Q1 2023 RH Earnings Call
Speaker 1: I.
Speaker 2: Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the RH first quarter 2023 Q&A conference call.
Speaker 2: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
Speaker 2: To withdraw your question, again press star 1. Thank you.
Speaker 2: I will now turn the call over to Allison Malkin of ICR. You may begin your conference.
Speaker 3: Thank you, Brianna. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 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 3: 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 issue today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Speaker 3: 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. Please also note that these forward-looking statements reflect our opinion only as of the date of this call.
Speaker 3: and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.
Speaker 3: 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.
Speaker 4: With that, I'll turn the call over to Gary. Great. Thank you for joining everyone. I'm going to begin with our prepared comments and our shareholder letter, and then open the call to questions.
Speaker 4: To our people, partners, and shareholders, revenues of $739 million, adjusted operating margin of 14.9%, exceeded our financial outlook in the first quarter, despite continued decline in the overall macro environment, especially for home-related businesses.
Speaker 4: With 30-year mortgage rates trending at 20-year highs, the possibility of continued economic tightening required to tame inflation, and then certainly regarding the recent regional banking crisis, we expect luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year.
Speaker 4: Based on the above and current demand trends, we are now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters. MP3 for each item to be 8EM defy COVID-19 such that we are CarPlayao 2, 3MC and 3MP
Speaker 4: We are raising our revenue outlook for fiscal 2023 to a range of 3 billion to 3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes approximately 150 basis point drag due to the ramp up of our global expansion.
Speaker 4: As previously mentioned, it's times like these that businesses tend to move in herds, pursuing broadly adopted short-term strategies that lead to mostly similar outcomes. It's also times like these that present opportunities to pursue long-term strategies that can create strategic separation. So, we now know that long-term strategies are more than just **a** and **a**.
Speaker 4: and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That path for RH is our climb up the luxury mountain and our long-term strategies of product elevation, platform expansion, and cash generation.
Speaker 4: for those teams willing to take the road less traveled and pursue their own unique path. That path for our age is our climb up the luxury mountain and our long-term strategies of product elevation, platform expansion, and cash generation. Product elevation. updated by a platinum manager.
Speaker 4: Our efforts to elevate the design and quality of our product are central to our strategy of positioning RH as the first fully integrated luxury home brand in the world.
Speaker 4: It is also the most difficult part of our climb as it requires attracting higher value, or discerning customers by offering higher quality, more desirable designs.
Speaker 4: While it's the climb that becomes more difficult as we reach new heights, it's also one we've been navigating successfully over the past 22 years.
Speaker 4: This year, we'll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby and Child and Teen.
Speaker 4: These new collections reflect a new level of design and quality, inaccessible in our current market and a value proposition that will be disruptive across multiple markets.
Speaker 4: We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the second half of the year. The new collections will be gracing the pages of a new sourcebook design with the objective of creating a cohesive collection of titles, reinforcing our design and quality leadership.
Speaker 4: with our trademark belief inscribed across the cover. There are pieces that furnish a home and those that define it.
Speaker 4: Platform expansion, our plan to expand the RH brand globally, address new markets locally, and transform our North American galleries represents a multi-billion dollar opportunity.
Speaker 4: This summer we'll be introducing RH to the UK in a dramatic and unforgettable fashion with the opening of RH England, the gallery at the historic Einhoek Park, a 17th century 73 acre estate that will be a celebration of history, design, food and wine.
Speaker 4: RH England includes three full-service restaurants, the Orangerie, the Conservatory, and the Loja.
Speaker 4: plus three secondary hospitality experiences, the wine lounge, the tea salon, and the juicery.
Speaker 4: Guests will appreciate views of Europe's largest herd of white deer grazing on the vast and scenic property from the 46 windows adorning the south-facing main building.
Speaker 4: and can enjoy a glass of wine or afternoon tea service while sitting around monolithic stone fire pits on the Grand Viewing Terrace.
Speaker 4: One of the most unique attractions that are in England is the Einho Architecture and Design Library featuring rare books from the foundational masters of architecture, Palladio, Scamozzi, and Parto cristina 13
Speaker 4: The centerpiece of the collection is one of the first printings of De Architectura, the Ten Books on Architecture by Vitruvius, whose work from the first century BC inspired Leonardo da Vinci's drawing of the Vitruvian Man, 15 years after Vitruvius sketched the original. The principles at the core of Vitruvius' philosophy.
Speaker 4: have also inspired the RH Design ethos.
Speaker 4: which is reflected in our galleries, interiors, and gardens.
Speaker 4: The gallery will also include the Sir John Soane exhibition, honoring one of England's greatest architects in partnership with Sir John Soane's Museum in London.
Speaker 4: The exhibit will touch on his life story and detail some of his most famous works, including Eindhoek Park.
Speaker 4: We believe RH England, the gallery that is historic on Inhale Park, also represents RH's greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe .
Speaker 4: We will be unveiling R.H. England at an exclusive private event Saturday, June 3rd and will be open to the public on Friday, June 9th.
Speaker 4: Our global expansion also includes opening in Brussels, Dusseldorf, Munich, and Madrid, as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan, and Sydney in 2024 and 2025.
Speaker 4: Regarding our North American transformation, we will be introducing a new gallery design in Palo Alto and Cleveland, as well as opening RH Indianapolis, a 178-acre estate on a private lake this year. For more information, visit www.plato.com
Speaker 4: RH Montecito, the gallery at the historic firehouse, will now open in 2024.
Speaker 4: Additionally, we have 12 North American galleries and development development pipelines scheduled to open over the next several years.
Speaker 4: We also believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation.
Speaker 4: We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena, and our former San Francisco gallery in the design district, where we have generated annual revenues in the range of $5 to $20 million in 2,000 to 5,000 square feet.
Speaker 4: We have identified over 40 locations that are incremental to our previous plan in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets.footage.dfa Chain, financial Gardner Wayne and our AMS eyes.
Speaker 4: We have demonstrated that those with capital in difficult markets are the ones who capitalize. That's why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation.
Speaker 4: As mentioned, we'll be focused on turning inventory into cash and continuing to optimize costs throughout the organization, further strengthening our balance sheet to maximize optionality.
Speaker 4: Outlook, we are raising our revenue outlook for fiscal 2023 to a range of 3.0 to 3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5% to 15.5%, which includes an approximately 150 basis point drag due to the ramp up of our global expansion.
Speaker 4: We estimate the 53rd week will result in revenues of approximately $60 million.
Speaker 4: For the second quarter of 2023, we are forecasting revenues of $765 to $775 million and adjusted operating margin in the range of 14 to 14.5%.
Speaker 4: The second quarter of fiscal 2023 includes incremental advertising expense of approximately 18 million versus last year for the new RH Interiors and RH Contemporary sourcebooks, plus the opening of RH England representing approximately 230 basic points of operating Margin D leverage in the quarter.
Speaker 4: 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.
Speaker 4: 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 4: 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.
Speaker 4: Our efforts to elevate and expand our collection will continue with the introductions to 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.
Speaker 4: generating revenues of $5 to $6 billion in North America and $20 to $25 billion globally.
Speaker 4: Our strategy is to move the brand beyond curating and selling products to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes RH, the RH brand, as a global thought leader, case, and place maker.
Speaker 4: 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 frames.
Speaker 4: Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses.
Speaker 4: Where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry.
Speaker 4: Additionally, we are creating bespoke experiences like RH Chonville 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 where the wealthy and affluent visit in vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture.
Speaker 4: 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 at the launch of RH Residences.
Speaker 4: fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning time starved consumers.
Speaker 4: 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.
Speaker 4: 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 who are shaping the world of architecture and design.
Speaker 4: Our plan to expand the RH ecosystem globally multiplies the market opportunity to 7 to 10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a 70 to 100 billion dollar opportunity.
Speaker 4: Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by our age, creating an emotional connection unlike any other brand in the world.
Speaker 4: 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.
Speaker 4: climbing the luxury mountain, and building a brand with no peer.
Speaker 4: Every luxury brand from Chanel to Cartier, Louis Vuitton to Laura Piana.
Speaker 4: Terry Winston of Tourmaze was born at the top of the Leisurely Mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to.
Speaker 4: We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect.
Speaker 4: We also appreciate that this climb is not for the faint of heart. And as we continue our sin, the air gets thin and the odds become slim.
