Q2 2019 Earnings Call

All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like Doug. Good question. During this time simply press Star then number one on your telephone keypad. If you would like to withdraw your question first the town Keith Thank you.

Allison Malkin of ice Yahr you may begin your conference.

Thank you good afternoon, everyone. Thank you for joining us for <unk> second quarter fiscal 2009.

When a conference call joining me are Gary and Chairman and Chief Executive Officer, and Jack Preston Chief Financial Officer, before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within minutes.

Federal Securities laws.

These statements about the outlook for 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 here.

He's before you are speaking filings as well is that correct.

Issued today for a more detailed description of the risk factors that may affect.

Please also note that these forward looking statements reflect our opinions only as the date and we undertake no obligation to revise or publicly release the results of any revision [laughter] statements in light of new information or future events.

Also during this call today, he may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in todays financial results press release.

A live broadcast of this call is also available on the Investor Relations section of our website at <unk>, our dot our H dot com with that I'll turn the call over to the operator to begin our Q and a session.

[noise].

Syntel, we're ready for questions.

At this time I would like to remind everyone in order to ask a question Press Star then number one on your telephone keypad. Please limit yourself to one question and one follow up question and then re queue to ask any additional questions. We'll pause for just a moment to compile the <unk> roster.

[noise].

Your first question comes from Tammy Sukkari with JP Morgan Your line is open.

Hi, Thanks for taking my questions. So could you comment on the three Q revenue guide and why revenue growth would step down to 5% to 6%.

After over 8% in the first half a was there any revenue pull forward into Twoq you. That's part of the expected sequential deceleration.

Hey, Tammy it's Jack So you may recall that we have the.

Sort of self inflicted.

Drags in a sense the decisions we made to it.

To to exit certain.

Revenue items and so that those those are two four to four to the quarter and.

That said so there is there is there is that the impact of the drag being different.

I think well the other thing is you're seeing is.

We saw an outlet.

What you see are the outlet sales in our press release and so there that we've talked about the closure of the 500000 square foot distrust distribution center last quarter.

And so weve cycled most of that inventory out and so you're not going to see that.

That benefit and that benefit was worth about two points in in Q3 and it was also a big drag on gross margins.

Got it. So so my follow up question is earlier this year you guided to 15 to 20 million additional savings from the home delivery initiative. So does that still hold or are you seeing incremental savings that could come from a this initiative.

Sure Tammy I think at this time, where we guided was 15 to 20 with third of the benefit this year and it and two thirds next year.

At this time, we're holding to that I mean, we're optimistic and.

Looking forward to to even better benefits, there, but but for the moment, we're holding to that and that is the timing.

Got it thank you so much.

Your next question comes from Steve Forbes with Guggenheim Securities. Your line is open.

Good afternoon.

Maybe another question on the on the Threeq you guide with this this one really on sort of the gross margin outlook.

Yes, maybe the third quarter sort of I guess looks a little weaker than than we were modeling in the fourth quarter looks a little stronger. So I don't know if there's sort of any.

Shift in both margin and expenses because you sort of the same tonight dynamic as you move down the piano.

Can you can you just talk about.

Yes, there is anything to call out sort of thing is idiosyncratic that's sort of impacting the model.

Clearly things advertising swinging around yet nothing nothing idiosyncratic Steve it's.

I think we don't we Didnt provide you quarterly flow and I think a lot of times what happens is that unfortunately, the asking me doesn't always get it right. If we don't.

Give you give you sort of the guide post where to go and so when I look at it on the half.

We're guiding 40 40.5 40.8.

So up 140 basis points versus last year versus what we did in the first half up 100 basis points. So I think I think thats, one way to look at it.

Fried so nothing nothing idiosyncratic call out and then.

Maybe maybe for you Gary Records I don't I didn't fully get the digest all released yet, but if you if you think about.

The comments around international.

Opportunity.

Last quarter I think during the pre announcement the I don't know if you can help us right as we start conceptualizing the international expansion opportunity can you update us on the timeline and maybe discuss sort of the infrastructure needs of the business for a successful transition into one or more international markets over the next few years here.

Yes, let's let's go back to your first question because I think that there. There is confusion and has been confusion about sometimes had a landscape the business year over year, if you're not paying attention to it. So the biggest thing year over year is we use the book advertising and amortize it.

Two our.

In our catalogs and the curve or catalogs and now we book advertising based on we mailed the books and so if you're trying to model the business you can be.

Kind of surprised to see we have.

But how much of our advertising expense for the second half is in the third quarter most of its like 80%, that's where 80% of our advertising costs are hitting in the third quarter because of the timing of our books and only 20% is hitting in the fourth quarter.

Yes, so you've you've you've got that kind of landscaping that can sometimes.

Make the numbers look a little funny, but I think if you.

Just look at the second half I believe we took that second half above everybodys numbers pretty meaningfully so.

Yes, what how it exactly line landscapes is going to sometimes be affected by different changes accounting policies and so forth.

As it relates to international.

I could tell you that I don't know if I've never been more excited about.

Anything any any idea or any opportunity, we just actually just got back Sunday night.

Hi from another trip.

Overseas to look at opportunities and locations and.

I think a couple of things.

A couple of things becomes clear.

Get closer to the opportunity and you kind of look at it at that.

Micro and a macro level.

There really is that complete void in the market for a concept like ours and for our higher end.

Kind of dominantly positioned in assorted home business and in the U.S. retails a lot.

More uniquely developed and especially in in all of Europe . So we just see the opportunity is so significant that fragmentation.

In in our marketplace in Europe .

He is exponentially greater than the fragmentation in North America.

And we it hit us.

Gotcha several months ago, we went to the Midland is not that these onshore but the.

That is salon show in Milan.

Chose it would generally be commercial.

Attendees and.

Maybe to be attendees are attended really by the open public and almost act like a pop up store.

And it kind of.

Did back and looked at it and I said Wow. This is this is interesting there is 500000 people here.

Shopping a commercial show it would be to give you a comparison it would be like RH didnt have any stores open daily in America, and we popped up with the Big store in New York City. Once a year and 500000 people came you know theres no way youre going to get the whole market, but it was really a guy not just a business to business kind of environment. It was a it was a consumer kind of interface and with the business not in a typical kind of retail environment and so it was it just opened our eyes and and again, we just got from it got back from another trip and we were at through Europe and.

Dealing with the actual potential locations that we've got multiple we don't have too many really good options and the hard part is going to be about.

Which ones to say no to.

And which ones to say, yes to and the other thing I'd I'd say.

As I get to more thanks.

Is is that.

We have two in North America, I think what people don't realize is we have to drag kind of are you know.

Our.

I hate to say ugly past for forward with us, but in many ways. It was I believe you picked up.

Anybody picked up an 86 page catalog with a box of Oxiclean laundry detergent that I carry randomized in my.

In my bag to kind of show people like where we came from.

Yeah, we don't have to drag the path forward. We have so many people in America, you say, where do you work what do you do and sale restoration hardware ago I bought.

It's interesting knickknack there.

They havent shop from us for 10 years, or 20 years, and and whatnot and so we don't have to create a forced reconsideration of our brand.

We get to make a completely new impression and if you thought about going into a market I mean, it's still today most people just where we live in the San Francisco Bay area. There is no new expression of our brand in most major markets. There is not a new impression of restoration hardware, we have an old legacy store from 25 years ago right. That's that's the impression of the brand and and so here I mean, I I mean people here and they vary in wholesale what are you doing work for our age.

Oh gosh I've been to your flagship store in the quarter Modera or I've seen your flagship store in San Francisco, our store in San Francisco's 4500 square feet.

Our storing quarter, but areas like 6500 square feet and like I have got one none of us not not really our flagship store and sometimes people ask me also do you work at that flagship store and I go now no one at work there.

[laughter] felt that.

Go there now and then but that really no. One is still in America. It may two two things one it helped me see like in America. There's so many markets where people just don't really understand we're doing because they can't see our assortment right and this is a visual business right. It's not an intellectual business retail is that first and foremost a visual business. If people don't like what they see they don't even begin to start to intellectualized and think about whether they should buy it or whether they like it or are not right people don't walk up to.

Things that are.

Kind of.

Visually not appealing to them and take another step.

So today, we're visually trapped.

In so many markets in America.

