Q3 2023 RH Earnings Call
Hello, and welcome to the Q3 2023 are each Q&A conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We please ask that you restrict yourself to one question and one follow up and you may re queue for further questions. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again Press Star One I'll now turn the conference over to Allison Malkin. Please go ahead.
Thank you and good afternoon, everyone. Thank you for joining us for our third 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 that we will.
Certain statements today that are forward looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward.
Looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events also.
Also during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's.
Financial results press release.
Live broadcast of this call is also available on the Investor Relations section of our website at IR Dot RH dot com with that I'll turn the call over to Gary Great. Thank you, Alex and good afternoon, everyone.
As we usually do we'll start with our shareholder letter and then open the call to questions.
Two our people partners and shareholders net revenues of 751 million right at the midpoint of our guidance for the quarter and adjusted operating margin seven 3% slightly below expectations due to higher than anticipated expenses.
Including international openings as well as costs related to our U R.
The acquisition of the New York guest House property and unsuccessful efforts to secure the iconic one Ocean drive Miami Beach location.
While pleased with improved demand trends generating from the launch of our new RH interiors and our HC temporary collection.
Experienced increased headwinds in early October when mortgage rates peaked above 8% and Hamastan basin, Israel triggered the war in the Middle East.
With 82% of homeowners have been wondering is below 5%.
62% below four <unk>.
Continue to expect the existing housing markets remained frozen until interest rates Andrew of home prices fall meaningfully.
Additionally, the home furnishings market has become increasingly promotional and we believe we will create we believe that it will create a mix shift towards clearance products pressuring gross margins.
In light of the current market, we are delaying the mailing of RH modern source book until the first quarter of 2024, when we believe demand trends will likely be more favorable.
As a result, we are narrowing our revenue guidance range for the year to $3 6 billion to $3 8 billion and now expect adjusted operating margin to be in the range of 13, 6% to 14%.
As mentioned we are in contact contract to make an opportunistic purchase of the New York guest house property for approximately $58 million scheduled to close in the fourth quarter.
The building was appraised at $85 million last September when the federal funds rate was half the level. It is today, we believe controlling the outcome is this one of a kind property is in our best interest. However, we will be poised to take advantage of any opportunity to do a sale leaseback with the appropriate investor when the commercial real estate Mark.
Rebounds in the future.
Product elevation.
We expect if we expect our demand trends to accelerate through the first half of 2024, and our product transformation as our product transformation unfolds in stocks improve we complete the reset of our galleries and introduce our new modern and RH outdoor sports books in the first quarter next year.
We anticipate our inflection point will peak in the second quarter of 2024, as our new collections fully ramped and we began another cycle of source book mailing completing transforming and refreshing the entire brand over a 12 month period.
We believe our latest collections reflect the level of design and quality inaccessible and our current market and a value proposition that will be disruptive across multiple markets positioning RH to gain market share throughout fiscal 2024.
While the product transformation of this magnitude will be margin dilutive in the short term. We believe it will be margin accretive over the long term is selling rates stabilize and allow for supply chain and sourcing efficiencies.
Platform expansion.
Our plan to expand the RH brand globally address new markets locally and transform our north American galleries represents a multibillion dollar opportunity.
As discussed last quarter, we introduced <unk> to the U K this past summer and a dramatic and unforgettable fashion with the opening of our age England. The gallery at the Historic Idaho Park, a 17th century 73 acre estate that is a celebration of history designed food and wine.
We had a spectacular turnout for opening event in the global press coverage. The brand received with multiple times greater than any gallery, we have ever opened.
Due to our <unk> country side location, we expect the majority of the revenues to be driven by our interior designer trade businesses, which are which are dependent on building books of business and high value repeat clients like interior design firms and hospitality projects.
And demand continue to build monthly despite the feasible seasonal nature of the location.
Our first U UK sourced interior source book within home in October and our next contact planned to be our RH modern and RH outdoor sports books in the first quarter of 2024.
In November we opened two new international galleries are H Munich NIH dusseldorf.
The response to our opening events with beyond our expectations with Munich hosting over 900 attendees romijn three floors with Jeffrey I believe investor Best for Martinez and traffic in both galleries has been strong since Anthony.
Although our England is our most unique and spectacular gallery to date and the only one with the hospitality component in Europe. All three are architecturally impressive multilevel expressions of the RH brand.
Only to be outdone by are even more impressive teams in each location.
While many retailers most of the capital light franchise or licensing approach to international expansion. We believe the only way to build the brand and optimize the business globally is to invest into and control the brand in the same manner, we do locally.
With people, who live and breathe our values because it's their values.
People, who will lead our cause and build our culture.
It's their costs and it's their culture.
We believe when you aspire to be the very best in the World. There are no shortcuts and greatness can never be delegated nor licensed for franchise.
Our next international openings included our include RH Pretzels, the gallery on the Boulevard, the Waterloo and Madrid, The gallery on the Plaza, Mark Hey, Joe Micah.
In the first half of 2024, followed by our eight Paris the gallery on the shiny LSA.
The fall of next year.
Our each Paris is is one building from the corner of the Avenue Montaigne known as one of the most exclusive and luxurious art arteries in the capital and the chosen home of the major Haute couture brands such as Chanel.
Our Utah, and Celine Saint Laurent and many others.
We believe this believe this space we've designed for this location will position <unk> as a place maker in pacemaker intellectually fashion capital of the World.
Our each Paris will be a sixth floor jewel box connected by a dramatic foreign H scissor sphere, and a central glass elevators that will lift you up to the fifth floor and group rooftop Champagne and caviar bar, where you can take any views at the Eiffel tower, while enjoying our innovative menu featuring the finance for Trojan caveat.
You can also visit the second floor and dining are dramatic atrium restaurant inspired by the Grand Palais.
With an Onyx car bar, Florida, as well as in table looking out into the beautifully landscaped courtyard with 30 foot Ivy covered walls, it's like dining and the secret garden erasing the noise and chaos to the outside world.
Mark your calendars for early September are each Paris will be an opening party.
Did I Miss.
We are also under construction in London, and Milan, and inspiring spaces that will celebrate the heritage of the historic structures and will integrate full expressions of our hospitality experience.
Our current plans call for opening both galleries in 2025.
We are also anticipating gaming local approval soon for our HCP The gallery in double Bay with plans to open in late 2025 early 2026.
Regarding our North American transformation, we opened RH Indianapolis the gallery at the behind a state one of the most accurate palladium style villas ever built in the United States. The estate spans 151 acres and over 60 rooms overlooking a 35 acre Lake and represents one of the largest most.
Inspiring and immersive physical expressions of our brand to date.
With construction delays pushing our each Cleveland into the first quarter of next year. Our plan now includes opening five North American design galleries in 2024 inclusive of our <unk>, Palo Alto or H, Cleveland and our Raleigh in the first half of next year NIH Montecito in our Newport Beach and the second half.
