RH - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the RH First Quarter 2023 Q&A conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the one on your telephone keypad. To withdraw your question, again, press star one. Thank you. I will now turn the call over to Allison Malkin of ICR. You may begin your conference.

Allison Malkin (Partner)

Thank you, Brianna. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2023 earnings conference call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinion only as of the date of this call. And we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the investor relations section of our website at ir.rh.com. With that, I'll turn the call over to Gary.

Gary Friedman (Chairman and CEO)

Great. Thank you for joining everyone. I'm going to begin with our prepared comments and our shareholder letter and then open the call to questions. To our people, partners, and shareholders, revenues of $739 million and adjusted operating margin of 14.9% exceeded our financial outlook in the first quarter, despite continued decline of the overall macro environment, especially for home-related businesses. With 30-year mortgage rates trending at 20-year highs, the possibility of continued economic tightening required to tame inflation and uncertainty regarding the recent regional banking crisis, we expect luxury housing market and broader economy to remain challenging throughout fiscal 2023 and into next year. Based on the above and current demand trends, we are now forecasting increased markdowns to clear discontinued inventory required to support our product transformation over the next several quarters.

Steven Zaccone (Director of Retail Equity Research)

We are raising our revenue outlook for fiscal 2023 to a range of $3 billion-$3.1 billion and lowering our outlook for adjusted operating margin to a range of 14.5%-15.5%, which includes an approximately 150 basis point drag due to the ramp-up of our global expansion. As previously mentioned, it's times like these that businesses tend to move in herds, pursuing broadly adopted short-term strategies that lead to mostly similar outcomes. It's also times like these that present opportunities to pursue long-term strategies that can create strategic separation and significant value creation for those teams willing to take the road less traveled and pursue their own unique path. That path for RH is our climb up the luxury mountain and our long, long-term strategies of product elevation, platform expansion, and cash generation. Product elevation.

Gary Friedman (Chairman and CEO)

Our efforts to elevate the design and quality of our product are central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our climb, as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it's the climb that becomes more difficult as we reach new heights, it's also one we've been navigating successfully over the past 22 years. This year, we'll be unveiling the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, Contemporary, Modern, Outdoor, Baby & Child, and Teen. These new collections reflect a new level of design and quality inaccessible in our current market and a value proposition that will be disruptive across multiple markets.

We also believe the new collections will generate a level of excitement and serve as an inflection point for our business in the 2nd half of the year. The new collections will be gracing the pages of a new Source Book design, with the objective of creating a cohesive collection of titles, reinforcing our design and quality leadership with our trademark belief inscribed across the cover. "There are pieces that furnish a home and those that define it." Platform expansion. Our plan to expand the RH brand globally, addressing new markets locally and transform our North American galleries represents a multi-billion-dollar opportunity. This summer, we'll be introducing RH to the U.K. in a dramatic and unforgettable fashion with the opening of RH England, the galleries at historic Aynhoe Park, a 17th-century, 73-acre estate that will be a celebration of history, design, food, and wine.

RH England includes three full-service restaurants, the Orangery, the Conservatory, and the Loggia, plus three secondary hospitality experiences: the wine lounge, the tea salon, and the juicery. Guests will appreciate views of Europe's largest herd of white deer grazing on the vast and scenic property from the 46 windows adorning the south-facing main building, and can enjoy a glass of wine or afternoon tea service while sitting around monolithic stone fire pits on the grand viewing terrace. One of the most unique attractions at RH England is the Aynhoe Architecture and Design Library, featuring rare books from the foundational masters of architecture, Palladio, Scamozzi, and Alberti.

The centerpiece piece of the collection is one of the 1st printings of De architectura, the 10 books on architecture by Vitruvius, whose work from the 1st century BC inspired Leonardo da Vinci's drawing of the Vitruvian Man 15 years after Vitruvius sketched the original. The principles at the core of Vitruvius's philosophy have also inspired the RH design ethos, which is reflected in our galleries, interiors, and gardens. The gallery will also include the Sir John Soane exhibition, honoring one of England's greatest architects in partnership with Sir John Soane's Museum in London. The exhibit will touch on his life story and detail some of his most famous works, including Aynhoe Park. We believe RH England, the gallery's historic Aynhoe Park, also represents RH's greatest work and will act as a symbol of our values and beliefs as we embark on our expansion across Europe.

We'll be unveiling RH England at an exclusive private event, Saturday, June third, and will be open to the public on Friday, June ninth. Our global expansion also includes opening in Brussels, Dusseldorf, Munich, and Madrid, as well as an interior design studio in London over the next 18 months, followed by Paris, London, Milan, and Sydney in 2024 and 2025. Regarding our North American transformation, we'll be introducing a new gallery design in Palo Alto and Cleveland, as well as opening RH Indianapolis, a 178 acre estate on a private lake this year. RH Montecito, the gallery's historic firehouse, will now open in 2024. Additionally, we have 12 North American galleries in development pipeline, scheduled to open over the next several years.

We also believe there's an opportunity to address new markets locally by opening design studios in neighborhoods, towns, and small cities where the wealthy and affluent live, visit, and vacation. We have several existing locations that validate this strategy in East Hampton, Yountville, Los Gatos, Pasadena, and our former San Francisco gallery in the Design District, where we have generated annual revenues in the range of $5 million-$20 million in 2,000-5,000 sq ft. We have identified over 40 locations that are incremental to our previous plan in North America and believe the results of these design studios will provide data that could lead to opening larger galleries in those markets. Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize.

That's why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. As mentioned, we'll be focused on turning inventory into cash and continuing to optimize costs throughout the organization, further strengthening our balance sheet to maximize optionality. Outlook. We are raising our revenue outlook for fiscal 2023 to a range of $3.0 billion-$3.1 billion, and lowering our outlook for adjusted operating margin to a range of 14.5%-15.5%, which includes an approximately 150 basis point drag due to the ramp-up of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million.

For the second quarter of 2023, we are forecasting revenues of $765 million-$775 million and adjusted operating margin in the range of 14%-14.5%. The second quarter of fiscal 2023 includes incremental advertising expense of approximately $18 million versus last year for the new RH Interiors and RH Contemporary Sourcebooks, plus the opening of RH England, representing approximately 230 basis points of operating margin deleverage in the quarter. RH business vision and ecosystem, the long view. We believe there are those with taste and no scale and those with scale and no taste, and the idea of scaling taste is large and far-reaching.

Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative as we continue our quest to build the most admired brand in the world. Our brand attracts the leading designers, artisans, and manufacturers, scaling and rendering their work more valuable across our integrated platform, enabling RH to curate the most compelling collection of luxury home products on the planet. Our efforts to elevate and expand our collection will continue with the introductions of RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, RH Atelier, and other new collections scheduled to launch over the next decade. Our plan to open immersive design galleries in every major market will unlock the value of our vast assortment, generating revenues of $5 billion-$6 billion in North America and $20 billion-$25 billion globally.

Our strategy is to move the brand beyond curating and selling products, to conceptualizing and selling spaces by building an ecosystem of products, places, services, and spaces that establishes RH, the RH brand, as a global thought leader, taste, and place maker. Our products are elevated and rendered more valuable by our architecturally inspiring galleries, which are further elevated and rendered more valuable by our interior design services and seamlessly integrated hospitality experience. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. Additionally, we are creating bespoke experiences like RH Yountville, an integration of food, wine, art, and design in the Napa Valley.

RH One and RH Two are private jets, RH Three, are a luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design, and landscape architecture. This leads to our long-term strategy of building the world's first consumer-facing architecture, interior design, and landscape architecture services platform inside our galleries, elevating the RH brand and amplifying our core business by adding new revenue streams while disrupting and redefining multiple industries.

Our strategy comes full circle as we begin to conceptualize and sell spaces, moving beyond the $170 billion home furnishings market into the $1.7 trillion North American housing market with the launch of RH Residences, fully furnished luxury homes, condominiums, and apartments with integrated services that deliver taste and time value to discerning, time-starved consumers. The entirety of our strategy comes to life digitally with the World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Our authority as an arbiter of taste will be further amplified when we introduce RH Media, a content platform that will celebrate the most innovative and influential leaders who are shaping the world of architecture and design.

Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion-$10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion-$100 billion opportunity. Our ecosystem of products, places, services, and spaces inspires customers to dream, design, dine, travel, and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. Taste can be elusive, and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer.

Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermès, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart, and as we continue our ascent, the air gets thin and the odds become slim.

We believe the level of work we plan to introduce this year, inclusive of our new collections, new Sourcebook design, new gallery design, and the introduction of RH to the UK in an immersive and unforgettable fashion, will continue to demonstrate the imagination, determination, creativity, and courage of this team and the relentless pursuit of our dreams. Over 20 years ago, we began the journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of OXO laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down 10 times and getting up 11, leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations.

Lessons that can't be learned in a classroom or by managing a business. Lessons that must be earned by building one or by reaching the top of the mountain. Onward, Team RH. Carpe diem, Gary. At this point, operator, we'll open the call to questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Please limit questions to one question and one follow-up, and re-queue for any additional questions. Thank you. Your first question comes from Steven Zaccone with Citi. Your line is open.