2025 years ago, and that's what people see unless they happen to get one of our source books are they happen to somehow be to go online, but even if you go online is only one dimensional experience you have to click the website too many times to kind of see it and get it and understand the depth and breadth of assortment or the.

The level of services and experiences that we can that we can offer so.

So that's that's a big piece I'd say in Europe .

In the rest of the world, we get to make an incredible first impression and when you when you see what we're gonna do when we finally choose which of these locations we will not in what we're going to do I think it John dropping I you know I mean, we seriously we are sitting around thinking his team like we opened New York.

So the next area. She is looking to be smiling right now because we are sitting there, yes area, I, DP, and Dave and Jack and all of US were there and.

We're like.

And how do we talk this week.

Your goal when we open New York City like Wow, We we did a good job here and what now what do we do now it gets like when.

The movie I used to watch with my kids.

Finding nemo right, if you've ever seen finding Nemo with your kids and baby as kids watch that 100 times, but the fish try to get out of the fish tank and figure out how to get into a plastic bag and get out on the dock and then they jump into the ocean, but they are still in the plastic bag and they look at each other and they go now what we had one of those now what moment Hannah.

We just got back from Europe , and and saw some things that.

Are going to make New York look like.

Yesterday's news seriously I mean incredible so as opportunity to make a first impression and to disrupt the market. We're trying to disrupt the market today in America, we've been disrupting the market in some ways disrupting the market, creating a new market, we've been trying to make create a new market with old physical presences.

Like that's kind of Crazy you think about it we had these old physical presence that we've been able to create a new market and we're going to coordinate era.

When I joined the company 18 years ago, the Karma their store did $2.5 million and now does $20 million right and so on.

When I joined the company in New York that $3.9 million now, it's tracking to do with 114 million hundred 12 million something like that so.

And you know that that's kind of a really hard thing to do to kind of show up looking one way and then try to get people to reconsider you right when they've already judged view and in the rest of the world. We don't we're not kind of dragging that past forward with us we don't have to kind of have them reconsidering I mean, we get to make an entirely new first impression.

But then the other headline see that that I think people can Miss most you know theres been a lot of if you look at history of retailers going internationally.

For a long time, a lot of retailers didn't have a lot of success internationally. Even today most people get massively de de leveraged when they when they go out in the role internationally and look at the cost and the returns that sometimes get it.

Turned down it.

It's generally because it's not that it's not that the rest of world is underdeveloped in retail there just underdeveloped in retail in certain categories. If you or someone like home depot and you go international there's like someone's done at home Depot light concept if you're.

If you're a discount or someone they've got discount stores internationally, they've got all kinds of businesses. They don't have a business like ours internationally, there's nothing like us internationally.

But but but the other the other point the ties into that is yes.

The potential for a business when you are selling commodities versus selling proprietary product is massively different so.

There's not too many at American retailers, where 75% of their business is outside the United States. When they are fully penetrated in the United States LVMH caring or Mays, you know all the luxury brands right, where we're kind of evolving in positioning our brand to be like 75% of their business is outside the United States right. So if you think about the right road map to look like to look at and how to kind of correctly dimensionalize. The opportunity you really have to look at not the mass market you will totally missed it.

Right, it's like looking at home sales and looking at total home sales that are affected by all kinds of units of homes that are two to 400 or 500 $600000 that's not our customer.

It's like someone is trying to sell me digital advertising.

Not too long ago, and saying like why aren't you buying the words sofa why aren't you buying the word couch bath hardware actually 90.

6% of the World can't afford my Sofa My Couch your my bad Bath hardware, the like putting my store.

In the middle of the city that was massively populated with people that can afford my goods you wouldn't do that right.

And so.

When when you look at that kind of that the pattern of the luxury businesses.

You know there is a lot of wealthy people and a lot of people and wealthy people spend multiple times X mentioned more in the home and so so we think long term I mean now that we've spent time thinking deeply about this right getting into it it's at a detailed level being.

Boots on the ground walking street's walking stores looking at it really from a customer's point of view.

In in the cities in the countries and talking to customers and talking to people that shop.

I think that the opportunity internationally is probably.

Could be three to Fourx, what we do in North America.

So that's how we think about im sorry. This is a really long answer but you haven't to catch me just coming back from a trip we landed Sunday night.

Yeah, we've been doing recaps on this.

We just think the opportunities huge and and the other thing is it's from a growth opportunity today, if we if we go to <unk>.

Kind of.

Got transformer store from a legacy gallery to it to a.

New design Gallery, we've got an opportunity to.

Doubled the business at the retail level in a market and then get a lift in the in the direct side of the business.

So if you take a $15 million gallery, you can go to $30 million and then you take the other.

$15 million in the market and lifted tenant 20% you can get another $2 million to $3 million right. So thats, how you think about it. So if you take like a market that was doing.

15 at retail 15, a direct and the retail doubled to 30 and the direct lifts by 10% to 20%. So list by 1.5 to 3 million. So say you get the upside on on both ends you're picking up 15, and three are picking up 18 million, but the real piece of that you really go at retail you go from 15 to 30, right and direct goes from 15.

Two to 18, so you really have a $50 million pickup right not an $18 million pickup and then if you kind of just think about think about going into.

The United Kingdom.

For example, if you just look at the data and you look at the numbers there's there's.

68 million people in the United Kingdom, with a Democratic profile I'd stick with it with a demographic profile and and wealth profile that kind of looks like California that not too different here there right.

And London, It looks a lot like New York, you seek it or or.

Southern California with it.

Secondary piece in it.

Kind of a little bit more fragmented than it's not really the next San Francisco, but 68 million people look pretty kind of similar demographic profile, California has.

40 million people, we do.

$450 million in California, and we only have one new stores, it's not even the full big store right. So when California, when we when we transform the real estate in California, it's going to be at like it.

And in a $7 million to $800 million market when it's at full maturity.

When each of that each the galleries has opened three years and expand the assortment. So so you say like California is like $700 million with 40 million people will 68 million people is was that 60% something like that more than.

Than that so you can take like potential and market 700 million.

600 million 700 million times, 60% is like a 1.1 point 1 billion dollar opportunity.

Like we don't have opportunities like that North America, we're going to go into the UK and have a 1.1 billion dollar opportunity with that demographic and then go in fresh not drag you know the oxytrol or oxiclean laundry detergent into the market with us and open.

Galleries, it could be our best and finest work ever.

Like you can go into a market and $250 million overnight.

Yes so.

We don't have that kind of growth potential in North America with a lot we doubled the company and get to 5 billion North America, we think today.

But now were looking at the landscape and saying Theres, another $15 billion to go get and and and it and you're not you're not kind of getting a lift on on the piece you've already got you're going after an entirely new market. So it's it's a huge opportunity.

A huge opportunity and.

And we get to go in with all our best thinking not dragging.

Old thinking from legacy stores, not dragging old supply chain infrastructure is not dragging any old technology, not dragging any bad habits, we get to go in with all our best work. So we're super excited about it.

Sorry, Thank you Gary.

Okay got it Okay Theres no time for other question sorry.

[laughter].

Thank you guys.

Your next question comes from Michael Lasser with.

Line is open.

Good evening. Thanks, a lot for taking my question is Theres two questions on on whats implied in the fourth quarter. So we assume that half of the growth in the second quarter came from the increases in the outlets and increases in the in the <unk> are each New York store. So is the difference between the 10%.

Sales growth recognizing that there are some nuances with what you are lapping from the year ago period, but is the difference between the 10% sales growth you experienced in the second quarter in the five to six that you're implying for the fourth quarter basically that you won't get the as significant a contribution from those two sources the growth in New York at the gross outlets in the fourth quarter.

You are very good with math.

Well I mean, it really you've got you've got the outlet you know we've been burning through the inventory we closed a 500000 square foot distribution center that was sitting on reverse logistics is part of we talked about I think for the last 18 months 24 months out we are kind of redesigning the whole reverse logistics outlet business and.

Part of that was don't hold outlet inventory.

And close facility in the last thing you want to do is like store.

Yes, second quality goods a lot of retailers do you know.

And a lot of retailers are sitting out there with liabilities not not not moving through inventory or markdowns and so we wanted to be make it almost impossible in our company to sit on bad quality goods, because they're like tomatoes at the grocery store I mean, they just don't get better with time, they've really down they don't turn into and peaks in our in our lifetime. So so we close that facility, we burned down those goods that gave us those where that goes but about a point little little more than a point.