We also believe there is an opportunity to address new markets locally by opening design studios in neighborhoods town for small cities, where the wealthy and affluent Liz visit a vacation.
We have several existing locations that are validated this strategy in east Hampton, John Phil, Let's scatter 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 2000 to 5000 square feet.
We have secured our first new location for design studio in Palm Desert and should open in the first half of 2024.
We have identified over 40 locations that are incremental to our previous plans in North America and believe the results of these design studios will provide data as it could lead to opening larger galleries in those markets.
CRH business vision and ecosystem the long view.
We believe there are those with pace and no scale and those with scaling no taste.
The idea of scaling taste is large and for reaching our goal to position our HSE arbiter of taste for the homes has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world.
Our brand attracts the leading designers artisans and manufacturers scaling and rendering their work more valuable across our integrated platform, enabling our H secured the most compelling collection of luxury home products on the planet.
Our efforts to elevate and expand our collection will continue with the introduction of Rguest picture upholstery are each bespoke furniture are each pillar, our AT&T and artifacts or <unk>.
And other new collection is scheduled to launch over the next decade.
Our plan to open immersive design galleries in every major market.
Lock the value of our vast assortment generating revenues of $5 billion to $6 billion in North America, and 20% to $25 billion globally.
Our strategy is to move the brand beyond Curating, these selling product to conceptualizing and selling spaces by building an ecosystem of products places services and spaces that establishes the RH brand as a global thought leader taste in place maker.
Our products are elevated and render more valuable by our architectural inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience.
Fatality efforts, we will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH guest houses, where our goal is to create a new market for travelers seeking privacy and luxury and the 200 billion North American hotel industry.
Additionally, we are creating bespoke experiences like our H, John Phil integration of food wine art and design in the Napa Valley are each one and <unk> two are private jets and our <unk> III, our luxury yacht that is available for charter in the Caribbean Mediterranean, where the wealthy and affluent visiting vacation.
These immersive experiences, both new and existing customers to our evolving authority architecture interior design and landscape architecture.
This leads to our long term strategy of building the world's first consumer facing architecture interior design and landscape architecture services platform inside our galleries elevating the RH brand and amplifying our core business by adding new revenue streams, while disrupting and redefining multiple industries.
Our strategy comes full circle as we begin to conceptualize and self spaces moving beyond the 170 billion home furnishings market into the one seven trillion North American housing market with the launch of our H residences fully furnished luxury homes condominiums and apartments with integrated services that delivered case and time.
<unk>.
Concerning time starved consumers.
The entirety of our strategy comes to life digitally with the world of our age and online portal, where customers can explore and be inspired by the depth and dimension of our brands.
Our authority as an arbiter of trade cases will be further amplified when we introduced our <unk> media.
A content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.
Our plan to expand the RH ecosystem globally mulch.
Multiplies the market opportunity to seven to 10 trillion one of the largest and most valuable addressed by any brand in the world today.
A 1% share of the global market represents a $70 billion to $100 billion opportunity.
Our ecosystem of products places services and spaces inspires customers to dream design Dine travel and live in a world thoughtfully curated by our H, creating an emotional connection unlike any other brand in the world.
Case can be elusive and we believe no one is better positioned than <unk> to create an ecosystem that makes taste inclusive and by doing so elevating and rendering our way of life more valuable.
Never underestimate the power of a few good people, who don't know what cant be done.
For the past 23 years, we've heard others tell us what cant be done.
And for the past 23 years, we've sale.
To listen.
We avoided bankruptcy, while being accused of lunacy.
Others have been have been shrinking and closing stores, we've been building the largest and most inspiring spaces in the world.
When wall Street didn't think our stock was worth buying we bought 60% of the shares ourselves.
When everyone told us we should be working from home. We are in the center of innovation working on rebuilding our new home our brand and its almost ready for prime time.
From the largest product in for transformation in our history to the most inspiring and unusual retail experiences in the world.
From couches to caviar edge to Bellini architecture to airplanes homes to hotel I should say, yes.
From Pittsburgh to Paris, London.
Los Angeles, London, Boston, Brussels Miami.
In San Francisco to Sydney soon the world will be within our reach never underestimate the power of a few good people, who don't know what cant be done.
Especially these people onward <unk>.
Which are pretty damn scary.
Operator, I'll now open the call to questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Your first question comes from the line of Simeon Goodman of Morgan Stanley. Your line is open.
Hi, everyone, Hi, Gary Jack Good afternoon, I wanted to ask about contemporary I know it's early.
I think some of the research was that it shouldnt cannibalize other aesthetics I don't know how much data you have on it yet but is that fair and how sales are progressing.
And then I don't think can you just remind US you would never concept you never touch pricing on contemporary.
Talked about changing some pricing on some items, but I don't think it ever related to the new collection.
We reviewed kind of.
Pricing in our value equation throughout the brand so everything was touched.
If you look at the contemporary brands. The contemporary book This re mailing of the book is Scott.
Very high new content.
No.
But all the products and have been I don't think Theres anything we can re price.
Yes.
Looking at contemporary books got in May.
Mid October or early to mid October.
This award was breaking out and interest rates peaked so it's hard to kind of see the initial reaction to it.
Collections.
Mechanics collection collections, theyre, selling really well selling good some not so well.
I feel very confident.
The overall mailing of contemporary is going to be incremental.
As we believe interiors has been as we believe modern will be and as we believe.
But your upholstery will be and bespoke furniture will be in everything we do.
So look we couldnt be more excited.
We're selling into the probably one of the biggest headwinds any of us.
And the housing market, while it's not the great recession of 2008 nine it is from a housing point of view.
It's that bad.
Youre lapping really big down numbers in the housing market and they are still down.
So if you've got a.
Little lift in the new home market, but thats only 10% of the market we've got it.
Yes.
Yes.
He said yes.
In this latest shareholder letter and I said last time.
I think we could.
Continue to see our business in black.
Yes.
Rest of this quarter and into.
Through the first half of next year and hit an inflection point.
Mid late second quarter.
Im.
And that'll be despite kind of the housing market unless there's.
Something where theres, another gapped down, but it seems it.
<unk> got inflation somewhat under control.
It seems like the fed becoming more confident.
And.
And if we can start to see a move in interest rates.
Easing in interest rates the federal funds rate.
The mortgage rates that will help mortgage rates went down a little.
You're still you still have an affordability issue with.
82% of people with.
Mortgage is at 5% or under 62%, 4% or under and 25% to under 3%. So.
That's the biggest issue facing the market and Thats why.
We don't have inventory that's not.
Inventory in the housing market and why prices prices are coming down because there's not inventory.
Some pricing coming down here or there in some markets.
The good news for us.
We're just taking a long view, we're trying to position the brand in the business.
For the next big run and.
And I think we're going to be.
Meaningfully better position than anybody else in our sector.
Not by a little by a lot.
When this one this housing we'll outperform.
Yes, the market and the competition I think over that.
The next period.
Yes, we gave some market share back.
Yes.