Steven Zaccone (Director of Retail Equity Research)

Great, good evening. Thank you very much for taking my question. I wanted to start on the need to take the increased markdowns. So Gary, I was just curious if you could comment, you know, what you saw in the business over the past couple of months, that this was updated in guidance now versus, you know, factoring into your original outlook when you spoke to us in the end of March?

Gary Friedman (Chairman and CEO)

Sure. Well, I think what we've seen is an, you know, an increasing headwind from a demand point of view and, you know, a slowing of our cycling through our discontinued inventory. You know, as we've, you know, increased our markdowns to begin to cycle through this product, to be prepared to move, you know, move the old product out and bring the new product in. Just projecting what it may cost us to cycle through transforming all of our galleries. Remember, we've got, you know, product in all of our galleries that we have to kind of do sell floor model sell-offs and transition through our outlet business. We now believe it's gonna cost us more from a markdown perspective to move through that inventory in this environment.

Steven Zaccone (Director of Retail Equity Research)

Okay, fair enough. The follow-up question I had was on the U.K. market opportunity. I think it was a couple calls ago, you know, you talked about the potential size of the U.K. market being as large as California. I guess on the, you know, on the cusp of opening RH England now, how do you think about the opportunity now? Maybe how do you think about the competitive environment, how you plan to merchandise this first gallery? Anything you could say would be helpful. Thank you.

Gary Friedman (Chairman and CEO)

Sure. I don't think we see anything that's different from how we've always viewed the opportunity. I think, you know, the timing, you know, is just the macro environment is somewhat different. You know, our initial expectations are more muted, as you would expect. From a competitive environment, I don't think anything has changed. You know, just as we become more connected to the market, as our people have been there longer, working, training, et cetera, at developing early connections and relationships with interior designers, you know, the trade industry and so on and so forth, we believe it's gonna be a huge opportunity for us. There's also a lot of unknowns in a new country.

You know, we believe we're being, you know, cautiously optimistic as we dip our toe in the water and begin. I, you know, I just remind everyone that RH England, you know, is really, you know, it's a unique kind of move in the market. It's a unique play in the market, where, you know, our goal is to create the right conversation and not I wouldn't say RH England is our play to maximize commerce originally. That will happen as we continue to open RH London and in other parts of the UK. How do you take a brand and introduce a brand to the United Kingdom and broader Europe in a way that positions the brand correctly for the long term?

If you stand back and think about the world and think about the world of luxury brands, I mean, basically, all the luxury brands in the world, you know, are from Europe, and the U.K., you know, mostly France and Italy. If you look at what, you know, what are the true luxury brands in the U.S., you can argue who really makes that cut. You know, I'd argue that, you know, the brand that's most clearly identified as a luxury brand from the United States is Tiffany, right? They haven't pushed their brand down or, you know, to broader markets, as, you know, others may have. The French just bought Tiffany a few years ago, right?

I wouldn't say we're particularly seen as the US is seen as the tastemakers of the world, you know, because we've usually looked to Europe for inspiration. You know, the US brands, I'd characterize, are more followers than leaders. To build a true luxury brand, I think you have to be seen and respected as a leader, a thought leader, a placemaker, tastemaker, however you want to characterize it. We're approaching our introduction in an entirely unique and one-of-a-kind way by opening a store somewhere no one has ever opened a store. You know, introducing a brand in a manner that no one has introduced a brand. There's, you know, there's a level of risk to redefine a brand.

There's a level of courage that's required to kind of go from where you are to, you know, where you wanna be. In our case, you know, as we characterize it, climbing the luxury mountain. What the world will see in a few weeks here is, I think, the most unique and inspiring retail experience anywhere in the world, bar none. I think it has a chance to be the most talked about retail store and the most admired retail experience of anything anybody's ever seen. Prioritizing, creating the right conversation versus, you know, maximizing, you know, the commercial activity in the market initially, we believe is the right sequencing to build the brand. It's very unique. It does open the entire market, from an, you know, from an online point of view.

We're 1 hour and 45 minutes outside of London, right? On many levels, you know, people would say, "This makes no sense." That would only be looking backwards, you know, and saying, "Well, no one's ever done anything like that before. Why would it work? Why would it..." You know, everyone's had different goals than we've had. Again, we're on a, we're on a 1 of a kind journey here. You know, we're on a climb that no one's ever attempted to make, and we're coming from a place that has only had what was the biggest economy in the world. You could argue we only have 1 real luxury brand, and now the French own it. You know, so it's a different path, and I don't expect it to be understood initially.

I do believe it will be respected, and it will inspire people eventually.

Simeon Gutman (Research Analyst)

Thanks for the detail. Best of luck with the opening.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman (Research Analyst)

Hey, Gary, and Jack, how are you? So I have, maybe I'll make it a two-part question, one question. Just to confirm, it looks like the domestic business seems to be hitting your forecast or bottoming outside of, you know, potential, let's say, consumer recession, so that the change to the guidance, other than the markdowns, is mostly the Europe inclusion. My second question, this is more theoretical. Thinking about the EBIT margin of the business, with the mix of Europe, US reaccelerating, and then, you know, hospitality and luxury coming into the mix. Getting back to, let's say, 20+, is that going to be a much longer timeframe? Or how should we think about that? Thank you.

Gary Friedman (Chairman and CEO)

I think it depends on the macro. If we get stability and, you know, there's any kind of, you know, the headwinds stop and subside, you know, you're gonna have a new baseline. I think it's, you know, depends on how well, you know, we've executed this next major product transformation. I mean, we've, you know, we went through transformations like this. We generally, you know, do one every seven or eight years as we've continued to elevate the brand and expand and, you know, just move the assortment upwards. Today, I'd say, you know, this is the best work we've ever done. You know, we're launching it into maybe the worst home environment at the high end that I've ever seen in my career.

You know, I've never seen luxury housing down at the levels we've seen, you know, from recent reports. You know, and we're at, you know, 20-year high, you know, interest rates. You know, there's some level of caution, and I, we can't control the macro, but I'd say I'm more optimistic than less optimistic about our model long term. I don't see any reason that we can't return to 20% plus, you know, mid-20s operating margins long term. You know, we have to prove out, you know, the European strategy and expansion. I think we have to be, you know, smart how we allocate capital and how we build that infrastructure, and how we keep things simple. I think our strategies, I think it's unique. You know, we're not duplicating corporate roles in Europe.

You know, we're not looking at Europe as a, you know, a separate business with a separate infrastructure besides, you know, our supply chain distribution piece. That too, is even an extension of what we do in the U.S. We look at the world differently than I think most people before us and historically have looked at a global expansion. I mean, we kind of look at countries in Europe, like states in the United States almost, you know, except, you know, there's the borders are different. There's some uniqueness there. You know, we run our business very well in North America.

From our view, you know, we're building a really a global leadership team, you know, and a kind of a global organization that will lead and oversee the business in an identical way that we do in North America, except that there are some unique differences within the countries. We try to keep it simple. You know, if we get any kind of reasonable demand and business, you know, we should be able to begin to leverage the initial investments in supply chain and so on and so forth, that are, you know, that create some deleverage initially. You know, I think we, you know, we have a whole new whiteboard, really, you know, to kind of address, you know, how to physically open the brand in the U.S.

We don't have to reverse engineer that. You know, when I began here, we had 106 legacy stores, you know, that weren't designed for the vision, you know, the business that we had. We've had to reverse engineer this thing and, you know, go from, you know, taking a, really, nothing about the infrastructure was correct for the brand. With here, we've got a clean slate, you know, building the right infrastructure for the brand. You know, they deliver furniture in Europe. That's not unique to North America. Furniture gets delivered every day. You know, there's all kinds of things that happens. What, what we're not entirely sure of is just the consumer is generally aware of our brand at the high end.

Humans are, you know, we're creatures of habit, so we have habits of shopping different places and going to different places when we think about our needs and wants. So we have to kind of change those habits and, you know, identify RH as a more inspiring, and attractive place, you know, to allocate capital from a consumer point of view. We think our assortment, especially as you see us go through this transformation over the next several months, we think it's unmatched in the world. We, we think our, you know, our design leadership, our quality, and then the, you know, the value equation for that design and that quality. We think our value equation is as disruptive as ever.

You know, if I look back and I'd say: Hey, where did we maybe kind of, not optimize, you know, our business, you know, last couple of years with all the tariff, you know, hits from a cost level, the supply chain costs that went up all through COVID, you know, the price changes, that were taken, you know, and then when you have easy business, I think our value equation suffered. I think our value equation is gonna be swung in a direction where it will be unmatched in the marketplace. That's really important, no matter what country you're in, right? People first, you know, look at the design of a product. If the design of the product is not good, you just don't walk up to it, or you turn the page, you know?