You know that that those goods, you're burning down outlet inventories or do we have today versus 18 months ago, 75% with outlet inventory something like that.

And so I said that channels now really clean we've you know we swallow does that margin I mean, a lot of people are like Wow is there more margin to expand here well I mean, the outlets where massive dragging in the first half of the year. So we've got lots of margin opportunity and expansion from that point of view for those for those people that care about earnings growth I mean might only be me and a few others, but.

But but the earnings growth opportunity based on lapping that burn down of the outlet inventory.

And we got rid of that distribution center, those holding a bunch stuff that we didnt need so.

So that's that's that.

That's that's a piece of it and then New York REIT opened really big in the recycling New York and then that the timing of the new stores. This year versus the timing of the new stores last year kind of gives us a little kind of.

Temporal trough, if you will like we in tilt the stores. We're opening this year come on and then what we've got is we had a different dynamic we not only have the stores coming on a little later that were going to open in the second half this year, but we have stores that we thought we were going to open in 2019 that are going to now open.

The first and second quarter of 2020, and they're going to open on top of no openings right. So in the first half of this year, we had no openings great correct. How many openings do we think we have in the first half next year.

What do we have like three three openings right. So you've got these three that are opening later than you've got three that are.

Opening on top and so you're going to get just like you see a little trough, you're going to see a spike in the first half next year and you'll see our revenues kind of kick back up.

And grow and then.

You know we.

Start to kind of kick back up and then then really when we start to kick up is when you get in Q3 and Q4 of next year.

You can have we have some some periods, where we have up to seven eight new stores on top of two comparatively year over year right. So if you look at it right now as we go into kind of Q3.

In early Q4, we had we.

We have a little bit of Troughed and timing and then it kicks right back up so you know.

Yes, maybe that helps to hedge funds that have.

Yes, two more quick questions on that.

One of them.

Atlanta speaking.

Is because you won't get such a contribution or is meaningful contribution from two the growth from the outlets Thats why gross margins are expected to sharply inflect in the fourth quarter.

In the the other question is just now that you've had time, which.

RH, Atlanta, Denver or each.

Tampa those type of galleries had been in the market for quite some time can you give us a sense for the shape of the of the growth profile many years leader and how the returns for those for those.

The classic initial openings are trending think oh, yeah. The returns are fantastic and generally our bigger stores or growth growing faster than our smaller stores.

And.

But but some of them right. If you know market to market you have different timing dynamics based on how housing markets kind of more localized regionalized economies are doing but yes. There's there's also a whole nother layer of opportunity with all of those kind of first and second generation galleries as they don't have hospitality.

So we're looking at adding restaurants to the rooftop in Denver.

Billy Tom and Bob you top and might be on the phone, yes, guys I'm going to ask you for tenant allowance to build the restaurants. So and you want you want these restaurants, but Denver and Tampa, both can have rooftop restaurants were when we're massively happy all those all those galleries that you've you've mentioned in all of our design galleries throw up massive cash right and.

You know that the cash return profiles in the earnings return profiles on all of our Big galleries, where we're extremely happy with right. We don't have one that we thought Oh look that was a mistake.

But we now think we can add hospitality, which not only adds that revenue. It hospitality lists the overall revenue of a gallery you know so so we've got an opportunity to go back to a lot of the first generation galleries, and I think I think almost all of them except for the smaller ones.

Houston can't fit it or maybe.

Greenwich, Connecticut, a few a few others, but all the ones you mentioned, we actually have already have conceptual designs for the restaurants in Atlanta, Tampa and Denver and.

And so we've got to know whole another layer of growth that we can go back and get in those markets.

But that yet, but it looks like those are the best positioned retail businesses. There is no one.

I mean go into Denver go into Tampa go into Atlanta.

And see if anybody's opened that looks like a competitor to our age.

It's going to be a long time before you see anybody take make place that kind of that so I think those those galleries, we'll continue to take market share over time as customers find them as people kind of cycle around into their buying cycle and their time to they either bought a new home remodeled the home or three furnishing their home, which is a cycle of anywhere from 5% to 20 years, what's their time to go shop, and you come more top of mind in the market because of these physical presence presences.

We're just going to continue to be.

Relatively disruptive and take market share and I don't see anybody coming thats.

Again to make that kind of.

Bad place to kind of bet that don't have the assortment don't have the merchandising finesse. We do don't have the creative conceptualization design or develop buildings and experiences like that at least I haven't seen it I mean, the wayfair stores sure doesn't look like that.

That opened in Massachusetts so.

And Michael as it relates to your gross margin question certainly outlet has an impact and then you may recall, we we plan to exit the holiday business. So that business overall has a lower margin in Q4. So we will get the benefit of not about not having those low margin sales. So that's another that's another pick up for Q4 I think the other thing that's the tone of the questions is all kind of based on our guidance right and I would just remind everyone to think about what was our original guidance in Q1, and what happened what was our regional guidance in Q2 and what happened.

There might be a pattern.

Hi.

Thank you very much that's helpful.

Your next question comes from Oliver Chen with Cowen Your line is open.

Hi, Thank you inventory management you made nice progress then what are your thoughts on a multiyear basis as you look to some of the newer concepts and you manage Brett universe is that versus a surprise and delight in terms of inventory management and working capital on a multiyear basis and then as you think about it looks like you've also made really nice progress with your with your home delivery and fulfillment would love your thoughts on what inning, you are there and and what's next in terms of just increasing the the customer satisfaction and the vertical integration there. Thank you.

Yeah. This is that first of all is a very good what we'd call a multi dimensional fully integrated question a lot of depth and breadth, but a lot of focus so hi. It. Good one could this one could take a while but I think that it's exactly what we think about right like <unk>.

As you build any business any brand or you know how do you how do you dimensionalize it without diluting. It you know how do you. How do you elevated are you know versus just expand it right because generally when you expand something you know a lot of time to it kind of gets worse versus just thinking about elevating when people are usually are trying to be additive. They're generally dilutive when people tried to do more are they mostly do less and that's very true with businesses. So you have to be super disciplined and go through really just the absolute right. You know filters I mean, one of the overall arching filters. We use here is that we say.

Everything that we do have to render everything else that we do.

More rather than less valuable most of the time when people do new things that it actually creates distractions and and it it renders other things less valuable and.

I it it's really hard it's really hard honestly to kind of use those kind of filters and and and you know just like you know you you asked the beautiful question as a kind of it was multi dimensional yet fully integrated right. It wasn't it's like when brand start branching out and adding other brands a lot of times, unless you're unless you're you've built such a kind of.

You know clear and.

Concise platform and methodology like Bernardo is built with LVMH I mean to me that's like one of the one of the hardest ones, but he's made it looks simple because he's got so many brands.

Different countries different cultures different people woven together in such an integrated way with such great harmony around luxury right.

Businesses and from alcohol to watches to apparel to Belmond and.

Hotels and trains and so on and so forth, but just.

Beautifully thought about you know and beautifully integrated yet still kind of isolated in brand dimensional brand dimension and so on and so forth and.

But most of time businesses the downfalls become.

In trying to get bigger and the pressure on growth usually leads people to to isolation and fragmentation and and what happens is that isolation in fragmentation you'd start doing completely different businesses in completely different brands.

But the problem is you can't split the people that were all made of lots of Adams anything and sales, but you can't you can split and Adam.

Technically and scientifically you can't do that with a human they won't respond very well.

If you try to break down their cells. So you only have so much talent in an organization you only have.

Yes, so many truly gifted people the key is how do you.

Elevate and amplify those people and not distract and dilute their their efforts and their talent and and so you have to be really really disciplined about building your thoughts and ideas in a completely integrated way versus an isolated way right when people work in isolation.

You get a lot of people working really really hard and all the wrong things not because they think they are working on the wrong things. It's just that they are in isolation and they don't have all the information.

The flow and you just have a lot of discord versus harmony.

So one of the breakthrough is I think we had in one of the best ideas, we've made and.

<unk> is when we were working for five years on a completely separate brands I was kind of.

Following an old path from from what I did before and.

Worked on West Elm for three years, when it launched right when I left Williams Sonoma.

And.

Great Great business, Great brand and I think we've got a really great model right and built a great platform with a lot of leverage. The problem is every business is really pretty different and and I think no differently than the gap that now wants to break apart right no differently than.

Limited brands rate, which weve built kind of like the gap with kind of multi brand multi dimension and kind of ramped up but then they got all kind of diluted in.