During the post Covid period.
<unk> got promotional like everybody else got everybody on the other side of Covid and everybody at promotional even though people say, they're not promotional or theyre not doing site wide promotions or whatever the languages.
Peoples websites.
Very promotional environment out there it has been.
I think what Youre seeing now is the people that got promotional are now going to lap their promote.
<unk> stamps.
And they have to go up against that so that was the lever post COVID-19 for people to.
Turn on the promotions.
The business now everybody cycling that.
I think youre going to see People's as Youre seeing it people and businesses and flexing downloads in this environment.
And our business is inflicting upwards and it will continue to do so.
Can you can as a follow up can you talk about your own inventory position.
The ratio of discounted or clearance items, because you mentioned the shifting to that could weigh on margin.
And if you have stuff that.
<unk> needs to be cleared or contemplated to be cleared does it makes.
Just tactically move it move it out of the way to make way for all the new product that's coming.
Yes.
We are we just don't want to lead with with clearance and lead with pricing I mean, we'll have a few emails that go out there that talk about end of year.
And of your sales.
To deal with.
With the clearance goods and stuff like that and we'll be aggressive pricing that's good so.
Yet the inventory planning.
Yes current inventory into cash we don't want it sitting here.
On the balance sheet so.
Yes, youll see effects.
The appropriate.
Action here and.
Got it.
Yes.
Nothing we wouldn't normally do we don't want to lead with promotions or start to turn the business back in that direction, where we're.
We're almost to the other side of this thing I can't believe maybe maybe we've got another six to 12 months, but I think you get to the second.
Second half of 'twenty, four unless again, unless they havent got inflation under control I think we're going to see we're going to see.
The fed.
You have taken easing approach I would be surprised if they left interest rates at these at these levels.
Prior year next year.
Nonetheless, even if they do.
And youre going to see us perform pretty well in any environment based on.
Just based on the work we've done and what's in the pipeline and the plans we have and they are all very big moves.
By far the biggest product transformation in the history of our industry. It is multiple times bigger than anything we've ever done.
Your next question comes from the line of Stephens <unk> of Citi. Your line is open.
Great. Good afternoon, Thanks for taking my question.
I wanted to ask on operating margin and I wanted to talk about ask in particular about the ability to protect the operating margin.
We're now at a level that's below 2019 granted the macro is challenging but can you just talk to your comfort with protecting operating margin what are some levers that you can pull if the macro deteriorates further into next year.
Yes.
Yes.
We're not going to have a strategy to protect the operating margin.
Sure.
Comparing it to 2019.
Are you Kidding me.
Why would you do that it's nothing like 2019.
Hey, guys housing downfall than anybody seen.
So first massive massive inflation since then yeah. So many items of the P&L cost yeah. So, yes, it's not where I'd be focused.
Like I mean, you can focus there you're just you'll dismiss everything that unfold here.
If you want to focus on that.
We're investing for the next cycle, we're investing for the long term.
We're not trying to protect the operating margin a point or two I mean, if that's going to get people really fired up about the long term strategy of this company, it's probably the wrong shareholders.
And Steve.
Just one thing to comment about that again, you mentioned lever, but just more of a point of tailwind is that we.
Elevated markdown activity this year that as we cycle through that next year that could on.
Unveil itself is a tailwind next year, so we'll talk more about that.
But.
That's one aspect that's positive.
Yes, I mean, the operating margins are going to be fine.
So.
Cash flow is going to be fine.
Back $2 $2 billion of our stock.
Because we think the model has a problem.
We're going through the biggest transformation in this entire industry.
And so you want to think about what's going to be on the other side of that.
What's the operating margin in the next quarter or two whether that bounces around a point or two.
That's not the biggest shareholder in this company, that's not what I'm worried about.
Okay fair enough.
A follow up then on just the promotional aspect to the furnishings industry.
How long do you think that lasts.
Is that something that continues for the next couple of years or is it something that probably is fair.
Finished by the end of 'twenty four.
Oh, you mean, just the broader industry.
Yes.
Yes, no I think the broader industry is back to pre COVID-19.
Pricing and promotions and it will be there forever now once you turn that on you can't go back.
So.
Maybe the E mails look different or they call them different but.
You go look at the website.
I mean, Joe.
Yes.
Youre getting pelted with sale emails.
And have been for over a year and Thats why.
And as I say, that's why every.
He is now cycling that and.
There is an easy business, we could we could have turned on promotions over the last year on the other side of Covid and moved our business, 15% to 20 points.
Would a permanently created a different model and so.
Some people are.
Promoting and cutting AD cost some people are doing a lot of different things.
And hoping they have a massively different model.
Yes, there might be people that come out of this thing with the with the.
Slightly better model, maybe there's some things they learned maybe than at the spend as much in AD costs, maybe after that so.
But it's not really people that we compete with.
That I'm too concerned with.
More focused on.
What we are doing and what our big strategies are in.
How this business is going to be positioned for the next.
Five years and.
Yes, and we really like what I see I think this is.
<unk>.
Our best work we've ever done.
You're going to see unfolding over the next several quarters.
And not just it won't stop there, while I would say that the inflection point will.
We will peak in Q2 Thats just based.
And what's in the pipeline.
On the next cycle likely will create a higher and higher peaks right. Because we've just now we're creating an entire new Harley New foundation to the business.
Stronger.
Better foundation to the business.
Yes, we're we got arrogant about around pricing during COVID-19.
We had all.
The price increases.
The tariffs and then the supply chain.
Raw materials going up.
We are just a lot stronger and we're going to play a very aggressive.
Game, because we can we have the scale to buy bigger than other people, we have the scale to get better pricing, we have the platform to presented.
And so we're I think.
We lost some market share because we're slowly.
Ramped back up.
Product development and marketing that business post COVID-19.
We've rebuilt those muscles.
Now, where we we're arrogant from a pricing point of view.
There is no arrogance anymore.
Additionally, incredible competitive focus.
So when and so.
Yes, the market's going to do what the market does I don't know if I would.
All the people that are out there they have been promoting this past year items, what are they going to do stop promoting their business will go down 15 to 20 points.
Yes.
Try not promoting that the furniture business when you have been promoting.
Okay.
If it doesn't work you have to go through a whole year cycle like we went through when we moved the membership.
Yes.
That's a painful thing to do and.
You have to be someone who owns a lot of the company like I did otherwise youre going to be a CEO that is under attack by Actavis.
You go through a transition like that so people would say Oh, we're going to do like an RH membership model good luck with that.
Okay.
It's not.
Not easy things to do we spent three years planning planning that and transitioning the business and the model but.
It has stopped <unk>.
Noting when you've been promoting.
Youre back on that promotional drug.
Yes.
You can't just get off it.
Your next question comes from the line of Chris <unk> of Jpmorgan. Your line is open.
Thanks, Good evening, so a couple of follow up questions on the gross margin so.