Speaker 4: We believe the level of work we plan to introduce this year, inclusive of our new collections, new sourcebook design, new gallery design, and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity, and courage of this team and the relentless pursuit of our dreams.
Speaker 4: Over 20 years ago, we began the journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Alondra detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed.
Speaker 4: by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral strengths that builds character in individuals and forms cultures in organizations. Lessons that can't be learned in a classroom or by managing a business. Lessons that must be earned by building one.
Speaker 4: or by reaching the top of the mountain. Onward Team RH. Carpe Diem, Gary.
Speaker 4: At this point, operator, we'll open the call to questions.
Speaker 2: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number 1 on your telephone keypad.
Speaker 2: Please limit questions to one question and one follow-up and re-queue for any additional questions.
Speaker 2: Thank you. Your first question comes from Steven Zacon with Citi. Your line is open.
Speaker 5: Great. Good evening. Thank you very much for taking my question. I wanted to start on the need to take the increased markdowns. Gary, I was just curious if you could comment what you saw in the business over the past couple months that this was.
Speaker 5: updated in Guidance now versus factoring into your original outlook when you spoke to us in the end of March.
Speaker 4: Sure. Well, I think what we've seen is an increasing headway from a demand point of view and a slowing of our cycling through our discontinued inventory as we've
Speaker 4: increased our markdowns to start begin to cycle through this product to be prepared to move the old product out and bring the new product in.
Speaker 4: And then just projecting what it may cost us to cycle through, transforming all of our galleries. Remember we've got product in all of our galleries that we have to kind of do floor model sell-offs and transition through our outlet business. We now believe it's going to cost us more from a markdown.
Speaker 4: perspective to move through that inventory in this environment.
Speaker 5: Okay, fair enough. The follow-up question I had was on the UK market opportunity. I think it was a couple of calls ago, you talked about the potential size of the UK market being as large as California. I guess on the cusp of opening England now, how do you think about the opportunity now? How do you think about the competitive environment, how you plan to merchandise this first gallery? Anything you can add?
Speaker 4: expectations are more muted as you would expect.
Speaker 4: And from a competitive environment, I don't think anything has changed. You know, just as we become more connected to the market, as our people have been there longer, working, training, et cetera, developing early connections and relationships with interior designers, the trade industry, and so on and so forth.
Speaker 4: we believe it's gonna be a huge opportunity for us, but there's also a lot of unknowns in a new country. So, we believe we're being...
Speaker 4: cautiously optimistic as we dip our toe in the water and begin. I just remind everyone that RH England is a unique kind of...
Speaker 4: move in the market, so can unique play in the market where our goal is to create the right conversation.
Speaker 4: and not, I wouldn't say RH England is our play to maximize commerce originally. That will happen as we continue to open RH London and in other parts of the UK. But how do you take a brand and introduce a brand to...
Speaker 4: the United Kingdom and broader Europe in a way that positions the brand correctly for the long term. And if you stand back and think about the world and think about the world...
Speaker 4: of luxury brands. I mean, basically all the luxury brands in the world, you know, are from Europe and the UK, mostly France and Italy.
Speaker 4: And if you look at what are the true luxury brands in the U.S., you can argue who really makes that cut. I would argue that the brand that's most clearly identified as a luxury brand from the United States is Tiffany, right, because they haven't pushed their brand down or to broader markets as others may have.
Speaker 4: and the French just bought Tiffany a few years ago, right? So I wouldn't say we're particularly seen as the, the US is seen as the pacemakers of the world, you know, and because we've usually looked to Europe .
Speaker 4: for inspiration. And the US brands I characterize are more followers than leaders.
Speaker 4: To build a true luxury brand, I think you have to be seen and respected as a leader, a thought leader, a place maker, a tastemaker, however you want to characterize it.
Speaker 4: So we're approaching our introduction in an entirely unique and one-of-a-kind way by opening
Speaker 4: store somewhere no one has ever opened a store. Introducing a brand in a manner that no one is introduced to brand. And there's a level of risk to redefine a brand. There's a level of courage that's required to kind of...
Speaker 4: go from where you are to, you know, where you want to be. And in our case, as we characterize it, climbing the luxury mountain.
Speaker 4: And so, you know, what the world will see in a few weeks here is, I think, the most unique and inspiring retail experience anywhere in the world, bar none. And I think it has a chance to be the most talked about retail store and the most admired retail experience of anything anybody's ever seen.
Speaker 4: And
Speaker 4: and prioritizing creating the right conversation versus, you know.
Speaker 4: maximizing the commercial activity in the market initially, we believe is the right sequencing to build the brand.
Speaker 4: So, you know, it's very unique. It does open the entire market from an online point of view. But we're an hour and 45 minutes outside of London, right? On many levels.
Speaker 4: you know, people would say this makes no sense, but that would only be looking backwards, you know, and saying, well, no one's ever done anything like that before, why would it work? Why would it, you know, everyone's had different goals than we've had. Again, we're on a one of a kind journey here.
Speaker 4: we're on a climb that no one's ever attempted to make. And we're coming from a place that has only had what was the biggest economy in the world to argue we only have one real luxury brand and now the French own it. So I'm.
Speaker 4: Yeah, so it's a different path. And I don't expect it to be understood initially. I do believe it will be respected and it will inspire people eventually.
Speaker 6: Thanks for the detail. Best of luck with the opening.
Speaker 6: Thanks for the detail. Best of luck with the opening. Thank you.
Speaker 7: Your next question comes from Simeon Guttman with Morgan Stanley . Your line is open. Hey, Gary and Jack. How are you? So I have maybe I'll make it a two-part question, one question.
Speaker 7: Just to confirm, it looks like the domestic business seems to be hitting your forecasts or bottoming outside of potential, let's say, consumer recession. So that the change to the guidance, other than the markdowns, is mostly the Europe inclusion. And then my second question, this is more theoretical, thinking about the EBIT margin of the business.
Speaker 7: with the mix of Europe , US re-accelerating, and then hospitality and luxury coming into the mix. Getting back to let's say 20 plus, is that going to be a much longer timeframe? Or how should we think about that? Thank you.
Speaker 4: I think it depends on the macro. If we get stability and you have
Speaker 4: you know, if we get stability and, you know, there's any kind of, you know,
Speaker 4: you know, the headwinds stop and suicide, you know, you're gonna have a new baseline. And I think it depends on, you know,
Speaker 4: how well we've executed this next major product transformation.
Speaker 4: Yeah, we went through transformations like this. We generally do one every seven or eight years as we've continued to elevate the brand and expand and just move the assortment upwards. So today I'd say this is the best work we've ever done. We're launching it into.
Speaker 4: maybe the worst home environment at the high end that I've ever seen in my career. I've never seen luxury housing down at the levels we've seen from recent reports.
Speaker 4: and we're at 20-year high interest rates. So there's some level of caution. We can't control the macro, but I'd say...
Speaker 4: I'm more optimistic and less optimistic about our model long term. I don't see any reason that we can't return to 20% plus, you know, mid-20s operating margins long term. You know, we have to prove out the European strategy and expansion.
Speaker 4: I think we have to be smart how we allocate capital and how we build that infrastructure and how we keep things simple. I think our strategy.
Speaker 4: I think it's unique. You know we're not duplicating corporate.
Speaker 4: roles in Europe , you know, we're not looking at Europe as a, you know, a separate business with a separate infrastructure besides
Speaker 4: you know, our supply chain distribution piece, but that too is even an extension of what we do in the US. So we look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of looked at countries in Europe , like states in the United States, you know, except.
Speaker 4: You know, the borders are different. There's some uniqueness there. But, you know, we run our business very well in North America. And from our view, you know, we're building a, really a global leadership team, you know, and it.
Speaker 4: kind of a global organization that will lead and oversee the business in a
Speaker 4: in an identical way that we do in North America, except that there is some unique differences within the countries.
Speaker 4: So we try to keep it simple and if we get.
Speaker 4: any kind of reasonable demand and business, you know, we should be able to begin to leverage the initial investments in supply chain and so on and so forth that are, you know, that creates some deleverage initially. So, you know, I think we...
