Q3 2025 RH Earnings Call
Speaker Change: [music].
Hello, and welcome to the RH third quarter fiscal 'twenty 'twenty four earnings call. All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session and if he would like to ask a question. Please press star one on your telephone keypad.
I would now like to.
Speaker Change: Turn the call over to Allison Malkin of ICR you may begin.
Allison Malkin: Thank you good afternoon, everyone and thank you for joining us for a third quarter fiscal 2024 earnings Conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make certain statements.
Allison Malkin: Day 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.
Allison Malkin: 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 date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward.
Allison Malkin: Looking statements in light of new information or future events also during this call we may discuss non-GAAP financial measures, which adjust alright.
Allison Malkin: <unk> rebuilt 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, a live broadcast of this call is also available on the Investor Relations section of our web.
Allison Malkin: Site at IR Dot, our H dot com with that I'll turn the call over to Gary Great. Thank you Allison and welcome everyone.
Gary: I will start with our shareholder letter that was released.
Gary: Last hour.
Gary: Two our people partners and shareholders.
Gary: The positive inflection of our business continued to gain momentum with third quarter demand increasing 13%. Despite operating in the worst housing market in 30 years.
Gary: Our vector is increasing in both magnitude and direction with November demand up 18%. That's the most prolific product transformation and platform expansion in the history of our industry continues to unfold.
Gary: Our industry, leading growth is being driven by the RH brand, where November demand increased 24% with the introduction of our new RH Modern sports book and has continued to accelerate into December with months of debate demand up 30% demonstrating the disruptive nature of our product transformation.
Gary: Right.
Gary: The performance of the RH brand reflects market share gains of 15% to 25 points in Q3 accelerating to 25% to 45 point in Q4 based on the current trends and expectations of furniture based retailers.
Gary: We believe our collections reflect the level of design and quality inaccessible and our current market and the value proposition that is disruptive across multiple markets.
In our age to gain significant market share for the foreseeable future.
Gary: Our contract outlet baby and child, and teen businesses should benefit from our product transformation in 2025.
Gary: One the new assortment becomes more widely available to support our contract business.
Gary: To return to a new product drive our outlet business and three the most successful designs are translated into smaller sizes for baby child teen.
Gary: We're also pleased that our results for the third quarter reflected our guidance with revenues increasing eight 1%.
Gary: Adjusted operating margin of 15 versus seven 3% last year and adjusted EBITDA margin of 28 versus 12, 4% a year ago.
Gary: Based on our current trends, we are raising our fourth quarter and full year guidance to Q.
Gary: Q4, total demand growth of 20%, 22% and revenue growth at 18% to 20% Q.
Q4, adjusted operating margin of 12, 2% to 13, 2% and adjusted EBITDA margin of 18% to 19%.
Gary: Fiscal year total demand growth of nine nine to 10, 4%.
Gary: And revenue growth of six eight to seven 2%.
Gary: Fiscal year adjusted operating margin of 11, five to 11, 7% and adjusted EBITDA margin of 17, two to 17, 4%.
Speaker Change: Every act of creation is first and ask the destruction Pablo Picasso.
Speaker Change: We have worked hard to destroy the former version of ourselves.
Speaker Change: In the process of unleashing what we believe is an exponentially more inspiring and disruptive RH brand.
Speaker Change: Inclusive of the most prolific product transformation and platform expansion in the history of our industry.
Speaker Change: We believe the important investments we are making during this depressed housing cycle are creating the level of strategic separation in our industry that rivals the most important brands in the world.
Speaker Change: Our product transformation plan for the remainder of 2024 and select 2025 highlights include.
Speaker Change: The second mailing of our new RH modern source book arrived in homes in November with 54, new collections across furniture upholstery lighting rugs and textiles.
Speaker Change: Yes.
Speaker Change: Based on your demand trends and confidence in the new offering we increased our advertising investment by approximately $6 million in the quarter to further expand both page count in circulation.
Speaker Change: Quarter to date demand leads us to believe that this investment will prove to be a wise decision over the course of the fourth quarter and into the first half of 2025.
Speaker Change: As a reminder, post analysis of our circulation data, we decided to consolidate our RH contemporary sportswear collection into the RH interiors and RH modern source books to optimize overall mailing depth and efficiency.
Speaker Change: Mailing fewer more meaningful books enables our brand to breakthrough the compounding clutter across the consumer industry and it's aligned with our gallery strategy, a fewer more immersive and brand defining physical experiences.
Speaker Change: The introduction of our new RH interiors source book is now planned to be in homes early February with 89, new collections across furniture upholstery lighting rather than textiles.
Speaker Change: The new collections and improved in stocks should further increase our vector and market share gains in the first half of 2025.
Speaker Change: The introduction of our 2025 RH outdoor source book.
Speaker Change: During the most dominant assortment of high quality outdoor furniture in the World is also planned for early February.
Speaker Change: The new source book will include eight new outdoor furniture collections and exciting new outdoor textiles, offering plus the significantly improved in stock position to start the season versus a year ago.
Speaker Change: As you know we acquired waterworks into 2016, arguably the most desired brand in the luxury Bath and kitchen category.
Speaker Change: The waterworks team has done an outstanding job over the past eight years to further elevate the brand and build a highly profitable business model that can scale.
Speaker Change: Waterworks like most other luxury brands in the home space generates the vast majority of its revenues from the trade market.
Speaker Change: Architects designers developers and builders.
Speaker Change: <unk> has a meaningful trade business the vast majority of our revenue is generated by consumers.
We believe there is a significant opportunity to amplify the waterworks business on the <unk> platform by exposing the brand to a much larger audience similar to how we have expanded other trade focused businesses and brands over the years.
Speaker Change: This week, we will begin to introduce the waterworks brand across CRH platform, beginning with a 3000 square foot waterworks showroom in our largest design gallery opening tomorrow, and Newport Beach, California.
Speaker Change: Our interior designers around the world will now be able to specify waterworks and their design projects and customers will be able to view and purchase waterworks on our H dot com in the next few weeks.
We also plan to test the waterworks source book in the second half of 2025.
Speaker Change: Waterworks today is just shy of the $200 million business with mid to high teens EBITDA margin that we believe has the potential to become a $1 billion global brand on our platform.
Speaker Change: We also have plans to unveil our H couture upholstery by Dmitry and co in the first half of 2025, we purchased Dmitry and co in 2020 with the vision of making the most exquisitely designed and crafted upholstered furniture in the world previously only available to the trade accessible to consumers.
Speaker Change: On the <unk> platform.
Speaker Change: While there has been much speculation regarding how we might change dmitry co to address a larger market. Our plan is just the opposite we believe by not changing anything.
Speaker Change: Will change everything.
Waterworks, we believe transitioning some of the most admired brands in the world from a solely trade based to a blended consumer and trade based business model is a very big idea.
Speaker Change: One that can result in exponential growth for these highly desired brands.
Speaker Change: Additionally, we plan to introduce a significant new brand extension in the fall of 2025 that we believe will meaningfully expand the market size and share of the RH brand.
Speaker Change: This new brand extension will include a new source book and have a significant website precedent on <unk> dot com, we expect to we expect to present, the new product in our galleries in early 2026, and we will share more details of this exciting new venture in the new year.
Lastly, we do not expect a negative impact to margins as a result of the most recent communications regarding the potential for increased tariffs in 2025.
Speaker Change: We have been proactively moving sourcing away from China over the past several years with the expectation of fully fully exiting the country by the end of the second quarter.
Speaker Change: We are also transitioning products manufactured in Mexico, and believe we can successfully reposition our sourcing with no disruptive disruption to the supply chain.
Speaker Change: Let me shift your attention to the elevation and expansion of our platform.
Speaker Change: We continue to open the most inspiring and immersive physical experiences in our industry and some would say the world.
Speaker Change: Spaces that are reflection of human design, the study have balance symmetry a perfect proportions.
Speaker Change: Spaces that blurred the lines between residential and retail indoors and outdoors home and hospitality space.
Speaker Change: Spaces with garden courtyard, rooftop restaurants widening barista bars.
Speaker Change: Spaces that activate all of defenses and spaces that cannot be replicated online.
Speaker Change: Our plan to expand the RH brand globally.
Speaker Change: Address new markets locally and transform our north American galleries represents a multibillion dollar opportunity.
Speaker Change: Our platform expansion plans for the remainder of 2024 and 2025 includes our.
Speaker Change: <unk> Newport Beach.
Speaker Change: Turning tomorrow with over 90000 square feet of indoor and outdoor spread over four floors with views of the Pacific Ocean.
Speaker Change: Yes, we will we.
Speaker Change: We will be one of our most dramatic immersive and brand defining physical experiences today and will replace three legacy galleries in our region.
Speaker Change: Our H Newport Beach, the gallery at Fashion Island features the RH Ocean Grill, a 270 feet indoor outdoor rooftop restaurant with uninterrupted views and dramatic sunsets over the California coastline.
Speaker Change: And barista bars are first waterworks showroom and interior design affiliates and the most expansive luxury outdoor furniture assortment in our industry.
Speaker Change: We believe our Newport Beach will be an inspiring destination and defend the California market and has the potential to become our second $100 million plus gallery.
Speaker Change: Our each Montecito also opening this week is it re imagination of the historic firehouse and the charming enclave purchased about Santa Barbara.
Speaker Change: The gallery will feature the RH firehouse grill and indoor outdoor courtyard restaurant with fireplaces incontinence, a wine in barista bar lessen RH interior design affiliates.
Speaker Change: The first <unk> interior design studio is opening this week in Palm Desert, California.
Speaker Change: Our goal is to establish <unk> as the leading interior design firm in the world as we've moved the brand from simply Curating is selling product to conceptualize conceptualizing and selling spaces.
Speaker Change: Palm Desert location is a unique test of a consumer facing interior design firm not a gallery.
Speaker Change: Our theory is.
Speaker Change: Presenting our interior design in a singular fashion as a professional interior design firm, we will attract the highest caliber interior designers and therefore, the highest value consumers.
Speaker Change: We believe this might be one of the most important strategies to elevate and distinguish the RH brand as a global design authority at the highest end of the market.
Speaker Change: We are also developing an RH design ecosystem in Palm desert with plans to add a 10000 square foot RH design Gallery and.
Speaker Change: On a freestanding 5000 square foot RH outdoor furniture gallery on the same street <unk>.
Additionally, we are considering a freestanding RH all day cafe to complete the ecosystem in the near future.
Speaker Change: Our H Raleigh opened in November of this year with 50000 square feet of indoor and outdoor space over three levels.
Speaker Change: <unk> includes a rooftop restaurant garden courtyard, Hawaiian Barista bar and an interior design atelier.
Speaker Change: We plan to open seven North American galleries in 2025, including Montreal, Manhasset, Detroit, Oklahoma City, Los Gatos Palm Desert and Aspen.
Speaker Change: Additionally, we plan to open two international galleries in 2025 are each Paris NIH lending.
Speaker Change: We anticipate the inflection of our.
Our business in Europe, as we begin to open.
Speaker Change: Important brand building markets, Paris, and London in 2025, and Milan in 2026. It is then we will begin to gain scale to support the advertising investments necessary to build our business across Europe.
Speaker Change: We are pleased with the second year growth trends that are H, England at the gallery is up 42% July through December while the web business is up 111% current demand trends would indicate the gallery would reach approximately $31 million in its second full year and the weather demand, reaching $7 million in the second full year.
Speaker Change: To put these results in the proper perspective, if in our H gallery in the Ingrid English countryside with an estimated population of 100000 in a 10 mile radius almost two hours outside of London can generate $38 million of demand in its second year, what can and RH gallery in the center of it.
