, you know what? We don't have anything that's really that big worth investing in so like let's Let's here we go. Let's hit 20% operating margin. Let's make that the you know the goal, you know But we have some incredible you

stuff we're working on, the most exciting stuff we've ever worked on by far. And, you know, the kind of stuff that you're so excited you can't sleep, you know, you can't even go home. You're just so excited. And, you know, we have groups of people that here have been through all kinds of hours, like figuring stuff out because the work.

is really that special. So we're investing in that work as we think that work will change the vector and will change everything and will create massive strategic separation. So we're not really looking at,

I wouldn't say, you know, if you said, hey, Gary, is your focus on financial outcome in 2023? Not really. Our focus is on creating a leapfrog in 2023 and 2024 that when we come out of this cycle.

that people look around and go, where did they go? That we've just made such a leapfrog that we're so much farther ahead of everybody else on every level. And that will create big returns.

And we know how to create big returns. We built the best model in the industry. So we're gonna do things that make the model better. But you can't do that by not investing and go, okay, we're 20, let's hang on, let's do less. That's the downward spiral. That's the long-term death spiral.

And that's not the game we play. Understood. Thanks very much and happy holidays. Our next question comes from the line of Jonathan Matsitsuki.

from Jefferies. Please proceed. Great. Good afternoon, and thanks for taking my questions. Gary, you mentioned 2023 will mark the largest introduction of new products in company history. So how should we be thinking about your sourcebook strategy next year? How are you thinking about mailings relative to maybe this past year?

Given all the new product launching and should we be planning for elevated source book costs? That's my 1st question. Thanks. Yes, you should and probably.

a big advertising campaign. So I think it's the best work we've ever done. So we're gonna shout from the rooftops. Gotcha. And then, you know, my follow up question on supply chain, can you help us understand the cadence of how...

supply chain costs tailwinds may flow into gross margin next year. The reason I ask is I think 70% of your cost of goods sold is sourced from Asia. So how should we be thinking about the timing once we're on the other side of elevated inbound container rates next year?

much higher rates than we've talked about on various calls.

But I would say every month since then, we have actualized a number lower than contracted. And the way you achieve that, obviously, you're not always going on contract with the spot rates level. So you're going out in the spot market and those rates have been coming down. There's excess availability, especially along certain, you know, Asia Pacific routes. And so while we initially saw a margin structure from the higher rates.

in I would say, you know, the first four or five months. We're at a point now where we, like this last month, we're lower than we were for the sort of contracted rates.

I would say, you know, the first four or five months, we're at a point now where we, like this last month, we're lower than we were for the sort of contracted rates for the prior year.

They're kind of, we're kind of, and that's reflected in our guidance, but that we expect honestly, as we look at it and we think about what's happening with supply chain. I think there's. There's probably more conduct more opportunities and so those are starting and we'll continue to see this in the next year. We believe. That's helpful. Best of luck for the rest of the year.

Thank you. Thank you. Our final question comes from the line of Michael Lasser from UBS. Please proceed.

Good evening. This is Atul Mahaswamy on for Michael Lasser. Thanks a lot for taking our questions. Gary, your stock buybacks slowed quite a bit this quarter. The question is why did you go slow on buybacks so much? Was it because of the M&A or has anything fundamentally changed about how you view buybacks in the current landscape given you still have a lot

great have one up. And so.

I think Simeon's first question was about being responsible. So,

We're not going to necessarily change the world through a buyback strategy. When you're going into

kind of a storm that you haven't seen before. You don't wanna sail, or let's say you're not in a sailboat, but you're in a boat that is in, you don't wanna spend all your fuel before you can see the shore.

and run out and be floating around out there. So there's lots of examples of people who went out and spent a lot of money on buybacks and went bankrupt. Bed, Bath & Beyond will probably be the next one that does.

Yes, they're pretty famous for how much stock they bought back. I don't know exactly how

you know, this housing market's gonna play out. I don't know if the housing market's gonna, it almost always, the housing market is in a recession. I mean, if somebody doesn't think that, I'd like, I'd love to just do a Zoom and put our numbers up for you. But you know, the luxury housing market has trailed down since last September , right? Since down eight, down 16, down 17, down 16.

down 12 in January , down 13 in February , down 15 in March, down 18 in April , down 18 again in May, down 21 in June , down 24 in July , down 28 in August . And the new numbers will come out for the next quarter and we'll know how far it goes down, but the odds are it could be down 35, it could be down 40.

So when we start seeing trends like that, I don't know how it comes all apart. Did anyone see 2008 coming? I mean, because the way the market reacted, it didn't seem like it.

right? And nobody sees the big implosions. And, you know, we're not greedy. Again, we're not gonna accomplish our goals here based on a buyback. So we're spending our, you know, we'd rather just go look.

You know, like where is the world going right now? We've never pumped this many trillions of dollars into the economy.

where's the world going right now? We've never pumped this many trillions of dollars into the economy.

Interest rates have never accelerated this fast. Inflation hit numbers that we haven't seen in 40 years.