Speaker 4: we have a whole new whiteboard really to kind of address how to physically open the brand in the US. So we don't have to reverse engineer that. You know, when I began here, we had 106 legacy stores that weren't designed for the vision of the business that we had. And so we've had to reverse engineer this thing and go from, you know,
Speaker 4: you know, taking a, you know, really a, nothing about the infrastructure was correct for the brand with here with we've got clean slate, you know, building the right infrastructure for the brand. Um, you know, they, they deliver furniture in Europe . That's not unique to North America. Furniture gets delivered every day. Um,
Speaker 4: uh you know there's all kinds of things that happens what we're not entirely sure of is just
Speaker 4: the consumer is generally aware of our brand at the high end. But humans are, you know, we're creatures of habits. So we have habits of shopping different places and going to different places when we think about our needs and wants. And so we have to kind of change those habits and.
Speaker 4: you know, identify RH as a more inspiring and attractive place, you know, to allocate capital from the consumer point of view. And, you know, and we think our assortment, especially as you see it, as you see us go through this transformation.
Speaker 4: Over the next several months, we think it's unmatched in the world. We think our design leadership, our quality, and then the value equation for that design and that quality, we think our value equation is as disruptive as ever.
Speaker 4: And if I look back and I'd say, hey, where did we maybe kind of not optimize our business business last couple of years with all the tariffs hit from a cost level, the supply chain costs that went up all through COVID, the price changes.
Speaker 4: that were taken, you know, and then when you have easy business, I think our value equation suffered. And I think our value equation is gonna be swung in a direction where it will be unmatched in the marketplace. And that's really important, no matter what country you're in, right? People first, you know, look at the design of a product. If the design of the product is not good.
Speaker 4: you just don't walk up to it or you turn the page. You know, so you have to have great design. People have to see and be attracted to the product or nothing else matters. You know, the next.
Speaker 4: the page, you know, you know, so you know, you have to, you have to have great design. People have to see and be attracted to the product or nothing else matters. You know, the next.
Speaker 4: the next thing you have to win on is you have to win in quality. You know, and so, you know, consumers are going to look at the design. If they love the design, they're going to get closer. They're going to look closer. They're going to, you know, walk up to it, touch it, interact with it. And they'll make a perception about quality.
Speaker 4: And then the next thing they'll do if they're interested is they'll look at the price. And for that design and that quality, do they perceive that product?
Speaker 4: It's a good value, a great value, or not a value. And then that will.
Speaker 4: create the decision to purchase or not purchase, right? And that's why everything we do is through a lens of design, quality, and value. And I think if I look back and critically look at what happened over the last, I call it three, four years with,
Speaker 4: all the conflict with China, the tariffs, all the dislocation of supply chains and all the increase in freight, increase in raw materials, increase in product costs, so on and so forth. And then an easy demand environment. I think the world took prices up and we all know that because inflation.
Speaker 4: in an easy demand environment. And as the easy demand environment has waned, and it's required us to kind of really challenge, is our value equation.
Speaker 4: I'm gonna create the level of demand, you know, that we believe is right for the business. And so, you know, that's, I think people...
Speaker 4: are gonna really respond to this new product transformation. I think it is the best design we've ever done. The quality is really outstanding. The level of detail and the work we've done has gone into it. And because we've now had some experience with.
Speaker 4: Italy with Italian upholstery, Italian sofas, so on and so forth and other places, people see that we actually can scale and have the ability to create efficiencies at the higher end of the market that our value equation is gonna be significantly better at very high margins. So I wouldn't say the value equation.
Speaker 4: is gonna result in a lower margin structure than we've run. It may result once we've cycled through, you know, just the discontinued product that we have to move through to transition, you know, to this next kind of climb and step up the luxury mountain for our brand. I think it's gonna be, yep.
Speaker 4: the best value proposition we've ever had, because we've really worked on it. And we've really just.
Speaker 4: and super critical thinking and really challenging and really looking at the competitive environment and the competitive environment from a broad point of view, like up and down the food chain and to make sure that we are disruptive, not just at the high end, we're disruptive.
Speaker 4: I'm not saying going all the way down to the low end, but in some of the cases,
Speaker 4: I mean, we're disruptive everywhere. And I think when you do that, you know, you.
Speaker 4: That's when you can get a real outsize share of the market.
Speaker 1: Okay, thank you.
Speaker 2: Your next question comes from Curtis Nagel with Bank of America. Your line is open. Your line is open.
Speaker 8: Thanks very much. Good afternoon. So kind of along the lines of Simeon's question, Gary, I'd just love to hear. Good afternoon. I'm Gary.
Speaker 8: An update on the contemporary line, you know, fully realizing an abnormal year, of course, but just in terms of how many galleries it's been rolled out to.
Speaker 4: what the reception's been for the ones where it's been in place for, you know, an appropriate amount of time where, you know, it could be judged in terms of the reception. Yeah, I'd say we're happy with the response of contemporary, you know, considering the environment. It's only been rolled out to four galleries and the reason why we didn't push it as far as Jamie Alder.
Speaker 4: value equation, right? I think that's where I'd be most critical of us. You know, some of the price points just.
Speaker 4: hit highs that, you know, maybe in a, in a tailwind, and everybody wants every you're in the biggest migr the suburbs and second home
Speaker 4: in any history we've seen. I think we were just too aggressive with the pricing, too arrogant maybe to some degree. And so we've relooked at that, we've looked at the sourcing, we've challenged everything. And I think if you see,
Speaker 4: you know, you see how what's coming, but you know, whether you're looking at interiors or contemporary or modern, you're just gonna see a real meaningful value equation connected to design and quality leadership that will change the trajectory of everything, including contemporary. So contemporary.
Speaker 4: Look, if you look at it with the context compared to modern things like that, you know off to a really good start but if you look at it compared to the work we're about to unveil you go, oh.
Speaker 4: It's just the next level of transformation from a product point of view. I think it's going to kind of.
Speaker 4: It's like having a trump card in a game. You know, it's it's just going to win. We believe so. I look at, you know, contemporary, not just in isolation, but, you know, integrated with the broader thing, I think everything, every interior and.
Speaker 4: Modern are going to look entirely new and different. Contemporary is going to also look pretty new and unique. There's a lot of new collections contemporary.
Speaker 4: Collections, you know, contemporary really only, wouldn't we have five full collections? Four. Four full furniture collections, you know, and that will, I think it more than doubles, right?
Speaker 8: Yeah, so contemporary you really see in this next phase is that much more robust assortment. Okay, great to hear and really helpful to one of these quick follow up Gary just curious to hear a little bit more detail on the format for Cleveland and Palo Alto. I know Palo Alto I think is a little smaller 25,000 square feet but anything else in terms of
Speaker 8: Perhaps I was sorted layout that just feel just curious. Yeah, do you hear more about that format that you mentioned? Yeah, in a lot of ways, yeah, they represent, you know, an aesthetic change. And, you know, a fresh name, you know, you'll see us begin to evolve away from gray, you know, and create.
Speaker 4: really the platform for where the goods are going. You know, we've kind of ridden the gray wave for the last, I don't know, 14 years or so. And you know, there's big cycles in product. You know, people ask me a lot, hey, you know, what's next? And you know, how do you know what's next? Where did the trends come from? And I say, you know, what's next?
Speaker 4: You know, I like to say, you know, the trends in our business come from the dead. You know, generations pass away, their, you know, their belongings go into a state sales. If state sales feed the high end antique fields, feed the antique markets, the antique markets, really what drives the high end interior design market, you know, then that, you know, is then goes into the high end reproduction market and then it starts to trick.
Speaker 4: We made probably the biggest move in modern, if you look at the mid-century movement that started to roll through. And you can kind of time things back. If you look at winter consumers generally and their peak buying years for furniture, it used to be 40 to 50 because there was a shorter lifespan. Lifespan has gotten longer, and it's been a bit more big.
Speaker 4: the high end of the demographic that has the greatest access to healthcare and are more focused on longevity and fitness and eating well. I think it's now up to 87 years old, right? And so what that does is it pushes up, I think that people
Speaker 4: get older, more wealthy, there's more focus on the home, you know, until, you know, they can't really use their home. They get to an age where, you know, they're just not really mobile and they can't enjoy.
Speaker 4: as much, but if you look back in the 1950s, you'd say, you know, 40 to 50 really be.
Speaker 4: the peak buying years for furniture, for real furniture. People get to an age where they're in their second or third home in their life stage and they've done well financially and they can afford to furnish a home. Then if you look at the average lifespan and how old people are today, well, now those people are really old, right? So that cycle is...