Speaker Change: Mayfair the most of the exclusive district of London, a global city with a population of $9 7 million during its second year.
Speaker Change: We believe exponentially more.
Speaker Change: We're also making meaningful investments to elevate and differentiate our online experience with plans to upgrade our web site in the fourth quarter of 2024 and throughout 2025 seven.
Speaker Change: Some of the functionality we plan to introduce is quite revolutionary and unlike anything in the market with.
Speaker Change: We plan to file for design patents on several of the easier interface and presentation designs and will begin to discuss the new web site strategy in more detail as we rollout the new functionality.
Speaker Change: Leaders have to be comfortable making.
Speaker Change: Others uncomfortable.
Speaker Change: Leadership is about pursuing that vision, leading people somewhere they've never been doing things they've never done as creatures of habit changes are uncomfortable for humans.
Speaker Change: For the people in partnership team RH culture of invention and innovation is at the core of who we are and reflected in everything we do with.
Speaker Change: <unk> grown comfortable making ourselves and others uncomfortable for over two decades and plan to continue doing so for the foreseeable future.
Speaker Change: It's what leaders do and how we know we're on the right path.
Speaker Change: Whether it's investing in the most prolific product transformation in the history of our industry, while others are hunkering down during the worst housing market in three decades or opening the largest and most immersive physical retail experiences in the world, while others are shrinking or closing their stores and moving online.
Speaker Change: By refusing to follow the herd into anything, but social world of social media, you won't find us on Instagram.
Speaker Change: Strangers Influencers to say, they love our brand and Tic Toc, we choose to in the words works Ralph Waldo Emerson.
Speaker Change: Instead, where there is no path and leave a trail.
Speaker Change: We aim to craft our own unique identity, one built on a foundation of innovation and invention truth interest taste and style leadership and left.
Speaker Change: Over 20 years ago, we began this journey with the vision of transforming and nearly bankrupt business that had a $20 million market cap and a box to box at all laundry detergent under coverage catalog into the leading luxury home brand in the world.
Speaker Change: The lessons and learnings the insights any intricacies the sacrifices made in the scar tissue developed by getting knocked down 10 times and getting up 11 leads to the development of the mental and moral qualities that build character in individuals and cultures and organizations.
Lessons that can be learned in the classroom or by managing the business lessons that must be earned by building one.
Speaker Change: In a world that rewards duplication and patent license the inherent bumpy road of innovation, especially for companies in the public domain, we the people and partners of TMR H continue to drive ourselves to destroy today's reality. So we can create tomorrows future.
Speaker Change: While remaining completely comfortable making ourselves and others uncomfortable.
Speaker Change: Never underestimate the power of a few good people, who don't know what cant be done, especially these people.
Speaker Change: Onward team RH Carpe diem.
Speaker Change: At this point operator, we'll open the call to questions.
Speaker Change: Thank you.
Speaker Change: I would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
Speaker Change: Ask that you please limit yourself to one question and one follow up then rejoin the queue if necessary. Thank you.
Speaker Change: Your first question comes from the line of Michael Lasser with UBS. Your line is open.
Michael Lasser: Good morning. Good afternoon. Thank you so much for taking my question.
Michael Lasser: The outperformance relative to the industry has obviously been very wide. So how are you thinking about taking advantage of this.
Speaker Change: Such that would you.
Speaker Change: Further accelerate some of the investments that you're making in 2025 and if that were the case would you be willing to trade some margin for suppress margins.
Speaker Change: Even if it meant that you were still accelerating your sale. Thank you so much.
Speaker Change: So Michael I think that's always a question for business leaders.
And what is an investment cycle look like what does the harvesting cycle look like.
Speaker Change: Yes.
Speaker Change: How are you thinking about the business long term versus short term.
Speaker Change: It's an interesting time in our industry.
Speaker Change: Yes, multiple people pursuing different paths generally.
Speaker Change: At a time like this is a hunkering down our harvesting time people pull back investments.
Speaker Change: If you looked at our history. This has always been an investment period.
Speaker Change: Because the other side of that downturn in the housing market, usually leads to the potential to gain significant market share on the other side.
Speaker Change: So yes, we look forward I would say today the view would be.
Speaker Change: Most of the significant investments are behind us.
Speaker Change: The early investments into Europe, which is not that we don't have more but.
Speaker Change: Initial investments into Europe.
Speaker Change: Just put in a platform to be able to launch a business. There is pretty significant we do have some.
Speaker Change: The significant investments with Paris and.
Speaker Change: Our each London, an orange line.
Speaker Change: But most of that cash spend is behind us.
Speaker Change: Even as we think of the investments we've made.
Speaker Change: Transform the product over the last.
24 months because the real.
Speaker Change: Effort began a.
Speaker Change: A couple of years ago.
Speaker Change: They're ramping up and building the muscle that we need to operate at a level that we are operator error today is really behind us if you think about the new significant.
Speaker Change: Brand extension, we are discussing.
Speaker Change: Most of that product is in the pipeline I mean, we could technically launch it today.
Speaker Change: We're just kind of polishing made up so those investments are mostly behind us.
Speaker Change: But our our company is based on invention and innovation, it's based on investing into the future and it's based on.
Speaker Change: Hi.
Speaker Change: And with growth if you will.
Speaker Change: Now one of the things that.
Speaker Change: Is that generally happens to retail brands over time.
Speaker Change: I'd like to say that our retail mall is nothing but a graveyard for short lived ideas.
Speaker Change: Because most retailers opening new concepts they get enough right.
Speaker Change: Band it.
Speaker Change: They don't evolve it they don't innovate.
Speaker Change: <unk> kind of get a model that we're going to open 20 of these a year 40 of these year and pretty soon you Glenn Sage seven years goes by.
Speaker Change: Somebody has.
Speaker Change: Range of 100 to 300 stores.
Speaker Change: And they are all kind of dated and Theyre all tired because there hasnt been a focus of invention and innovation that's been a focus of rollout.
Speaker Change: Duplication.
Speaker Change: And Thats why most retail brands.
Speaker Change: Don't even last the full term of their lease.
Speaker Change: If you look at our retail mall and take a snapshot of it today and look back 10 years or look forward 10 years about 65% of the retail mall evolves every 10 to 15 years and a lot of retailers don't yes.
Speaker Change: Don't make it to the terminal lease so.
Speaker Change: Where we're somewhat different in that nature right. We've been on this journey now this is my 24th year.
Speaker Change: Yes, when we took a business that was basically a bankrupt business and we had to correct.
Speaker Change: Dig it out of the grave right. So we started underground as we will have to kind of dig our way out and then we've been building we've been pursuing that path the decline.
Speaker Change: A luxury.
Speaker Change: To build a luxury brand and that's taken.
Speaker Change: Considerable investment, but today, if you just again motor up and look at the platform we built.
Speaker Change: And think about put the current numbers into context right.
Speaker Change: Yes, we have a lot of de leverage to our operating model because of significant investments we've made.
Speaker Change: All of the cash investments are behind us.
Speaker Change: And so I look forward I think about the cash flow over the next couple of years.
Speaker Change: Significantly increasing compounding cash flow model.
Speaker Change: I don't see really significant capital investments beyond the kind of iconic brand building galleries that even from that point of view.
Speaker Change: Actually its mostly out the door in the company.
Speaker Change: Paris, London and started so forth, yes, some of it youre going to have you're going to have a drag.
Speaker Change: Depreciation going forward, because we've made a lot of.
Investments and that's why we think it's probably important as you think about our model looking forward to focus on adjusted EBITDA margin right, because thats going to be.
Speaker Change: Adjusted EBITDA margin in kind of cash flow generation, that's going to be the right way to look at a model like ours.
Speaker Change: And then for how many years.
Speaker Change: Amazon, having depressed model because they were in a serious investment mode to build a platform nobody else.
Speaker Change: As ever built and.
Speaker Change: Never see again I believe that.
Speaker Change: Relative to our story.
Speaker Change: Can you just go back over the last 10 or 12 14 years and think about the investments we've made in our platform and think about the number of significant galleries. We have that are unlike anything in our industry nobody close.
Speaker Change: And think about what we've built over the last several years think about the <unk>.
Speaker Change: Product transformation, we went through and the investments that takes time to build that.
Speaker Change: Inventory investments that takes too.
Speaker Change: Yes, it's a front load a business like ours with inventory. So you had the inventory to create an inflection and then think about the inventory that you have that kind of.
Speaker Change: Invest into to kind of bridge from.
Where we were to where you are so you don't create a dish as you transition from current product to new products.
Speaker Change: All of that is a serious investment cycle and.
Speaker Change: Somewhat distorts the short term view of our model.
Speaker Change: I think if you take the vector which is yes.
Speaker Change: Significantly increasing right magnitude direction and kind of chart out that vector overtime and you think about a significant amount of the investment cycle.
Speaker Change: And behind Us.
Plot out what this model might look like over the next 2345 years and then if you can.
Speaker Change: Compound that with a.
Speaker Change: And accelerating housing market, which is will come right.
Speaker Change: The most depressed housing market any of it's seen in the history.
Speaker Change: History.
Speaker Change: Of our experience.
Speaker Change: And you have the kind of appreciate the position we're in today.
As you look out over the next five years.
Speaker Change: Got you very helpful.
My follow up question is as we look out over the next couple of years.
Speaker Change: Should we think your baseline assumption that as the housing market does improve.
Speaker Change: We will lead to an acceleration in the recent.
Speaker Change: The trajectory of the business that you've seen so we should.
Speaker Change: Think about that as we start to model next year and beyond.
Speaker Change: Given the.
Speaker Change: The pacing of margin decline.
<unk> experienced over the last couple of years as sales have been under pressure is that the right frame of reference to think about how margins will recover the same degree of sharpness as the pace of sales growth maintained like <unk> seen it recently thank you.
Speaker Change: Yes, I think Thats Directionally Mark right.
Speaker Change: The question is what is the housing market words, it's.
Speaker Change: It's not only <unk>, 5% when it comes back.
Speaker Change: It is likely worth 30% right and.
Speaker Change: And that'll kind of compound over a couple of years and it might start out mix.
Speaker Change: With pen and it compounds.
Speaker Change: 15, but it might just spike and you might see the housing market come back like we might see 30% growth you could see 50% growth. If you think about how depressed it stands for how long we think about that <unk> built up.
Speaker Change: Potential demand and how many people have wanted to move for several years.
Expanding families.
Speaker Change: People relocating.
Speaker Change: Turning into renters.
Speaker Change: And so on and so forth because of the.
A significant gap.
Speaker Change: GAAP.
Speaker Change: Between interest rates right.
Speaker Change: And how many people are locked into low interest rates. So that that's just that's.
Speaker Change: That's been involved thats going to change.
Speaker Change: Yes.
Speaker Change: Actually when it happens.
Speaker Change: Ambivalent about that.
Speaker Change: Quite frankly, sometimes I talk internally about.
Hey, I hope the housing market.
Flat for another year, we will have a lot less competitors if it does.
Speaker Change: We will gain a lot more market share at the desk.
Im not necessarily enthusiastic about when the housing market comes back because of bad housing market for a brand like ours positioned the way it is.
Speaker Change: It's actually.
Speaker Change: Kind of a good thing if you think about what the future will look like because a lot of the ankle Biters said.
Speaker Change: We're able to.
Speaker Change: And our raised capital easily over the last.
Yes.
Speaker Change: 10 years, and especially pre.
Speaker Change: Pre COVID-19 five years before Covid.
Speaker Change: Four five years after COVID-19.
Speaker Change: Everything in the home business with little Gray and you could raise capital really easy and someone can start an online brand in.
Speaker Change: Yes.
Speaker Change: That has some level of rate competition right. There's just more places to shop, if more people marketing there's more people on.