You know, you have to have great design. People have to see and be attracted to the product, or nothing else matters. You know, the next, you know, the next thing you have to win on is you have to win on quality. You know, consumers are gonna look at the design. If they love the design, they're gonna get closer. They're gonna look closer. They're gonna, you know, walk up to it, touch it, interact with it, and they'll make a, you know, perception about quality. The next thing they'll do, if they're interested, is they'll look at the price. For that design and that quality, do they perceive that product is a good value, a great value, or not a value?

That will create the decision to purchase or not purchase, right? That's why everything we do is through a lens of design, quality, and value. I think if I, you know, look back and critically look at what happened over the last, you know, call it three, four years with, you know, all the conflict with China, the tariffs, you know, all the dislocation of supply chains and all the increase in freight, increase in raw materials, increase in product costs, so on and so forth, and then an easy demand environment. I think the world took prices up, and we all know that because inflation, you know, went to 40-year highs, right?

You know, that is gonna affect things, you know, and I think we were probably, you know, somewhat too arrogant in our ability to raise pricing in an easy demand environment. As the easy demand environment has waned, and you know, it's required us to kind of really challenge, is our value equation, gonna create the level of demand, you know, that we believe is right for the business? You know, that's I think people are gonna really respond to this new product transformation. I think it is the best design we've ever done. The quality is really outstanding. You know, the level of detail and the work we've done into, that's gone into it.

Because we've now had some experience with Italy, with Italian upholstery, Italian sofas, so on and so forth, and other places, people see that we actually can, you know, scale and, you know, have the ability to create efficiencies at the higher end of the market, that our value equation is gonna be significantly better at very high margins. I wouldn't say the value equation is gonna result in a lower margin structure than we've run. It may result once we've cycled through, you know, just the discontinued product that we have to move through to transition, you know, to this next kind of climb and step up the luxury mountain for our brand. I think it's gonna be, you know, the best value proposition we've ever had, you know, because we've really worked on it.

You know, we've really, you know, just been super critical thinking and really challenging and, you know, really looking at the competitive environment and the competitive environment from a broad point of view, like, you know, up and down the food chain. To make sure that, you know, we are disruptive, not just at the high end, we're disruptive, you know, at... I'm not saying going all the way down to the low end, but, you know, in some of the cases, I mean, we're disruptive everywhere. I think when you do that, you know, it's, you know, that's when you can get a real outsized share of the market.

Simeon Gutman (Research Analyst)

Okay, thank you.

Gary Friedman (Chairman and CEO)

Your next question comes from Curtis Nagle with Bank of America. Your line is open.

Curtis Nagle (Director and Equity Analyst)

Thanks very much. Good, good afternoon. Kind of along similar lines of Simeon's question. Gary, I'd just love to hear an update on the Contemporary line. You know, fully realizing it's an abnormal year, of course, just in terms of, you know, how many galleries it's been rolled out to and what the reception's been for the ones where it's been in place for, you know, I guess, an appropriate amount of time where, you know, it could be judged in terms of the reception. That'd be really helpful.

Gary Friedman (Chairman and CEO)

Sure. Yeah, I'd say we're happy with the response of Contemporary. You know, considering the environment, it's only been rolled out to four galleries, and the reason why we didn't push it farther is because we have so much more newness and so many more choices to think about moving into the business. We've held some of it back because I think, you know, Contemporary, I'd say, you know, it was our worst level of execution from what I'd say the disruptive value equation, right? I think that's where I'd be most critical of us. You know, some of the price points just hit highs that, you know, again, you know, maybe in a tailwind, you know, in a COVID, everybody's buying everything, and everybody wants everything tomorrow.

You know, you're in, you know, the, you know, the biggest migration from cities to suburbs and second-home markets, you know, in any history we've seen. You know, I think we're just too aggressive with the pricing, you know, too arrogant, maybe, to some degree. You know, we've relooked at that. We've, you know, looked at the sourcing, we've challenged everything. I think as you see, you know, you see what's coming, you know, whether you're looking at interiors or contemporary or modern, you're just gonna see a real meaningful value equation connected to design and quality leadership that will change the trajectory of everything, including contemporary.

Contemporary, look, if you looked at it with the context compared to Modern things like that, you know, off to a really good start. If you look at it compared to the work we're about to unveil, you go, you know, it's just the next level of transformation from a product point of view, I think is gonna kinda. It's like having a trump card, you know, in a game. It's just gonna win, we believe. Yeah, I look at, you know, Contemporary, not just in isolation, but, you know, integrated with the broader thing. I think everything, you know, Interiors, you know, and Modern are gonna, you know, look entirely new and different. Contemporary is gonna also look pretty new and unique. There's a lot of new collections, Contemporary.

You know, collections, you know, Contemporary really only. What do we have? Five full collections? Four full furniture collections, you know, That will, I think, more than doubles, right? Yeah. Yeah. Contemporary, you're really seeing this next phase is a much more robust assortment.

Curtis Nagle (Director and Equity Analyst)

Okay, great to hear and really helpful. Just one other just quick follow-up, Gary, just curious to hear a little bit more detail on the format for Cleveland and Palo Alto. I know Palo Alto, I think, is a little smaller, like 25,000 sq ft. Anything else in terms of perhaps how it's sorted, the layout of the field? Just curious, yeah, to hear more about that format that you mentioned.

Gary Friedman (Chairman and CEO)

Yeah. In, in a lot of ways, you know, it represents, you know, an aesthetic change, and, you know, a freshening. You know, you'll see us begin to evolve away from gray, you know, and create really the, you know, the platform for where the goods are going. You know, we've kind of ridden the gray wave for the last, I don't know, 14 years or so. You know, there's big cycles in product. You know, people ask me a lot, "Hey, well, you know, what's next? And, you know, how do you know what's next, and where do the trends come from?" And I, you know, I like to say, you know, the trends in our business come from the dead. You know, generations pass away, their, you know, their belongings go into estate sales.

Estate sales feed the high-end antique fields, feed the antique markets. The antique markets, really, what drives the high-end interior design market, you know, then that, you know, is then goes into the high-end reproduction market, and then it starts to trickle down from there. You know, if you look at kind of the major trends, whether it's, was kind of what I'd call the Belgian European look, that we kind of exploded at a commercial level, you know, throughout the United States in, you know, 2009, 2010, 2011, 2012, you know, 2013. You know, the, you know, we made probably the biggest move in modern, you know, if you looked at the mid-century movement that started to roll through. You know, you can kind of time things back.

If you look at, you know, when are consumers generally in their peak buying years for furniture? It used to be, you know, 40s to 50s because there was a shorter lifespan. You know, lifespans have gotten longer. If you look at, you know, the high end of the demographic that has the greatest access to healthcare and, you know, are more focused on longevity and fitness and eating well, you know, I think it's now up to 87 years old, right? What that does is it pushes up, you know, as people get older and more wealthy, there's more focus on the home, you know, until, you know, they can't really use their home. They get to an age where, you know, they're just not really mobile, and they can't enjoy as much.

If you look and say, you look back in the 1950s, you'd say, you know, 40-50, really the peak buying years for furniture, you know, for real furniture. People get to an age where they're in their second or third home in their life stage, and they've done well financially, and, you know, they can afford to furnish a home. If you look at the average lifespan and how old people are, Today, well, now those people are really old, right? That cycle is now moved through. Mid-century modern is, you know, a waning trend. The next cycle that went through was actually called Contemporary. That's where we launched Contemporary.

You know, and the contemporary trend was really, you know, happened in the, you know, seventies, you know, and eighties and then in the later eighties, that trend, it moved to kind of an eclecticism, mixing, you know, more contemporary things with antiques and so on and so forth. If you just look at those cycles, the cycles tend to come back through. What you wanna think about is what is the right platform, you know, for kind of those kind of trends or those influences? Not that we have a brand that's a trendy brand, because everything gets filtered through an RH point of view and how we, you know, how we interpret the trends and how we present the trends.

You know, I'd say, you know, as I, as I've looked at retail throughout my career, one of the things I've been critical of others, is I've just seen people create a retail concept and then roll out 300 stores, and 7-10 years later, they're all old and tired, and it becomes a dead concept. The platform that you place your product in, you know, is either gonna render that product more valuable or less valuable. As we look at our product transformation, and this is really the largest product transformation in the history of our brand, is our platform prepared to render that product more valuable? Now, the good news is, from an architecture point of view, they're beautifully architected and timeless buildings. You know, they, you know, they're perfectly balanced and symmetrical.

They have fresh air, natural light, you know, they're proportioned, you know, correctly, you know, all the things. You wouldn't change anything to the building. A lot of the buildings we built, right, I mean, can arguably stand up to great historical architecture. It's all the same principles. But the way we skin them, you know, no different than what are the surfaces, the finishes, you know, the colors, the backgrounds, and, you know, and how they're presented, what does that canvas, you know, that background look like, is very, very important. In a lot of cases, you know, it's kind of an aesthetic surfacing, kind of feeling that will be, I think, a more, you know, more relevant and exciting canvas and background to amplify the product.