Speaker 4: now move through. Mid-century modern is, you know, is a waning trend. The next cycle that went through was actually called contemporary. That's where we launched contemporary. You know, the contemporary trend was really, you know, happened in the, you know, 70s, you know, and 80s, and then in the later 80s that
Speaker 4: trend, it moved to kind of an eclecticism and mixing more contemporary things with antiques and so on and so forth. And so if you just look at those cycles, the cycles tend to come back through. And so what you want to think about is what is the right platform for…
Speaker 4: kind of those kind of trends or those influences. And not that we have a brand that's a trendy brand because everything gets filtered through an RH point of view and how we interpret the trends and how we present the trends. But you, you know, I'd say, you know, as I've looked at retail throughout my career, one of the things I've been critical of others is I've just seen.
Speaker 4: are less valuable. And so as we look at our product transformation, and this is really the largest product transformation in the history of our brand, is our platform prepared to render that product more valuable? Now, the good news is from an architecture point of view.
Speaker 4: they're beautifully architected and timeless buildings. And they're perfectly balanced and symmetrical. They have fresh air, natural light, they're proportioned correctly. All the things, you wouldn't change anything to the building, so a lot of the buildings we built, I mean, can arguably stand up to.
Speaker 4: great historical architecture, it's all the same principles. But the way we skin them, you know, no different than what are the surfaces, the finishes, you know, the colors, the backgrounds, and, you know, and how they're presented, what does that canvas, you know, that background look like, is very, very important. So in a lot of cases, you know, it's a, it's...
Speaker 4: kind of an aesthetic surfacing kind of feeling that will be, I think, a more, you know, more relevant and exciting canvas and background to amplify the product. The logic of our galleries and, you know, how they're laid out.
Speaker 4: you know, it's very scientific and architecturally timeless and relevant. You know, so, but it will look very fresh and new to a consumer, no different than.
Speaker 4: When did we do? 2009, 10, we took all of our galleries from silver sage paint and white trim and blonde maple floors and they went to all gray with gray wash floors. That was...
Speaker 4: 14, 15 years ago. So I always think about the cycles are generational, right? And if you, you know, the definition of the generations is 15 to 20 years, right? And so every 15 years or so, you know, I think, you know,
Speaker 4: I think that there's generally a major move to make. In every seven or eight years, there's also in between cycles of refresh. So this is the next major move from a product point of view and just making sure everything's presented on the right platform and the right canvas.
Speaker 4: that renders the product more valuable. So, you'll see these new ones start to happen and you'll see us go through the...
Speaker 4: you know, through the platform over the next several years and update, I'd say every gallery to, you know, aesthetically just colors, walls, paint, finishes, possibly replastering the outside of galleries from gray to, you know, a beautiful buff color that we think is the right, you know, the right canvas for the next.
Speaker 4: through the platform over the next several years and update, I'd say, every gallery to, you know, statically just colors, walls, paint, finishes, possibly replastering the outside of galleries from gray to, you know, a beautiful buff color that we think is the right, you know, the right canvas for the next 10 to 15 years.
Speaker 4: And Curtis, Jack, one thing to add on your size question, Palo Alto is basically the same size as Corte Madera. So I think you mentioned 25,000. It's not that. About 48,000. And Cleveland's just around the same size.
Speaker 4: One thing to add on your size question, Palo Alto is basically the same size as Corte Madera. So I think you mentioned 25,000. It's not that. About 48,000. And Cleveland's just around the same size.
Speaker 8: Okay, very informative, thanks, and good luck with the rest of the year. Thank you. Your next question comes from Steve Forbes with Guggenheim. Your line is open. Good afternoon, Gary Jack. I wanted to ask about regional trends during the quarter. Are you seeing any disparity by region, anything that either builds on the trend of the year?
Speaker 4: Nothing that we've shared to read into any trends on that.
Speaker 8: Then maybe just a quick follow up, giving your comments around the holistic value equation.
Speaker 8: and improving across the portfolio, any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?
Speaker 4: On supply chain costs, specifically you're talking about like ocean freight or?
Speaker 8: Any cost relief, right? That would maybe help fund a better value proposition.
Speaker 4: Well, we've been getting that and that's, you know, I think Gary mentioned that, you know, at last call or the prior call that, you know, when someone asked about select price changes, but we've already been seeing some cost relief that we're putting back into into product prices from a supply chain and ocean freight perspective. I mean, we're at a point given our turn and, you know, given the way our team approaches, you know, getting the best.
Speaker 4: rates for the sailings, we're at a
Speaker 4: It's a creative now. Or it's a, we're on the other side, you know, the Ocean Freight contracts, we're past the bad news of May, 2022. And we're into sort of a lift now, a slight lift in the margin from that good news.
Speaker 2: Thank you. Your next question comes from Michael Lasser with UBS. Your line is open.
Speaker 9: Good evening, thank you so much for taking my question. Gary, as you had mentioned before that you might have been too aggressive with increasing some pricing. And in the past, you've talked about pivoting to serve a more affluent consumer and that might have eliminated your addressable market.
Speaker 9: Should we interpret some of your current thinking to be, hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points because that would ultimately drive the sales of the business hire and in turn the profitability of the business hire.
Speaker 4: I'd say we again, I start with the lens of design, quality and value, right?
Speaker 4: I think we've been most successful when we won with design, we had the best design in the market. You know, that design is at a quality level that's appreciated and respected. And for that design and quality.
Speaker 4: The value of create equation is disruptive, clearly to the market above us. If you look at any people left and right.
Speaker 4: massively disruptive and even disruptive to slightly below us. Just because we really have the biggest platform, right? So we have the ability to have real scale. And I think as we've, you know, we've
Speaker 4: you know, launch contemporary, been moving the brand up, you know, when demand is easy, you know, like it was through, you know, the event of COVID and the migration that happened because of COVID and the focus on the home because people couldn't travel and, you know, the shifts of spending by big market segments.
Speaker 4: you know, launch contemporary, moving the brand up. You know, when demand is easy, you know, like it was through, you know, the event of COVID and the migration that happened because of COVID and the focus on the home because people couldn't travel and, you know, the shifts of spending by big market segments.
Speaker 4: you know, when demand is really easy, you know, and you can get higher prices, you tend to take them. And then all of a sudden it flips, you know, and it makes you reevaluate. So as we reevaluate, you know, just where our pricing was and has been, I just think, you know, through, you gotta remember, we went through a big pricing cycle increase because of tariffs, right? And then we went through a massive supply chain disruption and how bearish can we make sure that we're
Speaker 4: raw goods, raw material costs going up, labor going up, everything going up, freight going up, that massively impacted pricing. And so I'd say, you know, probably we, as probably anybody in our industry, you know, optimize, you know, what you could get, you know, and I think that you're gonna see some, you know, some, you know, people re-pricing things and trying to...
Speaker 4: optimize whatever market you're going after. So ours is a little trickier because we're moving up, right? And we're trying to get a more affluent consumer and get a bigger piece of their wallet because they spend exponentially more on the home. Not a little bit more, exponentially more. I mean, customers above aren't worth a little bit more. They might be worth 10 times more. You think about the peak of the pyramid.
Speaker 4: It's like flipping the pyramid upside down when you look at spending on the home, you know, at the really affluent levels. And so, you know, we are still going after those customers. We've got a win there on design and quality. And our value will be massively disrupted there because we're only the only platform with scale in the entire world, you know, in these products.
Speaker 4: And so, you know, when, when our age creates a relationship with anybody from a manufacturing point of view, it's a big deal to those people because we can change their lives. You know, and if they put their product on our platform, it changes everything. But we've got to always think about, you know,
Speaker 4: That's a great value. You know, if it's not a great value, people will look around, you know, but if it is a great value and they trust you for that value equation, you know, they don't even have to think about it. And I think in the age of the internet, you know, you have so much more.
Speaker 4: visibility, you have so many more prices, so many more choices, it's harder to distinguish, I'd say both design and quality online. But I think that all works its way out at the end because if you buy something and you thought it was really a great value and you get a piece of crap.
Speaker 4: of branded products that you know, like consumer goods and things like that, you know you're buying some toothpaste or whatever you're buying, you know it's from the brand, it's what you buy. But when you have a lot of blind product and our industry is I'd say more blind product than branded product.
Speaker 4: you know, it's sometimes it's a little confusing for a customer, but it all works itself out. You know, like if you go on to, you know, name your marketplace, you know, there's just an endless aisle of choices. One, they're not curators, you know, two, you know, from a design point of view or not from a quality point of view and not from an aesthetic taste.