It seems like Powell kind of, you know, sounds relatively confident when he's up there, but he's the guy that raised interest rates way too slow. You know, he's the guy that didn't start easing. I mean, he should have raised interest rates and not let the housing bubble happen.

You know, housing prices went up from 2020 to 2022 by 45%.

went up from 2020 to 2022 by 45%.

That's never happened except in the 70s. The two year period, housing going up 45%.

happened, except in the 70s. The two year period, housing going up 45%. And so

I don't want to sit here and have all kinds of depth and not have any clarity of what it looks like out there. So let's let the storm become clear. Let's make sure we can see the shore.

Does that mean, oh, maybe the stock runs a little bit and we buy a little less? We're not here spending all our time trying to figure out how to optimize a buyback.

We think our stock is undervalued today. Could it get worse? I think business will get worse before it gets better. Will our stock get worse before it gets better? I don't know. But I haven't been here for 22 years. BECAUSE folk regulations are going to be McDonald's laws. For nonstop FB UK

But, you know, spend all my time thinking about that. We got much more exciting things to focus on. When we have a better view of the shore, it will make the right decisions. That's fair, Gary. Thank you for that.

look to maybe delay some of the openings until when the macro stabilizes so as to get the most customer attention to some of the great work that you and your team have been doing.

Yeah, it's a little tough to do that. You know, because once you're in construction, you know, if you stop, you're just going to make a gallery cost twice as much, you know, and you're still paying rent and, you know, you still have costs. So I mean.

I don't think we've ever opened a gallery that doesn't make money. So, you know, our new galleries, I anticipate, will do well. I mean, if business goes down 30%, you know, we're going to have to do well.

70% of the people still buy. All our galleries are really productive in the company today. So, again, so we open a little slower and then it just means when we come out of this.

70% of the people still buy. All our galleries are really productive, you know in the company today. So, you know again, so we open a little lower and then it just means when we come out of this those galleries have big comps.

You know, we don't try to time things like that. I mean, we're not, if we were a company that had like, you know, 5 to 8% operating margin or, you know, even 10 or 12% operating margin and you hit a downturn like this.

that could be sustainable and it pulls you down and you might have a cash flow problem, yeah, then you're going to make decisions like that. We're not going to have a cash flow problem. You know, so why would we stop building stores that we know are strategic and are going to make a lot of money? You know, so that doesn't make sense.

It sounds to me, maybe other people have to do it because they have a cash flow problem. We're not going to let ourselves have a cash flow problem. That's why we haven't deployed two billion dollars buying our stock back yet. Because I don't know

You know, does Powell and his team know what to do? Or are they just tinkering around they haven't seen this before and is you know someone gonna Make some calls here and we go into a ditch.

You know, it's not gonna be a subprime thing, but it could be something else. Nobody saw it. Nobody's seen any of these big things coming except for one or two people. You know, the guy in the big short. You know, he got it. Maybe a few others. Most people don't get it right. And right now, I've never seen.

more confusion. You read the headlines of the top papers in the world and I mean who's saying what? Who thinks, I mean, you know, the KPMG Consulting Group, they think housing prices are going to drop 20% next year. Goldman Sachs thinks housing prices are going to drop 7.5%.

you need to sell houses to make money. So you're gonna have the rosiest outlook. If you're a banker, you don't want transactions to stop. You don't want, you know, the banking industry to slow down, right? And if you're a consultant, you're gonna have the rosiest outlook.

You don't mind telling everybody the bad news because people hire you when they're all screwed up and panicking, you know? So maybe they're the ones that can tell you the worst case. I don't know, but that's a big spread, don't you think? Housing prices are gonna go up 20.

Have you go down 20 or they're going to go up one? Well, that sounds like everybody's on the same page. Yes, so…

You know, so it's just a lot of uncertainty right now, but one thing I'm certain of the housing market is collapsing.

At a level I haven't seen since 2008. I haven't seen this kind of drop since 2008. So go look at, you know, how far housing dropped in 2008 and 2009 because these numbers look just like that. That's probably bit closer to normal than most of these Strings. For these actual number ofnelts in terms of spines,

Thanks for taking my question. First, Gary, I'm sorry I jumped on late, but if you already addressed this, but we noticed some of our work that you're partially rolling back some pricing increases on select products. We've also seen a higher level of clearance on your website. Can you characterize that relative to your pricing and brand strategy?

Sure, sure. Well, you know, as Jack mentioned, you know, freight costs are coming down, raw material costs are coming down, pricing is coming down, and you know, we're not going to not want to have a good value in the marketplace. So of course we'll adjust pricing.

as our pricing comes down. And sales are down. So did we plan for sales to be down this far? No.

Did we think that housing market was going to collapse this fast? No. Do we think interest rates were going to go up this fast? No. So do we have more inventory than we'd like? Yes.

Should we be accelerating the things that we don't want to have in our exorbitant long term that we're clearing out because we have new product coming in? Of course. Will we have more than normal? Of course we will.