And I think answers isolation.

And and not integration Anda.

You have discord and you don't have harmony and so you can't have true focus in situations like business like that same same thing here, we had a whole team for five years on it we spent 25 or $30 million building a brand that honestly I wish I could go sell it we can we can anybody wants to come here.

It's not still set up in a room, we had it will set up we had we had samples we had everything we thought we could kind of go underneath that our age and build a whole kind of nother brand into the business hit another market and then we talked about time allocation right, we talked about human capital and how we're going to allocate our time and when you really go through human capital allocation, which you realize.

And what we always say I was thinking it look weak.

We can always raise more money I don't know how to raise more time.

Right like we can make a mistake financially and we can kind of clean up that mass raise some more money you know, it's always ways to get capital and and so so we only say human capital is exponentially more valuable than financial capital because you can't get the time back right and anybody says they can save you time is like I can't I don't know how you save time, either spend time or waste time, and so how you allocate your human capital. The company. So important as we were going through a process and a debate on what was next where we're going to focus our time.

Aerie sitting next to me he said to me.

Gary you know right like she is like if I could do her voice the way she would just chill kick me here, if I say this but.

So like how hard it is how hard it has been to get our age to where it is and.

How do we build.

How do we build the next brand.

There's it's an isolated and we can't build and integration.

What we can do in integration is we can.

Yes, kind of multi dimensionalize RH and weve it together in a very.

In a very integrated way and create a lot of harmony and where everything that we do in our age will render the rest of our age more valuable but everything that we would try to do outside our site of our age if we're allocating human capital towards that it's actually going to render RH last less valuable because you only have so many great resources anywhere in an organization right and so much talent so much expertise and.

Some people that have the scar tissue from getting knocked down 10 times and giving up 11.

And so the ability to truly allocate human capital correctly is we think is the winning formula and we think doing that in a focused way and.

We make we are debating here, whether we do.

A whole investor day.

This fall sometime in October so maybe news that comes on that and if theres not its only because we are kind of too busy working not because anything is wrong, but.

But but we've got a I think a really compelling.

Like your question very clear.

Very multidimensional yet beautifully integrated vision of where this business can go and we believe it can be one of the great ecosystems of all time and if you think about the ecost the great ecosystems.

I think Apple built one of the great ecosystems of all time once consumers bought into that brand in that ecosystem. They had you on so many levels. They beautifully integrated people almost forget that we used to carry around a camera weeks to carry around a video.

Thing not too long at ice that video my little twin girls with a little video camera.

We used to we state carry around a written a phone waste to carry around something that where the call walkman.

Music thing you had all these kind of separate things an apple really beautifully integrated all these disparate things into into kind of an ecosystem.

Businesses and products that really changed the way people shop, and created an entirely new market and everything they did rendered everything else that they did more valuable and Disney has created one of the great ecosystems of history right I mean, everything that they do renders others everything else if they do that the characters they developed and the stories they tell in the movies, they make and how it would how that integrates and happens in that theme parks and and how it gets communicated and how it gets licensed into the toy business and divisions and and it's all beautifully integrated.

And.

And that's why I think they've stood the test of time and have performed so well will we happened to have kind of exist in a in a kind of category of home goods that relates to the biggest.

Part of the economy, which is the housing market right and so if you stand back and think about.

Kind of the bigger picture and what you might be able to build with the RH brand with the head start that we have and what an ecosystem that extends all the way through the actual largest part of the economy right and.

And think about like getting small percentages of the biggest market in the world like we at some point they can't get too excited and I'll talk about the whole thing and then then.

Anyway its.

I think we can build one of the great ecosystems of history and one of the most focused integrated businesses that anybody has ever seen no different than.

You know our galleries in physical locations render our products more valuable our interior design business right embedding that into our galleries renders our product and our galleries more valuable.

Our our hospitality business beautifully integrated into our galleries and into our experiences renders our gallery renders our products renders our experience even renders interior design more valuable because they can sit down and have a lynch catered into a room and create a beautiful meeting setting and fee to customers. So they don't get hungry and and so it's just you know thinking about weaving businesses together.

Really.

Kind of really thoughtful way that that they were they all amplify each other and they all render each other more valuable so.

We think pretty deeply about those things and I think what we're most excited about is I think we we believe we can build one of the most admired brands in the world and from a financial point of view, we believe when we unveiled this thinking it will be pointed and will have the opportunity to create a entirely new market like a disney like an apple right and be one of those brands that.

You know that really stands the test of time for generations.

Gary that's that's really helpful just to follow up than our.

Final question was as you do think about.

Global in your earlier comments what are your thoughts about.

The flywheel and network effect as well as sequencing the growth and thinking about supply chain awareness build can also be very difficult for us brands historically.

And how how might you approach.

Lot of the DNA of your merchandise is Belgian linen and that that a static I'm just curious about how that will translate.

Globally as you think about the product matrix.

Yes, yes, I think when we kind of have to look at it country by country.

I think the world is getting smaller not bigger.

Right and that's what the Internet's doing thats what.

Social media and and networks and connections are doing.

My My my gross now turned 17, but they have had friends in multiple countries.

Through technology for years, now that they've never met but they.

Look at their ability to cure rate and see things and react to trends and know about brands.

It's yeah, it's completely different so.

I don't think.

The ideas of the future don't exist in the past the clues do right theres dots in the past you can.

Kind of reference in the future, but you really have to kind of think about where it's going and not necessarily where it's been.

And.

And as we look forward and think about where the world is going.

And how brands can evolve in the world of.

Tomorrow.

We think that the brands are going to be more valuable not less valuable.

That that the world is so cluttered with.

With choices with information with with really bad visuals right I mean.

For the most part the Internet is a really good platform like we look I joked around because of consulting company called this feeble right. So.

I've seen in my Mom East always tell me if you don't stand up for yourself finding no one else will so yes, we have a lot of people take potshots at its because we say its not about the internet. It's you know it's it's about the.

The fact that the reach.

Decay of retailers because people haven't really done anything to evolve retail environments retail stores, it's not that we don't believe in the Internet, we've got to over $1 billion business, It's done online.

But but really.

The.

What were doing physically in the world I really believe people are going to look back in 20 years, and 30 years and think that this.

He is going to be one of the relevant stories of how to build a brand.

The you know that there's a lot to kind of follow ship in kind of humanity right someone heads in a direction and have some successor then everybody starts building the thesis around it and then you have consulting companies talking about that success and then Youve got everybody kind of following the same direction, whether it's reengineering or.

Yes, it used to be multichannel retailing, then it was omni channel retailing than it was this and that and then everything now its customer centrist assist centricity and put the customer in the middle or build everything around the customer well that's interesting.

The customer doesn't know what they want unless you're selling dog food or toilet paper and stuff like that but if you're trying to.

Lead customers and create brands you.

You better not be using focus groups because that's a good way to go backwards and usually you know all the dying brand are the ones who use the focus groups.

And Ben that the living brand, we say, we say great great brands don't Chase customers customers Chase, great brands right and.

And I think we're building a great brand and when we look forward and we think about international and we think about what we're doing and we think about what we're doing with the the product assortment and how we're going to beautifully integrate that and how our brand is going to be more focused more powerful more clear.

Even though it's got more dimension to it.

And it's Rick it will be richer.

But it won't have discord it it will exponentially more harmony right like you think about our each New York.

We basically tripled the size of our New York Gallery think about what retailers in the world could take their store size and triple it and actually have it be more focused more clear more beautiful more harmony less discord, that's really hard to do then throw a restaurant into it then through through a brief the bar and Hawaiian terrace into it then throw it.

Embedded.

An interior design business into it right you are adding complexity, but yet at the same time, you're creating clarity that's super Super hard so when I look forward and I think about over the next couple of years is we're going to take the first few baby steps into.

Kind of Europe , first and wherever second thing, we will figure out how to kind of sequence. This we've got a lot of ideas were still debating.

I think we're going to enter these markets with such.

Intention such clarity such purpose.

With such a clear and compelling brand that I think we're going to break through the clutter and.

And create a new market I think there's people, we're going to get people to shop for the home to redesign their homes that arent, even thinking about it I mean, that's how we built the business there's people that walk in to our galleries every single day.

That were maybe thinking about their home or maybe they decided to kind of walk in but they see such a beautiful inspirational space and they see product.