Speaker Change: On Instagram marketing and our online marketing and so forth and theres been a proliferation of.
Speaker Change: Competitors in the housing market.
Speaker Change: You see that now shrinking very quickly.
Speaker Change: It's been a lot of public bankruptcies.
Speaker Change: Bankruptcies or.
Speaker Change: Yes, I'd say almost bankrupt or kind of bankrupt and bought out of bankruptcy because theres a couple of online aggregators.
Speaker Change: I can't remember the name of one of the brands is quite a bunch of them by private I need to say it anyway, you guys probably know who they are.
Speaker Change: Yes, Gavin Grover.
Speaker Change: Lead upside cancel always says.
Speaker Change: Too drunk people leave.
Speaker Change: Leaning against the bar doesn't create a better situation.
Speaker Change: So you take kind of multiple bad brands and put them together and hope for leverage.
Speaker Change: That aggregation.
Speaker Change: It's usually doesn't work.
Speaker Change: I mean look at the recent situation with the.
Speaker Change: Yes.
Speaker Change: Overstock dot com and bed Bath and beyond.
Speaker Change: Anybody backing on that that marriage I think it is.
Scott: Thank you Scott.
Speaker Change: Look good over the long term.
Speaker Change: Yes, so so.
Yes, we would think that yes, there is so many levels.
Speaker Change: Opportunity.
Speaker Change: The housing market there is if the housing market stays down.
Speaker Change: To be.
Speaker Change: More people struggling.
And our market furniture based home furnishings market.
Speaker Change: And theres going to be more opportunity on the other side I mean, our inflection is happening regardless right.
Speaker Change: So ask yourself when is the last time.
Speaker Change: Brand of our size and scale in a mature market has created a market share share lead up more than <unk>.
Speaker Change: Five points.
Speaker Change: Or 10 points five points would be considered.
Speaker Change: Really good 10 points would be considered outstanding.
Speaker Change: What is 25% to 45 points look like.
Speaker Change: Track that out over the next few years.
Speaker Change: That can completely change everything.
Speaker Change: Thank you very much and have a good holiday.
Speaker Change: You too.
Speaker Change: The next question comes from Christopher <unk> with Jpmorgan. Your line is open.
Speaker Change: Thanks, Good evening, good evening, everybody. So I'll keep my question to a two parter.
Speaker Change: The first question is as Youre guiding the fourth quarter below what you are seeing quarter to date is that just caution on your behalf is there some sort of seasonality of the business to think about proceeding through the quarter.
Speaker Change: And then the second part is you've put a lot of clearance in the past few years to introduce all of this newness, 80% newness. This year is it your expectation that over time that you can get that clearance margin back thanks very much.
Yeah.
Speaker Change: Good question Ed.
Speaker Change: Guidance.
Speaker Change: Thank you.
Speaker Change: And I have it correct guide.
Speaker Change: Depends on what.
Speaker Change: The rest of the December and January plays out.
Speaker Change: So.
Speaker Change: Yes.
Speaker Change: With 75% roughly of our business.
Speaker Change: Bounces between $73 76, I think.
Speaker Change: <unk> is our.
Speaker Change: Kind of core RH brand, if you think about it and then we have.
Speaker Change: Another quarter of our business.
Speaker Change: Other things like that.
Speaker Change: Contract outlet baby and child Teen Waterworks Dmitry.
Speaker Change: Et cetera et cetera.
Speaker Change: And.
Speaker Change: If you just.
Speaker Change: Have pulled back and think about the.
Speaker Change: Those businesses are not accelerating like the core brand.
Speaker Change: And are outlined in the letter.
Speaker Change: Those should accelerate many of them honestly waterworks won't be impacted by our product transformation, but our platform will enable the waterfront too.
Speaker Change: Houston things that they might not have been able to do in the past.
Speaker Change: No different than.
Speaker Change: Other how we scale the other businesses.
Speaker Change: But.
Speaker Change: <unk>.
Speaker Change: The markdown percentage if you looked at the history of our business and are in our core business.
Speaker Change: I would say.
Speaker Change: Yes, the amount we have on Mark I'd like today, if you looked at it 75% of our.
Speaker Change: Or are there today, if you look at about 80%.
Speaker Change: Of our business in the third quarter.
Speaker Change: Is that full price was at full price and about 20% stat of markdowns, yes. It will fluctuate 2022 78.
Speaker Change: 22 88.
Speaker Change: Over the years and it really up housing market.
Speaker Change: That could be as low as 90, 10, but theres always a percentage of clearance.
Speaker Change: I'd say.
Speaker Change: Our competitive set.
Speaker Change: Or is it just the general industry as a whole would love to have an 80 20 mix.
Speaker Change: Okay Love to have an 80 20 mix is the clearance part of the business maybe.
Speaker Change: More under pressure than it.
Speaker Change: Would be in a good housing market sure.
Speaker Change: As the clearance as part of the business can it be bigger during a.
Speaker Change: A bad housing market of course it is.
Speaker Change: Those are all firm grasp of the obvious right.
Speaker Change: But.
Speaker Change: The other thing we're doing is.
Speaker Change: If you read my letter.
Speaker Change: Jeremy talked about.
Speaker Change: Sure.
Speaker Change: The disruptive nature of our brand and you've seen us.
Speaker Change: Kind of moved in the past couple of years into.
Speaker Change: Much more of an attack mode.
Speaker Change: And.
Speaker Change: Yes, we think that there is.
Speaker Change: And the ability to take more oxygen out of the room, if you will.
Speaker Change: By playing the game that we're playing right now.
Speaker Change: Necessarily it's a clearance game.
Speaker Change: It's Ed design quality value gain.
Speaker Change: Yes, we're.
Speaker Change: We're looking at.
Speaker Change: Yeah.
Speaker Change: Disrupting the market from a design point of view, a quality point of view and a value point of view.
Speaker Change: And I think that's what we're doing today so.
Speaker Change: Maybe that's putting a little bit of pressure on margin initially.
Speaker Change: Angie and grow like we are there is inherent efficiencies and scale alright. So if you think about the demand trends. We have today. If you think about us ordering back into product. If you think about the leverage.
Speaker Change: We're going to get in our and our partner's manufacturing partners are going to get and what the future orders might look like.
Speaker Change: Those could be at much higher margins.
Speaker Change: But taking the market share taken the oxygen out of the room, creating leverage in the business model from a top line point of view.
Speaker Change: Putting the investments in place and then continuing to expand margin through that leverage you get throughout the platform and when I say the platform I also and talking about our manufacturing platform. Our vendor partners, we do own some of our own manufacturing we are a factor in North Carolina, upholstery et cetera et cetera.
Speaker Change: But mostly we don't own the manufacturing platform, but if you are a partner of ours.
Speaker Change: Yes.
Speaker Change: We've talked about and we interface with our partners like we're one company and we talk about where is there leverage where scale can create.
Speaker Change: Better margin better.
Speaker Change: Better pricing more disruptive pricing and so on and so forth I think right now is that it is a better time.
Speaker Change: To invest in disruptive pricing and just able competitors than it is to harvest the business and take lower sales.
Speaker Change: Yes, Pete different people are taking different paths some people are taking.
Speaker Change: Giving up market share not trying to take market share and their harvesting right and expanding operating margin and margins right now we could do that too.
Speaker Change: We could do that too.
Speaker Change: I'd, rather be trending up 30% and Mike core RH business, sitting down, 3% or 5%, giving up share. During this time, there will be lots of leverage on the other side of running up 30.
Speaker Change: It will it lots of leverage.
Speaker Change: Significantly stronger market position.
Speaker Change: Thank you so much have a great holiday.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Speaker Change: Hi, This is zach on for Simeon Thanks for taking a question.
Following up on some of the.
Speaker Change: Free cash flow commentary earlier can you speak to when you expect RH to turn free cash flow positive and as a follow up how do you think about the funding needs of the business and whether it can be self funded thank you.
Speaker Change: Yes.
Speaker Change: Yes, we believe next year.
Speaker Change: Free cash flow positive and globe.
Speaker Change: Yes.
Speaker Change: Be able to self fund the business I mean.
Speaker Change: Because part.
Speaker Change: Yes.
Speaker Change: Our debt.
Speaker Change: As is.
Speaker Change: Yes, we don't really think about it is that right.
Speaker Change: Think about it more.
Speaker Change: Get the currency swap right. So if you look at our debt independently you can say oh, they have a lot of debt.
Speaker Change: As we look at it somewhat differently, we think of it as the currency swap.
Speaker Change: We didn't spend the money, we didnt buy anything we didn't buy any physical assets, we can buy buildings with our debt.
Speaker Change: Yes, we didn't build any distribution centers with our debt.
Speaker Change: We exchanged one currency that for what we believe is an exponentially more valuable currency, our stock, which is a highly liquid currency right. We can turn our stock into cash tomorrow.
Speaker Change: So we took on that week's gains that currency for our stock.
Speaker Change: Today.
Speaker Change: Post the interest cost on the debt.
Speaker Change: We've turned it to <unk>.
Speaker Change: Two 5 billion dollar investment into.
Speaker Change: Lee we've made several hundred million dollars fund that investment already based on the closing price of our stock today.
Speaker Change: If you look at where our stock is trading after hours that investment looks significantly bigger right. So.
Speaker Change: Based on our.
Speaker Change: Our business trends and an expected return to growth in the housing market.
Speaker Change: That return, we believe we will grow exponentially right.
Alright.
Speaker Change: Yes, we don't we don't.
Speaker Change: We have debt on our balance sheet, because we needed cash.
Speaker Change: Meaningful part of debt on our balance sheet.
Speaker Change: As we.
Speaker Change: We wanted to do a currency exchange, we wanted to purchase our stock when it was undervalued I think we bought seven 6 million shares at an average price of $2 95.
Speaker Change: I don't know what the stock after hours right now.
Speaker Change: Is something.
Speaker Change: It is at 450 last night shot.
$460 million 452, so that's a pretty good return.
Speaker Change: But with that return.
Speaker Change: What's our cost of capital over that period, a 100 something.
Speaker Change: Okay.
Speaker Change: And in terms of the energetic.
Speaker Change: About $350 million return so what we've done this before this is not the first time we've done. This if you look at our history we have.
Speaker Change: Taking debt exchanged it for our stock.
And created significant significant value for shareholders.
Speaker Change: I'm the largest single shareholder in the company.
Speaker Change: That's the way I think about it.
Speaker Change: Thank you.
Speaker Change: The next question comes from Steven Zaccone with Citi. Your line is open.
Steven Zaccone: Alright. Good afternoon. Thanks for taking my question congrats on the momentum.
Steven Zaccone: I was curious Gary if you could just help us understand.
Steven Zaccone: The driver is that really the acceleration in the business.
Steven Zaccone: What's really changed with the product how do you feel about your competitive positioning why do you think you're outperforming the industry by such a such a wide margin and then if the industry comes back stronger than 20 Fives do you think you are well positioned to scale and fulfill that higher demand.
Speaker Change: Well I think everything that.
Speaker Change: And we believe it's in the letter I don't know if there is a lot more to say than what.
Speaker Change: What's in the letter what I might have commented on thus far why we think we're outperforming.
Speaker Change: We have a lot of competitive advantages we have a platform.
Speaker Change: Significantly.
Speaker Change: We believe better than anybody else in the industry we have.
Speaker Change: Yes.
Speaker Change: <unk> capabilities.
Savi.
Speaker Change: We have a taste.
Speaker Change: We believe better than anybody in the industry as I've said before there are those with paste and no scale on those with scale and no taste and we believe the idea of scaling taste is large and far reaching so that's what we're doing.
Speaker Change: We believe our pace level demonstrated not only through the product with demonstrated through the.