That shouldn't surprise anyone. It's the retail business. You have new product coming in, you've got to get rid of old product. So you mark it down. If your sales are down, you've got more old product. So you're gonna mark it down a little faster.

surprise anyone. It's the retail business. You have new product coming in, you've got to get rid of old products. So you mark it down. If your sales are down, you've got more old products. So you're gonna mark it down a little faster. Otherwise your DC can't.

you know, can't process it. So, yeah, that's all that's happening. And if, you know, prices go up, raw materials go up, shipping goes up, like everything that happened with COVID, you're going to take your pricing up. The customer, consumer's going to understand it. It's, you know, it's well known, but they're also going to understand when things come down. And so,

You know our whole business you look at everything through a lens of design quality and value in that order But the design is not beautiful and inspiring Nobody buys it

If the design is great, then they get closer to the product and they assess the quality. If they love the design and they believe it's really good quality, it's great quality, then they look at the price. And then the consumer makes the decision for that design and that quality, is this a good value and do I buy it?

We try to guess where that best point is. Sometimes we're right, sometimes we're wrong.

So we adjust pricing all the time. We're never gonna price anything exactly and we're never gonna, you know.

We're never going to buy it exactly right. As it relates to your clearance strategy, Gary, is the primary channel of clearance through your full-price stores and website as opposed to your outlets? Oh, yeah, yeah, you want like we...

We've got way more galleries with way more people coming into them, right? And we have a website, our full price website is

where we have the most traffic. So you don't want to move product out of that channel right away. You know, like we have, yeah, we would, you know, you'd just back up inventory really fast. I mean, this isn't the luxury apparel business where they just throw it in a dumpster and burn it. You know, this is furniture. You know, we're never gonna run it exactly like the luxury apparel people or the luxury jewelry.

I mean, once it goes on a truck and it's out of the box, you got to take it somewhere so you have outlets. If the customer doesn't like it or it's got a tiny scratch or, you know, that you can't fix or something's wrong, you got to figure out what to do with it.

But, you know, when you have plans to say, okay, yeah, here's the collection, here's the things that are gonna be going out, that you're gonna be marking down and your demand falls.

pretty rapidly, that's gonna change your pricing strategy. It has to, because you've got inventory that's on order that's coming in. Got it. So, bulky goods like ours, you better keep that inventory moving because.

Fernando is sitting here, if we don't move the inventory, he'll have to figure out where to put it and we might not like what he does with it. Lastly, if I may, a point of clarification. Did you say earlier that you could do 20% operating margins next year if you pulled back on a lot of investments?

So with this tough macro investments or environments, we think of 20% as the high watermark for next year. Well, I think it all depends where demand goes, what happens to the housing market? Yeah, what's gonna happen with interest rates, inflation in the housing market? And are we...

in a, how long of a downturn are we in? Does the downturn get worse? As housing falls off.

in a, how long of a downturn are we in? Does the downturn get worse? If housing falls off at a greater rate.

just demands gonna go down. You know, our business is tied to the housing market because, you know, if you look at our business, it's tied to events. Someone bought a new home, they're remodeling a home, or they are redecorating their home. The core of our business is not like the city parking now, artists get electric standard, or the label t lists the secondmarket, the biggest high story around, not justHere is our business. It's life gift

person that goes, yeah, I need, you know, I need some new bedding. That's our business is tied to those three things.

So if people are not buying homes, if people are not remodeling a home, and by the way, when people remodel a home, they're generally buying a home to live in, our customers, while they're remodeling. So that's actually kind of good for our business. But if the real estate activity stops, it hurts our business. You know, so if you have a

20% downfall in the housing market, two out of 10 people didn't buy a home. You know, if it's 30%, every out of 10 people didn't buy a home.

and then, you know, or didn't move, and, you know, are not, you know, remodeling the activities. I mean, look, what is it? Mortgage applications, we're down 47% in October .

That's just the number. I'm not the doomsday guy. That's just the number. And we look at these numbers.

So mortgage applications down 47% isn't good for the outlook of our industry. It's the highest print yet. So next year is like a month and a half away.

That's slowdown. You know, they'll buy a house and they buy the furniture the next day. You know, so there's a whole pail to all this stuff.

down are, you know, that like that, you know, they don't buy a house and they buy the furniture the next day. You know, so there's a there's a there's a whole pail to all this stuff. And you country.

you know, so how it cycles through, you know, I don't know where it's going yet. I don't think anybody does. I think anybody tells you they think they know where the housing market is going.

I don't know who has been right yet. This is not, by the way, for the housing point of view, there is no soft landing. We're way beyond a soft landing. This is a really hard landing or a crash landing.

and it's looking more like a crash landing in the housing market. It's looking like 08-09. And if that sounds like whatever Aaron said, like I'm gonna...

or whatever. Yeah, you know, ominous or whatever. Yeah, OK. OK, maybe I'm a truth teller and I'm not a BS'er.

But sometimes the truth isn't what everybody wants to hear. But it's just the truth. It's the facts. You guys can read that. Yeah, yeah, so.

Thank you for your candor and happy holidays. That does conclude today's questions. I would now like to turn the call over to Gary Friedman for closing remarks. Great. Thank you, everyone. As we said in our letter, we...

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.

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