Speaker 4: you know, or point of view, you know. So, you know, our platform really is unique in the world today. And, you know, and I think what we're doing next is gonna prove that. So, you know, I think you're always, every business is going like, you know, how big is that market and where do I go and so on and so forth.
Speaker 4: I think it's really difficult. Yeah, I think it's difficult for any of us in this home industry where all of a sudden, boom, your demand goes up 40 points. You know, it actually goes down 40 points, then it goes up 40 points. And all of a sudden you can't get, you know, you have too much goods and you don't have enough goods and anything you can throw out there. Customers want, can you furnish my house next week?
Speaker 4: you know, and so on and so forth. And then all of a sudden you get on the other side of COVID and then you compound that with, you know, the inflation which required, you know, the fastest rise of interest rates in history, which.
Speaker 4: you know, firm grasp of the obvious, that's not good for mortgage rates or the housing market. And you go, it makes you re-examine everything, which you should, you know? And so I think the key becomes, how do you, you know, how do you act on that other side? Like for instance, you know, people ask me about this all the time, oh, you might be losing more market share, this and that. Like, well.
Speaker 4: you have to say, what's the quality of the market share? Could we push a promotional button today? Could I start sending out sale emails like everybody else did, does? And does it matter whether you're doing whatever promotions you're calling it, site-wide promotions, everybody's trying to kind of create a veil of, you know, kind of...
Speaker 4: non transparency out there, you know what they're doing. If you're promoting the business and you're sending sale emails, like you're gonna be known as a promotional business. And you know, you're also creating, I'd say a layer of long term, low quality revenues.
Speaker 4: Those will never be high quality revenues. You've got to put categories on sale, whatever on sale to get those revenues. Well, you got to put all those products on sale. So how many people would have bought your product at full price at really healthy margins? And then for the incremental lift, how much margin did you have to give back across everything that you marked down? Whether it's site wide or category, or if it's only bed and bath or lighting, now you're doing the lighting.
Speaker 4: low quality market share, long term.
Speaker 4: hold to our pricing integrity and our messaging that's more about design and quality.
Speaker 4: and just transform the business for the next cycle. And if we're successful, which we've been, I don't know, this is my 23rd year here. We've done this a lot of times, we've transformed a lot of times, we've been through all kinds of cycles here. This is not a new leadership team. So, you know, so, you know, so, you know,
Speaker 4: we like what we see next, but you just have to take a longer term view. So, you know, that's why I always say, you know, people ask me, should I buy your stock? And I ask them, are you a trader? Are you an investor? Now, if you're a trader, you're looking for short term episodic moments and ups and downs and trying to optimize. And you know, if you're a trader, don't buy our stock. You know, cause we're making long-term moves. If you're a...
Speaker 4: long-term holder and you want to be on a winning side, I mean, look at our performance over 20 years, you know, look at our performance even over the last five years and you're gonna be a happy shareholder. Look at our performance if you bought us during COVID, you know, or different times, you know, and you.
Speaker 4: thought everything was gonna stay that way forever, well, okay, maybe you're someone who hadn't been through cycles before, maybe you didn't understand the dynamics of COVID or you read the press and it said, it's the decade of home. It wasn't the decade of home, it was the goddamn pandemic. That's what it was, it's a temporal thing. So, but you know.
Speaker 4: But now we're on the other side of it. Now we're at high interest rates. You know, what are the choices people are making and what are gonna be long-term choices, you know, and what are gonna be high quality choices? You know, if I was worried about the stock price.
Speaker 4: on a quarter to quarter, year to year basis. You know, I, you know, some CEO that had a short-term view and wanted their stock options to vest and sell out at the right time, I might push the promotional button. Yeah, like.
Speaker 4: But I'm the largest shareholder of the company. It's taken me a long time to get here. Not going anywhere. And we're gonna do the right things that are gonna reward long-term shareholders and investors.
Speaker 4: just different games, how we look at it and how we think about it. We'll make tougher long-term decisions than other people will. We'll be an outlier sometimes on the lower end like right now, we're clearly somewhat underperforming other people because we're not pushing promotional buttons.
Speaker 4: different games, you know, how we look at it and how we think about it. You know, we'll make tougher long-term decisions than other people will. We'll be an outlier sometimes on the lower end like right now, you know, we're clearly somewhat underperforming other people because we're not pushing promotional buttons. But over the long term, I think you'll find.
Speaker 4: You know, we're going to be a big winner. And we're very confident about that. It's just, you know, during times like these, we look different. And then over the long term, we also look different. Thank you for all that. Just so we can calibrate our models and forecast properly, if you had to guess collectively, how much do you think you will roll back price? Is it going to be in the double digit range? So on average, 10% across the assortment, is that a reasonable guess? No, I wouldn't say we're going to roll back price, you know, at a broader level, right? It's, um.
Speaker 4: a knockoff on TikTok or on this thing. It's a famous sofa. But it's also, it's the sofa that carried us the last 10 years. It's not the sofa that'll carry us the next 10 years. And that's that I'm telling people don't buy a class sofa. It's a great sofa. It'll be here the next 10 years. But I don't expect it to perform the same way. So, yeah, it will.
Speaker 4: you know, it will just find its new level. So, and, you know, we'll be more competitive, but we also, you know, our manufacturers will be sharp in their pencils and everybody's sharp in their pencils because they want to keep as much market share as possible. So I wouldn't think, you know, I wouldn't call it a big rollback. I'd say, you know, I think of it really about a spring forward because there's so much.
Speaker 4: on a large scale generally means being disruptive. And again, you have to kind of...
Speaker 4: really look at it through the lens of design quality and then value based on that design and quality and I think based on the design and quality that we have coming, I think we're going to be massively disruptive.
Speaker 8: Thank you very much and have a great day.
Speaker 4: Hey everybody. It's sort of a follow-up to that last question but you know just thinking about last quarter you announced some cost reductions the 50 million in annualized savings. I guess just in light of the markdown pressures and your demand comments and that this could just last longer which is not unreasonable.
Speaker 4: How are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any other inefficiencies? Thank you. Yeah, I think we're always looking at that. So, but look, we had a meaningful change in demand. Yeah, and whenever you have a meaningful change in demand, whether it's to the positive or the negative.
Speaker 4: to do things. So, but you know, we had always known, look, if there's a meaningful step down on the other side of it, we're obviously going to have to optimize the organization at that time. That's what we did. So, if demand weakens again, and so on and so forth, we'll…
Speaker 4: make the right decisions for the business and try to optimize things and sharpen our pencils just as any good leadership teams would. And I think a lot's gonna depend on what happens with the macro. Does the housing market begin to recover? And again, when you think about the housing market, perhaps you've really got to look at the luxury housing market.
Speaker 4: which has taken like a 10 point greater hit than the overall housing market. So those are the key things, but you really gotta, the key is I say, it's about the goods, right? That's what we sell. And if we're right, we're directionally right with the product and.
Speaker 4: like a 10 point greater hit than the overall housing market. So those are the key things, but you really gotta, the key is I'd say it's about the goods, right? That's what we sell. And if we're right, if we're directionally right with the product and where we're going.
Speaker 4: we'll see some kind of inflection. Headwind or no headwind, right? Is this product transformation, is it worth five points, 10 points, 20 points? I don't know, 30 points? Look at our history when we've done these things. When we've done these things, we've been a lot more right than wrong.
Speaker 4: and we've been able to inflect the business. So, and then you've got to kind of put it in context with just this COVID cycle, you know, the downside of COVID and then compounded with the rising interest rates and, you know, the collapse of the luxury housing market to say, you know, when we hit bottom, okay.
Speaker 4: What does it look like as we come off the bottom? I mean, there's history in cycles, right? Everyone can look at, you know, and so we really like where we are. I mean, yeah, is it a tough time? Did we have to make a lot of tough decisions and redesign the organization and...
Speaker 4: you know, part with some people, we did. And those are tough decisions that you have to make, you know, in business. But the key is like, what does it all look like on the other side? You know, how are we positioned on the other side? You know, did we make good long-term decisions? We don't have to cycle.
Speaker 4: all the sale emails that everybody else does. They have to cycle all those promotions. They have to cycle all those sale emails. We don't have to cycle one of them. Do we have a lower base? We do. Could that mean we have a higher rise off a lower base? You'd think so. That's possible.