The logic of our galleries and, you know, how they're laid out, you know, is very scientific and architecturally, timeless and relevant, you know. It will look very fresh and new to a consumer. No different than When did we do? Like, 2009, 10. Yeah, 2009 and 10, you know, we took all of our galleries from silver sage paint and white trim and, you know, blonde maple floors, and they went to all gray, you know, with, you know, gray wash floors. I mean, that was 14, 15 years ago. I always think about the cycles it are generational, right? If you know, the definition of the generations is 15 to 20 years, right?

Every 15 years or so, I think that there's generally a major move to make. Every seven or eight years, there's also in-between cycles of refresh. This is, you know, this is the next major move from a product point of view and, you know, and just making sure everything's presented on the right platform and the right canvas that renders the product more valuable.

You know, you'll see these new ones start to happen. You'll see us go through the, you know, through the, you know, the platform over the next several years and update, I'd say, every gallery to, you know, aesthetically, just colors, walls, paint, finishes, possibly replastering the outside of galleries from gray to, you know, a beautiful buff color that we think is the right, you know, the right canvas for the next 10 to 15 years. Curtis, Jack, one thing to add on your size question, Palo Alto is basically the same size as Corte Madera, so it's... I think you mentioned 25,000. It's not that. About 48,000, and Cleveland's.

Jack Preston (CFO)

just around the same size, just slightly smaller.

Curtis Nagle (Director and Equity Analyst)

Okay, very informative. Thanks, and yeah, good luck with the rest of the year.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

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

Steven Forbes (Senior Managing Director)

Good afternoon, Gary, Jack. I wanted to ask about regional trends during the quarter. Are you seeing any disparity by region? Anything that either builds on optimism or caution right around the revised revenue outlook you guys provided?

Gary Friedman (Chairman and CEO)

Steve, there's always regional differences. you know, just to echo prior comments, we don't really comment on those unless they're so massive that they stand out, like oil markets one year did. There's nothing that we would share to read into any trends on that.

Steven Forbes (Senior Managing Director)

Maybe just as a quick follow-up, given your comments, around the holistic value equation and improving across the portfolio, any comment on the potential magnitude of input or supply chain cost relief that you see on the horizon here?

Gary Friedman (Chairman and CEO)

On supply chain costs? Specifically, you're talking about, like, ocean freight, or?

Steven Forbes (Senior Managing Director)

Any cost relief, right? That would maybe help fund, right, a better value proposition.

Gary Friedman (Chairman and CEO)

We've been getting that, and that's, you know, I think Gary mentioned that, you know, at last call or the prior call, that, you know, when someone asked about select price changes. We've already been seeing some cost relief that we're putting back into product prices. From a supply chain and ocean freight perspective, I mean, we're at a point, given our turn and, you know, given the way our team approaches, you know, getting the best rates for the sailings, you know, It's accretive now, or we're on the other side. You know, the ocean freight contracts, we're past the bad news of May 2022, and we're into sort of a lift now, slight lift in the margin from that good news.

Steven Forbes (Senior Managing Director)

Thank you.

Operator (participant)

Your next question comes from Michael Lasser with UBS. Your line is open.

Michael Lasser (Equity Research Analyst)

Good evening. Thank you so much for taking my question. Gary, as you had mentioned before, that you might have been too aggressive with increasing some pricing. In the past, you've talked about pivoting to serve a more affluent consumer, and that might have limited your addressable market. Should we interpret some of your current thinking to be, "Hey, maybe we have to peel back to serve a broader community of customers at maybe lower price points, because that would ultimately drive the sales of the business higher and in turn, the profitability of the business higher?

Gary Friedman (Chairman and CEO)

I'd say we again, I'd start, you know, with the lens of design, quality, and value, right? I think we've been most successful when we won with design. We had the best design in the market. You know, that design is at a quality level that's, you know, appreciated and respected. For that design and quality, the value equation is disruptive, clearly to the market above us. If you look at any people left and right, massively disruptive, and even disruptive to slightly below us. Just because we really have, you know, the biggest platform, right? We have the ability to have real scale.

I think as we've, you know, we've, you know, launched Contemporary, been moving the brand up, you know, when demand is easy, you know, like it was through, you know, the event of COVID, and the migration that happened because of COVID, and the focus on the home because people couldn't travel and, you know, the shifts in spending by big market segments. You know, when demand is really easy, you know, and you can get higher prices, you tend to take them. Then all of a sudden it flips, you know, and it makes you reevaluate. As we reevaluate, you know, just where our pricing was, and has been, I just think, you know, through. You got to remember, we went through a big pricing cycle increase because of tariffs, right?

Then we went through a massive supply chain disruption and raw goods, raw material costs going up, labor going up, everything going up, freight going up, that massively impacted pricing. I'd say, you know, probably we, as probably anybody in our industry, you know, optimize, you know, what you could get, you know? I think that you're gonna see some, you know, some, you know, people repricing things and trying to optimize whatever market you're going after. Ours is a little trickier because we're moving up, right? We're trying to get a more affluent consumer and get a bigger piece of their wallet because they spend exponentially more on the home. Not a little bit more, exponentially more. I mean, customers above aren't worth a little bit more. They might be worth 10 times more.

You know, you think about the peak of the pyramid, it's like flipping the pyramid upside down when you look at spending on the home, you know, at the really affluent levels. You know, we are still going after those customers. We've got a win there on design and quality, and our value will be massively disrupted there because we're the only platform with scale in the entire world, you know, in these products. You know, when RH creates a relationship with anybody from a manufacturing point of view, it's a big deal to those people because we can change their lives. You know, and if they put their product on our platform, it changes everything. We've got to always think about, you know, that's a great value.

You know, if it's not a great value, people will look around, you know, but if it is a great value and they trust you for that value equation, you know, they don't even have to think about it. I think in the, you know, the age of the internet, you know, you have so much more visibility, you have so many more prices, you know, so many more, you know, choices. It's harder to distinguish, I'd say, both design and quality online, you know? You know, I think that all works its way out at the end because, you know, if you buy something and you thought it was really great value, and you get a piece of crap in the mail, you know, and the quality's-...

crap or the finish is crap, and, you know, it's not good, you're gonna return it, you know, or you're never gonna shop there again. That will all shake out over time, you know, like all the marketplaces and all this other stuff. I think those will all really serve branded products that you know, you know, like, you know, consumer goods and things like that. You know, you know you're buying some toothpaste or whatever you're buying, you know, you know it's from this brand, it's what you buy. But when you have a lot of blind products and, you know, our industry is, I'd say, more blind product than branded product, you know, it's sometimes it's a little confusing for a customer, but it all works itself out.

You know, if, you know, like, if you go on to, you know, name your, name your marketplace, you know, there's just an endless aisle of choices. One, they're not curators, you know. Two, you know, from a, not from a design point of view, or not from a quality point of view, and not from an aesthetic taste, you know, you know, or point of view, you know? Our platform, you know, really is unique in the world today. I think what we're doing next is gonna prove that. I think every business is going, like, you know, "How big is that market? And where do I go?" And so on and so forth. I think, yeah, it's really difficult.

Yeah, I think it's difficult for any of us in this home industry, where all of a sudden, boom! Your, you know, your demand goes up 40 points. You know, possibly goes down 40 points, then it goes up 40 points. All of a sudden, you can't get. You know, you have too much goods, then you don't have enough goods. Anything you can throw out there, customers want, "Can you furnish my house next week?" You know, and so on and so forth. Then all of a sudden you get on the other side of COVID, and then you compound that with, you know, the inflation, which required, you know, the fastest rise of interest rates in history. Which, you know, firm grasp for the obvious, that's not good for mortgage rates or the housing market.

And you go, it makes you reexamine everything, which you should, you know? I think the key becomes how do you know, how do you act on that other side? Like, for instance, you know, people ask me about this all the time. "Oh, you might be losing more market share," this and that. Like, well, you have to say, what's the quality of the market share? You know, could we push a promotional button today? Could I start sending out sale emails like everybody else does? Does it matter whether you're doing whatever promotions, you call it, sitewide promotions? Everybody's trying to, you know, kind of create a veil of, you know, kind of non-transparency out there, you know, what they're doing.

If you're promoting the business and you're sending sale emails, like, you're gonna be known as a promotional business. You know, you're also creating, I'd say, a layer of long-term, low-quality revenues, right? Those will never be high-quality revenues. You've got to put categories on sale or, you know, whatever on sale to get those revenues, right? Well, you got to put all those products on sale. How many people would have bought your product at full price, at really healthy margins? Then for the incremental lift, how much margin did you have to give back across everything that you marked down? Whether it's sitewide or category, or if it's only bed and bath or it's lighting, now you're doing a lighting sale, or now you're putting all this on sale. I mean, interesting, not relevant, but what do your emails say?