Once we get past holiday do you think youll be clean to start 24 and is it fair to say that the vast majority of the non fixed cost deleverage in gross margin was clearance and to your comment Chuck is there any reason why you wouldn't get that back presumably with all the newness.
You wouldn't expect a lot of markdowns.
Okay.
Yes.
I think transition out.
Look starting today, we're going to be in a better position than let's say the start of the quarter, but I think we'll be going through continue to sell through the markdown goods.
By the by the end of the first half that's probably yes, I mean, we'll always have some some level of markdowns right, but what do you want to think about it.
What is the overall mix look like so the mix is going to be.
Markdown mix.
Q4.
And youll have some of that move into Q1, it looks like not going to lighten up.
Q2, as we sell down and you're going to have.
As the quarters go you're going to have a higher mix of new.
Higher margin product.
Yes, so what I said in the letter over the short term margin the transformation, we're making is margin dilutive.
But long term it's margin accretive.
Mix shifts.
Yes.
Inventory rebalancing.
Hi.
Got it and then one of the questions. We also get from investors is trying to think about there is a lot going on with all the new galleries.
And the acceleration acceleration of the books.
Our source books back to what it was.
Pre COVID-19.
As you think about what's implied here are that the third quarter. SG&A dollars is like is that the right base I guess said another way does advertising is there any reason advertising steps up again next year and if you think about the complexion of the openings next year with more international or where are we.
Just sort of naturally raising the expense space given those two factors.
Yes, well, let me see.
Perfect time to guide next year, we will we will guide next year. So we're not I mean next year right now.
Okay.
Theres always going to be certain startup cost right. When you are.
We're ramping up new countries and things like that and investments to get the galleries.
Running to get people trained.
Restaurants opened to date.
The home delivery network setup and operating people trained.
And then you'll cycle those things right. So.
Yes.
Are we going to have some yes.
Yes.
Cycles to get around as we opened different countries, yes sure.
Once businesses ramp.
Cycle those things so.
Yes.
Yes.
We have a lot of confidence in our long term margin.
Business and.
And the model so.
I don't think Theres any reason why this.
Why this business and brand doesn't get back into the 20% range.
We cycle through I mean, youre not going to get there and one of the worst housing market. This is <unk>.
I mean.
When you compare the exact numbers to 2008 and 2019. This is this is if it is not the worst in the second.
Second worst in my career and I think I've been doing this as long as anybody leaving the company in this industry.
There might be some people that have been.
Been doing along with me I don't know too many but I haven't seen a market like this.
How to navigate through a housing market downturn like this so.
Yes.
I can't remember when people were locked into low interest rates and they can't step up because of it.
Different interest rate so you've got to kind of look beyond this kind of temporal time I can't believe that we're going to be in this lockup like this forever.
It goes through 'twenty four it could.
So what.
No it does.
Change the long term.
Bye.
The good thing is we've now cycled around so we didn't bite on the promotional.
Drug like everybody else did.
So we gave.
Gabe gave away some market share because we didn't do that but at the same time, we've sharpened our value proposition.
At regular price and we're going to be tough to compete with even if people go on sale.
Yes people don't they just don't have the buying power of the platform to presented that we do and so.
I wouldn't want to be on the other side of this.
This big move we're making.
Thanks, Chris.
You asked about Q3 being a base.
We don't look at it as a single quarter as a base and you've heard me talk about <unk>.
Try to read some trends on a basin looks look for a full four quarters given the given the cadence of advertising timing and yes, you can.
Can't just use a quarter, yes, I mean, we you.
Used to be able to mail a book and we amortize it over six months to 12 months now email book, Yes.
Okay.
The day you drop it is today.
So yes.
And obviously.
Books more valuable than.
That single period, but there is just an accounting rule change that.
To make.
A business like ours kind of lumpy right.
From quarter to quarter based on.
The AD costs hitting when the book drops.
No no no amortization of the AD cost with that to make sense.
Youre not going to get all the sales that week.
Your next question comes from Liberty hurdles Nagle of Bank of America. Your line is open.
Great. Thanks very much.
A quick one more of a clarification than anything else.
So just in the share leader.
There was a comment about reaching kind of a peak inflection point.
Second quarter of next year is that in terms of kind of a ramp as that demand trends.
Revenue.
If you could specify level, but wasn't yet that would be really helpful. I appreciate it.
Yes, yes that will be.
That'll be demand trends.
Which will turn into revenue and.
They're just going to be just continued step ups.
There's going to be.
So as we get in stock can be step ups as we finish the gallery transformation.
Sure.
Anytime you.
You have big moves like this youre going to have.
Some things some collections that are just wildly better than you could have thought.
And youre not going to have.
We have a collection here that is the best collection in the history of our H by probably 40%.
We're not going to catch up on the inventory.
Until March April.
Somewhere around there.
So yes, there is.
And you've got all these imbalances when you have this much newness so you've got to kind of rightsize all of that you've got it in stock.
Because yes, because things like that in other collections and things are selling so well you can't even put them in the stores.
Alright so.
You've got too much demand so you've got to fill the demand.
Some of the product that you're planning to transform the galleries with now has blown out.
And then you've got to let them.
Manufacturing base.
Just to get their legs underneath them with all this newness right and they're going to get more efficient.
And things are just the flywheel is going to be running yes. We will then have again, we're going to have the second round of the book Mailings, which is going to have another.
Well I mean modern can be massively new but then.
All the books will remain.
In the first half we made modern because we're pushing on the later may make may go in the.
Third quarter, but.
But all of those folks will have another.
Probably on average 20% to 40% more newness based on what's in the pipeline.
So it's like we usually have 15% to 20% newness and so.
Basically the entire brand is Kenneth.
It's going to transform and the assortment is can expand on top of that.
And so you just got to kind of get it all dialed in the inventory balance.
Get everything set.
Some things you have planned youre going to put into the.
In the galleries in the retail gallery.
And also on the demand doesn't look good and youre like that led to swap that out with something else and so.
Yes, you're reading and reacting to real data now.
And so we like what we see in the data.
Like what we have in the pipeline, we like when we.
Ed.
We dimensionalize all the trends and all the data and say what does this all look like.
Three months from now six months from now when this happens that happens that happens.
And yes, that's when we think we will.
For this big transformation.
When we should start to reach peak inflection.
Got it and then just a follow up for Gary.
Constant Germany were interesting worried a lot stronger it sounded like you said you had expected.
They can put a ton of marketing behind it.
So what drove it.
Bernstein online.
Great locations and a beautiful exterior as all the rest of it but in terms of just this response.
What's resonating.
You could say in terms of just potential.
Potential relative to some of the I guess the average size in terms of revenue for U S.
If you could size that muscle.
Too early.
Yes, I think.
<unk>.
Just in general we're in highly populated shopping areas right. So.
Dusseldorf, where on the main shopping Boulevard.
Dead center across from Chanel.
A few doors down as it is.
The main luxury shopping Street, we're dead Center.
There is a lot of people walking by and a lot of people walking in.