Displayed maybe the way they never would think about it in a home and they become inspired and then they just might decide hey look lets forget about the Caribbean or Hawaiian vacation. This year lets save that money and redo our living room are completely redesigned our backyard and and that's where you start to create a new market. So.

I think its awareness is really difficult for us brands to build when you're selling commodities right. If you're you're going in and you're now that you know the fifth pet store in Europe , or you know you're going to come in and sell Tvs or you're going to come in and sell.

Tools or lumber or are you know your discounter got it you know there's there they got good people at all those businesses internationally. They don't have anybody like us out there there's more people that are closer to our business here in the US we think we're massively differentiated here, but there is other people that sell furniture home furnishings in a lifestyle kind of approach.

That aren't half bad.

Over there, it's super mom and pop and I just think that.

It's going to be a very different.

For us versus you can't compare the way, we're going to do it versus other businesses again like the housing market spite like it'd be like counting the units.

Homes that 500000 below are counting the the homes that are 5 million and a but there is a lot less units, but theres a lot more dollars right and.

And so.

The answer is in kind of the subtleties, but I think I think we're going to enter a market entered these markets with more differentiation and uniqueness as a new brand entering a re entering a new country in it from a retail.

Consumer point of view.

Then the history of the World.

I think thats going to be that much differentiation of how our h. introduces.

Our our goods in our category.

The kind of differentiation that no one's ever seen.

Like how different is our each new York than every other home business in New York City.

How different is it.

It's not close we'll then now take the next closest people. The next closest 10 people and take them out of New York, then how different it is it.

Exponentially different those next closest 10 people don't exist internationally.

But that makes sense.

It makes sense to us so yes very helpful sounds like complexity and also balance. Thank you best regards.

Yep.

Your next question comes from Zack.

Wells Fargo. Your line is open.

Hey, good afternoon.

Gary It looks like you are now on track for about 240 basis points of operating margin improvement. This year curious if we could bridge the gap here as you approach that mid teens or higher target over time, how much of sales labor leverage whats going and whats going forward would you attribute to operating initiatives things like home delivery and reversed a logistics and as you reconcile those maybe you could talk through the levers that you view as more near term one to two year opportunities compares to those opportunities may be further out.

You know I, Yeah, I don't know, if we can kind of get it.

Prepared right now to lay them out all granularly, but I think you can pick up the last press release, we did and look at the last letter I wrote I think I'd like listed five kind of key points that were worth somewhere between four and 600 basis points more operating.

Operating margin I think as we look at it today, we click this thing up from low to mid teens to mid to high teens operating margins and.

We've got a really clear line of sight to there I think it's.

20 to 20 plus operating margins.

Look you know.

Very doable to us as we look out over the long term again think about it start with.

We're from a design gallery rollout were one third penetrated so to take two thirds of the market put these new disruptive design galleries and the rest of the market lift the sales to $5 billion think about the next generation design galleries are going to take a fraction of the capital.

They are going to have a fraction of the depreciation they're going to have better rent structures.

So the whole occupancy piece of the business has it has a lot of opportunity for leverage.

We don't need to build new.

Inventory teams or merchandising teams are.

Overhead teams to support.

Bigger stores right, we need to make investments at the at the gallery level, we need to make investments in hospitality at the local level and so on and so forth to run run those businesses, but you think about adding if you could just like today right. We don't really need I don't think one more person at the headquarters level like if we just had all big galleries out in the market today, we wouldn't have to add a person corporately. So take our company from 2.7 billion or.

Yes, it and take it to 5 billion and think about what advertising looks like what SGN, a looks like what occupancy looks like if those new galleries have a completely different structure from rent from depreciation perspective from return on invested capital perspective, we don't we didnt like put out that we can be in excess of 50% ROI see as like that's a dream like we have a five year plan that shows it and its just and it's a pretty conservative five year plan right. This this is going to be like a cash machine like what we're building and the structure and the model that we built.

And then if you look at the supply chain we've made some.

Big moves right. We've we've simplified this thing and been able to focus and comparatively. It's if we are if we had inventory turns today that we had just three or four years ago. Three years ago, we would have $500 million more inventory in our system. Today. So we basically have taken out $500 million of inventory in three years, three and a half years something like that.

At like.

That was just like looking under the Hood.

I don't want to.

Make it sound that simple, but we attracted new talent into the company Weve got you'll hear more about some of the things that we're doing as we are coming but we think there's lots of opportunity.

Lots of ways to amplify things with with with technology and systems.

And what I always say, we stay inside our company that systems don't simplify systems amplify right people simplify you can take a system and put it on a bad platform. You are you just going to make that bad platform go faster.

You are going to make the outcome Blake you are going to amplify bad right insist systems can make a flywheel go faster.

They're not the flywheel in a lot of cases, yet first designed the business process and.

And the methodology and Architected right and then you can amplify it and so we're architecting things and then we're going to be in the process of amplifying what we've Architected and said, we think theres exponential opportunities to all of that through simplification and and clarity and removing complexity right and creating harmony.

So.

Home delivery, we've just gotten started like just gotten started and.

We've got an incredible new leader that can I talk about yet or when.

I can you your deals that everything's good okay. So I can talk about it might have to take the whole conference call. It's like four questions today.

But.

Fernando Garcia's joined us as the president of of furniture operations on home delivery and Fernando is a.

Young man compared to me.

But.

That.

It came to America with the dream with $5 in his pocket and yes.

What is your for your first job was in a kmart right, claiming and decided that an opportunity to.

To deliver furniture and through that opportunity to deliver furniture figured out how to save enough money bought a truck and off the back of one truck built a company that span 26 states and controlled 550 trucks and drivers.

And built one of the best logistics companies.

In America and just.

We got a chance to meet Fernand who is one of our providers.

And.

We've found that we were very much aligned in our vision and our values and what we wanted to do and the Dent we wanted to make in the universe and Fernando said look I think I can help you guys in the part of it and finance has just completed selling his company and joining our company full time and.

Has been working with this part time, which his part time looks like everybody else is full time, so I can't imagine what his full time looks like but.

But the opportunities he sees because he's actually built it from the ground up and he knows the model and he knows it.

In he knows.

How to take the complexity of the of a business like that and simplify it and as you know.

Intellect drive and desire and what he can do to help us take the learnings and what you see when you are really at the point of contact with the customer in the home and see those issues and actually architect and engineer that all the way back to our factories right, whether it's the design of the products, whether it's the packaging of products whether way, it's being handled in a distribution center or whether it should even go through distribution center.

What how the truck is designed how the cabins design.

How you handle things in reverse logistics, how you look at the entire transportation network what are all those opportunities I mean.

You know that the heat he came when we first met.

He told me.

Like I have been trying to meet with you for three years, but it couldn't get a meeting with you because I I think I know, what you need any and I said will really what.

And I didn't even know.

We were doing a meeting here and I was asking some questions on metrics and nobody in the room, new the numbers and I have the numbers the tip of the tongue and I said, well somebody and the company has got to know there is numbers can we get those numbers right now can we call somebody and they said well Fernando will know the numbers and I said I think it Fernando worked for us they called for an AD for now gets on a conference call and I'm. This guys like like Bang Bang Bang on every metric every detail every input and output and and I'm like I write on a piece of paper.

We're in a room, there's price 20 person room I go we should promote him and then he they said.

He worked they write a note back he works for EFT. He is one of our providers and I go up Okay and then.

And then I write another piece of paper I said, we should hire him and I hold that up in the in the room and then they go he owns the company.

I think there were screened he owns that company I'm like.

Oh <expletive> and I'm thinking maybe we should buy his company, but it's but.

But we we didnt do that Fernando had opportunities to sell his company did quite well as American Dream will write a book soon where you'll be reading about this guy.

And.

But but he when I sit down he actually flew out the next weekend.

That offered to come out just help us think through the problems. We are trying to solve and we got to spend a few days together in one on one with them and I said well you know what.

Really motivates you and he said well just being here and talking to you guys in the snack because I've been trying to get a meeting with you for three years and have been able to get in the door and goes I've got some ideas I think I know what you need to get a little presentation here, if you'd like to see and I go.

Okay any pulls out a whole beautifully laid out powerpoint on a complete strategy that we ought to pursue that was founded to us exactly like what we ought to be pursuing and he said look I think I've got an opportunity to.

Yes, So my company and join your company and.

And I think we can we can make a huge difference together and.