You know, like, just look at the emails and look at the sale banners on all the emails, and look at the things, you know, Memorial Day sales, this sale, this sale, that sale, you know, all hitting you right now. Those people are all gonna affect their model long term. I'd rather give away lower value market share long term, low quality market share long term, hold to, you know, our pricing integrity and our messaging that's more about design and quality, and just transform the business, you know, for the next cycle. If we're successful, which we've been for, I don't know, this is my 23rd year here. You know, we've done this a lot of times. We've transformed a lot of times. We've been through all kinds of cycles here. This is not a new leadership team.

You know, we like what we see next, but you just have to take a longer-term view. You know, you know, that's why I always say, you know, people, you know, ask, you know, ask me, "Should I buy your stock?" I ask them: Are you a trader or are you an investor? You know, if you're a trader, you're looking for short-term, episodic moments and ups and downs and trying to optimize and... You know, if you're a trader, don't buy our stock, you know, 'cause we're making long-term moves. If you're a long-term holder and you want to be on a winning side, I mean, look at our performance over 20 years. You know, you know, look at our performance even over the last 5 years, and you're gonna be a happy shareholder.

Look at our performance if you bought us during COVID, you know, or different times, you know, and you thought everything was gonna stay that way forever. Well, okay, maybe you're someone who hadn't been through cycles before. Maybe you didn't understand the dynamics of COVID, or you read the press and it said, you know, it's the decade of home. It wasn't the decade of home. It was a, you know, it's a goddamn pandemic. That's what it was. It's a temporal thing. Now we're on the other side of it. Now we're in high interest rates. You know, what are the choices people are making? What are gonna be long-term choices, you know? What are gonna be high-quality choices?

You know, if I was worried about the stock price on a quarter-to-quarter, year-to-year basis, you know, I, you know, and I was some CEO that had a short-term view and wanted their stock options to vest and sell out at the right time, I might push the promotional button. It's like, but, you know, I'm the largest shareholder of the company. You know, it's taken me a long time to get here. Not going anywhere. You know, we're gonna do the right things that are gonna reward long-term shareholders, and investors. You know, just a different game, you know, how we, how we look at it and how we think about it, and, you know, we'll make tougher long-term decisions than other people will.

We'll be an outlier sometimes on the lower end, like right now, you know, we're clearly somewhat underperforming other people because we're not pushing promotional buttons. Over the long term, I think you'll find, you know, we're gonna be a big winner, you know, and we're very confident about that. It's just, you know, during times like these, we look different, and then over the long term, we also look different.

Michael Lasser (Equity Research Analyst)

Thank you for all that. Just so we can calibrate our models and forecasts properly, if you had to guess, collectively, how much do you think you will roll back price? Is it, you know, is it gonna be in the double-digit range, so on average, 10% across the assortment? Is that a reasonable guess?

Gary Friedman (Chairman and CEO)

No, I wouldn't say we're, you know, roll back price, you know, at, at a broader level, right? It's, you know, again, we're going through a major product cycle. Like, you know, do you see us lowering price on the Cloud Sofa? Yes. We'd lower price on the- we've had, when did we introduce the Cloud Sofa?

Jack Preston (CFO)

2015.

Gary Friedman (Chairman and CEO)

2015, right? We're in our eighth year, right? Things in their eighth or 10 year, you know, like that, you know, they start to wane and, you know, and you've got to, you know, you're gonna have more... You know, there's, you know, I mean, how many dukes in Cloud Sofa? Who doesn't get an email every day of, you know, another Cloud Sofa knockoff on TikTok or on this thing or, you know, it's a famous sofa. You know, so, you know, but it's also, you know, it's the sofa that carried us the last 10 years. It's not the sofa that'll carry us the next 10 years. Not that I'm telling people, "Don't buy a Cloud Sofa." It's a great sofa. It'll be here the next 10 years, but I don't expect it to perform the same way.

You know, it will, you know, it will just find its new level. And, you know, we'll be more competitive, but we also, you know, our manufacturers will be sharpen their pencils, and everybody sharpen their pencils because they want to keep as much market share as possible. I wouldn't think, you know, I wouldn't call it a big rollback. I'd say, you know, I think of it really about a spring forward because there's so much newness. You really got to kind of look at where the product's going, not where it's been. Then, you know, also look at what is the current competitive environment and what does it take to be, you know, to win and winning on a large scale generally means being disruptive.

You know, again, you have to kind of really look at it through the lens of design, quality, and then value based on that design and quality. I think based on the design and quality that we have coming, I think we're gonna be massively disruptive.

Michael Lasser (Equity Research Analyst)

Thank you very much, and have a great day.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Sigman with Barclays. Your line is open.

Seth Sigman (Managing Director and Senior Analyst)

Hey, everybody. It's sort of a follow-up to that last question, you know, just thinking about last quarter, you announced some cost reductions, the $50 million in annualized savings. I guess, just in light of the markdown pressures and your demand comments, and that this could just last longer, which is not unreasonable, how are you thinking about the potential for further cost reductions and maybe other levers or opportunities to maybe address any other inefficiencies? Thank you.

Gary Friedman (Chairman and CEO)

Yeah, I, you know, I think we're always looking at that. you know, but look, we had a meaningful change in demand, you know, and whenever you have a meaningful change in demand, you know, whether it's to the positive or the negative, you know, there's gonna be investments or you're gonna rationalize costs, right? You're gonna constantly. We look at the organization every year, and we try to rearchitect the organization based on where we think the business is and where it's going. We try to, you know, always look for efficiencies and always look for better ways to do things. but, you know, we had always known, look, if there's a meaningful step down on the other side of it, we're obviously gonna have to optimize the organization. At that time, that's what we did.

If demand weakens again, and so on and so forth, we'll make the right decisions for the business and try to optimize things and, you know, sharpen our pencils, just as, you know, any good leadership teams would. You know, I think a lot is gonna depend on what happens with the macro. You know, does the housing market begin to recover? Again, when you think about the housing market, for us, you've really got to look at the luxury housing market, which has taken, you know, like a 10-point greater hit than the overall housing market. You know, those are the key things. The key is, I'd say, just it's about the goods, right? That's what we sell.

If, if we're right, you know, if we're directionally right with the product and you know where we're going, we'll see some kind of inflection, headwind or no headwind, right? Is this product transformation, is it worth 5 points, 10 points, 20 points? I don't know, 30 points. Look at our history when we've done these things. When we've done these things, we've been a lot more right than wrong, and we've been able to inflect the business.

Then you've got to kind of put it in context with just this COVID cycle, you know, the downside of COVID, and compounded with the rising interest rates and, you know, the collapse of the luxury housing market and say, you know, when we hit bottom, okay, what does it look like as we come off the bottom? I mean, there's history and cycles, right? Everyone can look at, you know. We really like where we are. I mean, yeah, is it a tough time? Did we have to make a lot of tough decisions and redesign the organization and part with some people? We did, and those are tough decisions that you have to make in business.

The key is, like, what does it all look like on the other side? You know, how are we positioned on the other side? You know, did we make good long-term decisions? We don't have to cycle all the sale emails that everybody else does. They have to cycle all those promotions. They have to cycle all those sale emails. We don't have to cycle one of them. Do we have a lower base? We do. Could that mean we have a higher rise off a lower base? You'd think so. That's possible. You know, we have a massive amount of new product coming. It's, you know, it's revolutionary from anything we've done. We really like how the horizon looks. I wouldn't feel that way if I'd been promoting, you know, for the last six or 12 months or, you know, however long everybody's...

You know, when the pivot back to promotional emails hit, you know, but just, you know, you guys collect the emails from everybody in our industry. I'm sure just line them all up. You haven't sent a seen a sale email from us in over two and a half years. You know, maybe, you know, close to three now. When did you start getting sale emails from everybody else? When are they cycling those? How challenging is that gonna be? How many more sale emails are they gonna go to next? What are they gonna do next to drive demand? You know, I think that, yeah, the next 12 to 24 months for RH is gonna look very different than the next 12 or 24 months for everybody else in our industry.

Seth Sigman (Managing Director and Senior Analyst)

Yep, no doubt. Can I just ask you a follow-up around the guidance? You did raise the low end of the sales guidance for the year modestly. Help us with the message there in light of some of the cautious demand comments. Do we just interpret that as confidence and visibility and optimism around new products or the expansion? Just help us frame that a little bit more. Thank you.

Gary Friedman (Chairman and CEO)

Really two things. One, what you just said, you know, our confidence about the new product. As you know, all samples got finalized, costing negotiations got finalized, value equations got finalized. You know, presentation, you know, how we're presenting it in the books, how we're gonna present the stores, how we're gonna cycle things, what the productivity per sq ft of each area of our galleries are gonna be. You know, we go down to this detail level. You know, we're replacing this product with this product. What do we think? You know, how did this product perform, you know, per week, at what margin? What's the new product gonna perform per week at what margin? You know, yeah, we try to figure out the arbitrage of every decision we make, you know, positive or negative, right?

Then what's the aggregate of all those decisions? We feel more optimistic as we spend more time on, you know, on looking at what's coming and what's new and what we're gonna transition. Then, look, it's gonna cost us more to cycle through the product. We're gonna have to take deeper markdowns than we thought to, you know, because of the greater headwinds that have developed. That's gonna provide a lift. You know, so you're gonna get some lift from the higher, you know, the greater markdowns. The low end, you know, that of the guidance we gave, we think it would be hard.