Speaker 4: We have a massive amount of new product coming. You know, revolutionary from anything we've done. So we really like how the horizon looks. I wouldn't feel that way if I'd been promoting, you know, for the last six or 12 months, or, you know, however long everybody's, you know, when.
Speaker 4: When did you start getting sale emails from everybody else? When are they cycling those?
Speaker 4: How challenging is that going to be? How many more sale emails are they going to go to next? What are they going to do next?
Speaker 4: to drive demand. You know, so I think I think that yeah the next 12 to 24 months for our age is gonna look very different than the next 12 or 24 months for everybody else in our industry. Yep, no doubt. Can I just ask you a follow-up around the guidance? So you did raise the low end of the sales guidance for the year modestly.
Speaker 4: Help us with the message there in light of some of the cautious demand comments. Do we just interpret that as confidence and visibility and optimism around new product or the expansion? Just help us frame that a little bit more. Thank you.
Speaker 4: Really two things. One, what you just said, our confidence about the new product, all samples got finalized, costing, negotiations got finalized, value equations got finalized, presentation, how we're presenting it in the books, how we're gonna present the stores, how we're gonna cycle things, what the productivity per square foot of.
Speaker 4: each area of our salaries are going to be. We go down to this detail level. We're replacing this product with this product. What do you think? How did this product perform per week at what margin? What's the new product going to perform per week at what margin? We try to figure out the arbitrage of every decision we make, and positive or negative. Then what's the aggregate of all those decisions?
Speaker 4: and we feel more optimistic as we spend more time on looking at what's coming and what's new and what we're gonna transition. And then look, it's gonna cost us more to cycle through the product. So we're gonna have to take deeper markdowns than we thought because of the greater headwinds.
Speaker 4: that it's developed in and so that's gonna provide a list. So you're gonna get some lift from the higher, you know, the greater markdowns. So the low end, you know, that was the guidance we gave.
Speaker 4: we think it would be hard, we'd have to have another meaningful economic macro event for us to kind of consider the low end based on what we know today, based on what's happened in the last seven weeks and the quarter and what's happened in the last, since the last quarter we've talked to you the last three months. I mean, yeah.
Speaker 4: So, you know, that's how we feel about it now and based on all the data we have. And I think we're, you know, we're calling it kind of straight down the middle.
Speaker 4: We hope that there's, you know, there's a lot of people that think that we're not at the end of the banking crisis, we're the beginning of the banking crisis, you know, and very smart people, you know, believe, you know, okay, you know, you know, the, you know, the balance sheet situation.
Speaker 4: is getting corrected, but there's gonna be a whole credit issue going forward with regional banks. You know, that could become a big problem. I don't know, those people are smarter than I am. I've never ran a bank and I'm not an economist, but you know, I've been in business a long time and I've seen cycles and what I've seen is that.
Speaker 4: nobody calls it exactly right. And it just, if you said, what am I most worried about? It just seems a little odd that, banks get seized over weekends, and my bank basically gets seized and sold for nothing to JP Morgan. And oh, and it's all over now, it's all better. It just seems kind of strange, like so, everybody.
Speaker 4: thought it was all better back in the other banking crisis and then more banks fell. So, I'd say that's the thing, if you ask me what about, what's worried about it, I'm most worried about what's next in the world of regional banks, which could have further impact on a lot of things. Lending to small businesses, the economy, supportive innovation, and invention.
Speaker 4: massive tightening of credit, more banks to get seized, government have to get more involved and just general uneasiness by the consumer. But we can take another hit and I think we'll still be in that range if there's a big hit, if there's another big macro move, I think things will change for everybody. So we're giving you what we can see.
Speaker 4: But I don't think there's anybody out there that's completely at ease with the regional banking issue. And if they are, I'd say, whoa, be careful. I think it's a good time to pray for peace and plan for war. And so that's how we're kind of positioned. We think no matter, again, no matter what the macro looks like, even if...
Speaker 2: Jonathan Matuszewski with Jefferies. Your line is open.
Speaker 5: Great. Good evening and thanks for taking my question. Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishing. Is there any color you could share on spending patterns across your income cohorts?
Speaker 5: Are there certain customer segments that are behaving differently lately versus others in the Rh business. Asking just because the reference to giving away low quality market share. So, you know, curious what what percentage of your members you would consider to be maybe low quality and. You know, what that could imply for maybe what the membership file looks like long term. Thanks.
Speaker 4: Yeah, I think if you just study the wealth data in studying the ultra high net worth and you look at home ownership and you know.
Speaker 4: you know, people as they go up the economic ladder, they collect more homes. You know, the home becomes the biggest source of investment.
Speaker 4: you keep buying a better home, you generally keep buying a bigger home unless you're in the downsizing mode. But, and then people buy multiple homes, they buy a second home, then they buy a third home. You know, ultra high network people have three to five homes. You know, so, and not only those.
Speaker 4: you know, the data would tell you that at the high end, at the wealth, the second home that's on average has twice as many furniture, twice as many bedrooms as the primary residence, right? And as people go up the economic cycle, those second homes are furnished beautifully.
Speaker 4: because they're trying to impress their guests and they're trying to create a hotel experience. So you're not going into second homes that have like a bed frame pushed against the wall with a cheap headboard and some crappy sheets. And look, you can go on Zillow or Redfin and just look at homes, right? Go to second home markets and look what's on the market. Your first second home, maybe you're not spending that much on it. Maybe you stretch for the second home. But again, when you go up the economic ladder.
Speaker 4: people spend exponentially more on the home. That is where the money goes. It goes into more real estate. You have more rooms to furnish. You're now furnishing with better and more expensive furniture because that's how people are defining themselves, defining their success and their place in the world. I'd like to say, then they go beyond that. If you kind of get silly rich, you buy a plane and if you get stupid rich, you buy a yacht. That's why we have our planes that are also available for charter. We've done RH1 and RH2.
Speaker 4: We're earning that respect. Our guest house is being visited by the very top of the economic pyramid. It is being talked about at the very highest end. It's very, very top.
Speaker 4: of that ladder. People are aware of our guest house and visiting, staying, touring, asking for tours, so on and so forth. And we're demonstrating what we're capable of. And we're beginning to speak to those consumers. What people will see at RH England.
Speaker 4: It's at another entirely another level for our brand. We're gonna speak to people in a way that they've never been spoken to. And by the way, R.E.C. England, now every investor and analyst on this call is gonna wanna come to the opening. R.E.C. England is gonna have all the newness, almost all of it.
Speaker 4: If you want to see the new product for the first time, go to RH England. It's being flown there, it's being craned in through windows, but that will be the first view. So we're introducing the brand in an entirely new way with entirely new assortment. Do we have some of the legacy product? We do, yeah, some of it.
Speaker 4: key items, best sellers, best collections, but it's like what percent is new.
Speaker 4: 70% of that gallery is new. So, and how many rooms do we have? There's over 60 rooms. Yeah. 60 furnished rooms. Yeah. So, you know.
Speaker 4: You want to see the new, you want to get a head start and everybody else come to the opening party. But, you know, yeah, save, you know, the lower quality, you know, you're always, we've been shedding customers for 23 years I've been here.
Speaker 4: Like, you know, we're building a luxury brand. That's just gonna happen. You know, it's just gonna happen. But if you do it right, you're gonna have a positive arbitrage, which we've always had. You know, and I think that, I think we're gonna have it again. You know, so I think this move is gonna create another positive arbitrage. I think people are gonna look at the.
Speaker 4: is that just, and they did 100% R-H contemporary. And the conversation is starting to really happen at that next level, but you gotta stay with it. You gotta keep investing. These things like the places we build, whether it's.
Speaker 4: the galleries in our San Francisco, or most recent one, or a guest house, which our restaurant in our guest house just made the Michelin guide. Tell me another retailer in the world that has restaurants, that has a restaurant listed in the Michelin guide. We didn't get a star, but we had Michelin guide. We had one of the best chefs, arguably the best chef in the entire world, eat at our restaurant two nights in a row, and said.
Speaker 4: said they could dine there two or three times a week and thought the food was outstanding. Gave us some feedback, you expect the best chef in the world to give us some feedback on what might be better, little bit more salt here, this, that, but for the most part, a glowing review.
Speaker 4: And so, again, all those things, all those conversations with people at the top of the mountain starts to change the conversation, the perception, the image, the respect of a brand. And it takes a long time to earn it, right? And we're working at earning that respect, getting the tip of the hat, and...