And so here is and I can tell you is first finding a 30 days.

Yes, when we said what we said 15 to 20 million or 15 to 30 million to two to 2015 to 20 million, which means it's always more than we tell you right. So you know, but I know his first couple of months, finding huge opportunities to simplify and and massive savings and he didnt come here and I think he was going to find it on the first two to three months I guarantee you that so.

Yes, as we think theres huge opportunities and we're just getting warmed up here on so many levels and again I mean.

Take take whatever we're doing here and whatever you think we might do here over the next five or seven years, and then kind of four exit and that's with the global opportunity looks like we.

Is that is that the global opportunity of this dimension of our age when we unveiled the entire ecosystem.

You can like.

10 X that as though its.

We're just do more excited than we've ever been about the future and I know everybody wants to kind of get into the weeds and.

The next quarter and the guidance and so on and so forth and we look we all know business that theres some form of pattern recognition, that's important and relevant and.

In short term information that's key in.

Yes, but theres pattern recognition here that you should look at and.

And there's massive opportunities ahead of us in the future and.

But there's there's exponential value creation, that's going to come we point out I tell people.

10 years ago, LVMH stock was at $39 a share right 10 years later it hit 390.

I think people are going to look at.

10 years ago, our H was.

Whatever its trading that today $150 a share $160 share.

10 years from now the stock could be $1600 a share and.

And we have.

Lines the sites to stuff like that so yes, so we're not going to get too caught up on the next quarter or this guide or did we.

If we go out there and guide really aggressive I don't know do we guide aggressive in Q2 would happen in Q2 did we guide aggressive in Q1 would have into Q1.

I think all this and were going to guide too aggressive in Q3 and Q4 now.

Thanks for that Carrie welcome and welcome aboard Fernando I appreciate the time guys.

Yes, you can say high they're pretty front end hi, guys. Thank you.

Just in case, if that is making you up.

I don't know you're here.

Your next question comes from Brad Thomas with Keybanc Capital. Your line is open.

Hi, Thanks for taking the question.

Just to dovetail off of some of that opportunity on the delivery and.

First logistics side could you talk to that a little bit more about the outlet strategy and how many you think you'll have at the end of the year and what that May look like over two or three years and how that will fit into the business model.

Yes that that's not a.

We we I think we now have the inventories at a level, where there what kind of clean and moving and.

That in our mind the outlet ought to be like us really super simple flywheel right. The stuff that gets returned or Nick or damage. There I'd just spin I'm. We abandoned it was three four years ago, and we have x. actually the flip chart that we were mapping this thing out that three four years ago is exactly the same place I'm looking over it we actually made a joke last night as we were kind of going through some details and planning and and we said Hey look like Theres. The flip chart number the famous meeting where we realized that the slowest turning inventory and the company was the outlet which is like hard to believe right that should be the fastest turning part of the company because that inventory.

Really rotce quickly and you know and it's out of the box and if it gets handle multiple times.

So yeah, we've simplified it we've got it to.

And okay place exactly.

The dynamics of the future of the outlet the outlet is will be responsive to the changes and improvements we make to the entire business versus the business being responsive to the outlet, meaning that you. The outlet is that whole strategy is going to be is true should be triggered off a create rate right. That's driven by returns are damages or whats happening and all of that is triggered off.

Your quality or packaging your delivery experience your customer.

Experience and so theres all these things that all kind of weave together that are all app, absolutely actually completely integrated.

From.

From product ideation.

To presentation from.

Concept, all the way to customer and you've got to kind of see that whole piece and.

I understand all the pieces in integrated beautifully together and not play whack a mole what happens when organizations work in isolated way somebody makes an improvement over here and look how much money I saved over here and then they created.

One and a half times the cost somewhere else in the whole company goes backwards and say it takes it certain kind of people.

In a certain kind of culture to really work in a deeply collaborative way to build.

Really integrated methodology, where everything that you do renders everything that you else that you do more valuable and and just as we think about the brand we think about the operating platform and Anda.

Every every piece of our business right capital structure everything it's we take the same kind of kind of approach in view and and deep thinking about it so.

We again, we think that there's lots of opportunity exactly how many outlets stores and exactly where they should be we have a lot more to learn before we can really know theres a lot more kind of we sit inside our company that you have to listen learn and then lead in that order right. So all of US have to continue to do a lot more listening to get close to the details get close to the problems get close to the opportunities.

And learn and really learn and understand.

And then be able to lead the organization forward, we say inside our company that.

The smartest people in the company are those people closest to the customer and those of us that get farther and farther away from the customer usually get dumber and dumber, So which makes me the done this guy in the company by the way and the only way I can do my.

Do my job is to spend time listening and learn and then if I do those two things well I can actually lead.

Right and and we have a leadership culture here not a management culture, you don't need to really listen and lead to try to manage people 'cause you're just kind of a ranging in organizing the status quo, but if you want to lead people to a better outcome you really got to understand what the reality is today and can get the kind of key insights. It organizations will tell you what we do smart in what we do dumb.

Leaders have to listen so they can learn and then therefore lead.

And.

We've got a lot of listening to do and a lot of learning to do so we can lead and by the way you find out when you really build the culture like that you never stop you're never done.

You're just never done the opportunities get bigger and bigger and bigger and the dots connect faster and faster and faster and just when you thought like you've done something like our each New York and you say, how the Hell would we.

This took US 20 years of our life to get to this point, how the Hell will we ever do anything better than this and.

Like within a year, you see something that could be exponentially better and more exciting.

And and more valuable for me.

From an emotional value point of view from a strategic value point of view and from a financial value point of view.

That's great and if I could a follow up on the source books launching is that you have it here in the back half of the year.

Could could you talk a little bit about the new modern book, Ken and.

How you are continuing to grow that important mine for the business.

Yes, we think early stages I mean that was so thats been our big focus we went to the Salon show in Milan.

Really for the first time and spent a lot of time, there and we're able to kind of think see the market in a whole new way and.

And.

Think about modern.

In a whole new way. We modern was are we just got back from.

The maze on Dave Jay Show last week, we were in Paris for them is onto Ajay show and we were in the flea markets.

And.

In the big headline and takeaway for the team is how much bigger modern can be and how that is continuing to evolve and.

I joke around a lot of times people asked me so.

Where did trends come from and in our business site like they usually tell them the dead right and what happens is generations passed away.

Their belongings go into a state sales the stage sales feed the flea markets and antique markets the flea markets the antique markets become inspiration for that.

Reproduction markets, the reproduction markets or inspiration for that next level.

Broader markets higher end markets and then it gets into the the broader and mass markets and Thats kind of the evolution of home trends right. So the reason you've seen all this midcentury modern and.

All these products kind of develop you've had a couple of things like that you've had amplifiers years, but you've had.

All the people that were at home buying age is that where you were anywhere from 30 to 60 years old in the Fifty's and Sixty's.

Our kind of either aged out or died right and so their belongings went into the estate sales. They then went into the antique markets and flea markets and depending on how valuable they were and then they get picked up by the interior design market and then they feed the reproduction markets and so on and so forth right. The the antiques of.

Today, a lot of that one's kind of feed the the products of tomorrow.

And maybe I just gave an education to all my competitors, but that's kind of how it goes will you take few years to figure that out though so for your plan.

You got to go to a lot of flea markets and and go to a lot of.

Storage to figure out like that Thats, how it happens that's why I'm here.

But that.

And so the amplifiers to that and I think I talked a lot about this when when we launched modern is that you've got the these these other kind of things that have happened.

At the same time, you've had a move to modern architecture most of the major architectural.

Work, that's been done around the world has been contemporary and modern right from the Bilbao in Spain from 20 years ago, right and to Hudson yards to go to every major.

Okay every continent on Earth and look at the kind of that.

Greatest new architectural work like look at the Apple campus right. We got back we spent.

We spent a day it at foster and partners.

In London Norman Foster same is.

Famous from like incredibly or they did Apple campus and they do so they are doing some of the greatest work in the world, It's all contemporary and modern right and.

And then you look at the influences of the devices, we carry you say that.

Apple is kind of the champion of the move to kind of kind of.

Yes, taking taking technology and making it.

Yes, so beautifully designed right that they created a movement in their own they put a dent in universe from a modern design point of view and then the stores that they created.

And that the spaces that created so.

We think that.

We're in a long upward trend for modern now that that could make some people go Oh, my God classics going to go away.