Speaker Change: The galleries, we built the physical aspects.
Speaker Change: Aspects of our business our source books are website and stuff and so forth.
Speaker Change: We believe we are building a platform for taste.
Speaker Change: That would be highly disruptive and lucrative over the long over the long run.
Speaker Change: And that.
Speaker Change: Taste level and.
Speaker Change: Capabilities, we have at scaling test our ability to curate our ability to curate product our ability to integrate product.
Speaker Change: <unk>.
Speaker Change: And our ability to present product better than anyone in the world.
Speaker Change: I think as demonstrated based on the size and scale and profitability of our business, thus far and will continue to create strategic separation as we go forward. So.
Speaker Change: That's who we are at our core alright, Thats, what we do that's what we've spent 24 years building.
Speaker Change: And.
Speaker Change: You haven't seen our center of innovation and product leadership.
Speaker Change: Anybody on the call I'd recommend you.
Speaker Change: Try to schedule that.
Speaker Change: Is it because nobody has anything like that that has been built it's a huge competitive advantage our methodologies. The way we think about the business. The way, we strategically think about categories. The way we.
Speaker Change: Yes, strategically integrate categories into a singular and focus point of view with a breakthrough the clutter in the market.
Speaker Change: All of those are reasons why we are outperforming.
Speaker Change: <unk>.
Speaker Change: So.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: I've talked about the strategic mistake I made when I turned off the product engine during COVID-19 because.
Speaker Change: We couldnt get the goods.
Speaker Change: We cut orders in the beginning of Covid.
Speaker Change: The business went down 40% than the business working down 40% at 40% moved to 80 points.
Speaker Change: As we cut orders factories were shutting down and so forth.
Speaker Change: We had a hard time getting product. So I said, let's shut off the product engine per year then.
Speaker Change: The crime hit and you had another cycle of Covid into the product engine was off for two years and then when we tried to turn the product engine back on.
Speaker Change: Kind of less lost our muscle memory, we executed poorly and that third year.
Speaker Change: No.
Speaker Change: Now everybody is competing against.
Speaker Change: Not only kind.
Speaker Change: Kind of who we were.
Speaker Change: We have built ourselves into a better version of ourselves and so.
Speaker Change: That's why we didn't mail our core books for three years.
Speaker Change: Yes so.
Speaker Change: So everybody thought they were doing so well with our H on the sidelines.
Speaker Change: Don't feel so good today.
Speaker Change: And.
Speaker Change: Now, while we are back to playing our games, but in.
Speaker Change: In a very evolved.
Speaker Change: The way I think we're smarter than we've ever been we're more driven and determined that we've ever been we're more creative curious and critical than we've ever been and I think the next five years for this company.
Speaker Change: This is going to be the best five years in the history of this company.
And I think five years from now will be better than we are today. So.
Speaker Change: So yes.
Speaker Change: It's just who we are at our core.
Speaker Change: Innovation is at the core of what we do.
Speaker Change: Understood. The follow up I had is just on gross.
Speaker Change: Gross margin.
Speaker Change: When you reported the last quarter, you talked about August being a positive inflection in product margin, how did that play out over the balance of the quarter and maybe how should we think about product margin in the fourth quarter. Thanks, very much yes product margin. If the demand level is still positive we did have.
Speaker Change: You have some adjustments below the selling margin.
Speaker Change: Working with Mark out of stock I think we did such big.
Speaker Change: Transformations of our galleries.
Speaker Change: Net debt.
Speaker Change: It's a bigger market stock.
Speaker Change: We ship our product outside of the box.
Speaker Change: It's not generally a good thing and so we took when we go when we do a floor set transformation.
Speaker Change: We take the product off the floor.
Speaker Change: We have teams that are local home delivery networks that pick up all that product that product is not new it's not in the box on the protective packaging. They take it back and then it gets sent to the outlets.
Speaker Change: Yes.
Speaker Change: We've never made a transformation that's large and I think we probably had more damages and more things that.
Speaker Change: Got banged up moving back and forth in trucks and moving around with the boxes as we had to take.
Speaker Change: Some write offs for product that we thought it wasn't really sellable at the outlet level.
Speaker Change: Plus the elevated costs of moving the product.
Speaker Change: Inventory transferred to US Yes go ahead, yes, onetime inventory transfer costs related to moving that product. We also rebalanced.
Product in our in our Dcs.
Speaker Change: Just to get it optimally position. So this will also move the product from Europe from Europe back to America.
Speaker Change: Didn't start off with picking all the right products when we build the DC in Europe and now we see the trends that we realize Oh gosh.
Speaker Change: Got too much it is too much of that instead.
Speaker Change: Instead of marking down all of that product in Europe, it's better for us to just ship it back.
Speaker Change: Baltimore.
Speaker Change: To feed the core business that we did that's another onetime pennant charge so.
Speaker Change: But at a general selling level, especially in our core business, we like how our margins are trending we think theres going to be.
Speaker Change: Upward opportunity in margins not downward pressure on margins looking forward and Gary said on demand margin basis. It's also on us ship margin basis, the selling margins on a ship basis, yet in the quarter were inflect deposits yes.
Speaker Change: Okay very helpful. Thanks, guys.
Speaker Change: Great. Thank you.
Speaker Change: The next question is from Steven Forbes with Guggenheim. Your line is open.
Speaker Change: Good evening, Gary Jack.
Speaker Change: Gary can you just add.
Speaker Change: Two part question on real estate, given sort of the plan the sheer number of openings right planned over the next couple of years here so to start.
Speaker Change: Can you speak to maybe the pro forma payback periods and store level ROIC fees.
Speaker Change: Yes that youre sort of expecting in these classes of galleries.
Speaker Change: Maybe relative to what you've spoken to in the past and then how are you.
Speaker Change: Discussions with landlords and developers evolved over the past couple of years, maybe you haven't you seen cost.
Speaker Change: Cost pressures normalize.
Speaker Change: The uniqueness of your model and just the pipeline itself, how is the conversation with landlords and developers about.
Speaker Change: Sure.
Speaker Change: Sure.
Speaker Change: So.
Speaker Change: Okay, let's start with the payback and ROIC is historically, we've always said with payback.
Speaker Change: Payback of I think 1% to three years.
Speaker Change: We believe that's still the right number where it wasn't the right number was.
Speaker Change: <unk> built during COVID-19 right as things get <unk>.
Speaker Change: <unk> current COVID-19 stopped and started three or four times.
Speaker Change: And you had raw material costs and some places go up two to three times or Forex.
Speaker Change: Anything built during COVID-19 with significantly more expensive up to three times more I'd say in a general sense building cost today to build to build at any level no matter, if you're in retail or any kind of business.
Speaker Change: Are somewhere between 70, and 100% higher so it costs us more to build the gallery today than it did.
Speaker Change: Good news is we have a significant inflection.
Speaker Change: Our demand in our sales and we have we have an expectation for returning housing market lift.
Speaker Change: Most of the galleries I would say in the pipeline today that we're opening will be relatively quick.
With paybacks.
Speaker Change: It may be that really iconic lines like London.
Speaker Change: Paris.
Speaker Change: It takes three or four years.
Speaker Change: But it might take two years.
Speaker Change: For example, our <unk> Newport Beach is a good example.
Speaker Change: A developer and a partner there and you are buying a company I think they cleared about eight retailers for US right. So if you think about the investment.
Speaker Change: Yes.
Ed.
Speaker Change: Developer partner would make here.
Speaker Change: They cleared probably eight retailers took that rent for several years.
Speaker Change: Our projects take anywhere from two to three years. It takes a long time to get approvals.
Speaker Change: And build these kinds of buildings.
Speaker Change: They cleared.
Speaker Change: Rent for several years.
Speaker Change: <unk>.
Speaker Change: A completely cleared the site rip down 2% or three storey buildings.
Speaker Change: Yes.
Speaker Change: Declared the site and make it construction ready for us.
Speaker Change: And they invested $25 million right, we got in Ti.
Speaker Change: We probably invested in that in that one an additional 50 to 60 Directionally, we're still adding it all up.
Speaker Change: Little bit of a chaos is trying to get it open for the opening party.
Speaker Change: Because these things are big and complex.
Speaker Change: Yes.
Speaker Change: That gallery will likely pay back.
From our cash point of view in one year, maybe one five.
Speaker Change: And so but you have other ones that yes, the ones in Europe.
Speaker Change: There's not a lot of Ti Street locations.
Speaker Change: So as I said.
Speaker Change: Yes, somewhat bigger investment and we'll see how the revenues are.
Speaker Change: London does what we think it's going to be.
Speaker Change: Maybe it's a two year payback.
Speaker Change: It could be a three year payback, but three year paybacks on iconic brand defining locations that youre going to control for the next 40 years.
Speaker Change: It's the right thing to do right.
Speaker Change: And the other thing I'd say is think about how many of these big galleries, we already have out there is that we now built for half the price of what it cost today.
Speaker Change: I think it is going to be really hard for anyone to duplicate our physical platform almost impossible I would say you'd have to have.
Speaker Change: Yes.
Speaker Change: The revenues that we generate.
Speaker Change: And then you would have to be willing to pay multiple times, what we paid for the vast majority of our platform right. So.
Speaker Change: But I think one of the keys.
Speaker Change: We've talked about internally into how do we create the right lens for investors looking forward is we do have.
Speaker Change: Increased depreciation and we will have increased depreciation.
Speaker Change: So if you look at us on an operating margin point of view say Oh.
Speaker Change: Pressure on operating margin has had more depreciation.
Speaker Change: While that's true we spent that money and we have a little bit more of its coming kind of coming through with Paris and London.
Speaker Change: As we.
Speaker Change: They come on board.
They're going to come on more from a depreciation point of view not from a cash point of view.
Speaker Change: That makes sense, so when I look at the business again as the Companys largest shareholder I am thinking about what are the long term cash returns look like.
Speaker Change: Say to myself, yes operating margin the right lens, probably not adjusted EBITDA is probably the right lens.
Speaker Change: Cash flow generation.
Speaker Change: For the next five years is probably the right lens.
Speaker Change: But the headline on gallery paybacks.
Speaker Change: Going forward I would say one to three years a lot of the ones that are in the pipeline today will yes, some will be one year one five years.
Speaker Change: No.
Speaker Change: London, and Paris might be three.
Speaker Change: Something like that might be too all depends what we come out I think.
Speaker Change: Yes, the math I tried to lay out in the letter.
Yes, RH, England right, it's two hours outside of London Scott.
Scott population and a 10 mile radius of 100000 people.
Speaker Change: Theres not a lot of cards to drive by.
Speaker Change: By that gallery, and it's still trending I would say the galleries in our business to do somewhat like $38 million.
Speaker Change: And.
Speaker Change: What does that look like when you go into the center of Gary Woods.
Speaker Change: It sounds like the audio operator, you there.
Speaker Change: Sure.
Speaker Change: Operator.
I can hear you.
Speaker Change: So you can hear us okay.
Speaker Change: Okay sorry.
Speaker Change: Sorry.
Speaker Change: An external issue, but the call silicone, okay, sorry, what we feel super optimistic about when we think about some of the investments we're making.
Speaker Change: From a physical perspective.
If we can generate in a.
Speaker Change: $35 million to $40 million two hours outside of London.
Speaker Change: Our 10 miles and a 10 mile radius, there's like 100000 people.
Speaker Change: What can we generate in Mayfair.
Speaker Change: And that the.
Speaker Change: Absolute bullseye of <unk>.
Speaker Change: London, or Theres, $9 7 million people, but you got to take some multiple right.
A three axes at a five acts as it.
Speaker Change: It's not 50% more so.
Speaker Change: So.