In Munich.
One of the key parts of town and where there is a lot of people and you really can't compare those to what we did in England right.
But I've said since the beginning England.
England, we didn't do England through a lens of cod.
Commerce first we did it through a lens of conversation first how do we create the right conversation with the brand how do we make the right first impression how do we do something that is so extraordinary.
It is.
The high end luxury consumers to look at us differently think about us differently.
So, England, it's really a it's a big brand investment.
A lot of people, there's no one walking by that store not not a single human is walking by you got to drive there, it's an hour and <unk>.
45 minutes out of London.
I mean, the business is building.
Closed are today, we've closed our biggest sale, yes, it's 330 <unk>.
Where shall anywhere from Joe in the French Alps, as Shelly on the franchise.
So.
The book of business is building the design business with our.
Our internal interior designers is building with our trade clients is building.
All of those pieces of business are building nicely.
I really share at this time of the year, it's going to it's going.
Go slow because it seem that the weather is not that nice out there right now and it's not like you're walking around the grounds unless you've got heavy coats.
Rubber boots and stuff so.
But our demand in our <unk>.
Our book of business and everything as building Bill most of them up and.
Yes. So the branch is just going to take a while for the brand.
Now, we're here and know who we are and what we're doing.
Yes, remember people only buy furniture.
Billy.
Every kind of 5% to 20 years right, depending if you bought another new home or what you did so.
You don't generally just go out to furniture stores.
Unless unless theres a need so.
Yes.
England just doesn't have the traffic.
Yet the locations that we have in Germany, and so this is just our first look at the locations in Germany, and we like what we see we like the people that are coming in.
They are starting to engage our designers, they're starting to learn about the brand some know about the brand.
Blizzard in America in Netherlands, and Germany.
Some of telling.
Telling us at the opening part of Munich.
I had a couple have a shift there have been shifting their own containers to Munich and now they're so excited with here and.
<unk>.
Yes, so we had a lot of fans I mean, what I was I think.
Beyond my expectation was just the excitement for the brand and the quality of people that were at the opening events.
It was I mean, it was as good as you could have expected.
So that's.
Again, Thats again, creating another conversation does people, telling their friends and others.
Yes.
Yes.
Start building.
And I would expect these.
These countries are going to probably have pretty big compounding comps for the first three years.
Much bigger in.
America.
When we open a new store, even if we're not in a market we're already in that market, where our H like we can open in Milwaukee.
Next month, and we don't have a gallery, there, but we do millions of dollars in Milwaukee.
People are shopping from us online they know the brand.
And so when we open in a place like that people are lined up ready to shop, there's people that have been shopping as theyre ready to place transactions in place orders and we have immediate demand.
I think in these new countries.
People are going to come in and get to know us and yes, we will start working on yes. They will get to know the brand will start working on design projects and.
And then people get familiar with who we are what our prices are.
How we compare.
And start to interact with us, but it'll it'll happen faster in.
In Germany than it did in England.
They are just not that much traffic I mean, we did catch.
Back half of the summer and so we did have some really high quality traffic out there.
Yes, but but I think what.
What im amazed by RH, England is that the demand is building.
Yeah.
<unk>, a slow season and Mike.
Yeah.
It's interesting.
So.
So we like that and we've only made one book and not that many people.
So just learning about how your investment in marketing and advertising and building the brand.
A lot to lot to learn here.
For us so we.
We like what we see.
Yes.
Pleasantly surprised.
How the business is continuing to build an RH, England.
I'm really happy with just the initial.
Turnout for the events and.
And then the amount of traffic coming into the galleries.
Exploring coming to see us.
So.
The demand that's happening in the demand will then start building right.
So, let's see but we're going to know a lot more.
Every quarter.
Every six months every year here.
Your next question comes from the line of Max <unk> of TD Cowen Your line is open.
Great. Thanks, a lot. So in the letter you noted being pleased with improved trends from the launch of interiors and contemporary so just curious if you could frame the uplift in the context of revenues down 13 and change and then how should we think about the magnitude of growth in the next couple of quarters from those to collect.
And bigger picture all contemporary.
Gary What's your latest thinking around how large this collection can be comp.
Yes.
Finally, we.
Yes.
We don't primarily look at it.
It's really what we look at is kind of.
One giant assortment.
Packaged in different vehicles right that allows it to breakthrough and.
Yes presented aesthetics, and so on and so forth to the consumer.
It's not like we sit here and go has.
Temporary doing hasnt periods Damien has as we say.
The furniture upholstery business doing and we're looking at every sofa and the entire.
Assortment, whether its interiors contemporary modern.
So it's not so much the books from.
How we manage the business suite books, it's how we presented to the consumer we look at the entire.
<unk> Assortments Alright, and then we're looking at.
The books, they're in and how we're going to adjust and what's working and what's not working and so on and so forth.
When you think about it the way you're thinking about it okay with that.
Well that assortment.
Yes, when you parse it out how big will it be.
It just depends on how big we make that book, how big we make that assortment.
How many are in the contemporary or how many things that.
Wind up going into interiors and how many things go into modern because you've got some things.
The lines are blurred, we could put it in.
Almost any of the three books.
Hi.
Yes so.
Hi.
About the way the way I think about this today is.
<unk> is going through a massive product transformation the biggest thing they've ever been.
How does the whole thing look.
And as the whole assortment gets out there interiors contemporary modern outdoor right as the books get out there as the products get into the galleries as we get.
In stock.
What is that total.
Assortment look like and how it how is it performing.
Versus the old Assortments.
We think it's going to be meaningfully accretive.
Got it that's helpful and then.
No.
That's great and then I guess can you speak to the phasing of the new products to galleries and your confidence of completion by the end of the first half of 'twenty four and then specifically you will all the galleries, we touched will some get more newness and others or how should we just think about the totality of the in Dallas in Gallery resets.
You mean.
The reset support the floor sets.
Yes, I think yes.
They are being done in stages as.
Yeah.
As we're ramping up inventory and hence again is that.
If you are ramping up.
If all of sudden you have some really high performing collections.
We're just not going to be you're going to have to fill demand and not put the goods in the galleries right you're going to have to wait and so.
I'd say were going to get.
90%.
And stocking Q1 or something as far as completion of the <unk> of March timeframe, not yes, it wouldnt be the end of the quarter, but RASM.
I mean the MRC.
Some galleries will get prioritized versus others.
Yes, I think it's.
I think we will.
Okay.
We'll be in really good shape by the end of Q1 into Q2 and.
And then I think by mid to end of Q2, and Thats why I say it that should be our kind of inflection point I mean based on all the numbers we're looking at today.
<unk>.
We don't have data on modern yet we won't until we mailed that.
So that will have the same kind of challenges lots of new product, we're going to as with any new product. When you don't have data youre going to be 100% wrong with your inventory investment.
I've been doing this.
A long time I've never seen anybody by new product exactly right.
So if youre going to be little over bought under bought a lot over bought.
Under bought.