We'd have to have another meaningful economic macro event for us to kind of consider the low end based on what we know today, you know, based on what's happened in the last 7 weeks. You know, and, you know, the quarter and what's happened in the, you know, since the last quarter, we've talked to you know, the last three months. I mean, yeah. You know, that's how we feel about it now and based on all the data we have. And, you know, and I think we're, you know, we're calling it kind of straight down the middle. We, we hope that there's, you know, there's a lot of people that think that we're not at the end of the banking crisis, we're at the beginning of the banking crisis, you know?

Very smart people, you know, believe, you know, okay, you know, now the, you know, the balance sheet situation is getting corrected, but there's gonna be a whole credit issue going forward with regional banks, you know, that could become a big problem. I don't know. Those people are smarter than I am. I've never ran a bank, and I'm not an economist, but, you know, I've been in business a long time, and I've seen cycles, and what I've seen is that nobody calls it exactly right. It just, you know, if you said, what am I most worried about?

It just seems a little odd that, you know, banks get seized over weekends, you know, and my bank, you know, basically gets seized and sold for nothing to JPMorgan, and oh, and it's all over now. It's all better. It just seems kinda strange, you know? Like, you know, everybody thought it was all better back in the other banking crisis, and then, you know, more banks fell. You know, I'd say that's if you ask me, what am I most worried about? I'm most worried about what's next in the world of regional banks, you know, which could have a further impact on a lot of things.

You know, lending to small businesses, you know, the economy, you know, support of innovation, you know, and invention, you know, massive tightening of credit, you know, more banks that get seized, you know, government have to get more involved and, you know, and just general uneasiness by the consumer. You know, we can, you know, we can take another hit, and I think we'll still be in that range. If there's a big hit, you know, if there's another big macro move, you know, I think things will change for everybody. You know, we're, you know, we're giving you what we can see, but I don't think there's anybody out there that's completely at ease with the regional banking issue, you know?

If they are, I'd say, "Whoa, be careful." You know, I think it's a good time to, you know, pray for peace and plan for war, you know. That's how we're kind of positioned. You know, we think no matter, you know, again, no matter what the macro looks like, even if there is a bigger banking crisis, our new product will create some level of inflection. That I'm sure of.

Simeon Gutman (Research Analyst)

Thank you for the thoughts.

Operator (participant)

Your next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Jonathan Matuszewski (SVP)

Good evening, thanks for taking my question. you know, Gary, I wanted to follow up on your comments regarding the most discerning households being 10 times more valuable in terms of luxury home furnishings. Is there any color you could share on spending patterns across your income cohorts? Are there certain customer segments that are behaving differently lately versus others in the RH business? Asking, just 'cause the reference to giving away low-quality market share. you know, curious what percentage of your members you would consider to be maybe low quality, and, you know, what that could imply for maybe what the membership file looks like long term. Thanks.

Gary Friedman (Chairman and CEO)

Yeah, I think if you just, you know, study, you know, the wealth, you know, data in, you know, in studying the ultra-high-net-worth, you know, people, and you look at homeownership and, you know, people, as they go up the economic ladder, they collect more homes. You know, the home becomes the biggest source of investment. You know, you keep buying a better home. You generally keep buying a bigger home, unless you're in the downsizing mode. Then people buy multiple homes. They buy a second home, then they buy a third home. You know, ultra-high-net-worth people have three to five homes.

you know, not only those, you know, the, you know, the data would tell you that, at the high end, at the wealth, the second home is on average, has twice as many bedrooms as the primary residence, right. As people go up the economic cycle, those second homes are furnished beautifully, you know, because they're trying to impress their guests, and they're trying to create a hotel experience. You're not going into second homes that have, like, a bed frame pushed against the wall with a cheap headboard and, you know, some, you know, crappy sheets. You know, look, you can go on Zillow or Redfin and just look at homes, right. Go to second home markets and look what's on the market.

You know, your first, second home, you know, maybe you're not spending that much on it. Maybe you stretch for the second home. You know, again, when you go up the economic ladder, people spend exponentially more on the home. That is where the money goes. It goes into more real estate. You have more rooms to furnish. You're now furnishing with better and more expensive furniture, 'cause that's how people, you know, are defining themselves, with, you know, defining their success and their place in the world. You know, I like to say, you know, they go beyond that. If you kind of get silly rich, you know, you buy a plane, and if you get stupid rich, you buy a yacht.

You know, that's why we have our planes that are also available for charter. We've done RH One and RH Two and RH Three, you know, because we're trying to communicate to those consumers. If we can get them, and we have some of them. I mean, we how many what's one of our big projects, you know the one I'm talking about, I can't say the names. Yeah. It has how many bedrooms? 30, 28 bedrooms. In that range. It's 28 to 30 bedrooms. Yep. A second home. Yep. We're doing the entire project. You know, we I mean, we do. You know, we have some of those clients. We're earning that respect. You know, our Guesthouse is being visited by the very top of the economic period, the pyramid. It is being talked about at the very highest end.

It's very, very top of that ladder. You know, people are aware of our guest house and visiting, staying, touring, asking for tours, so on and so forth. You know, and we're demonstrating what we're capable of, you know, and we're beginning to speak to those consumers. What people will see at RH England as it's at another, entirely another level for our brand. We're gonna speak to people in a way that they've never been spoken to. By the way, RH England, now, you know, every investor and analyst on this call is gonna wanna come to the opening. RH England is gonna have all the newness, almost all of it. Like, it's, if you wanna see the new product for the first time, you know, go to RH England. You know, it's being flown there.

It's being craned in through windows. That will be the first view. You know, we're introducing the brand in an entirely new way with entirely new assortment. Do we have some of the legacy product? We do, yeah. You know, some of the key items, best sellers, best selection, it's like, what percent is new?

Jack Preston (CFO)

Seventy.

Gary Friedman (Chairman and CEO)

70% of that gallery is new. How many rooms do we have there? Over 60 rooms.

Jack Preston (CFO)

Yeah.

Gary Friedman (Chairman and CEO)

60 furnished rooms.

Jack Preston (CFO)

Yeah. Rooms. Yeah.

Gary Friedman (Chairman and CEO)

So you know, you wanna see the new. You wanna get a head start on everybody else, come to the opening party. That's it. You know, yeah, I'd say, you know, the lower quality, you know, we've been shedding customers for 23 years I've been here. Like, you know, we're building a luxury brand. That's just gonna happen. You know, it's just gonna happen. If you do it right, you're gonna have a positive arbitrage, which we've always had, you know?

I think that, I think we're gonna have it again, you know, I think this move is gonna create another positive arbitrage. I think people are gonna look at the design and quality of the goods at the highest end, you know, and they're gonna go: Oh, my God, this is incredible! They're gonna, you know, look at the price and think like, "This is such an incredible value. Do my whole house." You know, we just did, you know, another, I can't say names, you know, person's house, you know, they did a 100% RH Contemporary. You know, you know, the conversation is starting to really happen at that next level, but you gotta stay with it. You know, you gotta keep investing.

These things like, you know, the places we build, whether it's the galleries in RH San Francisco, our most recent one, or our Guesthouse, which our restaurant and our Guesthouse just made the Michelin Guide. Tell me another retailer in the world that has restaurants, that has a restaurant listed in the Michelin Guide. We didn't get a star, you know, we in the Michelin Guide. We had one of the best chefs, arguably the best chef in the entire world, eat at our restaurant two nights in a row and said, you know, they could dine there two to three times a week, you know, and thought the food was outstanding. Gave us some feedback, you know, you'd expect the best chef in the world to give us some feedback on what might be better.

A little bit more salt here, this, that. For the most part, a glowing review. You know, again, this, all those things, all those conversations with people at the top of the mountain, starts to change the conversation, the perception, the image, the respect of a brand. It takes a long time to earn it, right? We're working at earning that respect, getting the tip of the hat, you know, if we do it well, we will have, you know, higher quality, you know, higher value, more discerning consumers that just spend multiples of consumers that are just a click or two down from them. A lot more, not a little more, 'cause they have a lot more money.

I would argue, you know, if you look at it, you know, the baby boom generation, you know, is. Luckily, studies are saying, you know, if you're at the high end, and you have access to health and healthcare and you take care of yourself, so they're saying the average age is, like, 87 lifespan now, right? That's up from 77, you know, for lower economic demographics. What are people gonna do as they're living longer? I don't know if they're gonna save money. I think they're gonna spend money.

You know, I had someone really say something to me, you know, the other day that's like, "Oh, you know, you know, did you fly private to get here?" I said, "Yes." They said, "Well, you know, good, because if you don't, your kids sure will." I thought that was a really funny comment. You know, like, you know, I mean, people that, you know, I think, you know, the baby boomers are living longer. It's the biggest, you know, pot of wealth. You know, there's gonna be the biggest wealth transfer, I think there's likelihood we're gonna see an acceleration of spending because people are gonna say, "You know, I don't have that much longer to live." I think they're gonna loosen their pocketbooks.