Speaker Change: When looking at the numbers that way were highly optimistic.
Speaker Change: <unk>.
About Europe.
Speaker Change: Some of those things and we're probably <unk>.
Speaker Change: Based on what we think will happen even in Europe will be a much more desirable tenant.
Speaker Change: Yes, especially where we're not buying a building but.
Speaker Change: Landlord discussions how they've evolved over that yes.
Speaker Change: Past few years.
Speaker Change: Okay, Yes, landlords are doing hey, how are you performing.
Speaker Change: What's your market cap look like all of those kind of things.
As our performance is better as our margins are better as our stock prices higher we've become more attractive.
Two landlords.
Speaker Change: That will probably have a better credit rating their properties are going to get a lower cap rate.
Speaker Change: And that's why we've been able to do what we've been able to do over.
Speaker Change: For the past 15 years in building this platform.
Speaker Change: Right now people are really excited.
Speaker Change: To talk about developing with us again.
Speaker Change: I'd say, we're getting three times the inbound.
Speaker Change: And I think that's only going to increase our optionality is going to be better, but you still do right now right.
Speaker Change: Bigger cost for building because that is higher.
Speaker Change: Et cetera et cetera. So.
Speaker Change: The outlook should be great.
Speaker Change: There'll be a lot of Optionality ahead of us at the same time, we don't want to get over saturated saturated and we don't want to create a whole bunch of cannibalization.
Speaker Change: We think it's better to have fewer more iconic locations then to just kind of cover the market.
Speaker Change: In an ordinary way so.
Speaker Change: Yes, we'll continue to be very selective in what we're doing but we do have.
Different vehicles and now we have we will see how this test goes with the first freestanding.
Speaker Change: Design studio, which is not a design studio like we built a task as we build things that we call design studios are really small stores right. These are actual.
Speaker Change: Interior design offices, consumer facing which theyre R&M in the world right interior designers don't have consumer facing offices. We do I mean this is a point of reference on that point I think which is interesting because I think this is going to be more important than we think.
Speaker Change: When we opened a gallery and we.
Speaker Change: Look yes, we look at applications for interior designers, we might get.
Speaker Change: 12 interior design applications.
For our freestanding interior design office.
Speaker Change: We got two to 300 applications.
Speaker Change: And our theory was.
Speaker Change: A lot of interior designers don't want to work in a retail store and.
Speaker Change: We think we're changing that in our current retail stores, because we're creating separate.
Speaker Change: Design offices that are kind of walled off with glasses dealt with and so forth.
Speaker Change: Its still yet.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Depending on how that happened with the response, we've had and then just the response we've had from people trying to come in consumers trying to come in and accept that we'll learn a lot more starting next week.
Speaker Change: But theres going to be lots more opportunities and then also as our volumes build.
Speaker Change: We do and volume.
Speaker Change: And that more opportunities and more markets.
Speaker Change: So if you thought about five years ago, if we did X in a market, where we thought we were going to do it in a market with now we look at the market and we can do one five X.
Speaker Change: Often the real estate deals look completely different and the number of markets look completely different.
Speaker Change: And so that's where we are.
Speaker Change: That could change.
Speaker Change: We think we could add.
Speaker Change: 60 to 70 galleries.
Speaker Change: Criticized galleries.
50, or 60, whatever the ranges and I will send you are doing 50% more volume.
Speaker Change: In a 345 years now.
Speaker Change: While at the fed and we probably have an additional 30 markets you can open because Theres places you thought you could only do.
Speaker Change: $20 million and now you can do.
Speaker Change: $30 million and it changes the economic model.
Speaker Change: Sure.
Speaker Change: I think people are pretty excited about our age today I think even more excited after they digest our numbers from today and think about where we're going.
Speaker Change: And yes, we've become like a preferred anchor like if you look at what we're going to do in <unk>.
Speaker Change: In Naples were taken.
Speaker Change: And nordstrom's location and we're building one of our first <unk> compounds I don't know if thats, even talked about <unk> compound yet now youll hear more about it and maybe I have I can't remember, but anyway, it's a whole new kind of our eight shopping experience multi building connected with courtyards and walkways.
Speaker Change: Nothing else anybody has ever seen but it's a way to take a big site.
Cover the site in a really exciting way and probably spend a third less capital.
Speaker Change: And and then there is another RH compound coming in Walnut Creek, where we're taking a neiman Marcus location.
Speaker Change: <unk>.
Speaker Change: And I.
Speaker Change: I think when when the landlord community.
Speaker Change: <unk> is a developer community sees the new compounds I think.
Speaker Change: People are going to like that too.
Speaker Change: Yes.
Speaker Change: So we're really excited about looking at it at openings.
Speaker Change: The physical expansion of the brand, but we wanted to be cautious not to get over saturated that not to create.
Speaker Change: Too much cannibalization.
Speaker Change: Thank you Gary I appreciate the color I'll pass it on.
Speaker Change: Thanks, Steve.
Speaker Change: The next question comes from Max <unk> with TD Cowen Your line is open.
Speaker Change: Great. Thanks, a lot and congrats on all the progress. So first just what any of the product transformation cycle would you say you're in now and that's both the product itself as well as the gallery for resets.
Speaker Change: Okay.
Speaker Change: Hey.
Speaker Change: I would have said maybe that.
Speaker Change: <unk>.
Speaker Change: Yes.
<unk> my latest trip to Asia and Vietnam.
Speaker Change: And now I would say we might be in that.
Speaker Change: Fourth inning.
Jeff.
Speaker Change: Yes, because the data.
Speaker Change: Continued did.
Speaker Change: Connect and.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: A lot in the pipeline.
Speaker Change: A lot in the pipeline and maybe if you again, if you read the letter there is a lot happening a lot coming.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Extension I'm talking about.
Speaker Change: Might be worth as.
Speaker Change: As much as everything that we just did.
Speaker Change: So I mean, I think it could be massively massively accretive.
Speaker Change: <unk>.
Speaker Change: And so.
Speaker Change: Yes, it will still.
Speaker Change: Call it.
Speaker Change: Maybe the fourth or fifth inning fourth inning halfway.
Speaker Change: Again that always changes right as you evolve because you connect desktops, you've seen more so on and so forth I think.
Speaker Change: Yes.
Speaker Change: I mean to sound arrogant and compare ourselves to Apple right, but at what point, if someone would ask Steve jobs.
Speaker Change: When they introduced the first Apple phone and he said this is going to change everything what inning were they in.
Speaker Change: Yes.
Speaker Change: What was their market cap.
Speaker Change: After the first year of the iPhone or second year of the iPhone.
Speaker Change: Maybe 500.
Speaker Change: Something like that maybe 400 billion $300 billion I don't know Apple's worth today, two five trillion.
Speaker Change: Pre trillion I'd like to add.
So.
Speaker Change: The more you do the more you see.
The more you see.
Speaker Change: The more you can do and you go into what I referred to internally as an upward spiral and I'd say today, we are in an upward spiral we're doing more we're seeing more therefore, we're doing more and seeing more.
Speaker Change: Go through that cycle.
Speaker Change: You can keep connecting dots and seen more so.
Speaker Change: Why I say competitors that anybody is hunkering down or trying to harvest.
Speaker Change: Harvest mode, or they're trying to squeak out every.
Speaker Change: <unk> point, they can out of an operating model.
Speaker Change: That said very temporal.
Speaker Change: Condition.
Speaker Change: Yes, yes.
Speaker Change: And a real upward spiral here that.
Speaker Change: This can lead to more and more.
Speaker Change: So.
Speaker Change: Youll keep asking me what inning, you're in and I might be perpetually in the third to <unk>.
Speaker Change: Yes.
Speaker Change: Yeah, I'll I'll keep that in mind, and then just thinking about some of your comments previously about harvesting profits down the road on the investments that youre, making or you've made in the past.
Speaker Change: How are you just thinking about the magnitude and where margins can go a couple of years from now.
Speaker Change: And no different than we've always thought about it.
Speaker Change: Always good to be at some level.
Speaker Change: At investment stage.
Speaker Change: Has.
Speaker Change: That's what you do have your yes.
Speaker Change: <unk> a brand that's faced an invention and innovation.
Speaker Change: Innovation so.
Speaker Change: I'd say the phase, we just went in with its pretty massive investment cycle.
Speaker Change: Now it gets to scale up and ramp all the product that we have and build the pipeline.
Speaker Change: Sorry, and so forth and build the organization to do that.
Speaker Change: New partnerships to do that but also <unk>.
Launched in Europe, right, I mean Thats big.
Speaker Change: Big kind of one time.
Speaker Change: Investment, you're making in and so.
Speaker Change: Some of that is behind US, yes that period, yes, some of it in front of us.
Speaker Change: But.
Speaker Change: Once we build the platform in Europe and once we.
Speaker Change: Kind of get the brand going look if we were in year.
Speaker Change: Two and yes, we were cycling.
Speaker Change: Our each England.
Speaker Change: And we are doing like.
Speaker Change: $8 million.
Speaker Change: I'd be really worried but when I sit there and I go like okay, where that demand tracking it.
Speaker Change: $35 million to $40 million.
Speaker Change: Somewhere else, we think net 38, something like that and then turn that into revenue.
Speaker Change: Yes.
Speaker Change: $32 million something like that $33 million and then you say I don't know whats, London, <unk> with $9 7 million people in the heart of Mayfair.
Speaker Change: If you said it.
Three times that which I think could be conservative that's a $100 million in revenue.
Speaker Change: Yes <unk>.
Speaker Change: Time's up.
Speaker Change: The five times that debt.
Speaker Change: $130 million to $160 million in revenue.
Speaker Change: And thats by the way this is with the brand relatively unknown and we went into an unknown place. We're the only retailer of our kind.
Speaker Change: Like I don't know 100 miles.
Speaker Change: Good.
Speaker Change: So long way to anything like that so it's.
Speaker Change: I think margin.
Speaker Change: Where we think the margin model ought to be on a regular basis going forward.
Speaker Change: We're also in the depths of a bad housing market.
Speaker Change: Somebody said, Oh well no.
<unk> increased 3%, alright, Thats, a dead cat bounce.
Speaker Change: The housing market has not shifted yet not meaningfully growing yet.
Speaker Change: And when it does we'll benefit from it and you will start to also see.
Speaker Change: Where the margin model will be but right now if you look at it youre looking at our margin model Youre looking at margin model based on a bad housing market and a significant investment cycle.
Speaker Change: Maybe the biggest investment cycle.
Speaker Change: Actually absolutely the biggest investment cycle, we've ever been at right.
Speaker Change: Yes.
Speaker Change: Really looking at kind of bottom margins.
Speaker Change: Chris.
Chris: Great. Thanks, a lot appreciate it and enjoy months sito.
Speaker Change: Okay, sorry, I missed your first opening Max.
Chris: Yes.
Speaker Change: The next question comes from Curt Nagle with Bank of America. Your line is open.
Speaker Change: Great. Thanks, very mature kicking in.
Speaker Change: Couple of ones.
Speaker Change: One in.
Speaker Change: In terms of just thinking about the demand on the revenue trends when should these equalizer and when should the gap narrow and maybe more specifically looking at the first half of <unk>.
Speaker Change: 25 should be holding something similar to what we're seeing in <unk> is that.
Speaker Change: Roughly the right margin and follow up after that.
Speaker Change: That's a good question I think it's going to it's going to start to narrow.
Speaker Change: Our in stocks are getting better.
Speaker Change: Yes, yes.
Speaker Change: <unk> invested in more inventory.
Speaker Change: Close that gap and so.
Speaker Change: I think it'll be a little bumpy for a while until.
Speaker Change: Till the collection of new product is against slows down a little bit but.