Yes, so if you just don't.
Yes, you don't have exact science and early trends on any of the newness. So.
Yes. It takes it takes a few quarters to kind of.
Get the trends.
Read the trends right make the adjustments you need to get beyond orders corrected make less of this make more of this and.
Yes, let the factories get adjusted.
As they are ramping up on a lot of new products. So.
Yes, but.
Yes.
That will all work itself out again I just think about this is like.
The next couple of quarters, it will be meaningful if we're sitting here.
At the end of Q2.
And we didn't get the inflection point, we need it.
That would surprise me.
We think we're going to get that's not a little one it's going to be.
Meaningful.
That's going to keep building.
Yes. It is all these things happen in stocks gallery sets.
But.
Modern outdoor and then a recycling and re mailing of those books with more newness right with probably 30% to 40% be more newness.
And then you'll have some adjustments with that 30% to 40%, but but that'll be much smaller compared to what we're doing today.
Your next question comes from the line of Steven Forbes of Guggenheim Securities. Your line is open.
Hey, Gary Jack.
Maybe it might be a repetitive question on the product transformation.
It was really just hoping you can yes.
Anything you can give us or speak to whether it's sort of what you're seeing now or.
Or you or even a reference point back into history on sort of higher product transformation cycles.
Help us contextualize like what's the potential magnitude of the inflection.
On the horizon is.
Whether we whether we can reference sort of peak demand during COVID-19.
Just anything that helps us think through really.
Should we be expecting.
Behind this front product transformation.
Okay.
I think it's all going to depend on what what the macro is doing and the housing market.
Yes so.
Okay.
The housing market stays where it is.
I mean again.
Latest guide you next year Youll get a better sense. So.
Yes, we will have a little bit more data.
But.
Yes.
Yes, I'd, just say generally I'd be surprised if anybody's outperforming us.
When we get to Q2 of next year.
These shocks.
That maybe someone else shocked me.
I don't think so.
We will anxiously await that and then just a quick follow up the 70, new collections that were referenced sort of in past calls.
Where are we today with the number of collections that are out.
How many will be launched by spring next year by fall of next year, what sort of the.
The pipeline looks like.
Yes, there is more than 70 now.
Yes.
Yes.
Yes.
Okay.
We will have.
Probably.
When modern.
With modern hitting and outdoor hitting.
It will probably be somewhere between 70 and I'd say.
Not up to 90.
And.
With more in the pipeline and we have.
We have a whole another.
Look we're working on.
We haven't announced yet so you'll you'll hear about that that we think is going to be meaningful and it's not it's not bespoke if not mature it's something we haven't we.
We haven't talked about.
And that's going to be a whole new big bank.
So we're working on that too.
Yes, so just to latch, Kevin Steve Buckle up.
Yes.
Your next question comes from the line of Michael Lasser of UBS. Your line is open.
Good evening. Thank you so much for taking my question Jay Why do you think you are losing market share and if it's an issue with pricing how much more do you think you need to lower prices in order to stabilize or gain market share.
Yes. Thanks.
Hello, everyone.
I mean did you Miss the first part of this conference call.
I can repeat myself.
Yes.
The transformations in the early stages. The goods are in in stock Theyre not in the gallery of yet we havent been through a full mailing cycle out and.
Dan.
I don't believe.
We've massively closed the gap I think we're gaining market share in a lot of people today and yes, there might be a few people out there.
That are outperforming us added demand point of view I mean, they may not.
Outperformance in the next quarter or two I would say theres going to be an inflection very soon here.
Hi.
And so what do we have to deal with everything I just said so.
I don't think you want me to repeat myself do like.
I don't think we got to lower our prices anymore I don't think we've got to.
The goods just got to get in stock, we've got to get the galleries reset.
And.
We got to go through the next cycle.
Yes, it will be up to the races. So.
Yeah.
My follow up question.
Yes.
My follow up question is on the degree to which your P&L this quarter benefited from lower freight and transportation costs was that more significant.
Could you quantify it.
Was it more significant than the P&L had experienced in the second quarter. Thank you very much.
Michael we've talked about this a few quarters now.
Given our turn.
The way Fernando and his team.
Ocean freight.
Bulk of the increases in costs had occurred.
Through the pandemic.
Those turned over last year, where we peaked in may as.
As far as the highest contracted rates we've ever seen and then every month thereafter, it's been a decline in now and most many markets were back to or close to 2019 levels Red Fernando.
Sure.
As far as kind of any kind of.
Product margin impact from some freight rates I mean, we're for the most part cycle through that given given our given our yeah. We're not really seeing the benefit right now I know other people are I think they got.
Got stuck.
In longer contracts with bad freight rates than we did.
Yes, we were just more nimble at access in the spot market and taking advantage of the decline in ocean freight rates that really began last June I think June July.
So we're.
I wouldn't say, there's any really thats quantifiable or if it is it's de minimis.
For Q3.
Your next question comes from the line of Jonathan <unk> of Jefferies. Your line is open.
Hey, Gerry Hey, Jack Thanks for taking my questions. The first one is just a follow up on RH, England great.
Great to hear the demand continues to build.
While ago, Gerry you mentioned, the 50 to 250.
Range for first year revenues with possible obviously, the backdrop has changed a lot, but what you've seen in the first six months and the sequential trends.
How should we think about what you're internally expecting for an annualized first year.
Volume and appreciate its more about conversation in commerce, but just trying to think about how it's annualizing versus expectation.
Yeah, I don't know, if we had any real expectations.
People said like what could it be could it be I don't know it could be 50 million to be $250 million and thats.
I'd think about it is.
We're going to keep.
Kind of marketing the brand right to create about RH that gallery think about that country.
And.
What.
What will our investments in marketing due to the direct business what will the brand recognition mission do have how does it build when do you get to.
Certain run rates.
I just think it's super early for us to know because we didn't open a typical.
Store right, if we were to Oakland and London first it would be massively different.
Yes, we opened in the country side, we try to do something.
Super inspiring and something the world's never seen.
And so.
Making investments.
I wouldn't get too focused on this gallery right yes.
Yeah.
Try to draw a conclusion of this one it's not going to.
It's not going to tell us youre not going to get the right answer from this one this is really a brand investment.
And to create the right first impression and the REIT conversation.
Sure.
London is going to be coming around the corner, we're looking at other locations in other parts of England.
And we're going to be investing and marketing right.
Not just books, but other types of marketing.
To drive the online business.
But we're just in the early stages of all that.
Yes.
I'm, telling you don't get too obsessed with RH, England.
That telling us what the market is going to be for us.
I'm not too obsessed about that has to be the wrong place to draw conclusions from.
Yes.
Is there anybody opened a store like that.
Or in the world in any category.
Somebody named something similar to that.
Let's think about that.
If you've seen it if you've been there anybody.
Anybody on the call you haven't take a look at the pictures.
Have you ever been to a retail store like that.
No.
So if you try to draw too many.
Okay.