Speaker 4: And if we do it well, we will have higher quality, higher value, more discerning consumers that just spend multiples of consumers that are just a click or two down from them.
Speaker 4: well we will have you know higher quality you know higher value more discerning consumers that just spend multiples of consumers that are just a click or two down from them a lot more
Speaker 4: not a little more because they have a lot more money. And I would argue, if you look at it, the baby boom generation is, look, luckily studies are saying, if you're at the high end and you have access to health and healthcare and you take care of yourself and stuff, they're saying the average age is like 87 lifespan now.
Speaker 4: That's up from 77 for lower economic demographics. And, you know, so.
Speaker 4: What are people going to do as they're living longer? I don't know if they're going to save money. I think they're going to spend money. I had someone really say something to me. They'd be like, oh, you know.
Speaker 4: you know, did you fly private to get here? And I said, yes. And they said, well, you know, good. Cause if you don't, your kids sure will. I thought that was a really funny comment. You know, it's like, you know, I mean people that, yeah. Yeah, you know, I think it's gonna be baby boomers are living longer. It's the biggest pot of wealth.
Speaker 4: You know, there's going to be the biggest well transfer, but I think there's likelihood we're going to see an acceleration of spending. People are going to say, you know, I don't have that much longer to live. And I think they're going to lose in their pocketbooks. I like all that, all these kind of sub things underneath, you know, this main trend. I like coming out the other side.
Speaker 4: I'd like where we're positioned for the next five to 10 years. I think we get through the cycle here over the next, I don't know, six to 12 months. I don't see it lasting much longer than that. I think 24, I think it's going to look a lot better than 23.
Speaker 4: And I think if we get inflation under control and whatever happens in the banking thing, you know, like you gotta kind of let it happen. Again, I wish they just say they guaranteed all the deposits or something. So, you know, they just stop everything, but we still do have, you know, a credit reckoning that's gotta come through. I mean, there's no way those banks.
Speaker 4: like they were lending, right? So that's gonna have some effect on the economy. But nonetheless, no matter what happens, the path we're on, I think is a path to a really profitable model and a really enduring and lasting brand.
Speaker 5: I really appreciate all that color, Gary. And just a quick follow up. You had some helpful comments on the domestic competitive landscape before in terms of peers who are below you being more promotional. For Marchek we're seeing some more luxury brands in home furnishings out of Italy.
Speaker 5: increasingly eyeing the US after years of chasing growth in China and India and Brazil. If some of these brands are pursuing more sizable showrooms in key US markets, do you see this as a threat? Any thoughts there would be great. Thanks.
Speaker 4: Yeah, you know, I mean, look, everything's a threat, you know, so we don't take anybody for granted. But I just say that our value proposition versus those brands is massive. And they also most of those Italian brands are our volume trading o f
Speaker 4: Two things, one they're just mostly category focused, right? They either are a upholstery brand selling soap and sectionals chairs, they're a lighting brand or they're a category specific brand. There's not one that's integrated all the categories like we do and have a complete lifestyle point of view and can furnish and design a home. And they don't have the size or scale to have.
Speaker 4: our value creation, our value proposition, our value versus the brands that the ones I think you're talking about. I think we're massively disruptive to those brands and especially now that we're sourcing out of Italy ourselves.
Speaker 4: So, when you've got made in Italy versus made in Italy and you have a significantly better value proposition because of your platform, the size of your platform. And then I think that the one other thing I mentioned is they don't control their distribution, right? Some of the brands you're probably talking about, you know.
Speaker 4: the most famous one, I think has 800 points of distribution in the US and they control, I think, four points to those 800 points of distribution. You know, and, you know, so there's a whole kind of convoluted platform, you know, and, you know, pricing discrepancy, they don't really get to control price. They've, you know, got a lot of dealers, you know, representing them and, you know, so, you know, it can take them a long time to kind of build what we built, but nonetheless, you know, look, they're great brands. They built great, great product.
Speaker 4: I like our positioning way better than theirs, way, way better.
Speaker 4: I like our positioning way better than theirs, way, way better. Really helpful. Best of luck.
Speaker 8: Yep, thank you. Your next question comes from Brad Thomas with KeyBank Capital Markets. Your line is open. Hi, thanks. Good evening. A follow-up on England. I was wondering, Gary, if you could just give us a little bit of an update on how you're going to be dealing with the supply chain and...
Speaker 5: logistics, obviously the furniture industry can be a challenging one from a logistics standpoint. How do you ensure the customer has a great experience for you, especially these early customers that you get in the months ahead here? And then I was wondering, Jack, if you could give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top line perspective, what's making the guidance any color there would be great. Thanks.
Speaker 4: Yeah, let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 years, 18 months to two years. I mean, you know, working, training, you know, we feel highly confident in the supply chain experience, delivery experience that our consumers are going to receive from our age. And then, you know, the, you know.
Speaker 4: One of the keys is just making sure we figure out how to be efficient on the reverse logistics. You're always going to have some level of returns in any business and how we handle that, and the ability to not have too many touches and liquidate efficiency efficiently through an outlet network and so on and so forth, all the things that we're working on.
Speaker 4: There'll be some things to learn where the demand gonna all come from across the UK, some things to work out, but I feel highly confident. We've got a great team. We've got a lot of people that have been with us for years that are over there. Oh yeah. Yes, I don't know if you wanna. Yeah, no, in our England gallery, we're going to have eight folks.
Speaker 4: on the gallery side and another five for hospitality that are from RH in the US. And then from a supply chain perspective. And from a supply chain perspective, we have one of our best guys over there now. Yeah, leading it, yeah. Yeah, yeah. Yeah, so we, yeah, science there, you know, and so we feel highly confident, you know, that, you know, on every level that we will execute well.
Speaker 4: But there's gonna be things for us to learn. Like we don't know exactly where the demand's gonna come from. We don't know exactly, you know, and we have to just acclimate everybody to our, you know, our brand, our services and everything that we offer. And, you know, so we'll see, we'll see how the ramp is. Yeah, I'll tell you one thing, the response to the party invite has been incredible. We thought we were gonna have X number of people and
Speaker 4: And now, all of a sudden, just after a few days, we think we might have 2x number of people coming. So if anybody's on this call and you wanna come, like, you know, let us know quickly, you know, because at some point we've gotta cap this thing. We're really worried, like, gosh, we're out here in the countryside.
Speaker 4: and we're doing a, you know, doing a soapy party, you know, we're sending an email invite, you know, how many people are gonna come and it looks like everybody's coming. So as long as they're, you know, in town, it looks like everybody's coming, so. On the second question, we haven't said, Brad, so, you know, it's modest and I think we'll all learn together. You know, at one time, you know, Gary had projected that, you know, first year sales or demand of England could be.
Speaker 4: Thanks for taking my question. So I know the call's running longer, so I'll just give you one question. But the question I have for Gary, we talk obviously a lot going on internally with RH and a lot of the really interesting initiatives you have. But if you look at the macro environment, there's been a lot of talk about the macro environment of headwind. And you know your customer, you do customer. To get out of this belays, to allow the macro environment to become a tailwind versus the headwind is probably.
Speaker 4: What needs to change most? I mean, what are the key factors there? I don't know if I got that quite right. Your connection wasn't the greatest. Maybe just kind of repeat the question, just make sure we get it right. Yeah, I apologize. I'm driving. So just from a macro standpoint, as you think about your customer and the headwinds, the other macro headwinds, to get out of this malaise, what needs to change?
Speaker 4: What do you think is most important from a macro standpoint to really start to change here to drive, get to it for your customer? Yeah, I think we just got to find out where the bottom is, right? Like things just have to stabilize somewhere. Interest rates stabilize somewhere, mortgage rates stabilize somewhere and just get through a cycle. So what's the new baseline? I think that's the key. And then generally, once you've kind of hit whatever bottom is and there's a new baseline and we've got the...
Speaker 4: you know, the macro headwinds, you know, get stabilized. And history would tell us you start to grow off that new base, right? And so I think the key is what's the base? You know, is the base luxury housing down 50, you know, cause you know, it hit down 45 last quarter and...
Speaker 4: That means, you know, if you look at the sequential kind of from quarter to quarter, that would tell you, you know, went from 38 to down 45. It probably means. The last month of that quarter was down 50 or 54. I don't know, you know, somewhere around there. Like, I've never seen this kind of stuff, you know, but then again to I've never like the first time we're navigating the brand through it.