Now thats not going to happen, because really architecture kind of drives statics and home.

Homebuying too so when we launched RH modern we had disappeared funny right, Dave when we remember that I think we were looking at modern and it's like we we launched modern to moderate was off to a great start and Dave and I were down looking at real estate and were in Santa Barbara right and we go to our gallery. This.

Gives low end of the day early evening and the whole team. They must have heard that we are going to be in town because like all the designers every we'd like we had so many people there we realized first if I only got like.

Who's doing the scheduling here, we have like a dozen people in the store and there is only a couple customers about seven.

Seven P.M. and Dave I walked in realized that they knew we were in town and everybody showed up and so we went up the stores get ready to close we had a meeting with them for about two hours three hours.

Walk the gallery, we just launched modern and we said so has the launch of modern doing and they kind of looked at US and then we looked at each other and knowing kind of 70 things and someone said so.

Have either have you been to Santa Barbara and we're going to go yeah. We've been here quite a few times and.

We're looking for gallery space and do Big New Beautiful Gallery here and they said, yes, but theres not a lot of modern architecture and Santa Barbara, It's all kind of classic in Spanish colonial and so on and so forth and.

So people are coming in and saying like to see how this looks really great, but I don't know how it fit in my home. So you have to respect the fact that architecture does drive design vernacular right and.

You're not going to see really kind of.

Hard straight edge modern goods inside probably.

Beautiful Montecito home in Santa Barbara.

Yeah, Theres got it otherwise, you'll have discard discord and not harmony right and so.

So, but as the world is changing if you look at the architectural movements you look at the Verticalization of cities and the movement back into cities and these high rises in these condos that are being developed and they are just generally almost all modern right. So thats going to drive a trend, but if you look at the data and you look at the.

The data around how many homes, our modern and how many classic homes. There are and you can take a classic home in a class a condo and you can remodel it and give it more contemporary point of view and and creative transitional environment, but it's not doesn't change overnight.

And but but we like where the trends going and.

And we also know that looked.

Classic.

And kind of updated traditional.

Look is.

Good to be here forever, because you're not going to bulldoze all the architecture in the world.

So, but when you think about market ice they tell the team think about a couple of things think about.

In our business think about who's dying and what they are leaving behind because it's going to probably started a trend.

Think about what's being built and what the design vernacular is and is there a trend that is happening and then look around that at everything that is existing and every piece of existing architecture is going to have in it.

It's going to have an influence on the potential and possibilities in our business in our marketplace. So.

So we we like how we're positioned we like that we were kind of out there with modern in a big way, even though we got other gay people get Lego man that launch of modern got it.

Cost is $20 million, we had some hiccups when we launched it's just that's R&D cost thats nothing modern massive success.

The business is significantly bigger than our five year plan and then when we launched it and we will continue to be so we like our positioning around modern we like our positioning around contemporary we like our positioning around classic.

And we think we can bring our own unique point of view to just about any design vernacular anesthetic and.

Create.

Beautiful environments and.

Elevate peoples lives by creating harmony Anda.

And so there's just a lot of lot of potential that we see ahead of us.

Very helpful. Thank you Gary.

Your next question comes from Brian Nagel.

With Oppenheimer. Your line is open.

Hi, Good evening. Thank you for taking my question.

So short.

The time here, but curious what time early in the conversation talking about potential move overseas. So the question I have is are there any core numbers yet how we should think about timing of that initial markets and then follow up on it I guess another question, perhaps show nice progress late EBIT margins would improve overseas to some extent weigh upon expenses or capital your term.

Yes, we're kind of flushing, all that out but.

How to think about the timing well, let me give you some reality, we just got back on Sunday.

We saw that we went to the maze on marketing flea markets than we had a merchandising trip and it was an integrated real estate trips. The whole team was kind of a cross functional team that saw multiple locations multiple opportunities.

And.

Dave and I are backend of playing when are we going to Sunday or Monday.

To be determined to be a to be determined so got home Sunday, we're going to probably leave Sunday and.

We've got a whole cross cross functional team designers architects things like that and we're going back to see locations and advances the price. So we think that.

Timing wise.

Our projects are not little projects right, we're not building a storefront.

Inside a mall and then filling in a.

An empty box with some fixtures, we are we have real development projects, but.

Nonetheless.

The projects we're looking at.

Are pretty inspiring spaces that.

Yeah, we're pretty far along they're not ground up build their their spaces that we would take over in and adapt.

Right and and then in habit.

So we think we can move quickly but at the same time.

You want to move really thoughtfully here.

As far as the infrastructure and capital I don't think Theres, a whole lot of complexity to it right, we really run like that.

Direct to customer showroom platform business right, we don't really what's our cash and carry in a in a big design gallery now less than 1%, 1%. Yeah. So if you think about our business model less than 1% of the goods is walking out of the store in a bag like less than one I mean, it pretty soon it might be zero.

And so we don't have the same complexity from a cash and carry point of view.

We were really like a direct business with these inspiring showrooms and that's why I think our model is also so efficient.

We don't have to spread inventory all over the place we really just have floor models on display and then we we can architect the inventory.

In the most efficient way behind the demand and the fill it really well we will have less markdowns because we run the business that way. We're finally getting rid of the last of holiday. We are talking on this last Treprostinil remember yeah remember when we were in although shitty seasonal businesses, we used to sell like Halloween crap and we used to sell Easter crap and we used to sell like Valentine's crap and.

Like all these businesses that had like at four week or six week lifespan and.

God forbid the vendor shifted two weeks late and now 90% of it is getting marked down in your whole margin structure screwed up and not only that you're massively polluting. All your core business is people are it sounds like I know you should sell all this stuff and you have all these empty dining tables that you can put all these things on and you can sell extra things.

Like Bill put a bunch of Halloween crap on top of the beautiful dining table and render it less valuable immediately render that dining table less valuable. That's why we don't have all that crap piled up in our stores right and so.

So so that you know our business and what the point of what I'm, saying is our businesses. So much simpler than a lot of People's business and a lot of ways and then it's more complex in other ways right and you know, but through the simplification of it all I think we're creating a really capital efficient model, we're doing fewer things really well.

We're executing all those things really well, we have less waste less complexity less collector less waste right and and.

So as we have been thinking through international and how we can do it.

It's like again, it's like that storage, we don't have to drag the past into the future. We don't have to lake Dis architect a supply chain that was built for a completely different business and didn't make sense for the business. We're in we can take our very best thinking of today.

Advanced that thinking into a market and.

Make a minimal capital investment like I think we leased out how many dcs that we have five or six like buildings for welfare five furniture, yes, yes, yes, we have like one and a half kind of today.

And.

Mike It's it's we're going to be way simpler like it's what's been really hard in complex is actually taking.

What we had weather is image brand real estate old stores.

Yep.

Our.

Quarterly Architected.

Processes and systems and infrastructures and this architecture redesign it redo it like think think about weren't changing all this stuff right and like you goes like when you guys think like Oh, My God, they're redesigning their whole supply chain.

That's going to go really wrong. This is can be really expensive, they're going to make less a lot less money for a time like we had kind of one transition year. When we went from a promotional model to a membership model that change things you know there was timing between when we took membership revenue and how we booked into our PNM. How we explain to everybody. Our earnings are going to go down. This is what's going to happen nobody believed us stock went to 25, the people who are smart enough to buy it at 25 are pretty happy today.

But we're doing all of these big moves were moving really big rocks really changing massive things in our company.

And.

It's taking less capital, we've got higher earnings higher margins right.

Why wouldn't that be the same in international it will be it will be that what we've got is we've got some startup cost to kind of train people build culture do you got to build the dcs or Dcs hard to build no.

Like there till to up Waltz right and.

Concrete floors, and skylights and things, it's not it's not like building.

Not like building. These galleries are developing the galleries and then then you got or people delivering furniture in every country in the world. Yes, that's not entirely new will we do it better of course, we will.

And so to me you know Europe and international in lot of ways, just looks like kind of some more stores.

And you know we don't change in anything about our brand people go like low well. They don't have the homes in France are not as big again, they have smaller apartments will that's why our soap has come in well many sizes like seven lengths and three Deps, yes, Okay via Petite version of that by a classic version of that you got a bigger home by deluxe version of that.

Get it in nine feet 10 feet 12 feet four feet like we've got the assortment. We can it's not like we got to build a new assortment here.