We're not going to really do another one like that right. So.
Yes.
We've got other things.
How how does Germany build that's a lot more normal.
<unk> work.
We're on streets, where theres a lot of people walking by driving by kind of is it worth it.
There are two different.
Objectives and goals and visions and.
<unk> for the two <unk>.
They serve two different purposes.
So yes.
Did I think England.
There is a number I always had.
And yes, a modest number and.
But.
What you don't know is okay. When you open up.
Our brand to an entire country like England.
How does that go how does it grow what marketing do you have to do.
Alright <unk>.
So we're still learning.
So.
Yes.
Thanks.
We're not in a hurry to jump to any conclusions on any of this.
We're really happy.
With the work we've done with the team we have.
The initial.
<unk>.
The feedback we're getting from consumers in the kind of people that are coming in.
All of that looks directionally right. So.
Over time, we'll take care of itself.
That's correct.
Yes, yes.
England since one thing there is nothing like it in the world.
That's why we did it.
To get people see something they've never seen think of Eric that our brand in a different way.
Have people.
Highest levels.
Yes.
<unk>.
Yes economic.
Ladders like who were shopping the best luxury brands in the world and stuff.
Look at us differently think about us differently.
Yes.
They're all long term things like that is really a long term investments like a guesthouse.
Yes, we opened what we believe is the highest quality hotel experience.
In New York City, if not one of the best in the World.
I'm not looking at that thing to really.
Tell me if I get a rollout a lot of guest houses now.
Just trying to.
Communicate differently.
About a brand to build something that no one has ever built before.
It's like somebody just wrote a report.
That was one of the most comprehensive reports written about our company went all the way back to the very beginning wrote about everything wrote about RH music. When we had a record label and we are.
We did a concert at the.
Greek theatre and we did.
So our performances in all of our news.
New galleries, and we had RH contemporary art, we owned the rain room, the most exhibited art.
EBIT in the history of the moment, New York and the history of the Lackland New York.
And I remember being at the Goldman Conference and someone asking me about RH music and this and that.
Mike.
And I say that.
A different way of communicating I could go run ads.
Digitally or in print or do anything.
They're not like I don't know how do you really measure those returns if it was that easy.
Everybody if everybody had really great data on digital advertising I think everybody would have a really high performing business stayed out.
How much to spend they don't know what they're getting for any of it.
Google and other people try to give you a great things.
Make you spend more money, you'll look look what youre going to find out they clicked on your name like you don't know if they click the under name because it came in your store.
They got there.
But it's just a different way of communicating and building our brand if youre going to build something.
Unlike anything anybody has ever done.
You don't take the same path as well.
But we got here and we did things like RH music and we had three artist for I don't know three years, and we produced albums and we did concerts and we did add thanks.
And I think people thought it was really cool and it made our brand.
Look different and that people think differently about us like who are those people.
Yes, we did RH contemporary art and we had the rain room Dow first piece of art, we brought but became the most attended exhibit in history of the world.
We're not going to get it right, but I'll tell you anybody who's been to RH, England.
Differently about RH.
And thinks about ha.
Those are pretty interesting people.
And.
We're trying to build something special with specific not a game plan to anybody else's running because they're all running the same game plan for the most part.
We're running different one so at different times.
It would be hard to look at hard to model or to understand.
But that's how it should be by the way.
Great. Thanks, Thanks, Gary and then just a quick follow up on product a lot of discussion about disruptive pricing ahead, and just kind of curious how you are able to achieve that while preserving margins. So any color you could give us on how the material to the.
Finishes at the sizing of pieces in the new collection is going to be evolving.
Would be helpful. Thanks.
Yeah.
It's just it's it's.
Because of our scale and buying power and confidence in <unk>. If you look at.
You look at our source books are you look online and you look at the Jacob Chair for example.
And if you go.
Look at it.
Everywhere else and look at.
The pricing and then you look at our pricing and you look at our assortment and you look at our presentation you might have an ankle biter here or there and somewhat.
20 <unk>.
They're not making any money in there.
Match, our pricing but.
There is there's no one that can really by as much as we can.
No one that can be presented.
On our platform as big as ours and mail as many books as we do and get behind it.
And.
And a lot of people.
Don't place the financial bets, we do on product, we do that very well that we got to where we are.
Yes so.
A few.
I mean, we've got people who are selling their version of the Jacobs chairs and they pulled it off their website, hence their price was so embarrassing and they already own the inventory at a much higher price and now they don't know what to do so they're probably sending it to an outlet.
And they know who they are.
It probably listening to this call.
And if you look at anybody selling the Jacob care, whether it's the cane Jacob chair the upholstery Jacob chair the leather Jacob chair the dining chairs allowance chairs.
I wouldn't want to be competing with us in that chair.
And.
The margins are as high as anything else.
That we have.
So it's not necessarily a lower margin when you think of disruptive pricing.
Your next question comes from the line of Seth Basham of Wedbush Securities. Your line is open.
Thanks Al and good afternoon.
My question is also around the product transformation.
Understanding theres a ton on and there's a lot going on here, but as we think about modeling. It but you mentioned that is can be margin dilutive near term for that switch to accretion as a sales inflect in the second quarter or is there a longer ramp and margin accretion.
Yeah should which should.
Alright.
That's reassuring.
And then.
The second question I have is just regarding the <unk>.
Ramp in Europe, and understanding those galleries will take longer to ramp as the brand awareness more limited than the U S and how should we think about the ultimate margins and ROIC.
Are those new European galleries, putting RH, England side.
Okay.
Okay.
<unk>.
Yes. It is.
Not that many like we're just going to we're going to get them open.
We're going to learn a lot we're going to focus on how do we build our business in these different countries.
What kind of marketing investments they've taken.
What they look like.
It's not.
So you start with saying like what's been our ROIC, so you're going to be.
In Germany, I don't know if there are sold anything in Germany.
I look like what's it going to cost.
Build the brand.
Yes.
People come.
For to build up the design book.
The trade book and everything else so.
Ken.
It's a handful of them.
Galleries stripe tend altogether I think we've got 10 nine or 10.
And yes, we do yes because.
Sydney, India, two in Madrid, and stuff. So, yes, so we're going to get them open.
And we're going to start learning.
And we're going to.
All kinds of adjustments.
Get some things right and get some things wrong.
Worked really hard to make it great.
But I like how we're starting.
I mean like.
We look.
Yes, you go into Germany.
Really good I mean, the galleries looked great. The teams are fantastic.
Alright people are coming in so.
It was really encouraging being being in Munich.
Yes.
A really good feel for it so.
Yes, I mean, obviously very different than England and.
So we didn't have to spend much capital.
And those two gallery suite.
We took over.
A couple of the Abercrombie and Fitch flagships.
<unk>.
Yes, we didn't have to build them like some of the other ones.
Given an orange, England.
Had to rebuild it.
So.
Yes, they are all going to have different kind of ROI or OFC dynamics to them.