Speaker Change: Yes, we will.
Speaker Change: We will have a stronger point of view in the next quarter or two.
Speaker Change: But clearly we see the GAAP shrinking.
Speaker Change: The in stocks are going up, but theres, a whole new cycle of newness coming.
Speaker Change: <unk>.
Speaker Change: They could.
Speaker Change: You could have some real runaways debt.
Speaker Change: Rate really high Backstops and.
Speaker Change: Longer lead times.
Speaker Change: Set forth so.
Speaker Change: But the initial the initial gap is closing.
Speaker Change: Could you could get a little wider and bounce around a bit but.
Speaker Change: Directionally.
Speaker Change: And then going back to as big as it was in the beginning of the transition.
Speaker Change: Got it and that would be I guess, a high class problems.
Speaker Change: It does happen.
Gary: The second one I guess, Gary for you just trying to think through.
Gary: Early stages here, but potential demand synergies for the core product in the trade business with this acceleration and expansion of the waterworks business, which is which of your service.
Gary: Strong core.
Gary: <unk>.
Gary: Customer base.
Gary: Sure, Yes, I think Ken.
Gary: Glenn.
Gary: The contract side of our business start to start there.
Gary: OLED can benefit from the new product, yet because we're still getting in stock and the best product and we still are building inventory to get into to transform the galleries I mean, some of the newest product is coming out and outperforming.
Gary: The phase one product right. So we're going to have to transition galleries again to get the best product, which is again part of an upward spiral.
Speaker Change #100: Yes, I'd say I'd say the galleries today.
Speaker Change #101: Our third right.
So I think theres two more.
Speaker Change #101: Yes, Mark.
Speaker Change #102: Transitions in the gallery to kind of optimize that which that means that it's going to take a while for the best product to be available to the contract business.
Speaker Change #103: I think thats, what you mean by the trade business, but maybe I've got it wrong and then.
Speaker Change #104: Waterworks, yes, just.
Speaker Change #104: Having it.
Speaker Change #104: Yes higher exposure.
Speaker Change #104: And.
Speaker Change #104: Our our interior designers panels beckett across our projects and our customers being able to see it on our website.
Speaker Change #104: As seen in our source book.
Speaker Change #104: Yes.
Speaker Change #104: The brand recognition and awareness of waterworks is going to grow and the effects ability is going to grow. So yes, we think we think thats going to be.
Speaker Change #105: Big idea, how big can it be.
Speaker Change #105: We think it looks like a $1 billion of idea to us when we kind of track it out.
Speaker Change #105: So yes, so the synergies and then just taking the best designs and translating those into smaller sizes for baby child teen it's going to be a real synergy.
Speaker Change #105: And.
Speaker Change #105: As.
Speaker Change #106: Retailers don't like returns returns are what drive the outlet business. The outlet businesses is dragged behind the core business significantly alright, because theres not enough returns of the new product, yet, which will drive that so again.
Speaker Change #106: All part of an upward spiral right and.
Speaker Change #106: When we get together and.
Speaker Change #106: <unk>.
Speaker Change #106: Yes.
Speaker Change #106: All of the learnings right now all of the things we're seeing.
Speaker Change #106: All of the dots, we can now connect because there's a whole whole new set of data that we haven't had.
Speaker Change #106: So the data becomes richer.
<unk> become smarter, we start investing wiser.
Speaker Change #106: Next ideas are likely better than your last ideas because youre more informed you have more knowledge.
Speaker Change #107: Yes, you are making better decisions.
Speaker Change #108: Some things.
Speaker Change #108: More correctly.
Speaker Change #108: So I don't know if that answers your question or not.
Speaker Change #109: That's very clear.
Speaker Change #109: Appreciate your happy holidays.
Speaker Change #109: Thank you thank you Curtis.
Speaker Change #110: The next question comes from Seth Basham with Wedbush Securities. Your line is open.
Thanks, a lot and good afternoon.
Speaker Change #111: My question is just regarding that product.
Speaker Change #111: Information and what you'd characterize as Flores.
Speaker Change #111: Inflection.
Speaker Change #111: Previously calculate peak inflection point sometime in early 2025 of this upward spiral that youre seeing right now would you think that peak inflections extended outwards.
Speaker Change #112: Massively outwards.
Speaker Change #113: I talked about the peak inflection like to think about what I knew almost nothing.
Speaker Change #113: Alright, we had new product hitting we saw trends are there any product we're tracking it out what does it look like but we didn't have enough data and information.
Speaker Change #113: Sure.
Speaker Change #114: We know any more than we knew.
Speaker Change #114: So.
Speaker Change #114: Got it got worst peak inflection now based on what we know I think it's several years out.
And previously you talked that you can flex them being sort of the <unk>.
Speaker Change #115: <unk> year over year growth I assume youre not thinking the strongest growth is going to be a few years out where do you think that you will see strong growth for the next few years in other words.
Speaker Change #114: Okay.
Speaker Change #116: I think the strongest growth might be a year or two out.
Speaker Change #116: We have significant brand extension I talked about is significant.
Speaker Change #116: Not small it's meaningful.
Speaker Change #116: And the amount of new product that's coming.
Speaker Change #116: For example, a year ago.
Speaker Change #116: A year into this transformation.
Speaker Change #116: I kind of re framed everything for our internal team and our external partners I said look we are still in.
Speaker Change #116: In the early stages of what I call the product development Super cycle.
Speaker Change #116: We've never done because we haven't set our Napa data.
Speaker Change #116: To say like this is this can be much bigger we think about the market completely differently.
Think about the size of the market to consumer.
Speaker Change #116: We see more consumers, we see more homes, we have seen more rooms, we've seen more aesthetics, we see.
Speaker Change #116: Significantly bigger opportunity for our H in some ways I'd say.
Speaker Change #116: <unk> way to think about us.
Speaker Change #116: Yes.
Speaker Change #116: Kind of as a specialty brand right with a certain point of view.
Speaker Change #116: That's how I'd, probably say I looked at us over the last 20 years, how do we build this in a specialty brand.
Speaker Change #116: Certain aesthetic point of view.
Speaker Change #116: <unk>.
Speaker Change #116: And grow this brand I think about us differently today.
Speaker Change #116: And I think that it's a lot differently just in the last.
Speaker Change #116: Okay.
Speaker Change #116: 45 days I, just havent articulated it completely.
Speaker Change #116: And clearly based on what we've learned.
Speaker Change #116: And it is directionally, what we framed over the last.
Speaker Change #116: Five years right with our long term business vision and ecosystem. We've said there are those with taste. The no scale in those with scale and no taste and the idea of scaling taste is large and far reaching.
Speaker Change #116: And then we've articulated right like a public.
Speaker Change #116: Called the one pager kind of a bigger view of how that can play.
Speaker Change #117: See what the nuances.
<unk>.
Speaker Change #117: Is now beginning to see us and the team.
Speaker Change #117: Again, you can see us as.
Speaker Change #117: May be a platform for taste.
Not just the brand so you would think about.
Speaker Change #117: I don't know think about <unk>.
Speaker Change #117: Platforms or marketplaces.
Speaker Change #117: Wafer area as a marketplace.
Speaker Change #117: Somewhat it is it a brand of course, it's recognized for certain things and so on and so forth, but they don't they don't really.
Speaker Change #117: It's not their product it's available.
Speaker Change #117: Everywhere else, there's nothing unique about the product and wafer, but it is a.
It is a platform and marketplace.
Speaker Change #117: That's driving $12 billion of revenue some number like that right.
Speaker Change #117: And that not all furniture, they felt lot lots of things, but if you start to say can you transition to thinking about RH from.
A classic way to think about it the specialty brand.
Speaker Change #117: And think about RH.
Speaker Change #117: As a platform for taste.
Speaker Change #117: And think about how you could dimensionalize taste across multiple aesthetics across.
Speaker Change #117: Different life stages across.
Speaker Change #117: Different.
Speaker Change #117: Times of homes, and so on and so forth.
Speaker Change #117: That to us.
Speaker Change #117: It looks.
Speaker Change #117: Multiple times bigger.
Speaker Change #117: Potentially than I thought we could be.
Speaker Change #117: And.
Speaker Change #117: We're still kind of shaping that banking, but some of it we can see relatively clearly today.
Speaker Change #117: And Thats why I think.
Speaker Change #117: The growth trajectory or the vector may continue longer than we think.
Speaker Change #117: And we May think Oh.
Speaker Change #118: You are running.
Speaker Change #118: The core business is trending at 25% to 30 right.
Speaker Change #119: Well youre going to go up to 25% 30 or you're going to grow.
Speaker Change #119: Eight or 10 on top of that.
Speaker Change #120: I don't know how can we grow 30 or 40 on top of that.
Speaker Change #120: It's.
Speaker Change #121: Not impossible.
Speaker Change #121: And what we see today I don't want to not promising anything I'm not trying to give any kind of guidance I'm just trying to kind of share. It with you directly how we're thinking and what we see again the more we do the more we see the more we see the more we can do and we see a lot more.
Speaker Change #121: Than we've ever seen right now because of the product transformation and the product development Super cycle.
Speaker Change #121: And the things we're doing are the dots, we're connecting and so I think this upward spiral.
Speaker Change #121: That we're in.
Speaker Change #121: Can be exponentially bigger.
Speaker Change #121: And last significantly longer than if you would ask me.
Speaker Change #121: A couple of months ago.
Speaker Change #122: Wonderful and just last follow up so I know you'll provide more information next year, but there's significant brand extension that you think could be worth over $1 billion.
Speaker Change #123: In furniture or is it more adjacent beyond furniture.
Speaker Change #124: Now, it's just kind of within the same thing we're doing is just.
Speaker Change #125: Unique different aesthetically different.
Speaker Change #125: And probably addresses the biggest part of the market.
Speaker Change #125: Yes so.
Speaker Change #125: And we think it's going to be.
Speaker Change #125: Amplified by what we think is that.
At a trend that is Kevin.
Speaker Change #126: Wonderful gateway, Thanks, a lot Gary.
Speaker Change #127: Okay. Thank you.
Speaker Change #128: The next question comes from Andrew Carter with Stifel. Your line is open.
Speaker Change #128: Hey.
Speaker Change #129: Thank you good evening I just wanted to ask about the inventory kind of going up again again this quarter. The purchase was up 30% could you talk to kind of what kind of inefficiencies are in there is there is some planning around there I know that you're exiting China is there any safety stock in there for that already contemplating that in your exiting Mexico.
Speaker Change #130: And on those two points.
Speaker Change #130: Correct me, if I'm wrong, China was 22% of your purchase dollars last year I don't know if you ever disclose Mexico.
Speaker Change #131: Where is that going.
Speaker Change #131: Thanks.
Speaker Change #131: Yes.
Speaker Change #131: The first part of everything you said I'd say correct.
Speaker Change #131: That would be my answer.
Speaker Change #131: The last part where where is that going to I think.
Speaker Change #132: We've said, where we're going in China.
Speaker Change #132: It all depends on what's happening in Mexico.
Speaker Change #132: Yes.
Speaker Change #132: Donald Trump wrote the art of the deal.
Speaker Change #132: And if you've ever read the art of the deal.
Speaker Change #132: <unk>.
You do you will see the negotiating.
Speaker Change #132: Starting to play out there it is a global negotiation happening right now.
Speaker Change #133: Well Mexico.
Speaker Change #133: What will happen with Mexican tariffs.
Speaker Change #133: What moves should we make proactively we're making some moves proactively.
Speaker Change #133: But I think Mexico is making moves.
Speaker Change #133: We are already hearing from inside sources.
Speaker Change #133: Theyre moving troops to the border, they're going to try to Ed.