Speaker 4: cycle like this where we've been positioned so high in the market, right? So, um, and also what I say what's different about us today is, um, you know, we've eliminated, you know, we're not really in the accessory business in a meaningful way. We're not the tabletop business. We're not, you know, yeah, we're not in the holiday business. We're not selling anything for Easter or Mother's Day or Christmas or anything, right? You don't go in and see all the, you know, Christmas decorations stuff or stocking stuffers anymore.
Speaker 4: you know, when we had, you know, when the company had a bigger mix of accessories and stuff like that, you know, you're gonna, you know, you're not going to get hit as hard, you know, but today, we're basically all high ticket, right? We're really furniture focused, you know, between indoor and outdoor furniture, it's the lion's share of our business. And then you've got, you know, rugs and lighting and, you know, and, you know, bedding and bath towels and things like that. But we're not, you know, we're really a furniture focused business today. So we're going to
Speaker 4: we're gonna swing a little farther than other people during these times. But really the key is what's the baseline? What's the new baseline? When, you know, are we done with the tightening cycle? You know, are we done? I don't know, the markets are saying, you know, they're betting there's not another raise, you know, and then there's, you've got some fed people saying there, there might be another raise. And, you know, all of a sudden interest rates on, you know, 30 year mortgages, you know, hit seven, then they went back to six two, now it's setting their back to seven.
Speaker 4: You know like why you know, what's that telling you in the tenure, you know, they believe interest rates are going up But I think it's just got to kind of go. Okay, have we Have we hit the bottom from a housing point of view specifically luxury housing on this cycle? You know is is are we done with you know?
Speaker 4: the regional banking issues, is inflation tamed? And are people willing to buy? I mean, it's, you know, people aren't putting houses on the market because they can't afford to trade up. And-
Speaker 4: you know, so you just don't have a lot of inventory to buy. And, you know, and then look, that's better for the new housing market, right? 90% of the market is the resale market, 10% is the new housing market. They only have inventory to sell, they have to sell. You know, so they're putting it all in the other thing. So, you know, so it's gonna be a, you know, it's gonna be a tailwind. There's gonna be some level of tailwind to new homes because they have inventory. You know, resells don't have inventory because the owners don't wanna sell into this market, you know, and so.
Speaker 4: But once everything gets stabilized, like if interest rates stabilize the bed, it kind of says we're done for now. We got inflation under control and
Speaker 4: Interest rates stabilize, federal funds rate stabilizes at five or whatever number, and then interest rates can stabilize. And once you cycle that and you're through that cycle for a year, you've got a baseline. And then, yeah, things start to look better and they start to loosen, that will obviously...
Speaker 4: that will obviously help. But you still have other things that are having people worried, right? You've got the commercial real estate market. I mean, you don't wanna be in the office building business right now. I feel bad for my friends that own office buildings. I mean, this is like this thing has, that's not over yet, right? And so that's gonna have a wealth effect. There's people out there that.
Speaker 4: you know, invested in funds that own commercial real estate and, you know, people that own buildings, things like that. I mean, people are already starting to give keys back to the bank, you know, to the banks on commercial real estate offices. You know, it says there's people don't want to go back to those companies that, you know, that, you know, working from home and there's people don't want to go back to work and, you know, strikes at Apple and Microsoft, you know, that's kind of crazy, right? But what's going to happen with commercial real estate? You know, there's some things that still have to get kind of worked out. And I'd say that the luxury customer is the most aware of the issues.
Speaker 4: they have the broadest view of economic challenges and where things are going and interest rates and all that kind of stuff. And when they're gonna start buying houses again, when they're gonna decide to start selling their houses, that'll create activity. And I think once everything stabilizes, people kind of go, okay, this is the new reality. Let's go back to normal. And so long- So-
Speaker 10: just your latest view on how profitable those galleries can be in maturity. I think you previously thought once galleries mature they could potentially have higher margins than in the States. So just curious for an update there. And then just any differences in cost structures that we should keep in mind. Yep.
Speaker 4: We believe that we're a lot of debate on pricing. We're going right up to the wire. We're trying to do the math on everything and make sure we understand it. But I believe that long-term...
Speaker 4: we couldn't have an accretive strategy because I think we're also building everything kind of on a clean sheet of paper. So it should be the most efficient from a supply chain point of view. There should be efficiencies and things just because it's all gonna be new thinking and our best thinking. And we'll learn a lot in the beginning here. So I just say, look, every plan we have generally is some degree wrong. Are we more right than wrong? That's the key. Are we strategically right? So we're gonna be, we're gonna be,
Speaker 4: we're going to be wrong in a lot of things at launch, you know, whether it's pricing, where's this, where's, you know, like, and, you know, the point is, is are we strategically right? You know, because we'll improvise, adapt, overcome, you know, modify, and, you know, as we get going. So, you know, we're excited to just get going and start learning, you know. So, like, but look, there's debates, like right now, where should we price this, where should we price that, you know, who are our competitors over there, and what does it look like? And, you know, so more to learn. I'd say, I'd say directionally, I feel exactly the same way.
Speaker 4: But we're not in the game yet. So ask us in six months, we'll have a much better view. Got it. Thanks a lot.
Speaker 4: But we're not in the game yet. So ask us in six months, we'll have a much better view. Got it. Thanks a lot. Thank you, Matt.
Speaker 10: Your next question comes from Seth Basham with Wedbush. Your line is open. Thanks a lot and good evening. My question is around inventories. As you take these markdowns to clear excess inventories, do you expect your inventory to be clean by the end of the fiscal year?
Speaker 11: Yeah, I think we'll have everything in line by the end of the year. Great, and then similarly with the 70 new collections you're planning for this year, do you expect to be in stock in meaningful quantities so that they can be additive, materially additive to sales this year?
Speaker 4: We do believe that, yep, yep. I think we'll be in really good shape mid second half. You know, there's always with the ramp up of this much newness, you know, different timings, different things as they go into production and you have some delays here or there and as they're going through final finishing and getting into ramp up, you know, ramp up.
Speaker 4: you know, moving from sampling to production. So, but we'll be, you know, we'll be kind of some things will be in stock, you know, end of second quarter, some beginning of third quarter, some mid third quarter, I'd say mid third quarter, let's see, yeah, late third quarter will be really good.
Speaker 4: late third quarter as far as shipping, right? And again, think about our business. Our business will generate demand even if we're not really in stock because people are working on projects. So, but you know, I think we'll be able to
Speaker 4: understand what the inflection point potentially can look like, I think, by late third quarter. And we'll have a lot more data and information and see where the consumer is really responding and what that looks like.
Speaker 4: you know, for us, look, we've got to, you know, we've got to play certain bets and we got to buy goods long term because if, you know, on certain things, we, you know, that's our job, right, is to is to know what's going to be great. And, and again, we never buy anything 100% right ever in my entire career. The point is, are we directionally right on the on the investments on the buys? And, and, you know, some of these things are gonna be really big, right? So we've got to make big bets, we got to buy inventory, kind of out there because furniture can't scale, you know, you just can't ramp up furniture production fast, not at these quality levels.
Speaker 4: So, you know, so we'll learn a lot and, you know, we'll cycle through and, you know, but that's why we're really, really excited about 24 because we'll, you know, we'll have some really good data, you know, by the end of the third quarter and we'll be making a lot of much better decisions as we look out. And then we have another, you know, layer of newness that is going to come, you know, as we cycle into the spring, you know, a lot of newness kind of coming through, you know, either late this year, you know, some of it might come or we'll hold it for next spring, depending on what the responses are, but.
Speaker 11: So, yeah. Fingers crossed. That's really helpful. My last question is just on your pricing strategy and architecture, as you move up to the very high end, and you bump up against pricing from timeless designers, do you see that being a challenge to convert high net worth customers to shop RH when they could buy the true designer piece? Yeah, I think we're pretty much...
Speaker 4: I mean, against the showrooms and against, you know, the real luxury brands in the categories and stuff like that we're gonna be a disruptive value.
Speaker 8: I think, you know, I think our competitors are going to be scrambling. Okay, thank you. Good luck. There are no further questions at this time. I would now like to turn the call back over to Gary Friedman. Great. Well, thank you everyone for your interest and.
Speaker 8: We hopefully will see some of you at the opening of our jingling and other than that we'll talk to you next quarter. Thank you. This concludes today's conference call. You may now disconnect.