But it's really it's how does it all blend out what does it look like.
Year, two year three as it ramps once you cycle some of the initial investments.
Get home delivery up and go in and yet all.
All the investments we have to make.
Sure.
But the biggest the real big key I would say, it's like is going to be the inflection of the U S business. That's the key.
Right.
That's the big thing to focus on these things.
They are they're going to kind of.
Take their own path.
And we'll learn and we'll make adjustments but.
Yes, we're getting these openness I don't I don't mean to minimize it I mean, it's just.
Yes, I think it's kind of unrealistic to have.
Really specific goals for these.
We just wanted to be Directionally right and then we will refine it and learn and continue to improvise.
And improve everything.
But.
Sure.
Our big focus is to inflect.
Yes.
U S business, the North American business and.
Get back to taking market share and.
Yes, getting our margins back to historical levels, and we're going to for.
For part of it to get to historical levels.
And in.
And operating margins in the 20% range, we're going to need the housing market.
Two.
Unfreeze here and and kind of return to somewhat normal housing market.
That could take.
Yes, another 12 months.
I don't know.
Your next question comes from the line of Peter Benedict of Baird. Your line is open.
Oh, Hey, guys happy holidays, yes, a.
A follow up on that comment there Karen just so so.
I was going to ask you about the conditions you thought were required to.
To get you back to that 20% ish operating margin clearly.
Freezing of the housing market I was thinking more is there a revenue level are scale businesses around 3 billion now given the cost increases across the P&L just just post pandemic like what is there a revenue level that you think is required to maybe support that.
That was kind of my first question.
Yes, we know that answer I don't know if we want to.
Say that right now.
Yes.
Yeah.
We clearly have some amount.
Hey.
Said that the margin will both gross margin operating margin will naturally lever as we as we as we build back the revenue.
So, but we're not we're not ready to give you that number.
Okay got it fair enough and then other question was just around the membership favorites notice you took that up to 200, just curious the rationale behind that.
That decision.
Just happened to you or maybe in the last month or two so that's that's my second question. Thank you.
Yes.
Had plans to.
Bump it up a bit so.
It's a natural progression of our business when we started membership at a $100 and for years, we didn't move it but <unk> of the business had increased and so when we first moved it to $1 50, we talked about that we were kind of.
We might see it.
Yes.
On a more regular cadence of increases so I would just say this is just part of that and that reflects the sort of average order value of our business continuing to.
To creep up and so its membership as a percentage of that that's one way and one way to look we look at.
And our last question comes from the line of Brad Thomas of Keybanc Capital markets. Your line is open.
Hey, thanks, so much.
Gary I was hoping you could talk a little bit more about the outlook for gallery.
We look at what you've done in Indianapolis and what you.
We're working on for Miami really pushing the boundaries here of whats going on in the U S.
I think the letter referenced 20, sorry, 40 additional markets Youre looking at I was wondering if you can just expand a little bit more on what you think the U S Gallery network looks like 10 years from now with this continuing evolution.
Something like Indianapolis as an opportunistic move right.
An incredible home and the state came on the market we bought it for.
$14 $5 million is that what we bought for you yes, it's in our joint venture.
So.
So we.
50% of it.
And it's an opportunity to get something like that for $14 $5 million investment in <unk>.
Yep.
What we put into it.
Pretty minimal versus what our normal investment was so we have this incredible.
Experienced further.
Yes.
Experience for the customers.
Got it.
At a lower investment rate, then we would make on the lower occupancy costs.
We would expect to have so.
That was just a.
Yes, that's kind of a one off great outcome I mean, we're always looking for things like that come up but I Wouldnt say thats like Youre out looking.
Not really looking for something like that.
They just kind of happened so.
I think.
That's just an opportunistic move but what does it look like 10 years from now we have 35 legacy galleries.
Yes.
More and more of those converted will also go back to the existing design galleries, we have talked about certain ones that are going to have.
The next iteration like a Houston for example.
Los Angeles, some point, yes, Gabriel <unk> for example.
<unk>.
In North America will continue.
And the 40, Gary talks about the design markets of the <unk>.
Logic there so that's that's a whole different <unk>.
Animal I guess.
In terms of in terms of adding to the store base, Yes, we may learn and some of these smaller kind of weak.
We refer to as a design studio is really.
In Palm Desert, just like a design office right, it's really enabling entrepreneurs.
Interior designers that maybe you don't want to work in our retail galleries.
And where there is market.
Opportunities to do something to improve and have a more dominant interior design presence, we think thats really good for the RH brand.
Some of these will look a lot less like a small store though.
Look a lot more like an interior design office with.
A couple of.
Small presentations to the product, but really a real office for an interior designer to to work with clients.
Highly professional way and attract.
Entrepreneurial people that want to run their own interior design business.
And we become a platform that can support them and allow them to.
Do what they really want to do.
Yes, so we may.
For example, I can the first one.
That we got in Palm Desert.
How big is that 3000 feet.
3000 feet.
We're also looking to probably do it.
10% to 20000 square foot gallery, there, probably 15% to 25000 called the range.
In that market.
And we will have both of those locations.
Yes.
One is really a true interior design office, but that gallery that will build.
Probably won't.
The same dedicated space for interior design that we might have a one of our big galleries, where we have interior design embedded into the gallery.
So yes.
So it just gives us more flexibility reach more markets activate the interior design business.
Yeah.
Growing part of what we do.
And I think we're going to learn a lot of these opportunities.
For even bigger.
Bigger stores.
If we're right on this transformation.
We're kind of.
The gun here.
And we're right around that Brad how the business is going to inflect.
Just kind of meaningfully take up your volumes in all of these market, which makes all the occupancy models look different right in.
It allows you to access different things and invest in different ways. So.
We're going to.
I'm sure we're going to have an even new new view in the second half next year.
As.
As our baseline performance improves.
It changes.
Your economic outlook from a real estate point of view.
That's great. Thank you guys.
Hmm.
There are no further questions at this time I will now turn the call over to Gary Friedman, Chairman and CEO for closing remarks.
Great well. Thank you everyone. We appreciate your interest.
We wish you all a happy holiday and I would say to TMR H.
We just.
I can't tell you how much we appreciate the energy and.
And the commitment and passion, we bring to our business into our brand.
You are.
Heart and soul of this company that you are the ones that.
Interface with our consumers every day.
So proud and especially to the teams that just brought our international galleries for life.
Incredible.
What we've done.
We are in Germany, with just two weeks ago or 10 days ago and.
You walk in you interface with the people you look at the gallery you'd think it was in North America.
And to be at the very beginning of this and to be executing at that level.
To have that quality of people and that energen galleries.
Gives me and the team here a great deal of confidence.
What we can do.
Globally with this brand so we wish everyone, a wonderful and happy holiday.
<unk>.
Wish for.
Piece in the Middle East and.
Hopefully this will become to.
A more peaceful place very soon so.
So happy holidays, everyone.
This concludes today's conference call you may now disconnect.
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