Speaker Change #133: Take more responsibility for immigration and if I was the president of Mexico, Sherwood because I wouldn't want the biggest economy of the world to cut me off from trade.
Good.
Speaker Change #133: Mexico, I think is a little different than China.
Speaker Change #133: Mexico is not going to become the next global superpower that has.
Speaker Change #133: Our military that can threaten the United States China can.
Speaker Change #133: So if you think about why our country has never been attacked besides 911, which is basically some terrorists boarding our own planes and fly them into our buildings.
Speaker Change #133: It's a very unique attack.
Speaker Change #133: There hasnt been a military that is tax in the United States internationally on our home ground.
Speaker Change #134: Since when.
Speaker Change #134: Yes.
Speaker Change #134: Yes, yes, yes exactly why.
Speaker Change #134: We have the strongest military nuclear Arsenal in the world.
Speaker Change #134: Yes.
Speaker Change #135: So I mean look Donald Trump is a great negotiator I think he is looking at the world Plainfield insane.
Speaker Change #136: How do you use leverage negotiation without leverage.
Speaker Change #137: As in person nation. Thank you better hope that they don't find out Youre not who you are.
Speaker Change #138: He is really good at using leverage he has done it before we're seeing them do it now he hasn't even taken office and the art of the deal is in full play right now, it's actually quite impressive I would say and so hazmat.
Speaker Change #138: Mexico is going to play out.
Speaker Change #139: I don't think.
Speaker Change #139: Pure Mexico, you do not want that faucet turned off.
Speaker Change #139: You don't want to 25% tariffs.
Speaker Change #139: Im not saying its not going to happen it may happen they happened for a while.
Speaker Change #140: Thank you.
Speaker Change #141: I think we have too much leverage there China as a whole different story told different game.
Speaker Change #141: You can think about what happened North Korea, and Trump's first term.
Speaker Change #141: I mean, the guy in North Korea, with sending missiles over Japan well.
Speaker Change #141: Every week.
Speaker Change #141: He could hit California.
Speaker Change #141: Trump met with them once and they never sent another missile.
Speaker Change #141: Because we like to drop no.
Speaker Change #141: For another reason.
Speaker Change #141: We're going to see a lot of negotiations played out here I don't think there'll be a lot of decisions that becomes.
Speaker Change #141: Big negative for us or for the U S economy.
Speaker Change #141: I think the United States of America is a lot of leverage right now.
Speaker Change #141: And I think we have a leader that knows how to use leverage.
Speaker Change #142: Fair enough and then kind of switching gears, a little bit of you talked about going into kind of a massive kind of cash flow mode.
Speaker Change #143: How are you thinking about that in terms of kind of the external investments you've funded I know you talked a little bit about prioritization last call I don't know if those are being de emphasizes or off the table, but in terms of the guest house. The real estate JV do you do you go lean into those more heavily or is it just a straight a more of a prioritization on the core business.
Speaker Change #142: <unk>.
Speaker Change #144: Well I think there's look there's always a prioritization in the core business there are certain opportunities that we'll unveil themselves at certain times.
Speaker Change #144: Like in Ashburn joint venture and.
Speaker Change #144: The developed the opportunity to develop an ecosystem and ask them, which we think is one of a kind opportunity and we think there'll be a.
We think very very good if not outstanding return on that investment as it unfolds and unfortunately, we hit a housing market.
Speaker Change #144: Okay.
Speaker Change #144: Downdraft.
Speaker Change #144: And high interest rates and Thats not necessarily good for an investment cycle and real estate.
Speaker Change #144: So those things get de prioritize but yes, we do have a gallery opening there we have a desktops thats coming we finally got the city to approve our facade and.
Speaker Change #144: And we'll probably do a fee residences and other things that we've talked about.
Speaker Change #144: Yes.
Speaker Change #144: That will happen and I think it will start to become more of the harvesting cycle.
Speaker Change #144: Investment cycle in the aspirin JV.
Speaker Change #144: We will turn real estate assets into cash we have will have a gallery will have a guesthouse and Simon cohort.
Speaker Change #144: And.
Speaker Change #144: The prioritization I think will always be on the core business everything we do whether it is an aspirin JV or any other investments we make are all to amplify render the core business more valuable.
Speaker Change #144: To amplify the core business to amplify the brand how people think about the brand how people see about the brands see the brand.
Speaker Change #144: And perceive the brand and I think we're doing a very good job in building.
Speaker Change #144: Okay.
Speaker Change #144: Globally iconic brand.
Speaker Change #144: I think we're there yet but we are there.
Speaker Change #144: Looking through a lot of People's lives I mean, this brand I think is seeing very differently than any other brand.
Speaker Change #144: In our category.
Speaker Change #144: <unk> antibody is close from a brand perception point of view.
Speaker Change #145: Yes, it's taken years of investment years of work to craft are we where we think we want to be known this brand will continue to evolve.
Speaker Change #145: But as I said earlier.
Speaker Change #145: We are in a significant investment mode. The biggest we've ever had we're cycling some of that we will keep investing I don't think it will be today as the opportunities. We see I don't think it'll be at the same pace a lot of the investments we've made whether it's ability to new brand extension and other things there's 10.
Speaker Change #145: <unk> investment pace and advertising investment to mail a book of courses.
Speaker Change #146: Do we have to build new stores, so that new investment now.
Speaker Change #146: We did that leverage our current platform. Yes is it is it merchandised by the same people, yes. It's the same product development team, yes is it.
Speaker Change #146: There's massive leverage and a lot of things we're doing.
Speaker Change #146: <unk>.
Speaker Change #146: But setting up Europe is inexpensive piece and so that deleverage too.
Speaker Change #146: 230 basis points or so.
Speaker Change #146: If you just tack that 230 basis points on this business.
Speaker Change #146: The model looks a lot better if you took some of the other investments out that we've made.
Speaker Change #146: Real estate platform and other things that are creating more depreciation.
Speaker Change #146: The model looks pretty good in a very down housing market now.
Speaker Change #146: Recast that model with.
Speaker Change #146: The inflection in factor that has been built.
Speaker Change #146: And.
Speaker Change #146: And in depth investment cycle, that's going down.
Speaker Change #146: Is how I'd say it so you'll get a completely different outcome from free cash flow point of view.
Speaker Change #147: Thanks ill pass it on happy holidays happy holiday. Thank you.
Speaker Change #148: The next question is from Brian Nagel with Oppenheimer. Your line is open.
Speaker Change #149: Hi, good afternoon.
Speaker Change #149: Congrats on the <unk>.
Speaker Change #149: Proving momentum within the business.
Speaker Change #150: So my question and it's probably going be a bit of a follow up here, but just looking at the business and Gary you talked a lot about we haven't talked a lot over the last several quarters about the macro environment. We discussed here on the call Tonight, but you look at the business and the improving demand trajectory you are saying.
Speaker Change #151: Clearly the new products is helping to ensure we are driving this but do you think youre also starting to see maybe the early signs of some sort to say let up.
Speaker Change #151: In the in the U S housing market.
Speaker Change #151: Yes.
Speaker Change #151: I don't see our competitors haven't given us so.
Speaker Change #151: Are we the only ones getting I don't know.
Speaker Change #151: I think there is a pent up demand and a few people.
Speaker Change #151: Yes.
Speaker Change #151: Having to buy homes, yes, but the numbers wouldn't say it's a.
Speaker Change #151: The macros is it is the issue of otherwise you'd see it.
Speaker Change #151: A more broad pickup so I think people are more optimistic I think there might be a few more people.
Speaker Change #151: Stepping into the housing market.
Speaker Change #151: But thats.
Speaker Change #151: I mean.
Speaker Change #151: For the most part our industry is.
Speaker Change #151: Is down.
Speaker Change #151: Seven or 8%.
Speaker Change #151: I mean theres not to make people that are positive growth right now.
Speaker Change #151: Yes.
Speaker Change #151: Even if you looked at our growth from a comparable basis. There was only a two point difference between.
Speaker Change #151: Total demand.
Speaker Change #151: Comparable demand.
Speaker Change #151: Alright.
Speaker Change #151: So.
Speaker Change #151: Yes.
Speaker Change #151: Could we be getting a point or two from the.
The macro is a little better maybe.
Speaker Change #151: But I don't think Thats meaningful I think it's really meaningful.
Speaker Change #151: Is is the <unk>.
Speaker Change #151: Results of <unk>.
Speaker Change #151: Very targeted.
Speaker Change #151: And well executed product transformation.
Speaker Change #151: Yes.
Speaker Change #151: Size and time that the world has never seen.
Speaker Change #152: Okay. That's helpful and then just on that.
Speaker Change #153: My follow up question, so with regard to the product transformation.
Speaker Change #153: Like you just said very significant product share information so going forward I think someone asked a question before I think kind of what inning, we're in and I think so much of it six or something but I guess the question I'm asking is.
Speaker Change #153: Is this was this should we think about our reach over the next few years is this going to be is it going to be a more progressive more consistent.
Speaker Change #153: Product introductions that we've had over the last couple of years or was this really one big ones a step up.
Speaker Change #154: I think it is.
Speaker Change #154: Yes.
Speaker Change #154: As I tried to articulate earlier, we see a much bigger market opportunity and I think.
Speaker Change #154: Youre going to see a much more aggressive approach to expanding that.
Speaker Change #154: The product.
<unk>.
Speaker Change #154: Particularly the product offering.
Speaker Change #154: And really that's how we got hit right in the early days I think I used to talk about.
Speaker Change #154: I think I've talked about it publicly.
Speaker Change #154: But we came up with the term here called direct centric growth and we said we said look we are not in the early days I think we're not going to limit our assortment to the size of the stores, we're going to size our assortment assortment to the potential of the market. So we're going to merchandise beyond the four walls of the stores and we're going to use our source.
Speaker Change #154: And our website present that assortment and that strategy is how we went from $300 million.
Speaker Change #154: Where we are today I'd say in the in the last.
Speaker Change #154: 10 years.
Speaker Change #154: The introduction of moderate as we call it nine years.
Speaker Change #154: We kind of slowed down.
Speaker Change #154: Does that process I think we perceived ourselves as more mature.
Speaker Change #154: Slowdown newness slowdown expansion of the product.
Speaker Change #154: And Thats, what I tried to articulate earlier I think we see the brands differently I think we see the brand bigger I think I think by kind of slowing down our product transformation and hurt our product expansion.
Speaker Change #154: And brand expansion I think we allowed competitors to enter the market.
Speaker Change #154: Yes.
Speaker Change #154: Would not have been able to be successful.
Speaker Change #154: We kept doing what we're doing and I think.
Speaker Change #154: It is shaped by the fact that decision with an outcome.
Speaker Change #154: You have seen the world more traditionally seen RH as a specialty brand not a platform for test.
Speaker Change #154: Yes, so this idea of <unk>.
Speaker Change #154: <unk> not as a specialty brand, but a taste platform.
Speaker Change #154: Health set to see a much bigger market.
Speaker Change #154: And.
Speaker Change #154: And allows us to.
Speaker Change #154: Much more disruptive RH brand that can take share.
Speaker Change #154: From more people based on our taste or style.
Speaker Change #154: And.
Speaker Change #154: The power of our platform.
Speaker Change #154: I appreciate it thank you.
Speaker Change #155: Thank you.
Speaker Change #156: The next question comes from Jonathan <unk> with Jefferies. Your line is open.
Speaker Change #157: Great Good evening and thanks for taking my questions. The first one is on pricing to carry you shared some helpful color related to clearance activity for discontinued product I was hoping you could just comment on the pricing strategy for some of the new collections that have been recently launched so when you talk about maybe peak year over year.
Speaker Change #157: <unk> sales growth one to two years out is that going to be driven by higher prices from the new collection.