I like all these, you know, kind of sub-things underneath, you know, this main trend. I like coming out the other side. You know, I, you know, I like where we're positioned for the next five to 10 years. I think, you know, we get through the cycle here over the next, I don't know, six to 12 months. I, you know, I don't honestly see it lasting much longer than that. I think, you know, 2024, I think, is gonna look a lot better than 2023. I think, if we get inflation under control and whatever happens in the banking thing, you know, like, you gotta kind of let it happen. Again, I wish they'd just say they guaranteed all the deposits or something, so, you know, they just stop everything.

We still do have, you know, a credit reckoning that's gotta come through. I mean, there's no way those banks lend like they were lending, right? That's gonna have some effect on the economy. Nonetheless, no matter what happens, you know, the path we're on, I think, is a path to a really profitable model, and, you know, a really enduring, and lasting brand.

Jonathan Matuszewski (SVP)

Really appreciate all that color, Gary. Just a quick follow-up. You had some helpful comments on the domestic competitive landscape before, in terms of, you know, peers who are below you being more promotional. From our checks, we're seeing some more, you know, luxury brands in home furnishings out of Italy, you know, increasingly eyeing the U.S. after years of chasing growth in China and India and Brazil. You know, some of these brands are pursuing more sizable showrooms in key U.S. markets. Do you see this as a threat? Any thoughts there would be great. Thanks.

Gary Friedman (Chairman and CEO)

Yeah, you know, I mean, look, everything's a threat, you know, we don't take anybody for granted. I just say that our value proposition versus those brands is massive. They also. Most of those Italian brands are two things: one, they're just mostly category-focused, right? They either are a, you know, upholstery brand selling sofas, sectionals, chairs. You know, they're a lighting brand or, you know, they're a category-specific brand. There's not one that's integrated all the categories like we do, and have a complete, you know, lifestyle point of view and can furnish and design a home. They don't have the size or scale to have our value creation, you know, or our value proposition.

Our value versus the brands that are, the ones I think you're talking about, I think we're massively disruptive to those brands, and especially now that we're sourcing out of Italy ourselves. You know, when you've got made in Italy versus made in Italy, and you have a significantly better value proposition because of, you know, the size of your platform. I'd say the one other thing I'd mention is they don't control their distribution, right? Some of the brands you're probably talking about, you know, the most famous one, I think, has 800 points of distribution in the US, and they control, I think, four points of those 800 points of distribution. You know, and, you know, there's a whole kind of convoluted platform, you know.

you know, pricing discrepancies, they don't really get to control price. They've, you know, got a lot of dealers, you know, representing them. you know, so you know, it takes them a long time to kind of build what we've built. but nonetheless, you know, look, they're great brands. They've built great products. I like our positioning way better than theirs. Way, way better.

Jonathan Matuszewski (SVP)

Really helpful. Best of luck.

Gary Friedman (Chairman and CEO)

Yeah. Thank you.

Operator (participant)

Your next question comes from Bradley Thomas with KeyBanc Capital Markets. Your line is open.

Bradley Thomas (Managing Director)

Hi, thanks. Good evening. A follow-up on England. Was wondering, Gary, if you could just give us a little bit of an update on how you're gonna be dealing with the supply chain and logistics. Obviously, the furniture industry can be a challenging one from a logistics standpoint. How do you ensure that the customer has a great experience for you, especially these early customers that you get in the months ahead here? I was wondering, Jack, if you can give us any color on how you're thinking about the financial impact from England in the second half, particularly from a top-line perspective, what's baked into the guidance? Any color there would be great. Thanks.

Gary Friedman (Chairman and CEO)

Yeah, let me start with the supply chain. We feel really confident. I mean, we've had our team boots on the ground over there for 18 years, 18 months to two years. I mean, you know, working, training, you know, you know, we feel highly confident in the supply chain experience, delivery experience that our consumers are gonna receive from RH. You know, the, you know, one of the keys is just making sure, you know, we figure out how to be efficient on the reverse logistics.

You're, you know, you're always gonna have some level of returns in any business, and how we handle that and the ability to, you know, not have too many touches and liquidate, you know, efficiently through an outlet network and so on and so forth, you know, all those things that we're working on. You know, there'll be some things to learn where the demand gonna all come from, you know, across the U.K. You know, some things to work out, but I feel highly confident. We've got a great team. We've got a lot of people who've been with us for years that are over there.

Jack Preston (CFO)

Oh, yeah.

Gary Friedman (Chairman and CEO)

Yes. I don't know if you want to.

Jack Preston (CFO)

Yeah, no, we in our RH England gallery, we're going to have eight folks on the gallery side and another five for hospitality, that are from RH in the U.S.

Gary Friedman (Chairman and CEO)

From a supply chain perspective.

Jack Preston (CFO)

From a supply chain perspective, we have, you know, one of our best guys over there now.

Gary Friedman (Chairman and CEO)

Leading it. Yeah.

Jack Preston (CFO)

Yeah. Yeah. [audio distortion]

Gary Friedman (Chairman and CEO)

Yeah, Stein Sarah, you know, and, you know, so we feel highly confident.

Jack Preston (CFO)

Yeah

Gary Friedman (Chairman and CEO)

.You know, that, you know, on every level that we will execute well. There's gonna be things for us to learn. Like, we don't know exactly where the demand's gonna come from. We don't know exactly, you know, we have to, you know, just acclimate everybody to our, you know, our brand, our services, and everything that we offer. You know, we'll see. We'll see how the ramp is. Yeah, I'll tell you one thing, the response to the party invite has been incredible. You know, we thought we were gonna have X number of people, and now all of a sudden, just after a few days, we think we might have two X number of people coming.

If anybody's on this call and you want to come, like, you know, let us know quickly, you know, because at some point we've got to cap this thing. It's, it's, you know, we were really worried, like, gosh, we're out here in the countryside, and we're doing a, you know, doing this opening party, you know, sent an email invite, you know, how many people are gonna come? It looks like everybody's coming. As long as they're, you know, in town, it looks like everybody's coming, so. On the second question, we haven't said, Brad, you know, it's modest, and I think we'll all learn together. You know, at one time, you know, Gary had projected that, you know, first-year sales of or demand of RH England could be $50 million-$250 million.

The point is there, you know, we'll learn together. We'll share data when we have it, but it's a modest amount. It's not just worth, not worth highlighting. It's in our guides.

Bradley Thomas (Managing Director)

Really helpful. Thanks, and good luck with it.

Gary Friedman (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Brian Nagel with Oppenheimer. Your line is open.

Brian Nagel (Managing Director and Senior Analyst)

Hi, good evening. Thanks for taking my question. I know the call is running longer, so I'll just keep it to one question. The question I have, I guess, for Gary, you know, we talked obviously a lot going on internally with RH and a lot of the really interesting initiatives you have. If you look at the macro environment, and there's been a lot of talk about how the macro environment is a headwind, and you know, your customers, your new customer, to get out of this malaise, you know, to allow the macro environment to become a tailwind versus the headwind it is currently, what needs to change most? I mean, what are the key factors there?

Gary Friedman (Chairman and CEO)

I don't know if I got that quite right. What's? Yeah, your connection wasn't the greatest.

Brian Nagel (Managing Director and Senior Analyst)

It wasn't the best, right.

Gary Friedman (Chairman and CEO)

Maybe just kind of repeat the question, just make sure we get it right.

Brian Nagel (Managing Director and Senior Analyst)

Yeah, I apologize. I'm driving. Just from a macro standpoint, you know, as you think about your customer and the headwinds, the other macro headwinds, you know, to get out of this malaise, what needs to change? What do you think is most important from a macro standpoint, to really start to change here, to for your customer?

Gary Friedman (Chairman and CEO)

Yeah, I think we just got to find out where the bottom is, right? Like, things just have to stabilize somewhere. You know, interest rates stabilize somewhere, you know, mortgage rates stabilize somewhere, and just, you know, get through a cycle. You know, what's the new baseline? I think that's the key, you know, and then generally, you know, once you hit, you've kind of hit whatever bottom is, and there's a new baseline, and, you know, we've got the, you know, the macro headwinds, you know, get stabilized, and history would tell us you start to grow off that new base, right? I think the key is, what's the base? You know, is the base luxury housing down 50?

You know, because, you know, it hit down 45% last quarter, that means, you know, if you looked at the sequential kind of from quarter to quarter, that would tell you know, it went from 38% to down 45%. It probably means the last month of that quarter was down 50% or 54%. I don't know, you know, somewhere around there. I've never seen this kind of stuff, you know? Again, too, like, the first time we're navigating the brand through a cycle like this, where we've been positioned so high in the market, right? Also, what I say was different about us today is, you know, We're not really in the accessory business in a meaningful way. We're not in the tabletop business. We're not, you know...