Not like you go into country, though they only like Pink sofas, you don't have any.

Yes, yes, we will pass on that market.

That when we'll have we'll give the wayfair.

[laughter] Im sorry, picking on that a little bit disguise saw the new store everybody was telling me wafer it's getting to the retail business are you worried.

Go take a look at the store I'm not worried.

Thanks.

I appreciate it.

Thank you.

Your next question is from Oliver Wintermantel from Evercore ISI. Your line is open.

Hey, this chancellor Raleigh.

Hi, just a couple quick ones Gary.

Any update on tariffs sourcing efforts conversation with vendors and for Jack If you could just delve into the tax rate guidance that you changed the year. Thank you.

Yes, I would say, it's kind of what I would have said I think that.

Look there's certain things that are episodic and.

But they are there.

Distractions.

But they're they're not.

Kind of necessarily strategic right like.

There's there's implications of.

Some strategic sourcing shifts that are going to happen with Paris, but.

Tariffs are more of a distraction.

You know and they shouldn't take our focus off the big rocks, and what we're doing and where we're going.

The tariffs are a little rock, it's kind of distractive somebody dropped a little rock and our head Oh here comes another one is another little tariff and.

It's like you got to kind of kind of.

It's like having apples falling on your head and.

And thinking long standing under tree, but you can't see the Orchard right you got to get up and look at the bigger picture and.

So.

Look there's.

Long term, where it is at all shake out the numbers say.

The us needs, China, and China needs to us to what degree does China needs to us and what degree does the U.S. need China. The numbers would tell you that China it needs the us more than the U.S. needs China. Therefore, if you read the art of the deal.

And understand what's in the mindset of a guy that wrote that book and how we negotiate whether you like that he negotiates and public and on Twitter or not is kind of irrelevant.

You got to understand like when you have leverage you should use leverage if you're negotiating the U.S. has leveraged with China.

China's uncomfortable us is uncomfortable.

Read the letter I wrote in our recent sourcebook leaders have to be comfortable making others uncomfortable because you're leading people to places they've never seen you know getting outcomes that you know.

That that has have never been.

Achieved before and I think yes, I think this is what we're going through a tear point of view is very important to the us long term strategically I am perfectly comfortable being uncomfortable about tariffs because I think it can be really good for our country long term balancing trade with China is a really good thing and people that don't understand that don't understand math in economics and world power you know so I'm, okay is that a distraction.

So do I have to worry about like Oh <expletive> I was going to do a convert and Trump tweeted about more tariffs on our stock went down 12 points in one day, and we called off a convert or something like that yet.

Got it.

It's inconvenient, it's distraction, it's not strategic you know strategic is strategic nature of it is as it relates to the United States and you know.

Our countries.

Economy long term and.

So.

How it's relating to our business specifically.

Nothing different than what we report I mean, we actually.

Yes put out press releases when these things happen and tell you like look.

I mean.

Edge anybody seen that difference in our.

You know our business or our performance our profitability since all these tariffs have been launched.

No.

You know so we keep telling you don't its not an issue it's not a problem.

No different than the U.S. needs, China, and China needs to us.

You know I like to say to our partners and the people that produce our products I go look look.

You know we should be.

Linked together and completely integrated we're you know, we're shopkeepers without factories and.

And your manufacturers without stores.

We're not really good in isolation, either one of US right, we have to be integrated and we have to have deep partnerships and relationships and thats. What we we have so we have really good partnerships and relationships all over the world and in China and when you are playing for the long term and you've got deep long relationships and you have real partners you don't abandon your partner in times of trouble.

Right Thats not when you fleet so.

We're not just like hey, Okay, like let's just uproot and leave China, We've got great partners in China, We have great manufacturing partners, we have great relationships in China, we are great getting great product out of China, great quality out of China.

And so how do we get through difficult times, we work together as partners, we do the math, we figure out how to.

Create a really good outcome.

And we get through it and Thats, what Weve done and yes, we've moved a little production where.

Probably the only places we've moved production is where.

We the relationship wasn't as good and the quality wasn't as good or the you know the long term you.

Investment wasn't going to make sense, but.

You know, we're not I think I said it on Cramer I said like that you know the companies that are going to like in a complex business like ours, where quality and manufacturing capability is so key you going to uproot and just try to take things to other countries and ramp up production get ready for you know the chaos in the complexity and chaos and problems that comes with that.

I'd I'd, rather deal with the math and some of the changes and we'll all get through this.

It's not.

We're not going to have an embargo on China don't underestimate, what Trump might do and what moves you might make from a negotiating point of view and it.

Yes, I think he's.

She's master negotiator.

And.

But don't.

Like I don't think we're going to have like the.

The embargo Cuban missile crisis thing happened here, there's not going to be an embargo and all the ships.

You know Scott to get through some negotiation and.

And I think and I think it's going to work out for both countries really well and we're going to get back a little of what we've given up long term and.

Or you know.

We're tickets.

Yes, I wouldn't want to be in China's position and have the cards, China has versus the cards. The us has in this in this negotiation.

When you have leverage it's just a matter of time.

So, but but we've been able to get through it we're not really worried about it.

And if it really escalate for a short period of time.

Panics everybody in a short period time is going to be a distraction.

We will look back.

A few years from now go yes that wasn't that big of a deal.

And I think the outcome will be good for our country.

Got it thanks guys.

So John as it relates to taxes.

I think you know the dropped one of the drivers of a changing tax rate is the exercise of employee stock options in the vesting of restricted stock units and so depending on that activity in the share price and the amount that our employees exercise theres a certain benefit that flows through to us and benefit changes can change quarter to quarter last year in particular, we saw some.

Some distinct variability in that we had a tax rate last year of 16.8% effective and in Q2 is 4.4%. So I think as we talked about in a couple of quarters ago as we were preparing our outlook for.

For the for this year and.

There is just the noise of that low tax rate versus what what the activity in trying to project that employee activity quarter by quarter.

You know that just it doesn't help.

In terms of comparisons in looking at the earnings growth year over year now so we addressed that by picking a normalized tax rate and we picked it quarter to quarter is go 26%, which is effectively our statutory tax rate. It's in essence are marginal one.

The problem with that though is that economically we do.

There is this activity I think there's some of that activity in in 2018 was pronounced but what we continue to get this benefit and this year, it's a real benefit a real benefit real cash benefit, which which so this year our outlook for the tax rate is 21%, 21% in terms of EPS. If you think about that just in terms of our guidance that that math is 67 cents and that's a material amount of earnings power that was being understated by our choice of 26%. So we're just we just want to make sure. The investors and you have the most accurate view of what what the earnings power of the businesses and so we are going with the 21% normal normalized tax rate for all four quarters and that again I think that just takes a little confusion out with that with the variability that we were seeing last year, yes. I mean, if you. If you just take a simple multiple I mean whats our multiple now about 15 or so if you take our multiple and take 15 times 67 cents, it's $10 a share why would we present the numbers to be worse.

For our shareholders, where we all were trying to do is create compare ability that make sense to evaluate the health and growth of the business. We don't want to understate. It we don't want to overstate it but you know the tax rules changed you've got some of these activities happening and so we're just trying to create the best comparison for ourselves for our investors.

And for our shareholders that's all.

There are no further questions I'd like to turn the call back over to Gary for any closing remarks, great well. Thank you everyone I want to thank our you know our people and our partners all around the world who have just work so hard and passionately, bringing our vision to life and you know generating you know these really extraordinary results like I couldn't be more proud of we just ended the quarter with operating margins of 14.9%.

I don't know who the next closest competitor in our space is maybe you know the l. two people want to do a ranking on that but you know, but you know we've got we've got really one of the best models in our industry and you know and we're just warming up I think we've got the best people in the World Best team in the World not just inside this company, but outside this company our partners around the world are incredible that we work with.

We're proud to work through problems with them, whether it whether it's in Europe or weather today, it's in China, We're we're about partnerships anda.

And and and worry about passion and vision and I can tell you, we've never had a greater or or.

Greater view of the future in a more inspiring vision in the future and we are going to passionately pursue that vision and I think we're going to build one of the most innovative and inspired and inspiring brands the world's ever seem so.

Thank you for being a part of the journey in.

Wanting to be interested in our story.

We'd like.

We like talking about it.

So I will talk to you next quarter. Thank you.

Okay.

This concludes today's conference call. Thank everyone for joining you may now.

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