Speaker Change #158: Greater unit velocity.
Speaker Change #158: Okay.
Speaker Change #158: Yeah.
Speaker Change #158: Exactly no.
Speaker Change #158: Probably both.
Speaker Change #158: But.
Speaker Change #158: Again, we're going to keep learning.
Speaker Change #158: I think a lot of it is we just see a much bigger market.
Speaker Change #158: Yes.
Speaker Change #158: We have more leverage we can.
Speaker Change #158: Use that leverage to.
Speaker Change #158: Have more disruptive value.
Speaker Change #158: People today.
Speaker Change #158: If you could buy a dining chair.
Speaker Change #158: At.
Speaker Change #158: At RH.
Speaker Change #158: Versus somewhere else.
Speaker Change #158: I think the consumer would feel better about buying from our age because of the positioning and the perception of our brand.
Speaker Change #158: Versus.
Speaker Change #158: Online offer.
Speaker Change #158: Yes.
Speaker Change #158: Some other platform versus waste there versus other competitors might have I think you'd rather walk into one of our galleries and you would perceive that.
Speaker Change #158: Yes.
Speaker Change #158: <unk>.
Speaker Change #158: Taste and style is validated by us.
Speaker Change #158: That the.
Speaker Change #158: Brand.
Speaker Change #159: Hello, and value you get when you built a brand like ups.
Speaker Change #159: It makes things more valuable it renders the product more valuable.
Speaker Change #159: And I think that.
Speaker Change #159: All of us tend to.
Speaker Change #159: By things based on our trust in that brand based on what that brand stands for.
Speaker Change #159: Based on what their values are.
Speaker Change #159: And just kind of why we buy why we why do we trust certain brands versus the other brands that why do we trust them more.
Speaker Change #159: I think we.
Speaker Change #159: As consumers.
Speaker Change #159: We value.
Speaker Change #159: Tremendous physical experiences we value incredible design.
Speaker Change #159: Designing an article presentation of product.
Speaker Change #159: Physical nature or digital nature, whether its source books or online.
Speaker Change #159: We value.
The.
Speaker Change #159: Our quality perception and the design authority brands and I think we built a brand that stands alone and our category. Today do we have competitors of course was there people are going to try to emulate what we do.
Speaker Change #159: Yes, they are.
But.
Speaker Change #159: I wouldn't want to be competing with us on that so it just allows the brands to have a bigger market because someone would be.
Speaker Change #159: I think someone would rather buy that share from us than someone else.
Speaker Change #159: If it's similar.
Speaker Change #159: I think they will value it more it's it's no different than <unk>.
Speaker Change #159: Cards.
Speaker Change #159: While people pick up.
Speaker Change #159: BMW or Mercedes versus a Chevrolet or a tesla versus.
Speaker Change #159: Whatever.
Speaker Change #159: Somebody else was electric car.
Speaker Change #159: Because of their value they placed on that brand the trust they have in that brand.
Speaker Change #159: Yes.
They believe that they are getting a better level of design and quality.
Speaker Change #159: And it renders the consumer more valuable that's part of the equation people don't understand.
Speaker Change #159: And <unk> got everything in my House from way Fair.
Speaker Change #159: Doesn't really render even more valuable if youre trying to position yourself.
Speaker Change #159: Higher in the economic societal perception of the world.
Speaker Change #159: Sandy.
Speaker Change #159: Yes.
Speaker Change #160: Your house from our H, I think renders new more valuable.
Speaker Change #160: Versus other people.
Speaker Change #161: That's really helpful. Thank you and then just a quick follow up on product.
Can you give us any color in terms of maybe some of the lines that had been outperforming and not sure. If theres any commonalities in terms of maybe aesthetic or price points or any other common denominators not sure if youre leaning into particular trends relative to other peers any more flavor there would be help.
Speaker Change #162: Thank you.
Speaker Change #162: Yeah.
Speaker Change #162: What I would tell you that.
Speaker Change #163: Think about for a minute why would I tell anybody that.
Speaker Change #163: Publicly.
Speaker Change #164: Completely respect that just trying to get more cash all of our competitors are on this call.
Speaker Change #165: Like why would I tell anybody that.
Gary: Thanks, Gary.
Gary: Okay. Thank you Jonathan.
Speaker Change #166: Your final question comes from Zach Sodom with Wells Fargo. Your line is open.
Speaker Change #167: Hey, good afternoon, and thanks for fitting me in.
Speaker Change #167: Larry following up on the balance sheet I appreciate your currency swaps comments.
Speaker Change #168: Since earnings are constrained by about $9 and interest expense any thoughts on the appetite for knocking out some of the debt and interest expense.
Speaker Change #168: And the priority versus investment or buybacks or something else.
Speaker Change #169: I mean, we're we think we're.
Speaker Change #168: Making.
Speaker Change #168: The right investments.
Speaker Change #168: To create the most significant shareholder returns.
Speaker Change #168: So yes the debt.
Speaker Change #168: Yes.
Speaker Change #168: $9.
Speaker Change #168: Sure compressing right now, yes, there are seven 6 million less shares.
Speaker Change #168: So you have to do the math on the other side.
Speaker Change #168: And you have to think about that seven 6 million shares.
Speaker Change #168: Two years from now three years four years five years from now and think about where the trajectory of the businesses and would you rather taking seven 6 million shares out of the market and have that cash.
Speaker Change #168: Or would you rather have.
Speaker Change #168: What do you think is going to be more valuable.
Speaker Change #168: And our math would tell us.
Speaker Change #168: What we're doing is going to be exponentially more valuable that buying our stock at $2 95, when we think.
Speaker Change #168: It's going to be worse.
Speaker Change #168: Yes.
Speaker Change #168: 200 to 2000 down the road is going to prove to be the right move and it's no different than when we bought <unk>.
Speaker Change #168: 60% of the stock back in 2017.
Speaker Change #168: And.
Speaker Change #168: Yes.
Speaker Change #168: Price, we bought back stock at and where the stock is today.
Speaker Change #168: So no there's not.
Speaker Change #170: Other Ceos, maybe talking about currency swaps.
Speaker Change #171: But I am.
Speaker Change #171: Benefited from the fact that that was owned by private equity.
Speaker Change #171: Several years.
Speaker Change #171: Worked for some very smart people.
Speaker Change #171: And I've learned a lot.
Speaker Change #171: Thank.
Speaker Change #171: Think about the business differently.
Speaker Change #171: From.
Speaker Change #171: From an investment point of view maybe than others do so.
Speaker Change #171: But again I look at our history you could have asked the same question.
Speaker Change #171: 2016, and 17, I think we've done kind of.
Speaker Change #171: Two or three major buybacks here and.
Speaker Change #171: But you don't see us doing like regular automatic buybacks.
Speaker Change #172: I think that's not a very smart thing to do.
Speaker Change #172: Looking at it like an investor.
Speaker Change #172: Yes.
Speaker Change #172: We're buying back our stock it.
Speaker Change #172: All time highs.
Speaker Change #172: We are.
Speaker Change #172: We're opportunistic.
Speaker Change #172: Investors and so we believe this will prove to be a very wise decision.
Speaker Change #173: I appreciate the thoughts and then lastly on the decision not to renew the leases in Germany any color there on on sales or margin impact on on those galleries and.
Speaker Change #174: Is the intention to close those right away.
Or wait until 2027 and any thoughts on Jeff.
Speaker Change #175: The margin constraint right now I think you said 230 bps. This year from from Europe, how much of that is Germany.
Speaker Change #174: Yes.
Speaker Change #176: Look we don't really give this level of detail but.
Speaker Change #174: <unk>.
Speaker Change #174: To get the Paris, and London add locations.
Speaker Change #174: We had to take those locations also.
Speaker Change #174: And we work maybe necessarily ready to go into Germany at that point, but Paris, and London locations with awkward so extraordinary.
Speaker Change #174: It's taken US 10, or 20 years to find locations like that.
Speaker Change #174: 10, or 20 years, so we started to taper as locations.
Speaker Change #174: In some cases.
Speaker Change #174: We weren't even going to open and when we did.
Speaker Change #174: With a lawsuit potential lawsuit from landlord, we thought we were rendering this properties property less valuable. So we said, okay, let's open let's not spend too much capital.
Speaker Change #174: And but.
Speaker Change #174: Both of those cases.
Speaker Change #174: The landlords wanted us to renew the leases and extend the leases to 10 to 15 years. We didn't know if those are necessarily the right location as we didn't know who is the right timing for the market and so forth and we said how do we secure this London location in this tariff location.
Speaker Change #174: What what.
Speaker Change #174: What are we willing to invest to get those two locations not that we don't like Germany.
Speaker Change #174: Wouldn't have launched in Germany.
That's not how you would have rolled out the brand.
Right.
Doing this deal enabled us to probably move.
Speaker Change #174: Moved 10 years faster than we would have moved.
Speaker Change #174: Had we not and so.
Speaker Change #174: Is there an incremental $20 million investment and that that's the way I'd look at it sure.
Speaker Change #174: Do.
Speaker Change #174: Do we know if we want to extend those leases and stay where we are do we or maybe theres better locations in Germany with better rent.
Speaker Change #174: Dan.
Speaker Change #177: That's how we can think about it no different than that again.
Speaker Change #178: Every investment decision you have to look at all the aspects of it.
Speaker Change #178: And you have to kind of say.
Speaker Change #178: Is it more important to do this now in investment invest now and maybe it's going to cost.
Speaker Change #178: Upfront like.
The hit we're taken on Germany.
But.
Speaker Change #178: I'd argue when we look at it 10 years later, we may not have it.
Lending Galleria Paris Gallery like the ones, we have today, we might not have even pulled the trigger so.
Speaker Change #178: Generally.
Speaker Change #178: Sure.
Speaker Change #178: Those people that.
Speaker Change #178: Move faster and do more.
With better outcomes, right, because you're going to learn along the way so.
Nothing nothing more than that.
Speaker Change #179: The noncash charge were still open.
Speaker Change #179: If you want to look at our business at an EBIT level and operating margin level next year.
Speaker Change #179: It would be accretive to operating margin and EBIT next year.
Speaker Change #179: Neutral on a cash point of view.
Speaker Change #180: Makes sense, thanks for the time happy holiday.
Speaker Change #181: Thanks Happy holidays.
Speaker Change #182: That is all the time, we have for questions I'll turn the call to Gary Friedman for closing remarks, great. Thank you everyone.
Gary Friedman: Your time and.
Gary Friedman: Followship of RH, we appreciate it.
Gary Friedman: Yeah.
Gary Friedman: I want to say to our teams.
Gary Friedman: That have worked so hard over the past two years, bringing this product transformation.
Gary Friedman: Life that we couldn't be more more proud of the effort.
Gary Friedman: Hi.
The drive and the determination that it takes to do this level of work.
Gary Friedman: And to bring a transformation like this to life.
Gary Friedman: Ed.
Ed: We value.
Gary Friedman: Yes.
Gary Friedman: Most important level in this company.
Gary Friedman: The shareholder letters are addressed to our people our partners and our shareholders in that quarter.
Gary Friedman: That's how we place the value.
Gary Friedman: So thank you all of you for your efforts thank you for bringing.
Gary Friedman: This next chapter of our story to life.
Gary Friedman: And.
Gary Friedman: We wish you a very happy holiday.
Gary Friedman: And.
Gary Friedman: We will talk to everyone more in the new year. So thank you.
Speaker Change #185: This concludes today's conference call. Thank you for joining you may now disconnect.
Speaker Change #185: [music].
Yes.
Speaker Change #185: Yes.
Speaker Change #185: [music].
Speaker Change #185: Yes.
Speaker Change #185: Okay.