Yeah, we're not in the holiday business. We're not selling anything for Easter or Mother's Day or Christmas or anything, right? You don't go in and see all the, you know, Christmas decorations stuff or stocking stuffers anymore. When the company had a bigger mix of accessories and stuff like that, you know, you're not gonna get hit as hard. Today, we're basically all high ticket, right? We're really furniture focused. Between indoor and outdoor furniture, it's the lion's share of our business. Then you've got, you know, rugs and lighting and bedding and bath towels and things like that.

We're not, you know, we're really a furniture-focused business today, so we're gonna swing a little farther than other people during these times. Really, the key is what's the baseline? What's the new baseline? You know, are we done with the tightening cycle? You know, are we done? I don't know. The markets are saying, you know, they're betting there's not another raise, you know, and then you've got some Fed people saying there might be another raise. All of a sudden, interest rates on, you know, 30-year mortgages, you know, hit seven, and they went back to 6.2. Now, all of a sudden, they're back to seven. You know, like, why? You know, what's that telling you in the 10-year?

You know, they believe interest rates are going up. I think it's just got to kind of go, okay, have we, have we hit the bottom from a housing point of view, specifically luxury housing on this cycle? You know, are we done with, you know, the regional banking, you know, issues? Is inflation tamed? You know, are people willing to buy? I mean, it's, you know, you know, people aren't putting houses on the market because they can't afford to trade up. You know, so you just don't have a lot of inventory to buy. You know, and then, look, that's better for the new housing market, right? 90% of the market is the resale market, 10% is the new housing market. They only have inventory to sell.

They have to sell. You know, they're putting it all in the, on the thing. You know, it's gonna be a, you know, it's gonna be a tailwind. There's gonna be some level of tailwind to new homes because they have inventory. You know, resales don't have inventory because the owners don't want to sell into this market, you know? You know, but once everything gets stabilized, like, if interest rates stabilize, the Fed just kind of says we're done for now, you know, that we've got inflation under control and interest rates stabilize, you know, federal funds rate stabilizes at five or whatever number, you know, that. You know, then interest rates can stabilize. Once you cycle that and you're through that, you know, that cycle for a year, you've got a baseline.

Yeah, things start to look better, and they start to loosen. That will obviously help. You know, you still have other things that are, you know, have people worried, right? You've got the commercial, you know, the commercial real estate market. I mean, you know, you don't want to be in the office building business right now. You know, I feel bad for my friends that, you know, own office buildings. I mean, this is, you know, like, this thing has. That's not over yet, right? That's gonna have a wealth effect. You know, there's people out there that, you know, invested in funds that own commercial real estate and, you know, people that own buildings, things like that.

I mean, people are already starting to give keys back to the bank, you know, to the banks on commercial real estate offices. You know, because there's people don't want to go back to those companies that, you know, working from home, and there's people don't want to go back to work and, you know, strikes at Apple and Microsoft. You know, that's kind of crazy, right? What's gonna happen with commercial real estate? You know, there's some things that still have to get kind of worked out, and I'd say the luxury customer is the most aware of the issues. You know, they have the broadest view of, you know, kind of economic, you know, challenges and where things are going and interest rates and all that kind of stuff.

you know, when they're gonna start buying houses again, when they're gonna decide to start selling their, you know, houses, that'll create activity. I think once everything stabilizes, people kind of go, "Okay, this is the new reality. Let's go back to normal." It's a long winded-.

Brian Nagel (Managing Director and Senior Analyst)

I appreciate the call.

Gary Friedman (Chairman and CEO)

Yeah.

Brian Nagel (Managing Director and Senior Analyst)

That was very helpful. I appreciate it. Thank you. Sorry about that connection, but thank you.

Gary Friedman (Chairman and CEO)

No, no worries. Thank you, Brian.

Operator (participant)

Your next question comes from Max Rakhlenko with Cowen. Your line is open.

Max Rakhlenko (Equity Research Analyst)

Hey, great. Thanks a lot. I'll just keep it to one, how are you thinking about pricing, products in Europe compared to the States? Just your latest view on how profitable those galleries could be at maturity. I think you previously thought once galleries mature, they could potentially have higher margins than in the States. Just curious for an update there. Just any differences in cost structures that we should keep in mind.

Gary Friedman (Chairman and CEO)

Yeah. We believe that. You know. Yeah, a lot of debate on pricing. You know, we're going right up to the wire, you know, trying to do the math on everything and, you know, make sure we understand it. But I believe, you know, that long term, we could have an accretive strategy because I think we're also building everything, you know, kind of on a clean sheet of paper. It'll, you know, it should be the most efficient from a supply chain point of view. There, you know, there should be efficiencies and things just because it's all gonna be new thinking and our best thinking. You know, we'll learn a lot in the beginning here.

You know, I just say, you know, look, every plan we have generally is some degree of wrong. Are we more right than wrong? That's the key. Are we strategically right? You know, we're gonna be wrong on a lot of things at launch, you know, whether it's pricing, whether it's this, whether. You know, like, you know, the point is, are we strategically right? Because we'll improvise, adapt, overcome, you know, modify and, you know, as we get going. You know, we're excited to just get going and start learning, you know? Look, there's debates, like, right now, where should we price this, where should we price that? Who are our competitors over there, what does it look like?

You know, more to learn. I'd say directionally, I feel exactly the same way. We're not in the game yet, you know, ask us in six months, we'll have a much better view.

Max Rakhlenko (Equity Research Analyst)

Got it. Thanks a lot.

Gary Friedman (Chairman and CEO)

Thank you, Max.

Operator (participant)

Your next question comes from Seth Basham with Wedbush. Your line is open.

Seth Basham (Managing Director of Equity Research)

Thanks a lot. Good evening. My question is around inventories. As you take these markdowns to clear excess inventories, do you expect your inventory to be clean by the end of the fiscal year?

Gary Friedman (Chairman and CEO)

Yeah, I think we'll have everything in line by the end of the year.

Seth Basham (Managing Director of Equity Research)

Great. Then similarly, with the 70 new collections you're planning for this year, do you expect to be in stock in meaningful quantities so that they can be additive, materially additive to sales, this year?

Gary Friedman (Chairman and CEO)

We do believe that. Yep. I think we'll be in really good shape by mid-second half. You know, like, you know, there's always with the ramp-up of this much newness, you know, different timings, different things as they go into, you know, production and, you know, some delays here and there, and, you know, as they're going through final finishing and getting into, you know, ramp up, you know, moving from sampling to production. We'll be, you know, kind of some things will be in stock, you know, end of second quarter, some beginning of third quarter, some mid-third quarter. I'd say mid-third quarter. Let's see. Yeah, you know, late third quarter will be really good, late third quarter for as far as shipping, right?

You know, again, think about of our business. Our business will generate demand even if we're not really in stock, because people are working on projects. You know, I think we'll be able to understand what the inflection point potentially can look like, I think by, you know, late third quarter. You know, we'll be, you know, we'll have a lot more data and information and see, you know, where the consumer is really responding and what that looks like. You know, for us, look, we've got to, you know, we've got to place certain bets, and we got to buy goods long term because if, you know, on certain things, we, you know, that's our job, right? Is to, is to know what's going to be great.

Again, we never buy anything 100% right, ever in my entire career. The point is, are we directionally right on the, on the investments, on the buys? You know, some of these things are going to be really big, right? We've got to make big bets. We've got to buy inventory kind of out there because furniture can't scale. You know, you just can't ramp up furniture production fast, not at these quality levels. You know, we'll learn a lot and, you know, we'll cycle through and, you know. That's why we're really, really excited about 2024, because we'll, you know, we'll have some really good data, you know, by the end of the third quarter. We'll be making a lot of much better decisions as we look out.

We have another, you know, layer of newness that is going to come, you know, as we cycle into the spring. You know, a lot of newness kind of coming through, you know, either late this year, you know, some of it might come or we'll hold it for next spring, depending on what the responses are. You know, yeah, fingers crossed.

Seth Basham (Managing Director of Equity Research)

That's really helpful. My last question is just on your pricing strategy and architecture. As you move up to the very high end and you bump up against pricing from timeless designers, do you see that being a challenge to convert high-net-worth customers to shop RH when they could buy the true designer piece?

Gary Friedman (Chairman and CEO)

Yeah, I think we're pretty much, you know, a really good value against any of that. You know, there's always going to be interior designers that will take somebody's product and go to, you know, their local area upholstery guy and knock it off, you know? You know, for the most part, you know, we're gonna be, I mean, against the showrooms and against, you know, the real luxury brands, you know, in the categories and stuff like that, we're gonna be a disruptive value, you know? You know, I think, you know, I think our competitors are gonna be scrambling.

Seth Basham (Managing Director of Equity Research)

Okay. Thank you. Good luck.

Operator (participant)

There are no further questions at this time. I would now like to turn the call back over to Gary Friedman.

Gary Friedman (Chairman and CEO)

Great. Well, thank you everyone for your interest and, you know, we hopefully will see some of you at the opening of RH England. Other than that, we'll talk to you next quarter. Thank you.

Operator (participant)

This concludes today's conference call. You may now disconnect.